賓州電力 (PPL) 2007 Q4 法說會逐字稿

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

Today's call is being recorded.

At this time for opening remarks, I would like to turn the call over to Tim Paukovits.

Please go ahead, sir.

Thank you.

Good morning, thank you for joining the PPL conference call on fourth quarter and 2007 results and our general business outlook.

We're providing slides with a 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 actual results or events to vary is contained in the appendix of this presentation and in the company's SEC filing.

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

Thanks, Tim.

Good morning, everyone.

Today we'll follow our normal format and cover some general business issues and updates and then we'll turn the call over to Bill Spence and Paul Farr, our Chief Operating Officer and Chief Financial Officer, for more detail, and then we'll go to Q&A.

Today, we're reporting strong fourth quarter earnings, $1.17 per share compared with our reported earnings of $0.46 per share in the fourth quarter a year ago.

While a significant portion of our reported earnings increased in the fourth quarter is due to the sale of our Chilean operations, ongoing earnings from our supply segment were 12% higher than a year ago.

This supply segment's fourth quarter -- strong fourth quarter, resulted from stronger wholesale market prices and higher output from our baseload generating plants.

The international business segment had a very strong quarter, improving by 69% over a year ago.

Fourth quarter earnings from our Pennsylvania delivery operation continued steady, increasing by about $0.02 a share.

And overall, ongoing earnings were up about 30% for the fourth quarter of 2007, compared to 2006.

$0.56 per share of our fourth quarter reported earnings resulted from the sale of our Chilean delivery business in November.

So in total, we realized about $851 million in proceeds from the 2007 sale of our entire Latin American portfolio.

Clearly the marketplace did recognize the economic value that was created in these companies, both through our really solid customer service improvements and enhanced operational efficiencies there.

We're very pleased with the results of the divestiture and that will certainly enable us to further sharpen our focus on growing our core businesses.

As we've said previously, the major of the sale proceeds were used to repurchase a portion of our common stock.

Today, we also reported 2007 earnings of $3.40 a share.

While special items contributed about 24% of the record number, we had an excellent year when we look at ongoing earnings growth as well.

Overall, per-share ongoing earnings for 2007 increased by 16% over 2006.

The supply business drove this increase as a result of higher wholesale margins, greater realized margins from our new load following deal and higher output from our generating plants.

For the year ongoing earnings from the supply business increased by 20% over 2006, and that is exactly the kind of growth that we expect from this dynamic part of our core business.

Our international operations also had a very strong year improving ongoing earnings by about 13%.

The combination of our nonregulated supply business in the U.S.

and our international delivery business accounted for 85% of our 2007 earnings from ongoing operations.

Additionally, we forecast that more than 90% of our earnings will come from supply and international delivery businesses in 2010.

We also are very pleased that investors are continuing to respond positively to our story.

During 2007, our common stock rose by more than $16 a share, ending 45% higher for the year and that performance was among the best in the sector.

Our 2007 results underscore the significant benefits of our expanded marketing and training operations combined with improved performance at our power plants and the consistent performance of our delivery businesses.

Paul and Bill are going to provide some more detail on our financial and operational performance for 2007, but before we do that, let's talk about 2008 and also 2010 forecast.

Today, we're reaffirming the 2008 forecast of $2.35 to $2.45 a share.

And while the midpoint of the forecast is lower than earnings from ongoing operations in 2007, it's important to note this forecast does reflect the loss of synfuel-related earnings, earnings from our divested businesses and some tax benefits recorded in 2007 that won't repeat in 2008.

Importantly, we're also reaffirming our forecasted 2010 earnings of $4.00 to $4.60 per share.

We're encouraged by the further strengthening in the wholesale energy market since the fall when we established the 2010 forecast.

There is some key assumptions included in the forecast: continued strength and forward market prices through 2010, continued strong performance of our fleet, and power upgrades at our nuclear facility, Susquehanna, and strong 2010 capacity prices for PJM, specifically in MAAC and the APS zone.

And Paul's going to provide some additional information on the building blocks for the 2010 forecast.

While the 2010 forecast certainly is important, we certainly don't view that as a stopping point for our growth.

Quite the contrary.

We have the plans in to achieve our numbers in 2010 and we're aggressively pursuing additional growth opportunities.

The marketing organization is continuing to identify ways to enhance the value of our generating fleet and to maximize the value of our trading operations.

We have significantly upgraded our in-house capabilities in a number of areas, especially in the pursuit and execution of bilateral contracts, and in the sophistication of our training operation.

We estimate that our marketing and trading operation added about 150 -- $150 million in margins in 2007, compared to what we have made by simply selling the output from our plants.

Operator?

Operator?

(OPERATOR INSTRUCTIONS)

No, sorry.

The -- we've gotten some calls, the phone lines don't appear to be working.

Okay, we'll look into that, sir.

I apologize.

We'll pause Jim's remarks until we're able to figure out the phone line issue.

Okay, we're sorry for the delay.

We'll continue on.

Apparently a couple of phone lines are having problems with people dialing in, but as I was saying, we have significantly upgraded our in-house capabilities in a number of areas in our marketing and trading operation.

Particularly strong execution in establishing bilateral contracts in the sophistication of our operations.

We estimate that our marketing and trading operation today at about $150 million in margins, as I said earlier in 2007, compared to what we would have made simply by working on the output of our power plants.

Additionally, we have re-entered the natural gas market and are also talking with potential customers in the retail commercial and industrial electricity market in the east.

Commercial industrial retail customers have been part of our operation in Montana, since we have been operating there.

We're also continuing to pursue possible acquisition and construction of new generating assets, an important element in this asset expansion effort of course is our recent announcement to pursue a construction and operating license for a potential new nuclear unit adjacent to our Susquehanna plant in northeast Pennsylvania.

In addition, to the potential to build near Susquehanna, we're also exploring opportunities to jointly invest in other new nuclear facilities.

Very much encouraged by the project that we're seeing on a number of fronts regarding nuclear expansion, the industry is making headway on nuclear loan guarantees, standardized designs are moving ahead and we're getting positive signals regarding regulatory process.

In addition to that we're now seeing future price levels that would justify investments in new large-scale generating facilities, including nuclear.

We'll also continue to work on issues related to Pennsylvania's state energy policy.

As you all know, a special session of the Pennsylvania legislature is ongoing and we have been very much involved in constructive discussions with legislators, regulators, administration officials and other energy companies in the state.

The details of some of the legislative packages still are being worked out.

There are many areas of agreement regarding demand site management, energy efficiency, conservation, and how delivery companies should acquire supply for customers who don't choose an alternative provider.

Work also continues on possible approaches to moderate price increases when generation rate caps for Pennsylvania's major electric utilities begin to expire at the end of 2009.

As I mentioned in our last call, we're proactively pursuing options for PPL Electric Utility customers to manage price increase when is the caps come off.

We asked the California PUC to approve a five-year phase-in plan under which an average residential customer could limit annual increases to approximately 7% for the first two years of the plan and 6% in 2010, '11, and '12.

These numbers are preliminarily -- are preliminary, of course, and assume that the price of secured for 2010 supplies and the two RFPs completed are the same for the remaining for four RFPs.

We believe our phase-in proposal appropriately addresses the most pressing concern regarding the rate cap expiration, a large one-time increase in a customer's bill.

We have asked the PUC to act on our proposal soon so that we can begin this program in July of this year.

The legislature is also working on a plan -- a phase-in plan that would occur after the rate caps expire, a concept that we generally support.

While there is no shortage of a challenge in today's sector, I am pretty confident that the PPL has a solid strategy in place to make the most of the opportunities available to us and we're working hard to present as many options to our customers as possible to deal with the end of rate caps.

So 2007 was a very strong and an excellent year, actually, for PPL.

We're optimistic about the future, we like the fundamentals, they appear to be working to help support continued growth of a corporation.

And so I will turn it over now to Paul Farr, our Chief Financial Officer for a more detailed financial overview.

Paul?

Thanks, Jimmy, good morning, everyone.

As outlined on slide six, you can see that we delivered strong fourth quarter growth in ongoing earnings in each of our business segments compared to a year ago.

These results were driven by the same key factors that drove our full-year 2007 results.

As indicated on the past several calls, 2007 earnings from operations include the operating results of the Latin American and natural gas delivery businesses, but exclude special items related to their divestiture.

Given that we're close to obtaining binding bids for the sale of our natural gas delivery business, I would like to mention the potential for an impact on 2007 reported earnings from the divestiture process.

While any potential gain on the sale of this operation will impact future earnings, a loss could impact 2007 results if an assessment is made that the sale value is below the book value and this assessment is made before the filing of our 2007 Form 10K at the end of February.

Under any scenario the gain or loss will be treated as a special item and will not impact earnings from ongoing operations from the period reported.

We continue to expect that we'll close on the sales of the gas business in the second half of 2008.

Before reviewing our 2008 forecast, I will review the key segment earnings drivers for 2007.

Turning to slide seven, let's start with our unregulated supply segment.

The unregulated supply segment earned $1.42 per share in 2007, a 20% increase over the prior 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 net wholesale prices compared to a year ago, higher unrealized -- higher realized margins on new and existing full requirement supply contracts, higher base-load generation and lower coal costs, as well as higher unrealized gains on trading activities.

Higher energy margins from the west where the net result of higher wholesale prices and higher base load generations partially offset by higher fuel costs.

The supply segment also reported higher synfuel earnings of $0.06 per share, primarily due to the gain on oil options purchased ahead of synfuel tax credits and lower income taxes.

Partially offsetting these positive earnings drivers are higher O&M, driven by higher outage cost at our fossil, hydro and nuclear power plant, higher nuclear disposal costs and higher payroll costs, as well as higher financing costs.

Turn to slide eight, our Pennsylvania delivery segment earned $0.40 per share in 2007, a 5% increase in 2006.

This was driven by higher electric delivery revenues as a result of warmer weather in 2007, compared to 2006 and higher revenues in our gas delivery business as a result of a distribution rate increase that was effective early in the year.

The revenue benefits were partially offset by higher O&M and higher depreciation.

Turning to slide nine, our international delivery segment earned $0.78 per share in 2007, a 13% increase over 2006.

The 2007 increase was a result of lower income taxes including the $0.08 tax benefit realized in the second quarter of '07, higher U.K.

delivery revenues due to a more favorable customer mix and the recovery of a 2006 revenue underrun, beneficial currency exchange rates and lower depreciation.

These positive factors were partially offset by higher O&M at WPD, and WPD's comparative results were also impacted by income realized in 2006 from the ongoing liquidation of certain nonstrategic businesses in the U.K.

On slide 10, we summarize the major drivers of earnings from ongoing operations between '06 and '07.

I'm not going to specifically discuss these drivers as basically just covered them in my segment review.

So let's move to slide 11.

As Jim mentioned, we're reaffirming our 2008 earnings forecast of $2.35 to $2.45 per share.

While the $2.40 per share midpoint of the forecast range is lower than our 2007 earnings from ongoing operations, we expect to partially overcome the loss of significant earnings drivers for '07, including $0.18 from synfuel-related items and a $0.08 tax benefit that helped '07, and the net loss of $0.08 per share from the impact of divesting Latin America.

Let's move to slide 12 which outlines the principle items that drive '08 earnings forecast versus our '07 actual results.

Our 2008 earnings are expected to benefit from lower O&M of $0.06 per share primarily driven by pension expense at WPD, higher energy margins at $0.06 per share, due to higher wholesale energy contracts and higher base-load generation output.

Netted in this margin improvement is $0.04 of higher fuel cost in 2008, to replace the synfuel we purchased from third party producers to be a part of the eastern fleet.

Also contributing our higher Pennsylvania delivery margin of $0.02 per share as a result of new electric distribution rates which became effective January 1, 2008.

The impact of PPL Electric $55 million approved revenue increase is netted down by a assumption of a return to normal weather in '08 .

These positive drivers will be more than offset by the $0.14 per share loss at synfuel operational earnings, the decrease of $0.08 per share of the sale of the Latin American asset, the $0.08 per share tax benefit, again recorded in Q2 of '07, and higher depreciation expense primarily in the supply business segment due to some of the scrubbers coming online as well as additional plant and service.

We expect 56% of our 2008 earnings to come from the supply segment, 25% from international delivery segment and 19% from the Pennsylvania delivery segment.

Turning to slide 13, we've highlighted the primary earnings drivers between the $2.45 share midpoint of our '08 forecast and the $4.30 per share midpoint of the 2010 forecast.

The forecast increase from 2008 to 2010 earnings is driven almost exclusively by our unregulated supply segment, which is expected to provide approximately 77% of our 2010 earnings.

We expect the distribution of our international and Pennsylvania delivery segments to be 14% and 9% respectively.

Clearly, the most significant driver of the forecast is the increase in energy margins and we've continued to see strengthening in prices since we set this new 2010 forecast last fall.

The increase in energy margins between 2008 and 2010 is driven primarily by higher energy prices, higher capacity revenue, additional margin growth from continued expansion of marketing and trading activities, as well as higher nuclear generation output.

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

In addition to the growth and energy margins, we expect higher O&M primarily in our supply segment as a result of the startup of the scrubbers and other pollution control equipment at our fossil units, additional planned outages as well as inflationary increases.

Our Pennsylvania delivery and international delivery segments are also impacted by inflationary increases.

Higher interest costs of $0.10 per share on higher debt levels to finance our CapEx programs, as well as the plan common stock buybacks also impact 2010, as well as higher depreciation, primarily due to the scrubbers coming online and other plant edition.

Moving to slide 14, the strength in 2007 cash flow was driven by the sale of our Latin American portfolio and the sale of our domestic telecom business.

The 2008 forecast doesn't yet include any after tax sale proceed assumption from the sale of that business -- from the sale of the gas business, excuse me.

Additionally, the CapEx numbers have been updated to reflect the elimination of CapEx spend for the already divested businesses and includes additional CapEx for the electric utilities, PJM transmission line project.

The CapEx spend also includes funding for preparation of the coal for a third nuclear unit.

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

Furthermore, our business plan includes $700 million of common stock repurchases beginning in early 2009.

These planned stock buybacks are a place holder for other growth opportunities that would add future greater shareholder value.

Finally, dividend growth remains an important component of our total shareholder return from PPL.

We will be assessing the dividend level next month on our normal schedule and we expect to continue our recent trend of strong stock dividend increases.

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

Thanks, Paul.

And good morning, everyone.

First, I would like to give you an update on the major activities of our operating segments since the third quarter call.

I'm happy to report that the Pennsylvania PUC approved its settlement agreement for PPL Electric Utilities distribution rate increase request that was filed in March of last year.

This approval provides for a $55 million revenue increase that was effective January 1, 2008.

Several key programs to address, customer impacts resulting from the expiration of supply rate caps were also included in this filing and in the settlement.

Next month, PPL Electric Utilities will begin its third solicitation to procure 1/6 of its expected default supply requirements for 2010.

Bids are due March 24th and PUC approval is expected March 27.

After the completion of this third solicitation, PPL Electric Utilities will have 50% of its expected default supplier requirements for 2010 already under contract.

On the supply front, we remain confident that the scrubber projects at our large eastern coal plants will be completed on time and on budget in 2008 and early 2009.

Turning to slide 16, we continue to execute on our plans to increase generating capacity in Pennsylvania and Montana by 328 megawatts through upgrades at existing generating stations.

A few of the smaller hydro and cooperates actually came online in 2007.

And yesterday, we received NRC approval for the power upgrade at our Susquehanna nuclear facility.

We recently reviewed the new -- received the new steam dryer for the unit one reactor.

This was our critical path item for beginning the 70 megawatt upgrade project for this unit.

We plan to increase the power levels on Susquehanna unit one after the new dryer is installed and other modifications are made during our spring 2008 outage.

Unit two's upgrade is scheduled for the 2009 outage, with the unit increasing power shortly thereafter.

After completing an extensive review of various nuclear reactor technologies, we announced in December that we had contracted with UniStar Nuclear Energy to prepare the NRC application for the combined license to construct and operate a third nuclear unit adjacent to our Susquehanna plant.

This unit would be based on Areva's U.S.

evolutionary power reactor design.

Earlier this month, we also announced our filing of an application with FERC to more than double the output of our Holtwood hydroelectric plant.

We worked very closely with the Pennsylvania Department of Environmental Protection on this proposal to ensure that we not only address the state's renewable energy needs, but importantly we also addressed important environmental and ecological considerations.

DEP Secretary McGinty attended our press conference and spoke in support of the project.

I think it's important to note that the planned new hydrofacility at Holtwood and the potential third nuclear unit at Susquehanna would substantially enhance our noncarbon emitting footprint.

Currently 40% of our generation output is noncarbon emitting, upon completion of these projects, that could rise to more than 50% of our generation production.

Additionally, we're continuing our plans to invest $100 million or more in renewable energy projects over the next five years.

Over the past few months, for example, we announced the completion of solar energy projects and that we are developing several methane to electricity power generation facilities.

Today, we developed renewable energy projects that total more than 30 megawatts of generation, and that's enough to power 20,000 homes.

As I said, we continue to expect the scrubbers to be completed on time and on budget.

The photos on slide 17 show the progress that we have made on the Montour scrubber project over the past year.

The construction at Montour is now about 93% complete and we're making great progress at Brunner Island, which is about 50% complete at this point.

The Montour unit two scrubber will actually come online at this quarter and we'll tie in the scrubber during its scheduled outage in mid-March.

Turning to slide 18, the PJM RPM auction for the 2010/'11 planning year is underway and results are expected to be announced here very shortly.

The zones for this auction have been revised since the last auction, the new zones are depicted on the map on slide 18.

You will note that all PPL's Pennsylvania generation is in the new MAAC zone, which is essentially a combination of the eastern MAAC and the MAAC portion of the old MAAC plus [APF] zone.

While we don't expect the results in this auction to be significantly different from the results of the previous auction, the combination of these two zones shows that the constraint is moving west.

As a reminder, our 2010 earnings forecast assumes that the auction results for the '10/'11 planning year will clear at $191 per megawatt day.

I would like to next walk you through our expected margin change for the 2007 actual results to our 2008 forecast.

As you can see on slide 19, expected margin improvements are driven by a number of factors.

First, improved power value, which includes power price and [sparks] spread changes across our entire fleet, as well as the value added from asset management by PPL EnergyPlus and the results from other marketing and trading activities.

In addition, higher nuclear output is expected resulting from the first phase of the upgrade project I previously mentioned and the completion of the final rechanneling outages that we had in 2007.

Also, higher coal generation resulting primarily from fewer planned outages in 2008, and higher east and west hydro output.

These increases are expected to be offset by higher fuel costs, primarily resulting from higher coal expenses due to increased prices for coal and coal transportation, including the higher costs of replacement coal due to the end of our synfuel program.

We had been burning synfuel at some of our eastern coal facilities, and in 2008, we have to replace that synfuel with traditional coal sources.

The synfuel replacement will negatively impact margins by about $25 million.

Also contributing to higher fuel cost is an increase in price of nuclear fuel.

And finally, margin growth will be impacted by the loss of generation from our Martins Creek coal units one and two, which we shut down in September of last year.

Moving to slide 20, I would like to provide with you an update on our open EBITDA position in 2010.

In forecasting the data on this page, we used four prices as of the end of December, which can be found on page A-1 on today's presentation.

The unhedged gross margin for the supply segment in 2010 is expected to be about $3.7 billion, with associated O&M of $814 million, this brings the value of our open EBITDA to $2.9 billion, an increase of almost $250 million from our forecast in October.

While this negatively affects the mark-to-market of our hedges we have executed for 2010, to ensure -- and that's to ensure a more predictable earnings and cash flow.

It does clearly indicate strengthening in value that could be realized as our hedge positions roll off.

In total, we have hedged about 62% of our 2010 generation.

While we have also hedged a portion of 2011 generation, it's at a much lower level than 2010.

While this open EBITDA is based upon current forward prices and numerous assumptions on plant availability and O&M costs, we're encouraged by the trend.

As we've indicated in the past, we not planning to continuously update our 2010 earnings forecast.

That said, we're providing you with a few key sensitivities on slide 21 that you can use to mark the earnings forecast to market.

Of course, our hedge positions and other factors are dynamic, so that should be carefully considered as well.

And now I would like to turn the call back to Jim Miller for the Q&A.

Thanks, Bill.

Operator, just hold for a moment on the call-in.

We have a number that can be used for others to call in, too.

This is Tim Paukovits.

I want to apologize to the few people who haven't been able to dial in to listen on the phone lines, but maybe are listening via webcast.

There is another dial-in number we have for you.

If you like -- if an analyst would like to ask a question during the Q&A session, the number is 877-419-6594.

Again, that's 877-419-6594.

We understand there were a of couple analysts that didn't get through on the Q -- on the dial-in line.

You can use that number to ask your question.

Now we will go to the Q&A session.

Operator.

Operator?

Thank you.

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

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

Hi, I just was wondering if on the sale of your gas business are the proceeds going to be used for the stock repurchase in 2009, or are there any other type of usage that you would like to use for that?

Daniele, this is Paul Farr.

Yes.

The amount of proceeds will be, because of the size of that business, significantly less than the proceeds from the combined sale of -- in the Latin American portfolio.

We haven't chosen a spot for those -- the use of that cash right now.

Okay, and in terms of the -- do you have any other opportunities in hydro upgrades or is this pretty much what you can do at this time?

Well, no.

In addition to the Holtwood hydro facility, we're adding about 30 megawatts to the Montana portfolio as well through a new powerhouse up there, an upgrade to that fleet of assets.

Okay.

Thank you.

Sure.

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

Good morning, guys.

Morning.

I wanted to ask you about the impact of the emission alliances.

I'm looking at the cash flow statement, the cash flow for investing activities, and sort of what is driving that and the short-term investments in the net sales purchases?

They seemed to have (booked) around and I wanted to get more clarity on that.

There is a larger planned sale assumption in 2009 for those, Paul, but that is a combination of that as well as movements in our [NDT] assets and things that purchase themselves there and purchases and sales of other liquid securities that we have cash parts in, that don't fit well into the other line items.

Okay.

That captures more than just the emission allowances and asset sales.

Okay.

And then what is the impact on earnings, I guess, when we look at this?

It looks like there's about $100 million swing, '07 versus '06, and I guess what you're indicating is that that number might go higher for the emission allowances, with I guess with the scrubbers coming in.

Is that one reason that drives it, or could you just giving more flavor to what drives these things?

Yes, that is already assumed in the $101 million number in '09 that you're looking at there.

Okay.

And the flat to negative [15] as I think about the business plan basically continues into '11 and '12.

There is no significant assumptions about material items that would affect that other investing activities line-item.

And what are these short-term investments that you're selling.

Movements in the NDT assets.

Oh, I got you.

Okay.

The trust.

I got you.

And then looking at slide -- and first of all, I appreciate the detail on slide eight/nine, you guys showed your expected reserve margin, which is helpful.

Where do you see that bottoming out or leveling off?

The trend looks like it's declining pretty substantially.

I'm just wondering where do we get, where do you think it bottoms out or do we have fuel to that past 2010?

Paul, this is Bill Spence.

It's hard to predict but I think probably in the mid-single digits might be the place where it bottoms out.

We're still not seeing any substantial new generation being added, particularly in the mid-Atlantic here in PJM.

But there are folks, obviously, that have announced some plans for some new (gas hard) combined cycle units in the region, but the real question is probably what impact on demand will a significant rise in electricity prices have and how might that be met going forward.

So very difficult to predict, though.

Are there any reliability issues that begin in the mid-single digits?

Well, I think it's highly dependent on weather, and if you get the one in 20 negative weather event, you could have some voltage reductions and so forth, but that is why we have a forward-planning process in place with PJM.

And so obviously our hope is that we maintain the reliability through planned increases.

And, obviously, we have reacted at existing plants with some upgrades that we have had at the fossil, as well as the nuclear plants.

All right.

Okay.

Thank you.

Okay, sure.

And we'll take our next question from Ashar Kahn with SAC.

Good morning.

Just going back to the update on the open EBITDA slide, if I'm doing my math, I just want to make sure my math is correct.

The previous slide had a open EBITDA minus market value of hedges of [two, four, nine, seven].

This is October when you did it.

And now it's two, six, four, four, which is an increase of about $150 million.

So, assuming that this open EBITDA stands until you hedge out the remaining portion of your portfolio and the prices remain the same, to me it's implying that 2010 earnings, if these prices remain as what is in these open EBITDA calculations have increased by $150 million pretax, am I correct?

That is how the math would work.

Okay.

And then if I can go, Paul, to the next slide, where you showed the sensitivity analysis of $19 million for one megawatt and you're using the [ATC] price, am I right because the ATC price is more dependent on your POLR load and your POLR load is around $40 million or so.

So if the sensitivity now is only $19 million, that would imply that only $19 million of the $40 million POLR is open and hence, you're hedged over 50% or so on the POLR requirements.

Well, versus looking at it in terms of POLR requirements.

The POLR load was what it was at the end of 2009 and the statistic that I think Bill used in his part of the presentation was slightly in excess of 60% hedged on 2010.

At this point in time.

Okay.

Okay.

So then the hedging is somewhere else also in the portfolio.

Okay.

Okay.

Correct.

Okay.

And then if I can just go to another line item, which is that the cash flow from operation from 2010 was [$239.0 million] in the October presenting, which has been updated to [$249.9 million] in this current presenting a, which is an increase of $100 million.

Is that being driven by this higher open EBITDA?

Or what is the basis of that provision?

It's primarily working capital and other changes.

That $100 million would adjust that figure effectively up, after -- if you're using the $150 million after tax.

So, we haven't updated the cash or the earnings forecast to reflect improvement in lower prices.

Okay, so the improvement that is happening is because of working capital changes right now, the $100 million improvement in tax.

Primarily.

We have updated as well as we got better information toward the end of our business planning cycle, some information on O&M costs and things like that and potential rate outcomes across the portfolio, but primarily working capital.

And then if I can go to Jim on the nuclear.

Jim, when do you expect, I guess regard to loan guarantees, I'm expecting that your application and your assessment will include applying for that and getting that, but do you have some kind of plan as to when the application fulfillment is completed and when the break -- when can a nuclear plant come online from a PPL portfolio?

Well, Ashar, the -- our current plan is to aggressively work on the construction operating license and submit that around October or prior -- slightly ahead of October of this year.

Okay.

And such that we can attain acceptance of that filed application by the NRC by December 3st of 2008.

And then roughly speaking, we would anticipate hopefully a two-and-a-half-year review period or less if things go well at the NRC and it could be a little less.

And so then it begs the question on questions like where we ultimately end up in the Q on forgings, and forgings are the critical path of the whole process, and I would say our objective is to strife for an online time of about 2016 or '17.

But as I said, there are a number of variables out there and that is what we're working through right now.

And Jim, you said that the prices now support, I guess you're talking about capacity and energy prices supports economics.

Does that mean that you're going to be looking now as price -- capacity prices moved up and all of that in towards -- is nuclear the only new bill that you're going to do, or could you be looking to buy more assets on the market as you look at these prices?

Yes.

I think it's a little bit of everything, Ashar.

We're certainly looking and continue to look, and every deal, of course, is different and has different aspects to it.

But we look at gas assets and some are out there looking for the right gas assets in the right areas, and we continue to say and repeat, we're not going overpay beyond what we believe the fundamentals show, where we'll deliver, but coal is a question, a big question, of course, and that has got its environmental overhang to it.

Coal right now is probably the technology that we're looking at the least, but that could change as events infold.

So I think really gas and nuclear, we're focused on, and, of course, we're continuing to update our hydro assets but from a large-scale block of generation, we're certainly looking at gas assets and nuclear.

Thank you very much, sir.

Yes.

And we'll take our next question from Greg Gordon with Citi.

Thank you, good morning.

Good morning, Greg.

Good morning.

To ask Ashar's question a slightly different by on the open EBITDA.

If the assumptions you played out on page 21 represent the debased -- the average ATC price of $64, PJM capacity of $191, EQA of 91%, those assumptions represent the assumptions that set the midpoint of your 2010 guidance, correct or incorrect?

Correct.

So given where power prices, where your open EBITDA shifted in the last several months, assuming that you could in fact lock in those margins, you'd be shifting more towards the higher end of the range at current economic pricing.

Correct.

And obviously subject to the outcome to the RPM option upcoming.

Right.

And you have more hedge options that have to take place and who knows what happens to pricing from here, whether it goes higher or lower.

Correct.

Let's talk about coal -- [spot coal].

Spot coal pricing is, obviously, through the roof.

I talked to my coal traders here at Citi.

And to paraphrase what he said, he said, the guys in central and northern Ap, who own coal mines are so bulled up they can't even get their horns out the door.

What are you seeing in terms of how that spot coal price is affecting your ability to hedge out your open position in '09, '10 and beyond?

And what type of pricing are you assuming in your forecast?

Well, first of all, we're, and, Bill, can you speak to this, we're moving away with the scrubbers coming online.

We hope to move significantly away from the central Ap coal and move towards Pennsylvania coal or either -- even looking at Indiana or Illinois basin coal.

I think, too, the other point I would make is, remember that, yes, the spot prices are moving and, yes, they have taken a sharp uptick, but we don't buy a material amount of our coal and spot coal basis and there are very long contracts.

And I don't know, Bill, are you see anything percentage to discuss now?

No.

If you look at our position for 2008, we're 94% hedged on coal in the -- 100% in the west.

As Jim said with scrubbers coming online, we had already previously contracted a pretty good chunk of coal that we had announced previously in the four years actually through 2012 and beyond.

If you look at where we're hedged 60% to 70% beyond 2008, I think we're in fairly good shape, and I think there are some reasons why this is a pretty short-term event with the issues that you have with flooding in Australia, China shutting down their exports.

And I think if I look at U.S.

inventories of coal at the existing power stations, people are in pretty good shape, and I think with the spring outages coming up, that will ease up on some of the demand for coal.

So, hard to predict, but our expectation is that you may see this volatility continue through the summer, and then our expectation is it would ease off after that.

But we're not seeing any material impact, I guess, the bottom line is, to our fleet at this point.

Final question, what is the time line for getting resolution of your [basin temp] plant proposal in Pennsylvania.

Well, I'd answer it this way.

We're continuing to work with, obviously, work with PUC as necessary.

As we mentioned, we would like to begin the phase-in plan in July of this year, so we're dialoguing with all of the interested constituencies that normally get involved in these type of filings.

And those discussions are underway.

I would say that I -- to date, we have had, I think, very positive comments associated with the plan, and so it's our objective to continue the dialogue with all those interested parties and see if we can work our way through and come to agreement on any of the details that need ironing out.

And then the PUC will then take that information, if you will, or that agreement by parties, and I think move it on through their process.

So, I can't give you today a date that the PUC will rule on this, but I think we think of it in the steps that we have to get out of the way, we want to find out are there issues with interested parties and can we resolve those issues, and I believe we can.

And then I think the PUC will take that information and our hope is that they will move quickly knowing that our planned 54-month phase-in plan needs to get started in July.

So, we're optimistic that they will recognize that and move forward.

Thanks, gentlemen.

Thanks, Greg.

We'll take our next question from Edward Heyn with Catapult Capital Management.

Good morning.

Morning.

Just to follow up on some of the questions Greg was asking on coal.

First, could you give us any sort of sense of what percentage hedges you have for coal in 2011/2012 time period?

Well, I don't want to get into real specific numbers, so all I can say is that we have significant portions of our coal and fuel across-the-board hedged and we're comfortable with where we sit right now.

Okay.

But is it significantly below the 70%, like if you look at the east, is it significantly below the 70% in 2010 or --

No.

It's not.

No.

It's not?

No.

So, it's around 50%, somewhere around that range.

Or higher.

Yes.

We're greater than 50% both years.

Okay.

And then in the 2010 hedges that you do have, that 70%, is there any -- can you give us any on the dollar-per-ton basis where you're hedged?

We haven't provided those details in the past.

We've spoke more about year-on-year absolute increases versus getting specific on a dollar-per-ton deliver basis.

Okay.

What about from a sense of where you are relative to current market pricing, current market forwards?

Is that significantly below market or above market?

Again, with the way that we contract and they're typically under medium to long-term contracting arrangements, spot marketing prices don't impact necessarily or directly the prices that we pay under those separate arrangement.

I would say we're significantly under spot, spot as you call it.

Definitely.

Under spot but less than -- the contract prices is a little different.

You also mentioned the -- how you do give a forecast of the increase in coal costs on a 4% to 5% basis over the next couple of years.

Yes.

That has actually come down.

I think last time on the third quarter slides, you said 5% to 6%.

Can you kind of walk through how -- it would seem with the bullish coal market that that would actually be going up.

Is there a reason why that has come down?

I think in the last couple of years we were 4% to 5%, and closer to 5% than 4% and closer to 4% than 5% and 5% to 6%.

I think 5% is a good number to assume for purposes that you're forecasting.

Okay, so that didn't change too much.

No.

No.

Okay.

And then just finally, do you have any -- you talked about the spot prices, do you have any indication of where you're seeing forward prices on a dollar-per-ton basis for central Ap?

I haven't looked at it here this week.

So I would be hard-pressed to give you a number.

Okay.

Thank you very much.

Sure.

Thanks.

We'll take our next question from Paul Ridzon with Keybanc.

Good morning.

Morning, Paul.

From '07 to'08, we're losing $0.18 of synfuels, that is $0.14 of tax credits and then -- and then $0.04 of higher coal costs, is that how that works?

That's correct.

And on the third quarter release we talked about $0.11 of a headwind.

Was that $0.07 of tax credits and $0.04 of higher coal?

That's correct.

In the fourth quarter we had, I assume, $0.07 higher synfuel than you expected?

Yes.

It would have been -- it wouldn't have been $0.07 and $0.04 but $0.11 and $0.04 and your question about the prior view, we had typically talked -- when we talked about hedging, we basically hedged the value of the synfuel operational earnings, not the benefit in fuel prices that affected margins.

So the total would have been $0.15.

You picked up $0.03 incremental versus what you're expecting in the third quarter.

That's correct.

We had stronger plant production, a little less phase-out than we thought at that point in time and the value of the oil collars ended up benefiting us pretty significantly.

What was the synfuel benefit in the fourth quarter?

$0.03, I believe.

One second.

Should have been a little stronger than that, actually.

$0.03 in the quarter.

Thank you very much.

Thanks.

We'll go next to Judd Arnold with King Street Capital.

Hey, guys.

Could you go through, on I think it's slide 13, what the $0.10 in higher interest expenses on the 2010 bridge?

That's primarily the impact of scrubbers coming online, additional plant and service beyond the scrubbers and viral plus others, as well as effectively use of cash for the stock buyback, the plan in '09 and '10.

Okay, so just we'll add like $400 million of debt for all that stuff?

Well, you got, prior to the scrubbings coming online, that stuff is being capitalized and now through depreciation and interest expense, it will roll through the bottom line, the financing cost for the scrubbers.

Okay.

I follow you.

And on coal stripping, it looks like Northwestern might sell, how much of a read through in the value of your units on coal strip do you think you'd get?

I know their structure on coal strip is a little weird.

Well, not only is it a little weird but it has contracts that have to be factored into the valuation.

So, I wouldn't read -- I wouldn't imply much to whatever the outcome is for Northwestern on that vis-a-vis, the value of our facilities and the whole portfolio on Montana.

And then, again, we're seeing higher just CapEx for Pennsylvania delivery business.

How sustainable do you think the $500 million outer year CapEx number is?

Well, a big piece of that, in excess is of $320 million is coming from the [r-tap] lines, which is FERC jurisdictional and not distribution or state jurisdictional.

But a lot of the rest is just simply based upon reliability, growth, obsolescence, and spend in support of the programs that we think the state really wants us to be investing in, relative to demand-side management and improving the capabilities of the advanced meters that we already have deployed, so I think it's very sustainable, from that perspective.

I don't see that order of magnitude and transmission line projects in our service territory post the 2012 targeted online date, but --

Sure.

Okay.

Appreciate it.

Thanks so much, guys.

Sure.

We'll take our next question from Brian Russo with Ladenburg Thalmann.

Good morning.

Good morning, Brian.

Most of my questions have been asked and answered.

But I was wondering, it looks like you have a $0.06 foreign currency translation positive impact in '07.

What are your assumptions for 2008?

$1.97-ish, $1.98 on Sterling.

Okay.

And one more question on the coal strip, unit four.

Could I assume your comments that you're not interested in acquiring the 222 megawatts that Northwestern presumes to have strategic options for?

I wouldn't read anything into that from that light.

Okay.

Thank you.

Sure.

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

Good morning.

Morning.

The first questions I have pertains to the rate phase-in plan that you're working through at the PUC, and obviously, some legislator have been trying to have designs phase-in plans on their own, separate legislation.

I'm just kind of wondering kind of how this works.

For example, if you get a phase-in plan approved and it goes into effect in July, for example, and the legislators pass law in September, with a different phase-in plan.

What happens?

Does your plan get grandfathered or do you have modify it?

Well, there are -- the jury is still out on what gets approved and when, obviously.

There is legislation being written.

I would characterize it this way, that it's very much dependent on the aspect of each of the programs, whether they're an opt-in or an opt-out program.

It's very possible that two programs could exist simultaneously and a customer could just have two choices of phase-in programs, and make their own choice as to which one they would like to be in.

Or, a customer, of course, could decide to enter neither and take the rate hike as it turns out in 2010.

So I think we still have to see, as it pertain to our rate phase-in plan, what form does it end up in?

Does it end up in an opt-out as we filed it, or will it need to move to an opt-in.

And I think that the legislation that has been put forth, I think that legislation is based on an opt-in approach.

So, we'll have to see how the final words are written, but I think to answer your question, we believe that it's in the best interest of the ratepayer -- and to have as many choices as possible, and that is why we have been basically supportive of the legislation that provides a second phase-in option for the customer.

I see.

Are any of the parties that you have been talking to seeking more of like a wait-and-see attitude to see what the legislator puts out first before --

No, I don't think so.

I think we're working through the process with the interested parties.

From our phase-in plans, the standpoint.

We're working with the interested parties and then we'll await the PUC's decision on it.

The second question pertains to carbons, and in particular to the [Regi] routine.

I was wondering if there is any momentum for Pennsylvania to join Regi.

I understand that now I think as an observer.

I was wondering if there was a chance it would be part Regi in 2009 and 2010, and how that might affect your outlook in 2010 earnings.

Well, I can't speculate as to what people's views will be out there in 2009 or '10, but at present, they're just -- I'm not aware of a lot of detailed discussion ongoing about Regi as it pertains to Pennsylvania.

I think the broader picture is with our generation mix, I think that we're well-positioned, obviously, to try to comply with whatever federal legislation is passed, and I think again we have a nice generation mix, so what downside it would be to coal margins with our nuclear and our hydro assets that provides a nice offset and really come up with.

-- questions.

In your walk across for 2008 guidance, I think there is an eight -- a $0.06 benefit from O&M, and I think you said that it's coming mostly from a reduction in pension expense and international?

Correct.

Correct.

The WPD.

WPD.

I was wondering if those savings eventually, I guess, get -- when you put on your next five-year plan over there in the U.K., do those savings get factored into the like the test year and the benefit goes away for you guys, or do you get to keep the benefit going forward?

While the concepts are related from a rate-case perspective for the [DPCR5], which will be effective April 1, 2010, the regulator looks much more at actuarial funding levels and the amount of cash funding that's necessary to meet the future obligation versus the GAAP expense calculation that has different discount rate assumptions and salary increase assumptions and all of that baked into it, and so they related but I wouldn't look at that as a clawback.

And finally for, I think, there was some sort of a U.S.

tax benefit that you benefit from in the fourth quarter this year.

That's also in the international segment and I think in the guidance statements that you put out, you expect that to go away in '08.

How much was that benefit?

We recorded an $0.08 benefit in the second quarter of this year and a late in the year repatriation, we did experience a lower U.S.

income tax expense hit on the repatriation than was planned, but it was not significant.

All right.

Thank you very much.

Sure.

We'll take our next question from Jeff Gildersleeve with Millennium Partners.

Yes, thanks a lot.

Just with all the coal questions, I thought it was interesting that you're obviously far along in your scrubber program, which enables you buy -- burn the lower quality, higher sulphur coal, which is a big price spread between that and the low sulphur coal.

I was just wondering if you could comment on that?

Is your question, what is the spread, or just the confirm that there is a spread?

I'm not quite clear.

Well there is a pretty big spread, but just that as you put on this scrubbers, you're able to switch from some of the higher-quality, higher-priced coal in the region to some of the higher sulphur coal.

Yes, and we have been for some time planning for that in contracting the higher sulfur coal.

Right.

And hopefully taking advantage of whatever positive price benefits that provides to us.

So, that is already reflected in our forward prices and margin.

Right.

I think, just the prices, it seems we're seeing up to $12 spreads between certain northern Ap coals and the lower quality.

Is that consistent with what you're seeing?

Yes, and I think it's very locational specific and mind specific.

So it's hard to make a general characterization of what those are.

But I guess when it comes to spot coal prices, we look at those and we follow those, but quite honestly, these are short-term disruptions that don't have a lot to do with, in my mind, the fundamental supply and demand as it relates to coal.

So I don't expect that this is an emerging trend that certainly I'm not losing sleep over.

Right, but I think what -- my only point is what people are looking at on the price quotes, typically is compliance coal or higher-quality coal.

Yes.

Those prices are quite a bit above where you're -- what the coal you're burning, right?

Yes.

The low sulphur could have a good spread.

You could have a $10 spread.

Right.

But it's really hard to give you a good spread number because it depends on the length of the term of the contract that we negotiate, it depends on the mine, the location, transportation costs.

All of that is a different mix with every supplier.

Right.

But you're correct.

There is a hefty spread and that went into our calculations on why we should build our scrubbers.

Right.

Thank you very much.

As well as a allowance costs.

Sure.

Thank you.

Yes.

Sure.

We'll take our next question from Reza Hatefi with Polygon Investments.

Thank you.

Could you talk about when you're going to file your procurement plan for 2011 and onwards, and is that going to resemble the methodology used for 2010 pricing?

To answer the question, we would be filing that plan, hope to file it here this year.

The exact timing has not been established, but clearly we're looking at what legislation is being proposed, and we want to make sure that whatever we file is consistent with what the potential expectation that might be coming out of the legislative session.

So, we are going to factor that in.

But thus far, our plan, absent any new legislation, would be follow the PUC's guidance in their rule making that they came out with last year, that pretty much described the manner and the methods that one could use as an electric distribution company to file the procurement plans.

And I think we're prepared to do that and we'll be doing that here some time this year.

Great.

Thank you very much.

Sure.

(OPERATOR INSTRUCTIONS) We'll take a followup from Daniele Seitz with Dahlman Rose.

Hi.

The question is with the emission credits, I'm assuming that you already sold some of your emission credits ahead of time.

Is there some of these benefits included in your 2010 margins, and so is the change in price of coal, I'm assuming.

All of that is already in your margins estimates.

Correct?

Yes, yes, Daniele.

Okay, great.

Thanks.

Yes.

And there are no further questions at this time.

I would like to turn this conference back over to our speakers.

Okay, thank you, operator, and thank all of you for participating in the call, and we're looking forward to another good year in 2008.

Thanks for attending.

Thank you, everyone.

That does conclude today's conference.

You may now disconnect.