Tag Archives: philosophy

Another Market Crisis? My Survival Manual/Journal

I would be lying if I said that I like down markets more than up markets, but I have learned to accept the fact that markets that go up will come down, and that when they do so quickly, you have the makings of a crisis. I find myself getting more popular during these periods as acquaintances, friends and relatives that I have not heard from in years seem to find me. They are invariably disappointed by my inability to forecast the future and my unwillingness to tell them what to do next, and I am sure that I move several notches down the Guru scale as a consequence – a development that I welcome. To save myself some repetitions of this already tedious sequence, I think it is best that I pull out my crisis survival journal/manual, a work in progress that I started in the 1980s and that I revisit and rewrite each time the markets go into a tailspin. It is more journal than manual, more personal than general, and more about me than it is about markets. So, read on at your own risk! The Price of Risk For me, the first casualty in a crisis is perspective, as I find myself getting whipsawed with news stories about financial markets, each more urgent and demanding of attention than the previous one. The second casualty is common sense, as my brain shuts down and my primitive impulses take over. Consequently, I find it useful to step back and look at the big picture, hoping to see patterns that help me make sense of the drivers of market chaos. It is my view that the key number in understanding any market crisis is the price of risk. In a market crisis, the price of risk increases abruptly, causing the value of all risky assets to drop, with that drop being greater for riskier assets. While the conventional wisdom, prior to 2008, was that the price of risk in mature markets is stable and does not change much over short periods, the last quarter of 2008 changed (or should have changed) that view. I started tracking the price of risk in different markets (equity, bond, real estate) on a monthly basis in September 2008 – a practice that I have continued through the present. Getting a forward-looking, dynamic price of risk in the bond market is simple, since it takes the form of default spreads on bonds, and FRED (the immensely useful Federal Reserve Database ) has the market interest rates on Baa rated (Moody’s) bonds going back to 1919, with data available in annual, monthly or daily increments. That default spread is computed by taking the difference between this market interest rate and the US Treasury bond rate on the same date. Getting a forward-looking, dynamic price of risk in the equity markets is more complicated, since the expected cash flows are uncertain (unlike coupons on bonds), and equities don’t have a specific maturity date, but I have argued that it can be done, though some may take issue with my approach. Starting with the cumulative cash flow that would have been generated by investing in stocks in the most recent twelve months, I estimate expected cash flows (using analysts’ top-down estimates of earnings growth) and compute the rate of return that is embedded in the current level of the index. That internal rate of return is the expected return on stocks, and when the US Treasury bond rate is netted out, it yields an implied equity risk premium. The January 2015 equity risk premium is summarized below: That premium had not moved much for most of this year, with a low of 5.67% on March 1 and a high of 6.01% in early February, and the ERP at the start of August was 5.90%, close to the start-of-the-year number. Given the market turmoil in the last weeks, I decided to go back and compute the implied equity risk premium each day, starting on August 1. Note that not much changes until August 17, and that almost all of the movement have been in the days between August 17 and August 24. During those seven trading days, the S&P 500 dropped by more than 11%, and if you keep cash flows fixed, the expected return (IRR) for stocks increased by 0.68%. During the same period, the US Treasury bond rate dropped by 0.06%, playing its usual “flight to safety” role, and the implied equity risk premium (ERP) jumped by 0.74% to 6.56%. I did use the trailing 12-month cash flows (from buybacks and dividends) as my base-year number in computing these equity risk premiums, and there is a reasonable argument to be made that these cash flows are too high to sustain, partly because earnings are at historical highs, and partly because companies are returning more of that cash than ever before. To counter this problem, I assumed that earnings would drop back to a level that reflects the average earnings over the last 10 years, adjusted for inflation (i.e., the denominator in the Shiller CAPE model), and that the payout would revert back to the average payout over the last decade. That results in lower equity risk premiums, but the last few days have pushed that premium up by 0.53% as well. My computed increases in ERP, using both trailing and normalized earnings, overstate the true change, because the cash flows and growth were left at what they were at the start of August, a patently unrealistic assumption, since this is also an economic crisis, and any slowing of growth in China will make itself felt on the earnings, cash flows and growth at US companies. That effect will take a while to show up, as corporate earnings, buyback plans and analyst growth estimates are adjusted in the months to come, and I am sure that some of the market drop was caused by changes in fundamentals. The argument that a large portion of the drop comes from the repricing of risk is borne out by the rise in the default spread for bonds, with the Baa default spread widening by 0.17%, and the increase in the perceived riskiness (volatility) of stocks, with the VIX posting its largest weekly jump ever, in percentage terms. The Repricing of Risky Assets When the price of risk changes, all risky assets will be repriced, but not by the same magnitude. Within mature markets, you should expect to see a bigger drop in stock prices at more risky companies than at safer ones, though how you define risk can affect your conclusions. If you define risk as exposure to the precipitating factor in the crisis, I would expect the stock prices of companies that are more dependent on China for their revenues to drop by more than the rest of the market. Since I don’t have data on how much revenue individual companies get from China, I will use commodity companies – which have been aided the most by the Chinese growth machine over the last decade, and therefore, have the most to lose from it slowing down – as my proxy for China exposure. The table below highlights the 20 industry groups (out of 95) that have performed the worst between August 14 and August 24: (click to enlarge) Notice that commodity companies comprise one quarter of the group, with a few cyclical and technology sectors thrown into the mix. Looking across markets geographically, changes in the equity risk premium in mature markets will be magnified as you move into riskier countries, and thus, it is not surprising to see that the carnage in emerging markets over the last week has exceeded that in developed markets, with currency declines adding to local stock market drops. In the picture below, I capture the percentage change in market capitalization between August 14, 2015, and August 24, 2015 in US dollar terms, with the P/E ratios as of August 14 and August 24 highlighted for each country: (via chartsbin.com ) Note that this phenomenon of emerging markets behaving badly cannot be blamed on China, since it happened in 2008 as well, when it was the banking system in developed markets that triggered the market rout. A Premium for Liquidity? There is another dimension, where crises come into play, and that is in the demand for liquidity. While investors always prefer more liquid assets to less liquid ones, that preference for liquidity and the price that they are willing to pay for it varies across time and tends to surge during market crisis. To see if this crisis has had the same effect, I looked at the drop in market capitalization, in US dollar terms, between August 14 and 24 for companies classified by trading turnover ratios (computed by dividing the annual dollar trading value by the market capitalization of the company): Surprisingly, it is the most liquid firms that have seen the biggest drop in stock prices, though the numbers may be contaminated by the fact that trading halts are often the reactions to market crises in many countries that are home to the least liquid stocks. If this is the reason for the return divergence, there is more pain waiting for investors in these stocks as the market drop shows up in lagged returns. To the extent that market crises crimp access to capital markets, the desire for liquidity can also reach deeper into corporate balance sheets, creating premiums for companies that have substantial cash on their balance sheets and fewer debt obligations. To test this proposition, I classified firms globally, based upon the net debt as a percent of enterprise value, and looked at the price drop between August 14 and August 24: The crisis seems to have spared no group of stocks, with the pain divided almost evenly across the net debt classes, and the largest price decline being in the stocks that have cash balances that exceed their debt. Note, however, that the multiples at which these companies trade at both prior and after the drop reflect the penalty that the market is attaching to extreme leverage, with the most levered companies trading at a P/E ratio of 3.11 (at least across the 15.76% of firms in this group that have positive earnings to report). If your contrarian strategy for this market is to screen for and buy low-P/E stocks, this table suggests caution, since a large portion of the lowest-P/E stocks will come with high debt ratios. As the public markets drop, the question of how this crisis will affect private company valuations has risen to the surface , especially given the large valuations commanded by some private companies. Since many of these private businesses are young, risky startups and that investments in them are illiquid, I would guess they will be exposed to a correction larger than what we observe in the public marketplace. However, given that venture capitalists and public investors in these companies will be self-appraising the value of their holdings, the effect of any markdown in value will take the form of fewer high-profile deals (IPO and VC financing). What now? A market crisis bring out my worst instincts as an investor. First out of the pack is fear pushing me to panic, with the voice yelling “Sell everything, sell it now”, getting louder with each bad market day. That is followed quickly by denial, where another voice tells me that if I don’t check the damage to my portfolio, perhaps it has been magically unaffected. Then, a combination of greed and hubris kicks in, arguing that the market is filled with naive, uninformed investors, and that this is my time to trade my way to quick profits. I cannot make these instincts go away, but I have my own set of rules for managing them. (I am not suggesting that these are rules that you should adopt, just that they work for me.) Break the feedback loop: Being able to check your portfolio as often as you want and in real time with our phones, tablets and computers is a mixed blessing. I did check my portfolio this morning for the damage that the last week has done, but I don’t plan to check again until the end of the week. If I find myself breaking this rule, I will consider sabotaging my wifi connection at home, going back to a flip phone or leaving for the Galapagos on vacation. Turn off the noise: I read The Wall Street Journal and Financial Times each morning, but I generally don’t watch financial news channels or visit financial websites. I become religious about this avoidance during market chaos, since much of the advice that I will get is bad, most of the analysis is after-the-fact navel gazing and all of the predictions share only one quality, which is that they will be wrong. Rediscover your faith: In my book (and class ) on investment philosophies, I argue that there is no “best” investment philosophy that works for all investors, but that there is one for you that best fits what you believe about markets and your personality. My investment philosophy is built on faith in two premises: that every business has a value that I can estimate, and that the market price will move towards that value over time. During a crisis, I find myself returning to the core of that philosophy to make sense of what is going on. Act proactively and consistently: It is natural to want to act in response to a crisis. I am no exception, and I did act on Monday, but I tried to do so consistently with my philosophy. I revisited the valuations that I have done over the past year (and you can find most of them on my website, under my valuation class) and put in limit buy orders on a half a dozen stocks (including Apple (NASDAQ: AAPL ), Tesla (NASDAQ: TSLA ) and Facebook (NASDAQ: FB )), with the limit prices based on my valuations of the companies. If the crisis eases, none of the limit orders may go through, but I would have protected myself from impulsive actions that will cost me more in the long term. If it worsens, all or most of the of the limit buys will be executed, but at prices that I think are reasonable, given the cash flow potential of these companies. Will any of these protect me from losing money? Perhaps not, but I did sleep well last night, and am more worried about whether the New York Yankees will score some runs tonight than I am about what the Asian markets will do overnight. That, to me, is a sign of health! The Silver Linings Just as recessions are a market economy’s way of cleansing itself of excesses that build up during boom periods, a market crisis is a financial market’s mechanism for getting back into balance. I know that is small consolation for you today if you have lost 10% or more of your portfolio, but there are seedlings of good news even in the dreary financial news: Live by momentum, die by it: In trading, momentum is king, and investors who play the momentum game make money with ease, but with one caveat. When momentum shifts, the easy profits accumulated over months and years can be wiped out quickly, as commodity and currency traders are discovering. Deal or no deal? If you share my view that slowing down in M&A deals is bad news for deal makers but good news for stockholders in the deal-making companies, the fact that this crisis may be imperiling deals is positive news. Rediscover fundamentals: My belief that first principles and fundamentals ultimately win out and that there are no easy ways to make money is strengthened when I read that carry traders are losing money , that currency pegs do not work when inflation rates deviate, and mismatching the currencies in which you borrow and generate cash flows is a bad idea. The Market Guru Handoff: As with prior crises, this one will unmask a lot of economic forecasters and market gurus as fakes, but it will anoint a new group of prognosticators who got the China call right as the new stars of the investment universe. If a market crisis is a crucible that tests both the limits of my investment philosophy and my faith in it, I am being tested, and as with any other test, if I pass it, I will come out stronger for the experience. At least, that is what I tell myself as I look at the withered remains of my investments in Vale (NYSE: VALE ) and Lukoil ( OTCPK:LUKOY )! Spreadsheets: Implied Equity Risk Premium Spreadsheet (August 2015) Returns (8/14-8/24) and PE ratios (before & after), by Industry Group Returns (8/14-8/24) and PE ratios (before & after), by Country

The Philosophy Of Value Investing – Reject ‘New Paradigm’ Thinking

By David Foulke Every few years, people start to question whether value investing is dead. A recent Google search along these lines generated 3.1 million results: Likewise, people sometimes question whether the size effect is permanently going away. For instance, during the dotcom craze in the late 90s, large-cap growth investors made small-cap value investors look foolish. People jumped on the bandwagon, and embraced the “new paradigm” for investing. In “New Paradigm or Same Old Hype in Equity Investing?” Chan, Karceski, and Lakonishok (a copy is here ) examine equity returns across the growth/value and large-cap/small-cap spectrum during this era. I went ahead and cherry-picked some key data that illustrates the big picture trends explored by the authors. In the academic world, market returns during the 1970s and particularly in the 1980s were fertile grounds for researchers studying the cross-section of market returns, and variables that explained them. For instance, as can be seen from the panel below (from the paper, as are the other data below), during the 80s, value stocks earned more across the board than growth stocks, and small-cap value stocks beat small-cap growth stocks by 9% per year. The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. This 1980s sample period was influential in the establishment of the “size anomaly” and the “value premium.” The evidence seemed clear – you should go forth and buy small-cap value stocks. But then something strange happened – Both of these anomalies seemed to show elements of reversal! 1. First, large-cap began to outperform. Note below how from 1984 through 1998, large cap beats small cap: The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. And the large-cap trend only accelerated in the late 90s: The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. 2. Second, growth also seemed to outperform value, particularly for large-caps. From 1990-1998, large-cap growth beat large-cap value: And again, as with the large-cap outperformance above in #1, by the late 90s the trend in growth also appeared to accelerate: The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Indeed, in general, growth began to look like the better overall bet than value. Based on value weightings, growth stocks beat value stocks by 1.1% from 1990-1998 (although small and mid cap value still beat growth over the period). Particularly in the late 90s, large-cap growth just hammered small-cap value. In 1998, for example, large cap growth earned 41%, while small cap value earned -1.2% . Value investors began to look like idiots. During this period, even the king of value investors – Warren Buffett – began to feel the pain. In their paper, “Buffett’s Alpha,” (a copy is here ) Frazzini et al. observe that from June 30, 1998 to February 29, 2000, Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ) lost 44% of its value while the overall stock market gained 32%. Thus, over this ~1.5 year period, Warren Buffett underperformed the market by an astonishing 76% . At the tail end of this stretch, Barron’s published a piece entitled, “What’s Wrong, Warren?” From the article: After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch. Huh? What was going on here? Was Warren Buffett no longer a guru, was value investing dead, and had the small-cap premium disappeared forever? Some seemed to think so. Yet, if this were the case, how could you explain why these anomalies would do a 180 degree turn, and perform in a way that was the opposite of how they had performed previously? The paper examines three potential explanations for why this could be the case: Rational Asset Pricing Under this view, the outperformance of large-cap growth was driven by a series of unexpected positive shocks for large caps, and negative shocks for small caps, perhaps due to new technology, or investor expectations. If this were true, then the performance edge of small-cap value should reappear in the future. New Paradigm Popularized during the dotcom bubble, this view argues that technology and the dynamics of large companies have altered the investing landscape. Technology will allow huge long-run returns, with high growth rates persisting in the future, and large-caps have sustainable advantages based on their scale and international presence. Therefore, the old paradigm, in which firms were priced based on historical returns, no longer applies, and new valuations might be low given the new high expected growth rates under these new-paradigm conditions. If this is true, then small-cap value may continue to lag large-cap growth for a long time. Behavioral/Institutional This view argues that investors overreacted to the growth potential of technological innovation, and prices became disconnected from underlying fundamentals. Additionally, as markets continued to march higher, and large cap growth continued to outperform, the trend was self-reinforcing. If this view is right, then small-cap value will in the future exhibit return patterns consistent with its historical performance. We can test these explanations. Did large-caps experience excess profitability and small-caps experience depressed profitability? If this were true, that would support the rational pricing and new paradigm interpretations. If we failed to see this evidence, that might support the behavioral interpretation. So what does the evidence say? The authors examined performance data based on four accounting metrics: net sales revenue, operating income before depreciation, income, and cash dividends. We’re going focus on sales only since, as the authors point out, this data has no negative values, and is “smoother” (although you can read the paper to confirm that the other accounting metrics exhibited similar characteristics). The authors examined the price-to-sales ratio of the various asset classes and found something surprising: The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Note the extreme multiple expansion for price-to-sales that occurred for large-cap growth from 1997 through 1999. This expansion was obviously not duplicated by the other asset classes. Yet was this expanded multiple justified by the fundamentals? No. Note below how 1996-98 sales growth for large-cap growth was nothing special at 6%. In fact, growth badly lagged the 29 year average for large-cap sales growth of 10.3%. The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Meanwhile, sales growth for small-cap and mid-cap showed no particular weakness; in fact, small-cap sales growth from 96-98 was 12.7%, versus its long term (70-98) average of 8.1% – much stronger than historically! While we have only reviewed price-to-sales versus sales growth in detail here, again, the other profitability metrics reviewed in the paper are consistent with these observations. We therefore have a reasonable basis for rejecting the rational asset pricing argument, since we observed no unexpected fundamental shocks. Sales growth trends actually showed the opposite: it was weak for large-cap growth, and strong for small-cap value. Similarly, we can (mostly) reject the new paradigm argument, since we weren’t able to identify any emerging trends in sales growth that would justify higher valuations. It’s possible that these dramatically higher growth rates would show up farther in the future, but again, you would expect to see at least some evidence that this was occurring. Accordingly, it seems reasonable to embrace the third argument: behavioral/institutional. That is to say, the very high valuations of large-cap growth became disconnected from any reasonable assessment of future growth prospects, and this was driven by human bias, as investors overreacted to new technology and wild extrapolations of internet growth, and they chased anticipated returns. Taking a Step Back This observation is not especially revolutionary, in hindsight. By now, it’s obvious to everyone that during the dotcom years investors were caught up in “irrational exuberance” and bid up large-cap growth stocks to unsustainable highs. Yet it is still remarkable to see the actual fundamental data laid out so starkly and juxtaposed with equity prices. One observation that emerges from this analysis is how broader trends and market distortions can cause certain historical patterns and relationships, such as the size anomaly the value premium, to break down. Yet, once these behaviorally-driven market trends recede, and internet fever subsides, it seems reasonable to think longer-term value and small-cap effect will take hold once again. Of course, during this period in the 90s, people began to question value and size effects. As was demonstrated, Warren Buffett lagged the market by 76%! And people questioned him and his methods. Now that is the kind underperformance that can give you plenty of cover to argue that Buffett has lost his touch, that value investing is dead, and that only suckers believe in the size anomaly. Yet we have a long history of returns that gives us confidence that value and size effects are persistent. So we should be realistic and recognize too that they are not consistent. That is, there are prolonged periods, such as this stretch in the late 90s, when large-cap growth looks like the smart way to bet going forward. So when you see a broad reversal, say when large-cap growth has a stretch of outperformance, don’t be fooled. Consider that it’s pretty likely that you are getting fooled by “new paradigm” thinking that prevailed in the 90s. Original Post

FirstEnergy’s (FE) CEO Tony Alexander on Q4 2014 Results – Earnings Call Transcript

FirstEnergy Corp. (NYSE: FE ) Q4 2014 Results Earnings Conference Call February 18, 2015, 09:00 AM ET Executives Meghan Beringer – Director, Investor Relations Chuck Jones – President and Chief Executive Officer Leila Vespoli – Executive Vice President, Markets and CLO Jim Pearson – Senior Vice President and CFO Donny Schneider – President, FirstEnergy Solutions Jon Taylor – Vice President, Controller and CAO Steve Staub – Vice President and Treasurer Irene Prezelj – Vice President, Investor Relations Analysts Neel Mitra – Tudor, Pickering, Holt Dan Eggers – Credit Suisse Paul Patterson – Glenrock Associates Angie Storozynski – Macquarie Stephen Byrd – Morgan Stanley Julien Dumoulin-Smith – UBS Anthony Crowdell – Jefferies Ashar Khan – Visium Paul Ridzon – Keybanc Brian Chin – Bank of America Michael Lapides – Goldman Sachs Operator Greetings. And welcome to the FirstEnergy Corp.’s Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. I would now turn the conference over to Ms. Meghan Beringer, Director of Investor Relations. Thank you, Ms. Beringer. You may now begin. Meghan Beringer Thank you, Manny, and good morning. Welcome to FirstEnergy’s fourth quarter earnings call. First, please be reminded that during this conference call, we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects and other aspects of the business of FirstEnergy Corp. are based on current expectations that are subject to risks and uncertainties. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the Safe Harbor statement contained in the consolidated report to the financial community, which was released yesterday and is also available on our website under the Earnings Information link. Today, we will be referring to operating earnings, operating earnings per share, operating earnings per share by segments and adjusted EBITDA, which are all non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures are contained in the consolidated report. The updated fact book, and as well on the Investor Information section on our website at www.firstenergycorp.com/ir. Participating in today’s call are; Chuck Jones, President and Chief Executive Officer, Jim Pearson, Senior Vice President and Chief Financial Officer, Leila Vespoli, Executive Vice President, Markets and Chief Legal Officer; Donny Schneider, President of FirstEnergy Solutions; Jon Taylor, Vice President, Controller and Chief Accounting Officer; Steve Staub, Vice President and Treasurer; and Irene Prezelj, Vice President, Investor Relations. Now I will turn the call over to Chuck Jones. Chuck Jones Thanks, Meghan, and good morning, everyone. It’s my pleasure to talk with you today. For today’s call we are deliberately keeping our prepared remarks rather brief, so there will be plenty of time to take your questions at the end. Clearly the topic many of you will be most interested in is our 2015 earnings guidance, which we made public late last evening. But before moving to that discussion, I’d like to take a moment to thank Tony Alexander for his leadership of FirstEnergy over the past decade. Tony guided our Company through a dramatic expansion and navigated through one of the most challenging periods in the history of the utility industry. As you know, we also announced last night that Tony’s last day will be April 30th and we certainly wish him well as he begins his new chapter in his life and enjoys more time with his family. Since moving into the CEO position on January 1, I’ve had the opportunity to either meet personally or talk with many of you over the telephone. We’ve had some good two way conversation over the past couple of months. And I want you to know that the entire FirstEnergy team is committed to providing frank and open discussion about the challenges and opportunities we are facing as a company, that’s why in light of the recent Pennsylvania rate case settlements we decided to provide you with our earnings guidance range earlier than originally planned, so you would have a clear sense of what we are expecting this year. The 2015 operating earnings guidance range of $2.40 to $2.70 per share is in line with the updated drivers for our utilities business and corporate segment that we provided in November, although some street expectations have not been adjusted to reflect that information. Looking at consensus estimates, we saw a fairly widespread of about $0.50 ranging from $2.60 to over $3.10 and we understand the challenges of modelling FirstEnergy giving all the moving pieces we have right now. Given the disparity between the street consensus and our 2015 base earnings, we believe it’s very critical to ground the investment community on earnings sooner rather than later as we reset our utilities around the new growth strategy. After today, our focus shifts to customer service driven growth across the utility segment. In that light now that we have made our 2015 earnings guidance public, following this call Irene and her investor relations team will be happy to answer your detailed questions about all the disclosures we made yesterday and today including here in our consolidated report and in our updated fact book. In the future once all of the pending rate case proceedings are finalized modelling are going forward earnings power should be far more transparent. And we hope to better articulate that for you later this year during the analyst meeting where we expect to provide a growth target for our utilities as well as in overall strategic update on all three of our business segments. We continue to believe the initiatives that were put in place during 2014 laid the path for our future growth and success. So let’s several minutes to review the key events of the past year. We successfully launched our Energizing the Future of transmission expansion program. Under this program, we will invest billions of dollars with an eye towards serving our customers better. These investments will improve reliability, add resiliency to the bulk electric system and install enhanced physical and cyber security to ensure our assets perform as designed. With our multiple rate proceedings, we have also set the stage for similar investment in our regulated businesses and more timely recovery of those investments. The recent major storm events that have impacted FirstEnergy service territory have highlighted the need for hardening of our distribution systems. And of course in the wake of the polar vortex and other severe weather events last winter we began taking a far more conservative approach in our competitive business to limit risk and — focus on greater stability. We have made good progress on these efforts. Our West Virginia rate case settlement was approved by the state public service commission earlier this month and we have filed settlements in our Pennsylvania and Ohio rate proceedings that require regulatory approval. We also look forward to closure on the base rate case at JCP&L and remain hopeful that the board of public utilities final decision in that proceeding will appropriately include the $580 million incurred by JCP&L for the 2012 storms. Once that case is finalized we look forward to working with the BPU to make Jersey Central Power & Light a stronger company going forward. In our ATSI proceeding, we believe FERC’s approval of our request to move to forward looking rates as of January 1 signals support for transmission investments for grid reliability. As we anticipated FERC accepted it subject to refund and also set hearing and settlement procedures and initiated an inquiry into ATSI’s return on equity. We believe that more timely recovery associated with forward looking rates is a major benefit to us which outweighs the impact of a potentially modest ROE adjustment. This rate structure for ATSI will provide a much better co-relation to our cost as we continue to implement our Energizing the Future of transmission investment plan. That plan is comprised primarily of thousands of small, customer focus transmission projects and equipment upgrades that can be implemented relatively quickly across our existing 24,000 miles of transmission assets. These projects are designed to enhance system reliability and resiliency for our customers while providing long term and sustainable growth for FirstEnergy. I strongly believe that the right investments are those that customers value and are willing to pay for and that provide attractive returns for our investors. It’s gratifying to report on the successful first year of that program. We overcame some weather related setbacks early in the year but by December we successfully completed our plan of $1.4 billion in new investments spanning more than 1100 projects. You can see the impact that that investment when you look at our financial disclosures for the transmission segment. The plan for 2015 calls for an additional $970 million investment across 430 projects including 1000 pieces of substation equipment and 300 miles of transmission lines. By the end of this year we expect to be well on track to meet our four year goal of $4.2 billion in investments through 2017. Key projects for 2015 include construction of a new substation and transmission line near Clarksburg, West Virginia to support an existing gas processing plant and reinforce the regional grid. We are also planning construction of a new transmission substation near Burgettstown town, Pennsylvania that will support low growth and improve service reliability for more than 40,000 customers of West Penn Power. At the EEI conference last November, we told you that we have identified about $15 billion in incremental transmission projects in 2018 and beyond providing a path to both improved customer service and a long term and sustainable growth platform for our company. Lets shift gears now and look at our competitive business. The actions we continue to take with regard to our more conservative strategy have been very effective at reducing the overall risk in this business. While our open position is subject to market movement we are structuring the business to be more predictable and self sustaining. Our conservative approach will better protect us in the event of extreme weather or unplanned outages at a major generating facility. We are projecting this business to be cash flow positive each year over the 2015 to 2018 period using conservative assumptions. I’ve been asked numerous times about the possibility of divesting this business, frankly at this point in time it doesn’t make sense while we are at or hopefully near the bottom of the market to sell these assets at the lowest value they will likely ever have. In addition, capacity market reforms and pending changes to the treatment of demand or response are likely to provide near term value for this business. Once these moving pieces play out we should have a much better picture of what we can expect from our competitive business going forward, at this point it remains a core business for FirstEnergy. However, we continue to monitor closely the financial performance of some of our individual generating units, particularly those located in western PJM. While the low market revenues are build into our financial models several of our units continue to struggle to run economically. The strategies we have in place in all three of our business segments are sound. They are the right priorities for our company at this time and in this environment and we will continue to refine them as conditions require or opportunities emerge. Along the way we intend to provide clear communication about our challenges, opportunities, strategies and goals. I’m sure you will have many questions at the end of this call and we have full investor meeting schedule coming up. I will make myself available as often as necessary to ensure we address all of your questions. I also hope to get to know many of you more in the next several months. For those of you who are not yet familiar with my style, I was trained in as an engineer to solve problems. My career FirstEnergy has been focused on customers and looking for sound long term solutions. Our distribution and transmission businesses have been my main focus, although I did have the opportunity to oversee our competitive business for the couple of years as well. As I mentioned earlier, in my mind the best investments like the ones we’re making in our transmission business are those that provide both customers and shareholders with real value. Its our responsibility to provide customer with a safe, reliable, affordable and clean electricity and my philosophy is that a commitment to these principals reflected in both our decision making and our management style is good business. Lastly, I believe very strongly in transparent communications whether to employees, customers, regulators or the financial community that mean saying what we know, when we know it. That’s why we decide to write earnings guidance sooner than originally expected. Looking forward, we will remain focused on long term shareholder value, executing our regulated growth plans and taking a conservative approach to our competitive business. At the same time, we will continue to evolving [ph] to meet the needs of our customers who rely on electricity to power their businesses in everyday lives. It’s my priority to move FirstEnergy to its next period of growth and success benefiting our customers, employees and investors. With that, I’ll turn the call over to Jim for a short review of 2014 financial results and additional details on our earnings guidance. Following Jim’s remarks we’ll open the call to your questions and we should have ample time to address whatever you’d like to talk about. Jim Pearson Thanks, Chuck and good morning everyone. This morning we’ve reported 2014 fourth quarter operating earnings of $0.80 per share and full year operating earnings of $2.56 per share, which was at the upper end of our guidance range. It was a strong quarter and solid year overall with numerous achievements. In somewhat of a change to past practice I won’t cover the results for the quarter in detail by segment since that information is available in the consolidated report or from our IR team. Instead, I will speak to the major drivers and events while leaving more time for Q&A. For the fourth quarter of 2014 GAAP results were in loss of $0.73 per share. This includes special items of $1.53 per share of which $1.23 is related to our annual pension and OPEB mark-to-market adjustment and as a non-cash item. This adjustment primarily reflects a 75 basis points decline in the discount rate and revise mortality assumptions used to measure our obligation. Moving now to our fourth quarter operating earnings drivers, consistent with the guidance we provided at EEI November, the FirstEnergy consolidated effective tax rate was 21.6% in the fourth quarter of 2014 predominantly reflecting a tax benefit associated with the resolution of state tax position. This drew a quarter-over-quarter benefit of $0.12 per share of which $0.10 was included in the corporate segment. And our regulated utilities overall distribution deliveries decreased fourth quarter earnings $0.01 per share. Total deliveries were down slightly primarily driven by milder weather which drove a 2.5% reduction in residential sales quarter-over-quarter. Industrial sales were up 1.8%, the sixth consecutive quarter of growth in that sector. On the transmission side we’ve reported fourth quarter operating earnings of $0.14 per share in line with our expectations as we ramped up our Energizing the Future initiative. At our competitive operations results came in slightly better than expected for the quarter. Commodity margin was down $0.08 per share primarily due to lower contract sales that resulted from the change in retail strategy as well as mild weather. These factors were partially offset by higher capacity revenues related to the increase in the auction clearing prices. Let’s move to a short overview of some of the key earnings drivers for 2014 which included a 6% earnings improvement in our transmission segment year-over-year as we launched our Energizing the Future Initiatives. On a competitive side of the business we experienced a year-over-year earnings decline of $0.51 per share due to the extreme weather events early in 2014, partially offset by the actions we put into place to reposition our sales portfolio and effectively hedge our generation by reducing weather sensitive loads. Adjusted EBITDA was $653 million in line with our expectations. At our regulated distribution utilities we’ve reported 2014 operating earnings of $1.93 per share in line with the midpoint of guidance we provided in November. We saw the full benefit of the West Virginia asset transfer but also rising expenses for maintenance, depreciation, general taxes and interest without commensurate recovery in rates. However, as Chuck said, new rates that we expect to be effective in 2015 will reset the base line for a majority of our utilities. Distribution deliveries increased 1% compared to 2013 on both on actual and weather adjusted basis. Industrial sales were up each quarter and ended the year up 2%. At our corporate segment we benefited from multiple tax initiatives and ended the year with an effective income tax rate of 29.3%. As we have previously discussed, we anticipate an effective tax rate of approximately 37% to 38% in 2015. Let’s now move to a discussion of some of the 2015 operating earnings guidance details. On the regulated utility side which is where we believe most estimates did not fully account for the increases in ongoing expenses such as depreciation, interest and taxes, we expect a midpoint of $1.82 per share. This includes new rigs in West Virginia which will effective this month and our expectation for new rates in Pennsylvania which would be effective in May based on the pending settlement. For New Jersey, we assumed revenues neutral to 2014 levels but included $0.08 per share for amortization of deferred storm cost for both 2011 and 2012 storms. We expect moderate low growth in distribution sales of about 1%. Commodity margin at our competitive operations is expected to increase by $0.44 per share in 2015 compared to 2014 primarily due to higher ATSI capacity prices. For 2015, our committed sales currently are 67 million megawatt hours. Our 2015 adjusted EBITDA for the competitive business has been revised to $875 million to $950 million, a slight decrease from our previous range given the drop in power prices since November. At our transmission segment, this year we expect an uplift of $0.11 per share related to the implementation of forward-looking formula rates as requested in our FERC filing and high rate base at both ATSI and TrAIL. An although FERC has initiated an enquiry related to our ATSI, ROE we anticipate the range for that segment should accommodate the outcome of that process. At corporate a combination of a more normal effective tax rate coupled with increase net financing cost is expected to reduce 2015 operating earnings by $0.42 per share in line with the drivers we provided at the EEI. Last evening, we published detailed information regarding our 2015 guidance on our fact book, which is posted on our website. With that, I’d like open the call for you questions. Question-and-Answer Session Operator Thank you. We would now… Jim Pearson Okay. As promised we have 35 minutes left for questions. Operator Thank you. [Operator Instructions] our first question is from Neel Mitra of Tudor, Pickering, Holt. Please go ahead. Neel Mitra Hi. Good morning. Jim Pearson Good morning, Neel. Neel Mitra Jim, I had a question on the O&M expense at the regulated utilities, so it seems to go up $0.08 in 2015 and then in your drivers in 2016, it looks like its flat. Was just wondering what’s causing the increase in 2015 and maybe what’s the normalized run rate on a percentage basis for increases going forward? Jim Pearson Going forward, Neel, I would say our O&M is going to be pretty much consistent with what we’re reflecting in 2015. In 2015, we’re seeing some additional O&M expenses associated with some of our rate filings and vegetation management mostly. That would be the primary driver. Chuck Jones And vegetation management are big piece of it, in light of the major storms that we saw, we been spending a lot of money reclaiming our rights of ways and expanding our rights of ways which has been capital expense and we’re going to be shifting more into more typically four year trim cycle which is going to shift some of that back to O&M. Neel Mitra Right. So in 2016, it looks it shows its kind of neutral, as I mean you expected to be flat or do you expect kind of a consistent percentage increases as 2014 or 2015 between 2015 and 2016? Jim Pearson No. In 2016 Neel we would expect that O&M to be flat to 2015. Neel Mitra Okay, great. And then, is there any kind of update on the timing of the higher PPAs as far as when we get a decision and whether that would be before RPM? Leila Vespoli Hi, Neel, this is Leila. Yes. So the procedural schedule slipped in Ohio little bit. We may have FirstEnergy supplemental testimony being due in March 2 as well as intervener testimony and Staff testimony on March 27 and hearings on April 13. Given that we’ve asked for – originally asked for an April 8 decision date, obviously that is not going to happen. But from our standpoint I still think we’re in a good place. Originally we had asked for April 8 date to commit two things. If you think about it from an FES perspective, FES needs to know to whether they have this generation and how to hedge it. So we need a reasonable period of time to allow FES to be put in to position to sell it. And also with regard to the RMP auction. I think given the schedule the way it is now we’re FES is going to have to bid those units in along with the rest of the competitive generation and it just kind of a missed opportunity for the utility side to do that. But again I don’t think a critical thing. it just would have been a nice to have kind of thing. So that’s – it was respect to the schedule for us. As you may AEP has a case dealing with the PPA coming up, I understand decision will probably come out in the next two to three weeks or so and I’m hopeful that will bode well for decision in our case. Neel Mitra Great. Thank you very much. Operator Thank you. the next question is from Dan Eggers from Credit Suisse. Please go ahead. Dan Eggers Hey, good morning guys. Chuck, I think Jim hit it well that you prior lot of us in the industry were surprised by some the expense lines of the utility, if you look at the earned ROEs for the jurisdictions how do you think those ROEs look in 2015 versus what you expect going forward meaning, are you going to see improvement in ROEs beyond this year, or we normalized at this ROE level? Chuck Jones Well, Dan, here’s what I’d say, obviously I think given fiscal policy in our country there is going to continue to be pressure on ROEs as long as interest rates stay low. But absent regulatory action on our part I don’t see any way that those are going to change. So once we get through Pennsylvania, we’ll figure out where we end up with ATSI and we get through New Jersey. I think we’re going to be in a pretty stable place there and I expect later this year when we do an Analyst Meeting that we’ll be able to give you little more transparency into what those ROEs are company by company other than we kind of did the rate making and kind of a black box type environment. So hopefully we’ll give you more clarity on that later this summer. Dan Eggers Can I maybe ask that little clumsier than I meant to. From an earned ROE perspective, if you look at the different utilities and particularly with your rate cases having gotten resolved, should the earned realized ROEs kind of level out at where you are expecting in 2015 guidance or do you look at things in 2016 and 2017 that could allow ROEs to improve? Jim Pearson I would think they’re going to certainly level out at where we’re at in 2015 and I expect overtime there will be some modest improvement. Dan Eggers Okay, and I guess here Jim on the operating expenses you know being higher on the utilities something that you expected the Pension/OPEB in depreciation expenses seem to stand out from our math, can you just talk about what was underlying in some of those increases year-on-year and how we should think about those going forward? Jim Pearson Yes let me start with the Pension/OPEB line Dan, that’s primarily driven by the absence of a credit that is expiring over the 2014, 2015 timeframe. And then you have slightly higher pension expense associated with the mortality tables. So that’s what drove the reduction in that line. From a increase in what I would say the depreciation and property taxes when I look at distribution that’s pretty consistent year-over-year and if you look at 2013 to 2014 depreciation property taxes increased about $0.09 were showing about an $0.08 increase 2015 to 2016. And when you think about it, we’re spending about $1.4 billion, $1.3 billion annually at our distribution company and we have about $650 million of depreciation, so we’re spending more in our depreciation there so. I would look for that type of a consistent increase in depreciation and property taxes. From the transmission side, we showed a increase in depreciation property taxes of about $0.03 2013 to 2014 and that was showing the ramp up of our Energizing the future program. We spent $1.4 billion in capital; in 2014 we are expecting to spend just about $1 billion in 2015. So that $0.11 increase in property tax is really associated with that increased capital and essentially the timing of when it goes into service. Dan Eggers Okay. Just one last question just on the transmission side with the CapEx down this year versus last year, I know that was part of the plan you laid out in the fall but because you have a lot of smaller projects what could motivate you guys that allow the opportunity fee you spend more money in 2015 than you’ve budgeted so far? Chuck Jones I don’t think we’re going to spend more money in 2015 than we budgeted, so wouldn’t want to leave you with that impression. You know one of the critical aspects of that plan quite frankly is getting the workforce to be able to construct these projects and there is a constraint on that across our nation, but we have locked in through a partnership with Quanta workforce that will be available to FirstEnergy well into the future and I think that it makes sense to just approach this in a kind of steady predictable fashion. The drop off from 2014 to 2015 is due to the fact that we had a number of reliability projects that PJM ordered as a result of the late plant closings that were finishing up and putting in service early this year. Dan Eggers Great. thank you guys. Operator Thank you. The next question is from Paul Patterson of Glenrock Associates. Please go ahead. Paul Patterson Good morning, sorry about that. Can you hear me? Chuck Jones Yes, we can hear you Paul. Paul Patterson On the $0.30 per transmission that you guys are projecting for 2015, how much of that is in the [Indiscernible] Forward treatment that you guys are expecting? And just on that for a quarter, as I recall my understanding was that they really hadn’t signed off on the Ford test-years treatment. Correct me if I’m wrong, I know the settlement discussions must be encouraged and I think they are still going on, can you give us any flavour for that as well in this context of the Forward test-year stuff? Leila Vespoli This is Leila, I’ll answer the latter part of the question first and then turn it back over to Jim. So you are correct, we are in the settlement of process associate with that, there has been no set procedural schedule although if thing stay inline you might expect that decision in that case maybe late this year or slipping into the first quarter of the following year. With regard to the rate they have not left the forward looking tester, what they did is put the rate into effect subject to refund. So January 1st we started it and I think the refund date was something like the 12th or 13th of January. So that’s where it stands from a procedural schedule standpoint. Jim Pearson And Paul to your first question that $0.30 uptick in revenues there, the majority of that would be associated with actually in the forward-looking test year. Paul Patterson Okay. But you guys feels confident I guess I mean with respect to your settlement discussions and what have you about the forward test year treatment is that Leila that fair enough to say? Leila Vespoli I think if you look at past President at FERC I think the forward-looking test year part of it even though that is an issue that the party is raised is something that you know from my standpoint I feel very comfortable on, I mean some of the other things they are looking at you know – Interveners allege is you know — finding the system. They are also looking at the protocols for true up. So from my standpoint officially given how Chuck described what it is we’re doing and the reliability aspects of this I feel very comfortable where we are. The one thing we have always highlighted is the rate of return and the fact that we thought that that would be an issue and not withstanding that we felt that appropriate to go in with the formula rate. If you want to think about it every 100 basis points is about $16 million and so you know if you then look at past President you can do your own calculation with regard to that. Paul Patterson Okay, great. Jim Pearson Paul, I just want to point out, I’m sure you understand this, but because the 2014 expenditures were you know lagging rate mechanism and now the 2015 expenditures are in a forward-looking mechanism what you are seeing in terms of the shift in earnings from 2014 to 2015 really is two years worth of expenditures. So that’s not the number that you are going to expect to see going forward. Paul Patterson Great. Thanks for the clarity guys. And then Chuck you mentioned in your remarks that you wanted I believe the merchant business to be more self sustaining and also that your thoughts of the market was at a very low price and – power prices and what have you in that it just being the wrong time to divest the business if that were the case. And I guess the question that I have is A, if your market outlook changed would you be willing to perhaps look at breaking off these companies if it were possible? And then just B, what’s your appetite for additional investments perhaps and merchants just and in general how do you see the merchant arm of this business which is clearly very different than the rest of the business, how do you see that strategically going forward, do you see a possibility of a spin off or just in general how should we think about how you are really looking at this business and what you might do strategically to enhance value? Chuck Jones So here’s how I am thinking about it. And I have told several others who – asked this question, I wanted to long time ago never say never and never say always. So, things can change, but for now we’re looking at running that business in a mode where we remain cash flow positive where we used those market changes that are coming to take that cash and begin retiring some of the holding company debt that’s associated with that business and overtime put that business into a position where we can have more flexibility and how we look at it. And then if you can tell me what the market’s going to be like in two years, three years, four years, I think I could answer what I would do depending on what that market’s like. But I don’t think anybody can tell us what that’s going to be. So right now we’re hedged down, we’re committed to running a cash flow positive and we are committed to de-risking it so that it doesn’t continue to be the conversation when 80% of our company is regulated and generating absent [ph] today and getting everybody kind of in line with where we are at, generating consistent predictable regulated earnings, so that’s the plan. Paul Patterson Okay. Thanks so much. Jim Pearson Hey Manny, before we go move forward, I intended [ph] to know when I was giving Dan an explanation on the increase as of depreciation year-over-year I said it increased 2016 versus 2015 I should have said 2015 versus 2014. Operator Thank you. Our next question is from Angie Storozynski of Macquarie. Please go ahead. Angie Storozynski Thank you. I wanted to go back again to the distribution earnings, I mean we are clearly missing a piece here, so you’ve just gone to rate cases in Pennsylvania and New Jersey and West Virginia. You know what if your cost structure going into these rate cases, you showed us what is the pre-tax impact of the rate case settlement or decisions and yet we have all of this $0.25 plus drag from higher cost on the distribution side, shouldn’t that have been already reflected in the rate cases that you have gone through and also is this just an attempt to basically reset the base for future growth of this business and have fetched us just incremental on them [ph] spending that basically is not recurring? Jim Pearson Angie, yes this is Jim. Some of the expenses that we had incurred was to prepare us for these rate filings that we had. As I said earlier we would expect that our O&M is going to held flat going into next year and we will be realizing the full impact of all of those rate filings next year. As Chuck said earlier, I would look at 2015 as our base line that we are going to start growing those distribution earnings from that point and you know we’ll be said that provide more clarity on that at the analyst day meeting that we have. Angie Storozynski Okay, but can you please give us a sense of this growth that other regulated utilities can offer. I mean is this a meaningful step up starting in 2016 for distribution? Jim Pearson For this point we are not giving any type of 2016 guidance but you know this is the base line that we would expect to start showing growth at our distribution utilities. I don’t think we are going to put a percent out there yet until we fully understand what’s reflected in all of the regulatory outcomes and that we’re comfortable and confident that we’ll be able to deliver on that. Chuck Jones We’re got some work to do here, we have a settlement but it hasn’t been approved by the PA regulators, so I don’t think it’s fair for us to assume that we still got work to do in New Jersey and obviously we have a big case pending in Ohio. Once all that settles out then I think we are in a better position to decide what’s our investment strategy going forward, what’s our plan for each of those states going forward and that’s what we plan to tell you later this year once we get all those answers. Angie Storozynski Okay, thank you. Operator Thank you. The next question is from Stephen Byrd of Morgan Stanley. Please go ahead. Stephen Byrd Good morning. Chuck Jones Good morning. Stephen Byrd Wanted to just follow up I think really on Paul’s question on the sort of market outlook, you all are fairly physically close to a lot of the shale gas activity and we’re seeing a lot of development of shale gas. I was – just have a high level interested in your market take in terms of what the growth in shale gas really means longer term for power prices, what’s your expectations, it sounds like from Chuck’s earlier comments that you are relatively bullish on power prices relative to the four, I was just curious how you think about the dynamics from the shale gas that we are seeing being developed right around in your territory? Jim Pearson Well first of all I’m not sure what I said to make you think I was bullish on forward curve power freight [ph], because that’s quite to the contrary. I think as we look at the shale gas issue we have to look at it in a couple of different ways. The first way is on those forward price curves and we actually had IHS in yesterday to talk to us about their views. And I think you know for the foreseeable future, we’re not expecting any significant uptick in those forward price curves, so we are structuring our competitive business around those forwards as we know. The other side of that coin is it’s the economic development engine that’s driving growth in our territory and over the next few years we expect to connect over a 1000 megawatts of new load directly attributed to the midstream part of that business, you know there are discussions underway about upto three cracker plants in our region, if any or all of those come to fruition I think those are the foundation for an industrial revolution in the part of the country that we serve. So that’s the upside long term, the reality in short term is we expect gas prices to stay fairly low. There is some congestion in the gas markets that’s going on right now, but there is also roughly $20 billion worth of gas transmission projects that are under construction and expected to go in service over the next few years that will release some of that congestion and eliminate some of the basis difference between our zone and the rest of the country. And that might have a modest change but all in all we are planning to run our regulated business around the market forward as we see them today. Stephen Byrd Okay, great. And just wanted to touch base on your hedging strategy given that they are repaying [ph] your seen in the market any changes in terms of your thinking in terms of the volume that you’d like to hedge or given what you said about sort of your market outlook, any changes we should expect in terms of how you all think about hedging your generation fleet going forward? Chuck Jones I would say no. And what I said my prepared remarks was, we’ve structured that business in a way where we are trying to expose risks to volatility as associated to weather and to kind of protect ourselves against an unplanned generator outage, so we have the ability to generate 80 to 85 million megawatts hours a year. We’re going to sell something less than that, so that as the load fluctuates with weather our committed load fluctuates with weather and/or we have issues that any of our plants we have the ability to cover ourselves. That will – I understand were likely giving up some earnings potential from that business by taking risk out of it, but as I said earlier I’d rather make it more predictable, more stable and get it out of the conversation as much as I can so we can talk about the type of company FirstEnergy really is which is a large regulated utility with 6 million customers. Stephen Byrd That’s very clear. And just lastly very briefly the – we’ve seen some relatively extreme weather through the winter time, in general how has the fleet performed through this sort of this winter period that you are seeing, have you been satisfied with the performance of the fleet and anything compared to sort of prior years in terms of performance trends. Chuck Jones I would say our fleet has performed very well, the markets have not. So had two units at the Bruce Mansfield plant that didn’t run for six days in the last two weeks because the LMP at those plants we couldn’t make money, so we didn’t run out. So but the plants are available, they are running well, our generation team has done an amazing job between last year and this year getting ready for this winter. Stephen Byrd Great. Thank you very much. Operator Thank you. The next question is from Julien Dumoulin-Smith of UBS. Please go ahead. Julien Dumoulin-Smith Hi, good morning. Chuck Jones Hi Julien Jim Pearson Good morning, Julien. Julien Dumoulin-Smith Congratulations again. I really wanted to focus on the transmission side of the business, specifically the guidance. What are you guys assuming in terms of an earned ROE, I know that may be awkward in the context of your pending case for ATSI, but can you give us a sense of how much lag is embedded in that number and as you turn towards the forward test year and implementing that in kind of a run rate for 2016 what kind of improvement should we be thinking about there and what’s ultimately reflected in 2015 specifically? Chuck Jones All right. So I’m not sure if I got all of those, I’m going to answer the first quesztin and then you can answer or ask them one at a time, it will be easier for me to follow. So, but the first question on you know, we get that question a lot of what are we assuming about ATSI’s rate of return going forward and here’s how I view this. We just got first approval January 1st to move forward. There are – there’s a case now that going to be had and there’s a settlement process that’s going to be had and my view is we’re going to go into those arguing like 12.38%, it makes sense going forward and it’s stimulating the type of investment and reliability that I believe folks should want. And that’s our going in position, anything from there I give you a number then we are going to be negotiating from that number. So we’re not going to give you a number, we are going to go into those settlement that settlement process and we’re going to make the best case we can to make sure that we get the right return for our investors so that we can continue making these investments in the way that we are. Julien Dumoulin-Smith But from a regulatory lag perspective, what are you assuming if you can talk to that. Chuck Jones Regulatory lay we are assuming forward-looking rights. Julien Dumoulin-Smith Okay. So there’s not necessarily improvement next year as you have a full year or have you? Chuck Jones No. Julien Dumoulin-Smith Got you. And then in terms of the outlook for transmission CapEx how are you feeling about flowing dollars in the transmission versus distribution. Can you kind of elaborate a little bit on where you see capital going in the future and then subsequently I know we’ve discussed this before, on the distribution side, what kinds of future investments do you see now that you’ve gone or about to go through all of the state utility rate case? Chuck Jones So lets take transmission first. We’ve told you about 4.2 billion over a four year period that was in the second year of it was 1.4 billion the first year, it’s 900 and some million in the second year. After two years we’ll be right on track to be halfway through that and for 2016 and 2017 that will be the number. We have $15 billion worth of projects in addition to those that are in the four year plan that we can’t execute. That hopefully albeit in a position that when we talk to you later this year to articulate kind of more of a long term strategy for transmission and what we are planning to do there. But for the foreseeable future the numbers we’ve given you is what my plans are and I think one of the things that I have to start doing is saying what we are going to do and then doing what we say. So I don’t expect any change in that over the next couple of years. On the distribution front, the rate cases in Pennsylvania are a huge step. It rebases those utilities and it was a necessary step if we decide to make reliability improvement investments in Pennsylvania. Pennsylvania has a methodology that’s available to us called the disc that we can make investments, but as I told you when you came in, we got to get through these rate cases first and then we’ll make decisions there. And in my prepared remarks I said once we get through the base rate case in New Jersey then I look forward to the certain amount of BTU and working together to figure out how we make JCP&L stronger going forward. In Ohio we have a DCR mechanism that we have been using to invest in those utilities. So later this year I know you want numbers, I’m not prepared to give you numbers today, but later this year, I think we can lay out a strategy of how much and where we plan to invest to start using our distribution utilities to improve service to customers and improve the picture for shareholders at the same time. Julien Dumoulin-Smith Got you. And you are interested in using the disc mechanism to be clear in terms of… Chuck Jones I think we will definitely look at it once we are done and then decide is that the best way and does it allow the right investments because more importantly to me is making the right investments that truly benefit customers. And if that makes more sense to make them and just have traditional rate cases then we’ll go that way. But to me we have to lay out what the plan is for customers first and make the right investments. If that can be done under the disc then the disc would be a smart way to do it. Julien Dumoulin-Smith Great. Thank you. Operator Thank you. Our next question is from Anthony Crowdell of Jefferies. Please go ahead. Anthony Crowdell Hey good morning. More of like I guess a long term view question or I guess earlier in your remarks you had said that you are not interested in selling the generation assets and I maybe paraphrasing just you thought that was kind of a departmental market, but as I think three to five years if you are locking up the assets now in terms of the regulatory agreement, aren’t you locking that in at these depressed prices and don’t – three to five years will not be able to benefit if there is a power price recovery? Chuck Jones Well, so let me opine a little bit on what’s going on in Ohio, and you know I am of the belief that long term those states that remained fully regulated when you have the opted—the ability to optimize between generation transmission and distribution you are going to serve customers best. Some of our states chose to go to competitive markets. This whole discussion in Ohio is around whether or not we trust regulators better to look out for the long term interest of customers or whether we trust markets better to look out for the long term interest of the customers. Those states that are net importers of generation end up with the highest cost and don’t have the ability to optimize between those three segments, so if the PPA is successful we’re basically taking those plants and turning it over to the regulators to regulate them again. They will have a chance to look at how we run them, to look at the prudency of our expenses, but we are saying I think we trust the regulator to look out for a future Ohio more than we do the markets today. Anthony Crowdell Great. thanks for taking my question. Operator Thank you. The next question is from Ashar Khan of Visium. Please go ahead. Ashar Khan Most of my questions have been answered. I just wanted to thank Tony for his leadership during the very very hard period and I wanted to congratulate you on your taking over the responsibility of the new position. Thank you. Chuck Jones Well thank you. And I’m sure Tony does too, and I’m sure he’s listening. We don’t have a microphone in front of him, but I’m sure he is listening this morning. Operator Thank you. The next question is from Paul Ridzon of Keybanc. Please go ahead. Paul Ridzon Just I think you made a comment about 100 basis point of ROE at actually was it $16 million of net income? Leila Vespoli That was a comment I made and pre-tax, yes. Paul Ridzon Pre-tax, okay. And then I know you are not going to give a growth rate, but given the moving pieces we have with the timing of Pennsylvania rates coming in and New Jersey, do you think 2016 will be a step up from 2015 at the on the regulated side obviously competitive is going to be very well… Chuck Jones Well 2015 only includes seven twelfths of what Pennsylvania is worth, so in 2016 it will be a full years worth of treatment and then beyond that we need to see where we land in New Jersey and Ohio. Paul Ridzon And what was your assumption as far as New Jersey in guidance? Jim Pearson Yes what we assumed in the guidance Paul was that it would be revenue neutral and that there would be $0.08 of storm caused amortization associated with the 2011 and 2012 storms. Paul Ridzon Effective one, is that going to bleed into 2016 as well? Jim Pearson That would be effective March 1st , so you might have just slightly higher amortization year-over-year. Paul Ridzon Any sense of when you are going to hold your Analyst Day? Chuck Jones Not yet. Paul Ridzon Okay, thank you very much… Chuck Jones It will be after we have a decision in Ohio, a decision in New Jersey, a decision hopefully on ATSI and then we’ll go from there. Paul Ridzon Okay thank you very much. Operator Thank you. The next question is from Brian Chin with Bank of America. Please go ahead. Brian Chin Hi good morning. Chuck Jones Good morning, Brian. Brian Chin About a year ago the management team had expressed a possible interest in looking at the REIT structure for transmission growth opportunities and given now that there is an entity out there that’s you can see what the cost of capital is like, just wanted to see if you could give us an updated sense of that and Chuck also any comments you have there on your perspective? Chuck Jones I’m not sure. We are always looking at any option that’s out there, but I’m not sure that we saw at that time or see today any real benefit to a REIT for our company. Our company is a little complex in terms of we’ve got transmission that’s inside utilities, transmission that’s inside the ATSI, transmission that’s inside TrAILCo the transmission that’s inside ATSI, the real estate is owned by the utilities and I just think it’s a distraction that would take a lot of time and effort of the management team to figure out that we don’t need to be looking at right now because it doesn’t provide any significant long term financial advantage for us. Brian Chin That’s very clear. And then just one additional question you had mentioned in your prepared comments PJM West plant, plant box and some plants appear to be a little bit more struggling here. Is the primary criteria that you are thinking about cash flow accretion it seemed to be that you are leaning towards trying to get the merchant generation business to be cash flow positive so is that really the criteria that we should be thinking from a plant perspective here? Chuck Jones So we have the merchant generation business cash flow positive for the next four years at market forwards as we know them and with capacity as we know it. So that’s not our goal, that’s where we are at. As we see the changes that are happening with the capacity market reforms, that’s going to be additive. We’ve put ourselves in a position with our generating fleet that we’re not forced to generate because we have load committements. We’ve got a significant amount of our generation that’s going to be market driven generation. That gives us the ability like I said two weeks ago to say if Mansfield is not in the money we’re not going to run it and loose money. So we’re going to optimize it and that optimization is something that we’re going to do day in day out. We’re going to do day in kind of more as we look at any options on the retail side as new customer opportunities present themselves, but the goal is, is cash flow positive and were there. And then beyond that we want to obviously drive it more cash flow positive so that we can start getting additional flexibility in that part of our business down the road. Brian Chin Thank you very much. Meghan Beringer Manny we have time for one more question. Operator Certainly. The final question comes from the line of Michael Lapides of Goldman Sachs. Please go ahead. Michael Lapides Hey guys, thanks guys for taking my call this late in the hour. Just thinking about the balance sheet and capital structure, you guys did a really good job year and a half or so ago of reducing the debt levels at the competitive business. You narrow in a position where you’ve got a lot of debt at the holding company level and a lot of it is short term or floating rate, many economist would argue that short term debt is probably at its all time lows and that directionally short term debt is likely heading high up. Do you have any thoughts in terms of how you can deal with the significant amount of short term debt that’s on the balance sheet, meaning whether you would turn [ph] it out and therefore kind of lock in a long term interest rate for that and kind of give yourself some multiyear certainty of that or would you potentially pay it off and if so where – how would you where would you receive the proceeds or how would you generate the proceeds to pay down some debt? Jim Pearson Michael, at this point I think we need to see how a number of these initiatives play out. If you think about the PPA in Ohio finalizing the rate cases, the potential for the capacity performance product I think that will give us a much clear sense of what our cash projections will be going forward. At this point we have no plans to term out any of the long term debt that’s sitting at the Holdco. I do agree with you that we are carrying more debt at that level than either Chuck and I are comfortable with, but as we lay out our long term plan going forward, it will be our intention to strengthen the balance sheet and with that reducing some of that debt at the holding company, but at this point I cannot give you a specific plan to do that until we know some of the outcomes of these major initiatives. Michael Lapides Got it. Thanks Jim and Chuck, congratulations. Chuck Jones Thanks Mike. Chuck Jones Okay, well I’d like to thank you all for your continued support of FirstEnergy and I think you know our goal today was to give you a clear and transparent view of our company and to build the foundation for our growth strategy that we will lay out in more detail this year at the analyst meeting. I’m proud to have the opportunity to take over for Tony. I am proud of our employees at FirstEnergy because I truly believe that’s what makes our company strong and I’m thankful for our six million customers and obviously all of our investors. Take care everyone. Operator Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.