賓州電力 (PPL) 2008 Q2 法說會逐字稿

Good morning.

My name is Jessica and I will be your conference operator today.

At this time, I would like to welcome everyone to the PPL Corporation second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr.

Paukovits, Director of Investor Relations.

Thank you.

Good morning.

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

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

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

Good morning.

Thanks, Tim.

Good morning to everyone.

Today we will follow our customary format and first we will provide you with a general business update and commentary on the second quarter 2008 results we announced this morning.

Following that, we will take your questions.

Joining me on the call today are Paul Farr, our Chief Financial Officer; and Bill Spence, our Chief Operating Officer.

Today we're reporting second quarter GAAP earnings of $0.50 per share compared with $0.88 per share in the same period a year ago when we recorded a significant gain on the sale of one of our electric delivery businesses in Latin America.

For the first six months of 2008 on a reported basis we earned $1.19 per share compared with $1.41 per share a year ago.

Other major factors contributing to the second quarter and year-to-date declines in reported earnings include the loss of operating earnings from our Latin American delivery companies that were sold last year, a 2007 U.S.

tax benefit that did not recur in 2008, rising fuel costs and the loss of synfuel-related earnings.

Turning to earnings from ongoing operations, second quarter earnings declined from a year ago coming in at $0.50 per share this year compared to $0.63 per share a year ago.

For the first half of the year our earnings from ongoing operations were $1.11 per share versus $1.28 per share a year ago.

These results for the first half were on plan for us to this point in the year and were previously indicated that we expected earnings pressure in the first half of the year due to the loss of several 2007 earnings contributors.

While we continue to expect stronger balance of the year margins in our supply business segment compared to the first six months, these stronger margins will not be enough to overcome the continued unprecedented rise in coal commodity and transportation prices and lower results than planned from our marketing and trading activities.

These drivers are causing us to reduce our forecast of 2008 earnings from ongoing operations to $2.25 to $2.35 per share, a $0.10 decrease from our previous forecast.

Paul will provide more details on our second quarter financial performance and expectations for the full year.

Before we hear from him, I would like to talk briefly about our forecast beyond this year.

As we indicated in our news release this morning, we anticipate that rising fuel and other commodity costs dramatically reduced prices for SO2 allowances and the completion of our scrubber construction program will create challenges for us in 2009.

We anticipate that our intensive efforts to mitigate these cost pressures will not be enough to avoid a decline in 2009 earnings compared with what we expect to achieve in 2008.

We will have more details when we formally initiate our 2009 guidance later this year.

Beyond 2009, however, we continue to see upside in our earnings potential.

Based on the hedging we have already completed and the prices we are seeing in the marketplace, we see upside to the earnings outlook for 2010 that we established last year and will update you on that look at the end of the third quarter.

We anticipate that for 2010 and beyond, our strong generating assets and marketing and trading operations will allow us to continue to increase value for the share owner even in the face of higher fuel and other commodity costs.

I would like to provide a brief update on our asset growth initiatives.

On the nuclear front in October we expect to file a construction and operating license application for a new nuclear unit in northeast Pennsylvania.

We are also moving forward with an application for DOE loan guarantees, a critical requirement for us to move forward with construction.

And we are continuing negotiations with potential partners in the new unit.

In addition to the possibility of building a new unit near Susquehanna, we are continuing to explore opportunities to invest in new nuclear facilities at other sites.

We are continuing to explore other generation opportunities as well including more aggressive additions to our growing renewable energy portfolio.

However, renewable energy and conservation alone will not be sufficient to meet the energy needs for the future.

The nation needs new, large scale electricity generation and we can't wait for a decade.

Provided the federal government provides the necessary incentives for new nuclear units or other acceptable financing alternatives emerge, I'm confident that PPL will be among the companies building new generation sources that the country needs benefiting consumers and providing value for our share owners.

As part of finalizing Pennsylvania's 2008 and 2009 budget legislators and Gov.

Rendell reached a compromise on an energy fund which will provide money for clean energy projects such as energy efficient buildings and a large solar energy program for homeowners and businesses.

There was no agreement, however, on several other energy related issues.

Those include demand-side management and conservation, rules governing electric distribution companies' acquisition of provider of last resort electricity, and mitigation of rate increases as generation caps expire beginning in 2010 for PPL Electric.

All of the remaining energy issues could be considered in a legislative session that begins in mid-September.

There appears to be general agreement regarding conservation, DSM programs and provider of last resort procurement issues.

Methods for mitigating the impact of rate cap expirations, however, continue to be a matter of debate.

Unfortunately, the state PUC has continued to postpone action on PPL Electric Utilities' rate phase-in proposal.

In our view, this proposal is a critical tool for customers who need help in mitigating price increases coming in 2010.

We will continue to work with all parties involved to facilitate the transition to a competitive marketplace in Pennsylvania.

I remain hopeful that the special legislative session will result in reasonable governmental action that encourages wise energy use, smooth rate impacts on customers, establish clear procurement guidelines and ensure reliability of electric delivery service in Pennsylvania.

In the meantime, PPL Electric Utilities is continuing to purchase default energy supply that its customers will need for 2010.

The Company has purchased one-half of that supply and has another RFP scheduled for this fall.

While there is significant uncertainty, volatility and cost pressure in the U.S.

energy business these days, PPL is well positioned for long-term success.

We believe our approach to increasing our generating capacity, layering on hedges for our portfolio and building on an already beneficial carbon footprint will allow us to take full advantage of opportunities as they emerge.

With that, I would like to turn the call over to Paul for the financial overview and I look forward to your questions.

Paul?

Thanks, Jim, and good morning, everyone.

Second quarter earnings from ongoing operations are lower than last year due to the loss of synfuel benefits, higher depreciation in the supply segment and lower international earnings.

International segment earnings were lower due to a U.S.

income tax benefit recorded in 2007 and the sale of our Latin American portfolio last year.

I'd like to remind everyone that earnings from ongoing operations include operating respects of the Latin American and natural gas delivery businesses but exclude special items related to their divestiture.

Turning to slide 8, I will discuss the supply segment in more detail.

The supply segment earned $0.26 per share in the second quarter of 2008, a $0.04 decrease compared to a year ago.

Higher East and West energy margins were more than offset by higher depreciation and the loss of synfuel benefits.

Higher energy margins in the East were primarily the net result of improved margins from marketing and [trading] activities, higher average fuel prices and lower baseload generation.

Higher margins in the West were primarily the net result of higher wholesale prices and lower hydro generation.

These favorable earnings results were more than offset by higher depreciation expense of $0.02 per share due to completion of the Montour scrubbers and the (uprate) of Susquehanna Unit 1 that went into service during the second quarter of ' 08.

The first phase of the [uprate] added 50 megawatts with the remaining 109 megawatts to be added in early 2009 and early 2010.

Also offsetting the margin gains was a $0.02 loss in synfuel benefits which includes the loss of earnings from synfuel production as well as the cost of replacing synfuel consumed at our Eastern power plants in ' 07.

Turning to slide 9, our Pennsylvania delivery segment earned $0.08 per share in the second quarter of 2008, a $0.01 increase over a year ago.

This increase was driven by higher electric delivery revenues as a result of PPL Electric's base rate increase that was effective January 1, 2008 as well as customer load growth.

O&M costs are up modestly due to general inflationary increases.

Moving to slide 10 our international delivery segment earned $0.16 per share in the second quarter of 2008, a $0.10 decrease compared to a year ago.

The decrease was the result of an $0.08 U.S.

income tax benefit recorded in '07 that I already mentioned and the loss of earnings from our Latin American portfolio, partially offset by higher U.K.

delivery revenues reflecting the benefit of the annual inflation adjustment factor and higher sales volumes and lower pension expense.

As Jim mentioned, we are revising our 2008 ongoing earnings forecast from $2.35 to $2.45 per share to $2.25 to $2.35 per share.

This reforecast is driven by the continued increase in delivered coal prices we are experiencing including transportation costs in coal contract adjustment clauses as well as reduced expectations for our marketing and trading operation for the balance of the year.

Bill will speak more about these drivers in his remarks.

The earnings walk on this slide reflects our current expectations for 2008 over what we achieved in 2007.

We now expect supply segment energy margins to be flat compared to 2007.

Increased margins from higher margin wholesale energy contracts and higher baseload generation are expected to be offset by higher coal commodity and transportation costs and lower results from our marketing and trading activities.

Our 2008 ongoing earnings are expected to benefit from higher delivery margins of $0.06 per share as a result of PPL's Electric's new electric distribution rates that became effective January 1 as well as customer load growth and lower O&M of $0.02 per share driven by lower pension expense at WPD, but partially offset by higher expenses in the supply in Pennsylvania delivery segments.

These positive earnings drivers will be more than offset by the $0.18 per share loss of synfuel contribution combining the loss of the earnings from synfuel production with the increased costs for replacing synfuel consumed at our Eastern plants, a decrease of $0.08 per share as a result of the sale of our Latin American portfolio, $0.08 per share in tax benefits recorded in ' 07 and higher depreciation expense primarily in the supply business segment due to scrubbers coming online in '08 and this year's Susquehanna Unit 1 uprate projects.

As a net result of all of these items we now expect 50% of our 2008 earnings from ongoing operations to come from the supply segment, 30% from international delivery and 20% from Pennsylvania delivery.

While we expect to initiate formal 2009 earnings guidance later this fall I would like to comment on a few of the drivers we expect to affect that forecast.

We expect the 2009 earnings will be negatively impacted by the continued rise in delivered coal costs and higher operating expenses as a result of the commercial operation of the Brunner Island scrubbers coupled with the impact of lower SO2 allowance prices.

Our business case for building the scrubbers assumed that the additional operating expenses of the scrubbers could have been offset in whole or in part by gains from the potential sale of SO2 allowances at prices higher than we are seeing in the marketplace now.

In fact, our original plan for 2009 was to achieve the $2.40 per share midpoint of our original 2008 forecast leaving '09 flat over 2008.

The combined effective increases in delivered coal costs and reduced expectation for SO2 allowance gains for 2009 is approximately $210 million pre-tax with $100 million related to coal and $110 million related to SO2 gains.

We now believe the pressure of these factors on earnings coupled with 2009 being the final year of PPL EnergyPlus' commitment to supply all of PPL Electric's load requirements under the polar contract at below market prices will result in 20090 earnings being lower than our revised 2008 earnings forecast.

Again, we expect to provide formal guidance for 2009 earnings on our third quarter earnings call.

At the same time as we see near-term pressures, we are more optimistic about our 2010 earnings outlook than we were a year ago when we established the current 2010 earnings forecast range of $4.00 to $4.60 per share based on our significantly hedged portfolio and the prices we currently see in the marketplace.

We anticipate that for 2010 and beyond our generation portfolio and marketing expertise will provide growth and EPS and share owner value even in the face of higher fuel and operating expenses.

We expect to update the 2010 forecast later this year as well as provide you with a mark on our open and hedged EBIDTA for the following few years beyond 2010.

Turning to slide 12, our free cash flow before dividend forecast has been updated to reflect the impact of lower margins and emission allowance gains in '08 and '09.

Our business plan continues to incorporate planned common stock buybacks which we continue to view as a place holder for other growth opportunities that can add greater share owner value.

The current annualized dividend rate of $1.34 per share brings PPL's payout ratio to 58% based on the $2.30 per share midpoint of our revised 2008 earnings forecast.

Despite the short-term challenges that we see for 2009 we still expect to grow our dividend next year and we plan to address any potential change in the dividend on our normal schedule early next year.

With that, I would like to turn the call over to Bill for an update on key issues affecting the businesses.

Thanks, Paul, and good morning, everyone.

As I'm sure you are aware last month the D.C.

Circuit Court vacated the EPA Clean Air Interstate rule or CARE program.

This ruling eliminated the scheduled reductions in SO2 for 2010 and 2015 and vacated the annual NOx program.

The seasonal NOx program was unaffected.

We are still evaluating the financial and operational impacts of this decision but we anticipate all of our annual NOx allowance purchases will be impaired as a result of the CARE recision.

In addition, market prices for SO2 allowances have fallen nearly 70%.

And as Paul mentioned, this is expected to have a significant impact on our 2009 GAAP earnings unless prices rebound.

The completion of scrubbers at our Eastern coal plants as well as the allowances we purchased in anticipation of the 50% required reduction in 2010 created a long position in SO2 credits.

We had planned on selling this length in 2009 to help offset the incremental costs associated with the scrubbers.

We currently do not anticipate making any allowance sales now in 2009.

Turning to slide 15, at this point it is still our intent to complete the construction of the scrubbers as planned despite the CARE decision.

Both units at Montour are in service and operating well and construction remains on budget and on schedule for the units at Brunner Island.

We will, however, evaluate the way we operate the scrubbers and weigh the variable cost of operation versus the market price of allowances.

We believe the CARE ruling had some implications for the Pennsylvania mercury requirements and we are assessing our options in that regard.

If that rule is maintained, the scrubbers and SCRs will be vital in helping us meet the 2010 Pennsylvania mercury reductions.

Moving to slide 16, I'sd like to provide some comments on the energy markets and the recent volatility we have seen in prices.

As you are probably aware, natural gas and electricity has moved downward while global demand for coal continues to provide upward pressure on U.S.

coal prices, particularly in the East.

Gas and power prices have fallen more than 20% since early July.

NYMEX prices for Eastern coal, on the other hand, have moved from $55 a ton at the end of '07 to about $80 a ton at the end of the first quarter and then peaking at $140 dollars a ton on June 30.

In recent weeks Eastern coal prices have retreated somewhat but are still well above our original business plan assumptions.

And the emission allowance markets are still absorbing the negative implications of the recent D.C.

Circuit Court ruling regarding the CARE decision.

Clearly there was an immediate impact also to off-peak power prices in addition to the emission markets themselves.

Along with the recent price volatility we are also seeing a large decrease in power market liquidity with forward bid and ask offers actually disappearing in some cases.

Specifically, many banks and hedge funds have pulled back from the market.

Accordingly, we are lowering our margin expectations from PPL's marketing and trading operation at least in the short-term.

All these factors are pressuring our earnings in the near term as you heard from Jim and Paul while we remain under generation rate caps.

Turning to slide 17, our hedge positions for electricity and fuel have been updated to reflect our position as of June 30.

We continue to receive our coal supply as scheduled without interruption and we have not experienced any supply defaults.

We have added detail to provide you with our estimated open Eastern coal positions for wholly-owned plants and I will be providing more detail on our 2008 coal position in a moment.

As I mentioned on the first quarter call, we are evaluating options to help mitigate coal price increase and utilize the flexibility afforded by our scrubbers at Montour.

We completed our first test burn of Illinois Basin coal at the Montour plant.

That test went very well and we plan additional testing later this month.

We are also continuing with the engineering work needed to utilize PRB coal in the East.

We hope to have some of this capability in place by 2009.

I'd like to give you some more specifics now regarding our 2008 coal position.

Since we currently expect our West coal expense to be close to plan, I'm going to focus my comments today on the coal issues in the East.

Of the total East projected coal use of 9.3 million tons, 1.4 million tons relate to our share of the Keystone and Conemaugh power plants and 7.9 million tons are for our wholly-owned Montour and Brunner Island power stations.

First, a few comments about 2008 contract terms that impacted delivered costs of coal for our two wholly-owned plants.

The majority of these coal supply contracts specify a fixed base price.

Some, however, have provisions for passing on increases in mine related diesel fuel expenses and a smaller number include a collar on prices.

Virtually all of our contracts have provisions for regulatory and legislative taxes like those related to mine safety and all of the tons are, of course, impacted by a fuel surcharge component on our rail transportation contracts.

So while we came into the year highly hedged at 94%, the dramatic rise in oil and coal prices has still had a material impact on our delivered coal costs.

And the last few small contracts we've signed to cover our remaining 2008 needs have, of course, been at much higher price levels.

We are currently projecting a $40 million increase in fuel expense as compared to our original 2008 plan that formed the basis of our prior earnings guidance, $26 million of this is related to base price increases, $13 million of that is from increases at our wholly-owned plants and an estimated $13 million is expected from our share of Keystone and Conemaugh.

And finally a total of $14 million is projected increases from the various surcharges net of oil hedges that we put in place to mitigate some of that exposure.

With regard to our longer term coal position we have all of our coal supply for coal strip units 1, 2 and 4 in Montana under contract through 2019.

This amounts to approximately 3 million tons of coal.

In the East, we have a contract with CONSOL for an additional 3 million tons of high sulfur coal that runs through 2018.

These long-term coal hedges in the West and in the East equate to about 6 million tons hedged through 2018.

Therefore, about 50% of our coal requirements are hedged through 2018 at prices that are obviously very favorable compared to those currently.

Moving onto slide 19, continuing with our practice of updating our 2010 open EBIDTA position with prices at the end of the quarter slide 18 has been updated to reflect forward prices at the end of June, which are available on page A-1 of today's presentation.

Based on all prices at that time, the unhedged or implied gross margin for the supply segment in 2010 would be about $4.3 billion, with the associated O&M of approximately $814 million.

This brings the value of our open EBIDTA to $3.5 billion, an increase of $600 million from our March 31, 2008 update.

You will also notice that the change in mark-to-market of our hedges since the first quarter reflects the higher forward electricity prices at the end of June.

However, with the large move down in electric prices over the past few weeks, the numbers on this slide would probably be more in line with the numbers we presented to you on the first quarter call.

Again, as mentioned, our long-term view for the power markets is strong and we remain optimistic about PPL's long-term earnings growth potential.

Now I would like to turn the call back over to Jim Miller for the Q&A.

Okay.

Thanks, Bill.

Operator, let's open the meeting up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Ashar Kahn.

Good morning.

I wanted to get a sense as to you had mentioned going forward.

Can you give us some sensitivity as to at what prices the coal contracts were bought at this quarter so we can get some sense -- I'm assuming you are buying it at a discount to spot prices, would that be fair?

Yes, that's a fair comment.

I think it is a very safe assumption that, yes, absolutely we are buying them at a discount to spot clearly.

I don't think we are in the position to really talk about the exact prices that we are buying them at.

Okay.

Jim, looking forward, do you think we will get commission to act on this proposal for the phase-in or what is your optimism level?

The time frame is shrinking as every day goes by.

My view if it doesn't get acted in the next month or so, the impact of having a phase-in with 2010 so close becomes very minimal.

I think, Ashar, the way I look at it you are exactly right as time ticks away, you do lose benefit from the proposal we have placed in the hands of the PUC which, of course, was on opt-in program.

Customers could choose to pay ahead a bit and those funds held and paid interest on for the customer would be used to offset their particular rate increase.

Remember, I think that there are other rate mitigation proposals as well being proposed in legislation that has been drafted.

I would say that there ultimately -- the PUC, I think, ultimately will act on our proposal.

It will be somewhat dampened by the time frame that is lost when they do act on it.

I should point out there were also, I suspect, the other mitigation proposals that have been designed by other legislators.

So I think the customer ultimately will end up with a choice of several mitigation proposals in the form of opt-in programs.

Okay.

Thank you very much.

Your next question comes from the line of Paul Patterson.

Good morning.

Good morning, Paul.

How are you?

Just -- I wanted to briefly go over the 2009, the SO2 and Brunner impact.

I don't know if I got that completely.

There were $110 million because of less SO2 gains.

Could you review that briefly again, I'm sorry?

Yes, that's correct.

The impact of coal in terms of the total $210 million that I mentioned, coal was $100 million in terms of higher expectation of costs than we had at this time last year, and we had planned SO2 transactions that would generated around $110 million in gains from the sale of length given that we would have the forward positions given that we had the scrubbers online.

By order in magnitude of '08 over '09 with all of the scrubbers on, the last unit coming on at least a portion of the year is slightly in excess $100 million year-over-year over the '08 combination of depreciation, interest expense, O&M, [Winestone], [Oxload], all of that.

I got it.

I guess what I'm wondering when we look at these hedge numbers for coal, obviously, there is some variability because of the things you mentioned at Conemaugh and Keystone, and et cetera.

How should we think about the variability of price or is there any rule of thumb associated with diesel or any of these things we can think about because it seems there is some flexibility in the pricing there?

Yes, Paul.

This is Bill Spence.

I think we try to give you a sense of that by calling out those percentages of the load or the coal tonnage that are subject to those price movements.

The 23% that I noted is really what is going to be fluctuating based on oil prices as well as the collars that exist in the contracts.

I think overall I'm really very pleased and I think we have done an excellent job of managing our procurement and deliveries and minimizing our exposure.

As I mentioned, we came into the year at 94% hedged and the increase that we are talking about here, two-thirds of it is related to Keystone, Conemaugh and transportation and the other third reflects some of the increases we are seeing in spot prices and some of the unhedged portions.

I think, we can certainly think about maybe providing some sensitivities down the road as to how these would potentially move under different price expectations.

I don't have that in front of me.

But I do think that as we look at our long-term contracting, what we have in place, I think not only are we well below the market, but for 2008 and '09 we will still be at a very competitive level, I think, if I look at 2008 we will probably come in at less than $45 a ton at the mine and probably next year in the low $50 a ton at the mine.

These other surcharges are the thing that really tend to drive our price points up and have the variance that under these polar generation rate caps we don't have a lot of flexibility to deal with that right now.

Okay.

Just the trading and marketing, could you give us a little bit more of a flavor as to what you actually expect as a total contribution for 2008 ?

Sure.

Typically, we have a fairly low expectation I guess around marketing and trading as it relates to our total gross margin in the 5% to 8% of our total gross margin would come from asset optimization of marketing and trading.

The actual decline we are expecting here is really about $15 million after tax.

It is not a very large number.

We have a fairly conservative shop as you know.

And what we are really seeing is really an exit from the market from a lot of the players that created the -- particularly in the forward markets a lot of the liquidity, the hedge funds and the banks have really pulled back with this big downward move in the volatility as well as the financial prices and their access to credit for margin calls in trading.

They are just not in the market and with what we see -- the summer is the time we would expect to have the best opportunities for that -- for the shop and with the lack of players out there to trade with, it is really hard for me to sit here and expect we are going to get that 5% to 8% of our gross margins.

Again, fairly small amount in the grand scheme of our supply gross margin, but we thought we are going to call it as we see it and let you know what we are thinking right now.

Okay.

You expect that to rebound in 2009?

I do.

I think -- the possibility, quite frankly, exists that later in the year things could change and we could have -- we could be back on plan.

I think the prudent thing to do in our view is just call it like we see it and let you know what the drivers are.

In the front end of the market, Paul, you saw Allegheny's approval in terms of their procurement plan.

I think you will see the other large utilities in the state that come out and [11] coming out as well.

And where maybe the financial players created some depth we'll see some physical load there and be able to take advantage of those opportunities as well.

Okay.

And then just finally, coal strip, I heard there was an outage there I believe in -- have you heard anything about that?

Well, of course, we have but I can't -- I don't want to comment on current outages but I can say there is nothing out of an unusual nature about any of the outages we are seeing right now.

Yes, there have been some recent issues but we are talking about a couple days worth of outage, not anything significant.

Okay, great.

Finally, the upside in 2010, can you give us a little more flavor as to what -- any more of a flavor as to what you see in 2010?

Really it is a combination of again the coal hedging that we were able to get in place and improve the position there and as prices rose fairly steadily at the front end of the year, especially during Q2, we were able to layer in some of the collar strategy that we have been using using options to lock in floors, if not above above floor levels, at prices better than we expected in that original plan.

The net of the open position on both power and fuels and, as well, the hedge position we are were able to layer in they were at better prices than we had in the original plan.

Okay, great.

Thanks a lot.

Your next question comes from the line of Paul Ridzon.

I'm wondering when you get out to '10 what kind of exposure do you have to what we are seeing here with fuel and transportation and price re-openers on the coal?

Sure, Paul.

I think when we get out there, we are balancing ourselves and making sure that as we lock in the electricity sales, we are also locking in the fuel.

So we obviously are off of the polar fixed price contract regime that we have been under and I think if you look at our electricity sales that we have locked in out there in the coal that we have locked in, we are feeling pretty good about the where we are for 2010 and quite frankly, we have locked in a lot of the dark spread into some of these higher coal -- power prices that is we have seen.

And, of course, as I mentioned we had already locked up a major long-term coal contract with CONSOL.

So again, I think we are -- feeling pretty comfortable right now with 2010 and what we are seeing.

But do those contracts have escalators that can be re-opened?

Some do but, again, most of them if they have any kind of opener from a price perspective, they tend to have a collar with a floor and a ceiling in them.

So not a lot of them have what I would consider just total price re-openers in them.

Most of the ones that have collars, if we took those out to the max each year on the collars even the longest tendered contract that Bill mentioned that we have got would still be at a price that is substantially below current market forwards for the near-term years.

I know it is totally beyond your control, how do you see CARE evolving from here?

I guess the EPA might be appealed by the end of July.

That didn't happen.

What is your read on what is happening?

We were a bit -- our speculation was that, and still is I believe, that there won't be a successful appeal process.

That being said, no one knows for certain, but my sense of it with what I see going on politically and the EPA and the election, et cetera.

We don't view this as necessarily a long-term situation because I think there is going to be tremendous pressure from the states over the environmental side of this, impacts of this ruling.

But near term I think it is fair to say there is no near-term quick fix for this issue.

I think from our perspective, from a shareholder perspective, there is absolutely no reason to, obviously, rush out there and destroy value, potential shareholder value by attempting to move allowances at much lower prices.

I think we see this issue being reversed over the long haul, but at the same time, we feel that our allowances, obviously, will increase in value over time.

Do you think there is an awareness that the existing -- whatever happens has to preserve the credibility of the existing allowances?

You know, I think in the end no matter what program comes forth, facilities across the U.S.

will be required to utilize allowances to run.

No not everyone has scrubbed.

Not everyone has reached their reduction levels.

In my own mind, I think it is more of an issue of how the law is fashioned to deal with states impacting other states.

Quite frankly our view was -- this is sort of irrelevant in a sense -- it occurred, the court ruled what it ruled.

The court could have solved the problem that was raised by North Carolina without eliminating the entire program.

But that being said, we are where we are, but I think, ultimately, the allowances will be usable and I think they will increase in value over time once the program is redefined.

Thank you very much.

Your next question comes from the line of Edward Heyn.

Yes, hi.

It is Steve Fleishman.

Can you hear me?

Yes.

Hey, guys, couple of questions.

First, on the share buyback that you have mentioned still in your long-term plan, is that something you still think you could do in '09 or is that more likely '10?

I think we are assessing the timing right now.

Given the order of magnitude of the impacts it would be reasonable to assume it would be deferred to some extent.

Okay.

Secondly, I know Bill gave the numbers on gross margin for trading but just -- I don't know if he gave like percent of gross margin but from a rough, maybe, millions of dollars, what in '08 is your rough range for marketing and trading within your guidance?

Pre-tax would be $100 million to $150 million in that range.

Okay.

One other logistical question, in your open EBIDTA, I know you use market prices for power.

What do you use on your coal?

Do you open up all your coal contracts in the open EBIDTA?

No, because of the mine-mouth contract at Kolstrip, that is reflected in the open, but the benefit of the -- then we mark the rest of the Eastern coal to market and then the hedges go down in the hedge line for the coal.

Okay.

Are the Eastern hedges done at NYMEX prices or are they done where you kind of know where you think you can get it to your plant?

The actual -- if you are talking about the hedges, it is the actual contracts that we have got in place with the transportation agreements we have in place.

I'm sorry, I meant the open position.

When you open up the coal?

It is your question how do we mark that?

Yes.

Compared to market?

Right.

I think we look at the forward prices as best we can tell in both NYMEX as well as in the over-the-counter market and then we try to apply some reasonable judgment to it.

It is probably a blend of both.

Basis plus delivery.

Yes.

Okay.

One last quick question on the scrubbers.

When you make a decision on whether to operate these or not, are there contracts and other limitations related to operating them where you have to operate them?

For example, some of the -- I don't know if you were making gypsum out of it or something like that.

Do you have commitments that need to be met or can you just not operate them?

Those scrubbers for instance at Montour that are placed in service -- Bill, you can expand on this -- once you place them in service you are under your new regulations and they must run.

As to Bill's point, we are evaluating steps to be taken regarding the Brunner Island units.

Bill?

And, yes, there are some requirements that we have to produce the gypsum for the U.S.

gypsum plant.

And I think what I was referring to was more operating them at less than full load but still within our permit requirements.

Once we turn them on, we are under new permit requirements and I think in the long-term, clearly, we are still going to need scrubbers.

Whatever comes out of the next son of CARE or whatever it will be called, which I think will be a legislative derived fix, if you will, but I think it is going to be equal to or probably more stringent than what we had under the CARE rule.

And I think the decision to put the scrubbers in is still the right one and for the long-term and still the right thing to do for the environment and just in the interim here, as Jim mentioned, in the short-term, we need to look at are there modes of operation that we can use that would still meet all of our contract requirements and permit requirements and see what flexibility exists and we are evaluating that right now.

Okay.

Great.

Thank you.

Sure.

Your next question comes from Leslie Rich.

All my questions have been asked and very thoroughly answered.

Thank you.

Great.

Your next question comes from Jonathan Arnold.

Good morning.

One of my questions that hasn't been answered really was on strategy with the trading business.

You have begun to emphasize it as more of a story going forward.

You have obviously had a change of leadership over there.

Can you talk a little bit about what kind of things you are doing, how you see that business evolving over the next two to three years?

Well, Jonathan, I think, regarding change of leadership I don't think that has in any way changed our view of how we choose to set our expectations of our trading floor.

As we have said, we continue to I think implement the policy of being principally an asset-backed Company.

We don't choose to get heavily involved in large percentages beyond our baseload assets.

Yet we try to focus on optimizing around the deals we put in place to sell our power.

We do trade beyond -- a bit beyond our assets but -- I think at a very nominal and conservative approach.

I don't see us changing that.

Our view is -- our strategy is going forward is to continue finding good shareholder value by adding generation to our portfolio, but remaining relatively in the same realm of trading beyond our assets a slight amount.

We just don't choose to move to that higher risk posture of high levels of trading beyond our assets.

On another subject, back to the open EBIDTA disclosure, you talked about it being more consistent with the Q1 disclosures.

These late July prices, then you have also said in your release that you feel that you have upside versus that original range you put out on earnings.

Is that statement based off the June pricing in the presentation or more off where prices are currently?

No.

That would be where prices are currently given hedges that were done in the front half of the year and where we see current forward prices for both fuels and the open positions on power.

And when you talk about these hedges, it's clear you have some value in 2010.

To what extent was that hedging activity out into the '11, '12 period, beyond just the one year?

We did execute hedges as we have been for '11, '12 and even some maybe a little bit further, but that's -- '11 is -- I think it is safe to say significantly less hedged than '10 is and '12 less than '11 but we have taken advantage of the opportunity as the market had liquidity and as the liquidity comes back we will do the same thing.

As prices evolve and give us good price points try to lock in additional contracts.

Thanks, Paul.

Your next question comes from Daniele Seitz.

You mentioned a certain increase in (inaudible) transportation costs for '08.

Is the order of magnitude for '09 assumed relatively the same?

I think Daniele, the best way to look at that was the number of around -- that was versus plan number I guess.

I think the order of magnitude is actually higher -- not only in terms of absolute dollars as Paul mentioned, $100 million of increase compared to our original business plan.

I think the expectation right now with oil prices where they are that affects both the mine related surcharges as well as the transportation related surcharges net of our hedges is still a fairly sizable increase year-over-year.

The number that I gave, Daniele, of around $100 million in terms of an increase is approximately the right number to focus on, and that would be inclusive of open and higher hedge-priced commodity as well as transportation including some estimate of the oil adjustments that affect the mine operations themselves.

We had, Daniele, some increase imbedded into our 2009 plan, but not at the levels we are talking about now.

Okay.

I guess it is too early to talk about breakdown in 2009, do you see some major changing in the distribution of earnings in '09 or is it pretty much in line with '08?

I guess I would see some level of change from the revised.

We talked about 2009 likely coming in below the '08.

The '08 was going to be 50 supply, 30 international, 20 delivery.

Clearly, the cost pressures that caused us to think that '09 will come in below '08 will all reside in the supply segment.

That mix will be slightly less or less supply and the result would be higher international and domestic delivery.

Great.

Thanks a lot.

Your next question comes from Scott Thomas.

Good morning, guys, both my questions have been answered.

I did want to zero in on something that I think Bill Spence went through on slide 18, the impact of base pricing (inaudible) the plan.

Was that -- was that just marketing the unhedged [pole] position at the beginning of the year for the market for the rest of the year or was that re-opened or index for the hedged portion -- can you give some color on that?(audio low) (Inaudible)

For which year, I'm sorry I didn't catch that?

In terms of the slide I was talking about, '08 versus the plan, I think.

It is a combination really of the surcharges, the Keystone and Conemaugh and some of it is fixed prices higher than what we had in the plan.

That increase is really driven by the unhedged piece we had coming into this year that we have now hedged up to the 100% level now at much higher prices than in the plan.

There is a component of that fixed price which really related to, at the time, what we planned to buy in the open spot market.

So it is now our best guess as to what all these fixed price plus the adders will come in between now and the end of the year.

Okay.

Just related to Daniele's question on the fuel surcharges.

Yes.

How real time that works?

Is it a maximum percentage increase per year based on where diesel is, et cetera?

Is it by quarter?

How does that flow through?

Some of them are based on indices that come out after the fact.

There would be a lag period, but we try to estimate where we think the indices will come in based on the forward prices.

That's the one case and the other case of some of the contracts that have collars in them we are assuming we will be at the maximum price -- that ceiling price that the suppliers would receive.

Because we are so far above where we would have expected in the industry.

So I think we will be at the max level of the collars.

Okay.

Just so I understand that $100 million pre-tax number that I think Paul referenced was your estimate of the increase next year that would wrap up those max dollar transport costs and the mark-to-market of the rest of the unhedged pole prices.

Is that fair to say?

That's correct.

Yes.

Okay.

Thanks, guys.

Your next question comes from the line of Yiktat Fung.

Good morning.

Good morning.

First question, I think, in the previous conference call, the management team talked about maybe perhaps testing burning PRB coal at some of the Eastern plants to diversify the coal mix.

I was wondering if there has been any progress on that front?

There has in that we continue to do the engineering work necessary to understand what the cost would be capital as well as O&M, as well as the D rate because of the BTU content of the Western coal versus the East to make sure that (A), the economics work and (B), that we can actually effectuate the changes.

And I think so far we are cautiously optimistic that we can make the modifications with a fairly reasonable cost and being in an ability some time next year to begin to blend the PRB coal.

My expectation is you are probably talking about blending in the 10% to 15%, maybe at the outside, 20% of the actual coal and we would anticipate doing this in Montour right at the moment.

Is there any estimate as to the capital costs in order to enable this switching?

My expectation, we haven't finished the engineering yet but it is probably less than $20 million.

When will PPL file its 2011 procurement plan in Pennsylvania?

What did he say?

The team has, I think, a recommendation completed.

Senior management is going through a review right now.

I would expect that would be filed relatively quickly.

Is it going to be significantly different than the way the power is procured in 2010?

Is it going to be bid through like an RFP process?

It would.

I think the differences would be instead of 2010 being a one-year bridge plan to get us up to the rest of the peer group, the '11 and beyond plan would be a multi-year plan.

There would be probably like others some expectation of a portfolio of contracts that would be bid out.

Okay.

We'll try to take advantage of the flexibility that the PUC left in their ruling on long-term statewide procurement plans a few years ago when they came out with their ruling.

Our plan will try to utilize, I think, the wise flexibility that they provided in that ruling.

And just one last question, I was wondering if there were any updates on the United Kingdom delivery segment?

Is there a rate case coming up or anything like that?

Yes, Distribution Price Control Review 5 would be effective in April 2010.

WPD as well as the rest of the [wrecks] in the U.K.

are in process now and preparing capital plans to be filed with the regulator here in August and all of the various kind of committees and activities that go into preparation for this five-year cycle review are well underway.

Thank you very much.

That's helpful.

Yes.

Your next question comes from the line of [Cary St.

Louis.]

I just want to focus back on the '09 guidance, this $210 million of pre-tax impact.

I guess I calculate on the after tax basis that is roughly $0.35?

That's about right, Cary.

Okay.

Are there offsets to that or should we go ahead and assume if you said your '09 target was 240 that it would now imply your '09 number would be roughly 205?

I wouldn't imply that at this point of time.

We do expect offsets by way of margin enhancements, by our focus on O&M.

We are still in the throws of our normal annual business planning process.

The real goal of providing that level of detail was to show you order of magnitude of two very significant drivers, what the impact of those would be.

And then as I said and, I think, Bill said too, we will provide that guidance on the Q3 call, the formal guidance.

Okay.

I would hope that you really work to improve your hedging guidance because it really looks like you were pretty significantly hedged and you wouldn't see these size of cash flows changes going forward.

To follow-up on that point this 77%/ 23% split on fixed and re-open coal contracts, I'm ascertaining that basically that split will stay constant going forward?

It is not like that will change significantly such that your percentage of potentially re-open contracts isn't going to increase up to like 30% or 40% in any outer years, but that split should remain more or less constant?

I think that is subject to market conditions, Cary.

So while we strive to be as -- narrowly define the costs as best as possible, to the extent that others in the industry negotiate certain terms and those become market, we are [compulsed] to negotiate market.

We make every attempt to -- in Bill's discussion in terms of the variability of some of this pricing -- even including the oil, we did have significant amounts of oil hedges in place that really did economically isolate us from a much bigger order of magnitude impact that could have been felt, but it is really trying to get arms around the more narrow mine-related costs rather than their use of diesel, rather than diesel used to transport it from the mine to the plant.

We try to the greatest extent possible to do that, as well as keep the collars themselves when there are re-openers as tight as we can but that is a provider by provider negotiation.

I guess when you see something like 94% hedged and you have $100 million fluctuation.

It doesn't seem to jive real well.

I would just implore you to step up the disclosure in terms of what the hedge definition actually refers to, if at all possible in the future.

And then I just wanted to talk about the cash flow statement and cash flows from investing activities.

It appears like you had a large expenditure for intangible assets and then a large increase in -- or decrease in restricted cash.

I want to know what those two items relate to?

It's typically the restricted cash would relate to NYMEX postings that we have for exchange traded contracts.

I think we did talk about earlier in the quarter the consummation of the purchase of the toll, the Ironwood toll from Bear Energy and that's a significant component of that one line item.

Okay, so that's the value of that.

Okay.

It is a contract so it is by definition intangible.

Okay.

Thank you.

Your they question comes from [Fadul Marti.]

Good morning.

My questions have been asked and answered.

The next question comes from the line of Tom O'Neill.

The question on the CNX contract, does that have a re-opener every three years to the 15% cap that is hitting?

I'm curious is that showing up, is that showing up in 2009?

I'm sorry, I didn't catch.

Which contract were you asking?

The CONSOL.

I really -- we are under confidentiality at provisions under that contract.

I can't speak to specific contracts.

I'm sorry.

Okay.

But that was signed in 2005?

2006 -- either late '06 or early '07.

I can't recall now.

It was not 2005.

On the rail, just curious what exactly you are seeing or is it mainly a coal issue?

No, it is both.

On the rail side we have seen some fairly significant increases on the order of magnitude of about $5 a ton.

I think last numbers I saw we were previously paying about $11 per ton to deliver some of our Eastern coal and that's up to about $16 a ton.

It is pretty sizable on a percent increase.

And then just one last question on the coal contracts.

To date you haven't really seen anybody break like a price majure type of situation on coal contracts.

This is just sort of the levers that sit inside the existing contracts that are --

That's correct.

Yes.

Okay.

Thank you.

Sure.

Your next question comes from the line of Shalini Mahajan.

You have slated a small amount of hedging in 2010, I was wondering if you could indicate -- give some indication on the pricing there?

And then broadly how should we be thinking about your 2010 hedging philosophy on your electric sales especially on the Eastern side?

Is there any target of, a target on how hedged you want to be as you enter '09 or get to at the end of the year?

Well, '09 I think we are still under our affiliate agreement in '09.

So that is not a good year to talk about hedging philosophy.

I think what we have said in the past concerning hedging, there is a lot of ingredients that go into a hedging philosophy at 2011 and beyond.

We, in fact, are assessing that and taking the steps necessary.

We, obviously, want to find ourselves in a pretty reasonably hedged position as we approach the year in question.

We don't necessarily want to be fully hedged, but I think to leave some room for upside based on the fundamentals of the market we see.

But I think generally speaking with posting considerations and the like, there is a number of ingredients.

But I would say on balance, we believe in -- our Company has believed in a more high percentage hedge as you approach the years versus a lower percentage hedge counting on gaining a bunch of upside that may be there.

We would rather bring more certainty to the year in question than doubt.

But just given the impact that you are seeing from both the fuel surcharges and coal prices hitting the collars, would it make sense to more open or would you also look to maybe hedge your diesel oil, kind of doing oil hedging and mitigating the impact that you see see in the future?

I think certainly on the oil hedging side we will continue to do that.

We have done quite a bit of that and it has really helped and we'll continue that.

On the surcharges side, I guess, in the overall portfolio, when you think about the open EBIDTA that I mentioned earlier and the over $4 billion when you're talking about these surcharges they are measurable and they are important and we focus on them.

But in the grand scheme of how we approach hedging our margins, it is a relatively small factor in the overall equation to be honest.

Certainly, I would add that in this -- in today's world with a number of the geopolitical events going on that you cannot predict we are certainly not in any thought process that we want to be at all open significantly on the fuel side, certainly.

Which is why we really focus on those fixed price components, the base coal and as Paul mentioned earlier, we are subject to where the market is and try to factor that in and do as much homework on the fundamentals in the coal markets.

We have a good sense of where they are headed and I think the wild card in a lot of this is where oil prices will fall out more than anything.

Okay.

Thanks.

I might have missed this but have you guys indicated how much of blending you could do using Western coal with Illinois coal?

Is there a percentage that you guys are targeting or you could achieve without a loss of efficiency?

Yes, I think we are right now still in the midst of our engineering studies, but 10% to 20% would be the range.

Okay, great.

Thank you so much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Raymond Leung.

Hi, guys, how are you?

Most of my questions have been answered.

Just a housekeeping question in terms of you have a fairly large short-term debt balance.

Can you talk a little bit about what that is comprised of, is that mostly a collateral posting?

And if there is some maturities talk about financing plans for maybe this year and maybe into next year?

We do have a relatively modest debt issuance planned for later this year.

I'm not sure if it has creeped into the window yet or not, but there is about a $600 million refinance for Electric Utilities next year.

The balance would be collateral postings and given where prices were at 6-30, those were, obviously, more significant than they are today by a pretty significant amount.

So --

Is there a breakdown of what was collateral and what wasn't?

What portion was collateral?

Just one second, let me see if I have that handy.

Between commercial paper and other things out affecting the NYMEX type contracts and things like that, we are somewhere between $200 million and $300 million.

I don't have the details beyond that.

We will have to get back to you on that one, Raymond.

Okay.

Great.

Thank you, guys.

(OPERATOR INSTRUCTIONS) There are no more questions at this time.

Okay.

Well, thank you all for attending the call.

As we said, we have given you, I think, the best information we have with us at this time.

Obviously, 2009 will be the last year of our rate cap period.

It presents its form of challenges in many ways.

On the 2010 and beyond, as I said, we will update you on the third quarter call on our view of 2010.

We feel very good about 2010 and also things are looking positive for '11 and '12.

So with that, thank you for attending.

This concludes today's conference call.

You may now disconnect.