賓州電力 (PPL) 2002 Q4 法說會逐字稿

Good day everyone and welcome to the PPL Corporation's fourth quarter earnings release conference call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to the Investor Relations' Manager, Mr. Tim Paukovits. Please go ahead sir.

Thank you. Good morning. Thank you for joining the PPL conference call on fourth quarter results and general business outlook. Today's discussion includes forward-looking statements concerning earnings and other matters. Although we believe the expectations and assumptions reflected in these statements are reasonable, these statements involve a number of risks and uncertainties and actual risks 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.

Thank you Tim. With me here this morning is John Biggar, Chief Financial Officer and Larry De Simone, Executive Vice President of our Supply Business. You have all, I am sure, seen our news release this morning. For the fourth quarter of 2002, we reported earnings of $0.71 per share. From core operations in the fourth quarter, we have results of $0.82 per share. That compares with the consensus fourth quarter earnings of $0.70 for core operations. For the year 2002, we have reported a $1.36 and results of $3.54 from core operations and that compares with a consensus 2002 core operations earnings of $3.42.

For the year 2003, we have revised our guidance from a previous guidance of $3.60 on the low side to $3.80 on the high side to a new guidance of $3.45 on the low side to $3.75 on the high side. And I'll explain the background of that now. One item accounting for approximately $0.08 per share is the dilution related to more shares outstanding. We will be selling equity during 2003. We had sold additional equity from a self-registration through the remainder of the fourth quarter and we are continuing to do so.

Additionally, we will have reduced pension credits of $0.02 per share projected for 2003. So, that's about $0.10 per share reduction in our earnings guidance not related to core operations. We have also widened the guidance by $0.05 a share on the upside and $0.05 a share on the downside. So, if you do that arithmetic, you get $3.45 to $3.75. I will tell you that that band is still less than 10% of our mid-point guidance and we feel that's, our band should be at least that wide given the uncertainties in any business. But that's, however, 2003 guidance.

Looking out toward the longer term, we continue to project growth in the 5 to 8% band based on 2002 core operations as a starting point and we recognized that 5 to 8% compound growth is of a larger base than we had previously projected. So that target continues to remain optimistic to us. I want to talk a little bit now about the components of our business in 2003. I'll talk about the margins that are hedged and unhedged and our fuel hedges briefly and then I will move into few other items. For 2003, we break down our business by major components as follows.

The supply business; we project at between $2.70 and $2.90. The delivery business approximately $0.40 to $0.45 and international about $0.35 to $0.45. If you do the arithmetic, that will give you a band 345 to 380 that approximates the overall guidance that we have provided at 345 to 375 and we think that those numbers are of realistic assessment of our business outlook. I want to talk now about what's that risk and what's hedged. With regard to the supply business, we have in our margins the total hedge of about 88% or so of our expected margins are already hedged. That breaks down by about 69% hedged in the West and about 92% hedged in the East. Fuel hedges; we have about 90% of our coal requirements hedged, about two thirds to three quarters of our coal consumption is in the East and about one quarter to one third of our coal consumption is in the West. Our Western coal requirements are essentially 100% hedged. We have a modest amount of oil that we burned number six heavy oil at our Martins Creek units. That oil is 60% hedged for '03 and our natural gas requirements are essentially 70% hedged for 2003. So, I think that probably anticipates some questions that you have had in the past and we tried to get those up front for you.

For our liquidity credit quality and balance sheet related issues, let me give you a little bit of information and then we can see if we can add to that if you have further questions. As you know our debt has a number of different components, we have transition bonds, which are not generally included on the balance sheet. We have also non-recourse debt at WPD, which we believe doesn't belong on the balance sheet for rate [Inaudible] for liquidity conservation purposes. So, there are a number of different ratios. Let me give you these numbers and see if it helps. Our equity to total capital excluding 100% of the Western Power Distribution non-recourse debt and of core use excluding the transition bonds, 36% is our equity to total capital. If you wanted to take equity to total capital, and exclude the leases, that number would rise to 43%. So I have hoped that's helpful to you. I would like to give you some cash flow numbers for 2003 and then move into one or two other items before we start questions.

Our cash from operations for 2003 is projected to be just under a billion dollars. Our cash expenditures, our total CAPEX are about $850m, about $600 to $650m of that is maintenance or sustenance CAPEX and the remainder of that capital is to build out of our generation expansion program including the Susquehanna turbine replacements, which will add about a 100 megawatts of capacity without any fuel cost, that's all thermal efficiency improvement. We have dividends, common and preferred dividends of just under $300m expected during 2003. Other items that indicated I wanted to move on and talk about a little bit or include our decision with regards to the Kings Park Project on Long Island. We have decided to terminate that project, we will not be moving forward with that project. We had been expensing the development cost as we moved along with the project. It is our practice to expense development cost or actually capitalize that and then reserve for them until we get an air permit and then we reverse the reserve. We did not have an air permit for Kings Park, that permit application is still in process. So we have taken during 2003 the remaining charge for the equipment to write it down to fair market value. Much of the equipment will be required as spare parts at our other power plants project will be offered for sale.

I wanted to move on next to dividends. It has been observed by many of us that our dividends or our pay-out ratio is relatively modest compared to our core earnings. When we consider dividend, we consider both net income and pay-out ratio. We also consider cash flow and of course we consider the source of the cash flow and the source of the earnings and its sustainability. We will be formally considering the company's dividend policy at our regularly scheduled February Board meeting and we will report further on our dividend policy after that meeting. Many of you have asked from time to time about the investigation conducted by the Department of Justice and the State Attorney General into our transactions involving PJM (ph) installed capacity in the past. We have had further communications with the Department of Justice and the State Attorney General and we continue to believe that the investigation will terminate without further action. Those are the opening comments that I have. Operator, we would like to turn it over to questions now.

Thank you Mr. Hecht. This question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touch tone telephone. If you are on a speaker phone, please make sure your mute function is turned off to allow the signal to reach our equipment. We will proceed in the order that you signal. We will take as many questions as time permits. Once again that is star one to ask a question, we wil pause just a moment to assemble our roster. We will take our first question from Kit Konolige, Morgan Stanley.

Good morning.

Good morning Kit.

Just wondered if you could give us some sense of the effect of the low water conditions out in the West. On the pricing you are seeing, is that a net positive or negative for you and maybe overall you can just give us a view of pricing in the East as well as West and whether that is looking a little more positive or negative for you [Inaudible] .

Okay of course it is difficult to tell when we looks at prices what all the factors are that have influenced prices. But in the West we see prices stronger than we had projected them to be. In earlier discussions of our business outlook we had indicated that we were basically looking at a flat forward curve and we have been expecting to see something in the mid 30s, excuse me, for mid-Columbia we were seeing something in the low to mid 30s and we are now seeing prices on peak mid-Columbia in the low 40s and in fact for 2004 we have begun putting on some hedges for the previously unhedged generation in those ranges, in the low 40s. So net conditions have improved in the West. Does that mean that low water has raised prices and as the increase in prices off set the expect, more than off set the expected reduction in our hydro? I don't know what's has caused an effect, Kit but we are stronger in the West than our earlier business plan had suggested. In the East prices have firmed up on peak a little bit but we still are showing in our own business plans we are using a very conservative forward curve that shows some backgradation (ph) after 2003 and we may be mistaken in that. That may be overly conservative and we may be pleasantly surprised. But the projections we have you of 5-8% growth off the 354 assume, I think, a fairly conservative forward curve for the East. Have you picked up what you needed?

Yes that sounds good. Can I ask one other unrelated question?

Sure.

Just wondering if you are looking at continuing to issue equity in 2003. I was wondering if you have in mind the target capitalization ratio at this point?

Well, we have in mind issuing about 300 million in equity during 2003 and of that 300 million, 50 has already been sold, and 35 million is expected to be issued under our dividend re-investment plan. That's about 85 million leaving about 215 million remaining to be issued. Now, we don't have a target-equity ratio as such, but we can give you equity ratio that we project for year-end with that equity sale. I think, John, you have that number?

Yeah. Excuse me. Kit, using the same basis that Bill used for giving you the 36 percent equity ratio at the end of 2002, now, this takes into account the common equity sale and obviously retained earnings. Our equity ratio at the end of '03 will go to 42 percent.

And, I guess, my question would be then, how long would you expect to continue equity issuance beyond the end of '03?

There are no more equity sales in the plan after '03.

Fair enough. Thank you.

Kit. Let me just add to that. That's based on our current business plan, which includes no projects, no one identified investment opportunities to grow the business. And, it's, that equity ratio is consistent with the 5 to 8% compound growth.

Kit. Just let me add that we do have, the dividend re-investment plan, which is kind of on automatic pilot if you will. And that runs about 35 million a year. That's built into the plans. So, that will continue to grow equity all the time. We will say that, the business plan that we currently have the equity sale. The 42% number that's in the... that I gave you for '03, we see that continuing to grow as we go out with time.

Thank you.

Thank you Kit.

We will go next to Andy Levi [Inaudible] .

Hey guys. Just a couple of questions. I mean, 215 that's left, how will that be issued?

That will be issued periodically, when... as we have been... in the same way, we have been issuing stock during the fourth quarter. We have been selling new stock periodically off of a shelf registration.

The kind of [Inaudible] like you did in December?

That's correct.

That's exactly right.

Ok. And I just, kind of going back and what Kit was saying about 2004. If I'm not mistaken, I think, it was in the last conference call, or was it before that you guys basically were saying that '03, we were looking at equity unless like you said, certain things happen. So, I guess '04 is still kind of uncertain, you are kind of leaving it to or open for equity depending on what the conditions are and how the rating agencies are? It is not an automatic (ph) , we are not doing equities. Is that correct?

Well. We don't see a need for equity and we think after this 300 million will be quite strong with equity. I think, what would change our plan would be any new opportunity that we felt show such strong returns that we wanted to finance and that would also include revised forward earnings guidance upward. So, consistent with the current business plan, I don't think we would have equity issuance other than the dividend re-investment plan after '03.

Ok.

You can look at our cash after '03 and look at our retained earnings after '03 and that's pretty strong position I think, I don't think, we will have a need for it.

Ok. I think, you kind of said the same thing at the end of '02.

Well, we said at the end of '02, we are going to have a block equity issuance, though we did say, we've continued to have the dribble (ph) program. But it's true, we probably didn't say that, we think, it would be as large as 300 million either.

Ok. Fair enough. And one last question and I will let somebody else go. Could you just kind of give us an idea could you tell how it is, like you said a 10% raise in the earnings, kind of, what gets you to the low-end and what gets you to the high-end? What kind of things you need to watch out for?

Well. All of the normal variables in a business, in the supply business, we can get to the low-end if wholesale prices fall and that curbs the expected margin from this relatively small-unhedged part of our generation. We can get to the low end on the delivery business if there is a very unusual weather, mild summer, mild winter. We can get to the low end on the international business if there is unexpected deterioration of business conditions in the UK or in Latin America. I will tell you, I think our volatility is probably substantially less than most companies in our space because on the supply business we have the hedges in place that I described to you. We had historically good performance in our power plants and even in our hedging plants we allow for some production risk. On the delivery business, of course, that is a regulated business domestically and internationally. Our earnings are from two principle sources, the United Kingdom and Chile. The United Kingdom is a pure regulated delivery business with no commodity involvement whatsoever, the consumer contracts for its own supply. So those are the kinds of things that kind of affect our earnings upside strength in the forward prices, particularly the way what we have seen happen for 2004 in the West is a good example. That gives us substantial upside.

And weather, I would guess too because you are assuming normal..

Well, weather will directly affect our delivery business, but that is a small part of our earnings. Weather will indirectly affect the wholesale markets and push up forward prices if we have weather extremes, that is true. So we obviously say whether you sort of double counting if I say volatility in the wholesale prices and then add weather to it is a sort of the same thing.

Okay. Well great guys. Stay warm okay.

I love it.

Take care.

Thank you.

We will take our next question from David Schanzer, Janney Montgomery Scott.

Good morning, congratulations on the real solid year.

Thank you David.

I only had one real quick question and that is I noticed that in the quarter O&M expense was up about 15% for the year over 6.5. Could you give us an idea what 2003 might look like?

The O&M expense increase that you have seen is probably an increase in total dollars because of new plants coming online rather than an increase in O&M based on the same set of business.

Right.

Okay. Our O&M for we have seen couple of increases related to pension of course I think I mentioned that. That is actually a reduction in the credit rather than an expense, but with same effect and we have seen an increase of course in insurance expense. So that has helped push up our expenses. For 2003, again I mentioned pension and the insurance we have written for 2003 program cost a little bit more. The fiscal O&M will be quite flat. Fiscal O&M excluding fuel would be quite flat for 2003.

Great. Thank you.

Thank you.

We will take our next question from Paul Patterson, Glenrock (ph) Associates.

Hi, How are you?

Fine Paul. How are you?

I am managing. I want to ask you on that you haven't got the math, but just back of the [Inaudible] , on what did you get 300 million dollars, basically assumes no dividend increase both for the dividend and projection that you have for pre of cash flow that you went through?

The business plan that we have long term I think we nominally use the plug number of a few percent.

Okay.

But that was just for a business planning purposes that was not reflective of a thorough discussion of what our dividend policy ought to be.

Okay. The second question I have is with respect to the announced short-term debt that you have seems to increase the debt to about 1.6 billion [Inaudible] I am wondering what is your plans are with respect to what you're going to do with that as that's come to and how the bank lines that you discussed in the press release might enter into that?

Okay. We don't plan to draw down the bank lines at all or our financing plans continue to leave the bank lines untouched and available for contingency. So, I can tell you that, John may be able to help you with more detail to the cash management plans.

The credit lines that we have in place Paul as the press release said we've have a $1.5b of credit facilities domestically 400 of that which is electric utilities expirers June of this, we expect it to continue that. When you get the energy supply there is 300 that expirers at the end of June, 500 June of '04, 300 June of '05. Our intention is to roll those forward. Internationally at WPD we have two credit facilities, one this given current translation between the pound and the conversion between the pound and the dollars are $160m runs through October of '03, the others is about $240m runs through October of '06. There is about $454m of short-term debt from WPD that showing that we expect to roll out and convert that into longer-term debt in the very near future.

Is that the bridge loan?

Yes.

Okay. And when does this be -- when do you have - expect the bridge loan to be rolled over again?

Early this year.

Okay. And then finally in terms of the price sensitivity just a follow up on Kit's question. Do you guys have a megawatt hour changed EPS impact? I think you guys have provided that in the past?

Megawatt hour change in megawatt hour production from our generation company?

Yeah. From supply in other words I mean if there is a change with that small portion which is unhedged it appears a change roughly speaking you know you guys have [Inaudible] ?

Yes, okay we will look for that. Can we, while we, we had given you our numbers in the past on EPS impact of an extra cent change in forward prices. While we look for that Paul if you don't mind maybe we'll move on to another question and then we'll come back when we find that number.

Okay. That sounds great.

Great. Thanks Paul.

Thank you.

We can answer it now actually let's do it.

Okay. Paul if there is -- we look at it from a perspective change in margins and we did it on a basis of about a $3 change in the price were unhedged margins that would translate into about $0.04 in earnings.

And we'll go next to Paul Foss, Value Line.

Hi. A couple of questions, first of all, what changed to make you decide to do another equity offering this year?

Well, the number of things that are continue to change in this business as the perception of the business by the rating agencies has also continue to change and we felt that we will be in a stronger position and we are willing to trade off a few cents a share to have some more depth on the balance sheet. There has been I think a continuing evolution in this business without much of a pause for the last year to two years. And as that has changed during the fall and as we have seen our equity sales had to go through successfully without putting downward pressure on the stock price, we felt that it was a healthier company to have a stronger balance sheet, sell the stock and it was a worth well trade off.

And was there specific pressure from the rating agencies, there was this kind of preemptive thing?

With no specific pressure from the rating agencies, we keep them informed, we work with them proactively but there was no specific pressure from the rating agencies. We just felt that our equity sales were going forward successfully. The rest of the industry continue to see pressure and we felt we would help to strengthen our company relative to everyone else by continuing with the equity sales up to the 300m level.

I also want you to elaborate a little bit on the international businesses, how is WPD acquisition working out so far and are there any potential problems in Latin America that we should be aware of?

The WPD acquisition is working out very well. The international contributions to earnings for 2002 exceeded our expectations rather substantially, Latin America, Chile continues to be a very well managed country. And our properties in Latin America, we continue to be well satisfied within Chile. The risk exposure in Chile is simply that Chile no matter how well managed is a relatively small economy when compared to Argentina and Brazil and Argentina and Brazil have well known problems and that's the principal risk. We have a degree of installation from that risk, of course, because our business in Chile has (ph) regulated delivery but nonetheless, we all are realistic that Chile no matter how well managed that country is, they are unfortunately in such closed proximity to Argentina and Brazil that there is that exposure but so far, we've seen our Chilean property perform well. But I think, it's very important to distinguish the Chilean economy from the rest of Latin America. Next question?

We will go next to Peggy Jones, ABN Amro.

We had a, a couple of questions. The first one, could you review the items that are included in the short-term debt number of 1309? You already mentioned that WPD, I just wondered what else is in there?

WPD, as I said it's 454. Other debt for the corporation is 489, [Inaudible] 943 and I believe the balance is long-term debt due within a year that shows up in short-term debt.

So this 489 is that the PPL [Inaudible] level?

That's right.

Okay great. Actually, so how you would refinance that or will that remain as short-term debt?

No, we expect that the short-term debt balance will come down as we go through the balance of the year.

Okay fine. And then we move on to WPD, we are aware and I have talked with your IR department about the Moody's decision to put the ratings under review. What do you think the likely outcome is for WPD in SIUK? And how do you think that you will get to that outcome? I am alluding to the fact that the agencies are concerned that there is more debt there than they are comfortable with and that it might be necessary to build the equity layer there.

Well, we are working with the rating agencies right now and not just Moody's but Standard & Poors as well, I have to set guidelines and limits that we think will -- with respect to WPD that will strengthen the credit profile. It won't have any adverse impact on PPL core back here. We are looking at the dividend policy from WPD back to the US and looking at reducing debt as a percentage of total rate base. So those things are all under consideration and we remain -- optimistic that we will able to dissolve those issues.

Do you think you can solve the well enough to keep the ratings where they are or would you be willing to accept one notch downgrade and do you think that you can meet the agencies concerns on that level?

I believe that we can meet the agencies concerns and it is our objective to keep the ratings at the current level.

Okay and where is the $454m, is that South Western Electric?

I believe it's at WPD.

WPD Holding? May be I can follow offline.

We will look into the detail, follow up with Tim and he can provide that, I am just not sure whether it's at the holdings or the operating company.

Terrific, last question. Do you anticipate any change in the agency's assessment of your business position as a result of this situation?

Yeah. I think, we constantly talked to the rating agencies. We are talking to a model (ph) of time, you will be looking at this. We will be actually will be over to New York to see all of the rating agencies next month in a normal process that we go through to review our business plans with them annually, but I am as I said I am hopeful that we can solve these problems as I said in a way that won't have any adverse impact on the credit profile with WPD or PPL Corp.

Thankyou very much. We will follow up with Tim.

We'll go next Leslie Rich (ph) , Banc of America.

In the third quarter 10-Q, you talked about taking a 300 million dollar charge at WPD for pension and I didn't hear that mentioned. Have you decided against doing that or is that substantially pending?

I think the final number is 287 million, but we did the charges reflected [Inaudible] , it is not as we have indicated back when we published the 10-Q for the third quarter. It is a non-cash charge that runs to other comprehensive income to the extent that our market values for the WPD pension plan plus the value of plan assets increases that liability declines, that's kind of what we have at the final number for the years 287 million.

Okay, thank you.

We'll go next to Henry of [Inaudible] Angelo Gordon (ph) .

Hai, all my questions are answered.

Our next question comes from Steven Fleishman, Merrill Lynch.

Good morning Bill.

Good morning Steve.

How are you?

Good.

Could you just provide a break out of the 2002 operating earnings by segment just as you provided the outlook for '03?

Sure, let us see we can get hold of those numbers. I think John has some.

Steve for 2002 it is $2.65 for delivery. US delivery is $0.45 and for internationals $0.44.

Okay. Do you have kind of the cleaned up '01 comps for those also?

I don't believe we have them right in front of us back in '01. I can give you percentage, which would get you.

I will come back to you on this.

Secondly, Bill you commented regarding the DLJ investigation and attorney general that you have had some conversation to remain very confident on the outcome. Could you just elaborate a little more? Had those conversation been encouraging for that end or are you just saying the kind of same view that you had, you know, six months ago, not really based on the tone of these conversations.

Well, we are encouraged.

That's a little bit of a different.

I think that's about all I should say Steve, but we have some basis from my comments.

Okay that's helpful. Third question is in the release, you talked about the variable infinite entity transition impact related to the leases coming on due to accounting changes.

Yes.

And you mentioned that as a one-time $0.08 impact. Is that just a really a one-time impact or is that an ongoing impact on earnings.

There is two pieces. There is an ongoing impact of DSPs coming up. That's a special purpose entity rule that we have referred two minutes before, but I guess that's because funded proprietary change the reference. There is the ongoing impact that you have when you bring up those transactions on the balance sheet substituting interest and depreciation for rental expense and that's build in and picked into our forecast for 2003, but when the rule becomes effective on I believe its July 1, you have a cumulative adjustment picture make for the change in accounting and essentially what you do is in a change in accounting you put all the prior period effects, once your income statement is one item as a change in accounting below the line if you will and that's the $0.08 we are talking about.

Okay. Could you give us some sense what the ongoing annual earnings impact is?

When you get on to 2003, on an ongoing... Let me just do it this way, on an ongoing basis, it's roughly 10 cents a share.

That's obviously included in your '03 outlook?

That is included in all of our projections. Whether, it's in the '03 specific or in our earnings growth guidance.

And recognize that we include that 10 cent reduction earnings in our future outlook, still project 5 to 8% growth over the 354.

Okay. And, finally Bill, what's the date of the February board meeting?

It's the fourth Friday in the month.

Right.

The fourth Friday in the month, Steve.

Ok.

Well, I have you just to answer your questions on the 2001 earnings from core operations.

Yeah.

Supply 313, delivery 82, international 27.

Ok. One last thing, on the CAPEX levels, when you look to '04, should CAPEX be placed in the current plan roughly in line with this 650 million of maintenance CAPEX?

Yeah.

Ok.

The maintenance CAPEX in that range, 600 to 650. 650 is the high-end of the maintenance CAPEX overtime.

Ok. Thank you and congratulations on being one of the few companies to meet your outlook for 2002.

[Inaudible] for 2002, Steve.

Ok. Thank you.

It was quite a thing, Steve. [Laughter] Take care.

We will go next to Devon Hegan (ph) with Luminus Management (ph) .

Hi guys. Thanks for the call [Inaudible] , I appreciate it.

Hi. Welcome.

Also, congratulations on good '02. Just a couple of questions. One, assume that the rating agencies have been aware of the SPVs (ph) and there shouldn't be a credit impact from their point of view?

That's exactly correct. We've had numerous conversations with the rating agencies and all of what might be referred to is off balance sheet transactions and [Inaudible] balance sheet are all on credit and there are things that we have reviewed in great detail with the rating agencies from the very beginning. So, they are fully aware of all of this.

Ok. Great. And then with the SPVs (ph) . It is my understanding that until they become operational then only the interest portion is included in the lease payment. For the two plants that are operational and as part of the principles then included as they are now [Inaudible] cash flow rather than income statement. Do that help offset some of the drag to some extend?

I don't think. No. It's not reflected.

Ok. [Inaudible] two of the the plants are operational?

Two of the plants are operational.

So, I guess, those lease payments would have included P&I (ph) for the SPV (ph) principal and interest?

No. Those are... The way they are structured, they are essentially, essentially the interest only [Inaudible] payment.

Ok. I got you now. And then, for a low amount battle. Can you just... any one of you guys talk a little bit how much is contracted for that plant?

I think, well, it's difficult first of all to separate our hedges into plant by plant because we have an eastern portfolio overall and we don't necessarily identify a plant. In many ways, the operating characteristics of lower amount [Inaudible] lend itself to assigning it to our polar (ph) obligation and that would free up other generation for the broader wholesale merchant market. But that's sort of a hypothetical calculation or hypothetical assumption if you will. We don't really identify a plant to back up a particular sale necessarily when you have a large portfolio, the way we are doing PJM (ph) .

Sure. That makes sense. Just two last questions. In the 1,300 that's due with this year, I think, what 255 is [Inaudible] , which is pretty much taken care of to chop out rates?

That's right.

Ok. So, it is. And then, just for the [Inaudible] , so you can miss all those numbers, you said, 400 from utilities in June, energy supply has 300 in June, and then I missed the next number after that. It totaled at 1.5.

It's electric utilities was 400, then supply is 300 for '03, 500 for '04, and 300 for '05.

300, that is the number missing.

Sorry about that.

No, no. I appreciate it. How much of those were drawn down that are due this year?

None.

None. Ok, great.

Nothing is drawn.

Great. Thank you so much.

Yes sir.

Congratulations again.

Thanks.

We will take our next question from Rosilyn Amstrong, SAC Capital (ph) .

Hi. I have a few quick questions. Just to clarify the SPE consolidation, that's $0.10 on an annualized basis?

That is right. It is roughly $0.10 on it may be little you know a penny or two more of it which I was looking at it rather than [Inaudible] a longer period of time.

Okay.

It is in that range and it is built into our, I said it is built into our forecast.

Okay. And then secondly last year you had provided the portion of supply earnings that were locked in through hedges. Can you do that again?

Yes I think I did repeat it.

I apologize.

That is okay.

I don't mean on a percentage basis. I am talking about on an actual EPS basis.

Okay, well the supply contribution to EPS is about $2.70-2.90 okay. And of our total margin about 88% of that is hedged. But I want to explain that what we do, is we take all of our expenses including depreciation expect for fuel and charge that to the hedges okay.

Let me try it this way and see if it will help. Following on what Bill said when you do that calculation and essentially what we have looked at is in terms the amount of our earnings that are committed if you will. Doing all of that you get roughly I am going to say $3 maybe more a shade more than 3$ of the and I will take the mid point of our range of $3.60. That is a composition of our generation our supply business what we view has beginning locked in. Our domestic delivery business and the WPD portion of our international business. And when you do all that it comes up to a shade over $3 a share. You are somewhere between $3-3.15 and that if you use $3 that would give you the 85% locked in ratio if you will.

Okay, that is ultimately what I was getting at.

Okay.

And then lastly with regard to the 5-8% earnings growth can you just identify some of the sources of that growth going forward over the next few years?

Sure, let me break it down for you. We have built in growth in the price charge to our affiliate for the Polar contract okay. That contract that goes up to 2009 has prices increases. In 2003 the price is about $42.7 a megawatt-hour and that raises to about $50.20 a megawatt-hour by 2009. The second component of the growth is the new turbines at the Susquehanna plant. One new turbine will go in service in this year 2003. So you get a full year of commercial operation of that additional 50 megawatt in 2004. Second turbine will go in 2004 so you won't get a full year of benefit of that until 2005. Those are primary sources of growth that are easily visible and I will say very, very low risk. There are some other opportunities that you will see modest growth in forward prices, we have seen the forward prices strengthen in the west probably more than we anticipated, last time we spoke okay.

All right thank you.

Thank you.

We will go next to Jeff Gildersleeve, Argus Research.

Good morning.

Good morning.

Good morning.

Thanks you have answered most of my questions. However with fuel you laid out 2003 hedges.

Yes.

Did those change much in 2004 or did we do you have those or can you provide any color?

Yes I can. In 2004 the oil hedge but that's the least important fuel in our portfolio. That hedge drops to around 10% in 2004. Coal drops to the 70% range. Our gas hedge has actually increased, we are about 100% hedged on gas in 2004 and 2005, okay.

Okay great and I missed the hedge on the coal in the east for 2003?

Well the coal in the west is essentially you can do the arithmetic or I could. The coal on the west is essentially a 100 percent hedged and that's a third to a quarter of our total coal consumption. So the reduction in hedging is mostly in the east and we think that that's prudent based on market conditions in the east and our access to multiple sources of coal in the east. We can burn Pennsylvania coal, Central Appalachian coal, we can burn a number of different kinds of coal from multiple sources and we have transportation arrangement that can accommodate them. So, we actually do better with a little bit lower hedge ratio, a little bit different mixes supply in the east and in the west. We are 100% hedged.

Okay. I guess I missed the total coal hedge for '03, was that 90 --

About 90% overall.

Okay. Great. And secondly on the pension front, have you changed or planning unchanged in your expected return assumption?

We have not changed our expected return assumption and I at this time we don't plan to. We can get that assumption for you. We are looking for it now and what it is but we -- it's not one of the out layers the return assumptions is 9%. 9% is our return assumption. Our plan is presently over funded on an ABL and a PBL basis.

Excellent. Thankyou.

We'll go next to Neil Stein, John Levine and company (ph) .

Hi. Just a couple of questions. First on WPD if you were to get down greater they are not, would there be any negative consequences as far as triggers or collateral posting requirements?

I don't, it's a holding company I don't believe so.

Okay. Then as far as taking out the WPD bridge earlier this year, is that going to be capital market offering or will that be through the bank market?

I don't know we'll have to get back to you on that. I am not sure how they have structured it.

Okay. Let's see as far as the guidance --

It's probably going to be a capital markets offer.

Has that been firmly decided or you just [Inaudible] around.

I have planned to believe that's the direction ahead at this point in time.

Okay. As far as the new guidance beyond additional shares outstanding, where there any changes in some of the assumptions? For example, are you using the same power price assumptions or you had been using back in October?

We are using essentially the same power price assumptions. That's right. The earnings guidance I think I gave you the arithmetic on how we got there, we lowered the range by $0.10, $0.08 because of shares outstanding and $0.02 reduction in pension credit. And then we just widen the band by $0.05 at each end.

Okay. I just want to clarify because I missed some of these comments. So, if you are having your board meeting in late February, you'll be formerly considering you said your dividend policy.

Yes.

Do you foresee any major changes in your target payout or anything like that?

Well, we haven't established the target payout. As I guess I described earlier payout ratio was one consideration we also look at cash and we look at the source of our earnings and its sustainability. In other words we might feel comfortable with the higher payout ratio on the portion of our earnings that comes from regulated businesses that are domestic or the portion of our earnings that come from long term hedges with the credit worthy counter party might feel comfortable with a rather lower payout ratio for earnings from more less stable sources. So, we look at cash flow near term, but also anticipated cash needs over time. We think there are number of considerations like that, that are important in dividend policy beyond simple payout ratio.

Okay.

But I did feel it was important because the question continually comes up, I felt it was important to give you that information up front rather than wait for the questions.

Thankyou.

We'll go next to David Dickens (ph) Depayment Capital Management (ph) .

Hi. Most of my questions have been answered I do have quick or one follow-up on the STE's (ph) . Can you give us the impact to the balance sheet of bringing those variable interest entities on to the balance sheet?

We can't. While they are looking for the number just confirm that you understand that the rating agencies put them on the balance sheet as far as we understand for debt purposes anyway.

I do understand.

Okay good.

And there is, you talked about the interest impact, there is a depreciation impact to those coming on as well as they are not they are basically [Inaudible] releases.

That's right.

Okay. The other part as you gave us the color on the 2004 fuel hedges, can you give us an idea of may be just the change or the degree of hedging you have on the supply business, 2004 vs. 2003?

Let me see if I can give you that.

And what -- a kind of what the hedge levels look like vs. 2003 directionally?

Yeah, the hedge is in the east for 2004, stake quite high and the hedge is in the west or slightly less in 2004 than they are in 2003, but I should tell you that's changing. The hedges are being put in place as we speak in 2004. So that's changing, you might say daily. A way to look at it is this, we have a single large hedge in the east with your affiliate for polar (ph) load and in the west we have a five-year contract for about half of our production to sell to North Western, the successor to Montana Power for their polar (ph) load effectively polar (ph) load. In the west we've been putting in hedges for 2004 really on a daily weekly basis putting in calendar 2004. So the hedging in the west is growing as we speak.

Okay. And you said, clearly we are getting reduced output from the hydro facilities and -- something a little under half of your western generation is hydro.

Yes.

The forecast I have seen for -- Thomson's on the clock (ph) that's -- forecast right now some are peak (ph) running 60% percent in normal flat heads kind of similar, I assume the Missouri Rivers -- also significantly lighter than normal. So, you are saying the prices -- you are getting higher prices on the smaller balances essentially that you have to sell vs. normal and it's kind of all balancing out slightly (ph) of the positive side, did I understand that correctly?

It's balancing out (ph) significantly to the positive side. I can give you just kind of couple of illustrative (ph) numbers that -- might be interesting for 2003 on-peak mid Columbia the forward prices had been around $32 for 2003 during the September, October, November timeframe and that's now over $42 on-peak for mid Columbia.

But I understand that the prices are significantly higher but at the same time the expected output that you can get I assume is may be not being impacted yet to the degree versus normal that it would be. The summer forecast, are that you will have significantly less output from these facilities.

Yeah, but recognized that when you have reduced output from hydro, you reduce your off-peak production and you bring a larger proportion of your total production to the on-peak period.

Okay, so these are not necessarily run on the river facilities?

No, they definitely will not run, even run of river facility has daily storage, even a run on river facility on reduced water retains the production that it does have for the highest priced hours, not at all linear.

Fair enough.

Okay?

Thank you.

You want to get back to your-- on the one question you asked about the asset value of [Inaudible] .

Okay.

Those price strengthenings in the west are significant positive from our original business plan even with the low water. Okay.

We'll go next to Win Win Chim (ph) , ABN Amro.

Hello.

Hi.

Hi. When you required (ph) the rest of WPD, how much were you expecting to upstream to the parent company per year?

Are you talking about cash or earnings?

Cash.

Cash, okay. About $14m in cash was expected to be upstreamed to the parent.

Okay, on an annual basis. So, if you are not able to take any cash out of WPD, but you are not expecting the very adverse effect?

I don't think so. No and I don't imagine that even in a worse state scenario that we wouldn't be able to take any cash out of WPD overtime. Okay?

Okay and I just wanted to know what your 2002 operating cash flow was?

Our 2002 operating cash flow was 500 and some million dollars and that's really about 545. That's atypical because it did not consolidate WPD with the full year and we also had the turbine cancellation charges and that were one-time charge.

Okay.

Okay, so the operating cash flow of $1b is round round numbers. It is a much more typical value.

Your last guidance for operating cash flow was about $700m. Is there any..

I don't remember that number actually. That might have been pre-WPD, but that wasn't in our last guidance. So, our guidance was post-WPD. Oh.. continue with your question. I am sorry.

I am just wondering about the discrepency between ....

If you want to think of our cash in nice round numbers and big blocks think of about a $1b and operating cash, think of about 600 just growing or up to $1.2b by '07. Think about sustenance CAPEX of $600 to $650m and dividends around $300m. So, those are the big blocks and then we can refine it from there, okay.

Okay and just one last question. What is the impairment charge for Kings Park this year?

For '03 there is no charge.

There is no charge.

We wrote the asset value of the Kings Park equipment down to fair value in the 4Q and that was reflected in the $3.54 earnings that's not [Inaudible] $0.17 was the balance that's right, but it was reflected in 2002 results.

Okay.So for all the equipments associated with Kings Park..

If you look at the press release, that's detailed in that little payable that we put in the press release on the unusual items for the year.

Okay. Thanks for taking my call.

Sure.

We'll go next to David Frank Zimmer Lucas Partners.

Yeah. Hi good morning.

Good morning David.

Could you tell us what the fair value of Kings Park is now and why did you decide to cancel this project because typically when I think the generation on Long Island and I think of it has been very valuable, very very hard to get permits. Were you unable you think to get these [Inaudible] ?

Well, we think that Long Island is capacity type and LIPA's (ph) behavior suggests that they have the same view. Merchant prices don't seem to reflect that. That's why on [Inaudible] and EdgeWood (ph) we sort or negotiated tolling arrangements with LIPA, because merchant prices jst don't seem to reflect what the fundamentals of that market suggest thehy should be. A contract with LIPA for King's Park was not availble. So, we felt that it was best for us to end that project, offer it for sale. We have the equipment, the remaining fair value of the equipment that we are locating at other facilities as necesary spares that we would have had to go out and buy any way is about $55m. The only write-down related to equipment of the development costs otherwise where all expense [Inaudible] a long. So that King's Park is behind us. I agreed with you that Long Island, you would think from the fundamentals that it shoulld be a lucrative market, but merchant prices just don't seem to be high enough to attract new CAPEX on their own.

Did LIPA provide a reason, there was a rational why they didn't want to enter into a contract for that facility?

I can't speak for LIPA.

If you don't mind, is it possible just to touch on some of the individual power projects you do have that are running and maybe just tell us the status of hedging at those facilities if possible. You have got plants Griffith, [Inaudible] Arizona. Is that is any power from that plan under contract or gas?

Yes, it is hedged that I descibed, we do have some hedges in place, some of those hedges, we can supply either from our own production, or if the market is lower cost, we can supply from the market. So, it's a little bit misleading to look at hedge ratios of Sundance and Griffith. If you see how that would operate, we can write a hedge for, say a, standard-on peak product and then some of the hours that hedge would be back by our own production. Our own production basically puts a ceiling on our supply cost and then we can supply it from the market if the market is below our production cost. So, hedge ratios in the Southwest are less significant. Larry I don't know if you have any other specifics?

Not by plant Bill.

Not by plant. In the East, of course, we don't hedge by a plant as I guess I described earlier, really look at our portfolio and it can be just a little bit of an academic exercise to assign specific hedges to specific plans. In Connecticut, we have filed for reliability must-run status on the plant and under that condition there is a provision in the New England power pool to be paid before cost to service rather than just sell into the merchant market. That filing is been made and is supported by [Inaudible] .

Okay. And as far as University park goes, I think in the past, you said there was some hedging on there?

Some small hedges and we have some negotiations underway that we are optimistic about that may provide some creative opportunities there.

Okay great.

Okay.

Thanks a lot.

Thank you.

We'll take our next question from Jim Von Riesemann, J.P. Morgan.

Hi Bill. Good morning.

Good morning Jim.

Can you guys talk about the tax rates that occured in '01 and '02. The change of what we should think about modeling for effective tax rate going forward?

We've got to dig a little bit for that detail.

If I just take a quick effective tax rate from the press release it looks like you have had about 29.5 percent for '02 and 55 percent for '01. What are movements going on there? Can you give us, kind of a -- what was going on again and then what we should be thinking about for '03 and beyond?

Yeah. Give us a movement, what we can [Inaudible] together.

Okay.

Maybe, Jim will go on to other questions and then we'll circle back to that and we can give you a little more articulate answer.

I appreciate it.

Okay. Sure, anything else that you have Jim?

That was it. All the other questions have been asked and answered.

Okay thanks. Other questions.

We'll go next to Teresa Hao (ph) , Bank of America.

Yes. Good morning. First, I want to go over [Inaudible] unit three in Montana. I believe that it has been unavailable since the middle of November. Just wondering, when it's going to be backup? Is it backup by now?

Larry can speak to that.

Teresa [Inaudible] three is backup.

It is. When did they go backup?

Well, it came back up about two weeks ago. I came down this weekend for a balance shot came backup on Monday.

Okay. And for comparative purposes, when we look at the hydro situation out in the West (ph) could you speak to previous drought years and the availability of the hydro facilities and what you expect in terms of hydro capacity and conditions are about say 60 percent or 70 percent of normal.

Yeah. Just, maybe, Larry can go to that. Just point out that's 50 (ph) or 70 percent runoff does not translate into 60 or 70 percent revenues because as I described earlier the production will be used during the high cost periods. Larry, I don't know if -- this is not a record-breaking drought. This is probably somewhere in the 70th percentile, maybe.

Right. We are looking now at conditions in a roughly 70 percent of normal and what we see on a normal year, Teresa, is about between 3.5m and 4m megawatt hours of generation from the hydro facilities [Inaudible] . Past years, where we had some drought conditions that number is collapsed to closer to 3 or 3.1 million. So, it's a little wider than the 3.5 to 4. There is another significant difference, which is that one we received the reduction in hydro availability, we tend to run our phosphorus until (ph) unit particularly the coal units around the clock at higher capacity factors and higher output levels. So, we more than make up that difference with the thermal and the higher prices and that's really the backdrop for why we think we are going to see higher margins in 2003.

Okay. And then if you could remind me in terms of the pricing assumptions embedded in your earnings assumptions, I understand it's low-to-mid 30s in the West. What is it with the East?

Okay. Well let me clarify that a little bit. In the West, it's low-to-mid 30s on peak at mid Columbia. By the end of the five-year period rising into the low 40s. That's our business plan assumption. Current prices on peak at mid Columbia are higher than that.

Okay.

Okay. Around the clock mid Columbia, it's our -- earlier prices had been around 30 dollars they are now in the high 30s. If we go to that's mid Columbia, if we go down to the Southwest joint, we say West, separate distinction between Northwest and Southwest, we are down to [Inaudible] . We had seen prices little bit ago in the 40s rising to the 50s by the end of the five-year period. We see prices now on peak at meed (ph) in the 50s. And around the clock, it had been in the mid-30s and we now see it in the low-40s at meed (ph). So, those are the kinds of ranges that things are trading in right now. We are pretty conservative though about building those kinds of prices into a committed business plan because the markets are really not that liquid. You know, you can get a lot (ph) and maybe sell 50 megawatts at that price, but if you have much more to hedge off, the markets are fairly thin and you have to hedge it off overtime and see how the markets behave. So, we are little bit careful about, when we quote (ph) forward prices about not implying that you can lock anything in at those prices. That's not always the case. Okay.

Ok. I'm sorry. And for the East?

For the East. I use PJM as probably the best proxy (ph) for the East. That's in the mid-30s rising on peak PJM in the mid-30s rising into the low 40s. We have seen '03 firm up just a little bit from what it had been, but we haven't seen the strengthening to the same degree in PJM that we have seen in the West. Okay. Does that help you?

I'm sorry. Just one more. And for University Park in Illinois, could you sort of provide your assumptions there?

We can, although, it can be a little bit difficult to convert these numbers into earnings contribution because the standard on peak product is 16 hours a day, five days a week, or in the West, six days a week. And that's it. So, the prices in average of many hours, some of which are very high and some of which are low, and University Park wouldn't be expected to operate 5/16 at all. It's only to operate [Inaudible] super peak hours, but to get to your question specifically on peak in May (ph), we are seeing high 20s, had been our business. You know, somewhere in the high 20s rising to the high 30s, let's say. Something in that range on peak in May (ph).

Thank you.

Thank you.

We will take our next question from Tim Ryan (ph) State Street Research.

My questions had been answered. Say it for one, supply for '01, did you broke up for [Inaudible]. Could you just give me that supply number? I get the delivery in International [Inaudible] supply?

255

All right. Thanks gentlemen.

Sure.

Excuse me. We'll go next on Neal Choy (ph) Goldman Sachs.

I am sorry '01 is 313.

[Inaudible] not 265 that was the '02 number.

'01 was 313, '02 was 265. The next question was Neal (ph).

Yes. Could you provide an update on Simone (ph) whether or not the ownership of that has been transferred or if they are still booking some level of operating loss from that asset?

No. The sale has not been consummated, but we are no longer booking anything related to the project. Let me explain. The government entity has taken control of the project and they operated. So, we have deconsolidated. We anticipate approaching the SEC to get conformation that if [Inaudible] for any reason had some undetermined time in the future attempts to turn operation back over to us, that we would not be required to reconsolidate and we fully expect to get that SEC conformation. They are moving forward with the sale in Brazil. We don't know when that might happen. You are probably aware that there is a new administration in Brazil with the election of [Inaudible]. We do not have any further charges now nor do we expect any further charges in the future from [Inaudible]. The activity that we are engaged in there is to help a sale happen, but there are no future expected financial effects on the company. John, can you add anything to that.

No. I think, Bill has covered it. I just think that if [Inaudible] returned to us we will have no real control of which would permit us to support the position we should consolidate.

Ok. And one follow-up question. In terms of the operating cash flow that you guys had been giving out, slightly under one billion dollars, that's already taking off the transition debt maturities. So, on a GAAP basis, the operating cash flow is going to be higher, closer to 1.2?

Yes.

Okay. Thanks.

Thank you.

We will take a follow-up question from Jeff Gilbersleeve, Argus Research.

Thank you. I was just wondering with the equity offering, the incremental 215 million, I assume, the $0.08 you gave out, is under the assumption that, that's equally issued throughout the year?

That is correct.

So, '04 impact versus '02 would be, it seems like closer to together $0.15?

I don't think it would double. No. It wouldn't quite double.

It was pretty close (ph).

Well, I mean -- it will be another 7 cents.

Yeah. Okay. Yeah.

That's why I mean--

That's built into our guidance.

Right. And just, I note, you did [Inaudible] repetitive, but what, I mean it seems like the outlook as far as the business has improved in your view, given the earnings growth being maintained in light of the additional equity. Can you just run through those points again, what gets you up to the 5 to 8 percent?

Sure, the 5 to 8 percent comes from some increases that are built in to our affiliate contract in Polar.

Right.

Those prices go from a little over 42 dollars a megawatt hour today to something over 50 dollars a megawatt in the out years. Additionally, we have got the new turbines that are [Inaudible] nuclear plant. Those will increase output by about a 100 megawatts and as purely thermal efficiency improvement. So, there is no operating expense or fuel expense increase associated with the increased output. And then, we have some other growth opportunities in there that are from existing assets. So, that is how we get the 5 to 8 percent.

Okay, can you be more specific about those opportunities [Inaudible] they mostly surrounding [Inaudible]?

Well, one of the opportunities is our regulated delivery business in Pennsylvania. You can do the arithmetic, the current rate of return is somewhere in the mid-to-low single digits and our cap rate freeze or rate cap on our regulated delivery business expires in two years. So, there are some opportunities like that and then we have talked about the strengthening and wholesales prices, and I believe, that I talked about the reliability must run filing for the Wallingford plant in Connecticut.

Right when is that expected to hear back on the Wallingford request?

I don't have a date in front of me.

We asked for an effective date of February 1st of this year. We are not quite sure how contentious this proceeding might be. So, it could be a few months.

Okay, and then any expectation on EITF (ph) 98 cent that is the resending of that accounting measure, any impact from that?

I don't believe so.

Okay, thank you.

Thank you.

We'll take a follow-up question from Devon Hegon, Luminous Management.

Hi. This one wasn't clear to me. Just for the current guidance, [Inaudible], I guess some power price assumptions have increased in your, in the 335 to 375 number.

No. We have not increased our power price assumptions. I gave you the business plan; I will call it, the power prices built into our earnings guidance. We have seen some strengthening, particularly, at mid Columbia. But I think I also pointed out, we haven't put those into the business plan. We have started to write some hedges that are seemed to be favorable prices, but the markets are really not very deep. They are pretty liquid (ph). So, it's not at clear that when we see the forward curve move that you can necessarily lock in a significant amount of production at that price. That and counter party availability of creditworthy counter parties are limitations and so we are conservative in the hedges we put out. We are conservative in counter party credit evaluation and we think, we are, we tried to be realistic in our earnings guidance.

One last question, the 38-cent addition for asset retirement obligation. Does that affect depreciation expense at all?

No, I don't believe so.

Okay.

Not that. I basically represents the over-funding, primarily the over-funding of the [Inaudible] decommissioning fund.

I got you. Okay, thank you very much.

You are welcome.

And Mr. Hegon we have no further questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.

I have no closing remarks.

There are no further questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.

I have no closing remarks. I thank everyone for their participation and their questions and we look forward to talking with you in the future.

That does conclude this PPL Corporation fourth quarter earnings release conference call. We thank you for your participation. You may disconnect at this time.