第一能源 (FE) 2009 Q3 法說會逐字稿

Greetings, and welcome to the FirstEnergy Corp. third quarter 2009 earnings conference 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.

It is now my pleasure to introduce your host Irene Prezelj, Director for Investor Relations for FirstEnergy Corp. You may begin.

Thank you, Doug. 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 stated in the consolidated report to the financial community which was released earlier today and 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 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; 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 Mark.

Thanks, Irene, and good afternoon, everyone and thanks for joining us today. I'll start today's call with a review of third quarter results, followed by an update on other financial matters. I'll then turn the call over to Tony for an operational overview as well as an update on regulatory activities in Ohio. As I review our results it may be helpful for you to refer to the consolidated report to the financial community we issued this morning.

We continue making solid progress towards our 2009 goals despite the negative impacts of the economy, significantly lower wholesale power prices and the unusually mild weather across our region. Excluding special items, normalized non-GAAP earnings were $1.11 per share compared to $1.60 in the third quarter of 2008. On a GAAP basis third quarter earnings were $0.77 per share compared to $1.55 per share in the same period last year.

Three special items had the net effect of decreasing this year's GAAP earnings by a total of $0.34 per share. The first of these was a debt redemption premium of $0.30 per share related to the cash tender offer completed in September, $1.2 billion of FirstEnergy Corp.'s 2011 notes. The second special item was $0.07 restructuring charge related to an employee severance and our voluntary enhanced retirement program. The third item was a $0.03 per share positive adjustment related to impaired securities held in our nuclear decommissioning trust.

There were four main drivers that had positive impact on this quarter's non-GAAP results. First, the Ohio utilities distribution rate increase added $0.05 per share. The second positive driver for the quarter was $0.06 per share increase from the Ohio distribution service improvement rider. Third, O&M reductions contributed to $0.17 per share for the quarter, reflecting lower labor and benefit cost, use of fewer contractors and other cost control measures. A recent voluntary enhanced retirement program and an employee severance program have reduced employment by about 1,000 or 7.5% since the start of the year.

Through the end of the third quarter O&M reductions totaled $242 million. Given the strong performance in this area I believe we are on track to meet our cost saving goals for the year. Our O&M reductions would have been $0.11 per share higher, but we are recognizing the repayment of reduced employee salaries, 401(k) bonus match and incentive compensation payments that may be paid for 2009. As you may recall, we did not factor these three items into this year's O&M target in developing our 2009 earnings guidance, but at the same time we challenged our employees to find savings over and above our target to provide an opportunity to earn back their wages and begin to earn incentive compensation for 2009. While we still have another quarter to go, we are proud of what they have accomplished so far. Depending on our performance during the fourth quarter, we may reduce or eliminate the third quarter accrual if we fall behind our performance target.

Finally, we realized a $0.23 per share gain from the sale of securities held in our nuclear decommissioning trust. During the quarter our investment committee converted the majority of trust holdings in cash and cash equivalents as part of their overall investment strategy to limit the volatility associated with the recent performance of our trust funds. As many of you are aware, there's been a significant amount of year-over-year volatility with respect to everyone's pension plan and other similar financial assets. By way of example, the projected year-over-year change in our pension plan is a negative $0.42 per share. The investment committee did not feel this level of volatility was acceptable and will be transitioning the assets into investments with risk return characteristics appropriate for each of the funds, including our pension, corporate owned life insurance and the nuclear decommissioning trust. The committee's decision is consistent with the Company's financial strategy of aligning the asset with the liability. In addition, investment income from corporate owned life insurance increased earnings by $0.02 per share.

These positives were offset by eight negatives. First, Generation gross margin reduced earnings by $0.32 per share during the quarter, primarily due to lower sales volumes in Ohio, which was driven by the effects of the economy, lower wholesale market prices and mild weather. Given the number of factors impacting Generation margins we've included a more detailed summary on page two of the consolidated report. That summary provides additional details on all of the components that make up this earnings driver and we are hopeful this additional material will make the discussion easier to follow. FirstEnergy Solutions served approximately 65% of the Ohio load during the third quarter of 2009 compared to nearly 100% a year ago. This represents the 51 tranches won in the May auction, the acquisition of an additional 21 tranches and the ramp-up of our government aggregation communities and direct commercial and industrial customers over the quarter.

Through last week, FES increased the load it serves in Ohio to a total of 73% which is consistent with our strategy. On a year-over-year basis, our competitive retail sales were strong, increasing 18% over last year. Generation output was 17.5 million megawatt hours, a reduction of 21% compared to the third quarter of 2008. Through the end of the quarter, Generation output was 50.2 million megawatt hours. This is lower than we projected for the first three quarters and put us behind in achieving our estimate of 70.1 million megawatt hours for 2009. As a result, we are adjusting our full year output forecast to 65.7 million megawatt hours.

Lower Generation sales were offset somewhat by lower fossil fuel and transportation cost related to the reduction and Generation output. While purchased power volumes and rates were both lower this quarter, purchased power cost reduced earnings by $0.08 per share primarily due to higher PJM capacity expenses at FES, Met-Ed and Penelec.

After Generation margin, the second negative relates to lower transition cost recovery margin which had a net negative impact of $0.28 per share. Recovery of transition costs for Ohio Edison and Toledo Edison ended in December 2008 in accordance with the Ohio rate certainty plan.. While recovery for CEI will continue at a reduced rate through 2010.

Third quarter earnings also reflected the absence of a $0.12 benefit recorded in the previous year's quarter from the resolution of tax issues that were settled in 2008.

Fourth, higher pension expense reduced earnings by $0.11 per share. In September we made a $500 million voluntary contribution to the plan. At the same time we revalued the plan, including lowering the discount rate to 6.0%. On a net net basis, we expect to see a slight reduction in pension expense in the fourth quarter of $0.01 per share.

Fifth, we had a $0.09 per share reduction in earnings in the third quarter due to the absence of the Ohio distribution reliability deferral that ended in December of last year.

Sixth, lower distribution delivery revenues reduced earnings by $0.08 per share, principally due to an 8% decline in sales to residential customers. This was largely driven by the mild weather we experienced during the summer. July in particular was significantly cooler than normal. For the quarter, cooling degree days were 14% lower than last year and 17% below normal. Industrial deliveries decreased 16% while commercial deliveries declined 6%. As we discussed before, lower volumes in these segments have not had an impact on revenue so far this year because of demand based rates, and the expiration of certain Ohio contracts at the end of 2008. I'll talk more about some of the economic activities we're seeing in the region in a moment. In total, electric distribution deliveries declined 10% compared to the year ago quarter. These lower volumes were partially offset by lower general taxes in the amount of $0.02 per share primarily for kilowatt hour and gross receipts tax.

Seven, higher depreciation expense reduced earnings by $0.04 per share due to incremental property additions.

And finally, net financing costs reduced earnings by $0.01 per share as capitalized interest related to the Sammis environmental retrofit construction project was offset by higher interest expense related to the financing activity that took place in the fourth quarter of 2008 and the first three quarters of this year.

As I mentioned, the continued economic downturn did have an impact on the Company during the quarter. While we are not seeing a full rebound, we have observed what I'm calling hopeful signs. Information related to some of our largest customers in the industrial class shows this group experienced a trough in electric usage in April with slight to moderate improvement each month thereafter. It is, however, important to note that they remain below January usage levels. Fuel is an important indicator of economic health in our region, and Mittal Steel, one of our largest Cleveland area customers. called back its second shift in early October. Two weeks ago the World Steel Association said that developed nations should see growth in the steel sector of about 15% in 2010, which is a strong prediction compared to the 34% retraction the group expects in 2009.

Beyond steel we continue to see strong growth in other sectors. One example would be the Cleveland Clinic which is northeast Ohio's the largest employer, in the midst of an expansion plan. In addition to the financial results I discussed, an important element of our financial strategy has been to align our liabilities to the appropriate assets.

We made significant progress in support of this strategy during the quarter by completing four financings totaling nearly $2.5 billion. Notable among these were the $1.5 billion unsecured notes offering for First Energy Solutions which was the first direct issuance of long-term debt for our competitive Generation subsidiary. In addition, Cleveland Electric Illuminating Company issued $300 million of first mortgage bond and Pennsylvania Electric issued $500 million of unsecured notes. While $177 million in air quality development revenue bonds were issued in Ohio on behalf of FirstEnergy Generation Corporation relating to air quality compliance expenditures at the Sammis plan. Also during the quarter we retired $1.2 billion of holding company debt through a cash tender offer. These financings, as well as other actions like O&M reductions, have helped to build our financial flexibility while significantly reducing our refinancing risk for the next three years.

Now I'll turn things over to Tony.

Thanks, Mark, and good afternoon. I'd like to start with the regulatory update beginning with our filing last week at the Public Utilities Commission of Ohio for a market rate offer or MRO. As you know, Generation pricing under our current ESP, or Electric Security Plan, has been established through May 31 of 2011. Our MRO proposes a long-term competitive bid process for procurement of Generation service for our Ohio utilities utilizing a series of descending clock slice-of-system auctions similar to the one conducted in May of this year. Notably different however, would be a staggered solicitation process. In June and October of 2010, we would conduct solicitations for 12, 24 and 36 month products which combined for Generation service for 100% of the June 1, 2011 through May 31, 2012 period, two-thirds of the needs for the following year and one third of the needs for the next year.

Subsequent auctions also conducted in June and October of each year would complete a transition to where one third of the total load would be procured every year with three-year products. This would move our Ohio utilities to a system not unlike New Jersey's auction for basic generation service where a similar approach provides for reduced volatility in customer prices. The Ohio statutes call for a 90 day Commission review period. Accordingly, we would anticipate a final decision by January 18, 2010. Importantly, this line dovetails with our application currently before the Federal Energy Regulatory Commission to integrate into PJM on June 1, 2011, which would coincide with the implementation of Generation pricing from the 2010 auctions. We are expecting to hear from the FERC on this application by year end.

Moving now to a couple of other project matters. Starting with our Fremont combined cycle facility. Last month we announced our decision to accelerate completion of the Fremont plant. We now expect to complete plant construction by the end of next year so that the facility can be operational in 2011 and available to respond to increased customer usage as the economy recoveries. Other benefits include immediate support for the local economy surrounding the plant by bringing jobs to the northwest Ohio region. If we decide to sell this asset in the future, a completed facility will put us in a better position than a partially completed one. It will cost approximately $180 million to complete the facility.

And also I would like to update you on our Montana coal mine. I'm pleased to report that we continue to achieve solid progress at Signal Peak. As you know, the rail spur and wash plant are already completed. Installation of the long wall and associated equipment is proceeding smoothly and is more than 70% complete. We'll begin testing the long wall next month. We've already received nearly 100,000 tons of coal at our generation facilities for additional testing. In addition, we've sent test shipments to other domestic utilities and several test cargoes are currently shipping to Vancouver which are scheduled to leave for Asian markets shortly. So all in all, great progress. We expect to get the mine into full production later this year or very early next year.

In closing, I'd like to reiterate our firm commitment to delivering shareholder value. As Mark mentioned, our employees are engaged, and we've captured significant O&M savings thus far. I believe these efforts will continue into the fourth quarter and enable a solid finish for the year. Another bright spot has been the strong execution of our FES team in both government aggregation and direct sales to commercial and industrial customers. Not only have they exceeded their goals for the year, particularly in Ohio, they have set the stage for future success by doing so.

While we can control our retail sales efforts and O&M cost, unfortunately we can't control the economy and weather. And although we are seeing some early signs that the economy is coming back as Mark mentioned, it's not at the point where we are predicting the likelihood of a sustained and complete rebound. In addition, wholesale power prices are not as robust as we'd obviously like to see them. As a result, we decided it made sense to narrow our guidance range to $3.70 to $3.80 per share given what we've seen so far. I know you are also keenly interested in what 2010 will bring. I can tell you we are currently refining our outlook and assumptions as we finalize our 2010 earnings guidance which we plan to share on December 3rd in New York.

Now we'd be happy to take your questions.

Thank you. (Operator Instructions) Our first question comes from the line of Ashar Khan from Incremental Capital. Please proceed with your question.

Good afternoon. I was trying to get a better sense as to what have the volumes been this year? Weather was kind of normal.

That's a good question. If you look at the residential side, the volume in the revenue side was offset by about $34 million. We said $0.08 was below our distribution. About $0.07 of that was attributable to the residential. In Ohio you are seeing some reduction, 12% PAA percent, in total 10%. Most of that Ohio reduction was industrial, which is around 16% and even most of that was in steel, metal, auto, and tire. Hopefully that is a lot of detail and answered your question.

Okay. Thank you.

Our next caller is Paul Ridzon from Keybanc. Please proceed with your question.

About your guidance, it seems like you found $0.23 in your portfolio optimization. What were the offsets that made you drive down the top end of guidance?

As Tony alluded to before, the unseasonably warm weather in July, particularly, and then throughout the third quarter, the industrial sales I just alluded to being down 16%. The weather affecting the residential side. Just the general economy. Nothing specific other than we can't make that up in the fourth quarter, the weather and the industrial sales. So we just got more comfortable reducing the guidance down at the top end.

Mark, you mentioned $0.11 around deferred comp that could come back. I was unclear what that discussion was.

When we provided the original O&M guidance that did not include any incentive comp, salary reduction or 401(k) bonus dollars in it and what we said to our employees was if you would like to get your salary back, 401(k) bonus match and any form of incentive comp, you will have to exceed our O&M guidance. So through September, we've expended $63 million for incentives, meaning that our employees earned that amount by reducing O&M expenses some $305 million for the first nine months of the year and that nets us down to the $242 million. Now in the fourth quarter, if we don't stay on path for achieving our O&M reductions, we will take back the incentive comp and salary and 401(k) bonus match. It is possible that they achieve it and continue to earn. It is also possible that they slow down and we'll reverse some of these entries.

Thank you.

Our next question comes from the line of Daniel Eggers from Credit Suisse. Please proceed with your question.

Good afternoon. Just real quick on the decommissioning trust, the COLI and all that sort of stuff. What was the cumulative number for this year and where were you guys starting off from a guidance perspective? Was any of that in this year's numbers?

It's kind of a catch 22. On the one hand, if we weren't capturing the O&M savings, Dan, we wouldn't have put the incentive comp back in. So we look at the whole thing. We've moved some of our plants around in terms of production, outage schedule, things like that. So everything came into play. In terms of the actual number for the third quarter, and Harvey stands to correct me, was $157.4 million as compared to $46.4 million last year.

Since you've asked Dan, if you don't mind, I'll just do the pension as well. The pension last year had the impact of benefiting earnings by $0.12, and this year we expect it by $0.28, that's a $0.40 delta. And then on COLI, the corporate owned life insurance, that was a $0.02 positive this year, and Harvey again correct me, I think it was an $0.08 negative next year. Last year, sorry, 2008. So that had a $0.10 year-over-year. And that specifically, Dan, is why the investment committee is looking to take this volatility out. It's just $0.40 here, $0.10 here, $0.30 here. It's just too volatile, and it makes it difficult for us to manage. So hopefully that's the answer.

As you think about looking into 2010, as you rebalance these portfolios, what is the right run rate for pension expense? Does that mean that the minus $0.28 this year on a year-over-year basis, is that the new baseline if you stabilize out the portfolio or do you expect lower returns and a more balanced portfolio? Does that mean there's actually an increase in expense next year? How should we think about the long run implications?

I can't give you the guidance for 20100 because we'll reset the pension expense in December, the end of December, but you do know that we put a $500 million contribution which would increase the asset value. Now, the big trigger after that would be what occurs with the discount rate and we've lowered it several times this year down to 6% when we remeasured the pension. So you could expect to see with more assets a higher return on that side but the big unknown at this point, I would say, would be the discount rate. Harvey, do you want to add anything to that?

No, that's fine.

From the run time on the coal plants obviously a lot of pressure, and system load has a big impact. But that lower output, was that all a function where the market was in the quarter and your generation wasn't needed? Or was it, in part, maintenance and other reasons why the plants didn't run?

I think it would be a combination because we commenced some fairly large outages at some of our facilities in September which would have affected our production capability, as well as the market was very soft in the rest of the quarter, July and August in particular.

Just along those lines and I'll turn it over to somebody else, coal inventories, where are they right now? Are you finding alternates to avoid over stockpiling at this point?

We have coal to sell, if that's a question. It runs anywhere from about 30 days to 60 some days, depending on how you want to measure it. If it's measure on net demonstrated capacity, the unit, it's lower. If it's measured on average burn, you will get a higher number. A good average in there would be about 45 days. We are storing coal. We've made provisions for storing coal. We are also, as you might expect, renegotiating contracts to not have delivery of coal. So we are trying to manage our fuel inventory in recognition of the economy and the weather so that means storing some, renegotiating some, and burning some.

Okay. Thank you.

Our next question comes from the line of Johnathan Arnold from Deutsche Bank. Please proceed with your question.

Good afternoon, guys. A couple of quick questions. If I heard Tony right, you talked about having exceeded your goals for the year in terms of aggregation and retail sales. Is it that you've already passed the annual target or you are more than ahead of plan to meet that target?

John, this is Mark. Let me answer that. I would characterize it as we are ahead of plan, that we are very pleased with the results in the group so far. Our strategy is to keep 7% to 10% of our generation back for the wholesale markets, spot, ancillaries and those types of things. So they are still selling and they are still being aggressive in the aggregation, particularly in the industrial market. Not surprising they started with the large industrial customers and they are working their way down through the list. So we would expect that to continue to grow throughout the year, and that's the charge we've assigned to them.

So you are not saying you are already ahead of that annual target.

Yes, yes we are.

Can you talk a little about margins as opposed to just the volumes you've achieved there and generally the competitive landscape as you look into profitability into that business?

We are not going to speak to margin because in our view that is somewhat competitive information. Not somewhat, it is competitive information. The margins are about where we'd expect them to be. They are a little soft right now because of the economy, the weather, particularly the decline in the industrial sales have left an awful lot of capacity in the market. It's a soft market, but we are pleased with the margins, and we are making sales.

Would you say margins are where you expected them to be when you launched this plan earlier in the year, or are they coming in below that or above?

I think, A, they are lower than what we originally planned in let's say 2007 and in 2008. Improving slightly as we are working our way through the year. And part of our strategy is to get these retail customers under contract so when the auctions are up, hopefully the margins would be up when these contracts just automatically would be renewed.

Thank you guys. Thank you very much.

Our next question comes from the line of Hugh Wynne with Sanford Bernstein. Please proceed with your question.

Hi. This is a question for Tony. What's the best way for us to think about the decline in megawatt hours produced by your generation fleet this year and the potential recovery of that output in subsequent years? On the one hand I can construct a scenario in my mind where a more stringent version of the Clean Air Interstate Rule, for example, might require you to install scrubbers more widely on your fleet and that might lead to some of these plants being retired and that generation perhaps not coming back on a permanent basis. On the other hand, you may have a completely different view regarding the recovery of that output with the end of the recession and that generation then serving as a tailwind to earnings in 2010, 2011 and beyond. I'm interested in your view as to the fate of that portion of the fleet.

A lot of questions in there, Hugh, and an awful lot of speculation. My own sense is what you are seeing from the standpoint of generation this year is really primarily related to what's going on in the wholesale markets and the economy. That coupled with about as nice a summer as you can hopefully have and perhaps never experience again. All of which combine to make the market for electricity much weaker and softer than you would expect. Couple that with the fact that we started the summer essentially, probably about 80% to 90% open with respect to our generation production. Our capability is roughly about 80 million. Ohio is roughly 60 million of megawatt hours alone, not quite that high but I would like to think about it in those kind of context. It's unlikely that we will ever have that much load open as we move through a transition, ever again, and we all understood that going into this because the rules in Ohio require that you would potentially have to serve 100% of it. So we are working through that transition, the last part of that transition, right now which is the conversion of that open position into longer term retail and other sales that lock in the usage of our generated facilities. We are well on our way to accomplishing what I think is reasonable, and my sense is that as the economy recovers, as the demand for energy in the marketplace improves, as the industrial load continues to grow, there will be plenty of room for every kilowatt hour we can produce and that's where we are heading.

That's helpful. Just on the question of your O&M savings, you obviously had enough success so far this year to reinstitute the incentive compensation. Have you revised at all your thinking regarding the next year? Are there savings that you believe will be in excess of plan or do you see some of these reversing next year? What's an updated view on O&M cost cuts?

This is Mark. The incentive comp was expensed but as I alluded to before, it could just easily be reversed if we don't continue on our target. Without again getting into 2010, in my comments, we've eliminated 1,000 employees through severance or employee early retirement enhanced programs. So those employees won't be here. We changed the healthcare benefit program. We also alluded to, in the second conference call, that we flattened our overall organization back in May which affected about 5% of our non unionized workforce.

The other comment I would make is some of this is aligned with the economy itself. Right now we are saving over time but next year we may spend over time if bringing that plant back is economic from a revenue standpoint. Several expenses like employees will go forward. Other expenses might track down, like overtime, but they would have revenue offsets to them. As I've said, we are very pleased with what our employees have done so far. They are committed and they have quite a bit of incentive to keep going.

Great. Can I just ask you to repeat your answer to a previous question? What was the earnings impact of the cool weather in the third quarter relative to normal?

On the revenue side, on the wires distribution side, it was about $40 million which is the $0.08. $0.07 or roughly $35 million of that was related to residential. And then again on the distribution delivery side we don't see much revenue dispersion because of the contracts coming off and some of the demand features of their contracts.

So about $0.08 is the weather impact relative to normal?

That's what I would say.

That would be the weather impact roughly relative to normal on the distribution side of the business. The weather also affects wholesale prices significantly and it did this summer and that runs through the entire rest of the system including the generation margins that you are seeing.

Great. Thanks very much.

Our next question comes from the line of John Alee with Decade Capital. Please proceed with your question.

It's been answered. Thank you.

Our next question comes from the line of Paul Fremont with Jefferies. Please proceed with your question.

Thank you very much. Really two questions. The first is you routinely strip out impairments in your nuclear decommissioning fund as a nonoperating item. How do you not trade a $0.23 gain due to repositioning in the same way?

We look at that a little differently. I want to emphasize that employee incentives were reduced last year because of the significant $123 million nuclear decommissioning impairment. Our employees are only going to get paid their incentives if we achieve our earnings and our earnings are partially going to be affected by the nuclear decommissioning trust, it's going to be affected by our ability to reduce O&M, it's going to be affected by our ability to continue our path on the retail side. So it's affected by a lot of things. But last year they were penalized. Whether they are awarded this year will completely depend on whether we hit our targets.

Right, but this is still a $0.23 non recurring gain in the quarter, is it not?

Paul, this is Harvey Wagner. Traditionally we have carved out or normalized out the accounting impairments for the nuclear decommissioning trust. We do not believe that it's appropriate to carve out realized gains from the sale of the security. And that's been our approach consistently applied throughout the time that we've been required to recognize these impairments.

Okay. I think you've actually said that on past conference calls. Second question that I have is back in June you talked about 70 million-megawatt hours this year which we are now closer to 65. For 2010 you had given a number close to 81 million-megawatt hours. Given where you are in industrial sales and given where the economy is, should we assume that that 81 could be subject to a downward revision?

As Tony alluded to, Paul, we'll be giving some rather detailed guidance in about six weeks so we will defer that question until then.

Thank you.

Our next question comes from the line of Gregg Orrill with Barclays Capital. Please proceed with your question.

Thanks a lot. Maybe I'll follow up on Paul's last question there. Did you happen to see much coal to gas switching in the third quarter and could you quantify that if possible? It seemed that that could have been a factor for the low capacity factor in your load following assets.

This is Bill Byrd. We really didn't observe much coal to gas switching in the market.

Okay. Thank you.

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

Good afternoon. Just to follow up on a few things. One is the deferral of coal to be burned and what have you, when you are stockpiling that coal, you're deferring delivery. We've seen some companies defer the higher cost coal in terms of what they are not burning and as a result we've seen some cost shifting now projected into future years. How does that work with you guys?

I think it's a balancing act, as you might guess. The mining companies would like to deliver the high cost coal and we would like to not have it delivered. We are trying to work with them. They have issues, we have issues, and depends on the supplier, but we are trying to work through it.

So all things being equal, because of this less coal that you are burning, you might see a little bit of a higher increase in coal expense just on a per ton basis in 2010 than we would have otherwise seen?

Yes, maybe. But I think we'll be more specific with that on December 3. I'm being flagged here to say we can only take one more call.

Do you want to take somebody else's question?

No, go ahead, we'll let you go all the way.

Okay. In terms of the shopping in territory I think you said you have the 73% share. Is that correct?

That's correct.

That's the Ohio territory, your territory, correct?

Correct.

Now, what about your activities outside of there? I know you guys had some designs on a few of your neighboring utilities. How is that working and can you give us an update on that?

Sure. What we've decided to do was to really be much more aggressive in our own footprint, if you will, take first mover advantage where they are used to our name. As I said before, on the industrial accounts, work our way down the list. As we have gone down that list and got communities ready to aggregate, now we have the time to start moving into some of the other regions that we talked about, whether that is southern Ohio, western Pennsylvania or west of us. Our first move was to try to capture as much as we could in our own footprint and now we are starting to make movements outside of that. So we are about as what we said, we are ahead of where we expected to be at this point and we are very pleased with what our retail group has done.

Okay. Finally on the economic outlook, I think there was a little bit more of a less optimistic perhaps, and I don't want to read into it, maybe you can clarify it a little bit more, outlook for 2009 in terms of how the economy has been operating. I know you guys are going to give guidance on December 3rd, and I don't mean to jump on that. But what do you think about the economy now with respect to 2010 and what do you think we are going to see? Do you have any flavor on that when you talk to your customers and what have you?

Our customers are as concerned as we are as to where they are but again, the union at Mittall is very surprised that they added the second shift as fast as they did. You've got Large Town 2,000 workers for the Chevy crew. Ford added, on their engine plant. So we are seeing fairly significant changes in some of the individual facilities, but we're still seeing an overall softness, which is why we lowered the top end of our guidance.

For '09 but for 2010?

We'll give you that in December.

Thanks.

Now after Paul I'll take one more question. Thank you.

Our last question comes from the line of Danielle Seitz with Dudack Research Group. Please proceed with your question.

Most of my questions have been answered. I was wondering if you can help me out. The Ohio transition cost recovery margin, it seems that you are anticipating a negative $1.31, and it seems that a lot of it has been put into the fourth quarter, is that correct? Or I didn't completely understand how much you had so far for the nine months.

Are you talking about the transition cost?

Exactly.

You mean the $0.28?

Right. The $0.28. I was wondering what was the number for the nine months.

The transition revenues would be down a little over $220 million. But then the amortization offset some of that, which is let's say $83 million, so you are getting $139 million net net in that which is roughly the $0.28 this year. Those are the numbers.

But it seemed that for the year you are anticipating $1.31 negative impact, and it looks like, if I put the second and third quarter together, it's far from that number. I was wondering how much it was for the nine months.

I think perhaps you are looking just at the revenue side of that equation. The net for the first nine months has been $0.56 a share.

Great. So you are still looking at $0.75 coming up?

Right.

That's only going to be in the fourth quarter?

Right. It will be something less than $0.35.

Okay. Thank you very much.

I'd like to thank everyone for joining us on the call today. Tony and I look forward seeing many of you next week at the EEI financial conference. And as always, we appreciate your continued support and interest in FirstEnergy. Thank you, all, very much.

Thanks, everyone.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.