賓州電力 (PPL) 2002 Q1 法說會逐字稿

Please stand by -- we're about to begin. Good day, everyone, and welcome to the PPL Corporation's first quarter earnings release conference call. Toady's call is being recorded.

For opening remarks and introductions I would like to turn the call over to the Investor Relations Manager,

. Please go ahead.

Thank you. Good morning. Thank you for joining the PPL conference call on first quarter results and general business outlook. 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 report, and other reports on file with the SEC.

At this time, I would like to turn the call over to Bill Hecht, PPL chairman, president and CEO.

Good morning. Here with me this morning, in addition to Tim, are John Biggar, chief financial officer, and

, our executive vice president supply. This morning I'm going to cover about four items. First, I'll talk about our reported results for the first quarter of 2002. Then I'll speak about earnings from core operations. Next, we'll talk about certain unusual items. And then lastly, I'd like to make some comments about PPL's strategy going forward.

Fort the first quarter, PPL reports a loss of two cents a share. From core operations, we're reporting $1.03, which puts us on track to meet our earnings guidance of 330 to 350 per share for the year 2002. The $1.03 compares with a reported first quarter 2001 of $1.52, which was PPL's best single quarter ever for earnings. Principle items affecting earnings from core operations were lower wholesale prices, especially in the West; somewhat lower earnings from international operations; and somewhat lower earnings related to our delivery business in Pennsylvania, primarily due to milder weather and perhaps a sluggish economy. On the positive side, earnings were aided by increased volumes in the western U.S., increased margins in the eastern U.S., earnings contributions from our synthetic fuels operations, and earnings from our mechanical contracting and energy services operations.

I want to now talk about certain one-time items. Included in our reported results is a write-down of goodwill, associated with our Latin American properties as a group, of $150 million net of tax. Also want to talk a little bit about

.

is our distribution subsidiary in Brazil.

As you'll recall, in late January the company announced that it had taken an impairment charge of 217 million with respect to

.

At the same time the company announced it would provide new additional funding for

.

The impairment charge at that time represented the net asset value at December 31, 2001.

The balance the company's enclosure with respect to

was about 100 million, which is primarily related to the cumulative translation adjustment -- the CTA.

Under applicable accounting rules the company could not take the impairment charge for the CTA in 2001.

Our worst case assumptions for

have not changed from those that the corporation announced in January - that is, to incur the charge for the CTA.

However, we have undertaken a workout plan with

creditors and the authorities in Brazil including a rate increase request, which has not yet been ruled on by the regulators.

Because we've not yet exhausted all avenues open to the company to maximize the value of

, the company did not take the CTA charge in the first quarter as originally anticipated.

However, the company did take a charge for an additional six million investment equivalent to about three cents a share that was made in

in early January 2002 before the company made the decision to provide no further funding for

.

We expect that the rate process will reach a conclusion probably in the early third quarter.

Continuing the workout plan during 2002 will leave the company in no worse position financially than if it had taken a remaining charge related to

-- that is, the CTA of 94 million at the end of the first quarter.

Our first quarter earnings report also reflects ongoing operating losses of three cents a share from

. The company expects that it will continue to incur quarterly operating losses of about this level during 2002 as it continues to work with authorities in Brazil to maximize the value of

.

Should the company exit its investment in

, the company will incur, as early as discussed, the charge for the CTA and any operating losses would be completely offset.

So that's the background on

and where we stand.

So summarizing our earnings, our earnings results were $1.03 from core operations, goodwill impairment a negative $.102, and a negative three cents

, netting out to two cents a share loss.

I now want to talk a little bit about the company's strategy going forward. Our strategy continues to be focused on wholesale generation operations in two key markets, the Western U.S. and Northeastern quadrant of the U.S., extending broadly speaking from the Great Lakes up through New England. We are emphasizing in that generation strategy longer-term, multi-year hedges for the fixed prices. In that regard, as you know, we have our Eastern generation, primarily Pennsylvania, largely hedged out through this decade with a contract with its related delivery affiliate. In the West, we have multi-year contracts in place with Montana Power that have been accepted by FIRC, are not subject to state approval. And will begin when the transition agreement expires at mid-year.

We've also entered into some agreements with the Long Island Power Authority for tolling arrangements for a multi-year tolling arrangements on two power plants on Long Island -- Edgewood and Shoreham -- that were previously announced. And those are examples of the kinds of arrangements that we focus on in executing our generation strategy in the Western U.S. and in the Northeastern quadrant.

With that, Operator, I'd like to open the call now for questions.

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit one, on your touch-tone phone. Again, that is star one if you would like to ask a question. We'll pause a moment to assemble our roster.

We'll go first to

, J.P. Morgan Fleming.

Yes, hi, Bill.

Good morning,

.

Good morning. In terms of elaborating on your longer-term strategy, the generation strategy, and your regional focus, as far as building out your earnings space it would be through further acquisitions, tolling arrangements? What kind of activities do you foresee?

A combination of those. We continue to identify assets that are for sale, as well as research green field opportunities. And in both cases, we seek out opportunities to hedge some fraction of the generation through multi-year agreements in some fashion.

The nature of the agreement, of course, would vary depending on the region and the opportunities available. So we've been thoroughly creative in trying to create - make those opportunities.

Isn't it very tough since everybody else wants to do the same thing? And what kind of returns can you fetch from the current market? And are you seeing opportunities? And do you expect activities this year? And, if so, what would be the capital dollars that you plan to commit? I know it's all inter-related.

Well, we don't have specific plans to commit capital dollars. We seek out opportunities as they -- as they arise and finance them.

But if opportunities arise that look attractive then the attractiveness includes the cost of financing the thing.

We don't have a fixed target on megawatts or fixed target on capital investments. The projects we've announced are the ones that we are -- have commitments on.

I don't think I can add any more to that right now,

.

The returns that we're finding are favorable.

You can't quantify it?

No.

OK -- thank you.

Sure

We'll go next to

,

.

Yeah -- hi -- good morning.

Good morning, Dave.

I was wondering -- I'm looking at the table on the wholesale sales table that you have towards the back here and in terms of megawatt hours. And it shows out west about 1.3 million megawatt hours of sales, other sources and the battle for

.

I was wondering have revenue numbers that you could share with us that correspond with those sales figures

?

We probably do. We'll have to take just a moment to get them.

Yeah -- that's fine. Basically -- I'm principally looking for the other of 1.3 million megawatt hours. I was curious what kind of prices you were realizing out in the west.

This is for the 1.3 -- 66?

One, two, nine, four.

One, two, nine, four -- under other.

Yeah -- I was just trying to figure out what type of prices you were realizing out there. Is the hedging that you have

?

We're - the best number I can give you is a little bit under $30 . . .

OK.

. . . per

hour.

OK -- so not too much higher than the spot. I know the spot market was low out there -- maybe in the low -- mid 20s.

Yes, that was -- the $30 is considerably higher than the spot market. That's a judgment call as to whether you think 30 is considerably high than the low-20s. I do.

Yes, well, I mean, it was -- I think it was $150 last year. So the difference -- 30s and low-20s ...

Well, last year was an anomaly, and I think we have to be realistic that that was a very, very strong year, but it's really not a valid comparison for anything today. I think, realistically, we think in the $30 range per megawatt hour provides strong returns for us.

I would agree, and actually I'm wondering would you expect to continue to realize those types of power prices, given I guess hedging you might in place throughout the balance of this year, and into '03?

I actually think we'll do that possibly better.

OK.

I think we're fairly -- actually, I think we'll -- the $30 bucks is probably conservative, going forward, based on hedges we have in place.

And that's for '02 and '03 you would feel that way?

'02 and into '03 for a lesser volume, yes.

OK.

Yes, we think the $30 is conservative into '03 and beyond.

OK, great.

OK?

Thank you.

OK, David, thanks.

We'll go next to

, Morgan Stanley.

Good morning, Bill.

Good morning,

.

Just kind of following a little on David's question and broadening it a little bit. I wonder if you could discuss with us obviously wholesale prices will be a key driver of earnings this year, and I assume a key variable in the range you're talking about. Can you give us any further color on this year, and possibly look into '03 a little bit and see if -- I gather at this point you don't want to discuss possible EPS ranges. But just what the drivers might be, out into '03?

Sure. Key drivers are wholesale prices, as you pointed out. That's clear. We think that, with our strategy of multiyear contracts that we already have in place, we've locked in a fairly strong portion of our earnings for '03 and well beyond. So while we'll be subject to changes in the wholesale market, I think we'll be less volatile in the wholesale markets than other companies similarly situated.

We do have hedges in place for the components of our generation not locked up with the Montana contract and the affiliate contract in the east that are pretty strong.

So we're not ready to give guidance yet for '03 but we see growth over '02 into '03. We're pretty confident to that -- quite confident to that.

Importantly, earnings from international operations do show strength going forward and earnings from mechanical contractors show strength going forward as well as from synthetic fuels operations.

But, again, no doubt whole markets are key drivers.

Thank you.

I hope that helps a little bit,

.

Absolutely.

OK -- thanks.

We'll go next to

, Merrill Lynch.

Yeah -- Bill?

Yes, Steve.

How are you doing?

Good.

I've got about eight questions but I'll keep it to less than that.

OK -- one at a time.

First of all, do you have a segment breakout for the quarter of the business line in terms of their earnings?

Yeah -- broadly speaking the supply group is almost 80 cents. Delivery group is a little bit less than 18 cents and international group including the

operating loss was about six cents. And those add up to be about $1.03.

And then how about the syn fuel and mechanical? Is that . . .

We report internally the syn fuels and the mechanicals as part of the supply group.

I'm going to ask

I think he can give you a better number on the mechanicals and syn fuels. Or perhaps

can. We just -- give us a second here to find it.

Syn fuels -- Steve, it looks like syn fuels is four cents for the quarter and mechanical is about one cent.

And that's the absolute number or the relative number to last year?

Four cents is both absolute and relative.

OK.

And the one cent is absolute.

I think it is -- OK.

That grounds down to about a penny for the mechanicals for the first quarter.

OK.

I might want to point out -- the mechanicals volume backlog is -- right now is the largest it has been.

OK.

So we see a surprising strength in the mechanical contracting group, despite the reports on the economy.

OK, go ahead, next.

OK. The next question is I just wanted to get an update on your '02-'03 hedge percentages. And you've often done this between the East and the West. I'm wondering if you could do that as well?

Yes, we'll do that.

probably can give you the best detail. Larry.

Steve, let me focus on margin, rather than volume. For the entire year 2002, we're just over 90 percent hedged. And for margins going forward for 2003, it's right at 90 percent.

And that's percent of margins, versus kind of what's in the budget?

That's percent of our economical capacity that's hedged.

Correct, right. Oh, well, but that's a volume number, not a margin number?

Right, right, that's a volume number. Now recognize when I say economical capacity, at currently anticipated prices, that's the generation that would run, if economically dispatched. So as prices firm up, there's additional generation becomes available and economical for sale into the spot market. If prices weaken, those sales are still firm. So we're 90 percent hedged on an economic generation basis. Does that help your question? Or do you want more detail?

I'm just -- I guess maybe if Larry could just update on kind of East versus West, and just clarify what is margin, and what is volume on these numbers?

Yes, sure.

We're more hedged East than we are West,

. The number's actually right at or just above 90 percent East, on a margin basis. And it's closer to 70 percent-plus on the West. But remember, our West business is roughly 10 percent of our total.

OK. I guess another question: Is there any unrealized mark-to-marketing come in the quarter?

A million nine, about three-tenths of one percent of our total margin for the quarter.

OK. And I think one last question while I've got you there, John. Any update -- after all the announcements in January, February, I think you were going to go visit with the rating agencies and give them your plan, et cetera. We really haven't heard much from them. Maybe they've been busy with other problems. But just any update on the feedback you've gotten from the rating agencies?

We've had conversations with all of them. We're though the ratings process -- through the process with Moody's and Fitch -- no changes -- and we're still - we're still in conversations -- finishing the process with Standard & Poor's.

So we should assume they've gone through -- done the review and just no changes?

Yes, sir.

OK -- thank you very much.

OK, Steve.

Thanks, Steve.

Well, go next to

,

.

Hi. I have two questions with regard to your Brazilian operations. First of all, what would happen if we process about a rate increase that was delayed substantially?

And the second question was related to that -- would PPL eventually change its attitude with regard to financing its Brazilian subsidiary if there was a substantially positive decision by the Brazilian authorities?

Well, both of those issues we would address if and when they happen. We don't presently anticipate a substantial delay in the rate making process. We've made it clear to the agencies in Brazil that rate relief needs to be resolved promptly and explained why.

So if there is a substantial delay we'll deal with that if and when it happens.

OK. And the other question is then --

decision about

financial support only after knowing the decision by the rating agents by the authorities -- by the authorities here in Brazil?

Yes. But I want to make clear it's our expectation and our request of the Brazilian authorities that they make

financial viable on its own merits. And if they -- if it is financially viable on its own merits then the question of financing resolves itself.

OK -- thank you very much.

Thank you.

Once again, it is star-one if you have a question. We'll go next to

,

. And it appears that he does not have a question.

Once again, it is star-one if anyone has a question. It appears there are no further questions t this time. I would like to turn the call back over to Mr. Hecht for any closing remarks.

OK -- we thank you all very much for your participation this morning and we look forward to working with you in the future. Good bye.

Thank you for joining today's conference. You may disconnect at this time.