第一能源 (FE) 2011 Q2 法說會逐字稿

Greetings and welcome to the FirstEnergy Corp. second quarter 2011 earnings conference call. At this time, all participants are in listen-only mode. A brief 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, Executive Director Investor Relations for FirstEnergy Corp. Thank you, Ms. Prezelj, you may begin.

Thanks, Rob, and good afternoon. During this conference call we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects, and other aspects of the business of FirstEnergy Corp. are based on current expectations that are subject to risks and uncertainties. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the Safe Harbor statement contained in the Consolidated Report to the Financial Community which was released earlier today and is 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; 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. Thank you for joining us today. During the 3 months since we met with you in New York, we've made significant progress integrating Allegheny and implementing the strategies we outlined. Our second quarter results are inline with our expectations, and we are on track to meet our objectives and capture the benefits we outlined for you at that meeting. At this point, I'm very pleased with our performance. And given our confidence in our business strategy, and our ability to achieve our merger targets, we have narrowed our 2011 non-GAAP earnings guidance to $3.30 to $3.50 per share. Mark will talk more about the revised guidance, including expectations for the third and fourth quarters when he discusses financial results a little later. He will also provide updates on the major areas we outlined in May, including debt reduction, asset sales, and our liquidity position. For my part, I'll provide a detail around our progress with the merger savings and review some other recent developments for you.

Let's start with the merger. Through the end of the second quarter, we have completed merger-related initiatives that will allow us to capture approximately $132 million in pretax benefits on an annual basis. That's over 60% of the merger-related savings we expect to achieve by year end. Keep in mind that the $132 million benefit is an annualized figure. So only a portion is reflected in the second quarter results. But this is consistent with the timing and realization we expected.

The completed actions include once-and-done items like restructuring our combined credit facilities, reorganizing the executive team, and canceling many overlapping or duplicative contractual arrangements, such as insurance policies and Allegheny's outsourced information technology services contract. Most of the remaining actions are associated with enhancements and how we operate as a combined Company. Things like increasing retail sales, improving super-critical fossil fleet performance, implementing various supply chain initiatives, and optimizing fuel transportation. These are captured generally over time and billed as we improve the efficiency of our operations.

At this point, the merger and integration are going very well. I'm pleased with our progress. In fact, we are a little ahead of schedule. And I remain confident that we will achieve the synergies we've outlined this spring.

Respecting FES, our solutions company, as you know, one of the most significant benefits of the merger is the addition of the super-critical generation that can be deployed by FirstEnergy solutions within our competitive business model. During the second quarter, FES continued to have tremendous success in growing its customer base and now has 1.65 million customers. A 65% increase over the second quarter of 2010. FES also has made significant gains in direct governmental aggregation and mass market sales during the second quarter. Government aggregation sales have increased 41% compared to the second quarter of 2010, and our initial mass market efforts in Ohio and western Pennsylvania have exceeded our expectations. In July we signed our first mass market customers in Illinois, complementing our governmental aggregation efforts in that state. We are planning to expand our mass market effort into Maryland later this year. We are starting to see both wholesale forwards and retail prices increase to reflect the anticipated environmental changes.

Turning now to some other recent developments, starting with those environmental regulations. On the fossil side of our business, we are continuing to review the EPA's new cross-state air pollution rule, or CSAPR, which will require significant reductions in nitrogen oxides and sulfur dioxide emissions from plants throughout most of the eastern half of the United States. The new rules are more aggressive than the CAIR rules they replace, and they are likely to have an impact on the amount of generation that will be available beginning in 2012. In general, we believe we are in pretty good shape relative to other coal generators, thanks to the work that has been completed across our fleet. Looking at our competitive base load generating capacity, most of the air pollution control equipment is already in place to meet the EPA's new NOx and SO2 emission reduction requirements.

Of the 14 super-critical coal units at our competitive fleet, Eastlake 5 is the only one that is not scrubbed for SO2. And there are only 4 units without SCRs. On a percentage basis, including our nuclear units, 95% of our competitive fleet is either non-emitting or well controlled for NOx and SO2. I would like to emphasize that our analysis of the EPA's rules is ongoing. And we do not plan to make any final decisions or announcements about plant status until after we have thoroughly evaluated CSAPR and the final maximum achievable control technology, or MAC, rules for mercury and hazardous air pollutants that are expected to be finalized in November.

One final point in this area. We have about $40 million in existing CAIR allowances in our inventory that we will continue to use through the balance of 2011. So the impact of any potential impairment to these allowances that are unused from that old EPA program would be relatively insignificant.

On the transmission side of our business, during the second quarter we celebrated 2 milestones. First, in mid-May, our 150-mile trail line was energized. Taking this 500 KV line from concept to operation in 5 years was a tremendous accomplishment by the team. And as PJM noted during the recent heat wave, the completion of the trail line means 1,000 megawatts of power was added to population centers along I-95 corridor this summer. On June 1, we completed the integration of ATSI's operations into PJM. So at this point all of our transmission assets are now part of a single RTO.

Finally, we continue to actively voice our support of competitive markets, especially in Ohio, where there is much debate on this topic. We firmly believe that competition is the best way to offer lower generation prices to customers, increase productivity and efficiencies from existing generating facilities, provide the appropriate market signals regarding the need for new generation, and promote jobs and economic growth. 1.6 million customers throughout Ohio are already taking advantage of competitive market by choosing their supplier of electric generation. We will continue to aggressively support customers' right to participate in competitive electricity markets and their ability to take advantage of the benefits that only competitive markets can deliver.

Now I will turn this over to Mark for his second quarter review.

Thanks, Tony. And good afternoon, everyone. Today I would like to guide you through our second quarter, and then I'll spend a few minutes updating you on our progress against many of the financial targets we outlined during our analyst meeting in May. As Tony said, our second quarter 2011 results are consistent with our expectations. Excluding special items, non-GAAP earnings were $0.65 per share compared to $0.82 in the second quarter of 2010. On a GAAP basis, this quarter's earnings were $0.43 per share compared to $0.87 per share last year. As Tony also mentioned, we have narrowed our non-GAAP earnings guidance to $3.30 to $3.50 per share, which reflects our confidence in the full year. As you refine your models for the remainder of the year, our earnings guidance implies estimated earnings for the second half of 2011 of $1.94 to $2.14 per share. As this is the first year with Allegheny, and to provide greater clarity, I will add that we anticipate achieving about 60% of those earnings in the third quarter and 40% in the fourth. As I walk through our second quarter results, it may be helpful for you to refer to the Consolidated Report to the Financial Community we issued this morning.

As detailed on page 18 of the Consolidated Report, there were several special items that decreased this quarter's GAAP earnings by a total of $0.22 per share. By comparison, in the second quarter of 2010, special items increased GAAP earnings by $0.05 per share. There were 3 merger-related items that decreased GAAP earnings by a total of $0.12 per share. These included merger accounting, integration costs, and regulatory charges. The resolution of litigation related primarily to remediation costs for legacy manufactured gas plants in New York, reduced GAAP earnings by $0.05 per share. Marked to market adjustments of certain wholesale power contracts decreased earnings by $0.03 per share. And 2 items reduced GAAP earnings by $0.01 each. Impairments of nuclear decommissioning trust securities and non-core assets in the process of being sold.

Moving now to the key drivers of our second quarter non-GAAP results, I will start with the merger. Results from the Allegheny companies contributed $0.20 to second quarter earnings. Earnings also increased by $0.04 per share as a result of fair value adjustments under purchase accounting that impact interest expense, pension and OPEB costs, depreciation expense, regulatory asset amortization, and purchase power costs. And while the shares issued in conjunction with the transaction decreased earnings by $0.22 per share, the merger continues to be accretive to our quarterly earnings. As Tony said, we are pleased with our progress to integrate Allegheny and we expect to achieve the benefits we described when we met with you in May.

Turning now to other second quarter drivers, higher O&M expense decreased earnings by a total of $0.07 per share. This was driven by 2 planned nuclear outages and several planned and unplanned fossil outages, partially offset by lower overall expenses on the utility side. Commodity margin decreased earnings by $0.04 per share, principally as a result of the unplanned forced outages. A more detailed summary of this item appears on pages 2 and 3 of the Consolidated Report, including additional information on megawatt hour volumes and prices.

At our FirstEnergy solutions subsidiary, contract generation sales increased 4% compared to the second quarter of 2010. As Tony mentioned, FES made significant gains in direct governmental aggregation and mass markets. And as you would expect, growth in these channels is matched by a corresponding decrease in POLR sales. With respect to our hedge position, our 2011 book is essentially full. While 2012 contracted sales and revenues are nearly 75%, and we are approaching 40% for 2013. All of these are very consistent with the glide path we outlined in May. Generation output for the quarter was 10% below the second quarter of 2010, or 1.8 million megawatt hours. As I stated earlier, this decrease resulted from both planned and unplanned outages including an extended outage to repair the generator at one of our Sammis units which is now back on line. As a result of lower generation output and higher contracted sales, wholesale sales decreased 713,000 megawatt hours, or 64% compared to the second quarter of 2010.

Lower generation output also resulted in an increase in purchase power costs, offset by a reduction in fossil fuel expense during the quarter. Going forward we expect to temper any fuel expense increases as we continue to capture merger synergies and other opportunities to restructure our existing coal contracts. Benefiting from the move to PJM on June 1, we saw increased capacity revenues. And finally we incurred higher capacity congestion network and line loss expenses associated with our increased retail sales, principally in Pennsylvania.

Continuing with other second quarter drivers, financing costs, including lower capitalized interest and higher interest expense, reduced earnings by $0.04 per share. General taxes decreased earnings by $0.02 per share compared to the second quarter of 2010 that reflected favorable tax settlements. And higher depreciation expense reduced earnings by $0.01 per share. This was essentially the net impact of in the-service of the Sammis AQC project and the write-down of the Lake and Berger plants. Finally, distribution deliveries were down 1% overall with slight decreases across all categories. I would characterize industrial sales as spotty while commercial sales continued to lag. Although perhaps difficult to remember after the recent heat wave, or should I say the current heat wave, we've had relatively mild conditions across our service territory during the months of April and May. Which largely neutralize the impact of June's summer weather. For the first 6 months of 2011, the impact of weather on kilowatt hour sales was basically flat compared to 2010.

Looking forward, while we still have 2 months remaining in the third quarter, the expectation is our distribution revenues in July should benefit from the extreme heat that we're now experiencing. And for the second half of the year we currently expect industrial sales to increase at a rate of about 3%.

At our May analyst meeting we provided an approximate breakdown of how we expected each of our 3 business segments to contribute to earnings. And through the first half of 2011, the results are very much in line with our expectations. And that makes for a good transition to discuss our progress against other financial targets we identified at the analyst meeting. We shared with you our plans to deliver strong financial results with consistent earnings, positive cash flow, and a strong balance sheet. We outlined our strategies to grow our competitive business and achieve benefits from the merger. And as Tony said in May, our team has a track record of doing what we say, and we're going do just that. Earlier today, Tony described how in the 5 short months since the completion of the merger we have already captured $132 million in synergies, and we expect to achieve more than $210 million in merger benefits by the end of the year.

We're also on target with respect to our debt reduction goals. Year to date we have reduced net debt by more than $100 million and we expect additional redemptions of maturities to bring our 2011 net debt reduction total to approximately $825 million. We are using the proceeds of the December tax legislation, combined with asset sales and free cash flow, to continue to reduce our balance sheet leverage. We completed the sale of the Fremont generating station last week which will increase our overall liquidity by approximately $510 million. I would note that the $825 million of debt reduction total does not include proceeds from the planned sale of Signal Peak. That sale process continues on track, and if completed, the proceeds would provide additional cash for further debt reduction and increased overall liquidity.

And our liquidity position is strong, with $4.6 billion available at the end of the quarter. As you may know, in June we successfully renewed and restructured $4.5 billion of revolving credit facilities consisting of a $2 billion, 5-year credit facility for FirstEnergy and its regulated entities, and a $2.5 billion credit facility for FES and AE Supply. We were very pleased with the overall response of commitments of our banks and want to express our thanks to them.

Only 3 months have passed since we outlined our overall financial strategy. Despite that short time frame, we have made considerable progress towards our goal of strengthening our balance sheet, divesting non-core assets, generating positive cash flow, maintaining a strong dividend, and capturing merger synergies. Given how far we have come in a short period of time, we are confident in our narrow non-GAAP earnings guidance of $3.30 to $3.50 per share. I can assure you that our team remains focused on meeting its commitments and continuing our success.

Thanks for listening. And now I would like to open up the call to your questions. Thank you.

(Operator Instructions) Dan Eggers with Credit Suisse Group.

Good morning, guys. Tony, I was just wondering if you could give a little more thought on the dynamics in 0hio. Presumably an AEP settlement maybe this week and Duke's plan out there, clearly they're going a different direction. What are the routes you see available to try and keep Ohio on the path to a competitive market environment rather than going back to regulation for those guys?

If you think about the AEP case, probably synergies are going to be about same, or Duke's, about the same. There's multiple parties, not just FirstEnergy, engaged in trying to assure that competitive markets are the way to stay in Ohio and move both Duke and AEP more towards that model. We're not the only voice in this debate, although obviously we're one of the larger ones. But obviously there are customers involved, there are other marketers involved. And quite frankly I think it's a hard sale overall. The basic process in Ohio is one in which whatever path you choose, it must be lower or less value than using a competitive market. And if, in fact, they want to sell at lower than competitive prices, so be it. I don't think that's where their heads are at. I don't think that's where they're going. And from what I understand, their filings wouldn't support that. So I think the debate is still very lively and very much at the beginning here in the state.

Given the volume of customers that have shopped in Ohio, are you finding Duke and AEP's service territory folks who are willing to permanently step out of their service to avoid the non-bypassable charges you talked about before? Do you see any success capturing that permanent customer shift right now?

I think we are, Dan. I think we're having some pretty strong success despite rules within each of those areas that are not conducive to shopping. So we are moving customers. I think, if, in fact, they knew that they could avoid the non-bypassable charges by shifting before they're established, I think you'd see much more shopping, much more activity in those areas.

Okay. Just 1 more question on the shopping trends you're seeing. Ohio, looks like you've lost momentum on a lot of shifting, at least out of your utility base. Do you think Pennsylvania can get to that same level of shop -- 70%, 80%, 85% shopping over time? And what tame frame do you think that would occur under?

Go ahead, Mark, then I'll answer some of them.

Dan, this is Mark. We've always talked about we only have so many megawatt hours to sell. And to the extent we reduce some of our sales in Ohio and move it someplace else, all it means to us is that we're moving that megawatt, or kilowatt hour to where we can generate a greater margin. Ohio is shopping it around 75%, and I would expect it to stay pretty close to that. Pennsylvania, I believe, is up to 50%. And our expectation is it would grow because it really somewhat opened up at the end of December. So it's not so much we're dropping there or adding there. It's where can we get the most margin for that megawatt hour. Tony, do you want to say something?

I think what you will see over time in Pennsylvania is shopping will approach the levels that you're seeing in Ohio. I just think it will take a little longer because you don't have the ability in Pennsylvania to use tools like government aggregation, which allow you to make groups of residential customers look more like larger commercial and industrial customers. Which means it takes a little longer to move customer by customer in those markets. But the fact of the matter is, as customers get information, as it becomes clearer and clearer to them that there is an advantage to competitive markets and they want to take advantage of it, there certainly will be suppliers out there like FirstEnergy. And FirstEnergy solutions will hopefully be the preferred supplier of all these customers, and they'll seek contracts with us over a longer term.

And I didn't see an updated hedging slide but are you guys on course to get this shift in customer mix that you expected from the analyst day?

Yes, very much so, Dan.

Jonathan Arnold with Deutsche Bank.

Good afternoon. Couple of quick questions. I think I heard you right, but you're not planning to give us some kind of holistic view of what the environmental rules mean for your fleet until you get a final MACT rule. But based on what you've seen with the CSAPR rule and the reactions you've seen in the forward curves around the region, do you feel the market's generally reflecting that effectively or something different?

I think the market is beginning to appreciate the impact these rules may have on available generation. I think it's just starting, because there's just pieces of information coming out. I think the PJM auction set a tone for that. The new CSAPR rules, which have accelerated requirements with respect to SO2 and NOx, and have limited trading capability within that potential compliance regime, I think we're at the beginning of trying to understand how this will, in fact, impact prices going forward. I don't think there's any question that it will.

Okay, thank you, Tony. Then just following up on that, I think you had mentioned you have 4 of the super-critical units that are not controlled for NOx. If you were to decide you needed to do that for next year, how quickly could it be done?

It can't be done in a year, I can tell you that. That's part of what we're looking at right now. I don't think they have to be done by next year, because they do have some controls on them. And we might be able to use some interim controls like SNCRs and better burners at some of the Allegheny plants. So I'm not quite ready to give you, or to outline exactly, all of the options we've had near term and long term.

Okay, thank you. Could I ask a specific one on, firstly, to what extent do you have customers under contract in Duke's territory where the contracts run beyond the current ESP? And if there are such customers, what's your sense of how they would get treated if the ESP was to go forward? Is there a risk they'd effectively be paying you for capacity and also having to pay Duke's capacity charge? How would the contracts deal with that?

This is Bill Byrd. We do have some contracts which do go beyond the time horizon of Duke's ESP. Not huge numbers to customers but we do have some. The specific as to how the capacity would work from the customer perspective, we just to have work it out. It isn't provided for in our contracts, and we'd have to see how it would be dealt with on the regulatory side and then work it out with our customers.

The old contract is silent on that topic?

Yes. Basically, Jonathan, anything you do inside of a market that makes things non-bypassable in a competitive market raises all kinds of issues and questions with respect to timing and with respect to who and how long they're willing to pay for things.

And if you will allow me, just on one other topic. We've seen some stories about some operational issues at Signal Peak, and it sounds like you may have pushed back timing expectations on sale a little bit. Maybe I didn't hear that right. What are your thoughts around timing of potential sale there?

Jonathan, this is Mark. We haven't changed our timing. I think we slowed it up until we moved the long wall into the second panel. That was done early July. There were some operational issues there which required some additional support. Mine health Safety Administration has signed off on our plan. We're in the process of doing that. They've signed off on our ability to resume production. But we're still on schedule. We've narrowed it down to eight bidders, as we said before. We didn't really want to get anyone into the mine until those panels were moved, so management's sole focus was getting that done. We're back into the sales process again, and in my mind, we're right where we had anticipated being in terms of the schedule.

That's a 2012 event rather than '11, from a cash standpoint from the sound of it?

It could be 2011, but it would be probably later in the year. There are a number of different options to pursue with respect to the sale. The asset has a lot of value and we'll take our time working through which option seems to be the best for us and our partner.

Steve Fleishman, Bank of America.

Good afternoon. Couple of questions. First, I will ask a few, I'm not sure any of which you will answer. But when you gave the merger outlook, you gave 3 years worth of guidance. And I know you don't want to be in position to always be updating that. But so far on the merger and all the different factors you baked in, as well as the updates in the markets, would you say you're still on track for the 3 years?

I'll speak to the merger piece. We're certainly on track for the merger piece. We feel very comfortable with that. We talked about the fact there were 289 initiatives. They've all been assigned. The folks are working them. So we feel very comfortable with. Tony alluded to the prices seem to be moving up a little bit, so you can factor that in. We've talk about the fact that we're hedged about 75% in 2012, about 40% in '13. So I think we're very comfortable with where we are.

Okay. Secondly, on RPM, I'm wondering if you could give any color on what ended up happening with your sub-critical plants bidding into the auction.

This is Bill Byrd, Steve. I think it would be safe for you to assume that we didn't sell forward the plants most at risk to the environmental rules.

Would that be like all your sub-critical or some portion of them?

We've said there's 1,500, 2,500 megawatts of sub-critical units that are most at risk from the environmental perspective. So, in that range.

Okay. And then lastly, I don't know if Donny is there, but maybe some color on, you've clearly done very well adding customers, retail customers, during this time. What are you seeing on the competitive dynamic on retail? Is it getting a lot more? You're one of the big competitors, making it more competitive, but are you seeing a lot of others? And what are you seeing on margins and the like?

I think in Ohio, I think what we would say, customers, as we've outlined before, still remain somewhat sticky. That market has been there a little bit longer. PA is just starting up since the beginning of the year so time will tell about that. But we're comfortable with the margins, as we've said. We've only got so many megawatt hours to sell, and we're going to move them around to where we can get the most. You've got to remember, our generation was built for a particular load shape, and all we're trying to do is replicate that shape at the highest possible margin. So we're very comfortable with where we are. And we're extraordinarily pleased with the efforts of Donny's group and how fast they've been able to do it. Not only on the front end margin, but we're doing a lot of work, Steve, on the back end and trying to make sure that we have the most efficient back room possible so we don't get it on one end and then give it away at the other. So we've been spending a lot of time on that, and making a lot of progress there, as well. So we're very pleased with the overall success, both in the capture of the customer and the margin and efficiency that are being created in the back office.

Marc De Croisset with FBR Capital.

Hi, good afternoon. I know you're still digesting this cross-state air pollution rule. When I looked at it, I found it to be really tough on Ohio and Pennsylvania. And the thought occurred to me, you had about $2 billion of CapEx in the outer years that I think was earmarked for environmental compliance. And I'm wondering if your initial assessment of this rule changes the timing of that CapEx.

Mark, this is Mark. When we gave our guidance in May we said that our capital would be around $2 billion a year. It might change a little bit as we move. For example, this year we reduced some substation expense and moved it into other areas, but still staying within the $2 billion. That $2 billion was not used to address the environmental issues. So, as Tony alluded to, we're doing our homework now and we don't have a number, and we won't until we get to see all the different options, which we hope to get through this summer. But I just want to be clear that that $2 billion was what I would call the ongoing business itself. I should say we did add $100 million in '12 and '13 for any potential engineering that needed to be done for the nuclear, or the fossil units.

Okay. I think there was a $2 billion number outside of that 3-year projection period that was just a number, very rough number, for potential compliance with all EPA regulations you saw coming down the pike.

That's correct, Mark. In that number, there would have been, for example, there would have been investment at Eastlake 5. Beyond bag houses, which are probably the primary means for complying with the MACT rule.

And you don't see maybe a tick-up in operating expenses, perhaps you may be short allowances in 0hio, Pennsylvania? I'm just speculating. But you don't see any of that impact yet from the cross-state air pollution rule?

Again, not all this is all clear yet in terms of how all the allowances, and how this is all going to get allocated. For example, the base year is 2005. Most of our equipment in Ohio was not scrubbed in 2005. It is scrubbed today. So the Sammis plant construction project, as an example. So how those allowances are going to get used across the state, they don't have to cross state lines to be able to use them in other plants in time, how we will, in fact, meet the requirements for 2012, '13, and '14.

Thank you for that color. And if I may, just very quickly, you called industrial activity a bit spotty. What's happening with respect to industrial activity in your markets?

You have to remember that the first half of last year was extraordinarily strong with double-digit growth. We obviously wouldn't expect double-digit growth, as nice as that might be. But we're seeing where you've got pockets in the market that are very strong. For example, steel and the piping for wells. You've got the Chevy Cruze on a third shift over at Youngstown. You've got the 2 auto engine plants for Ford. You've got some strong segments and you've got some other segments that aren't doing so well. But it's all being compared against that very strong first half of last year.

Paul Patterson with Glenrock Associates.

Good afternoon, guys. I wanted to ask you about the ESP staff proposal that they're passing around to parties and what-have-you. Could you just give us a feeling as to where their general direction is, at least, what they're actually proposing?

No. To be honest with you, I haven't seen it, Paul, so I don't even know if anything is being passed around. I know that's what people are talking about, but I haven't seen anything like that.

Okay. And on the guidance, the bottom of the range going up, what was that? I'm sorry if I missed it. Was that because of weather or the merger outlook or a combination of things?

It is a combination of things. July was, I read this morning in the paper, was the hottest July we've had in 140 years. I think we're getting better. The merger started February 28. We've got everybody in place now. Folks know what's expected of them. We got a better handle on where the costs are, where the opportunities are. If you will recall, we took some of the Allegheny plants off-line intentionally to get some of their production up. So I would say it's pretty much across the board, and that's why we're very comfortable with raising the bottom end.

Okay. And then with respect to the dispatch of the Allegheny plants, is everything looking there like you guys had expected, that you will be able to increase the super-critical? Is that still on track?

Yes.

Okay. And then just finally on the direct sales, it looked like there was a little bit of decrease in margin. Is that because of the type of customer you're signing, or what's going on there? Is there any significant change there? It was only a couple cents. But I was just wondering. It seemed that the rates, the margin had decreased a little bit or something there.

I think you're reading the numbers too finely. It's just noise.

(inaudible) the impact associated with some of the forced outages that we had as compared to last year, which I think had a fairly major effect on what they could do, what they could sell, having to buy some purchased power. It's, again, another reason why we're fairly comfortable with the second half of the year. Sammis is back online.

Hugh Wynne with Sanford Bernstein.

Hi. I just had a question on the output of the fossil fuel fleet. At the FirstEnergy fleet you had the decrease in fossil fuel generation of about 2.1 million megawatt hours, which is very substantial, about 18%, particularly for a fleet as large as yours. So, my question was, how did that flow through earnings-wise, the items like purchased power, wholesale sales, transmission expense? And what portion of that earnings impact should we think of as exceptional? Were there exceptional items that drive this decline in generation?

That's a great question. I think it hit across the board. You Sammis 6 off for 91 day, you had Mansfield 3 off for 32 days, you had Eastlake 5 off for 7 days. It's 161 days. You compare that to, without getting into detail, some of the fossil units planned and forced last year of 107. So we lost a significant amount of the fleet in the first half but the biggest chunk of that was Sammis which will come back. Because you don't have Sammis, you go up your cost curve in terms of generation. Our fuel costs would go up, associated with that. The opportunity costs we can't capture because those units are now being used to meet our contractual sales. So it's across the board that purchased power goes up, fuel costs go up, and the margin goes down. But as I said, the biggest chunk of that was the Sammis 6 unit of 91 days, and that is back on line, and expect to be back on line for the balance of the year.

No EPS impact that you could offer?

It did have an impact, but I would to have speculate as to what the opportunity sales could have been. I'd speculate as to would that plant have run or not run. So I think I would just leave it that it had an impact, it would have been nice to have the units on, particularly with the weather. We didn't get it. And even despite the fact that those units aren't on, we're increasing the lower end of our guidance, given the confidence we have in the second half of the year. So despite all of that, we're still confident in what we told you back in May.

Paul Ridzon with KeyBanc Capital Markets.

Good afternoon. I missed your commentary around you have some CAIR allowances. Were you basically saying those are stranded at this point?

Paul, this is Harvey Wagner. We still will be using those throughout the remainder of the year. We're expecting that any kind of impairment that could result from that really wouldn't be anywhere near the numbers that you're seeing, from others in the industry.

And just switching gears, one of the things about the Allegheny merger that you touted was the ability to blend fuel. Can you just give an update on where you are there and what you have to do forward?

We're proceeding with plan. It just takes time to get the contracts in place and the transportation arrangements and the coal yard facilities set up, but we're proceeding with plan.

The only other thing I would add is it takes awhile for people to understand how we manage our units, how we like those units to be managed. And that's all part of the learning curve, and unfortunately takes some time, and we're being careful as we go through it.

I think this question has been asked a couple times. But you took up the bottom end of guidance. Can we assume that what's good for '11 is good for '12, '13, and forward?

We took up the bottom end of guidance in '11 and didn't speak to '12 or '13.

It wasn't one-time things that drove that deal?

I can just speak to the fact we increased the bottom end of the guidance for '11 because that was the focus of what we reviewed, and we're going through '12 and '13 right now.

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

Thanks, everyone.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.