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PPL Corporation (NYSE:PPL)

Q1 FY08 Earnings Call

May 2, 2008, 09:00 AM ET

Executives

Timothy Paukovits - Director of IR

James H. Miller - Chairman, President and CEO

Paul A. Farr - EVP and CFO

William H. Spence - EVP and COO

Analysts

John Kiani - Deutsche Bank Securities

Paul Ridzon - KeyBanc Capital Markets

Tom O'Neal - Highbridge

Operator

Good morning. My name is Jessica, and I will be your conference operator today. At this time I'd like to welcome everyone to the PPL Corporation 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].

At this time I'd like to turn the call over to Mr. Paukovits, Director of Investor Relations. Sir, you may begin your call.

Timothy Paukovits - Director of Investor Relations

Thank you. Good morning. Thank you for joining the PPL conference call on first quarter results, and our general business outlook. We are providing slides with 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.

James H. Miller - Chairman, President and Chief Executive Officer

Thanks, Tim, and good morning everyone. Today we'll follow our usual format and we'll respond to your questions after we provide a general business update and some commentary on the first quarter of 2008 results we announced this morning.

On the call today with me are; Paul Farr, our Chief Financial Officer; and Bill Spence, our Chief Operating Officer.

Today we've reported first quarter earnings of $0.69 per share compared with $0.52 per share at the same period a year ago. The 33% improvement over last year was driven by strong results in our international delivery segment, and some special items related to the mark-to-market energy hedges.

Earnings from ongoing operations, which exclude the special items were $0.61 per share about 6% lower than in 2007. As we previously discussed our ongoing earnings for all of 2008 will be down about $0.20 versus 2007 results, as the result of the loss of the synfuel earnings and the cost to replace synfuel consumed at our Eastern power plant. In the first quarter the loss of synfuel led to $0.08 reduction in earnings compared to the last year. Our first quarter results from ongoing operations put us solidly on target to achieve our 2008 earnings forecast.

As was the case last year we expect virtually all of the margin growth in our supply business to come in the second half of the year. Supply business margin growth will be driven primarily by the replacement of expiring supply obligations with higher margin wholesale energy contracts, by higher base-load generation, and by further growth in energy marketing and trading activities. And Paul and Bill will provide more details on our financial and operational performance in the first quarter.

Before we hear from them, though I'd like to talk briefly about our 2008 and 10 forecast, as you probably saw on our release this morning, we're reaffirming our 2008 forecast of earnings from ongoing operations of $2.35 to $2.45 a share. Our reported earnings forecast is $2.43 to $2.53 per share reflecting the special items recorded through March 31st. We're also reaffirming our 2010 forecast earnings range of $4 to $4.60 a share.

Our 2010 forecast is driven primarily by higher energy margins based on higher wholesale electricity and capacity prices, higher expected generation output, and increased earnings from marketing and trading activities. We continue to execute on the tactical plans to achieve this 2010 forecast. Our top priorities include achieving higher availabilities in our generation fleet, prudent hedging, and improving the value of the energy marketing and trading operation.

Our 2010 forecast does not include the impact of any new assets that might be added to the company's portfolio and assumes that PPL Electric Utilities will be able to fully recover its cost to purchase, provider of last resort electricity as provided under Pennsylvania law.

While we certainly are focused on making the 2010 numbers, we're also aggressively pursuing additional growth opportunities as evidence by our recent acquisition of a tolling agreement for 660 megawatt plant in PJM. Our marketing organization is continuing to identify ways to enhance the value of our gen fleet, and to increase the value of trading operation. We significantly upgrade our in-house capabilities in a number of areas especially in the pursuit and execution of bilateral contracts, expanding our offering of products to the market, and in the sophistication of our trading operations in general.

We are also working on the construction and operating license for a potential new nuclear units near our Susquehanna plant in Northeast Pennsylvania, and we expect to file application with the NRC in September followed closely by an application for DOE loan guarantees, which is a critical requirement to move forward with construction. We are continuing negotiations with potential partners in the new unit, and hope to reach agreement on participation in the near future.

In addition to the possibility of building new near Susquehanna we are also exploring opportunities to jointly invest in new nuclear facilities at other sites. And we recently brought on Board the Vic Lopiano, who was an industry veteran with an extensive background in large construction projects and nuclear technology, and Vic will head our nuclear development efforts.

Nuclear expansion I believe is increasingly becoming a viable option as it becomes more difficult to build coal-fired plants. As energy prices continue to climb and as reserve margins continue to decline. This viability is predicted... is predicated I should say on federal loan guarantee is being available so we will continue to watch that closely.

We are continuing to provide inputs as the commonwealth of Pennsylvania considers a state energy policy. The special legislative session is ongoing and we continue to be involved in many constructive discussions with legislators, regulators, and administration officials and other energy companies in the state.

The legislative proposals are focused on four areas. First, demand side management and conservation. In this legislation would require energy and demand reductions while requiring smart meter technology and new billing options for customers.

A second item deals with how electric distribution companies will acquire provider of last resort electricity in the future. The main issue in this discussion is a mechanism for making long-term contracts part of that procurement mix.

Third, is bill that would provide for phase-in of rate increases as caps expired beginning in 2010. This bill would enable the type of prepayment program that PPL Electric Utilities as proposed, as well as the post-cap phase-in with recovery of carrying costs by utilities.

And the fourth area is the establishment of an energy fund, which would provide money for clean energy projects such as energy efficient buildings and a large solar program for homeowners and businesses.

It seems to be fairly widespread agreement on most of the measures being discussed, and we are supportive of the intent of all of legislations that I have just described. There is substantial debate however regarding the details of the energy funds. In addition to those bills there remains one bill that proposes to extend rate caps beyond their current end dates.

We believe that reasonable parties to the debate understand the severe consequences and substantial disruptions that could result in states distribution companies if that type of legislation were to be implemented. In the mean time PPL Electric Utilities is continuing to purchase the fault energy supplies that its customers will need for 2010. The company is now purchased half of that supply and has another RFPs scheduled for the fall.

On another front PPL Electric Utilities is continuing to push for PUC approval of its rate stabilization plan an option that would allow customers to manage price increases when the rate caps come off. Under our proposed 54 months stabilization plan an average residential customer could limit annual price increases to approximately 7% in 2008 and 09 and 6% in 2010, 11, and 12. Unfortunately the PUC recently postponed action on this plan.

Our ability to provide these levels annual increases depends on the timing of the approval of this filing. We believe that electric utility space in proposal approximately addresses the most pressing concern regarding rate cap expiration, a large one-time increase in customer bills.

So we will continue to work with all parties involved to continue to transition to a competitive market lace in Pennsylvania. We are hopeful that we can address the needs of the customers and encourage the wise use of energy going forward. We continue to believe that our focus strategy and our focus on solid execution of that strategy will continue to resolve and sustain growth for our share owners.

I look forward to questions and thanks for your attendance on the call. And now I will turn it over to Paul Farr for the financial overview. Paul?

Paul A. Farr - Executive Vice President and Chief Financial Officer

Thanks, Jim and good morning, everyone.

First quarter earnings from ongoing operations are lower than last year and the loss of synfuel earnings and reduced international earnings as a result of the sale of our Latin American portfolio in 2007.

As outlined on slide 6 lower earnings in our supply business segment were partially offset by increased earnings in our two delivery business segment. Each of our business segments is performing within our expected ranges before them. We are on target to achieve our 2008 forecast of earnings from ongoing operations.

As I've indicated on the past several calls earnings from ongoing operations include the results of the Latin American and natural gas delivery businesses that excludes special items related to their divestiture.

Turning to slide 7, I'll now discuss the supply segment earnings drivers. The unregulated supply segments are $0.19 per share in the first quarter of 2008, a $0.13 decreased compared to a year ago. This decrease was primarily due to the loss of synfuel earnings and lower wholesale energy margin. The $0.08 per share loss in synfuel benefits includes the loss of earnings from synfuel operations, as well as the cost of replacing synfuel consumed at our Eastern power plant in 2007.

Lower energy margins in the East with the net results of higher average fuel prices, lower base-load generation primarily due to the retirement of the two Martins Creek coal unit in September 2007, increased energy margins for major marketing and trading activities and higher solar prices.

Lower energy margins in the West were the net result of lower hydro generation and unrealized trading losses partially offset by higher margins and energy marketing and trading activity. The supply segment also reported higher operating expenses as a result of planned and unplanned outages at our Eastern fossil generating station and higher operating expenses in our energy marketing group.

Moving to slide 8 our Pennsylvania delivery segment earned $0.16 per share in the first quarter, a $0.01 increased over last year. This increased was driven higher electric delivery revenues as a result of the distribution rate increased 1/1/08 as well as customer load growth. The revenue benefits were partially offset by higher storm expenses and inflationary increases.

On slide 9 our international delivery segments earned $0.26 per share in the first quarter of 2008, $0.08 increased compared to year ago. The increase was the result of higher UK delivery revenues reflecting the benefit the annual inflation adjustment factors, lower pension expense, lower depreciation, lower UK income taxes, and lower financing costs. These positive factors were partially offset by the loss of the earnings from Latin American portfolio as a result of the divestitures in '07 that I already talked about.

As Jim mentioned, we're on target to achieve our 2008 ongoing earnings forecast of $2.35 to $2.45 per share. Similar to what we've experienced in 2007, we expect most of our margin growth to occur in the second half of the year. This slight change slightly from the last time we spoke with you to reflect current expectations about 2008. We also changed the synfuel loss of $0.18 per share to combine in one line item, the loss of earnings from synfuel operations, as well as the increased fuel costs for replacing synfuel consumed that our power plant in '07 that was previously reflected in margins.

Our 2008 ongoing earnings are expected to benefit from lower O&M of $0.04 per share driven by lower pension expense at WPD, which is being partially offset by higher expenses in the Pennsylvania delivery segment and higher energy margins of $0.10 per share due to higher margin wholesale energy contracts, higher base-load generation and expanded marketing and trading activities partially offset by higher coal expense as a result of higher coal prices and higher coal transportation costs.

Also contributing to 2008 ongoing earnings, our higher delivery margins of $0.06 per share, which include $0.04 of higher delivery margins in the UK and $0.02 per share as a result of PPL Electric's new distribution rates that were effective January 1 of this year. The impact of PPL Electric $55 million approved revenue increase is netted down by an assumption of return to normal weather this year.

These positive earnings drivers will be more than offset by the $0.18 per share loss of synfuel benefits, a decrease of $0.08 per share as a result of sales of Latin American assets, $0.08 per share in certain tax benefits that were recorded in '07 that will not repeat at similar level or are at least that are not expected to, and we also project higher depreciation expense primarily in the supply business segment due the scrubbers coming on... some of the scrubbers coming online in '08 and other additional plant and service. We expect 55% of our 2008 earnings from ongoing operation to come from the supply segment, 28% from international delivery and 17% from Pennsylvania delivery.

On slide 11 we've highlighted the primary earnings drivers between the $2.40 midpoint of our 2008 forecast and the $4.30 per share midpoint of our 2010 forecast. The earnings drivers in this forecast haven't changed since our year-end call. The increase from 2008 to 2010 earnings is driven almost exclusively by our unregulated supply segment which is expected to provide approximately 77% of our 2010 earnings. We expect the contribution of our international in Pennsylvania delivery segment to be 14% and 9% respectively. Clearly, the most significant driver of the forecast is the increase in energy margins and we've continued to see strengthening in the prices since we've set the 2010 forecast last fall.

On slide 12, you'll notice an improvement in our projected 2008 free cash flow before dividend, reflecting the expected proceeds from the pending sale of our gas and propane distribution businesses. Consistent with our prior assumptions, the CapEx spending includes funding for the ongoing preparation of the COLA for a possible third nuclear unit near Susquehanna, but does not include any funding of long lead-time materials that maybe committed to and partially funded before year-end 2008.

While our business plan continues to incorporate planned common stock buybacks that continue to be a placeholder for other growth opportunities that have the capability to add even greater shareholder value. Recognizing that a stable growing dividend is valuable to our shareowners and also an important component of total shareholder returns, we increased our common stock dividend by 10% effective April 1st. The current annualized dividend rate of $1.34 per share brings PPL's payout ratio to 56% based on the $2.40 per share midpoint of our current 2008 earnings forecast.

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

William H. Spence - Executive Vice President and Chief Operating Officer

Thanks, Paul, and good morning, everyone.

Let me begin with our Pennsylvania Electric Utility business. As you know in late march PPL Electric Utilities conclude the third of six solicitations for 2010 generation polar supply for the residential small C&I customers. PPL Electric Utilities now has one half of its expected 2010 polar supply needs under contracts with a number of suppliers. On March 27 the Pennsylvania PUC approves this third solicitation. The prices in that auction were about $3 per megawatt higher than the previous RFP.

A summary of prices achieved in the first three solicitations is available on the appendix to today's presentation. Of course final 2010 prices will not be known until all six supply purchases have been completed. The next solicitation will be conducted later this year with bids to September 29th, and PUC approvals are expected on October the 2nd.

Turning to slide 15, I am very pleased to report that the Unit 2 scrubbers on Montour facilities shown in the slide when into service in mid March and the Unit 1 scrubber is being tied in as we speak. Our team is really doing an excellent job in bringing the scrubbers into service on time and on budget. This project illustrates PPL's commitment to the environment, as well as our capability to manage large scale construction efforts.

Construction at Brunner Island is also progressing very well, and we are applying lessons learned for the Montour project that should provide some cost benefits as we drive the competition of that site.

On slide 16 our generation expansion efforts took a very important step forward in April when we agree to acquire a long term tolling agreement for the capacity, energy, and ancillary services from the 654 megawatt Ironwood combined-cycle facility in PGM. This totaling arrangement runs through December 2021 providing us with quick access to additional megawatts in the PGM region and the ability to contribute to our future margin growth. We are also continuing to execute on our plants to increase generation capacity in Pennsylvania and Montana by 331 megawatts through upgrades and our existing generating facilities.

We completed phase I of our Susquehanna nuclear uprate earlier this month. During phase I we expect to see an additional capacity of about 7% at Unit 1 this year with the remaining 7% increase occurring in 2010 following the spring refueling outage. Unit 2 is uprate is schedule for the 2009 refueling outage. Other capacity expansions include new hydro facilities in Pennsylvania at our Holtwood site and in Montana at the Rainbow plant. Almost all this capacity addition to our non-carbon emitting and will continue to add to our strong position in the event carbon legislation is passed.

As we have communicated to you in the past about 40% of our current output is non-carbon emitting and applying completion of all projects in the pipeline that derives to more than 50%. We are also continuing with our plans to invest 100 million or more in renewal energy projects over the next five years. And in fact we may end up reaching that commitment level to projects before the end of this year. To-date we developed renewable energy projects that total more than 30 megawatts of generation.

Slide 17 provides an overview of key milestones associated with our new nuclear development opportunity as Jim mentioned. By the end of September we plan on submitting the COLA application to mine operating license and construction agreement. Application for the third unit near our Susquehanna nuclear site. We also plan to submit our DOE loan application later this year and could make commitments on long lead-time material such as large forging to achieve a yet to be finalized commercial operation target date.

As we stated before DOE loan guarantees are absolutely critical to the success of getting new nuclear generation bill especially, merchant generation in the nuclear space. It's clear to PPL that the current congressional preparation level of 18.5 billion must be expanded in order to build sufficient nuclear generation that we believe the country desperately needs. Early site work could commence as early as next year, but the NRC approval to COLA likely would not be received until 2011. The timing of commercial operations will be dependent upon many factors, but certainly I would not expect operations to begin in early than 2016.

As far as in RPM update on PJM capacity pricing the FERC made a couple of rulings during April 2008 they could have potential significant impacts from the upcoming 2011, 2012 RPM auction. First FERC denied PJM's request to increased the CONE that the cost of new entry elements of the PJM capacity pricing formula beginning with the 2011, 12 auction. FERC's rationale for the denied was administrative indicating that PJM missed the filing date to make adjustments to the pricing formula.

PJM can of course re-file the request for CONE pricing increase for the 2012, 13 auction. In the separate action and in connection with Duquesne decision to leave PJM. FERC ruled that PJM may allow capacity resources in the Duquesne zone they bid into the 2011, 12 RPM auction. In response to this ruling PJM as indicated that it will grant transmission rates to generators in that Duquesne zone. These actions in our view will not affect our margins for 2010, but we do expect that it will reduce capacity prices for the 2011, 12 RPM auction is going to take place later this month.

On the flip side to the extent that some supply projects in the PJM queue or canceled or delay due to these reduced capacity prices, that could actually improved heat rates. Of course it's difficult to predict the net out come in these changes, but we are of course going to be monitoring them closely.

Turning to slide 19, I am sure you're all well aware of the recent worldwide supply and demand events that have driven the price of coal to new heights. I'll first address our hedge position in the physical supply picture and then I would like to give you an update on how this run up and prices is expected to impact PPL and how we plan on mitigating some of the cost pressure.

In our Eastern fleet we continue approximately 9 million tons coal annually and in the West about 3 million tons annually. Our coal supply in the West is 100% hedge through the 2008 to 2010 period and we do not expect any negative coal price or supply issues there. In fact based on the recent agreement with the miner... of owner at Colstrip for Units 1 and 2, now all four Colstrip units have committed supply through 2019.

In the East we're hedged 89% for the 2008 to 10 period. Ultimately, our total coal portfolio will come from a mix of purchases under fixed price contracts, contracts that have price collars and mine-mouth mill cost based agreements with the remainder from spot market purchases. Thus far we've not experienced any supply defaults and we are working closely with our coal suppliers and transport providers to ensure deliveries occur as they're scheduled.

Our diversified coal sourcing and our fleet of over 1,600 railcars have been very helpful in maintaining our deliveries in the current environment. We're also evaluating several options to help mitigate any future price increases. For example, we're taking steps necessary to allow us to planned blend PRB coal at our Eastern fleet. This is an option we've looked at in the past, and we believe we can actually have some of this capability in place by 2009.

On top of evaluating the PRB option, next month we're planning some test burns of Illinois basin coal in our Eastern fleet. The completion of the scrubbers will allow us to further diversify our coal supply sources. The Illinois basin is a growing source of coal that we'll be able to utilize at our eastern units if the scrubbers come online. This region has been expanding its coal production capability and has generally been a lower cost provider.

Turning to slide 20 I want to examining the impact of rising coal prices on PPL earnings. I believe that it's important to look at this in three separate time periods; short, medium and longer term. The first is the 2008 and 2009 period while rate caps are still in place. Looking at the 2008 hedge positions you can see why we are comfortable and our ability to deliver on the forecasted 2008 ongoing earnings range we reaffirm today.

Uranium is 100% hedged and only 1% of our coal is unhedge for 2008. Our coal and power hedges are also above at about 99% at this time, so while we experience increases in coal expense due to loss of synfuel supply higher price contracts and increases in transport cost the pressure due to spot coal prices... price increases is greatly reduced.

Looking at 2009 while we are still highly hedged with 93%. This is also a period going which we remain under rate caps. If coal prices remain at the level they are now we would expect to see our average delivered coal price for 2009 increased by about 10% to 15% over the average delivered price for 2008. Previously, we were expecting about 5% increase. However, as I mentioned we are working on PRB and Illinois basin coals to help offset some of the potential increase. This 10% to 15% increase takes into account the higher prices for the coal currently not under contract and the portion of the contracted coal subject to price collars, as well as increases in rail transportation costs. We expect to provide you with 2009 earnings forecast later this year.

The next period is 2010 the year in which our rate caps come off. Our hedging strategy for that year is focused on achieving the earnings forecast that Paul talked about earlier. For 2010 we have a significant portion of our fuel supply hedged and plenty of generation linked more than offset the impact of higher coal prices.

Finally, when you look at the period beyond 2010 particularly 2011 and 12 where we have significantly lower count hedges executed, we see actually positive incremental value based on current fuel and power prices. We see coal prices levellizing in the outer years and again I would know that the rise in power price increases our energy margins in those years exceeding the impact coal prices could have on those same margins. So in summary while we have some 2009 pressures we really in good shape overall and our highly hedged positions in the short term have provided some real share meaningful risk protection.

Turning to slide 21 you will see our open EBITDA position in 2010 has been updated to reflect forward prices as the end of March, which are available on page A1 of today's presentation. Based on our recent price moments the unhedged or implied gross margin for the supply segment in 2010 is expected to be about $3.7 billion with the associated O&M cost of about $814 million. This brings the value of our open EBITDA up to $2.9 billion, decrease of only $14 million from our update based on forward prices as of the end of last year. The small decline is the net effect or the effect of higher spot prices offset by increases in power prices, and it proven in the value of our peaking units.

We also notice that the mark-to-market of our hedges has improved since our last day... update this reflects the favorable value of our coal hedges including new contract this price is lower than current spot offset by the negative value for electric hedges caused by the increase in power prices. The bottom line message from this slide is that in 2010 we expect to be able to withstand the impact of the recent increases in fuel prices.

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

James H. Miller - Chairman, President and Chief Executive Officer

Okay. Thanks Bill, and operator we are ready for questions.

Question And Answer

Operator

[Operator Instructions]. Your next question comes from line of John Kiani [Deutsche Bank Securities]. Your line is open.

John Kiani - Deutsche Bank Securities

For the $2.9 billion of open EBITDA on slide 21, I am trying to understand what price you used when you marked to Eastern coal position I did some basic maths, and I got to an Eastern coal price equivalent of about $71 a ton for your PJM assets, is that close or in the ballpark of what you used for that 2010 open EBITDA figure?

William H. Spence - Executive Vice President and Chief Operating Officer

John to be honest I haven't roughs that calculation and I don't have those numbers right here in front of me. I think generally speaking prices on average was 2010 previously we were expecting about 4% to 5% increase, and as I indicated if you look at current forward prices for 2009 and 10 we would expect that would be more or like 10% to 15% for those of course positions they are currently unhedged.

John Kiani - Deutsche Bank Securities

Okay. And then maybe the another way to come out at it for the 2010 open EBITDA it sounds like you remarked your 100% of your Eastern coal position and then treated the in the money value accounted for the in the money value of the 70% to 77% of 2010 that's hedged in the $240 million below market hedges at the bottom?

William H. Spence - Executive Vice President and Chief Operating Officer

You're right. Yes, john you are right, that's correct.

John Kiani - Deutsche Bank Securities

You've marked 100% at the East, but didn't mark the West obviously because Colstrip has these very, very long term mine-mouth type contracts.

William H. Spence - Executive Vice President and Chief Operating Officer

Correct.

James H. Miller - Chairman, President and Chief Executive Officer

Correct.

John Kiani - Deutsche Bank Securities

Okay, that's helpful. And then from the perspective of your 2009 and 2010 coal hedges that you've discussed on the prior slide, what portion or volumetric or cost based and not fixed price?

James H. Miller - Chairman, President and Chief Executive Officer

For 9 and 10?

John Kiani - Deutsche Bank Securities

Yeah.

James H. Miller - Chairman, President and Chief Executive Officer

9 and 10 are all fixed price.

John Kiani - Deutsche Bank Securities

9 and 10 are all fixed price?

James H. Miller - Chairman, President and Chief Executive Officer

Yeah, the contracts that we've got that flip into the collar type arrangements or have some variability around them are in outer years.

John Kiani - Deutsche Bank Securities

Okay, great. And then one last question, can you talk a little bit about the... how we should think about the value associated with the PPA you signed off the Longview coal plant, am I correct in assuming that in any earnings from that contract are accrual based and in some of the out years, when will you see benefit from that in earnings?

James H. Miller - Chairman, President and Chief Executive Officer

Starting in 2012.

John Kiani - Deutsche Bank Securities

In 2012, okay and how far out does that go roughly?

James H. Miller - Chairman, President and Chief Executive Officer

2017.

John Kiani - Deutsche Bank Securities

2017?

James H. Miller - Chairman, President and Chief Executive Officer

Five year contract.

John Kiani - Deutsche Bank Securities

Okay, and can you say if that's been hedged or not?

James H. Miller - Chairman, President and Chief Executive Officer

It's in the portfolio with the rest of the generation resource. It's a West hub delivery...

James H. Miller - Chairman, President and Chief Executive Officer

Under the contract, so we've got again much, much lower amount of 2012 hedge then was reflected in 10.

John Kiani - Deutsche Bank Securities

Got you, so you just think about it from a portfolio perspective and the accrual earnings from that contract we'll see starting in 2012?

James H. Miller - Chairman, President and Chief Executive Officer

That's correct.

John Kiani - Deutsche Bank Securities

Okay, great. Thanks, guys. That's very helpful.

James H. Miller - Chairman, President and Chief Executive Officer

Sure. Thanks, John.

Operator

Your next question comes from Paul Ridzon from KeyBanc.

Paul Ridzon - KeyBanc Capital Markets

In the second quarter what's the drop off synfuel going to be?

William H. Spence - Executive Vice President and Chief Operating Officer

One second. It's going to be much lower than it was in the first quarter because of the mark-to-market on the oil collars that benefited the first quarter.

Paul Ridzon - KeyBanc Capital Markets

And then what was... can you delve a little more deeply into what happen with UK taxes and how much of an impact that was?

William H. Spence - Executive Vice President and Chief Operating Officer

The synfuel is going to be about $0.03 or $0.04 a share for next quarter, on the UK tax side that was a positive outcome of an item that was under negotiation within the revenue that got resolved within the quarter and was $0.03.

Paul Ridzon - KeyBanc Capital Markets

Okay. Thank you very much.

Operator

Our next question comes from Tom O'Neal with Highbridge. Your line is open.

Tom O'Neal - Highbridge

Good morning. I was just wondering if you give a little more detail on just in terms of volumes where you might be able to burn from the PRB, or the Illinois basin?

William H. Spence - Executive Vice President and Chief Operating Officer

Sure on the PRB coal let me start with that first without major modifications to the Eastern units, which are mostly in a coal handling facilities. We could probably burn safely up to about 10% blend with modifications which would take us probably into 2010 to complete those. You are talking about maybe up to 30. On the Illinois basin coal as I indicated we are doing test burns so until we complete those it's difficult to say, but clearly with the scrubbers in place we can burn that higher sulphur coal coming from the Illinois basin of course in both the Illinois basin, as well as the western PRB coal they are typically much slower BTU content so you have to net effect the actual output and heat content of the coals when looking at the economics which we do, but we still think there are very positive economics to looking at this particularly compared to the current spot prices.

Tom O'Neal - Highbridge

And then to get to the 30%, when... what sort of CapEx are you talking about?

William H. Spence - Executive Vice President and Chief Operating Officer

We have not yet put the exact numbers together, so I will have to... I could probably update you in the second quarter call.

Tom O'Neal - Highbridge

Okay. Thank you.

William H. Spence - Executive Vice President and Chief Operating Officer

Sure.

Operator

At this time there are no more questions in queue.

James H. Miller - Chairman, President and Chief Executive Officer

Okay, well thank you all for participating in the call, and we will see you in next quarter. Thank you.

Operator

This concludes today's conference. You may disconnect.

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