賓州電力 (PPL) 2006 Q4 法說會逐字稿

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

Today's call is being recorded.

For opening remarks and instructions, I'd like to turn the conference over to the Investor Relations Director, Mr. Tim Paukovits.

Please go ahead, sir.

Thank you.

Good morning.

Thank you for joining the PPL conference call on fourth quarter and 2006 results and our general business outlook.

We are providing slides of this presentation on our Web site, at 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 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 this 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.

Good morning, thanks for joining us today on the call, everyone.

On this call are -- with me today, John Biggar, our Chief Financial Officer;

Bill Spence, our Chief Operating Officer; and Paul Farr, Senior Vice President, Financial.

They will be covering some details on our 2006 results and also forecast for 2007, 2008 and the long term.

Before we get started with John and Bill, I would like to make a few observation on our '06 results that we've announced today.

As you saw from our announcement this morning, we announced record GAAP earnings of $2.25 a share compared with $1.77 in 2005.

Our 2006 earnings from ongoing operations at $2.22 per share, that also established a new Company record.

Earning from ongoing operations increased by 7% versus a year ago.

So by all means, 2006 was another successful year for PPL, despite the fact that we did have impact from some unplanned generation outages in the fourth quarter and the impact of very mild -- milder than normal weather on both the Pennsylvania delivery and the supply segments, which prevented our results from being significantly stronger.

Driving the increase in 2006 earnings really was our energy marketing center and some very excellent performance.

They were very successful in capturing additional margins and also mitigated the impacts of the unplanned outages and the very mild weather we had in fourth quarter.

And John and Bill will provide more detail on the 2006 results.

Looking to the future, we are reaffirming our 2007 earnings forecast of $2.30 to $2.40 a share.

And if you look at the midpoint of this forecast, that represents a 6% increase over our 2006 earnings from ongoing operations.

In addition, we expect robust growth in 2008 compared with 2007, despite the loss of synfuel earnings at the end of the year.

Excluding synfuel earnings from our 2007 forecast, we are projecting growth of at least 5% in 2008 based on the midpoint of the 2007 forecast.

In addition to that, we are continuing to forecast 2010 earnings of $3.50 per share.

Now that earnings level in 2010 would represent more than a 50% increase over our level of earnings that we are reporting today.

Certainly, the earnings trajectory through 2010 would significantly outperform many others in the utilities sector that are expected in the way of growth.

These forecasts do reflect continued robust prices in electricity markets, continued strong performance in operations at our plants and capacity expansion at some of our plants and the continued efficient operation of our delivery operations.

Our common stock performed very well in 2006, increasing by about 22% during the year.

And our total return of 26% for the year resulted in PPL significantly out performing the market.

Dow Jones index -- utility index was only 16.6% in 2006.

So over the past ten years, our return has been an outstanding 373% compared to the Dow utility index of 188%.

We still remain very optimistic about the future and we're superbly positioned to really succeed in the competitive wholesale markets because of very good assets, good location and continually improving marketing and trading program in the largest power pool in the U.S.

We've layered in a significant number of energy contracts for 2010 and those contracts are clearly confirming our positive view on the market.

We've also made significant progress in longer term fuel procurement for our base load generation for that period.

Our extremely low cost base load fleet in Montana continues to give us access to a strong, growing Western electricity market.

And we anticipate continued strong steady revenues from our delivery companies.

Our best in class service enables to us deliver superior results for share owners and customers and reap the rewards from the regulatory systems associated with those companies.

While we continue to believe in the very transparent fundamentals that drive our long-term forecast, we are certainly not complacent and we're continuing to actively pursue any and all new opportunities to further improve value.

We are focused on building the scale necessary to better position PPL within the industry.

An example; last week we announced a five-year, 300 Megawatt deal for capacity and energy, beginning in 2012, from a new plant being built in West Virginia.

So I look forward to further discussion during the Q&A, but let me first turn the call to John Biggar -- over to John, and he'll provide more detail on the financial results that we announced today and our earnings forecast.

John?

Thanks, Jim.

Good morning.

Fourth quarter earnings from our Pennsylvania and international delivery business segments were below last year's level.

As a result, PPL did not do as well in the fourth quarter of 2006 as it did in the fourth quarter of 2005.

But if you exclude the effects of milder than normal weather and lower generation output because of some unplanned outages, fourth quarter 2006 earnings per share from ongoing operations would have been slightly ahead of the fourth quarter of 2005.

For the full year, we had solid growth and earnings from ongoing operations from our supply and international business segment -- international delivery business segments.

Specifically, earnings from ongoing operations for our supply business segment increased 9.5% in 2006, and increased 23% for our international delivery business segment.

Overall, PPL's earnings from ongoing operations increased 7% from $2.08 a share in 2005 to $2.22 a share in 2006.

Again, if you exclude the effect of milder than normal weather and lower generation output because of unplanned outages throughout the year, our 2006 earnings from ongoing operations would have approached the $2.30 per share high end of our 2006 earnings forecast.

I'd like to take a few minutes and walk you through some of the major factors that contributed to the growth in PPL's earnings from ongoing operations in 2006.

The largest contributor to PPL's record earnings in 2006 was higher realized wholesale energy margins in both the eastern and western United States.

This improvement in realized energy margins in 2006 was primarily the result of an 8.4% increase in the sales price under the energy supply contract in Pennsylvania between our supply business and our Pennsylvania electric utility, PPL Electric Utilities, for Provider of Last Resort, or POLR customers, that is customers who do not shop for an energy supplier.

As you'll recall, our POLR contract runs through the end of 2009 and provides for increasing prices each year, albeit at lower levels of increase than in 2006.

We also saw an improvement in other energy margins in 2006 as a result of higher wholesale energy prices and our success in entering into new load following and other supply contracts at those higher prices.

During 2006, increased hydroelectric generation in both the east and the west helped to add to our realized wholesale energy markets.

The benefit of those higher prices was somewhat offset during the year by higher coal costs and by lower coal, oil and nuclear generation.

Importantly, though, this across the board improvement in energy margins for 2006 reflects the successes achieved by our energy marketing operations under the direction of Joe Hopf.

Taken together, the higher margins resulting from increased POLR prices and entering into wholesale energy supply contracts resulted in $0.27 of additional earnings per share from ongoing operations in 2006 compared to 2005.

Our 2006 results reflect net unrealized losses of $19 million pre-tax on economic hedges of wholesale energy contracts, that is forward purchases we made to cover certain forward wholesale energy sales made during the year.

While the mark-to-market impact of these purchases reduced 2006 margins, it's 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 2006 results if these unrealized losses are excluded.

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

International delivery margins added $0.11 a share to earnings from ongoing operations in 2006.

About three-quarters of this improvement came from a more favorable customer mix at WPD in the United Kingdom, and from higher unit prices.

The balance of this earnings increase was the result of higher energy margins throughout Latin America, driven by a composite 7.4% increase in sales.

Our international delivery business segment also saw a $0.07 per share benefit from income recognized from planned ongoing liquidation of certain U.K. subsidiaries that are not related to the electricity delivery business.

As shown on this slide, 2006 O&M expenses were higher than they were in 2005 and adversely impacted earnings from ongoing operations by about $0.17 a share.

About 40% of the increased O&M expenses in 2006 is attributable to our supply business segment, primarily the increased O&M associated with the higher level of plant outages that I mentioned earlier.

About 35% of the increased O&M relates to our international delivery business segment and it is driven primarily by increased pension costs and higher [miring] expenses at WPD, as well as higher employee and contractor costs in Chile.

The balance of the increased O&M in 2006 results from increased tree trimming, storm restoration and other O&M expenses experienced by our Pennsylvania delivery business segment.

Milder than normal weather adversely impacted margins at our Pennsylvania delivery business segment by $0.02 a share in 2006, primarily in the fourth quarter.

Our 2006 results include $0.08 per share of synfuel earnings, which is less than half of the $0.17 per share that we earned a year a ago from synfuels.

This decrease is due to lower production at our synfuel facilities and in the projected phase-out of tax credits, due to high average price of oil in 2006.

Moving across the slide other income -- excuse me, income taxes and other, primarily reflects the net effect of the realization of certain income tax benefits in the U.K.; higher depreciation related to additional plant placed in service in 2006, and adverse movements in the exchange rate related to the British Pound.

To answer a question I know we will get in the Q&A session, the adverse effect of the exchange rate was about $0.01 per share in 2006.

Reflecting all of these items, PPL's earnings from ongoing operations were a record $2.22 a share in 2006, which equates to a solid 7% increase from the $2.08 for 2005.

Our 2007 earnings forecast is $2.30 to $2.40 a share.

The $2.35 per share midpoint of the range represents a 6% increase over our 2006 per share earnings from ongoing operations.

As we've stated in the past, the supply segment will continue to be the primary driver of growth for the remainder of the decade.

We expect about 60% of our 2007 earnings will come from the supply segment, compared to 52% in 2006.

Our international delivery segment is expected to provide about 23% of 2007 earnings, with the balance coming from our Pennsylvania delivery business.

Now let's move to the next slide, which shows the principal items that factor into our forecast of earnings growth for 2007.

The projected growth in 2007 earnings per share is primarily the result of higher energy supply margins, due to the replacement of expiring fixed price supply obligations with higher margin, wholesale energy contracts.

And Bill Spence will provide you with more information about those contracts in his remarks.

We also expect to see a benefit to margins in 2007 from load-following commitments that were made in 2006 for delivery this year.

We continue to be an active participant in load-following options in 2007 and will pursue other opportunities to achieve margins for the long-term which are consistent with our forecast.

The 2007 energy margin forecast also reflects the 1.3% increase in the sale prices under the POLR contract that I mentioned earlier, and higher generation output in 2007 as a result of improved plant performance.

Partially offsetting these factors is a modest increase in fuel-related expenses.

We expect higher international delivery margins, due to higher sales volumes in Latin America and higher per unit prices in the United Kingdom.

However, gains from the liquidation of UK non-electricity delivery businesses are not expected to occur at the same level in 2007 as they did in 2006.

And we expect higher O&M expenses and higher depreciation across all of our business segments in 2007 as compared to the last year.

Income taxes and other on the slide reflects higher lower taxes in the UK, partially offset by higher Pennsylvania delivery margins and higher synfuel earnings.

We expect synfuel earnings of about $0.10 a share in 2007 compared to the $0.08 a share in 2006.

And in this regard, we've taken action to fully hedge our 2007 synfuel earnings.

As Jim indicated earlier, we expect moderate growth in earnings in 2008 compared to 2007, despite the expiration of the synfuel tax credits at the end of this year.

Excluding the expected $0.10 per share of synfuel earnings from our 2007 numbers, we project growth of at least 5% in 2008.

For 2006, PPL had positive free cash flow before dividends of $167 million, which is better than we had forecast earlier in the year, due to a change in working capital.

As we have said before, we expect to have negative free cash flow before dividends in 2007, and that reflects primarily the reversal of the benefit from working capital we saw this year -- or last year, and the fact that a major portion of our CapEx spending for scrubber projects, that Bill will talk about, occurs in 2007.

We are forecasting -- continue to forecast significant improvements in cash flow from operations as we move toward 2010.

These improvements in cash flow will result from reduced environmental CapEx as the scrubbers are completed in 2008 and early 2009, the POLR price increases I mentioned earlier, power plant uprates that we have underway and will be coming online throughout the balance of this decade, and improved plant availability.

In 2009, we will continue to recover stranded cost from customers but we won't have any offsetting transition bond maturities.

That represents a $200 million after-tax improvement in cash from operations.

We also will have expiration of long-term supply contracts, including the Pennsylvania POLR contract, that will provide us with the opportunity to re-market that supply at higher prices and that will also improve cash flows.

These improvements 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 twelve months.

Our GAAP equity ratio at the end of 2006 was 41%, up from 38% from a year ago.

On an adjusted basis, that is excluding non-recourse debt, $605 million of transition bonds and $2.7 billion of international debt; our equity ratio was 55% at the end of 2006, up from 51% a year ago.

PPL has achieved its targeted adjusted equity ratio and we expect to -- expect it to remain at or near that level going forward.

We have $3 billion of available capacity under our $3.4 billion of bank credit facilities, providing a solid liquidity base for our energy marketing operations and interim funding needs.

We plan to fund the scrubber project and other expenditures in our current capital expenditure program with cash from operations and the issuance of long-term debt in hybrid securities.

As we've said before, we have no plans to issue any common stock to fund our current CapEx program.

Based on our current business plan, we expect to initiate a repurchase of about $700 million in common stock by the beginning of 2009.

Our current analyzed dividend rate is $1.10 a share.

To get to this level, as shown on this slide, we increased the dividend twice in 2005 and once in 2006, with the April 1st dividend payment.

The current analyzed dividend rate equates to a 47% payout ratio based on the $2.35 midpoint of our 2007 earnings forecast.

We expect to grow the dividend faster than the rate of growth in earnings per share from ongoing operations over the next few years.

And that would result in a payout ratio greater than 50% beginning in 2007, based on the midpoint of our earnings forecast.

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

Now I would like to turn the call over to Bill Spence, our Executive Vice President and Chief Operating Officer.

Bill?

Thank you, John, and good morning.

Slide 12 is an updated gross margin chart reflecting 2006 actual results.

As John mentioned, margins in 2006 are above 2005 but were below our previous forecast, due primarily to unplanned outages and weather.

Our margin forecast on this slide for 2007 to 2010 have not changed as we continue to believe those levels are achievable.

This confidence is based on our view of the forward supply and demand fundamentals in our key markets, especially PJM, coupled with the hedging we've already accomplished.

As Jim mentioned, we've layered in a significant number of contracts for 2010 at prices inline with our margin assumptions.

We also continue to make good progress in our marketing operation, primarily through participation in regional POLR auctions and I feel good about our ability to achieve the wholesale market value shown on this slide.

Now turning to the next slide.

As both Jim and John indicated, our earnings performance in 2006 could have been even stronger had it not been for some unexpected plant outages and the warm weather we experienced in the fourth quarter.

This chart shows the effect those outages had on the equivalent availability of our fleet.

As you may recall, our fleet performance over the past five years has really shown significant improvement.

And performance over the 2003 to 2005 period placed us firmly in the top quartile of our industry.

Our goal is to continue to be in the top quartile, but as you can see from this chart, 2006 we did not meet our high expectations.

The lower availability was driven by two turbine outages at our coal plants and an outage at our Susquehanna nuclear facility necessary to address control rod friction issues.

While unit availability is very important, the safe operation and long-term reliability of our equipment are values we are not going to compromise.

We've taken steps to address the turbine outages and have one remaining outage scheduled at Susquehanna to complete our planned program on addressing control rod friction.

That nuclear outage, in addition to other planned outages, is taken into account relative to our 2007 earnings forecast.

On a positive note, our 1542 Megawatt coal plant at Montour achieved its highest availability and output in its 34 year history.

Looking at the next slide on generation uprates.

As you may recall, we have plans at 369 megawatts at our existing facilities between now and 2011.

These increases will be accomplished with turbine upgrades at four of our facilities, a power uprate in Susquehanna and expansion at our Holtwood hydroelectric station.

We've added 28 megawatts in 2006 through turbine upgrades at our Brunner Island and Colstrip facilities.

You'll notice a portion of the Susquehanna uprate program has been delayed until 2009.

That delay is due to our decision to replace rather than modify existing steam dryers at Susquehanna.

Our application for the uprate was accepted by the NRC just recently on January 5, 2007, and we expect to receive the NRC's final approval in a timeframe that will allow us to achieve the inservice date for the Susquehanna uprate shown on this slide.

Moving on to global climate change.

It's obviously become a preeminent public policy issue and it's clear to us that legislation action is just a matter of time.

We have been working closely on this issue for some time, and while we would prefer a voluntary program on greenhouse gas emission reductions, it's becoming more likely that a mandatory approach will be taken.

It has been our position that any efforts should, at a minimum, should be national in scope, ideally international, and cover all major industrial and transportation sectors of the economy.

If a national mandatory program is developed, it should establish an emissions cap and trade system that will provide the right economic incentives for reductions.

We've seen this type of cap and trade system work very effectively with regard to SO2 emissions.

It's impossible to predict if and when legislation may be inacted, but PPL intends to be fully involved in the debate.

I would also note, that we've been an active renewable energy development program participant.

Just last week, you may have noticed that PPL received from the EPA it's Project of the Year Award for renewable project in Pennsylvania.

We are continuing to invest in renewable projects and we have the development team in place to execute on viable opportunities.

On the R&D front, PPL is one of only four U.S. power companies participating in the Future Gen Alliance, which is developing a near zero emissions power plant that can capture CO2 for sequestration.

We are also involved in POE's Big Sky Sequestration partnership that is developing technologies to store disposed CO2 emissions.

Moving on to our scrubber projects; we continue to make excellent progress on this program.

We have all of our limestone supply needed now under contract for 2010.

We have our own rail cars to transport that limestone.

As we've indicate before, we've hedged our metals exposure under equipment supply contracts.

And we've turned our scrubber waste into a revenue stream by signing a contract with the a wallboard producer, which has now begun construction of their manufacturing facility next door to our Montour plant.

You may recall that we have made these commitments to our scrubber programs several years ago before the big push by others to build scrubbers.

As a result, PPL has been able to achieve attractive pricing and lock up contractors for our project.

Also, we've not seen the run up in prices in scheduled delays that are being announced on a frequent basis by others in our sector.

So I'm pleased to tell you that we continue to expect the construction of the scrubbers to be completed on time and on budget in 2008 and early 2009.

Moving on to PJM reserve margins, we've stated before that this is a potential value driver -- and a key value driver as we move forward.

We continue to see a tightening of expected reserve margin in PJM and other key markets.

In light of the cost and political challenges based new base load in coal plants, we anticipate that reserve margins will be further pressured as we approach the next decade.

You may recall from Jim's comments, that PPL recently announced our signing of a long-term purchase contract with the project developer for one of the few coal plants nearing construction in PJM.

We believe this is an effective way for to us grow our base load supply.

In addition, this particular plant in West Virginia should be one of the first to market and it has several cost advantages.

As I've indicated before, I think PPL is very well-positioned to benefit from these improving market fundamentals.

As far as a regulatory update on our PPL Electric Utilities, the next slide shows a couple of bullet points here.

As we announced last week, PPL Electric Utilities is asking the PA -- PUC to approve a modest increase in our distribution rates, beginning in January 2008.

To meet that time frame for new rates to become effective on that date, we expect to file a request with the PUC by the end of March.

We will make this request to ensure we continue to have the resources necessary to provide the exceptionally reliable service our customers have come to expect.

This request reflects PPL Utilities intent to seek smaller adjustments every few years, as higher operating and capital costs warrant.

Under the rate increase that went into effect on January 1 of 2005, we were allowed a return of 10.7% on equity and an 8.4% return on rate base.

The customer increase at that time was a 7.1% overall rise in customer charges.

In our upcoming filing in March, we anticipated smaller rate requests.

You can also see from the slide that as of September 30, 2006, our estimated returns were 8.1% on equity and approximately 7% on the ate base.

In early August, you also may recall that PPL Electric Utilities filed a plan with Pennsylvania PUC to request approval to hold six regularly scheduled procurements for our ten -- 2010 POLR supply over a three-year period, beginning this spring.

The purpose is to gain the benefits of supply cost averaging, thereby reducing some of the risk of significant price hikes in the wholesale market.

And we expect to hear something very shortly on that filing.

Before we begin the Q&A, I would like to turn the call back to John for further comment.

Thanks, Bill.

As many of you know, I will be retiring on April 1st after 38 years with PPL and nine years as CFO.

And Paul Farr will become Chief Financial Officer.

It's been both a privilege and pleasure to have gotten to know so many of you over the years.

And I will miss the opportunity to work with you in the future, but it really is time to move on.

PPL has a strong management team in place, lead by Jim Miller, Bill Spence and Paul Farr, and I am confident that they will continue PPL's record of success.

Now I will turn the call back to Jim for the Q&A session.

Thank you, John.

From all of us, thank you is grossly inadequate, but we all wish you the best, as you well know.

Operator, we are now ready for Q&A.

[OPERATOR INSTRUCTIONS] We will have our first question from Daniele Seitz, Dahlman Rose.

Thank you.

I just want to say good-bye to John and it was swell working with you all these years.

Thank you.

I just wanted to ask, how much of the growth rate do you anticipate from the international operations over the next few years?

It seems that it has been relatively slow, given the type of positive news that we've heard in both Latin America and the UK?

Daniele, this is Paul Farr.

John had kind of mentioned in his comments some of the items that were driving this is results, in terms of the -- the $0.07 coming from the liquidation of the non-electricity related businesses.

That's the most significant effect as we look at -- if you look at from the earnings release, the midpoint to the forecast in 2007 versus 2006.

We do continue to see some pressure coming from pension expense, which we are expecting to moderate throughout the business planning period.

So we see a reduction in 2007.

But then, basically, growth off of that number as we work our way through the planning period.

So you anticipate after 2007 that -- in the 5% to 6% is a -- is doable?

5% to 6% is probably a little bit strong, but depending upon currency movement then and items that effect our pension calculation, it's possible.

Another question on the rate increase that you mentioned, that is included in your expectations for 2008?

It is.

Thank you.

We will have our next question from Ted Heyn, Citigroup.

Good morning.

First I had a quick question on your cash flow slide in the appendix.

It looks like for 2007 and 2008, your CapEx is probably going up relative to the last disclosure, about $150 million.

But then on the plus side, in 2010 your cash flow from operations is probably going up by that amount, as well.

I was wondering if you could walk through what the changes on the margins were, relative to the last disclosures?

Just one second.

Ted, the biggest driver on that one, if you look at the movement from '06 to '07, is the timing of some of the expenditures is somewhat delayed and that slippage from '06 is affecting 2007.

There hasn't been any absolute increase -- any material increase in the cost of that scrubber program or the expectations on other major capital expenditure projects.

That's the most significant driver.

Got you.

And then higher cash from operations longer term, is that just better power markets outlook or -- ?

Higher earnings.

Okay.

And then just had a question on the -- I know you guys talked about the bridge hearings and it looks like that's in front of the ALJ right now, is there any word on the broader POLR rules for 2011 and beyond?

And what the timing associated with that process is going to be?

I don't think there's anything significant at this point.

What we are hearing is that it is likely that the PUC may well put their effort in the near term to arriving at a plan for all the utilities in Pennsylvania for the longer term.

That being said, the ALJ process continues to move forward on schedule.

And we are expecting and have been expecting -- and continue to expect to hear something regarding our particular transition, which you recall, were one year ahead of the other utilities.

We expect to here something from the ALJ by the end of February.

But it sounds like, potentially, the broader kind of statewide auction process may be moving forward -- ?

Yes, that's probably the new piece of information we have for you this time is that we are hearing that there are some discussions going on to move that process for all of the state utilities along faster, which is, of course, good for all of us.

Great.

Thanks for your time this morning.

We will have our next question from Judd Arnold, King Street.

Hi, guys.

Just going to slide A-10, on the cash from operations guidance;

I was trying to foot a little bit and I was wondering if you could help me with my math?

Is the bridge from the 2009, 2010 -- if I want to think about what power price you guys are assuming, the way I'm doing it -- correct me where I'm going wrong -- is I'm taking the 2009 number of $1680, taking out the transition bond cash flow you're going to get that year.

And then your delta -- then versus the 2010 number, I get to about $700 million, that being after-tax.

And if I gross it up, I get to $1.180 billion?

Is that a proxy for the uplift in generation rates that you are going to get -- first the $50.20 POLR rate compared to what you think your wholesale number is going to be?

That's the lion's share of it but there's some other drivers in those numbers.

The number that you raised is a little robust.

I think if you reflect back on the supply chart and look at the increase, the 40 million, roughly, Megawatt hours that's under POLR that frees up, at around $20 a Megawatt hour, in terms of an increase, that's an $800 number pre-tax.

That would be the biggest driver.

Okay.

That was my only question.

Thank you.

[OPERATOR INSTRUCTIONS] We will go next to Andrew Levy, Brencourt.

Hey guys, how you doing?

John, congratulations.

Thank you, sir.

I wish I was joining you on the golf course.

I'll be thinking about you.

Thank you for everything over the years.

You always were very accepting, so I appreciate that.

Just thinking longer term the next year or two, strategically, WPD -- any thoughts there on, I don't know, either spinning it off or selling it or doing anything on the strategic side with that?

Or is it kind of steady as you go there?

Andy, this is Jim Miller, a good question.

I think our response to that is similar to what we've remarked to in the past.

I guess first and foremost, we're -- everything is driven by where we can improve shareholder value, of course, and we are not wedded to any asset in this business.

But on the other hand, WPD has been an excellent asset, performed wonderfully for us, well run, big value driver for us.

But I think the way we view it is, if it could play a role as other assets -- could play a role in a deal that we feel could bring more shareholder value -- clearly more shareholder value, we would look at how we might utilize WPD.

But I think that we are very happy with that asset.

It's doing very well.

And we continue to look for opportunities all across our sector, where we can drive further value out of this organization.

And WPD, as could any other asset, play a part in that.

Do you think that you are getting the true value in your stock in WPD?

Or do you think that -- ?

I think we are, I think we are.

I think -- maybe four years ago, perhaps, I would give you a different answer.

But I think, at least from our viewpoint, I believe people have seen the value of the earnings and the value of the regulatory system in the UK and the resultant benefits of how that unit has performed within that regulatory system.

In 2006, we earned -- I think, Paul -- $17 million in incentive payments by the excellent metric performance of that unit.

So I believe most people now see the benefits of that system and the performance of the unit, and view it as a very strong performer.

And I think we are getting the full value.

Thank you very, very much.

Both very good answers.

We will take our next question from Shelby Tucker, Banc of America Securities.

A quick question on the impact of the environmental retrofits.

What do you anticipate would be the impact on PJME's pricing as a result of the industries environmental retrofits?

Especially in light of the increased cost to build these retrofits?

I think, yes, one of the things we have to adjust for is on peak versus off peak.

But nonetheless, if you look at our program, we are going to spend a little over $1 billion -- a little over $1.1 billion on our scrubbers at both Montour and Brunner.

And that averages out to, based on 3,025 Megawatts there, about $372 a KW.

Now of course, I guess we could try to normalize that over time and figure out what the ongoing costs, but I think more about this as not so much the capital cost but the ongoing O&M impact that scrubbers have on the units.

So I haven't done a recent calculation to determine what I think would be reflected in the dispatch price of generators, but what I could say is, that based on our experience with SO2 and [Knox] credits and that system, we think those have been fully reflected --- or near fully reflected, ultimately, in the price of power.

So we'd expect as these units go in, it will be the impact of raising marginal prices on the system.

And how much gets recovered precisely in the dispatch cost is yet to be seen, I guess.

I know it's not a really precise answer for you but that's the best I can do at the moment.

I guess -- to put it another way, having started a little early in the process you have a cost advantage over others.

What kind of benefit you think that provides you versus others?

Well clearly, I think it is a benefit.

How much, I think will really be determined once all these units go into operation.

I think it's going to be reflective not only the in the capital cost of the operation but effectiveness and efficiency of that equipment, because clearly, with this type of equipment, there can be issues in operations.

So I think it's going to depend on the operator and a lot of other factors.

So again, that's probably a pretty broad answer to your question, but --.

Okay.

Then the other question -- it is more of a detail, you mentioned in the press release that you had -- that you were also helped marketing contributions at supply.

Have you -- did you quantify that?

And if you have not, could you?

And just give us a sense of what you expect going forward?

Yes, it's about $70 million last year, 2006.

In pretax margins.

Versus -- how much was the year before?

Pardon?

Versus the year before, how much was it?

Just one second, Shelby.

Thanks.

We will get back to you on that one, Shelby.

[OPERATOR INSTRUCTIONS] we will have our next question from Reza Hatefi, Polygon Investments.

Good morning.

Quick question.

On the increased CapEx, there seems to be some increases at delivery and international.

Is that basically fair to assume that you'll -- in the future rate cases whether it's in the UK or your next, next one in Pennsylvania, you will get recovery on that?

That's our goal.

And your next rate case filing in the UK will be -- when will that be?

It will be -- it's not really a filing, Reza, it's-- we come up with the rest of the industry.

And that would be for rates being effective April 1st, 2010, on the five-year cycle that we are on there.

Okay.

Great.

Thank you.

We'll go next to Alex Kania, Merrill Lynch.

Good morning.

Just a real quick question.

What was the contribution in synfuels for the full year 2007 and in the fourth quarter?

You mean 2006?

I'm sorry, 2006, yes.

It was $0.08 for the year and approximately $0.02 for the fourth quarter.

Great, thanks.The other question actually is, how are you guys thinking about the rumblings of re-regulation in Montana?

Is does that kind of effect you in any mean meaningful way?

We are certainly keeping our eye it.

And with re-regulation, I think -- some of the things we consider are, if in fact -- re-regulation is defined as allowing the local wires business to construct -- I think, certainly, that's a possibility that could occur.

We don't see that as a horrendous near term impact for a couple of reasons.

One, the debate for re-regulation -- there is still strong discussion about whether or not that, in fact, will create any savings.

The new cost of generation, the new cost of construction will have to be born by the rate payer and they are going to have to take the risk of overruns.

And, quite frankly, cost of new plants are going to be exactly the same under regulation as they are under deregulation.

The cost is the cost.

And that will have to be reflected in the rate payers charges.

So I think, certainly, re-regulation is something, over the long-term, that could affect a deregulated or partially deregulated country.

But it's not something that we are immensely concerned about.

We are in the debate.

We are trying to effect the decision-making process so that everyone knows what the impacts could be on the rate payer.

And continue to push for the understanding that, in the long-term, open market will, in effect, deliver improved rates for the consumer versus turning re-regulation back to the wires businesses and going through a new phase of learning over again how to build power plants.

Great.

Okay.

Well, thank you very much.

And congratulations, John.

Thank you.

Next, [Robert Sweeney], Sun Capital Advisors.

Can you go over your financing plans and any plans for hybrid issuance?

Thanks.

Yes, we do -- as we said in the main part of the call, we plan to finance our funding needs with either long-term debt or the issuance of hybrid securities.

And we are looking at the possibility of issuing hybrid security some time in 2007.

But the precise amount and the timing has not yet been finalized.

All right.

Thanks.

And at this time, we have no further questions in the queue.

I will turn the conference over to Mr. Jim Miller for any additional or closing remarks.

No.

I have no additional comments.

Thank you all for joining us and we appreciate your attendance.

Thank you.

That does conclude today's conference call.

You may disconnect at this time.

We do appreciate your participation.