賓州電力 (PPL) 2003 Q3 法說會逐字稿

Good day everyone.

Welcome to the PPL Corporation's third-quarter earnings release conference call.

Today's call is being recorded.

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

Good morning.

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

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

Although we believe the expectations and assumptions reflected in these statements are reasonable, these statements 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 other financial measures during this call, we will be talking about such measures as reported in accordance with Generally Accepted Accounting Principles or GAAP, as well as earnings from cooperations, which exclude items that we do not expect to recur on a regular basis and other non-GAAP measures.

A reconciliation of GAAP and non-GAAP measures is provided in PPL's earnings press release issued this morning, the 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's Chairman, President and CEO.

Good morning.

Here with me this morning is John Biggar, Executive Vice President and Chief Financial Officer, and Larry De Simone, Executive Vice President of Supply.

This morning we are going to follow a slightly different format than we have at previous quarterly conference calls.

I am going to make some introductory comments on bottom-line results.

Then I ongoing to turn it over to Larry who will discuss the results of operations.

Then John Biggar is going to discuss some additional financial details, and then I will wrap it up with an overview of what we see going forward in '04 and beyond, and then we will be happy to take questions.

PPL achieved strong results in the third quarter and in the first nine months of 2003.

Reported net income for the third quarter was $171 million or 97 cents per share compared with $122 million or 80 cents per share last year.

Excluding noncore items, our third-quarter income was 176 million or $1.00 per share.

By comparison, income from core operations was $145 million or 95 cents per share in the third quarter last year.

The only noncore item in the third quarter this year was a 3 cent per share charge for the completion of a workforce reduction program that began in 2002.

We had all the individuals identified, but we were not under GAAP able to take the entire charge at one time.

You are probably aware of that GAAP change.

Last year's third quarter had one noncore item as well.

A 15 cent per share non-cash charge related to operating losses at CEMAR, and of course, that was a recorded loss in Brazil, but no cash going into Brazil.

And, of course, CEMAR is behind us.

On a year-to-date basis, reported earnings were 526 million or $3.06 per share this year compared to 92 million or 52 cents per share for the same period last year.

From core operations, income for the first nine months of this year was 468 million or 2.73 per share compared to $407 million or $2.72 per share a year ago.

Two noncore items were recorded in the first nine months of this year -- a credit of 36 cents per share related to a new accounting rule related to asset retirement obligations, partially offset by the 3 cent per share charge in the third quarter related to workforce reduction that I mentioned a moment ago.

There were a number of noncore charges recorded in the first nine months of 2002 that total $2.10 per share, and they are detailed in our earnings release which can be found on our Website at www.PPLweb.com.

Now I am going to turn the call over to Larry De Simone who is going to discuss operations for third quarter and year-to-date.

Thank you.

Good morning.

Collectively our supply business, our Pennsylvania delivery business and our international operations are on track through the first nine months of the year, and we anticipate closing out the year 2003 on plan.

We have included a breakdown of core earnings by business segment in today's earnings news release.

Let me briefly recap some of that information and explain what is behind some of those numbers.

The third quarter saw our supply business deliver its strongest quarter of the year.

The supply group earnings for the third quarter were 91 cents per share compared to 74 cents per share for the third quarter of 2002.

Year-to-date 2003 earnings from the supply business reached $1.97 per share compared to $2.07 for the same period in 2002.

We remain an asset-backed marketer of electricity, not an unhedged merchant generator or a big trading shop.

Our fleet of powerplants continues to run well, which is essential given the high percentage of production volume and margin that we have sold forward or hedged.

Our powerplants were available to generate electricity more than 94 percent of the time during the third quarter.

This is called equivalent availability.

This high-level availability brings our year-to-date equivalent availability to over 90 percent.

All of our unit outages and our D (ph) ratings, both planned and unplanned, are included in the calculation of equivalent availability.

A key reason for our high availability is that we have run very tight scheduled maintenance outages at four large generating units this year, Montour Unit 1, Susquehanna Unit 2, Cold Strip (ph) Unit 4, and Brenner (ph) Island Unit 3.

With the imminent completion of work on Brenner Island Unit 3, we will have completed all of these outages on or ahead of schedule and on or under budget.

We expect our high generating unit availability to continue through the remainder of the year.

Prime time availability is the percentage of time our units are available during peak periods.

Prime time availability serves as another key indicator of the overall performance of our generation fleet.

In addition to overall availability, it is important that the generation is available when it is needed most, during peak periods.

Our prime time availability for the entire generation fleet is currently running at 98 percent, and that we believe that that number will hold for the entire year.

We still anticipate our sales volume to be about 56 million megawatt hours for 2003 -- roughly split that 46 million megawatt hours East and 10 million megawatt hours West.

While the third quarter was a solid period for energy generation and margins, we have not yet made up for the reduced margins that we experienced early in the year.

These lower margins resulted from higher than anticipated provider of last resort loads and higher-than-expected fuel cost for oil and natural gas.

For the remainder of 2003, we expect downward pressure on margins due to high gas prices and reduced spark spreads, as well as lower than budgeted generation from our hydro-electric facilities in Montana due to the ongoing drought.

Our energy services and mechanical contracting businesses remained profitable and on budget in spite of the economic downturn.

We did announce the successful installation of another 250 kW fuel cell earlier this month bringing our total for the year to six.

Our Somerset synfuel project remains on budget to produce and sell about 2 million tons of output in 2003.

Let me now turn to our delivery business.

Our Pennsylvania delivery business earnings for the third-quarter 2003 were a loss of 2 cents per share compared to a positive 15 cent per share for the third quarter of 2002.

Year-to-date 2003 earnings reached 20 cents per share compared to 41 cents for the same period in 2002.

The major impact on our Pennsylvania delivery business was around $20 million of unanticipated expenses due to storm damage in the third-quarter.

We experienced heavy storms in July and August and then hurricane Isabel in September.

In response to Isabel, we brought in assistance from as far away as Iowa and Canada to restore electric service to about 500,000 of our 1.3 million Pennsylvania delivery customers.

The storm caused the most customer interruptions in our 83 year history.

We have also experienced an increase in spending reserve and area regulation costs to (inaudible) the provider of last resort load this year.

As our third-quarter results demonstrate, our delivery business will not be able to fully offset these higher expenses in 2003.

We intend to address these expense items and other expense and return issues in a rate increase request which we will file in 2004.

New rates will become effective January 1st, 2005 when our distribution rate counts expire.

Our international operations continue to exceed plan, reinforcing the value of these assets in the PPL portfolio.

International earnings for the third quarter of this year were 11 cents per share compared to 6 cents for the third quarter of 2002.

Year-to-date 2003 earnings reached 56 cents per share compared to 24 cents for the same period in 2002.

The performance of our Latin American operations remains strong, particularly in El Salvador where we are seeing higher top line growth than expected.

The benefits of full ownership of Western Power Distribution in the United Kingdom are also evident.

Western Power Distribution continues to perform very well due to several factors, including volume gains from lower losses at our South Wales operations, lower operation and maintenance expenses, interest savings due to lower rates and currency improvements.

We expect this (inaudible) performance from international operations to continue throughout the remainder of 2003.

In summary, our performance for the year was solid.

Our supply group will likely close out the year at the lower end of our expectations.

Our domestic delivery business will fall quite a bit short.

Our international operations, led largely by a strong performance at Western Power Distribution, will significantly exceed expectations.

Performance from our international segment will offset the lower-than-expected performance from our supply and domestic delivery business segments in 2003.

Now let me turn the call over to John Biggar who will provide more financial details.

Good morning.

As our performance today demonstrates, our balanced corporate strategy is providing growth in both cash flow and earnings for our shareowners.

Income from core operations in the third quarter was $31 million higher than last year.

That is a 21 percent improvement.

Year-to-date September income from core operations was $61 million or 15 percent above the same period in 2002.

This solid performance allowed us to absorb the dilution from about $1 billion of common stock issued since the beginning of September in 2002, and it substantially improved our liquidity position and strengthened our balance sheet.

And that the same time, it has allowed us to remain on target to achieve our forecast of earnings from core operations.

In this regard, we have narrowed the range of our 2003 core earnings forecast of $3.50 to $3.70 a share from our prior forecast of $3.45 to $3.75 a share.

We expect our reported earnings for 2003 to range between $4.17 and $4.52 a share, which is a revision of our prior forecast of $3.70 to $4.00.

We have determined that the Company is entitled to an ordinary tax loss related to its Brazilian investment, CEMAR, which is expected to benefit 2003 earnings between 50 and 65 cents a share and will be recorded in the fourth quarter of this year.

In addition to the benefit of the CEMAR tax loss, the revised forecast of reported earnings reflects the first quarter 36 cent per share credit associated with the change in accounting rules related to asset retirement obligations, and this is partially offset by the 3 cent per share workforce reduction charge in the third quarter that Bill mentioned and the expected 16 cent per share charge in the fourth quarter resulting from a change in accounting rules that require the addition to our balance sheet of certain powerplant financing arrangements that were previously treated as operating leases.

PPL's liquidity position has also improved.

At the end of September, we had no commercial paper outstanding and $587 million of cash on the balance sheet.

In addition, we had $1.8 billion of available credit facilities.

PPL expects about $1.3 billion in cash flow from operations in 2003.

With projected capital expenditures of about $800 million, common and preferred stock dividends of 300 million, and the repayment of $250 million of transition bonds, we now project negative free cash flow of about $50 million this year.

Now these cash flow numbers that I have given you are done a little differently than we have done it in the past.

In prior discussions, we have excluded the impact of transition bonds from both sides of the equation; here we have included it.

But in either event, we are seeing $100 million improvement compared to our previous forecast of $150 million of negative free cash flow in 2003.

Looking out to the end of the year, we expect to have about $500 million of cash on hand, net of our short-term debt.

Our balance sheet is stronger.

Our September 30, 2003 equity ratio calculated on a GAAP basis was 29 percent.

As we have mentioned in the past, we think it makes sense to look at capitalization ratios by excluding transition bonds and debt related to our international investments, both of which are nonrecourse to PPL, but adding back certain powerplant leases and treating our PEPS units since they will convert to common stock in May of 2004.

On that basis, our equity ratio was 45 percent at September 30 compared to 38 percent at the end of 2002.

That completes our review of the third quarter and year-to-date performance.

I will now turn the call back to Bill to review our preliminary 2004 earnings forecast and our outlook for the longer-term.

As you can see, we are very pleased with the third-quarter core earnings of $1.00 a share since that all includes the expense related to storms this summer and hurricane Isabel, and also includes the additional shares outstanding that we sold earlier in the year.

As we look forward to 2004, we see a number of factors that will have a positive impact, and those are factors that relate to the core operations, and we have discussed those with you previously.

We have a 45 megawatt increase in capacity from the turbine replacement at Susquehanna Unit 2, which took place last spring. 2004 will be the first full year of commercial operation of that, and we will have a second turbine replacement at Susquehanna Unit 1 in the spring of 2004.

We see a built-in increase in the price for generation fold to the affiliate PPL electric utility as far as polar supply.

It is for provider of last resort.

We project about a 2 percent increase in sales at electric utilities, though there is a compound effect, an increase in the unit price as well as an increase in the volume under that polar contract.

Lower financing costs next year and also benefits from previously announced wholesale energy contracts including two in Arizona that we previously described, one with Arizona Public Service and one with Tucson.

Contracts in New Jersey for their basic generation service, as well as a contract in Idaho for sales off of our Montana assets that we described previously.

At the same time, we have a number of challenges and uncertainties going forward.

First of all, when we make our projections forward, we conservatively assume that wholesale prices will remain approximately at the same level.

Some may see an increase in the forward curve, and if that happens, then that is just added value.

But we conservatively estimate that prices will be flat.

We will have a full year of the dilutive effect of additional shares of common stock outstanding that were sold earlier this year, and we will have the conversion of the PEPS units to common stock that John mentioned a moment ago.

We have been booking net income rather than an expense for pension, and we project that that net pension income will decline for '04.

We see higher operating expenses in electric utilities, despite cost reduction initiatives.

Those include higher transmission-related costs that are subject to FERC regulation that we will be requesting rate relief for in our rate case that we expect to file next spring.

And we see depreciation next year associated with the powerplant leases that will come on the balance sheet as a result of FIN (ph) 46, and John mentioned that just a moment ago.

So you can see we have some positives that are core operations in production and sales of that production, and then we have some uncertainties that we are working our way through.

As a result of all of that, we are issuing today preliminary guidance for next year at 345 to 375 per share.

So that is our preliminary outlook, and we will be continuing to refine that as we go forward.

Even though that preliminary per share forecast for next year is the same as the previous forecast for 2003 core earnings, we are projecting significant increases in net income and in cash flow and a strengthening balance sheet and improving credit profile.

We are projecting free cash flow next year of $50 million positive, and the major components of free cash flow projection are these.

About $1.25 billion of cash from operations.

We expect about 650 million of CapEx, and that is a 150 million reduction from the earlier projected 2003 CapEx. 300 million in round numbers for common and preferred dividends, 250 million of transition bond payments, and that gives us a net 50 million free cash flow positive for 2004.

That is about a $100 million improvement over our free cash flow presently projected for 2003.

We are projecting about $500 million of cash on hand at the end up 2004, net of short-term debt, and on a GAAP basis, our year-end 2004 equity ratio will be about 35 percent significant improvement over the 29 percent equity ratio at September 30th this year that John mentioned earlier.

Adjusting that to reflect all powerplant leases as though they are on balance sheet, but to take out of that equity ratio all of the nonrecourse debt -- that is the international debt and the transition bonds -- our equity ratio will be 48 percent.

That is compared to 45 percent at September 30th this year.

We are taking a hard look at our longer-term forecast and continue to see many of the opportunities and challenges that I described a moment ago with respect to 2004.

We believe that our balanced strategy will result in a long-term growth of about 3 to 5 percent.

The elements of that are -- that are quite visible, of course -- are the increases in the polar prices under the contract with our affiliate, the increases in volume, both polar sales and the new turbines at Susquehanna.

At the same time, there are some elements of our corporate strategy that will provide growth and also have some uncertainties -- that is the electric utilities rate case in Pennsylvania that will be filed in early 2004 for effective date January 1, '05 and the rate review in the United Kingdom for WPD that I believe you are aware of.

But our 3 to 5 percent long-term growth assumes conservatively roughly flat wholesale prices, so any increase in wholesale prices should add to that.

There are additional opportunities that we are in the process of clarifying internally.

Future pension income or expense; synfuel issues, which as you know are in the news currently, and some modestly positive news in the last day.

We are also exploring the point at which in the longer-term our growing equity ratio will permit us to buy back common stock consistent with an improved debt rating that we would expect to achieve as our cash flow continues to improve and our equity ratio continues to grow.

Before I take questions and answers, just one or two items I might briefly update you on.

First of all, synfuels.

Progress issued a release yesterday.

We don't have at this moment a great deal of information on that subject that you don't have.

We do have a synthetic fuel operation.

We have been booking the tax credits for it.

We do have a private letter ruling.

That private letter ruling was granted following extensive scientific tests done by a third party, which were provided to the IRS at the time they gave us that private letter ruling.

We have examined our operation and continue to be confident that we are in complete compliance with our private letter ruling.

Given recent events, we continue to feel strongly about synfuels, that it is a part of our earnings and will remain that way, but we will pursue that if need be.

I also want to discuss some insider trading issues that have been reported so that you are aware of what has happened here.

About three months ago, our Board of Directors adopted formal -- replacing informal -- guidelines, adopted formal guidelines for stock ownership by executive management.

Those guidelines were based on actual stock owned, not unexercised in the money options.

And as a result, executives, although they had almost a year or more than a year to get to that guideline, in many cases exercised options.

And the only stock sold, with one special case exception for an employee, was a unique circumstance.

All the stock sold was merely to pay the strike price and taxes, and the remaining stock is all held by executives.

So those conclude our opening remarks, and now I would like to take your questions.

(OPERATOR INSTRUCTIONS).

David Frank, Zimmer Lucas Partners.

Good morning.

I was wondering -- you mentioned that you were anticipating wholesale prices next year to be flat?

No.

I am sorry, David.

What we said was we are basing our forecast on the conservative assumption that they are flat.

Okay? (multiple speakers) Our view is that we really don't find ourselves feeling very confident about projecting wholesale prices.

When we do earnings projections for discussion with you, we make the conservative assumption that they are going to be flat, and then you can make adjustments from there based on your own view of the forward market.

Does that help?

What I meant to say was your guidance assumes flat wholesale prices, and I am trying to ask flat to what, relative to what?

What your guidance was for this year or is this year for prices, or that your actual realized wholesale prices will be flat?

Current prices.

Flat to current markets.

Can you be a little specific as to what that would be?

(inaudible) the current markets at? yes.

Let's give you some rough numbers.

We would say in PJM in the low 40s on peak and in the mid-20s off peak.

In the low to mid 30s around the clock.

For the West, let me just give you what we think they would look like currently for mid-Colombia.

But we also try to tie down numbers for Meade (ph) and Paliverti (ph).

I would say again in the low 40s on peak at mid-Colombia and in the low to mid 30s off peak mid-Colombia.

For around the clock, high 30s at mid-Colombia.

Something in that neighborhood.

But I just felt it was more useful to you rather than for us to disguise the effects of our internal operations by just assuming an increased forward curve.

To assume that the prices are flat to those levels, we can tell you what our operations will produce, and then if wholesale prices grow, then that is additive.

My last question has to do with the breakout of earnings for the different segments.

I think previously, and I might be wrong, but you had said for '03 supply would be approximately 72 percent of the earnings.

International, I think, was 17.

Utility or distribution would be about 11 percent.

Do you have an updated breakout for '03, and can you break that out for '04 as well?

Yes.

I think we can give you a shot at some of that.

First of all, in '03 our actual performance is going to break down differently than we anticipated when the year began.

The domestic delivery business had significant storm expense, and that is built into our numbers.

The supply business had a tough first quarter because its major contract with the affiliate is a full requirements contract.

Because of the wet cold weather, the volume supply was greater, and wholesale prices were higher, and we had to go to the market to cover some of the on peak requirements for the affiliate.

So that reduced supply group margins.

That was offset by a substantially better-than-expected performance at the international affiliates.

So we are still giving you the same range for the end of '03, but the breakout is somewhat different.

So with that, let me give you some really round numbers.

We think the supply business at the end of the year will be around 70 percent of the total, and we probably earlier had thought that would be a little bit more than 70 percent.

The domestic delivery business will be around 10 percent and the international business around 20.

Okay?

Now let me give you '04. '04, nice round numbers.

Around 80 percent from supply, something less than 10 percent for domestic delivery, and something more than 10 percent for international.

The breakdown will shift a little bit.

Does that help, David?

It helps a lot.

Thank you very much.

Tom Hamlin, Wachovia Securities.

Looking at your two guidance ranges for '03 and '04, the midpoints of both of them are 360 a share.

If we were to weather normalize '03, it certainly would be a lot better than 360.

So we are on a normalized basis looking at a drop-off from '03 to '04.

I know the negatives were this depreciation and this dilution.

Is there a way you can qualify what the impact of that depreciation is on a per-share basis, as well as the dilution?

Yes.

The depreciation I think is about 10 cents.

That is I think the best nice round number, about 10 cents a share.

The dilution for additional shares outstanding is about 20 cents a share.

That is why you are looking at the much better net income for '03?

I am sorry for '04?

'04.

Yes.

That helps clarify it.

There are a lot of moving parts, and there tend to be some offsets there as it turns out.

Can you tell us how much pension income is contributing this year? (multiple speakers)

We can in just a moment.

Give us just a second to find that number.

Pension income is about 6 million, about $6 million of the domestic pension plan.

And you are looking for it to go down next year?

Is that because you smoothed the actual results?

Yes.

We use a so-called double corridor (ph) method for amortizing the excess funding in the pension plan.

So the excess funding by an amount above a certain threshold is amortized faster.

(multiple speakers) There is also -- just be aware that in reducing the pension income partly as a result of the lower discount rate that we are using with our actuarial assumptions to determine plan funding because interest rates have come down, so we have lowered the discount rate.

That tends to reduce the extent to which the plan is funded.

Is that an effect that is for '04, or did you do that for '03 as well?

For '04.

We lowered the discount rate in '03 as well.

Lowered additionally for '04.

Correct.

Great.

Thanks a lot.

David Schanzer, Janney Montgomery Scott.

Good morning.

Just to clarify things.

The expenses from storm damage in the summer, are there any expenses that you expect to realize in the fourth quarter, or were they all taken care of in the third?

There might be a couple of million dollars of cleanup work that is still going on.

All the customers were restored, but then there is some additional, some work that you do to make repairs more permanent.

Round numbers, the summer thunderstorms, plus hurricane Isabel through the end of the third quarter, I guess, Larry, is about $20 million.

I would say, to pick a number, $2 million or so might be the additional expense in the third quarter.

Fourth quarter, I meant.

I am sorry.

To the extent that the storm damage is applicable to the distribution business, do you anticipate asking for recovery in the upcoming rate case?

Yes.

The last question, upcoming rate case in the UK, what kind of parameters are you seeing at this point in terms of returns?

The rate process in the UK is not the same as the U.S..

That is the rates are not set based on a test year, prudently incurred expenses and a rate of return.

It is a rather different process.

Everyone's rates are reviewed at the same time.

Their performance is compared with a so-called model company, and then when prices are set, they are are still adjusted annually during the five-year period between rate reviews.

So I don't really have numbers to give you.

I will tell you that we are assuming and building into our long-term forecasts that I am sharing with you, a modest reduction in prices in the UK.

Thank you.

Bob Sullivan, UBS.

Just a couple more questions on WPD.

What do you expect for a return on equity in 2003 on WPD, just to get a sense of how well it has been performing?

I don't know that I can give it to you in those terms, but we can try to do some arithmetic from publicly available numbers, and maybe Tim Paukovits can touch base with you if that would be helpful.

Is there a way to get a sense of what percent of international earnings come from WPD?

Yes.

The majority of it comes from WPD.

Not all, but more than half comes from WPD.

We can give you a breakdown in just a second.

How much has the benefit from currency been in the third quarter and year-to-date?

I am sorry.

Let me back up.

I think of the WPD income being about 80 percent of the total international.

Year-to-date or for the year?

Yes.

Then your second question was?

What is the currency impact?

You mentioned the currency.

The currency translation is positive to us.

I will try to quantify how much.

Our earlier work had been about $1.53 a pound Sterling and $1.69 is current.

So that can give you a rough idea.

We were assuming $1.53 per pound, and we are now getting $1.69 per pound Sterling for the conversion.

Okay.

Just a couple of quick questions.

At the end of the third quarter, how much was your nonrecourse for the international debt that you are excluding from your calculation (multiple speakers) and same with transition bonds?

About 1 billion international (multiple speakers).

1.8 to 1.9 billion.

And the transition bonds at the end of the quarter?

About 1.5.

How much were you adding back (multiple speakers) and then the billion was what you were adding back for leases?

Yes.

I missed that comment before those.

We added back a billion for leases.

The transition bonds is 1.5 billion, and the international debt is 2.1 billion.

Great.

Thanks very much.

John Raleigh, Goldman Sachs.

Thanks for the call.

Just to clarify on the cash flow forecast, you said, John, that you're doing something different.

Is it simply the 250 coming out of the (multiple speakers)

The 250 gets added to both sides of the equation.

When we gave it to you before, we netted out transition bonds from both the cash in and cash out,

The 500 million that you have at the end of the year, how does that compare with any previous period, the end of '02, and where did that 500 million come from?

Obviously the operating cash flow looks --?

On a total basis, when you look at our cash and netted it out, we were negative.

We had more short-term debt than we had cash on the balance sheet.

Okay.

So we are making substantial improvements.

Bill, you mentioned in the UK that you are assuming a modest reduction looking out at post '04, '05, '06.

In terms of the Pennsylvania delivery business, it looks like you are under-earning there.

Can you give us an idea what the under-earning is going to be in terms of ROE or millions of dollars in '04?

The Pennsylvania delivery business is dramatically under-earning actually.

I would say the ROE -- we can get you maybe a more -- mid single digits were below.

Some of that are costs internal to the distribution business.

Some of that is payment that the distribution business must make for transmission services and ancillaries, which we purchased from PJM under FERC-approved tariffs.

So our rate case for the Pennsylvania distribution business will have a significant component of it that relates to a pass-through to Pennsylvania jurisdictional customers of federally-approved tariffs.

I think you also mentioned that production in the West in terms of just volumes due to the drought is below expectations.

Could you give us an idea in millions of megawatt hours what it is and how that ties to your '04 forecast?

I will ask Larry to ask that.

If you look at specifically a hydro-electric trick production out West, on a 50 year average, we look at about 3.5 million megawatt hours from those facilities.

We actually budget a little less than that, so the '03 and '04 budgets have a number of about 3.3 million megawatt hours in the budget.

And this year with the drought, '03 will come in right around 3 million megawatt hours, so it is modest.

You know a few hundred thousand megawatt hours, but it still lower than what we had planned.

Great.

Thanks, Larry.

Jim von Rieseman, J.P. Morgan.

I have got three questions.

The first one is on WPD, but I know (inaudible) has talked not so much on ROEs, etc., but they are looking at the CapEx.

What they are looking at is actual spending versus projected spending and how people playback that game.

Can you tell us what your, like, trailing 12 months or planned expenditures for '03 are, and what you think your actual will be?

The same thing for '04.

Then I have two other questions.

Okay.

Let us get you that number on CapEx and WPD.

CapEx for all the international -- I have got it for all the international.

I don't have it for (multiple speakers) broken out.

If you don't have it on hand, let me ask it this way.

Are you spending what you said you were going to spend there?

Yes.

And service performance is better than anticipated, in the best-in-class.

We believe we are in a very strong position, the strongest position we could possibly put ourselves in going into the rate review.

We do abide by the CapEx commitments, and we have service reliability to demonstrate for it.

The second question is on maturities for 2004.

You talk about a $50 million free cash flow position at the end of '04, but you don't talk about -- can you give us an update on maturity and how you plan to roll that over?

The numbers -- I think the maturities for next year are about a little over 300 million. 307 million in our forecast at the moment is that we would roll out that (inaudible).

Say that one more time?

We would plan to refinance that debt, but I will plan out, as I said in my direct remarks, we expect to end up this year with about $500 million of cash on the balance sheet net of our short-term debt, and at that position, we will carry right through to the end of 2004.

We do maintain a substantial amount of liquidity during the entire period.

The last question I guess is for Bill, and I don't mean to beat a dead horse, but go over, if you would please again, the '04 outlook?

You have a wide range there in terms of your earnings.

Your growth forecast has been low -- now 3 to 5 from 5 percent -- better than 5 percent.

Can you give us some parameters what gets you down to the bottom end of that range versus what you (inaudible) at the top end of the range?

What can get us down to the bottom end of the range, and anybody in my position would hate to admit it, but I can give you a lot of things that can go wrong.

Certainly we have got wholesale energy prices that, as I said earlier, we try not to forecast because that just overshadows other matters.

We can get lower wholesale prices.

We could have lower projected pension income, even lower than we are currently projecting.

We could have an unfavorable outcome that either the rate review at WPD or in Pennsylvania.

That would, of course, -- the primarily effect of that would be beyond '04.

We could have poorer plant performance.

We have set as an intermediate term goal 90 percent equivalent availability to our powerplants.

We have achieved that goal now earlier than expected.

We could have some challenges there.

We could have some challenges in the Susquehanna outage and the turbine replacement.

We did it once.

We were very pleased with that outcome.

It was by far the most complicated evolution we have ever undertaken at the plant.

We brought the plant in roughly on budget and a day early.

We are not taking that for granted.

People are focusing on that because they know they have to do it again.

So there are a number of things that could work against us to pull us to the low end of the range.

And, of course, you can identify pretty quickly the things that can pull us to the high end of the range.

We had a good outage at Susquehanna last year, and we can do it again next year.

We can have even modest strengthening of wholesale prices.

Continued good plant performance.

We can see ourselves under a scenario that is at the high end of that range, very nicely at the high end of the range.

But we do -- I think we have had a history, established a history of giving conservative outlooks early.

Just one final question.

You want to comment on dividend policy?

Well, we will.

We have commented on it before.

We view dividend as both an earnings related issue and a cash flow related issue.

Our payout ratio is on the low side by some traditional measures.

As our cash flow moves positive, then we feel particularly comfortable in considering increasing our dividend.

We don't have, I would not say a formal policy, just attention to the fundamentals of good conservative fiscal management.

So you can see that our dividends, common and preferred, is around 300 million, and we have got projected $50 million of positive free cash flow net at the end of the year.

So you can see that there is room in there for us, and our payout ratio is modest by some many standards, less than 50 percent by utility standards.

So we have got a considerable amount of maneuvering room there.

It is incorrect for me to assume that with a 300 million flat dividend, common and preferred, that we could -- that we won't see an increase come January?

Give me a double negative there.

I know.

I am the old English guy here.

Yes.

We will see you guys down in the (inaudible).

We will see you down there.

I hope I have answered your question.

Okay.

I will jump back in the queue.

Brian Olsen, Luminous Management.

I was actually going to ask about the dividend policy as well.

Also, in connection with that, I think you mentioned a share buyback.

I was wondering if you had any idea what size that would be and how much offset that would be to the dilution coming from the PEPS units?

Well, it is out into the future.

I discussed the idea of a share buyback in the context of our five-year outlook.

If we just extrapolate today's businesses, obviously you would see our equity ratio continuing to grow.

Now today that growth in equity ratio, that growth in free cash flow, is very important because we intend to strengthen our debt ratings.

We are absolutely focused on that.

But if we extrapolate, the question comes up in our minds as to how high should the equity ratio go before we consider a stock buyback just for calculation purposes?

Though it was in the context, not in the context of identifying any number of shares and certainly not 2004.

We are talking about the five-year outlook.

So it will be something that does not come into play until '05?

Or beyond that.

Also, I was wondering you talked about the electric rate for Pennsylvania delivery.

I was wondering if you guys had any idea of what you would expect an appropriate return to be when you file for '05?

We can give you what the talk has been.

We think there are return consultants that can support 12 percent, and some commissions have been on the shy side of 10 percent in what their actual awards have been.

So that gives you a bracket I think. (multiple speakers)

I do want to reemphasize though that we are in the, for the next couple of years at least, we are absolutely focused on our debt ratings.

Absolutely focused on strengthening our balance sheet, improving our equity ratio and improving our cash coverages.

We are ahead of plan in that regard.

We are absolutely focused on that for the next couple of years.

Okay?

Next question.

Margaret Jones, ABN AMRO.

After that comment, I guess a fixed-income question is in order.

My first question is what are you shooting for when you talk about strengthening your debt rating?

Is the initial objective to just get the negative outlook removed, or do you mean to imply that you actually are looking for an upgrade?

Well, John, we should speak to those, but, yes, to both of those.

We intend to get the negative outlook removed, and we intend ultimately to get upgraded.

Realistically it seems to me that a potential timeframe then for the upgrade would be after these two regulatory proceedings are concluded and you know where you stand on those?

Well, it is possible.

We continue to work with the agencies to understand what their expectations are and develop our plans to meet them.

Certainly we should strive to get the negative outlook removed just as soon as possible.

I would like to see an upgrade before the rate cases are completed, but I would understand if that were not to happen.

Okay and two other quick questions.

Number one, how much cash do you anticipate being able to upstream out of WPD in '03 and '04?

I am under the impression that you are still committed to paying down some debt there.

And lastly, can you provide sensitivities to wholesale price changes given how much of your output is hedged?

I can tell you right now we are looking at cash coming back from WPD, but as you point out, we are also focused on strengthening the balance sheet.

So it is a balance, and we have not yet finalized on those numbers.

Do you have the wholesale price sensitivities?

Yes.

Round numbers, about a 10 percent change would be about, call it, $3.00 a megawatt hour.

For '04 would be about 6 cents a share.

That is given the amount that we now have hedged.

In other words, that is the impact on our unhedged part of our portfolio.

Great.

Thank you very much.

George Rubis (ph), Angelo, Gordon & Co.

Towards the end of your prepared remarks, you had mentioned additional opportunities in synfuels and pensions.

Can you just discuss that a little bit more?

I don't know that I mentioned additional opportunities, but certainly we are in the process of clarifying the impact of pension expense or income on our income statement for '04.

Synfuels, we are building into our business plan the expectation that we will continue to operate our Somerset facility and continue to book income from that.

There may be additional opportunities in synfuel as well.

They would await a clarification of the IRS's policy on future private letter rulings.

Jeff Birch, Bank of America.

A question on the UK business, if I could.

I think that WPD had a bank line that was maturing this month, and they were in the process of rolling it out.

Do you know if that process has been completed?

Yes, it was.

Okay.

And that is both on the short tranche and the five-year tranche as well, if you know the specifics?

I believe it was.

Sharina Chowdhury, Merrill Lynch.

Firstly, thank you very much for providing the segment breakdown in your earnings release.

That is very helpful.

It was just for you.

I just wanted to follow-up on Jim's question earlier in 2004.

On the factors that you provided for us, is there any way to quantify some of them, like the financing costs on the pension income for example?

Let's talk about the pension income I guess.

I think a base assumption might be that that will go from about $6 million of income to somewhere between $6 million of expense on a domestic pension.

Total basis --

Now there is also a pension fund in the UK, which has an expense -- income I am sorry, of $41 million for '03 projected to a 40-ish that will about drop in half for '04.

These are pre-tax numbers?

Yes.

Anything on the financing side that you can give us?

We gave the dilution.

About 20 cents for the dilution for '04.

I meant on the lower financing costs that you quantified separate from the dilution or that you highlighted?

Let's see if we can get you a number.

We will look for that here for a second.

I can follow-up off-line with Tim as well.

If we don't find it right away --

About 3 cents in lower interest costs.

(OPERATOR INSTRUCTIONS).

Andy Levy, Bear Wagner.

I am all set, guys.

Thank you very much.

Okay.

If there are no further questions, I thank everyone for their participation this morning.

And for those of you who will be at the EEI conference, we look forward to seeing you in Orlando.

That does conclude today's conference.

Thank you for participating.