賓州電力 (PPL) 2009 Q3 法說會逐字稿

Good morning.

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

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

(Operator Instructions) Mr.

Joe Bergstein, you may begin your conference.

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 or forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

Thanks Joe and good morning, everyone.

As usual we'll follow the normal agenda and go over general business update and third quarter results and then we'll take questions.

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

This morning we released our third quarter results, $0.05 per share on GAAP basis compared with earnings of $0.54 a year ago.

Third quarter earnings from ongoing operations which excludes special items increased over a year ago to $0.52 per share compared with $0.45 last year.

In the face of continued pressure on wholesale energy prices, mild weather and lower industrial demand, we're pleased to say that our financial performance and our ability to track ahead of plan through the first nine months of the year.

Our relatively strong results for the quarter also reflect the continued benefits of the cost control actions that we took early in 2009.

And Paul and Bill will provide additional insights on our performance in the quarter and through the first nine months of the year.

This morning we also reaffirmed our 2009 and 2010 forecast.

Our 2009 forecast remains $1.60 to $1.90 per share in earnings for ongoing operations.

And through 2010, we continue to forecast a substantial increase in earnings over what we're forecasting for 2009 driven by increased margins in our supply business.

Our $3.10 to $3.50 per share 2010 forecast represent an 88% increase over this year when comparing the mid-points of the two forecasts.

We remain convinced that our hedge strategy, which was aggressively executed when forward prices for 2010 were much higher than they are today will provide greater earnings and cash flow predictability.

While we continue to be vigilant on containing costs, holding down CapEx, where appropriate, we're continuing capacity expansions at both our Holtwood hydroelectric plant in Pennsylvania and Rainbow hydro facility in Montana.

In fact, just a couple of weeks ago we broke ground in Rainbow in Montana.

These projects are largely driven by the availability of federal stimulus incentives.

It will provide us with 153 megawatts of additional clean, renewable energy capacity.

Speaking of the federal government, we're continuing to make our voice heard as Congress debates various approaches to constraining carbon dioxide emissions.

As you well know, there's a considerable way to go before any legislation gets passed, but PPL should see net benefits in the carbon reduction provisions that we've seen thus far.

Driving this benefit is 40% of our annual generation comes from noncarbon emitting sources.

We still continue to believe that a legislative approach to carbon reduction is preferable to a regulatory approach.

Before I move on to hear from Paul and Bill, I'll just briefly mention that the transition to truly competitive electricity markets in Pennsylvania is continuing.

As I'm sure you know, PPL Electric Utilities generation price gaps expire at the end of this year after being in place for more than a decade.

Electric Utilities has completed its purchase of default supply electricity for 2010, electricity for customers who don't select an alternate supplier.

When the generation recaps expire, the average PPL Electric Utilities residential customer will see an increase of just under 30%.

But all customers will have choices as a number of competitive suppliers already have offered prices that are below the default supply price.

Customers also have the ability to choose phase in and deferral options and we hope to begin offering time of use rates to all of our customers early in 2010 as well.

While there's still some deferral legislation under consideration in the Pennsylvania legislature, it's becoming less likely that we will see legislative action on this front.

With that, I'll turn the call over to Paul for more details on our third quarter results.

Paul.

Thanks, Jim and good morning, everyone.

As I walk through the numbers, please remember that the 2008 earnings from ongoing operations include the operating results of the gas delivery business, but exclude special items related to the divestiture of that business.

As Jim mentioned, our third quarter earnings for ongoing operations were higher than last year primarily driven from higher energy margins and earnings in the supply segment, which were partially offset by lower earnings in our two delivery segments.

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

The supply segment earned $0.33 per share in the third quarter of 2009, a $0.17 increase compared to last year.

Directly impacting this quarter's comparison are the trading losses we incurred last year when the market experienced a dramatic decline in wholesale energy prices and market liquidity.

Excluding this impact, east energy margins were effectively flat for the quarter as the net result of higher value from our base load generation, higher capacity prices and lower margins from load following deals as a result of the weak economy, customer shopping and mild weather.

The third quarter also reflects higher west energy margins due to higher wholesale volumes, higher nuclear O&M primarily driven by higher NRC inspection fees, higher materials costs for preventive maintenance activities and higher payroll costs.

Finally in supply, we also experienced higher depreciation primarily due to the Brunner Island three scrubber that went into service in the second quarter of this year.

Moving to slide seven, our Pennsylvania delivery segment earned $0.07 per share in the quarter, a $0.02 decline compared to last year.

This decrease was a result of lower distribution revenue and higher financing costs resulting from the October 2008 pre-funding of this year's debt maturity.

The lower distribution revenue was due to milder weather and lower industrial sales driven by the broader economy.

Moving to slide eight, our international delivery segment earned $0.12 per share in the third quarter of 2009, an $0.08 decrease compared to last year.

The decrease was the net result of lower O&M, lower interest expense on WPD's index linked bonds driven by lower inflation, less favorable currency exchange rates and higher UK and US income taxes.

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

And also, as Jim mentioned, we are tracking ahead of plan through the third quarter.

We have been able to more than offset the headwinds of reduced customer demand and declining commodity prices.

We are also reaffirming of 2010 earnings forecast of $3.10 to $3.50 per share and we continue to derisk our 2010 earnings forecast on several fronts.

We've hedged nearly 100% of our baseload generation and corresponding fuel needs and, in addition, we continue to look for cost control measures that won't compromise our operating performance or reliability.

We continue to expect approximately 79% of our 2010 earnings will come from our supply segment with the contribution of our international and Pennsylvania delivery segments to be 12% and 9% respectively.

On slide ten, we've outlined our current forecast of free cash flow before dividends by segment.

The only significant change since last quarter is that our cash from operations for 2009 now includes the full benefit of an IRS approved change in the deductibility of certain costs for income tax purposes.

This change is expected to provide an additional cash flow benefit of approximately $70 million in 2009 as well as smaller cash flow benefits in future periods.

Our base plan for the year had assumed a $130 million cash flow benefit from this method change.

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

Thanks, Paul.

Good morning, everyone.

Let's turn to slide 11 and I'm going to start with an update on our delivery businesses.

PPL Electric Utilities has now completed its sixth and final default supply purchase for 2010.

As a result of blending prices and contracts from all six solicitations, the bill for an average residential customer who chooses not to shop will see an increase of just under 30% in 2010.

In the latest round of solicitations, PPL Electric Utilities also purchased 2010 fixed price default supplies to large, commercial and industrial customers who did not shop for competitive suppliers.

These customers have until November the 9th to decide whether to accept the fixed price option from PPL Electric Utilities, choose an alternate supplier or allow Electric Utilities to acquire electricity for them on an hourly basis in the competitive market.

Last week, PPL Electric Utilities also completed its second purchase for a portion of its 2011 electricity requirements.

As a reminder the 2011 to mid-2013 electricity needs will be procured over a series of procurement auctions that began earlier this year.

Our procurement schedule is in the appendix to today's presentation.

We continue to work with the Pennsylvania PUC and the National Parks Service in order to obtain approvals necessary to construct the Susquehanna to Roseland transmission line.

In order to complete the project on schedule, it's important that we receive these approvals in a timely fashion.

The Pennsylvania PUC completed its evidentiary hearings regarding our application to build the Pennsylvania portion of the line and a recommended decision by the ALJ assigned to the case is expected in November with final PUC decisions expected in January.

Earlier this week PPL Electric Utilities was awarded a $19 million grant from the US Department of Energy for $38 million smart grid project that will strengthen reliability, save customers electricity and money and allow the Company to restore power faster by reacting more quickly to power outages.

The project will be installed in the Harrisburg, PA area.

One final note on PPL Electric Utilities.

Retail sales at the utility in the third quarter were 3.3% lower than the third quarter of 2008 on a weather normalized basis.

This was driven by lower industrial sales, which declined by 12.3% for the quarter.

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

While year-to-date 2009 industrial sales are 12% lower than last year, the decline has leveled off during the - - and did level off during the second quarter and industrial sales are expected to remain at this level for the remainder of the year.

Even though PPL electric utility's retail sales are down, distribution revenue has not declined significantly due to the rate structure for industrial customers which is based on customer and demand charges, not kilo-watt hour charges.

On the international front, the UK fifth distribution price control review is progressing as scheduled.

The initial proposals were issued by August and updated by Ofgem earlier this month.

We continue to be involved in the negotiation process of the price control review and final resolution is expected at the end of November.

The new price control period will begin April 1, 2010.

After the final proposals are issued, we will provide you with additional information regarding the financial impacts for WPD going forward.

Now moving on to supply, I'm pleased to report that during the third quarter, Brunner Island Unit 1 coal station surpassed a record run mark of nearly 165 consecutive days.

This was a direct result of the hard work and dedication of the plant employees to running a safe and reliable unit.

Also, our commercial availability for the entire fleet has been very strong year- to-date at 95.2% through September.

Earlier this month, PPL Montana began construction of a new power house at our Rainbow plant as Jim mentioned in his opening comments.

Smaller units installed between 1909 and 1930, with a combined capacity of 37-megawatts will be replaced with a single 62-megawatt unit.

In addition, we expect to begin construction in the next several month on our 125-megawatt hydro expansion at our Holtwood plant in Pennsylvania.

We have applied for DOE loan guarantees for these projects.

Moving on to an update on our hedge program on slide 13.

We've updated our hedge positions as of September 30.

You'll notice that the hedge levels have not changed substantially from the update we provided you at the end of the second quarter.

We continue to hedge our 2010 through 2012 expected economic generation, primarily through option collars that protect against downward market price movements and allow upside if market prices recover.

This collared approach protects the base load generation from the volume metric risk associated with load falling contracts as well as the associated price risk.

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

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

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

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

With that, operator, please open the call up for questions.

(Operator Instructions) Your first question comes from Jonathon Arnold with Deutsche Bank.

Jonathan?

Jonathan, your line is open.

Why don't we go to the next question and have Jonathan step back in the queue.

Your next question comes from Daniele Seitz with Dudack Research.

Thank you very much.

I just was wondering if you - - when do you think you will be able to file your rate increase for distribution rates in Pennsylvania and also what type of hour you are seeing currently on the distribution side?

The ROE on the distribution side is around 7.5% and we would expect to be able to file early next year a rate case to be effective January of 2011.

Okay.

And in terms of the international, since most of it seems to be coming from tax rates, do you anticipate that this tax status will stay - - I mean this is a permanent change?

No.

Most of that comparative, Daniele, is some positives that we saw in 2008 from some enabling legislation in the UK that gave us some tax benefits.

I would think that the current year number is more of a normal run rate number.

Great.

Thanks a lot.

You're welcome.

Your next question comes [Reva Hatepi] with Decade Capital

Thanks, good morning.

I notice that your rate based guidance in the third quarter slides are materially higher than second quarter slides, even the 2008 or 2009 rate bases are now much higher.

What is that due to?

The big driver there is we updated it for the UK.

We had held off on that until we got through this second round iteration with the October numbers that we got through Ofgem before we updated that slide.

So that's the big driver.

The domestic side is spot on.

There's not been any significant changes there.

Oh, so has it been mislabeled because I guess the slide says Pennsylvania delivery rate base, slide A5.

The rate base slide, sorry, Resa.

Yeah, sorry.

I guess and second quarter 2008 was 2.77 billion and now 2008 is a little over 3 billion and it kind of 300 higher for every year in the near term and then the out years are much higher.

Yeah, the big driver there was true up for the formula rates for 2008 that then affected effectively all the subsequent years and it rolled through the entire plan.

Okay.

Okay.

So I guess much more earnings power going forward from a - - if you guys ever hopefully get to your (inaudible), I guess.

So that's good.

Correct.

Great.

Thank you very much.

Your next question comes from Andrew Levi with Incremental Capital.

Just longer term, just thinking about the PPL and sitting there in Pennsylvania, do you envision your Company going it alone the long-term or do you see yourself getting bigger through an acquisition, through adding assets?

What are you thinking longer term?

Well, I think we look at all of the obvious possibilities.

I think we're well positioned here, particularly in our Pennsylvania wholesale markets to add a lot of value given our asset structure and asset location.

I think long-term a lot of us in the industry, us included, think that there's benefit of perhaps adding scale for various reasons, but it's not a driver with us.

It's not something that we have to do.

I think we've got a good future ahead of us based on the plans we've laid out.

I think we probably, as well, consider looking at the balance of our basic business.

How much of it we want to be unregulated and commodity based and how much of it we want to be regulated and provide a little more or less volatility and grow through the regulated side, the infrastructure side of our business.

So I think there's opportunities.

We'll look at them carefully as we go forward, but I - - no, no pressing urgency for any large scale additions, but I think in today's world, as I see the segment, probably the most logical approach is to to balance your portfolio or work towards a balance where you can reduce your volatility in this uncertain world that we see out there.

And I guess the angle I was thinking, a little bit different, I guess, was you're a single state company, as you said, it's not like you're going to be going out and adding a lot of assets.

Do you think you're better off partnering with another large utility longer term?

I don't see any pressing need for that today as I sit here, but as I say, we're well balanced geographically with both on the Montana side with unregulated generation there that has been a very profitable venture for us and high return.

And, also, we diversify our regulatory holdings and are currently running one of the top performing recs in the UK which has also been a solid performer for us.

So as I've always said to everyone, we're not wedded to any of our assets type or geographic nature of them, but right now, I think we logically focus on what is the correct mix of commodity versus regulated play in the world as we see it unfolding.

But to answer your question directly, no, is there any crisis for a large scale addition of a merge with another company, no.

I'm not sitting here worried about that.

Okay.

Thank you.

Your next question comes from Steve Fleishman with Merrill Lynch.

Yes, hi.

Hey, Steve.

Hi.

Just on your hedging with the option collars that you mentioned, could you just give a little more flavor on exactly how these work?

And you've mentioned you lock in the downside, but you've maintained upside.

Are you - - do you take a discount to what you would have gotten if you just locked in the price to be able to get that?

Just give a little more flavor on how you're doing this.

Yeah, not really, Steve.

Effectively what we do - - and Jim's got actually an example slide he's going to walk through it at EEI.

I think it was using numbers effective as of 9-30.

But if we look at an ATC price at 9-30, we typically buy a put option, which basically locks in the lowest value that we'd get for our generation.

We would then sell a call given - - given order of magnitude, the call would typically be somewhere between 15% and 20% higher than that put price and so we typically don't do these on a costless basis, so the net position has some cost.

So if we look at 9-30 prices, ATC would have been around $52 bucks.

If we take a 15 to 20% adder, the - - so that would be the put side.

The call side would be up towards 60.

So if power prices move above the $52 put price, we participate in the upside up to the 60ish dollar value number net of the cost of the collar which is probably a buck or two.

So we're really not - - it's not - - other than the cost of the option, which we think is beneficial in terms of being able to participate in upside subsequent to entering into that market price put, we think that's more than appropriate trade off and we like to do that.

Now, the prices that we did these collars at and the financial forwards at going back prior to this 15 month price decline, those deals are so in the money that it's more the recent transactions that we'd be looking at to participate in upside because we did ours at effective net gas prices that are substantially higher than current net forwards are.

So a lot of those historic contracts, we wouldn't look to participate in upside, but they did exactly what we wanted them to do and that was to protect us from price declines in the future and we're clearly seeing that on a mark- to-market basis.

Okay.

And just two questions on this, first, do you embed the option cost in the average prices that you show here on this slide?

Yes.

Okay.

So this is netted out.

And then secondly, the - - okay.

I just forgot my other question.

Moving on to one other thing on the Ofgem review.

What was your take on the initial proposals and how much variability risk is there and what comes out in November?

Do you feel like it's pretty defined at this point?

Yeah, Steve, it's Bill.

We felt very good about how we came through the process in terms of what we ask and what the preliminary feedback was given to us.

So I think there were a couple of articles that noted that a couple of weeks ago.

As far as marching to the end of the process here at end of November, I think we feel pretty good.

We'll wait to see.

We still have to deal with a couple of significant issues like pension costs and weighted average cost of capital, but I think in terms of the CapEx spend and the O&M and the performance metrics, we feel pretty good about that.

And we clearly got recognized again as being frontier performer in customer service and will earn the revenue bonus for the period for that designation.

Okay.

Thank you.

Sure.

You're welcome.

(Operator Instructions) Your next question comes from Jonathan Arnold with Deutsche Bank.

Good morning, guys.

Good morning, Jonathan.

I apologize.

I think I had to jump off when you called me before.

I wanted just to ask about where you are in terms of call inventories and maybe you could provide some color on whether you're taking everything that you're contracted to take or whether you're turning any deliveries back and just generally your load factors on the call side?

Sure, Jonathan.

We're not turning call away or having any real delivery issues to speak of.

Our coal inventories are like many folks up, but they're probably running right now around 60 days on average - - 50, I'm sorry, 50 days.

So I think we feel pretty good about it in terms of our capacity factors.

They're off a little bit year over year compared to last year, but overall not a significant driver either way for us.

So how long would you anticipate it might take you to get back to a more normal level of coal piles if nothing else much changes?

Yeah, I think typically this time of year we start building inventories normally for the winter.

So I don't know that 50 is that significant compared to where we might otherwise be targeting, maybe in the 35 to 45 day range.

So I don't think it's going to take us that long.

I think it's really how are the units going to get this batch this winter and into next year?

Jonathan, it's only eight to ten days of additional.

It's not significant at all.

So I think, as Bill said, that's a result of some weekend turn backs and very offpeak periods, very normal cycling, so - - given power prices.

Great.

Thank you.

Sure.

Your next question comes from Julian [Demoilan] with UBS.

Good morning, everyone.

I just wanted to ask you with regards to your expected O&M on the supply segment.

I notice that you guys published in one of the latest conferences a gross margin expectation for the supply segment, but didn't include an O&M number and I pulled from a previous deck of 859 million on the O&M side.

I was wondering if you could provide any kind of flavor around where that is going directionally at this point or any comments around the EBITDA profile at this point?

Sure.

One second.

That number has not moved significantly from the last time that we gave that open EBITDA look.

So that number would be in the right zip code.

All right.

Perfect.

And the second question here is on the marketing and the M&T side.

You guys had updated that in the last quarter to 35 as far as I understood.

Right.

And I wanted to get a sense from you guys as far as what your expectations were on margins?

I mean it seems as if it's fairly conservative compared to some of your peers and what the - - some of the other companies out there are saying as far as expectations go.

So if you could comment around what you're seeing as far as going forward, load expectations or losses or whatnot, just to try to reconcile that difference.

Well, I think that we're comfortable with the $35 million.

And as far as comparatively to other companies, I think it's all about the risk appetite of the various companies in our sector.

As we stated before, we've got a pretty conservative risk appetite, so we've accordingly adjusted our numbers.

I think we're just comfortable with the number we've got.

I think as I've mentioned before, the marketing trading function at PPL, its primary function is really to optimize the value out of the fleet of assets we have first and foremost as well as put on appropriate hedges and other types of marketing and trading activities are really tertiary to those first two objectives.

Julian, of the negative where we were previously on that number, a lot of that is being driven by historical backlogs on deals.

that we've seen the load degradation the contracts we've entered into.

As more current deals come through, and we're basically through the season at least as of right now, in terms of procurements by utilities.

Some of that is turning back to normal dollar per megawatt hours profit numbers.

So, it's the historical stuff we suffered the declines on as well as many of our peers.

So, I'm not sure how others would make up 12% to 15% regional declines in load split between shopping, weather impacts, and declines on industrial volume.

All right.

Great.

Thank you so much.

Sure.

(Operator Instructions) At this time there are no further questions.

Please proceed with any further comments or closing remarks.

Okay.

Thank you all for participating.

We think we're headed for a good year this year and as we said earlier, tracking ahead of our plan and reconfirming the 2010 expectations and so we look forward to talking to many of you with the upcoming EEI financial conference.

Thank you all.

This concludes today's conference call.

You may now disconnect.