第一能源 (FE) 2009 Q1 法說會逐字稿

Greetings, and welcome to the FirstEnergy Corp. first quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ms. Irene Prezelj, Manager Investor Relations for FirstEnergy Corp. You may begin.

Thank you and good afternoon. During this conference call, we will make 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 earlier today and it's also available on our website 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 on our website at www.firstenergycorp.com/ir.

Participating in today's call are Tony Alexander, President and Chief Executive Officer; Mark Clark Executive Vice President and Chief Financial Officer; Leila Vespoli, Executive Vice President and General Counsel; Harvey Wagner, Vice President and Controller; Jim Pearson, Vice President and Treasurer; Bill Byrd, Vice President of Corporate Risk; and Ron Seeholzer, Vice President of Investor Relations. I'll now turn the call over to Tony.

Thanks Irene, and good afternoon, everyone. Earlier today we reported first quarter 2009 normalized non-GAAP earnings of $1.02 per share. This compares to $0.88 reported for the first quarter of 2008 and is a positive start to the year, especially given the challenges our industry faces in the current economic climate. Our recently named CFO Mark Clark will provide you with more details about our financial results, but first I'd like to give you a short overview of recent significant events, including some positive regulatory developments.

First and foremost is the resolution of our amended electric security plan in Ohio. On March 25th the Public Utilities Commissions of Ohio approved our amended plan, which was signed by nearly all of the parties in the case. I believe the plan strikes the appropriate balance we were seeking. It settles pricing and service arrangements for the distribution of electric service through the end of 2011 and provides for a competitive bidding process to establish generation prices through May 2011. Under the plan, FES is supplying essentially 100% of the generation in April and May 2009 to our Ohio utilities at the average wholesale rate established in the December 2008 bidding process of $66.68 per megawatt hour and the January through March generation prices were approved. Retail generation rates for the two year period beginning June 1st will be set from the results of a descending clock competitive bidding process that begins on May 13. In this process, the Ohio utilities will seek to procure on a slice of system basis 100% of their supply requirements, including energy and capacity, transmission, and ancillary services. This bidding process will be conducted by an independent bid manager and represents a key step forward in our transition to competitive markets in Ohio.

The Cleveland Electric Illuminating Company will continue to defer a portion of its purchase power cost during April and May, with recovery of the deferred balance plus carrying costs beginning June 1st of 2011. The plan also freezes base distribution rates through the end of 2011, establishes a delivery service improvement rider effective April 1st, 2009 through December 31st, 2011 and helps to mitigate some financial risks through the addition of riders to recover uncollectable accounts and deferrals previously approved by the commission. Finally, as a result of the plan, we have written 50% of CEI's extended RTC balance, which is about $216 million. The impact of that reduction will be reflected in customer bills beginning on June 1, 2009.

Now turning to Pennsylvania, in late February we filed with the Pennsylvania Public Utilities Commission a generation procurement plan for Met-Ed and Penelec for 2011 through 2013. In the plan, we proposed a staggered procurement schedule as required by Pennsylvania law, and we hope to have a final order from the Commission by October of this year. Also in Pennsylvania, the legislative debate continues with respect to phasing in customer rates when rate caps expire at the end of 2010 for Met-Ed and Penelec. Hearings were held in late March and our Executive Vice President and General Counsel Leila Vespoli testified on behalf of our companies. We support a carefully crafted phase in as long as several important areas are addressed, including establishing the right phase in level and ensuring full recovery of any resulting deferrals and carrying charges. Leila and her team continued to work with legislative leaders on these important issues.

Now let's move to two more recent generation related announcements. First, on April 1st, we announced plans to repower our Burger plant units 4 and 5 totaling just over 300 megawatts with biomass. When complete, the Burger plant located in Shadyside, Ohio is expected to be one of the largest biomass facilities in the United States. The capital cost for retrofitting the facility are estimated to be approximately $200 million, which is less than the estimated cost to install scrubbers and other environmental equipment that would have been needed to continue operating the plant with coal. We expect to complete the conversion in 2012. Importantly, the repowered facility would help us achieve the newly enacted Ohio Renewable Energy Portfolio goals.

More recently on May 1st, our unregulated generation company announced the sale of a 9% participation interest in the Ohio Valley Electric Company for $252 million. This transaction is expected to increase earnings in the second quarter by $159 million. That's the aftertax number.

While we are pleased with these and other accomplishments, we were not immune to the adverse effects of the current economic climate. It should be no surprise that we experienced reduced customer loads during the quarter. The ongoing recession resulted in a 7% decline in distribution deliveries across our three state service territory as compared to the prior year, and our industrial sales were off about 17% for the first quarter of 2008. While the sales decline was [largely] offset by several factors including colder weather, resulting in no significant earnings impact for the quarter compared to last year, it is likely to impact the remainder of the year.

On the generation side, our output was lower and we expect that our generation output for the year will be down in comparison to 2008, partly related to three scheduled nuclear refueling outages in 2009 as well as a fairly significant number of planned fossil outages in the second half of the year including the tie in of Sammis unit 6 as part of our air quality control project. We are also reevaluating our near term maintenance outage schedules as well as outages scheduled over the next several years and may take advantage of the reduced loads we are experiencing as a result of the recession to undertake additional work on our facilities, which would include our largest units.

Our emphasis on the fundamentals of the business remains unchanged. We continue to pursue operational excellence in our energy delivery and unregulated generation operations, maintain rigorous financial discipline, and a focus on continuous improvement around the organization. The solid foundation we have carefully built over the past several years has positioned us well as we work through the current challenges.

I know many of you may have questions concerning the upcoming Ohio competitive bid process. Let me start by answering any questions you might have about the mechanics of the auction. The competitive bid process is scheduled to begin on May 13. We expect it to end the same day, but the process is run by an independent auction manager and it could take longer. The Ohio utilities will know the results as soon as the auction is completed, but will not disclose information until the PUCO rules on the validity of the completed process. The PUCO has up to two business days after completion of the auction to make their ruling. So an official announcement of the winning price from the PUCO could come on Friday, May 15 or Monday, May 18, or thereafter. However, contracts are not scheduled to be signed by the winning bidders until Monday, May 18, at the earliest.

Beyond the mechanics, you may have questions regarding our view on price. For a number of reasons, we cannot speculate on what the outcome of the competitive bid will be. FES, which is FirstEnergy Solutions, and we presume other bidders are currently developing their bidding strategy, which will include a review of the forward energy prices as well as a host of other items such as premiums for shopping and load shaping risk; capacity, ancillary, transmission, and collateral cost; and margins appropriate over the two year period of the obligation. We expect that the competitive bidding process will be robust with many participants.

Outside of that, there really isn't much we can talk about until after the process is complete. While we will not speculate about the price in advance of the auction, we have already taken steps on the retail side to lock in communities through government aggregation. We have signed 20 communities so far. We are actively implementing our retail strategy.

I would like to introduce to you our new CFO, Mark Clark, for details on the events that helped to shape our positive results for the first quarter of 2009. Mark?

Thanks, Tony, and good afternoon, everyone. It's a pleasure to join you today in my new capacity. Before I start, let me recognize the outstanding job that Rich Marsh did as our CFO for the past 11 years. I look forward to working with all of you.

As I review our first quarter results, it may be helpful for you to refer to our consolidated report to the financial community that was issued this morning. As Tony mentioned, normalized non-GAAP earnings for the quarter were $1.02 per share compared with $0.88 per share in the first quarter of 2008. On a GAAP basis, earnings in the first quarter were $0.39 per share compared to GAAP earnings of $0.91 per share in the same period last year. First quarter 2009 results include four special items that in total reduced earnings by $0.63 per share. First among these were one-time regulatory charges totaling $261 million or $0.55 per share for the Cleveland Electric extended RTC write-off and other obligations primarily associated with implementing the amended electric security plan. Second, the impairment of securities held in trust for future decommissioning activities reduced earnings $0.07 per share. $0.05 per share earning decrease was associated with our organization restructuring, and finally earnings benefited from $0.04 per share gain from the resolution of tax issues related to prior years.

There were seven factors that contributed to this quarter's positive results. The first two are related to the distribution side of our business. First, lower energy delivery expenses increased earnings by $0.06 per share, driven primarily by cost control measures. Also, more of our vegetation management work was associated with capital projects in 2009 compared with the first quarter of last year. And higher distribution rates in Ohio, which became effective January 3 for Ohio Edison and Toledo Edison, increased earnings by $0.04 per share.

The third positive driver was the $0.30 per share increase in generation gross margin, which is made up of the following components. Retail electric generation sales excluding sales source from third party suppliers to our utilities were down 4.1 million megawatt hours or 21% for an overall negative impact of $0.12 per share. This was offset by higher wholesale sales which increased by 800,000 megawatt hours for 28% and added $0.15 per share to generation margin. This primarily reflected the increased availability of generation for sale into MISO since our generation did not serve 100% of the Ohio utility load in the first quarter of 2009 under the December competitive bidding process. Lower fuel expenses increased earnings by $0.04 per share as a result of reduced generation output this quarter. Earnings increased $0.04 per share because of lower purchase power expense, representing 1.5 million-megawatt hours. And the final generation item relates to the deferral of certain purchase power expenses from the December 2008 RFP process at Cleveland Electric Illuminating, which contributed $0.19 per share to increase generation gross margin.

The final four positives were -- a lower effective income tax rate increased earnings by $0.03 per share. For all of 2009 we expect the marginal tax rate to be about 38%. Investment income from corporate owned life insurance benefited results by $0.03 per share, but was partially offset by $0.01 per share decrease in nuclear decommissioning trust income. Lower financing cost increased by $0.01 per share. Higher capitalized interest related to construction program more than offset the higher interest expense associated with our recent utility debt issuances. And reduced general taxes primarily due to lower kilowatt hour delivery subject to the excise tax in Ohio increased earnings by $0.01 per share.

Beyond these positive factors, four items partially offset the prior benefits. First, the completion of transition cost recovery at the end of 2008 for both Ohio Edison and Toledo Edison reduced earnings by $0.13 per share. Increased pension and other postemployment benefit expense reduced earnings by $0.12 per share and was primarily driven by reductions in pension plan assets due to the unfavorable market conditions experienced in 2008. The end of the Ohio distribution deferrals under our previous rate plan allowed the utilities to defer up to $150 million per year. Absent these deferrals reduced earnings by $0.07 per share, and finally incremental property additions increased depreciation expense by $0.02 per share.

Earlier, Tony mentioned that our distribution deliveries were lower as a result of the economic slowdown. I'd like to provide some additional details on the offsetting factors that made this a neutral item for the quarter. While our electric distribution deliveries declined 1.9 million megawatt hours or 7% due to the general economic slowdown across our service territories, the reduced outage in the industrial sector primarily in the steel and automotive industry and principally in the Ohio region made up the majority of this decline or 1.5 million megawatt hours.

These sales declines, however, were essentially offset by three factors. First, the impact of colder weather during the quarter compared with last year. Heating degree days were 3% above the same period last year and 3% above normal. Second, distribution revenues did not typically decrease proportionately because distribution rates for our large industrial and large commercial customers are largely based on monthly peak demand charges rather than megawatt hour sales. And finally, a considerable number of special contracts between Ohio Edison and Toledo Edison and their industrial customers terminated at the end of 2008, with those customers moving to tariffed rates.

In closing, I want to affirm our four financial objectives for 2009. First is to maintain a strong liquidity position. We had access more than $4 billion of liquidity as of May 1, of which more than $1.9 billion was available, including cash reserves of nearly $700 million. Second, to remain flexible in response to the changing market conditions. Third, to maintain a secure dividend with a potential for growth. And finally, to position the company to emerge strongly when the economy recovers.

We are very pleased with our first quarter performance, especially given the current market dynamics. Completion of the Ohio competitive bidding process which is scheduled to begin May 13 will enable us to finalize earnings guidance for the year. We plan to schedule a time shortly thereafter to discuss our projections with investors.

We appreciate your time today and continued interest in FirstEnergy. I also look forward meeting all of you in the near future. Now I'll ask the operator to open the call to questions. Thank you.

Thank you. (Operator Instructions). Our first question is coming from Kit Konolige with Soleil Securities. Please state your question.

Hi, Tony and Mark. Welcome. Some big shoes I guess.

I would agree.

I see they put you in here right when things are really happening.

I was in strategy before.

Okay. No problem then. I wanted to just focus for a second on your discussion of the more or less offsetting sales earnings effect where you sold less through your service territory and more into MISO and you came out ahead. That sounds like a pretty good deal. Is there a way that you can work so that is a permanent condition, or how should we think of that going forward?

With respect to the first quarter, lower industrial sales meant that we had lower fuel cost and since their contracts rolled off at December 31, 2008, they paid a higher price and we had lower fuel cost. That would be nice to continue, but the auction will determine that beginning May 13.

The auction will determine -- is the auction going to have a separate pricing mechanism for industrial, all different classes of customers?

It would be a slice of the system.

Right. Okay. But the auction won't affect your fuel cost.

The auction will affect it to the extend it affects our dispatch strategy for the generating units.

Right. So in other words, I shouldn't really take much from, the first quarter was -- you had some extra megawatt hours to sell. You sold them. That was a good deal. The industrials are [pay on] demand charges, not energy charges, and it comes out slightly ahead. But that is effectively overwritten in the new regime once the auction is conducted.

Yes.

Kit, this is Tony. But also the first quarter we really had a strong performance of the entire fleet. There wasn't a lot of scheduled outages. And the units ran strong for us with the kind of performance that we've seen over the last several years. So there were a lot of positives moving through this timeframe. Obviously the colder weather help offset some of that too as customers moved into higher pricing brackets into their own tariffs.

And you'll have more outages for work this year, I think. You talked about -- presumably they will be in the second and fourth quarter primarily?

We've got three nuclear outages scheduled this year. We are in the process of closing down one. We are in the middle of a second one. We have a third one later this year. We also took an outage at one of our plants that was not scheduled. Actually, it became scheduled during what will be the second quarter. So then as you look into the fourth quarter, as we start the tie in work for the Sammis AQC project, and take a hard look at the overall outage schedule in comparison to the reduced loads that we had, we could be making modifications to take advantage of this timeframe.

I would only add two things to what Tony said. Our ability to control our O&M expenses in the first quarter will continue through to the year. Additionally, one of the special items was the reorganization special charge in the first quarter. The benefits of that will not really be effective until the second, third, and fourth. There are some positives that will carry through and other positives that will start.

Just to be clear -- I'm sorry. The control of O&M and then there's a second control of O&M from reorganization?

We had a staffing reduction of 335 management support staff announced in March, and those people left the payroll in April. Additionally, we had 4% of our nonunion workforce affected by management changes, alignment of responsibilities. We took a one time aftertax charge of $16 million or $22 million pre-tax for severance related benefits. We expect ongoing expenses to be reduced by approximately $37 million from those changes.

I'm sorry. $37 million ongoing annualized for the two changes, or -- ?

Yes.

Okay. Thank you.

Our next question is coming from Paul Ridzon with KeyBanc Capital. Please state your question.

Sounds like you are early in the planning process, but should we read that given the industrial demand you are throwing the towel in 2009 and you will accelerate a whole bunch of O&M into the year? How much would that be and for how many years would that be coming?

I don't think Tony would let me characterize it that we are throwing in the towel. We are aggressively trying to manage our O&M expenses, and to the extent the market stays soft, we will some of our scheduled outage around.

Do you have a sense of how much O&M that Could be?

We are looking at that right now.

Thank you.

Thank you. Our next question is coming from Hugh Wynne with Sanford Bernstein.

I had a question regarding the capital structure of the company. I noticed that you had a decline in the equity and adjusted capital structure to 36%, I believe, and FFO to debt is also seems to me somewhat below the Standard & Poor's target for your rating grade. The relatively weak balance sheet combined with the economic downturn resulting in lower wholesale prices in the second half and possibly therefore lower retail prices in Ohio -- it seems to me it must be creating some concern among lenders and the rating agencies, but I may be wrong about that. So I wanted to ask and see from you or hear from you what commentary you are getting from the rating agency and you creditors?

I will let Harvey Wagner speak to the accounting aspect of that and I'll speak to the strategic.

One of the things our equity did go down, but it was a result of some of the special items that happened. So we were actually -- had reported earnings that were less than our dividends in the first quarter. We don't expect that to continue going forward. Jim Pearson can address the rating agency question.

If you are looking at decline in our equity, some of that is compared to the first quarter of 2009 comparing to the first quarter of 2008. We did take a reduction for other comprehensive income at the end of the year associated with our pension plan. Every year you have to remeasure those assets. So that reduced our equity by about 4%. From the rating agency standpoint, we've had ongoing dialogue with the rating agencies. They understand the mechanics of our ESP and we stay in continual dialogue with them. We will probably have our annual review with the agencies sometime in June, but from our perspective we really don't speak for them.

What from a financial strategy perspective do you think is the need to strengthen the balance sheet?

A lot of that would be determined by the auction, the fact that we just sold OVEC and picked up $251 million cash. Our retail sales are not exclusively -- competitive retail sales are not exclusive to Ohio. We sell in Pennsylvania, Maryland, Illinois, and Ohio. So you mix all that in and we'll place that into the context of the auction.

Okay. Can you provide any guidance as to the level of power output of the generation fleet, both in the first quarter of this year relative to the first quarter of last year, but also looking forward to the remaining three quarters? I know you are still in the planning phase regarding your outages, but can you give us a sense of how generation will compare year-over-year?

I'll give you first quarter results.

First quarter generation output was down 2.3 million-megawatt hours versus 2008, and I think as we alluded to before, depending on the auction our dispatch strategy will determine how much of that production will be in the balance of 2009.

And that's what percent? That total generation output was down by what percent?

2.3 million megawatt hours. I don't have the percentage.

The total?

11%.

11%. Okay. And then you said the remainder of the year you don't have enough clarity yet?

Correct.

Thanks very much.

Thank you.

Our next question is coming from David Frank with Catapult Partners. Please state your question.

Good afternoon. I want to go back over that industrial sales issue that Kit was talking about. The way you have your sales structure now is the way most traditional utilities do. You get this demand charge, and you're ambivalent as to how much energy you actually sell to them. And now post the auction, if I understand this correctly, that goes away and so you will be at risk for lower sales, but they would be into the wholesale market, which is what you're selling into now. Is that a fair -- ?

We would be at risk for lower sales, but that would not mean they would go into the wholesale market. For example, Tony alluded to the 20 communities that have already signed up in aggregation, so that all gets mixed together.

Right. Okay. But if you are serving roughly 60 million megawatt hours or whatever the number is for your total Ohio retail load including industrial, if all your industrial switched, you can only serve so much residual small commercial and residential I guess. So at what point when you are serving all those folks to the max that you can, the residual just goes into the wholesale market?

If I understand your question correctly, if we lost 100% of our industrial sales, you are correct. We'd have to find another source, whether that is in the wholesale market or the retail market. They would have to be replaced. That's correct.

And I'm not suggesting that is going to happen.

Neither are we.

And just to go back over the cost cutting, the $0.06 that you experienced in the first quarter, can we annualize that to a $0.24 kind of number?

I think we are going to look at that after the auction and look where we are in total. It can go up. It can go down. Clearly the staff reductions are something that will continue through the year. Clearly the 4% change in management and other alignment of duties will remain constant. But I think it would be premature to suggest where we think that will come out until we get more clarity around the auction.

Okay. And my last question just on the Pennsylvania utilities, Met-Ed and Penelec, I guess no one was paying attention, but suddenly those guys are in market rates now. So I guess before there was this huge lost opportunity cost that you were facing over the next couple of years instead of selling into a higher spot market or auction or whatever, you were selling to those guys in the low 40s and now they are corresponding to PJM West prices more or less at this point. Are you going to be seeing lower purchase power costs and related to those utilities now?

This is Bill Byrd. That is not quite correct. The rate caps at Met-Ed and Penelec continue to be in place and will remain through the end of 2010. But nothing has really changed at Met-Ed and Penelec. They have filed their plan for how things will work after 2010.

Right. But in the meantime if you are on the hook to serve them, your cost to serve them has come down quite a bit.

The opportunity cost has decreased along with the market price.

Okay. And then -- but are you forecasting at this point any contribution to earnings because you have to procure less power at cheaper -- at higher rates or less rates?

Nothing materially different than prior years. It will be the same dynamic.

Okay. All right. Well, thanks a lot.

(Operator Instructions). Our next question is coming from Jeff Coviello with Duquesne Capital. Please state your question.

Good afternoon, guys. I have one more clarifying question on the industrial sale. I want to make sure I understand it correctly. Right now those sales are handled under a tariff that is tied to peak demand and has a fixed demand charge associated with it. Then I guess post auction or post mid-year, those sales are going to be treated like any other seller -- just get a retail price and then the margin will fluctuate with the volume. Is that correct?

Not really.

Okay.

There will still have demand charges and they'll still have a G charge and that would be depended on the auction.

And how does the demand charge work? Does that reset with the peak on an annual basis? What peak is it tied to?

It's Bill Byrd again. It's a function of the monthly maximum demand of the customer. So it's set each month for the maximum energy consumption for a given hour.

Okay.

And what we see is -- manufacturing concern with two shifts due to economics, the second shift may be eliminated, but their demand during the first shift is still the same. Energy consumption is cut in half, but the demand charge is still exactly the same.

So if they lower the number of shifts, they could have the same demand or likely would have the same demand. But if there was a closure or something like that, then you'll see the impact?

Exactly.

I understand. Thank you.

Our next question is coming from Danielle Seitz with [Seitz] Research. Please state your question.

Thank you. I was under the impression that you were predicting something around $100 million reduction in O&M originally. Is it still in the cards or does it change tremendously because of other considerations?

I would say it's not changed. The staffing reductions are still there. The O&M reductions and energy delivery are still there, and what we were saying is it may change dependent on the outcome of the auction. We still plan on $100 million.

Okay. So if it was to change because of the schedule of maintenance, it would be on the way up, not on the way down?

Depends if the maintenance is capitalized or if it's O&M. But yes. If it's O&M, it would reduce that amount.

Great. Thanks.

Thank you.

Our next question is coming from Dan Jenkins with State of Wisconsin Investment Board. Please state your question.

Hi. Good afternoon.

Hello, Dan.

I was curious first of all on the pension and OPEB cost. It was a negative impact on the quarter. Is that something you expect will persist throughout the year? Is that a one time charge? Will you have to make any pension contributions this year?

Well, the first part of your question is yes, we would expect it to continue throughout the year. The second part of your question, no, we do not anticipate making any pension contribution this year. I would only add to that that expense is getting quite a bit of review at the present time in terms of options.

Okay. I was curious on the writeoffs related to the Ohio plant, have those been completed or will there be any future writedowns or has it all been taken in this quarter?

This is Harvey Wagner. Everything was recognized in the first quarter.

Okay. And then I was curious on Perry, sounds like it's been offline for coming up on 2.5 months. Was that the scheduled outage time or is there something more going on at Perry than originally planned?

Dan, the original schedule was to be in excess of 50 days. It will probably run a little longer than that. We had some work that we wanted to accomplish before that outage was completed. But beyond that, the outage is going fairly well in terms of the amount of work that we wanted to complete, and for the long term operation of that facility.

Okay. Then on your cash from operations, you had about a $250 million benefit from what the changes in working capital and other line on page 10 of your release. I was wonder if you can give more color on that, what is going on with that.

Dan, this is Harvey again. A lot had to do with accrued compensation cost and employee benefits. As we talked about a minute ago, pension and OPEB costs which are non-cash items were higher in 2009. That accounted for about half of that $200 million. It's about $98 million there. The decommissioning trust impairment increased working capital reconciliation item by $20 million. Accrued interest was up by $27 million. A reduction in gain on asset sales from sales that took place last year increased the working capital component by $32 million. And the accrual of items associated with the implementation of the electric securities plan in our restructuring charges amounted to $57 million. That is the lion's share of the increase that happened from the working capital and others.

Okay. And then on your balance sheet, you have quite a bit of short-term debt. Is that the way you want to run going forward? You have quite a bit drawn on your lines, at least in March it looks like. You plan to turn that out or is that the way you are going to run over the intermediate term?

We would expect to run that way over the intermediate term. Liquidity is very high on our list. So we would expect to maintain a fairly high cash balance in the intermediate future.

The last thing I have is on your strategy with the new rate plan in Ohio and what you saw as what you got that you wanted, that you were willing to give up. My main concern I guess was a number of these operational expenses that are being deferred over 25 years, which seems like quite a long time for current expenses, and what your philosophy was on agreeing on that long of a deferral for those items?

I will let Harvey talk to the deferral one, because I'm not sure it was created as a result of the current plan that we have. It was created as a result of prior plans that were put in place in 2001 and 2005 and maybe 2006 and 2007 as a supplemental plan.

We look at it very differently. The recent electric security plan provided for recovery of all of those costs. So there was certainty there. The 25 years that was developed in connection with the rate certainty plan was based on a strategic analysis for our customers' prices.

There were some other features in the plan that we considered very positive and Tony alluded to them earlier. First, the uncollectable rider. The storm rider is important to us in Ohio. We have quite a bit of income statement exposure without the rider. We have a rider in New Jersey. There is the T&D portion to help us rebuild the system. There are a number of other items in that [D] case that we view as very positive. These are all subject to prudent of the commission, but we view them all very positive.

Okay. Thank you.

Our next question is coming from Ashar Khan with Incremental Capital. Please state your question.

Hi. Good afternoon.

Good afternoon.

I was trying to get a sense, if I remember correctly -- fuel and purchase power costs were going to be up something in excess of $100 million from 2008 to 2009, something like $150 million or so. If I'm right, they're down for the first quarter. So I'm trying to understand the dynamics of those increasing from 2009 to 2008. Am I right or wrong in my assumption to what was said earlier, the early part of the year?

The original assumption for 2009 for the total calendar year was that they would be up. In the first quarter, they were actually lower, which increased earnings by $0.04. Fossil fuel cost declined by $17 million. Nuclear was up roughly by $1 million, which produced a net $16 million, which is where the $0.04 comes from. We would have a very good idea of what our fuel cost would be after the auction when we recalibrate our dispatch strategy.

Doesn't it seem that that $150 million which if I'm right was given earlier on seems to be on the high side now based on where you are?

That would depend on the economy, the success we have in the auction, and a multitude of different factors for the balance of the year and we will include that in our revised forecast when we prepare that.

Okay. Thank you.

We have time for one more call.

Your last question is coming from Hugh Wynne with Sanford Bernstein. Please state your question.

I found the discussion of the $0.30 increase in your generation gross margin somewhat confusing, and I was hoping maybe you could give me a canned version that is more idiot proof. Is what happened here that you were able to enjoy higher retail prices at the Ohio companies and the continued collection of the RTC at least at Cleveland Electric, and then were you also able to shift a portion of the sales that you were not making to the Ohio companies to the wholesale market and apparently realized there some attractive margins? I am trying to come up with a simpler way to understand this relatively robust result.

That's a fair question. Let me give you five components, four of which positively contributed, one of which was negative. I think that is sometimes the confusion when you get the negative and the positive together. Retail generation sales reduced the margin by $0.12 and that was a combination of higher retail regulated sales on the competitive side and then lower retail competitive sales because of the market. That was $60 million or $0.12 a share. Now that is the negative.

The next four are all positive. The wholesale sales contributed $0.15 or roughly $72 million, which was -- in the wholesale market was a combination of energy of $6 million and capacity of $66 million. The second positive was fuel, which the prior questioner asked about, and that was lower fuel cost at our fossil plants slightly higher than nuclear, which was roughly $16 million or $0.04. The next positive or the third was purchase power -- with the economy being down, we did not require as much purchase power. $69 million of that was rate driven and $91 million was volume as a negative which produced the $0.04 and then the final positive to the gen margin was the deferred purchase power for Cleveland Electric Illuminating, which is $0.19, which is the amount that kept the rates at their current level. So there were four positive, one negative which adds up to the $0.30.

And the first negative, the $0.15, you said it was on competitive sales?

The first negative was $0.12 on retail generation sales.

Was that competitive or just across the board?

That was principally competitive, yes.

It sounds from what you are saying to some extent this decline in generation this 11% decline in generation that you guys talked about allowed you to reduce the operation of some of the higher cost units and that there may have been a bit of a per megawatt hour margin improvement as a result.

That's fair. We dispatched our unit based on economics, and because we didn't -- the sales were down, we didn't have to purchase as much. So you had dispatch in the lower price units and then not having to purchase power. That would be correct.

Good. Thank you very much.

Thank you very much. I'd like to thank everyone for joining us on the call today. As always, we appreciate your support and interest in FirstEnergy. Thank you very much.

Thanks, everyone.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.