第一能源 (FE) 2008 Q3 法說會逐字稿

Good afternoon. My name is Christel and I will be your conference operator today. At this time, I would like to welcome everyone to the FirstEnergy Corp. third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Ms. Irene Prezelj, Manager of Investor Relations. Please go ahead.

Thank you and good afternoon. During this conference call, we will make various forward-looking statements within the meaning of the Safe Harbor provision 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 can 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 earlier today and it is also available on our web site under the earnings release link.

Reconciliations to GAAP for the non-GAAP earnings measures we will be referring to today are also contained in that report as well as on the investor information section of our web site at www.FirstEnergyCorp.com\IR.

Participating in today's call are Tony Alexander, President and Chief Executive Officer; Rich Marsh, Senior Vice President and Chief Financial Officer; Harvey Wagner, Vice President and Controller; Jim Pierson, Vice President and Treasurer; and Ron Seeholzer, Vice President of Investor Relations. I'll now turn the call over to Rich.

Thank you, Irene. Good afternoon, everyone. Thanks for joining us today. I'll start our call with a review of third quarter results followed by an update on our financial position. I'll then turn the call over to Tony for an overview of our operational results, as well as an update on regulatory and legislative activities in Ohio and Pennsylvania.

As we review our third quarter results today, it may be helpful for you to refer to our consolidated report to the financial community that we issued earlier this morning.

Our financial results in the third quarter were strong. Earnings on a GAAP basis were $1.55 per share, an increase from 2007 third quarter earnings of $1.36 per share. Excluding special items, normalized non-GAAP earnings were $1.60 per share compared to $1.32 per share in the third quarter of 2007. This exceeded our guidance for the quarter of $1.40 to $1.46 per share. This year's normalized non-GAAP earnings exclude a $0.05 per share reduction for the impairment of securities held in trust for future nuclear decommissioning activities.

Several items drove this quarter's positive results. Higher generation revenues increased earnings by $0.16 per share primarily due to increased wholesale sales volume and prices. This result was supported by a record generation output of 22.2 megawatt hours during the quarter. Wholesale sales volume increased by 15% due to a 6% increase in generation output and a 4% decline in retail generation sales. The retail sales reduction of 1.1 million megawatt hours reflects the impact of mild weather, a reduction in industrial usage during the period, and fewer competitive contract renewals in PGM by our FirstEnergy solutions subsidiary.

Lower income taxes improved earnings by $0.12 per share and this was driven by two items. The first was a favorable settlement of tax positions taken on our federal income tax returns for 2004 to 2006 which increased earnings by $0.08 per share. The second was lower taxes payable on our 2007 federal income tax returns filed this September compared to the amount initially estimated. This increased earnings by $0.04 per share.

Net MISO and PGM transmission costs increased earnings by $0.04 per share due primarily to increased revenues from the additional allocation of auction revenue rights associated with transmission investments in PGM.

Investment income during the period increased earnings by $0.04 per share. We realized higher nuclear decommissioning trust income of $0.08 per share as a result of asset rebalancing within the nuclear decommissioning investment portfolio. And this gain was partially offset by a $0.04 per share reduction due to declines in the market value of our corporate-owned variable life insurance.

Lower financing costs improved earnings by $0.03 per share. This reflected the positive impact of lower interest rates during the quarter as well as more interest being capitalized this year related to our construction program. Finally, lower expenses in our energy delivery business increased earnings by $0.01 per share. Relative to the same quarter last year, reduced use of contractors and additional resources devoted to capital projects, more than offset increased storm related expenses.

The cost of system repairs from the hurricane Ike winter storm that impacted our service area in September was approximately $30 million, of which $19 million was capitalized. The impact of all storms that occurred during the quarter was additional expense of $0.02 per share compared to the prior year. However, the lower energy delivery expenses discussed earlier essentially offset this impact. Tony will provide additional details on this significant storm event in just a minute.

Mild weather contributed to a $0.01 per share decrease in distribution revenues. Cooling degree days were 8% lower than in the same period last year and 5% below normal. Kilowatt hour deliveries to our distribution system dropped by 2% compared to the same period last year.

A decline in industrial sales accounted for nearly half of this change and primarily reflects the current difficult dynamics in certain segments of our manufacturing base, particularly autos and auto-related industries. However, the conversion of these generally lower margin industrial sales into increased generation available for wholesale sales at the higher wholesale price, as I mentioned earlier, helped drive our increased generation revenues for the quarter.

While we saw a slowdown in sales growth during the period, particularly in the industrial sector, we don't expect this trend will have a significant impact on our 2008 financial results. We're closely monitoring our sales activity and other economic indicators to determine what impact the slowdown may have in 2009. And the steps that we may need to take in response to any such slowdown.

In addition to the mild weather, three items offset the positive results. An increase in fuel and purchase power expenses reduced earnings by $0.12 per share. Increased purchase power costs accounted for $0.11 per share of this reduction driven primarily by higher wholesale prices. Higher fuel costs reduced earnings by $0.01 per share due primarily to our increased generation output and were partially offset by our annual coal inventory review that reduced this year's fuel cost by $25 million.

As I mentioned on our second quarter conference call, total fuel costs for 2008 are expected to be about $200 million greater than in 2007 and most of this increase is driven by the terms of a new three-year western coal transportation contract that took place in 2008 and the impact of rising coal transportation surcharges. Roughly 55% of this increase is expected to be collected through the Ohio fuel rider this year.

We continue to expect a similar overall increase in fuel costs in 2009 due primarily to the terms of several eastern coal contracts as well as increases in other fossil noncoal costs and nuclear fuel expense. The other items partially offsetting the quarter's positive results included a $0.01 per share increase in our depreciation expense due to incremental property additions and a higher Ohio transition cost amortization expense that reduced earnings by $0.01 per share.

We believe that our strong financial results in the third quarter position ourselves well for the remainder of 2008. And we're raising our full year earnings guidance to $4.30 to $4.40 per share on a non-GAAP basis from the current range of $4.25 to $4.35 per share that was provided in August.

Before providing an update on our liquidity position, I would like to spend a minute on our pension plan and our nuclear decommissioning trust given what's occurring in the markets. We expect that First Energy and other companies that offer a defined benefit pension plan will experience an increase in expense in 2009 resulting from the decline in the value of their plan assets.

Our pension trust had an asset value of $5.3 billion at the beginning of the year and an estimated value of $3.7 billion on October 31st, representing a negative investment return of 25%. Based on this current market value and an estimated discount rate of 8%, our FAS 87 pension expense could be about $0.36 per share greater in 2009 than in 2008. This accounting change would have no impact on cash.

The actual accrual for 2009 will be determined at the end of this year and changes in either asset values or the discount rate during the final quarter could materially alter this impact. However, I wanted to provide an order of magnitude estimate of the potential outcome.

The pension plan has benefited from cash contributions of $1.3 billion made by the company from 2004 through 2007 and in spite of the market downturn, it currently maintains a funded ratio of 99% on an ABO basis. And based on the overfunded status of plan assets at the beginning of the 2008 plan year, we aren't required to make a cash contribution in 2009.

In regard to our nuclear decommissioning trust, we made the decision earlier in the year to reduce the equity exposure in these portfolios. In addition to rebalancing the asset mix, we also changed the investment manager line-up and shifted some assets from active to passively managed accounts. This process resulted in net income of $0.08 per share this quarter as gains were realized on some of the assets sold. We don't expect additional cash contributions to the nuclear decommissioning trust in 2009 other than the required annual PMI two trust contribution that's collected through customer rates.

Finally, I would like to provide a brief update on our liquidity position before I turn the call over to Tony. We issued a letter to the investment community on October 9th that reviewed our liquidity position in some detail. Today, I would like to reiterate that our liquidity position continues to be strong. We expect to continue to execute our financing plans for 2008 and beyond.

In the consolidated report we issued today, we've updated our liquidity status on page 10. As of October 31st, 2008, we had access to more than $4 billion of liquidity of which more than $1.9 billion is currently available, including $456 million in cash.

Given the turbulent times that we live in, we've already taken several steps to further enhance our financial flexibility. First, in early October, we entered into a $300 million, 364-day secured term loan facility with Credit Suisse. We took this proactive step to further solidify our liquidity position during this time of extraordinary market uncertainty.

Second, we increased our flexibility by extending the repayment terms for letters of credit associated with our tax-exempt pollution control revenue bond portfolio. We negotiated with our LOC providers to extend the reimbursement period for more than $900 million of letters of credit that previously would have required reimbursement on any draws within 30 days or less. These LOCs were successfully modified to extend the reimbursement period to either six months or to June of 2009.

In addition, as of today, we've seen the successful remarketing of all but $51 million at the PCRBs backed by Wachovia letters of credit that we reported as not being successfully marketed in our October 9th investor letter. And this indicates to us that this market has improved over the past few weeks.

And third, you may recall that our original financing plans for 2008 called for additional debt financings during the year. To maximize our flexibility regarding the entities to issue this debt, we had previously applied for regulatory authority to issue up to $300 million in each of our Ohio operating companies as well as MetEd and JCPNL. We also asked for authority to issue up to $100 million at Penn Power.

On October 20th, we successfully completed the issuance at Ohio Edison of a $275 million 30-year first mortgage bond and a $25 million, ten-year first mortgage bond, and the effective yield was 8.5% for both transactions. Our financing plans reflect additional issuances as our needs and market conditions dictate.

We remain focused on insuring that First Energy will continue to deliver the value that investors expect even in these difficult markets. We're reevaluating our capital budgets and plan to adjust our discretionary expenditures while continuing to meet our commitments to require capital projects and necessary operational expenditures. Although this process isn't yet completed, I expect that our capital expenditures will be reduced from the levels previously anticipated.

We also anticipate the capture of meaningful O&M efficiencies that will help mitigate cost increases in other areas including our pension expense. Combined, we expect these additions to further increase our financial flexibility in cash generation in these uncertain markets.

Now, I would like to turn the call over to Tony for his comments.

Thanks, Rich. Good afternoon, everyone. I'll start with an overview of the damage to our transmission and distribution systems that resulted as hurricane Ike swept through Ohio and Western Pennsylvania on September 14th. This was the largest storm-related outage in our company's history with severe winds up to 80 miles per hour affecting more than one million customers in four of our service territories.

The restoration effort included energy delivery team members from all seven of our operating companies. I was very proud of our efforts to restore service in a timely and effective manner.

The performance of our generation fleet during the quarter was also noteworthy. We produced 22.2 million megawatt hours, breaking the previous record of 21.5 million megawatt hours in the third quarter of 2006. Our nuclear group achieved an all-time high quarterly output of more than 8.6 million megawatt hours with a near perfect capacity factor of 99%.

This solid performance reflects the continued efforts and benefits that we are realizing from the full potential of our generating assets through incremental, low risk investments. We call this approach mining our assets and it is delivering results to the bottom line.

Let's talk about regulatory and political activities during the quarter. In Pennsylvania, there is a lot of activity in late September and early October related to energy legislation. The outcome of this was House Bill 2200 which becomes effective next week. This legislation focuses on energy efficiency, demand side response, smart meter programs and generation procurement.

The bill calls for required reductions in energy consumption for all customer classes of 1% by 2011 growing to 3% by 2013. It also imposes a requirement for peak demand reduction of 4.5% by 2013.

Utilities in the state are required to file a plan within nine months regarding the installation of smart meters, which is expected to take place over the next 15 years. Companies are also required to file plans with the PPUC to procure power. This process must include a prudent mix of long and short-term contracts as well as spot purchases. We expect to recover the costs of generation procurement, energy efficiency programs and smart meter installation as provided for in the legislation to adjustable riders.

This bill fits into Governor Rendell's energy and independence strategy announced last year. And from our perspective, it is a step forward in Pennsylvania's transition to market generation rates and provide customers additional tools to manage their energy usage and costs.

We expect that MetEd and PennElec will file a proposal with the PPUC in the next few months regarding their power procurement processes.

In Ohio, our electric security plan, or ESP, continues to work its way through the regulatory process at the PUCO. Intervener and staff testimony was filed and the evidentiary hearing process that began in mid October was concluded last week. The parties are required to submit initial briefs by November 21st with all reply briefs due by December 12, 2008.

As you probably know, the PUCO failed to act on our market rate offer or MRO on October 29, 2008, as required by statute. We're currently unable to predict the outcome of this proceeding, but we do expect the PUCO to fulfill its statutory obligations respecting the MRO.

In our original ESP filing, we included an option that we termed the severable short-term ESP. This provided the commission time to consider the ESP and the market rate offer plans. We should know next week if the PUCO will choose this alternative. If not, we expect the PUCO order and the ESP case within 150 day statutory requirement, which would be prior to the end of this year.

Whichever option the PUCO chooses, it appears that a final resolution of our filing is unlikely prior to the annual analyst meeting that we had scheduled for December 3rd in New York. We've said that the final outcome in Ohio was necessary to provide earnings guidance for 2009. And that we would postpone the meeting if that wasn't forthcoming. Accordingly, our Investor Relations group will provide additional details about the rescheduling of the meeting as a regulatory picture in Ohio was clarified.

While we continue to believe that the ESP offers benefits to our customers, including price stability over the three-year term of the plan, if the commission opts not to approve that filing, we are fully prepared to proceed under the market rate offer to ensure that our three Ohio companies have an adequate supply of generation to meet their obligations on January 1st of 2009.

Let me close by saying that our organization recognizes the challenge that these uncertain times could produce for First Energy and our economy as a whole. We're prepared to take those steps necessary to ensure the continued success of our company. We expect to do this in a way that will enable us to build on the positive momentum we've developed. We continue to focus on the fundamentals, including a rigorous approach to financial discipline and capital management and the aggressive pursuit of excellence in every area of our operations.

Our business model is to seek incremental capital additions rather than make large bets on major construction projects. We anticipate that this will continue to give us flexibility over our capital spend and is a good fit for this new economic environment. I'm confident that our actions will provide the value that you expect and that will ultimately again be reflected in our market capitalization.

Thanks for your time. And now, I'll ask the operator to open the call for questions.

Thank you. (Operator Instructions). Your first question comes from the line of Greg Gordon with Citigroup.

Good afternoon.

Hi, Greg.

Just to be clear, the delta -- the pension cost number you gave, that's a delta off of 2008.

That is correct, Greg.

Because you had a modest positive contribution to earnings through FAS 87 this year, is that not correct?

That is correct, Greg. So, we would be going from modest pension income in 2008 to pension expense next year with that delta assuming everything stays the same of about $0.36 per share. So you've got that right.

What percentage of the total under -- of the total FAS 87 expense is that versus how much is being capitalized?

It varies from the individual companies. In general, I guess we use something around 3/4, 1/4 kind of split. But it varies for each of the individual entities.

Around 25% goes through the income statement and the majority is capitalized?

No, just the opposite.

The opposite, sorry. Thank you.

Sure.

My next question is on -- you may not want to answer this until after you get the final decision in the ESP case. But as you look at managing cash flow into 2009 and 2010, the deferrals that you're willing to bear under the ESP filed, while the earnings profile would increase dramatically, you've been willing to absorb fairly large deferrals.

How quickly since everyone is focused on cash flow and liquidity in this market do you think you would be able to start recovering those deferrals? Is there a clear path to securitization? Because there has been a debate as to whether there is or there isn't based on the current framing of the legislation. Or is there a clear path to an aggressive amortization schedule that would bring the cash in the door relatively quickly?

Greg, under the plan we filed, as you know, we are seeking commission authority to securitize. And as you know, in Ohio, that's more like securitization light as compared to the more sophisticated language that we have in other states. With respect to recovery, under the plan, I believe that starts automatically.

The first part of it, the deferrals in '09 and '10, they start to recover in '11 and will run for approximately ten years. And then in '12, any deferral that would result from the commission's exercising its option to continue the ESP for 2011. That additional recovery would start in 2012. That is part of the plan.

Ok, so to get that cash in -- on a faster track, you would need to execute this securitization route?

Yes. And as Tony said, it is not the full-blown off-balance sheet securitization that you've seen in some other states but there could be some options to get the cash in the door quicker.

Thank you.

Thanks, Greg.

Your next question comes from the line of Jonathan Arnold with Merrill Lynch.

Good afternoon.

Hi, Jonathan.

Rich, thank you for the color on the pension. Just wondering if you could give some sense of some of the other O&M drivers and you mentioned potential offsets that you're working on. Is there anything you can do? Are you just going to talk about some of the areas and potential magnitude of movements in that line.

Well, two things on that Jonathan. One, we've not talked about our '09 guidance yet. Number two, we're still going through that process of identifying internally exactly what we can do to reduce both our O&M and capital intensity in 2009. So, our plan would be to present the details on that as a package when we talk about our 2009 guidance.

Whatever we end up doing in terms of our capital and O&M budgets, we're going to do thoughtfully. We aren't going to do anything that takes us off our current strategic track. So, we're prioritizing items into things that need to get done and those things that have some discretion around timing or magnitude. Also looking at obviously how we can do the same things but in a more efficient way.

Ok. If I may ask another, I was just hoping, wondering if there's anything that came out of the settlement that Duke has reached in Ohio, where you see some implications for your own ESP proposal. Any color or thoughts on that having seen that settlement?

Jonathan, quite frankly, I've seen what I've read in terms of what you guys and others have summarized. I congratulate Duke for getting a proposal in front of the commission with some parties agreeing to it. But I think our case is a little different.

Would you add (multiple speakers) ok, thank you.

Thanks, Jonathan.

Your next question comes from the line of Dan Eggers with Credit Suisse.

Hey, good afternoon.

Hey, Dan.

On the customer consumption patterns you're seeing out there in the third quarter, were you seeing down usage out of the commercial industrial or commercial and residential customers or was this all an industrial hit once you weather adjustments?

We don't weather adjust. I know some companies do that. Obviously that makes that comparison more difficult. I think it is fair to say economic -- the economic conditions are probably starting to impact our load as a whole. The most noticeable was in the auto sector during the third quarter as you would expect. But the impacts are not even across our service territory.

Our steel customers continue for the most part to do well. Our residential base and sort of the Southeastern part of Pennsylvania continues to show growth as people migrate out of the New York and Maryland areas into Southeast Pennsylvania, that is still continuing to grow.

General Motors, I understand, is looking to invest a considerable sum of money in the Lordstown plant near which is near Youngstown. They're going to produce the crews that global subcompact car there.

So, the results are not evenly spread but I would say the biggest impact we've seen is in the auto sector, which is not a surprise.

And in the quarter, there was a net gain for you guys by being able to redirect the industrial megawatt hours from industrial customers into the wholesale market. Is that a fair assessment?

That is a fair assessment.

In today's power price environment, is it still a fair assessment that it is a net gain or has some of that gone away as prices have come down?

It has probably been reduced. But given the prices that we have on those customers, it is still a favorable calculus for the company when that happens.

And then one last one, Rich, the tax rate for '09, what should be the expectations since you guys got some nice positives here in '08.

Sure. I'll have Harvey answer that.

Marginal rate would be about 37.75%, Dan.

All right. Great. Thank you, guys.

Thanks, Dan.

Your next question comes from the line of Gregg Orrill with Barclays Capital.

Hi, everyone.

Hi, Greg.

Hey, Greg.

Just a quick one back on the topic of pension.

Sure.

You touched on the discount rate of 8%. I was wondering if that was something you were looking at changing as well.

Well, the discount rate, it is based off high grade corporate yields. So, that changes over time. The 8% was an estimate we made at the point of time where we did this calculation around the end of October. So, that will likely change in some way by the end of the year, could very well change.

So, that and as that and asset values change, it will obviously impact pension costs for 2009. So, when you look at the number that I gave, just remember that was as of that point in time, October 31st and could change.

Ok. Thanks a lot.

Sure, thank you.

Your next question comes from the line of Hugh Wynne with Sanford Bernstein.

Hi. Congratulations on the output of the generation fleet. That was truly impressive this quarter.

Thanks.

A question regarding the revision to earnings guidance. You've included in the third quarter a couple of items that I guess are unlikely to recur, right? The $0.12 in tax adjustments date back to the 2007 federal income tax return in previous years and then this nuclear decommissioning trust income of $0.08 is also I think one off, isn't it? In the sense it has to do with the reallocation of the portfolio and realized gains as a result.

I think that's largely a fair statement.

Ok. So, we've got $0.20 positive in Q3 normalized earnings and then the earnings guidance, however, is increased by only $0.05 for the year. Does that reflect anything? Are you expecting a particularly difficult fourth quarter? Or does it not have any particular information by it?

I don't think it implies anything specific. We set the annual guidance at what we thought was a reasonable level. Obviously, we did have a couple of items in the third quarter.

Given the economic climate we're operating in, it could always be uncertainties out there. But you know, we would expect to finish the year certainly within the new revised guidance range and that should set a strong stage for 2009 but there's nothing other specific in the fourth quarter that will be taking us off track.

One last thing regarding earnings items in the third quarter. Did I hear you correctly to say that fuel costs were reduced by $25 million due to an inventory review?

Yes, you did.

Thanks, Rich, appreciate it.

Thanks, Hugh.

Your next question comes from the line of John Kiani with Deutsche Bank.

Good afternoon.

Hi, John.

Can you remind us again what benefit or contribution you have from the recent coal mine that you bought into and how that affects or improves your coal hedge position, please?

Yeah, you're talking about Signal Peak or Bull Mountain, I guess?

That's right, Bull Mountain.

This is the mine we bought in Montana that is currently being built out. We would expect to start taking coal from that facility in late 2009 and into 2010. The benefit there is that that [took] coal is higher BTU content than PRB. So, we get a pickup in the energy content of the coal.

The deliver cost from Signal Peak will be roughly equivalent to what Powder River Basin is. But with about a 10% higher energy content so we get a pick up, if you will, in terms of free generation or free megawatts; 170 to 200 additional megawatts over what we would have achieved with Powder River Basin coal.

So, that's the primary benefit that led us into this transaction. There could be other economic benefits as well. In that, some portion of the coal that we're entitled to take we won't need for our own uses and that can be resold on the market. So there could be an upside from that as well.

If I understand you correctly, Rich, it sounds like the supply you get from Signal Peak in addition to the benefits of the heat content could actually make you net long coal in the 2010 and '11 time frame?

Yes, we're net long for that time frame.

Okay. Thank you very much.

Thank you, John.

your next question comes from the line of Ashar Khan with SAC Capital Advisors.

Good afternoon and congrats.

Hey, Ashar.

Rich, I just wanted to go over the numbers that were provided on cash flow, CapEx at the conference last year and just wanted to see if we are on track on those. You had net cash flow from operating activities for '08 of $2.2 billion, CapEx of about $1.7 billion and the nuclear fuel fabrication of $0.1 billion which said available cash before dividends of about [$395 million]. Is that still an expected, cash flow number for this here?

We've had some changes on the capital side, Ashar. One being -- some of the things we've done during the year, one is Signal Peak as we just discussed. Purchased that during the year. There was an equity investment of $125 million for that that was not included in the original $1.7 billion capital number.

Also purchased, the Fremont gas generating asset that was $275 million. We also reacquired certain of our sale leaseback interests, which was $438 million. So, those were some of the significant additions that will push capital above the $1.7 billion that you had mentioned.

Ok. But if I'm right, those were like one-time acquisition opportunities which have PVs going forward positive. As we look out next year, CapEx on AQS was to fall down. So is one safe to say that you will be on like a cash flow basis, kind of neutral? After paying for the dividends because if I'm right, environmental CapEx falls down $150 million and we get the Ohio distribution case that we no longer require the deferrals. So going forward in '09, shouldn't we like be in a balanced cash flow position after paying dividends?

As you know, Ashar, we haven't given specific guidance but I think the pieces you're putting together sound reasonable. Capital should go down next year. The environmental spend goes from over $600 million this year down to about $500 million next year.

As I mentioned, we're looking at ways of producing some incremental savings from both the capital O&M side which will increase free cash flow as well. So, I think you're looking at the pieces properly. As I said, we haven't specifically added it all up for the street yet but we look forward to doing that when we give our guidance as a whole.

Ok. Then if I can just ask, what happens on November 15th, we get either they say hey, we can't make a decision and hence your interim proposal is accepted. And that becomes the interim proposal in here so we get a notice from the commission on November 15th that either they're going to issue a decision or they're going to accept the interim proposal.

And secondly, if you could just talk with us how the interim proposal is different from the current proposal in terms of its kind of earnings impacts as long as in the first year until we get a decision.

Well, yeah, Ashar, I mean the commission can choose not to do anything next week on it. And it will expire on its own weight. If I understand it correctly. They couldn't accept it as we filed it. They can modify it and we could reject it or accept it.

Under any one of those scenarios depending on how it shakes out, let's assume the commission adopts it as we filed and therefore, it would go into effect January 1st. I think it runs for three months, I believe, three or four months to give the commission adequate time to deal with either an ESP at that point or to take the MRO option.

My sense is that when it was filed, it was filed fairly neutral to what would happen under an ESP within some sort of ranges. Because there are a lot of moving parts when you put these things together. So, at this point, we're just kind of waiting to see what the commission chooses to do.

I think one of the changes under the short term ESP, Ashar, was that the generation rate would be $7.75 so it looked a little bit higher than the ESP which is 75 next year.

Right. But we don't get to write off the Cleveland -- am I right, Rich? Under the interim one?

That is correct.

So, we still have to -- ok. Ok. Ok. Thank you very, very much.

Thanks, Ashar.

your next question comes from the line of Paul Patterson with Glenrock Associates.

Good afternoon, guys.

Hey, Paul.

Hi, Paul.

Just to clarify a few things. The tax rate for this year, I'm coming up with so far about 36.5%, maybe a little bit more than that. Is there -- what should we be thinking about in terms of the full year and the tax rate for 2008 and is there any other benefit that you guys are expecting in 2009?

Paul, this is Harvey Wagner. Are you asking for tax benefits in 2008?

Right. And 2009, if there's anything that's planned there as well.

Nothing further in 2008. We do have a large item that's before the I.R.S. now that we expect could be taken to the joint committee of Congress. If we're successful with that, that could be a significant amount for 2009.

And that's included in the 37.75%?

No, it's not.

That was the marginal rate.

How much is that?

It is upwards of about $130 million.

Ok. Before the interest component of that. So, it is a large item.

It sounds pretty big. Ok. The second thing is what was the pension benefit that you guys have for 2008? It looked like it was $0.02 for the quarter, am I right? What's the total benefit you're getting from pensions?

If you're talking about FAS 87 expense, Paul, which I think you are. For the full year, it is income of about $0.07 per share this year in 2008.

Ok. And then with the nuclear decommissioning trust fund just year-to-date. I mean the $0.08, it sounded like there was some realized gains in that. What was the impact of the nuclear decommissioning trust fund for 2008?

In terms of the $0.08, let me just explain first how that was generated. As I mentioned earlier, we had [rejiggered] the portfolio. We had moved from less active to more passive. Retained some new managers, terminated others. So, as you go through that process of moving assets around some of the assets were sold and gains were realized. So, that's what drove that item.

There is an impact to one degree or another every quarter, I don't know, Harvey, do you have that in front of you?

Yes. We've impaired securities in the trust up to $0.12 a share so far in the first nine months. So, that would be an offset to the gains that you're talking about.

Ok, great. And then finally, I guess Tony, why do you think that the commission didn't act on the MRL? It just seems a little peculiar. I'm just wondering what you think is sort of going on there? I mean, if you know, I don't know. Just in general, what sort of -- how should we think about that? It just seems like there was a statutory time line. I don't see it on the agenda in the near term. What's going on?

I guess you probably should ask them. My sense is they probably got their hands full right now. And they're trying to get out as many orders as they can. They've got a lot of balls in the air. And you know, hopefully they're going through it and they're spending the time that's necessary to issue an order that will allow us adequate time to prepare and have our utility companies and their customers protected as of January 1st.

Ok. But they haven't given you much more detail than that. I mean other than that, we don't really have any specific time. Or any sense --

Again, you ask for my perception. I haven't been in contact with the commission about the timing of it.

Ok. Thank you very much, guys.

Thanks, Paul.

your next question comes from the line of [Brendon Nuvay] with Levin Capital.

Hi, it is actually Neil Stein. Just had a couple of questions. First, could you talk about what interest rate you've been paying recently on the pollution control bonds and how that compares with what you were paying earlier in the year?

Those rates have ticked down. Jim can give you a little overview of where we're at now.

Those rates have been ticking down. We've been seeing some of our daily resets in the 1 to 1.25% range. They're coming back pretty much in line with what we have been paying earlier in the year.

Ok. As you go forward, I guess it is a great program because it is so inexpensive but then it makes you at times I guess more vulnerable to events like what we saw over the past six weeks. Any thoughts kind of [rejiggering] that program or reducing the dependence on it or shrinking it?

We do plan to rejigger it to some degree in terms of trimming some of that out. Maybe into one to five-year kind of put bond maturity; something on that magnitude depending on market conditions. That will allow us to take advantage of that market generally but give us more flexibility and eliminate some of the other issues you had mentioned there. So, yes, we will be taking a good look at how we can make that portfolio better going forward.

When would you expect to do that? Would that be over the next few months or over a longer period of time?

It is really governed by market conditions and when you can do it. So, it could be done in several slices even it might not all be done at one point in time. There are various things.

We'll be moving -- over the last several years, we've been moving PCRBs over from the op cos, over to the generating companies following the transfer of the assets at the end of 2005. We have one more slice of that to do. So, there's various parts and pieces that we can do. There's a new money financing for the CMSAQC project, PCRB. So we could do part of it through that mechanism as well.

And they're shifting over to your big credit facility, the $2.7 billion? What's the rate you're paying on that?

Go ahead, Jim.

We generally borrow at the weekly LIBOR and again, the weekly LIBOR started to come back into more of a normalcy range. I think it is preset at 1.34 yesterday. So, once we pay that along with essentially our commitment fee, we're down in and around the 2% range now.

That includes a spread over and above that?

Yes, it does.

Ok. And that -- you're expecting to term that out over the next several months?

No. I would not say we are. That facility is good through 2012. And we have the ability to roll that on a weekly basis as we borrow from. We will look to term out some of our borrowings through some of our new financing that Rich talked about but it is not our intention to take that down to zero at this point.

But you know, should we expect you to maintain a balance in excess of $2 billion on that facility or do you think maybe it will come down to a billion or below?

I think the trend will be to come down. As I mentioned earlier, our capital expenditures, our capital intensity will be less next year. And the financing plan that we have in place incorporates issuances that are operating in companies and elsewhere. The combination of those two things will reduce in the amount drawn going down over time.

Ok. Thanks very much.

Thank you, Neil.

Your next question comes from the line of Paul Fremont with Jefferies & Co.

First question, something I guess I totally don't understand. You've got an adjustment from non-GAAP earnings for trust securities, nonrecurring impairments but the trust securities, nonrecurring gains are included in your operating number. What's the difference and what's the logic there?

Paul, this is Harvey Wagner. It is basically what is realized versus what is unrealized. Under the accounting rules with other than temporary impairments, we're not able to recognize through P&L the increase in the value of nuclear decommissioning trust securities after they've been impaired. So, that's basically the difference between the two.

Ok. The other question that I have is can you give any type of an update on how much of the Pennsylvania megawatt hour position remains open and should we expect lower power prices to essentially reduce that expense on a going forward basis, also, what it would have been let's say midyear when gas prices were high?

I think they have position from a power supply standpoint is essentially closed. Obviously, a big chunk of that is coming out of the Beaver Valley Plant as we wield that power over to our Pennsylvania customers, so it might have some marginal impact but I don't think it is going to tremendously alter the equation.

What you're saying is between now and the expiration of the Pennsylvania plan, all of that supply is basically hedged at a fixed price?

I would say the majority of it is, yes.

Ok. Last question has to do with the heat rates. We didn't really see an improvement in heat rates with the declining gas prices in the third quarter. Any thoughts as to why that might not have happened in the Midwest?

I don't have any. I don't know if anybody in the group does. Don't know. Don't know, Paul.

Thank you very much. Thank you.

Your next question comes from the line of Paul Ridzon with KeyBanc.

What's a good average rate to industrial customers if we just kind of want to think about the margin remaining from moving industrial sales to the wholesale markets?

I don't know what the average is, Paul, it varies. Some of these customers had contracts that go back quite a period in time. It varies, but I would say the majority of them are well under existing market rates but I don't know exactly what the average is.

Is $30 reasonable?

I would think it would be, yes.

Have you done a sensitivity on what a 50 basis point move at a discount rate, how that would change your pension?

Well, we have some rules of thumb. Basically, I think for every 25 basis points change in the discount rate, it equates to about $13 million pretax expense plus or minus. That's kind of the rule of thumb we use.

Thank you very much. My other questions have been answered.

Thank you, Paul. Why don't we do one more question, please.

Your next question comes from Jeff Coviello from Duquesne Capital.

Hi, guys.

Hi, Jeff.

I think this question might have been answered but just as far as I guess hypothetically, if the MRO plan doesn't get approved by the commission and they don't act on the ESP or the short term plan, then what course of action do you take? You have to supply power to your customers so you just buy it from the market and then charge for it at market price, is that essentially how it would work?

That would be one option.

Ok.

The utilities could go out and do any sort of sourcing that they -- but it would be all sourced from the market.

Ok. And that exists under the current law, right? The MRO is just -- is MRO just a method of going about that?

The MRO is a statutory method.

Right.

Going about it. The others are just a practical what happens if the customer needs electricity and Ohio Edison, CEI, and Toledo Edison do not have access to it. We're going to have to work on behalf of customers to try to lock something down. That's why it is very important that the commission act in a responsible way.

Got it. Ok. Thank you very much, guys.

Thank you, Jeff. We appreciate everybody's time today. We went a little bit longer than we typically do. We had a lot of good questions and we appreciate that and hopefully that additional information was useful to you. If anybody didn't get a chance to ask a question or if there are any follow-up questions, as always, please feel free to give our Investor Relations team a buzz. And we appreciate your time and look forward to seeing many of you at EEI next week and hope everybody has a good day.

Thank you very much. Have a good day. Bye, now.

This concludes today's conference call. You may now disconnect.