賓州電力 (PPL) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to PPL Corporation's fourth-quarter earnings release conference call.

Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the conference over to the investor relations manager, Mr. Tim Paukovits.

Please go ahead, sir.

Good morning.

Thank you for joining the PPL conference call and fourth-quarter and year-end results and our general business outlook.

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

Although we believe the expectations and assumptions reflected in these statements are reasonable, these statements involve a number of risks and uncertainties and actual results could differ.

For more information in this regard, you should refer to PPL Corporation's Form 10-K report and other reports on file with the SEC.

In discussing earnings and other financial measures during this call, we will be talking about such measures as reported in accordance with Generally Accepted Accounting Principles, or GAAP, as well as 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 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.

With me this morning are Jim Miller, Executive Vice President and Chief Operating Officer and John Biggar, EVP and Chief Financial Officer.

I'll give a few introductory remarks about our fourth quarter and then I'll turn the call over to Jim, who will review the performance of the operations of our supply group, domestic, delivery, and international.

Then John will follow up with a financial review and a discussion of our forecast and our little bit longer-term outlook.

And then we'll open up the call for questions.

PPL reported net income this morning of $177 million or 93 cents per share for the fourth quarter of 2004.

That compares with $280 million or $1.17 per share a year ago.

There were no unusual items in the fourth quarter of 2004, so the 93 cents per share is also our number for ongoing operations.

For the fourth quarter last year, I want to emphasize there were three unusual items that resulted in a net credit of 19 cents a share.

We've discussed those items on previous calls and the details are available on our earnings news release, which we issued this morning and is on our website.

Excluding items, earnings from ongoing operations for the fourth quarter of 2003 were 174 million or 98 cents per share.

For the fourth quarter and the full year of 2004, PPL reported an increase in total earnings from ongoing operations.

Earnings from ongoing operations for '04 were 690 million, which were about 7.5 percent higher than the 642 million for 2003.

Earnings per share from ongoing operations were 371 for both 2004 and 2003, and that reflects 24 cents of dilutive impact of 12 million shares of additional common stock outstanding in 2004.

As we noted in the news release, reported earnings for 2004 were 698 -- 698 million or 3.76 per share, and that included a net benefit of 5 cents per share from several unusual items.

And that compares with 734 million or $4.24 per share in 2003, which included several unusual items, which netted out to a benefit of 53 cents per share.

Again, we discussed those individual onetime items on previous calls and all of the details are available in the news release that we issued this morning as well.

Jim Miller shortly will review fourth-quarter and full-year earnings performance as it relates to several factors in our business segments, and they were offset largely by the dilution that I've already mentioned and certain higher expenses in certain areas.

Key in the year-over-year comparison are the results from sound performance of the delivery companies in the United Kingdom and the higher wholesale energy margins in the Eastern part of the U.S. due to productivity of our power plants, excellent availability and the fuel diversity of our generation facilities.

We will also be reaffirming this morning our 2005 forecast, which we've given you before -- a range of 3.80 to 4.20 per share in earnings from ongoing operations.

And the midpoint of that forecast is about an 8 percent increase over 2004 earnings from ongoing operations.

But following Jim's remarks, John will give some additional detail on our financial performance and the outlook for the future.

Now I'd like to ask Jim to speak to operations.

Jim?

Thanks, Bill.

Good morning, everyone.

First, I'll go over the performance and supply segment.

In the fourth quarter of 2004, supply earned 56 cents per share from ongoing operations compared to 72 cents per share in the fourth quarter of 2003.

The lower earnings per share were the result of dilution from increased shares of common stock that Bill mentioned; higher depreciation expense due to the consolidation on the balance sheet of certain leased assets; an adjustment to earnings recorded on the Company's nuclear decommissioning trust; and higher interest expense associated with PPL's Lower Mount Bethel power plant in Pennsylvania, which went into commercial operation in May 2004.

Partially offsetting these effects were higher energy margins in the Eastern United States and improved earnings from the Company's synfuel operations.

The improved earnings from our synfuel operations were primarily the result of our newest facility, Tyrone, which began production in July.

When compared to 2003, fourth quarter 2004 margins from the Company's Eastern operations increased for the following reasons -- higher average realized energy prices for sales, which more than offset increased average supply costs while generation output was slightly higher than 2003; margins in the West were lower in the fourth quarter when compared to 2003, mainly due to less favorable results for the Southwest caused by compressed spark spreads, less operation of our gas-fired generators, and lower trading margins.

These factors more than offset the positive impact of higher coal-fired output and improved hydro conditions, which increased hydro output by almost 12 percent compared to the fourth quarter of 2003.

For the year, supply earned 2.30 per share from ongoing operations compared to 2.70 per share in 2003.

About half of the lower earnings per share were due to the dilution from increased shares of common stock outstanding with the remainder of the lower earnings the result of higher depreciation due to the accounting change at the end of 2003, higher interest expense, and higher operation and maintenance expenses.

In addition to the interest expense associated with our Lower Mount Bethel power plant, we also had higher interest expense as a result of the buyout of our gas-fired power plant leases in Arizona and Illinois.

O&M expenses were higher in 2004 as compared to 2003 due to higher maintenance expenses at PPL's power plants in the Eastern United States and onetime insurance recovery in 2003 that offset expenses in that year.

Key factors that benefited PPL's ongoing earnings were higher energy margins and improved earnings from the Company's synfuel operations. 2004's supply realized greater energy margins from both its Eastern and Western operations than in 2003.

The East results benefited from higher output from our coal-fired and nuclear plants and higher wholesale prices.

These factors helped offset the increased generation fuel costs and the higher prices for power purchases.

Western operations benefited from higher output from PPL's coal-fired and hydro plants and improved trading margins overall.

The Company's generating facilities continued to run well and achieved an equivalent availability of about 93 percent for the quarter.

For the year, the fleet-wide equivalent availability was over 91 percent.

In addition to strong availability performance, prime-time availability, the measure of our plan availability during peak periods averaged close to 98 percent during 2004.

Now I'd like to summarize performance of our domestic delivery business segment.

Our Pennsylvania delivery business earnings from ongoing operations for the fourth quarter were 13 cents per share compared to 4 cents per share for the fourth quarter of 2003.

Primary reasons for PPL electric delivery's improved earnings include the resolution of certain tax issues and higher delivery revenues.

Year-to-date 2004 earnings from ongoing operations were 43 cents per share compared to 24 cents per share for the same period in 2003.

Primary drivers of these increased earnings were increased delivery revenues; lower storm expenses in 2004 compared to 2003; and various tax issues including a real estate tax adjustment in the first quarter; increased income from a '91 to '95 IRS tax settlement; and the resolution of previous-mentioned tax issues.

For our international business segment, earnings from ongoing operations for the fourth quarter of 2004 were 24 cents per share compared to 22 cents per share for the fourth quarter of 2003.

This favorable quarterly performance is primarily due to positive performance of our UK operations, including favorable currency exchange rates, lower O&M expenses, and lower interest and local taxes.

For 2004, earnings from ongoing operations were 98 cents per share compared to 77 cents per share in 2003.

For the year, we achieved excellent performance at our electricity distribution companies in the UK and in Latin American.

Favorable performance at WPD was due primarily to positive currency exchange rates, higher distribution gross margin, and lower local UK taxes, primarily from onetime benefits realized in 2004.

In Latin America, our favorable performance versus last year was primarily due to higher electricity margins in our Chilean and Bolivian affiliates.

Regarding 2005, as Bill mentioned, PPL is reaffirming its forecast to 3.80 to 4.20 a share from ongoing operations that was first communicated in December of '04.

Let me briefly review some of the underlying key factors for our 2005 earnings forecast.

Key factor that affects all three segments is the dilutive effect of 4 million additional average shares of common stock outstanding as a result of the conversion of PEPS units to common stock in May 2004.

Let's look at each of the business segment's contributions to 2005 earnings.

Supply is projected to contribute 55 to 60 percent of PPL's total earnings per share from ongoing operations in 2005, compared to about 62 percent in 2004, even with energy margins essentially flat and a full year's production at the Tyrone synfuel facility. 2005 earnings per share will be affected by higher taxes, higher O&M expenses from additional planned outages for our generators, and higher depreciation expense, including a full year of depreciation associated with PPL's natural gas-fired plant in Lower Mount Bethel Township, Pennsylvania.

Energy margins for 2005 are expected to be essentially flat when compared to 2004 for the following reasons.

Projected increases in Eastern revenues, driven by a scheduled increase in PLR prices, that is, the price relating to the contract between Electric Utilities and PPL EnergyPlus for customers who choose not to shop for an energy supplier.

And a full year's benefit of the 45 MW increase in Unit 1 capacity at our Susquehanna nuclear plant in Pennsylvania -- are expected to be offset by projected increases in fuel emission allowance and purchased power expenses.

2005 margins in the West are also projected to be essentially flat to 2004 results.

This is the result of our assumption about continued low-flow conditions at our Montana hydro facilities and slight increases in Montana coal expenses.

Domestic delivery is projected to contribute 20 to 25 percent of PPL's total earnings per share from ongoing operations in 2005, compared to 12 percent for 2004, driven largely by the approved increase by the Pennsylvania PUC in PPL Electric Utilities delivery charges for 1.3 million customers in central and eastern Pennsylvania.

This 194 million annual increase was effective January 1st 2005.

The earnings increases will be partially offset by the absence of certain tax benefits that occurred in 2004.

We experienced a devastating ice storm in January and restoration efforts took ten days to complete.

While the storm was very concentrated, we nevertheless had approximately 2400 trouble cases and 237,000 customers out of service.

We are estimating the cost of the storm at 20 to 25 million, with approximately 90 percent of that amount being expensed.

We're currently considering our options to address this issue.

International delivery is projected to contribute 20 to 25 percent of PPL's total earnings per share from ongoing operations in 2005 compared to about 26 percent in 2004.

A key driver that will have an impact on 2005 international earnings is an increase in the after-tax pension expense at WPD.

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

Thanks, Jim.

Good morning.

Again for 2004, our performance clearly demonstrates that our strategy is providing growth for shareowners.

I just want to reemphasize a couple of points that Bill made in his opening remarks.

Total earnings from ongoing operations in 2004 were up $48 million or 7.5 percent from 2003.

And if we look at earnings per share from ongoing operations in 2004 at $3.71, I think it's important to go back and compare that to our original forecast of earnings from ongoing operations for 2004 where the midpoint was $3.60 a share.

As Bill mentioned, earnings from ongoing operations of $3.71 this year were flat with last year, but again, I think it's important to recognize that we absorbed the dilution from 12 million more shares of common stock outstanding.

As Bill said, that's a 24-cent per share impact.

That common stock was also important because it helped us to strengthen the balance sheet of PPL.

At the end of 2004, our GAAP equity was 36 percent.

That compares to 28 percent at the end of 2003.

And for 2005, we're projecting that GAAP equity will grow to 40 percent.

That will result primarily from a reduction of debt of about $600 million and an increase of about $400 million in common equity through the growth in retained earnings.

When we talk about our capitalization in the past, we've also mentioned capitalization on an adjusted basis, somewhat consistent with the way some of the rating agencies look at it, and that is, we exclude non-recourse securization debt and international debt.

And we do that for 2004 and exclude about $1.2 billion of securization debt and about $2.3 billion of international debt.

Our equity ratio at the end of 2004 was 50 percent.

Projecting out to the end of 2005 on the same basis excluding securization of debt of about $900 million and international debt, we see our adjusted equity ratio at about 55 percent at year-end -- at the end of this year.

We continue to have strong free cash flow before dividends.

Cash from operations for 2004, excluding the proceeds from the sale of our minority interest in CGE, that Chilean energy holding company, was about 1.4 billion last year, excluding transition bond repayments and CapEx, resulted in free cash flow before dividends of about $450 million.

For this year, we're projecting cash from operations of about 1.4.

Subtracting out transition bond repayments and CapEx of about $830 million, we expect free cash flow before dividends to be about $285 million.

There are a number of factors that impact our result and the declining cash from operations in 2005 compared to last year.

First was the fact that we had a federal income tax refund last year.

Cash income taxes are expected to be higher in 2005.

And we are expecting some reduction in cash for our international operations related to the pension fund contribution increases at WPD that Jim mentioned; and the impact of Ofgem's rate review.

Offsetting that, we see significant cash flow improvement from PPL Electric Utilities and the PUC's decision in December of 2004.

There are a number of items that impact our CapEx expenditures in 2005 versus last year.

Primarily more planned outages at our generation plants in 2005 than we projected last year, plus an increase in environmental expenditures at those plants.

We'll also see some increase in CapEx at our domestic and international delivery businesses for system reliability purposes.

And in this regard, I think it's important to point out that from an international perspective -- that is from a UK perspective, those capital expenditures are reflected in customer rates when the expenditures are made.

In December, we announced a plan to more aggressively grow the common stock dividends.

And as you know, it's currently at an annual rate of $1.64 a share.

Based on our sound financial position, we've adopted a policy that provides for growing the dividend at a rate that exceeds the projected growth rate in earnings per share from ongoing operations.

And we expect to pursue that policy until the payout ratio reaches the 50 percent level.

And we expect that we get to that 50 percent level over the next couple of years.

We've also today reaffirmed our 2005 forecast of $3.80 to $4.20 per share from ongoing operations.

And again, based on a $4 midpoint for the 2005 range, that represents about an 8 percent earnings growth compared to the $3.71 a share that we earned in 2004.

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

And the growth elements of our strategy are visible and include increases in the PLR prices under the contract that we have between our supply business and PPL Electric Utilities for customers who choose not to shop; and that of course includes the 8.4 percent increase in PLR prices that's scheduled to occur in 2006.

We expect to see some increases in volume of PLR sales, reflecting load growth at Electric Utilities.

And we see possible incremental capacity of about 250 MW at existing facilities, including a power upgrade at the Susquehanna nuclear plant and minor capacity enhancements at some of our fossil plants.

Importantly, in developing the long-term forecast, we have assumed no increases in forward electricity prices.

And we've also assumed that no new assets are added to our portfolio.

Now, before we open the call to questions, I'd like to make a final comment on our common stock dividend.

As I mentioned at the December 20 call announcing our 2005 forecast, in developing the Company's dividend policy, we've closely analyzed our credit metrics and other factors for 2005 and beyond.

We determined that the strong growth in PPL's retained earnings not only supports the dividend policy but also provides the potential for stock buybacks in future years while sustaining PPL's overall credit quality.

This concludes our prepared remarks.

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

Thank you.

Operator, we're prepared to take questions now.

(Operator Instructions).

Ashar Khan with SAC Capital.

Good morning, and congratulations on a great year.

John, you he mentioned how the cash flow decreases.

Could you quantify what the higher tax amounts would be '05 versus '04?

And how much of less cash you are expecting from the international operations?

Rough numbers, Ashar, the federal tax refund in '04 was about $50 million.

Cash -- looking at income taxes for '05, the higher income taxes for '05, that's probably another 45 million.

Okay.

Internationally, the combination of the pension fund contribution increase at WPD and the impact of the rate review, probably another 35 to 40-ish.

Then offsetting that, there's obviously the large increase in cash from operations resulting from the electric utility rate case; and that's a little over $100 million.

Okay.

And Jim you --

Those are the big pieces.

There are some others in there as well.

But those are the major portions or pieces of it.

Thank you.

Jim, you had mentioned that you might ask for some deferral on those storm costs or you were exploring the strategy.

Could you a little bit specify what you're looking towards and when the decision will be made?

I think we're looking at various options right now.

We really can't discuss it at the moment.

But I would expect that we'd come to a decision here within several weeks.

Okay.

And Bill, if I remember correctly, your dividend -- next board meeting is usually what, in the third week of February when you review the next dividend?

Our board meeting is normally the fourth Friday.

And yes, our past practice has been to review the dividend in February.

In February.

So it's the fourth Friday of February?

Yes.

Okay.

Thank you very much and congratulations.

Paul Ridzon with Key McDonald.

Good morning.

A clarification on Ashar's question -- you're going to have the rolloff of a $50 million refund plus 45 million?

So an incremental 95 or?

Is that --?

Right.

And secondly, another local utility, headquartered in Baltimore, recently told a story about the rolloff of PLR and marking that portfolio to the current strip.

Have you done that exercise?

No, we have not.

Our PLR contract -- our PLR situation and the industry structure is slightly different in Pennsylvania than it is in Maryland.

Our PLR prices -- that is, the prices paid by the consumers, are determined out through the end of 2009.

And that's a -- it's not a fixed price.

It's a fixed schedule, which increases year by year.

Our PLR prices increase year by year.

And of course, the volumes have been tending to increase year by year.

Our affiliate contract is slightly out of the money.

That is for (ph) the supply group.

That is to say if the supply group takes that power to market rather than the PLR contract, which would happen in 2010, about, we would see an increase.

But we haven't marked it to market because the prices out in 2010 simply are not very indicative.

The market is simply not very liquid.

Okay.

Thank you very much.

I hope that helps you.

Does that help -- does that answer your question?

Yes, it does.

David Schanzer with Janney Montgomery Scott.

Yes, good morning, everybody.

A couple of questions.

First of all, with regard to -- I know this is a somewhat difficult question because it encompasses utility, non-utility, and a bunch of different geographic areas, but can you give us kind of a sense of what you thought weather did in the fourth quarter in terms of earnings?

I would speculate that it was a net zero.

Okay, so in other words --

There wasn't anything dramatic either way.

You know, the weather -- colder weather tends to increase utility sales and the utility throughput and therefore delivery revenues.

But at the same time, if it pushes up wholesale prices some hours, we're selling into the spot market, some hours, we're buying from the spot market in small amounts to balance our book.

So I think of it as a wash.

Okay.

You talked about higher margins in Latin America.

And I guess my question is along with those higher margins, are you seeing any interest from any sources at this point in wanting to be in that business?

Is this an opportunity for you to exit Latin America in a positive way?

We haven't solicited any interest, although we monitor the market down there.

As of right now, we don't feel any sense of urgency.

The businesses are performing very well.

We have top-line growth in Latin America that's in the high single-digits, you know, somewhere around 8 percent in top-line growth.

I just emphasize to people that our experiences internationally shouldn't really be compared with the international experiences of others.

The two or three key things is to pay an appropriate price for the asset, which we believe we did, manage it actively, which we believe we're doing, and have your assets in regions with a favorable political climate and favorable currency.

And as you know, currency has actually worked in our favor.

Both of our assets are in the UK, which is obviously a AAA-rated economy.

Chile, which is probably one of the stronger economies in the world, certainly the strongest in Latin America -- foreign exchange has worked in our favor.

I point out that in the past 12 months, the Chilean peso has dramatically grown in value against the U.S. dollar.

So yes, if there's an opportunity to divest the businesses, we look at it on its own merits.

We're not wedded to those businesses.

But I just continue to point out they add to earnings and they have.

Okay.

Your 2005 number encompasses, I suspect, a fairly positive outlook with regard to the synfuel part of the businesses.

What kind of obstacles or milestones or benefits do you see going forward?

I mean is it going to become a larger part of where you're taking the Company?

Synfuel?

Yes.

No, synfuel rolls off in 2007.

Okay.

And our long-term growth includes the effects of that.

Okay.

And then lastly, with regard to the question about storm recovery, a few years ago, a number of utilities declined to try to pursue recovery of expenses in states in the South in particular.

Is this an option that you're looking at as well?

Yes, we are.

And I just point out that the hurricanes that we all experienced in 2004, to give you a rough comparison, the biggest hurricane that we had ever seen was in the fall, late summer, fall of 2004, and it was around $15 million, okay?

And we pursued that as a deferral in the utility rate case -- I'm sorry it was the end of 2003, was our largest hurricane.

And we pursued that during 2004 as a deferral in a rate case.

That hurricane was $15 million.

Because it was a hurricane and was widespread, it got a lot of visibility.

The ice storms that we experienced in early January were not widespread, didn't get a lot of visibility outside the area, but that was a 20 to $25 million dorm.

So that's why we mentioned it, to give it some perspective and to understand that it was substantially larger than the previous largest storm damage we'd had.

But it just didn't get a lot of visibility because it tended to be localized in the Poconos and Northeastern and North Central Pennsylvania.

Okay, great.

Thanks.

Andy Levi (ph) with Bear Wagner.

Hi.

I missed the comments on the dividend and the timing and increase and all that stuff.

Can you just go over that one more time?

John, do you want to do that?

Sure.

The dividend policy that we announced is to grow the dividend at a rate which is faster than the growth rate and ongoing earnings per share until we reach the 50 percent level, which we expect to see happen over the next couple of years.

And then Bill made the comment in response to a question as to when the Board normally considers dividends, and that's at the February Board meeting.

And that would occur on the fourth Friday in February, which I think is the 25th, if my memory is correct.

Great.

Thank you.

Leslie Rich of Colombia Management Group.

Yes, I wanted to ask you about the upgrade (ph) that you talked about at your fossil and nuclear plant -- you said 250 MW were possible.

And I just wondered if you could walk through how much of that would be at Susquehanna, how much at the fossil, and timing and spending.

Sure.

Yes, Jim?

Let's start with the largest piece of it.

Around 100 -- call it around 170 MW or so with the Susquehanna reactor up-rate.

170 or 107?

170.

In that vicinity.

That will come into commercial operation in the period late '07 through '09.

And at a rough cost of around $150 million.

We have some fossil upgrades in the order of some of our Eastern fossil units at 30 MW, Western fossil units at 20 MW; and they will come in the '06 through '08 time period.

And we do have an additional piece of effort at Susquehanna, around 20 MW in the '05, '06 timeframe; and a very small Western upgrade of about 8 MW in '05; which total about 250 or so MW.

I might mention, Leslie, the capital expenditures to accomplish all of that is baked into our forecast.

Of course, both our earnings growth forecast and our credit metrics.

Okay.

And then could you just review -- I know your coal is largely hedged for the next several years.

Could you just review what the pricing inflation is, embedded in that?

In our hedge contract?

You're pretty well hedged for '05 and '06 coal, right?

Yes, we are.

Yes.

So you indicate that supply margins are part of the PLR increases offset by higher coal and emissions costs.

And I just wondered if that's a trend that would continue into '06 as well.

I think that was really a longer-term comment.

For approximate numbers, you can think of our coal prices -- although we certainly don't disclose individual contracts, think of our hedge coal in the neighborhood of 50 bucks a ton delivered.

And think of our emission allowances -- the market for emission allowances is about $700 a ton.

Bear in mind that just as we're hedged with our coal supply, we have been accumulating emission allowances.

So we're managing our emission allowance book in a way to optimize the economies of the operation, and given the timing of our scrubber projects.

So again, for competitive reasons, just as we don't disclose individual coal contracts, we haven't disclosed our allowance position.

But we do have a substantial bank of sulfur allowances.

Jim, do you want to add anything to that?

No, I think we don't like to get into discussing individual years.

But for the next few years, we're well hedged in that arena.

And substantially hedged over the five-year plan in total.

And from a coal perspective, the only thing I'd add is, as Bill said, if you look out over that long period, you might use a number between 45 and 50.

And the only other additional note would be that we do see, as many others do, we do see -- have seen -- a rapid rise in coal prices.

But we do see it leveling.

And so as we look out at the out-years, we begin to see that escalating curve level out.

And time will tell, but just some insight we see in some of the forwards.

That $50, Leslie, that I gave you for delivered coal -- let's understand that's Eastern coal.

Right.

And then could you just refresh my memory on your scrubbing?

Do you have a lot of environmental CapEx later in the decade?

Or are your plants pretty much done?

We do have scrubbers CapEx later in the decade.

And the CapEx for that is baked into our financial forecasts, both earnings and credit metrics, and was reflected in John's comments about longer-term stock buyback.

That is all included, all rolled together.

Okay.

Thank you.

So we can readily manage the CapEx for the scrubber installations on the financial base that we're working from.

And you're spending would be in 2008? (multiple speakers)

Well, the spending is for -- beginning now.

We're capitalizing the engineering design right now as we speak for scrubbers.

Okay.

Thank you.

The big years, of course, are '07, '08 when the construction is at its peak.

Okay?

Yes, thanks.

Paul Patterson with Glenrock Associates.

Good morning.

I'm sorry if I missed this.

I think Dave Schanzer was asking about it.

What was the total synfuel contribution in 2004?

21, 21, 21 cents.

About 20, 21 cents a share.

Okay.

And David was asking if that was going to become a bigger part.

And our answer was that rolls off after '07.

Okay.

And then in taxes other than income seem to have gone down year-over-year.

I'm sorry, quarter-over-quarter, I guess and a little bit over the year.

What happened there?

Primarily, there was a settlement of a real estate tax issue in Pennsylvania and there was a reduction in the amount of capital stock tax that we paid this year -- in '04.

Okay.

How much was that?

2 cents. (multiple speakers) capital stock actually was 2 cents.

And what was the currency impact for 2005?

I mean for 2004, excuse me.

I'm sorry.

What was the currency impact at the end of the year?

Everything looked at and -- I mean you mentioned Chile doing a bit better and you've given us some sensitivity to the UK pound.

But I'm just wondering what the total impact was.

We're looking for the number.

Around 12 cents would be a good number, good estimate.

Okay.

And then hedging on the Western power situation out there -- how does it look for '06 and '07?

Do you guys have contracts rolling off and --?

Yes, right now, I would say the forward prices at mid Colombia on peak are around $50.

And off-peak, around $40 round-the-clock, figure mid-40s.

I might mention that that means that there is some upside as the contract rolls off with Northwestern.

We are in conversations with Northwestern, as, I assume, others are.

Might just mention now that 3 to 5 percent earnings growth that John reiterated does not reflect any speculation about increasing energy costs.

We're assuming flat energy costs, which may be a bit conservative -- may differ from the assumptions of some others.

We do not assume any additional assets.

And we don't assume any growth in wholesale prices.

So we think that 3 to 5 percent is a conservative and visible growth.

Yes, I guess to -- if you could just give us a little more flavor here.

I mean as I remember, the contract was signed about three or so years ago with Northwestern.

And how much I mean is the difference between 40, 50 off-peak, on-peak versus what you guys are selling them now?

We're around $32 now, Jim.

We're around $32 now.

We have a 300 MW block and a 150 unit contingent.

That contract rolls off end of June '07.

And Bill mentioned the prices at mid-C are around 50 on peak and around 40 off-peak.

Right.

Okay.

And then finally, just -- I don't mean to keep a harping on the dividend, but when you mentioned that it will get up to a 50 percent payout ratio in the next couple of years, I think was what I heard John say.

What do the couple years mean?

Is that two years?

Is that four years?

What is that --?

A couple usually means two.

But we don't tell you which year we start counting from, Paul.

So we really have said all we should say about the dividend.

Okay?

I appreciate it.

Thank you very much.

Brian Olsen (ph) with Luminous Management.

Good morning, guys.

Most of my questions were answered, but I was wondering -- you just mentioned with the dividend that you don't give the base year.

I was wondering if we could talk about the 3 to 5 percent growth rate, and what year I can take the base for?

Should it be the 371 that I see for --

2004 is your base year.

I was teasing Paul a little bit.

But you can use 2004 as the base year for 3 to 5 percent growth and that's fine.

So if I take the 3 to 5 percent growth and then I include the Electric Utilities rate case, we're going to see obviously a higher growth rate in '05.

You mentioned it's like 8 percent.

And if we look, if have like an 8 percent PLR increase again in '06, what are we implying as longer-term then on that 3 to 5 so it looks like we have some pretty strong growth here in the near-term?

Well, we certainly, as you point out, you can readily see, we're not suggesting that the growth is going to be uniform each year.

Inevitably, it will be irregular.

You can infer from that perhaps that we intend to beat the 3 to 5 percent.

We'll have to see what the future holds.

Okay.

Thank you.

Kit Konolige with Morgan Stanley.

Thanks.

Good morning, guys.

Just again, a lot of the questions have been answered and not to be too focused on the minutiae, but I noticed that the cash from operations for '05 -- you're projecting a just vary slightly lower number than you had written in in the December meeting.

Can you give me a sense of that particular item change there?

Is that just everything is in flux until it's done, and this trended just very slightly downward?

Yes, it's a mix of several items.

We have the delivery rate increase in '05, of course, going one direction.

There is tax issues moving different directions.

And other small items that tend to aggregate.

That's about all you can say.

The Accounts Receivable and accounts payable at the beginning and end of each year also tend to move the number around.

I hope -- it's not a -- there's no significant underlying trend implied by that change though.

Right, okay.

Fair enough.

And the emissions allowance and coal costs -- not to beat this consistently, but those -- can we take it that those are pretty well locked in for '05 at any rate?

That the --

Yes.

Okay.

And for '06?

Yes. 90-ish percent for '06.

Okay.

So you know what they are, but they're -- I would assume from what I hear from other companies and what I hear about the marketplace that those costs are going to be rising in those years, however.

Well, the costs are rising.

But of course, if your hedged on coal, that's why you hedge.

We're also in effect hedged on allowances in the sense that we have accumulated a bank of allowances.

And as you know, you can carry allowances forward.

So rising price of allowances gives us an opportunity to manage our allowance book in ways that can add shareowner value over time.

So Bill, are you saying '05 versus '04, you're paying the same for coal?

Or -- I mean most companies are even so they're hedged and they have contracts, they are paying significantly more in '05 than in '04.

I wouldn't say significantly more, Kit.

Our contracts continue on at known prices and there are a portfolio of contracts.

We're also sensitive to delivery prices for coal.

Rail costs have been under pressure, and that's reflected also in our plan.

Jim, you want to add to that?

Yes, I mean, obviously, the coal prices have gone up.

And as we bring more higher-priced coal in, our inventory costs will rise.

But a couple things that are important to note.

One, we're talking the numbers in the vicinity of 10 percent, 12 percent.

We're also dispatching our units based on the higher prices of coal, such that when we dispatch on off-peak or sell into the market beyond our PLR contracts, those units are priced at those higher coal prices.

They're also priced at the higher allowance price.

And the higher allowance prices.

Exactly.

Right.

Allowance consumption is booked at the current market value of allowances.

Right, which has been up a lot obviously on the SO2 anyway.

On SO2, yes.

And then just finally, I slipped my mind what I was going to ask.

I'll get back to you.

Thank you very much.

Daniele Seitz with Maxcor Financial.

Good morning.

I just was wondering -- the CapEx level for '05 -- should we assume that in '06, '07 rate -- this should increase by a certain amount?

Can you give a bit of color as to how high it can go?

John?

CapEx, as we look out over time, Daniele, we're forecasting about 830 million this year.

With the increase in expenditures for environmental compliance, I expect it's going to go close to $1 billion in '06 and a little higher than that in '07 and begin to tail off and come back down again.

It's driven primarily by the capital expenditures for the compliance and the coal units in Eastern Pennsylvania.

Right.

And on the regulatory scene, is there any idea as far as riders or something like that associated to environmental costs in Pennsylvania?

Or we should assume that they will be actually included in the price eventually?

Our -- if I understand your question, all of our power plants are unregulated and in the competitive wholesale markets.

So there is no environmental pass-through to retail customers.

And we've reflected all the environmental costs and CapEx in our 3 to 5 percent growth outlook that we've given you.

Yes.

And given this kind of a CapEx, I'm assuming that your free cash flow sort of disappears eventually.

So in terms of financial actions that you're going to do in '05 and '06 -- there are more redemptions with the free cash flow and some stock buyback, and eventually after that, you will not have any more free cash flow in '06, '07?

When we look out, if I understand your question, when we look out over the five or seven-year period, we have a couple of years with net free cash flow after dividends and a couple of years where we're doing net outside financing beyond refinancing maturing debt.

But at the same time, even though we have a few years with net new outside financing, that new outside financing is less than our retained earnings each year.

So our equity ratio will continue to grow out over time, even though we may have negative free cash flow and a couple years of peak CapEx.

Okay.

Thanks a lot.

And just one quick -- weather impact in '04 was roughly zero?

We think roughly zero, yes.

Okay.

Thank you very much.

(Operator Instructions).

Steve Fleishman with Merrill Lynch.

Hi there.

A couple clarifying questions.

In 2004, the total impact of kind of nonrecurring tax items -- could you give that number?

Nonrecurring tax items?

Well, you had a number of tax benefits at delivery and --

Yes, we did.

Give us a minute to sort through that, Steve.

Okay.

Do you have other questions while we dig all the details out?

Go ahead with those.

Yes I do.

Okay.

Secondly, just on the synfuel in '05 when you have a full year of Tyrone, what would be the expected synfuel earnings in '05?

About the same.

Be about 21 cents.

21, 21, 22 cents.

Think in those terms for synfuel.

Okay.

And just to clarify some of your comments you've made on call, Bill, you talked about numbers of 45, $50.

That to me seems like -- my recollection is your contracts have been more like 30 to $35.

So is that a market statement?

Is that your actual cost?

That's delivered, Steve.

So you're saying fully delivered, $45, $50.

Yes, we're saying around $50 delivered, yes.

Okay.

And as I mentioned earlier, delivery is a very significant issue.

And there is some pressure on rail freights, as you probably know.

Right.

Okay?

Okay.

Now the tax break -- you want to go back to the tax breakdown?

Yes, if that's --

May if you want to give Tim a call.

Tim Paukovits a call.

I think we're going to have to do that rather than just be uncertain with the details we give you, Tim can provide that for you.

Okay?

Okay thank you.

David Pintos (ph) with Deephaven Capital Management.

Hi.

Most of my questions have been answered, but I do just want to confirm.

Your guidance for next year does not include any operational benefits from the Sundance transaction?

That's correct.

And everything else has been answered.

Thank you.

Paul Debbas with Value Line.

Hi, this is Paul Debbas.

Is there any particular reason why your PLR price escalation schedule was designed to have a bigger than normal step-up in 2006?

It was negotiated.

And my best recollection was that the increases in PLR price were partly influenced by the desire to make the shopping credit larger.

If you think about it, the PLR -- the higher the PLR price, the higher the shopping credit, and/or the cost to compare.

And there were some pressures on some of the parties to our settlement to encourage retail shopping.

Now, why the step increase in '06 rather than making it smooth, there are a whole lot of moving parts to that negotiation.

Part of it included our ability to amortize stranded costs.

So nothing really specific.

It's just the way it was negotiated at the time.

So there's no big cost increase you were expecting at supply in '06 that would limit the effect of that increase on your margins next year?

No.

The settlement was negotiated so long ago, 1998, that in 1998, nobody had the precision to speculate that there was going to be some cost increase in 2006.

It was nothing like that at all.

That was just something that was agreed to to cut a deal in 1998.

Alright.

Thank you.

Annie Tsao with Alliance Capital.

Good morning, everyone.

Just a follow-up question to David's question on your currency.

You said last year you had a benefit from the currency.

If I remember correctly, you mentioned about 12 cents rate.

If the cost goes in the other direction, what kind of impact is this to you?

And your guidance for '05, what kind of assumption do you use?

And also, do you hedge anything on the currency?

Okay.

We do hedge currency to some extent.

We primarily -- our general consideration is to hedge currency for, certainly, for cash that we expect to bring back during the year.

And we debate on a case-by-case basis whether we want to hedge book earnings to the extent that those book earnings are different than the cash that we bring back.

Now, your other question was if the currency went the other direction, what would the impact be?

Yes, what kind of impact is it going to be to you?

Do you have some kind of sensitivity analysis or something?

No, I don't think we do.

Jim, do you want to take a shot at it?

Well, in the case of -- let's say the pound is right now $1.88.

For every 0.05 movement in the case of WPD in the UK, it's worth about $4 million to us.

0.05 movement -- what does that mean, you mean 5 cents?

Yes.

So if we would move from 1.88 to 1.83, that's worth about $4 million to us in revenues UK.

About that.

That's a good thumb rule.

Okay.

How about Chile?

I don't know that off the top of my head.

Probably less sensitive.

Very much less.

Much less sensitive.

From the tone of your question, were you implying the belief that the dollar would -- the pound would decline against the dollar?

Yes, just in case of if the accounts (ph) work the other way, I just want to know the impact.

Yes.

Well, I think that gives you a rough idea of the sensitivity.

And we do hedge -- we do typically hedge about a year forward on at least cash that we expect to repatriate.

Alright.

Thank you.

Jim Ferguson, AIG.

Good morning.

A question on your -- on the cash-flow statement.

What was depreciation in '04 and '05.

And also, what is the net debt reduction, if you can give me that?

From the end of '04 to the end of '05, the net debt reduction is projected at about $600 million.

And what was it in '04?

Hold on.

Depreciation --

Dig that number out.

Depreciation in '05 is 441.

Depreciation in 2005 is about 440 million.

Okay.

And in '04, what -- (multiple speakers) was it the same on the income statement as the cash flow?

Yes.

Okay.

Is the cash-flow statement going to be available before the K is printed or no?

No, that will be in the K.

Okay.

Question on supply.

What percentage increase would you need in the generation prices you receive over the next couple of years in order to recover your environmental expenditures?

Current generation prices do amortize the additional cost of owning scrubbers.

So the additional -- I'm not sure -- I'm not sure I can follow your question because -- (multiple speakers)

Well, as you spend money over the next couple of years for environmental CapEx, how much would you have to recover -- or increase your prices in order to recover that and stay even?

In other words, have the earnings that we would have had had we not had the CapEx for scrubbers?

Yes, sir.

You know, the scrubbers are actually lower cost to us than consuming $700 a ton emission allowances.

So we don't think of scrubbers as an added cost.

We're in compliance now, so they're not a compliance investment.

They're an economic investment when we compare the cost of carrying the investment and operating the scrubbers with the cost of emission allowances, we're ahead.

So our objective now, given that allowances are 700 bucks a ton to get the scrubbers in as soon as we practically can so that we can sell any surplus allowances we have in the market.

Okay?

Okay.

Yes.

So the scrubbers, in our situation, the scrubbers are actually an economic investment.

So they're a profit center.

They're a profit center given that allowances are at the prices they're at, yes.

Okay.

And a final question is about the investments in Montana and the UK.

What measures does management use to evaluate the performance of the two investments -- PPL Montana and WPD?

And what were those metrics in '04 and what are they forecast to be in '05?

In other words, how do you assess whether it's good, bad, or superlative?

Well, there are several metrics.

I don't think we've disclosed our internal management metrics.

We look at their contribution to earnings.

We look at internal rate of return.

Certainly in the early years, we compare the performance of the investment with the pro forma that we used to evaluate when we contemplated the investment.

In all of those cases, the investments are outperforming the pro forma that we considered when we evaluated the opportunity.

Thank you.

If you want to follow up on the question about the reduction in debt from 2003 to 2004, if you combine long-term debt and we also retired some preferred securities between 2003 and 2004, which was the tax issue, that's about an $800 million reduction in total long-term debt, treating the preferred securities as debt for this calculation.

Okay good.

Thanks.

Kit Konolige with Morgan Stanley.

I remembered my question; it's very brief.

If you're seeing any impact from the -- you mentioned, Bill, I think -- issues with rail -- if you can give us any sense if that's depleting your inventories.

And do you have any side effects from the Ohio River problems that you're seeing?

The pressure -- what I mentioned on rail is really price.

There's a cost pressure on the railroads and therefore, a freight rate pressure on ourselves.

We are -- there are some pressures on rail systems that we've observed in getting deliveries to certain plants.

We have not been a victim of that.

We've, in fact, been building inventories, which is what we normally do this time of year in early winter; so inventories have been building.

We have not seen the effects of rail shortages on ourselves.

We've worked pretty closely with the rail systems to make that happen.

We do own our own fleet trains; so what we rely on the rail systems for is locomotives and crews.

And if you read on the Eastern rail systems, they tell the world that they're short on locomotive power.

We have not seen any direct effect on us of the Ohio River problems unless perhaps that will start to push up prices.

But all of our plants are served by rail.

And in one case in the West is Monmouth of course.

But we're in great shape with the rail systems.

It's just normal business with the rail systems regarding freight rates.

Great.

Thank you.

Daniele Seitz at Maxcor Financial.

(indiscernible).

Are you at liberty to tell us how much you spend on emissions per year?

Or is it something you don't want to tell?

Yes, we'd rather not say what our allowance consumption rate is.

Our allowance consumption rate and the status of our book of emission allowances is proprietary for (multiple speakers).

Okay.

That's fine.

I just was closing the loop.

Thank you very much.

Since there are no further questions, Mr. Hecht, I'll turn the conference back to you for any additional or closing remarks.

Okay, we have no additional comments this morning.

We appreciate everyone's participation and their questions.

We hope we've been able to answer them.

Thank you all very much.

This concludes today's conference.

We thank you for your participation.

You may disconnect at this time.