賓州電力 (PPL) 2005 Q4 法說會逐字稿

Good day, everyone.

Welcome to the PPL Corporation's fourth quarter earning release conference call. [OPERATOR INSTRUCTIONS]

For opening remarks and introduction, I would like the turn the call over the Investor Relations manager, Mr. Tim Paukovits.

Please go ahead, sir.

Thank you.

Good morning, Thank you for joining the PPL conference call on fourth quarter and 2005 results and our general business outlook.

We are providing slides of this presentation on our website www.pplweb.com.

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from such forward-looking statements.

A discussion of factors that could cause actual results or events to vary is contained in the appendix to this presentation and in the Company's SEC filings.

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

Good morning.

With me today are Jim Miller, PPL's President and Chief Operating Officer, and John Biggar, our Executive Vice President and Chief Financial Officer, and Paul Farr, our Senior Vice President, Financial.

This morning we reported fourth quarter and full-year 2005 earnings, and our release provides you with some detailed information about the reported earnings and earnings from ongoing operations, which excludes the effect of unusual items.

There is also some material available on our web that you can follow along with that gives additional information.

The items that we plan to discuss on this call are -- fall into several categories.

First of all, we'll talk about improved long-term compound annual growth rate of earnings per share of about 11% and dividend growth opportunities in 2006 and beyond.

Secondly, we'll review in little bit more detail our 2005 results.

Thirdly, we'll reaffirm, today, our earnings forecast for 2006.

Next, we'll give more information on our preliminary forecast for '07.

And, lastly, a financial outlook, including cash flow and balance sheet information.

In addition to reaffirming our 2006 forecast this morning, we're also increasing our forecast of compound annual earnings growth through 2010 to 11%.

The 11% growth rate in earnings is based on a starting point of $2.08 per share for 2005 from ongoing operations.

The new long-term forecast for 2010 target earnings of about $3.50 a share, and that's a significant increase, as you will recall, over our previous long-term forecast of 6 to 7% and that was first announced last August.

The prospect of favorable new energy contracts for PPL as fixed-price supply contracts expire in conjunction with sharp increases in forward wholesale prices over the past six months, leads us to increase the long-term earnings forecast.

And as we've mentioned with you in the past, this is based on very visible growth, identified and specified growth opportunities.

And it incorporates today's current 2010 forward energy prices, fuel prices, emission allowance prices, and fuel transportation costs.

And I want to emphasize that our $3,50 target for 2010 is -- while it's based on the current forwards for that year, we have actually begun to place some contracts in 2010 for our unsold generation.

So I really want to emphasize that, that we have started to hedge 2010 in modest amounts to the extent the market has liquidity there.

Furthermore, our forecast does not depend on any further scarcity being reflected in energy or capacity prices.

That would be in it an upside to the $3.50 number.

And need to point out that underlying forces, such as rising fuel costs, increasing emission allowance prices, but especially declining reserve margins in PJM, combined with anticipated capital cost for eventually needed new base-load generation, all suggest to us that 2010 energy prices will be substantially higher than the current out-of-the-market prices that we're receiving under our POLR contract with our affiliate.

The forecast that you see on this slide, of course, does not depend on any hypothetical asset acquisitions that the Company might make.

Those are -- those would not be included in this.

This forecast is only known capacity additions to our existing fleet that have been identified to you, and current forward prices for which we are now layering in sales.

We also outlined today dividend growth opportunities beyond 2006.

That is to say, we expect the growth rate of our dividends over the next few years to exceed the growth rate of our earnings per share, and we acknowledge that that will result in a dividend payout ratio above 50% after 2006.

As you may recall, we indicated previously that we intended to get the dividend payout ratio to the 50% level this year, and suggesting to you that we would expect to have some consistency in our dividend pattern and that -- and, of course, our earnings don't grow uniformly year-by-year and that would suggest that you can expect a meaningful dividend increase from PPL over the next several years.

And as I've said earlier, our growth drivers are very visible, they're summarized on this chart.

The growth engine for the Company through the end of this decade is clearly the supply business, the combination of our generation fleet and our energy marketing organization.

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

And there are periodic increases in POLR prices, as you know, out through 2009.

And at the end of 2009, they -- the current POLR contract expires.

There are, of course, a couple of other marg -- drivers to our margin growth.

There'll be the remarketing of expiring fixed price supply obligations with higher margin wholesale contracts and higher wholesale prices on unsold generation from our plants.

Those contracts, for example, include not just our POLR contract, but include full requirements bids that we've made, like the New Jersey BGS contract, sales in the Pacific Northwest following the expiration of contracts with NorthWestern Energy in about the mid -- in the middle of 2007, for example.

We will have increased output from our low-cost coal, nuclear and hydro generation; that'll total about 258 megawatts by 2010.

And those projects continue to move forward.

We anticipate improved generation availability during this period, and we have specific plans in place that have been implemented to reduce planned outage time for plant overhauls.

So we believe improved availability at our plants is a clearly achievable management objective.

We revalued, of course, the output of our gen -- our PJM fleet in 2010 at market prices when the POLR contract expires.

I think it's important that we should emphasize that built into this forecast are increases in fuel and fuel transportation and environmental costs, such as emission allowances and scrubber operating costs.

That's baked into the forecast that we've provided.

I probably should re-emphasize, too, that we have not, and reaffirmed today that we will not experience negative earnings surprises from unanticipated fuel shortages or from a failure to cover our emission allowance requirements.

That will not happen.

With that, I'd like to turn the call over to Jim Miller.

Jim'll discuss our results for 2005 in a bit more detail.

Jim?

Thanks, Bill.

Good morning, everyone.

Let's start by talking about 2005 results, and then we'll talk a little more detail about the earnings projections for 2006 and '07.

Despite some unexpected plant outages at Susquehanna Nuclear this year and at Martins Creek coal facility, we had a really strong fourth quarter in 2005, and I think that, again, demonstrates the strength of an integrated business model.

Total earnings from ongoing operations for the quarter increased by $24 million or 13.6% over 2004.

As well, earnings per share from ongoing operations for the quarter increased by $0.05 or 10.6% over 2004.

We also saw very strong results for all of 2005.

Total earnings from ongoing operations increased by $108 million or 15.7% over 2004, and earnings per share from ongoing ops increased by $0.21 or 11.2% over 2004.

So a very strong last quarter and a strong year-end result.

It's really worth noting that in 2005 that the strong results of our delivery businesses, both domestic and international, more than offset the decline in earnings from our supply segment.

Now let's walk through the operating results by segment.

The supply business earned $0.23 per share in the fourth quarter of 2005, compared to $0.28 a year ago.

Now, the $0.05 per share decline in fourth quarter earnings were due to several factors: Lower eastern energy margins, which were a result of our increased supply cost due to higher sales associated with our POLR contract; and higher fuel and purchase power expenses, as a result of the outages -- unplanned outages at our Susquehanna and our Martins Creek facilities.

Additionally, margins were also impacted by higher per unit coal expenses, and this was due primarily to premiums paid for lower sulfur coal in 2005.

This means, though, that we used less emission allowances in 2005, which makes them available to meet our needs in later years.

And I'd add here, just to remind you for information, our average annual coal cost increase projections that we currently see 2006 through 2010, you can figure about 5% a year, in the range of 4 to 5% a year.

The supply segment also incurred higher O&M, due to Susquehanna maintenance outage and more planned outages at our major coal-fired plants in 2005.

And as you recall from previous calls, our outage cycles vary from year-to-year, such that '05 was a heavier outage year, with more units down than perhaps '04 and '06.

These unfavorable earnings factors were partially offset by higher earnings on our nuclear decommissioning trust and lower income taxes.

Now let's take a look at the entire year.

The supply segment earned $1.05 per share in 2005, compared to $1.16 a year ago. $0.11 per share decline was primarily due to, again, lower east energy margins, driven really by the same factors that affected our fourth quarter margins, higher fuel purchased power, offset by a hiler --higher POLR price.

Additionally, higher O&M costs were primarily driven by additional planned outages in 2005; also the on-site remediation of Martin's Creek ash basin and overhaul cost at some of our coal-fired plants in Montana.

We did have $0.04 of dilution due to 14 million additional average shares outstanding.

And as well, these unfavorable factors were partially offset by our increased synfuel earnings, due to higher output at our Tyrone facility.

That facility went into commercial operation the third quarter of '04, so we received a full year's operation from Tyrone.

And we had an unrealized gain on our oil options purchased to hedge the synfuel tax credits for 2006 and '07.

Supply segment also received some nominal benefits from lower depreciation, capital stock tax, and some lower income taxes.

Let's move to domestic delivery.

The Pennsylvania delivery business segment earned $0.06 per share more during the fourth quarter, as compared to a year ago, and $0.25 per share more in 2005, compared to 2004.

Both periods, the primary driver of this very strong performance was: One, our 7.1% increase in rates that was effective January of 2005; and coupled with higher sales volumes in both periods.

The higher O&M in both periods was driven by increased line expensh -- inspections and some repair work, tree trimming and customer response work.

All of this is geared to reducing our customer downtime and maximizing our revenues from the delivery business. 2005 results were negatively impacted by dilution, some higher depreciation, lower margins at -- slightly lower margins at our gas utility, and a reversal of a previous property tax accrual.

Let's move to international.

International's delivery business earned $0.04 per share more in the fourth quarter, as compared to a year ago, and $0.07 per share more in 2005, compared to 2004.

These increases were driven by lower U.S. -- principally driven by U.S. taxes on foreign earnings.

In both periods, though, the delivery business segment experienced higher delivery revenues in the UK and higher delivery revenues in Latin America.

Some of the reasons for these increased revenues -- let's take the UK.

Due to the excellent performance of the UK business in executing their responsibilities in the delivery sector, the regulatory system, or the regulator, awarded an incentive award for outstanding customer service.

As well, we did see an improved customer mix in the UK, a little heavier residential use that added to the revenues.

In addition, in Latin America we saw increased sales volumes, 5% in the fourth quarter and 7% for the year.

So that increased the revenues in Latin America.

For both periods, these positive earnings' drivers were offset by some higher pension costs and higher depreciation in the UK.

Dilution adversely affected the international segment by about $0.02 for the year, and we did receive about $0.01 of currencly -- $0.01 positive for currency translation benefits.

Let's talk about earnings contributions in 2005.

This slide really shows the major drivers in earnings from ongoing operations on a per-share basis between '04 and '05.

And as I earlier said, we -- you know, I've reviewed these drivers in our segment discussions and this slide really just puts all the drivers on one side to show you their relative importance to our operating results.

Most notably, I guess, you can see how the Pennsylvania delivery rate increase more than offset the higher fuel and purchased power costs incurred by our supply segment.

Also, I'd like to highlight the fact that PPL had strong earnings per share growth, despite $0.07 of dilution.

The income taxes, another bar you see, represents $0.16 of net benefits that include $0.10 a share benefit due to lower income taxes, some higher international delivery margins and lower interest expense, partially offset by depreciation in the delivery segments, and some other nominal charges.

Today we're going to reaffirm our 2006 earnings forecast of $2.15 to $2.25 a share.

The $2.20 mid-point of 2006 forecast represents nearly a 6% increase, compared to $2.08 per share earnings from ongoing ops in 2005.

Now, let's walk through the components of the projected increase on the next slide.

This highlights the major drivers in PPL's earnings between 2005 earnings from ongoing operations of 2008 per share, and the $2.20 per share mid-point of the 2006 forecast.

Major 2006 earnings factors include 20% increase per share, as a result of the 8.4% increase in the generation prices under our POLR contract.

Additionally, an increase of $0.10 per share in other energy margins.

And they're really due to higher expected base-load generation in 2006, improved spark spreads on our oil fired and gas units and higher and some higher average wholesale prices.

These will be partially offset by higher fuel and transportation costs.

There will be lower synfuel earnings in 2006.

Synfuel earnings in 2005 benefited from full production at our facilities and some unrealized gains on the oil hedges put in place to hedge out the synfuel tax credits.

We don't expect -- we do not expect both of these events to reoccur in 2006 at the same level they were in 2005. $0.10 for operation and maintenance cost is due to higher pension costs domestically and internationally, and some normal inflationary increases throughout the organization.

As you can see from the next slide, we expect the supply business segment to significantly increase its earnings contributions in 2006 over its 2005 earnings.

As a result, we expect our supply business segment to account for 57% of our per-share earnings from ongoing operations, with the remainder pretty much evenly split between our Pennsylvania and international delivery business segments.

Today we're announcing our preliminary forecast of 4 to 5% increase in earnings per share in 2007 over 2006, primarily driven by the expiration of some fixed-price contracts, of which we can replace with higher margin wholesale contracts.

And we continue to be an active participant in basic generation, or BGS auctions throughout the northeast United States.

Additionally, an increase in supply price under the POLR contract between PPL Electric Utilities and EnergyPlus for our customers in Pennsylvania.

These positive earnings' drivers will be partially offset, of course, by increased fuel and fuel transportation costs, and some lower earnings from our delivery business segments.

Let's move now and talk a little bit about our scrubber timetable.

I think where we stand today is we received our permits 12 weeks early on the Montour scrubbers and that allowed us to get an excellent start and make excellent progress on the installation.

We've currently poured the first major pours and beginning to prepare to erect the stacks, and we're currently ahead of schedule on the Montour units and on schedule on Brunner Island permitting.

At this point in time, all our contract costs are on or under budget.

So, this large -- very large project is moving along very well, better than anticipated, and we hope to bring this project in early.

We have an update on our business case for more current market prices for S02 allowances, which have been recently trading north of $1,400 a ton.

When you consider these higher market prices, the estimated annual cost avoidance benefits that we talked about in August, now rise to more than $150 million a year, $50 million higher than what we saw in November, and actually double what we projected in August of last year.

These are significant benefits, and they continue to reinforce our economics for installing these scrubbers.

And we're going to do everything we can to get them online early and take advantage of freeing ourselves from the use of allowances, and then be able to monetize those lengths.

With that, I'm going to turn it over to John Biggar, who will review the Company's cash flow and our strengthening balance sheet and dividend growth.

John?

Thanks, Jim.

Good morning, everyone.

PPL has provided its shareowners with a 17% compound annual growth rate in their dividends since 2001.

Reflecting our solid earnings performance in 2005 and our forecast for strong growth going forward, we increased the annualized dividend rate on common stock twice in 2005, by a total of 22%.

The most recent increase was the 8.7% increase that was effective with a dividend paid last October 1st.

While future dividend action is, of course, is subject to approval by -- by the board, our intention is to achieve a 50% dividend payout ratio in 2006, as previously announced.

As Bill mentioned, combined with our 2006 earnings forecast, this strongly suggests you should expect a meaningful dividend increase this year.

And in this regard, I point out the board normally considers adjustments to the level of dividends at its February meeting.

As Bill mentioned earlier, we expect the growth rate of our dividends over the next few years will continue to exceed the growth rate in our earnings per share, which would result in a dividend payout ratio above 50% after 2006.

Our cash flow is expected to improve over the next several years.

In this regard, I think it's important to understand the major components of our cash from operations.

There is a portion dedicated to transition bond maturities, which averages about $300 million annually over the period of 2006 through 2008.

And, of course, those bonds are fully retired by 2008.

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

We see significant improvements in cash available to meet our corporate needs as we go out through 2010, driven by the price increases under our provider of last resort, or POLR contract, with our delivery affiliate.

The addition of capacity, the 250 megawatts of additional capacity that Jim and Bill have talked about at our existing facilities and improved plant availability.

In 2009, we continue to recover stranded cost from customers, but with no offsetting transition bond maturities.

And by itself, that's a $200 million after-tax improvement in cash from cash from operations.

And then, of course, there's the expiration of long-term supply contracts, including the NorthWestern Energy contact in Montana in mid-2007, and the POLR contract in Pennsylvania at the end of 2009.

This, as Bill and Jim have already detailed to you, provides and opportunity to remarket supply at the higher prices indicated in the current forwards.

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

For 2005, we had positive free cash flow before dividends of $337 million.

As this chart indicates, our free cash flow will be under some pressure in the 2006 to 2008 time frame, but that's really not surprising with the capital expenditure program that we have in place over the next several years, which is really divided into three major categories.

Sustenance CapEx, which is capital expenditures that we make to allow us to maximize the value of our low-cost generation, and achieve higher availability and capacity factors.

There's what we call discretionary capital expenditures, which is capital expenditures justified by strong project economics, such as the 258 megawatts of planned power upgrade projects that we've announced.

And then there are environmental expenditures, which in our case are primarily for the scrubbers being installed at Montour and Brunner Island plants, which,as Jim indicated, those expenditures really are economically compelling.

So we look at all of this.

Importantly, our free cash flow improves dramatically, as our capital expenditure program begins to wind down in 2009, and you see that on this slide.

We continue to strengthen our credit profile, while maintaining a solid liquidity position.

PPL has available to it credit facilities of about $2.4 billion that extend into 2010.

Looking at our capitalization ratios, GAAP equity was 38% at the end of 2005, and we expect that ratio to get stronger, growing to 43% at the end of 2006 and 45% by the end of 2010.

On an adjusted basis, excluding transition bonds and the debt of our international affiliates, all of which are non-recourse to the parent Company, our equity ratio increased to 51% at the end of 2005, and will continue to improve to our target level of about 55%.

As we've said before, we have no plans to issue common stock over this period to fund our CapEx requirements.

Our equity grows by about $1.9 billion over this period, an average of about $400 million a year after paying all dividends.

This allows us to meet funding needs during this period, including the dividend, and still maintain credit metrics that support our current BBB ratings, with stable outlooks across the board.

And buy-back of $700 million of common stock through 2010, and that buy-back is reflected in the 2010 equity ratios shown on this slide.

There is visible growth at PPL in both earnings and cash to provide superior overall shareowner returns.

Bill and Jim have described the factors that will drive our growth and earnings through 2010, and for your reference, those -- those factors are also listed on page A4 in the appendix to today's presentation.

And these factors are the same ones that I just described that will improve our cash flow over the same period.

All of that translates into growing high-quality cash earnings over the balance of the decade for PPL.

And there's some additional value drivers not included in our forecast.

And I know Bill mentioned those in his remarks, but but I think it's good to review those again.

They include further increases in base-load generation and higher equivalent availability at our power plants, higher capacity prices and increases in energy prices above the current forwards that are in our forecast.

As Bill noted, the market forces we see today and anticipate into the future, such as higher fuel and emission allowance costs, tightening reserve margins and increasing costs of constructing new generation, suggest even higher prices than are indicated by the current forward curves.

Importantly, PPL's long-term forecast does not depend on new assets being added to the Company's portfolio.

Now, with that, I'd like to turn the call back over to Bill to monitor the Q & A session.

Bill?

Thank you.

Just want to point out that we've done the best we can, we think, to answer as many questions in advance as possible.

We've made note of your questions in the past, tried to reflect your need for information in our news release and now in the material on our website and the appendix, so we'd be happy to take any questions that you might have at this time.

Operator?

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Paul Ridzon with KeyBanc.

On your '06 forecast, what are you assuming for the potential phase-out of synfuels?

At what level have you hedged that risk out?

I know you've bought some -- some oil futures.

Yes, I'll ask Paul Farr to give you some detail on that.

Paul?

Yes, the hedges that we have in place for 2006 represent about 45% of the expected synfuel earnings value.

Is that cash flow or earnings?

Effectively both.

Because it's within that same period.

And does your guidance range incorporate potential phase-out?

It does.

And then your '10 forecast of $3.50, that is on a share count based on a $700 million buy-back?

Correct.

Thank you very much.

Thanks Paul.

We'll take our next question from Paul Patterson with Glenrock Associates.

Go ahead, sir.

Hi, guys.

How are you?

Good morning.

Morning, Paul.

Just wanted to follow-up with this a little bit on the synfuel.

What was the total amount that you guys had in 2005?

The total dollar value -- EPS value that came in, as a result of synfuels?

About $0.16 in total.

Okay, about $0.16.

And you have $0.07 going away in -- does that -- does the $0.16 include the oil hedges?

It does.

Okay.

And how much was the oil hedges and how much was the synfuel, I guess?

Oil hedges were $0.02 in 2005 earnings, the mark-to-market on that position.

Okay.

So we should expec -- you're expecting -- okay, I think that explains it.

Then let me ask you this, with -- what was the -- does tax -- income tax impacted $0.11 a share on the international.

Could you just review exactly what happened there, again, and how that works going forward?

The income tax impact's really comprised of two items, a lower effective rate on the underlying earnings in the current period, as well as U.S. income tax benefits from higher foreign tax credits on distributions from the foreign subs.

And that continues going forward?

That continues going forward.

Okay.

There's no -- so it doesn't -- it's not one-time in nature at all, right?

Not one time in nature, but 2005 was stronger than most periods.

Okay.

Okay, and then I guess -- what I was wondering is you mentioned that your guidance in 2006 involves some negative impact associated with currency, right?

And I'm trying to -- but in the walk-through you don't really break that out.

Could you give us an idea of what you're seeing in terms of currency or what the issue is there?

We really only ended up with a net, I think, $0.01 benefit for 2005. and it's minor in terms of what that impact would be for next year versus the rates that we saw in '05.

We start the year typically hedging a significant portion of the translation of foreign earnings, and that's been completed for 2006.

So, I wouldn't expect to see anything significant in terms of a net move.

Okay.

We try to hedge and then beyond that, to the extent we're unhedged, we really don't try to outguess the markets.

We basically base our budgets on what we see in the forwards.

That's excellent.

What I wanted to finally ask Bill, you mentioned 2010 and the positive impact of higher commodity prices, and you also mentioned you were hedging some of it.

But as you know, prices go up and prices go down, and could you give us an idea of what sort of the hedging philosophy is now?

When you're seeing these prices in 2010, you're seeing -- you know, obviously they've improved, so it sort of behooved one not to hedge too much.

But there's always the sort of double-edged sword here.

What's the thought process in 2010 in terms of sort of locking this in, or not locking that in or -- how do you feel about that?

First of all, the markets in 2010 aren't that liquid that we could lock all of it in very quickly, even if we wanted to.

You know, it's an interesting philosophical point you raise, because our policy fundamentally is to hedge, not to try to out guess the market.

But then, you know, you're right, you made the point that, gee , the markets are strong, they got stronger than they were last summer when we last talked about this phenomenon, well why don't we hold off and hedge later?

Well, as soon as you say that, you're making a directional call.

You know?

So, let's just put it this way, we do hedge to the extent we find opportunities to hedge.

It's probably not right now more than a few hundred megawatts, in that neighborhood.

You know, we look for -- certainly that far out we're thoughtful about credit-worthy counter parties.

But the point is, we have started to hedge.

The 2010 number is not purely hypothetical.

Okay.

I hope that helps, Paul, but that's a basically where we are on it.

Okay.

Great.

I appreciate it, guys.

You're welcome.

Take care, Paul.

Thanks.

And we'll take our next question from Reza Hatefi with Zimmer Lucas Partners.

Please go ahead.

Thank you for your time.

Just one thing, looking at the chart on page 4 on the slides, where you have the 2010 margin growth, it kind of looks like about $800 million from '09 to '10, implying something like a $20 million increase in your POLR.

Am I reading the correctly, meaning that in year '10 guidance, you're sort of implying $70 for your POLR repricing?

Yes, something like that.

What we're doing is we're taking the POLR obligations of the electric utility, assuming that the utility in 2010 still has a POLR obligation, and that we don't move into a world where everyone is obliged to shop.

We're assuming that the utility buys power at market and has a pass-through for those market prices, and that the supply business sells its power at market.

Now, though you kind of mentioned earlier just on that $70 or whatever's baked into that 2010 number, could we assume though, that in reality, it would be more of a full requirements load-shaped price, which would imply something like a 25% premium to that?

We're basing it on load-following prices.

So at that price --

Oh, yes.

We're not saying, well, the market for around the around-the-clock is 'X' and we price it at 'X.'

When the utility buys power to cover its POLR obligation, we're pricing it at what we realistically think the market will expect for a load-following product.

So what's really in that 2010 bar graph is a load-following price?

Oh, yes.

Okay.

Because also I was looking at slide A1 of your appendix, where you have some of the forward strip prices and -- yes, so I guess if you're saying around-the-clock it's $58.

Yes.

Okay, now I understand.

Yes, load-following would be a pre -- it would be a premium for load-following to an around-the-clock strip, obviously.

You're right.

Great.

And any progress or comments on the NorthWestern recontracting?

Actually, nothing that you haven't read in the media.

We have begun selling unhedged capa -- unsold capacity, post the NorthWestern contract, already and we expect to continue to do so.

We're selling it at mid-Columbia in the open market.

Great.

Thank you very much.

You're welcome.

Well take our next question from Paul Debbas with Value Line.

Please go ahead, sir.

Hi, I have a couple of questions.

First, why do you expect a decline in delivery earnings in '07, and do you have a more specific target for the long-term payout ratio, other than just higher than 50%?

Let me take the second question first.

We don't have a specific payout ratio policy that's higher than 50%, at this time.

But what we're pointing out is that even if we never raised our policy outside the 50% range, that in the near-term, we would go above 50%, because our earnings grow more rapidly in some years than in others.

But I think what we can tell you is that our 50% payout ratio nominal policy is conservative compared to much of this space.

That our earnings' quality is strong and can readily support a payout ratio of above 50%.

And in the near term, we fully expect that we will exceed 50%.

As we go forward to the extent we can tighten that down for you, we certainly will try to do that.

On the other side of that question.

Yes, the other question.

Reduced delivery earnings, Bill.

Go ahead, Jim.

That's really in the domestic delivery business, O&M, and depreciation and what you see from year-to-year, the normal regulatory lag.

On the international side, it'd be principally due to pension costs.

At what point do you think you'll have to go back in for a rate increase in Pennsylvania?

We -- we're evaluating that, but --

It's a couple years away.

A few years away yet, at least.

Okay.

Thank you.

Your next question comes from Vedula Murti with Tribeca Global Management.

Good morning.

Hi.

Let's see, following up a little bit on what Reza was asking about.

If you take a look at the 2010 increase, if we go to about $70 from about $50, that implies almost a 40% increase at that point in time.

I'm just wondering what, you know, thoughts or strategies you may have to try to, you know, manage that kind of a rate shock, or how you're talking with the various constituencies and explain to them what's going to happen out there and how to address it?

Thanks for -- that's a good question and one we're spending a lot of time on.

And let me try to give you wha -- as much as I can about it.

First of all, we are very cognizant of the fact that no company can really prosper in the long-term if they aren't sensitive toward their customers' needs, and if they don't have a constructive approach toward a regulatory process.

So we-- we'll always keep that in mind.

We don't take a retail price increase for granted at any time.

First of all, on the rate shock, any increase in generation cost in 2010 is going to be offset, at least in part, by the expiring transition charge.

So keep that in mind, first of all.

So, you know, you'll see the entire increase in generation cost does not translate into an increase in the prices the consumer pays.

Secondly, the Company has -- that is our supply business has sold generation to its affiliate, the electric utility, to support POLR at below-market prices for most of the 12-year transition period.

And we acknowledge that, we've accepted it, and we have abided by that rate cap.

Any increase that the customer pays in 2010, after the offset provided by the expiring CTC ITC, comes after about a 12-year rate freeze on the generation side.

So when you look at the price increase out there, you know, if there is a price increase in 2010, it shouldn't be viewed as a single increase of such an apparent large number.

That comes after 12 years of generation-rate stability that was, as I pointed out, subsidized by the affiliate.

Next, point out that we believe that there will be a gener -- a genuine shortage of base-load generation developing somewhere around the end of the decade. and reliability may well start to suffer if new base-load generation isn't put in the pipeline at some reasonable time in the near term.

And any new generation -- whether we're in a regulated or unregulated world, any new base-load generation of consequence implies a cost increase.

New construction is more costly than embedded construction.

There is nothing -- next, I point out, there is nothing in the Pennsylvania legislation that suggests that another generation rate freeze can be mandated.

That's simply not in the legislation.

Also, point out that when we've looked at our retail prices out in 2010, to the extent you believe projections and that's what they are, although we believe they're good projections and they're based on forward prices that we're contracting at now, when we look at those prices, we believe that they will be substantially lower, or lower maybe substantially, than the prices will have long been by that time in neighboring states like New Jersey, New York and New England, where they're passing through market prices for generation now, not enjoying the subsidy that has been ongoing at PPL.

And, lastly, I point out that the Company, the electric utility, PPL Electric Utilities, has long had very strong programs for the support of consumers that have a limited ability to pay.

We feel that that's important.

It's important socially.

It's an important value and we think it's critical in working with the regulator on a constructive basis.

And the cost of those programs is built into our 2010 business plan.

So kind of a long answer to a question that I think is fundamental.

It is fundamental to our future strategy and probably a question that many of you had had in your minds in one form or another, so I thought I'd take that moment to walk through some of our reasoning.

I hope that's helpful to you.

No, Bill, that was very helpful.

Just as a follow-up, can you talk a little bit about what you anticipate -- you know, how the commission's going to set about going to setting up a market structure, when they'll be ready to go down path of setting up rules, and all that kind of thing, and -- or is -- and kind of your feel on that?

They haven't done anything definitive.

They have done some good work with some informational dockets and received input from the various constituents.

And I don't have anything specific, but I think we all fully expect that, in the coming months and years, they'll become increasingly more definitive on how to handle it.

And, of course, we'll share that information with you just as soon as we have it.

But for our forecasting purposes, we've simply gone through the reasoning I've outlined and we've priced the POLR service for the utility at market, and marked our generation to market, and the numbers give us some very, very strong performance.

Thank you very much.

Sure.

Our next question comes from Ashar Khan with SAC Capital.

Please go ahead.

Good morning.

Going to this waterfall chart, I was trying to see if you could break this O&M increase between the segments that you report?

You know, supply and Pennsylvania delivery, international delivery, the negative $0.10 from '06.

Because you've come up with guidance for each of the business segments, and I was trying to see how I can break this O&M expense number, between the three segments for the '06.

Okay.

We'll have to -- we'll try to give it a shot.

Maybe Paul Farr is in the best position to try to help you out here.

Yes.

Just one second, sure.

I tell you what, Ashar --

Okay, Bill, I'll go to another question --

Go to another question and then give us an opportunity to try to assemble something for you there.

Okay?

Bill, in your opening remarks you had mentioned that earnings forecast did not include any, you know, asset acquisitions and everything.

And, you know, you guys had mentioned that you would be -- that is something that you look at, as part of your strategy.

As you sit here now and as you look at the picture going forward, I think so there's more calm when you think in terms of meeting your numbers.

What kind of asset acquisitions, are there any in your pipeline that you anticipate in the regions?

And then, I guess, second, a little bit different question, with I guess another margin being announced since we last spoke with you publicly, could you just again mention where you think the M&A environment takes the Company, going forward?

The first question on any asset acquisitions in the pipeline, we don't have anything to announce at this time.

We do look very closely at assets as they come on the market, and the assets that have been on the market, of course, it's a public information.

As you might expect us to say, the -- those auctions that we win were fairly priced and those auctions that we lose were overpriced.

That is our market view.

We try to look at it aggressively, but realistically.

We're not interested in expanding the size of the Company without increase per share asset value for our shareholders at some point.

The M&A environment.

Our answer is the same on M&A as it has been.

We consider opportunities to be both a buyer and a seller.

And when we do, if we are -- if we were to be a seller, for example, we look at the currency offered by a would-be combination, stock or cash, and if it's stock, we certainly look real closely at the quality of that paper.

And we compare it with the business plan out through 2010 that we've shown you, both in absolute value and in risk.

So, we don't have anything to announce right now, but we very realistically examine the alternatives and the opportunities.

Okay.

And, Bill, can I just -- going back to dividend, I guess you indicated '06 reaching 50% a payout level.

But -- and then you said that, if I can just repeat what you said, the dividend growth is going to match the earnings' growth, is that what --

No, in the near term it will exceed the earnings' growth, Ashar.

Can we then assume that your long-term earnings growth target is 10%, but in the near-term the earnings growth target is, of course, less than 10%, if you look at your '06 and '07.

So can we take from that that the dividend growth matches more the long-term earnings growth of 10% that you foresee now, is that a way to look at it?

That is a way to look at it.

The long term is more like 11 than 10.

Now don't take 1% away from me, we've worked hard for that.

Okay.

Okay.

Okay.

Yes, I think that's a realistic way to look at it and, of course, we continue to re-examine dividend policy, with an eye toward how we compare with the other companies in our industry.

And, of course, the 50% policy is conservative and we're conscious of that, and we certainly have announced that we will expect to increase dividends faster than earnings' growth in the near term.

Okay.

Thank you.

Ashar, on the $0.10 O&M for '06, you can figure about $0.06 of it is due to increased pension costs, maybe two-thirds of that $0.06 is international and the other third is domestic.

And of the remaining $0.04, figure half that O&M is in supply and the other half in domestic and international delivery.

Jim, can I just ask you, what's the ROE that the delivery business, Pennsylvania delivery business, earned in 2005?

About just little over 10, I'd say, roughly.

Just a little bit over 10.

Thank you very much, sir.

We'll now go to [Mora Shauhnessy] with MFS.

Please go ahead.

Good morning.

Hi, Mora.

Just a couple questions, actually, with regards to the environmental situation.

Congratulations on being so well prepared on that front.

Thank you.

I think that will pay off in the long run, but in a big way.

Just two thoughts there.

If you were to order a scrubber today, and I know that you guys have already put all that -- those orders in place, what would -- do you have any sense as to what that timeline would be?

Jim pro -- Miller probably has the closest read on that market.

I suspect it is pretty ugly, Mora.

Yes, I -- I would say that -- at least, I think, if you say you are starting the process today, I suspect with the backup of vendor capability that is going on right now, you may be looking at a 2011, possibly a 2012 in-service date.

Now, there is a lot to that comment, but I think just if you're making the assumption that today having done no work, no engineering, and someone embarks on contracting, engineering and construction and getting into the pipeline of the vendors, which are seeing a huge on-slaught of in-service dates of 2010, I suspect you're going to be '11 or '12 getting it commercial.

Couple of thoughts to just kind of amplify that.

The engineering for scrubbers is -- can be very site-specific.

So it is a big variable in there how much site engineering needs to be done, and that would include the physical scrubber, but also engineering for gypsum disposal.

Second point, I guess, occurs to me, is that the 2011, 2012 timeframe also comes at a price.

Ordering late hits both schedule and cost.

That's the best we can tell you, I suspect.

What is the cost per KW of the scrubber specifically?

Do you -- have you told us that information yet or --

Well, we told you our total capital plan.

Right.

And, of course, that includes both our scrubbers at two different sites and it includes selective catalytic reduction, in some cases, and includes upgrading precipitators for dust removal, So there's a kind of -- it may not be easily transferable to another plant.

I was just wondering if the cost is all that variable, let's say, of the scrubber specifically, assuming you got those scrubbers under contract around comparable times.

Are they very variable between the two plants?

They can be extremely variable.

It really depends on your site-specific conditions, and it also can depend on basically what other site problems you may or may not have.

So that number -- and, of course, it depends on your selection of vendor technology.

So there's a number of key variables in there that can be very misleading when you compare a dollars per kilowatt comparison between site and site.

Another way to look at it, Mora, if you look at page 16 of the material we have on the web, and we'll click on that now, you should see it, you can probably do a little bit of pencil arithmetic and equate that to dollars per megawatt if you wish.

Another way to say it it is around $500, $600 per ton of sulfur removal in capital cost.

Okay.

That is another way to look at it, for us.

What is the view of your long credits in terms of monetizing any of those over the next year or two, as you think about your own situation and getting the scrubbers up relatively quickly?

Yes, we've been pretty quiet about our allowance position for competitive reasons and our allowance book.

You'll recall back in August we said we're 100% hedged for most years, and then we took a block of years and said we were ex -- we were hedged in excess of 100% for a block of years.

And we really would rather not disclose anything else, because of the -- our marketing strategy for those allowances.

But it -- but with the assumption that you're long, as you just said, just any sense as to the viewpoint on monetizing them today --

No.

-- or over the next year or so?

No. [LAUGHTER]

No, okay.

Okay.

Well, it's good to be long.

It's good to be long.

Okay.

Thanks very much.

We'll now go to Daniele Seitz with Dahlman Rose.

Please go ahead.

Hi, I just had one quick question.

The O&M trends, do you anticipate that they will flatten out after next year?

Or are they supposed to be pretty robust for a while?

John?

O&M.

I believe they will flatten out.

The largest component of the drive in the $0.10 in 2010 was pension, and we do expect that expense pattern, or increasing cost, to revert in '07 and then turn positive again.

Okay.

In view of this thing, too, is that -- are you compelled to think of additional capacity for the future, or you are looking at 2010 as saying it's an open market and we don't have to?

I'm not quite understanding your philosophy because, obviously, there is not much reserves that you anticipate in your area?

In the competitive wholesale markets that we have our supply business, there isn't an obligation to serve, if you will.

It's a competitive market, and an opportunity to build merchant generation is just based on each would-be operator's view of the forward markets, like any other commodity.

So, it's not the regulated world where you have a retail obligation and an obligation to project customer demand and build in anticipation of meet -- meeting it.

And that's why wholesale prices have been rising, in part, and why we think they need to rise.

For competitive markets to work on a sustainable basis, the market prices need to reflect the all-in cost of new capacity, and that's what we think has been happening, in part, out in 2010.

Fine.

And the other thing was the it seems that seems that, obviously, relative to other independents, you will be well positioned to think of building base-load again, is it coal or nuclear.

Do you have any thoughts about that?

We think we're well-positioned, or better, as anyone and better than many, in the sense that our financials are strong, we have a good operating record, and we have the opportunity to get sites for plants that are at least as strong as the opportunity of others.

So we think we're very positioned to participate in the future market.

So our view is any decision to participate in new base-load would be based on the returns that we see, the risk associated with those returns, including our ability to hedge the sales from yet unbuilt generation out over the long-term.

So, yes, we think we're well-positioned.

And most likely, would you think of approaching that decision more like in a year or two, or it could even come up earlier?

I don't think we have any comment on that just now.

Okay.

Okay?

Thank you.

Sure, thank you.

We'll go now to [Carl] Brown with Cramer Rosenthal.

Please go ahead, sir.

Hi, I had another question about 2010.

What is the volume that we're assuming associated with the POLR contracts?

I remember from previous presentations that it was 30 million megawatt hours, but I don't know if that's changed.

And then, associated with that, I was just trying to do the math.

If I take a $20 increase on 30 million megawatt hours, that's about a plus $600 million of higher margin in 2010.

Can you size the offset on the expiring CTC and ITC?

It'll -- first of all, the total megawatt-hour requirement for POLR is around 40 million.

Now, be a little bit careful with that, because even now and increasingly as we get to 2010, we don't cover all of our POLR load on peak all of the time.

It -- frequently it's economical for us to go to market rather than run high cost peakers.

Other times, if we have a plant outage, we're obliged to go to market.

Also, our off-peak generation goes to market and we have -- because of the amount of base-load generation that we have, we frequently have length to go to market off-peak.

So it's not -- you probably don't get accurate results if you just subtract total megawatt hours and take a look at total market prices.

It's a little bit more variable than that that you have to deal with.

Sorry to be confusing, but that's really, I think, needs to be said.

Sure.

I hope that is helpful.

Well, just to cut to the chase, then, is it possible the size the CTC and ITC expiration that'll take place in 2010?

Yes, it'll be about - -well, we've sized it in dollars for you in our material, I think.

I think if you look in the charts that are in the back, the scale-up, the delivered price under the POLR for the gen, it's about $0.05 by the end of 2009, and that would be -- if you'd add to that about $0.01 for KWH for the CTC charge, so total of $0.06.

I think Bill had mentioned earlier a price of $70.

It's probably closer to $80, including ancillaries and losses and all the things that would be built into a load-following price.

So you'd be really comparing an end-of-period $0.06 for KWH charge in generation to approximately $0.08, times -- so that $20 a megawatt hours times the 40 million megawhours -- megawatt hours would be $800 million.

Okay.

Great.

Thanks.

Okay.

We'll go to Tom O'Neill with Citadel.

Good morning.

Hopefully a quick question.

Just wanted to ask on your comment, Bill, about the not having an issue with EPS short-falls related to [coalert] emissions, I just wanted to understand better what gives you the continuing confidence on that?

Is it the S02 bank, as you're answering prior question hedges on coal or combination?

A combination.

They're a couple of --- again, they're a couple of moving parts.

We have an emission allowance bank.

We have different hedge ratios and different years, but we also have different coals that we purchase. and each coal has a different sulfur content and a different price.

So what we're -- what we're trying to optimize is the coal we buy, what we pay for the coal, and the value of the emission allowances that we either are able to sell or the value of emission allowances that we consume.

So, a couple moving parts, but we do have confidence.

Our construction is off to a very good start on the scrubbers.

We've - -I think that tells you.

Jim, anything you want to add to that that is not market sensitive?

From a delivery standpoint, we continue to have been able to avoid, and I don't see any problems with coal deliveries in the future.

I know people have struggled with deliveries, both east and west, but with our transportation situation and number of unit trains and the logistics of that, we don't have transportation problems.

So I think with our multi-sourcing of -- as Bill said, multi-sourcing of coal vendors and flexibility in that region, and as well our emissions planning program -- allowance planning program, I think we're in very good shape.

We have a different relationship with our transportation vendors, that is, the railroads than many of our competitors, because we own fleet trains and have for a long time, and the railroads just provide the engine and the crew.

And so we have a transportation advantage, both in cost and in relationship with the railroads, and we access multiple coal markets.

We've spent some real effort at our plants to be able to burn different types of coal, so we've got both the bituminous fields in central Pennsylvania, southwestern Pennsylvania, as well as central Appalachia.

So I think we've run a pretty tight ship there and are reaping the benefits of it.

Great.

Thank you.

Thank you.

And we'll take a follow question from Reza Hatefi with Zimmer Lucas Partners .

Thank you.

Could you please discuss RPM and how that could affect your Company and could that, I guess, provide some up-side when that 2010 POLR is repriced, meaning the capacity portion may be higher than currently assumed?

RPM, we don't think is a significant -- it's an upside, not a major upside.

Our view would be that RPM is just one approach.

New England is looked at LICAP, and you've seen in the press how that's been debated and discussed.

My sense is that the cost of new base-load generation is such that RPM is not enough to do it.

And if new generation is going to be built base-load, looking at the risk involved, wholesale prices have got to be pretty -- pretty salty.

And an alternative to help energy prices from needing to get much higher than they already are in 2010 would have to place greater value on capacity than RPM does.

So I think RPM is just an interim step; that's my best guess, though.

Interesting.

And just from your analysts day back in August, you guys had guided to something around a 10% increase in coal costs from '05 to '06, then maybe 4% from '06 through '10.

Should that -- does that still apply?

Basically it does, with the exception from '05 to '06 we will not see that 10% increase.

It'll be closer to a 5% increase, because our coal cost was a bit higher in '05 than anticipated because of the extra receipt of low sulfur coal.

So having spent more in '05, that reduces the percentage from '05 to '06.

All of that balances out from a value perspective in the end, so I would just assume, if I were you, that looking out to '10, assume a 4 to 5% annual coal cost increase for us.

Great.

Thank you.

And at this time we have no further questions, so I'd like to turn the conference back over for any additional or closing remarks.

Okay.

Thank you all very much for your participation this morning.

I have no further remarks for you all and good luck.

And that does conclude today's conference, ladies and gentlemen.

Thanks for your participation today, and you may disconnect your lines at this time.