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PPL Corporation (NYSE:PPL)

Q1 2009 Earnings Call Transcript

May 1, 2009 9:00 am ET

Executives

Tim Paukovits – Director, IR

Jim Miller – Chairman, President and CDO

Paul Farr – EVP and CFO

Bill Spence – EVP and COO

Analysts

Ameet Thakkar – Deutsche Bank

Kit Comly [ph] – Soleil [ph]

Daniele Seitz – Dudack Research

Arex Kenya [ph] – Merrill Lynch [ph]

Neil Kalton – Wachovia

Paul Ridzon – KeyBanc

Paul Patterson – Glenrock Associates

Travis Miller – Morningstar

Nathan Judge – Atlantic Equities

Operator

Good morning. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the PPL Corporation's First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the call lover to Mr. Tim Paukovits, Director of Investor Relations. Sir, you may begin your conference.

Tim Paukovits

Thank you. Good morning. Thank you for joining the PPL conference call on first quarter results and our 2008 results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com.

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the Appendix to this presentation and in the Company's SEC filings.

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

Jim Miller

Good morning, everyone. Thanks, Tim. Just a note here to begin. As you many of you maybe aware, this is Tim’s last call. He is leaving PPL to pursue opportunities in the non-profit sector and so I would like to thank Tim for his significant contribution to the Company and we wish him the best in his new endeavors. Joe Bergstein, who many of you already know, will be replacing Tim, and I know Joe and his team will continue our record of being responsive to your needs.

As usual we’ll begin with a brief business update and first quarter results and then we’ll take Q&A. Joining me this morning are Bill Spence, our Chief Operating Officer and Paul Farr, our Chief Financial Officer.

Today, we are reporting first quarter GAAP earnings of $0.64 a share compared with $0.69 a share a year ago. Our first quarter earnings from ongoing operations, which excludes special items, were $0.60 a share, $0.01 per share lower than a year ago. Primary drivers of our first quarter results compared to the first quarter of 2008 were less favorable currency exchange rates in the U.K. and lower wholesale energy margins in the U.S., offset by financing activity benefits and lower operating expenses in both the U.S. and the U.K.

Given the continued challenges in the energy and financial markets, these first quarter results are very positive. They put us solidly on track to achieve our earnings target for the year. During the quarter, we saw the benefits of reducing our capital and reducing our O&M spending. We also took advantage of our strong liquidity position to repurchase some long term debt, which will result in reductions in future interest expense.

A major focus for us continues to be the maintenance of the strong balance sheet, stable investment grade credit ratings, which provide us with access to lower cost funding. Our credit rating and our strong dividend are cornerstones of preserving and growing shareowner value in these challenged economic environment that we are in.

On the asset front, we are still pursuing selected growth opportunities such as the expansion of our hydro capacity in Pennsylvania and in Montana. These initiatives, which are largely driven by the availability of federal economic stimulus incentives, will further enhance our already diverse generation portfolio as the nation moves towards limits on carbon emissions.

As you may know, about 40% of our current production capability is from non-carbon sources and once completed these expansions combined with several smaller investments in renewable projects will further strengthen that position.

Now, let’s talk about our forecast for 2009 and ’10, which we are reaffirming today. As I mentioned earlier, the actions we’ve taken over the last six months combined with our solid first quarter results, make us confident in our ability to achieve our forecast of $1.60 to $1.90 per share for 2009 earnings from ongoing operations. For 2009, we are continuing to project higher earnings from our Supply business, driven by higher energy margins that will be partially offset by higher O&M and depreciation expense.

We expect modestly lower earnings from our Pennsylvania delivery segment for 2009 because of the 2008 divestiture of our gas delivery businesses and higher O&M expenses. We are projecting lower 2009 earnings from our international delivery segment due to the weakened pound sterling.

Now, turning to 2010, we are now expecting our results to be at the low end of our $3.60 to $4.20 range due to lower wholesale electricity prices that are affecting the value of our unhedged generation. And Bill Spence will discuss later in the call concerning our move towards further increasing the amount of power hedged for 2010. Following our normal practice, we’ll provide a full review of our 2010 forecast in the fall.

Before we move on to Paul, I will give you a brief update regarding the transition to wholesale markets in Pennsylvania. PPL Electric Utilities generation rate cap expires at the end of this year. And we are continuing to provide customers with options to manage the price increase that will result when caps expire. About 10% of or customers are participating in a pre-payment program for 2010, and more than 200,000 customers have now visited a wise energy use website that we’ve established.

Another option we are pursuing to help customers has been filed with the Pennsylvania PUC. If approved, this post cap phase in program would give customers the option to defer 2010 rate increases in excess of 25%. We are awaiting PUC action on this plan, which would allow us to collect the deferred amounts plus carrying charges over a period of two years. Our filing is similar to plans already approved by the PUC for some other Pennsylvania utilities.

As a result of lower wholesale electricity prices, we currently project that the average residential bill would increase by about 30% on January 1st, 2010. Meanwhile, the Pennsylvania legislature is considering legislation that would mandate that utilities offer deferral programs for customers. Last week, the Pennsylvania House Consumer Affairs Committee approved legislation that would require utilities to offer a deferral option for customers under which a customer’s bill could increase by no more than 20% in any year during the three-year phase – in period. This bill includes provisions for full recovery of carrying charges.

The timing of the full house vote on the legislation is uncertain at this time. Also uncertain is what would happen to such legislation if it were to pass and be sent to the Senate. While PPL is not opposing the legislation, we continue to believe that the plan we filed with the PUC is in the long term best interest of the customers and that decisions regarding such plans are best left to the PUC, which already has the authority to implement such phase-ins.

Now, we’ll turn the call over to Paul for more details on our strong first quarter results. Paul?

Paul Farr

Thanks, Jim, and good morning everyone. Before I begin, I would like to remind everyone that prior year 2008 earnings from ongoing operations include the operating results of the gas delivery business, but excludes special items related to the divestiture that took place late last year.

As Jim mentioned, our first quarter earnings from ongoing operations were modestly lower than last year, primarily driven by lower international segment earnings as a result of the weaker sterling, which was partially offset by benefits from a completed debt repurchase, and lower operating cost in both the U.S. and the U.K. Even excluding the debt repurchase benefit we are tracking well against our plan and are solidly on track to achieve our 2009 ongoing earnings forecast.

Turning to slide six, let’s begin with the Supply segment performance. The Supply segment earned $0.22 per share in the first quarter of 2009, a 0.03 increase compared with the year ago. The increase was driven by higher West energy margins on higher wholesale volumes and increased hydro generation, lower nuclear O&M, primarily driven by the fact that the shift of this year’s refueling outage was to April as compared to the 2008 refueling outage that started in March. Combined with lower operating cost in our Energy Marketing Center and lower financing cost, including a $0.05 per share gain on the completion PPL Energy Supply debt, which will result in future reductions in interest expense as well.

Partially offsetting the positive earnings drivers are lower East energy margins as a result of higher average coal prices and slightly lower marketing and trading margins. Also impacting the first quarter were lower realized gains in the nuclear decommissioning trust and higher depreciation.

Moving to slide seven, our Pennsylvania delivery segment earned $0.14 per share in the first quarter of 2009, a $0.02 decline compared with last year. This decrease was the net result of the loss of earnings from the divestiture of our natural gas delivery in October, higher financing cost as a result of pre-funding a portion of PPL Electric’s 2009 debt maturity in October of 2008 and lower O&M.

Moving to slide eight, our international delivery segment earned $0.24 per share in the first quarter of 2009, a decrease of $0.02 compared to a year ago. The primary driver of the decline was currency translation, which resulted in a $0.09 per share decline in earnings compared to a year ago. Partially offsetting the currency impact were lower interest expense on WPD’s index linked bonds driven by lower inflation, lower O&M, and lower U.K. income taxes.

Turning to slide nine, as Jim already mentioned, we are reaffirming our 2009 forecast of ongoing earning of $1.60 to $1.90 per share. While we now expect earnings in 2010 to be at the low end of the $3.60 to $4.20 per share range, due to lower 2010 wholesale power prices we will still experience a significant increase in earnings in 2010 over 2009.

The next comments we expect to have on 2010 as well as a formal update to the 2010 guidance will be in the fall after we have completed our business planning process, which has just kicked off.

Slide 10 reflects the Supply segment’s 2010 open EBITDA based on forward prices as of March, 31st. You can see that (inaudible) money value of our 2010 hedges is almost $800 million and our expected margin is approximately $60 million lower than it was at December, 31, 2008. This is consistent with the sensitivity analysis we provided you to monitor our 2010 position last quarter. Sensitivities to our 2009 and 2010 forecast are available in the appendix to today’s presentation material. The decline in expected margins causes us to be at the low end of the 2010 forecasted earnings range.

We removed the 2011 and 2012 detail due to market volatility and the near term focus of investors in the ongoing business process. But our prior sensitivities we provided you should still hold.

On slide 11, we have broken our free cash flow before dividends by segments. We felt that it was important to start to show this level of detail as PPL transitions from a period of heavy CapEx spending at the Supply segment for environmental control equipment and plant upgrades, to a period of rising CapEx spending at our regulated delivery businesses.

Bill will provide more detail about CapEx plans in a moment. The Supply business will obviously be providing significant positive cash flow as that business transitions to fully competitive markets.

In February, we increased our common stock dividend by 3% to the current annualized level of $1.38 per share. With this increase, the dividend has risen 68% in the last five years. While the payout ratio has increased to 79% based on the mid point of the 2009 earnings forecast, the dividend action was in consideration of the significant increase in earnings that we are forecasting for 2010.

On slide 13, we provide detail on our credit facilities and collateral postings. We remain highly focused on maintaining our strong credit profile and liquidity position. During the first quarter, a $300 million, 364-day facility at Energy Supply matured and we were able to replace it with a new $200 million, 364-day facility. 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.

The Supply segment has a diverse group of 23 banks providing credit with no bank having more than 14% of the total commitment. Planning for our liquidity needs and sources is an ongoing process for us and we continue to look for the best and most cost effective ways to address our future liquidity needs. And PPL Electric Utilities and WPD continues to maintain adequate liquidity positions for their respective businesses.

Slide 14 reflects an update to the level of collateral available and posted at PPL Energy Supply. As we said many times in the past, these credit facilities and our BBB investment grade credit rating are extremely valuable to the Company as we look to further execute on our multi-year hedging strategy.

Finally, on slide 15, we are providing an update to our debt maturities schedule. As we mentioned last quarter, proceeds from the Electric Utilities’ issuance in October will be used to partially pre-fund this year’s $486 million maturity. And we have no maturities in 2010. We do expect a further $300 million debt issuance at EU later this year to funds strong growth at the utility, CapEx growth at the utility. In March, we paid off the $201 maturity at PPL Cap Funding.

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

Bill Spence

Thanks, Paul and good morning everyone. And let’s turn to slide 16. I am going to start with an operational update on our delivery businesses. During the first quarter, PPL Electric Utilities successfully completed another round of solicitations for its 2010 default service load with five of the six RFPS now completed. Electric Utilities has over 80% of its expected supply needs for residential and small commercial customers under contract.

In September, Electric Utilities will begin the final solicitation. Bids for the sixth installment, which includes residential, small C&I, and the only solicitation for large C&I customers, are due October 5th and PUC approval is expected October 8th. If prices in the last round of purchases match the lower prices we received in the fifth round we would estimate the average residential customer bill would increase by about 30% in 2010.

Regarding the plan filed with the PUC to purchase supply needs for 2011 to mid 2013, an administrative law judge has found the purchase plan to be in the public interest, has recommended PUC approval to this plan. It now goes to the PUC Commissioners for final consideration.

We are continuing to evaluate the impact of Pennsylvania’s Act 129, and we are on target for the July 1st deadline to file a compliance plan. The plan will include details on how we will comply with the actual reduction requirements of 1% by mid 2011, 3% by mid 2013, and a peak demand reduction of 4.5% by mid 2013. These reductions are to be achieved within a cost cap equal to 2% of 2006 annual revenues, which is approximately $60 million per year.

As Jim mentioned, PPL Electric Utilities continues its commitment to helping customers mitigate rising electricity cost. Customers have responded well to the prepay plan that was implemented in 2008 with 10% signed up for the program and PPL Electric Utilities filed its second option with the PUC recently. If approved by the PUC, this rate deferral plan will provide customers another way to spread out the expected increase in electricity prices.

One final note on Electric Utilities. Demand at the utility in the first quarter was 1% higher than the first quarter of 2008. This was driven by higher residential and commercial units sales as a result of the colder weather compared to first quarter sales in 2008, offset by lower industrial sales. For the year, we continue to forecast flat sales, with limited residential and commercial sales growth, roughly offsetting declines in industrial sales.

On the International front, the U.K.’s Distribution Price Control Review is in process and moving along smoothly. Ofgem, the U.K. regulator, is expected to publish its initial proposals in July 2009, with final proposals in December. The new rates would take effect April 1st, 2010.

We saw about 2% decline in demand at WPD in the first quarter driven by the soft economy in the U.K. And we forecasting slightly lower demand in 2009 compared to 2008 at WPD.

Now, moving on to Supply, I am pleased to report we had a very strong overall plant performance in the first quarter. Coal Strip Unit 4 in Montana set a continuous run record of 174 days and Susquehanna Unit 2 set a nuclear plant generation record on April 7th, when it started its refueling outage. Susquehanna Unit 2 generated electricity for 723 consecutive days. That is not only a record for the Susquehanna plant, but it’s the second longest run ever by a nuclear unit in the U.S.

With respect to the Susquehanna Unit 2 outage, we had originally planned to complete all the modifications to achieve an extended power upgrade of 72 megawatts. However, we decided to defer a digital control system upgrade. Because of this decision, we’ll not realize the full increase in generation from Unit 2 until early 2001. However, we do expect to realize a 45 megawatt increase or about 60% of that increase this year in Unit 2. This deferral will not have a significant effect on earnings.

While I am on the topic of capacity expansion, I want to mention we’ve reapplied with the FERC for an – our expansion project at the Holtwood hydroelectric plant in Pennsylvania. The expansion project will have 125 megawatts of clean, renewable electric generating capacity by the spring of 2013.

We reconsidered this project as a result of the tax incentives and potential for loan guarantees now available under the Federal Economic Stimulus package. These stimulus package benefits are expected to improve project economics, offsetting the factors that caused us to withdraw our original application in December, and offsetting the further decline in future energy prices since that time.

As a final comment, on the operational update, our Scrubber projects are expected to be completed later this year on budget and on schedule.

On slide 18, we’ve updated our hedge positions for electricity and fuel as of March 31st. I would like to remind you this slide represents all projected economic generation, not just base load. I will address base load in a moment.

Our current electricity hedge position for 2010 is 86%. That’s an increase of 7% over the previous quarter. We’ve continued to hedge 2011 and 2012 as well with 55% hedged in ‘11 and 34% hedged in ’12.

On the fuel side, we’ve contracted for 100% of the coal tonnage needed for 2009 and our wholly owned plants are fully hedged for 2010 with only a small open position related to our interest at Keystone & Conemaugh. We remain well hedged through 2012. As was evident when Paul discussed our 2010 open EBITDA position, our average hedge fuel prices are well below current forward market prices and should provide significant value as we move into 2010.

Turning to slide 19, our coal supply portfolio incorporates a mix of short and long term contracts and spot purchases as well as coal sourced from a diverse group of suppliers and markets. We’ve not experienced any significant coal supply issues to-date. We also utilize a mix of fixed price contracts and contracts subject to price collars. Those contracts subject to the collar specify max and min prices that limit our exposure to rising prices, but also provide some opportunity for lower prices when market prices decline.

The solid line on this chart shows the estimated weighted average price of the coal that’s contracted at predetermined fixed prices. The dotted lines represent the estimated range of max and min prices for the tons under contracts that are subject to collar pricing. Individual contracts have tighter ranges than shown here, but this gives you the totality of the estimated range for all contracts subject to collars.

Given current forward prices and the terms of our supply contracts, current earnings forecast assume that max price will be paid for coal subject to these collars. If these prove not to be true then additional value could be realized.

We are exposed to diesel surcharges in all of our real transportation agreements and a few of the coal supply contracts also include diesel surcharges for the suppliers’ use of diesel fuel at the mine. We use oil [ph] hedges to manage some this variable component.

Moving on to slide 20, we’ve update our base load generation hedge percentages. For 2009, essentially all of our expected base load generation output is committed. For ’10. We’ve hedged over 90% of our base load generation. That’s an increase from our last quarter. This provides the Company with a solid base in support of the earnings growth we are forecasting. For 2011 and 2012 you can see we’ve also hedged some significant portions of our base load generation and the hedge prices are favorable to current market forwards.

I’d also like to note that substantially all of capacity has been hedged primarily through selling forward capacity in RPM auctions. Starting Monday, May 4th, and running through Friday, May 8th, the next RPM auction will be held for the period June 2012 through May 2013. This will complete the implementation of the three-year forward capacity market in PJM,

Slide 21 provides a breakdown of capital expenditures by the three segments, Supply, PA Delivery, and International Delivery. As you may recall, we took significant steps to reduce 2009 CapEx spending by $200 million in light of the economic conditions and we remain vigilant in that effort.

Starting with Supply, our Susquehanna CapEx about $500 million a year. Expenditures beyond that level in 2009 primarily reflect the completion of Scrubbers and increases in 2010 through 2013 are due primarily to the scheduled upgrade projects at Susquehanna, our Holtwood Hydro in Pennsylvania, and Rainbow hydro in Montana.

For Pennsylvania Delivery 2010 to 2012 CapEx above the $300 million annual sustenance level is driven primarily by the Susquehanna-Roseland transmission line. This 500 KV line is part of PJM’s RTEP program and is needed for system reliability in the region.

Electric Utilities portion of the line is expected to cost about $500 million and we will receive incentivized equity returns to that project. Additional CapEx in 2013 is for smaller transmission projects.

CapEx for International Delivery increases in 2010 through 2013 due to system reliability upgrades expected to be approved by Ofgem as part of the ongoing rate review process. This spend will only be made at levels if the program is ultimately approved by Ofgem. And it is important to note that WPD earns real-time returns on CapEx as part of the regulatory structure in the U.K.

Slide 22 illustrates the substantial rate base growth for our Pennsylvania Delivery business due the significant CapEx program the business is about to undertake. We expect a 9.3% compound annual growth rate in the rate base from 2008 to 2013. The transmission rate base almost doubles from 2009 to 2013 due to transmission projects such as the Susquehanna-Roseland line.

We are in the final settlement discussions regarding the formula based rates for PPL Electric Utilities transmission business. I think it’s important to highlight that although the supply business will be the driver of earnings as we move from 2009 to 2010, we do expect to see some rebalancing of our earnings as we move beyond 2010. We believe this rebalancing will have a positive impact not only on our earnings, but also on our ratings with more earnings predictability.

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

Jim Miller

Okay, operator, let’s open for the question-and-answer session.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Ameet Thakkar with Deutsche Bank.

Ameet Thakkar – Deutsche Bank

Good morning guys.

Jim Miller

Good morning.

Paul Farr

Good morning, Ameet.

Ameet Thakkar – Deutsche Bank

Congratulations on a good quarter.

Jim Miller

Thanks.

Ameet Thakkar – Deutsche Bank

I had a quick question on slide 20 regarding the hedge load base load electric sales and the average sales price. Can you guys remind us, does that include any things like beyond energy, I mean to the extent you guys participated in any of the power supply auctions that you’ve held and have incremental margin from (inaudible), et cetera? Or is this just a pure energy price.

Bill Spence

That was just the pure energy sales against our base load generation, not including any incremental power deals we do outside our asset base. So, for example, when we participate in a BGA socs [ph] in New Jersey in 2009 that would not be included.

Ameet Thakkar – Deutsche Bank

Alright, great, thank you very much.

Operator

Your next question comes from the line of Kit Comly [ph] with Soleil [ph].

Kit Comly – Soleil

Good morning guys.

Jim Miller

Good morning, Kit.

Kit Comly – Soleil

Can you bring us up to date on the proposal to tax earnings from overseas operations? Is that – I don’t recall noting that that’s been moving, but there is a lot of moving parts in the federal government. So – and if – just – if you can give us some sense of where you think that might end up and what kind of exposures you might have and so on.

Bill Spence

Yes, Kit, you are probably as knowledge about that as we are simply because there is not a lot of definition yet to what the administration is attempting to do there. With the—

Kit Comly – Soleil

They are going around generally.

Bill Spence

Well, with the U.S. being the second most high – the second highest corporate tax rate in the OECD, no other President worldwide effectively for a deemed repatriation like that which would significantly harm U.S. companies both in country as well as ex foreign investment enterprises. You know there is a long way to go on that. I – if there would be an implementation on that given that the U.K. statutory rate at 28% is substantially below the U.S. rate, there would like be a negative economic impact on the Company. We basically – other than the dividends, permanently reinvest those profits that we make in hard physical assets. It’s not a foreign sales entity that’s got no material presence, if you will. It’s all physical asset and plants. So, we are extremely hopeful that saner minds will prevail and they will back off of that proposal. But there is just not enough definition right now to be able to provide a lot of comment.

Kit Comly – Soleil

Fair enough.

Operator

Your next question comes from the line of Daniele Seitz with Dudack Research.

Daniele Seitz – Dudack Research

Hi, thanks. I was wondering how much did you assume for the currency impact in the U.K. for 2009 in you assumption?

Paul Farr

The – yes, the budget assumption was $1.50 with the earnings that we’ve recognized to date that includes the impact of hedges as well as what was unhedged and what we have for the balance of – what we are looking at in hedges for the balance of the year. We are greater than 90% hedged for the total year 2009. The hedged value is at a level below the $1.50, but fully contemplated. It’s not significantly below that. And it’s fully contemplated in where we think we are going to come out from a forecast range perspective.

Daniele Seitz – Dudack Research

And you used to say a number in 2010 I mean each project.

Paul Farr

2010 was originally at $1.75. Again, we used an average of bank forecast at that time. The forecasts are off of what that original assumption was, but again the current assumption reflects current forwards in being at the bottom end of that ranges, as Jim and I both talked to.

Daniele Seitz – Dudack Research

Okay great, thanks a lot.

Paul Farr

Sure.

Operator

Your next question comes from the line of Arex Kenya [ph] with Merrill Lynch [ph].

Arex Kenya – Merrill Lynch

Hey good morning.

Jim Miller

Good morning.

Arex Kenya – Merrill Lynch

Two quick questions. The first is just I guess it’s slide A-5 on the Pennsylvania Delivery cash flows. I want to make sure I am thinking about it right, the declines from 2009 to 2010, is that related to the transition bond, you are kind of – you are getting cash on the bonds for the 2009 of a couple of $100 million, I believe in –

Jim Miller

Yes.

Arex Kenya – Merrill Lynch

(inaudible) kind of repayments (inaudible), is that right?

Paul Farr

That’s correct. It’s about $200 million after-tax.

Arex Kenya – Merrill Lynch

Great. And the second question is just kind of the International segment, just looking at kind of what the guidance is for the year of about $0.50 to the mid point and where you are at through the first quarter, I just wanted to think about how we should – should you really see drastically a lower earnings over the rest of the year of $0.08 or so kind of on average or is there – do you think that there is cause for the International be able to better than or that point guidance is right now. Just given us round the first quarter level.

Paul Farr

I guess the best way to approach that is it’s – we had a very good first quarter. It is only the first quarter. We are not – we didn’t adjust guidance. We feel extremely comfortable with where we at. The winter is a seasonally more peaky period for WPD’s earnings and with the one month lag, what keeps picked up in the calendar year is effectively December 1, ’08, through 11/30/09. So, some of that upside from the winter peaking is reflected in the number. We could see some additional benefits in the year. But that’s probably all we have to say at this point in time.

Arex Kenya – Merrill Lynch

Thanks.

Paul Farr

Yes.

Operator

Your next question comes from the line of Neil Kalton with Wachovia.

Neil Kalton – Wachovia

Good morning everyone.

Paul Farr

Good morning, Neil.

Jim Miller

Good morning.

Neil Kalton – Wachovia

First, congrats to Tim and thank you for all your help over the years. And then second, just a question on slide A-1 and the market prices, specifically on capacity prices for 2012. That $119 number is that a market price and is that indicative of how we should be thinking about the upcoming RPM auction?

Bill Spence

That is a market price, but it’s the mid point of a very wide range. I believe 12-13 prices were trading in a range of $90 to $150. So, whether it’s indicative of the auction that’s going to come off next week or not remains to be see, but at least (inaudible) market is thinking.

Neil Kalton – Wachovia

Okay, thanks.

Bill Spence

Sure.

Operator

Your next question comes from the lien of Paul Ridzon with KeyBanc.

Paul Ridzon – KeyBanc

What was the impact of the lower taxes in the U.K. and what drove that?

Paul Farr

It was around a positive $0.02, and that was a net of a favorable ruling that we got from the U.K. tax authorities related to the sale of our supply business going back several years, which was a positive about a nickel, but it was offset a $0.03 2008 benefit that we got related to hydro related tax activities.

Paul Ridzon – KeyBanc

Okay, thank you.

Paul Farr

Sure.

Operator

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

Paul Patterson – Glenrock Associates

Good morning guys.

Paul Farr

Good morning.

Jim Miller

Good morning, Paul.

Paul Patterson – Glenrock Associates

Congratulations, Tim, once again.

Tim Paukovits

Thank you, Paul.

Paul Patterson – Glenrock Associates

I am sorry, but I had to jump off for a little bit – the trading margin in your guidance for 2009-2010, is it still $85 million and $125 million for 2010?

Paul Farr

That’s correct.

Paul Patterson – Glenrock Associates

Okay. And then the ROW at the distribution company, what do you see it as being in 2010, I mean just roughly speaking or when do you think you got to have to go in for rate relief?

Paul Farr

Yes, we do have in the plan an expectation that we will be making a filing in ’10. The current plan has a filing in March of ’10 for new rates that would be effective 01/01/11. ’10 is the trough year in domestic utility earnings. If we look at where the earnings will be and if you look at our original ’10 guidance it’s in the low $0.30 range, $0.30 to $0.32 in that ballpark, the earnings of the utility with the combination of getting that rate – more timely rate relief and the CapEx that we are spending, virtually double by the time we hit 2013, but does trough in ’10. I want to say that the last set of numbers that I looked at showed in the low 8% range by the end of 2009 – 8.3, 8.4 in that kind of ballpark range. So there would be some further deterioration. ’10 would be the future test here for the new rates in ’11.

Paul Patterson – Glenrock Associates

Okay. And then how is depreciation? How is that benefiting you guys this year and sort of just how should we think with the cash flow impact associated with that in the next few years?

Paul Farr

I don’t have a number, an exact number, but it’s all factored into the cash flows from the cash flow by segment slide that we provided. We wouldn’t see any or call it more permanent benefits from the ITC side of things until we start spending the dollars around the hydro projects. So, that’s – ends up in deferred tax liability land on the bonus depreciation. But it’s all factored into the guidance.

Paul Patterson – Glenrock Associates

Okay, great, thanks a lot guys.

Paul Farr

Sure.

Jim Miller

Sure.

Operator

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

Travis Miller – Morningstar

Hello, how are you?

Paul Farr

Good morning.

Jim Miller

Good morning.

Bill Spence

Hi, Travis.

Travis Miller – Morningstar

A question on the Supply segment. How many megawatt hours did the East portion and the West portion each produced this quarter?

Paul Farr

One second. Trying to get the numbers for you. Just a minute.

Travis Miller – Morningstar

Okay. Sure. As you are looking for it, question on the production, how is that being affected by the dispatch change we’ve seen here recently, especially the (inaudible) gas version in some places?

Bill Spence

Yes, I can generally speak to that. We have seen more run time on our gas units at Martins Creek, but I would say in the grand scheme of things, it’s not been material from a margin contribution side because when we have been dispatched it’s many times at fairly low margins, as you can imagine, looking at the fairly low power prices we saw in the first quarter. And the fact that we are fully hedged doesn’t provide a lot of upside for us as it relates to how the dispatch goes.

Paul Farr

The total East generation was 11.2 million megawatt hours. And the total West generation was 2.2 million megawatt hours.

Travis Miller – Morningstar

Okay. Remind me how that compares to a year ago?

Paul Farr

It is in the West up around 85,000 megawatt hours, and in the East down about $150,000 megawatt hours.

Travis Miller – Morningstar

Okay. And is that East number what you are talking about mostly due to the dispatch difference or is it other factors?

Bill Spence

I think it would be other factors, not only how we used to dispatch based on market prices, but also for example we started an outage at Brunner Island 3, so we have – you have to look year-over-year at – where our outages are scheduled and so forth.

Travis Miller – Morningstar

Okay. Was that the only major difference in outages?

Bill Spence

That would be the primary driver, I believe.

Travis Miller – Morningstar

Okay.

Bill Spence

And weather.

Jim Miller

Yes, the weather.

Travis Miller – Morningstar

Yes, yes.

Paul Farr

The gas net of – East gas net of East oil is not a significant number at all, so I think goes right to – the dispatch is not causing that great of an impact on the portfolio.

Travis Miller – Morningstar

Okay. Thanks a lot for your help.

Bill Spence

You’re welcome.

Operator

Your next question comes from the line of Nathan Judge with Atlantic Equity.

Nathan Judge – Atlantic Equities

Good morning.

Jim Miller

Good morning

Paul Farr

Good morning.

Bill Spence

Good morning.

Nathan Judge – Atlantic Equities

Wanted to enquire into your domestic retail delivered megawatt hours? I think you posted a 1% increase year-on-year, which is quite a bit better than some of the peers. Could you just break that out of what the weather impact on that was and what you are seeing underlying usage basis?

Bill Spence

Yes, generally speaking, I think weather contributed about one – really makes up the bulk of that 1% year-over-year increase. If you adjust it for weather I think we’d be pretty much flat and as I mentioned in my portion of the discussion, we are still expecting flat sales for 2009. And that would –

Nathan Judge – Atlantic Equities

Where there any – in fact, if you could further – break that out further into residential usage versus industrial? I’d like to just (inaudible) as far as the economy?

Paul Farr

Of the 36 or 37 million megawatts hours at the utility, about 14 million a little more than 14 million residential, a little more than 14 small C&I, and about 9 million-ish – 8 million to 9 million-ish from large industrial. So, large industrial, even though we are reflecting it to be down, a little south of 10% on the year, the couple of percent that we expect in residential and small C&I on a total volume basis are basically offsetting each other. So, it’s a bigger percentage down in industrial, but industrial only makes up around 25% of the utility load, the large industrial.

Nathan Judge – Atlantic Equities

Okay. And that is tracking in the first quarter so far?

Paul Farr

Yes.

Bill Spence

Yes. Actually little bit better than in plan.

Nathan Judge – Atlantic Equities

Just on slide 21 the CapEx by segment, there is clearly – I just want to confirm that the increase in Supply CapEx was related to the hydro plants that you are now expecting to build?

Bill Spence

Yes, beginning in ’11 and ’12 and then completing in ’13.

Nathan Judge – Atlantic Equities

What would be the driver for the increased CapEx in ’10?

Bill Spence

That would be the completion of – we have a cooling tower project at Brunner Island and it also begins the project at Holtwood as well as Rainbow.

Nathan Judge – Atlantic Equities

If I am not mistaken, that’s gone up from $752 million your forecast as of the fourth quarter? Is that just – or there is higher than expected or is there something else driving that?

Paul Farr

There has been some increase on the Rainbow project. It – the more significant impact there would likely be on ’11, virtually all coming from the Holtwood, the addition of Holtwood.

Nathan Judge – Atlantic Equities

Okay.

Bill Spence

Yes, I think Holtwood would explain the major difference between year-end and now.

Nathan Judge – Atlantic Equities

Okay.

Bill Spence

Recall that we had we had (inaudible) or backed away from Holtwood prior in 2008 and with the onset of the tax credits; we’ve reapplied for the expansion of that facility. So, you are seeing that jump down and increase.

Paul Farr

Yes, Holtwood’s around $117 million in ’10, so that’s virtually all of the increase versus the 752-ish number that you mentioned.

Nathan Judge – Atlantic Equities

Do you have any forecast expenditures in your budget for the (inaudible) plant disposal?

Paul Farr

We have – what we have in the plan is simply the cost necessary to complete the permitting process that’s underway with the NRC. There are no long lead time material commitments that we have made or that we plan to make currently and it simply reflects getting a permitted site. So, we’ve got –

Nathan Judge – Atlantic Equities

Thank you very much

Paul Farr

$750 [ph] million capitalized and there is around $20 million to $30 million remaining to be spent to complete the NRC coal [ph] process and that’s reflected in the numbers.

Nathan Judge – Atlantic Equities

Thank you very much.

Paul Farr

Yes.

Operator

Your next question is a follow-up from the line of Daniele Seitz with Dudack Research.

Daniele Seitz – Dudack Research

Thanks. I just was looking at the trend in ’09 basically flat. Do you think you can keep that or the fact that it was very low in the first quarter comes from just the timing of the refueling?

Paul Farr

The refueling was contributory, but the benefits that we expect to get from the cost reduction initiative, both on an employee affected basis as well as well as contractors and other costs that we are trying to reign in, we clearly think that we can hold it for 2009. There will be continuing benefits in ’10 and ‘11. At the utility level though, as WPD completes its rate review process later this year and the electric utility will be going in for rate relief in ’10, effective ’11, whatever gains that we would get be relatively short-lived if we use that as a strategy. So, we are most focused of Supply and corporate overhead. So, in total –

Daniele Seitz – Dudack Research

And so 2009, you still expect it to be relatively flat, but 2010 and ’11 you could see a resumption of some uptick?

Paul Farr

Correct. Not as high as we had originally planned, but some resumption of uptick.

Daniele Seitz – Dudack Research

And going to the Delivery when the construction expenditures – you are looking at most of the confirmation [ph] expansion need and authorization is it a state expansion or is it – would it be inter-state and would you get some additional return or is it all regulated under PA Delivery?

Bill Spence

On the transmission – ?

Daniele Seitz – Dudack Research

The transmission, yes.

Bill Spence

On the transmission side, it would be regulated under FERC, under the formula of REITs that were in the midst of settling. And we would get incentive adders for being in the RTO as well as for the characteristics of the transmission line. So, we are looking at 12.5% to 13% return on equity in total under the formula rates.

Daniele Seitz – Dudack Research

And you anticipate this decision to come – you have a – ?

Bill Spence

Yes, we would expect to file a settlement with the FERC, shortly, amongst the parties, and then the FERC would hopefully take it under consideration, probably in early June.

Daniele Seitz – Dudack Research

Okay, great. Thanks a lot.

Paul Farr

Daniele, it is an interest inter-state line but PPL is only constructing the Pennsylvania portion while PSEG would be constructing the New Jersey side.

Daniele Seitz – Dudack Research

Right, thanks.

Paul Farr

Yes, sure.

Operator

There are no further questions at this time. I would now like to turn the call back over to management.

Tim Paukovits

All right. Well, thank you all for attending and we’ll continue on our push for meeting or beating our numbers this year and everyone have a good weekend. Thank you for attending.

Operator

This concludes the PPL Corporation first quarter conference call. You may now disconnect.

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