賓州電力 (PPL) 2008 Q4 法說會逐字稿

Good morning.

My name is Rachel and I will be your conference Operator today.

At this time I would like to welcome everyone to the PPL Corporation fourth 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)

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

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 fourth quarter and 2008 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 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.

Thank you, Tim.

Good morning, everyone.

We will begin our call this morning with a general business update and commentary on the fourth quarter and full year 2008 results, and after that we will take your questions.

Joining me this morning are Paul Farr, our Chief Financial Officer, and Bill Spence, our Chief Operating Officer.

So today we are reporting 2008 full year GAAP earnings of $2.47 per share compared with $3.35 per share a year ago.

Fourth quarter GAAP earnings were $0.74 per share compared with $1.11 per share in the fourth quarter of 2007.

Primary contributors to our lower 2008 results were lower wholesale energy margins and the loss of synfuel earnings versus a year ago, and the impact of special items in both years driving the decline in fourth quarter and annual reported earnings was a decline in wholesale energy margins and lower international delivery earnings.

As we explained in our third quarter conference call in November, the Company's 2008 wholesale energy margin decline was driven by unrealized losses in marketing and trading, and extended outages at two of our coal-fired power plants in Pennsylvania.

The global financial crisis has had, and will continue to have, a significant effect on wholesale electricity markets for the foreseeable future.

As a result, we are adjusting our tactics accordingly.

We have already reduced our capital expenditures for 2009, and we are focusing on other areas to control and further reduce costs.

We expect 2009 will present a very challenging business environment.

Our portfolio of regulated and competitive business positions us to weather the challenging environment, and to prosper when economic recovery takes hold.

In the near term, we remain well hedged with respect to both fuel and power.

In these volatile commodity markets, we continue to see the benefit of our hedging program.

Now let's briefly cover ongoing earnings for the full year 2008, as well as the fourth quarter.

2008 earnings from ongoing operations were $2.02 per share versus $2.60 a share a year ago.

For the fourth quarter of 2008, earnings from ongoing operations were $0.46 per share compared with $0.60 per share in the fourth quarter of 2007.

Ongoing earnings for the year and quarter were affected by the same operating drivers as reported earnings, and Paul will provide more details on those drivers in his remarks.

Moving on to our earnings forecast.

As we announced earlier today, we have reaffirmed our 2009 earnings forecast of $1.60 to $1.90 per share, and our 2010 earnings forecast of $3.60 to $4.20 per share.

Our 2010 forecast is based on the benefits of our hedge strategy, which has resulted in us having sold more than 80% of our 2010 expected base load generation output and 100% of the available capacity, as well as having contracted fuel requirements at prices that are significantly below market.

Before turning the call over to Paul, I'll just take a minute or so to bring you up-to-date on the political front in Pennsylvania.

As you know, PPL Electric Utilities' generation rate cap expires at the end of this year.

We are continuing to provide customers with options to manage the increase when caps expire.

About 10% of our customer base in Pennsylvania are participating in our prepayment program for 2010, and more than 200,000 customers have utilized our energy use website that we have established.

At this point, based on the electricity supply that PPL Electric Utilities already has procured for 2010, the average residential customer rate would increase by about 36%.

If forward prices remain where they are for today for the remaining procurements, our estimates indicate that the increase in residential customer bills would be lower than 36% by at least a couple percentage points.

Bill will provide more details on our procurement plans.

The Pennsylvania Legislature has reconvened, and we expect rate mitigation to be a topic of discussion as the State deals with a number of challenges, including a significant budget shortfall.

We remain open to discussing reasonable mitigation efforts with State officials, as long as the plans can be implemented without harming the financial health of the Company.

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

After that, we will take your questions.

Paul?

Thanks, Jim, and good morning, everyone.

Before I get into the numbers today, 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 divesture.

As Jim mentioned, fourth quarter earnings from ongoing operations are lower than last year, primarily on lower energy margins in our supply segment and lower international segment earnings.

I will review the key earnings drivers by segment for 2008, and then get into our earnings forecast.

Turning to slide seven, let's start with the supply segment performance.

The supply segment earned $0.81 per share in 2008, a $0.61 decrease compared with last year.

The decrease was primarily driven by lower East energy margins, as a result of realized and unrealized losses on certain trading positions, higher average fuel prices and lower base load generation.

Partially offsetting these negative margin drivers were higher realized supply contract margins.

Higher West energy margins were primarily due to higher generation output and lower supply cost on lower energy prices.

2008 earnings were also impacted by the loss of $0.18 of synfuel-related earnings and higher financing costs, primarily driven by higher debt levels and lower interest income on invested cash; lower O&M, primarily due to lower outage and non-outage costs at our power plants; and lower operating costs at our energy set.

Moving to slide eight, our Pennsylvania delivery segment earned $0.44 per share in 2008, a $0.04 increase over 2007.

Higher electric delivery revenues of $0.09 per share, resulting from PPL Electric's distribution rate increase, were partially offset by higher O&M of $0.02 per share, driven by higher tree-trimming expenses, higher uncollectible account expense and other inflationary impacts, as well as higher financing costs, higher income taxes and other expenses.

Moving to slide nine, our international delivery segment earned $0.77 per share in 2008, a $0.01 decrease compared to last year -- the prior year.

The decrease was the net result of higher delivery revenues resulting from the annual inflation adjustment; lower O&M, primarily driven by lower pension expense; and lower overall costs, resulting from the sale of the Latin American business in 2007; the negative impact of currency exchange rates in the UK; lower income taxes and others, including lower financing costs on lower debt levels, lower income taxes, which is the net result of an $0.08 US tax benefit in 2007, and a UK tax benefit of $0.06 per share recorded in 2008; and the loss of $0.11 per share in earnings from the Latin American businesses, which again were sold in 2007.

On slide ten, we've summarized the major drivers of earnings from ongoing operations between 2007 and 2008.

I'm not going to specifically discuss these drivers since I just covered them in my segment review, so let's move on and take a look at our 2009 forecast.

Today we are reaffirming our 2009 earnings forecast of $1.60 to $1.90 a share.

The earnings [lock] on the slide reflects the midpoint of our 2009 forecast of $1.75 per share, as compared to the $2.02 per share earned in 2008.

The major drivers of our 2009 earnings forecast are higher expected delivery margins of $0.27 per share, primarily driven by improved power value from higher electric sales prices in the West, and higher sale prices under the [fuller] contracts between PPL EnergyPlus and PPL Electric Utilities; higher margins for marketing and trading activities; higher coal-fired and nuclear generation output, offset by higher fuel costs.

These higher energy margins are more than offset by unfavorable UK exchange rates; higher O&M of $0.10 per share, primarily due to power additional planned outages at our coal-fired plants, and higher operating costs associated with the scrubbers; higher contractor pricing; higher costs for customer programs; higher uncollectible customer accounts at PPL Electric; higher operating cost at WPD; a higher effective tax rate on WPD's earnings; higher financing costs due to higher debt balances, and the increased cost of credit facilities; higher depreciation due to scrubbers and precipitators that are expected to go into service during 2009, as well as a full year of depreciation expense for scrubbers that went into service in 2008, and higher plant in service throughout the Company; lower delivery margins of $0.04 evenly split between WPD and PPL Electric; and the other category includes 2008 discontinued operations for PPL Gas, and lower projected earnings from our mechanical contractors.

Turning to slide 12, in November we announced our 2010 earnings forecast of $3.60 to $4.20 per share, and provided a summary of the drivers of 2010 earnings, including a significant increase in energy margins coupled with strong earnings from both our Pennsylvania international delivery segments.

I'd like to take a few minutes to discuss that forecast at a high level, and provide insights into expected 2010 earnings.

As Jim mentioned in his remarks, our 2010 forecast of energy margins is based on the fact that we have hedged over 80% of our 2010 expected base load generation, 100% of our available capacity, and about 92% of our coal requirement.

Given the success of our hedging strategy to date, we continue to see a strong increase in energy margins between 2009 and 2010.

However, since November, 2010 forward electricity prices in PJM have declined about 12% to 14%.

This decline in forward prices has a direct impact on the expected returns of our unhedged positions.

In addition, forward exchange rates for the British sterling have declined about 11%.

Finally, since our November call we have received new casts -- new forecasts for our domestic and international pension plans, both of which are expecting modest increases in expense for 2010 over the levels that we predicted in November.

As a result of these factors, in an economy which shows no signs of recovery in the near term, we now expect to be in the lower half of our 2010 earnings forecast range.

Moving on to cash flows, as we had forecast we experienced negative free cash flow in 2008.

Given the uncertain financial times, the increasing costs of financing and our desire to preserve capital, we have maintained our CapEx at the reduced levels disclosed in the third quarter.

These decreased expenditures include reductions in discretionary CapEx in the supply segment; no new renewable commitments; the cancellation of a hydro expansion opportunity; and very limited nuclear development activities.

Dividends remain a very important part of total shareholder return, especially in these difficult financial times.

We will evaluate the dividend level with the Board on our normal schedule later this month.

On slide 14, we provide detail on our credit facilities and collateral postings.

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

We continue to 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.

We are providing more detail this quarter on the available portion of our liquidity.

We have about $3.3 billion available at PPL Energy Supply under the existing facilities.

Domestically, the Supply segment has a diverse group of 23 banks providing credit, with no bank having more than 14% of the total commitment.

Planning for our liquidity needs and sources is an ongoing process for us.

We continue to look for the best and most cost-effective ways to address our future liquidity needs.

The credit facility needs of PPL Electric Utilities and WPD are clearly not as substantial as the Supply business.

However, both are in a solid liquidity position as well.

On slide 15, we update the level of collateral at PPL Energy Supply through December 2008.

This slide reflects the strong liquidity position we have consistently maintained.

As mentioned last quarter, the postings increased earlier in 2008 as power prices began to rise significantly.

When they fell from these mid-year highs, a significant portion of the collateral was returned to us.

These credit facilities and our BBB investment-grade credit rating are extremely valuable to the Company, as we look to further execute on our hedge strategy.

Finally, on slide 16 we are providing an update on our debt maturity schedule, and for the first time including a look at 2013.

As we mentioned last quarter, proceeds from the electric utilities issuance in October will be used to partially pre-fund this year's $486 million maturities, and we have no maturities in 2010.

Finally, in my remarks I would like to comment on S&P's recent announcement placing us on negative outlook.

A strong credit rating is, as I said, an extremely valuable asset for our energy marketing business, and we remain extremely committed to maintaining the investment-grade credit rating.

While we are disappointed in S&P's recent decision, we do not expect any material adverse impact on either cost or liquidity, and we believe the significant improvement in 2010 cash flows will warrant the elimination of the negative outlooks as we move forward.

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

Thanks, Paul.

Good morning, everyone.

Let's turn to slide 17, and I'll provide an update on our delivery businesses.

As Jim mentioned earlier on the call, during the fourth quarter PPL Electric Utilities successfully completed another round of solicitations for its 2010 default service load.

With four of the six RFP's now completed, PPL Electric Utilities has over 66% of its expected default supply needs under contract.

Next month we will begin the fifth solicitation, and bids for that installment are due March 30 and PUC approval is expected April 2.

We are currently evaluating the impact of Pennsylvania's Act 129 as well, which among other things requires Pennsylvania utilities to implement energy efficiency and conservation programs over the next five years.

The Act requires consumption reductions of 1% by mid-2011 and 3% by mid-2013, to be achieved within a cost gap of 2% based on 2006 annual revenues.

As a result of Act 129, PPL Electric Utilities has modified its procurement plan to reflect supply needs for 2011 through mid-2013.

As Jim mentioned, PPL Electric Utilities continues its commitment to helping customers mitigate rising electricity costs.

Customers have responded very well to the prepay plan that was implemented in 2008.

In fact, 10% of eligible customers signed up for the program, and have already started contributing towards their 2010 electric bills.

One final note on Electric Utilities.

2009 overall unit sales are expected to be flat compared to 2008 sales, resulting from continued negative economic conditions.

Limited residential sales growth is expected to roughly offset declines in industrial and commercial sales.

On the international front, the UK's fifth distribution price control review is in process and is moving along smoothly.

Later this month, we will be submitting our detailed business plan to Ofgem, the UK regulator, for their review.

Ofgem is expected to publish its initial proposals by July 2009, and final proposals in December.

The new rates would take effect April 1, 2010.

Now moving on to Supply, I'm happy to report that construction work on the Montour cooling tower was complete, and Unit 1 came back online November 15, 2008.

The project was completed safely and well ahead of our schedule.

I'm also pleased to report the Susquehanna nuclear plant set a new generation record in the fourth quarter.

The plant generated over 19 terawatt hours, which is nearly one terawatt hour more than the previous record that was set in 2005.

This achievement is the direct result of dedicated personnel at Susquehanna, and comes on the heels of successful completion of one of the most complex outages in the plant's history during the spring of 2008.

Also at Susquehanna, we are scheduled to complete and up-rate at Unit 2 of 69 megawatts this Spring.

This will bring the total Unit 2 up-rate to 1,131 megawatts.

In addition, a 32 megawatt up-rate at Unit 1 is planned for 2010.

As you are aware, in December the DC circuit court reversed an earlier decision to vacate the Clean Air Interstate Rule, or CAIR.

Somewhat surprisingly, SO2 allowance prices have not risen as a result of this court decision.

It appears market participants are taking a wait-and-see approach.

We of course continue to evaluate our strategy with regard to the length we have in SO2 allowances as a result of the scrubbers we have installed on our Eastern fleet.

Let's turn to slide 19, and review the results of our marketing and trading operations in 2008.

During the third quarter call, we discussed the trading positions we had taken and the losses we experienced.

As you can see from the chart, we ended 2008 basically at a break-even level.

I've also included the amount expected from our marketing and trading operations in 2009.

As we previously discussed, we've scaled back our marketing and trading operations given market traditions.

I would also point out our 2009 expectations reflect the marketing transactions that have been executed prior to 2009.

In other words, we had some margin backlog coming into the year.

On slide 20 we have updated our hedge positions for electricity and fuel as of December 31, 2008.

I would like to remind you that this slide represents all economic generation, not just base load.

I will address base load in a moment.

Our current electricity hedge position for 2010 is 79%, an increase of 3% over the previous quarter.

We have continued to hedge 2011 and 2012 electricity sales as well, with 47% hedged in 2011 and 26% hedged in 2012.

On the fuel side, we have contracted for 100% of the coal needs for 2009 for our wholly-owned units and remain well hedged for 2012.

Our average hedged fuel prices for each year are below current and forward market prices, and should provide significant value as we move into 2010 and beyond.

This will be evident when we review the open EBITDA positions in a few minutes.

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

For 2009, substantially all of our expected base load generation output is committed to sales obligations.

For 2010, we have hedged over 80% of our base load generation, a small increase from the last quarter, which provides the Company with the solid base of earnings growth that we are forecasting.

For 2011 and 2012, you can see we have also hedged some significant portions of base load generation at prices favorable to current market forwards.

I'd also like to note that substantially all our capacity has been hedged, primarily through selling forward capacity in PJM's RPM auctions through 2011.

On slide 22, we provide an update of our open EBITDA positions.

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 December, which are available on page A1 of today's presentation.

Based on all prices at December 31st, the unhedged gross margin for the Supply segment in 2010 would be about $2.6 billion, with associated O&M of $859 million.

This brings the value of our 2010 open EBITDA to almost $1.8 billion.

The change since the first quarter reflects the dramatic decline in electricity prices, partially offset by lower fuel prices.

During the fourth quarter, PJM around-the-clock prices fell nearly $10 per megawatt hour for 2010, and coal prices fell about $53 per ton.

Our 2011 and 2012 open EBITDA positions were similarly impacted.

While the decline in power prices negatively affected our open EBITDA positions, the value of our hedges, as one would expect, have increased dramatically.

With that, I'd like to turn the call back over to Jim for the Q&A.

Okay, thanks, Bill.

Operator, we are ready for questions.

(Operator Instructions)

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

Good morning, guys.

Good morning, Paul.

Just on the trading and marketing, it looks to me that you guys are seeing better margins or you're expecting better margins in 2009.

Is that because of the backlog that you guys were talking about, and has 2010 changed as well?

2010 has not changed.

2009 does reflect the backlog we had coming into the year, which was roughly $50 million of margins we had from [polar] deals and other transactions that were executed prior to 2009.

Okay.

So that's -- because I think before it was $65 million, now it is $85 million?

Yes.

Okay.

And the 2010 stayed the same at 125?

It did.

Okay.

And then second thing was there was an e-mail that was published in your local paper about cost-cutting efforts, Jim?

Yes.

And I was wondering if that's got -- I don't see any change in the open EBIT numbers, but how you see that as potentially impacting earnings and what have you?

I think, Paul, you know, as we go into these in 2009, and it's not too much different from a number of other years, where we see a lot of economic challenges with the economy, we are trying to maintain a laser-sharp focus on all necessary steps to reduce costs in the corporation.

So I think the message to our employees and to the outside world here is that we are very focused on cost containment, cost reduction, and will continue that effort as we move through the next three, four weeks here, and determine where we can trim costs in the corporation to deal with any of the unforeseens that hit us in a difficult economic time in the country.

So I think there is nothing at this point that would cause us to change any of our forecasts one way or the other, but I think it's just a message to everyone that we are very intensely focused on delivering our numbers for 2009 and beyond, and you can't maintain a focus without bringing costs into the picture, and that's exactly what we are doing.

Okay.

That may lower costs from what we have actually got projected in the number now.

But you guys are being conservative in your estimation of that, is that a way to think of it?

I think one way to think of it there are a couple of headwinds, I mentioned in them my remarks, Paul, in terms of pension costs both domestically and at WPD.

The FX rate that we assumed in the plan was $1.50.

We gave a sensitivity around that number on the last slide in the deck.

What we are looking at from a cost control perspective would more than offset those.

So I guess we are trying to stay ahead of the game, and trying to -- not predict negative outcomes, but as Jim said we are clearly focused on meeting and beating the forecast we have given you guys.

So that -- it factors in some negative headwinds and our intent in terms of performance for the year.

Okay, great.

Just finally, the energy efficiency efforts that you guys mentioned in the legislation, and what have you, the demand reduction efforts, do you see those as being achievable or do you see any problems in accomplishing those, or what do you think about their attainability?

We are seeing this showing up in legislation around the country.

I'm just wondering what do you guys think of the capability of Pennsylvania reducing demand as they, I guess, hope to do in this legislation?

I think we -- they are very achievable numbers.

I think a key for us obviously in the legislation was ensuring that we had costs recovery and that there were going to be enough funds dedicated to be meaningful, and I think if you look at 2% of the revenue as the number that's targeted for allocation of the programs, we do think that would be sufficient to achieve the goals that they have both on the conservation end as well as on the demand reduction end.

Okay.

Great.

Thanks a lot, guys.

Sure.

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

Good morning.

Can you discuss the potential or talk about the potential 2011 through 13 procurement, and any additional rate mitigation efforts?

I know, Jim, you talked about it a little bit in your opening comments, but would a 2011 procurement at current prices be blended with the 2010 increase through some type of a deferral mechanism?

And if that's the case, what would the resulting rate pair increases look like on an annual basis?

I'll comment on that.

First, I would say in terms of the current process that we are using for 2010 that -- the GAAP period, we have no plans to modify that at this point.

We would of course consider other alternatives, but quite frankly we have already filed a plan.

It's been approved for 2010.

The 2011 plan was initially submitted and then recently modified to comply with the Act 129, and we think that is a well thought-through and highly structured plan is going to provide benefits.

If you look at forward prices, who knows where they are going to be; but clearly there is the potential, looking at where forwards are settling for 2011, that we could be looking at a decrease for customers in 2011, and possibly decreases in the next two auctions coming up.

So, you know, the 36% that is a result of the first four auctions is likely to come down, all other things being equal, but hard to predict where 2011 will fall out.

The PUC did recently do a new flash cut of where they expected prices to fall for 2011 and 2010, and substantial reductions from the prior flash cut that they had done.

So, all in all, I think as prices are dropping, customers could see those benefits as auctions unfold here.

Okay.

And then can you talk a little bit about the transmission line that you recently announced from Susquehanna?

Sure.

Just in terms of a general update?

Yes, and timing, and what kind of the benefit of the line is, and why you're pursuing the development of it?

Sure.

I think, first and foremost, we are constructing the line at the direction of PJM, which has forecasted the need from a reliability standpoint for that line.

Secondly, we have filed with the Pennsylvania Public Utility Commission our applications, and would expect that process to take about a year.

So you would be looking at probably the end of this year at the earliest that we would have approval from Pennsylvania.

In terms of the -- we have formula rates that are on file with the FERC and we're in the process of settling our case there, so that looks favorable.

But our belief is from a reliability standpoint, and I would also -- there is certainly a need.

I would also say there are a lot of renewable projects out there that I think everyone's focused on, making sure those renewable resources get to market, and this is another way to help that.

Okay.

That's helpful.

Then one last question.

Is it looks like your 2010 and 2011 coal hedges went down a few hundred basis points.

Can you talk a little bit about what happened there?

Are you referring to the EBITDA slide?

I'm referring to slide 20.

Yes, I think those are coming from better numbers from Keystone and [Kanama], John.

Got you.

We don't get -- we have estimates, and then as the owner group is provided better information from the Operator --

Got you.

-- we are able to update the numbers.

Very good.

Thank you.

Yes.

Sure.

Your next question comes from the line of Danielle Seitz with Dahlman Rose & Co.

I just was wondering if you could give us an idea of the tax rates for international delivery?

Is whatever has happened in '08 pretty much reflecting on '09, or do you see another change there?

Again, we did see about a $0.06 benefit coming through from resolution of an open issue that we had with Inland Revenue that we got resolved late in the year.

That is affecting the global rate for WPD.

Let me try to get to the effective rate.

Do you have another question, Danielle?

Yes, just quickly, the improvement in margins that you are anticipating for this year, how much of that would be coming from the up-rates that you are anticipating at the different nuclear plants?

Is it a major portion of that, or most of it is actually prices?

Hello?

Yes.

Okay.

The effective rates for -- are around 29%.

Okay.

That is for 2009?

That's correct.

And about roughly 30% for 2010.

Great.

Thanks a lot.

And as far as the effect of the up-rates for this year regarding the nuclear plants and next year, do you feel that the $0.27 you are anticipating this year, is this a minimal portion of that number, most of it is just prices?

No, the nuclear generation is about $0.03 of the total.

Great.

So it is not the majority.

It is, again, more significantly coming from improved power values, from higher prices in the West and higher prices under the polar contract, and then higher margins for marketing and trading, which is around $0.13; again, as we build from that basically flat net marketing and trading result in 2008 to the $85 million in gross margins that we expect in 2009.

Those are the biggest drivers.

Great.

And the higher O&M is mostly pensions on delivery that you are anticipating?

At the utility, more based on customer programs and uncollectibles.

At Supply, coming from additional plant outages at the coal-fired units, and higher operating costs of the scrubbers, which is about $0.05.

Thanks a lot.

Appreciate it.

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

It is actually Alex stepping in.

I just had a question on the pension cost there.

I don't know if you can give us just a little better idea of what the cost increase would be from 2008 to 2009, and a related question would be why we are really seeing an impact on the 2010 outlook, when -- I was thinking about things from an international perspective, but I would almost assume that any elevated pension costs might be incorporated in the next -- in the rate review, you know, with rates implemented next Spring?

Okay, on a consolidated basis from '08 to '09 we are seeing about a $0.03 increase in pension costs versus where we thought we were going to be, which was about a $0.01 increase, when we were going through our November review.

Virtually all of that came about because of the very significant decline in AA corporate -- the universe -- subset of the universe we use to discount the obligation at -- as everybody really saw, as there was a major drive to high-quality debt securities, including Treasuries and the higher quality corporates in December, really rates drove down, I think, slightly in excess of 100 basis points from where we were at beginning to mid-November to where we ended up with at late December, and almost all of that came within the month of December.

So it just was not predictable.

We thought we were being as conservative as we could be, but there was a little bit of a hit there.

From a WPD perspective, we do get recovery of a significant portion of the ongoing pension costs and underperformance of assets versus liabilities.

However, when they do the distribution price control reviews, they use actuarial numbers from triennial evaluations for the pension plans.

So from a WPD perspective, they look at the -- which occur mid-year, so they are going to use mid-year 2007 pension cash funding assumptions as they determine the revenue requirement, instead of numbers which would come through in early to mid-2010.

So in this price control review, they are using data from '07 for 2010 through 2015 revenues.

Ultimately, the 2015 revenue case would factor this in.

So it's a relatively large gap timing issue.

The [recs] in the UK, all of them, including our sales, are trying to get Ofgem to recognize what's happened in the marketplace from an interest rate perspective and an asset performance perspective, to try to adjust revenues for that item, but it is not a given that we would be able to accomplish that.

But yes, ultimately a significant portion of the costs are recoverable in revenues, but you can end up with timing issues and we are not on FAS 71 for UK, so they hit as we go.

Great.

Just a follow-up on WPD.

I was just wondering what overall thoughts are just in terms of Ofgem attitudes and indications on rate of return, I guess, compared to the last price control and also what your work performance benchmark has been for WPD relative to the other companies?

We would expect I guess similar treatment to what the gas folks thought, so some slight haircut in the [whack], not significant and factored into our forecast.

WPD clearly remains a frontier performer in terms of quality of service, as well as from a cost perspective, you know, although we have got a little more work to do there as it relates to trying to get them to normalize or -- I guess normalize is the right word, as they do the regression analysis and compare and contrast each rec against each other to get more network-focused in terms of number of customers focused in that calculation.

We rate very highly from a cost perspective, as well as being the frontier in quality of service.

We have maximized our revenue bonuses between the rate cycles each year for the last several years as well.

That performance obviously begets higher expectations from Ofgem as they reset the expectation bar for the next review, but we are confident that we can continue to outperform there.

So nothing in terms of philosophical change by Ofgem.

They really are trying to find ways, again with their incentive mechanism, to reward performers who say that they need certain O&M costs, certain CapEx levels, and then outperform the metrics.

If you do you that you get rewarded, and if you don't you get penalized.

And thus far we have been treated extremely well.

extremely well.

So we don't expect that to change.

The next question comes from the line of Yiktat Fung with Zimmer Lucas Partners.

Good morning.

Hello?

Hello.

Hello.

Hello.

Sir, your line is open.

Good morning.

I just have a question about low growth at the Pennsylvania delivery segment.

You said during the call that you expect residential load to grow slightly, and that will be offset by declines in commercial and industrial.

I was wondering if you could put more specific numbers around that?

Sure.

On a weather-adjusted basis, we basically saw just under 2% load growth from 2007 to 2008, and as Bill mentioned in his remarks we would expect on a consolidated basis to be roughly flat to down a 0.5% from '08 to '09.

Virtually all of the decline that we are seeing in industrial is being slightly offset by residential and small commercial.

So the numbers vary in terms of the total load by the customer classes.

So the percentage, it is not an equal load across the universe of customer classes.

What kind of decline are you seeing for the industrials?

Just over 2% on a weather-adjusted basis between '08 and '09.

Okay.

And with the power prices coming down, do you now expect that there will be significant customer switching going to 2010?

There is clearly the potential for that.

I guess it depends on how quickly that market develops.

In most markets that have gone through deregulation, obviously in commercial industrial the first ones often, in fact, they are not part of that utility six tranche procurement program for 2010.

There will be one auction late this year on their behalf, and they can either opt into that program or shop.

They are really required to effectively shop.

So from a C&I perspective, I don't see any significant change from what the prior view was.

They will be off system, if you will, from a default supply standpoint.

As it relates to the residential and small commercial industrial, we will see what happens.

Again, the prices, if you use current forwards, would be less than the 36% as procured thus far, and as the utility conducts the next two auctions, if there's further declines the likelihood of shopping is greater, and that all benefits customers.

So we will wait and see.

When do you expect to file your next rate cases for the Pennsylvania delivery segment?

As we see -- you know, the relatively flat load growth profile, as we see rising costs, as we see relatively significantly rising CapEx on the distribution side of the business, clearly a rate case could be warranted even in 2009, but 2010 would be more likely, as we kind of look forward with effective rates in -- higher rates in 2011.

Just one last question.

What are you expecting for pension contributions in 2009?

In 2009 -- one second.

From a domestic perspective, around $44 million.

From a UK perspective -- we will get back to you on the UK cash one.

And the $44 million for domestic, that's mostly at the delivery segment?

Yes, that's the consolidated domestic funding expectation.

That's Montana.

That's EU.

That's Gen, all under the umbrella plan.

Thank you very much.

You're welcome.

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

Thank you very much.

I was just looking at your CapEx slide A6, and noticed that slide -- CapEx in 10 and 11 are $752 million and $790 and [11].

What does that include?

I thought Holtwood was not happening, and yet the CapEx is still at previous levels, or am I just mistaken?

One second.

This is Bill Spence.

You were looking at 2010 levels of CapEx for the Supply group?

Right.

The previous '10 levels were also above $700 million, which I thought included Holtwood?

It probably only included a small amount for the front end of the project at Holtwood, so that would be one driver.

The other thing is we have included for sustenance, you know, general maintenance of the plants we have included some, and reflect some increases there year-over-year from our prior forecast.

There's only about a little over $100 million in what I would consider to be discretionary CapEx.

Most of it is either sustenance, environmental-related or regulatory-driven.

Okay.

And these numbers, just to confirm, include nuclear fuel CapEx?

They do.

Okay.

And could you also maybe give us a little color on what you're seeing in the coal markets?

Obviously, last year was a pretty wild year.

Is it kind of getting tamer?

Are you able to do some long-term contracting at reasonable prices?

What do you see out there?

Well, certainly on the spot market side, prices have come down substantially, and I think for small train loads on a spot basis you could probably get Eastern coal in the $65 to $75-a-ton range, compared to where we were up at $140 last year.

On a term basis we are -- as you can see from some of our hedge slides, we are pretty well positioned overall.

So we are not out there for actively looking at additional long-term contracts of any sizable amount.

If an opportunity presents itself, of course we are going to look to lock some in.

But right now I think we feel pretty good with where we are sitting, and don't have the exposure but for what may exist with Keystone and [Kanama], don't really have any exposure on our Eastern side for this year.

Thank you very much.

And in the West, just to add a little bit more, prices are down a little bit, but more or less holding where they were in the $16, $18-a-ton range.

Thank you.

Operator, do we have any other questions?

Your next question from the line of Ed Heyn with Catapult Capital.

Good morning.

I just had a few quick questions.

Paul, I think you mentioned this, but the sterling assumption you are using in your '09 and 10 guidance is $1.50, is that right?

That's correct.

$1.50 in 2009, $1.75 in 2010.

Okay.

Which was baked more off of -- we use a series of forward -- not really forwards, but forecasts by various sources to try and develop a view.

Got you.

Okay.

And then you put that sensitivity in, now that a $0.05 move is worth about $0.02 in EPS?

That's correct.

Okay.

And then just on the open EBITDA.

Can you guys disclose what sort of coal prices you're assuming in those numbers, or give us a kind of idea how much they have moved down from the last time you gave us a mark?

I would say just for 2010 in general the prices have moved down, rough numbers, about $5 a ton.

And that mark, that would just affect pretty much the East, because the West, because it's mine [mouth] for coal strip, we use contracted prices.

Okay, so --

In the open number.

So when you guys gave the open number of $9.30 versus year end '08, the coal price in '10 only came down $5 a ton?

And that would primarily affect the 9 million tons of coal in the East.

Got you, okay, because you don't include the West because it is hard to get a mark there?

Well, because it is contracted through 2019 at a cost-based contract, so a market benchmark wouldn't be relevant.

Got you, okay.

So that -- bringing it down $5 a ton, is that still like in the $90 range or so for 2010 you're assuming in the open EBITDA?

Or is it a lot lower than that?

It would probably be in that range, yes, with transportation included on a delivered basis.

Okay, but you're seeing spot stuff now in the $65 range.

Does that include transportation?

$65 to $75, that would not include transportation.

Okay.

So at whatever you think might be an appropriate number to that.

Got you.

Yes.

Then just a last question.

I think Yiktat kind of touched on this, but I guess the switching risk, given that commodity prices have come down in the 2010 auction for residentials, I know that residentials are kind of sticky but how much of like your 80% electricity in the East hedged in 2010 is kind of really -- is that, I guess, energy supply which is directly serving the auction that could basically be at risk?

The confidentiality provisions, as dictated by the PUC, don't permit discussion or disclosure of the level of participation or wins in the auction processes.

The only out that's provided for in the underlying contracts is the one that -- if the amount that's garnered by a particular supplier is significant enough that they deem it necessary to disclose from a financial reporting perspective.

So we discussed in the first auction that we had won 85% of the total lots in the auction.

We haven't disclosed anything since the first auction, so you can read that to be it was an immaterial amount to zero in the subsequent auctions.

Remember, we had 50% of the base load hedged before the utility conducted the first auction, so from our perspective it is not significant.

It [wouldn't] be considered material from a corporate perspective.

Okay.

And the switching risk would only come into effect if you actually won the auction, as opposed to selling through a third party that has essentially supplied the auction, because you would basically not have that load variability risk?

Right.

Got you.

Thanks for the help.

You're welcome.

(Operator Instructions)

Your next question is a follow-up from the line of John Kiani of Deutsche Bank.

Hi.

Thanks for taking my follow-up.

One last question on the Susquehanna transmission line.

Do you have a higher-level estimate for how much that transmission line, once it is put into service, would increase the realized market heat rate or the price of power or whatnot at the Susquehanna [bus pour]?

No, we don't.

Directionally, would it go up or down?

You know, I haven't looked at it for some time, so I would be hesitant given the dramatic declines we have seen in prices across-the-board.

I would want to go back and look at that before I would even venture a guess, to be honest.

Okay.

Thanks.

Sure.

Your next question is a follow-up from the line of Yiktat Fung with Zimmer Lucas Partners.

Hi.

You mentioned earlier in the call that you are seeing 2009 earnings in the lower half of your previous guidance range.

I was wondering, what are the specific factors that are leading to that view on 2009 earnings?

It is -- in 2010, not '09.

'09, we are fine.

2010, it is being driven by simply -- almost entirely by the decline in power of the open power position that we have got, as we have all watched forward prices decline for the Cal 2010 period, that slightly more than -- less than 20% open base load position has impacted gross margins.

Thank you very much.

That was very helpful.

You're welcome.

To get back to the question that Danielle asked earlier, and there is no change to this cash payment assumption in the UK from any movement in interest rates or anything like that.

It was consistent with the plan, again because of the triennial evaluation.

It is around $90 million in cash funding for the pension in WPD for next year.

There are no further questions at this time.

Do you have any closing remarks?

Well, Operator, I think to all I would just say -- remind everyone that from our perspective at PPL these are challenging times in the economy, but rest assured we have an intense focus on doing all -- taking all the necessary steps to deal with any headwinds we see in 2009 and beyond, to ensure that we deliver the numbers that we put out to the community.

Additionally, I think that in this year, this Spring we will continue to work with both the PUC and Pennsylvania Legislature to complete our transition to market purchases for PPL Electric Utilities in 2010, and as well we will take all the necessary steps to strengthen and maintain our credit rating for the corporation.

So I thank you for your attention, and we will talk to you at the end of first quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.