賓州電力 (PPL) 2004 Q3 法說會逐字稿

Good day, everyone and welcome to PPL Corporation's third quarter earnings release conference call. Today's call is being recorded. For opening remarks and introductions, I'd 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 and third 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-K report and other reports on file with the SEC.

Discussing earnings and other financial measures during this call, we will be talking about such measures as reported in accordance with generally accepted accounting principles or GAAP as well as non-GAAP measures such as earnings from ongoing operations which exclude items that we do not expect to recur on a regular basis. A reconciliation of GAAP and non-GAAP measures is provided in PPL's earnings press release issued this morning which is available on our web site at www.pplweb.com. At this time, I would like to turn the call over to Bill Hecht, PPL chairman, president and CEO.

Good morning. I'd like to begin to just introduce the people here with me, John Biggar, executive vice president and CFO and Jim Miller, EVP and COO. I'll begin with some introductory remarks about our third quarter and then Jim will review operations of the supply group and the domestic delivery and international delivery operations. John will follow with a financial review and he'll also discuss our 2004 outlook for the remainder of the year as well as our longer term view. And then we'll open it up for your questions.

PPL reported net income or earnings of 196 million or $1.03 a share for the third quarter of '04 and that compares with 171 million or 97 cents a share a year ago. There were no unusual items in our third quarter 2004 so earnings from ongoing operations were also $1.03. You may recall last year in the third quarter, we reported an unusual item of 3 cents a share and that was related to work force reductions. Excluding that unusual item earnings from ongoing operations for the third quarter of 2003 were $1 a share. For both the third quarter and year to date, PPL reported an increase in total earnings from ongoing operations.

Earnings from ongoing operations as I said were 196 million in the third quarter of '04 compared to 176 million for the third period, third quarter last year and that's an increase of about 11%. Earnings from ongoing operations for the first nine months of '04 were 513 million which were about 10% higher compared to the 468 million for the same period last year. Earnings per share from ongoing operations were $2.79 for the first nine months of '04 compared to $2.73 per share for the same period in 2003. As we pointed out in our earnings news release for the first nine months of '04, PPL had reported earnings of 521 million or $2.84 per share compared to 526 million or $3.06 per share. There were a few unusual items that impacted year-to-date earnings and we've discussed those items on previous calls and they're also identified in our news release that we issued this morning and that's also available on our web site. As Jim will review with you shortly, PPL's strong third quarter earnings resulted primarily from sound performance that the electricity delivery companies in the U.K. and from higher wholesale electricity energy margins in the eastern U.S. due to the productivity and availability as well as fuel diversity of our generating fleet.

Based on favorable year-to-date results, we are raising our 2004 forecast for reported earnings from its previous range of $3.50 to $3.80 per share to a new range of $3.65 to $3.85 per share. In addition, we're raising the 2004 forecast for earnings from ongoing operations from $3.45 to $3.75 per share to a new range of $3.60 to $3.80 per share. And again the difference between reported and ongoing earnings forecast is due to the net positive impact to reported earnings of 5 cents per share from four unusual items recorded during the first half of '04. Following Jim Miller's remarks, John Biggar will give you additional information on our financial performance, as well as our outlook for the future. So, now, let me turn the call over to Jim Miller.

Thanks, Bill. Good morning, everyone. First, I'd like to review the performance of the supply segment. Third quarter of 2004, supply earned 77 cents per share from ongoing ops compared to 91 cents per share in the third quarter of 2003. The low earnings per share were the result of dilution from increased shares of common stock outstanding, higher depreciation expense and higher operations and maintenance expenses. Partially offsetting these negative effects were higher energy margins in the eastern United States and interest income on a favorable tax settlement from the I.R.S. in 1991 through 1995 audit. The increase in depreciation expenses 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.

Operations and maintenance expenses were higher compared to the third quarter of '03 when PPL benefited from the settlement of various insurance and environmental claims. When compared to 2003, third quarter 2004 margins from the company's eastern operations increased for the following reasons. Higher output from our generators and higher average to realized energy prices which more than offset increased average supply cost. Eastern revenues were also favorably impacted by the net revenues from our PJM transmission congestion positions. PPL's eastern generation increased by almost 6% over 2003 levels with the largest increases in output coming from the coal fired and nuclear facilities. This higher total output reduced the amount of market purchases while at the same time, PPL was able to realize a higher average price for its sales. Margins in the west were essentially flat in the third quarter when compared to 2003.

Operations in the west were positively impacted by improved hydro conditions which increased high hydro output by almost 15% compared to the third quarter of 2003. This lowered the average supply cost but was offset by lower average sale price. On a year-to-date basis, through September, supply earned $1.74 per share from ongoing operations. Compared to $1.97 per share in the first nine months of 2003. Low earnings per share were due to the dilution from increased shares of common stock outstanding, higher depreciation expenses, due to the accounting change at the end of 2003. Higher interest expense and higher operations and maintenance expenses. The higher interest expenses were due to the transaction costs associated with the buy out of our gas-fired power plant leases in Arizona and Illinois. Besides the insurance and environmental claims that lowered 2003 operations and maintenance expenses, compared to 2004, increases in 2004 O&M can also be attributed to the higher cost for the maintenance and refueling outage at PPL Susquehanna nuclear plant earlier this year.

In the first nine months of 2004, supply realized greater energy margins from both its eastern and western operations than the same period last year. The east results benefited from higher output from coal, nuclear and hydro and the net revenues from the PJM congestion positions. Western operations benefited from higher output from PPL's low cost coal fire and hydro generation. As a result, average supply costs were almost identical to last year.

At the same time, average sales prices increased, causing western margins results to be higher for the September year-to-date period. The company's generating facilities continue to run well in the third quarter and achieved an equivalent availability of almost 97%. For the first nine months, the fleetwide equipment availability is over 91%. And in addition to the strong equivalent availability performance, our prime time availability, the measure of our plant availability during peak periods has averaged close to 98% year-to-date. Thus far in 2004, the supply group results continue to be supported by excellent performance of our generating fleet and improved margin contributions from our energy marketing center.

Now, I would like to summarize the performance of our domestic delivery business segment. Our Pennsylvania delivery business earnings from ongoing operations for the third quarter 2004 were 7 cents per share compared to negative 2 cents per share for the third quarter of 2003. Primary reason for the improved earnings figure for the current period is that during the third quarter 2003, hurricane Isabel hit the PPL electric utility service territory requiring approximately $15 million in additional cost for restoration. While the remnants of hurricane Ivan affected our territory in September 2004, our restoration costs for that event were only about $5 million.

Also, a positive earnings impact resulted in third quarter 2004 from the resolution of the 1991 through 1995 I.R.S. audit settlement. Year to date, 2004 earnings from ongoing operations were 30 cents per share compared to 20 cents per share for the same period in 2003. Delivery sales for the year-to-date period were higher from the same period last year by about 1% which contributed to the positive difference. For the year-to-date, transmission expenses related to the provider of last resort service were 5 million higher in 2004 versus 2003 which had a negative earnings impact.

For our international business segment, earnings from ongoing operations for the third quarter of 2004 were 19 cents per share compared to 11 cents per share for the third quarter 2003. This favorable quarterly performance is primarily due to positive performance in our U.K. operations including about 3 cents per share in favorable currency exchange rates. Earnings were also favorably impacted by lower interest expense and higher distribution gross margins. Year to date 2004 earnings from ongoing operations were 75% -- 75 cents per share compared to 56 cents per share for the same period in 2003.

For the year, we continue to achieve favorable performance at our electric distribution companies in the United Kingdom and in Latin America. The favorable performance at Western Power Distribution was due in large part to positive currency exchange rates equal to about 10 cents per share on a year-to-date basis when compared to prior year periods. In addition, we've seen improvements in the number of units delivered and reductions in interest expense and local U.K. taxes. In Latin America, our favorable performance versus last year is primarily due to higher electricity margins in each of our three Latin American companies.

And let me give you an update on the status of our international and delivery rate matters. In Pennsylvania, we're proposing to increase our electricity delivery revenues by about 8% or $221 million a year. This consists of $164 million request for an increase in distribution rate revenues and $57 million of transmission costs we expect to pass through to customers beginning January 1, 2005. PPL electric utilities customers are currently paying about the same rates today as they were in 1986. We filed -- Pennsylvania requested in late March and have gone through the normal review process. We expect a recommended decision from the administration law judge shortly. The judge's recommendation is the next step in the process. Parties may file exceptions to the ALJ's recommendation and the final decision rests with the PUC commissioners. We expect that the commission will issue its final order in mid-December.

Our Western Power Distribution company in the United Kingdom is also undergoing a rate review. A process that occurs every five years. WPD ranks at the top of the U.K. distribution network operators. In comparison of customer complaint rates, frequency of customer interruptions and restoration of service. The regulator issued its initial proposal at the end of June and its update proposal at the end of September. There will be an -- there will be ongoing discussions between the company and the regulator with the final document issued at the end of November. The new price control for WPD will go into effect on April 1, 2005.

In both Pennsylvania and in the United Kingdom, it's our expectation that our excellent record of customer service and operating efficiency should serve well us as the regulators review our electric delivery rates. Although we've progressed far in these rate review processes, we're unable to predict the final outcome of either rate proceeding at this time. Let me now turn the call over to John Biggar who will provide more financial details.

Thanks, Jim. Good morning. Our performance in 2004 continues to demonstrate that our strategy provides growth for our share owners. As Bill noted, total income from ongoing operations in both the third quarter of this year and for the first nine months is up compared to the same period a year ago. This is true also on a per share basis. We earned $1.03 from ongoing operations in the third quarter of this year compared to $1 last year and $2.79 for the first nine months of 2004 compared to $2.73 last year. This is particularly noteworthy because this year's results reflect a dilute of impact of having about 12 million more shares reflected in the calculation of outstanding shares than the per share calculation. At the same time, however, the additional common stock has allowed us to strengthen our balance sheet. We have availability credit facilities of $1.7 billion.

Our balance sheet is strong. At September 30, 2004, our equity ratio calculated on a GAAP basis was 35% compared to 28% at the end of 2003. As we've mentioned in the past, we think it makes sense to look at capitalization ratios by excluding $1.2 billion of transition bonds and $2.2 billion of debt of our international affiliates, all of which is non-recourse to PPL. On that basis, our equity ratio is 49% at the end of the third quarter of 2004. This compares to 48% at the end of 2003 and 45% at the end of the third quarter last year. And for these adjusted calculations for the 2003 period, we did treat the $575 million of [INAUDIBLE] as equity because those securities were converted to common stock in May of this year.

Looking out to the end of the year, we are projecting an increase in total earnings from ongoing operations in 2004 as compared to 2003. But on our earnings per share basis, this is offset to some degree by the dilute of effect of the additional shares of outstanding common stock that I mentioned earlier. After taking all of these factors into effect and as Bill noted earlier, we are raising our 2004 forecast of earnings from ongoing operations from $3.45 to $3.75 per share to a new level of $3.60 to $3.80 per share. You'll also noticed we tightened the range of our forecast. You'll recall that in May of 2003, PPL energy supply issued $400 million of unsecured notes that are convertible into PPL common stock upon the occurrence of certain market price and other contingencies.

Earlier this month the emerging issues task force recommended to FASBY (ph) we new accounting rules to be effective for reporting periods ending after December 15, 2004 requiring these contingently issuable common shares to be included in the calculation of diluted earnings per share from the issuance date. We expect FASBY to adopt the EITF recommendations and if PPL makes no changes in the turns of the notes, it would have to restate 2003 diluted earnings per share down by approximately 10 cents and 2004 diluted earnings per share would be reduced by approximately 11 cents from the forecast I just described. Not withstanding the fact that PPL's current business plans do not call for the issuance of any additional common stock. This anticipated accounting change rule change does not change underlying cash flows of the company. We don't feel a compelling need to change the terms of the notes. However, given the perception related to the diluted earnings per share calculation, it is our intention to seek an amendment to the terms of the notes which may require or involve soliciting the consent of noteholders by the end of the year to mitigate this potential dilute of earnings per share impact.

We think such an amendment would be in the interest of our investors including the noteholders. We are now forecasting positive free cash flow of $100 million for 2004 up from the $80 million that we forecast at the end of the second quarter. And this excludes the $123 million in proceeds from the sale earlier this year of our minority interest in CGE, a Chilean energy holding company. The approximate components of our free cash flow projection are $1.4 billion in cash from operations, $740 million of capital expenditures of which about $620 million is sustenance Cap Ex. $300 million of common and preferred stock dividends and $260 million of transition bond repayments. On a GAAP basis, our 2004 year-end equity ratio is projected to be 36%, 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 51% compared to 48% at the end of 2003.

With respect to the common stock dividend, I would reiterate what we said in the past, specifically that we focus on a number of metrics including our earnings and projected earnings growth rate, cash flow and payout ratio. As we've said before when we look at the items, we believe they provide opportunities to increase the dividend. And as you'll recall in February, we increased the common stock dividend by 6.5% or 10 cents a share on an annualized basis. And the current dividend rate is $1.64 a share. We continue to believe our strategy will result in a compound annual growth rate and earnings of 3% to 5% over the longer term. The elements of our strategy that provide visible growth include increases in polar prices under the contract with PPL electric utilities including the 8.4% increase that will occur in 2006.

Increases in the volume of polar sales reflecting growth and customer load at PPL electric utilities and the new turbines installed at Susquehanna this year and possible additional incremental capacity increases of about 200 megawatts at several existing generating facilities that we're currently evaluating. In addition, as Jim mentioned, electric utilities is awaiting the decision in December on its rate filing with the PUC that would become effective at the beginning of 2005. At that time, the company also plans to pass through to customer's transmission charges that electric utilities pays for its transmission services. And in addition, as Jim also mentioned, we are expecting to complete the rate review process in the United Kingdom by the end of November.

Importantly, in developing our long-term forecast, we have assumed that no new assets are added to our portfolio. And we are continuing to consider the point of which our growing equity ratio will permit us to buy back common stock consistent with our plans to improve our debt ratings. This concludes our prepared remarks and I'll now turn the call back to Bill who will moderate the Q&A session.

Thanks very much, John. Operator, we're ready to take questions from the audience.

Thank you, the question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch tone telephone. If you are using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again that's star 1 if you'd like to pose a question at this time. We'll go to Andy Levi of Bear Wagner.

Actually most of my questions were answered through your comments but the only other question I have is with Peggy's (ph) nuclear plants having been out part of the summer and also into the fall. Are you guys benefiting from that at all?

All other things being unchanged, yes. Now, of course, there are multiple changes to the integrated system in the northeast day to day and Peggy's outages are just one part of it. But yes, we would benefit from that.

Great. Thank you very much.

Sure.

We'll go next to Ashar Khan of SAC Capital.

Good morning and congrats on good earnings. Jim, can you mention what average prices you are seeing or you saw in the third quarter or you realized in the third quarter and also the margins on the east as well as west?

I can give you the prices we're seeing -- let's say in PJM which I'll use as our zonal prices. We've been seeing on peak prices in the low 50s. Off-peak prices in the mid 30s. And normally we don't really get into discussing our margins. But I think as compared to last year, you know, prices in the similar period last year were high 40s on peak and -- high 20s off peak. So it's been a jump.

Ashar, let me just point out that Bill's prices that Jim is giving you are the as delivered prices for the market and much of our energy is sold under previously-written contracts so our actual revenues derived may vary up or down from those particular prices but those are what the market looks like in the as-delivered world this past summer.

And what about on the west?

Well, out at mid C, I'll give you some Mid C and maybe some need prices. Mid C in the mid 40s on peak and at need as high as the low 50s. And off-peaks in both locations are in the high 30s. And as well, we -- our western power, of course you're aware we have contracts with northwestern that are currently in place as well as selling to industrials out there.

And John, you mentioned -- you know, buying back of stock at some period of time. Could you just remind us when do you reach that comfortable level with your now increased cash flow in your forecast that that could be -- become a distinct possibility and we might see you in the market?

Ashar, this is Bill. I just want to point out that that might -- that would depend on what we decide to do with the dividend. We're generating free cash. We have a reasonably modest payout ratio compared to the rest of the industry though we have some options here going forward. And you know, to some degree, there is a trade-off between buying back stock or increasing the dividend. So a simple extrapolation may not give you a clear-cut answer.

Ok.

I think that's a fair assessment from a.

Bill or John, why don't you look as terms of long-term improvement, you know, you laid out various, you know, factors. Something that comes into mind to me is northwestern is now coming out of bankruptcy and your contract with them is way -- you're charging them way below what the market price is. Isn't that a potential for further, you know, increase in margin and earnings in '07 when that contract rolls off?

It may be. Certainly, there is a forward market for '07 but that's not really liquid. So, we don't really know what '07 numbers are going to look like. And also, it would depend a lot on the form of the contract that we might enter into with northwestern. Whether it would be unit contingent or not. Whether it would be a flat block of power or a strip or whether it would be load following. So, there are a lot of variables. But yeah, generally speaking, you're right. To the extent that wholesale prices go up faster than fuel, and we're still -- you know, more than half coal in the northwest and the rest is hydro. Coal has also gone up. So a lot of moving parts, Ashar. But net net, we think there is some opportunities out there when that contract expires.

Thank you very much.

Sure.

We'll go to David Schanzer of Janney Montgomery Scott.

Hi, good morning everybody.

Good morning David.

Congratulations on a very solid quarter. Couple of questions if you could give us maybe a little color as far as next year is concerned vis-a-vis the rate actions that have been filed for -- in the U.K., assuming that both the initial proposal and the updated proposal pretty much stand as is, percentagewise, how would your net be affected in '05 vis-a-vis '04?

John?

Sorry about that.

That's all right, David. We have not gone down that road primarily because the rate decision is not a final decision. Not withstanding the fact that the regulator has come out with his initial proposal document and his modified proposal document. It 's not final. Similarly, same thing is true with the Pennsylvania rate decision and until we have final decisions, we're really not talking about an '05 forecast because we don't know what to predict.

Alright. Well, then let me switch over to Pennsylvania. Cause there's some more very specific questions about '05. The 57 million of additional transmission cost, is there anything in that amount that's controversial?

I think in the positions filed by others, there was one position filed that was a few million dollars below the 57, but there hasn't been a strong argument made, we believe, that suggests the 57 million is generally at risk.

And if I could ask that U.K. question maybe a little differently in Pennsylvania, in what you're hearing from the staff or some of the interveners and so forth, are there any items overall that are -- that appear to be either very promising or very difficult for you to address.

I'm not sure I could put any of the items into either category. Certainly, there is a lot of discussion about rate design by the different customer classes. All I would want to say now is this. PPL electric utilities, the Pennsylvania distribution business continues to be a drag on earnings. Last year, we had a return on low single digits and that was after we took out the cost of hurricane Isabel and deferred that 5 cents for consideration and the rate review. Electric utilities does continue to be a drag on the corporation and our returns at that property by the end of this year will continue to be in the low single digits. vary 1% or 2%. S that continues to be an important item for us to rectify with the expiration of the rate cap. We feel we've stuck by our end of the bargain and abided by the rate cap and electric utilities and used other businesses to subsidize it and stuck by our -- and continue to stick by our end of the agreement to cap generation prices to the polar contract. But that's really all we can say. The ALJ's decision should be out shortly and that's on a timetable that's consistent with the commission meeting its expectation of ruling before year end.

Ok. One last question. Last year's change in dividend policy or dividend action occurred in February. Would it be reasonable to assume that if a change occurs for next year, would happen roughly around the same time?

Well, that's possible.

Ok. Thank you.

Sure. Thank you, David.

We'll go next to Tom O'Neill of Lehman Brothers.

Good morning. Just a couple of questions on your revised guidance. You had indicated that FX was at 10 cent a share benefit versus '03. Just curious what that is in terms of absolute contribution for '04.

Well, 10 cents a share, you know, we're around $3 million in pretax is about a penny a share at the consolidated level. It is around $20 million. After tax.

$20 million after tax for '04?

Yes.

Okay. And then the tax benefit that you described '91 through '95, is that showing up in the '04 operating guidance?

Yes.

And could you size that up in terms of net income or EPS?

7 cents.

7 cents, ok. And then last item on that front. How much negative impact from weather for '04?

Basically none. Our hedging contracts give us the opportunity to manage that weather exposure. In our situation, we have a large fixed price contract with electric utilities and if we have extreme weather that drives up wholesale prices combined with poor performance of power plants then we gotta go to the market to cover and hot weather can actually hurt us. In the alternative cool weather for insulated from the effects of cool weather if our clients perform well in the summer because we continue to sell under that same fixed price to the affiliate. So, we're really able to manage weather effect through our hedging strategies. So, weather was not a factor.

Ok. And then one final question on the cash. It looks like you're talking about a 300 million increase in year-end cash. Just curious. Is that financing or tax-driven?

It is financing. Just about 300 million. It's financing driven. We sold debt at energy supply earlier this year in anticipation of a maturity of $320 million in the early part of next year.

Great. Thank you.

We'll go next to Paul Patterson of Glenrock Associates.

Hi, how are you?

Good morning, Paul.

I wanted to ask you guys about the depreciation from the leases. Could you quantify what that impact was?

Yeah. Give us just a second. I think about 3 cents.

Okay, so that was about 3 cents a share? Ok.

That would be for the quarter. More like 10 cents for the year.

So, Okay. So it'd be about $7 million or so. Would that be the increase?

Get you that.

It looks like depreciation went up about 7 million and I'm just wondering if that was totally because of this or if there was anything offsetting that?

No largely this. There are a number of other smaller items both directions but it was -- the change is largely putting the leases on.

Ok. The other question I wanted just to clarify. It sounds like it was only 3 cents associated with currency benefit, is that right? For the quarter?

For the quarter, yeah.

Okay. And then for the other thing I wanted to sort of ask as going forward, there has been a lot of talk about PGM pricing changing. Do you guys have any outlook on that in terms of how that might benefit you going forward for Icap.

We can't really provide you much -- any specifics on that. I don't think it would be a significant effect to us given our current hedges either way.

Ok. Then just finally the 200 megawatts that you guys mentioned that you guys are looking at, could you elaborate a little bit further about what you're seeing out there or what markets or you know, obviously you're doing stuff with Susquehanna. That's not included in that, I don't think.

It is included in that. The 200 megawatts relates totally to additional megawatts from our existing power plants out at Susquehanna, primarily Susquehanna and Brunner Island and Montour.

So that includes the 45 megawatt increase that you guys?

No that excludes -- this in addition to the 45 megawatts achieved through the turbine replacement this year. There is an extended power uprate project we're looking at Susquehanna and some other smaller projects. At both Susquehanna, Brunner Island and Montour

Could you tell us how much is coming from Susquehanna?

In the longer term?

Yeah.

In the longer terms, somewhere in the neighborhood of less than 200 megawatts between 150 and 200 megawatts from Susquehanna out through the '08ish time frame. And probably 25 to 50 megawatts from Brunner Island and Montour with turbine upgrades there.

Ok. Just to focus a little bit on Susquehanna. You said -- is there a certain -- is this a big uprate that would happen during that period of time or is this something that would happen gradually? I'm just sort of --that's a significant number of sort of low cost megawatts that would seem to be --

It would probably be in the '07-'08 time frame. And we're in the process now of working through all of the particulars of an extended power operated Susquehanna. Each element of the steam cycle and going through all of the engineering details and preparing materials for regulatory filings -- NRC filings and so forth. So that will be a longer term project but yes, it's a valuable increase in megawatts at relatively low capital costs given the fuel loss at Susquehanna.

Okay, great. Thanks a lot, guys.

Sure.

We'll go next to Leslie Rich of Columbia Management Group.

Hi, I wondered if you could talk about on your eastern margins, you talked about net revenues from PJM congestion positions being a positive.

Yes.

Impact. And I just wondered if you could elaborate on that.

Yeah. Our energy marketing group does do transmission network analysis and looks at expected future nodal prices and does take a position on financial transmission rights. There were some equipment issues in New Jersey, for example that we were able to take advantage of. That's primarily where we got significant earnings in that area.

Can you quantify that?

I don't -- I'd rather not.

Ok. And then on the contingent converts, John, you mention you might seek amendment to the terms of the notes. What's actually involved in that? You would need to pay a premium to do that? Or sort of what is the process? And do you need to do that by December?

We need to get the terms -- ff we're going to do this, assuming FASBY does adopt a final rule, we will need to get the terms changed by the end of the year. Then we're looking at exactly what that will take.

Thank you.

We'll go next to Nancy Doyle of Net Life

Yes, thank you. I just wanted to know if the new tax law that makes it easier to repatriate foreign earnings would have an impact on you?

It's -- well -- a couple of things, it's number one, I'm not sure the tax law has been signed -- the tax bill has been signed into law yet. There are still some uncertainties there. It is a complex bill with, as you can imagine with tax issues, multifaceted implications of it. We are looking at that to see what impact, if any, it will have on us in terms of repatriating funds from our international businesses.

Any positive is not included in the earnings guidance we've given.

Yeah, that's right. We've made no assumptions in our guidance and about the legislation.

All right, thank you.

We'll go next to Steve Fleishman of Merrill Lynch.

Hi, guys.

Hi, Steve.

Just a couple of detail questions. The 7 cent benefit from the tax settlement, how does that split between supply and delivery? I think you said you got benefits in both businesses.

Yeah.

About half and half Steve.

About half and half? Ok. And then secondly, I know I think I asked this in the last quarter. It looks like your tax rate for the quarter was about 27% and year-to-date is about 25%. Is that mainly due to the syn fuels or more the earnings coming from overseas? Any sense on explaining why the tax rate is so low?

Year to date is about 25%. We maybe will be a little bit below that in effective tax rate a shade below that by year end. I don't -- other than syn fuels, I'm not sure there is a lot we can peel apart in that for you. As you can imagine, our tax strategy has a lot of twists and turns with the international operations and repatriating cash so I'm afraid we can't give you more detail.

Ok. And I guess one other question with regard to the international business, which is continuing to do very well. Obviously the currency has helped. But if you look at the other benefits you noted, the distribution margins, and things like that, I mean --

The business is -- currency is only a fraction of the outperformance of international. Chile has been ahead of plan and continues to be ahead of plan because it just -- good fundamentals and active management and cost efficiencies. In the U.K., it's been a combination of currency, as I said, that's only a fraction of it. And there's been some substantial growth in southwestern England. There has been very strong construction and sales have been ahead of plan as well as strong cost performance by management. So, it's a combination of all of those things but it's much more than just currency in England. Kind of a little bit surprisingly, there has been very strong top line growth in our properties in the U.K.

Ok. But just to clarify, you know, as we look ahead, obviously that we have to look at the rate case outcome and we'll have to look at what happens with currency but the improvement in this business that we've seen both last year and this year, it's not due to any kind of timing or other benefits. It's more core kind of business improvements.

Absolutely. Core fundamental strengths in the U.K. The economic development growth that we've seen in southwestern England and to some extent south Wales, you know those are ongoing sales, generally.

Ok. And then one last quick question. The northwestern bidding.

Yes.

When do you expect to hear an outcome on that?

I'm not sure, Jim?

The process is still ongoing. As you're aware. We have a number of proposals in. We have been contacted over some and have had discussions on various proposals that we've submitted. So, we at this point in time, Steve we don't have a timetable for western, when that process.

Do you think by year end?

I would suspect that certainly by year end or the first half of January. They will have worked their way through a number of the proposals that they want to select.

As you know, Steve, that's not a structured process in Montana the way it is, for example, in the New Jersey BTS. So the timetable really is under the control of northwestern and the commission. Rather than anything that is repetitive, regularly scheduled cycle of bidding the way New Jersey and Maryland have structured it.

Okay. Thank you.

Sure, take care.

We'll go next to Paul Ridzon of Key McDonald.

Good morning. How are you?

Good, Paul.

Do you have clarity on the ongoing impact of this I.R.S. audit? Is that going to be confined to 2004?

You want to know -- Which audit are you talking about?

You had a 7 cent benefit.

That was for the '91 to '95 period. And that's concluded.

Was there another audit?

No. The I.R.S. looks at our tax returns on a regular basis but that's --

What are you seeing with regards to migration, reverse migration and giving your generation stack, is reverse migration a detriment?

Talking about customer shopping?

Yes.

We haven't seen significant shopping either way. About a year ago, I suppose, we saw some customers that had shopped returned to polar service. But the shopping only went from about 4% to 2% so it's not really a material issue.

And then, lastly, with regards to the 57 million of transmission cost recovery, I assume you're eating that now. So that's pure gravy when you pick it up. What -- is that your forecast '05 number and what level are you absorbing now?

We're absorbing it now.

The full 57?

Yes.

Ok. Thank you very much.

Thank you.

And that is star one if you would like to ask a question. We'll go next to Kit Konolige of Morgan Stanley.

Thank you, good morning guys.

Hi, Kit.

Good morning Kit.

Question about your fuel costs going forward. Can you give us some sense of what you expect to be paying on average for coal in say '05 and '06 versus '04?

I guess we'll give you some very general numbers, Kit. I don't think we want to disclose the particulars of our purchase arrangements. Jim?

Yeah, I'd rather not talk about -- giving Kit -- obviously we have a myriad of contracts constantly under negotiation. Maybe I 'd give you a feel for what we see in the way of average increases on a year-to-year basis perhaps.

Ok.

Going from -- looking at '05 to '04, I'm expecting to see about a 4% to 5% increase in our coal situation. Coal costs.

So, that would be when you report your costs, the coal portion of fuel per megawatt hour, we'd expect to see up 4% to 5%.

That is correct.

And we've substantially covered our coal positions, our expected burner is largely purchased for the next couple of years. And all the way out to about half of our needs as far out as 2008 and we are continuing to layer that in. So our coal position is -- and our inventory is

29, 30-day inventory which we'll expect to move higher as we approach the winter months.

Our inventories are strong.

All right. Are you seeing any improvement? You're a winter peaker I think, correct?

Right.

Are you seeing any improvement in -- there is a lot of talk about the rail congestion and delivering coal.

Well, first of all, we're winter peaker at the electric utility but of course our generation is hedged around the season. We do have a good relationship with the rail systems that serve our plants. And as I think you know, we have our own unit trains so we have 12 or 13 unit trains so we are not subject to troubling availability of coal hoppers. In fact, our coal hoppers have given us some -- in a few cases, a pricing advantage where we've been able to take coal from mines where is they couldn't build a mine inventory any longer and couldn't get trains in to get the coal out of there. So, we're not seeing substantial problems with rail transit. We continue to work with the railroads and get service that meets our needs.

Ok. And finally, can you give us some sense of your expectations. This might be over even a little longer period of years of your expectations for the cost of emissions controls.

We do see emission allowance prices of course increasing. We do have a substantial position of emission allowances. We can't give you any quantitative information on what we think emission allowances are going to do. We'd rather not disclose that but I think we can say we're evaluating the economic opportunities to install pollution control equipment and free up the allowances for sale in the market. So, we would really -- in summary, we have some length in allowances and we do have economic opportunities to -- to install pollution control equipment on an economic basis.

So, that will be an ongoing -- decision whether it is cheaper to use the current allowances or project them to the future and buy them or to add some more by subscribing your own units.

Exactly. That's something we've done before. You may recall a couple of years ago, we put in selective catalytic reduction at our Montour plant early in order to free up knocks (ph) allowances for sale into the market when the market was very strong a few years back. So, that's something we've done in the past and we'll continue to do that on an economic basis.

And finally, can you give us any sense when you talk about the average price of coal being up 4% to 5% next year. Would higher emissions costs be in addition to that?

Higher emissions costs would be in addition to that. But we -- as I said, we do have a substantial bank of emission allowances.

Right. We would still be seeing that in your cost line on fuel costs.

Yes. And we dispatch our units accordingly. When we dispatch our units, we look at the cost of the -fuel and the value of the emissions allowances. Jim, you want to add anything to that?

No, I think it's important to note that we insure that that cost obviously is included in so that when we take advantage of off-peak sales opportunities, we're fully costing obviously our units and make sure that our units are dispatched appropriately to maximize our margins.

Great. Thank you.

Sure.

We'll go next to Raymond Lange of Bear Stearns.

Hey, gentlemen. Couple of questions. WPD, can you talk a little bit about what was dividended up to the parent company as well as is of the cash flow number that you threw out there the $1.4 billion, is roughly 25% from WPD? Is that a good number to use?

Hold on one second. From a cash flow perspective with WPD looking at the dividends, we expect that they'll dividend back about $20 million this year.

$20 million this year?

$20 million this year.

Of the CFO, that number you threw out there, is it WPD roughly 25%?

Of the cash from operations?

Yeah. The billion four number you threw out there.

That sounds about right.

Around $300 million, yeah.

And finally, can you elaborate a little bit more on the converge and what it may potentially cost to amend the converts?

It would be pretty premature to do that at this point in time. We don't expect the cost to be significant.

Ok. Fair enough. Thank you.

We'll go next to Paul Ridzon of Key McDonald. Sir, your line is open please check your mute button.

Could you remind us what your Montana pricing currently is. And, with reference to your inventory of EAs, is that mostly knocks (ph) or socks (ph)?

It's both knocks and socks and the current pricing of the existing northwestern contracts. Around $32.

Would you say your longer socks or knocks?

I wouldn't say.

Okay, thank you very much.

Sure.

Gentlemen, at this time, there are no further questions in the queue. Mr. Hecht, I'll turn the conference back to you for additional remarks.

Okay. Thank you all very much for your participation. Many of you we will see next week at the EI financial conference. And we look forward to that. Thank you very much.

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.