賓州電力 (PPL) 2002 Q3 法說會逐字稿

Good day everyone welcome to PPL Corporations third quarter earnings release conference call.

Today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to Investor Relations Manager Mr. Tim Packovich, please go ahead sir.

Thank you.

Good morning.

Thank you for joining the PPL conference call on third 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 involved 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.

I am going to this morning discuss PPL's earnings for the third quarter.

I am then going to turn to our earnings outlook for 2002 and 2003 and beyond.

I am going to try to give some visibility to our earnings growth expectations in beyond 2002 and 2003.

I am going to then briefly discuss the situation in Cemar, where it in Brazil, where PPL owns property distribution utility known as Cemar.

And lastly, I am going to give some information about PPL's liquidity in capitalization ratios and then we will open it up for questions.

For the first - - for the third quarter of 2002, PPL earned 80 cents per share, which includes 15 cents per share non-cash charge related to operating losses at our Brazilian affiliate Cemar.

Excluding the impact of that charge, our core operations earnings for the third quarter were 95 cents per share.

Our earnings outlook for 2002 continues to be in the range of 3 dollars and 30 cents to 3 dollars and 50 cents and our earnings outlook for 2003 continues to be 3 dollars and 60 cents to 3 dollars and 80 cents per share.

For the longer term, we also reaffirm our previous forecast of 5 to 8 percent compound annual growth in core earnings per share using the midpoint of the 2002 forecast as a basis.

I want to talk a little bit about our earnings growth expectations and where that comes from, what the elements of that are.

First of all, the largest single contract that we have, that hedges our merchant generation is a contract with the affiliate electric utility for provider of Last Resort Service, that contract provides by its terms for a fixed escalation in the price of energy from about 40 dollars per megawatt hour in the early years to 50 dollars per megawatt hour in 2009.

In addition, in 2003, will have a full year of commercial operation of our Shoreham and Edgewood plants on Long Island that are under tolling arrangements for a Long Island Power Authority and a full year of commercial operation of University Park and Sundance and will also have a full year of our new contract for supply of 450 megawatts to Northwestern, the success at our Montana Power.

In, excuse me, in 2003 we will also be installing the first of two new steam turbines that are Susquehanna Nuclear Plant and in 2004 will add the second turbine to Susquehanna, so it won't be until 2005 that we'll enjoy our full year of commercial operation of both of those new assets.

Those turbines are produce 90 megawatts of increased production entirely on thermal efficiency without any change to the nuclear-steam cycle or any change to fuel cost.

We also expect to enjoy the increases in earnings drive from taxes and financing and operating expenses.

So, I think there is some clear visibility not only to PPL's earnings in 2003, but earnings beyond that.

As we've reported in the past, our strategy is to develop merchant generation and hedge that generation under a long-term contract.

Using that strategy we remain hedged; 85 percent of our expected projected margins from energy sales through 2003 are locked-in with hedges and 75 percent beyond 2003 are expected to be of our earnings, are expected to be derived from long-term fixed price energy contracts.

Let me go on now to Brazil and very briefly explain the situation there.

On October 7th an individual was appointed by an yield regulator in Brazil to operate and manage Cemar, we have put no cash in Cemar since the beginning of 2002 and did not plan to add any cash to Cemar.

The regulator has made a public statement regarding a schedule to transfer ownership of Cemar to a new owner by December 20th, although there is no guarantee that if the transfer will occur by that date.

When Cemar is transferred to a new owner we will reverse the 15-cent non-cash charge and put that back into earnings.

We have, as you know totally written-off our investment in Cemar to zero and as I have said we'll be putting no cash into Cemar.

Let me talk a little bit now about PPL's cash flow situations and our liquidity.

Very broadly or generally speaking, our cash flow from operation in 2003 will be just under a billion dollars.

That will grow, so that over the over a five-year period that cash flow from operations will increase to approximately 1.1 billion dollars.

Our capital expenditures that are sustenance capital, maintenance of the equipment, replacement of deteriorated parts is about 600 to 650 million dollars.

Our dividends at present dividend rate after conversion of the PEPS into common will be in the neighborhood of three hundred million dollars, that's at present dividend rate.

So you can see from that I think that by 2005 we'll clearly be in a net cash positive position and increasingly cash positive beyond 2005 as our capitol expansion program winds down in 2003 and a little bit in 2004.

I want to talk now a little bit about our equity ratios and then we will open it up for questions.

PPL's present balance sheet as you, as you are aware has a number of different debt issuances on it and so there are number of different capitalization ratios that I can give.

We have some securitization debt that we entered into when we went through deregulation.

We also have securitization debt at the regulated electric utility when we ring sense the utility in road of fuller (ph) contract and we also have non-recourse debt, which is on the balance sheet for GAAP purposes, but is non-recourse to the parent at WPD.

So I can give you a number of different ratios excluding leases.

Our total debt to capital is 67 percent including all debt.

If I go to the other end of the spectrum and I exclude the WPD non-recourse debt and I exclude the transition bonds our total debt to capital is 61 percent and by 2006 that total debt to capital declines to 48 percent.

So, I have given you a kind of a band that - - that should be helpful to you.

Once again, if we exclude the non-recourse debt at WPD and we exclude the transition bonds we have 51 percent debt to capital and by 2006 that declines to 48 percent.

With that background let me now open it up for questions.

Steve.

Thank you, today's question and answer session will be conducted electronically to ask a question press the star key followed by the digit one on your touchtone phone.

Again that's star one for questions.

Please make sure your mute button is turned off, so your question will register in our queue.

We will pause just a moment to assemble our roster.

Our first question, Devon Goughan, Luminus Management.

Hi Bill.

This is Devon Goughan.

Congratulations on the third quarter.

Yeah hi.

Just a couple of questions.

The debt maturity in going forward, it seems to be like a lot of those are largely utility related and, you know, in the current environment this seem little difficult to refinance the going forward, it shouldn't pose a problem for you guys, is at the right when looking?

Let me ask John if you would like to speak to that.

I think that's accurate.

It is a good portion of it is electric utility debt and it is currently priced that the coupons on that are currently are higher than, that'll be considered to be current market rate.

So, I don't expect on a go forward basis that our electric utility is will have a problem refinancing its debt obligations.

Yeah. [Inaudible] some of this, too much liquidity problem there.

And then also just on the liquidity walk through am I right, also that the grip is about 35 million.

So, I should add that back to the dividends?

Grip is about 30 to 35 million on an annual basis.

That's right.

Okay.

Great, thank you very much.

Our next question from Paul Patterson, Glenrock Associates.

Hi Paul.

Can you hear me?

Yes.

I can Paul.

I want to ask you first of all if you are experiencing any switching at PPL and whether you expect anything to change with the increase in the Polar?

We probably have a about one percent of PPL's customers are shopping and some fraction of that are in fact supplied by PPL's competitive affiliate.

We haven't seen that increase very significantly.

Where you do see shopping probably is the Cherry Picking customers that are in right classes that have a higher shopping credit.

We are seeing very gradual pick up, I think in the competitive supply business.

So, I really don't see shopping being a big factor.

Wholesale prices are, you know, the energy that we wouldn't sell to Polar, you know, we do pretty well in the wholesale market.

So, I don't see that as a big factor, Paul.

Okay.

Great.

And secondly, you mentioned Cap-ex around 600 to 650, is that the amount you see in 2003?

It's the first in its capital, Paul.

That is it's the maintenance of existing equipment, extension of lines to serve new customers, the capital we spend in WPD it is to replace deteriorated equipment and serve new customers.

It's not the discretionary capital in new investments.

And that discretionary capital would be?

That'll vary from year to year, some of it is, lets say in '03, it will be about 300 million and that would be 300 to 350 million and that would be for the Susquehanna turbines, Kings Park, Free Ports, Lower Mount Bethel.

Okay.

Now that's completely, is that does completely [Inaudible]?

That's right.

Okay.

And then you mentioned with then PEPS conversion the dividend was 300 million, no formula less in 2003, is that right?

Yeah.

In 2003 it's only a little less than the 300 million.

How much is that?

Very close to 300 million, its common and preferred, Paul.

Okay.

You can conclude in those of the...

Yes, yes.

Common and preferred.

Okay.

I see and then in terms of your, you mentioned in the press release, you got 1.5 billion dollars on credit line, when do they expire?

Have you renegotiated them recently, I think?

We did renegotiate them recently of the credit, one billion and half of credit lines, 400 million of that is electric utilities, which will expire in June of next year; 300 million is, then there is a billion one at energy supply, 300 million is a three-year term, 500 million is a two-year term, and 400 million is a one-year, 300 million is a one-year term, excuse me.

Okay.

And the, when the utility expires, in June of next year, is that right?

I believe it's June of next year.

And as the one, both the one-year for we have a year term mode on them.

Okay.

And then just to clarify, the debt capital you said was 50 percent includes all debt and including the securitized bonds and leases, is that correct?

Yes.

That's right.

Okay.

Okay, great and thank you very much.

Okay Paul.

Take care.

Our next question is from Paul Ritzon, McDonald Investments.

You may have gone over, I missed the beginning of the call, but previously you were endorsing the higher end of your last 2002 guidance, I was wondering if that is still the case?

And secondly, could you give you an update on the political rhetoric that is going on in Montana?

Well, let's state our earnings guidance for 2002 remains 330 to 350 and from core operations and I don't know that we have endorsed the higher end of that, let's I think we have always said 330 to 350 for 2002.

Political rhetoric in Montana, I assume, you mean with regard to the proposition that would have the state form a commission to investigate acquisition of the hydro plants, we are taking it seriously, we have been conducting a good deal of market research and public opinion research on the subject.

Our sales, the organized labor groups of Vista and other interested parties have been publicizing our position on the matter and we are optimistic that it will be defeated at the polls.

Now, if it isn't defeated at the polls, there are a number of other challenges that can be made and the initiative, the voter initiative only calls for establishing a commission to investigate the acquisition of the plants.

So, while we are taking it seriously, we are quite optimistic that we are going to be in Montana, as a Hydro and Coal-based producer for the foreseeable future.

And just back to the guidance maybe I am mistaken, but I thought on this last call you, I don't know, you gave some body language which is feeling bullish?

Well I am.

I am feeling bullish about my body language [Gap In Audio] outlook.

Look the earnings guidance is 330 to 350 and we are confident.

Okay.

We really are quite optimistic and feel that we have the fundamentals very, very well hedged.

Fair enough.

Thank you.

Thank you.

Our next question is from Teresa Haul, Banc of America Securities

Hi, good morning.

Good morning.

I have got just a couple of questions.

First of all, could you update us on the cost savings plan, when do you, when we should we expect a start on, you know, you know 2003 or should we, it seems only that is going to start in the 4th quarter?

You will start seeing it in the 4th quarter and more aggressively in 2003.

And what is the annual expectation on savings?

Well, the work force reduction itself, we anticipate at least 50 million a year.

Beyond, beyond that, we have other cost reduction initiatives and other CAPEX sustenance CAPEX reduction initiatives, which should have a cumulative effect over the 5-period.

But 50 million a year from the work force reduction is, is, current and committed, and firm.

Okay, and then when you are answering how [Inaudible] , when is that going to be due to next year?

Teresa, I believe it's in June.

It's in June, okay, suppose the energy supply and...

Electric, they all come due with the same time, about the same time.

Okay and then, when we look at the securitization debt, how are the rating agencies looking at that debt?

Are they including that as part of their capitals, their GAAP ratios?

The transition bonds, whether the transition bond that that by the rating agencies has rated AAA.

I can't tell you, how, I believe that they don't counterpart, I think that's the question more appropriately directed to the rating agencies to be honestly with you.

Okay, Just a two more questions.

In terms of the CAPEX, you mentioned the maintenance CAPEX, is that also included in the capital maintaining CAPEX has Sundance and University Park part?

Yes, it includes the maintenance CAPEX for all the consolidated properties.

Okay, and lastly, you know, we have talked about this before, but the payout ratio is pretty low.

Do you have a sense of what the ideal payout ratio is?

Well, actually I, I, guess I would rather look at dividend as controlled by book, earnings, book earnings and also by cash, by cash availability in other word.

You know, if a company is investing cash, is cash negative because of new investment and still paying a dividend there, on a cash basis, they are financing the dividends.

So, we look at our payout ratio and cash as well as other factors.

So, I, I couldn't give you an ideal pay-out ratio, but you certainly conceive that we expect earnings growth of 5 to 8 percent over the 5-year period and we expect a billion dollars, growing to a billion one in cash from operations and our net cash to become cash positive in all 5 and increasingly positive thereafter.

So, but we haven't made in any firm dividend policy in a formulae expense.

Okay, thank you, very much.

Okay, thank you.

Our next question from David Chancer with Jenny Montgomery Scotts

Good morning.

Good morning David.

Hi David.

Hi could you give us an update on the space investigation, is there anything new since the last call?

No, we have nothing new to report.

Okay.

We are quite confident that we have we are on pretty quite firm ground both the PJM market monitor and FERC indicated that we didn't break any rules and we are quite confident that we conducted our trading and marketing operations in an ethical manner.

We did buy low and sell high.

Did they give you any idea about schedule?

No they don't.

Okay, yes I didn't think so.

My second question has to do, well you don't have a formulated with regard to dividend policy, do you think it would be fair for us to assume that at least in the near term the thrust would be to try to sustain and maintain the dividend and then consider increases down the road.

We certainly think that maintaining the dividend is a clear priority and we see no reason to that to think that the dividend isn't in anyway threaten.

Our dividend is relative as was pointed out is quite of a modest pay out ratio by many standards and we have all the financing in place for our capital expenditure program, we are extremely liquid we have a billion and a half in untapped credit lines that don't expire until begin even expiring until next June.

We see the company becoming net cash positive, so we see at this time no reason to question the current dividend level at all.

We are and do reexamine our dividend policy regularly in light of investor expectations and our capability to raise the dividend.

Okay.

And then my last question is as with the case with order utilities there in the state there has been some success in getting sustenance capital in the regulated business, into rate base when projects are completed is there going to be any effort on the part of PPL to ask the space for similar treatment.

We have not dealt into that at this time, as you know, until 2004 our regulated delivery prices are under a rate freeze anyway.

Right.

So, we haven't dealt into that.

Okay.

Thank you.

Our next question from Dillon Winthem with Simco

I am sorry I thought I cancelled.

My question has been answered.

Our next question from Kit Conolick with Morgan Stanley.

Hi, good morning Bill, excuse me if I got on a little late excuse me if this has been answered, could you review with us you mentioned in the press release 85 percent of your energy sales hedged through in 2003, could you review with us the un-hedged part, what the un-hedged part consist of, what your expectations are there perhaps year-over-year and what the potential might be for hedging some of that going forward?

Well let's talk about what our hedges are might be easier and then you can subtract that out.

We have of course with the significant hedge would be affiliate propeller supply in Pennsylvania.

We have a hedge to supply energy in capacity into New Jersey for basic generation service, I believe that's 300 megawatts.

We have a hedge on Long Island in a sense we could think of them as hedges the totaling acrangements (ph) with LIFO for Shoreham and Edgewood.

We have a hedge in a different sense in Connecticut with the Connecticut municipals to we have sold them a coal one on related to one of the units at Walling Fred (ph) three of the units at Walling Fred (ph) and that's a three year arrangement.

We are examining other opportunities in the east.

We have a significant hedge off course in Montana of 450 megawatt's with Northwestern.

The Northwestern hedge provides approximately the same revenue that the transition agreement did with the former Montana power for about half the energy in capacity.

The previous transition agreement with Montana power provided with a basically a full requirements contract and on peak accounted for all of our capacity, this arrangement is about half that amount of energy over a year and provides just about the same revenue.

Now, we are looking at we have other smaller hedges in place for shorter periods of time with various counter parties as a normal marketing operation would enter into.

We are examining other opportunities for hedges I think you can see, we tried to be creative, we have looked at selling we have sold coals, we've ventured in the tolling arrangements and there are number of other opportunities that are now in the pipeline that we really haven't disclosed yet.

I hope that helps Kit.

Well it does, I wondered if is there anyway to characterize to look at the un-hedged portion, I guess by implication when you say your expected band of EPS for 2003 is 370 to 390, I guess the implication that is the un-hedged portion doesn't have a plus or minus EPS effect of more than a 20 cents swing?

Yeah well let me try it this, first I think we I know, we said 350 to 380.

360 to 380 I am sorry.

Okay and..

Don't want to try to get you ahead of yourself.

When you are on the call Kit you know, I am listening closely, our supply business next year will we think will contribute in the range of 270 to 280, I am giving you some bands now.

Okay.

Yep.

And we think the delivery business will be in the range of 50 cents.

The US delivery business and international could be in the range of 40 to 45 cents or more.

Of the international can I ask how much is WPD?

Actually... about 60 percent, 15 cents to second half of WPD, I would say two thirds.

Yeah 50 to 65 percent.

Okay.

Now of that 270 to 280 in the supply business in excess of two dollars is from hedged contract.

Great.

That should help.

That helps a lot thank you.

Okay Kit, you are welcome.

Our next question from Bill Hieler, CIBC

Yes.

Hi good morning.

I need a help, little help on that interest expenses line if I can, we went from 231 million in interest expense for the quarter, is that the right number?

You are on the income statement?

Yeah 231, I know we consolidated the WPD, but it still its seems to imply very high rate?

Let me give it to you Bill this way.

Okay.

The 91 which is the old quarter, last year did not have WPD and at - but the differences are as follows.

Okay.

And that gets you pretty close to the 140.

About a 102 million for WPD.

Or any, okay.

Okay.

We cancelled a remarketing option that we had for our input three securities that's roughly 24 million.

Is that a one-time item?

That's a one-time.

Okay.

And essentially what we did was by removing that remarketing option we have reduced our financing cost on a go forward basis by not having to remarket that security and pay up and above market coupon rate on it, so that benefits interest expense on a, over the longer-term and then we issued some notes out of energy supply in the fourth quarter, the third quarter of last year.

And you get the interest expense associated with that, which is an increase over the last time that's about 8 million so when you add that at a 135 million issue of the 140.

Okay.

What is the interest rate on WPD debt roughly?

It's about, I guess 102 divided by 2.1 billion?

That'll be a quick way to get out it and I don't have the [Inaudible] .

Mostly by 4 naturally, just seems, what's sounds 102 million a quarter right, the WPD then.

Right.

400 million dollars and what was the total debt?

That's 2.1.

And thus the rate just seems high doesn't it, John?

I really get the numbers and will

I just, the interest expense just seem high to me for the quarter, so if we can get a better handle on that, the other line item that really move was minority interest went from 1 to 74 million which there must be a something you are consolidating now that you are taking out a -

I think, WPD, when we bought the other 49 percent of WPD we went to, we consolidated it, but it, does that account for?

I believe it should.

Yeah, but you are consolidating it all and unless for part of the quarter, when did, what day did they close?

September last.

Okay.

September 10 or so.

Okay if it, so then might increase the [Inaudible] .

The Labor Day I think yeah.

So may be your, so may be that's the.

Because that, I think, that we'll check it and get back to you.

But, I can't give you now [Inaudible] .

May be it is like the [Inaudible] .

Well we are adding back may be part of the quarter when you wasn't fully owned, yeah if we can get an answer on that, that would be helpful and I guess there is one other question I had with on the CAPEX, the 6 to 6.50 next year of maintenance, now that number does not include the capital, the complete Mount Bethel, Kings Park and the Susquehanna expansion?

[Inaudible] Not, don't include that.

That's right it is, that's not included.

Okay and where are we in those place, Susquehanna is that still should be completed by, it's nuclear expansion early next year?

No, one of the two units will be done during the refuel outage in the spring of next year.

Okay.

And the other unit will be done during the refuel outage in the spring of 2004, the following year.

Okay and I [Inaudible]

We, there was 24 month [Inaudible]

I think that a [Inaudible] , what is the total cost of that?

Total cost of the Susquehanna turbine, I think,

It's a 110 million dollars.

110 million, something in 100.

Our share is that we own 90 percent Allegheny (ph) Corp. 10 percent, so it's a 110, 120 million.

Okay and the other two key plants, the King's Park, and the Lower Mount Bethel?

Yeah, Lower Mount Bethel will be under a lease, that will be least financed.

That's not [Inaudible] the capital.

The two, the combined port for all our new generation including Susquehanna's Turbine up rate is about 430 million dollars

Total and -

That's total.

The whole thing through the completion of construction.

Right that's the total capital outlays?

Total capital outlays, that's Susquehanna and the other plants that are under construction.

Okay and one last question, the Griffith project, your 50 percent ownership in, the plants that came on this year were basically Griffith, University Park, I believe and then well the Shoreham we talked about?

Sundance in Arizona.

Right.

Sundance in Arizona came on this summer.

Right.

University Park came on this summer, and Shoreham and Edgewood on Long Island came on this summer.

And going forward, is there any kind of indication you can give us on the ability to contract these plans?

I know, the contract market has been very weak and the new.

Well they are our opportunities, just give you, but we have some in the pipeline that we haven't disclosed but give you a general idea they are polar (ph) contracts or basic generation service contracts of various kinds that come up for a re-bid that we will be participating in.

There are municipal and other entities that will have been looking for supply, that we have worked with as we did in Connecticut, we were providing a call for three years on one of the Wallingford units, so there are our opportunities like that if you look for them and if you are creative.

So, but does the earnings forecasts, you know, you got a good hand on the contracts, the delivery business but does the earnings guidance next year that 360, I think, the 380 range, what do you kind of assuming on the new capacity that's come on since going 02 and 03, are we just taking the forward curves or we assuming improvement?

No we are not assuming improvement.

We have, we are taking the forward curves and our forward curves are essentially I think for all intents and purposes we are assuming flat prices in the wholesale markets out over the forecast period

Okay.

Now we have little, little, lot of detail into that but when all is said and done the growth that we are talking about 5 to 8 percent is from identified initiatives without any fundamental change in the wholesale prices.

Okay I appreciate it.

Okay you are welcome.

Our next question from Andy Levy with [Inaudible]

Hey, guys.

Just a couple of questions.

This first on operating cash flow, the numbers that you ran by.

So I guess with the 300 million dollars of discretionary to finish the plans .

You have got 200 million dollars in the hole for '03 and I just wanted to know how you plan to finance that?

That financing is in place.

Lower Mount Bethel will be lease financed and the financing is in place for all of the other....

No, no.

It sounds that, there is some understanding.

Are your 200 million dollars negative cash flows.

Remember we started the year with you know, substantial amount of cash on hand and then we'll finish the year with between 2 and 300 million of cash.

No, no but okay so, basically you are saying you are not going to have to finance that negative free cash flow or you are going to do to lease refinancing.

Is that what you are saying?

Just want to understand you.

Part of the plants that are under construction are lease financed and that financing is already in place.

Right.

But if you just look at operating cash flow less, construction less dividends, less the $300 million discretionary that makes negative free cash flow.

Yeah.

We started with over 900 million dollars of cash on hand.

So what you are saying is you have cash on hand.

So you are not going to have to go to the capital market.

That is exactly right.

It is very important we do not accept the capital markets [Gap In Audio]in the next couple of years and we don't out through the five-year except for debt maturity.

Right.

The only way, Bill is right, the only way we would accept the debt markets would be debt maturities for opportunities in the markets to refinance maturing debt or the redeemed debt and reduce our financing cost.

Perfect.

Thank you very much.

Okay.

Our next is from Elizabeth Nobel Bangard.

I have a couple of clarification questions actually one is a follow-up from the previous.

Could you actually list your debt maturities for 2003 and 2004.

We are looking for the details.

Give us just a moment.

We have, I know, we have to 200 million dollars of energy of CAP funding debts that comes due in November.

While you are looking at in, I have another clarification question.

You said at the beginning of the call that excluding leases and you know, the backing out the transition or securitization debt and the non-recourse debt.

Your debt CAP was 61 percent and going down to 48 percent.

What happens to those two numbers when you include the leases?

That include the leases [Inaudible] .

I think you originally said it excluded leases.

That is what I am wanting to clarify?

Okay.

Let me give you a number then.

The debt, if you included leases, when I said that debt excluding WPD non-recourse debt and excluding transition bonds, 51 percent debt-to-total capital includes the leases.

Okay.

Okay?

And excluding the leases that number will be 57 percent.

Okay.

Okay?

Okay.

Then, I do have another question.

Could you remind me how much capacity is un-hedged University Park, Sundance?

I think that actually a better way to look at it is this.

Because we do have a variety of smaller contracts in place from a number of clients, a better way to look at it is financially rather than in megawatts.

We are projecting for the, consistent with the earnings guidance for the next year, something in the range of 270 to 280 from the supply business and of that in excess of 2 dollars is from hedges that are already in place.

But I am correct that University Park and Sundance are primarily, there is primarily no contract for the output?

Not necessarily.

There are a number of smaller contracts bi-laterals with individual counter parties of the 50 mega watts variety.

So don't assume they are un-hedged because, nearly because they don't have a single large long-term contract such as we have in Montana or Pennsylvania.

Okay, It would not be accurate to assume they are completely un-hedged.

Okay.

You want to get back to the debt maturities?

Yes.

Okay.

We have a 200 million dollar debt maturity with the bill date for three securities that come due in November and essentially we have the cash on hand to pay that.

When you go out to '03, I am going to give this to you a excluding securitization maturities because we have essentially treated our cash flow with excluded securitization, the cash flow derived from securitization has been excluded from all our numbers we have shown to you and so I am going to exclude that debt for '03 our maturities, there are 103 million, 104 million, and for '04 about a 125 million.

Thank you.

Our next question from David Frank, Lucas Partners.

Good morning David.

Congratulations on the quarter, Bill.

Thank you.

Just a couple of questions.

One, how are you treating the converts in your initial summary of the capitalization structure and can you give us some prices, average realized prices in PJM and Montana in the third quarter, kind of what you realized as far as prices go and then where you saw the wholesale markets in the third quarter in those two areas?

We really don't have the detail on what we realized average in the third quarter, what we would have to do.

I assume you mean the spot market not the hedges.

And we would have to back out the hedges, the kind of tough to do.

Overall trends in the wholesale markets, I think, we would say that we've seen them pretty flat.

PJM has really lost a lot of the volatility it once had, a little less so in New England.

New England has seen some volatility this past summer.

We do see some strength in this comparatively.

But I would say that, once again our forecast in our earnings guidance and our business plans are based on flat wholesale prices for the forecast period for the five-years span.

But I really don't think we could back out for the third quarter and I am not sure of the real significance, to be honest with you because it is just one season out of the twelve- month cycle for one thing.

Right.

I don't want you to necessarily back out what the hedging was.

Including hedging do you have a rough approximation of what your average realized wholesale sales price was in PJM and Montana for the third quarter and then also how are you treating the converts in your capitalization summary?

The converts are treated as equity.

80 percent or 100 percent?

100 percent.

Okay.

The realized prices in PJM were heavily dominated by the hedge with electric utilities.

It averages around 42 dollars a megawatt hour for the hedge with electric utility.

I see what you are saying.

So that is why I thought you wanted me to back that out because that dominates our portfolio and it doesn't tell you very much about the merchant market.

That is not what you are asking for.

We are probably in the low thirties for the rest of the market.

Low thirties?

Yeah.

But that is integrated over the same thing in the west low thirties.

But it is integrated overall the hours.

So it may not be very, you have to be careful with using that as an index of the merchant markets.

All right.

That is okay.

Probably we could talk more about it offline.

Thank you.

Okay sure, David.

Take care.

Our next question from Marsh Shwanazy, MFS.

Good morning, I was wondering if you could just give the total capital spending plan for '02, '03, and '04?

Not the maintenance.

Not the maintenance.

Okay.

Give us a moment, we will see what we can. '02, let us look at '02 first.

On balance sheet CAPEX is about 810 million and that includes the sustenance capital, maintenance capital which is about 650, give or take.

Acquisitions and investments in '02 were about 211 million that was primarily WPD, the announced price was 235 but you back out of that the cash that was in the property will get you done to round 211 for acquisition.

Lead financing in '02 was about 534 and that drops to about 77 million in '03 and the lease financing, it was Sundance, University Park, and Lower Mount Bethel.

Okay.

Going out into '03 for on balance sheet that rises to almost a billion dollars but that includes in '03, that would include an increase in CAPEX because we are now consolidating for full year WPD.

So the sustenance capital goes up a little bit and it includes the Kings Park, Freeport, and the new turbines of Susquehanna.

So we see by '05, there is no CAPEX other than sustenance capital and '04 is sort of a transition year depending on construction schedules.

I hope that helps.

Another question.

What was the cash flow from ops expectations for this?

You mentioned that it is a sort of billion for next year.

What is it for this year?

Well, little bit of a transition year which I want to compare comparable relationships, we are consolidating WPD in '03.

This year it will be around 600 to 700 million dollars in cash consolidation of WPD.

The rest of it course are the new power plants.

Well, I will give you an opportunity to dispute some of the comments in the C4 (ph) report this week.

First comment with regards to the accounts receivable and DSOs picking up and the concern that was thrown out there was perhaps some credit issues.

Can you address that?

And the second point....

With regard to this company or with regard to the second?

With regard to this company?

Yeah.

In that C4 report this week and it obviously didn't have a third quarter results in it but we are talking about DSOs ticking up to 60 days or what have you?

That is not based on information that we provided and we cannot support that at all.

Our counter party credit profile is very strong and that has been a key issue in our hedging operation is counter party credit.

So I can't support this data at all.

I don't know where they came from.

They are not accurate.

Okay.

Okay.

But so there was no deterioration on the credit side this quarter and perhaps it was even little bit better?

That's right.

And then the other comment was the cash flow form operations was quite low in the first half relative to the same period last year but you already mentioned that you are on target to make this 6 to 700 million for the year and so there is....

Absolutely.

Yeah.

Okay.

I think that's it.

Thanks

Okay just one clarification there can be some of the reported numbers maybe distorted by turbine cancellation payments..

Right, right.

And that So people, if they don't back that out they don't really understand the numbers they have.

Right.

Okay.

Thank you.

Our next question from Peggy Jones ABN Amro.

Hi guess well I think my questions have all been answered.

Thank you.

Okay.

Good, thank you.

Again that's star one for questions and if your question has been asked and answered, pound, press the pound key to remove yourself from the queue.

Our next question from Darren [Inaudible] , Allied Capital (ph) .

Hi.

Good morning.

I am, should be clear about a couple of things, I'm still a little fuzzy on here.

Shown in the balance sheet September 30th, short-term debt, a billion 85 and I know you are giving the debt maturities over the course of next year, but can you tell me what's in that billion 85?

John may be able to sort that out for us.

Give us a second.

We are looking for it, hold on a second.

Why don't we get back to you on that?

Okay.

Do a little bit of research for some numbers on that.

Okay.

I guess my other question.

Okay.

Let's.

I got it, I got it.

I am sorry.

I knew I had it, I just found out the right page.

Got you.

Okay.

The billion 85, about 250 million of that is securities. [Inaudible] There's some domestic debt, it's to do within a year, that's about 80 million and there is about 50 million, 50 million or so from Latin America in short-term debt.

Okay.

And so the 500 million-dollar, [Inaudible] are you saying would that be, that will be taken out in the US or?

That will be taken out in the UK.

UK.

Okay.

And I guess my other question comes back to your leverage numbers again.

I am still little bit unclear, it seems that the numbers that you are putting out, having still trouble reconciling with how the rating agencies seem to be looking at it and specifically S&P had made comments about concerns about your over all financial leverage.

Yet the numbers that you are putting out don't seem to be, that honor us and what are the numbers that they say as your consolidated leverage is 68 percent and I am trying to see whether or not you agree with that number, what they may be including that you are not or is it strictly come down to the WPD debt that's been backed out or I am not really clear on how you guys are looking at the leverage numbers versus the agencies.

If you include transition bonds or exclude transition bonds, excuse me, and include leases, you are close to what you suggested where S&P is.

Okay.

I mean is there an overall, I mean with respect to the leverage that the agencies want you to maintain, what do they, what is it based on?

Is it based on the measures what you've excluded in terms of taking in?

I think yeah, the agencies have, I guess they have their way of looking at equity ratios and our view is that what we want to do is achieve an equity ratio and the debt to cap ratio, we are already looking at it at 50 percent.

And our target is to get to a 50-50 ratio with all the debt.

Really it isn't practical for us to try to speculate on exactly how the agencies look at it.

We give them every thing and they certainly don't tell us exactly how they look at it and obviously they look at cash coverage ratios very carefully not just capitalization ratios.

Okay.

Well, may or not the, if the agencies haven't told you, I mean if you are not really sure exactly how the agencies are looking at it, how did you decide on the additional equity that you issued [Inaudible] ?

Well, we look at cash coverage ratios, we discuss our plans with the agencies, we look at a variety of factors.

The agencies never have, it hasn't been their practice to my knowledge ever to disclose in any formula way how they look at it and it may, in all likelihood they don't have a formula, they look at some situations a company may have very good equity ratio, but have bad cash coverage or vice versa.

So, I don't think they have a formula either.

We look at, what, not only what our capitalization ratio is today, but we look at its rate of change over time as the business evolves.

As you can see from the numbers we see our capitalization ratio improving pretty dramatically as time goes on from retained earnings.

Okay.

Thank you very much.

Our next question from Neil Stein, Credit Suisse First Boston.

Hi, good morning and excuse me if this has been asked already, I've been on and off.

Could you talk generally about your view, your updated view on M&A either corporate or asset acquisitions you know, and there have been a lot of changes in the market over the last few months and even have some neighbors around you who are how you can consider in financial distress?

Well, we don't discuss M&A and that's been our practice for a long time.

We examine opportunities from time to time as we identify them and they become available.

Asset acquisition, we increasingly as important an asset as production.

That's a little bit non-traditional but that's been our strategy to maintain as balanced as closed to balanced portfolio as possible.

So we will not just identify power plant opportunities, acquisition or Greenfield will identify load opportunities.

It doesn't matter to us which one you do first.

You can get the load and then go find the asset to back it or vice versa.

So, I think that one very important point I want to make that's distinctive about our strategy.

So we'll look for load and if we find the right load opportunity then we will go find the power plant.

There are, there has been a lot of discussion about assets coming on the market at bargain basement prices that may happen certainly there are a number of people that are in financial some kind of financial pressure, but we haven't seen really good assets on the market yet, we've seen some power plants that have been sold but we didn't think we are good material condition.

So we really haven't seen good power plants to come on the market yet, that may happen if it does, one of the first things we'd look at is what load we would hedge it with and I hope that helps.

Yes, you know, is there any dollar amount you be willing to go up to per year in terms of doing asset acquisitions sort of you really have no specifics, I guess..

It would depend on the value of the opportunity; if the opportunity were strong enough we'd certainly work very, very hard to finance it if even it were very large.

We haven't seen those opportunities but I don't look at the opportunities as defined by size, I look at our interest in the opportunity as defined by our ability to add it in as a balanced portfolio.

I look at it as that is to say, can we match load in generation in a reasonable way.

Okay.

Yeah and beyond...

I think that's really the key in these markets.

Merchant generation un-hedged is not necessarily the way to grow a company.

And beyond doing smaller taken-on acquisitions, do you have any willingness or do you see a need to do seeing more transforming or larger?

I believe this industry will consolidate.

I believe that will consolidate more slowly than many commentators have suggested in the past for a number of reasons.

Regulatory approvals in the US take a very long period of time and it's been very hard to hold deals together waiting for those regulatory approvals that's one issue.

Second issue is the uncertain financial condition of some counter parties and of transforming transaction, you know, Dynergy going after Enron is a key example that certainly people would want to think about before entering into an agreement the transaction with a counter party that's under pressure.

You don't really know until you look under the hood what that pressure is caused by and whether in fact there is a positive net asset value looking back again at the Dynergy, Enron deal.

So, I do think the industry will consolidate number one, number two, I think it will consolidate more slowly than many people have speculated over the last decade and number three there are a whole lot fewer companies larger than us now than they were a year ago.

Okay.

Okay.

Thank you very much.

Thank you.

Our next question from Devon Goughan, Luminus Management.

Another couple of comments on what you were saying.

I think the CTCs are not counted by the rating agencies and your all in credit rating.

Yeah, that is good to know.

And I think the 68 percent versus 67 percent have to do with PPA's, that they have taken that present value in terms of risk factor since.

The PPA's that you guys are in cover the risk factors like 5 percent.

So that is probably that 1-point difference.

That could be.

And then, my other question just before WPT was consolidated I think your CAPEX on balance sheet was about 730 for 2003?

Not so sure about that.

No?

Okay.

And with the common dividends over 230 and then the preferred probably makeup your 70.

Is that right?

It seem like some of the net cash numbers of people are throwing out were a little bit low?

I am not sure.

Our, my best, well thanks.

I am not sure what the question is.

I just trying to get to, I am little confused when I am looking at this without consolidating WPT.

You are starting with about, you know, you are starting with about, you know, quarter billion in cash flow from operations (ph) .

And then you a dividend from the comp of about 230, maybe 240, and then drifts about 30.

And then what I thought was CAPEX above 730 for 2002 leaving the free cash flow of about 75 million?

No.

I think the CAPEX, Will first of all, the common and preferred dividends get you up a lot closer to 300 million.

Right.

And the subsidence beyond balance sheet CAPEX for 2003, the maintenance capital plus Kings park, Free Port and the Subslanded (ph) turbans gets you close to a billion dollars in CAPE for 2003.

Okay.

Something in that neighborhood.

And then [Inaudible] is least financed.

Okay.

But we of course are in the range of almost 900 million almost a billion dollars in cash when we started 2002.

We will end the year with almost 300 million in cash.

And take that into the start of 2003.

Right that is a pretty good balance.

That's a, we think that's a very strong balance.

And as we said we have all the financing in place for the program.

Right.

It does [Inaudible] .

My last question is just back on the zipper report, which I know they made some mistakes with CEG, they talked about your NUG contract in there.

And it seems to me like, I don't if I am right in assuming this, but they missed the fact that if the NUG contract won away, your cash flow from operations is actually increased but no net income differentials.

So....

That's right.

So it seems to me like that they were a little bit punitive in their discussion of that when [Inaudible] it is a regulatory issue.

And if it won away there would be no net income impact at all but the cash fraction improves?

That's correct.

I believe their, some of their material to be inaccurate.

Yeah.

I know they used the wrong 10Q for consultations reports.

Okay, I appreciate the time and congratulations on a good quarter.

Thank you.

Thanks.

Our next question from Paul Patterson, Glenrock Associates.

Well can you hear me.

Yes I can Paul.

Just a few house keeping things here.

What was the number of shares outstanding at the end of the quarter?

Excuse me Paul.

The number of shares outstanding at the end of the quarter?

At the end of the quarter about a 162 million after the equity sale.

And what would you [Inaudible] again for 2003 that you are looking at in sign?

35 million.

Okay.

Right and then I know that I don't think you guys have any triggers with any of your debt, but do you have any triggers with any of the leases or anything any rating [Inaudible]

No.

There are no triggers in our financing arrangements that permit acceleration.

Excellent.

Thanks a lot guys.

Okay.

See you Paul.

Thank you take care Paul.

And our next question from Paul Ritzon with McDonald Investments

In the past you've given some EPS sensitivities to dollars per megawatt hour change, do you have any updates on that?

I think they'd be about the same.

Okay, thanks.

Sure.

Having no further questions Mr. Hecht, I'd like to turn the call back over to you for any additional or closing comments.

I thank everyone for their participation this morning and we look forward to seeing many of you next week.

Thanks very much.

This does conclude today's conference Thank you for your participation.

You may now disconnect.