賓州電力 (PPL) 2002 Q2 法說會逐字稿

Good day, everyone.

Welcome to PPL Corporation second quarters earnings release conference call.

Today's call is being recorded. For Opening remarks and introductions I'd now like to turn the call over to the Investor Relations Manager Mr. Tim [PACKOVICH]

Mr. [POCKOVICH] please go ahead.

Good morning, thank you for joining the PPL conference call on second quarter results and general business outlook.

Today's discussion includes forward looking statements concerning earnings and other matters. Although we believe that 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, 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, first of all here with me this morning in addition to Tim, is John Biggar, CFO, and Larry [DESIMONE], our Executive Vice President of Supply.

Due to two unusual charges, PPL reported a loss of 18 cents per share for the second quarter, for $30 million.

The components of that report is as follows.

First of all, a pre-tax charge of $94 million or 64 cents per share after tax related to our subsiderary in Brazil, Sumare .

Secondly, a pre-tax charge of $74 million or an after tax effect on earnings of a negative 29 cents per share related to a workforce reduction that was previously announced. And lastly, a core earnings number of $111 million or 75 cents per share.

That compares with the Thompson first call estimate of 60 cents per share.

Now, I would like to go back, briefly and talk about each of the components.

Sumare, our subsidiary in Brazil, we had previously announced we will be exiting that property.

We had previously written off our invest in the property with the exception of a cumulative translation adjustment related to currency translation, which we were unable, under accounting rules to write off until this second quarter when we formally put the property up for sale.

The $94 million pre-tax charge represents the last of a remaining investment in Sumare and in a news release issued yesterday, we announced that we were in the process of selling that property for a nominal amount to another party.

Secondly, the workforce reduction, that was also previously announced. It will reduce the workforce by approximately 600 positions.

We anticipate on an annualized basis about a $50 million or 20 cents per share reduction in O&M expenditures for the remainder of 2002, of course, it will be somewhat less than that as people exit over the next several weeks and beyond.

The core earnings of $111 million was driven, primarily, by wholesale margins, especially in the east that compared favorably to our expectations and O&M expenditures across the board that compared favorably to our expectations at the beginning of the year.

Other business lines performed approximately as expected.

Now, I would like to look forward to the remainder of the year.

At this point, we will reiterate our earnings guides given previously of 330 to 350 per share, although with our performance during the first half of the year, we now view that guidance as somewhat conservative.

For 2003, we reiterate our previous statement that we anticipate growth in the mid single digits. And that growth is a composite of the following:

Changes in O&M expenditures, new generation coming on-line, and conservative assumptions about margins on unhedged generation, earnings attributable to the Pennsylvania Electric Utility, and conservative assumptions also about our results from our international operations and other business lines.

At this time I would like to open the call up for questions. Operator?

Thank you sir. The question and answer session will be conducted electronically today. If you would like to ask a question please signal us by pressing star 1 on your telephone key pad.

We'll take our first question from Kit Conolick from Morgan Stanley.

Good Morning Bill and team.

Hi Kit.

Just wanted to get a little perspective on, I note that you report that you expect in '02 82% of earnings come from long term contracts, regulated energy, and the first half short term energy sales.

Can you break down where you expect the earnings to come from in the remainder of '02, and if you have it roughly how you would break in down for '03?

Okay we'll try to sort out some of those numbers for you Kit. John probably has the best detail.

Okay Kit. You said about 82% is committed margins, if you will. The uncommitted margins look like about 35-40 cents split probably three quarter, one quarter between east and west.

And then of course the international, we didn't include any of that. That's for the balance of the year.

When you include the international margins, the international to date it's probably closer to 90%, is already committed.

When you look out to next year, right now what we see when you take a look at margins that are committed through long term contracts, if you will, or excluding uncommitted margins in international I would say about three quarters of our earnings come through committed energy transactions and the regulated Pennsylvania delivery businesses.

I'm sorry clarify for me the three quarter for '03 that does not include the international?

This does not include the international. The only thing committed for '03 includes, is the contracts in place, and the Pennsylvania delivery businesses.

Very good thank you.

We'll take our next question from Devon [GOUGHAN] with [LUMINUS] Investment Funds.

Hi guys, congratulations on a good quarter. I just had a couple of questions regarding the Sumare sell.

You said nominal price. Are you guys getting any proceeds from it?

At this point all we are saying is that it is a nominal price. On our guidance assumes no proceeds from it.

Does this clean up the drag that was associated with that?

This should go away after this quarter?

Yes.

Okay, good.

And then last question, you mentioned that the gain was associated with higher wholesale prices in the east. How do the mid-sea prices effect you guys?

And how do you expect going forward? That too.

I don't think the mid-sea prices affected us substantially compared to our expectations when we began the year.

Have you guys seen those prices firming up at all going forward?

Because I think they have been between $5 and $10 for the past quarter.

Larry [DESIMONE] probably is in the best position.

Going forward the prices have firmed slightly, what you are seeing currently with those low prices is that the northwest is a wash with hydro.

And so the spot market, or short term prices, are below normal given the hydro conditions.

Right. Thanks guys congratulations.

Thank you.

Now we will go to David Chancer with Jenny Montgomery Scotts.

Yes good morning.

Congratulations on a solid quarter.

Couple of questions. First of all, I noticed that the operating and maintenance expenses have been really kept under control.

I mean there sort of flat for the 12 month period, and they are down in the quarter.

How many more quarters do you estimate that that kind of trend will continue?

I think we'll be able to keep O&M expenditures at this level.

You are looking at a combination of factors when you look at an individual quarter all alone, of course, you are looking at the results of explicit management efforts to reduce expenditures.

There's always some timing in there in processing major invoices. Sometimes early, sometimes late.

So we are kind of cautious about raw data.

But our expectation is that O&M expenditures will be flat to down.

For the balance of the year?

For the balance of the year and on in to '03.

Great.

The other question is certainly not tongue and cheek, it may sound like it, but have you folks considered exiting the western generation mark.

I mean given the fact that current conditions are disadvantageous, but also taking into consideration the contentiousness in Montana of the political process, and you know that fact that California is not as an attractive place to sell into.

Is that something that has been discussed or considered?

Well we consider, and reconsider, both disposition of existing properties as well as acquisition of other properties pretty frequently David.

And look at it pretty thoroughly.

I'm not convinced that the western markets are all that negative. They are certainly not what they were a year and half and two years ago. But that was an extraordinary period.

We still see some favorable margins, highly favorable margins with our five year contract with Northwestern.

And we've experienced some favorable margins and sales out of Sundance in the southwest this summer already. Which by the way is in commercial operation now.

You did mention the political climate in Montana.

From a standpoint of our marketing, we think we are in pretty good shape. The Montana commission endorsed, although it wasn't necessary for them to improve our contract with Northwestern, they did endorse it.

We have seen, it's true, a voter initiative that may be on the ballot, there is a long way to go between now and election day to see how that voter initiative turns out.

In any event, if you believe the markets are efficient, sale of the assets is probably not going to result in a whole lot of benefits compared to continuing to operate them.

We've seen some really strong margins in the west. It is an important part of our earning, even with softer prices at mid-sea.

So at this point it's our plan to stay in the western markets, we think they are important.

Okay great. Thanks.

We will move on to Andrea Finestein with Angelo Gordon.

Okay just have a couple of quick questions.

Last call you guys had walked us through your percent hedge of economic capacity with 90% in the east, and 70% plus in the west.

Is that still the same or has there been any change to percentages?

The hedge ratio probably is 90% both places for the remainer of the year, as the year has gone on, we have put some additional hedges in.

I'm sorry.

I was talking about 2003.

I apologize.

2003, John, you may want to--

2003 as we look out at the amount of our margins that are expected to come from contracts that are in place, that is our committed transactions in the east.

It looks like it's a shade over 90% in the west around 70.

Balancing outs in the high 80's.

Okay, but that's just for the committed piece?

That's the committed piece.

Can you talk about what kind of spark spread you are assuming on the unhedged piece in the uncommitted portion?

In terms of pricing?

Yes.

Right now, when we look out for next year, about high 30's.

That's a price, not a sparks.

Recognize that usually, when people talk about sparks spread, they are talking about natural gas and some heat rate compared to market price and some of our unhedged generation is more economical than gas and we are continuing to increase the hedging on our coal supply.

So we would rather give you that $30 price and then, based on our portfolio of generation, you can estimate margins.

But they are more favorable than a sparks spread would appear because we are burning a lot of coals.

The high 30 price is that an average for east and west.

It's an average for east and west.

And not that different integrated over a year, there just very different markets seasonally.

And I have two other quick questions.

I wanted an update on Sundance and University Park, are either of them online, yet?

Larry?

Yes, Sundance went commercial last week. Of 10 L and 6,000 units and it came in about 10 days ahead of schedule.

University Park, which is 12 L and 6,000 units will be declared commercial on Thursday of this week.

We are going through the final testing of the last of 12-units.

I'm sorry, last question. Can you give us an update on Coal Strip and when you expect that back online, and how you're viewing the replacement power for that contract.

Coal Strip 3 will be online on Thursday and the replacement power, as you know, over the last month, has been in the five to 15--dollars.

It's been really cheap, okay thank, guys.

Thank you.

Paul Debis, Value Line please go ahead.

Three questions, first of all, you mentioned this wholesale margins were better than expected in the second quarter.

Why was that?

Just a combination of general market conditions and supply demand relationships and possibly a conservative assumption in our business planning process earlier in the year and late '01, our expectations going forward, probably were conservative, but margins were somewhat stronger, especially in the east.

That's about the best explanation we with give you.

And you are still sticking with the mid-single digit earnings increase guidance for '03, even though you have taken out 20 cents of costs from the head count reduction.

Why wouldn't the growth rate go up?

Our earnings expectations like everyone else's are a combination of a large number of factors.

Not just or O&M expenditures, but market prices for wholesale generation and any number of other factors.

We don't change earnings guidance when we just change one factor in isolation.

We look at all of the parameters that effect earnings and on an integrated bases, still feel that mid single digits is a conservative estimate of what we can deliver next year.

Recognize, we also believe that the third 330 to 350 guidance this year, we are sticking with that guidance, but we now see that guidance is probably on the conservative side, based on what we have accomplished in the first half.

Right, so this is something that has turned the other way that would offset the benefit of the O&M reduction such as maybe prices for '03 being less than you expected.

Or maybe '02 being stronger than he we expected.

Have your thoughts changed about retaining the rest of your foreign distribution companies?

We look at opportunities to both sell and buy domestically and overseas, as I mentioned earlier.

At this time, we see the remaining international properties as contributing to earnings and contributing to cash.

We have made real progress over the years in our operational performance, very high quality customer service, very favorable reductions and O&M expenditures and at this time, the best path we think going forward is to retain those properties.

We examine that as opportunities arise.

They do represent a relatively modest part of our portfolio and as John pointed out, a bit ago, we do not include any earnings from international properties when we give you a breakdown of earnings, we treat the earnings from international properties the same way as we treat those from unhedged.

So we think international has a useful part, a small amount of international in a portfolio the size of PPL's.

You aren't facing any problems where you were at Sumare then with the other properties?

No, they are very, very different.

In the U.K.

For example, it's a purely regulated delivery business with all of the supply the responsibility of supply companies, so we don't have any market exposure at all.

In Brazil, of course, we were buying at wholesale and whatever we didn't deliver to our retail customers, we delivered to the spot market in Brazil and were not paid for it.

That was really the key issue, one of the major factors in Brazil is a $75 million account receivable that we have from the operator of the spot market in Brazil, which is the government.

We don't have anything like that in any of other properties.

In Chile, we have seen strong top line growth, tremendous advances in reducing operating expenses, reducing staff, improving quality of service, top line growth and bottom line growth.

So they are very different properties.

Thank you.

Sure.

[INAUDIBLE] UBS Principle Finance.

Could you give me an update on the D.O.J. and [INAUDIBLE] investigations in the capacity market in Pennsylvania?

Yes, we have been fully cooperating with the Department of Justice.

We have given them documents and stayed in touch with them and they have indicated to us that we have been fully responsive to their data requests.

We intend to do the same with the Pennsylvania Attorney General.

We are confident that those investigations will conclude that the company broke no laws if you go back to the report from the Pennsylvania market monitor.

He, in his report, concluded we broke no laws, nor did we break any regulations of the market.

We are confident that the Justice Department or the Pennsylvania Attorney General will conclude the same thing.

Also, we would point out that in a response to a complaint to FERC in the past about this same matter, FERC also concluded that we broke no laws and broke no rules and dismissed the complaint.

So, we will continue to cooperate, work our way through it and we are confident that the conclusions will be favorable to the company.

Do you have a timing in terms of what you are expecting? Like when is the next hurdle period or timing when more news will come out on this stuff?

No, we don't, we will work with D.O.J. and it really is up to them what they do with it and when they reach any conclusion.

Okay, thanks.

Sure.

We'll go to Citi Group Investments, Barbara Chapman.

Good morning.

Follow-up on the international call, specifically on WPD.

Your co-owner Merit has reportedly hired an advise to consider selling their stakes.

Given your comment that you are happy with what you have internationally, would you consider buying that additional stake?

Because you do have the right of first refusal, don't you?

We do have certain rights to -- regarding a disposition of the property, along with our partner and we are in close contact with Merit and we would evaluate retaining our half.

We will evaluate acquiring Merit half, and we will also evaluate selling our half and we will evaluate selling our half if Merit sells their half.

Those are the three choices and we are looking at all three very closely.

Currently, you've changed your ownership percents and management controls.

Currently, how does it stand on what percent and who has control?

Currently, neither party has control and neither party consolidates.

So, I think currently, it's 50/50.

51% of the equity.

You have 51?

We have 51% of the equity, but the ownership arrangements are such that neither party is in control.

The voting stock is not split the same way as the equity interest.

So that neither party has control.

If they end up selling their stake to a third party, then that certainly will be an issue of negotiation, I would think, is who has control over the entity?

No.

They would just sell it and somebody would be an equal partner with you?

If Merit sells their half and we take no action, then the new party just steps into Merit shoes.

Also, what's your dollar investment in this federal investment in this property?

In WPD?

On our books, it's about $400 million.

Just about $400 million.

It was less than that at the beginning of the year and with the earnings of the property, it has grown to 400 and then later, there will be a cash dividend out of the property that will pull that number down, I believe.

It's about $400 million.

And the total debt on that property?

The total debt is nonrecourse, first of all, for the parent.

I don't have that number.

We would have to get it, but it is nonrecourse to the parent and investment [INAUDIBLE] debt, John, do you have more detail?

I don't know, but it is triple D rated debt by Moody's and Standard and Poors.

Right, I am aware of that. If somebody can just confirmed what you show as being the debt on the entity.

That would be helpful.

Okay, we'll get that for you.

Okay, thank you.

Okay, thank you.

Steve [FLIESHMEN] with Merrill lynch.

Bill?

Hi, Steve.

How are you?

Good.

A couple of questions.

First, could you update us on the debt to capital numbers at the end of the quarter and also, what is your latest plans on equity issuance?

I'm going to let John speak to the capitalization structure, right now.

Steve, I don't know if I have it at the end of the quarter, to be honest with you.

Okay.

We can get back on that.

How about the latest thoughts on equity issuance.

I think you talked about $200 million.

Right, we had talked originally about up to $200 million of common stock.

That still is our plan to do that in the near future.

As you may or may not know, we went effective with the SEC yesterday filing on our filing, the shelf registration.

We are also looking at the possibility of doing, at the same time, a smaller offering of equity link securities.

We think that's particularly attractive to us at this point in time, given current market conditions and our view that our stock is undervalued.

So, it would be a combination of two things.

Straight common stock offering and then a smaller equity link securities offering.

Okay, and if that's what you are considering, I assume that would be that kind of offering would be included in your guidance for this year and next year?

That is reflected in the information we have provided, correct.

Okay, secondly, Bill, not to harp on the PJM related investigations, but just to get some sense, based on the kind of questions and you have been getting and discussions you have had with D.O.J., Attorney General, et cetera, is there any direction they seem to be heading that is different different from what they are talking about that would be a new view on this issue?

I don't think so.

Okay.

I think there is a there is a great deal of concern and interest in activity on the part of regulators and market monitors to assure themselves that markets are not inflated and they have become very, very active, and very, very thorough and we appreciate their need to do that in light of the California situation of the past, the Enron allegations and so forth.

We have a strong culture here to abide by all of the rules and regulations.

We conduct regular and thorough training of all of our traders, if you call them that, or marketers and we are quite confident that we not only have been within the letter of the law, but within the spirit of the law, nonetheless, this investigation is underway to we are cooperating with it fully and we are optimistic of a favorable outcome.

We agree we would like to see it resolved, obviously, sooner rather tan later.

Okay, one last question, just so I have a better understanding, when we look at your western business, while you are relatively well hedged, you do have an unhedged piece and pricing in the pacific northwest has been extremely low.

My guess would be that you have been able to potentially use the low pricing to serve your contract, so, even though you may not be making as good a margin on your excess sales, you're probably making better margins on the contract.

Is that how I should look at how the economics are working in the west?

Yes, I think so.

Recognize, of course, that a good bit of our production in the northwest is hydro, so depending on hydro conditions, we'll dispatch that to make maximum use of the water.

But I think are you probably looking at it about right.

Recognize, too, prices in the northwest are extremely low, right now, but as Larry pointed out, there is a lot of hydro and that's a seasonal thing.

Hydro conditions can change in a matter of a month or two sometimes, so, we still see the west as being a very good market for us and it's a significant contribute to earnings.

It's not what it was two years ago, but that was an obviously an extreme anomaly.

So I think you are looking at it about right, Steve.

Okay, thank you.

Steve, before you go, your question on capitalization if you exclude securitization debt, it looks like about 60% debt, 40% equity at the end of the second quarter.

How much, then, would you add back for off balance sheet, usually?

Usually like three or four percentage points?

Yes, that's probably about right.

About four.

Okay, thank you.

Yeah.

Thanks a lot, Steve.

Next question?

William Hieler with CIBC.

Good morning, I'll be pretty quick.

I think most of the questions you guys handled pretty well.

Is just a quick question on the contracts, correct me if I'm wrong, but one of the positives here is that both in the east and the west, you are not really subject to price renegotiation at lower prices.

That's correct.

In the east, I think you got a slight escalator over the next nine years. And in the west we've got a fixed price.

That's correct.

So, does the 82% that's under contract this year include? Or is there a percentage of that is volumes that were, that are not under long-term contract that you were able to just hedge, either over the last 12 months at favorable prices?

Some of that is, yes.

When we give an economic hedge ratio, we are including both a longer term contract, the five year contract with northwestern, affiliate contract in the east and we are also including shorter term hedges that we put in from time to time.

What percentage of the total, would you say, is basically the long-term contract with PPL Electric and the one with Montana power?

Well, about three-quarters, 75%?

In the east, it's about the majority of the hedge is the long-term contract with the affiliate, probably 70%, 75%.

In the west, it's probably less than that, probably 50% or 60% is our hedge, five year hedge with northwestern.

In that ratio.

Okay, all right be and just one other follow-up. Anything new with regard to your coal assets, regarding -- you are hearing some talk about the emissions standards 2004, 2005.

How do you guys stand right now as far as CAP-X and meeting whatever is coming down the road?

I think we are pretty good.

We do have selective catalytic reduction at our Montour plant.

We put that in early because the allowance market was favorable and we could sell the knocks allowed generated, but I think we were in pretty good shape, certainly in good shape, compared to companies that have been much more aggressively challenged than we have with regard to plant modification.

So, we do reflect in our business plan an expectation of making future capital investments for emissions control that are coal fire plants.

That is reflected in our longer term outlook.

Is there any opportunity to raise utilization rates at your coal facilities or is that just pretty much where we could possibly get to?

No, there is opportunity.

We have seen improvements in equivalent of availability at our coal fire plants and we expect to continue to see some improvements.

Of course, we will reach a point of diminishing return on the coal fired units.

On our nuclear facility at Susquehanna, we are in the process, in 2003 and 2004 of replacing the steam turbence.

That will give us an increase of 50 megawatts and that's purely an improvement in heat wave without any additional thermal generation in the reactor, just because of new technology in the turbine. And we are looking at power upgrades in other components at that plant and each element from the reactor through the turbine and into the condenser and ultimately the generator step-up transformer, each appear to have some opportunities that we are evaluating. So we look at the whole thermal cycle and we continue to see opportunities over time to increase output at Susquehanna.

Alright, appreciate it.

Thank you.

We'll move on to David Frank with Zimmer Lucas Partners.

Hi, good morning.

Congratulations on a good quarter.

Thank you.

A couple of questions, one, I wanted to clarify, you had told Andrea you expected to receive somewhere in the neighborhood of the high $30 range for average realized unhedged power prices in '03?

Yes.

Does that have to do with the type of generation that's unhedged seasonalties involved in that generation.

It seems like the weighted average peak for the east and the west are lower than that?

It is, the reason it's in the high 30's is much of our unhedged generation is peak in the summer.

So it is weighted toward the peak hours where we would expect to sell the generation. And as I guess I've said, when we get a hedge ratio, it's the economic generation.

So, the remaining unhedged generation will run primarily on peaks so you will see a higher weighted average price.

Okay, and I wanted to clarify, Steve had asked you about your plans for issuing stock and you mentioned common and some equity links securities.

Are you looking at doing up to $200 million of common, plus additional equity type securities?

Yes, we are.

The $200 million of common, plus the equity link security in a slightly smaller amount.

And the conversion date, John for three year.

Three year conversion.

Yes.

Pretty much similar to what we did a year ago.

And what are you targeting as far as your balance sheet goes, for the end of this year from a debt to cap and I guess, if you can include the off balance sheet as well.

At the end of this year, we expect to see equity ratio on a grading agency basis of about 43%.

Now, this excludes the securitization debt on a GAAP basis.

Again, excluding the securitization debt around 47%.

And if you include the off balance sheet?

That is reflected in the 43% number I gave you.

It is, okay.

43% includes the off balance sheet and it's how the rating agencies essentially would look at it. And then the higher number, the 47% number is off the balance sheet.

In each case, excluding the securitization debt that we did to finance transition costs.

Okay, great.

Thank you very much.

Thank you.

Before we take our next question, I would like to remind everyone to press star 1 if you have a question.

Or if you find your question has already been answered, press star 2 to remove yourself from the cue.

We'll move to Vanguard's Elizabeth Noble.

Just a follow-up question from the prior question.

What's the difference between the 64% that you entered for Steve earlier and the 47% that you are talking about from a rating agency perspective?

I understand backing out the securidized debt, but is there some different basis for the way the sale lease backs are added back?

I think the number I gave Steve was 60%, so not 64.

So we get a little closer.

Adding the off balance sheet debt was 64%.

That would be 57 going the other way.

We did a quick calculation to try to give Steve the numbers.

We will have to do the detailed calculations and we can get back to you on that.

I new you were going to do some sale lease backs for your new capacity this year.

Have they been done and executed? Or if that is still to come?

No, those transactions are done, already in place.

And the amount?

About a billion dollars.

And is that included in your off balance sheet debt?

Yes, it is.

Just point out that all of the financing is in place for our construction program.

All of the new generation we had announced.

All of the financing is in place for that.

Okay, thank you.

Thank you.

We'll move next to Paul Ritzon with McDonald Investments.

Can you give a 40,000 foot view of where you see the energy markets over the next couple of years and maybe some idea of how you plan to position the company to take advantage or minimize the damage?

Sure, my sense is that we will see wholesale prices generally being fairly low for a period of years and until there is an identified or an acknowledged need for new construction and new capital investments.

Now, that's on a broad basis, more narrowly, I think we will see locations where new generation is required, now and there will be some tightness of supply that will be recognized in whole sale prices.

I think the west is one of those markets and I think there are other markets like that are somewhat smaller geographically like Long Island, Southwestern and Connecticut and so forth.

How we intend to position the company is this.

First of all, the strategy that we have had of hedging has been extremely valuable.

We have decided, a long time ago, not to be long load and short generation.

That is to have our provider last resort obligation in the electric utility and not have power plants.

We also intend to not be long generation and short load.

That is be a merchant power producer and rely on the markets to sell the power.

We think we have been pretty well positioned in both the east and the west and the east because of our affiliate contract and in the west with our contract with Northwestern.

We will continue to search out opportunities like that, our totaling arrangements with Lipa on Long Island or Shorearm and Edgewood are great examples.

Those opportunities will be selected, that they are not easily found.

We -- I think you will find that's the reason for a mid single digit growth rate rather than a much higher growth rates that people were forecasting 18 months ago in this industry.

We also see continuing opportunities in the regulated delivery business, both in Pennsylvania and in Latin America and the U.K.

Chile and the U.K. have been good markets for us and they have added modestly to earnings.

We have also made some favorable, but selective retail contracts primarily in the west.

We do not believe the mass markets will be profitable for us, but we do believe that the large commercial and industrial markets at retail will add to earnings and provide an opportunity to hedge generation as well.

We are using the mechanical contractors, very efficiently both as part of our retailing strategy at the Industrial level, as well as our entree into the distributed generation market.

We see distributed generation contributing modestly to earnings.

We see the opportunities for growth in mid single digits during the next several years to be, I think, compared to the rest of our pier group, I think that's pretty good.

After we work our way through this market situation, we will see new opportunities for capital investments.

In the meanwhile, in the near term, we are strengthening our balance sheet.

We think our balance sheet is relatively good compared to the IPP sector.

But there is an opportunity to strengthen the balance sheet.

Also, want to point out as we complete the construction program for our new generation out through next year, we will see positive cash flow.

Our cash flow from operations this year is about $850 million and that grows to over a billion dollars over the next two years.

When we complete our generation expansion program, our net free cash flow will be somewhere in the neighborhood of $600 million or so after taking money out for what I will call sustenance capital investment and existing facilities.

I think that puts us in a very strong position, but it's a strong position relative to a much more realistic outlook to the future that the world has today, compared to the the view the world had of these markets 18 months ago.

That's my 40,000 foot view.

With a lot of assets coming into market, what is your take on that?

Are we still seeing the less and desirable assets and how do you view that and how do you think you might capture any opportunity there?

Well, we are looking at assets as they come to market and you are right, they have been the less than desirable assets, so far.

But, we find ourselves in a position where if the right assets become available, we think we are in a position to be an acquirer.

Our balance sheet is strong, relative to many of our competitors and as I said, we see strong free cash flow after this construction program winds down.

We evaluate lots of opportunities.

We have been highly selective in what we have executed on.

But I haven't seen the really good assets come on the market, yet.

Everybody talks about it, but it doesn't seem to me that it has happened, just yet.

We'll let someone else go, thank you very much.

Before we take the next question, I want to get back and respond to the question about the difference in the ratios between June 30 and the end of the year and try to close that loop.

The numbers I gave Steve earlier, for end of the year are June numbers, the second question I answered were year end numbers.

The difference is between the June 30 numbers and the year end number, we have the common stock offering, equity links securities offering, use of proceeds to retire some debt securities, and we also have the effective and other half years worth of earnings.

So that explains the difference in the equity ratio between June 30 and the end of the year, both on a rating agency basis, and a balance sheet basis.

Next question.

We'll go Carl Brown with [INAUDIBLE].

Hi, guys.

I want to understand the dynamics in the west.

The increase in unit sales of the volumes that you provided on the chart were pretty substantial.

Is that again the result of hydro assets being able to operate at a higher capacity factor?

Larry?

The chart of generation on the west is really a combination of better hydro availability this year as well as generations coming into service in the southwest.

In thinking about hydro assets in general, what would you say is a normal capacity factor during a quarter like we just had or what would be the swing from maybe a depressed environment to a much better environment like we just came off of?

How often do hydro assets run?

The majority of assets in the northwest are run of river, which means it's seasonal.

You will see, with the melting of the snow, a lot of runoff in the spring.

Roughly, April, maybe as late as May, it was cold this spring, so the runoff was delayed a bit and it peaked probably the mid part of June.

In a good normal year like this year, we'll have availability into the fall.

In a poor hydro year, the two previous years, we saw actually saw shortages as early as August where we just didn't have the water coming down the river to run through the facilities to generate the electricity.

During the run off period in a good year, do the hydro assets run at 100% capacity factor?

Only during peak flow seasons.

That's the same as the limited hydro we have in the east.

It will run during the day at limited output through a dry summer and then shut down at night and just fill the energy into the higher priced markets.

Just a few thoughts on the dynamics of the hydro dominated western market.

During a good hydro year, we have additional production, but there are generally lower market prices and the reverse is true, also, during a bad hydro year.

Market prices tend to be higher, but our volume production tends to be lower from the hydro.

We are also about half coal in Montana.

So there is the interplay of several different factors.

If you look at the hydro assets in isolation, are the costs of operating those so low that you can almost make as much money if prices were cut in half but your volume is doubled?

Yes, operating cost is low, it's nominal.

Most of the hydro facilities are un-maned or remotely controlled.

To answer your questions on capacity factor, in a near normal year like this year, the hydro facilities out west will be operating in round numbers at about 60% capacity factor.

Okay, and I had to jump off the call for a second.

So I apologize if you answered this, you mentioned the equity link offering would be in addition to the $200 million of common?

In addition to the common stock offering.

Any idea about the size of the equity links piece?

Smaller than the common.

Substantially smaller? Or slightly smaller?

Not substantially smaller, sort of smaller-Medium.

Any other options available with the stock price arguably being very cheap?

You could make an argument that it's at seven and a half times next year's earnings, rather than doing any of these offings that would, at these prices, in terms could you pair back the CAP-X or do anything else?

Have you looked at that?

We are working hard to do what we can where we do have flexibility and looking at the timing for the equity offering.

But right now, these markets are not very predictable, as I'm sure you would agree.

How much flexibility would you say you have on terms of the timing?

Can you wait until maybe the environment is a little better and the stock prices are given a chance to recover?

We can wait -- the time we can wait might be measured in weeks or months at most.

Whether that is enough time for the market to recover is something neither of us can speculate on, of course, but we do have some flexibility in time and we are working to make best use of that.

Okay, all right, thanks very much.

We'll move to Tim Dodman with Solomon Smith Barney.

This is actually Danielle [INAUDIBLE] most of my questions have been answered.

I was wondering, since you are saying that you going to be in the position of free cash flow, et cetera. Could this be the last equity offering you see over the next three years, given the fact that most of your construction is going to decline?

In all likelihood, Danielle, based on our current outlook, it will be.

If we see significant and highly favorable opportunities--

Yes, short of a major acquisition.

Yes, short of that, but I think this would be our last equity offering, based on our current identified expenditures and so forth.

Okay, thanks a lot.

Thank you.

Final reminder to press star 1 if you do have a question today.

We'll go to Devon Goughan with Luminus Investment Funds.

Hi, one last question, I wanted to find out what the proceeds would be for the equity facilities.

Retirement of debt.

You are trying to get the balance sheet?

It's really to help the balance sheet and it's also to take advantage of the upside potential in an equity transaction in terms of value of stock.

Just on the canceled domestic plants, which plants were canceled?

The plants that were canceled were Pennsylvania, LM 6,000 and the Starbucks project, which was a combined cycle plant in the state of Washington.

Okay, great, thank you very much.

We'll go to Raymond Long with Bearstern.

Hi, gentlemen, just if you could -- I don't know if you went over this, but could you outline what your CAP-X budget is for 2002-2003?

John will get those details for you.

One other question, is there a time line with the D.O.J. review?

What sort of milestone should we look for?

Actually, there isn't a specific time line.

The D.O.J. conducts their investigation as, of course, they see fit and we may hear from them very shortly or we may not hear from them for weeks or longer.

But, we stay in touch with them on a reasonably regular basIs and inquire regarding their need for any additional information from us to help them along.

Finally, can you also update us on what your short term facilities and bank lines are and I think you guys just renewed a facility.

Maybe if you could update us on that.

We have a billion five of credit facilities available to us, a billion one at energy supply which is a combination of both three year and one year facilities and a $400 million facility at PPL Electric Utilities.

You asked a question on CAP-X.

For this year, total CAP-X, which is both on balance sheet lease financing about a billion five, and the breakdown between balance sheet and lease financing $535 million leased, 906-ish, 965 on balance sheet and for next year, about $670 million on balance sheet and $75 million leased finance.

How much lease?

I'm sorry.

75.

And any anticipated debt financings later this year, or are you pretty well set?

We continue to monitor the debt markets and play it -- if we do anything, it would be to refinance.

Okay, great, thanks, guys.

Thank you.

At this point, there are no further questions.

Gentlemen, I'll turn the call back to you for any additional or closing remarks.

Thanks, very much, I have no further comments.

I appreciate everyone's attendance and participation this morning and thank you again.

With that, we'll conclude today's conference.

Thank you, everyone, for your participation.