賓州電力 (PPL) 2004 Q2 法說會逐字稿

Good day everyone.

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

Today's call is being recorded.

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

Please go ahead, sir.

Good morning.

Thank you for joining the PPL conference call on second-quarter results and 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 non-GAAP and non-GAAP measures as provided in PPL's earnings press release issued this morning, the link for which you can find prominently displayed on the homepage of our website, www.pplweb.com.

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

Good morning.

First I will just introduce the other PPL people that are here with me -- John Biggar, Executive Vice President and CFO;

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

I will begin with some introductory remarks about the second quarter performance, and then Jim Miller will talk about the operation of our supply group and Larry will give some more details on our domestic and international delivery operations.

John Biggar will close the presentation with a review of our financials and a discussion of the '04 forecast and longer-term outlook, and then we will open it up for questions.

PPL reported net income or earnings of $148 million or 81 cents a share for the second quarter, and that compares with 116 million or 67 cents a share a year ago.

We did record an unusual non-cash credit of 13 cents a share in the second quarter of this year for the sale of CEMAR.

That's the former electricity distribution company in Brazil that was sold during that quarter.

Other unusual items recorded by the Company in the second quarter were charges of 3 cents for an impaired investment in a technology supplier and 1 cent per share for a previously discontinued telecommunications operation in El Salvador which we sold during the second quarter.

By comparison, there were no unusual items in the second quarter of 2003.

PPL reported an increase in total earnings from ongoing operations.

Of course, that's a non-GAAP measure that excludes unusual items.

Earnings from ongoing operations were 132 million in the second quarter of '04 compared to 116 million for the same period last year, and that's an increase of about 14 percent.

Earnings per share from ongoing operations were 72 cents in the second quarter of this year compared to 67 cents for the second quarter of '03, and that's an increase of about 7 percent.

And that's despite the dilutive effect of the additional common stock that was issued to improve our balance sheet.

For the first half of '04, we had a reported earnings of 325 million or $1.80 a share, and that compares with 355 million or $2.09 per share for the same period last year.

Earnings from ongoing operations for the first six months were 317 million, and that was about 9 percent higher compared to the 292 million for the same period last year.

Earnings per share from ongoing operations for the first half were $1.75 compared to $1.72 for the same period in 2003.

There were a few unusual items that impacted year-to-date earnings in addition to the second quarter items that I mentioned a moment ago.

We recorded an unusual charge of 4 cents per share in the first quarter this year for the sale of our minority interest in CGE; that's a Chilean electric distribution company that we sold and reported on previously.

In the first quarter of 2003, PPL recorded an unusual credit of 37 cents a share, and that's due to the adoption of the new accounting standard for asset retirement obligations.

As we will review with you shortly in a little more detail, PPL's second quarter reflects the sustained strong performance of each of our business lines and our disciplined and quantitative approach to the commodity markets.

We continue to forecast 2004 earnings from ongoing operations at the range of $3.45 to $3.75 per share.

That's the same earnings band for 2004 that we've been giving you in the past.

Our forecast for reported earnings -- reported earnings, now, for 2004, not ongoing operations -- is in the range of $3.50 to $3.80 per share.

And that reflects the net benefit of 5 cents per share from the four unusual items that I mentioned previously.

Following Jim and Larry's comments, John will give some more information on our financial performance and our outlook for the future.

Now I'd like to turn the call over to Jim, and he will review the second quarter for our supply business.

Jim?

Thanks Bill.

Good morning, everyone.

In the second quarter of 2004 our energy supply business earned 47 cents per share from ongoing operations compared to 52 cents per share in the second quarter of '03.

The lower earnings per share were the result of dilution from increased shares of common stock outstanding, higher depreciation expense, interest expense associated with buy-outs of lease financing for some of the Company's gas-fired generation, and lower margins from our western operations.

The increase in depreciation expense was primarily due to an accounting change at the end of 2003 that required PPL to consolidate on its balance sheet certain gas-fired power plants financed through operating leases.

The higher interest expense was due to transaction costs associated with the buy-out of our gas-fired power plant leases in Arizona and Illinois.

Partially offsetting the above charges were lower O&M expenses due to the timing of expenses for the refueling outage at PPL's Susquehanna nuclear plant.

When compared to 2003, second quarter 2004 margins from the Company's eastern operations increased slightly, driven by greater total sales volumes and higher average realized prices.

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

However, the higher eastern margins were more than offset by a decline in west margins, resulting from decreased wholesale volumes caused by lower hydro output and higher coal prices due to an arbitration decision on a supply contract with a coal supplier for our Colstrip units one and two in Montana.

On a year-to-date basis through June, our supply business earned 97 cents per share from ongoing operations compared to $1.05 per share in the first six months of 2003.

The lower year-to-date earnings per share are due to the dilution from increased shares of common stock outstanding, higher interest costs associated with the lease financing buy-outs, greater depreciation expenses, and increased O&M for the maintenance and refueling outage at our Susquehanna nuclear plant.

In the first six months of 2004, our supply business realized greater energy margins from both its eastern and western operations than in the same period last year.

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

In spite of lower output from our west hydro generation, overall margins from the Company's western operations were higher due to greater sales volumes and higher average realized price.

The Company's generating facilities continued to run well in the second quarter and achieved an equivalent availability of almost 88 percent, which included the effects of the longer-than- planned refueling outage for Susquehanna Unit 1.

For the first six months the fleet-wide equivalent availability is approximately 89 percent.

In addition to the strong equivalent availability performance, prime time availability, the measure of our plant availability during peak periods, has averaged close to 98 percent year-to-date.

PPL’s synfuel operations completed another successful quarter in 2004 by contributing almost $8 million in net income or approximately 4 cents per share.

For the first six months synfuel operations contributed $15 million in net income or 8 cents per share.

Relocation of PPL's new synfuel facility to Cinergy’s East Bend, Kentucky generating station from its location in Tyrone, Pennsylvania was completed, and the startup and test process began on July 15.

Full production is expected to commence by the end of the month on schedule to meet our in-service target.

As I mentioned during the first quarter call, the incremental earnings from the Tyrone facility of $2.9 million,or about 1.5 cents per share, were included in our 2004 forecast.

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

Now I would like to turn the call over to Larry.

Thanks Jim.

I will summarize the performance of our domestic and international delivery businesses.

Our Pennsylvania delivery business earnings from ongoing operations for the second quarter of 2004 were 1 penny per share, compared to 0 cents per share for the second quarter of 2003.

The primary reason for the improved earnings figure for the current period is that delivery sales were up about 3.6 percent in the second quarter of 2004.

Year-to-date 2004 earnings from ongoing operations were 23 cents per share compared to 22 cents for the same period in 2003.

Delivery sales for the year-to-date period were higher than the same period last year by about 1.2 percent.

Both reported earnings and earnings from ongoing operations were the same for the quarter and year-to-date periods because there were no unusual items for the delivery segment.

Warmer weather during the second quarter of 2004 contributed to the higher volumes we experienced compared to the second quarter of 2003.

However, for the year-to-date period, weather essentially had no impact, and higher volumes can be attributed to growth and increased usage.

Offsetting the higher delivery sales, we've continued to experience increased operating and maintenance expenses.

Additionally, our depreciation expense was slightly higher as a result of the installation of automated meter-reading equipment.

And we incurred higher expenses for transmission-related or ancillary services.

For our international business segment, earnings from ongoing operations for the second quarter of 2004 were 24 cents per share compared to 15 cents per share for the second quarter of 2003.

Year-to-date 2004 earnings from ongoing operations were 55 cents per share compared to 45 cents per share from the same period in 2003.

Ongoing operations for the 2004 periods exclude the unusual items pertaining to the sale of our investments in Latin America.

There were no unusual items in the corresponding periods of 2003.

We continue to achieve strong fundamental performance at our electricity distribution companies in Latin America, and also in the United Kingdom.

At WPD we benefited also from positive currency exchange rates equal to about 3 cents per share for the second quarter and 7 cents per share on a year-to-date basis when compared to prior year periods.

PPL serves 5 million energy delivery customers on three continents.

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

We continue to pursue two very important regulatory matters -- rate reviews for our Pennsylvania and United Kingdom electricity delivery companies.

In Pennsylvania we're proposing to increase our electricity delivery revenues by about 8 percent or $220 million a year.

About three-quarters of the proposed rate increase or $164 million stems from our quest to increase our electricity distribution rate.

This proposed increase requires Pennsylvania Public Utility Commission approval.

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

These are costs that we've been incurring but have not been able to recover from our customers because of the transmission and distribution rate cap that is in effect until January 1st of 2005.

This rate cap is a result of our 1998 settlement agreement in Pennsylvania.

PPL Electric Utilities intends to pass through the amount of these transmission-related costs to customers beginning next year in accordance with FERC tariffs already in place.

We notified both the Pennsylvania Public Utility Commission and our customers of this pass-through.

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 rate request in late March, and we expect a decision by mid-December with new rates going into effect on January 1st of 2005 following the end of the current rate cap.

Intervenors in our rate case filed testimony at the end of June.

A review of the opposing cases indicates that there are no unexpected positions advanced by other parties.

We responded formally and filed our rebuttal testimony yesterday.

This rebuttal testimony is available on our website at www.pplrateinfo.com.

The administrative law judge in our proceedings scheduled public input hearings for June and July.

Six hearings were held the week of June 28th, and two more were held on July 19th to gather public comment about our proposed rate increases.

No major concerns emerged from the public input hearing.

Evidentiary hearings on our Pennsylvania rate case are scheduled for August 9th through August 13th.

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

This process occurs every five years.

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

The UK regulator is reviewing the Company's cost of doing business and its performance versus other electricity delivery companies to determine what WPD's revenues should be for the next five years.

WPD is a frontier performer in quality of service in the United Kingdom.

WPD ranks at the top of the UK distribution network operators in comparisons of customer complaint rates, frequency of customer interruptions and restoration of service.

The regulator issued its initial proposal at the end of June.

There will be ongoing discussions between the Company and the regulator with an updated policy document from the regulator expected in September.

A final proposal document will be issued in November of this year.

The new price control for WPD 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 final results, and we are unable to predict the outcome of either rate proceeding.

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

Thanks Larry.

Good morning.

Our performance in 2004 continues to demonstrate that our strategy is providing growth for our shareowners.

As Bill noted, income from ongoing operations in both the second quarter of this year and the first half is up compared to the same periods a year ago.

On a per-share basis we earned 72 cents from ongoing operations in the second quarter compared to 67 cents last year and $1.75 in the first six months of 2004 compared to $1.72 last year.

Of course this year's results reflect the dilutive impact of having about 11 million more shares reflected in average shares outstanding when we calculate 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 second quarter we had $358 million of cash on hand, and we have a total of $1.9 billion of credit facilities.

Our balance sheet is stronger.

Our June 30, 2004 equity ratio calculated on a GAAP basis was 35 percent compared to 28 percent at the end of 2003.

Now, as we've mentioned in the past, we think it makes sense to look at capitalization ratios by excluding the $1.28 billion of transition bonds and the $2.3 billion of debt of our international affiliates, both of which are non-recourse to PPL.

On that basis, our equity ratio was 50 percent at the end of the second quarter of 2004, and this compares to 48 percent at the end of 2003 and 44 percent at the end of the second quarter last year.

For the adjusted calculations in those 2003 periods, we treated the $575 million of PEPS units as equity because those securities were converted to common stock in May of this year.

As we look out through 2004 we see a number of factors that will have a positive impact on the Company's performance.

These include the 45 MW increase in capacity from the turbine replacement at Susquehanna, which was completed in April; as Jim indicated, higher price per generation under our POLR contract with PPL Electric Utilities for customers who choose not to shop for their electricity supply; projected load growth at PPL Electric Utilities of about 2 percent; and the benefits of previously announced wholesale energy contracts including those in Montana, New Jersey, Connecticut, and Idaho.

At the same time, we continue to face a number of challenges for the balance of the year, such as the dilutive effect of the additional shares of common stock issued in May from the conversion of the PEPS; as Jim mentioned, lower energy margins in the west primarily due to hydroelectric generation being lower; and higher coal prices resulting from the arbitration decision that Jim mentioned; projection of lower pension income; higher operating expenses for electric utilities, including higher transmission-related or ancillary costs that are subject to regulation by FERC; and then higher depreciation expense and higher interest expense associated with the power plant leases that Jim discussed.

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

But on an earnings per share basis, this is offset by the dilutive effect of the additional shares of common stock that we spoke about earlier.

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

We're also projecting continued strong cash flow, a strengthen balance sheet, and improved credit metrics this year.

We're still forecasting positive free cash flow of about $80 million this year when excluding the $123 million of proceeds from the sale of our interest in CGE.

The approximate components of our free cash flow projection are about $1.33 billion of cash operations; $690 million of capital expenditures, of which about $600 million or a little more is sustenance capex, and this number is about a $160 million reduction from our capex in 2003; and also a forecast about $300 million of common and preferred stock dividends and $260 million of transition bond repayments.

We expect to have about $400 million of cash on hand at the end of the year.

And on a GAAP-basis our year-end equity ratio is projected to be 37 percent, a significant improvement over the 28 percent equity ratio at the end of last year.

If you adjust that on the basis I outlined earlier, our year-end 2004 equity ratio is projected to be 52 percent compared to 48 percent at the end of last year.

With respect to the common stock dividend, I'd 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 pay-out ratio.

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

And, of course, you'll recall that in February we increased the common stock dividend by 6.5 percent or 10 cents a share on an annualized basis, and the current dividend rate is $1.64 a share.

We believe our strategy will result in a compound annual growth rate and earnings per share from ongoing operations of about 3 percent to 5 percent over the longer term.

However, we expect that growth to be somewhat “lumpy,” if you will, with the next two years having the potential for greater growth than the later years.

The elements of our strategy that provide this visible growth include increases in POLR prices under the contract between PPL EnergyPlus and PPL Electric Utilities, including the 8.4 percent increase that will occur in 2006; increases in the volume of POLR sales to electric utilities; the new turbines installed at Susquehanna this year and possible additional incremental capacity increases of about 200 megawatts at several existing generating stations that we're currently evaluating.

In addition, as Larry described, PPL Electric Utilities has filed a proposal with the PUC to increase distribution rates and has notified customers and the Commission that it plans to pass through to customers transmission charges that PPL Electric Utilities pays for transmission service.

And, also, WPD is in the middle of a rate review in the United Kingdom.

Importantly, in developing our long-term forecast we have assumed that no new assets are added to our portfolio, but we are continuing to look for opportunities for growth by adding selective assets.

We're continuing to consider the point at which our growing equity ratio will permit us to buy back common stock consistent with our plans to improve our debt rating.

This concludes our prepared remarks, and I will now turn the call back to Bill who will moderate the Q&A session.

Operator, we are ready to begin the Q&A portion.

(OPERATOR INSTRUCTIONS) Ashar Khan, SAC Capital Advisors.

Good morning and congratulations on a good quarter.

Jim, could you elaborate a little bit on this supply in the western area, why the margins were weak; and regarding this arbitration thing that happened with the coal supplier, whether this was a one-time effect?

Or is this something which is going to impact going forward?

This was a one-time issue.

We had an outstanding negotiation that has been ongoing several years and over a profit component on a coal contract.

That ultimately went to arbitration and was resolved at arbitration, and we did realize the impact of that decision.

The ongoing impact of that is a relatively small compared to our overall fuel budget, but it does slightly increase our coal supply cost in the west at our Colstrip plant.

Could you just elaborate what that impact was on the coal thing for the quarter?

It was a $7 million impact for the quarter, and it will impact our coal cost in the west on the order of about $1.5 million per year on an ongoing basis.

On an ongoing basis.

And then, Bill, I guess this is a larger question for the dividend policy going forward.

As you're seeing, I guess, some of your competitors are now targeting a 50 percent pay-out level on the dividend with Excelon announcing today and FPL earlier.

Is there in your mind, as you look at the dividend policy going forward, that a pay-out level in the 50 percent range is something that you guys will be looking at to come in line with other people as you look at your dividend policy going forward next year?

As we've explained in the past, we think dividend policy is a combination of both pay-out ratio and free cash flow.

So, we will be looking at our dividend.

We do evaluate it regularly.

We have not established, nor announced, any specific formulaic policy.

I think our dividend -- as you can see, our pay-out ratio is relatively low, and our free cash flow is growing according to plan or better than plan.

And you know we have increased the dividend the last two years running.

And we have not announced a formulaic dividend policy, however.

Okay.

Again, congrats on a good quarter.

Thanks.

Kit Konolige, Morgan Stanley.

Some of my questions have certainly been answered, but why don't I follow up on Asher's question and go to the stock buy-back area.

John mentioned that you continue to look at the point -- given growing balance sheet strength, look at the point where that might make sense.

Can you give us any flavor for when you think it makes sense?

How strong a balance sheet do you need in this industry?

How strong a balance sheet we need in this industry is certainly a good question, and we're all sorting that out, I guess, at the same time.

No, we don't have a specific date in mind.

And I certainly want to emphasize that a stock buy-back is sort of a “default plan,” if you will, that we continue to evaluate as assets become available in order to grow the business fundamentally.

Our conclusion, obviously, is that the assets that have come by on the market have sold at prices that are not prices we feel that we should pay.

So, we're still very disciplined in evaluating assets, but a stock buy-back is the default plan.

John, I don't know if you want to add anything to that --

No, I think that covers it -- no.

Does the stock price come into a stock buy-back plan?

Certainly, but we have not established any formula or policy on it.

It's a couple of years out in the future certainly, so there's no really reason for us to try to analyze the details of our tactics of what the right price would be that we would execute a buy-back.

It's a couple years out, so it's at least two years from now?

I would say so --

It's not this year, and I think that's about right--

It's not this year, and it's not particularly likely next year.

And I think that's about the best answer we can give you right now.

Let me turn to one other area -- cost of coal.

In your second quarter I don't see any mention of any higher coal costs with the exception of this one issue in the west with arbitration.

I assume you're still operating substantially under existing long-term contracts, so market prices of coal are not really effecting you too much.

But you tell me, don't let me put words in your mouth.

I am going to ask Jim to deal with that.

We do buy coal in advance to cover our expected coal burn.

Jim, do you want to talk to that?

Yes, I think that your statement is basically correct.

Obviously, we continue to buy coal under long-term contracts, and in fact are in many cases extending the length of those contracts to longer periods where appropriate and where pricing is appropriate.

This year we see minimal impact on our coal costs as a result of the high spot market prices in a very illiquid market that you happen to see traded out there.

Kit, I might add that in addition to contracting forward we look very closely at the counter-party credit of the various coal suppliers.

Over the decade this industry has seen exceptionally favorable contracts sour because the supplier is unable to perform.

So, we look at both our contracts going forward and the credit of the counter-party.

I might also add, since it's become an issue, that we do not have any particular issues currently with our inventory either.

Meaning you have plenty of coal on hand at each of the plants?

Our inventories are appropriate for our business plan, that's right.

Our inventories are consistent with our historic practice.

So, we should not expect any announcement from you this summer about running short on coal anywhere?

No, sir.

One final question, to wrap up this discussion of coal, at least from my viewpoint.

Can you update us on how much you have hedged in future?

How much coal you have bought forward out, maybe through -- I think in the past you talked about through '06.

And can you give us any idea of how the average cost you're paying under those hedges changes from year-to-year?

Kit, we can't.

We do have some long-term contracts.

And as Jim mentioned, we're extending some of those contracts.

We are in regular negotiation with coal suppliers, so it really wouldn't be appropriate for us to comment on that just now.

But our coal situation is -- we're well satisfied with our position in coal.

Thank you.

Paul Patterson, Glenrock.

I wanted to touch base with you on the net difference between this interest expense and lease expense, I guess, and depreciation associated with these buy-outs and whether or not you guys are planning any more buy-outs.

To answer the second question first, no, we're not.

We did buy out the leases.

We used the proceeds from the sale of the PEPS -- the issuance of the common stock and the conversion of the PEPS to buy out the leases.

And the higher cost, if you will, was the transaction cost related to the lease.

We don't expect to see that recurring in the future.

I guess what I'm wondering is what is the actual difference in the interest?

In terms of the buyout, what is the net impact?

Because you are losing a lease expense, right, but you guys are also gaining the interest and depreciation expense?

What's the net-net of it all?

Do you follow me?

Yes, I do.

Hold on one second.

Let's see if we can –get that information for you.

If you're looking at that, the other thing I just wanted to touch base on as well is that in terms of currency I think I heard there was a 3 cents a share benefit from WPD for the quarter.

I wanted to make sure that that was accurate; if I heard the right, in other words.

That is correct.

Then I guess what I was wondering was what was the Latin American impact.

And then what else was driving international operations other than currency, which were seeming to do pretty well this year -- this quarter, excuse me?

We didn't break out the Latin American impact, but I can say that it was ahead of plan and it was predominantly from our Chilean operations.

Okay.

So the majority of the currency impact, correct, would be WPD?

That's right.

The 3 cents is the WPD currency translation.

So, the Latin American currency impact would probably be smaller is what I'm assuming.

But I don't know if that's right.

That's right, but we should emphasize that our Latin American properties, generally speaking, are ahead of plan.

But what is it that you guys are doing there that's making things go better, I guess?

All of the basics -- accurate billing, and good economic growth in Chile, good top- line growth in Chile, and managing expenses very, very well.

Great.

Finally, I guess the other thing is pension income, just to get better feel for that, and I guess also back to that interest -- that buyout.

Let me deal with the buyout issue first, ( if I can.

Remember that those leases came on the balance sheet as a result of FIN 46 at the end of '03, and we began to reflect depreciation in '04.

So, there's really no change in depreciation as a result of the buy-out of the leases.

It is about 3 cents impact in transaction costs that we've described.

And there's essentially no change in ongoing interest expense as a result of it.

So, it's a 3 cent transaction cost that's reflected in the second quarter, and that's it.

So it's sort of a one-timer?

Exactly.

Oh, great.

And then pension?

Maybe I can take that.

In 2003 our net periodic pension cost was roughly neutral.

And for our net periodic pension cost by year-end we are projecting something in the magnitude of $10 million.

That's our domestic pension. cCertain pension issues in WPD are still to be addressed by the regulator in theU.K. rate review.

But we currently expect by year-end a net periodic pension benefit or credit to earnings in the mid-$30 million range at WPD.

Okay.

Just back to the international business, how much would you say is -- outside of the currency transactions, how much of this improvement, which is pretty substantial it appears outside of currency-- is from Latin America versus WPD?

3 cents quarter-over-quarter.

For Latin America?

For Latin America.

Thanks a lot, guys.

Paul Ridzon, Key McDonald.

A question on what's the magnitude of the next Pennsylvania POLR hike.

And are there any legislatively mandated stickiness for customers when they do come back?

Do they have to stay through a year or what can they do?

Yes, they are required to stay for a year so that they can't be gaming where somebody can cherry-pick and have people shop in the spring and fall and have them come back to POLR supply for the peak-load period.

John, can give you the exact POLR numbers and how they step up in '04, ‘05 and ‘06?

'04's PLR number is $43.40 on average, '05 is $44.10 -- it was up a little more than a percent, if my memory, yes.

And then the big jump is in 2006; the 8.4 percent increase goes from $44.10 in '05 to $47.80 in 2006.

Are you still seeing the trend of C&Is coming back?

Or is that accelerating, decelerating?

C&Is are coming back at a fairly steady pace.

Most of the people, at least in our retail territory among the competitive suppliers, have been retrenching, and that seems to be continuing.

And then if you could just kind of give us how you view currency hedging strategically.

And you've got a nice tail-wind, but at some point we could probably expected that to turn, and how you plan to deal with that?

And then just update us on the IRS audit status of your synfuel plants.

John, do you want to talk about currency tactics?

Certainly.

We have hedged about 75 percent of our total earnings in the U.K. at very attractive levels, and a little more than -- I think it is about 50 percent -- in Latin America.

What's the term on those hedges?

They run out through the end of this year.

Jim will talk to the synfuel project.

On the question of audit status, first our Somerset facility, that's nearing the end of an IRS audit for returns in calendar year '99 through 2002.

And we've seen nothing identified of concern there.

Our Tyrone facility is being audited for the period prior to PPL's investment back in 2002.

And that's the audit status of our synfuel facilities.

Do you see any parallels between the plants that have been flagged and something that you have (ph)?

No, we do not.

Thank you very much.

David Schanzer, Janney Montgomery Scott.

Most of my questions have been answered, but I did have one that was kind of the result of a recent rate action in Pennsylvania.

I take it that you folks are aware of the fact that Aquamerica (ph) got a rate case that was litigated, but did not go to the full statutory nine months; it was accelerated.

What's the possibility of your current rate case with the Commonwealth being accelerated?

It's certainly possible that there will be a settlement.

We reported earlier, I think, that we not only filed, of course, a revenue increase, but a rate-design change, kind of truing-up our rate designs, which had not been adjusted for a couple of decades actually.

So, that would certainly add some issues that would make it more difficult to settle.

But we certainly will try and have been attempting to reach a settlement with the key parties, and we will just see how that goes.

For planning purposes now we're assuming that we will litigate the full case, but there's always the possibility that we will reach a settlement.

But we don't have anything to report on that now.

Great.

Thanks.

Andy Levy (ph), Bear Wagner.

Actually all my questions were asked.

Thank you very much.

Jeff Gildersleeve (ph), Millennium Partners.

Most of my questions were answered.

One more -- on any update on Sundance?

And can you just remind us what the timing is of that divestiture?

No update at present.

The issues at Sundance are still under review by the Arizona Public Service Commission.

And you’re well aware that as well as APS Public Service Commission having to come to conclusions FERC will as well.

So, no update at present.

What's the timing again?

We would expect to hear something from the ACC and Arizona by the end of the year, but that's our expectation.

Great.

Thank you.

Tom O'Neill (ph), Lehman Brothers.

I was wondering if you could update us on hedge levels for output.

I think the last time it was 85 percent in '05.

And then any update on the coal hedges, which I think were 90 percent in '05; 65 percent in '06?

I think we already discussed the coal hedges, if I'm not mistaken.

Did those coal hedges, the percentages still stick then?

They do.

We have been in the process of layering in more contracts, so that they are higher, if anything.

The hedge ratios are in the neighborhood of the high 90s in the east, based on committed sales, if you will.

The percentage of our anticipated production that is already committed is in the high 90s in the east and trails down into the mid-80s over, say, four to five years.

And in the west our sales commitment is in the middle-to-low-90s now.

And that trails off to about three-quarters of our expected production that is committed in '06.

And then it drops off after that, of course, with the expiration of the current contract with Northwestern.

I want to emphasize, though, that you can see volatility variability in earnings, even with a significant portion of our expected production committed because of variations in plant availability, variations of customer load for those contracts that are load-following.

All can produce variations in earnings up-and-down.

And the degree of hedging that we enter into, then, we look at quantitatively to try to balance the market risk versus the production risk that we take.

I hope that is helpful.

But we are pretty heavily hedged.

Thanks.

Steve Fleishman, Merrill Lynch.

In the quarter, it looked like your tax rate was quite low.

Could you explain the reduction in income taxes?

Yes.

There are a couple of different components, so we try to sort that out for you.

Can I ask a few other questions, and we can come back to that?

Secondly, with respect to the potential for a rate settlement, if there is any, is there a certain time in the process in Pennsylvania when that would be most likely or not?

Not necessarily.

Certainly, the benefits of a settlement are more significant earlier, and once you've done the testimony and the cross-examination and the rebuttal, you have put the thing in the hands of the judge.

But a settlement can occur at anytime.

And I could also point out, which I should have done for David's question as well, that it's certainly possible that we can have a partial settlement and stipulate certain components of our request and litigate other remaining components to try to make the case a little less complex.

That's also a possibility.

Okay.

And then on the western power markets, your hydro is obviously below normal.

Could you give us a sense of kind of where your hydro conditions for your facilities are?

Obviously you're aware we're continuing on in this long-term drought in the west.

From our perspective this year I think -- although we are below last year's quarterly hydro production by about 16 percent and year-to-date by about 5 percent as compared to the first six months of last year-- that our annual expectation is that we will come in pretty close to where we had planned.

But be aware that we are in a continued drought situation.

So, you're down 5 percent in first-half, so you expect that will rally in the second half?

For the first six months of this year as compared to the first six months of '03.

And '03 was a subnormal .

Those kinds of things can change very suddenly either direction.

Okay.

I guess those are really my questions.

Anything on the tax?

I think the two things that are driving it would be the synfuel tax credits and reduced international income tax.

Is the lower international income an ongoing benefit or is it just a one-time benefit--?

No, that won't be ongoing.

That will probably not be ongoing

Just on the synfuel also, obviously you had synfuel credits last year too.

Is it just the way the timing of those credits go quarter-by-quarter?

We had a little better production from the synfuel plants.

In this quarter?

Yes.

I don't mean to ask so many questions, but just I think you mention synfuel was like 3 cents this quarter or something?

Yes, 4 cents in the second quarter and 15 cents expected for the year.

So, the comparable in last year's quarter which was (ph) a lower number?

I'm sorry?

The comparable number for last year's second quarter?

Last year's second quarter I don't have in front of me.

Probably maybe 3 cents.

We can get that for you.

Tim can get that for you.

There is also the factor of more shares outstanding when we look at the synfuel tax credit in cents per share.

That will also figures into the mix.

Okay, thank you.

Paul Debbas, Value Line.

I have a hypothetical question about the rate case in Pennsylvania.

Suppose you were to get everything you asked for, what would that add to earnings next year?

Well, you can figure about 3 cents per share -- I'm sorry, a penny per share for every $3 million in revenue.

Okay?

And our total request was, Larry --?

$221 million.

And that includes?

The transmission pass-through charge.

It includes the $57 million in pass-through for transmission and ancillary services that we have purchased, but have not been passing through under the rate cap.

About $220 million is our total request.

And you can figure about a penny per share for every $3 million in pre-tax revenue.

Does that help you?

Presumably, though, some of your expenses would be contingent on getting some recovery in rates.

Not really.

Our expenses are what are necessary to run the business.

So, if we don't get recovery in rates, we can't necessarily avoid the expense.

The expenses are things like increased depreciation expense for automatic meter-reading and expenses to run the business.

There is a small amount in there -- John is right.

We did request some customer funding for so-called universal service accounts that provides a subsidy for customers with a limited ability to pay.

And if we weren't recovering that from customers, then we would not have that program.

But I think that's less than 10 percent of the total request.

Thank you.

Leslie Rich (ph), Columbia Management Group.

My questions have all been answered.

Thank you.

Daniele Seitz, Maxcor.

Just very short questions.

How much do you think will be the impact of the new turbines that you just installed -- the impact on earnings?

Just to get a color on it.

Tthe two new turbines together give us about 80 MW, 80 to 90 MW; about 90 MW is our share at PPL; the other 10 percent is for Allegheny co-op, the part owner of the Susquehanna plant.

You can figure about 90 MW.

Now, you can figure on the margins for that no incremental fuel; so, the margins are in the range of $40 -- around a $40 margin.

And the depreciation associated with the capex was about $120 million.

So, you can take about a 30-year life for the remaining life of the plant.

Take about a 30-year life straight-line depreciation on $120 million, so that's “Bill Hecht's dangerous calculation.”

The other thing quickly, the Susquehanna units are both, I'm assuming ,100 percent now, and you anticipate the refueling to be when?

We will refuel the next unit the next spring.

And both units are currently at 100 percent power and have been in continuous operation since their respective refueling outages.

Unit 2 is approaching 500 days of continuous operation .

And Unit 1 has been in continuous operation since its refueling outage ended in late spring.

Last question.

This contingent convertible bonds there with your free cash flow-- is there the possibility for you to look into buying them back, or that's not an option?

I guess what I would tell you is right now that we're looking at all the options.

First, it's still a proposal by FASB.

I guess it's gotten EITF concurrence and it is out there now.

As we look at it, I guess I would say that we understand what they're trying to do in terms of disclosure.

We think that there are other ways to get there, maybe with footnote disclosure.

So, we are going to be sharing our thoughts with FASB on the proposal.

And we are looking at the various options.

As you know, we have the ability to settle the securities either in cash or in common stock.

So, we're looking at all of our various options.

And when and if FASB does something with the accounting rule, then we will give you a full report on where we are.

But it is an option that you will have?

It is an option that we would have, yes.

It is one of the things we would be looking at.

That is what I wanted to know.

Thank you very much.

Win-win Chen (ph), ABN Amro.

With your equity ratio at about 50 percent right now, are you happy with that?

Or, do you want to increase that a little bit more?

We're happy.

We are planning to increase it, as you could expect.

We expect to see it continue to grow.

By year-end it should be around 52 percent, excluding non-recourse debt.

And we will see that continue to grow.

It may be that our equity ratio is not the limiting factor in our perceived credit quality.

Maybe funds flow from operations may be perceived as another limit in our credit quality.

Okay.

So if you had a target (inaudible)

I think it would probably be a little bit higher than that.

But as I said, cap ratio, equity ratio probably isn't the limiting factor in our perceived credit quality.

Okay.

Can you go into what is the limiting factor?

Probably funds flow from operations to total debt would be the more limiting factor, which we're also continuing to improve.

Can you tell us where you are with that right now -- where you are at (inaudible)?

We would have to (technical difficulty) a little bit --

I could give you a guess, but I would rather get you a more definitive number rather than to try to guess that at this time.

We will give you a call.

That's fine.

We will talk about it off-line.

And then in the UK, if you received what was put out in the initial proposal, would that be a lot of upside for you?

The proposal is not complete, so we really couldn't comment on how much or whether or not it's a lot of upside for us.

There are a number of elements that were not intended to be included in that letter.

So, there's more to go in the process, I'm afraid.

But we're continuing to communicate with the regulator on the remaining outstanding issues.

Thanks a lot.

We were gratified that the regulator did explicitly recognize WPD service quality quantitatively in their rate proposal, as you probably saw.

Yes I did.

Thank you very much.

(OPERATOR INSTRUCTIONS) Vic Katan (ph), Deutsche Asset Management.

Two questions.

One, Bill, you talked about that for '05, '06 you have substantial contracts, but are those contracts for power at the higher rate than what you're getting on '04?

And second question, I will come to second question in a second.

Some are and some aren't, but we obviously don't disclose detailed contracts.

But some contracts are at a higher price than they are for '04.

And you'll recall John gave the specific numbers for the POLR price.

That's our largest single contract, and that is escalating in price from '04 to '05.

Okay.

The second question was that, as you said earlier, that next two years the earnings will be “lumpy.” And, obviously, one of them being the rate case, and number two being this POLR rate.

Could you give us the magnitude of what that lumpy looks like?

Actually we can't because there's no way for us to speculate on the outcome of the Pennsylvania rate case.

We can tell you that we're requested a total of $221 million.

And, as I said earlier, you can think approximately in terms of a penny per share for every $3 million of pre-tax revenue.

So, that's really the best answers anyone can give you.

We don't know what the outcome will be.

There's still a long way to go in the process.

But you do know the POLR side of the --?

Yes, we do, and we gave you those numbers.

We can give them to you again if that's helpful.

No, I can look up (multiple speakers).

One final thing, though, that when you talk about the long-term 3 to 5 percent growth rate, that I would imagine is based on beyond this “lumpy” improvement you will see in '05, '06.

Yes, that's the five-year outlook.

But these two years could be a lot more than 5 percent, and then on top of that you're talking about 3 to 5 percent, I imagine.

No, we're talking about 3 to 5 percent net over the five-year period.

And we're explaining that that forecast or projection includes the new turbines at our Susquehanna nuclear plant, the rate reviews, and the increases in POLR price and volume, and does not include any new assets.

So, it's sort of our “default plan,” if you will.

It will be current assets, current visible growth.

Let's go back, if we could, before we take the next question.

There was a question about funds flow from operation to total debt and the percentage.

And this is looking at it the adjusted way that I mentioned earlier when we look at cap ratios of excluding the international debt.

The ratio the end of this year would be about 21 percent, just a tad short of 21 percent.

Okay, we can go on to the next question.

Robert Chewning, BB&T Capital Markets.

Looking at the improvement in international, if you take out 3 cents for Latin America and the 3 cents currency, it looks like you had 3 percent improvement at WPD in pound sterling.

Could you tell us what the return on rate base that you earned for the latest 12 months was there?

Actually we have to do some work to get that number.

I'm not sure we have that at our fingertips.

But I assume you're going to be filing those 12-month numbers, and that it would be higher than the 12-some percent that you have talked about previously.

We will be filing the numbers.

Are you looking toward a potential impact on the rate review?

No, I just want to know --

We will be providing those numbers ultimately.

I am not sure that we have them right at our fingertips, though, I'm afraid.

Twelve months ending return on RAB in the U.K., I'm afraid we don't have it.

Secondly, am I correct in terms of the filings by the public staff, as well as the consumer advocate in Pennsylvania, have either explicitly or implicitly assumed recovery of the $57 million in transmission costs, and that won't be an issue?

It's basically not an issue.

I think one of the interveners proposed $53 million instead of $57 million, and it was a detail adjustment that can be debated.

But the fundamental opportunity to recover those costs is as a pass-through because the fact that they are FERC jurisdictional has not been challenged.

Thank you.

Daniele Seitz, Maxcor.

Just to get some color on the renewal of contacts with Northwestern, how do you visualize this over the next few years; the timing, as well as the outcome?

Northwestern is currently in the process of working on their portfolio preparation formation.

There is an RFP currently outstanding from Northwestern.

And we and others, I'm certain, will be responding to that RFP this summer.

And the outcome will be coming when, the results?

We do not know at this point when Northwestern will make a decision on that particular RFP.

There are a number of RFPs outstanding in various forms.

We're in the process of preparing a response to one in particular.

And this represents the whole contract, not just the portion?

It is a multi-part, very complex RFP that we're in the process of responding to.

And it covers a portion of Northwest requirements.

There are other RFPs in the areas of new generation, renewables, etc. that are also outstanding.

Thanks.

I just was wondering about the update on that.

Thank you very much.

Gentlemen, at this time there are no additional questions.

Mr. Hecht, I will turn the call back over to you, sir, for closing comment.

Thank you all very much for participating.

We hope we've been able to answer as many of your questions as we can.

And certainly other information that you might need, we will try to gather that for you where we can.

Thank you all for your participation.

Ladies and gentlemen, this will conclude today's conference call.

We do thank you for your participation and you may disconnect at this time.