賓州電力 (PPL) 2006 Q3 法說會逐字稿

Good day everyone.

Welcome to today's PPL Corporation Third Quarter Earnings Release Conference Call. [OPERATORS INSTRUCTIONS] As a reminder today's call is being recorded and at this time for opening remarks and introductions I would like to turn the call over to the Investor Relations Director, Mr. Tim Paukovits.

Please go ahead, sir.

Good morning.

Thank you for joining PPL Conference Call on Third Quarter Results and General Business outlook.

We are providing slides of this presentation on our website at www.PPL Web.com.

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the "Safe Harbor" provision 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 the presentation and in the Company's SEC filings.

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

Thanks, Tim.

Good morning, everyone and thanks for taking the time to join us this morning on the call.

With me here today, I have, John Biggar our Chief Financial Officer, Bill Spence, our Chief Operating Officer and Paul Far our Senior Vice President of Financial.

We will get to your questions in a very few minutes but first I would like John our Chief Financial Officer and and Bill Spence our COO to provide you with some details of our third quarter results and our forecast for the future.

Before turning to John and Bill for some of the third quarter specifics let me put our results in some perspective.

While our EPS from ongoing operation were slightly lower this quarter versus the same quarter a year ago it's important to note that we did achieve essentially the same level performance despite a significant reduction in earnings from our Synfuel operations as well as a higher O&M maintenance cost burden and additionally unrealized losses on some economic hedges that were put in place for some of our future power contracts that have been signed.

And John will talk a little more about those unrealized losses a little bit later on.

As we said in our news release this morning our third quarter results again proved that our business model is resilient enough to deliver solid earnings in a wide variety of market and economic conditions.

But the most important aspect of our third quarter results I think, is that they keep us on a path to achieve our forecast of $2.20 to $2.30 per share from ongoing ops for 2006.

Now the midpoint of this forecast is a very strong 8% increase over the results from a year ago.

Our earnings forecast for 2007 remains at $2.30 to $2.40 a share, another 4.5% increase.

And we are continuing to forecast an11% compound annual growth rate through 2010 based on our 2005 earnings from ongoing ops of $2.08 a share.

This growth rate is among the strongest in the sector.

These forecasts reflect continued strong prices in electricity markets and on the proven ability of our people to effectively operate our plants and provide solid superior delivery service to customers around the world.

Another important point about our forecast through 2010 is that it's based on very visible growth driven by a number of factors that Bill will cover in more detail in just a few minutes.

Remember this growth is on top of total return performance over the past ten years has been more than double that of the Standard & Poor 500.

As you should be able to tell from my comments this morning I am very optimistic about our future.

The optimism is based on the fact that about 70 to 75% of our earnings by the year 2010 will be coming from the supply side of our business, the generation and marketing operation.

We are superbly position to succeed in competitive wholesale markets because of the excellent aspects and have proven an aggressive marketing program in the largest power pool in the U.S.

I had mentioned before to you that our low cost coal and nuclear assets positioned in the heart of PJM gives us a tremendous competitive advantage.

Additionally, we signed a significant number of contracts for the period beginning in 2010 and beyond and those deals are confirming the very positive view we've had of the market to date.

We also had high performing assets in Montana that give us access to a growing western electricity market.

Internationally, we anticipate continued strong steady revenues from our delivery companies in the U.S., United Kingdom, Latin America, and in these operations we continue to see best in class service enabling us deliver superior results for our share owners and customers.

We were also right on target with our decision to install advanced pollution and control equipment at our major Pennsylvania coal fired plant, several years earlier than was required.

That decision will not only allow to us take advantage of a favorable emission credit market but it will also shield us against the cost overruns which were are seeing and hearing about that others are experiencing in the marketplace.

Unfolding events are confirming the view of the future that we've been sharing with you for some time now.

All this doesn't mean though that we are satisfied with the status quo situation.

We are actively pursuing new opportunities to improve shareholder value and build scale so that we are even better positioned in our industry.

I will emphasize however that I have absolutely no intension to pursue an acquisition or merger simply for the sake of doing a deal.

On the contrary as I mentioned earlier we are very well-positioned.

We have a strong visible growth projection that's among the best in the industry.

In the meantime as our third quarter results show we remain focused on execution of an aggressive business plan.

I will look forward to having some further discussion during the Q&A period but first I will turn the call over to John Biggar who is going to provide more detail on our third quarter results and our future forecast.

John?

Thanks, Jim.

Good morning everyone.

This slide breaks down our third quarter and year to date results by business segment.

While our third quarter results are slightly below last year's third quarter we are solidly a head of our 2005 performance on a year to date basis and really are well-positioned to achieve our forecasted 2006 earnings from ongoing operations of $2.20 to $2.30 a share as Jim indicated.

Once again our results for the third quarter demonstrate the ability of our diverse businesses to deliver solid earnings.

Before reviewing our 2006 earnings forecast I would, however, like to discuss third quarter results for each of our business segments starting with supply.

Our supply business segment earned $0.31per share in the third quarter compared to $0.34 per share earned a year ago.

Our higher realized margins in the east were driven by higher wholesale prices primarily due to new load following contracts and the 8.4% increase in the price under our provider of last resort contract between our supply business and our Pennsylvania electric delivery company.

These higher margins were partially offset by lower coal generation and higher coal costs and in the west we experienced lower energy margins due to lower generation output.

With also saw higher OM costs due to higher outage and non outage costs at our power plants and as Jim indicated in his opening remarks lower Synfuel earnings primarily due to unrealized losses on oil auctions purchased to hedge Synfuel tax credits.

Our third quarter results include net unrealized losses on economic hedges of wholesale energy contracts, that is some forward purchases we made to cover certain wholesale energy sales made earlier this year.

While the mark-to-market impact of these purchases was a $0.04 per share reduction in third quarter earnings it really is economically neutral to us because offsetting gains on the underlying accrual positions will be recognized in the future.

You can do the math as well as I can to determine the impact on third quarter results of these unrealized losses are exclude from our ongoing earnings.

Given the increased activity in our marketing business we will likely see more mark-to-market volatility and we are evaluating how to best present the impacts of these mark-to-market swings in the future.

Our Pennsylvania delivery business segment earned $0.09 a share in the quarter down from $0.13 a share earned a year ago.

This earnings decline was primarily due to higher O&M expenses due to general cost increases and higher tree trimming and storm expenses.

Also I guess I should point out that in the third quarter of last year, 2005, we deferred expenses related to do an ice storm that occurred in January of 2005.

And this deferral followed an accounting order from the Pennsylvania public utility commission in September of last year.

As a result of that our third quarter 2005 earnings for our delivery business were about $0.02 a share higher than they would have been last year without the benefit of that deferral.

Just a point of comparisons as you look at our delivery business earnings between last year and this year.

Our international delivery segment earned $0.15 a share in the third quarter compared to $0.09 a share a year ago.

We experienced higher delivery margins in the U.K. driven by a more favorable customer mix and in Latin America the higher margins were driven by a 7% increase in sales.

We also reflected the positive effect of a deferred tax adjustment in [Milan] Chili, and a $0.01 a share gain from currency translation.

These positive items were partially offset by higher O&M in the U.K. including higher pension costs.

Now with that review of third quarter results as a background let's take a look at our 2006 earnings forecast.

We continue to forecast 2006 earnings from ongoing operations of $2.20 to $2.30 a share as Jim indicated in his remarks.

The $2.25 per share midpoint of our forecast for this year represents an impressive 8% increase over our 2005 earnings from ongoing operations of $2.08 per share.

As I noted earlier we are well-positioned to achieve our forecasted 2006 earning from ongoing operations.

This slide details the major drivers of our 2006 earning and we've shared this with you in detail several times in the past but briefly we continue to see an increase of about $0.20 a share due to the 8.4% increase in the POLR price in 2006 versus 2005, but a 17% per share increase as a result of increased other energy margins.

And an increase of about $0.04 from approved UK electricity delivery margins.

Offsetting that, about $0.12 of higher O&M costs and $0.11 less in Synfuel earnings in 2006 and in 2005.

For 2007 our earnings forecast is $2.30 to $2.40 a share and $2.35 per share midpoint as Jim noted is a 4.5% increase over the midpoint of our 2006 forecast.

Our 2007 earnings forecast includes about $0.10 in Synfuel earnings as a result of lower oil prices which have reduced the expected phase out of the tax credit for 2007 but this forecasted improvement in Synfuel tax credit earnings is expected to be offset by reduced margins and higher O&M in our Susquehanna nuclear plant due to the addition of a mid cycle outage to address remaining control rod friction issues and delay in benefits from the planned power operate until later in 2007.

Our 2007 earnings growth is being driven however by replacement of an expiring fixed price supply obligations with new higher margin wholesale contracts and Bill Spence will talk more about that in the information that he provides to you in his remarks and will continue to be an active participants in other load following auctions and actively pursue opportunities to lock in margins for the long-term, which are consistent with our forecast.

Our 2007 margin forecast also reflects a 1.3% increase in sales prices under the POLR contract and about a 2% increase in generation from higher availability in our power plants in 2007 versus 2006.

On the down side if you will, these positive drivers are expected to be offset by that some degree by projected increases in O&M expenses and increased fuel related expenses as well as lower earnings from our international delivery business due to higher local taxes in the U.K. and a lower level of income from the sale or liquidation of U.K. nonelectricity delivery businesses in 2007 as compared to this year.

And for 2007 we expected our earnings from our Pennsylvania delivery business will be pretty much flat compared with 2006.

Essentially our 2007 earnings growth will come from our supply business segment which we expect will provide about 60 to 65% of our 2007 earnings.

Our current analyzed dividends rates is $1.10 a share, that's a 50% pay out ratio based on the $2.20 low ends of our 2006 forecast.

And you remember to get to this level we increased the dividend twice in 2005 and once in 2006 beginning with the April 1, dividend payment.

We expect to grow the dividend faster than the rate of growth in our EPS from ongoing operations which would result in pay out ratio greater than 50% after 2006 based off the midpoint of our earnings forecast.

We are well aware of the importance of dividends to our investors and we will continue to focus on dividends growth as an important component of growing share owner value.

We do continue to see pressure on free cash flow before dividends in 2006 and 2007 but that's to be expected given the impact of our measured CapEx program which is focused primarily on environmental expenditures and particularly the scrubbers at our coal-fired Montour and Brunner Island stations in Pennsylvania and in his remarks Bill will give you an up a to date report on the excellent progress we are making on the scrubber project.

We also expect to see significant improvements in cash flow as we move towards 2010.

These improvements in cash flow will result from a reduced environmental CapEx as the scrubber are completed in 2008 and early 2009.

Our cash will improve as a result of lower price increase as well as our power plant operates coming on line and improve power plant availability.

As we mentioned before in 2009 we will continue to recover stranded cost from customers with no offsetting transition bond maturities and that adds about $200 million of improvement in cash from operations on an after tax basis.

And, of course, with the expiration of long-term supply contracts and the remarketing of that supply at higher prices that will result in an improvement in cash flow as well.

All of this improvement in cash flow will provide us with additional financing flexibility and a stronger balance sheet going forward.

Our credit profile continued to get stronger over the past 12 months.

Our GAAP equity ratio at September 30 was 43%, up from 39% a year ago.

On an adjusted basis that is excluding all of our non-recourse debt, about 670 million of transition bonds and about $2.2 billion of international debt, our equity ratio was 55% at the end of the quarter, up from 54 % a year ago.

Essentially we've achieved our target adjusted equity ratio.

We have $3.1 billion of available capacity under our $3.5 billion of bank credit facilities and we plan to fund our scrubber project and other capital expenditures as we mentioned in the past with cash from operations and the issuance of debt and hybrid securities.

You recall that in July of this year we issued $400 million of energy supply debt.

The proceeds of that offering combined with our cash from operations provided the cash that we needed to meet all of our 2006 domestic capital expenditures as well as a portion of our expected 2007 funding needs.

We have no plans to issue any common stock to funds our current CapEx program and our plan continues to include a repurchase of about $700 million of common stock in the 2009 and 2010 time frame.

Now I will turn it over to Bill Spence, our Chief Operating Officer.

Bill?

Thanks, John, and good morning everyone.

This slide probably looks pretty familiar to you by now.

Since our last earnings call neither the elements of our margin growth nor the financial expectations have changed.

So today I would like to spend a few minutes discussing some of the recent successes we've had in executing on some of the key elements shown on the slide.

The POLR increases shown in orange on the slide represent the known increases associated with our contract between PPL electric and PPL energy supply.

The new wholesale contracts shown in yellow represent contracts with nonaffiliated counter parties.

In some cases like Montana and New England were repricing our supply as older contracts role off.

In other cases, like PJM, we are entering into new POLR contracts as markets are opening up for the first time.

What I wanted to share today is our success in securing a number of multi-year energy supply contracts in PJM, [Inaudible] and in Montana.

In PJM we've been actively participating in many wholesale auctions with supply contracts now executed in Illinois, New Jersey, Delaware and Pennsylvania.

Most recently we won contracts with Tom Edison, MedEd and [inaudible] .

In [inaudible] we have additional contracts with CLT and in Montana we have previously announced the new seven-year contract with Northwestern.

Most of these contracts are multi-year with several extending beyond 2008.

My key message is that we are achieving the type of success I believe is necessary to fulfill our growth expectations relative to these new wholesale contracts.

We will continue to be an active participant in other load following auctions and look for opportunities to lock in additional margins for the long-term.

The green bar on the slide represents our planned increases in generation capacity and availability.

I will discuss the capacity additions later in the presentation.

Finally as you can see from the slide the largest driver in growth during the period will come when our contract with PPL Electric rolls off and our eastern generation goes to market.

As noted on our last earnings call we have already begun to hedge our output for 2010 and we continue layering in a significant number of contracts at margins consistent with our business plan.

We've also been actively hedging our fuel purchases, namely coal.

Earlier this year we announced the contract, or earlier this quarter I should say we announced a contract with [South Coal] which will provide over one-third of our supply needs.

That contract begins in 2008, extending through 2018.

By selling our generation forward and hedging the fuel we are making excellent progress in achieving our 2010 financial goals for the energy supply business.

Let me now turn to the next slide and discuss PPL electrics plan for a manageable transition to market price POLR supply.

As you know in early August PPL Electric utilities filed a plan with Pennsylvania PUC, requesting approval to hold six regularly scheduled procurements for 2010, POLR supply over a three-year period beginning next year.

The purpose is to gain a benefits of supply cost averaging and there by reducing some of the risk of significant price bites in the wholesale market.

RFPs would be held twice a year in March and September of 2007, 2008, 2009.

Advanced approval of this proposed process is intended to remove risk from PPL electric and also provide a reasonable transition to market for our customers.

An administrative law judge has already been assigned to the case and we are working towards a PUC decision by first quarter 2007.

As mentioned previously we currently expect 2010 customer rate increases on the order 20 to 30%.

These are obviously lower than the rate increases experienced in other states including recent Pennsylvania results.

Even with the anticipated increase in rates, PPL electric customers should continue to see rates that are among the most competitive in the region.

We are also actively responding to the PUCs request to provide customer programs that could help mitigate some of the rate increase.

For example we plan to offer enhanced demand site response programs, a three-year consumer education program on energy usage, and increased funding for assistance to low income customers.

Let me now turn to our generation scrubber project and give you a quick update on where things stand.

Construction is progressing well at both Montour and Brunner Islands.

The photo on the slide shows progress already made on the absorbing and flu gas chimney at Montour.

As you can see we are well along and we continue to forecast completing the projects on budget and on schedule.

Essentially all of our major capital work is under contract at this point.

The next slide is an update on our upgrades.

There are two new pieces of information on this slide.

The first is some finer detail on the amounts and timing of our Susquehanna nuclear plant upgrade and second is the addition of a new project that we have in the early planning phases.

Relative to Susquehanna we filed our request for power upgrades with the NRC earlier this month and we are hopeful that approvals will be received in the second half of 2007.

The new project I mentioned is at Holtwood, one of our existing hydro electric stations.

That plant has expansion potential of 125 megawatts.

With the increasing cost of new generation options and the tightening of PJM power supply near the end of the decade this project could hold some promise.

Which brings me to the last slide regarding PJM reserve margins.

Based on this past summer we continued to see a tightening of expected reserved margins in PJM and other markets.

This slide represents PJMs view of the expected reserve margins over the next several years but does not yet reflect this past summers actual load growth and the peak load impact associated with that growth.

Other independent reports indicate PJM could fall below required reserve margins as early as 2009.

None of the recently announced base load generation additions in PJM would come on line before that time.

I think PPL is well-positioned to benefit from these improving fundamental supply and conditions and with that I would like to now turn it back to Jim to moderate the Q&A session.

Okay.

Thanks, Bill, and, operator, if you would let's open the phones for Q&A.

Thank you very much. [OPERATOR INSTRUCTIONS] First question will come from Paul Patterson from Glenrock Associates.

Good morning.

I want to touch base with you on the mark-to-market losses.

First of all, it sounds like these would be sort of normalized numbers that you would basically back them out of operational earnings and you haven't and you discussed the fact that you guys are increasing your marketing business and I'm wondering just what the thought process is in terms of how mark-to-market gains and losses are going to be thought of in terms of reporting earnings going forward.

And if you could just sort of elaborate a little bit on that because I guess if we were to back it out it would be more like a $0.59 number that you guys would have had.

This is John, that's right.

If you back that out you would get to $0.59.

As we indicated in our remarks we had given the way we are headed with our energy marketing operation we do expect to see continued volatility as we put transactions on the books that do make economic sense.

And we are looking at as I said, we are looking at how to best report that so that you understand exactly what those mark-to-market ramifications are and how they flow through the income statement.

So I would expect in the future you will see us report this differently than we did in this quarter.

Okay.

Then on the Synfuel, now just if you could remind us how Synfuel and oil prices work in 2007 or how you see them working and how hedged you are with respect to that $0.10 and how any change in oil prices might change that either positive or negative?

This is Paul.

We are in the process of evaluating the hedges that we already have in place that hedge around a quarter of Synfuel earnings for next year and looking at the best way to try to hedge that, recognizing that with oil prices still being relatively high putting out additional positions is a bit expensive.

So it's a trade-off between certain lower earnings amount or try to best manage that position through monitoring production, watching prices when opportunities arise to try to take some of the risk off the table.

We do do that.

So it's more of a continuous review process than it is a single point in time determination or a single action that we would take to try to create more certainty around that $0.10.

Where do oil prices have to be with respect to your Synfuel production in order to get to the $0.10 ?

Is it just the forward curve that we have of $64 or $63 in 2007?

Yes, and I think if you actually look at what the forwards are when we created the number it's probably closer to 65, 65, 66 and that's with a phase outrange, next year with a current forecast of inflation for the current year adjusting the phase outrange, the phase out is starting around 62.5, 63.

And deferred income tax in Chili that you guys mention on page 4, what was that impact and what was the currency impact so far this year in general?

Currency impact was $0.01.

And the Chili and deferred tax adjustment was around $0.03 in the period.

$0.03 positive.

Correct.

Finally the generation opportunities that you guys mentioned?

Anything in particular that we should be thinking?

Are you guys looking at coal is nuclear?

Can you elaborate?

You mentioned in the press release that you are looking at requiring some additional generation opportunities.

I think the fair answer is we are looking at a number of paths.

One, we are involved current until evaluating technologies and possible opportunities in the coal area.

I've said in various points in time we don't anticipate starting a nuclear plant in any time soon but we haven't excluded any possibles for the future of evaluating joint venture opportunities.

And I guess as Bill Spence mentioned earlier we are evaluating the economics of expanding an existing Holtwood facility and continuing to grow all of our existing assets to their full potential.

So we will continue to look at assets that come on the marketplace.

As everyone is aware they've been fairly high priced and some of the numbers have been beyond what we think is rational for earning a good shareholder return on those assets but we will continue to look at those as they move along and make themselves available.

Thanks.

We know will now go to Andy Levy from Bear Wagner.

Please go ahead.

I'm all set.

Thank you very much.

As a reminder, [OPERATOR INSTRUCTIONS] Ryan Watson from Stanfield for our next question.

Your line is open, sir, please go ahead.

Thanks.

On Slide 16, on the scrubbers can you remind me again what your planned budget is for those?

Because recently there have been generators that have upped their guidance, albeit stale guidance, for the cost of scrubbers?

Sure, this is Bill Spence.

At the Montour facility we are looking at the 540 to 550 million and at the Brunner Island 580 million.

What does that work out on a per KW?

For the size of the units I don't have that in front of me.

Okay.

So 580 for Brunner and 540 for Montour?

Right.

Is it 540 for Montour. one and two and 580 for Brunner, one, two, three.

Yes.

Okay.

Moving on we will hear from [Pollygunn] Investment Partners, [Resa Hetefey] for our next question, please go a head.

Thank you.

So is increased nuclear cost for Susquehanna, is that sort of, I guess, kind of a one time next year?

Yes, it is.

Actually there is a problem that some of the BWRs have seen throughout the industry concerning control rod friction and involves replacement of rod channels with different material and that's what we will be completing next fall with the final mid cycle outage and we hope to have that problem behind us.

So it sounds like that problem probably would cost you around a dime in earnings since you added the Synfuel but took out the kind of stayed the same [inaudible]?

That would be around a dime, it would be a combination of that additional outage plus the delay until basically almost the December time frame of a planned upgrade that we had at Susquehanna from end of first quarter, beginning of second quarter.

So the combination of those two items would be close to a dime.

I also notice that your fuel costs forecast is now four to 5% versus 5%.

Is that just really due to the coal market going down in recent months?

Yes, the coal market has certainly leveled off and this year in fact the increase in coal prices is a little bit lower than that 5% that we've been talking about.

So I think we just represented a four to 5% number on a long-term basis going forward for your use.

And I also noticed that CapEx supply has kind of went up from the last slides and main until 2009 is that due to the Holtwood upgrades?

Yes, it is.

And finally can you talk for a second what the RFP case is?

Is there a chance that that case gets settled in the next several months where it won't potentially go into the first quarter '07?

I think that our objectives is to attempt to either reach an early settlement with all the involved parties or if that's not possible to do, then we would be looking for a decision sometime end of first quarter next year.

But there is the possibility of reaching a settlement on these issues and that's what what we are currently working with various parties on.

Thank you very much.

It would be advantages of course to reach that beginning that we have a first quarter or a first March of '07 first procurement.

But there is always a possibility of pushing that off a little later mid year if we haven't completed it by that time.

We are still optimistic.

Our next question will come from Ashar Khan from SAC Capital.

Please go a head.

Chuck, could you just mentioned to us if the RPM settlement gets approved by the end of the year how that might impact your results going forward?

Ashar, this is Paul Far from a planned prospective we have factored into the near term and long-term forecast expectations surrounding what RPM would mean to us.

There is still significant volatility around that.

It's difficult to come up with numbers that are precise but we do have some expectation built into the forecast that contemplates the potential impact of RPM.

If I am right in your '010 guidance you mentioned the capacity price you were using was very, very minimal for your contracts.

Is that still correct or not?

I think it's more minimal list at the front end.

I do think we are conservative with the numbers that we have in 2010.

But again it's forecasting both RPM and congestion within our service territory in the area where the plants are.

Most of those factors have to move positively for us to see any significant upside.

But I do think we are conservative in what we have in 2010.

Thank you.

Moving on our next question will come from Glenrock associates Paul Patterson.

Just a follow up on sort of the generation question.

Excluding the low cost upgrades which seem like very low hanging fruit, et cetera, and very low risk when you are talking about building new existing base load or building new coal plants potentially or new technology and in the context of obviously you have RPM and what have, do you see the merchant market out there being able to support that or would you guys be more liking to look for long-term contracts or something to hedge that off of?

Do you follow me?

I mean just in terms of what the risk profile, what you guys are looking at in terms of new generation and what your comfort level is in terms of where you see technology costs and price and everything and the market, if you follow me?

Right.

Well, I think as you've stated RPM will play a role.

To what extent time will tell that.

We are watching that very closely.

But on the other hand we certainly would want to hedge out the output of that plant to a significant degree before we would see the benefit of proceeding with new construction at today's prices.

I think that's not something that we or probably many other people would pursue on a pure merchant basis.

Thank you very much.

Now we will hear from Ryan Watson from Stanfield for our next question.

Just a follow up into what Paul had asked.

What areas then are you looking to expand in?

Are you looking to add on to where you are currently located or are there pockets of the country that you see opportunities in whether it be coal or gas?

And if you were to build a coal plant with, using existing technology not IGCC or anything, would you look to hedge that out as well?

Well, a couple, let's take that in pieces.

First of all we would probably focus first and foremost in the northeast here, the northeast region, particularly in PJM and our heart territory.

Yes, we would want to hedge it out.

We think that there's going to be plenty of market capability and liquidity to do that as we go forward.

And it would more than likely be coal although we have not -- we are under those evaluations right now.

We are looking to various technologies, whether it be super [crit] or whether it be I GCC, et cetera.

Fluid ice bed, et cetera.

So I think we have existing sites within PJM.

We have two existing sites, one adjacent to our Susquehanna plant and one adjacent to our Montour plant that is suitable to new units.

I think the key is, one, the economics have to fit, two, the risk posture has to be such that we've hedged out appropriate amount of the plant such that we are not getting into high merchant risk and, three, it has to be in the right location.

But I think those are the types of things we are looking at and will evaluate as we go down the road.

When you say the northeast then is that because you see market conditions there the most favorable or is it because, or is it a combination of that plus you already have incumbent plants there?

Both.

We are very competitive with our location within PJM and given that we have available sites we obviously get pointed to that area.

It's a good market.

We are very competitive.

The need is there and so all those things lead you towards looking hard at that heart territory.

Thank you.

Moving on we will hear from Judd Arnold from King Street.

Your line is now open, sir.

Hi, guys, on Slide A2, you layout sort of how much you've hedged.

I was wondering and I know you've been a little reticent to go into 2010 but you could by a-- with a band of 10 to 15% maybe talk about what you hedged in 2010 in PJM.

Well, you know, I'd like to leave it at this.

You can think about 2010.

I feel we've hedged a significant amount of 2010.

But with that work in process and on an ongoing basis we've stated this thoroughly internally and we feel right at this point in time in fairness to our marketing group we better hold tight without providing a number out to the world.

But it's not an insignificant amount.

We do see liquidity out there and we are layering on contracts in 2010 and beyond.

You should know that.

And there will be further to the extent that we are successful from a timetable perspective with the Pennsylvania PUC, and electric utilities is filing for transition, that plus the other Mid Atlantic auctions that will broach 2010, in the 2007 time frame will provide a lot more transparency I think in the next several months out to validate our forecast.

We hope for all on the line, we hope that in the near term future we will be to a point where we can give you a little better feel but we want to hold tight for the moment.

Sure.

It's definitely helpful.

I guess the follow up would be, now that we've got Illinois as a comp as well as the BGS that we already have, the focus being the number is what is the adder in an auction and how you think about the value of trade-off I guess of hedging straight wholesale power now versus holding your generation back and into an auction to what some call maybe an inflated price because [inaudible] the has to buy the power from you or the other incumbent and gets a profit margin on that so you can make an extra $10 a megawatt hours it looks like if I do the math right.

In Illinois the incumbent guy just because these there's these success supplies [inaudible] you don't really get that inflated price and certain extra value that goes to the incumbent generator.

If you could one, am I thinking about that correctly, but there's trade-off, two, I guess I am, how are you guys thinking about that trade-off for your own perspective auction?

And then obviously you hit on the PGS.

Which you can bid into and I know you bid into BG&E auction as well.

How you think about that in terms of maximizing the value of your.

I think you've raised all the pertinent points.

Everything is a trade-off.

There are risks of being too long at any given time.

There are risks at being too short at any given time with lost opportunities.

So we are evaluating and it's an ongoing evaluation constantly every day on the floor we look at where do we want to be with our length as we go into 2010 or do we want to have length in 2010.

I think again like anything else it's a balance.

It's part of our marketing plan and we agree with the risks you layout and there's always risk of leasing money on the table but there's also risk of prices moving and our focus is deliver the plan first and foremost is deliver our growth plan that we've laid out to the street and that's what our marketing plan is designed to do.

And what we've seen in Illinois, what we see in some of the auctions around us, everything that we see suggests that our continued approach to what we are doing in 10, 11 and 12 will deliver those returns.

Thank you.

At this time we have one question remaining in the queue. [OPERATOR INSTRUCTIONS] We will now here from Daniele Seitz from Dahlman Rose for our next question.

Actually most of my questions have been answered but I was wondering, you mentioned that there were lower margins in the west.

Is this just because of better hydro conditions or is it something that you anticipate for the longer-term?

Actually in the quarter, Daniele, that was lower than planned or comparable generation in the prior year.

We had better generation earlier in the year but with a quicker run off the impact is negative in the third quarter.

Okay.

And anticipate an upside next year due to rollover of contracts, most of the contracts have already been set.

This is Bill Spence we have begun to and continue to layer in 2007 and 2008 the new wholesale contracts that I mentioned earlier in the presentation consistent with the business plan.

So we are comfortable with where we stand in preparing.

You seem overly progressive upside going forward.

I'm sorry, I missed that question.

You seem overly upside going forward.

Yes, that's correct.

And the other question I had is was on the international operations.

It seems that you are doing better than you anticipated.

In terms of long-term trends what do you see?

Well, I think we've continued to see two things.

One, excellent performance of our international operations from a margin and a customer service standpoint.

So we've continued to reap benefits from the regulatory system, particularly in the UK.

We do continue to see growth in Latin America and better margins achieved in the U.K.

So as we look down the road, Daniele, we continue to see a good picture in our international operations that run well, that deliver better than our expectations and we hope that will continued to so.

So roughly the growth rate, not just, you have not reached the peak there?

That's what I was wondering.

No, I don't think we certainly have reached the peak in Latin America and growth rate may be a little slower in the U.K. but at the same time the U.K. business continues to be one of the highest performing businesses in the U.K.

Great.

Thanks a lot.

Sure thing.

Thank you.

At this time, gentlemen, there appear to be no further questions.

I would like to turn the call back to you, Mr. Miller.

I thank you all for joining us and we look forward to talking to you at the end of the year.

Thank you.

Thank you everyone for your participation.

That does conclude today's conference.

Everyone have a great day.