賓州電力 (PPL) 2007 Q1 法說會逐字稿

Good day everyone. Welcome to the PPL Corporation first quarter earnings release conference call. Today's call is being recorded. 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.

Thank you. Good morning. Thank you for joining the PPL conference call on first quarter results and our general business outlook.. We are providing slides of this presentation on our website 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 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 the results to vary are contained in the Appendix of this presentation, and in the Company's SEC filings.

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

Thank you, Tim. Good morning everyone. Thanks for being on the call this morning. We will get to the questions shortly, but first Paul Farr, our Chief Financial Officer, and Bill Spence, our Chief Operating Officer, and I will discuss some first quarter results, and also talk about 2007, 2008 and also the long-term. Concerning first quarter, as you saw in our release, we have reaffirmed the 2007 forecast. We really had solid performance of our generation plants, and also strong performance in our marketing and trading operation. We have got a very difficult and complex outage out of the way at Susquehanna, which leads to our extended power upgrade.

Earlier today, we did report the first quarter earnings of $0.52 a share, a decrease from the $0.73 a share that we reported first quarter last year. Much of that decrease resulted from the charges related to our anticipated divestiture of our Latin America delivery businesses, and also our telecom operation in the United States. Paul is going to talk more about the specific of those charges, but let me just cover a little bit about our thinking there. Initially, from a Latin American perspective, as you know, we looked at those assets very carefully, and they have been good performers. They have provided a solid stream of cash and earnings for PPL, and they were very well managed.

When we looked back, we really had to take a look at were we going to commit to further investment of capital in that region, and given that they were only 5% of our consolidated earnings, and that would ratio would significantly drop as we move in to the future, we really felt that where is the best use of our capital resources, and could we redeploy them in a better way? Did we really plan to get more scale in the business?

So we decided to go ahead and move the Latin American assets, we weren't going to commit any more capital there. They are small, and the valuations right now for Latin America are probably at a significantly high point, so in March we commissioned JPMorgan to seek buyers. Since then we have reached an agreement to sell the Bolivian operations to a group organized by the management team in the union. Sales activities are in progress for Chile and El Salvador. They continue.

And we do anticipate divestiture of the Latin American portfolio results. That anticipated divestiture results in about $0.11 in the first quarter. We do believe and continue to believe that the sale of the Latin American operations will result in a net gain for the Company. If we are successful in selling them, we plan to use the proceeds to pursue growth opportunities that really tie to our core business of domestic energy supply and energy delivery.

As you may know, we are considering an expansion at the Holtwood Hydro. We are looking for assets on the market as well. And another option would be to repurchase securities including common stock. We do expect to complete the sales process by year end. We are also pursuing the sales of our small telecom operation, which provides broadband for telecommunication companies, wireless and internet service providers, and large businesses and institutions.

Looking at the telecom operation, our decision process was much the same as in Latin America. Current contribution earnings is immaterial. We really were not prepared and didn't think that it was the right place to deploy large amounts of capital that would be necessary to succeed and compete on the long-term for the telcomm business, and additionally telecom was not viewed to be a part of our core business going forward.

Once the sale agreement is reached, we expect final approval and the final sale process to take at least several more months to complete. In the meantime, we have reflected a $0.05 impairment charge in the first quarter relating to this sale decision. While the divestitures had a negative impact on first quarter earnings. We are absolutely convinced there will be important shareowner benefits from these initiatives.

It is important for us to focus on the core business, and eliminate any businesses that are not going to drive share in our value in the near or the near future. We have I think much better places to deploy our capital in our core businesses, or again used to repurchase securities. We will keep you posted on developments and further thinking in this area.

I would like to highlight just another special item reflected in the first quarter. We are taking a new approach to deal with mark to market accounting for economic non-trading hedges that we expect to hold to maturity. It is something that many of the other Companies do in this sector. Paul will talk more about the reasoning behind that change.

Now let's turn to earnings from ongoing ops for the first quarter. We have had sound underlying performance in all business segments during the quarter. Paul and Bill will talk more about the specifics. I would like to emphasize that the first quarter performance especially improved output from the coal plants, and the success of energy marketing operations, has put us in very solid shape to achieve our 2007 forecast of $2.30 to $2.40 per share.

A note on this earnings forecast, the midpoint which would be about a 4% increase over our record 2006 earnings from ongoing, we expect virtually all of our earnings growth in '07 versus '06 to come in the second half of the year. This is because the growth is being driven primarily by higher margin wholesale energy contracts, and expanding marketing activities that primarily occur in the second half of the year. What we will see in the energy markets thus far in 2007 also allows us to continue to forecast moderate earnings growth in 2008, and that fully overcomes the lost of synfuel earnings that end in 2007.

Excluding the $0.10 of expected synfuel earnings from 2007, we are still projecting a growth rate of at least 5% in 2008, based on the midpoint of our current 2007 forecast. Based on really solid and robust forward market prices for both energy and capacity, we are continuing to forecast 2010 earnings of $3.50 a share. The earnings of $3.50 in 2010 would represent a 50% increase over our '06 earnings. We do believe that there is potential to achieve more than the $3.50 per share in the forecast. We will monitor and adjust the 2010 forecast, if and when appropriate.

Really when we look at 2010, it is truly based on strong energy pricing and the competitive markets, continued improvement in operations at our plants, capacity expansions at some of the plants, and continued efficient operations of our delivery operations in the U.S. and in the U.K..

Through 2010 we expect really a continued declining in the PJM reserve margins and high cost for new generation. Both of these elements really confirm our view that we can expect to see some significant margin increases following the expiration of our long-term provider of last resort contract with our affiliate delivery business. Bill Spence is going to provide you with the latest information on our POLR supply process discussions in Pennsylvania. I won't get into that.

Let's turn for a moment to the longer term energy hedging activity. In the past I have said we would try to keep you posted to the extent we could on progress on our hedging operations for 2010. At this point we have achieved a goal that we set earlier in the year. Now we have hedged about 50% of our 2010 PJM base load output. But given the current runoff or recent run-up in the forward prices for 2010, we will be judicious in how we hedge more of our base load energy at this time. One thing to note. We have not hedged any of the 2010 capacity at this time. We will closely following the RPM auctions through October and into January, as we evaluate 2010 forecast.

Based on our fuel and energy hedging accomplishments, and our energy market fundamentals we have got every reason to be very optimistic about the future. That being said, we are continuing to pursue new opportunities to grab further value for our shareowners and build some additional scale. These opportunities, of course, include some expanded energy marketing products and services, some capacity expansions at our plant, and we continue to look and participate in the acquisition of existing assets where appropriate, and also pursue any and all possibilities of evaluating construction within the PJM at some of our sites. So I look forward to further discussion as we get in to the Q&A.

I will turn the call over to Paul Farr, our Chief Financial Officer.

Thanks Jim, and good morning everyone. As you can see from the chart on Slide 5, our lower first quarter earnings were driven by the international segment, primarily as a result of higher U.K. income tax expense in 2007, compared to the prior year. Before reviewing the key earning factors that impacted the first quarter results of our business segment, I would first like to mention two changes in the presentation of earnings from ongoing operations for this quarter. First, we are excluding the mark to market volatility associated with certain energy-related non-trading economic hedges from earnings from ongoing operations.

The special items now excluded from our earnings from ongoing operations, are charges or credits that are unusual or nonrecurring in nature, as well as the impact of these economic hedges. We believe this change will provide greater transparency and ease of comparability, by eliminating temporary mark to market earnings volatility, associated with the timing of the inner loss recognition on these hedges.

This change reduced earnings from ongoing operations for the first quarter by $0.03, and for 2006 by $0.02. Second, earnings from ongoing operations include the operating results of PPL's Latin America delivery businesses, that exclude the special items related to divestiture process.

Turning to slide 6. I will now discuss the key earnings factors that impacted the supply segment. Our supply segment earned $0.32 per share in the first quarter of 2007. That is flat compared to Q1 earnings of '06. This was primarily due to lower energy margins against in the East and West, offset by higher synfuel earnings. The lower energy margins in the East were the result of increased customer demand under the provider of last resort contracts, between PPL Electric Utility and PPL Energy Plus, that reduced margins by $0.03 per share.

This higher customer demand was primarily due to the colder weather in the first quarter of 2007 compared to 2006. The negative impact of higher POLR demand was partially offset by higher coal fired generation output. Our lower energy margins in the West were primarily due to lower hydro generation output. Offsetting these results were higher synfuel earnings, due to a lower assumed phase-out of synfuel tax credits at the end of the first quarter of 2007, versus the assumption a year ago.

Turning to slide 7. Our Pennsylvania delivery business segments earned $0.15 per share in the first quarter of 2007, also flat compared to a year ago. The cold weather that negatively impacted the supply segment benefited sales volumes in this delivery segment, primarily usage by residential and commercial customers. This revenue increase was offset by higher O&M costs.

Moving to slide 8. Our international delivery segment earned $0.18 per share in the first quarter, a 14% decrease from $0.21 per share earned a year ago. Lower international earnings were a result of lower U.K. delivery volumes, due to milder weather in 2007 compared to a year ago, higher O&M, and higher U.K. taxes due to the favorable resolution of a tax-related item in Q1 2006. These negative earnings factors were partially offset by the positive impact of currency exchange rates, and higher Latin American earnings.

Turning to Slide 9. Our 2007 forecast of earnings from ongoing operations remains $2.30 to $2.40 per share. The $2.35 per share midpoint to the range represents a 4.4% increase over our revised 2006 earnings from ongoing operations of $2.25 per share. Let's move to Slide 10, which shows the principal drivers of the 2007 earnings growth. As we have discussed with you previously, the supply segment will be the primary driver of earnings growth through the remainder of the decade.

We expect 60% of 2007 earnings to come from the supply segment, compared with 52% in 2006. We expect the international delivery segment to provide 25% of '07 earnings, and the Pennsylvania delivery segment 15%. The projected growth in 2007 earnings per share is primarily the result of higher energy margins. While we expect higher energy margins for the balance of the year, as Jim indicated earlier, we see virtually all of the earnings growth coming in the second half of the year.

Margin growth over 2006 is expected to be driven by the replacement of expiring fixed supply contracts with higher margin wholesale energy contracts, such as the Northwestern energy contract in Montana, new full requirements contracts in the Mid-Atlantic region, and approve the equal capacity market. The 2007 energy market forecast also reflects a 1.3% increase in sales price under the POLR contract, and higher expected 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 U.K..

However, gains from the liquidation of U.K.'s non-electric delivery businesses are not expected to occur at the same level in 2007, as they occurred in 2006. I would like to highlight that this contributed about $0.06 to earnings in the second quarter of 2006, we do not expect that to repeat in the second quarter of 2007. We also expect higher O&M and depreciation throughout all business segments. The income taxes and other is primarily due to higher local tasks in the U.K., partially offset by higher Pennsylvania delivery margins, and higher synfuel earnings. We continue to expect earnings growth in 2008 compared to 2007, despite the loss of $0.10 of synfuel earnings as Jim mentioned, due to the expiration of that program at the end of 2007. Excluding synfuel earnings from our 2007 forecast, we project earnings growth of at least 5% in 2008 over the midpoint of our 2007 forecast of earnings from ongoing operations.

Moving to slide 11. Our forecasted free cash flow before dividends has not changed, and does not reflect the divestiture of our Latin American businesses. Excluding those divestitures we expect to have negative cash flow before dividends in 2007. This is not surprising, and is primarily due to the fact that about half of the total expenditures for the installation of the scrubbers at the Brunner Island and Montour power plants will be made in 2007. We do expect significant improvement in cash flow as we move towards 2010. The cash flows improvement results from reduced environmental CapEx, as the scrubbers are competed 2008 and early 2009, increases in prices in 2007, '08, and '09 under our Pennsylvania POLR contract, new wholesale contracts and load following deals, and power plant upgrades coming online, together with approved plant availability.

In 2009 we will continue to recover stranded costs from customers with no offsetting transition bond maturities. This represents about a $200 million after tax improvement in cash flow from operations for 2009. Expiration of the long-term supply contracts, including the Pennsylvania POLR contract, allows us to remarket that supply, at the higher prices expected for post-2009 sales, improving our cash flow significantly in 2010 and beyond. As we have discussed previously, we plan to fund the scrubber project and other capital expenditures with cash from operations, and the issuance of long-term debt and hybrid securities.

We have no plans to issue any common stock to fund the current capital expenditure program. Based on the current business plan, we expect to initiate a repurchase of about $700 million of common stock by the beginning of 2009. We expect strong cash flows to continue beyond this buyback. Factoring in all of the items PPL's cash flow is growing, and our balance sheet remains strong.

Turning to slide 12. We continue to focus on dividend growth as an important component of growing shareholder value. In this regard, we increased our annualized dividend rate by 11%, from $1.10 to $1.22 per share, effective with April 1 dividend. Since 2000 we have increased our dividend by 40%. This last increase takes our payout ration us to 52% based on the midpoint of our 2007 earnings forecast, and meets our prior commitment to grow our dividends faster than the rate of growth for per share earnings from ongoing operations. We expect to continue this dividend growth into the future, resulting in a payout ratio that would remain above 50% for the next few years.

With that, I would like to turn the call over to Bill Spence, our Executive VP and Chief Operating Officer.

Thank you Paul, and good morning everyone. I would like to give you an update briefly on some of the activities we are undertaking, and have discussed with you in the past.

First, I am very happy to report that we continue to expect the construction of the scrubbers at our large eastern coal fired plants to be completed on-time and on-budget in 2008 and early 2009. We are continuing also with our plans to increase generation capacity in Pennsylvania and Montana by 370 megawatts through upgrades at our existing generating plants, and a planned new powerhouse at our Holtwood hydro facility.

During the recent planned outages at our Susquehanna Nuclear facility, as Jim mentioned, we completed extensive work in preparation for the extended power upgrade, that would increase the capacity of that facility by about 140 megawatts. These projects continue to progress on the schedule we laid out for you during the year end earnings call.

On the regulatory front, we are awaiting PUC action regarding PPL Electric Utilities Fuller transition proposal, and we anticipate that action to occur shortly. As a reminder, the ALJ assigned to review that proposal has recommended to the PUC, essentially all of the major aspects of our filing, and the consumer advocate supports that recommendation.

In March, PPL Electric Utilities also filed for 2.7% distribution rate increase, which equates to an increase of about $83.6 million, and an 11.5% return on equity to be effective in the beginning of 2008. The Appendix to today's presentation provides you some additional materials that I think you may find useful on that filing. I also wanted to mention several recent customer service awards that were presented to the PPL Electric Utilities and WPD, our U.K. Electric distribution affiliate, that I think demonstrate the continuing strong operational performance of our electric delivery businesses.

First, PPL Electric Utilities was recently awarded its 13th J.D. Power & Associates Award for Customer Satisfaction. That is more than any other electric utility in the Company. Just last week, WPD once again, was awarded the Government's Charter Mark Award for Outstanding Customer Service. WPD has held this award continuously since 1992, and no other electric delivery company in the U.K. has received this award.

As Jim discussed earlier, we are continuing with the processes of divesting our Latin American and domestic telecommunication businesses. Slide 14 I am sure looks very familiar to you by now, since the last time we met with you neither the elements of the margin growth nor the financial expectations have changed. Although we are now evaluating the potential impact of improved fundamentals, particularly given the results of PJM's recent capacity auction in April, which I will come back to later in my remarks.

A key element of the growth strategy is tied to the success of our energy marketing center, which has really been doing a great job at increasing the value of our generation portfolio, and extracting additional margins for the market place. Our energy marketing center is expected to deliver improved margins and growth in 2007, and continue that growth through 2010. Focusing on our ability to extract additional value from the marketing function, as Jim mentioned, we have already layered in significant numbers of sales contracts for 2007, '08 and '09, including associated fuel and supply hedges. These include load following contracts in Connecticut, New Jersey, Illinois, Delaware, and Maryland. All transactions that were secured through auction processes in those states.

Even with these successes in capturing additional near term margins, the focus of our energy marketing operation also continues to be very heavily weighed on the remarketing of our PJM-based generation that is now committed to our PLR with our Pennsylvania affiliate. The expiration of this POLR contract at the end of 2009, as mentioned earlier, provides PPL with the opportunity to remarket that power and capacity for 2010 at higher prices. As Jim noted, we have already made significant sales for 2010. But I do want to reiterate, that it is not our objective to sell all of our 2010 energy at this time. During the first quarter our energy marketing center took advantage of some higher core energy prices, and we are now hedged at approximately 50% of our base load output for 2010.

However, none of our 2010 capacity has been hedged thus far. The prices we have captured for those deals are consistent with the assumptions in our $3.50 forecast for 2010. We have also hedged more than 80% of our base load fuel requirements for 2010. We are focused on capturing margins, not just making forward sales commitments.

Based on our view of the market fundamentals, we are convinced that additional upside is not yet fully reflected in the current quarter prices for both capacity and power. So while we are certainly taking prudent steps to hedge our fuel and power through 2010 and beyond, we are being very careful not to give up potential upside that we believe the market has yet to reflect. We are trying to take a balanced approach and appropriately taking risk and volatility our of the 2010 forecast, while preserving some of that upside that we believe will accrue over time.

Let's take a closer look at the PJM market fundamentals that we see as one of the key drivers to earnings growth for 2010. PJM as you know, is forecasting a drop below the crucial 15% reserve margin level in 2008. A recent [Ciro] study also concluded that the reserve margins in the Mid-Atlantic would probably drop below the 15% by next year. We don't believe the current forward curves 2 to 3 years out, yet reflect the scarcity pricing, particularly because the supply and demand pressures on natural gas prices have eased somewhat in the past year, as a result of the relatively mild weather we have experienced, and the lack of volatility drivers we have seen in the past couple of years. We believe however, this is temporary operation in the market, so shifting to what we expect to see closer to home, recent PJM information estimates that the PJM region will likely be constrained by 2009 and 2010 planning periods.

The two lines on this slide show the current and projected PJM congestion areas for capacity. With the exception of the southeast portion of Pennsylvania the existing PJM constraints are to the east and to the south. By 2009 the projection for congestion includes nearly all PPL's Pennsylvania power plant locations.

This further supports our growing expectation that capacity prices should rise significantly by 2010. Based on what we are seeing in the marketplace, we believe the capacity prices for 2010 could be substantially higher than the [$70] per megawatt day, that we assumed in our 2010 forecast. The results from the recently completed PJM 2007 and '08 planning year RPM auction, cleared at prices significantly higher than PJM's initial projections. Eastern Mack cleared at $198 per megawatt day, compared to PJM market simulation results of $129. Southwest Mack which is also a constrained region cleared at $185 per megawatt day, compared to simulation results of $103. The rest of the pool, which includes the PJM regions that are not constrained cleared at $41, compared to $18. All PPL and PJM generation is currently in the rest of pool zone.

If the max zone, which is where PPL's generation is located becomes constrained, as depicted on the previous slide, it would receive a separate clearing price for capacity as the eastern Mack and southwest Mack currently do. And PPL could receive substantially higher capacity payments. To give you an idea of our sensitivity to capacity prices, a $1.00/megawatt day change, would translate to about $3 million per year in gross margins post-2009, assuming no change in energy prices.

The 2008 and '09 planning year auction will be held this July, and the '09/'10 auction would be taking place in October. As you can see on this slide, most of our generation capacity is committed for 2009, largely due to our PPL POLR load, but for 2010 we have sold none of our capacity. So I think you can see from the last few slides I reviewed with you, why we are so optimistic about the future of PPL. With the market fundamentals taking shape as we expected them to, we are confident in our ability to meet our 2010 forecast, and we see very real possibilities for significant upside to that forecast.

With that, let me turn the call back to Jim Miller for Q&A.

Okay, thanks Bill. Operator, we are ready for the Q&A.

Thank you. (OPERATOR INSTRUCTIONS) We will go first to Greg Gordon at Citigroup.

Good morning gentlemen. Just circling back on that last sort of peace of math that you laid out for us. You said that you had presumed in your initial $3.50 guidance, that capacity would be valued at approximately $70 a Megawatt day, is that right? And every dollar change that is openly realized would be $3 million in revenue?

Yes, that is right. Go ahead.

Because just given where current pricing is unless we seem extremely steep backwardation, you could be looking at $125 per megawatt day, pulling a number out of thin air. An incremental $150 million in gross margin above the $2.7 billion that you laid out in your, 2.748 billion you have laid out in your 2010 slide on page 14. I am using basic arithmetic here. Does that seem reasonable?

Yes assuming your math is right, or maybe to make it simpler, if prices were $170 a megawatt day, times that $3 you would be looking at $300 million of incremental, yes.

What else just so we don't get too irrationally exuberant here has potentially changed. I think all of us that have watched these markets know that we have seen higher energy prices, whether that's higher heat rates or carbon starting to get priced in, and/or we have also seen higher capacity prices. What is that you could talk about that is causing some negative adjustment, if anything, in in your pro formas, sort of relative to that $3.50 base, just so we understand what all the positives and negatives might be, and don't just focus on the positives?

Well, there are certainly I guess any number of things that could drive things in the other direction. We always have to consider, I think, an unlikely but worst case of any type political intervention, or from a PJM where we get into price caps, and things of that nature. Which I think is an extremely low probability. You know, fuel could really backwardate or move down, but just we don't see that happening with the Iranian prices, and the coal prices, and transportation prices, all of which, if you look at for instance, the railroads have increased the transportation costs.

But as you look at their earnings releases, although sensitively improved, but I don't see the railroad's backing off on their demands for higher and higher freight rates, as you move down the road. It is sort of difficult to outline things that, you know, fuel doesn't appear to be moving lower. I don't anticipate that we will enter periods of cost caps. I just think the fundamentals, as we discussed, are driving prices appropriately to where the costs are.

So we should be cognizant that we are seeing rising fuel and transportation rates. Most of us would look at the forward curve, and the current transportation contracts as a reasonable bogie, is that fair?

This is Paul Farr. We are entering into a contract with a much longer period than a forward strip would represent. I think we get a little bit more and beneficial pricing from that. We are actually seeing, versus when we set the $3.50 forecast in motion, slightly less in terms of coal cost increases. I think what Jim was referring to is what could happen, versus maybe in what is represented in the forwards of what we are contracting at.

I just don't see when you look at the fundamentals, there is just nothing that jumps at us out to say that prices are likely to fall. You have to look at the fundamentals. That is all you have to look at.

Thank you, gentlemen.

Next to Daniele Seitz at Dahlman Rose.

Could you remind me of what 1% of return on equity is equivalent to in your rate case increase?

$16 million, Daniele.

Great. Thank you. Also the Latin American proceeds, did you already mention where do you anticipate it to go? It it too small?

I wouldn't say that it is too small. I think we are very early into the auction process for those assets. We clearly have an idea based upon market comps for other asset transactions, as well as trading values for traditional fee utilities in the country, especially Chile, but we haven't that is why we haven't really altered the cash flow forecast to reflect those after-tax sale proceeds. It is just a little bit too early.

But you still anticipate to be done by the end of the year?

We anticipate to be done by the end of the year, and we anticipate that at the end of the day factoring in all charges and all gains, that we will net end up recording a gain from the divestiture of Latin America.

Great. In terms of the now the new numbers that you have for 2010, can you assume an approximate increase for the customer, on customer rates at this time?

Yes, Daniele.

Is it too early to say?

Looking at the current forwards and we just laid that out in the 10-Q to be filed this morning, it is approximately 30%.

Great. Thank you so much. I appreciate it.

You are welcome.

Paul Patterson at Glenrock Associates.

Good morning guys. A couple things, first to make sure I understand the 2008 projections. It looks like you guys are indicating that you would have 5% growth off of 2007 midpoint excluding synfuel. Is that right?

That is correct.

When we look at 2010 you mentioned that you don't think the rate freeze is likely, and what have you. I hear you on that. But I am wondering is there any discussion about having a rate stability plan to sort of mitigate the potential for political?

Not so much, Paul, at least we haven't heard anything characterized at this point as rate stability. The Governor has put forth an Energy Independence plan with a number of different components. One of the components is a three year phase-in capability, which would be an opt-in by the customer. The customer could choose to opt-in to the three year phase-in of the rate increase that comes in 2010.

You are not looking at anything like Allegheny had set up, or anything like that?

No, not at this point, Paul, no.

Then when you look at reserve margins. You mentioned 2009, and you expect them to go below 15%, correct?

Yes.

Where do you expect them to be in 2010 or 2012? Where do you see them stabilizing out?

We estimate that they would be around the 10% mark, in that kind of range. In terms of where they would stabilize longer term, I think it is obviously going to be reflective of what people's expectations are, in terms of the economics of new generation and how much actually gets built.

I guess with the issues surrounding new coal fired generation and the long lead times associated with nuclear in our region, one could only expect that gas may have to fill the gap. I think it is a question of how many people jump out and build new gas fired generations to meet that projected gap in supply margins.

Where do you think the safety or the reliability range is? In what is PJM's goal on this? Historically that has been a pretty low reserve margin from a reliability perspective? What happens at that level, is there a problem with that? How low do you think it can go?

Because it is a reserve margin, and it is there for contingency purposes, it really depends on things very much like weather. If you get extreme weather. If you don't get extreme weather, and the units perform as historically they have, then we should be fine. While I think PJM is very concerned about this, I think A) they have contingency plans and B) an expectation that reserve will in fact be there.

So 10% you think is pretty workable and for a sustained period of time, and we should start seeing that sort of in the post-2010 period, is that correct?

I don't want to speak for PJM. It is more of a question for them. I think it is workable. I think what will have to happen in that case is you are going to get a lot more price spikes during those periods of scarcity, than we have seen in the last few years for certain.

Thank you.

Sure.

Our next question from [Brian Olsen], Luminous.

Good morning guys. Two questions. I think we have seen a bit of increase in off-peak pricing in PJM lately. I was wondering if you could comment on how you expect that will affect your results this year, and if you have any thoughts on what is driving that? Second, I was wondering if you would comment on the hedging policy and the impact the weaker dollar would have on U.K. WPD results.

This is Bill Spence. I will address your first question then turn it to Paul for the hedging question. In terms of off-peak prices, yes, we have seen compared to actuals last year off-peak prices at PJM East were about $37. The forwards would indicate they are up about $10, to about $47 off-peak wise.

Some of that is reflective of more of the mid [mera] generation setting on the shoulder hours during the peak period, some of the pricing. That is probably one aspect.

I think another is as older coal contracts for base load generation have been rolling off and SO2 prices and NOCs have been getting reflected in prices, et cetera, I think that is another driver to the off-peak price. I would say those are probably the two key drivers.

Is that something that will affect your guidance for the year going forward? You have more of your wholesale generation in the off-peak, is that something we should expect to have a positive impact on the Company?

I don't think it will have a material impact at this point. Because of the fact that we are very highly hedged for this year, and had anticipated some pick up in off-peak pricing, I don't know that it would have a material impact, but I haven't looked specifically.

What is your hedging policy has been for WPD on the dollar versus the pound?

It has historically been for both Chile and the U.K., when we enter the year we typically have about 75% of that year's earnings hedged. From the perspective of upside, we are seeing some we saw a bit in the first quarter. We would expect that to continue. To the extent that the forwards would hold, it would really benefit future periods rather than the current year.

Next is Alex Kania at Merrill Lynch.

Thinking about the proceeds from the Latin American sales, and your comments early on the call, it sounds like you have been talking about the potential for new generation at some of your brownfield sites, that it seems like maybe right now, asset acquisitions and maybe even securities repurchases might end up being more profitable right now?

Well, I think, you know, we constantly look at as we have always been doing and even most recently, looking at picking up some additional assets that have been on the market. I think we must continue to do that, but we are not going to seek scale for the sake of scale. If we can't see clear shareholder value we will not going to invest in additional assets at this time.

That being said, I think it is our responsibility to deploy that capital. If we don't see the asset area or other areas internal to spend it. We will move it to share repurchase.

I have a quick follow up question on the longer term outlook. It seems from the comments that were made that it seems like the current markets are supportive of your long-term 3.50 outlook, but you are saying that you do see some fundamentals moving in your favor that represent some upside. Or is your 3.50 still premised a little bit on what your fundamental analysis work has done that might not necessarily be suggested in the current price--?

I think that, you know, as I said earlier, our 3.50 is based on what we see as we look forward. We are admittedly seeing some very, very positive issues as far as 2010 and beyond. I think that is my comment really was that being said, if and when we are comfortable enough that what we are seeing in the out years continues to move in that direction, we would adjust accordingly.

Great. Thank you. Real simple last question. If I looked t0 2008 the Latin American asset sales, that 5% growth, so that '07 to '08 sort of assumes that you are continuing to earn from them, from those assets right now, is that how you think about it?

We are doing everything we can to try to replace those earnings through again either asset acquisitions or share repurchase, or what is necessary to back. We don't see any need to revise that estimate that we had and that we had made prior to the decision to divest.

Next is [Utak Sang] at Zimmer Lucas Partners.

Good morning. I have a question about potential transmission build out opportunities. As PJM indicated if any of PPL lines would be a preferred solution to relieve congestion?

There are a number of proposals out there on various routes either south of us or through our territory. And PJM continues to go through their 15 year planning analysis. There are still a number of PPL related projects in the current plan, but they have not been finalized or approved yet. We are optimistic that there will be at least a few that come through our territory. But the very large projects that would have probably the most impact on us have not yet been decided yet.

One comment. If those projects are decided, the current methodology today is as it comes through your respected, your wires business, would pick up that portion of the construction, so there would be opportunity, as Bill says, if and when those lines are approved.

I think you have talked about this before in a prior presentation. Can you remind me of the cost estimate for the open line is? How much that cost would PPL--?

We missed that? What was the question.

What is the total cost for the Susquehanna line? How much of that cost would PPL be responsible for?

I don't have those figures handy.

We will have to get back to you on those. We just don't have those handy.

One last question. I would like to get more color on the telecom sale. Can you give us a general indication of how much earnings telecom is accountable for, and if there is any value that you could give us to help us estimate what the proceeds might be?

Given that we are in the divestiture process we would probably be better served to hold back on that.

We do have that disclosed in the 10-Q the asset values are written down to reflect impairment is a little less than $50 million. The asset values net of the liabilities. From an earnings contribution perspective, there was more future growth than there was any real current earnings from that investment. Nil from the near term perspective in terms of earnings contribution.

Thank you very much.

Next we will go to Shalini Mahajan, UBS.

Thank you. I had a question about the capacity prices. Given the strong capacity, at the capacity auction, in your view when can we expect a significant supply response?

Bill, you might comment. It is hard to predict.

I am sorry, could you repeat that question? I didn't catch that.

When can we expect a significant supply response given the April capacity auctions were so strong, and it seems everyone is expecting similar kind of developments going forward?

I think having gone through one auction at this point clearly if others view the market the way we do, we will look at multiple data points before a decision on a significant new build comes about. Given everyone I think sees the same difficulties as we do with new base load generation that I commented on earlier.

I think, you know, as we are, others are looking at other potential sights and opportunities in the marketplace, but I really think that supply response will be a couple years out yet, and clearly until the next few auctions, probably through January of next year, until the results of that are known I wouldn't expect anything significant.

I wonder if you have had any discussion with your regulators in terms of what their reactions to these auctions? Because this is suggesting a further jump in customer growth?

Well, I think we have not had specific discussions about fundamentals and where prices can go. Our regulators, and in fact, the Legislature as I mentioned clearly understand that prices across the country are now reflecting the real costs of power. Fuel is up.

It is pretty well-known that power prices are up, and are going to stay up. That being said, I think in Pennsylvania thus far, there has been a real realization and recognition that the State deregulated. That is the State we are in, and we will continue to stay deregulated. I think that is why the Governor has proposed for those that are interested an opt-in program to phase-in the rate increases.

Then you mentioned transportation costs. How hedged are you on your transportation needs for the next few years?

I think we are pretty well hedged. Probably as you know, we own a lot of our own railcars. That takes one element out of it. We entered into a long-term contract earlier with [Consal]. We have long-term contracts on the rail side as well, although some of those do have escalators in them. We have a pretty good handle certainly in the near team on our rail costs, and I think even for the longer term we are in fairly good shape.

With our fuel and transportation costs across-the-board, we are very well hedged out into the future for all of those that are reflected in our numbers.

Then just shifting gears to Montana. Could you update us on what is the status of the deregulation bill there?

Sure. It is currently this is House Bill 25 you are referring to, which is the Northwestern Reregulation Bill, as it is called. My understanding is that it did pass, but it has either not been moved to the Governor's desk, at which time he would have 10 days to either sign or veto it. I believe it has not been passed on to him at this point.

The Legislative session ended last Friday without a budget being approved. Things are still in a state of a stalemate at the moment. A Special Session is probably likely in the coming weeks, and I don't anticipate much will be done on this bill until that point as well.

What is the process if the Governor vetoes it?

I am not sure what their process would be, to be honest.

Okay. Great. Thank you.

Next to Ten Heyn at [Catapult] Partners.

I had a quick question just to clarify on your hedging update on 2010, are you about 50% hedged in PJM?

Yes, that's correct.

You took advantage of the stronger pricing in Q1. Can you give us a rule of thumb about how much you were hedged before 2001, how much was hedged, that more 2006 prices reflective of 2006, as opposed to Q1 2007?

Coming into the year I think we had not given guidance for 2010 until this last first quarter. I believe we mentioned we were slightly over 30% hedged at that point. We have added and layered in additional hedges since the first quarter. I think we said at that time that we were projecting somewhere between 30 and 50% hedged by year end, depending on where we saw forward prices and if those were to get up to levels consistent with our 2010 forecast, we might layer in additional contracts, and that actually happened towards the close of the first quarter.

The pricing allowed you to do that in the first quarter and you don't really anticipate doing a lot more in the back half of the year?

We are kind of where we expected to be. We are keeping the powder dry so to speak, because we do feel so strongly that the fundamentals are improving from a supply and demand perspective. We would like to continue to watch that and get the data points that I mentioned earlier with the RPM capacity prices. We would also likely have, at least in our territory, one POLR auction hopefully by the end of this year as another data point. We will see where all of that shakes out, and revisit what we want to do to move forward.

I think in your prepared comments you didn't think that the forward curve reflected the supply and demand tightening, was that just on your view of capacity forward curves, or energy forward curves as well?

Really both. There is really not a liquid capacity market out there for 2010 of any size or significance. Most of it would be reflective of the energy prices, which are typically driven particularly in PJME, so for gas curves, and I think in a large part because it is somewhat difficult to predict scarcity pricing in those periodic, in the super-peak type pricing, where you may get 200 or $300 per Megawatt hours. They don't tend to get reflected very well in the forwards on the power side.

In spite of that you still felt in regards to your 3.50 forecast that it was appropriate to lock in that extra incremental 20%, even though that POLR market may not necessarily be fully reflective of fundamentals?

As I mentioned earlier, we are really trying to balance the predictability of achieving the $3.50, and prudently covering that in with preserving some of the upside. I think we feel pretty good about where we are right at the moment.

Thank you. (OPERATOR INSTRUCTIONS) Next to Tom O'Neill at [Hybrid]

Just had a quick question for you on the energy marketing center. We are starting to hear a bit more about it from you. I am curious if you could provide for us the absolute level of profitability you expect from that business in 2007 and say 2010? Just scope it in terms of people. I think I understand what they are doing, but I guess curious how you see it now in the profitability expectations, and how you expect it to grow.

Let me give you a sense of what our objectives are with the operation. First and foremost is to optimize the value of the existing assets and make sure we are extracting everything we can from those assets. Second is to really to dynamically hedge our future output, and the third objective is to participate in the regional [monay] markets where we already have assets.

Given that, we had incrementally just when you look at the marketing and trading activities by themselves, last year we estimate about $70 million was accrued from that operation. Looking to 2010, you are looking at maybe around the $100 million mark for that operation. While it is growth, you know, in the grand scheme of our gross margin, it is not that big.

As you will see in the 10-Q that we filed this morning, if you look at the load file, excluding the POLR commitment if you look at the regional load following type transactions that we have secured supply in, or commitments to, is around 1,300 to 1,400 megawatts.

An unrelated question. To your comment about the looking at assets opportunistically, would you say that extends to corporate M&A, or is this just the more than one-off type of assets that are available in the market?

It extend across the whole realm of including the corporate M&A. That is an area that without question deserves a lot of care and caution, and deliberation. There are just numerous examples of acquisitions that have not brought long-term shareholder value, and we respect that. I guess the easiest answers that we look at every opportunity, including those that would be something important for shareholder growth. I guess the realty is that PPL is not in a position that we are compelled to rush out and do a deal that is not, clearly, clearly going to be a winner, and a benefit to our shareholders.

Thank you.

That does concludes the question and answer session I will turn the conference over to management for any closing remarks.

Thank you for being on the call. We feel pretty good about where we are, and where we are positioned for the future. We look forward to talking to all of you again. Thank you!

That does conclude today's conference. Thank you for your participation.