賓州電力 (PPL) 2009 Q2 法說會逐字稿

Good morning, my name is Celeste and I will be your conference operator today.

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

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

After the speaker's remarks, there will be a question and answer session.

(Operator Instructions) Thank you.

I would now like to turn the call over to Joe Bergstein, Manager of Investor Relations.

Please, go ahead, sir.

Good morning and thank you for joining the PPL conference call on second quarter and our general business outlook.

We're providing slides to 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 filing.

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

Thanks, Joe.

As usual today we'll begin our call with general update and commentary on our second quarter as well as the revised 2010 forecast, and then we'll take your questions.

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

So let's begin with the second quarter.

Today we're reporting a second quarter loss of $0.02 per share on a GAAP basis compared with earnings of $0.50 per share a year-ago.

Second quarter earnings from ongoing operations which exclude special items were $0.32 per share compared with $0.50 per share a year-ago.

As we noted in our release this morning, the primary drivers for the lower GAAP earnings were special item charges related to certain economic hedge activity and an impairment related to the pending sale of our Long Island power plants.

Both our GAAP earnings and our earnings from ongoing operations were affected by lower wholesale margins, unfavorable currency change rates and lower domestic electricity sales.

While the very weak economy and mild weather continue to pressure wholesale energy prices and reduced electricity consumption, we're encouraged by our earnings from ongoing ops for the quarter and for the first half of the year across all of our business segments, and Paul and Bill will provide additional information on our performance in the quarter and through the first half of the year.

The cost containment actions that we took early this year are paying off and we continue to perform ahead of plan for the year.

Thus we're reaffirming our 2009 forecast of $1.60 to $1.90 per share in earnings from ongoing operations.

Turning to 2010, we continue to anticipate very strong earnings next year.

However, market conditions and volatility surrounding customer demand levels are putting significant downward pressure on the 2010 earnings.

Driven by our current expectations of lower margins and marketing and trading, and the continued decline in 2010 wholesale electricity prices, we have reduced our 2010 earnings forecast range to $3.10 to $3.50 per share.

Given the significant economic uncertainty, the challenging market conditions and lower regional customer demand for electricity, we did take aggressive actions to further lower our 2010 earnings risk by increasing our baseload generation hedge levels to 98%, and by lowering our expectations for our marketing and trading business.

While a revised forecast reflects current market conditions, it's important to note that the generation hedge strategy that we put in place several years ago has provided almost $700 million in value for the company for 2010 alone.

As a result of that strategy, our 2010 expected generation is hedged at an average price significantly greater than the current forward prices.

For 2010 we continue to be vigilant on containing cost, on our operating performance and holding down our capital expenditures.

We are, however, continuing with our plans to expand capacity at both our Holtwood hydroelectric plant in Pennsylvania and Rainbow facility in Montana.

These projects will provide us with 153 megawatts of clean renewable energy capacity and are largely driven by the availability of the federal stimulus money.

We continue to believe that we will eventually be operating in a more carbon-constrained world.

Today about 40% of our generation is non-carbon emitting and these hydro projects, which we expect to bring online in 2012 and 2013 will further strengthen that position.

I will take a few minutes now to provide you with an update regarding the transition to competitive wholesale markets in Pennsylvania and on our view of federal energy and environmental legislation.

As you know the generation rate cap at PPL utilities expires at the end of this year and we're projecting a 30% increase in the bills of residential customers.

About 10% of those customers are participating in a prepayment program that will soften the increase substantially.

In addition, more than 200,000 customers have visited a wise energy website that we have established.

A few weeks ago the Pennsylvania Public Utility Commission approved our second mitigation program, which would give customers the option to defer 2010 rate increases in excess of 25%.

Under this plan we would collect deferred amounts, plus carrying charges over a period of two years.

Meanwhile the Pennsylvania legislature continues to consider legislation that would mandate that utilities offer referral programs for customers, under which any increase would be deferred over a three year period.

The bill includes provisions for full recovery of carrying charges.

While we're not opposing the legislation, we continue to believe the details of phase-in plans are best left to the PUC, which already has exercised its authority to approve such plans for many of the utilities in Pennsylvania.

It's unclear whether or when or if this legislation will be considered by the Pennsylvania House or Senate.

Briefly let's talk about energy and environmental legislation passed recently in the US House.

As you know the Clean Energy and Security Act of 2009 addresses both climate change and renewable energy requirements.

PPL is supportive of the general concepts in the House-passed bill, but we have significant concerns about the required levels of carbon reduction and the proposed percentage of electricity that must come from renewable resources.

We believe both are unrealistic and will be working to address these concerns as the Senate considers the issues.

Before turning the call over to Paul, I would just like to reiterate that our revised 2010 forecast fully accounts for our adjusted risk profile given current economic and market conditions.

In evaluating market risks we determined that the downside risk of further demand destruction, a prolonged low-gas price environment and continued economic uncertainty was significantly greater than the upside potential of higher prices based on an uncertain economic recovery.

Our evaluation drove us to aggressively mitigate risk factors wherever possible.

With that I will turn the call over to Paul for more details on our second quarter results.

Thanks, Jim, and good morning, everyone.

Before I begin I would like to remind everybody that 2008 earnings from ongoing operations include the operating results of the gas delivery business, but exclude special items related to the divesture.

As Jim mentioned our second quarter earnings from ongoing operations were lower than last year, primarily driven by lower marketing and trading margins in the supply segment and lower delivery revenue in our PA deliver segment.

These lower earnings were partially offset by higher earnings in our international delivery segment despite a lower currency exchange rate.

These earnings keep us ahead of plan in achieving our 2009 forecast of earnings from ongoing operations.

Let's turn to slide six and begin with a review of the supply segment performance.

The supply segment earned $0.09 per share in the second quarter of 2009, a $0.17 decrease compared to last year, this decrease was driven by lower east energy margins on lower market and trading margins including lower margins from load following deals as a result of the weak economy and mild weather.

The second quarter was also impacted by higher west energy margins due to higher wholesale volumes and increased hydro generation.

Higher nuclear O&M primarily driven by the shift in the timing of this year's Susquehanna refueling outage, higher depreciation, primarily drew to the Brunner Island III Unit 3 scrubber that went into service in April 2009 and higher financing costs.

Moving to slide seven, our Pennsylvania delivery segment earned $0.05 per share in the quarter, a $0.03 decline compared to a year ago.

This decrease was the net result of lower delivery revenue due to milder weather, lower industrial sales and a true-up for our formula rates, higher financing costs as a result of prefunding a portion of PPL Electric Utilities 2009 debt maturity in October of last year and lower O&M.

Moving to slide eight, our international delivery segment earned $0.18 per share in the second quarter of 2009, an increase of $0.02 compared to a year ago.

The increase was the net result of lower O&M, lower interest expense on WPDs index linked bonds driver by lower inflation and lower UK income taxes.

Partially offsetting these earnings benefits was unfavorable currency translation, which resulted in a $0.07 per share decline in earnings compared to a year ago.

Turning to slide nine, as Jim already mentioned we are reaffirming our 2009 forecast of earnings from ongoing operations of $1.60 to $1.90 per share.

Today we also revised our 2010 forecast of earnings from ongoing operations to a range of $3.10 to $3.50 per share from our first quarter forecast when we expected to be at the low-end of the prior range of $3.60 to $4.20 per share.

While we said on the first quarter call that we would update you in the fall with 2010 guidance we decided to update you now with the best information we have for 2010.

I will walk through the primary drivers that caused us to change our forecast from $3.60 to the new range.

Our current forecast reflects significantly lower expected margins from our marketing and trading business, an increase of our baseload generation hedge levels to 98% and we also now expect lower coal fire generation and lower spark spreads on our gas and oil fire generation.

In addition, to lower energy margins we project decreased revenues at WPD due to a lower expected inflation factor applied to billing rates and higher O&M at PPL Electric Utilities.

We now expect approximately 79% of our 2010 earnings from ongoing operations to come from the supply segment with the contributions of our international and Pennsylvania delivery segments to be 12% and 9% respectively.

On slide 10, we've broken out free cash flow before dividends by segments, this chart has been updated to reflect our current forecast of 2009 and 2010 cash flow, and the only significant change to 2009 is in the supply segment, which now includes the previously announced asset divestures in Long Island and Maine.

2010 has been updated to reflect our revised earnings forecast, mainly a result of the supply segment margin impacts that I just discussed.

On slide 11 we provide detail on our credit facilities and collateral posting.

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

In July, we extended the expiration date of PPL Electric Utilities' $150 million asset-backed credit facility to July 2010 and the GBP150 million five-year credit facility at WPD was terminated and replaced with a new GBP210 million three-year credit facility which expires in July 2012.

We continue to have more than $4.1 billion in credit facilities supporting the activities of our supply business and our hedging strategy with about $3 billion currently available.

We continually evaluate our anticipated collateral requirements and look for the most efficient and cost-effective way to address our future needs.

Slide 12 reflects an updated level of collateral available and posted at PPL Energy Supply.

These credit facilities and our BBB investment grade credit rating remain extremely valuable to the company as we look to further execute on our multiyear hedge strategy.

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's turn to slide 13 and I'm going to start with an operational update of our delivery businesses.

During the second quarter the Pennsylvania PUC approved PPL Electric Utilities' procurement plan for electricity supply for 2011 to mid-2013.

Bids for the first procurement under this plan are due August 11, 2009 and PUC approval is expected August 13th.

A complete procurement schedule is available in the appendix of today's presentation materials.

As a reminder, in September PPL Electric Utilities will begin the final solicitation for its 2010 supply needs.

Bids for the sixth installment, which includes residential, small C&I, and the only solicitation for large C&I customers are due on October 5th with PUC approval expected October 8th.

On July 1st, PPL Electric Utilities filed its plan to meet the requirements of Pennsylvania's Act 129.

That plan includes details as to how electric utilities expect to comply with the ax load reduction requirements which are 1% by mid-2010, 3% by mid-2013 and a peak demand reduction of 4.5% by mid-2013.

These reductions must be achieved within a cost-cap of 2% of 2006 annual revenue or approximately $60 million per year.

Over the four-year plan the cost cap is approximately $240 million in recoverable and future rates.

PPL Electric Utilities continues its commitment to helping customers mitigate rising electricity costs.

As you may recall customers responded well to the prepaid plan implemented last year, 2008, with 10% signed up for the product.

In addition, as Jim mentioned the PUC recently approved a second rate mitigation program.

The PPL Electric Utilities filed earlier this year.

This plan will provide customers another way to spread out the expected increase in electricity price.

The deferred payment option allows residential and small business customers to defer increases of more than 25% starting January 1st, 2010.

Customers who voluntarily choose this option will repay the deferred amounts plus 6% interest over a one or two-year period.

One final note on electricity utilities, retail sales at the utility in the second quarter were 5.5% lower than the second quarter of 2008.

This was driven by milder weather than last year and lower industrial sales.

On a weather normalized basis, retail sales were 4% lower than last year's quarter, driven by lower industrial sales.

For the remainder of 2009 we continue to forecast flat residential and commercial sales growth.

For industrial customers sector while year-to-date sales are 11% lower than last year, the decline has leveled off during the second quarter and industrial sales are expected to remain at this level for the remainder of the year.

While PPL Electric Utility retail sales are down distribution revenue has not declined significantly due to the rate structure for larger customers which is based more on customer and demand charges than kilowatt hour charges.

On the international front the UK's fifth distribution price control review is in process and progressing as scheduled.

Ofgem, the UK regulator, recently published its initial proposals, in fact yesterday.

We're still evaluating the impacts of this preliminary proposal and its effects on revenues and earnings.

Final proposals are due in December and the new price control period would begin April 1st, 2010.

Now moving to slide 14, I would like to give you some additional details on PPL Electric Utilities' 2011 to 2013 procurement plan as it does differ from the 2010 plan.

Under the plan, residential load will be supplied with a mix of 12 and 24-month load flowing contracts as well as fixed volume block purchases.

The utility will also procure fixed volume products under five-year contracts in addition to 10-year contracts, which can be plant-specific and may incentive new renewable sources.

Finally 10% of residential load will be supplied with spot-market purchases.

Small commercial and industrial customers will be supplied under 12 and 24-month load flowing contracts as well as spot purchases.

Large commercial and industrial customers are to be supplied under hourly pricing products and an optional fixed price product.

Now moving on to supply, I am pleased to report that during the Susquehanna Unit 2 refueling outage, we successfully completed part of our extended power upgrade, adding an additional 45 megawatts to the unit's output.

During the quarter we also announced that we reached separate agreements to sell our peaking assets on Long Island and our hydro assets in Maine, as Paul mentioned.

These assets have performed well for us, but are not core to our concentration of assets in PJM and in the northwest.

Both of these sales are expected to close later this year, barring receipt of necessary consents and regulatory approvals.

As a final comment on the operational update our Brunner Island unit prescrubber went into service this quarter and the Brunner Island Units 1 and 2 scrubber will be placed in service this fall.

On slide 16 we've updated our hedge base load position for electricity and fuel as of June 30th.

The hedge levels for total expected generation are available in the appendix to today's presentation.

We've adjusted our demand assumptions for PPL Electric Utilities for the balance of this year and we believe that the declining demand across the region is temporary and we expect demand to grow once the economy recovers.

As a result of this change, however our 2009 hedge levels have gone down slightly from the first quarter.

We have increased our 2010 hedge positions as was mentioned earlier during the quarter in order to further mitigate financial risk.

In doing so we have increased our current electricity hedge position for 2010 to 98%, an increase of 7% over the previous quarter and this reflects our additional hedging to further mitigate financial risk.

We've continued to hedge 2011 and 2012 electricity sales as well with 80% of our baseload generation now hedged in 2011 and 53% hedged in 2012.

I would also like to note that substantially all of our capacity has been hedged primarily through selling core capacity in PJM's RPM auctions.

On the fuel side we've contracted for 100% of our uranium needs through 2012 and 100% of the coal tonnage needed for 2009.

For 2010 our wholly-owned plants are fully hedged for coal with only a small open position at Keystone and Conemaugh.

So we remain well-hedged through 2012.

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

Thanks, Bill.

All right.

Operator, let's begin the Q&A, please.

(Operator Instructions) Your first question comes from the line of Paul Patterson with Glenrock Associates.

Good morning, guys.

Good morning, Paul.

On the 2010 numbers, it seems, if I'm reading the release and your comments correctly, that it's all in the trading and marketing business.

At least in the supply business, that is where the negative impact is.

Is that right?

That is correct.

And when I read the reasons, I'm just trying to get a little bit of a flavor how increased shopping and lower regional customer demand is impacting that part of the trading/marketing business?

Well it's really impacting 2009 and 2010 as we enter into commitments with utilities to deliver them energy and capacity and ancillaries and demand, and we hedge that in the open markets, because we were already basically hedged on our output for generation because of the polar in 2009 and had pre-committed a lot of that for 2010, we purchased a lot of that product in the marketplace and we purchased it at higher prices.

So as customer demand levels come in lower, whether that be for weather or for shopping or macro economics, it causes us to have generation purchases that are no longer effective hedges and we take the hit by reselling that power back into the market at lower prices.

I got you.

So on the marketing base I see what you are saying.

Then in terms of the -- what kind of increase in shopping have you seen?

Could you just give us a flavor for what you have seen in terms of polar migration, what have you?

Sure, Paul this is Bill Spence.

If you look overall what we have seen recently, we have seen about a 19% to 20% decline in the polar volumes of the full requirements contracts that Paul mentioned.

6% of that we estimate to be weather-related, the remaining 14% is a combination of economy and migration, and I think it is, based on our best estimates, pretty evenly split between the economy and customer shopping.

So let's call it 7% migration or customer shopping.

What did you guys previously expect?

I think we would have expected from a shopping perspective, something in the 2% to 3%.

It's really the dynamic of the falling prices that is incentivizing the shopping.

The drop has been relatively dramatic and it creates marketplace opportunities.

I got you.

It was $85 million that you had for 2009 and $125 million in 2010 as I recall?

Correct.

What are the numbers now?

It is basically $35 million for each year.

$35 million for each year.

And then what is the expectation in 2011?

Will that all pick up?

How do we think about 2011?

I saw the hedged numbers, which was very helpful, and it looks like you guys increased that pretty much at the same sales price than what you had before, if I read the slide right.

Is that correct??

I think Paul, when we look to 2011, so much depends on where the economy goes.

We still have a perceived gas glut here and gas prices are so influential on setting the market price in PJM, but at the same time we're faced with the economy struggling and that has had a significant impact on demand destruction.

Paul, you might comment on 2011 a little further.

Yes.

We clearly don't have any guidance out for 2011.

I think we're basically in a wait-and-see mode on 2011.

We're hopeful that as the economy recovers demand levels pick back up.

We see clearly less customer migration.

A slow recovery would be, I guess, more beneficial in terms of not incentivizing things back the other way.

But clearly that would also help congestion on the trading front.

We've created significant value in the past through FTR positions, and with that complete collapse of gas, it's really broken down the west/east congestion and it's not providing those opportunities.

So we always approach this from the perspective of the risk/reward tradeoff and right now, rather than doubling or tripling down to come back to hope to make the same levels of margins, we're just not seeing from a risk-adjusted basis the opportunities there and that is where we're reflected down the expectations.

Okay.

And then just finally with the fuel hemming, how should we think about -- you gave us a good idea about electric sales, price and hedge.

Just in general, you gave us a pretty good idea about the fuel hedging, but how do we see prices in that period 2009 through 2011?

Is that trending up?

Trending down?

Staying flat?

Well, from a fuel perspective, I think, Paul, we see coal has certainly leveled and maybe continues to fall a bit, particularly when we negotiate the longer term contracts.

With the gas situation and many coal plants being turned back at night, that is creating plenty of coal.

So at the same time, I think uranium has marched right back down to, Bill, $50 a pound from previous highs.

So I don't see anything that is going to drive at least at this point, to drive coal prices must higher than they are.

The only negative that would be affecting us is that we do have certain contracts where we're stepping into collar arrangements and we're seeing in the early years where we are going from the fixed price into the collars, the prices we signed those contracts at were very beneficial, even relative to current prices.

So there is some uptick in price against the collar prices, but I think we're talking low-single digit increases for the next couple of years.

Okay, great.

Thanks a lot, guys.

Your next question comes from the line of Ashar Khan with [Incremental].

Good morning.

Could you just go over on the supply side from the market and creating how much the deltas are?

I guess what you're saying if I'm hearing is some the delta is caused by the volume, some is caused by the marketing and trading and I guess some is caused by pricing.

Am I right?

Could you quantify those segments as to the change in there, like, from the mid, I guess, I don't know, $0.50 of a decrease in guidance or something like that?

Could you quantify those amounts?

Well, I wouldn't say the guidance decrease was $0.50.

We did highlight that we were at $3.60 at the end of the first quarter.

What we saw from a market-opportunity perspective was that we were going to come in less than we were able to get through enough of our planning process to be comfortable providing this range.

So in the $0.30 decline from the $3.60 to the new $3.30 mid point, about $0.15 of that is coming from marketing and trading.

Virtually all of that I would say is marketing.

In both 2009 and 2010, the profit expectations around what I would call more pure trading was $8 to $10 million in that range.

So virtually all of this comes from lower expected margin and profit from supplying load following deals to utilities.

Okay.

And then as you said, Paul, was there any impact on -- so I should look at $0.15 for market and trading and $0.15 from the other segments?

That is just lower volume would be the main thing, is that correct?

It's actually $0.20 in total in margins.

There is another $0.05 from the couple of other items that I mentioned spread across slightly lower expected coal fire generation.

I think we took that from 91% to 90% and then lower gas spark spreads on the gas units, oil fired units.

The balance of the $0.10 is evenly split between $0.05 of primarily O&M in the domestic utility and $0.05 of lower expected revenues in WPD.

And going with this new cash flow forecast, what is the plan now?

Is there any plan for buybacks next year or no?

There is not anything assumed right now for buybacks in 2010.

And again, a lot of that is mainly predicated on doing everything we can through this transition period to maintain the BBB credit rating so that we can be out hedging, as we have done to try to lock in value when the market presents the opportunity.

Okay, but you don't require equity, right, Paul?

We do not.

No.

Thank you very much.

Your next question comes from the line of Kit Konolige of Soleil Securities.

Good morning, guys.

Good morning.

So if I would understand this, which I don't thoroughly or a lot of the time, you have moved in the direction of taking the exposure out of a lot of the supply business, and I'm assuming that that means that your exposure in collateral would be substantially lower.

Is that a reasonable assumption or are those just in two different directions?

Actually, Kit, I wouldn't say two different directions, but I would say that we're clearly more concerned about the potential for further degradation in gas, which would cause further degradation in electric prices for the next couple of years as we see the economy and as we make our calls on the market.

So as we're increasing the level of hedges and we're executing more at current prices, yes, the legacy hedges are significantly in the money to us, but we do need to maintain enough liquidity to be able to handle, if there should be a significant uptick in market prices, and avoid situations that have affected others severely negatively in the past couple of years, as well as to be able to withstand a credit downgrade, should that happen, which again we don't foresee at all, but we have always been focused on maintaining more than sufficient liquidity for a one in 20 price move or greater.

So as we hedge more and we actually get a bit above what our -- the hedge ranges that we had talked about for one, two, and three years out, it's more important than ever to keep the liquidity high.

Right, right.

One other question on the O&M, is there -- when was this discovered?

Utility basically went through a complete asset look in the first quarter of this year and broached into the second quarter.

We started to see some level of reliability issues on the system and we think it's going to take some O&M spending to stay out in front of those reliability issues until the CapEx investment is able to obviate those reliability issues.

I think it's a relatively short-term phenomenon in the P&L, as 2010 will be our future test year.

We will be going in for a rate request on the [d] side in 2010 for new rates effective in 2011, but unfortunately there is the one year where we do see a negative impact until the rate request is fulfilled in 2011.

Thank you.

You are welcome.

Your next question comes from the line of Devin Geoghegan with Zimmer Lucas Partners.

I appreciate it.

Just curious in terms of the marketing it sounds like a chunk of the $0.15 is because you overbought in terms of total megawatt hours as well as the price.

If that didn't occur in 2011, how much of the $0.15 is what you think is permanent destruction versus taking losses on perhaps buying too early for 2010?

Actually most of that negative hit, whether it would have been for 2009 or 2010 deliveries, when those hedges become ineffective, we basically liquidate that power length.

Whether they be options or whether they be actual open-market purchases that we had made, so that is the biggest reason why we have a $35 million expectation on 2009 versus the $85 million planned is it's being harmed by both 2009 and 2010 surplus sales that we've had to put back in the market.

So the reset for 2010 was primarily predicated on achieving a number that we were able to accomplish this year.

We hope that we can outperform that, but again, we're just not seeing the opportunities or profit levels in these deals in the marketplace to justify taking the risk that goes along with it.

So until we see that return --

Sorry, just to clarify.

The bulk of the $0.15 is basically taking the losses on where you bought it versus where you had to sell it?

No.

I think the bulk is simply a lower profit expectation on the backlog that we have for 2010 and the expectation of how much additional load we would expect to try to go after at auction, which would be down from where it was before, just given the lower profit levels.

Just think of it as the pure demand level on load following contracts is clearly down.

So where does the hit show up for selling stuff lower than where you bought it?

For deals that we have already done, again, whether they are backlogged 2009 or backlogged 2010, if we remodel the deals and we determine that load levels are down, the hit from that comes in 2009.

So 2010 is just simply a lower-profit expectation from lower unit deliveries for backlog that we have got and expectation that we would go after less load in the future given the profitability of those deals.

So last question, but your 2009 marketing actually is doing better, and yet we're in the heart of recession now, why do you guys feel so strongly that 2010 is going to be worse than 2009?

Well, for 2009 we're going off of a backlog of deals that we had garnered in the past.

So we have not unwound any of the load-following deals that we have got.

We continue to deliver under those.

In the first quarter of this year we did not see the volume levels decline as precipitously as we did starting in early second quarter and definitely by the end of the second quarter when we started to take the action to unwind some of the profit levels.

So I don't think net of those two items that it's a significant decrease of expectation year-over-year.

Okay, thanks for your time, appreciate it.

(Operator Instruction) Your next question comes from the line of Danielle Seitz with Dudack Research.

Thank you.

I just wanted to know about the reduction in loads that you are supposed to be going through.

Is that recoverable and will you be recovering it in the next rate case?

Danielle, we would clearly adjust the unit delivery forecast and the calculation of future test years would be off of the actual sales for 2010, at least as far as September/October of that year, when the staff makes their determination.

So they would reflect the current delivery reality that we're seeing today, if that is your question.

Yes.

And I just wanted to make sure the whole reduction was recoverable obviously on the rate of return situation.

It should be, yes.

Okay.

And you do not have yet an idea of how much you may need in terms of rate increase, right, for 2010?

I'm assuming that your rate of return is fairly low now?

Not at this point, yet, because again we're finalizing our business planning process for 2010 as we speak.

We'll monitor volume levels as we make our way through the year.

It depends on completing our CapEx schedule for the balance of the year as well.

So no, we really don't have a percentage adjustment in mind in terms of total bill or for the decharge at this point.

Okay.

Thanks a lot.

You are welcome.

Your next question comes from the line of Travis Miller with Morningstar.

Good morning.

Good morning.

I apologize if I missed this earlier in the call.

I had to drop off for a little bit.

Can you talk a little bit about your hedging strategy?

You mentioned you put on hedges in 2010, 2011, 2012?

I'm wondering what you're seeing out there in terms of heat rates or prices, or is this purely a risk mitigation type of move?

Can you talk a little bit more about that?

Yes.

Travis, this is Bill Spence.

It's predominantly a risk-mitigation strategy.

We're fairly bearish on power prices in the near-term, next 18 months in particular, and both, because of the demand-destruction as well as just the downward move that Paul talked about in natural gas prices.

So I think it's a defensive move on our part to protect margins that we think are at risk.

So we feel kind of in a nutshell, there is a lot more downside risk than upside potential.

So we're taking what we think are appropriate actions to lock in margins at this point.

Given that, should we think about 2009 as being kind of peak margins?

Well, no, because, again, the polar contract ends in 2009.

I mean, and again, if you look at slide 16 that kind of gives you an average idea of sales price.

If you look at in addition, to slide 16 the information in the appendix, the reason we have been, I guess, a bit more aggressive than our strategy outline or our strategy guideline, I should say, is that there still is contango in the gas curve, and therefore, the power curve and that is what we tried as best as we can to try to lock in is that contango.

So you are able to get some of that contango in?

We have heard from some other companies that it's real tough to hedge out there at those prices?

2011, 2012 opens up more when there is utility load options.

An element of our hedging strategy has been for years using options to hedge, where we lock in floor prices by buying puts and selling calls, and that has allowed us to maintain some level of upside opportunities, should there be a recovery in prices, which again, we think it's less likely that they would recover that they would go down for the next, as Bill said, 15 to 18 months.

But we have not found difficulty in executing the strategy.

You can really see that.

You can look at our hedge levels mentioned in 2012, and we have, I think, preserved significance on the order of $700 million by executing this advanced hedging, which we plan on continuing to do as much as we can.

Okay.

Great.

Thanks a lot.

You are welcome.

You have a follow-up question from the line of Danielle Seitz with Dudack Research.

I just was looking at your second half of 2009 and seeing that you are showing very strong numbers for supply and very poor numbers for international.

Am I supposed to assume that you anticipate the comparison to be much better in the second half in supply, and that international is because of currency or income tax will be going down in the international sector?

Could you explain it a little bit more?

I think the supply is a combination of some negatives that we had at the front of the year on our FTR positions and then as well the negative impacts that we had in the second quarter from unwinding hedges that were not -- we didn't think were no longer necessary for marketing transactions.

So it's back to normal in the second half, is that what you mean?

Yes.

And it's a comp to the prior year.

If you look back in terms of roughly $100 million that we had in trading losses from the three positions that we've talked about quite a bit in the past, 2008 was a big negative.

So if you are talking about year-over-year comparisons, then in Q3 and Q4 last year versus the balance of this year, on top of our experience on the front-end of this year, depending on what your comparison was, they are going to profile -- supply is going to profile much better.

Okay.

And as far as international, you attribute the $0.17 decline to half is income tax and the other half will be currency, or how would you attribute that?

That is probably about right.

A currency benefit from the prior year and a weaker FX this year.

Thanks a lot.

You are welcome.

(Operator Instructions) And you have no further questions at this time.

Okay, well thank you very much for attending and look forward to talking to you at the end of next quarter.

Thank you.

Ladies and gentlemen, this concludes today's PPL Corporation second quarter conference call.

You may now disconnect.