賓州電力 (PPL) 2007 Q3 法說會逐字稿

Good day everyone.

Welcome to the PPL Corporation's third quarter earnings release conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Investor Relations Director, Mr.

Tim Paukovits.

Please go ahead, sir.

Thank you.

Good morning.

Thank you for joining the PPL conference call and third quarter 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 Provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

Thanks, Tim, good morning, everyone.

We'll take questions, as always, on the call, and first we'll really go over a general business update, as well as some observations on our third quarter performance and some new revised forecasts we're announcing today.

Also Paul Farr, our Chief Financial Officer, and Bill Spence, Chief Operating Officer are with me today and they'll field questions as well.

Today we're reporting some very strong third quarter earnings of $0.84 per share, and that's nearly 50% higher than our reported earnings from the third quarter a year ago.

This really strong performance was driven entirely by growth in our unregulated supply and also our international segments.

While our domestic utility was able to achieve a comparable year over year -- achieve comparable year-over-year results.

The improvement in our supply business resulted from higher realized margins and increased profitable in our energy marketing operations.

We have also benefited from two special items in the quarter.

One was the effect of a decrease in the income tax rate in the United Kingdom and the recognition of revenue from a contract settlement the [RMR] settlement, relating to our [earned] regulated power plant in Connecticut.

Our earnings per share from ongoing operations also showed substantial improvement.

A 24% increase over the third quarter of last year.

Through the first nine months of the year, our reported earnings are 26% higher than they were for the same period a year ago.

And our earnings from ongoing operations are 12% higher than a year ago.

So the year-to-date results put us on target to achieve 2007 earnings from ongoing operations of 250 to 260 per share, and that's a further increase from the higher forecast we had in August.

Today, we also initiated our 2008 earnings forecast, $2.35 to $2.45 per share.

And with that, it's really important to note that this forecast indicates that in 2008 we believe we'll be able to partially offset the following significant contributors to 2007 earnings.

Earnings from the expiration of syn fuel tax credits, certain tax benefits that were -- that recognized in the current year, and the loss of earnings of our Latin America operations.

Net of the use of after-tax proceeds from their sale.

Our outstanding results for the first nine months of 2007 and a solid forecast for 2008 really do support the significant benefits of our expanded marketing and trading operations, and combining that with the improved performance this year at our power plant and the consistent performance of our electric delivery companies.

So we'll continue to execute the strategy that we have talked about established in our three core businesses, generation, marketing and delivery of electricity.

Now Paul and Bill will provide you some more details on the financial and operational performance for the third quarter and through the first nine months of the year.

But let's turn for a moment to the subject that I know we have talked about in the past, and that's our revised 2010 forecast.

We're now projecting earnings per share of $4 to $4.60 in 2010.

Let me just go over a few of the key assumptions included in the forecast.

And as I mentioned, there will be more details on this in Paul's comments.

One, continued strength in forward market prices through 2010 would be the first base assumption.

Also continued strong performance of our generation fleet and power uprates at our Susquehanna nuclear plant and strong 2010 capacity prices for PGM specifically in the Mac and the APS zone.

I'm aware that there has been significant speculation regarding the revised 2010 forecast, and also we're aware that there is a wide range of earnings estimates out there.

So I would just like to point out that this new forecast represents a view of the markets that we see today and it's balanced with the risks and rewards of taking positions in those markets.

So based on the fundamentals, the market fundamentals, we certainly believe that there's possible upside in the earnings for 2010, and we'll continue to review the forecast and provide updates as events or market conditions change and as warranted.

Before we leave the subject, I do want to assure all of you that we don't look at 2010 as an end point for our growth at PPL.

You know, it's an important milestone, and I think as we look forward we're still going to ensure that our tactical plans are in place to deliver on 2010, but we're also aggressively pursuing opportunities build on the foundation that we put in place.

Marketing organization continue to expand.

We're finalizing the plans right now to enter the commercial and industrial retail electricity and natural gas markets.

We're also very aggressively pursuing possible acquisition and construction and new generating assets.

So an important element of the asset expansion obviously is the evaluation of the construction of one or two additional units near our Susquehanna nuclear plant.

We're optimistic that we'll be adding generation assets and that our expanding marketing effort will continue to grow value for our share owners.

We also continue to work with our policy makers in Pennsylvania regarding the state energy policy, and as you know energy issues are being discussed right now during the special session, and quite frankly in regular session at the Pennsylvania Legislator.

PPL is meeting with both the Legislators and the administration officials.

We're providing constructive input to the process along with other energy companies in Pennsylvania.

Much of the current discussion involves issues like renewable energy, demand-site management, energy efficiency, conservation, and how the delivery companies should acquire supply for customers who don't choose to -- who don't choose to shop for an alternate supplier.

Proposals will being crafted by members of both parties, and we're actively engaged in those discussions on a real time basis.

An important element of all of this is development of plans to moderate price increases when Pennsylvania generation rate caps expire.

For example, current legislative efforts include a phase-in of increases following the expiration of rate caps.

In addition to these discussions, we're proactively pursuing options for PPL electric utilities, customers to manage their price increases when the caps come off.

Two days ago we announced that by the end of November we plan to ask the Pennsylvania PUC to approve a five-year phase-in plan in which customers could limit annual price increases to approximately 7% for the first two years of the plan, and 6% in 2010, '11, and '12.

These numbers are preliminary and assume that the price is secured for the 2010 supplies in the first two request for proposals completed this year are the same for the remaining RFPs.

We'll work and pledge to continue to support the efforts that will improve the supply, and reliability in the state.

And also look for policies that promote economic development and environmental improvement in the (inaudible).

I'm hopeful any legislation that is passed will further the development of regional competitive markets, and while it encourage the investment in renewable energy and other generating facilities in the state.

And provide customers with additional choices in their energy supplier.

We'll keep you posted on these events as they unfold.

And I guess I would say in closing, we're really working hard to continue to grow our core business here at PPL.

Extending our expansion from a regional utility in to a much larger player in the competitive wholesale business.

While we're doing that, we're still not going to change our intense focus on execution and being able to deliver what we tell you we're promising.

So I -- I think I see a solid future out there.

We'll proceed and give you some more detailed information from Paul Farr and Bill Spence, and I look forward to the Q&A session.

Hopefully we'll be able to answer any and all of your questions.

With that I'm going to turn it over to Paul Farr for some additional financial details.

Paul?

Thanks, Jim, and good morning, everyone.

Before reviewing the third quarter key earnings factors, I'll remind everyone that earnings from ongoing operations include the operating results of the Latin America and GAAP delivery businesses but excludes special items related to their divestiture.

As you can see from the chart on Slide 6, our strong third quarter results compared to a year ago are entirely driven by the performance of our unregulated supply business segment.

Turning to Slide 7, I'll review the key earnings drivers in the supply segment for the third quarter.

The supply segment earned $0.50 per share in the third quarter, a 47% increase over last year.

This increase was primarily driven by higher energy margins in both the East and the West.

Higher energy margins in the East were the result of higher realized margins, a new and existing full requirement supply contract, higher base load generation and lower coal costs and unrealized gains on trading activities.

Higher energy margins in the West were primarily due to higher wholesale prices.

In addition, the supply that have been reported slightly higher syn fuel earnings and lower income taxes.

Turning to Slide 8, our Pennsylvania delivery business segment earned $0.09 per share in the third quarter of '07, which was flat compared to earnings a year ago.

Modestly lower O&M was offset by (inaudible) higher income taxes.

Moving to Slide 9, our international delivery segment earned $0.13 per share in the third quarter, a $0.02 decline from last year.

The decrease was primarily a result of lower earnings in our Latin America delivery businesses, on beneficial adjustments to 2006 earnings for depreciation and deferred taxes, and the loss of earnings from Bolivia and El Salvador due to the sale of those investments, as well as higher pension expense in the UK.

These factors were partially offset by higher delivery revenue in the UK, due to a more favorable customer mix and the recovery of prior year allowed revenues and lower sales volumes in 2006.

And the positive effect of currency exchange rates in the UK.

Moving to Slide 10, as Jim mentioned, we have increased our 2007 forecast of earnings from ongoing operations.

Our new range is $2.50 to $2.60 per share, a $0.10 increase from our prior range of $2.40 to $2.50 per share.

The $2.55 per share midpoint of the range represents a 13.3% increase over our 2006 earnings from ongoing operations of $2.25 per share.

Jim also mentioned our 2008 earnings forecast of $2.35 to $2.45 per share.

While the $2.40 per share midpoint on the forecast range is lower than the midpoint of the range of our expected 2007 earnings from ongoing operations, we expect to partially overcome the loss of $0.28 of significant earnings drivers for '07.

These include $0.15 from syn fuel-related items, the $0.08 tax benefit recorded in Q2 and the loss of Latin America earnings net of the benefit to earnings from the use of after-tax proceeds.

I'll explain the major components of our 2008 forecast in a moment, but before I do that, let's move to Slide 11, which highlights the principal drivers of our 2007 forecast of earnings from ongoing operations.

As I mentioned earlier, we expect that the unregulated supply segment will lead PPL's earnings growth this year.

We expect 55% of our 2007 earnings from ongoing operations to come from the supply segment, 29% from the international delivery segment, and just 16% from the Pennsylvania delivery segment.

As shown on the earnings block, higher energy margins are expected to contribute $0.22 to 2007 earnings growth.

We indicated earlier this year, that substantially all of the growth in energy margins will be realized in the second half of the year.

This evident in our strong Q3 results.

The margin growth is being driven by the replacement of expiring contracts with higher margin wholesale energy contracts as well as new full requirements contracts.

In addition to improved in equal capacity markets 2007 earnings margins are also benefiting from a 1.3% increase in sales prices under the POLR contract and higher expected generation output in 2007 as a result of improved (inaudible) availability.

Other positive drivers of '07 earnings include the U.S.

income tax benefit of $0.08 per share related to our UK business that was booked in the second quarter, a foreign exchange benefit of $0.06 per share which is pretty self explanatory and higher expected Pennsylvania delivery margins for the year, the combined result of favorable weather that benefited the first half of '07 and low drove in our residential and commercial customer classes.

Partially offsetting these positive earnings drivers are significantly lower hydro liquidation proceeds in '07 versus '06, higher O&M in our supply and international delivery segments, as a result of higher outage costs at our nuclear and coal-fired power plants, and higher nuclear fuel disposal costs, as well as higher pension extense at WPD.

Moving to Slide 12, we expect the unregulated supply business segment to lead PPL's earnings growth in 2008 as it did in 2007.

We expect 57% of our 2008 earnings to come from the supply segment, 24% from the international delivery segment, and 19% from the Pennsylvania delivery segment.

The major drivers of our 2008 earnings forecast are higher energy margins of $0.07 per share primarily due to higher margin wholesale energy contracts and higher base flow generation output, incorporated into the net margin improvement is $0.04 of higher fuel costs to replace the syn fuel purchased from third-party producers in our Eastern fleet.

A $0.06 per share increase driven by higher revenues as a result of PTL [Ex] Utilities proposed settlement of it's 2007 distribution rate filings with new rates to be effective January 1, 2008.

These positive earnings drivers will be partially offset by the $0.11 share loss in earnings from syn fuel, the $0.08 per share international tax benefit recorded at the beginning of Q2, higher depreciation expense primarily in the supply segment due to some of the scrubbers coming in-line and additional plants and services at Susquehanna And finally, there is the net impact of our asset divestitures which includes the loss of earning from our Latin America businesses offset by lower financing costs and the impact of the share buyback.

Turning to Slide 13, here we outline a high level summary of the changes to our 2010 forecast from the 350 announced in December 2005?

As Jim indicated the midpoint of our 2010 forecast range is $4.30 per share.

The increase is the earnings forecast is driven entirely by our unregulated supply business segment which is now expected to provide approximately 77% of our 2010 earnings.

We expect the contribution of (inaudible) Pennsylvania delivery segments to be 14% and 9% respectively.

Obviously, the most significant change to the forecast is the increase in energy margins primarily driven by higher capacity revenue, higher energy prices, and additional margin growth from the continued expansion of marketing and trading activities.

These positive margin drivers are expected to be partially offset by higher fuel costs.

In addition to the increase in energy margins, we expect higher earnings at WPD, higher O&M in our supply in Pennsylvania delivery businesses, and a net loss of $0.06 per share as a result of the divestiture of our Latin America and PPL gas utilities businesses.

Moving on the Slide 14, our forecast of free cash flow before dividends have been updated to reflect the sale of our Latin America and telecom operations but does not yet reflect any after-tax sales proceeds from the GAAP and propane delivery business divestitures.

Additionally, the CapEx numbers have been updated to reflect the elimination of CapEx spend for the Latin America delivery and telecom businesses and includes additional CapEx for PPL electric utilities, for the transmission line that's been approved by PGM as part of their [ar cap] process.

The revised CapEx spend also includes amounts necessary for preparation of the COLA for our third [unit] at Susquehanna.

We continue to expect that we will fund discovered projects and other capital expenditures with cash from operations and the issuance of long-term debt and hybrid securities.

We have no plan to issue any common stock to fund our current capital expenditure program.

In fact we have almost completed our previously announced program to repurchase up to $750 million of common stock.

To date we have repurchased approximately 14.9 million shares for $712 million.

Our business plan continues to reflect $700 million in additional common stock repurchases beginning in early 2009, and we continue to view these stock buybacks as a place holder for other growth opportunities that's have the opportunity to add even greater shareholder value.

We remain focused on the dividend growth as an important component of growing total shareholder returns.

We increased our annualized dividend rate by 11% effective with the April 1, 2007 dividend and will be assessing the dividend level on our normal schedule in early 2008.

We expect to continue our recent strong -- recent trend of strong dividend increases in both 2008 and 2009.

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

Bill?

Thanks, Paul, and good morning, everyone.

First I would like to give you a brief update on some of the major activities from our delivery segment since our second quarter call.

I'm very happy to report that PPL Electric Utilities has reached a settlement agreement on its distribution rate increase request that was filed in March of this year.

We reached agreement on a $55 million revenue increase and rate design issues have also been fully settled.

You can find a summary of the settlement in the appendix to today's presentation.

On October 19th the administrative law judge recommended approval of that settlement, and PUC approval is still required, we expect that process to be completed by December with rates to be effective January 1st, 2008.

Several key programs that will address customer impacts resulting from expiration of supply rate caps were included in this filing and in the settlement we reached.

PPL Electric Utilities completed it second solicitation for [1/6] of its expected (inaudible) supply requirements for 2010.

I'll discuss the details of that in a moment.

As Jim discussed earlier, we continued with our various divestitures of non-core businesses.

Earlier this year you recall that we announced our intention to sell our natural gas and propane businesses.

Turning to Slide 16, earlier this month, PPL Electric Utilities concluded its second of 6 solicitations for generation supply for 2010 for those customers who choose not to shop for an alternative supplier.

PPL Electric Utilities now has 1/3 of its supply under contract with numerous suppliers for 2010.

On October 4th the Pennsylvania PUC approved this second solicitation.

But the average prices achieved in the first two solicitations were the same, the remaining four purchases total residential customer's bills would increase by about 34.5% over 2009 levels.

Actual 2010 prices of course will not be known until all six supply purchases have been completed and the prices are averaged together.

The next solicitation will be conducted in 2008 with bids due March 24th and PUC approval expected on March 27th.

Turning to Slide 17, PPL Electric Utilities is committed to smoothly completing the transition for generation rate cap for 2010 in ways that we believe will help our customers and provide for reliable supply well into the future.

PPL EU is developing and also implementing several strategies to help customers deal with rising wholesale electricity costs.

These strategies include energy efficiency and demand-side management programs, rebate programs for compact florescent light bulbs, and programmable thermostats, as an example, time of use pilot programs, as well as customer education on items such as conservation, available pack incentives and rate mitigation options.

As part of our education program, we also have launched a web site where customers can access a comprehensive energy analyzer in order to determine how, where, and when they use energy, and how to use it more efficiently.

Customer understanding of how their energy actions and behaviors impact their energy bill will help them make better decisions, and we believe that significant savings are achievable.

Turning to Slide 18, as many of you know, earlier this week, and as Jim mentioned, PPL Electric Utilities announced that weed will be asking the PA PUC to approve a five-year phase-in that will allow commercial customers to smooth the impact of price increases in 2010.

Under that plan customers would have the option of smoothing expected increases to 2010 bills by making additional payments on their electric bill beginning in mid-2008, and continuing through the end of 2009.

These additional payments, plus interest, would be applied to participating customer bills in 2010, 2011, and '12, smoothing the impact of the rate cap expiration.

PPL Electric Utilities will not profit from this program.

And at prices paid for the first 1/3 of 2010 generates and supply were consistent through the remainder of the procurement period, an average residential customer using 1,000 kilowatt hours a month, could limit the annual price increases to about 7% in 2008 and 2009, and to about 6% from 2010 through 2012.

The chart on Slide 18 illustrates the effect on the average residential customer's electricity cost.

Customers, of course, would have an opportunity to opt out of this program rather than spreading the increase over several years if they prefer.

Turning to Slide 19.

I want to give you an update on our supply segment.

First, we continue to remain confident that the scrubber construction in our large eastern coal fired plants will be completed on-time and on-budget in early 2008 and early 2009.

The construction at Montour is now approximately 85% complete, and we're making great progress also at Burnner Island.

Second, we continue to execute on our plans to increase generation capacity in Pennsylvania and Montana by 355 megawatts through upgrades at our existing plants.

During the recently completed plant outage at our Susquehanna nuclear facility, we completed extensive work in prep for the extended power uprate that will increase the capacity of that facility by about 140 megawatts.

In June we announced that we had taken the preliminary steps necessary to preserve the option to build a third unit at Susquehanna.

The first step, of course, would be to apply for combined construction and operating license from the NRC.

We're also in the process of identifying potential development sites for combined cycle natural gas projects throughout PGM in the northeast.

With the projected tightening of reserve margins, additional natural gas generation will undoubtedly be needed and need to be constructed.

And finally, as Jim mentioned, we have essentially completed the divestiture of our Latin America assets, and we expect to close on the sale of our Chilean properties next week.

Turning to slide 20.

As you know, PGM recently completed the RPM auction for capacity for the 2009, 2010 planning year, and as expected, the MAAC plus APS zones became a constrained zone with a higher planned price for capacity.

Al PPL's PGM generation is in the MAAC plus APS zones except for our Peking plant at University Park in Illinois.

That plant remains in the rest of the pool zone which cleared a bit lower as the constraint moved west.

The MAAC plus APS zone cleared at $191.32 and it's important to note that this is the price of capacity for the first five months of 2010.

The 2010, '11 auction will take place in January, with the results announced February 1st, 2008, and that auction will cover the remaining months of 2010.

We have assumed in our new 2010 earnings forecast, which I'll review in a moment, that the auction results for the 10/11 planning year will clear at a price of $191.

As you can also see from this chart, we have 46% of our capacity hedged for 2010.

So the market fundamentals continue to take shape as we expected them to.

Turning to Slide 21.

Let me take few minutes to walk you through our expected changes in margins for 2008 -- 7 rather, to 2008.

As you can see on Slide 21, margin improvements will be driven by improved power value, which includes power price and spark spread changes across our entire fleet from Montana to Maine, as well as the value-added from asset management by EnergyPlus.

along with the results from other marketing and trading activities.

Higher nuclear output resulting from the first phase of the upgrade project and the completion of the final rechanneling outage in 2007 also is a positive adder.

Higher coal generation, resulting primarily from fewer plant outages, again a positive, and higher east and west hydro output.

These increases will be offset by higher fuel costs, resulting primarily from higher coal expenses due to both increased prices for coal and coal transportation, as well as higher cost due to the expiration of syn fuel tax credits.

We currently burn syn fuel at some of our eastern coal facilities and beginning in 2008, we have to replace that syn fuel with traditional coal sources.

This alone results in a $25 million decline in margins.

Also contributing to higher fuel cost is the expected increase in nuclear fuel, margin growth also will be partially offset by the loss of generation from our Martin's Creek coal units 1 and 2 which we shutdown in September of this year.

Now turning to Slide 22, I'll take you through the margin growth from 2008 to 2010, which is expected to be driven by, again, improved power value, including higher power prices both for energy and capacity, improved spark spreads, portfolio management and growth in our marketing and trading activities, higher nuclear generation from the completion of the extended power upgrades at Susquehanna.

These increases will be partially offset by increased environmental compliance costs, resulting from mercury abatement and annual NOx compliance.

Higher fuel cost, including coal and nuclear fuel expenses.

Let me next turn to Slide 23, where I would like to provide you with more insight into the components of a load [filing] price and [PPR] Energy Plus's approach to providing low-flowing supply.

This chart compares the price PPL Electric Utilities customers will pay in 2009 under the existing POLR contract, to an example of a load filing price estimate using market prices for energy and capacity that existed prior to the PGM October RPM auction.

The 2009-bar labeled all customers represents the current expected average price all customers will pay for supply in 2009, including line losses and gross receipts tax.

This differs from the $50.20 we have projected in the past, because it's been updated to reflect two things, our current expectation of customer load and an updated gross receipts tax which is now at 5.9% projected versus the previous rate of 4.4%.

The 2009-bar labeled residential and small C&I, represents the average price these customers are projected to pay for supply in 2009, including same line losses and GRT.

This is higher than the all customer bar [fleet] because it excludes the large commercial and industrial customers who are charged at a lower average price to reflect the lower cost to serve them than the other customer [plans].

The large C&I load will be auctioned one time in October 2009.

The 2010 bar shows you how the estimated components of a low falling price could be derived based on the noted price assumptions.

The shape price for energy, capacity and congestion or basis is $82, and is based on forward prices for these three cost components, and the expected low profile for the projected mix of customers to be served.

Additional cost components are added to estimate various expenses and risks associated with serving a time-varying customer demand.

These other adders are shown in yellow in the 2010 bar, and are broken down further in the pie chart.

They include value matrix risks that may be caused by weather, customer shopping or changes in the mix of customers, the cost of credit support, the green adder is to cover the cost of buying renewable energy credits in order to comply with renewable energy requirements, and finally, ancillary costs to (inaudible) charge by PGM or other [ICOs] to maintain transmission voltages, provide load falling or spending reserves.

As PPL EnergyPlus enters at a new commitment to provide both volume supply, a hedge strategy is developed to recognize the specific characteristics of the load obligation, the cost associated with serving the load, and the market in which the load is located.

This hedge strategy reflects decisions about how the various load falling components will be provided and managed.

It is from the experience and market knowledge of our marketing and trading group that we have the potential to extract additional margins from providing the load falling supply.

Moving to Slide 24, I would like to provide you with our open EBITDA position in 2010.

In forecasting the data on this page, we use forward prices as of October 12th, which can be found on page A-1 of today's presentation.

The unhedged gross margin for this spark segment in 2010 is expected to be almost 3.5 billion with associated O&M of 810 million.

This brings the value of our open EBITDA to 2.64 billion, consistent with our approach of hedging the output of our fleet to ensure more predictable earnings and cash flows, and as we have communicated with you in the past, we have hedged about 50% of our 2010 base load generation at prices that were consistent with our previous 2010 forecast of $3.50.

Obviously, prices have risen since those hedges were put in place and the value of increased power prices has allowed us to raise our 2010 forecast, but at the same time, it has created an out of the money hedge position.

These historic hedges obscure the fundamental value of our generation fleet by about 143 million.

We have also hedged a portion of our 2011 generation, although at a much lower level than 2010.

Of course this open EBITDA is based upon current forward prices and numerous assumptions on plant availability and O&M.

Turning to slide 25, while we are not going to constantly update our 2010 earnings forecast, I did want to give you a few sensitivities that you can use to mark the earnings forecast to market.

Of course our hedge positions can be dynamic, so that should be carefully considered.

So, for example, a $1 per megawatt change in PGM electricity prices is about 23 million pre-tax gross margin, and we have assumed an around the clock price of $64 per megawatt hour in our 2010 forecast.

A $10 per megawatt day change at PGM capacity prices from June to December of 2010 would result in a $17 million pre-tax margin.

Again, we have assumed $191 per megawatt day for the remainder of 2010.

And a base load availability change of 1% would result in a $20 million margin addition with the assumption of an equivalent availability of 91%.

I hope that gives you a good understanding of how we arrived at our new earnings forecast.

And with that I would like to turn the call back to Jim for the Q&A.

Okay.

Thanks, Bill.

Operator, please open the call for q&a, and we'll get started.

Thank you.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment .

Our first question will come from Ashar Kahn with SAC

Good morning.

Good morning.

Paul, if you could just walk me a little bit through Slide 22, the margin.

If I read it between 2008 and 2010, the delta is somewhere like 1.44 -- 1.441, and then if I after-tax it, and divide it by your share count, I get something like a pickup of around $2.60 in earnings, and I'm just trying to correspond that with the guidance that's given.

I guess starting from 2008 guidance, it gets you, from my numbers, above the range that you mentioned this morning.

So I'm trying to figure out what the missing piece is?

Well, if you -- we're starting out with a number in 2008 that has a mid-point of around 240, and on annualized basis, that should have most of the benefits of the 750 buyback in it, and the midpoint of the 2010 number is about $2 higher than that.

So you are not absent putting in interest and depreciation, which, there will be hits from because of the plant being put in service during this time frame, especially the scrubbers, that will mitigate that total increase a bit, but as a comparator.

Okay.

But you don't deny the margin impact of that is like $2.60, correct?

Approximately.

That's about right.

Okay.

You would be using roughly at repurchase of about 15 million shares, but we have a presumed buyback as well in for 2010, (inaudible) starting early 2009, probably in the neighborhood of 350 million-ish shares.

I don't have the number right at my fingertips, but.

Okay.

And then if I can just go back to this other chart, which was very, very helpful.

But this is on page 23.

My first thing was I thought you were using in your assumptions 190-megawatt day price.

Am I right?

So I guess you just used a lower number for comparative purposes in this graph; is that correct?

Yes, Ashar this is Bill Spence.

This is an example that was put together prior to the last RPM auction clearing, and I think is representative of what the market may have been using in key assumptions for a low-falling price contract at that time.

This would have been, Ashar, roughly the price that PPL Electric Utilities secured in the auction, that $105 amount.

We tried to use that as the basis for the suppliers' view of cost and forward views of the market to be able to fulfill the obligation.

So it's not meant to been on par with the actual supply portfolio impact of the 191.

Okay.

Okay.

Okay.

Thank you, sir.

I appreciate it.

Yes, you are welcome.

Andrew Levy with Bancorp has your next question.

Okay.

Now I'm on the right call.

I have to say the DTL guys, they seemed confused.

On the exchange rate, can you just tell us what your assumptions are for 2008?

The assumption for '08 is just a little north of $2 per sterling.

Thank you very much.

Yes.

Anything further, Mr.

Levy?

No, that's it.

I'm good.

Thank you.

Greg Gordon with City Investment.

Thanks.

As we look at the political landscape in Pennsylvania, it seems like these legislators all get their script from central casting.

What is your view of the most likely outcome in terms of the legislative mandate that is going to get passed?

Is the governor's program still the most likely outcome?

And if so, given that the republicans in the legislator don't seem that willing to fully fund his program, how much of it do you think will ultimately come out of the pockets of the utilities in order to help meet that agenda?

Well, I think, it's very, very early and premature to speculate as to -- there is so much work being done now by both the administration and legislator.

There are bills that are being drafted by both the Senate and the House.

There's dialogue going on between the administration and the legislator.

So I -- I really think it's sort of just too premature to predict what the end-all energy policy situation will look like.

There's a process that has to -- that has to evolve in Harrisburg, and we're attempting to participate and to provide our thoughts, our recommendations, potential solutions and language.

We're working with both the admin -- have been working with the administration and the legislator.

So we're going continue to work along those lines, but I just -- I don't feel that I have the level of information at the moment to be able to predict the outcome, and I'm not sure quite frankly anyone can at this point.

The process has to work itself through, and people are working very hard on all fronts.

We'll just try to keep your posted as events unfold.

Thank you.

Paul Patterson with Glenrock Associates.

Hi, guys.

How are you?

Good morning.

Good morning.

I was wondering what you guys were -- and I unfortunately got a little distracted during the call.

What is your guys' thoughts on new generation investment due to the RPM?

You saw sort of a -- kind of an announcement out of Public Service Enterprise Group.

I know they are sort of an [e-map], or whatever, surprised you don't see that from APS plus MAAC.

So just what are your thoughts in terms of what you think new -- new generation coming on line might be in the next auction, or just your general outlook on supply/demand kind of issues with respect to the latest RPM (inaudible)?

Yes, Paul, it's Bill Spence.

I would say that even with the more -- much more robust capacity prices, I would not expect we're still at the level for the cost of new entry for what we see, at least as generation cost increases for new build.

So for example, a gas combined cycle may still be around $1200 a KW, which is going to be very difficult to economically justify for a green build site perhaps, given just the four prices as they exist today.

Clearly the fundamentals may suggest there's upside.

And I think when it come to existing plant sites or maybe some unique circumstances, I -- whether you are in a highly constrained zone, for example, then maybe the numbers can work.

But I think, clearly, the capacity price increases are encouraging in my view.

Some new editions, for example, with ourselves the uprates, I think those make perfect economic sense, and I think without more capacity price visibility and the increases we have seen, quite honestly I'm not sure who would continue to invest in uprates let alone new base load plants.

So, I don't want to minimize the impact that the capacity price increases are having, because I think it is measurable, but I don't think it is quite there, and certainly not for base load coal plant, in our view.

I hope that helps, Paul.

Yes, thank you very much.

Sure.

[Haum] O'Neill with Highbridge, you have our next question.

Morning, just had two quick questions for you, on the CapEx I was just wondering if you could break that down between the pieces that you talked about, just, I'm talking about the increase in CapEx '08 through '10.

You talked about the coal at Susquehanna transmission, and I guess related to that.

When does transmission actually start to show up in earnings?

Transmission would show up earnings -- into earnings in the 2012, 2013 time frame.

And just a second on the other item.

Most of the licensing costs for the third unit at Susquehanna (inaudible) '08 that's approximately $90 million.

The hydro-expansion scrubber, Brunner Island scrubber cost, as well as some continuation of the license cost is around $100 million, that hits '09.

Nuclear fuel starts to impact the CapEx cost in '09 and '10 by around $50 million each year.

By the time we hit 2010 we really start to see some level of cost increase from both Montana hydro-expansion as well as the whole [liquid] facility and we did see some cost increases versus the original estimate there.

Okay.

And then in 2008, what percentage of earnings are coming from international delivery?

24, I believe.

One second.

24% from international in '08 based on the midpoint of 240.

And that's purely WPD by that point in time?

That's purely WPD.

Thanks.

Yes.

Jonathan Arnold with Merrill Lynch, please go ahead.

Good morning.

Good morning.

Jim, I was just wondering to follow-up a little bit on politics in Pennsylvania, if you could give us your current views on -- clearly we can't see how this is going to resolve, but do you have a sense on the timing, how long it's going to take them to resolve?

And do we see this running significantly in through 2007 and just your best thoughts on that?

Yes, I think -- I think given the -- as I mentioned earlier, Jonathan, the process has to be given time to work itself through, and I think -- I think we would be unrealistic if we believed that all of the work that is being done will be completed by the end of 2007, which, of course is rapidly coming to a close.

So my -- my hope is that by the middle of next year, perhaps, many of these issues will have been vetted through the process in Harrisburg, and I think those discussions would have progressed far enough where you can begin to see a likely outcome.

So I'm kind of reaching up in the air and looking in to a crystal ball, but I -- my -- if you are asking for my gut, I think it's -- would be unfair of us to expect these number of issues to be resolved in 2007.

I don't think that there's nearly enough time, and I think probably mid-2008 is as realistic a guess as I can give you.

Thank you.

Steve Fleishman with Catapult Partners.

Yes, hi, can you hear me?

Yes, Steve.

Hi, Jim.

Couple of questions.

First the -- if you looked at the 143 million of below-market hedges in '010, and if we thought about, do those all roll away in '011, or do some of them continue?

Those all do roll away, Steve, yes.

Okay and then just on that same topic, if you think about the current market prices in '011 forwards, do you see them the same as '010 or backward dated down, or where do you see the '011 kind of market right now?

Well, I would say an improvement over 10.

Is that what the market is right now?

Or is that what you think?

It's pretty a liquid so it's always difficult to judge how much volume is trading out there, but I think that's more based on our own fundamental views than it is the actual market.

Okay.

And then is there any way to give us a feeling either in -- maybe in 2007 or in some of these future years, how much of the supply earnings are now coming from the kind of marketing and trading component of the Company?

Any rough view?

How much of the gross margin or --?

On a margin basis, it's around 5% of the revised 2010 margin numbers.

[Above] 5 to 5.5% in that range.

That would be the combination of what I'll call trading and marketing activities as well as the retail and other expansion opportunities that's we're evaluating or about to launch, so .

So it would be about 5% of the --

3., yes.

3.3 billion?

Correct.

And there's probably not a lot of cost against that because it's not --

Correct.

-- it's a not asset based -- it doesn't have a big asset cost.

No.

Correct.

Okay.

Okay.

Thank you.

Thanks, Steve.

Judd Arnold with King Street.

All of my questions have been answered.

Thank you.

We'll go next to Reza Hatefi with Polygon Investments.

Thank you.

On the question where there's -- or on the slide where there's the breakdown of the load following components, that the yellow $10, I'm sorry if I missed this, but, are you able to capture any of that $10, or does it get offset by the costs in the pie chart?

We would be able to capture some of it.

Primarily under the volumetric risk, which does include a small margin that we would expect to get in addition to just the hedge value embedded in the $82, so yes, there would be a small margin included there.

And the ancillary component, is that higher revenues that you are getting?

Meaning is there any benefit -- is that going up from like the '09 levels?

Is meaning that in 2010 it looks like about 1/2 of the pie chart so it's $4 or $5.

And maybe in '09 you are only getting a couple of bucks from that.

So you are sort of seeing a pickup from that as well?

There's a little bit of that which would fall to the generation side of the business, but we look at that more as the cost of providing the load than we do as an independent revenue stream.

Reza, in 2009, by way of comparison, this is really -- what this chart is really trying to do is compare and contrast what is happening in '09 kind of effectively with the POLR, with the load falling deal (inaudible) generator intent.

And, under the POLR contract the utility is bearing those ancillary costs in 2009, and passing that through the customer, so the utility is a net 0.

The generator is still collecting the ancillary benefits from providing those services and products in 2009, so net as the generator on the supply side of it, and it's providing that -- providing that as part of the product to the utility, that is a full incremental cost basically, and Bill is right, there is some net incremental benefit as those values rise to the generator, but you could look a lot of that as pretty much a pure cost increase to the hedging side of making that load-following commitment.

Okay.

And going to the cash flow slide in the back, it looks like cash from operations is down versus some of your previous slides from previous quarters.

What is -- is that just because of Latin America sales or --?

That will all be embedded in there.

Just one second.

And I'm mainly talk about '07, '08, '09.

Seems like they are down 100, $150 million a year.

Yes, just one second.

We're trying to get you an answer on that one.

We'll get back to you with the answer on that one, Reza.

Okay.

And just finally, on the CapEx, it is sounding like the increased CapEx is really mainly due to projects that should provide benefits in the next decade, other than the uptick in the nuclear fuel.

Is that a fair assumption?

That's fair assumption.

The only other kind of significant -- most all of those CapEx increases are occurring in the supply segment.

There is a small amount in the international delivery segment.

That's simply because of the CapEx -- or the FX increase assumption versus where we are at in the prior year, so that ends up being a benefit to earnings as well, because we're earning on that in rapid in dollar terms as the dollar depreciates, so --

Great.

All of those are for enhanced projects that should enhance margins on a go-forward bases.

Thank you very much.

Congratulations.

Thanks, Reza.

We'll go next to Yiktat Fung with Zimmer Lucas Partners.

Good morning.

Morning.

I just have a few quick, kind of, [falling] questions.

In terms of the Slide 23, in calculating the dollar per megawatt hour of the capacity pricing, what load factor are you using?

For the residential small CNI?

Yes.

We don't have -- I don't have that here.

Okay.

I'm not sure I can answer than.

And kind of what are the percentage line losses in percentage of GR -- gross receipts stacks.

Are you assuming for both the '09 and 2010 calculations?

Can you just repeat those?

Gross receipt tax is 5.9%.

I'm sorry, and the line loss is -- let me just see if I have that number here.

Yes, 5 to 6 -- I don't know the precise number, but it's in the 5 to 6% range.

Thank you very much.

Sure.

Daniele Seitz with Dahlman Rose has our next question.

Hi.

I was wondering if in your forecast for 2010 you are including WPD rate increase of some sort over -- rate action?

Could you say that one more time, Daniel.

The WPD every five year rate decision, is that included in your forecast?

It is.

That would impact eight months of 2010.

We don't expect anything radical by way of rate adjustment for that, so it pretty much -- at this point in time, as we see that, because we evolve our way to that point in time, and '09 is a big activity year for us in prep for that.

It's really more a continuation of the status quo with just some slight modifications, so.

Okay.

And did -- assuming those numbers is the 750 million buyback for '09 the same thing as you were originally anticipating?

That was 700 million, that was 300 million planned for '09 and 400 planned for 2010.

Okay.

And base remains the same?

And that remains the same for right now correct.

Okay.

And just last one, the fee being proposed, I'm assuming nothing happens until there is some sort of decision at the legislator in midyear '08?

I'm sorry Daniele --

For the phase-in proposed -- that you have proposed.

The five-year phase-in, assuming no decisions will be made until the legislator comes out with the final?

Well, Daniele, I think, we will -- we proposed and will make a filing with the PUC.

The PUC action is really separate and apart from action in the legislator.

So the PUC will go through its normal process evaluating our filing, as they would similarly to our filing when we suggested the auction process to procure power for 2010.

So they have their own process that they'll work through, but that's separate and apart.

So I wouldn't draw a parallel to mid-2008.

PUC will work it at their own pace with their own process.

Okay.

Thank you.

I do have an answer to Rez's prior question.

The, roughly, $270 million decrease in cash from operations from '08, is pretty much split on a 25%-each basis between loss of Latin America FFO, because of the sale, the taxes on that sale are paid as well in 2008, primarily, and then we have had got other changes in working capital and pension cash payment increases and it's pretty much evenly split between those four items.

We do have one question left the queue that will come from [Garav Favar] with [K Street] Capital.

Just one quick question or clarification.

On Slide 20, you have the PPO capacity hedge position at 46% going into '010.

Yes.

And I'm trying to understand how that relates, given that the two auctions, you only auctioned about 30% of the load, how the capacity hedge position is higher than that?

The primary driver of that hedge position in the first five months of 2010 where we participated in the last RPM auctions as well as other load-buying commitments we have made since then.

So it's really a combination.

So the increment -- if I'm understanding the increment is other obligations you have entered outside of just the -- what you might -- the load you might have won in the auction?

Correct.

Yes, but it's mainly the RPM auction.

Okay.

Thank you.

Okay.

Sure.

We have no other questions, I would like to turn it back to our presenters for any additional or closing remarks.

Thank you all for the questions, and hopefully we've answered them all, and thank you for attending the call.

That's all, operator.

Thank you.

That does conclude the call today.

We would like to thank everyone for their participation.

Have a great day.