賓州電力 (PPL) 2010 Q3 法說會逐字稿

Good morning, my name is Ashley, 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.

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

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

(Operator Instructions).

Thank you.

I would now like to turn today's conference over to Joe Bergstein, Director of Investor Relations.

Mr.

Bergstein you may begin your conference.

Thank you.

Good morning.

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

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

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

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

A discussion of factors that could cause actual results or events to vary is contained in the appendix of 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, Joe, and good morning, everyone.

Thanks for being on the call today, and I know it's a busy time for all of us in the sector.

I'll start today's call with some commentary on earnings and our 2010 forecast as well as the status update on the E.ON UStransaction.

And then after that we'll take your questions.

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

This morning we reported GAAP earnings of $0.51 a share for the third quarter.

That's compared with earnings of $0.05 a share in the same period a year ago.

Earnings from ongoing operations for the third quarter were $0.74 a share this year, compared with $0.52 per share in 2009.

And for the nine months of the year, our reported earnings were $1.40 per share, compared with $0.67 a year ago.

Ongoing earnings for this period were $2.29 a share this year, compared with $1.43 per share last year.

Before we move on to a discussion of our forecast for 2010, I will provide you a little bit of information on our acquisition of E.ON US.

On Tuesday we received FERC commission approval for the transaction, and that was the last regulatory approval necessary for us to close the transaction.

So we currently expect closing will occur on November 1.

I think this is really a remarkable accomplishment, given that we announced the transaction only six months ago, and over that period we received approvals from state regulators in Kentucky, Virginia, Tennessee, the FERC, US Department of Justice, and FTC.

In June, we also successfully completed the equity portion of the financing for the acquisition, raising $3.5 billion in net proceeds through sale of common stock and equity units.

And I might add that during this period we have been dealing with rate cases, both in Kentucky and in Pennsylvania, and I think our -- as Bill will point out, our ALJ has render a decision in Pennsylvania, and we feel the Kentucky rate case was settled very appropriately.

I think the swift regulatory approvals as well as the oversubscription of the equity offering did reinforce the soundness of our decision to make the acquisition and the value that it's going to create for all PPL stakeholders.

And I am proud of our entire team and as well our colleagues in Kentucky from an execution perspective, and also we have done significant work in the area of integration, getting ready to plug in PPL with LG&E and KU on November 1 when we expect to close.

So the integration teams have done a fine job on all sides in this area.

The acquisition will immediately improve PPL's business mix by adding two very high performing regulated utility operations to our portfolio.

So with that let's turn to our 2010 earnings forecast.

This morning we announced we're narrowing the range of our 2010 ongoing earnings forecast to $2.80to $2.95 per share.

This reflects the dilution related to our June equity issuances, but it excludes any impact on earnings for the portion of 2010 that we will own and operate the business.

The midpoint of the forecast is consistent with our original forecast for 2010 of $3.10 to $3.50 per share, and it has only been adjusted for dilution from the acquisition financing.

So, importantly, we expect as well, to overcome the $0.05 impact of the unplanned Susquehanna outage we discussed in the second quarter call.

Our forecast for GAAP earnings for the year reflected special items recorded through the first nine months of the year, and the dilutive effect of the new equity is now $1.94 to $2.09 per share.

So with that I'm going to turn the call over to Paul for more detail on the financials.

Paul?

Thanks, Jim, good morning, everyone, I'll start my prepared remarks on slide six today.

As you can see from the chart, the supply segment clearly drove our financial performance in the quarter, and it obviously has year to date as well.

Earnings from our supply segment increased significantly as a result of higher realized prices us for our Eastern baseload gen.

The supply business is clearly benefiting from the hedges we entered in to at very attractive prices in the past.

I'll begin the segment review of supply on slide seven.

The supply segment earned $0.54 per share in the third quarter, a $0.21 increase over last year.

The increase resulted primarily from significantly higher realized sales prices from the Eastern baseload generation.

In addition to energy margins, the third quarter was also impacted by higher O&M at our Susquehanna nuclear station as a result of the forced outage at unit one, which was partially offset by the timing of outages at our coal-fired power plants; higher depreciation due to some scrubbers that were placed into service last year; a lower effective tax rate; as well as dilution of $0.17 per share.

Moving to slide eight, our Pennsylvania delivery segment earned $0.08 per share in the third quarter, a $0.01 increase compared to a year ago.

This increase was the net result of higher transmission revenue resulting from cost recovery through FERC formula rates and higher distribution revenue due to warmer weather compared to a year ago; higher O&M expenses due to higher contracting, storm expense, payroll, and support group costs; lower income taxes as a result of a favorable US tax court decision related to street lighting; and lower interest as a result of lower average debt balances.

Finally, dilution in this segment amounts to $0.02 per share.

Turning to slide nine, our international delivery segment earned $0.12 per share in the third quarter, flat compared to last year.

This performance was the net result of higher delivery revenue, primarily driven by higher prices, which were effective April 1 of this year under price control group five, which was partially offset, which was partially offset by a less favorable customer mix; higherpension expense; higher interest expense as a result of the GBP400 million debt issuance this March; lower income taxes; and dilution of $0.04 per share.

On slide ten, we have provided an update to our free cash flow before dividends forecast for 2010.

Compared to our projects at the end of the second quarter, our Pennsylvania and international delivery segments have improved by about $40 million each, primarily due to changes in working capital.

The biggest change comes in our supply segment, driven primarily by the receipt of third-party collateral postings, a decrease in unbilled revenue, and the $381 million in proceeds from the pending sale of the non-core assets to LS Power.

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

Thanks, Paul, and good morning, everyone.

I know today and tomorrow are very busy for everyone as we all prepare to EEI, soI'm going to keep my remarks today very brief.

Starting with our request to increased distribution revenues at PPL Electric Utilities on October 15, the Pennsylvania Public Utility Commission, ALJ, recommended approval of the settlement we had reached with the other parties in the case.

That settlement would result in a $77 million increase in revenues at PPL Electric Utilities.

The commission is expected to make a final decision on the case in December, with new rates effective January 1, 2011.

For the supply segment, I would point you to the appendix to today's presentation for an update on our generation and coal hedge positions.

The generation hedge volumes for 2010 and 2011 are virtually unchanged from the update we provided you on the second quarter call.

You will note that the average hedge price for 2011 is somewhat lower, reflecting our expectations of where the contracts with collars will settle, and updates to the small amount of load-following contracts we have in the hedge portfolio, as well as some rounding.

The coal slide reflects settlement of the collars prices for 2011, also to fixed prices, and slightly higher hedge levels in 2012.

Regarding bases, our assumptions for baseload generation are unchanged for what we discussed with you on the second quarter call.

As a result of our hedges this year, we still expected to earn about $1 per megawatt hour in positive basis in the East this year, and continue to estimate no basis premium to West Hub for 2011 or 2012.

On the coal transportation front, we continue to forecast coal delivery charges of $24 a ton in 2011.

With that as our very brief operational update, I'll turn the call back over to Jim, and I look forward to seeing many of you next week at EEI.

Jim?

All right, operator, let's open it up for questions.

(Operator Instructions).

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

Thank you very much.

I'm sorry, could you go over that again?

The average expected hedge price in 2011 and 2012, which went down a couple of bucks?

What was that due to again?

I was specifically referring to 2011.

And if you look at the average hedge price in the East, previously I believe it was $58.

It has dropped to about $56, reflecting now our expectation as we approach 2011 of where the contracts that have collars in them will settle out.

So obviously they are going to be settling out at the low end with the significant drop we have seen in power prices of late.

It also reflects a small change, because we only have 1% of the portfolio hedged through load-following contracts, but our expectations on those as well.

So that went from $58 to $56 in the East.

The West was unchanged.

However, if you look at the total expected average price in the East, it actually dropped about $3 -- or I'm sorry, in total, the $61 -- dropped by about $3.

That's really reflective of the fact there's some rounding in there.

Because obviously if the East went down$ 2, and the West was virtually unchanged, that would only be a $2 change, butdue to rounding it's a $3 change.

So hopefully that helped.

And then is it the same issue causing the 12 hedges to go down a dollar or two as well?

It is.

And could you just explain, I guess how do these collars work in terms of why, I guess, quarter-over-quarter they cause the hedges to go down a couple of bucks?

Well, we don't adjust, necessarily, every quarter each and every contract or look at which contracts are going to settle down at the bottom or the mid or the upper part of a collared price.

So we update that as we get into the fourth quarter as we're getting in to now, we tend to try to hone in on which collars are going to settle in which months and just try to fine tune our estimates as we close out the year.

It's really rather the most recent -- of that year, it's the most recent contracts, because they were obviously entered in to at lower prices and still had some room to move down.

The stuff that's the oldest that was at the highest average price, you wouldn't see movement on those.

That's right.

Okay.

And then just lastly, I guess coal transportation you say is supposed to be $24 a ton in 2011.

Right.

What is -- I assume that's essentially a hedged price.

What is the latest outlook for open coal transportation prices?

I would peg it at the high 20s, low 30s.

And is --

For the sources that we're using.

And your coal transport hedge percentages are in line with your coal fuel hedge percentages?

Is that a fair assumption?

Yes.

That's correct.

Okay.

Thank you very much.

Yep.

And our next question comes from the line of Ashar Khan with Visium Asset.

My question has been answered.

Thank you.

And our next question comes from the line of Paul Patterson with Glenrock.

Good morning, guys.

Good morning.

Good morning, Paul.

Just in terms of the collar, is there any way -- I mean, I have seen this before on the gas side.

Sometimes it's difficult to see exactly how much price sensitivity you guys would have, and I guess in this environment if prices drop further, I mean, how much, I guess -- you mention where you are on the collars with certain contracts.

It's different and what have you.

Any sense of rule of thumb or something we could use in terms of what that could do to your hedge prices?

Well, I think at this point we're at the low end of nearly all of the collars.

That's good.

Yes, so I would not expect from this point forward to have much more degradation, if any, as we approach 2011.

Okay, great.

Sure.

And then on the merger, it's going to close in less than a week I guess, so have you guys had any change in your outlook in terms of what kind of savings or the outlook of the property itself or -- any feeling there you might want to give us in terms of what you are seeing there?

Any change?

Well, no, Paul, I think in general we still feel very good if not better.

I think everything that we reviewed in due diligence and through our contacts with our LG&E-KU colleagues, everything is looking good.

I think, obviously, from an environmental perspective with the upcoming legislation that is pending in Washington, we see the rate base -- potential rate base growth being much more significant than we had originally anticipated, given this is a vertically integrated regulated utility and principally burning coal.

So I think our team -- future team in Kentucky is already doing the leg work to brief regulators and state officials as to what this potential environmental regs could cause in the way of increase in the rate base and investment required.

So I think all in all a very positive answer to your question thus far.

Okay,great.

And as it terms, when we talk about benefits, I think we really have been focused on getting this deal to closure and getting all the approvals and settling in a very positive way that the rate cases that we needed settled.

Now the work begins to work together as a team and see what benefits we can extract from a combined entity.

Okay, great.

And then this -- there is, as you know, a demand response FERC NOPR that deals with locational marginal price -- full locational price being paid to the demand response people.

From a power market's outlook, if that FERC NOPR is what actually ends up happening, comes to fruition, I guess, what do -- do you guys have any quantitative ideas how that could impact prices for you guys?

Any sense about that?

We have not done extensive modeling.

We have done some just to get some sensitivities started, but I don't think, Paul, at this point enough work has been done to really peg that.

I think you also have the factor in PJM of the President and CEO of PJM indicating that he believes there is a certain level to which he would not be comfortable operating the grid from a total percentage of demand response in PJM, which would tend to mitigate potentially some of the impact of the FERC NOPR.

But I think it's a little too early for us to tell what the true impact and quantify it at this point.

Okay, great.

Thanks a lot, guys.

Sure.

Our next question comes from the line of Carrie St.

Louis with Fidelity.

Hi, good morning.

Hi, Carrie.

I just wanted to ask about the cash flow guidance at the supply segment.

It's materially higher versus the second quarter.

What is driving that?

It's -- I had it in my prepared remarks.

It's the $381 million of sales of the gen assets to LS Power, as well as higher collateral postings of counter parties to us.

As prices have gone down, they are remitting cash to us to support the mark-to-market on those positions.

Okay.

Those are the two biggest drivers.

So how much is the cash postings to you?

That seems like a big number.

Incremental.

It was a coup hundred million.

I think around $250 million.

In that ballpark.

Okay.

If I'm looking at the second quarter slide -- okay.

That's fine.

And then I just wanted to ask about 13.

You guys haven't provided any update on the 13 hedges.

When should we expect an update there?

I don't know that we plan to provide an update.

I guess I would say that they are not -- nothing has materially changed at all in those positions since we talked about the 13%-ish level.

Again, a lot of that is because of long-term contracts in the West that we have got with Northwestern and a very large co-op there that extends out there for several years, so the amount the hedged in the East is substantially lower than that, closer to 5%.

So no significant change on that front.

Okay.

And so that will be rolled out next year, kind of on your fourth quarter call?

Most likely.

Okay,great.

And then in terms of the financing for the LG&E acquisition, what is the thought process there?

Well, we clearly plan to close over the transaction using existing credit facilities, cash and the proceeds from the equity offerings that took place in June.

Due to some SEC restrictions that prevent us from discussing specific timing and amounts and things like that, it's clearly incumbent upon us to decrease absolute cost to get it done as quick as we can, so we'll have more to talk about in the near future.

Thank you.

You're welcome.

Our next question comes from the line of Greg Gordon with Morgan Stanley.

Thanks, good morning, guys.

Good morning.

Good morning.

So on the -- not to beat a dead horse, but on the performance of the hedges for 2011 and 2012, are there any other factors that might move those expected average price numbers up or down by a meaningful amount at this point?

You have already briefed us on what is going on with basis in last quarter's call, and you said the majority of the collars are now -- you have a pretty good visibility on where they are going to perform.

Right.

So is there anymore wiggle room in there, or can we --

Not on 2011, but part of the reason why 2012 went down is because the hedge ratio went up, meaning we layered in contracts at current [forward] prices versus where prices were previously.

As price drop and we lock, it's going to drive it down --

Yes, I know, but besides --

No, not besides that.

Not besides that.

And then in 2013, it would still be your expectation that the basis issues your are experiencing because of local transmission projects would start to dissipate?

Yes, that element and recall that we talked about previously that one of the things that historically has driven bases up significantly have been the relative level of gas prices over coal.

And depending on what your forecast is in 2013 for gas, that's going to be a factor you have to take into account.

But, yes, from a transmission-only perspective, we would expect the majority of the work that is going to impact 2011 and 2012 will have been completed.

If I was looking at 2013 now, and I presumed that, just for hypothetical purposes, that your Eastern position was completely open -- I know you said you are 5% hedged, but if you were completely open and I wanted to take a swag at what your realized price would be, would it be fair to use JME pricing and then adjust up for modest positive basis, or am I being too simplistic there?

I think so.

I think I had previously mentioned on the last call that we would expect to go back to a $1 to $3 per megawatt hour type of premium to West Hub.

To West Hub.

To West, yes.

Okay, great.

Thank you very much.

One more question.

Tax rate.

I know there were a lot of adjustments in the quarter.

In the fourth quarter and for next year's fiscal year, what is a reasonable expectation of the effective tax rate?

Are you specifically talking about international?

Well, the effective tax rate on the consolidated was very low, right?

And I know it had to do with a lot of adjustments.

Yes, it did.

We settled out windfall profits tax on a tax court case and the street lighting issue and -- We don't have a forecast for next year.

I would peg the supply segment next year at 25% to 26%, in that ballpark range.

It is very aberrantly low because of windfall profit and other things that are affecting this year, as well as some other tax settlements and reserve changes.

The domestic utility segment I would put at 40%, and supply 37% for your model

So 40% --

We don't have a forecast out, so I would prefer not to give a consolidated number, but that would be --

Okay, so 40% in the domestic utility, 37% at supply, and 25% to 26% at UK.

That's correct.

Thanks, guys.

Sure.

Our next question comes from the line of Steve Fleishman with Bank of America.

Yes, apologize for the beating a horse again here, but just on the collars, my recollection is you generally pitched your hedging as you locked in downside while keeping some exposure to upside.

And so I guess I kind of thought you were kind of betting the lower end of your collars.

So what is the range of these collars?

I guess, Steve, it's Bill -- since we put some of these on at varying times, of course, as you can imagine as the cycle has moved down, the latter hedges that have collars are obviously going to be the ones that are most impacted by the change -- significant change we've seen in this year, in 2010, in the gas curve and then hence the power curve.

As I indicated or -- and Paul also mentioned, we would not believe from this point forward now that we fine tuned where we expect all of our hedges to settle, both the ones that are collars as well as the small amount that we have under polar contracts.

We would expect that we would see very little degradation from this point forward.

Okay.

But just so I understand, when you were booking this hedge data before, were you using some kind of like midpoint of the collar.

Mark.

Yes, it would have been a mark as well as a fundamental kind of look at where we think prices at any given time are for the forward year.

So it's both what we see in the forward markets as well as what our own fundamental models might predict power prices to settle out.

So it's not a precise science, as you can imagine.

Okay.

So I guess maybe one silver lining in theory would be that if prices got better, these still potentially could go up?

Yes, of course.

Yes.

If that ever happens.

Yes, good point.

Okay, great.

Thanks.

Sure.

Again, Steve, it would be the same ones that have been done more recently.

There's a long ways to go to get up above the floors on the stuff that was put on long ago.

Okay.

Thank you.

Yes.

Sure.

Our next question comes from the line of John Kiani with Duquesne Capital.

Good morning.

Good morning.

Good morning.

Can you talk a little bit about some of the other moving pieces?I noticed you obviously have a new revolver, what type of cost impact do you think that has as we look out?

What -- how should we think about WPD and some of the changes we should see looking out there as well, please?

This is Paul.

On the revolver, the new $4 billion revolver at supply, that replaces the $2.2 billion facility.

If I think about that, or if we think about that as -- on kind of a 25% maybe drawn basis, and I look at the amortization and ongoing costs of that versus the legacy facility, it's probably on a pretax basis somewhere in the $70 million -- $60 million to $70 million dollars incremental cost range versus that other facility.

As we think about -- it was pretty wide open question on international.

John, was there something specific on WPD?

Yes, sorry.

I know the earnings profile of that business seems like it's a little bit more backend loaded where it increases in the outer years.

I was trying to better understand what some of the drivers would be for WPD for next year.

Yes, from a driver perspective, clearly on a revenue basis the increment that's coming from the 6.9% plus inflation increasenext year will be a positive.

Given that we're still working through several years of underperformance on the pension side of asset performance, and from an actual perspective versus what was expected or budgeted or put in to the FAS expense number, we're working to amortize off losses.

That will negatively effect things as will the decline in -- significant decline in interest rates.

That will be a relatively large driver.

And then at the end of the day it really comes down to the assumptions on inflation, because we're basically fully funded with the GBP400 million pound debt offering we did this year for most of the next five year period.

We're sitting on that cash, and there's negative carry on it, but that won't be as significant as the pension driver is.

So would you expect the negative to outweigh the positive for WPD then in the near term?

For next year as we think about it?

Between a combination of some tax benefits that we derive this year, and the pension, those could, clearly potentially more than offset each other and be a negative driver, so --

Got it.

And then sorry to just go back to the collar thing for a second, but I wanted to just maybe understand it and think about a different way.

It sounds like you said for 2011, we're pretty much at the floors on all of the collars, if I remembered that correctly.

Correct.

Yes.

But specifically for 2012, just hypothetically speaking , if gas and power were to fall a lot, let's just say from here, how much more downside is there in the 2012 hedge price relative to where we are in the floors

I have not looked at that specifically, but clearly we'll be adjusting that as we move forward, and I think when we talk about 2011 guidance in the next couple of months, we'll make sure that we provide a clear estimate on what a $1 move in gas may due to the average hedge prices as we go forward.

Something along those lines to give you a better sense for that.

Now, obviously, John, the biggest impact there is the impact to the open position, not the hedge position.

Obviously, right?

So --

Of course.

Just trying to understand for modeling purposes.

So just to be clear, we shouldn't necessarily extrapolate or assume the fact that because we're at the floors in 2011, that -- and that there's no downside to the 2011 hedge price, that that's necessarily the same for 2012?

Yes, and it would not be the same, John, because if you think about when we were hedging and at the time some of these collars were put on, the forward prices were dropping from $11 to $12.

So we were probably closer to the bottom there than we are today.

So it's probably not reasonable to assume the exact impact in 2011 would carry over to 2012.

Got it.

And just one last question, please.

I noticed your slide on rate-based growth looks like the rate-based growth as picked up a little bit.

And as we look out a few years and look at the CapEx needs for the utilities to fund this rate-based growth do you, think that can be funded with internally generated cash flow, or would you think there might be a need for some of the equity to fund some of that utility growth?

This is Paul, John.

One way to look at that.

And I know questions have come up in the sector around dividend.

Let me clearly say that we believe absolutely that our dividend is secure.

It wasn't -- we weren't designing things to get to this way in terms of the dividend basically being able to be fully funded or nearly fully funded by the utility side of the business earnings.

That is the case for the next several years or very close to it like I just said.

Sure.

It wasn't goal, but it's a reality, so depending on what you to view as the volatility or prospects around supply, the dividend is very secure.

Now those utilities, as you just said, have significant race-based growth opportunity, which we can always dial up and down, but if a large percentage of those earnings are being paid out, if you will, to support the dividend, and cash is fungible, we will need to -- it will be modest, but we will need to access the appropriate capital markets to fund that growth.

There will be modest amount of equities and debt needed to support the rate-based opportunities, which drives future cash flow and earnings, but that will be a reality.

The credit protecting mechanism that we achieve by having for supply, as was just approved by S&P yesterday, that credit-supporting mechanism comes by having strong utilities with strong ratings and strong growth in the business, and that business needs to be funded.

So until supply returns itself to more of a mid-cycle kind of set of numbers where it's generating significantly more cash flow than the business needs, which eliminates -- probably more than eliminates the need mid-cycle to have to go to the equity markets to fund the utilities rate-based growth, we will have to do some modest access on that basis.

Okay, great.

Thanks.

And just back on the revolver.

So you said -- was it is an incremental cost was $60 million to $70 million?

It is, because I believe the total as I come up with those numbers is closer to $70 million to $80 million on an actual cost, and my actual -- for the new facility, and the actual cost, 25% outstanding for the old facilities, because of just how absolutely cheap that stuff was at the time, was close $10 million to $15 million.

So it's $80 million versus $10 million to $15 million.

Got it.

So maybe around $0.09 or something?

In that ballpark.

Okay.

Great.

Thanks.

You're welcome.

And our next question comes from the line of Ed Heyn with Catapult.

Good morning, I think my questions have be asked and answered.

I guess -- actually, I have one little question.

It looks like on the hedge slide, the load-following contracts, there was a -- it went from 0% to 1% in 2012.

Is that what you want in the BGS?

That's probably one component of it, yes.

Okay, but the strategy is still to have that be a very small portion of your over all hedging profile?

Yes, that's correct in the short term.

In the longer term we would probably move that up as the market and retail competition kind of settles out.

Okay.

All right.

Great.

Thanks a lot.

Yes.

And our next question comes from the line of Jonathan Arnold with Deutsche Bank.

Good morning, guys.

Good morning, Jonathan.

Just a quick question on the international.

It looked like it came in decently.

The $0.06 number on tax and other was -- can you just -- I'm not sure if you clarified exactly what that was.

And then you obviously raised the midpoint guidance for the year.

Is that the same issue?

Is there some currency going on in there?

Can you just clarify a little?

Yes, that was basically the success we had in tax court against the IRS on windfall profits taxes.

Okay.

We have been disputing slash litigating for going over a decade now.

But we did win that case in tax court, along with a street lighting case that was a very modest benefit for --

Okay.

I heard you mention those, Paul, I won't take up more time.

I just -- I hadn't realized that's where that was.

That's where it is.

Below the line.

Thank you.

You're welcome.

Our next question comes from the line of Hasan Doza with Citi.

It has been answered.

Thank you.

And our next question comes from the line of [Julian Dumoulin-Smith] with UBS.

Hi, good morning.

Good morning, Julian.

Hey.

First, while I understand that this may not necessarily impact you, I'm curious to hear what your expectations for further migration in your service territory looks to be in 2011, just as you price -- or you've priced out the polar contracts at this point?

Sure, good question.

Right now we have 485,000 customers still shopping, and we would expect the bulk of those to continue either with their existing suppliers or to migrate to another supplier.

I guess the amount of incremental shopping will be in large part probably dictated by how far the forward prices continue to fall, and clearly since we put on the contracts that set the price of polar for next year, which went down by about $0.01 a kilowatt hour, they have continued to fall.

So I think the head room is continuing to grow somewhat, so I would expect that shopping would continue to be active in 2011.

But there's also the factor that those that would likely want to shop may have already taken the opportunity, and those that either are not interested or it's a distraction for them or whatever probably will continue not to shop.

So I think there will be some incremental, I guess bottom line is, but I wouldn't say it's going to double or anything of a significant magnitude as I see it kind of playing out.

Great.

Thank you.

And then just a quick second question.

It seems as if O&M has been fairly -- again, substantially on your growth, at least at a slower pace in the third quarter, but perhaps could you comment where you see that trending full year 2010, maybe even 2011 just in terms of the different segments?

If you can?

Well, I would say on the supply side, which is a fairly good chunk of O&M, that it's probably going to continue to rise somewhat just due to pressures on labor costs, materials, and just the normal compliance with emission controls, and so forth, so I would expect that segment to continue to go up.

On the electric utilities side, I think that it would probably be more likely to stay flat or slightly up next year, but we'll give you that guidance when we talk about 2011.

But --

We have been putting pressure, obviously, throughout the organization on trying to control costs as best we can in this environment.

We'll continue to do that, but as Bill said, there will be some inflationary pressure, inclusive of -- I mentioned pension on international.

The interest rate movement, the discount rates there haven't obviously helped the domestic side of things either, so -- but we're doing everything we can on the rest of the parts of the businesses where we do have control.

Great.

Thank you.

Sure.

And our next question comes from the line of Brian Chin with Citigroup.

Been answered.

Thank you.

And we do have a follow-up question from the line of Greg Gordon with Morgan Stanley.

Thanks.

Just a follow-up on your commentary on the dividend.

I mean, the dividend is currently at $1.40, and you indicated that you felt at this point the earnings from the regulated businesses more than covered that.

Come close to or -- yes.

Go ahead.

That the dividend is essentially covered by the utilities at this point?

That's correct.

And the -- even though the -- when you look at the operating cash flow profile of [ogenco] over the next few years, revenues are going to declining.

Gross margins are coming down.

But shouldn't CapEx also be coming down, and do you see [ogenco] still being -- throwing off cash, or do you see it being a consumer of cash?

I do net of the investments we're making in hydro expansion projects and closing out the [operate] at Susquehanna.

So by the time we hit 2012 -- well we have got to get really in to 2013 before the hydro projects close out.

But by 2013 type time frame -- it's not that it's necessarily negative or hugely negative in any way, but it's just not as significant of contributor.

So [ogenco] looks like it starts to be a contributor around 2013?

Is that -- obviously that's going to change quarter-to-quarter as you look at where power prices are.

Exactly.

And obviously once we get more of a full-year capacity from that 2013, 2014 auction, hopefully 2014, 2015 clears at or above that.

I would expect by that point, clearly, we would be in a good position.

Okay.

Thank you.

You're welcome.

Our next question comes from the line of Neil Kalton with Wells Fargo.

You just alluded to the 2014, 2015 auction.

I wondered if you would provide some more detailed thoughts on where that might price for RPM in the East, and what are the pushes and pulls there?

Sure.

I think on the push upward side, I would expect the EPA regulations would begin to have an impact, depending on how those ultimately kind of signal out from EPA.

So that, with early retirements, et cetera, that would be a driver in the upward direction.

Someone asked earlier about demand response.

That would tend to potentially push that down.

However, I think the fact that there's so much uncertainty due to both the relative level of power prices, EPA regulations and so forth, that there aren't a lot of new supply capacity coming on the grid.

So -- and depending upon what your assumptions on the economic recovery front,I think they are probably in our view more positive drivers than there are drags as we look at the next auction.

So would you expect the pricing to come in above cone next time?

Maybe not at -- quite at that level, but we'll be taking a look at our models and how we view that.

But that would be a pretty --

Yes, clearly all of the generation that should come off ultimately on the coal side, depending upon your view of finale EPA regs, won't all be there in that auction.

So it will take time to work its way through, but we should be approaching that as we move through the next several years.

Thanks.

Sure.

And we do have a follow-up question from the line of Paul Patterson with Glenrock.

I'm sorry, I forgot to ask this.

Just on the trading side, any change in the outlook there?

Or is that pretty much what it was last quarter?

Same.

Yes, no change, Paul.

Okay.

Great.

Thanks a lot.

And our next question comes from the line of Daniele Seitz with view Dudack Research.

I was wondering when you consider the EPA regulations, are there any -- is there any type of plants that you may consider retiring in your fleet?

And as you looked over the Kentucky fleet as well, is there any retirement?

Daniele, in the East our units are very well positioned.

They are all scrubbed, and they're fairly efficient relative to the peer group, so I don't see a lot of downside.

In fact, depending on how you -- things could turn out, it could be a positive for our particular units and our fleet overall.

There are a couple of plants that we're looking at in terms of options to co-fire or convert over to natural gas, both on economic basis as well as on an emissions-control basis.

And of course, with our Kentucky assets, they are fully regulated, and even there many of them are scrubbed and have SCRs.

So we'll be, obviously following this very closely and looking at both the competitive fleet as well as the regulated fleet and see what the impact is.

But I think net-net, we feel that we are very well positioned.

Thank you.

Sure.

And there are no further questions in the queue at this time.

Okay,thank you, operator, and thanks to all of you for being on the call.

Again, I know it's a busy time.

I would just like to reflect on a couple of issues here.

It has been a very busy six-month period for us at PPL, and I think with many positive outcomes of working our way through this acquisition, and from the standpoint of working with the Kentucky regulator and seeing our way through that process successfully, we have certainly improved, as you see in yesterday's announcement, improved our credit rating as confirmed by S&P.

As Paul mentioned earlier, we feel great about our dividend.

Our dividend is secure.

We moved quickly through the process to take all of the risks, and hopefully the overhang off of our situation as a result of this acquisition.

As we view the acquisition on a going-forward basis, we're seeing a number of positives from the standpoint of potential additional rate-based growth that we hadn't seen prior to this time.

And as Bill mentioned, our unregulated fleet as a result of whatever these environmental rules ultimately shake out to be, we have a principally scrubbed coal fleet.

We have the ability to convert some units, where economically appreciate, to gas, and we're not facing a number of -- having to shutdown a number of units that in the unregulated region could hurt us.

I think that -- I feel that as we move forward, our unregulated fleet is still very well positioned to gain from the upside when gas prices do return and power prices do return, and we do expect to see, certainly, over the next couple of years -- not sure where gas will go, but I certainly would expect to see some spark-spread improvement -- expansion over the next couple of years, because there's not much of anything being built.

So with that I thank you for being on the call, and we look forward to talking to you at the turn of the year.

Thank you, operator.

Thank you, sir.

And this does conclude today's conference call.

You may now disconnect.