賓州電力 (PPL) 2003 Q2 法說會逐字稿

Welcome to PPL Corporation's second 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 the investor relations manager, Mr. Tim Paukovits.

Please go ahead sir.

Good morning.

Thank you for joining the PPL conference call on second-quarter results and general business outlook.

Today's discussion includes forward-looking statements concerning earnings and other matters.

Although we believe the expectations and assumptions reflected in these statements are reasonable, these statements involve a number of risks and uncertainties, and actual results could differ.

For more information in this regard, you should refer to PPL Corporation's form 10-K report, and other reports on file with the SEC.

In discussing earnings and earnings projections during this call, we will be talking about earnings reported in accordance with Generally Accepted Accounting Principles, or GAAP, as well as earnings from core operations, which exclude items that we do not expect to recur on a regular basis.

A comparison of core earnings to GAAP earnings is provided in PPL's earnings press release issued this morning, a link for which you can find prominently displayed on the homepage of our website, www.PPLWeb.com.

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

Good morning.

In addition to Tim Paukovits, here with me this morning is John Biggar, our Chief Financial Officer, and Larry De Simone, Executive Vice President of Supply.

For the second order 2003, PPL reports GAAP earnings of 67 cents per share.

That is also our core earnings.

There were no unusual items recorded in the second-quarter.

We are well on track to achieve our guidance of $3.45-$3.75 per share for 2003 in core earnings, or $3.70-$4.00 a share in GAAP earnings.

That GAAP earnings is slightly different from previous guidance, and the only difference there is a slight change to the charge -- one time unusual charge -- we expect to take in the third quarter associated with the accounting change for a variable interest entity.

The unusual items during 2003 are an asset retirement obligation credit of 37 cents per share, which, as you know, we took in the first quarter.

We anticipate the variable interest entity charge in the third quarter, as previously reported.

This morning I am going to give you some additional information on our financial situation, both cash flow and liquidity, and then I am going to give you some information on our supply business -- some hedging information, where we stand on our hedging program and hedge ratios, what we see as the forward curve and earnings at risk.

And then I am going to talk about synthetic fuels, which, as you know, section 29 -- Tax Credits Associated with Synfuels -- has been in the news lately, and I will try to answer questions about that upfront.

And then we will take your questions.

For the first quarter -- our second-quarter rather, our earnings per share by segment is -- about 3/4 of our earnings comes from the supply business, and the remaining 1/4 is split between the regulated US delivery business and our international activities, which are also regulated delivery.

And that split is consistent with past splits.

Equity ratio.

As you know, we have a fairly complicated capital structure.

I will give you equity ratios actual and projected on the following basis -- I would exclude all non-recourse debt -- Latin America and Western Power Distribution in the UK -- and as usual, I will exclude transition bonds, transition bond debt.

I will include in my numbers all leases, including variable interest entities, and I will give you numbers on the same basis that I did in the first quarter.

At the and of 2002, as I reported last quarter, our equity to total capital was 38 percent, and at the end of the first quarter, I reported that our equity to total capital was 39 percent.

We are now at 43 percent equity to total capital.

As you know, we had an equity sale during the second-quarter that was very successful.

We continue to estimate 2003 equity to total cap year end at about 45 percent, and at the end of 2004, about 48 percent.

So our -- (indiscernible) made substantial progress during the past quarter, as you would expect, with the equity sale, and we are well on track with a considerable degree of confidence to meet our projections for the end of 2003 and the end of 2004.

With regard to cash flows -- as I have reported in the past, in very round numbers our cash from operations is about $1 billion, and our maintenance or sustenance CapEx is in the range of 600-$650 million, and our dividends, common and preferred, in the range of $300 million.

During 2003, we have some capital expenditures to complete our automated meter reading program, our generation expansion program at Lower Mt. Bethel, as well as the 2003 capital expenditures associated with the Susquehanna turbine replacements.

So CapEx in 2003 will be in the neighborhood of $853 million.

During 2004, we expect our cash from operations to be equally strong.

We will be bringing down our CapEx, and we expect to have net free cash flow in 2004, which can be used for debt retirement and other corporate purposes.

I want to move on now to our supply business in particular, and our hedging progress.

On a megawatt hour basis, expected energy production -- for 2003, we have now hedged about 98 percent -- East and West combined -- about 98 percent of our expected energy production.

In the East -- that is an increase, by the way, from 96 percent reported last quarter.

That breaks down as follows -- about 100 percent of our production in the East is now hedged through year end.

That is an increase from the 99 percent reported at the end of the first quarter.

And 89 percent hedged in the West.

That is an increase from the 83 percent reported at the end of the first quarter.

For 2004, we have also made significant progress in our hedge ratios.

At the end of the first quarter, I told you that we had hedged about 87 percent of our total energy anticipated production.

That has increased to 90 percent in the East.

We have gone to 93 percent hedged in the East, and increased our hedge ratio in the West from 70 percent to 78 percent.

So we see ourselves well ahead of plan in our hedging progress to bring in the margins that we have projected for 2004.

So we are very pleased with the progress that we have made there.

A good way to look at PPL's earnings forecast, perhaps, is earnings at risk.

And what we do there is assume that very worst case we could only get 50 percent of the uncommitted margin in our hedges, and that we don't get earnings from our Latin American properties -- which, by the way, are on plan in Chile and ahead of plan in El Salvador.

But assuming no earnings from Latin America and only half the anticipated margin from uncommitted sales, we have 95 percent of our earnings tied down, and only five percent of our earnings for 2003 remain at risk.

So we are well pleased with that.

At these calls, we get quite a number of questions about the forward curve.

And of course, forward prices are pretty complex animals; they vary hour to hour.

There are standard on peak products and off peak product, (indiscernible) on peak and around the clock products.

I can give you some general numbers, but I will say that our forecasts are based on a fairly flat forward curve, and in fact, some backwardation (ph) from the somewhat stronger prices that we have seen for part of 2003.

So our forward curve for our earnings forecasts for the five-year period are very conservative.

In the East at PJM on peak, we see the forward prices in the low to mid-40s; on peak -- in the off-peak periods we are assuming something in the mid-20s, $20 a megawatt-hour, and around the clock in the low to mid 30s.

That is PJM.

For the West, there are a number of different places that we market.

For our purposes this morning, I will give you the mid Colombia trading hub as an indicator of what we see the markets looking like in the West for our forecasting purposes.

Again, we see prices for our forecast purposes fairly flat.

So if there is any upside, that is in it, that is a plus to our earnings projections.

On peak in mid Columbia, low to mid-40s to $40 a megawatt-hour.

Off peak, the low 30s, and around the clock, the high to mid 30s -- high to mid $30 a megawatt-hour for mid Colombia.

Once again, for forecasting purposes, we are assuming relatively flat forward prices.

That may not be the case, but that's an assumption.

As you know, there is not a very liquid market for the longer-term sales, so some of this is our best judgment.

Based on those prices, we are reiterating our 5-8 percent growth guidance for the five-year period.

And as we've discussed in the past, the visible elements of that growth include the second turbine at Susquehanna, which will give us an additional about 50 megawatts -- 40-50 megawatts output at Susquehanna without any increased fuel consumption; the completion of Lower Mt. Bethel; increases that are built into the affiliate contract, increases in price and sales from our EnergyPlus affiliate to our Pennsylvania Electric Utility affiliate; as well as a rate case when the distribution rate cap expires in Pennsylvania at the end of 2005.

We have publicly announced our intent to file that case so that we can begin that process.

That is an overview of our financials and the supply business, and a foundation for our forecasts.

I want to move now to talk about our synthetic fuel operation.

Since the IRS announcement regarding its review of synthetic fuel operations a couple of weeks ago, there has been a great deal of activity and publicity regarding companies that have synfuel operations, and I want to tell you where we stand.

We operate a single synthetic fuel facility in Somerset County, Pennsylvania.

We project that less than 5 percent of the Company's overall earnings for 2003 are attributable to operations at our Somerset fuel facility.

We operate that facility under a private letter ruling, which we received from the IRS in November 2001.

And in that private letter ruling, the IRS concluded -- among other things -- that the process PPL utilizes at Somerset results in "a significant chemical change to coal feedstock."

In applying for that PLR, we provided the IRS with voluminous scientific data that was developed by an independent third party, and those data described the process utilized by our experts, our independent experts, in testing the synthetic fuel.

And the results demonstrating that a significant chemical change occurred.

And based on those data, IRS agreed with PPL's expert testing company that a significant chemical change had occurred.

We have operated that facility in complete compliance with that private letter ruling, and it is my expectation that we will continue to operate that facility, and hope to continue to record the tax credits.

Our earnings from the synfuel operations in the second quarter were 7.4 million this year, compared with 7.7 million a year ago.

Year-to-date, we have earned about 14 million versus about 14 million in 2002.

The plant is operating at near capacity.

So it gives you an idea that it has been a fairly stable, consistent operation.

A number of questions that you might raise about this that I will try to address upfront, and then I will be happy to take your questions and help answer anything else you may have.

We have no tax credit carryforwards at this time, so there would be minimum cash benefits to PPL from prior year operations, if the PLR were to be revoked on a prospective basis.

If we were, hypothetically, for some reason, forced to terminate the Somerset project, you should know that our investment at this point -- our capital investment -- is about $14 million.

The IRS has requested chemical change test results from actual operations, in addition to the data that we gave them prior to construction and operation, based on scientific test information.

We have provided the IRS with actual testing data of production products for the years 2000 and 2001.

We believe the IRS will do testing of their own during the audit process, which is underway.

They have, in fact, told us that they intend to take samples for testing some time in September.

All of the contracts for the sale of produced synfuel can be terminated in the event of an adverse decision on tax credits.

We also can terminate the contracts we have to purchase coal feedstock in the event of an adverse tax ruling.

We see no reason to adjust our production levels at Somerset at this point.

We continue to abide by the PLR that we have in place, and that means a continuation of current production levels.

We are exploring the possibility of other synfuel operations on a limited basis; however, we have no capital investment and no commitment, and obviously, the IRS activity recently will affect whether or not we continue to look into those operations.

If the IRS were two revoke our private letter ruling retroactively, we feel it would be necessary and in the best interest of our shareowners to undertake a challenge, and that would include a court challenge, if necessary.

We certainly hope that would not be necessary.

In the event the IRS revokes the PLR going forward, certainly, our actions would depend on the reasoning that the IRS provides for that revocation, but we believe we would have similar opportunities to challenge that revocation.

Once again, the filing for our private letter ruling was very extensive, with considerable scientific data, and the IRS reviewed that and gave us a private letter ruling which we feel entitled to rely upon.

We are in contact through various agencies with government officials to understand the IRS's reasoning and their reopening these questions, and we are, I think, expecting -- my view would be that we should expect to have a very strong case.

Those are my comments on synthetic fuels, and let me now take the questions that you may have, please.

(CALLER INSTRUCTIONS).

Andy Levy with Bear Wagner. (technical difficulty) We'll move along.

We'll go next to Kit (indiscernible) with Morgan Stanley.

Just a pretty broad question.

I believe the release indicates that your trailing twelve-month EPS is $3.50.

The year-ago third quarter, I think, was pretty hot, and you had pretty good earnings then.

So we are trying to come to terms with -- in your range of where you are going to end up this year -- wouldn't that broad picture suggest that you would be closer to the lower end than the higher end?

Not necessarily.

When you said the third quarter was hot, are you assuming that a hot third quarter helps us or hurts us?

You tell me.

That is the subject that sometimes is misunderstood.

Weather extremes help the regulated utility, but because the contract between the regulated utility and EPlus for supply is a full requirements contract at a fixed-price, and increased requirements of the utility results are supplied at a fixed-price, but the average price of a larger requirement -- or the average value, if you will -- increases for EPlus.

So my sense is that we are very well and strongly on track on plan -- on our plan -- to meet that guidance.

And I would not suggest that there is information at all that would point toward one end of that range or the other.

Let me follow-up then if I could.

Given your very significant hedge position, and obviously your knowledge of your -- a number of your other costs, like interest expense and pension expense and so on, why is the range still so large with five months to go in the year?

I am not sure the range is real large, it is plus or minus how many percent?

Less than 10 percent?

It's plus or minus much less than 10 percent.

Let me ask it this way.

The range is as large after seven months into the year as it was at the beginning of the year, so --

Yep.

It's a volatile business.

If I choose to change the guidance, we will let you know.

We are quite clearly on plan.

You mentioned pension expense.

Our pension plan is performing well.

Our power plants are performing very well this summer.

So the hedge ratios I gave you are for our budgeted production.

Our power plants are performing better than planned this year with lower forced outage rates.

Our equity sale was very successful, more successful than planned.

So we are quite confident in the plan, and I acknowledge that the range has not narrowed for the year.

Paul Ridzon with McDonald Investors.

I had a quick question on -- you had closed one synthetic fuel plant, and I just wanted to (indiscernible) some of the thinking behind that, and how that might interplay with what is currently going on now?

That's unrelated.

We closed -- we did not operate a plant known as the Climber plant, and the Climber plant was a completely different situation and not at all related to the IRS's current inquiry.

We closed that plant for other reasons.

Any (inaudible)?

There was no private letter ruling forthcoming on the Climber plant, so we terminated the project.

That was a different chemical process entirely, and we did not obtain a private letter ruling and did not move ahead with that project.

But that was quite some time ago and is not related to the current IRS activity -- (inaudible) our understanding.

In your growth forecast of 5-8 percent, is there any assumption of additional synthetic fuel capacity being added?

You mentioned that you were looking at (inaudible).

There was some modest assumption on synthetic fuel, but frankly, it's not material and does not change our 5-8 percent growth expectations at all.

We have been exploring a second small plant, but it's earnings contribution really is not material to our forecast.

Can you just tell us what chemical process, or what process was used at the Climber plant?

Actually, I can't remember the process.

I frankly don't.

Larry, maybe you do?

Yes.

It is a covol binder (ph) process, where we take the granular coal, the waste product, and we run it through the facility to bind it together with a vegetable oil-based material.

And then we ship it from there to power plants for use.

A cobalt binder?

Covol.

C-o-v-o-l.

There is a June 30, 1998 placed in service requirement, and I believe the Climber plant was not in compliance with that requirement.

So that is not related to any of the current IRS inquiries.

That was the big snag, was the placed in service?

Yes.

And the Climber plant, as I said -- that is not part of our plan, and that is ancient history now.

Tom Hanlin with Wachovia Securities.

Earlier, you were talking about earnings at risk and made some assumptions regarding 2003, mentioning that, as you see it, 5 percent of your earnings are potentially at risk for 2003.

Do you have any comparable sense for how much earnings are at risk, or what the other side of that is -- how much you have pretty well locked in for 2004?

I have not done the arithmetic.

Let me just do something real quickly.

But it's -- a pretty modest amount is at risk.

I would say a little bit more than 10 percent is at risk for 2004. 10, say 13-ish percent might be at risk for 2004.

And what we do in that arithmetic is just kind of arbitrarily assume no net income from Latin America, and the unhedged portion of our production only gives us half the margin we had thought.

And it takes out the synthetic fuels earnings.

Is your outlook for Latin America for next year, though, having some contribution in your current guidance?

Absolutely.

Our outlook for Latin America is actually quite positive.

As I mentioned earlier, we are on plan in Chile, and in fact, ahead of plan in El Salvador.

David Dickens with Deephaven Capital Management.

Most of my questions have been answered.

Can you talk, though, a little bit about where WPD is year to date?

Yes, we can.

We'll just get that number now.

WPD, as you may know, had an exceptionally strong first-quarter.

But year to date, they continue to be ahead of plan.

Give us just a second and we will get you this particular number for WPD for the first half.

Why don't we go on to the next question, and stay on the call -- we'll give you that answer as soon as we get it.

Anything else that you have?

I just want to make sure that as you have talked about increasing the expectation for your hedge production, I want to make sure there have been no changes in the projected production levels, that those have remained consistent and you have just locked in increasing amounts of that?

We've locked in increasing amounts.

We have not changed our anticipated production level, although at this point through the year, our power plants are performing better than budget.

Let me just go back to the WPD.

It's around 50 cents a share during the first half, well ahead of plan -- in that neighborhood.

What was it in the first-quarter?

Was it about about half of that?

No, it was somewhat more than half of that.

My understanding is there's not much seasonality to that business.

No, there is not.

That is -- there is some seasonality because of throughput varies, but there is no supply risk at all.

It is a purely regulated delivery business.

In fact, we billed a supply company every -- the UK industry structure requires that every end-user contract with a supply company for their energy.

Some of the variability relates to weather, though, because that does vary throughput.

And of course, there's some foreign exchange, which, of course, has been positive of late.

And there is some financing transactions perhaps that can move, as reported earnings, around.

But WPD is ahead of plan for the year, had a very strong first-quarter.

We are in the neighborhood of 50 cents for the year -- for the half year.

Any reason not to expect that to be -- continue and finish out the year well ahead of plan?

(multiple speakers) finish the year ahead of plan at WPD, yes.

David Chandler with Janney Montgomery Scott.

Could you give us a sense of what you see for the balance of the year for O&M, given the increase in the second quarter?

Probably not.

I don't know that our second-quarter O&M. -- sometimes there are timing differences of when we record certain major expenses with vendors, for example.

So quarter to quarter may not -- without being able to look behind the number -- may not be a great indicator of how we will come out year end.

But I think it is pretty clear that we will be on plan for the year end (multiple speakers)

-- one of the things you saw comparing last year to this year was an increase in O&M associated with a new generation that went online, and it went on mostly in the mid part to last year.

So that O&M would have -- for the second half of last year would have been reflected in the financials.

So as you do your comparisons, you would not expect to see a big jump from last year to this year in the last half of the year.

You also have a consolidation of WPD that shows up in the first half of this year that does not not show up in the first half of last year.

Along those lines, are there any other items that we need to look for in the third or fourth quarter?

No.

We will continue, obviously, to consolidate WPD, and no new generation will come on until around year end, when Lower Mt. Bethel is completed.

So there won't be any additional major unusual items that would affect your comparisons.

Secondly, just to clarify -- it sounds implied in what you've said that weather was not a major factor in the quarter.

Is that right?

(indiscernible) our second-quarter?

Right.

Yeah -- second-quarter is a pretty (multiple speakers) -- it's a boring quarter.

What's the political situation in Montana shaping out to be with regard to the Northwestern situation?

Are you comfortable with the way things are evolving there?

I think we are.

Certainly, Montana, unrelated to our own operations, has some complicated issues to deal with with Northwestern.

Our involvement, obviously, is our power supply agreement with Northwestern, which is in the money for Northwestern.

So we would expect and hope that the reasonable thing for anyone to do, if Northwestern were in Chapter 11, would be to honor those contracts, because they are favorable to Northwestern.

And they only supply about half or so of Northwestern's requirements, and Northwestern needs to access the markets to obtain the remainder of their supply.

So I expect that the process, from our point of view, is manageable, while complex, for Northwestern and the Montana Commission's point of view.

Steve Fleischman with Merrill Lynch.

First, a little bit on detail in the quarter.

When you look at the financial statement, first of all, there is 23 million of other income net.

That's up a lot from last year.

What is that?

We'll sort that out.

Ask your next question, we'll come back to it.

The other financial statement question is, when you look at the actual net margins, even before the O&M., they were pretty flattish when you look at there.

The second-quarter is a pretty shoulder quarter.

There are no real weather extremes, things are affected a lot by power plant maintenance, it's a maintenance quarter.

You do -- most of our Susquehanna refuel outage occurred in the second-quarter, half of it or so.

So the numbers don't tell you a whole lot about trends.

Anything else that you have?

I have other questions, not on the financial statement.

We will come back to your earlier question on other income net (indiscernible).

It's a very small item.

Go ahead.

How would you say the merchant gas plants have performed, relative to your expectation, and in terms of gross margin?

I assume your expectations were quite low?

Our expectations were very low.

In the Southwest, the contracts that we announced recently with Arizona Public Service and Tucson Electric are actually stronger than the kinds of margins we had built into our business plan.

So we are real pleased with those.

In the case of Wallingford, that also is somewhat ahead of plan.

Again, low expectations, low merchant prices -- but we are bidding under (indiscernible) so-called push process -- peaking in at safe harbor -- as well as selling installed capacity in the New York pool, rather than the New England pool, where installed capacity fetches a somewhat higher price.

So on those gas-fired merchant plants, things are somewhat better than our previous modest expectations, our conservative expectations.

The Long Island plants, of course, are tolling, so they are pretty consistent.

Any thoughts you have on the kind of initial paper for the UK rate review?

Was that pretty much as you expected, any surprises?

No surprises.

The process, of course, is in its very early stages.

And we have made our own comparisons of our quality of service parameters with the comparisons that the (indiscernible) uses comparisons with the other (indiscernible), and we are at the head of the pack.

The complaint rate is the lowest in the country by a wide margin.

The frequency of customers interruption is the lowest in the UK by a wide margin, as is the 60-minute restoration rate.

So by all objective measures, WPD is well ahead of its competitors, but it's very early in the rate process.

We will continue to work through that.

Anything else?

My recollection is that you also buy synfuel for some of your coal plants?

Yes.

Any thoughts on -- in the event that some facility stopped producing synfuel, would that have any impact?

It would have some impact, but the exact impact would depend on our ability to manage our replacement fuel supply.

The round round numbers that we have been using, worst-case, is that the synfuel that we are buying from AIG at Bruner (ph) Island, plus the amount that is being purchased at the joint-owned facility at Keystone, is around $20 million.

But my personal belief is that is probably a maximum or a highside number.

Because what will happen is if these things quit operation, and they are also going to cancel their feedstock contract, and that is going to increase the coal available on the stock market, that has got to look for a place to go, and that would have the short-term effect of depressing coal prices.

So you take your pick on how it will all shake out.

Synfuel is certainly a matter of principle that has us greatly concerned and engaged, but in terms of its ultimate financial impact on us, it's pretty modest.

By the way, congratulations on getting all of these (indiscernible) DOJ and other reviews done.

Paul Patterson of Glenrock Associates.

I wanted to ask you a follow-up.

With the synfuel business, what is the total amount of tax benefits you guys have taken so far as a result of this?

I apologize if you stated it before, but I didn't get that.

About $120 million through June.

Something in that neighborhood.

And then I also noticed the energy-related business has been down, in terms of earnings, and I was wondering if you guys could elaborate a little bit on that?

Energy related businesses includes the mechanical contracting properties.

Those businesses are more influenced by the economic cycle than most -- considerably more influenced by the economic cycle than the rest of our properties.

And they had been very strong, even when the economy started down, primarily based on contracts for government buildings, institutional construction, schools, hospitals and so forth.

And the real softness in the construction-related business relates to the traditional for-profit sector.

But that is a cyclical business.

But it's a pretty modest part of our earnings, too.

Jim von Reisman with JP Morgan.

What happens -- following up on this Northwestern -- are they paying you right now?

Are they current?

And if it's so far in the money, what are your rights under bankruptcy if you wanted to terminate the contract?

Could you?

Let me ask Larry De Simone to speak to how our arrangement is right now, because we have them on a very short string.

They pay us frequently.

Northwestern pays us on a weekly basis, and then there's a true up at the end of the month.

So we're current in terms of the long-term contract, and we also (indiscernible) transact with them on a daily basis.

And they are subject to the kinds of credit restrictions that we impose for credit quality purposes with counterparties, so that we maintain the current status of those short-term transactions.

Can you refresh my memory when that contract expires?

Yes.

The middle of 2007.

June 30 of 2007.

It's 2 contracts -- it's 150 megawatt on peak and a 300 megawatt around the clock contract.

Some of the daily rags or the weekly rags, like (indiscernible) suggesting, or at least Northwestern is suggesting an outcome could be liquidation.

Under a liquidation event, what happens to the contract, and then, when does the governor and the state of Montana decide to start to step in?

As Phil mentioned earlier, somebody has to continue to supply Northwestern.

So I guess I'm not quite sure exactly what happens to the contract, but you would expect something that's significantly in the money like this current arrangement would be something that a regulatory agency would want to -- like to tie onto a company with a provider of last resort obligation.

The fundamentals -- that is, the load and the supply -- won't change with the liquidation.

The customers are still there and the power plants are still there, ours and others.

So I would expect the fundamentals of the market to stay the same.

How it unfolds -- it could unfold 100 different ways I suppose.

And I am sure that if there is a bankruptcy and how that bankruptcy is disposed of will have us deeply engaged and be complicated for us, but I don't think it will change our financials.

If the contracts were negotiated today, they would probably be a slightly higher price then they actually are.

So you could argue there's a hypothetical upside to us now.

If Northwestern had to go to the market, they would probably pay a tad more.

But it's going to be a complicated life, but I don't see much of a downside risk to our net income on the whole process, when it is all over with.

Paul (indiscernible) with Value Line.

My question has been answered.

Thank you.

Leslie Rich with Bank of America.

Most of my questions have been asked and answered, but I just wondered what your projected tax rate is for the full year?

We will have to work up a number, and if we don't get the number before the call ends, we will have Tim Paukovits communicate with you, perhaps.

Would that work?

Sure.

And then in terms of the FIN 46 adjustment to special-purpose entities, how much debt will remain off balance sheet, if any?

The Montana lease, there is a lease associated with the Montana property, which would remain off balance -- part of it would remain off balance sheet, because it qualifies to remain off balance sheet for FAS B purposes.

We think that that is around 380, $390 million.

That is our current understanding of the application of that accounting rule.

Of course, for rating agency purposes, they were all on balance sheet.

So it really does not change the material numbers.

(CALLER INSTRUCTIONS).

Bob Sullivan with UBS.

I hope you actually didn't answer just some of these, but could you give me the debt at WPD?

I just want to be able to back into your numbers for debt to cap or equity to cap?

Yes. we will get that number in a second.

And the same with the securitization debt and the lease obligations?

The quickest number for me to give you is all international nonrecourse debt is about $2 billion estimated for the end of 2003, which is a tad more now.

But it round numbers about $2 billion.

That's WPD and Latin America.

And the transition bonds at June 30 were $1.54 billion ,and by year end that will decline to about $1.42 billion.

You may have just given us, but how much debt comes on with FIN 46?

No, I didn't give that number.

Would you like it?

Yes, please.

About $1 billion.

That's the peaking turbines of Sundance and (indiscernible), and lower Mt. Bethel.

I know you gave some estimates, but in the past you have given some specific numbers on net income by unit, supply, delivery and international.

(multiple speakers) gave that earlier.

It's about 3/4 of our earnings, in round numbers, are supply.

And international and the regulated Pennsylvania utility split the remainder.

It will vary a little bit from the 75/12/12, if you (indiscernible) took my estimates literally, with variations in quarter-to-quarter operations.

For example, WPD had such a strong first-quarter that it (indiscernible) it slightly differently.

Right.

I actually have the first-quarter numbers, but did you -- is that the weighting in the second quarter?

No.

Remember, I gave about 50 cents a share for the first half of the year for WPD.

So you can back out of that (multiple speakers)

About 85 million year-to-date?

(multiple speakers) what the WPD second quarter number was, and then back into the breakdown.

So I think that will work.

If you would like a little more detail on that, maybe you can chat with Tim.

It's just helpful to know how the segments did quarter-to-quarter.

And what -- what was the weather impact on earnings in the second half of 2002?

The question was kind of asked, but I'm not sure I fully understood the answer.

In the second half of 2002, we had -- you're backing up now to 2002.

That included, of course, a real hot summer.

Probably nil.

Net, not much.

It looks like from your annual guidance and the second quarter numbers that you are looking for a much stronger second half from the supply business, in particular, than in 2002.

Is that the correct way to look at it?

What are the drivers?

The drivers are somewhat higher wholesale prices than we saw in 2002.

The drivers are a higher contract price for the supply agreement between the EPlus and the electric utility affiliate.

Generation at Susquehanna is increased by about 45 megawatts for our share, with the new turbine on unit 2 that went in with the refuel outage.

We have the (indiscernible) and Edgewood, we expect to be a little bit stronger.

On Sundance and hedging, the contracts we wrote with Arizona Public Service and Tucson Electric are in place.

So I think those items will account for the differences.

The difference is pretty visible.

The question earlier on effective tax rate that Leslie Rich asked -- 40 percent, is the number that she was looking for.

Any other questions?

Jonathan Reilly with Goldman Sachs.

You mentioned that we're early on with the regulatory situation in the UK for WPD.

Could you just give us an update on the upcoming milestones?

I would have to scramble for the dates.

Ultimately, the rates take effect April of 2005.

April 2005, the rates take effect.

We can give you the dates;

I don't have them.

We don't have them right here.

But Tim can give you the dates.

There will be a number of submittals by the industry, as well as milestones of papers coming out of off jam.

We'll get those for you.

Could you just touch on your last thoughts on dividend policy?

My thinking on dividend policy is that dividend is a combination of cash flow as well as earnings.

Very frequently, people ask us about dividend and look just at payout ratio of dividend as a fraction of net income.

But of course, dividend is really a cash issue.

And a business like ours -- power plants and delivery infrastructure, T&D systems -- are cash consumers, just even on a sustenance basis.

But we do think pretty clearly that as we begin to complete the construction program, we will move into a free cash flow position in 2004, and we will be examining the dividend policy on a regular basis.

We think that there is clearly some opportunity in our dividend, given our very low payout ratio and the rapid improvement on our balance sheet and our movement to free cash flow in 2004.

Jeff (indiscernible) with Argus Research.

You talked about 2004 being modestly free cash flow positive.

Could you just repeat or reiterate the components of that, specifically CapEx?

The components are, in very round numbers, around $1 billion in cash from operations, around $650 million or so in CapEx - that is almost all sustenance or maintenance capital -- and around $300 million in dividends.

So as you can see from those numbers, if we can squeeze down on CapEx even modestly and enhance our cash from operations even modestly, the proportional change in net free cash flow can be significant.

So we haven't yet completed our business planning for 2004, of course, in that degree of detail, but we are pretty optimistic that we will be clearly free cash flow positive.

Following up on that -- Lower Mt. Bethel is on schedule, both on timing and costs, now?

Yes.

And you spoke about the better than expected performance at Sundance and Wallingford.

Maybe I did not hear it, but could you comment on University Park?

I did not comment on University Park.

I think that is reasonably consistent with our plan.

It is a very modest part of our plan, but there is nothing unusual to report at University Park.

Wen Wenchen (ph) with ABN AMRO.

What was your operating cash flow for the quarter and for the first half?

I don't believe we had a cash flow (multiple speakers) -- it should be in the Q, if I could refer you to that.

Tim Paukovits can help you out with that off-line, if that would be adequate?

What kind of a cash benefit do you get from the synfuels?

The cash benefit is fairly directly because it's a tax credit, and it is around $25 million.

So that's 25 million per year?

Yes.

I had a couple of questions about WPD.

First of all, do you feel that that business has kind of reached credit rating stability?

Do you feel there is anything else you need to do to make S&P feel comfortable?

As you know, the rating agencies' criteria have been in evolution, but we believe it has reached stability.

And we have always continued -- stayed in contact with the rating agencies on an ongoing basis to provide them with information they need to do their job.

So we are fairly optimistic that it has reached a state of stability, and should be able to, in fact, improve over time.

Are you aware of any kind of ramifications that might come about if WPD holdings were downgraded another notch?

Ramifications if WPD holdings were downgraded another notch --

I believe it's at BBB-.

Not off hand.

Are you still getting about 200 million in cash flow from WPD per year?

Operating cash flow is on plan.

Operating cash flow might even be a little bit ahead of plan.

Could you tell me why it's done better during this year?

First of all, done better -- you mean operationally, or done -- part of it, of course, is we control the whole property.

Some fraction of it is improvement in internal operations.

Some fraction of the net financials is foreign exchange, with the relative weakening of the dollar compared to the euro.

Lower debt, but we reduced the debt levels -- so we have lower debt and lower interest expense.

Teresa Ho with Banc of America Securities.

I have a question regarding your outages for the year.

I understand that coal strip units 3 and 4 were temporarily off-line during the second week of July.

And I was just wondering if they are back on, if that was just temporary, and if that would have any impact on your expectations for production for the year?

Both units, three and four, are back on line.

I think the strip that you're referring to was actually a problem with a lightning arrester on the high-voltage transmission network that Northwestern owns and operates.

We have no scheduled outages out West for the remainder of the year.

Both of the scheduled maintenance outages -- one for coal strip 1 and the other for coal strip 4 -- came in ahead of schedule and under budget.

Could you speak to scheduled outages for 2004?

Scheduled outages for 2004 across the fleet or in coal strip?

That's detail and market sensitive, that we really don't disclose scheduled outages for 2004.

Could you remind us what the expected production for the year is?

Yes.

For 2003, we had projected between 56 and 58 million megawatt hours total across the fleet, approximately 46-47 million megawatt hours East, and about 10 or 11 million megawatt hours West.

We are looking at numbers that are at the upper end of that 56-$58 million range right now -- million megawatt hour range.

As far as pricing, you mentioned PJN and the mid Colombia.

Could you just tell us what the pricing -- what you're looking in terms of pricing for Mead (ph)?

I can indeed do that, give me just a second.

Mead for the 5-year period on peak, our planning is based on the mid to low 50s; and off-peak, around $30 a megawatt hour; and around the clock, probably the low to mid $40 a megawatt hour -- something in that neighborhood.

A final question.

On the tax rate -- you mentioned that was going to be 40 percent.

Is that the effective tax rate?

I was not clear.

Are you including the impact of the synfuel on taxes?

That's only in effective tax rate.

All in for 2003?

For 2003.

Asher (inaudible) with Forsyth (ph) Investments.

I wanted to -- first of all, how much equity there is in the delivery business?

And just looking at returns, which I think (indiscernible) ROE at nearly in the high 6's for last year.

When you file a rate case next year, assuming you go for a 10 or 11 percent ROE -- and just multiplying earnings, could be nearly double from the delivery side of the business -- do you know what your rates would be -- the chart that you give on a comparative basis versus other players?

And as you said, you have already gone out and given the people a heads up on it.

Are they comfortable with the size of the rate increase that might be envisioned as part of the rate filing?

Let me speak to part of your question about public reaction.

The public reaction to our announcement was fairly benign, I think.

People in some cases credited the Company for making an early announcement, but other than that, it was fairly benign.

I will ask John Biggar to speak to the rest of your question if I can.

John?

In terms of where we would be following a rate case, in the charts that we have used in the past -- we have not set a definitive amount for the rate case yet, but we believe we would still be -- if you recall that chart -- we would still be to the far left-hand side or one of the lower level delivery charges of any utility in the state.

I don't think our rate increase would change -- might not at all change the relative stacking (inaudible) companies.

If it did, it would be only by one or two.

And there are other companies who may well be filing as well that will change the whole (inaudible) --

How much equity do you project to be in that business, approximately, in the test year when you file?

I think it's in the roughly mid 40 percent range, if that will help you. (indiscernible) electric utility's capitalization.

If I can have one follow-up question.

Bill, you mentioned that WPD earned nearly 50 cents for the first half of the year, and that it is not seasonal.

So can we multiply that by two?

Probably not.

The operations are less seasonal than a supply business, but there still is some seasonality because of changes in throughput, and (indiscernible) to operations.

But there are other variables -- financing being a big one -- that can change the earnings from quarter to quarter.

So I probably wouldn't suggest that you multiply it by two.

Because I was just thinking when you said your guidance -- nearly 12 percent coming from the -- 12 or 13 percent coming from the international business for 2003, and if you take the midpoint of your range, which is 360 -- which comes to nearly about 47 cents.

So you are already past that 47 cents on the international side of the business at the half of the year.

So I'm just trying to see that that pie that you have, unless there are losses coming from the other international business, I guess those proportions are already violated as we stand at the middle of the year?

They are, because the first quarter for WPD was ahead of plan.

So the nominal three quarters from supply, and then split the remaining quarter between delivery and international, won't quite fit at year end 2003.

Primarily because of the strong first-quarter at WPD, you'll see a slightly higher percentage from international by year end, and a slightly lower percentage from the supply business because of the offset.

So that's about the way it will shake out.

If I can just end up by asking -- you mention in your release that margins were better in the East and West.

Were the margins in the second quarter -- were they because of price or volume, if you can help us a little bit?

A little bit of both.

Our production was a little but ahead of plan, and our -- that is, volume a little bit ahead. 2003 is probably going to come in with as-delivered prices a shade stronger than the approximate prices I gave you for the 5 year outlook.

In both parts of the market?

Correct.

Tom O'Neill with Lehman Brothers.

Bill, (indiscernible) one question was -- you had indicated WPD was running ahead, and that (technical difficulty)

Hello?

Operator?

It looks like his line did disconnect.

We will move along to Danielle (indiscernible) with DMS Incorporated.

You mentioned that you were shooting for a 48 percent equity ratio for year end 2004. (indiscernible) any new equity, and do you anticipate any new equity in the future?

It does not anticipate any new equity.

And normally, if your plans go well, you don't anticipate that you will need more equity for the foreseeable future?

We don't in any material amount.

We'll probably issue new stock for our dividend reinvestment plan for next year, if that.

But other than that, no, there will be no new equity issuances anticipated in our current plan.

The (indiscernible) program produces roughly how much new equity?

30-35 million.

David Dickens with Deephaven Capital Management.

Just a follow-up on WPD.

Can you remind us what is built into the original guidance, the 345-375 from WPD?

I don't know that we gave original guidance on it by breakdown, by component.

But the annual budget -- I don't think we gave the breakdown, but we're running a bit ahead of plan because of the strong first quarter at WPD.

That's about the way I would prefer to leave it.

Neal Stein with John (inaudible) Company.

On WPD -- it's probably hard, because you acquired the rest of it in the third or fourth quarter of last year -- but could you talk about how it's doing in the first half of this year relative to last year, maybe normalizing for the acquisition?

Normalizing for the acquisition?

I think it just continues to do very well, modestly better than it did last year.

Modestly better?

I think operationally we just continue to make progress in improving service quality and managing O&M expenses.

So we're very pleased with the property.

It's certainly contributing at least as strongly to earnings -- more strongly to earnings, actually, than the pro forma that we used to acquire the property, both on a net income and on a cash basis.

Could you talk maybe in percentage terms about how it did in the first half this year versus last year?

I really don't think I can give you those kind of data.

Could you quantify the FX benefit?

I think that will be in the 10-Q.

And if you would like, maybe the best way to have to deal with that is for Tim to -- if I could, ask Tim to help you with that?

Okay.

But I think it'll be in the 10-Q.

If WPD is exceeding expectations, is there any other part of the business that is lagging behind?

Too early to tell.

Obviously, we're -- as I think you are implying -- we try to be conservative in our business plan and on our earnings guidance, and we are well on plan to meet our guidance expectations.

There are no further questions at this time.

I would like to turn the conference back over to you, Mr. Hecht, for any additional closing remarks.

Thank you all very much for your participation this morning, and look forward to working with you in the future.

Have a good day.

That does conclude today's teleconference.

We do appreciate your participation today, and you may disconnect at this time.

(CONFERENCE CALL CONCLUDED)