賓州電力 (PPL) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to PPL Corporation's third quarter 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).

Thank you.

I would now like to turn the call over to Tim Paukovits, Director of Investor Relations.

Sir, you may begin your conference.

Thank you.

Good morning.

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

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

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

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

A discussion of factors that could cause actual results or events to vary are contained in the (inaudible) 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.

Thank you, Tim and good morning, everyone.

Today we plan to follow our usual format, beginning with general business update and commentary on our third quarter results we announced this morning followed by Q&A session, as always.

With me on the call this morning are Paul Farr, our Chief Financial Officer and Bill Spence, Chief Operating Officer.

Today we are reporting third quarter GAAP earnings of $0.54 a share compared with $0.84 per share in the same period a year ago.

For the first nine months of 2008, GAAP earnings were $1.73 per share compared with $2.25 per share a year ago.

Driving the decline in third quarter and year-to-date reported earnings is the significant decline in wholesale energy margins.

The company's wholesale energy margin decline was driven by unrealized losses in our marketing and trading activities and extended outages at two of our large coal-fired power plants in Pennsylvania.

The margin declines were partially offset by improved earnings from our UK delivery business.

While Bill Spence will provide further details on both margins and the power plant outages, I would like to take a minute to put this quarter's results in some perspective.

As you know, during the third quarter, there was unprecedented volatility in the energy commodities market, a rapid decline in liquidity due to an elimination of market participants and a 25% to 35% drop in forward wholesale electricity prices.

Due to this lack of liquidity, we were unable to unwind certain market positions which lead to the unrealized losses included in the results that we reported to you today.

Our approach has been to conservatively market and trade around our assets utilizing appropriate stop loss controls.

Under most market conditions, these controls would have limited our losses to a small amount.

In light of the reduced market liquidity and volatility, we have taken steps that I believe will limit these types of trading exposures going forward.

Our approach to the marketing and trading business has been very profitable for us over the past several years and we exexpect it to be profitable this year as well.

We have also addressed the outage at our Montour plant which will return to normal operation later this month, and Bill will cover more details on that during his update.

Clearly, this was a challenging quarter for the company.

It also was clear that the worldwide financial crisis has had and will continue to have a significant impact on wholesale electricity markets for the foreseeable future and that we need to adjust our tactics accordingly.

I want to emphasize, however, that our long term strategy focused on the efficient operation of our generating assets and marketing the output of these assets combined with effective operation of our regulated delivery systems continues to provide significant value for our share owners.

As you know, we have excellent generating assets and one of the largest and most active wholesale energy markets in the world.

Our marketing and trading operations focus primarily on using these assets to serve load following needs of utilities in the mid Atlantic and northeast.

And our strategic approach to making the most of our generation assets continues to hold significant growth potential for 2010 and beyond upon exiting a rate cap period.

More on that in a few minutes, but let's first cover ongoing earnings.

Earnings from ongoing operations for the third quarter declined to $0.45 per share from $0.72 per share a year ago.

For the first nine months of the year, earnings from ongoing operations were $1.56 per share versus $2 a share a year ago.

Ongoing earnings for the quarter and year-to-date were affected by the same drivers as reported earnings, and Paul will provide more details on the third quarter financial performance.

Before we hear from him, I would like to talk about our forecast for this year as well as 2009 and also 2010.

As we announced earlier today, we have revised our forecast for 2008 earnings from ongoing operations from a range of $2.00 to $2.05 per share, primarily as a result of the lower energy margins I just discussed.

Today, we are also initiating our 2009 earnings forecast range of $1.60 to $1.90 per share.

The 2009 forecast takes into account a number of factors including ongoing costs pressures, fixed generation prices in Pennsylvania for the last year of our rate cap period, rising costs of financing and credit facilities and a stronger US dollar.

So given the ongoing uncertainty of financial and power markets, we will be focused on aggressively managing risks and preserving capital without jeopardizing our expected significant increase in earnings and cash flow for 2010 and beyond.

And as we have been saying for some time, we are well positioned for this time horizon.

Based on the value we have created through all of our hedging activities and marking the unhedged power and fuel positions to market, we are revising our 2010 forecast to $3.60 to $4.20 per share, and again, Paul will provide additional detail on this revised forecast.

This 2010 forecast is based on a solid foundation of having already sold more than 80% of our 2010 expected base-load generating output and 100% of the available capacity, as well as having fuel contracts in place that are significantly below market.

Strong longer term fundamentals replace in place for PPL.

There is unlikely to be substantial new generation on the market resulting in lower reserve margins.

We have high performing, relatively low cost generating assets.

We have sufficient credit facilities and improving cash flow and we have very visible earning from our supply business and our electricity delivery businesses in Pennsylvania and the UK.

The unprecedented events of the past couple of months appropriately have caused companies in this sector to reexamine their strategies and tactics, and PPL is no exception.

I am pleased to tell you that our long-term strategy continues to support growth for its share owners.

And now, I would like to turn the call over to Paul and then Bill to provide further details on our reported results, our forecasts, our updates on some key business items.

After that we will take your questions.

Paul?

Thanks, Jim, good morning, everyone.

Before I begin, I would like to remind everyone that earnings from ongoing operations include the operating results of the divested Latin American and gas delivery businesses, but exclude special items related to their divestiture.

Third quarter earnings from ongoing operations are significantly lower than last year as Jim mentioned, driven by lower energy margins in our supply segment and partially offset by higher international earnings.

Turning to slide 7, I will review the supply segment performance in more detail.

The supply segment earned $0.16 per share in the third quarter of 2008, a $0.34 decrease compared with last year.

The decrease was primarily driven by lower east energy margins as a result of unrealized losses on certain trading positions as well as lower base load generation resulting from unplanned outages at two of our large coal-fired power plants in PA.

We filed an 8-K earlier in the third quarter detailing the expecting decline in forecast earnings due to the partial collapse of the substructure surrounding one of the Montour cooling towers, and Bill will discuss more on these drivers in his remarks.

Beyond the outages, margins were negatively impacted by higher average coal prices.

Partially offsetting these negative margin drivers are higher realized margins from various supply contracts.

Also contributing to lower earnings versus last year are higher depreciation expense of $0.02, the loss of $0.03 of syn fuel related earnings and higher financing costs driven by higher debt levels, healthy issuances from credit facilities and the cost of additional credit capacity that was added late in the quarter.

The higher depreciation relates to placing the Montour scrubbers in service in the operator Susquehanna unit 1 that went in service during the second quarter of 2008.

As a reminder, the first, phase of the upgrade added 50 megawatts with a remaining 109 megawatts being added in early 2009 and early 2010.

Moving to slide 8, our Pennsylvania delivery segment earned $0.09 per share in the third quarter of '08, unchanged from last year.

Higher electric delivery revenues resulting from the used distribution rate increase and customer load growth were offset by higher operating expenses.

Moving to slide 9, our international delivery segment earned $0.20 per share in the third quarter of 2008, a $0.07 increase compared to a year ago.

The increase was the net result of a UK tax benefit on a changing UK tax law, lower US taxes on planned cash repatriations this year, lower O&M driven by lower pension expense and the loss of $0.03 per share in earnings from PPL's Latin American businesses which were sold in 2007.

As Jim mentioned, we are revising our 2008 ongoing earnings forecast to a range of $2.00 to $2.05 per share from the prior forecast range of $2.17 to $2.27 per share.

The margin impact affecting third quarter earnings leads us to this revised '08 forecast.

We now expect energy margins to be $0.33 per share lower in 2008 compared with 2007.

The expected decrease is primarily driven by lower margins from marketing and trading activities, lower coal fire generation and higher fuel costs.

These decreases are partially offset by higher nuclear and hydrogen generation and improved power value driven primarily by higher electric sales prices in the west and higher sales prices under the polar contract between PPL Energy Plus and PPL Electric Utilities.

Other factors impacting our expected 2008 earnings are lower O&M of $0.06 per share, the $0.18 per share loss of syn fuel related earnings, a decrease of $0.08 per share as a result of the sale of our Latin American portfolio and higher depreciation expense primarily, again, in the supply segment due to the scrubbers coming on line and this year's Susquehanna unit 1upgrade project.

Now let's look at 2009.

As we stated on our second quarter call and as Jim just mentioned again this morning, many of the cost pressures that are impacting 2008 earnings will negatively affect 2009 earnings as well.

The earnings walk on this slide reflects our current expectations for 2009 over what we expect to achieve in 2008.

The major drivers of our 2009 earnings forecast are higher expected energy margins of $0.22 per share, primarily driven by improved power value from higher electric sale prices the west and higher sale prices under the polar contract, again, between Energy Plus and EU, higher margins from marketing and trading activities, higher coal-fired and nuclear generation and higher fuel costs.

These higher energy margins are more than offset by higher O&M, primarily due to additional planned outages at our coal-fired power plans, higher operating costs associated with the scrubbers and higher operating costs at WPD.

Higher financing costs due to higher debt balances and the increased cost of credit facilities, unfavorable UK exchange rates, UK tax benefits recorded in '08 that are not expected to recur in 2009 and higher depreciation due to scrubbers and precipitators that are expected to go into service during 2009 and generally higher plant and service throughout the company.

Turning to slide 12, today we also revised our 2010 earnings forecast to a range of $3.60 to $4.20 per share.

This slide includes the drivers between expected '09 and '10 earnings and on the next slide, I'll walk through the change in the new 2010 forecast over the previous forecast for 2010.

2010 earnings growth is driven by higher energy margins which are expected to increase $2.40 per share.

These are primarily driven by improved power values, higher capacity prices, higher coal fired and nuclear generation, and higher expected margins from marketing and trading activity.

These positive energy margin drivers are partially offset by higher fuel costs and increased environmental costs.

Partially offsetting the net energy margin growth are higher O&M on increased environmental compliance costs including operating costs for the scrubbers and payroll expenses and supply segment, as well as higher planned maintenance work, increased funding for customer education and customer assistance programs and increased uncollectible accounts expenses in the Pennsylvania delivery segment, higher US taxes in the international segment, higher financing costs due to higher debt balances and higher depreciation due to higher plant and service throughout the company.

Now let's move to slide 13 and I will walk you through from the midpoint of our previous forecast to the midpoint our new forecast for 2010.

The decrease in the forecast is primarily driven by higher financing costs, mainly in supply segment due to higher debt balances and the higher cost of credit facilities, higher O&M, primarily in our supply in Pennsylvania delivery segments, lower earnings from WPD, primarily driven by less favorable expected exchange rates and slightly lower energy margins in 2010 as a result of lower expected margins from our marketing and trading activities.

It is extremely important to note that the margins expected from our core generation activities have not changed from the prior forecast to the current forecast, as we were able to hedge significant quantities for 2010 and beyond in Q1 and Q2 of this year when prices were much higher.

Other category includes lower Pennsylvania delivery revenue and higher operating expenses other than O&M.

We continue to expect that approximately 77% of our 2010 earnings will come from our supply segment with the contribution of our international and Pennsylvania delivery segments to be 15% and 8%, respectively.

Slide 14 on cash flow incorporates our current earnings forecasts.

While we continue to expect negative free cash flow before dividends this year, we do expect it to turn positive next year.

Given the uncertain financial times, the increase in costs of financing and our desire to preserve capital, we have cut our CapEx budget for 2009, mainly coming from discretionary CapEx in the supply segment including new renewable investments being eliminated, certain hydro expansion opportunities being cut back and significantly scaled back nuclear development activity.

We are still working on the CapEx for 2010, but most of that year-on-year CapEx increase is coming from expected increases in CapEx in the wires businesses at WPD due to regulatory requirements resulting from the next price control review and higher transmission CapEx in electric utilities.

While I did not include a separate slide on dividends, they remain an important part of total share on return, especially in difficult financial times.

We will evaluate our dividend level late this year upon finalization of our normal business planning process.

Given the current credit environment, we wanted to provide further details on our credit facilities and collateral postings.

We remain highly focused on maintaining our strong credit profile and liquidity position.

We have more than $4.2 billion in credit facilities supporting the activities of our supply business and our hedging strategy.

This provides us with one of the strongest liquidity positions in the sector.

Taking into account outstanding letters of credit and draws against the facilities, we have more than $3.2 billion available at PPL Energy Supply under the existing facilities.

The supply segment has its first group of 24 banks providing credit with no bank having more than 13% of the total commitment.

The credit facilities on slide 15 exclude amounts previously committed by Lehman Brothers due to their bankruptcy filing.

The credit facility needs or PPL Electric Utilities and WPD are clearly not a substantial supply segment.

However, both are in solid liquidity positions as well.

Moving on to collateral, we thought it would be helpful to review the level of credit posting that we've had for the supply business and this slide reflects the strong liquidity position that has been maintained over time.

The postings increased earlier this year, obviously, as power prices began to rise significantly.

When prices peaked mid year, postings totaled less than half of the capacity available inclusive of available cash providing the supply business with the necessary liquidity to withstand further price moves as well as credit downgrades.

As we all know, prices fell from those mid year highs and the significant portion of the collateral has been returned to us.

These credit facilities clearly remained valuable to the company as we look to put additional hedges on for the future, and Bill will talk more about our hedge strategy in his remarks.

Finally, PPL is also in a strong position from a debt maturity perspective.

Last month, PPL Electric Utilities was able to issue $400 million of five year notes in an extremely tight credit environment and late last year, WPD prefunded the majority of the remaining 2008 refinancing needs.

The EU issue into October was executed at a time when many others the sector were not able to issue debt securities, and the proceeds from that issuance will be used to partially prefund next year's $486 million maturity.

With that, I would like to turn the call over to Bill for an update on operations.

Bill?

Thanks, Paul and good morning, everyone.

Let me start with our marketing and trading.

As Jim indicated, we have revised our marketing and trading operations in light of current and expected market conditions, but I do want to put our 2008 results in some perspective.

As you can see from slide 18, our marketing and trading has been profitable each of the last four years, even with the poor third quarter results, the business has contributed positively to margins thus far in 2008, a positive $43 million year-to-date.

In the third quarter, we saw a rapid decline in liquidity, which coupled with a sharp decline in prices, caused the significant mark-to-market loss.

This price drop affected several power positions that PPL Energy Plus was unable to quickly close out due to lack of liquidity in the forward markets.

While some liquidity remained in the front of the power market, there was virtually no liquidity in the back end of the power curve, which is where we held these positions.

I think most of you are aware that banks and other market makers were forced to exit or significantly scale back their operations in the power market due to the credit crisis.

Unfortunately, this prevented us from efficiently exiting our positions.

The trades were well within our bar and our valued risk limits and in normal market conditions, as Jim said, we would have hit stop-watch triggers and exited with a relatively small loss.

As you can see from this slide, we have had relatively small trading profits in the past, and I firmly believe we would have limited our recent losses if not for the unusual market conditions we faced in the quarter.

I think you can also see from the bottom of this slide that the entire marketing and trading is a relatively small portion of our overall supply margins.

This is clearly a very different market and we have scaled back our risk profile and lowered our forecast of earnings from this segment going forward.

We do believe it's important to maintain some limited presence in marketing and trading over the long term.

The operation provides effective price discovery for hedging our generation output and managing our fuel inputs, and our marketing group provides multiple avenues for selling generation output.

On a more positive note, the reduced number of market participants may provide better margin opportunities as we market our generation into this environment.

Turning to slide 19, I'd like to address the other significant challenge we faced in the third quarter, the previously announced partial collapse of a cooling tower at Montour power plant.

As you can see from this photo, we are making excellent progress in replacing the entire tower.

I expect the plant to resume full operation within the next several weeks.

This outage and another unplanned outage at our Brunner Island plant reduced quarterly earnings by more than $0.10 per share.

On slide 20, we've updated our hedge positions for electricity and fuel as of September 30.

Taking a look at 2010 electricity sales, we have increased our hedge position since the second quarter call.

We were able to take advantage of high prices in the market in early July and increased our expected generation hedge position overall from 68% to76%.

We are also providing our hedge positions for 2011 and 2012 for the first time.

We have done a significant amount of hedging as you can see in those years as well, with 46% hedged in 2011 and 26% hedged in 2012.

On the fuel side, we have contracted for additional coal for 2009 and 2010 and are in a favorable coal position in 2011 and 2012 and we have 50% of our total expected coal burn hedged now through 2018.

As discussed on our last call, we do have some exposure to spot coal purchases associated with our joint interest in the Keystone and Conomo plants and you can see the estimated unhedged volumes at the bottom of this slide.

Our averaged hedged fuel prices for each year are substantially below current and forward market prices and provide a valuable foundation to provide more predictable earnings going forward.

This will be evident when we review our open EBITDA position in a few minutes.

Turning to go slide 21, coal, nuclear and hydro, our base load generation, makes up more than 90% of our expected generation output in any given year, and it is really the value driver of our generation fleet.

For 2008 and 2009, we sold essentially all of or base load generation output and are not materially sensitive to power price changes in these years.

For 2010, we have hedged about 80% of our base load generation which provides the company with the solid base of earnings growth we are now forecasting.

Again, for 2011 and 2012, our marketing and trading group has been able to hedge a significant portion of our base load generation at favorable prices.

I would also like to note that substantially all of our capacity has been hedged primarily through the RPM auctions in PJM through 2011.

Turning to slide 22, today we are providing an update to our 2010 open EBITDA position and for the first time, providing a look at our positions for 2011 and 2012.

Continuing with our practice of updating our open EBITDA position with prices at the end of the quarter, slide 22 has been updated to reflect forward prices as of the end of September which are available on page A 1 of today's presentation.

Based on all prices at September 30, the unhedged gross margin for the supply segment in 2010 would be about $3 billion, with the associated O&M of $860 million.

This brings the value of our open EBITDA to $2.2 billion.

The change second quarter reflects the steep price declines in the power markets and our revised expectations for O&M.

We do see growth in open EBITDA for 2011 and 2012.

The growth in 2011 is driven by the full year margin impact of the nuclear up rates expected to be completed in 2010.

Also included in 2011 is capacity revenue generated from the Longview coal plant under construction in West Virginia.

Under this contract, PPL will buy electricity and capacity at fixed prices, which were determined in January 2007.

We will start to receive the capacity in June 2011.

The growth in 2012 comes from the full year impact of the Longview capacity along with the electricity from Longview that we start to take on January 1, 2012.

You also notice the positive mark of our hedges.

This is due to the positive mark on our fuel hedges partially offset by some below market power contracts.

Slide 23 provides you with the earnings sensitivities from capacity, energy sales and changes in equivalent availability so you will be better able to model our forecast as market conditions change.

This is something that several of you have asked us to incorporate and we are providing this for the first time.

As Jim said, our long-term view for the power market is strong, and we remain optimistic about PPL's long term earnings growth.

As utilities in the PJM region begin their default supply procurement processes in the coming year, I believe PPL will be in a very competitive position.

I look for us to be successful in these auctions and I believe this might provide further growth opportunities for PPL.

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

Okay, thanks, Bill.

Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS).

We will pause for a moment to compile the Q&A roster.

Your first question comes from the line of Ashar Kahn of SAC Capital.

Hi, good morning.

Morning, Ashar.

Going to page -- slide 22, the above market value of hedges, 200, 174, 169, could you break this -- how much of this is coal versus electric prices?

Is it majority of it because of the coal contracts?

I believe that's correct, Ashar.

Yes, one second.

We're just checking that.

So in essence, because we just have very good coal contracts, the value of the hedges are going to remain, they are not going to reverse until the coal contracts expire, which is later on in the next decade.

Is that correct?

Yes, one of the things I mentioned on the last call was that we were planning and forecasting to be at the high end of many of the coal contracts that have collars in them, so that does reflect the higher price at the ceiling, if you will, for those contracts that have those provisions.

To give you some order of magnitude Ashar, the fuel side is around a $470 million positive in the $200 million and a negative $290 million on the electric hedge side.

Okay.

There's a few other positive marks for renewables and load following deals.

Okay.

Thank you very much.

Sure.

Sure.

Your next question comes from the line of Greg Gordon of Citigroup.

Thank you.

Good morning.

Good morning.

The $0.11 delta from the old guidance to the new guidance on O&M, I am just doing a rough calculation.

It seems like $0.07 or $0.08 of that is the higher O&M at power, the 859 versus 814, the old guidance.

And the remainder, is that WPD in the utilities.

Correct.

Okay.

Great.

Then can you talk about when you gave your guidance last -- the 56.2 million -- your 56.2 terawatt hours assumed in your open EBITDA and on the August 1 presentation, you are down to 55.5.

Yes Greg, that's being driven by lower expected gas generation given what has happened to prices and spread.

Okay.

When I do some rough math and I look at the unhedged gross margin of $42.99 in the last presentation versus $30.68 now, just divide it by the megawatt hour,s it goes from 76.50 to 55.25 on a gross margin per megawatt hours.

That's a $21 change.

By looking at my price, I am not going to presume that my price quotes are the same as yours, I see that power prices have declined from about $15 over that same time frame.

Am I to assume then that either my numbers aren't what you're seeing, or that the difference is you hedged coal at higher prices?

Well, no because on an open basis, that would just have include the Montana coal, the other coal would have been at market.

I guess -- let me rephrase the question.

From your perspective, is the entire decline in gross margin price or did you also lock in higher coal over the period?

It would be entirely because of price.

Our declines would indicate a higher increase than that, and I think as either Jim or Bill mentioned in their prepared part of the comments, we have seen across from curve, if you will, 25% to 35% decline.

So, starting with that implied low 70s number into a low 50s number, that fits right in the ball park.

Okay.

And remember, we had said at the end of Q2 that even at that point in time, we were reporting early August, that we were down at that point already closer to where we were at the end of Q1.

So we have seen further degradation, but we did indicate those numbers were down at that point as well.

The WPD $0.07 delta, is that all currency translation, of is there some underlying change in operating assumptions.

The $0.07 -- it is almost all currency.

Thank you.

Yes.

Your next question comes from the line of Paul Patterson of Glenrock Associates.

Good morning, guys.

Morning, Paul.

Just to follow up on the currency, is that just basically, you guys just look at the forward currency and what is causing you to lower the numbers?

That's correct.

Okay.

When we -- looking at slide 12, how much of the energy margin of 240 do you guys have for trading and marketing?

There's approximately $125 million in the 2010 expectations, which again, if you look at where we were on a year-to-date basis from an expected marketing perspective, it gets back to that kind of a number by that time frame.

It has been reduced from that number for 2009 given current conditions, but again, I expect we will remain significantly competitive as folks exit this space and I believe Jim -- or Bill mentioned that in his remarks.

What is it for 2009?

$65 million, Paul.

Sorry, didn't hear that, what?

$65 million.

$65 million, then it goes to $125 million in 2010.

Correct.

Clearly in the expectation of some return to normal liquidity and normal markets.

When I look at the cash flow statement for year-to-date versus six months, the unrealized gain on derivative and hedging activities looks like it is about the same, yet it looks like you guys were hurt by a loss.

I'm just wondering, where does that show up on the cash flow statement?

I mean, I think it was $84 million for the six months which indicated that you guys had a gain and if we were just to look at the nine month cash flow statement, it looks like it's $83 million.

And yet, my understand is that you guys were negativity impacted by unrealized losses.

Where on the cash flow statement do those show?

Just one second.

I am looking at the cash flow statement right now.

And while you are looking at that --

In that same line item, but that's the net of all derivatives that the company may have in place.

That would include the conversions of the euro -- the Yankee financings in the UK, which would have had a big price move with the move in FX.

That would include interest rate derivatives, that would include the entire portfolio.

So it is in that number.

Okay.

So it looks like you guys had other gains that offset those losses.

That's correct.

Okay.

And are those gains what you would normally expect, or I mean it sounds like there was some financial derivatives, et cetera.

Is that part of the trading business, or what is --

Again, I think the most significant piece of that is likely the Yankee bond issue in the UK that have been swapped to sterling.

So that was put on when Maraunt was in control of the entity, it was swapped a long time ago.

That better matches the sterling revenues and cash flows against sterling (inaudible) in the UK and whatever there is that is related to financial swaps that are on interest expense and things like that are included in either current or forecast interest rates in the forecast.

Got you.

But most of that stuff does not -- is not -- on the interest rate side, is not that significant.

Okay, great.

And then the financing $0.12 impact in 2010, just if you could break down just a little bit more in terms of, how much is that because of higher debt balances versus what your expected cst of financing is, or just a little bit more elaboration on that.

It is around $0.08 approximately due to higher debt balances and about $0.03 in credit facilities.

Okay.

Thank you very much.

Thanks.

Your next question comes from the line of Jonathan Arnold of Merrill Lynch.

Good morning.

Morning.

Just wondering if you can remind me what you had previously assumed in your former 2010 guidance on share repurchases, and guessing that whatever was in there maybe is not in there today?

We had approximately $600 million included.

It was originally $700 million, but that was before we acquired the Ironwood toll, so that effectively took that down by $100 million.

It is still in the plan, but we have pushed that a little back -- a little bit further back in 2010 from early 2010.

We still do expect with significant increase in cash flows and the enhanced flexibility that we will be able to accomplish that, again, in lieu of finding other growth opportunities that are a better shareholder value add?

Looking at the cash flow forecast, it seems to be less than -- in 2010, it doesn't seem to be as high as $700 million.

Does that mean you are assuming you would partially finance a buy back in that time frame?

That's correct.

Then on more of a -- from a trading standpoint, you gave these numbers on your percentage of gross margin coming out of marketing and trading and if I recall earlier this year, you were emphasizing trading as something you were going to be more active in.

Can you talk a bit about what you are going to change post the experience of this third quarter?

What is a reasonable target of that percentage going forward?

And just, any sort of shift of strategy going, and my sense is that you were beginning to put a little more emphasis on trading earlier in the year.

Sure.

I think our emphasis on trading and marking was really to reflect the fact that we were going to be coming off this rate cap where a lot of our generation was really earmarked for the existing polar load in Pennsylvania, and recognizing that to optimize the assets and market around those assets would be important as a merchant company going forward.

So that was the reason we were probably emphasizing the fact that we needed to be more active in the space going forward.

Having said that, we also indicated that we expected it to be in the range of 5% to 8% of total supply gross margins from both marketing and trading combined.

So again, a fairly small number, but I think in light of current market conditions, with just the lack of participants in the space today, the lack of liquidity, particularly in the forward markets, clearly, we've had to revisit that and reset expectations both for 2009 and 2010.

So I think that if I had to say where are we today, not that we wouldn't still need to market and trade around our assets, because it is a relatively large fleet, and we do need to participate in the market for price discovery and to really optimize the assets, but in terms of pure speculative positions as we said in the past, that's not our business model and would never be.

So hopefully that gives you a little perspective on our thought process.

Thank you.

Sure.

Your next question comes from the line of John Kiani of Deutsche Bank.

Good morning.

Not to belabor the trading questions, but I wasn't clear as to whether you have fully exited those positions, if you have not, if it was a situation of where you started to but obviously, the market liquidity dried and therefore, there are unrealized losses.

Can you give a little more color on what those positions were?

It sounded like you were perhaps long power and where you stand today.

Sure, be happy to.

We were long power, particularly in the off peak markets in 2012 and some puts in 2010, both of which become very illiquid very quickly.

Those positions have been closed out.

It did take some time and as far as don't looking forward, we still expect the marketing and trading in total to be profitable for the year, albeit at a much lower number than we had previously expected.

What was the VAR for the trading bus -- marketing and trading business during the third quarter?

It was a high of $10 million on a one day holding period, and I think it was a low during the period of $8 million.

And that's under a 95% or a 99% confidence?

95%.

And the collateral postings look like they had declined on slide 16 going into September.

What have they done in most recent periods?

Especially in the month of October?

October?

Is that collateral postings?

Yes.

Less than $700 million.

So those have declined.

Cash is a little less, as well.

All right.

And then can you also talk a little bit about kind of the idea of what you see in the Longwood and the tolls that you actually acquired recently, are those recognized under accrual or are those recognized under mark-to-market?

How do you account for the tolls that you recently purchased: For the ironwood, pardon me?

Yes, from an executory contract perspective, they would show up in our margin expectations, but they wouldn't show up on a marked perspective.

We recognize Ironwood and the other tolls under accrual accounting.

That's correct, we capitalize the acquisition cost of the toll and be amortizing that off and then be expensing the charges under that tolling arrangement as accrued.

And since you acquired those tolls, would you say if you did for economic purposes mark them to market, would they be in or out of the money?

They would likely be in the current environment, down from that original price point, but I don't have handy a current economic value and so we haven't disclosed the actual purchase price, and it is a single toll.

It is just Ironwood, okay.

There hasn't been anything else purchased.

Got it.

Okay.

Thank you.

Sure.

Your next question comes from the line of Paul Ridzon of Keybanc.

Good morning, how are you?

Good morning.

Good, Paul.

I just had a question on the unhedged -- the unrealized losses.

What was the magnitude of that?

It was approximately $0.20 in the quarter.

And why wouldn't we view that as kind of an unusual item, since you haven't exited those positions?

Well, we have either exited them or matched them with loads.

So they will not create P&L volatility on a go forward basis.

They have been exited from that perspective, and from our perspective given, again, what happened in the third quarter, we clearly expect to not repeat that performance or those positions.

But at the same time, marketing and trading is part of our core activities, and there was no basis to carve those out at all.

So they are now on accrual accounting, is that -- because they are matched?

No, they have either been by this point in time realized or they've been matched in that in any further price moves, they would roll against an underlying hedged obligation.

So as the obligation would change in value, so we would expect the positions to change and so we wouldn't see net exposure.

Then the other question was, I was looking for an update on your NOx and SOx position.

I didn't see it in the quarter.

In the release, if you read the release, we did impair our annual NOx allowances, and I believe the number was approximately $68 million, I don't have that off the top of my head.

But that is all that was impaired.

Okay.

I missed that, it has been a busy morning.

Thank you.

Your next question comes from the line of Edward Heyn of Catapult Capital Management.

Good morning.

Good morning.

First, just had a quick clarification question on Paul's question about marketing and trading.

$65 million you are assuming in 2009 and $125 million in 2010; is that right?

Correct.

And that's for marketing and trading, not just marketing?

That's correct, and that's gross margin.

Okay.

Sure.

And then the second question is just on -- when you guys gave your open EBITDA and also your guidance assumptions, are you -- what price deck are you using?

Are you using the deck as of September 30?

Yes.

Okay.

And what, it seems like prices have somewhat declined kind of going back to your point about collateral even declining in October.

What sort of impact would open EBITDA and guidance have if you were to layer in the current price deck?

Do you have any kind of range or direction there?

Yes, I think the best thing to use is the chart on 23, slide 23, which gives you the sensitivities.

So if you want to, depending upon what your view of market is on any given day, take the dollar per megawatt hour of unhedged, and that would adjust up or down by $0.02.

Okay.

So if I am looking at PJMATC of $69 in your deck versus what we see today, we can apply those earnings sensitivities and get a better sense of where we might be standing today.

That's correct.

Okay.

Great.

Thanks a lot.

Sure.

Your next question comes from the line of Danielle Seitz of Seitz Research.

Thank you.

I just was wondering if -- of the increase in O&M, how much of that was the uncollectibles?

In 2008?

Yes.

Nothing in 2008, nothing in 2009, and less than $0.01 in 2010.

We have built in some expected under recovery, if you will, because of the step increase that is happening in that year ,but we have been pretty aggressive in the current year and expect to be next year in staying on top of customers in advance of that increase.

Great.

And in the $0.10 for the outage of the two plants, how much of that is the repairs and O&M and how much of that is coming from the output?

All of that is the output, the $0.10 effect?

It is all output.

All output.

Yes.

There was a small amount of O&M related in terms of the construction activities, but it was minor.

Great.

Thanks a lot.

Yes.

Your next question comes from Raymond Leung of Goldman.

Hey, guys, a couple of things.

Can you talk a little bit about CapEx?

it looks like you cut '09 by about $200 million, yet 2010 went up by a similar amount, although (inaudible).

What else can you do on that line if you needed to?

We are looking at around $200 million of additional cuts potentially.

The real question in that is how much are cutting into muscle at that point.

We are trying to cut all discretionary CapEx wherever we are finding it, given our relative share value, the cost of capital, the cost of debt financing.

We are not seeing anything make economic sense at this point in time, or hardly anything at all, I should say.

Virtually we will cut whatever we can.

We are still focused on the business planning process.

We clawed back as much as we could from '08, '09, but have work to do for '10, '11, '12.

Okay.

Two other questions.

Any update on pensions and any implication there and then finally, if you can talk about -- have you talked to the rating agencies with the revised guidance and sort of any comments from that standpoint, and if you can remind us if there's any impact to collateral requirements under any potential downgrades?

Okay.

Let me tackle, I think there was three in total.

If I missed one, let me know.

I do not see -- we have factored in to the 2009 forecast what we expect from asset value moves, current discount rates, mortality changes, pay changes, all of those things that would factor into a cost number from a pension perspective.

That has been factored into the 2009 guidance for both the US and the UK.

The decrease or the credit downgrade scenario, we are approximately $1 billion in terms of additional posting requirements if we had a two notch downgrade, so if we were subinvestment grade.

We have not, as of right now had conversations with the rating agencies, but we will in the very near future.

I think my treasurer has a call lined up with them today to walk through the drivers of the forecast, the change in the commodity environment, and to let them know that we are obviously extremely still committed to our investment grade ratings.

Okay, great.

Thanks, guys.

Your next question comes from the line of Judd Arnold of King Street.

Hey, guys.

Hi, Judd.

Can you talk a little bit about the change in CapEx for 2009 for supply and also the change in 2010 CapEx for delivery?

Yes.

In terms of change for 2009 for supply, it reflects, basically elimination of wherever we haven't made commitments around additional renewable investments, we have eliminated those.

We are canceling or deferring hydro opportunities, we are significantly scaling back, substantially scaling back nuclear development activities.

Again, where we have been able to identify opportunities, we have made those cuts, we are still looking, but that has been the biggest moves.

The increases that are coming on the delivery front, more for 2010 than they are 2009, and deliveries are driven by the (inaudible) project, which we are seeing cost escalation on and other transmission investment opportunities on the utilities identifying.

And with formula rates and the ability to get immediate returns on that stuff, we expect those to be economic.

WPD is primarily driven by a change in regulatory requirements in the UK around line clearances, where we are going to be obligated to move certain lines and poles, but get full recovery on that.

But that's a multi year project initiated by the regulator.

And then just a recap a little bit of what happened on the legislative front.

I had heard that the governor had all the utilities in for about four or five hours which, from what I heard, was probably the first time the governor has ever done that for so long.

How close do you think we came to having a deal done in this past legislative session.

Judd, this is Jim.

Yes, we did did individually, CEOs met with the governor.

They were, to your point, I think the first time that a face to face has occurred on this subject.

I think it is a little bit difficult to answer how close.

I wouldn't say that a deal was imminent.

I think there were important points discussed, I think the governor's interest -- that certainly expressed his interest in what ultimately become House Bill 2200 that was passed.

We talked about that a bit, and we talked about issues pertaining to possible rate mitigation approaches, but I think given the very tight time frame that we were facing, it was a matter of a few days, that the legislature had to work.

I just don't think there was adequate time to go beyond the subject matter of House Bill 2200 and include a solution to rate mitigation if one was to be reached.

So, I, my answer would be all of the issues were discussed, the time period was extremely short and I think all things said and done, people realized it was not possible to deal with rate mitigation at the same time they dealt with all the issues that ultimately ended up in House Bill 2200.

I think this -- if these discussions are to resume, it will be after the first of the year.

I guess from what you said, it is fair to say that all of the issues that have been -- that are going to be raised -- I mean obviously, they're politicians, they could change their mind.

But you think all of the issues are out there on the table and the other side understands what the issues are, so you come back in January, it's not going to be a whole new menu of things --

Yes, that's a fair statement.

I think that the issues that were discussed in the meetings were no surprise to me for that matter, not speaking for others.

But I don't think there was a surprise with anyone.

I think we were clearly faced with just an untenable timeline that didn't allow all of the issues that were put on table to be dealt with in any sensible way.

Thanks much, guys.

Sure.

Your next question comes from the line of Reza Hatefi of Decade Capital.

Thank you.

Could you talk about the Pennsylvania delivery CapEx and recovery for all of that CapEx?

That is materially higher than your depreciation.

I am just wondering, is there a rate case coming at some point in the next two, three years than the plan?

We have gotten our formula rates approved, so from the transmission perspective, that doesn't require a rate case.

We would expect with the cost pressures that we are seeing that we may be looking at a rate case a bit earlier than we had previously forecast.

But obviously, given lots of moving pieces right now, we will wave the timing of that appropriately.

Is there a rate -- the delivery side, distribution side, is there a rate increase assumed in the 2010 guidance?

Not in '10.

And the CapEx that we see here, $281 million in '08, $293 million in '09 and $580 million in '10, how much of that is transmission?

Ballpark.

Virtually all the increase in '10 is coming from transmission.

There's a little bit of I think enhanced reliability projects in there on distribution front, but virtually all of that is transmission.

And I am sorry if I missed this earlier, but could you give us a little flavor on your average delivered coal costs?

Hedges for 2010?

I guess 89% is hedged in the east.

Sure.

Just one second.

We are probably looking at, on a delivered basis, somewhere in the range for 2010, I would say somewhere in the range of $60 to $70 a ton delivered.

It is going from roughly $51 to $61 from '08 to '09, and then there's some level of increase in '10.

$51 in '08, $61 in '09 and $60 to $70 in '10.

And then does it sort of levellize there for '11 and '12, or is there a continued increase?

There's some increases year-over-year.

And finally, your marketing and trading guidance, you talked about, I think $65 million in '09 and $125 million in '10.

I just want to make sure that's apples to apples to slide 18, where in '06, it was $78 million to $145 million in '07, and then so on and so on and it will be $125 million in 2010.

That's correct.

Right.

Gross margin.

That's correct.

Okay.

And just, I guess just one last question.

I was looking back at your third quarter 2007 slides a year ago, and your eastern power hedges in 2010 were 47% hedged, up to 76% now.

And my calculation, that's 29%, something along the lines of 14 terawatt hours or so.

What is -- and we have also had two auctions since then as well, each one maybe being six or seven terawatt hours in Pennsylvania.

What is the strategy there, in terms of -- I would have thought there will be more hedged over the course of the year for 2010 starting from that 47% base, and now 76.

I would have thought you would have taken advantage of the high power price we saw in the first half of '08 a little more.

Could you talk about your strategy there?

Well Reza, we did on a block basis as well as we evaluate multiple load following opportunities throughout the year.

We were more than 50% hedged on base load gen before the utility conducted its first load following deal.

So we would be looking at buying back from the market and reselling and there is an element of risk in Pennsylvania around the utilities given the discussions that were going on in Harrisburg.

So I think we appropriately evaluated those opportunities, we will continue to in the future.

The other limiting factor that we will face, and we may get into this in a little bit more detail, maybe at EEI, is there is an absolute limit to how much we can hedge on a multi year basis given the amount of credit facilities that we have got, even though we have got the third or fourth largest amount in the sector.

We cannot hedge 100% for the next three or four years.

That's not -- it is not feasible.

It wouldn't be a prudent thing to do and we have seen what happened to others by being too hedged, if you will.

So, we will continue to evaluate the opportunities on a load following basis as well as financial hedges and execute accordingly.

It is a balancing act.

It is really a balancing act trying to -- as Bill said, our philosophy is to try to assure as much certainly in the next year's earnings as we possibly can through a sensible, robust hedging program.

But we still have to account for the fact that many of the load following deals are multi year in nature, and that has collateral posting implications as well.

So it is a balancing act, but we think -- we review our hedging philosophies on a realtime basis based on market conditions, an certainly these latest market conditions over the last three or four months have caused us to reassess and I think, revisit our hedging policy and come to the right approach.

Secure the near term earnings as much as we can and leave room for participation in multi, long term load following deal opportunities.

Understood, thank you.

Your next question comes from (inaudible) of King Street Capital.

Hi, can you hear me?

Sure.

I apologize if you covered this before, but I am just trying to get a better bridge for the 2010 open EBITDA for -- that you have for this quarter relative to the initial guidance and the question I am trying to understand is, if I look at the forwards that you have as of 2007 when you first gave your guidance and the forwards for 2010 now, and given that we have basically gone -- we had forwards rising and then coming down to these levels.

I am not sure I understand why we go from open EBITDA of $2.8 billion down to $2.2 billion.

When we had our -- maybe I am missing the point, but we had not given open EBITDA back when we gave the original forecast, but when we started forecasting expected margin, which was the approach that we were taking, we were right at around $3.3 billion, and the current number is $3.27 billion.

So that is mainly a reflection of the decreased expectation in marketing and trading that came down from around $150 million, $155 million down to $125 million, as we discussed previously.

But that is --, you are seeing some higher O&M balances there, some higher fuel as well.

You can't just pay the power price change, you have to layer in kind of all of the variables, but we have been able to basically hold the margin forecast from the prior 430 midpoint.

Okay.

All right.

Okay.

Thank you.

Yes.

Your next question comes from the line of Mark Segal from Canaccord Adams.

Hi, good morning.

I just wondering if you could provide us an update on the status of your latest smart metering activities and any -- or what, if any your plans are going forward?

Well, I think we are in very good shape in that all of our 1.3 million customers on the electric side already have advanced meters installed.

And with the latest House Bill 2200, we believe that the language provides the capability to continue to use those existing meters.

Now as we change out those meters, we will probably replace them with the next generation of meters, but I think we feel pretty good where we are at with the smart meters right now.

So replacing would be some ways off in the future?

It would since we installed these in about 2005.

Okay.

Great.

Thanks so much.

Sure.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Brian Russo of Ladenburg Thalmann.

Good morning.

Could you tell us what your load growth or sales growth assumptions are at the domestic delivery business in 2009 and 2010?

In '09 and '10 are relatively flat.

There's a couple of drivers that are, I think are a little unique from just tracking the macro economy, but the macro economy is factored in, the price increase from 2009 to 2010 and the expected change in customer behavior because of that, as well as the utility obligation that comes from House Bill 2200 to shave peak demand, all of those factors combined have us with utility load forecasts that are relatively flat for '09, '10, '11, and then we would expect some return to, call it normalcy, where we see percent to percent and a half load growth following that time period as customers get sensitized to the higher costs.

All right.

Thank you very much.

Sure.

Your next question comes from the line of Greg Gordon of Citigroup.

Thanks, I have a follow up question.

When you talk about the marketing and trading function, $125 million of expected or targeted gross margin in 2010, just on a current share count that's roughly (inaudible).

How much of that is really trying to capture (inaudible) versus traditional trading?

Because when I look at your guidance, I see that you are telling us to assume you have hedged at wholesale prices, clearly, one would presume that some portion of your business will ultimately be load serving.

So is part of that $125 million really load serving premiums that you expect to win through auction, or is the majority of that additional trading?

Yes, that is basically, virtually all of that activity.

In the way that we --

The former, not the latter, load serving, not trading?

That's correct.

Trading is always been a very de minimus part of the activity.

They're very interrelated, which is why we group them together, but that's always been the focus for the past seral years, is on those marketing or loan following type opportunities.

As we have reported this out the past few years, it has been load serving beyond our current utility affiliate contract, because that has been a multi year contract in place for several years.

So in the past couple of years, it was focused on marketing beyond the generation resource.

As we transition out of that contract, the load following in terms of absolute amounts doesn't have to change that significantly from the recent years to still capture that $125 million.

So, we are hopeful that we could do better than that, but again, in the current environment, we have been try to plan appropriately for that environment.

Okay.

So just to be clear, it seems to me that the risk profile around that trading business evolves to one more where you're getting appropriate load serving premiums above and beyond the wholesale prices at which you have hedged?

Rather than chasing load serving premiums on -- outside of your core contracts, which is is the way things have looked through the transition, is that fair translation?

I think that's right.

The core aspect of our marketing and trading is clearly on the assets themselves, our core assets are base load generation, and we have, as Paul mentioned, participated in serving load in our region, but over and above our marketing and trad -- or marketing for our existing generation assets.

I think we will continue to do that, but again, it is a fairly small amount relative to the size of our base load fleet.

But it allows us to really understand the markets and helps really position us for our own fleet when we participate in these markets regionally so.

I think that you're correct in that the marketing is dominating value driver here, and clearly the trading is a compliment to it, but it has been a relatively small portion as you can see from my slide on 18.

Thank you.

Your next question comes from the line of John Kiani from Deutsche Bank.

Hi.

Thanks for taking my follow up.

Sure.

You had in the past briefly discussed the potential to start blending and switching to some Illinois basin type coals.

Can you give us an update on where that stands and how you see that progressing going forward?

Sure.

We did do one successful test earlier in the year.

We are in the process of doing a second test.

We do think it has opportunity there and we are are going to continue to pursue that.

As I mentioned, I think on the second quarter call, we do need to make some modifications to our plants to accommodate both PRB as well as Illinois basin coal, and we do have those planned for next year, and I believe those were less than $20 million in capital improvements.

So it is not a large CapEx spend, but we think to provide the flexibility, it is probably money well spent.

So from a timing perspective, when would you expect to be blending and burning more Illinois basin and PRB coal,l and can you give us just a ballpark percentage on our PJM fleet and what that would roughly translate into from a percentage -- or portion of your coal supply needs.

Sure.

We could begin as early as next year, and from a percentage perspective, the upper end is 20, but for planning purposes, I think we're planning for more like 10%.

And in your 2010 revised 2010 earnings guidance, are you assuming any incremental PRB and Illinois basin coal burn at this point?

We are not at this point.

So any PRB and Illinois coal basin burn, if you get up to 10% or 15% or whatever it might be is upside based on the current forward pricing environment relative to your revised 2010 guidance, is that correct?

That's correct.

Okay.

Thank you.

Sure.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Reza Hatefi of Decade Capital.

Thank you.

Just a couple of quick follow ups.

The coal -- average coal costs delivered for 2008 through '10 that you gave earlier, just as a basis for a relative basis, what was 2007's average delivered cost?

We don't have that one handy, Reza.

If you want to do a follow up with Tim or Joe, they can get that for you.

Sure.

Lastly, could you remind us, in the 2010 earnings guidance, is there a WPD rate increase assumed in that?

The full breadth of expected changes inclusive or normal inflation and everything else that we know of right now is in there, yes.

Thank you very much.

There are no further questions at this time.

Gentlemen, do you have any closing remarks?

No.

I think, thank you for attending the call and appreciate it.

Thank you.

Thank you, operator.

You're welcome.

Thank you for participating in PPL's Corporation's third quarter conference call.

This conclude today's conference.

You may now disconnect.