賓州電力 (PPL) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to PPL Corporation's fourth-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 fourth-quarter earnings and year-end results and our 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-Q 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 non-GAAP measures such as earnings from ongoing operations, which exclude items that we do not expect to recur on a regular basis.

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.PPLeeb.com.

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

Good morning.

With me this morning are John Biggar, Executive Vice President and CFO.

Also with me is Jim Miller, Executive Vice President with responsibility for our supply group; and Larry De Simone, Executive Vice President with responsibility for domestic and international delivery businesses.

I'll begin with some brief remarks about the year's performance, and then I will ask Jim to talk about the performance of our supply groups during the past year and some thoughts going forward.

Larry will talk to domestic and international delivery, and then John Biggar will give some more details on our financial situation, particularly issues related to liquidity and so forth, our '04 forecast and longer-term outlook.

And then we will open up the call for your questions.

This morning PPL reported an all-time record net income in 2003 of $734 million or $4.24 per share for 2003 compared with 208 million or $1.36 per share for 2002.

We also reported an increase in earnings from ongoing operations, which of course is a non-GAAP financial measure that excludes unusual items.

Earnings from ongoing operations, which we have referred to in the past as earnings from core operations, were $642 million in 2003 or $3.71 per share compared to 541 million or $3.54 per share in 2002.

Strong performance in 2003 in spite of, I think, challenging wholesale market conditions and reduced earnings at our Pennsylvania delivery business led the common stock to outperform the S&P index by more than 35 percent during the year.

We also provided a 2003 total return of 31 percent to shareowners who reinvested their dividends.

Our 2003 earnings from ongoing operations did, as you know, benefit significantly from a full year's ownership of Western Power Distribution, the delivery business in the UK.

WPD did have an exceptional year, and its performance in '03 did surpass our expectations.

Earnings from international operations generally were 77 cents per share in '03, compared to 44 cents per share in '02, or an improvement of 33 cents per share.

Most of that does relate to WPD; but we did also have strong performance in our international businesses in Chile and El Salvador.

The favorable currency position due to the weaker U.S. dollar equated to about 8 cents of that 33 cent improvement.

So about a fourth of it was currency translation related.

Just moving on a little bit, the positive performance in our delivery businesses also was reinforced by the supply business; it increased earnings per share from ongoing operations in '03 by about 1.5 percent over the prior year.

Positive performance in those two was partially offset by about a 45 percent decline in earnings per share from ongoing operations in the delivery business segment domestically.

The decline resulted primarily from PPL Electric Utilities rising transmission and distribution operating costs, and from increased expenses related to ongoing necessary investment in infrastructure.

There were a couple of other earning drivers in '03 lower interest expense, higher energy margins in the western portion of the U.S., and continued savings from a workforce reduction program that we began in 2002.

I want to talk a little bit about the unusual items.

We had two items that were unusual that benefited earnings, a net impact of 47 cents per share from the tax loss related to PPL's Brazilian investment CEMAR, and a credit also of 36 cents per share resulting from adoption of the new accounting related to asset retirement obligations.

There were two unusual items that adversely affected earnings, a charge of 16 cents per share due to an accounting change that related to what has been called variable interest entities; it is basically the balance treatment of some powerplant leases that had previously been treated as operating leases.

And an 11 cent per share loss due to discontinue telecommunications operations at a subsidiary in El Salvador.

And a charge of 3 cents per share related to a workforce reduction program that we completed in '03 but began in '02, and we were unable to take that 3 cent charge in '02 because of accounting rules.

So the net charges for unusual items in 2003 were a net benefit.

In 2002 net charges for unusual items totaled $2.18 per share, and of course they are detailed on our website.

I now want to turn the call over to Jim Miller, who will talk about the '03 operations and the supply business segment.

Thank you, Bill.

Good morning, everyone I would like to summarize the performance of our supply group for the last quarter and calendar year 2003.

In the fourth quarter of 2003, the supply group earned 72 cents per share from ongoing operations, compared to 60 cents per share in the fourth quarter of 2002.

Supply group earnings from ongoing ops for 2003 were $2.70 per share, an increase from 2002 earnings of $2.66 per share.

Supply segment earnings were pressured by high fuel and purchased power costs, associated with satisfying spikes in eastern retail load during the harsh winter of 2003.

Our western region performance was good, in spite of a continuing drought that left our western hydro output almost 8 percent lower than expected.

Our production facilities continued to run well in the fourth quarter and achieved a fourth-quarter equivalent availability of almost 92 percent.

Equivalent availability, you may remember, is a measure of the percent of time that your generating units are available for full load operation during a specified period.

Given our asset-backed marketing strategy, powerplant availability is crucial.

In 2003 our nuclear, fossil, and hydro facilities nationwide achieved an equivalent availability of over 91 percent, a new record for the PPL fleet, including new generation records at our Susquehanna nuclear and corec-coal (ph) facilities.

In addition to the overall availability of our generating fleet, primetime availability, or the measure of our plant availability during peak periods, was over 98 percent during 2003.

Our generation sales volume exceeded 55 million MWh for 2003, split roughly with 46 million MWh in the East and 9 million MWh in the West.

This represents an increase from 2002 of over 2 percent in the East and the West.

Our marketing efforts continue to focus on forward commitments that add value to our generating assets.

By the end of 2003, PPL had completed 18 months of providing reliable supply under new agreements with Northwestern Energy to serve their customers in Montana.

Additionally, we began supplying power under new agreements in Arizona and New Jersey.

PPL will continue to participate in various load serving opportunities as a means to further enhance the value of our assets, such as the upcoming request by Northwestern Energy in 2004.

Our energy services and mechanical contracting businesses completed 2003 profitably and on plan, despite challenging economic conditions in the northeastern United States.

PPL's synfuel operations completed another successful year in 2003 by contributing over 26 million in net income or approximately 15 cents per share.

In summary, the supply group, bolstered by the excellent performance of our generating fleet and margin contributions from our energy marketing center, performed better than the prior year despite the harsh winter experienced during the first quarter of 2003.

Now I would like to turn it over to Larry.

Thanks, Jim.

Good morning.

My objective today is to summarize the performance of our domestic and international delivery business segments.

Throughout these businesses we remain focused on safety, reliability, and profitability.

We intend to maintain or improve upon quality of service standards.

We are also working to true-up the rates that we charge customers, so that they better reflect our actual costs of doing business.

Our Pennsylvania delivery business earnings for the fourth quarter 2003 were 4 cents per share, compared to 5 cents per share from the fourth quarter of 2002.

For the year 2003, earnings from ongoing operations were 24 cents per share, compared to 44 cents in 2002.

The drop in 2003 earnings was due in part to increased transition and distribution operating costs.

We experienced an increase in pension and healthcare costs.

We also experienced an increase in spending (ph) reserve and area regulation costs to serve higher provider of last resort loads.

These PJM build FERC jurisdictional transmission related charges for our provider of last resort load are only partially recovered under our current transmission and distribution rate cap.

The higher costs for the domestic delivery segment also included increased expenses related to necessary investments in infrastructure.

You may recall that during our call in October we mentioned that hurricane Isabel caused the most customer interruptions in our 83-year history.

In response to this storm, 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.

These storm costs were reflected in third-quarter results.

On January 16 of 2004, the Pennsylvania Public Utility Commission issued an order allowing us to defer all operating expenses of about $17 million associated with Hurricane Isabel.

So in the fourth quarter of 2003 we reversed the costs expensed in the prior quarter.

Without the deferral order, domestic delivery business earnings from ongoing operations would have been 6 cents lower or 18 cents per share.

We intend to address the rate treatment of this $17 million deferral and other expense and return issues in a request to increase electric distribution rates in Pennsylvania.

We will file this request with the Pennsylvania PUC in the spring of 2004.

The major theme of our rate increase request will be electric system reliability.

We also expected to recover PJM build transmission-related costs.

These charges are billed by a PJM under a FERC-approved tariff.

New rates for delivery would become effective as of January 1, 2005, when our transmission and distribution rate cap expires.

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

International earnings from ongoing operations for the fourth quarter of 2003 were 22 cents per share, compared to 17 cents for the fourth quarter of 2002.

International earnings from ongoing operations for 2003 reached 77 cents per share, compared to 44 cents in 2002.

The benefits of full ownership of Western Power Distribution in the United Kingdom are clearly evident in our 2003 performance.

Over 80 percent of international earnings, before allocated interest administrative expenses and U.S. taxes, came from Western Power Distribution in 2003.

Western Power Distribution performed very well due to several factors, including volume gains from our South Wales operation, lower operations and maintenance expenses, lower interest costs, and a significant improvement in currency exchange.

The performance of our Latin American operations remains strong.

We saw increased ongoing earnings in 2003 from all three of our Latin American delivery businesses in Chile and Bolivia and in El Salvador.

In summary, our domestic delivery business fell quite a bit short of prior year results, while our international operations, led largely by strong performance and our first full year of ownership of Western Power Distribution, significantly exceeded 2002 results and our own expectations.

Let me now turn the call over to John Biggar, who will provide more financial details.

Thanks, Larry.

Good morning.

As our performance to date demonstrates, our strategy is providing growth in both cash flow and earnings for our shareowners.

Income from ongoing operations in 2003 was $101 million higher than last year.

That is a 19 percent improvement.

This solid performance allowed us to absorb the dilution from the 28.8 million shares or about $1 billion of common stock issued since the beginning of September 2002 and has substantially improved our liquidity position and strengthened our balance sheet.

With respect to liquidity, at the end of 2003 we had no commercial paper outstanding; $476 million of cash on hand; and $1.7 billion of available credit facilities.

PPL generated about $1.37 billion in cash flow from operations in 2003.

This cash flow supported capital expenditures of about $850 million, including construction expenditures for projects previously treated as operating leases; common and preferred stock dividends of $290 million; and the repayment of $250 million of transition bonds.

This resulted in negative free cash flow of about $20 million in 2003.

As we mentioned in our third-quarter conference call, these cash flow numbers are done a little differently than in the past.

Prior to the third quarter of last year, we excluded the impact of transition bonds from both sides of the equation.

Now that impact is included.

But under either method of calculating free cash flow, we have seen an improvement compared to the $50 million of negative free cash flow for 2003 that we projected in October; and compared to the $150 million of negative free cash flow that we projected back at the start of 2003.

Our balance sheet is stronger.

Our year-end 2003 equity ratio calculated on a GAAP basis was 28 percent.

As we mentioned in the past, we think it makes sense to look at capitalization ratios by excluding the $1.4 billion of transition bonds and approximately $2.2 billion of debt of our international affiliates, because both of those are nonrecourse to PPL.

Also we have treated our PEPS units as equities since they will convert to common stock in May of this year.

On that basis our equity ratio was 48 percent at December 31, 2003, compared to 38 percent at the end of 2002.

As we look out through 2004, we see a number of factors that will have a positive impact on the company's performance, such as the 45 MW increase in capacity from turbine replacements at our Susquehanna station.

Also from higher price for generation under our polar (ph) contract with PPL Electric Utilities for customers who choose not to shop for electricity supply, projected load growth of about 2 percent at Electric Utilities, lower interest costs, and the benefits of the previously announced wholesale contracts including those in Arizona, New Jersey, Connecticut, and Idaho that Jim mentioned.

At the same time we continue to face a number of challenges, such as the level of wholesale energy prices.

For 2004 our forecast assumes conservatively that prices will remain at approximately their current levels.

We also have the dilutive effect of the additional shares of common stock that were issued in May and the conversion of the PEPS units to common stock in May of this year; the additional dilutive effect was for stock issued in May of '03.

We are projecting lower pension income as well as higher operating expenses at Electric Utilities, including the higher transmission related or ancillary costs that are subject to regulation by FERC that Larry mentioned in his remarks, as well as higher depreciation associated with powerplant leases that came on the balance sheet in December of 2003.

As a result, we are confirming our previously announced 2004 earnings forecast in a range of $3.45 to $3.75 a share.

Even though the midpoint of our 2004 per share forecast is the same as the midpoint of our 2003 per share forecast of earnings from ongoing operations, we are projecting increases in total earnings from ongoing operations and cash flow, a strengthened balance sheet, and an improved credit profile.

We are projecting positive free cash flow of $50 million in 2004.

The approximate components of that free cash flow projections are about $1.3 billion of cash from operations; $690 million of capital expenditures, of which about 600 million or a little more is sustenance CAPEX;

I should point out this is about $160 million reduction from our capital expenditures in 2003.

About $300 million of common and preferred stock dividends; $260 million of transition bond repayments.

All of this results in free cash flow of about $50 million projected for 2004.

This would be a $70 million improvement from the free cash flow of 2003.

On a GAAP basis our 2004 equity ratio is projected at 36 percent, a significant improvement over the 28 percent at the end of 2003.

And if you adjust that on the basis that I outlined earlier, our year-end 2004 equity ratio would be projected at 51 percent, compared to 48 percent at the end of 2003.

With respect to the common stock dividend, I would reiterate what we've said in the past.

Specifically, that we focus on a number of metrics including our earnings and projected earnings growth rate, cash flow, and payout ratio.

As we have said before, when we look at these items we believe they provide opportunities to increase the dividend.

We've taken a hard look at our long-term forecast and see many of the same opportunities and challenges that I described a moment ago with respect to our 2004 forecast.

We believe our strategy will result in growth of about 3 to 5 percent over the longer term.

Importantly, in developing our longer-term forecast, we have assumed essentially no growth in wholesale prices, which some in the industry may find to be conservative; and we have assumed that no new assets are added to our portfolio.

There are elements of our strategy that provide visible growth, and they include the increase in polar prices under the contract with PPL Electric Utilities, including the 8.4 percent increase that will occur from 2005 to 2006; increases in the volume of polar sales to Electric Utilities; and the new turbines installed at Susquehanna that I mentioned earlier.

There are other elements of our strategy that provide opportunities but still have uncertainties, and these would include the PPL Electric Utilities rate case and the WPD rate review in the United Kingdom that Larry discussed.

There are still other opportunities we are in the process of clarifying, and these would include future pension income or expense, and the point at which our growing equity ratio would permit us to buy back common stock consistent with our plans to improve our debt ratings.

In addition we are continuing to look for opportunities for growth by adding selected assets.

And of course, our projection of flat wholesale prices over the longer term may prove to be conservative.

That concludes our prepared remarks.

I will now turn the call back to Bill Hecht who will moderate the Q&A session.

Operator, we are ready for questions.

(OPERATOR INSTRUCTIONS) Ashar Kahn with Foresight Investment.

Congratulations on a good year.

John, could you give us a breakup for the '04 forecast between the different business segments?

Yes, hold on just one second.

We are looking now at about 75 percent of the earnings would come from the supply group.

About 18 to 20 percent from international; and then the balance would be from domestic delivery.

Okay and could you just provide us what distributions of businesses ROE was earned in '03?

Domestic delivery probably low single digits.

Mid to low single digits.

And John, if I heard you correctly, you are saying the 3 to 5 percent growth rate does not assume a rate increase for the distribution business.

No, it does include the rate increase for the distribution business.

It includes the rate issues that we've identified, which is the rate review at WPD in the United Kingdom which will become effective in April of '05; and it also includes a rate increase at Electric Utilities which Larry mentioned, which Larry talked about, that will be filed this year.

It does not include any assumption that we have acquired any new assets.

Okay.

Can you share with us, I know you provided in the earnings release the megawatt hours of the wholesale business.

Could you share with us what kind of average prices they translated into?

Let's take the PJM first.

We are seeing peak prices in the mid-40s; off-peak in the mid-20s.

So out in our Montana operations, mid-C below 40s on peak and low 30s off-peak.

And then another delivery point out West at Mead, a little higher, up closer to Las Vegas, low 50s on peak and low 30s off-peak.

Those are rough numbers.

I really appreciate it.

If I can just add, can you share with us now what the size of the rate case might be?

No, we do not have a number at this point.

I appreciate it.

Thank you.

Kit Konolige, Morgan Stanley.

A couple of questions.

On your looking forward into '04, can you tell us what kind of hedging, if any, you've done on currency and on your generation output?

Let's talk about generation output first.

We are essentially fully hedged in the East.

I guess we could say our hedge ratios in the East going out over the five-year period are in the mid-80s; some years approaching 90 percent.

In the West we are hedged out through '06.

Next year we are hedged in the mid-80s, and out through '06 out at least 70 percent.

And then of course our contract expires in '07 with Northwestern, and you probably have seen that Northwestern has announced an RFP shortly for that contract.

Of course we will be participating in that.

Currency hedging, I'll ask Larry to give you a general idea of where we are in that.

We obviously focus on the UK, and then we've also brought Chile into the picture.

We are now looking to hedge up to 50 percent of earnings from WPD in the UK; and we are targeting 50 to 75 percent of earnings to be hedged in the Chilean peso.

And I'm not going to tell you how much of that we've done today.

One other question.

Two questions actually related to WPD.

First of all, can you just give us, just as a guideline, if there were to be a 5 percent price reduction at WPD, and no offset, just the impact of that price reduction; what would that translate into in either net income or earnings per share?

Larry, do you have a number on that?

I am going to get you there another way, Kit.

I think if you just assume the top line will flow right through, 5 percent should be about 35 million U.S. dollars top line, 5 percent rate reduction.

And what is the tax rate?

I'm sorry.

Maybe Tim Paukovits can get that for you.

But what we can not give you is what rate change we've built into our business plan.

Understood.

You could, but you won't.

Let's put it that way.

That is very effective.

One last question on WPD.

Is there any cash that is repatriated from WPD to the U.S.?

And/or any plans to do that in the future?

We have been bringing cash back to the U.S. from WPD.

We generate significant cash in WPD, and we have used some to retire higher cost debt in the UK; and we've repatriated some.

Excellent.

Thank you.

Paul Ridzon with McDonald Investments.

Could you quantify what the benefit was from the Isabel deferral?

Then I guess a couple more questions.

WPD certainly exceeded expectations.

Is this strength sustainable?

Was there something anomalous about '03?

Or like I said, can this continue?

And the third question, at EEI there was some discussion that with more certainty about synthetic fuels, you might increase your exposure.

Not necessarily because you thought you might get a multiple on the earnings, but the cash flow would be useful in strengthening the balance sheet.

And I guess lastly, what assets are you eyeing?

Let me take them from the last back to the first.

We don't have any specific assets that we are looking at now that we are prepared to discuss publicly.

With regard to synthetic fuel, we do see the possibility of increasing our synthetic fuel operations.

We would only do so with a private letter ruling.

And our indications, of course, are that the IRS has begun issuing PLRs.

Your question with regard to WPD's sustainability, it was an exceptionally good year, and I wouldn't necessarily expect every year to be this strong.

But we do expect WPD to continue to add to earnings, and I think we can certainly affirm that.

Now Hurricane Isabel, Larry?

The deferral amounts to 6 cents in 2003 earnings.

Paul, did we catch them all?

Yes, you did.

Thank you very much.

David Schanzer with Janney Montgomery Scott.

First of all with regard to weather, I know it is difficult with the supply part of business; but in the fourth quarter, could you give us what the difference was versus normal expectations?

In terms of cents per share of earnings?

We will take a shot at it, David.

Of course weather extremes help the delivery business; and depending on what your position is on the supply business, it can go either way.

So with that caveat, maybe John can take a shot at it.

Rather than give you something without having a chance to translate it into earnings, let us call you with that.

Great.

My second question was, you talked about a fleet availability factor of 91 percent overall.

Could you compare that in the fourth quarter to what your expectation -- what was the availability factor in the fourth quarter versus your expectations?

They were essentially the same.

We had planned on about a 91, almost 92 percent; and the actual came in within a tenth or so of that plan.

Okay, great.

And the last question is the auctions in Maryland.

Is there any intent on your part to participate in those?

Yes, we have an intent to participate in the Maryland auctions, correct.

Okay, great.

Thanks.

Tom O'Neill (ph) with Lehman Brothers.

Just wondering if you could review again the 2004 East and West hedge levels, as well as 2005.

I'll take a shot at it.

In the East we are essentially fully hedged in '04.

Beyond '04 the hedge levels out over the five-year period vary from the mid-80s on up.

In the West our hedges were about hedged in '04 in the mid-80s, and then out through the five-year period hedged 70 to 80 percent.

And of course in '07 the Northwestern contract expires, as I mentioned.

But that gives you a general idea of how we are hedged.

I just might mention that hedge ratios, as we increase the complexity and sophistication of our hedging activities, hedged ratios become less and less of a complete picture.

Because we are entering into contracts like the one in Connecticut, that is load-following.

So there are a family of hedging techniques that we use, a variety of products.

So the hedge ratio is an indicator, but it is certainly not complete.

I think I caught the Western pricing that you were saying was 40s and 30s on and off peak, or 50s and 30s on and off peak.

Could you review the East pricing again?

Yes in the West at mid-C we are seeing on-peak prices.

In the East PJM mid-40s off-peak mid-20s.

And West low 40s, low 30s at mid-C; and up at Mead low 50s low 30s on and off peak.

So East you said mid-40s?

Mid-40s on peak, mid 20s off peak.

Okay.

So the primary factor, I just wanted to understand the 2004 earnings guided, which the band is still pretty wide.

Primary driver of that would be the West still being 20 percent unhedged?

No, I wouldn't say it is necessarily in the supply business.

There are, as you well know, any number of items that can affect earnings.

So I think there is a fair degree of conservatism in the way we tried to give guidance.

We try not to give the impression of certainty where we do not have certainty.

Any number of things can affect earnings.

So I wouldn't say it is just the unhedged generation.

I might even mention that, as you can expect, if we hedge completely, then we have increased earnings volatility by exposing ourselves to adverse effects of powerplant outages.

So a higher hedge ratio in the extreme is not necessarily good.

I want to just also reiterate something that we hopefully explained earlier.

Our forward guidance does include our best judgment of outcomes of rate proceedings, but it does not include any growth in prices.

Some people may find that conservative in this industry.

I don't know.

But we've assumed relatively flat wholesale prices, as well as no new assets in our plans.

Would you mind maybe highlighting the top three in your mind of what is driving the range in 2004?

I am going to ask John to do that.

I think he tried to earlier.

Just to go back through those, I think the things that we see as positives for '04, as you know we are increasing the capacity at Susquehanna.

We are replacing the turbines in unit 1.

That will add 45 megawatts of capacity at Susquehanna.

There is a higher price for the generation that is sold to provider of last resort customers, at Electric Utilities of Dunkshop (ph).

That price goes from $42.70 in 2003; goes to $43.30 or about a percent and a half in '04.

We are seeing low growth at Electric Utilities of about 2 percent.

Anticipate lower interest costs.

And then of course the benefits of the contracts that we have put in place recently;

Arizona, the New Jersey contract, Connecticut, and the Idaho contract.

Some of those Jim mentioned.

So those are the key drivers for '04.

I am trying to better understand what causes uncertainty for you, outside of conservatism, in that range.

Well, going the other way there are other things that impact that.

As Bill mentioned, the level of wholesale prices.

We have more dilution from the common stock that we have been issuing to support our credit ratings.

I mentioned there has been about $1 billion of common stock, or a little over 28 million shares.

Plus we have another 10 million shares that will be issued in May when the PEPS units convert to common stock.

Remember, net income is going up.

When you look at earnings per share, it is driven by the dilution from the PEPS units, with the additional 10 million shares.

On the other side, we have higher operating expenses for Electric Utilities, including ancillary cost that Larry talked about.

And then there is the depreciation for the powerplant leases that came on the balance sheet.

So those are some of the things that go the other way on us.

Some of the volatility in earnings, which I think is what you're groping for, with the same plant availability, if we happened to have a forced outage during a peak load period, compared to a forced outage during a spring or fall, it can be a big swing in earnings.

A long forced outage at a major unit, several day outage for a major unit on peak, can be a half a cent a share without any problem.

So you can get that kind of volatility.

And we have found, you may remember we narrowed our earnings guidance for '04, and our ongoing earnings came in ahead, a penny ahead of the narrowed guidance.

So that is just -- fundamentally, though, we think the fundamentals of this business and how we manage it, excellent powerplant performance, strong attention to profitability in the delivery businesses, and a thoughtful quantitative, risk-managed hedging program gives us some really long-term stability and growth.

Okay, thank you.

Tom Hamlin with Wachovia Securities.

Am I getting this straight, then?

With the 6 cent deferral of the Hurricane Isabel costs, you would have actually had a negative 2 cents of contribution from the delivery business in the fourth quarter?

I believe so.

With the 4 cents positive.

So the 6 cents will be part of the rate filing that you're going to make?

That's right.

And is recovery of that 6 cents then an earnings neutral event?

Yes.

So it would just be revenue offset by an expense amortized over some period of time?

Correct.

So then these other expenses have led this to be a money-losing business?

The delivery business?

Or was there something -- I mean you said that the transmission costs were higher, the O&M costs were higher, and pensions.

Is there any one of those that particularly drove this into negative territory?

For the fourth quarter.

Over the year it was not a negative.

And of course the hurricane costs were extraordinary and are recognized as such by the Commission's ruling to defer them.

So it is not a negative business.

But it is a business that is underperforming, and that is largely a result of the restructuring settlement that we entered into that gave us the advantages of moving the power plants into exempt wholesale generator status.

And we understood at that time that that would be partially offset by a delivery rate cap that expires at the end of this year.

So that was a package deal, and we think it was just sound at the time we made it.

And in hindsight, it is still sound.

Is 17 million all of your Hurricane Isabel costs?

Yes.

And there was also lost margin due to lack of sales during that time period also.

Is that a meaningful number at all?

I am not sure.

Larry, do you want to take a shot?

I don't know.

We can tell you that because of the weather throughout the year the load on the delivery system actually exceeded what we had (multiple speakers).

I think what you saw during the hurricane period would have been negligible.

Great.

Listen, thanks.

Good luck in '04.

Steve Fleischman with Merrill Lynch.

First a question for Larry regarding the UK rate review.

I know the tenor going into this has been better, and I know I think you guys have felt that way.

Is it March when you really start getting a better feel for numbers?

And is there any other kind of stuff on the margin that you might be seeing that makes you feel either better or worse right now about the case?

Nothing specific to make us feel better or worse.

I think you are correct in terms of there are several milestone events, and we've already started seeing some consultant reports and suggestions from OPGEM (ph).

It will be a very long year and we will know the result on the first of April to put in place in 2005.

Okay, and then on the supply business, this Northwestern RFP for '07, is there a rough date on when the outcome of that will be known?

We don't have an expected date yet as to when a decision will be made.

We do know that that offering will take place in '04, probably second quarter.

But we don't have any indication yet when a decision will be made.

I would assume the forward markets there are, if anything, probably higher than your current contract price.

That's correct.

Finally, Jim, could you give us a sense of the snowpack and hydro situation to date, going into '04?

As we looked at our '04 hydro budgeting, as I mentioned earlier, we were 8 percent off in '03.

We are still suffering the results of a long-term drought out West.

We did budget or look at our flows.

The snowpack is improving.

But we still are conservative in looking at hydro expectations for '04, and still are considerably below the long-term 65-year average that we use as a benchmark.

Okay.

Thank you very much.

Brian Olson (ph) with Luminous Management.

Congratulations.

Just wanted to see.

You guys commented a little bit on dividend policy and had mentioned some share buybacks.

I just wondered if you could update that status?

As well as in context of higher free cash flow than I think (indiscernible) was forecasted.

With regard to dividend policy, I think John covered it and I could just reiterate.

We look not only at payout ratio; we look at cash flow.

And we do believe that the situation that we are in gives us the opportunity to consider a dividend increase in the not distant future.

We can't be more specific than that and, of course, the Board would have to act on that.

Stock buyback is down the road.

We are simply in the process of extrapolating what our business results will be, based on the assumptions that we've given you, that we don't have any new assets and that we don't have any dramatic changes or increases in forward curve.

And as we do that, of course, over time we see the equity ratio grow.

And it's a matter of something that we would have to consider a couple of years from now if the equity ratio does in fact follow that track, what in debt rating do we set as a target for ourselves; what expectations do the rating agencies have; and would a stock buyback, in fact, make the most sense for the use of free cash.

We certainly would consider a stock buyback in light of not only what the debt rating agency's expectations are, but in light of other opportunities to use the cash to grow the business.

So there are no plans to buy back stock at this time, but if we extrapolate we see ourselves in a situation financially a couple years down the road where we would look at our alternatives.

John, do you want to add more to that?

No, that's right on.

I just have one other question.

I was just wondering in the current environment if you guys were running the peakers you have across the portfolio, and sort of what's the forecast for those for the year?

Generally speaking, the answer is yes, we are running them.

We run them for various purposes.

We may be running them to cover some peak protection in some of our wholesale arrangements.

We may as well be running them to cover load in the PJM area.

Different reasons at different times.

Do you have it in the forecast sort of how much you plan on running the peakers?

Hang on.

I think while Jim looks for a more particular number, just point out that any variability in the price curve or the load curve shows up as high variability in the operation of the peakers.

So you could see the peakers vary in capacity factor pretty dramatically, and not necessarily have a big impact on earnings.

We have operated Wallingford particularly this winter in support of the New England power pool.

Really not an appreciable change from our expectations in '03, from our results in '03.

If there will be any increase, it's as Bill mentioned; you might see additional runs in our Wallingford facility associated with CL&P deals or bidding into the New England pool.

Okay, great.

Thank you very much, guys.

Douglas Lee (ph) with UBS.

Question for you about the capitalization ratio.

How are you growing the equity to total capitalization from 48 percent to 36 percent?

Can you please walk through the mechanics of that?

There are two principal things that will happen.

One is that the PEPS units reflected in the 28 percent as debt become common equity when the conversion occurs in May of this year.

Then the other is that we will have retained earnings from ongoing operations.

Those are the drivers.

Okay, thank you.

Nancy Doyle (ph) with MetLife.

To what extent have you hedged your coal supply?

Jim can speak to that.

I think for '04 we are essentially hedged out in coal.

We are currently at above 90 percent hedged in our coal situation for '04.

Again we are here at the end of January.

So as we move through the first quarter, that number will rise rapidly towards full hedge.

Do you give longer-term protection?

Yes; as you move out through the years we see mid 70s and out in '05; and then of course they drop off.

But as we move forward in our plan years, those numbers move upward to be reflective of what you're seeing now.

Let's say as we sit in January of '04, you are going to see coal hedged at above 90 percent.

Okay.

On WPD I know you have taken dividends out, but do you plan in '04 to reduce the amount of cash you are taking out of there in order to further pay down debt?

No, not our current plan.

What kind of rate cut would have to take place before you would feel forced to eliminate the dividend?

I don't think we can answer that.

We are pretty positive on WPD's operations and our ability to manage the property through a range of regulatory actions.

So we are fairly comfortable.

Okay, thank you.

Jeff Burch with Banc of America.

Another question on WPD.

I think you said in the past that you would not pull any dividends out of there unless the debt to asset value ratio was below 90 percent.

If you're bringing back cash into the U.S., can we assume that you guys have achieved that ratio?

We are working to achieve the ratio, but we are bringing cash back consistent with the ratings impacts in the UK.

Okay, thank you.

Bob Sullivan with UBS.

Sticking with that point for one second; how much cash did you bring back from WPD in 2003?

In round numbers, $25 million.

On your fuel for 2004, what do you expect for fuel expense versus '03?

You're hedged on the coal side.

Is that at higher prices in '03, lower prices, same prices?

What should we expect there?

We are seeing modest increases in coal.

We are seeing slight increases as we move out.

And of course gas, as we look forward at gas, those numbers over plan; although they are a little high now; 650 delivered for a million BTUs.

They are relatively flat over plan life, through our projections now.

In terms of the change in the higher polar price, does that get offset at all by higher fuel expense, in other words?

To some extent but not to a large, material extent.

Okay.

We've got over 2200 megawatts of nuclear that goes -- you don't usually label megawatts of course, but you can think of the nuclear as being pretty well a fixed price.

Some limited amount of hydro in the East.

And our coal hedges are pretty effective.

We are not seeing the rate of increase in coal prices, because of our contracts, that some of the market is showing.

So all in all, I don't think the fuel prices are having a material effect on our expected margin from polar during '04.

Good.

One final question on WPD, can you give the return on equity at the utility level?

For the utilities for '03?

I am not sure we readily have the number.

We will take a quick look and if we can't give it to you now, we'll have to get back to you with it.

But that is not as --.

Right, but just a --

-- UK of course as it is in the U.S. with the ROE regulation.

The regulatory structure in the UK is different.

Just to get some sense to back into the actual earnings with the utility.

Okay, thanks.

We don't have it.

Maybe if Tim Paukovits can get hold of it, he will give you a call, okay?

Great.

Thanks.

Paul Patterson, Glenrock Associates.

My question has been answered.

Tom Lyons (ph) with UBS.

I wanted to clarify if I could and summarize a lot of the comments that were made about WPD.

Could you please confirm the following points.

The first is that your objective is to hit a 90 percent debt to regulatory asset value ratio by the end of the current price review period, March 2005.

Second, only if that comes under threat, or only if the credit ratings come under threat, would you feel a need to restrict the dividend from WPD to PPL.

Could you just please comment on whether or not those statements are true?

Do them again, would you?

I'm sorry.

The first point is my understanding has been that WPD targets a ratio of 90 percent debt to regulatory asset value by March of 2005.

We didn't say that in this call did we?

No, I received that from prior reports.

We are at roughly that ratio now, if that helps answer your question.

I frankly don't recall that particular comment.

That may have been made, but I don't recall exactly when it was made.

But we are at about -- debt now is in the neighborhood of 90 percent of RAV right now in the UK.

If that helps answer your question, we expect to bring back cash next year from WPD.

Secondly, did you say earlier in this call that you're managing WPD's dividend policy in an attempt to maintain the existing credit ratings?

We are managing the debt level in the overall operation to maintain the current credit ratings, yes.

And that gets factored into it.

So if the credit ratings were under strain, one possibility would be to curtail or reduce or suspend the dividend from WPD?

No, our dividend policy today reflects our expectation of what it will take to maintain the credit rating.

Okay, depending on what happens in the price review we should expect the existing dividend policy to stay as it is going forward?

Yes.

Okay; and I think you mentioned earlier that you're not able at this point to characterize your expectations for how the price review will turn out.

That is, there is not a range of impact on the top line that would be appropriate to measure at this point?

That's correct.

All right.

Thanks very much for clarifying those points.

(OPERATOR INSTRUCTIONS)Tom O'Neill with Lehman Brothers.

Just on the earnings mix that you laid out, I think you said supply at 75 percent this year; and that is down from 80 percent previously.

International 18 to 20 percent, versus 13 percent previously.

So it seems like you are moving 20 cents from supply into international.

I guess international I would suspect is a combination of a higher foreign exchange rate versus the prior timeframe, as well as some improvement in Latin America.

If you go back and just look at -- I am just now taking what we told you for '04; and compare that to the actual results from '03.

They are pretty close.

Look at it; this is earnings from ongoing operations in '03, 73 percent came from the supply business, roughly 20 percent from international, about 6 to 7 percent, somewhere in that range, from delivery.

I'm just comparing it to the prior guidance that you gave in terms of earnings mix.

What has changed?

We're trying to round numbers, and I still think we are somewhere in excess of three-quarters of our earnings from the supply business.

And the remainder is what split between international and domestic delivery; and somewhat more than half is international, and somewhat less than half of the remainder is domestic delivery.

So it can vary a percent or 2 percent from that, but it is still in that range.

Something more than three-quarters from domestic supply, and the remainder split between the two delivery segments, a little bit more than half of the remainder from international, a little bit less than half of the remainder from domestic.

One final question, I am curious how much equity you have invested in Latin America?

And whether that is something you would consider for divestiture as operations start to improve?

We will look for a number for you.

Yes, we would consider it for divestiture if conditions were right.

But we would look at what we thought the earnings profile going forward would be, versus what the market is for the assets.

And also what we would do with the proceeds, and how we would replace the earnings from Latin America, and how we would deploy the cash proceeds from the divestiture.

So I don't think I would treat that divestiture consideration a whole lot differently than many other assets.

You look at what the market is for it, you look at whether a buyer has a different view of the future than you do, and look at where you would deploy that cash to grow the business.

The carrying value of our investment in Latin America at the end of the year was $537 million.

Great.

Thank you.

Douglas Lee with UBS.

That's okay; my questions have been answered.

Thanks.

It appears there are no further questions at this time.

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

We thank everyone for their participation this morning.

We hope we've been able to answer your questions; and we look forward to working with you in the future.

Take care.

This does conclude today's teleconference.

We would like to thank you for your participation.

You may now disconnect.