賓州電力 (PPL) 2001 Q1 法說會逐字稿

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  • Editor

  • Operator

  • Welcome to the PPL Corporation's first quarter release conference call. Today's call is being recorded. At this time, we will go live to the conference room where the manager of investor relations Tim Paukovits will begin his presentation in a few moments. Please stand by.

  • TIMOTHY J. PAUKOVITS

  • Good morning. My name is Tim Paukovits. I'm the Investor Relations Manager at PPL. Welcome to the PPL annual meeting.

  • Unknown Speaker

  • We thank them also for having a chance to [_______________] questions. I'm not so certain whether . . .

  • TIMOTHY J. PAUKOVITS

  • Welcome to the PPL analyst meeting and conference call on first quarter earnings results, the announcement of our strategic initiative and our revised earnings forecast for 2001 and 2002. Today's discussion includes forward-looking statements concerning earnings and other matters. Although we believe the expectations and assumptions reflected in these statements are reasonable, these statements involve a number of risks and uncertainties and actual results could differ. For more information in this regard, you should refer to PPL Corporation's Form 10-K and other reports on file with the SEC. At this time, I would like to introduce Bill Hecht, PPL's Chairman, President, and CEO.

  • WILLIAM F. HECHT

  • Thank you Tim. Good morning and welcome to the PPL Corporation's first quarter analysts' conference. With me this morning are John Biggar our Chief Financial Officer, Frank Long, Chief Operating Officer,

  • Paul Champagne, President of PPL Global, Larry De Simone President of PPL EnergyPlus, our marketing subsidiary, and Jim Miller, President of PPL Generation. Also with us is Jim Abel, Vice President, Finance. Our agenda this morning will include 4 items, first quarter earnings, new earnings guidance for this year and next, a review of our generation expansion program, and an announcement of our planned securitization of our domestic regulated electric delivery business. I will discuss the first 3 items, and I'll ask John Biggar to comment on the last. Basically, the securitization of the wireless business is the redeployment of about $900 million of capital from a low-growth, low-return business into higher-growth, higher-return business of merchant generation. First, a brief review of our strategy, the generation and marketing of energy in selected markets, and the operation of electric delivery businesses in selected high-growth areas overseas, the U.K. and Latin America, and secondarily Eastern Pennsylvania. The unregulated high-growth, high-return businesses are shown in the slide. Our operations are structured among 4 principal units, PPL Generation, the owner-operator of our merchant fleet of domestic power plants, PPL EnergyPlus, our marketing and trading arm, as well as our retailer, PPL Global, the operator of our international properties, as well as the developer, both domestic and foreign, of new

  • properties, and PPL Utilities. Unregulated activity, again shown in green, accounted for in excess of 80% of the year 2000's earnings. Now onto the earnings story. First quarter 2001 results show $1.52, 53% ahead of 2000's first quarter earnings of ¢99. This outstanding performance gives us confidence to significantly raise our earnings guidance once again. For 2001, based on conservative assumptions about future business conditions, we prudently estimate 2001 earnings at $4, and for 2002, we are raising our guidance to between $4.55 and $4.65. Importantly, these forecasts do not include any net earnings from synthetic fuels projects and related section 29 tax credits, do not include any change to FASB regulations regarding the amortization of goodwill, and they do not include any payment by California of the about $17 million that we wrote off last year. Over the longer term, we are forecasting a compound annual growth rate for earnings of 12%-15% through the middle of this decade, using 2000 actual earnings of 328 as a base. This forecast, I would emphasize, is not a simple extrapolation, rather it is based largely on actual business plans involving projects and programs already announced or in the planning stages. Clearly our energy supply strategy has been one of the key drivers

  • of our earnings growth, and we are continuing to execute that strategy. Our focus will continue to be in 2 key markets in the U.S. that we know well, and that continue to be the most desirable markets, the Western U.S., Western states coordinating council, and generally speaking the Northeastern quadrant of the U.S. We currently own or control almost 10,000 MW and have more than 4600 MW of generation in development. We are on track to achieve our goal of owning 20,000 MW by 2005. The map shows in blue the specific generation assets now operating as part of our portfolio, and in red the generation under development. I want to call your attention specifically to the two projects on track to begin operation this summer, the Wallingford project in Connecticut, 225 MW, and the Griffith project near Kingman, Arizona, joined with Duke. The Griffith project, 600 MW facility, has already produced test power in the very attractive western markets. The markets of the Northeastern quadrant of the U.S., extending roughly from the Great Lakes through the mid Atlantic and up into New England, are amongst the most liquid and well organized electricity markets in the U.S. This is particularly true of PJM, the electrical setter of the region, and the location of the bulk of PPL's eastern portfolio. Two especially attractive additions to PPL eastern fleet were announced on Monday. University Park, a 540 MW intermediate and peak-load facility plant to be in service next year will be located in an area of high prices

  • because of transmission limitations, and the Susquehanna upgrade will produce 90 to 100 MW as a result of steam turbine replacement, without any increase in reactor thermal output, purely a thermal efficiency improvement. In the Western markets, our agreement with Montana Power, announced last Friday, has locked in a favorable price for 500 MW for 5 years and eliminated uncertainty regarding threatened legislative action in Montana. This agreement, which is unit contingent and therefore very low risk to PPL, still leaves us with considerable Montana capacity for other merchant sales, and the Kingman, Arizona project is coming on stream this summer, as I mentioned earlier. Our marketing and trading operations have been extraordinarily successful and continue to grow and add value. Our trading operations are highly disciplined, and our risk management systems are sophisticated and thorough. We have conservatively estimated that our trading and marketing unit has added at least $60 million in value to our Generation portfolio. Now I'll turn the meeting over to John Biggar who will comment on our securitization transaction, and then we'll open the floor up for questions. Thank you.

  • JOHN R. BIGGAR

  • Thanks Bill. Good morning. It's really a pleasure to see so many of you here this morning. We know there are others of you out there on the phone, and we're really very happy that you could join us today for our call. We are unveiling a first of its kind transaction, the securitization of a U.S. electric delivery business. Although securitization relates to our Pennsylvania electric delivery business, it really allows us

  • to unlock the value of our generation assets by freeing up the energy for sale in the attractive wholesale markets. Also securitization of our electric delivery business allows us to re-deploy capital from a low-growth, low-return business, that is the Pennsylvania electric delivery business, to a high-growth, high-return deregulated generation business. As I review this transaction in greater detail, you'll see that it more than doubles the amount of generation we have available to sell in the wholesale markets and gives PPL an earnings growth profile that is consistent with a fully unregulated independent generating company. It lowers our overall cost of capital through increased leverage. It eliminates energy price risk for our Pennsylvania delivery customers, and it allows PPL to retain valuable advantages related to operating both in energy supply and in energy delivery business. The bottom line, everyone comes out a winner. Our shareowners prosper with increased earnings growth from our Generation business, which translates into a higher stock price. Our customers benefit from energy price protection for most of this decade. Pennsylvania comes out a winner in at least 2 ways. The strategic initiative is one more example of the innovation that Pennsylvania's deregulation success has spawned. Importantly, the resulting energy price stability sends a strong message about the outstanding economic development opportunities in Central and Eastern Pennsylvania, which in turn translates into growth in kilowatt-hour sales for PPL. Now with that as an overview, let's walk through some of the details of the securitization of PPL Electric Utilities. The securitization of Electric Utilities is made possible by a series of steps that substantially reduces the business risk for Electric Utilities. These steps will structurally separate Electric Utilities from PPL

  • Corporation and its other affiliated companies, employing some of the same legal ring fencing concepts we use to achieve bankruptcy remoteness when we securitized our stranded cost back in 1999. Among other things, this will include the establishment of an independent Director of Electric Utilities whose consent will be required for a bankruptcy filing by Electric Utilities. It will include the appointment of an independent third party administrator to oversee the formalities and financial separateness of our operations, make sure that we keep Utilities separated from the rest of the affiliated companies of PPL, and we'll be amending the Electric Utilities charter to restrict its activities to the electric transmission and delivery business. This structural separation allows us to recapitalize PPL Electric Utilities, resulting in an increase of leverage through the issuance of $900 million of senior debt without any significant changes in the credit profile. And in this regard, both Moody's and Standard & Poors have issued preliminary confirmations of their ratings, A3 rating by Moody's and A- rating by Standard & Poors, for Electric Utilities senior secured debt. Moody's and Standard & Poors have also issued preliminary confirmations of the existing ratings for PPL Corporation, post-securitization. As you may recall, PPL Electric Utilities has a provider of last resort obligation in Pennsylvania that extends to December 2009. In this regard, Electric Utilities currently purchases all of its energy supply from an affiliated company, PPL EnergyPlus. That energy sale agreement expires at the end of this year. In anticipation of the expiration of that agreement, Electric Utilities is currently in the process of soliciting bids for all of its energy needs for 2002 through 2009. We've already initiated the process of qualifying prospective bidders, and our schedule

  • calls for the contracts to be awarded and the transactions process completed by early June. Now recognizing the current price levels in the wholesale markets in the mid Atlantic region and the level that they're at, it's entirely possible that the prices that are submitted by prospective suppliers will exceed the amount that electric utilities can recover under the price caps that are currently in effect as a result of our 1998 restructuring proceeding approved by the Public Utility Commission, to the extent that the prices paid by Electric Utilities under its new supply contracts are above that price cap, those payments would be financed by Electric Utilities with the new debt. The increased leverage of Electric Utilities will translate into a lower overall cost of capital. As a result, because the cost of capital, as you know, is an important component of regulated rates, any rate increases that might be needed by Electric Utilities after the end of its T&D rate cap in 2004 would be lower than they otherwise would have been. I think it's also important to understand that Electric Utilities is not going to seek recovery from customers of any energy supply costs under these new contracts that exceed the price cap set by the PUC in 1998. Given what's gone on recently in other parts of the U.S., this transaction importantly eliminates both the supply and price risk for delivery customers of PPL Electric Utilities. The expiration of the current power sales agreement with Electric Utilities at the end of this year means that we have an additional 6000 MW of generation to sell in the wholesale markets, beginning January 1,2002. Now, of course, EnergyPlus, which is responsible for marketing PPL's generation, will bid on the Electric Utilities' supply contract, and in this regard, I think it' important to note

  • that EnergyPlus is going to be treated just like any other potential supplier in this transaction. It will receive no special treatment because it's an affiliated company of PPL. PPL EnergyPlus will bid for the energy needs of Electric Utilities at rates that EnergyPlus believes are competitive in the wholesale markets, given the nature of the Electric Utilities' requirement and EnergyPlus' evaluation of alternatives that it has for selling its available generation. To the extent that EnergyPlus is the only successful bidder, it will have locked up a sale of about 6000 MW of PPL's generation at market competitive rates through the end of 2009. There is, of course, the possibility that EnergyPlus will not be a successful bidder for Energy Utilities' generation requirements or will win only a portion of the contract. To the extent that that occurs, EnergyPlus will have additional energy to sell in the attractive wholesale markets. As a result, regardless of bidding results with Electric Utilities, our energy supply business will have an established earnings growth profile that's consistent with a fully unregulated independent generating company. Now, as Bill showed you on one of the earlier slides, as a result of securitization, we expect that about 95% of our earnings for 2002 will come from deregulated businesses, that is, the domestic energy supply and international delivery business. To put that into prospective, as recently as 1995, 100% of our earnings came from regulated businesses, so we certainly have transformed PPL from a regulated enterprise into a fully deregulated company. Now a couple of financing transactions that are associated with the securitization initiative. First, there is the planned issuance of the $900 million of Electric Utilities' senior debt that I talked about earlier. $200 million of the proceeds will be used by Electric Utilities to refinance the

  • maturing debt, and the balance, or $700 million, will be available to Electric Utilities to secure supply contracts to meet its general business needs, and if it is deemed excess to dividend funds up to PPL Corporation, and of course, to the extent that funds are dividended up to the parent company, they will be available for our generation expansion program. The Electric Utilities' senior secure debt will be issued under a new mortgage that will be collateralized by PPL Utilities' existing first mortgage bonds. As a result, Electric Utilities' debt will be secured by a first mortgage lien on Electric Utilities' assets. And as I noted earlier, both Moody's and Standard & Poors have issued preliminary confirmations of the existing ratings for Electric Utilities' senior debt obligations. The second financing transaction associated with this initiative is a $400 million offering of premium equity participating security units or PEPS units. The PEPS unit transaction is essentially the sale of two separate securities, a trust preferred securities issuance by PPL Capital Funding, which is our wholly owned financing subsidiary, and a forward contract to issue common stock to the holders of the trust preferred in 3 years. The proceeds from this transaction will be used to reduce short-term debt and to provide funding for the generation growth opportunities that Bill mentioned earlier. The earnings impact of the trust preferred has been incorporated into our updated earnings forecast that we reviewed with you a few minutes ago, and the expected dilution when the common stock is issued in 3 years is reflected in our longer-term growth projection of a 12%-15% compound annual growth rate and earnings for the period 2000-2005. We currently expect that the PEPS offerings will be priced by the end of next week. Returns from the PEPS units' sale permit PPL to lock in a minimum selling price for common stock that's equal to the market price on the date of the offering, with the shares to be

  • delivered to investors in 3 years. If PPL stock price is increased at the time the shares are delivered, PPL will realize a portion of that price appreciation. Between now and the time the shares are delivered, PPL will pay a tax-deductible fixed rate coupon. This strategic initiative is yet another confirmation that PPL has been transformed to a successful growth-oriented energy company. One element of this of course is a more growth oriented dividend policy. Given our stated objective of pursuing long-term growth for shareowners by reinvesting in the business, we have decided to maintain the annual dividend at $1 and ¢6 a share for the foreseeable future. Clearly our reinvestment of earnings in the business has resulted in far greater returns to our shareowners through increases in the stock price than would have resulted from increased cash dividends. The management team of PPL Corporation is committed to growing shareowner value through increases in the price of PPL's common stock. The securitization of PPL Electric Utilities will permit increased focus on the deregulated side of our business and will result in increased earnings. This in turn will grow shareowner value in the form of a higher multiple and therefore a high stock price. In closing, we believe that securitization is the most logical next step in the deregulation of the electric utility industry. It provides significant benefits for shareowners and customers, and it eliminates the supply and price risk that have placed a dampening effect on the deregulation process in the United States. Now, as Bill said, we'd be happy to answer any questions that you have for the time we have remaining. Thank you.

  • Operator

  • If you could, if I could ask you to wait till the microphone for the people on the phones. Thanks. Okay go ahead.

  • Unknown Speaker

  • What does your guidance have included for price. . .

  • Operator

  • Anyone on the phone lines wishing to ask a question may

  • signal by pressing the star key followed by the digit 1. Again, that's star 1 for questions on the phone line.

  • WILLIAM F. HECHT

  • . . . for the earnings components related to different markets for competitive reasons. So we really don't have that information broken up.

  • Unknown Speaker

  • If we could just focus on the West maybe for a second. . .

  • WILLIAM F. HECHT

  • Yes.

  • Unknown Speaker

  • . . . selling under contract now about half your output at ¢21/4. . .

  • WILLIAM F. HECHT

  • Yes.

  • Unknown Speaker

  • . . . the rest at some market price we don't know. That 21/4 is now going up to ¢4 in July of 2002.

  • WILLIAM F. HECHT

  • Correct.

  • Unknown Speaker

  • Is it fair to say that your '02 earnings guidance assumption assumes that you're selling the other half of that output at something in the same ballpark? Is that the contract price?

  • WILLIAM F. HECHT

  • Again, we really can't break that down, but we do intend to enter into a variety of contract selling, the remainder of the Montana production. In the guidance also, for us, includes the sales of the production in Griffith's out of Arizona.

  • Unknown Speaker

  • How much of the Montana assets are, other than that contract you entered into with MPC, are under contract or available to sell into the wholesale market?

  • WILLIAM F. HECHT

  • Again, some we do enter into a portfolio of contracts, some forward sales and some shorter-term sales, but we're really, for competitive reasons, we don't break down the components of our book. Larry De Simone would you, any other detail that you feel comfortable in providing or would that be about it?

  • LAWRENCE E. DE SIMONE

  • That's it Bill.

  • WILLIAM F. HECHT

  • Okay.

  • Unknown Speaker

  • Yes, hi. Can you comment on your current rate structure versus the PJM stock prices? It's my understanding that you are one of the low cost producers and buyers in PJM. . .

  • WILLIAM F. HECHT

  • Our cost structure, you said our rate structure. I think you meant our cost structure. . .

  • Unknown Speaker

  • I mean rate

  • structure. I mean, what are people saying now versus spot prices in PJM?

  • WILLIAM F. HECHT

  • Our retail prices to consumers are generally lower than the wholesale markets in PJM.

  • Unknown Speaker

  • Okay, and it seems like the securitization plan is going to take rates from the current rate structure, which is the rate agreement due to market price without raising the rate. . .

  • WILLIAM F. HECHT

  • Yes.

  • Unknown Speaker

  • Could this actually be financing savings from a securitization. . .

  • WILLIAM F. HECHT

  • What, would it . . .

  • Unknown Speaker

  • . . . off set that?

  • WILLIAM F. HECHT

  • Yeah, there are several different ways to look at it, and you come out in about the same place no matter how you work the numbers. One way to look at it is when we take the securitization funds, if we use that to buy energy from an affiliate, at market, then the securitization proceeds end up in the hands of the affiliate and can get dividended up to the parent for reinvestment in additional generation projects, as John described. That results in power being purchased by the utility at market prices but as lock continues to keep retail prices constant as provided by our restructuring settlement out through 2009.

  • Unknown Speaker

  • Okay. What dual process, and I guess particularly the [_______________] have to go through any other early stages of what they think was [_______________]. . .

  • WILLIAM F. HECHT

  • Yes. There are really 2 regulatory approvals required. One is a security certificate, which is something that's requested from a utility commission every time a utility sells securities. That security certificate has to be provided or ruled on within 30 days. The other regulatory approval is commission approval of the power supply agreement that we would expect to enter into, whatever that

  • may be. The entire program has been discussed with the Chairman of the Pennsylvania Commission and discussed with the Governor of Pennsylvania and is in the process of being discussed with the legislative leaders this morning, and we're very, very optimistic. As John described, it provides benefits for customers in terms of guaranteeing that we will continue to abide by our commitment for rate frees out through 2009, and it also lowers the cost of the wires business. So following expiration of the freeze on delivery prices in 2004, if we were to request any rate relief, it would be less than it would otherwise be, because of securitization. So it's a win-win, and they very favorably reacted to the program. Yeah.

  • Unknown Speaker

  • What is the advantage of doing this transaction versus a straight corporate separation, as a number of other companies have done?

  • WILLIAM F. HECHT

  • Well there are several advantages, and I'll asked John to add to these. One is that it takes a company, the wires business, which we think because of its current risk profile is inefficiently capitalized that it has more equity than the risk profile of the wires business really requires and redeploys that equity into higher growth opportunities. So you might say that if someone were to consider an IPO and spin a complete separation, that securitization is something they should consider doing first, rather than separate into 2 corporate entities and leave valuable equity in the wires business unnecessarily. It also avoids

  • what I think is the disadvantage of the IPO and spin and that is making a mid-cap company into 2 small-cap companies and the loss of financial scale. It gives us complete flexibility going forward. This is a reversible transaction with some difficulty, but if at some future date, for reasons not now foreseeable, we want to reverse it we can. You can't do that with the IPO and spin. It gives us all the flexibility we need going forward. John you want to add to that.

  • JOHN R. BIGGAR

  • Yeah, I think one other point. When you look at the concept of an IPO and a spin for a company that starts as an integrated company, if you look at it from the perspective of just separating the businesses and continuing the existing contractual relationships that you have between the supply side and the delivery side, which is at a rate which is designed to cover the shopping credit if you will, which is the current locked in rate, does not reflect wholesale prices, at the end of the day you haven't accomplished, I don't think you've accomplished an awful lot to change the earnings profile of the supply business because the bulk of its revenues from its delivery customers are still coming in at the old predetermined contract rate set by essentially the regulatory process, and unless you're willing to just cut the delivery business loose and create a California-type situation. What we've been able to accomplish with this transaction essentially is to transfer those benefits that we have in the delivery business into the supply side. We can grow whether the contract comes from using their energy supply or whether it's from the outside, we're going to see a growth in the earnings potential and the growth in the earnings from our supply side of the business, and you don't see that necessarily in a typical IPO spin. So we think that doing this gives us all the advantages of an IPO and a spin and yet retains the benefits of having a delivery business associated with our company.

  • WILLIAM F. HECHT

  • Maybe I'm just repeating in different words part of what John said, but if we were to do an IPO and spin

  • without securitization, we would still have about 6000 MW of our generation locked up with the below-market power supply agreement to the wires company after separation. This way we take the entire 10,000 MW in generation we have, and all of it's available for merchant sale at merchant prices.

  • Unknown Speaker

  • Yes.

  • Unknown Speaker

  • Yeah, but why are they locked up if the agreement, why would they be locked up if the agreement expires at the end of 2001?

  • WILLIAM F. HECHT

  • The agreement expires at the end of 2009. They would be locked up through 2009 without securitization. We have about 6000 MW of generation on peak, not available for merchant sale but instead sold to the wires business for provider of last resort service at below-market prices.

  • Unknown Speaker

  • Yeah, in the back? Yes?

  • Unknown Speaker

  • I have a couple of questions on the securitization. First of all, I believe you said that the PEPS financing you expect to get price sometime next week, is that correct?

  • WILLIAM F. HECHT

  • Till the end of next week, yes.

  • Unknown Speaker

  • What about the securitization transaction? When are you anticipating that will be done?

  • WILLIAM F. HECHT

  • I'm going to ask John to speak to that.

  • JOHN R. BIGGAR

  • We're looking at having that price by the end of, I think, by the end of June.

  • Unknown Speaker

  • Okay. The other question I have is a followup with this. I presume that this is Morgan Stanley who has got the service market in this. Is that correct?

  • WILLIAM F. HECHT

  • That is correct.

  • Unknown Speaker

  • Okay. As we go through this, what kind of grading are you assuming that your securitization transaction is going to get? What kind of bond rating?

  • WILLIAM F. HECHT

  • A-.

  • Unknown Speaker

  • A-?

  • WILLIAM F. HECHT

  • A3, A-.

  • Unknown Speaker

  • Okay.

  • WILLIAM F. HECHT

  • And we've had preliminary confirmation by both Moody's and Standard & Poors that they will maintain those ratings.

  • Unknown Speaker

  • From a planner point of view, you're talking about a long-term debt, I assume, in the securitization?

  • WILLIAM F. HECHT

  • Correct.

  • Unknown Speaker

  • Okay. What kind of term are you looking at?

  • WILLIAM F. HECHT

  • We're looking at multiple tranches of debt and we have not yet finalized on the exact amount of the link to the maturity or the amount in each tranche.

  • Unknown Speaker

  • Now, am I correct in assuming that the sensitivity analysis that your investment bankers must have done and the earnings forecasts are predicated on a certain level of interest rates remaining ineffective this period? Can you share with us a little bit about the broad range within the 50 or 75 basis points?

  • WILLIAM F. HECHT

  • I'm not sure. I don't have that detail with me, but we've done that, we've done that analysis and looked at those exposures.

  • Unknown Speaker

  • I guess my question really goes to the issue of, if you think that this is a model for the rest of the industry, how much of this is predicated on the existing low rate structure, and at what point, does it become uneconomical in your view?

  • WILLIAM F. HECHT

  • Well, it's not predicated on the existing low rate, interest rate structure at the moment. I think this transaction works, and as far as where the breakpoint is, I think that's an issue that each company would have to resolve if they think it's appropriate.

  • Unknown Speaker

  • Okay. Thanks very much.

  • Operator

  • We have a question from the phone audience.

  • WILLIAM F. HECHT

  • We're going to hold the phone calls till we're done here in the room.

  • Operator

  • Thank you.

  • Unknown Speaker

  • Would you be able to, based on your current view of the forward curve over the timeframe that you're putting the delivery business power requirements up for bid, can you give us a sense on how much of the securitization proceeds may be needed to pay for the power?

  • WILLIAM F. HECHT

  • No, we can't. One of the opportunities that this provides, of course, is if some other supplier has a different perception than we do of the forward curve, and if they perceive that power prices will be lower in the future than we think they are, then we'll be buying what we think is below market power, and that's another opportunity, but we can't quantify what that might be. Over here. Carl?

  • Unknown Speaker

  • Thank you Bill. Do you have any view of the benefit or detriment of the conclusion of the First Energy-GPU merger?

  • And relative to GPU, have you tried to sell them any power for long-term contract for the Pennsylvania PLR requirements?

  • WILLIAM F. HECHT

  • Oh, I really don't have any comment on what effect it might have on GPU's future. That certainly is a decision that they'll deal with. And once again, on our wholesale book, we really don't comment on the content of our wholesale book and transactions that we have made or contemplated making.

  • Unknown Speaker

  • I just wanted to clarify an answer to a previous question. The PLR obligation, is it the utilities through the end of '09, if I understand it correctly. . .

  • WILLIAM F. HECHT

  • Correct.

  • Unknown Speaker

  • . . . but EnergyPlus' contract only runs through the end of this year. . .

  • WILLIAM F. HECHT

  • That's correct.

  • Unknown Speaker

  • . . . so I'm not sure why you say that if you did an IPO followed by a spin you would have to leave that 6000 MW behind. I mean. . .

  • WILLIAM F. HECHT

  • There would be no feasible way to do an IPO and spin and leave the wires business without a power supply to live by a regulatory commitment. That's something we would not do.

  • Unknown Speaker

  • You're saying really from the standpoint of regulatory rather than from legal obligation?

  • WILLIAM F. HECHT

  • I think, that's correct, but ultimately they merge into one.

  • Unknown Speaker

  • Okay.

  • WILLIAM F. HECHT

  • Political obligations can be made into legal obligations with a stroke of a pen, as we know.

  • Unknown Speaker

  • Can you talk about the accounting treatment, any upfront payment if the bids come in above the shopping credit? How you'd treat that?

  • WILLIAM F. HECHT

  • John, would you like to talk to that?

  • JOHN R. BIGGAR

  • We have some options with respect to the upfront payment, but at the moment, it's our anticipation that that will be reflected and amortized over the life of the contract.

  • WILLIAM F. HECHT

  • Steve?

  • Unknown Speaker

  • Yeah, I guess on A similar vein. Could you just further explain 2 scenarios? One is, in the event that another

  • supplier wins the contract. . .

  • WILLIAM F. HECHT

  • Okay.

  • Unknown Speaker

  • . . . in the utility business, are you going to pay them as if it's a prepay contract, pay them upfront and then account for the contract as if it's at where your rates are, or are you just going to pay them as per normal contract?

  • WILLIAM F. HECHT

  • Steve, I think that will be part of the process that we go through in negotiating contracts with suppliers, and I think, just let me point out one thing. Don't get hung up on the concept of one contract for the entire load. We've gone out and we've asked for bids in 20% increments. So it could be that there will be multiple suppliers for Electric Utilities at the end of this process.

  • Unknown Speaker

  • Okay, but. . .

  • WILLIAM F. HECHT

  • . . . and what we do in terms of whether any payments that are required will be made upfront or spread over the life of the contract, we haven't resolved that, and that will be something that comes out of the discussions that we have with bidders at the time the bids are submitted.

  • Unknown Speaker

  • But if EnergyPlus wins, they will get paid upfront or is that also subject to what you just said?

  • WILLIAM F. HECHT

  • Well, we'll have to work that out and see what makes the most sense.

  • Unknown Speaker

  • Okay, one other. . .

  • WILLIAM F. HECHT

  • Probably most of it will be upfront.

  • Unknown Speaker

  • One other question. How did you come up with this $900 million number? Who says the number isn't double that if the market is really high priced, and where did you come up with that number, and what does the balance sheet look like based on. . .

  • WILLIAM F. HECHT

  • About 35% equity will remain in the Electric Utilities after this is done. So that does, maybe, I am anticipating your followup question, but with certain legal or regulatory changes, there is additional securitization in theory that could be done. There is a significant amount of equity remains in the wires business after this particular transaction.

  • Unknown Speaker

  • I guess one last

  • thing is, why do this securitization versus just, I mean, this just, that financing at the utility is essentially, or maintaining the best possible bond rating and lowest possible interest rate. .

  • WILLIAM F. HECHT

  • On the new debt?

  • Unknown Speaker

  • . . . on the new debt?

  • Unknown Speaker

  • Steve let me address that. I think that we're partially responsible for some of the confusion. We've referred to it, I guess, in a shorthanded way of saying it's securitization. It's not securitization as you think of it in a context of securitizing revenue stream like we did on transition cost bonds. We used securitization because the methods that we used to increase the leverage, which is the legal ring fencing, in Electric Utilities, we have employed some of the securitization type concepts in creating the separateness between Electric Utilities and the balance of the PPL Corporation. So that's why we've referred to it as securitization. In a pure sense, it's not, but we've used the securitization techniques to create the structures that support the higher leverage in Electric Utilities. I don't know if that helps you or not but that's. . .

  • WILLIAM F. HECHT

  • Yes?

  • Unknown Speaker

  • Could the business model limit somewhat the capital available to upgrade the transmission grid particularly as a means to enhance wholesale business going forward, or do you feel pretty comfortable about the level of spending you need in the next 5 years in the transmission side of the business?

  • WILLIAM F. HECHT

  • Well, expansion of the transmission grid is clearly limited by rights of way availability rather than financing availability. There's no doubt in my mind about that at all. It wouldn't limit the financing available for transmission upgrades at all, that is, the ability to enhance the transmission grid nationally is really a right of way issue.

  • Unknown Speaker

  • Okay.

  • WILLIAM F. HECHT

  • Yes?

  • Unknown Speaker

  • Is it possible to quantify the upward earnings revisions that you gave us for '02? How much comes from, in a sense, the securitization type deal versus just regular course of business?

  • WILLIAM F. HECHT

  • John?

  • JOHN R. BIGGAR

  • What we've done is we've, the additional leverage, the financing portion of the transaction in '02 was about ¢10 in earnings. Until we see how the contract relationships come out between Electric Utilities and its suppliers, we have not tried to quantify what the impact of that would be on earnings for us.

  • Unknown Speaker

  • Okay.

  • WILLIAM F. HECHT

  • And then there was a question here?

  • Unknown Speaker

  • Who is liable for shopping in this scenario? If customers leave your system, is the utility still required by all of the power?

  • WILLIAM F. HECHT

  • No. The power supply agreement will provide that the provider of power supply takes that exposure. So they will provide whatever power supply is needed into the future for customers who choose not to shop for the PLR obligation, and they should build into their bid their perception of future shopping and take with that the market swings.

  • Unknown Speaker

  • And just a followup. I think currently you are selling about 30-33 million megawatt-hours to your retail in need of load. If I assume that the utility is now, or the generation is now selling at the shopping credit rate or tariff rate to the degree that market price is above, they will then see a direct increase to their profitability on the generation side of the business. Say, as a result of this the earnings on the generation, if you enter into a contract and say $50 in a . . .

  • WILLIAM F. HECHT

  • Yes, the generation side of the PPL business will see a growth in earnings, either because they win the contract

  • for the PLR load at market prices or someone else wins the contract and the generation now used for PLR service is freed up for the wholesale markets. So, yeah, the key to this entire process is that 6000 MW of generation that has been locked up at below market prices in PLR service is freed up for wholesale prices exactly. Other questions in the room? Why don't we start taking questions now from the telephone.

  • Operator

  • Again, anyone on the phone can signal by pressing star 1. We'll take our first question from Doug Fischer with AG Edwards.

  • DOUGLAS A. FISCHER

  • Thank you. Could you just remind us of how the T&D rates are set or fixed already under your plan, over the next few years, and is there any risk that in the commission looking at this issue, because of the lower cost of capital, that they might make some adjustment near term as a price for approving this?

  • WILLIAM F. HECHT

  • Our T&D rates are fixed through 2004, and we believe there is no risk that they will ask for a reduction in T&D rates as a price for approving this, and John you have some numbers?

  • JOHN R. BIGGAR

  • The T&D rate cap which, as Bill said, is locked in actually through the end of 2004, is ¢1.74, and after that then, we're free to deal with the rates.

  • WILLIAM F. HECHT

  • Our return as calculated for rate case purposes on our T&D business, even with this lower cost of capital, is not in danger of over earning on the wires business. I think that goes directly to your question. Other questions on the phone?

  • Operator

  • We'll take our next question from Roselynn Perry with SAC Capital.

  • ROSELYNN PERRY

  • Yes, hi. I just want to make sure I understand correctly. The EnergyPlus contract was set to expire at the end of 2001.

  • Had you not made the strategic announcement, how would the utility business, where would they have gotten their power from in the future?

  • WILLIAM F. HECHT

  • In all likelihood, without this initiative, we would have to assume that EnergyPlus would continue to provide power to the utility, and the utility, at whatever price that power might have been provided, the utility would still abide by the price cap through 2009, as provided in our restructuring settlement.

  • ROSELYNN PERRY

  • Okay, so the price at which EnergyPlus would have supplied the power going forward after 2001 is unclear? I mean I'm not really understanding how this. . .

  • WILLIAM F. HECHT

  • Earnings standpoint at the parent company level, while that price is unclear it wouldn't matter. By varying that price, without this initiative, by varying that price all we would do is shift earnings between EnergyPlus and the wire company.

  • ROSELYNN PERRY

  • Isn't that what we're doing now?

  • WILLIAM F. HECHT

  • No. We are providing capital through securitization to pay for the price of power upfront.

  • ROSELYNN PERRY

  • Okay, but that's somewhat separate, is it not?

  • WILLIAM F. HECHT

  • I guess you can view it that way, yes.

  • ROSELYNN PERRY

  • Okay, and as far as the commission goes, what aspects of this plan would they have to approve? Do they have to approve the increased leverage at the utility, do they have to approve the. . .

  • WILLIAM F. HECHT

  • The commission approves generally, and this would be no exception, the commission approves issuance of securities by the utility, and secondly, they would approve the power supply agreement by the utility with whomever. Those are the two items that will be brought before the Pennsylvania Commission for approval.

  • ROSELYNN PERRY

  • Okay, and then just to

  • clarify, you said the rates are frozen. Can you just clarify what portion of the rates are frozen through what periods?

  • WILLIAM F. HECHT

  • Yeah, of course, as you know, our rates following deregulation were unbundled. The T&D prices are frozen through the end of 2004, and the generation price for PLR service is frozen through 2009. Okay? Does that answer your question?

  • ROSELYNN PERRY

  • Yes it does. Thank you.

  • WILLIAM F. HECHT

  • Thank you. Other questions on the phone?

  • Operator

  • At this time, there are no other questions.

  • WILLIAM F. HECHT

  • Are there any other questions in the room? One question near the back.

  • Unknown Speaker

  • What is the generation price frozen at through 2009, or the total price?

  • WILLIAM F. HECHT

  • Well the total price is frozen through 2009, and that's a number that varies by customer class. So John may have some specifics, but it varies by customer class. Do you have an average number John?

  • JOHN R. BIGGAR

  • Yeah, the shopping credit on average is, by the time you get out to 2009, it's little over ¢5.

  • Unknown Speaker

  • Be a little. . .

  • JOHN R. BIGGAR

  • But at that point, there is no total cap on rates because the T&D rate cap expired at the beginning of '05. The generation rates are frozen, are set through January 2010, actually December 31, 2009.

  • WILLIAM F. HECHT

  • Thanks, that's an important clarification, but do be a little careful with the average shopping credit because it varies pretty widely by customer class. If there are no other questions in the room we thank you all for your attendance this morning, and we thank the people on the telephone for joining us as well.

  • Operator

  • Thank you very much ladies and gentlemen. That does conclude today's conference call. You may now disconnect.