賓州電力 (PPL) 2004 Q1 法說會逐字稿

Good day, everyone.

Welcome to PPL Corporation's first 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.

Thank you.

Good morning.

Thank you for joining the PPL conference call on first quarter 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 Corporations' form 10K report and other reports on file with the S.E.C.

In discussing 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 press release issued this morning, the link for which you can find prominently displayed on the home page of our website, www.pplweb.com.

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

Good morning.

First let me introduce the people that are here with me this morning, John Biggar, Executive Vice President and Chief Financial Officer;

Jim Miller, Executive Vice President with responsibility for our Supply Group; and Larry De Simone, EVP with responsibility for Domestic and International Delivery businesses.

I will begin with some introductory remarks about this quarter's performance, and Jim Miller will review the results of our Supply Group, and then Larry will talk about the Delivery businesses, domestic and international, and John will follow with a financial review and a discussion of our '04 forecast and longer-term outlook, and then we will open it up for Q&A.

First quarter PPL reported net income or earnings of $177 million or 99 cents per share for the first quarter, compared with $239 million or $1.43 per share last year.

That's on an as reported basis.

PPL recorded an unusual charge of 4 cents per share in the first quarter of this year for the sale of its minority interest in CGE, a Chilean electric distribution company, that's a small share that we owned in passive investment.

In the first quarter of '03, PPL recorded an unusual credit of 37 cents per share due to the adoption of a new accounting standard for asset retirement obligations.

So, on a non-GAAP basis, earnings from ongoing operations in the first quarter this year were $185 million compared with $176 million for the same period last year, or $9 million higher.

Earnings per share from ongoing operations were $1.03 in the first quarter of this year, compared to $1.06 for the first quarter of '03, and that decline reflects the dilutive effect of the additional common stock that was issued to improve our liquidity position and strengthen our balance sheet.

First quarter results showed underlying strength of our hedging strategy and our business model, and we are on target to achieve our 2004 earnings forecast.

We continue to forecast 2004 earnings from ongoing operations of $3.45 to $3.75 per share, and that's the same forecast that we gave you in our call last October.

And that forecast reflects the net benefit of 7 cents per share from three unusual items.

There's a first quarter charge of 4 cents per share for the CGE sale, as I mentioned earlier.

There's an expected charge of about a penny a share for discontinued operations at our El Salvador SALTEL unit, and an expected credit of 12 cents per share for the transfer of ownership in SIMAR, the former electric distribution company in Brazil.

Our margins from wholesale and retail sales in the first quarter increased considerably over 2003 despite significant decreases in fuel prices, - increases in fuel prices nationwide, both natural gas and oil and coal.

As a result of the very strong performance of our power plants and the effectiveness of our long-term electricity sales arrangements, and our long-term fuel supply contracts, we were able to improve margins over 2003 by about $43 million or 14 cents per share.

Those increases in margins were split roughly evenly between the Eastern and Western supply operations.

As you saw in our earnings release, the breakdown of first quarter earnings from ongoing operations by business segment, was consistent with the segment break down that we reported in last year's first quarter.

There were some timing differences, however.

There was a particular timing difference of about 4 cents a share related to costs incurred in the Susquehanna outage, that I want you to understand that, it was also dilution that I spoke about earlier.

The 4 cents a share result from the Susquehanna outage is a timing difference.

On a comparable basis, costs of that nature would have been booked last year in the second quarter, not in the first quarter.

John Biggar will address first quarter earnings factors in a few minutes.

Now, let me turn the call over to Jim Miller to review the supply business and then Larry will pick up with the delivery operations.

So, Jim?

Thank you, Bill.

Good morning, everyone.

I will now review the first quarter performance of our Supply business segments.

In the first quarter of 2004, supply earned 50 cents per share from ongoing operations compared to 54 cents per share in the first quarter of 2003.

Lower earnings per share were primarily the result of dilution from increased shares of common stock outstanding.

The company's strong performance in the retail and wholesale supply businesses was offset in the first quarter by an increase in operation and maintenance costs and higher depreciation expenses due to an accounting change at the end of 2003.

The increases in O&M primarily resulted from the timing of expenses from the refueling outage at PPL Susquehanna Nuclear Plant, as Bill earlier referred to.

The accounting change required the company to consolidate on its balance sheet certain power plants that were previously treated as operating leases.

Supply realized greater than expected energy margins from both its Eastern and Western operations, with these increases being about evenly split between the two regions.

Higher revenues from provider of last resort service, to PPL Electric Utilities, resulted from the return to PPL Electric Utilities of commercial and industrial customers, who had previously shopped on the competitive electricity market, and a 1% increase in prices for all provider of last resort customers.

Supply saw increases in wholesale volumes in the West that were driven by higher output from PPL's hydro and coal-fired plants in Montana.

In addition, the effects of our systematic and disciplined hedging strategy and focus on operational excellence, allowed supply to realize an increase in the average price for its sales in the East and in the West, while holding the average generation fuel cost flat.

Because of the high level of fuel under contract and a more favorable mix of generation as low-cost coal in 2004 replaced higher cost oil and gas generation, which was used in the East in 2003.

Our production facilities continue to run well in first quarter and achieved the first quarter equivalent availability that exceeded 89%, which included the effects of having two of PPL's largest generators, Susquehanna unit 1, and Montour unit 2, scheduled out of service to perform periodic planned maintenance.

In addition to the strong equivalent availability performance, our prime time availability, the measure of our availability during peak periods, was over 97% for the first quarter.

PPL's syn-fuel operations completed another successful quarter in 2004 by contributing over $6 million in net income or approximately 3 cents per share.

A private letter ruling for Tyrone, a new syn-fuel facility located at Synergies East Bend, Kentucky generating station in which PPL has a limited partnership interest, was issued by the IRS on April 14th of this year.

Relocation of that facility from its location in Tyrone, Pennsylvania, is in progress with production at the East Bend Station expected to commence in mid 2004.

The incremental earnings were included in our 2004 forecast, and are expected to be $2.9 million or about 1.5 cents per share.

In summary, the Supply group results are bolstered by continued excellent performance of our generating fleet and growing margin contributions from our energy marketing center.

Now, I would like to turn it over to Larry De Simone.

Thanks, Jim.

My objective today is to summarize the performance of our Domestic and International Delivery business segments.

Our Pennsylvania delivery business earnings from ongoing operations for the first quarter of 2004 were 22 cents per share compared to 22 cents per share for the first quarter of 2003.

The first quarter is traditionally the strongest quarter of the year for our Domestic Delivery business segments.

While our electric delivery rates remained capped, we continue to experience upward pressure on costs due to higher salary, pension, healthcare and depreciation expenses.

We have also experienced an increase in PGM transmission related charges to serve our provider of last resort load.

For our International business segment, earnings from ongoing operations for the first quarter of 2004 were 31 cents per share compared to 30 cents per share for the first quarter of 2003.

We continue to achieve strong performance across our United Kingdom and Latin American subsidiaries.

The strong performance of Western Power Distribution in the U.K. was enhanced by a favorable currency position.

The benefits of full ownership of Western Power Distribution remain evident.

PPL serves 5 million energy delivery customers on three continents.

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

In 2004, we are pursuing two very important regulatory matters.

Rate reviews for our Pennsylvania and United Kingdom Electricity Delivery businesses.

In Pennsylvania, we are proposing to increase our electricity delivery revenues by about 8%, or about $221 million a year.

About 3/4 of the increase, or $164 million, stems from a request to increase our electricity distribution rates, which require State Public Utility Commission approval.

The remaining 25%, or $57 million, is related to increased charges that our PPL, that our PPL Electric Utilities pays to others for transmission services.

These PGM transmission charges are based on rates that are on file with the Federal Energy Regulatory Commission.

To put our proposed rate increase in perspective, PPL Electric Utility customers are paying about the same rates today as they were in 1986.

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

We filed the Pennsylvania request in late March, and we expect a decision by the end of the year, with new rates going into effect on January 1, 2005.

Our Western Power Distribution company in the United Kingdom also is undergoing a rate review.

This process occurs every five-years.

The price review process in the United Kingdom is markedly different from the rate review process in Pennsylvania.

The U.K. regulator will be reviewing the company's cost of doing business, and its performance versus other electricity delivery companies in determining what WPD's rates should be for the next five- years.

WPD is a frontier performer in the United Kingdom.

We believe that WPD ranks at the top of U.K. distribution network operators in comparisons of customer complaint rates, frequency of customer interruptions and restoration of service.

The regulator, which has begun publishing some of the of the ground rules for price review, is expected to make a decision by the end of the year.

New rates for the U.K. will go into effect on April 1, 2005.

In both Pennsylvania and the United Kingdom, it's our expectation that our excellent record of customer service and operating efficiency will serve us well as regulators review our electricity delivery rates.

It's still too early in these rate review processes to have a clear picture of the results.

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

Thanks, Larry.

Good morning.

Our performance in the first quarter demonstrates that our strategy continues to provide growth for our share owners.

As Bill indicated, income from ongoing operations in the first quarter of this year was $185 million, compared to $176 million a year ago, an increase of a little more than 5%.

On a per share basis, we earned $1.03 from ongoing operations compared to $1.06 last year.

This number reflects the dilutive impact of having about 11 million more shares reflected in average shares outstanding, when calculating earnings per share.

At the same time, however, the additional common stock has allowed us to improve our liquidity position and strengthen our balance sheet.

With respect to liquidity, at the end of the first quarter, we had $572 million of cash on hand, and credit facilities available to us of $1.3 billion.

Our balance sheet is stronger.

Our March 31, 2004 equity ratio, calculated on a GAAP basis, was 29% compared to 28% at the end of last year.

Now, as we have mentioned in the past, we think it makes sense to look at cap ratios by excluding $1.35 billion of transition bonds and $2.3 billion of debt of our international affiliates, both of which are nonrecourse to PPL.

Also, we have treated our PEPs (ph) units as equity since they will convert to common stock next month.

When you look at it on that basis, our equity ratio was 49% at the end of the first quarter of this year, compared to 48% at the end of 2003, and 40% at the end of the first quarter of last year.

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 megawatt increase in capacity from turbine replacements at Susquehanna; a higher price for generation under our Polar contract with PPL Electric Utilities for customers who choose not to shop for their electricity supply; rejected load growth of about 2% at PPL Electric Utilities; and the benefits of the previously announced wholesale energy contracts, including those in Arizona, New Jersey, Connecticut and Idaho.

At the same time, we continue to face a number of challenges, such as the level of wholesale energy margins; a projection of lower pension income; higher operating expenses for PPL Electric Utilities, including higher transmission related or ancillary costs that are subject to regulation by FERC, that Larry mentioned a minute ago; and depreciation associated with power plant leases that came on the balance sheet at the end of last year that Jim discussed in his remarks.

We are projecting an increase in total earnings from ongoing operations in 2004 as compared to 2003.

But on an earnings per share basis, this is offset by the dilutive effect from the additional shares of outstanding common stock that I spoke of earlier, and next month's issuance of $575 million of common stock in connection with our PEPs units.

As a result, and as as Bill noted earlier, we are confirming our previously announced 2004 forecast of earnings from ongoing operations of $3.45 to $3.75 a share.

We are also projecting increases in cash flow, a strengthened balance sheet and improved credit metrics this year.

We are now forecasting positive cash flow of about $200 million in 2004.

The approximate components of that positive free cash flow are: $1.33 billion of cash from operations; proceeds of $123 million from the sale of our minority interest in CGE, that Bill mentioned; $690 million of capital expenditures, of which about $600 million or a little more is sustenance capex; and I should point out this is a $160 million reduction from our capital expenditures in 2003.

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

Positive free cash flow of $200 million this year would be a $250 million improvement in free cash flow from 2003, and we are projecting a little over $400 million cash on hand at the end of 2004.

On a GAAP basis, our 2004, year end 2004 equity ratio is projected to be 37%, a significant improvement over the 28% equity ratio at the end of 2003.

Adjusted on the basis I outlined earlier, our year end 2004 equity ratio is projected to be 52% compared to 48% at the end of last year.

With respect to the common stock dividend, I would reiterate what we have said in the past, specifically that we focus on a number of metrics, including our earnings and projected earnings growth rate, cash flow, and our payout ratio.

As we have said before, when we look at these items, we believe they provide opportunities to increase the dividend, and, as you recall in February, we did increase the common stock dividend by 6.5% or 10 cents a share on an annualized basis, and the dividend at that new rate was paid April 1st of 2004.

Of course, the annualized dividend rate now is $1.64 a share.

We believe our strategy will result in a compound annual growth rate in earnings of about 3% to 5% over the longer term.

Importantly, in developing our long-term forecasts, we have assumed that that no new assets are added to our portfolio.

The elements of our strategy that provide visible growth include: increases in the polar prices under the contract with PPL Electric Utilities, including the 8.4% increase that will occur from 2005 to 2006; increases in volume of polar sales to PPL Electric Utilities; and the new turbines installed at Susquehanna this year; and additional planned incremental capacity increases of about 200 megawatts at several existing generating facilities.

Other elements of our corporate strategies provide opportunities but have some uncertainties, these would include: the PPL Electric Utilities rate case case; and the WPD rate review in the United Kingdom, that Larry spoke about.

There are still other opportunities that is we are in the process of clarifying, 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.

Now that concludes our prepared remarks.

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

Thank you.

Okay.

Thank you very much everyone.

Operator, we are prepared to take questions at this point.

Thank you.

Our question and answer session will be conducted electronically.

If you would like to queue up for a question today, please press the star key followed by the digit 1 on your touchtone telephone.

As a reminder, if you are on speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, it is star 1.

We'll hear first from Paul Ridzon with Key McDonald.

Good morning, a quick question.

What was the benefit of the currency swing in the U.K. for the quarter?

Okay, Paul Larry, do you have that?

I do.

Actually isolated, Paul, it was up about $7 million or 4 cents a share.

Okay.

Thank you very much.

We will hear now from Ashar Khan with SAC Capital.

Good morning.

Congrats.

Just going back to the question, could you just mention growth in the International business, how much debt came from the U.K. itself?

I guess, earnings were, on an operational basis, up $5 million, you said it was.

I heard the currency thing, so, if you take out the currency out, would that imply that that International business was kind of flat to slightly down?

Actually, on an operating basis, the U.K. contributed 85% of International earnings.

It was actually at the operating company level, net income was up.

The same was true for Latin America, 15%, that net income was up slightly.

The currency exchange actually washed with a tax item at the corporate level.

Okay.

Could you just explain that tax item at the corporate level?

It's higher U.S. taxes and we can have Tim provide you some additional detail.

Then, is there a schedule now set up on the electric rate case which would tell us when the - .

Was that the domestic rate case, Ashar?

Yes, the domestic rate case.

The domestic rate case is governed by Pennsylvania Public Utility Code, and it provides for the Commission to make a decision win nine months of filing, and they have been pretty good at holding to that.

So their decision should be adopted and a final order entered by the end of December '04 for effectiveness, Jan. 1, '05.

But is there a schedule set up when we can expect a staff recommendation or when hearings are going to start on the case?

Is there a procedural order or something?

The Commission has not yet even selected an Administrative Law Judge, to my knowledge, but Larry can give you what we have at this early stage.

Bill is right.

Once we have an Administrative Law Judge assigned to the case, that Administrative Law Judge will set hearings.

We are expecting evidentiary and public input hearings sometime in the summer, with the Judge actually preparing a recommended decision to the full Commission sometime around September.

Now, that's an Administrative Law Judge recommendation, and then the Commission would evaluate that recommendation, take some input, and adopt the final order sometime in December.

Ashar, let me - you asked about when the staff would make a recommendation.

I just want to point out that in the proceedings in Pennsylvania, there are two separate staff roles, one role is prosecutory, and the other is advisory.

The prosecutory staff is an intervenor, if you will, in the case with no different standing that any customer, or the consumer advocate, or the corporation itself.

And so that staff recommendation has the same standing as all the other recommendations.

Then the Administrative Law Judge comes out with his or her recommended decision, and then the commission makes a decision.

So I just mention that now to reinforce that, during the course of the case, there will be a number of interveners, and each intervener will have a position, but no one position bears any more weight than any other position.

So the Commission staff, that is the prosecutory staff, they don't have any different role than any other intervener.

The advisory staff, of course, makes no public statement and they are advisory to the Commission in the final stages of the decision making process.

I hope that helps, Ashar.

No.

That helps.

And if I can just - I see Susquehanna is at 100% this morning.

So are there some more extra costs that came up over budget as you finished this refueling outage that we should know or caution about?

Or it came up, according to what your plan was, was this, I think it was two or three weeks of extended outage?

Yes, Ashar.

The repairs that were conducted at Susquehanna were rather small cost impact.

The welding that did extend the outage was in the vicinity of $2 million, and some assorted additional outage work was conducted in the vicinity of an additional $2 million.

So, from that standpoint, the outage costs per se, were not significantly beyond what we expected.

Ashar, I did mention earlier that there were about 4 cents per share of costs for Susquehanna that were booked in the first quarter this year, that in previous years in a similar situation, would have probably been booked in the second quarter.

That's different than what Larry is talking about - Jim just mentioned.

The bigger, probably cost, was the lost production for the extra couple of weeks in the outage, but both units are now at 100% power.

Unit 2 has had a continuous run so far of over a year.

Jim, are you seeing, I guess, are you still on your forecast of no price improvements in the East and West from what you have given us at year end conference call?

And as you look out in the future, or are you seeing any changes in the wholesale prices?

Well, you know, wholesale prices have obviously moved up some.

Remember, that we are fully hedged from a committed power sales standpoint in '04, but prices have been moving up, particularly in the first quarter, but we do see prices in our mark to market moving moving off in the remainder of the year.

So no substantial change in our expectations as far as impact on our margins here on a going forward basis.

And, can you just explain, I know you mentioned, I thought last quarter on the fuel side, you were hit by these spikes.

But you said on a fuel basis, you, the comparison first quarter versus last first quarter came out flat if I heard it in the beginning of the call.

Can you just explain it a little bit better?

I thought the variance might help you a bit more, unless I heard something wrong.

Well, our margins were, as Bill mentioned, and you saw in the release, were higher in the first quarter, but they were offset, as we discussed, with some of the O&M issues and with moving some of the assets on to the balance sheet, were the principal pieces of that.

Fuel costs, we were not affected this year by fuel costs, because of our high fuel hedging levels.

Maybe we can, Ashar, circle back to further questions and take a few others first?

Sure.

Okay, operator.

We will hear now from Paul Patterson (ph) with Glenrock Associates.

Hey, good morning.

I want to touch base with you guys on just the, you mentioned and I didn't get it completely, the actual operating effect or improvements in Latin America and in the U.K.

Could you guys review them, without currency impacts?

How much you guys, it was something like 15%, I think, improvement in Latin America, is that right?

No, no, no, Paul.

What I was suggesting was that, or back to -- 85% of the earnings from International comes from the U.K., and 15% comes from Latin America.

Okay.

We saw a slight improvement in both, at the operating company level.

Okay.

Noncurrency adjusted, it was a slight improvement meaning, what, a couple of percent?

Yes, a percent.

Okay.

The second thing I wanted to ask you was, if you could just highlight a little bit, the, we are we are hearing more about the drought effect in the West and what have you.

I noticed hydro actually improved in terms of its output in the quarter.

Any, any color you can give to that in terms of what you are seeing out there?

Well, from a long-term perspective, Montana still is in the period of a long-term drought, and we expect this year to continue in that vein.

We are seeing a little better hydro production this first quarter, but I would caution, the reason for that is an early melt.

The key issue is that the snow pack is still at reduced levels, which leaves Montana in a continued condition of drought.

Our expectations are that the hydro production will come in about where we had planned for this year, at about, I will say between 70 and 75% of historic levels.

Okay.

And then finally, I noticed on the balance sheet, that there was an increase in goodwill and other intangibles of about $70 million.

Could you just clarify where that is coming from?

All we have, I see a wrinkled brow on my CFO's face.

Which is something - We will sort it out.

We will sort it out and get back to you with an answer.

Okay great, thanks, guys.

Thanks, Paul.

Our next question comes from David Schanzer with Janney Montgomery Scott.

Hi, good morning.

Hi, David.

Could you review for us what is different in this review in the U.K. than the last general review?

And maybe, you know, touch on any issues that you think might be sticking points with them?

Well, let me give you one or two thoughts, and then Larry can add a lot of detail to it.

I think one thing that is very different in the U.K. in this review is that there seems to be an increased sensitivity to the importance of capex to maintain the quality of the infrastructure.

There was significant disruption to electric service in London, and they are recognizing what I think the U.S. has recognized, that infrastructure is a business that you need continuing capex to sustain high quality service or it can get ahead of you.

So I think that's a fundamental difference, lots of other details, but, Larry, you want to add to this?

Yes.

Let me actually, David, complement what Bill said with comment on the capex first.

In previous reviews, I think there was a tendency for distribution companies to under spend the capex that they were allocated over the five-year period.

The concern about infrastructure and reliability, I think, is going to actually allow companies to request more capex on a going forward forward basis.

We are looking at numbers from 15% to 40% increases in capital expenditures over all the operating companies in the U.K.

I think because of the under spend, and we have actually been very close to the spend, we are somewhere between 90 to 90% of the proposed spend for the last five-years.

There may be an adjustment where there will be an annual review of that capex, as opposed to just an allowance for it over the five-year period.

The other thing that you might want to watch for is that in mid-June, we will see an initial proposal on the so-called PINOT and the efficiency improvement.

The PINOT adjustments in the past reviews have been 20% or 25%.

I am not sure that is achievable given a forward look of ongoing improvements that you might see and the efficiency improvement have been about 3%.

We will just have to see where that comes out.

The final item that I will mention is that the regulator has indicated that they will be addressing pensions directly in this review, and that is something that hasn't really been directly addressed in the previous price reviews.

By way of warning, the history has been that when that initial proposal was is released in June, it tends to be a lot more severe than the final result.

Okay.

Is there any one of these issues or any other issues that you think, I mean, you have primarily indicated you think you are, on a competitive basis, in good position.

Are any of these issues problems for you folks in particular?

No.

Okay.

Could you also possibly give us an idea of like, say, over the next two or three-years what the annual capex expenditures would be there?

Yes.

We spend, on an International basis, the numbers around $225 million a year, $200 million of that is in the U.K.

Okay, great, thanks.

Thanks, David.

We will now hear from Tom O'Neill with Lehman Brothers.

Good morning.

Hi, Tom.

I was just wondering if you could give us an update on the hedge position for output in 2005?

And then also on the input side, your hedges, coal and otherwise?

Okay, Jim.

Yes.

We will start with coal.

Obviously at this point, in the year, we are fully hedged on coal for the entire generating fleet.

And for 2005, as we stand today, we are really in excess of 90% hedged on our coal.

Looking forward, some significant -- fairly significant hedge positions out in 2006 in excess of 75% hedged for '06 and excess of 65% hedged out into '07.

From a price impact, obviously, spot market is up, we are very well positioned with those hedges in '04 with very minimal impact on a approximate $400 million a year coal budget, and minimal impact from those price increases in '05.

So, very good, very good positioning on our coal prices.

From a standpoint of load.

We are hedged out, obviously, very high in 2004, essentially all the way, and in 2005, we are right now in excess of 85% load hedged in 2005.

And that's about equally balanced East to West?

Yes.

Great, thanks.

I would like to circle back to Paul Patterson's question about changing goodwill.

John?

Yes.

Paul had asked a question about the change in goodwill.

And it's solely due to changes in FX, foreign exchange rates.

Okay.

We can move ahead with the questions then.

We will hear now from Tom Hamlin of Wachovia Securities.

Good morning.

Hi, Tom.

Talking about your earnings growth rate, I think, John, you said that right now, the outlook is 3 to 5%.

Is that just from the existing businesses, assuming nothing new coming in?

That's correct.

In that assumption, what do you assume that you do with the $250 million a year of cash flow?

Initially, strengthen our balance sheet, and I believe as John mentioned, we are examining when, consistent with our commitment to improve our debt ratings, we might consider a stock buy back if we don't come up with a more accretive investment opportunity for new assets.

So included in that 3 to 5 is $250 million of either debt reduction or equity repurchase?

Is that right?

Ultimately, yes.

And, can you give us any flavor on what the kind of assets you might be looking at?

Accretive assets, Tom.

Aren't we all?

Tom, I'm sorry, I don't want to be facetious.

We are examining assets that are consistent with our existing business strategy and our existing portfolio.

We intend to be in the supply business, and in the regulated delivery business, and we intend to do both in ways that we can have effective hedges.

Our strategy has been, from, as you know, from the very beginning, to hedge both our energy production and our fuel supply.

And to the extent we have polar obligations or other retail obligations growing out of wires businesses, to hedge those.

So we are looking for assets that sit back, portfolio, and assets don't necessarily mean generation.

Load can be an asset.

We examined lots and lots of opportunities, but we have a, you know, a fairly high threshold for quality.

Okay.

And that's as good an answer.

Yes, I understand.

My focus was more on what you were doing with the free cash flow in your existing model.

In the very near term, obviously, it's our intent to continue the path that we have been on for the last year or so to strengthen our credit rating.

Okay.

Thanks a lot, Bill.

And move forward.

Okay?

Yes.

Thank you.

Sure, Tom.

Our next question comes from Win Win Chen (ph) with ABN Amra (ph).

Good morning.

Hi.

Hi.

Could you repeat your coal hedging was for 2006 and 2007?

Sure.

Chen.

Yes.

In, say 2006, where we currently stand is in excess of 75%, and in 2007, an excess of 65%.

As we stand today, and of course that number continues to increase as we move through the year.

Have you seen spot prices for coal go up or go down over the quarter?

We have seen spot prices for coal go up significantly over the last year.

We seem to see - We think we are nearing the top of that movement, and can't forecast how long they will stay there, but certainly we expect them to move back down to a new level in the future, here, not too far down the road.

Okay.

And then back to the U.K. for a second.

Have there been any developments since your analysts meeting in New York last month?

With regard to the rate review?

Yes.

No, there have been no, no developments.

It's continuing on the calander that OFGEN has established.

It's quite early in the process.

Sort of looking at a little further, if WPD were to come under any kind of rate, ratings pressure, how willing will you be to support the credit rating of WPD?

We would, you know, we would have to take a look at it, but we do have opportunities by leaving cash in the U.K. from our earnings to strengthen the balance sheet by leaving cash there, rather than by dividending it back to the parent company.

Okay.

And would you see any scenario in which you might send any money over to WPD?

We don't anticipate any scenario of that sort.

In fact, there's enough cash generation in the U.K. to accommodate supporting the credit ratings and still bringing some cash back.

So, any, any support that we would envision to the credit ratings, at worst, would merely involve bringing less cash back to the U.S.

Okay.

Okay.

Thanks a lot.

Moving on to Leslie Rich with Banc of America.

My questions have been answered.

Thank you.

Thank you.

We will hear from Paul Debis (ph) with Value Line.

Hi, this is Paul Debis.

I have a couple of questions.

I understand the Office of Customer Advocate has filed a complaint against your rate proposal.

And I wanted to find out, besides that, have there been any negative response to the filings so far?

It's very early in the process, but we would anticipate a substantial number of intervenors that would -- have their own views on our, on our rate request.

Certainly those would be both the magnitude of the increase, as well as the rate design.

And it's not at all unusual.

In fact, it's, I don't know of any rate case in Pennsylvania that the advocate has not intervened in.

So, we expect a constructive outcome.

I would tell you that, across the board, there has been a lack of, I will say, emotional response to our rate case filing.

Which we view as positive, so that the agency can focus on the issues.

But it's not at all unusual for the Office of Customer Advocate to oppose a rate increase.

That's always been the case.

Okay.

Also, you mentioned that depreciation has increased and I want to know if you have any estimate of what depreciation and amortization would be for this year, including transition cost amortization?

We may want to get back to you with the detail number like that, because you are looking for both depreciation costs, amortization of the transition bonds.

All right, thank you.

Yes.

We will get, Tim Paukovits can get back to you.

All right.

That's fine.

Okay, thanks.

Thank you.

And moving on to Steve Fleischman with Merrill Lynch.

Hi, guys.

Hi, Steve.

What was the impact in the quarter of the FIN 46 accounting change you mentioned?

And what do you expect that to be on full year basis?

Okay, John is going to get that number for you, FIN 46.

FIN 46 in total, about 3 cents in the first quarter.

Okay.

Amortization and higher financing costs, so, roughly 12 cents on an annual basis, Steve.

And, I guess, that was, that was obviously already reflected in your guidance for the year?

Yes, it was.

Okay.

And then maybe if, if you could provide a little more flavor on the West.

In that I guess you are saying that you budgeted for 70 to 75% of normal hydro.

So the fact that we are close to that or even moving a little below, you don't expect to be an issue?

And then I guess how much do you have to potentially sell into a higher- priced power market in that area, too?

Yes.

A couple things, the different forces, you know, hydro production will be below long term norms.

We have thought we have seen, we are part of a long-term drought, and we have seen an early melt.

Some forces in the opposite direction, we have created improved productivity, improved availability at our fossil plants out there, Colstrip and Corette, had a record availability at Corette last year.

And we are seeing increased reports of concerns over power supply adequacy in California for the summer, and depending on how that plays out, that may push prices up around the West.

To the extent it pushes up off peak prices, particularly, can be of particular benefit to us.

Jim, there's a lot of pulling and tugging, but we are maintaining our forecast for the year.

Yes, absolutely.

As I have said, it appears our forecast for hydro conditions was, at least thus far, pretty close.

There has been an early melt that has produced some extra hydro generation for us in the first quarter, but we think that's, that condition will work its way back through to along the lines of our forecast.

But as Bill pointed out, you know, that given, plus our high availability of our Western plants, which first quarter were up in the mid 90s, provides us opportunities in off peak, so we view that as a positive.

Okay.

Thank you.

Okay, Steve.

Let's circle pack to the depreciation question that was asked a bit ago.

We didn't answer that.

There was a question on 2004 projection of depreciation for 2004.

About $400, about $413 million, and, if you will compare that back to the depreciation for 2003 of $380, the difference is primarily the impact of FIN 46.

And I will note the second part of that question was the amortization of transition bonds.

About $260 million, $262 is the more precise number in 2004.

Okay.

We can, I guess, go to the next question.

And we will hear now from Daniele Seitz with Maxcor Financial.

Thank you.

Actually, most of my questions were answered.

It's more of a (INAUDIBLE) Obviously with high prices, I would assume that you would have an extraordinary year.

Are there any elements in the Supply side that are making this year more difficult than normal and, actually, that will give you some benefits next year?

No, there are no unusual issues in the Supply side.

We have discussed all of the relevant forces, I would say, very broadly.

Jim, anything?

No, no, nothing.

So you do anticipate the same hydro conditions next year, the same conditions actually, excluding all rate cases, et cetera?

Well, hydro conditions are the same as the weather forecast.

So if you can forecast the weather, you know, good for you.

You wouldn't waste your time making electricity, I suppose.

We try to assume normal weather, and, unless we can get closer to the season and we know differently because of the snow pack.

But otherwise, we assume long term or a return to the mean.

Thank you.

Sure.

Moving on to Kit Connely (ph) with Morgan Stanley.

Good morning, guys.

Hi, Kit.

A couple of questions.

First of all, for the year, what does your guidance include for Syn-fuel earnings, Syn-fuel EPS for the year?

That's 14 cents, Kit.

Okay.

And that's, I assume, the same as it's been?

What, at the Delivery business, can you tell me what the trailing 12 months return on equity has been for regulatory purposes?

And just remind me, for purposes of the rate case, what earnings, or ROE, are they going to be using, is it through, is it a trailing 12-month number or an '03 number or a projected number?

Well, just the test-year concept in Pennsylvania, you file a case using a historic test year and a future test year.

In our case, the historic test year is 2003 calendar year, the future test year is 2004 calendar year.

That means, actually, of course, when you make your initial filing, your future test year is already under way, and that is updated as the proceedings continue.

So that's what what they used for a test period.

And they should use future test year, which is largely concluded about the time, or at least three quarters of which have been reported on at about the time the Commission needs to make its decision.

Now, return on equity on a trailing 12-month basis, let's see if we can find that number for you, we may want to circle back to it.

Probably about - very close to 1%, Kit.

Okay.

That's close enough, which is pretty close, if I recall, to what all of '03 was, probably?

That's correct.

Okay.

So you are tracking at about the same level?

Yes.

And, then, finally, I guess this would be more for Bill, a kind of strategic question.

What is your thinking, Bill, at this point on long-term ownership of WPD?

Is it a core business or not?

And, if not, would this not be a good time with favorable exchange rate to think about who might, who else might want to own it?

Well, the concept of core business is one that you know you can get into academic discussions on.

My view is that we will remain in the U.K. as long as we believe we add value, and the business adds value to us, and as long as the regulator recognizes that we are adding value.

Now, I don't mean to be incomplete in answering it but, but I don't know that any business is sacred.

There are core business, noncore businesses and sacred businesses.

We don't have any of the latter.

So we will consider objectively, realistic offers.

We certainly, if we were considering an offer today, we would have to look pretty hard at how we would replace the earnings.

And that certainly is an important consideration.

And, secondly, your comment about FX.

I can probably find as many people who feel the dollar has further to fall, as people who would feel the opposite.

So, I don't know that the current foreign exchange situation is a determining factor, but it's a, only one factor.

Our view is that we have added value to the business, we have added and improved quality of customer service by all of the measures that OFGEN wants us to look at.

So we are there as long as it adds value for our share owners, and we are adding value, but we will consider offers for any asset.

Fair enough.

Thank you, Kit.

Take care.

We will hear now from Vic Titan (ph) with Deutsche Asset Management.

Thank you.

Question regarding your 3 to 5% long-term growth.

Could you give us some assumption, what assumption are you making and what base are you using?

Because the current earnings base may be below normal?

Well, it's off the, it's off the forecast for 2004.

And the assumptions that we have, we have outlined some of the positive things that we see in that time frame, with the increased polar prices, including the 8% polar price increase from '05 to '06; continued growth in electric delivery, PPL Electric Utilities sales, both in the volume, new turbines, the new turbines at Susquehanna.

And then the additional generation, the incremental increases in generation at some of our existing plants, including Susquehanna, and Brenner Island; and then, of course, the rate increase for PPL Electric Utilities is all factored into that analysis.

Yes, but, John, that tells me that your base has to go up quite a bit, if you were to earn a reasonable return from Pennsylvania on the Delivery side.

Well, we expect to see a, you know, a significant improvement in the earnings from Electric Utilities as a result of the rate proceeding and being allowed to earn a fair return on our equity investments.

But are you using a very conservative base then, 3 to 5% growth from that base?

Well, we believe that we have used an appropriate, in our planning assumptions, we believe we have selected an appropriate base for the results of the rate case.

We think that 3 to 5% is a fairly conservative projection.

It assumes no, no new assets, and it assumes that wholesale prices are essentially flat, relatively minor variations around today's levels.

So, that 3 to 5% is, we are fairly conservative in our forecasts and our projections, and have been historically, as you probably know.

Okay.

Well, maybe I will follow up with John later on.

Thank you.

Okay.

Thanks fine.

Sure.

We will hear now from Faith Claus (ph) with Banc of America.

I just wanted to confirm whether or not you received any dividends from WPD.

Yes.

Can you give an amount?

We can give an amount.

We will, in fact, in just a minute.

Yes, on an annual basis, this year, I think it's about $20 million, $25 million.

On an annual basis?

Yes.

Thank you.

And moving on to Edouardo Abush with Zimmer Lucas Partners.

Thank you, my question has already been asked.

Okay.

Now Teresa Ho with Solomon Brothers Asset Management.

Yes.

Thank you.

I just had a question regarding the Pennsylvania case.

Considering that an ALJ has not been appointed, and my understanding is that the current Chairman's term expires, is there a risk for an overextension here in the progress?

Not, not a significant risk, no.

The Commission will -- they have terms of commissioners that expired in the past.

And I am sure that they will appoint an ALJ in a timely way and move ahead with hearings in a timely fashion, and the expiration of the term of this current Chair, I don't expect to have any material effect.

Historically, since the current Public Utility Code has been in effect, the Commission has actually met their nine-month obligation.

And the Code says that if they don't issue an order at the end of nine months, that the rates go into effect as filed.

At most, what the Commission may have done in the past is, if they are only days away from making the decision, asking the utility to concur in an extension of several days, something like that.

But they are actually quite good about the nine months, and we have no reason to believe that will change.

Okay.

Good.

Thank you.

Thank you.

We do have a followup from Win Win Chen.

Hi.

I wanted to come back from your discussion on coal.

And you said that you thought it was probably at the top right now.

Are there any structural reasons why you think prices might come down?

Well, two reasons.

One, there is some speculation as to the future non export out of China, utilizing their local needs for their industries.

Secondly, there were a number of production problems in many of the of the mines in Appalachia, Pennsylvania, last year some fires, some floods.

We do see some improvement in that arena.

I guess it's important to point out, so that you have the right perspective here, although spot prices are up, we utilize very long-term contract approach to our hedging.

Which means whenever you see us unhedged, doesn't necessarily mean we are going out and filling the gap with spot-priced coal.

We continue to lengthen our contracts and we have a very strong sourcing availability, not only in Central Pennsylvania, Southwest Pennsylvania and Central Appalachia.

We we utilize switching between those sources to avoid being subject to the spot market.

So I just want to point out, you know, don't draw the parallel that any level of unhedged coal is directly a spot purchase.

But there may also be some suppliers, some producers who can, if they can, might switch from steam coal production to metallurgical coal, because of a very, very strong demand for steel right now, primarily driven by China.

And that probably is not sustainable ultimately.

And when that moderates, then we will see a reduction in the demand for met coal, and there is some crossover between metallurgical coal and steam coal.

So, coal prices are strong, but it's probably not something that we will see indefinitely.

And the mines in Appalachia are getting over their production problems?

Yes.

A number of - that's correct.

Okay.

Thanks.

I would like to remind everyone that it is star 1 if you have any question or comment.

We will hear now from Adam Gilesky (ph) with Goldman Sachs Asset Management.

Thank you.

If I may paraphrase.

It sounds like the resumption of a dividend requires a debt rating improvement, or at least an improvement in the debt rating outlook.

What points will you emphasize when trying to convince the rating agencies to improve their ratings?

Will it be a function of the swing in free cash flow, or will there be additional elements besides that that you intent to emphasize in that negotiation process, if you will?

I want to clarify, he said resumption of a dividend.

Our dividend has been increasing.

Right.

Sorry, I misspoke.

Yes.

John, do you want to speak to the the items of emphasis for the rating agencies?

They are the ones you would expect, cash flow is positive, after all capex, and all after dividends, and cash flow is positive and increasing.

Equity ratio is increasing, risk levels are moderate to low, actually, with our mix of businesses, and our hedging strategy.

We will certainly emphasize the effectiveness of our hedges, and the quantitative risk management tools that we use to measure that effectiveness.

Well, Bill, I think you pretty much said all of the positive things.

The things that we would we would plan to and have reviewed with the rating agencies in the past.

We would probably also reemphasize that we have outperformed our own forecasts that we have previously given to the rating agencies.

To what extent does the debt at the U.K. level influence the ratings at this point?

Well it's hard to tell what the rating agencies do with that debt.

We would reemphasize regularly that that debt is nonrecourse to the U.S. and that our International operations bring cash back to the U.S. and can continue to bring cash back to the U.S. even if we leave some of the dividends offshore to strengthen that.

Even if that becomes necessary, we still bring cash back to the U.S.

So we emphasize that.

But what they do with it, certainly, is something that they don't share.

Okay.

In your mind, is the fact that WPD, they have got a refinancing, it looks like, that they have got to accomplish before the rating review is finalized.

In your mind, does that pose any incremental risk to an improvement in the PPL credit rating over the course of this year?

In other words, do you think they need to get that refi done before you can see an improvement?

No.

I don't see a relationship.

No, there is not a time.

Okay.

Thank you.

Thank you.

And there are no further questions at this time.

I will turn things back to Mr. Paukovits for any additional or closing remarks.

I will just close it up and thank everyone for their participation this morning.

And we look forward to talking with you in the future.

Thank you, and that does conclude today's conference.

Thank you, and have a great day.