賓州電力 (PPL) 2005 Q2 法說會逐字稿

Good afternoon.

My name is Tim Paukovits, I'm the Investor Relations Manager for PPL.

I would like to welcome everyone who's here with us today and those who are joining us on the live webcast.

You will be hearing from members of PPL's senior management team on issues involving second quarter earnings, our new earnings forecast, our increased long-term growth rate and other major items we announced today earlier in our press releases.

This presentation is being recorded, and 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 presentation, 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 the appendix of our presentation book, which is available on our website, www.pplweb.com.

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

Thanks very much, Tim and good afternoon, and welcome.

I appreciate everyone joining us here this afternoon.

We are pleased to have this opportunity to meet with you face to face to discuss our Company's dramatically improved prospects for growing shareowner value over the remainder of the decade.

If you have seen the news releases that we issued this morning I guess it's no mystery why we've arranged a gathering.

The compelling story told by this slide may be what's new today, but it's only the latest chapter in the growth of PPL Corporation.

And it reflects a proven commitment by thousands of people to continue the hard work and the heads up management to grow shareowner value each day.

Here's what's new -- a $0.20 per share increase in the lower end of our earnings forecast for 2005; an initial 2006 forecast that is more than 7% higher than the midpoint of the new 2005 forecast; a new long-term forecast that raises by more than 50% our expectations for compound annual growth through 2010; an 8.7% increase in the common stock dividend, and the two-for-one stock split.

The announcements we're making today underscore an important fact -- we've built a strategy and a management team that allows PPL to provide consistent growth during a range of market conditions, while also positioning us to benefit as the markets improve.

Certainly, the news today is very positive, and very important for our shareowners.

Equally important for our shareowners, however, is what has not changed.

PPL's management culture remains a key component of our success.

The people up here on the riser with me here today are only a few of the people who ensure that PPL never loses sight of the operating fundamentals that separate us from the competition.

Employees at all levels of our organization, not only are experts in their particular function, but they are also responsible to take a step back and anticipate changes, large and small in the business.

Examples of successful anticipation of change includes coal delivery -- no coal delivery surprises when supplies got tight or transportation problems arose; emission allowances or speculative trading, again no surprises.

We accumulated emission allowances over time and you will hear more about that story in a moment; lack of regulatory issues, whether they're the EPA or the CUC or the NRC, again no surprises because of anticipation.

Our commitment to operational execution incorporates a quantitative risk management program that ensures that we fully understand all the implications of the energy markets, the fuel markets and the financial markets.

And that commitment to operational execution and risk management means that the risks that we take are justified by the rewards.

Another thing that is not new is PPL's history of delivering on its promises.

This long-held corporate value has earned PPL customer service awards in both the United States and the United Kingdom.

And by delivering on our promises, we have also been able to fashion and maintain constructive regulatory relationships.

This includes solid relationships with economic regulators, as well as agencies like the NRC or the EPA or OSHA.

And that legacy of trust has also served us well in wholesale and retail markets where we are a respected counterparty.

Also not new, is the strategic foresight that PPL brings to its business.

PPL's management team is among the most experienced and knowledgeable in the industry.

We are fortunate to have people who not only understand the fundamentals of the business, but who are capable of what we might call pattern recognition or strategic foresight.

Such anticipation, for example, caused us to enter into an affiliate contract when wholesale prices were high to maintain our fuel supply when coal prices rose and to accumulate emission allowances before prices rose there.

And that same strategic foresight led to a PPL decision to pursue opportunities in both the electricity delivery and competitive generation businesses.

It led the Company to securitize the stream of stranded cost revenue that it received in its deregulation restructuring settlement.

And most recently, that same kind of foresight led to a decision to install emission control equipment at our Pennsylvania coal-fired power plants, well before we would have been mandated to do so by regulatory considerations.

One of our major objectives today is to the answer the question about PPL that may be on investors' minds.

As we talk with investors and analysts, most of the questions seem to fall into the general categories you see here.

By the end of our session this afternoon, I'm confident that these questions will be answered to your satisfaction, both at the high strategic level and at the more detailed execution level.

So to get us started, I would like to talk about PPL's business model, about the strategic direction we have used to provide extraordinary returns for our shareowners for the past decade.

And as we'll explain in detail today, we remain convinced that this strategic direction is the best way to continue to grow shareowner value.

As we begin the discussion of our direction, I should point out that we took this path based on our confidence in PPL's core competency -- the reliable generation of electricity at low cost, and the ability to provide the highest quality in electricity delivery services. [inaudible] quadrant of the U.S. and the western tates.

Our analysis of the opportunities in the electricity business also led us to conclude that asset-backed marketing was the most effective way to extract value from this competitive market, while ensuring that our shareowners did not face undue commodity risk.

And contrary to the conventional wisdom of six or seven years ago, we concluded that there is exceptional value in owning and operating high-quality electricity distribution systems.

I believe it is worth a few minutes to explore some of the sense behind the business model.

We are often asked why we chose to expand our generation business to Montana.

Why we are asked, does it make sense for PPL to be in two generation markets rather than focused on just one?

Simply put, there's inherent value in the diversity of being in two less correlated markets.

The diversity reduces our risk, and allows to us take advantage of superior returns in both markets.

It simultaneously reduces risk and volatility.

One plus one is more than two.

Why would we select those two particular markets?

Well, first there can be be little argument that PJM is the most liquid wholesale electricity market in the country and it's in that market that we have the largest concentration of our assets.

We were drawn to the west in the late 1990s by the risk management concept of the value of being in two less correlated markets and by the promise of high prices driven by scarcity in the west, prices higher, actually than we anticipated.

And by the fact that the Montana assets were available, were high quality, and provided us with the opportunity of gaining some semblance of scale immediately.

In both markets, PPL people operate highly reliable, generally very low-cost generating facilities.

There are also those who would ask -- why both the competitive generation business and the electricity delivery business?

We think the answer to this question is fairly clear and one that's delivered every quarter in our earnings reports.

The competitive generation business provides the Company with extraordinary growth opportunities and the regulated delivery operations provide stable cash flows and returns.

But most importantly the integrated model, as we have managed it, provides unique and valuable hedge opportunities, and that was the huge advantage for PPL when wholesale prices fell a couple of years ago.

The record, in fact, clearly shows that fewer merchant generators and the pure delivery companies that sold their base load power plants, both those groups underperformed PPL.

Perhaps the most misunderstood part of our business model is our international electricity delivery business.

First of all, internationally we are in regulated delivery, not in generation.

Secondly, we are in only two markets -- the United Kingdom and Latin America.

About three-quarters of our international investment is in the UK.

And in Latin America, we are primarily in Chile.

In both the UK and Chile, we are using our operational capability to create value.

In the UK, there is a very progressive regulatory system, which is especially beneficial for a company like ours, that understands how to provide outstanding customer service while reducing cost.

In fact, our extraordinary customer service in the UK was explicitly recognized in cash in the rates we charge for customers.

As you will hear later, the UK operation is producing very high rates of return and clearly is a very high quality asset.

In Chile, on the other hand, we are seeing electricity use grow in rates that are more than doubled the growth rate we are experiencing in the U.S. or in the UK.

The Chilean economy is very robust and is built on a foundation that's very strong, even compared to the U.S.

We will hear more about that in a moment as well.

We are satisfied with our current modest international portfolio.

As I mentioned earlier, we have announced today that our business model will be producing compound annual growth and earnings in the 6 to 7% range over the remainder of the decade.

Even while we pay a robust dividend, and we'll accomplish both objectives with a very low risk profile.

This growth forecast is not based on extrapolation.

It's based on very specific, visible, tangible, identified building blocks. 255 megawatts of specifically identified upgrades at our existing power plants; continued improvements in plant availability backed by a concrete plan; significant improvement in electricity margins as long-term supply contracts expire; and steady growth in our electricity deliveries.

It is on this foundation that we've built our new base growth forecast.

I believe that this chart clearly answers the ultimate question, why should someone own PPL stock?

Our forecast of 6 to 7% compound annual earnings growth, combined with dividends, holds the promise of a total return for shareowners of at least 65% (ph) through the remainder of the decade.

And this is based on very visible, solid growth, and on the conservative assumption that future prices for electricity remain at the level of today's forward markets.

Our growth forecast does not depend upon further scarcity pricing being reflected in prices.

That would be upside.

During our presentations today, we will also share with you several other potential upsides to our earnings picture over the next several years.

The forecast that you see on this slide also excludes the effect of any asset acquisitions the Company might make.

We continually explore the scale question, examining both opportunities that would provide both near and long-term benefits to our shareowners.

As you know, there has been significant discussion regarding consolidation in the sector.

Discussion that is likely to increase substantially with last week's passage of an energy bill that repeals the Public Utility Holding Company Act.

At PPL we look at consolidation as we look at every other business opportunity, whether we're a potential buyer or a seller, we look at a wide variety of factors, including the currency of the potential transaction, cash or stock, the risk profile, and the growth expectations.

In our analysis, just as we do with any business opportunity, we examine these factors in light of the base case -- PPL's current prospects for growing shareowner value.

In other words, we are not planning to sell the Company just based on the CEO's youth and inexperience.

In the last few minutes I've shared with you at a high level some of PPL's successes over the past decade.

Based on these successes and the visible growth that we're forecasting for the remainder of the decade, we believe that PPL's stock should be trading at a premium compared to other utility companies rather than at the discount that we've heard talked about.

Putting it another way, you probably have never met a CEO who is satisfied with his P/E ratio and I'm not going to be any exception today.

Setting the discount issue aside, however, I should be -- could not be more optimistic about the future of the Company.

We have and have had an excellent strategy in place, and an insightful, experienced management team that's relentlessly focused on extracting value from all of our businesses.

We continually scan the external environment for opportunities and threats -- a reason we have avoided the negative earnings surprises that have become all too common.

We have about 12,000 dedicated, well-trained employees who understand that their job goes beyond the current assignment.

Their job includes anticipation.

For these and many other reasons, we are convinced that PPL will continue to be a leader in the industry providing well above-average returns for our shareowners.

I'm very pleased to have with me today here, most of the members of our executive management team.

The members of the team on average have more than 25 years experience in this and related businesses.

Some have been with PPL more than 30 years and some, including Jim Miller, with the Company fewer than five years.

Taken collectively, their experiences include other utilities, manufacturing, consulting, government, financial services, commodities, academia and law.

All bring a high level energy and intelligence and curiosity to the job.

You will hear from a number of these executive team members today, but all of the senior executives of the Company are here to meet with you later this evening.

Having reviewed myself, the information that each of our presenters will provide today, I'm certain that it will answer many of the questions that you may have had.

We will, however, keep our presentations relatively tight so that there's plenty of time for questions.

As you will see from the agenda on page 11 of your books, first up will be John Biggar, who will provide the highlights of our second quarter earnings.

Then Jim Miller, in his second day as PPL's President, will outline the significantly results that we are expecting from our supply business over the next five years.

The President of our PPL Generation company, Bryce Shriver, will detail how his organization is transforming PPL's power plants into some of the best operated facilities in the country, enabling our supply organization to effectively compete in wholesale and retail markets.

Rick Klingensmith, the President of our international delivery company, will tell you about the benefits that PPL is deriving from its operations in the UK and Latin America.

To wrap up the formal presentations, John Biggar will come back up and give you an overview of some of our financial outlook and metrics.

We have structured the agenda today to address the topics that seem to be of the most interest to you in our recent interactions.

That's the reason, for example, we don't have a formal presentation regarding the Pennsylvania electricity delivery operation today, which is providing very steady and strong returns, now that our distribution and transmission rates have been appropriately reset.

John Sipics, the President of PPL Electric Utilities, however is here and will answer any specific questions that you might have.

Paul Champagne, President of PPL EnergyPlus, our marketing subsidiary, is also here, as is Dennis Murphy who is the Vice President of Eastern Fossil and Hydro and Paul Farr, the Senior Vice President, Financial and Controller.

And, by the way, we have some length (ph) today, during this heat.

So as I mentioned, we will be allowing plenty of time for questions at the end of the formal presentation and all of us will join you afterward for a refreshment after we break.

John Biggar now will provide you with the highlights of our second quarter performance.

John?

Thanks, Bill.

Good afternoon.

Earlier today, PPL reported second quarter earnings.

Our earnings release, and as Tim mentioned, the appendix to today's presentation material, provides you with detailed information about the Company's reported earnings and its earnings from ongoing operations, which exclude the effect of unusual items.

My remarks this afternoon will focus on our earnings from ongoing operations.

And all of the per share amounts that we talk about today will be on a pre-split basis.

PPL had a very solid second quarter of 2005.

Our total earnings from ongoing operations were $175 million, that's a $43 million or 33% improvement from our earnings from ongoing operations in the second quarter of 2004.

On an earnings per share basis, $0.91 in the second quarter of this year, a $0.19 or 26% improvement from our earnings per share from ongoing operations in the second quarter of last year.

And that reflects $0.03 dilutive effect of the 8 million more additional shares of common stock outstanding in the calculation.

And of course you'll remember that dilution relates to the $575 million of common stock that PPL issued in the spring of last year, that helped to strengthen our balance sheet and improve our liquidity position.

Our second quarter earnings per share are driven by vastly improved Pennsylvania delivery revenues and solid operating results across all of business segments.

Although the supply earnings per share were down slightly, its total earnings were flat with the second quarter of 2004.

We saw a strong performance by our delivery segments in the second quarter of this year.

Additional proof of the success of our balanced business strategy.

Except for dilution of $0.02 our supply segment was flat with the second quarter of 2004.

We experienced lower energy margins in the east as a result of several factors in the second quarter this year, including higher purchase power costs resulting from lower coal and hydrogeneration.

Actually it was down about $0.06 compared to the second quarter -- or 6%, excuse me, compared to the second quarter of last year, due to plant outages that had an impact on earnings of $0.08.

We also saw higher per unit coal expense, which had an impact on earnings of about $0.02 that was partially offset by the higher output at Susquehanna and that was primarily from the 45 megawatts of additional capacity from the new turbine at Susquehanna Unit number 1 which was placed in service in April of last year.

That had a positive benefit of $0.04 a share in the second quarter and there was a $0.02 benefit from higher prices under our provider of last resort contract between our supply business and our delivery business, PPL Electric Utilities.

There was also an improvement in the second quarter in our synfuel operations from our Tyrone plant, which went into service in the third quarter of last year, and that had a benefit of $0.04 in the second quarter of 2005.

Looking at our delivery businesses, both segments had a very positive second quarter of 2005.

PPL Electric Utilities saw the benefit in this quarter of a 7.1% increase in customer rates, that's the distribution rate increase and the increase in transmission charges that were made effective by the Pennsylvania Public Utility Commission in December of last year, for service beginning January 1 of 2005, and in the first -- excuse me the second quarter benefit of that rate increase was $0.15 a share.

The biggest item in the "other" category for PPL Electric Utilities was lower interest expense of about $0.01 a share, related to refinancing higher cost debt with lower cost debt.

On the international side, we saw margin improvements of about $0.05 a share in the second quarter and that was partially offset by increased pension expense, of $0.03 a share.

Dilution was essentially offset by the benefits of foreign currency and we saw lower taxes in the U.S. from greater realization of our foreign tax credits from the United Kingdom.

And that makes up the bulk of the $0.02 cents that's shown in the "other" category for international delivery.

Combining our strong second quarter results with solid first quarter performance, resulted in a very successful first half of 2005 for PPL.

Total earnings from ongoing operations for the first half of the year were $381 million, a $64 million improvement or 20% above the $317 million that we earned from ongoing operations in the first half of 2005 -- 4.

Our earnings per share from ongoing operations for the first half were $1.99, a $0.24 or 14% improvement over the $1.75 a share that we earned in the first half of 2004.

And that also reflects dilution of about $0.09 cents from the 10 million more additional shares outstanding in the EPS calculation in this first half of 2005.

Our solid results for the first six months of this year and our positive outlook for the balance of 2005 have led us to tighten the 2005 forecast of earnings per share from ongoing operations.

We look at our earnings forecast as we go through the year and we adjust it as appropriate based on the things that we see.

Energy margins and some other factors are putting some pressure on our supply business in 2005.

But, again, demonstrating the strength of our balanced business strategy, we've offset those pressures on the supply business with continued strong performance at PPL Electric Utilities and in our international delivery businesses.

As a result, we have raised the low end of the rage for earnings per share by $0.20 for 2005 to $4 a share.

The new midpoint of the 2005 forecast, is $4.10 a share.

That represents a 10% increase over the $3.72 a share from earnings from ongoing operations in 2004.

We have also published our initial guidance for next year.

And we have done that about three to four months ahead of when we have done that in the past.

The midpoint of our initial 2006 forecast is $4.40 a share.

That's driven primarily by the 8.4% increase in the POLR price for customers who choose not to shop for their electricity supplier.

The midpoint of the 2006 forecast represents a 7.3% increase compared to the new midpoint of $4.10 for the company's 2005 forecast of earnings from ongoing operations.

Today's announcement of our intention to achieve a 50% dividend payout ratio in 2006, combined with our initial 2006 forecast, strongly suggests that you should expect a meaningful dividend increase next year.

For the remainder of the afternoon, you will hear from Jim Miller, Bryce Shriver and Rick Klingensmith about growth of our marketing generation and international operations, not only for 2005 and 2006 but for the balance of the decade.

The growth they will describe will result in improved cash flows, improved liquidity, improved credit metrics and strong earnings growth.

At the end of their presentations, I will come back and review each of those financial measures with you.

Now, I would like to turn it over to Jim Miller, our President and Chief Operating Officer.

Jim?

Thank you, John.

Good afternoon, everyone.

This afternoon, I want to talk about our supply business.

That's the combination of our generation business that Bryce Shriver runs, and our energy marketing organization that Paul Champagne runs.

I'm going to show you the impact that the supply organization will have on Corporate earnings.

And I'm going to show you what the building blocks are that will support our growth in margins over the next five years that Bill and John have alluded to.

I will also show you a fuel management program that we are very proud of, including our emission allowance status and how the effective management of these areas support the projections that we're going to show today.

I think you will see that we have definitive plans in place to deliver very sound, sustained margins as outlined.

So let's move to the role that supply plays and how it's going to support our earnings growth.

As you can see from the slide, the supply segment will continue to be the major growth engine for the Corporation.

For 2005, supply will represent 54% of Corporate earnings and in 2006, greater than 60%.

And in 2010, energy supply is expected to account for almost 70% of Corporate earnings.

Now, the key to achieving growth in energy supply earnings is PPL's energy marketing and hedging strategy and -- and I'll emphasize -- operational excellence from our generation fleet.

I can't understate the importance of that portion of the business.

Let's move to the next few slides, which will provide you with an overview of some of the key drivers.

First, let me start by reminding all of you that the increases in supply margins are based on modest increases in wholesale prices year-to-year as Bill mentioned.

Therefore any increases beyond the current forwards will create immediate upsides.

Starting in 2006 with a scheduled 8.4% increase in POLR prices, supply margins will show steady and sustainable growth through 2010.

In addition to the periodic adjustments in POLR prices between 2006 and '9, supply margins are expected to increase as we secure new wholesale supply contracts that reflect more current higher market prices.

These new contract opportunities include full requirement bids like the New Jersey BGS auction; sales in the Pacific northwest, following the expiration of our contracts with NorthWestern Energy in mid-2007; an increase in PPL's low cost coal, nuclear and hydrogeneration by more than 250 megawatts; and improved generation availability during the same period will also provide long-term sustainable margin growth.

Following the expiration of the POLR contract in 2009, the forecasted energy increase in energy margins is based on valuing the Company's PJM-based generation at market prices.

Now let's quantify what these building blocks mean and can contribute.

First, the periodic increase in POLR rates from 2006 to 2009 is expected to contribute $100 million in margins by 2009, above the 2005 base.

The increase in POLR-related margins accounts for increases in load growth, fuel, transportation, and environmental costs.

New wholesale contract opportunities are expected to grow to nearly $130 million in addition -- additional margins annually by 2010.

PPL's planned base load capacity additions will also grow to approximately $100 million in margins annually, once fully implemented by 2010.

Now these economic additions -- capacity additions are economically compelling and they do reflect a disciplined approach to really maximizing the benefits from our low-cost generation, coal, nuclear, hydro.

Further improvements in generation availability starting in 2005, account for an additional $20 million in margins annually.

The revaluing of our PJM generation fleet in 2010, following the expiration of the POLR contract is expected to add approximately $350 million in additional margin.

In total, by 2010, key margin drivers are expected to add approximately $570 million in additional margins above our 2005 targets of about $1.6 billion.

Now this results in a compound annual growth rate over the period five to ten for energy supply margins that exceeds 6%.

We're confident that our marketing and trading strategy can deliver.

Even with the forecasted increases in fuel, transportation, and environmental costs.

I will emphasize, all of those costs are accounted for in our projections.

Now, some companies in our sector have experienced some negative earnings consequences from unanticipated fuel shortages and emission allowance shortfalls.

I want to explain why we have not, to date, and will not experience the same consequences.

First, for 2005, '6, and '7 respectively, 100%, 90%, and 84% of the expected coal consumption in the east and west is under firm contract with multiple suppliers.

Our coal procurement strategy balances the short and long-term requirements, allowing us to take advantage of market opportunities, secure supplies for forward sales and maintain appropriate inventories at all times.

Beyond 2007, with the addition of the eastern scrubbers, we see increased flexibility in sourcing our coal supply.

For the Susquehanna nuclear facility, PPL has all the necessary fuel, enrichment services and fabrication services in place for both units through 2009.

Active management of the fuel and emission allowance positions translates into extremely competitive generation fleet.

Average fuel and emission costs in 2005 are expected to be less than $14 a megawatt hour and through 2010 are forecasted to be less than $16 a megawatt hour.

There's been a tremendous run up in SO2 emission allowance prices over the last several years.

Many companies have experienced significant increases in fuel-related expenses.

As you will see, through the active management of our energy marketing organization, and our scrubbing, we have a strong story regarding emission allowance positions.

For 2005 and 2006, we already have all the necessary SO2 and NOx emission allowances that are required.

And as I said, the Company's SO2 emission allowance position has been greatly enhanced with scrubbing the eastern coal fleet.

Which, by the way, we intend to break ground on at the turn of the year.

It's anticipated that between 2007 and 2010, we will have 100% of our NOx and in excess of 100% of our SO2 emission allowance requirements.

Optimization of the SO2 allowance position on a year-to-year basis will allow PPL to avoid any negative impact on growth in energy margins.

No surprises.

PPL's expected length in SO2 emission allowances present an upside opportunity, not currently included in these forecasts.

As we've stressed earlier, diversity of coal supply allows PPL to be among of the most competitive generators of in PJM and in the Pacific northwest.

The flexibility of our fleet to utilize different coal types, allows our marketing organization to add value by contracting for coal in all major supply regions throughout the east, including Ohio and the Illinois basin coals.

PPL has long recognized the importance in owning and operating its own railcar fleet.

Today we have in excess of 1,200 cars, which is the equivalent of 12 unit trains under active management in the east.

That allows to us avoid transportation delays, and provides us the ability to maintain appropriate inventories.

These benefits, maintaining these fleet trains, have been readily apparent, because of the fewer number of cars available from the railroad and the large number of cars tied up in ports for overseas export of coal where storage area is very limited.

We have not experienced any coal transportation delays in the east or west and I don't expect to have any transportation delays in the east or west.

Delivered coal costs are expected to increase by around 10% from 2005 to 2006 as the result of higher contract coal prices and the expected impact of new rail transportation agreements currently under negotiation for our transportation from central and southwest Pennsylvania.

These expected freight increases have been factored into our margin forecast.

Now from 2006 to 2010, our delivered costs for coal east and west combined, are expected to increase annually by about 4%.

Let's talk about now, some potential upside opportunities.

The tightening of expected reserve margins in PJM and other markets should also benefit PPL through increased value for the capacity from our generation fleet.

It's expected that around the end of this decade, reserve margins in PJM could be approaching 15% on a pool-wide basis.

The 5% voltage reduction that was implemented last Wednesday in eastern PJM, might suggest that current reserve levels already may be too low in some areas.

Now let's discuss capacity and other upsides and their potential impact.

As I said, capacity overbuild is beginning to be worked off.

While the exact form of the capacity markets in PJM and other RTOs is not clear today, let me put in perspective how an increase in the value of capacity can benefit PPL.

Through the term of the POLR contract, as many of you know, the majority of our PJM capacity is committed.

However, starting in 2010, for every $1 megawatt per day -- megawatt day increase in the value of capacity, above the current market prices, we'll see an additional margin on the order of $3 million which equates to $0.01 a share.

None of the benefits from these changes in the capacity market are currently reflected in our supply margin forecast.

That will be all upside.

Continued improvement in the availability of our generation fleet will also provide additional value.

As Bryce Shriver will discuss shortly, we see the opportunity to increase generation availability above the 92% level we currently have in the margin forecast.

For every 1% increase in generation availability, we can add $20 million in margin annually.

Forward electricity prices for the five-year period have increased $8 to $10 in the past year.

This provides an opportunity for us to increase margins as we enter into new agreements.

Because our sales are more fully hedged through 2009, there's less upside potential during this time, $1 per megawatt hour increase in realized price for our sales, equates to about 10 million annual improvement in margins.

Greater opportunity, of course, exists in 2010, when $1 per megawatt hour price increase equals $50 million in additional margins per year.

As an asset-backed marketer, we'll continue to build on our successes and consider other opportunities to increase our generation capability and output, specifically at base load coal, nuclear and hydro.

Every 10 megawatts of added base load generation equates to about $4 million in additional margin.

We are also focused on asset acquisitions, as a means to grow our asset base.

PPL Development Company is proactively evaluating for purchase those generation assets that best visit our strategy.

We also seek potential value from our emission allowance position, as I mentioned earlier.

The continued tightening of air quality requirements and the implementation of the Clean Air Interstate Rules in 2010 are reasons we believe the emission market will continue to remain strong.

I believe you can see that we have a plan in place geared to drive results.

We have shown the specific building blocks that will deliver the growth.

We have a team in place focused on flawless execution, which in my estimation is one of the most important building blocks for success.

Now, I would like to turn things over to Bryce Shriver, President of PPL Generation to update you on the excellent performance of our fleet, truly excellent.

And most importantly how we intend to extract even more value from our supply business.

Bryce?

Thank you, Jim.

Good afternoon.

Jim Miller provided the basis for the PPL Corporation's robust future growth.

As you can see, excellent performance of PPL Generation is essential to achieving that plan.

Our current performance is excellent.

For example, we have established new generation records in each of the last three years.

Yet there's more we can do, more we must do, if we are to achieve our long-term goals.

Today I would like to summarize the strength of our fleet and the actions we are taking to increase earnings.

These actions include driving our performance to best in the industry levels and investing in our fleet to increase generation.

Let's start with the satellite view of our generation portfolio.

PPL owns a generation portfolio of almost 12,000 megawatts.

We have the generation assets needed to be very successful in the competitive energy market.

As you can see, our generation is predominantly located in the two markets that Bill referred to his opening comments.

We have the location, the scale, and the efficiency to be very profitable in these markets.

In addition, we are adding 255 megawatts of capacity to our existing plants by 2010.

These projects incorporate proven technologies.

They are the lowest cost method of increasing our generation in these growing markets.

In addition PPL's fleet is very well balanced, providing an advantageous mix of base load, intermediate and peaking power.

This mix creates values since we can rapidly respond to changes in the demands for electricity and related service.

Our fuel diversity results in low production costs.

Our projected 2005 average fuel and emission cost is less than $14 a megawatt hour.

This assures us a place in the competitive energy market.

In addition, this diversity reduces our fuel costs and operational risks.

Ownership of a fleet of highly competitive generating assets is an essential ingredient for our success.

However, the operation of those units is just as important.

This slide demorates -- demonstrates our success in achieving operational excellence by looking at a key performance indicator -- equivalent availability.

Equivalent availability is defined as the percentage of time in a year that a unit is capable of producing full power.

Over the past five years we have dramatically improved our fleet-wide equivalent availability, from the low 80% range to over 91% in 2004.

Improving availability directly contributes to earnings, since 1% increase in availability results in about $20 million in additional margins.

Our current 91% availability places us amongst the top performers in the industry.

Yet we are driving to achieve best in the industry -- 94% equivalent availability.

In addition to achieving record availability in 2004, we have been successful in being available during prime time, when energy values are at their highest level.

In 2004 our prime time availability was nearly 98%.

As a result of this clear operational focus, we achieved a new PPL Generation record of 53.8 million megawatt hours in 2004.

This was the third straight year where we have established a new generation record.

This increased availability and generation is reflected in the escalating Corporate earnings.

Our focus on operational execution is also evident at our nuclear stations.

Our two units at Susquehanna are now amongst the top performing units in the United States.

Susquehanna has set a new generation record in four of the last five years.

In addition, Susquehanna Unit 2 recently completed 677 days of continuous generation.

That's the third longest run of any nuclear unit in the United States!

Since 2000, you can see we've also made a striking and sustained improvement in our INPO performance indicator.

This indicator is a comprehensive metric that looks at nine aspects of plant safety and operations.

It allows to us compare Susquehanna's performance with each of the other nuclear units in the United States.

We have achieved top quartile performance, placing us amongst the best nuclear facilities in the country.

We have also made significant progress in reducing our planned outage lengths.

Susquehanna recently completed its shortest refueling outage in history at 26 days.

Again, this puts us amongst the strong performers in the industry, and beat our previous shortage outage duration by 12 days.

However, we recognize that to sustain excellent performance required continued innovation and employee commitment.

In this vein, we have a well defined path for continuing our progress, our improvement.

A key element in this plan is combining the discipline and systematic of focus of our nuclear program with the efficient and common sense approach from our nuclear stations.

This will advance our critical processes, such as equipment reliability and improve performance while reducing costs.

For example, we are focused on reducing our maintenance outage durations because they have a direct impact on the availability we discussed before.

These outages are required for equipment reliability and to implement capital improvements; however, they can be done in less time.

The payback on this focus on outage reduction is already evident.

In 2005, the outage at our Colstrip 2 Unit was reduced by seven days, increasing that unit's capa -- capability by 2%.

This disciplined approach will continue to reduce outage durations at each of our units while improving overall performance.

Our operational focus is paying strong dividends.

Another essential element of our long term term business strategy is to invest in increasing our generation fleet's capacity.

We are investing to improve our rate of return for the shareowners.

This slide shows our generation capital plan in three major categories -- sustenance capital, environmental projects and economic growth initiatives.

There are a clear three messages demonstrated in this plan.

First, we will continue to invest the sustenance capital required to ensure the safe, reliable operation of our units.

Past investments have resulted in that dramatic improvement we discussed previously.

Continued investments are essential to achieve the 94% availability we discussed; however, we are also focused on reducing these ongoing capital costs.

Second, we are committed to improving the environment while providing excellent shareowner returns.

Our environmental capital costs peak in 2007 as we move to install emission controls at our eastern base load coal units.

These capital costs will dramatically decrease in 2009 and beyond.

This investment addressed the strict new environmental requirements and as we will see in the next slide, are good for the shareowners.

Third, we continue to grow earnings by investing in new generation and efficiency at our existing plants.

These in-capital investments will result in 255 megawatts of additional low-cost capacity in our existing markets.

Let's look at how these investments will contribute to our earnings.

As previously noted, our capital expenditures increased significantly from 2006 to 2009, as we add new emission control equipment to our most efficient base load coal plants.

These investments total about $1.5 billion.

We currently meet the environmental requirements.

We could continue to do so by buying emission allowances.

But there's a compelling business case for investing in these environmental controls and for doing it now, before the new regulatory requirements drive up the cost of both the emission allowances and the equipment required to remove those emissions.

This slide summarizes the business case for installing our equipment now.

The projected cost of the SO2 emission allowances increase dramatically in 2010 and beyond, when the new requirements are in effect.

Our cost to remove these emissions are much lower than the projected costs of the emission allowances, reducing our operating costs by about $70 million a year.

There are two additional important points related to these investments.

First, PPL's strong income and retained earnings will allow us to fund these investments from internal resources and debt, while increasing our equity ratio.

Second, PPL is funding these projects, therefore the savings will go to our bottom line and ultimately to the shareholders unlike -- or not the ratepayers as may be the case for regulated utilities. 2,000 -- 255 megawatts of new base load generation will be in service by 2010.

In each case, these projects use proven technology with defined costs.

Collectively, they will provide an outstanding rate of return.

The largest project is at Susquehanna.

This project will provide 177 megawatts of low-cost nuclear generation between 2007 and 2010.

There are several other projects that will add another 78 megawatts of capacity by 2010.

The turbine projects are particularly attractive since they allow for increased generation with no increase in fuel.

In the aggregate, these projects will produce an additional $100 million in margins when they are fully implemented in 2010.

We continue to develop opportunities to increase our generation capacity.

But in doing so, we systematically evaluate each of those projects, the cost and the returns to assure that they're accretive to earnings.

Clearly, we are investing to grow shareholder value.

Our fleet performance is strong and we have a clear, well-defined commitment to sustain top industry performance.

Our investments in increasing generation capacity will contribute an additional $100 million a year to margins by 2010.

Our business plan reflects another $20 million per year from increased availability.

But our target is to increase that by another $40 million as we continue to drive to achieve top industry performance.

In addition our environmental projects will reduce our projected operating costs by $70 million a year.

We will continue our relentless drive to improve generation and reduce costs.

It's the right thing for the shareowners and it is our core business.

Thank you.

Now Rick Klingensmith, the President of PPL Global will provide an update on our delivery businesses.

Thank you, Bryce, and good afternoon.

Following on from our energy supply discussion, I will be providing you with an updated perspective of our international energy delivery business, and how we will continue to bring solid value to our shareowners.

As you heard in Bill Hecht's earlier remarks our focus in the international sector in in the active management of regulated electricity delivery, a business we know.

It is a business where we strive to achieve superior customer service and satisfaction by providing safe, reliable, and profitable electric delivery service.

PPL currently delivers electricity to over 5 million customers in the United States, the United Kingdom, and Latin America.

We serve over 1.3 million electric customers and 75,000 natural gas customers in northeastern and central Pennsylvania. 2.6 million customers in southwest England and south Wales and over 1 million customers in Chile, El Salvador and Bolivia.

We have a solid and growing base of customers who are served in our regulated delivery regions.

Additionally, we are experiencing growth in the amount of electricity consumed by our customers.

The combination of a higher number of customers and increases in electricity consumption per customer results in compounded growth in a number of gigawatt hours of electricity being delivered.

The chart you see here shows solid growth in the amount of electricity being delivered for each of our Pennsylvania delivery business, and our international delivery businesses.

In Pennsylvania, for example, we are forecasting a 1.8% compound annual growth rate, in the number of gigawatt hours of electricity being delivered.

This compounded growth rate is comprised of both a 1.2% per year growth in the number of customers and a 0.6% growth rate in electricity consumption per customer.

In Latin America our residential customers' electricity consumption averages about 2,000 kilowatt hours per year.

This consumption is less than 20% of the average amount of electricity consumed by a residential customer in the United States or the United Kingdom.

Consequentially, there's a significant opportunity for a higher growth rate of electricity delivery in Latin America as the region's economic growth, especially in Chile, helps drive higher levels of electricity consumption.

This is the primary reason for the estimated 4.5% compound annual growth rate in the amount of electricity delivered in Latin America.

The performance of our international delivery businesses over the past few years has demonstrated the success of a diversified portfolio for PPL.

Our segment earnings have increased 133% from 2002, to an estimated earnings this year of between $1 and $1.05 per share.

This substantial earnings growth has been driven primarily by outstanding performance in our United Kingdom operations, which was fully acquired by PPL in September 2002.

In addition, we have seen the benefits from operational efficiencies, lower interest expenses resulting from lower debt levels and foreign currency improvements.

This year, about 85% of the international segment earnings will be provided by Western Power Distribution, or WPD, our UK electric delivery company.

The United Kingdom enjoys a first world economy and a fully developed electricity market.

In the area of electricity networks, the regulatory structure is well established, where the UK regulator has a duty to ensure that companies can finance investments and operate its networks in an efficient manner, ensuring long-term security of electricity supply.

Our Western Power Distribution, focused on electricity delivery, continues to lead the industry in the low frequency of customer interruptions, the low number of customer complaints, storm-related restoration and call center performance.

WPD, in fact, is the only electric company in the UK holding the prestigious Charter Mark award for superior customer service and it has done so five times, with the most recent award occurring in April of this year.

In Latin America, the majority of our investment is in Chile.

Chile is a country that's experiencing significant economic growth and political stability.

But is unfortunately identified with its less performing neighbors when one thinks of Latin America.

The country have a solid "A" credit rating with rural GDP growing at about 5.5 to 6% per year.

The central bank has kept inflation in check and interest rates low.

Also, the exchange rate has stabilized due primarily to strong capital inflows from foreign direct investment.

Consequently the country's strong economic performance is driving increases in electricity consumption, to where our operations in Chile offer the highest electric delivery growth rate in our portfolio.

In El Salvador and Bolivia our total investment is modest comprising less than 11% of our international portfolio, and less than 4% of PPL Corporation's total equity.

Though a small part of the total, these operations are providing solid returns on invested capital.

In El Salvador, the economy is "dollarized," resulting in our regulated tariffs being denominated in U.S. dollars.

The local delivery operation, this eliminates currency risk from its financial results.

Additionally, the recent passage of the Central America Free Trade Agreement provides the opportunity for increased political stability and further economic growth.

And in Bolivia our operations continue to remain profitable.

On a regulatory front, PPL has enhanced certainty in revenue flow in our international businesses through the recent completion of regulatory tariff reviews in the United Kingdom and Chile.

In the United Kingdom, we are subject to incentive regulation under which a regulatory formula is established every five years to calculate maximum revenues.

These revenues are intended to cover efficient operating costs, depreciation of the regulated asset base and a return on assets.

The formula's terms are reset every five years but the concept has remained largely unchanged in principle since privatization of the sector in 1989.

The current five-year regulatory cycle will extend through April 2010 and during this period, WPD's regulated revenues will be adjusted on an annual basis, reflecting changes in the UK's retail price index.

A key component of the tariff review last year was recognition of WPD's leadership in the areas of customer service, reliability, and low customer complaints.

In fact, the degree to which WPD excelled in these areas compelled the UK regulator to increase WPD's revenues by an additional 1% per year through 2010.

WPD was the only electric distribution company in the UK that earned this distinction.

In addition, there are further incentives for achieving annual operational performance targets that can increase or decrease revenues by up to 4% per year.

Another feature of the UK electric regulatory framework addresses capital expenditures and the need to continually invest in the network infrastructure.

WPD and the UK regulator have established a capital expenditure program over the next five years to fund maintenance and improvements in WPD's electricity network.

There is no regulatory lag regarding these capital expenditures, as they are included in the determination of WPD's revenues during this regulatory period.

Under UK regulation, companies such as WPD, operate within their assigned revenue cap and subject to certain performance criteria, exercise broad discretion over operations and retain gains from efficiencies achieved during each regulatory cycle.

In this way, the UK's system is designed to reward operational efficiency, reliability and safety, all areas in which WPD's management has demonstrated state of the industry success.

In terms of allowed returns, there is no maximum allowed return in the -- under UK regulation.

The return on equity achieved will depend, among other things on weather and by how much companies can reduce operating costs below the regulator's estimate of those costs.

How cheaply companies can finance their operations, and how much they are rewarded or penalized for their operating performance.

This year, active management of the operation and the Company's capital structure will result in over a 15% return being earned on our equity investment in WPD.

This return compares very favorably to the equity returns earned by the the regulated electric delivery companies in the United States.

In Latin America, we see somewhat similar regulatory structures.

There's clarity and certainty in the timing of tariff reviews.

Distribution rates in El Salvador and Bolivia are effective until 2008 and in Chile until 2009.

In each country, there are periodic adjustments in tariffs due to changes in inflation, and operational efficiency and performance is rewarded.

Under the Chilean regulatory system for example, companies can earn a return on the replacement value of the distribution network.

This return on investment, currently set at 10%, is recalculated every four years based on a model company approach supplying electricity to similar types of location and customers.

International delivery works for PPL.

The majority of our businesses are located in the United Kingdom and Chile, highly rated countries with low political, economic and regulatory risk and, in the case of Chile, a rapidly growing economy.

We operate in well-defined regulatory cycles and have the opportunity for increased returns from our incentive-based regulatory structures.

For example, in the UK, we were awarded an additional $7 million this year as a result of surpassing reliability goals.

We continue to focus on safety and operational efficiency in each of our companies.

We are sharing lessons learned and best practices across all PPL's delivery companies, both domestically and internationally.

We are committed to standardizing work processes, consolidating activities where economic and improving our IT systems across the businesses all in an effort to drive inefficient costs out of the business.

Through this type of active management, the international delivery business will continue to add value to our shareholders

And now, John Biggar will provide you with a further financial overview of the Company.

Thanks, Rick.

As you've heard this afternoon, PPL's strategy is well grounded and it's successful.

It's resulted in outstanding shareowner value.

Since the end of 1999, and 1999 was the first year of competitive energy markets in Pennsylvania, PPL has substantially outperformed the S&P 500, and the EEI index of investor owned utilities.

As a matter of fact, I think during this period of time, only two or three companies in our sector have done better than PPL.

This isn't by accident.

It's the result of not only a solid strategy but strong performance by an experienced management team, with focus on operational execution, and financial discipline.

And that combination of a strong, experienced management team coupled with operational execution and financial discipline, will make us successful in the future.

Jim, Bryce and Rick all spoke about PPL's growth from an operational perspective.

Now I want to talk about what it means to us financially.

Let's start with some cash metrics.

There are essentially two components to our cash from operations.

There's the cash -- the component of our cash from operations that's dedicated to transition bond maturities which average about $290 million a year from period 2005 through 2008.

And then there's the cash available to meet our Corporate needs.

And as you see on the slide, we see significant improvements in cash available to meet our Corporate needs, as we go out through 2010.

Now, that's driven by our POLR price increases.

Increases in POLR sales volumes and increases in delivery margins, reflecting load growth both at PPL Electric Utilities and at our international delivery businesses.

There's the 255 megawatts of capacity addition and improved capacity factors that Bryce spoke about during his remarks.

In 2009 we continue to recover stranded cost from customers but there's no offsetting transition bond maturities in 2009.

By itself that adds about $200 million of improvement to our cash from operations in '09.

There's also the expiration of our long-term supply contracts, including the expiration of the POLR contract at the end of 2009.

And that, of course, provides us with an opportunity to remarket our supply at the higher prices that are reflected by the current level of forward energy prices.

Roughly about $100 million improvement in cash from operations in 2007.

Now, let's take a look at how all that translates into free cash flow.

For 2005, we expect positive free cash flow both before and after dividends.

Our free cash flow, however, before dividends will come under pressure in the 2006 to 2008 time frame.

But that's not surprising given the -- the major capital expenditure program that we have in place over the next several years.

As Bryce mentioned, we are spending sustenance capital, that is capital expenditures that allow us to maximize the value of our low-cost generation fleet, a wise investment of our capital.

There's also what we call growth capital or discretionary capital and those are expenditures for growth opportunities such as the 255 megawatts of capacity upgrades that Bryce talked about, just clearly justified by the economics.

And then there's the expenditures for environmental control, Bryce mentioned about $1.5 billion through 2010 and as he demonstrated, those expenditures are economically compelling.

As our capital expenditure program begins to wind down in 2009, our free cash flow improves dramatically, as shown on this chart.

And I should also point out that we have about $2.2 billion of credit available to us under our total of $2.8 billion of bank credit facilities.

And about two-thirds of those bank credit facilities extend out through the 2009, 2010 time frame.

PPL's balance sheet gets stronger as we go through the balance of the decade.

Throughout the 2005 through 2010 time frame, PPL's solid earnings position on average increases our common equity ratio by about $350 million from a growth in retained earnings.

That's annually.

From 2005 to 2010, our total debt, including international debt, declines by about $330 million.

Over the same period our equity ratio -- or our equity grows by $2.1 billion because of that strong growth in retained earnings.

And this allows to us meet our funding needs during this period of time and still maintain our desired credit metrics which support solid BBB ratings.

Now as you know the rating agencies each establish their own analytics and then assign credit ratings to debt securities based on their analysis.

Nonetheless, we model our own credit metrics based on our interpretation of the rating agencies' criteria and this is how we see it for PPL Energy Supply.

Now PPL Energy Supply is our affiliate, our subsidiary that provides debt financing for our supply business segment.

We have solid credit metrics in place now and we forecast an improvement in those metrics with the strengthening of our cash position in the growth and retained earnings and our equity ratio that I just described.

We expect to meet our needs for capital, including a growing dividend, with cash from operations and when necessary, through the issuance of debt securities over the period 2005 through 2010.

I've been doing corporate financing work for 30-plus years and based on all I have experienced over that period of time, I think these debt needs are pretty well balanced and -- over the period, and they are really quite manageable, especially given our improving credit metrics.

Except for relatively small amounts to fund employee compensation programs, PPL has no plans to issue common stock over this period of time.

Our financing program is reflected on this slide and supports a continuation of the current Energy Supply debt ratings which are Baa2 by Moody's, BBB by Standard & Poor's, and BBB+ by Fitch.

All of our outlooks across the board are stable.

And this also reflects about $700 million of common stock buyback in the 2008 through 2010 time frame.

On this slide, I've summarized a few of the key drivers or assumptions reflected in our forecast through 2010.

Increased electricity prices, including the 8.4% POLR price increase next year, and increased volumes of sales under our POLR contract at those higher prices; increased delivery volumes in Pennsylvania and internationally, reflecting the growth in customers and in customer demand; capacity additions that Bryce talked about and improved capacity factors, offset by some increased fuel and O&M costs which we are aggressively working to minimize; there's also the loss of the synfuel tax credits after 2007, but that will be offset by the growth that you've heard about this afternoon; and, of course there's the expiration of our supply contracts including the POLR contract, which provide opportunities to remarket our generation at higher prices.

Now, think back to what I said a few minutes ago when I talked about our cash flow position.

These earnings drivers that I just reviewed with you are essentially the same as the cash flow drivers that I discussed.

This translates into high quality cash earnings as we go out through the balance of the decade.

Why own PPL stock?

Well, for one it's currently undervalued.

It's trading at a discount multiple to its peer companies.

There's visible growth in PPL, both in earnings and in cash.

To provide superior overall shareowner returns.

And there are additional value drivers that are not reflected in the current forecast.

Here we quantify some of the additional value drivers for PPL.

Jim has already talked about these so I'm not going to repeat them again.

Suffice it to say, there are upsides that have not been included in the forecast of a compound annual growth rate and earnings per share from ongoing operations of 6 to 7% through 2010.

Okay.

Now I would like to turn the program back to Bill, who will moderate the Q&A session.

Thank you.

Thanks very much, John.

I guess that makes two of us who are not satisfied with the P/E ratio today.

I would like to take questions.

Let me remind you, first of all, we are being webcast this afternoon, so please wait for the microphone.

And when you get the microphone, probably be most convenient for the web audience if you announce your name and your affiliation.

[Inaudible question - microphone inaccessible]

I'm not sure if people could hear you, Paul.

Okay.

The $700 million worth of stock that you have in your buyback, and that plan that you have in '08 through '010 is that -- I know that's in your credit metrics forecast, is that in your EPS forecast?

That's the first question I have.

Yes.

Okay.

And then the second question I have is, when you look at the operating cash flow, which you guys also provide on appendix 11, it looks like it only goes up by about $80 million -- the operating cash flow, whereas just your margins alone -- this is '09 through '010, I'm sorry -- your margins alone would indicate that for the energy supply, that it's growing by 330 million or something, that's pretax, but still -- we would expect a little bit of a bigger jump perhaps, in operating cash flow.

Is there something -- is some timing issue or -- is there a little more color maybe you guys -- maybe John can give us with respect to that or -- ?

John, do you have it or --?

It's probably stranded cost recovery.

For 2009, versus 2010.

Yes.

Stranded cost recovery is not uniform.

Okay.

Yes.

When the settlement was reached, we agreed to freeze rates, and the stranded cost recovery varies year by year to stay within a -- a generation rate cap.

Okay, but just finally, the Sundance accretion, I just wondering if you could quantify that for us.

John?

Paul, this year, it's about $0.05 and on an ongoing basis, $0.10 or $0.11.

It's about half the year this year.

Okay?

Yeah, microphone there?

Yes.

Terri Shue (ph) , JP Morgan.

Just looking at the different charts and such, the big pickup in earnings averaging out to 6 to 7% a year seems to be 2010 because of the expiration of POLR also the share repurchases really are somewhat back end loaded because of the timing of the cash flow and you also pointed out the loss of synfuel credits in '08.

So am I right that the -- after '06, which you gave us a range -- it's much more moderate with perhaps a flattening in '08 and then a big pickup, not quite a hockey stick but a pickup in -- ?

It's not uniform, Terri.

Is that a fair comment?

Yes, that's a fair comment.

It's not level, Terri.

There's good growth into '06 and '07.

We've worked hard and largely offset the expiration of the synfuel tax credits after -- when they roll off in '07.

So you see a cliff down there and you do see a large back end loaded 2010.

What is the driver, for instance, '07 over '06?

I would think it's very moderate low single-digit growth because you don't really have the big pickup in POLR pricing.

Am I right there?

That's right, although we do have some new capacity additions coming on.

So you have some capacity additions coming on that helps give you growth in '07.

You'll see growth driven by emission allowances, will add to growth because of availability of scrubbers.

One other point, that we should make, Terri.

As you recall, the contract we have with NorthWestern Energy expires in June of '07 and that would be -- expect to be renewed at higher price levels based on current energy prices.

How much are synfuel credits, let's say for the next couple of years and -- ?

About $0.21 or $0.22 cents a share.

Which stays flat through '07.

Stays flat through '07 and then --

-- drops off.

-- ends at the end of [inaudible]

I ask these questions, because if you look at the tables it looks like a big hockey stick -- 2010.

Especially that supply graph, a big pickup, over 300 million pickup just in 2010.

There's a big pickup in 2010 and, of course if you look at just the earnings from the supply sector, of course you would see that loading (ph) exaggerated because the more moderate steady growth, the delivery business is subtracted out, yes.

That's right, Terry.

Steve?

Yeah, just looking at some of the numbers for the -- for 2010, I think I backed into about $59 market price that you are thinking in that period for power.

Is that roughly where you are?

I think we can give you -- that's close enough, yes, but, of course, it's -- we have different amounts available on peak and off peak, and that might -- that might be a good average.

Yes.

High 50s.

Something in that neighborhood.

Yes.

Okay.

And with respect to the kind of emission position and such.

Yes.

You gave 105%.

Right.

Over '07 to '010.

I assume you'd be -- obviously pretty bigger long than that '08 to '010.

In '07 you haven't really clarified.

We haven't given our exact position because you're right, we -- our length is in some years and not in other years.

And we have been actively selling allowances as the opportunity arises during years when we are long and filling in in years when we are short.

But the allowance markets are fairly liquid, and the allowance prices are comparable in all of those years.

So in other words, financially it's safe to give an emission allowance hedge ratio for the years as a composite and recognize that if anything, we certainly don't have a negative earnings surprise related to emission allowances.

If anything there's an opportunity there.

You could borrow from '09, '010 if you had more open in '07, essentially?

Essentially.

You can't advance emission allowances, but there's a little -- certainly a market for 2010 allowances which we could sell and use those proceeds to acquire allowances in years when we need them, which is something that's been an ongoing process of managing our allowance book.

Great flexibility for us by the way, not only to have some length in allowances but also to have scrubbers, gives us an opportunity to optimize our fuel purchases.

Because we have greater flexibility then in burning higher sulfur fuel if we have scrubbers and a little bit of length in emission allowances.

So we're in great shape.

That's a real asset for this portfolio.

One last question on this 2010 price.

Sure.

Obviously one of the issues is making sure you definitely can go to a market price, which I think is true under the law.

Just what is your sense on that and how do you feel about where Pennsylvania's going to go?

Well, Pennsylvania hasn't finalized all of the details of how POLR service would be provided after the end of the transition period.

But there are a couple of things to keep in mind.

First of all, there's no dramatic rate shock anticipated in 2010, because when the POLR contract rolls off, we also stop recovering the stranded costs, the CTC and the ITC expire.

So that's' a large offset.

So if the end use consumer is looking at an increase, it's -- it's a modest increase.

It's not a rate shock at all.

So that's -- that's one factor, I think that gives us a great deal of confidence.

The existing law is another factor that gives us confidence.

We also think that there actually may be some opportunities if the regulator decides, for example, that they don't want to go into an auction-type procurement similar to the New Jersey BGS auction, that they want some certainty, well, then there's some negotiating room in that certainty.

If a buyer wants certainty, they pay for it.

So we think there's a fair amount of latitude there but in any event, on a simple mark-to-market basis, our conservative forecast is the one that we have given you.

And as we pointed out, we did not reflect in that any increased prices related to scarcity.

And as you do -- you probably know, there are -- there's work going on now, on the part of FERC and PJM, to determine how to use the markets to attract new capital investment and generation.

Something that's really being driven home by the events of last week, for example, in the pool.

So we still think this -- listen, I think of this as a base forecast at 6 to 7%.

I don't know if there's anything you would like to add, Jim, the way you see things shaking out.

I think not much to add, Steve.

I think we're -- on the emission side we are well positioned.

We manage the portfolio, have been, you're always, in any portfolio management, you've got some shorts, you've got some longs.

But we are very well positioned there reflected in our numbers.

Capacity -- Bill has covered the capacity issue.

We are beginning to see the -- we are beginning to see the constraints in PJM.

We are beginning to see the congestion run real high, and that's going to continue to happen.

That's not going to go away.

So that's going to have to be dealt with sooner or later.

You know, there are analysts who make projections of future prices by determining when new capacity is needed and then just making the simple assertion that wholesale prices have to be high enough to recover the capital cost of new construction.

That's going to be higher -- that's going to be at least as high as the current forwards, I think.

We can also can compare Pennsylvania's prospects with what's happening in neighboring states.

And we have seen POLR prices rise in neighboring states, in Maine it's called the standard offer service, we have seen that rise.

So Pennsylvania consumers are enjoying a real flat POLR price for a long period of time.

And I think there's some realism on what's going to happen there.

So -- we're pretty optimistic about it.

Other questions?

Yes.

John, just going through at this year's forecast, are you counting the deferrals that you didn't get in the first quarter that you'll get them in the remaining half of the year or are those excluded in the '05 forecast?

I'm sorry [inaudible] are we counting what?

The deferrals that you're [inaudible] Pennsylvania commission?

No, they are not included in the forecast.

So if those deferrals come in, your forecast will be higher?

Is that correct?

That's correct.

Could you remind us how much that was, it was $0.07?

$0.05.

$0.05?

$0.05.

Okay.

Second, could you give us a breakdown in segment earnings for '06, because if I take your percentages of supply business, supply business is increasing by about $0.50 and your median guidance is increasing by about $0.30, I'm just trying to find out where the $0.20 leakage [inaudible].

I will give you some rough numbers and there's -- again, this is the initial forecast for the year.

Focusing in on the midpoint of the '06 forecast -- supply, roughly 280, delivery -- domestic delivery, Pennsylvania electric utilities, roughly $0.90 and $0.70 for international.

So international is going down.

Can I just ask you why international is going down '06, versus '05?

Yes.

One of the major reasons and we have also talked about it in 2005, is the higher pension costs that we are realizing in the UK as a result of a actuary evaluation that was taking place last year.

We expect that smoothing effect to continue, to where we will see additional pension expense next year.

For this year, what you are seeing in our current forecast, is that we have been able to overcome a big portion of the additional pension expense this year through some of our operational efficiency improvements.

And we'll continue to try to offset some of that additional pension expense that we are seeing next year as well.

Could you give us what the negative impact of that is? '06 versus '05?

I have the negative impact for 2005, is about $20 million.

I believe it's about the same for '05 to '06.

If I'm correct, this year international was expected to earn in the high 90s, am I correct, John?

In '05?

Midpoint, about $1.

About $1 is the number.

I guess I'd point out, Ashar that as Rick said, we see that going down from -- in 2006, but then as we out through the balance of the decade we do see an improvement in international earnings.

Have you built in some foreign currency losses -- or it's still a big -- going from a $1 to $0.70 that's about $0.30 drop off.

Pension is I guess, you said is nearly about ten to 11 --

One of the other factors as well, in addition to the pension is, we will see a full-year effect of the recent rate review that occurred in the UK.

This year, the rate review took effect on April 1st of this year, meaning that we are only getting about 8/12 of that rate effect.

Ashar, maybe we can come back if you have additional questions.

We'll come back to you.

Other questions here from anyone else?

Yes.

Wherever we can get a microphone.

Yes.

I was wondering if you anticipate enough shortage in capacity to make some acquisition or contemplate building additional capacity in Pennsylvania.

Over the next five years.

Well, we -- we look at acquisition opportunities when capacity comes on the market.

And some of the capacity we believe sold at prices that would not be appropriate for us.

Prices are not high enough now to justify the capital investment in greenfield development.

As I pointed out, and as the chart shows that we had on the screen earlier that showed the shrinking reserve margins in PJM, inevitably, new capacity is going to have to be built with market prices recovering CapEx.

And that's something that FERC and the PJM members are exploring now is to how to incent the construction of new generation.

That hasn't been resolved.

Typically thinking had been 15 to 20% range was somewhere where you wanted to be for reliability purposes.

We are now much higher than that.

And we had a voltage reduction last Wednesday, as you probably know.

So we haven't seen opportunities that we think are at the right price for us.

Yes?

Thank you.

Could you explain $70 million of emissions benefits that you have in slide 38?

And is that the incremental -- or what is incremental O&M -- ?

It is -- it is -- it is -- all we have done is compared the cost of operating the scrubbers, plus the capital-related costs, equity and returns and debt returns and debt interest and depreciation, compared that with the value, the market value of the allowances that that frees up.

So the -- the basic conclusion we reached -- we've had people ask us -- are -- you are not going to be able to rate base your scrubbers and that's a disadvantage and I think no, that's an advantage.

If our generation were regulated then we would get a regulated return on the equity investment in the scrubbers but we pass through the customer the operating benefit.

It is a stronger story for our shareowners if we make the capital investment in the scrubbers and flow the operating benefits through to earnings.

Could you tell us what the O&M incremental savings is in '010 versus '05as a result of [inaudible] the scrubbers.

'010?

That was $70 million which is on the chart that you refer to.

About $70 million a year in benefit.

But that includes all the capital costs?

That reflects all the capital costs. $70million net of all of the costs of owning and operating the scrubbers.

It's the net benefit flowing to earnings --

-- in 2010.

-- in 2010.

Okay.

In your guidance, are you assuming an uptick in your NorthWestern contracts in your forward growth rates [inaudible]?

We are assuming there's a modest uptick in our northwestern sales as those contracts expire.

And I should tell you, we are in the process now of selling our production in the years as opportunities arise.

We have multiple customers, both retail and wholesale in Montana and we're entering into contracts with those customers as opportunities arise to layer in a variety of contracts.

Can we assume, it's sort of a comparative uptick similar to POLR uptick, seems somewhat conservative -- ?

I think it's a conservative uptick.

It's a different market, of course, and, it doesn't reflect -- in the east it's 2010 prices, in Montana, it's '07 prices.

Thank you.

Sure.

Other questions?

Okay.

Yes.

I have a question for Bryce.

Actually international exposure that you have, can you go through the -- what should we think is the currency impact by the regions?

And what kind of assumption are you building into your guidance for your currency?

Two things on the currency.

We have currency impact in the UK and in Latin America.

First of all, Latin America, it's not as material because we do have some offsetting dollar-based revenue adjustments, as well as some other balancing items, that from a materiality standpoint, changes in currency will not affect upward or downward, the earnings dramatically.

Our largest currency exposure is in the UK and that sensitivity is that for about every $0.05 -- not 5%, but $0.05 per pound is worth about $0.02 a share.

You talk about also the costs of pension, is there any other costs that we should be aware of that --?

That's the major cost increase that we see.

But I do want to mention, we do have continued upside.

I -- the $0.70 that John had mentioned.

Some of those operational efficiencies that we're seeing this year, we're looking to continue those into next year.

And so and -- it's not so much the cost increases that we'll see.

But we do expect to see some upsides against that $0.70 number.

Okay.

Do we have anything else?

We have a question over here.

I don't think you've had an opportunity yet to speak.

Getting back to the emissions credits?

Just wondering why -- if there's so much benefit for you, for having this drop $70 million a year-- does that mean the credits are overpriced or what maybe is the advantage that your power plants have been able to put in emissions controls that is possibly cheaper than other people and why you're getting the benefit for the emission credit versus --?

I think what may have happened is this -- I don't think there's anything fundamentally different.

I think what happened is, emission allowance prices ran in relatively short order.

We saw -- we had a graph here a little bit ago that showed the change in emission allowance prices over time.

And in a period of a couple of years, emission allowance prices really ran up and it caught some people by surprise.

And you have seen other companies announce scrubber construction projects.

There is now a rush to build scrubbers, and you'll find a lot of scrubbers going in service in 2010.

And a lot of scrubbers are going to be going in service later than people would like.

We anticipated the market, accumulated allowances and got our engineering -- preliminary engineering done early.

And got our oder in early.

So I think one of the interesting things for the -- for your community would be to look today at announced in-service dates and then two, three years later come back and see how many people got them in service on the predicted date and how many didn't.

There is nothing unique about this Company other than the fact that we correctly anticipated what was going to happen with allowance markets.

Your timing there, as opposed to the plants being -- having something [inaudible] ?

I guess I'd prefer to call it good management.

Anything else?

Ashar, you had more questions.

Bill, going back to get to a 50% payout next year.

And as you mentioned, the earnings growth is about 5% -- 7%.

Can we expect the dividend to be growing at the same level and without this -- the '07, '08 -- because of the synfuel, can we expect 5 to 7% growth rates in dividends from '06 onwards?

Certainly, every dividend that we declare is subject to consideration of the board at the time they make that declaration.

And of course, that's true for every dividend declaration for every company.

And the 50% payout ratio is our current target and we certainly would review that from time to time to determine if that's the appropriate payout ratio for us.

I don't think a 50% payout ratio, for example, is particularly aggressive for this industry today.

So it's our anticipation that earnings will grow and that we'll have a meaningful opportunity for a meaningful dividend increase again in early 2006, which it would be our conventional cycle for dividend consideration.

There's a question over here.

Yes.

Hi.

I understand the energy bill has some provisions regarding accelerated depreciation for pollution control equipment.

How does that factor in to your guidance, here?

Have we explicitly -- I don't think we've finished our -- any explicit study of an impact of the energy bill on that.

There are some other provisions in the energy bill as well, that we need to do some work on.

For example, transmission depreciation lives are shortened by the energy bill.

And that -- that work we have not completed.

Broadly speaking the energy bill is viewed as positive.

Anything else?

Okay.

If there are no other questions, I thank you all very much for your participation this afternoon.

And we look forward to seeing you at the reception.

There's a reception.

Go out this door, straight ahead at the opposite end of the hallway.

And I look forward to talking with each, then.