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DPL Inc. (NYSE:DPL)

Q2 FY08 Earnings Call

July 24, 2008, 08:30 AM ET

Executives

John J. Gillen - Sr. VP, CFO and Treasurer

Paul M. Barbas - President and CE

Analysts

Leon Duval - Catapult

Neil Stein - Levin Capital

Paul Ridzon - KeyBanc Capital Markets

Eric Beaumont - Copia Capital

Paul Patterson - Glenrock Associates

Jeffrey R. Coviello - Duquesne Capital

Kevin Fowlen - Belnum Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 DPL Inc. earnings conference call. My name is Lacey and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. [Operator Instructions] as a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. John Gillen, Senior Vice President and Chief Financial Officer. Please proceed.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Good morning, and welcome to DPL's second quarter earnings conference call. I am John Gillen, Senior Vice President and Chief Financial Officer. Before we being today, I would like to remind everyone that all references to earnings per share are diluted, unless otherwise noted. And that this call may contain certain forward-looking statements regarding plans and expectations for the future. Investors are cautioned that actual outcomes and results may very materially from those projected due to various factors beyond DPL's control. Such matters are described in our 2007 Annual Report on Form 10-K and Form 10-Q for the second quarter of 2008.

In addition, today's discussion will include references to non-GAAP financial measures as defined under SEC Regulation G. As a part of this presentation, we will provide a reconciliation of non-GAAP to GAAP results. With me today is Paul Barbas, DPL President and Chief Executive Officer. Paul will provide an overview of DPL's performance during the quarter and update -- and an update on various important operating matters. I'll review the quarterly financial results and then open it up for questions.

Now I'll turn the presentation over to Paul.

Paul M. Barbas - President and Chief Executive Officer

Good morning, and thank you for joining us today. As we close the books on the first half of 200, I am very pleased with the company's performance. Financially, we are on plan, operationally, we are having a very solid year, and we have reached a significant milestone with the completion of the DP&L-managed scrubber construction.

We believe our hard work over the past several years to refocus on the electric business, share up our balance sheet, reduce our risk profile and put in place Ohio's only five year rate stabilization plan is serving us well, as we pay for slowing economy and changing regulatory environment.

As you can see from our release second quarter earnings from continuing operations were $0.41 per share, compared to $0.45 per share for the same period in 2007. On a non-GAAP basis, quarterly earnings were $0.34 per share compared to $0.18 per share in 2007.

For the quarter, top line revenues continued to steadily grow despite the mild weather driven by the second phase of our environmental investment rider. While fuel costs were higher, this was due primarily to a 15% increase in generation output. We have been successful in our ongoing efforts to control rising fuel costs during this volatile market, thanks in part to the fuel flexibility provided by our scrubbers and our ability to hedge coal costs. Likewise, stronger power plant performance led to decreased purchase power volume.

The net impact of increased revenues and higher power plant output was a positive $0.15 per share gain in gross margin for the quarter. In addition, we are doing a good job of controlling costs, while up quarter-over-quarter due to certain one time items in 2007, operations and maintenance expenses were essentially flat, year-to-date. As a result, we are on plan it to meet our 2008 earnings guidance of $2 to $2.20 per share.

Moving to operational items, the DP&L-managed scrubber construction program is now complete. This is a big win for our company, our employees, our customers and the people in the Ohio region. I would like to congratulate our team on a job well done.

The five year project represents the single largest environmental investment in this company's history. In total, our team managed the construction of five scrubbers, one at Killen and four at Stuart, completing the job on schedule while breaking new ground for scrubber design.

As I've mentioned previously, DP&L was the first to install the Chiyoda designed scrubbers on a commercial basis in North America. Our early adoption of this technology has resulted in capital costs that are well below industry averages. In addition, the simple design of the system results in lower scrubber operating and maintenance costs. We have been operating the Killen scrubber for approximately one year now and are very pleased with its performance.

To date, the unit is removing more than 95% of the sulfur dioxide from emissions and is having a positive impact on particulate reductions. The major fuel burning tests for Killen were completed during the first quarter of the year. Although we will continue to fine tune coal blends as we install new low-NOx burners this fall. At Killen, we have successfully proven our ability to use higher sulfur coals and are currently burning a blend of two-thirds Illinois basin and one-third Central APP.

Perhaps as important, our increase flexibility with regard to the types of coal we can burn puts us in a stronger position to respond to increasing volatile coal markets. At Stuart, the fuel funding is in the early stages and will continue through the year. We have historically burned an average of 1.6 pounds sulfur coal at Stuart and post-scrubber were projecting Stuart sulfur content to be in the 2 to 4 pound range.

Today, we have successfully tested a 50-50 blend of Illinois basin and central APP coals and one unit at Stuart. And our blend across all four units is approximately 15% Illinois basin and 85% Central APP. By the end of 2008, our plan is to get to a 25% to 35% blend of Illinois basin coal.

As a final note related to the scrubbers and emissions, I would like to briefly address the recent decision regarding the clean air interstate rule. We will continue to evaluate the court ruling with effect on SO2 and annual NOx markets and its potential impact on our 2009 earnings forecast. John will elaborate on the specifics of that in his comments.

Clearly the ruling has had a significant impact on the emissions market. Regardless though, it is important to keep in mind that emission limitation still exists and we feel good about having our scrubbers up and running. Their performance to date has exceeded our initial expectations, they provide us with the ability to burn higher sulfur coal and they give us an added level of fuel flexibility which has already proven to be valuable and of course, they are very good for the environment.

In terms of ongoing operations, we had an excellent quarter at our generating plants. Output was up 17% at date in operated units and up 18% at partner operated units. On a total fleet basis which includes our Mid-Merit Hutchings plant and gas peakers, output increased nearly 15%. Likewise, capacity factors at our base load units were up at both DP&L and top partner operated plants for the quarter and on a year-to-date basis.

This was due to a combination of fewer planned and unplanned outages as our equivalent forced outage rate for base load coal generation declined to 8% for the quarter. To update you on our fuel position, we are now 100% hedged on our committed burn basis to the end of 2010, which takes us through our rate stabilization plan. The committed burn is the amount of coal required to generate electricity for a full requirement or retail load in any forward power sales.

Our hedge numbers can change as we execute additional purchase contracts or increase our output in response to attractive energy prices. If there are favorable market opportunities for spot energy sales we will make spot purchases of coal. Spot energy sales typically consume 10% to 15% of the company's total coal consumption.

Given our current hedge position in the current market price for coal, we estimate our system average coal price on a per ton basis to be approximately $41.25 in 2008 and $49.90 in 2009. With regard to the new Ohio energy legislation, DPL and the other Ohio utilities are working through the beginning of the regulatory process.

Earlier this month the public utilities commission of Ohio published draft rules on some of the issues and finally requirements of the new law including electric security plans, market rate options and corporate separation plans. Additional rules regarding alternative energy portfolio standards and energy efficiency programs are expected to be released over the next month.

But we have not eliminated any options and all likelihood we will be filing an electric security plan sometime this fall that will incorporate the terms and conditions of our current rate stabilization plan. Incremental recovery for items such as renewables, energy efficiency initiatives and infrastructure investments is currently under review.

DP&L is the only utility in Ohio with a rate stabilization plan in place through 2010. We believe this unique position provides us with the advantages of time and flexibility as regulatory issues are clarified. And lastly with our $600 million scrubber program winding down, we project positive free cash flow beginning this year and continuing through 2010. This combined with our positive ongoing operational results led Moody's to recently revise its outlook for DPL and DP&L from stable to positive.

We have not made a final determination regarding the use of free cash flow. We must first fully evaluate the implications of Ohio's new energy legislation and the associated regulatory requirements currently under development. Alternatives being considered include investment and core business, increased cash dividends and continuation of our balance sheet restructuring.

Now, I will turn it over to John for a review of the quarter's financial results.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Paul. As mentioned, we reported second quarter earnings from continuing operations of $0.41 per share compared to $0.45 per share for the same period in 2007. For the six months ended June 30, 2008, earnings from continuing operations were $1.07 per share compared to $0.88 per share in 2007.

On a non-GAAP basis quarterly earnings were $0.34 in 2008 versus $0.18 in 2007. The one time items in 2007 included a litigation settlement of $0.16 insurance recovery related to litigation. Insurance recovery related to litigation of $0.08 and gain on the sale of corporate aircraft of $0.03. For the second quarter of 2008 we recorded a $0.07 gain on the settlement of the Ohio Department of Taxation.

The settlement agreement covered several tax issues, some dating back as far as 1998. In the end we believe the agreement was a fair and reasonable resolution and we are pleased to put it behind us. Story behind the higher non-GAAP earnings was the increase in gross margin of $27.9 million or $0.15 per share. This is driven by higher revenue and the impact of a nearly 15% increase in generation output.

Specifically revenues increased $35.7 million due largely to the second phase of our Environmental Investment Rider partially offset by 5% decrease in sales volume. In addition, PJM capacity revenue increased $16.4 million although these revenues were mainly offset by $15.1 million increase in PJM capacity expenses accounted for and purchase power.

Fuel cost increase $4.9 million due to higher generation output. And purchase power increased $2.9 million due to a $25.3 million increase in average market rates and a $15.1 million increase in capacity expenses partially offset by $37 million decrease in purchase power volume. Again, please note that the $15.1 million increase in capacity expense is offset by $16.4 million increase in capacity revenues.

Other incomes statement items of note include lower legal costs of $10.1 million or $0.05 per share, higher interest expenses due to the reduction in capitalized interest of $5.6 million or $0.03 per share and higher general taxes related to higher property balances and capital improvements of $5 million or $0.03 per share.

Turning to liquidity and cash flow, DPL's cash and cash equivalents totaled $78.7 million at June 30, 2008 compared to $134.9 million at the December 31, 2007, a decrease of $56.2 million. The decrease is primarily attributable to cash used to retire $100 million in long-term debt, $118.4 million in capital expenditures and $59.9 million in dividends paid on common stock. This is partially offset by cash provided by operating activities of $200.4 million and $20.5 million of restricted funds drawn to fund the pollution control capital expenditures.

Construction additions were $106.5 million and $193.5 million during the six month periods ended June 30, 2008 and 2007 respectively, and are expected to approximate $225 million in 2008. Construction additions in 2008 are expected to be financed by combination of cash on hand, short-term financing, tax exempt debt and cash flows from operations. From 2008 through 2010, DPL's projecting to spend an estimated $510 million on capital projects as previously forecasted.

We are reaffirming 2008 earnings guidance of $2 to $2.20 per share based on estimated $118 million, up 118 million shares outstanding. Additionally we were reaffirming 2009 earnings guidance of $2.10 to $2.40 per share based on an estimated 120 million shares outstanding. However, 2009 earnings may be impacted by the recent decision made by the U.S. Court of Appeals which invalidated the clean air interstate rule. The court decision has provided and has resulted in a decline in annual NOx and SO2 market prices and activity and may have an impact on DPL's forecast of emission allowance sales for 2009.

2009 earnings guidance assumed, assumes $20 million or $0.11 per share in emissions allowance sales. DPL will continue to evaluate the court ruling, its effect on SO2 and NOx markets and its potential impact on 2009 earnings forecast.

With that operator, we will open up the conference call to questions.

QUESTION AND ANSWER

Operator

[Operator Instructions]. And our first question will come from the line of Leon Duval with catapult. Please proceed.

Leon Duval - Catapult

Hi good morning.

Paul M. Barbas - President and Chief Executive Officer

Good morning

Leon Duval - Catapult

I'm just looking at the slide where you guys give your fuel costs and hedging. And you talk about the 2008 average cost being $41.25 versus last quarter where you had same slide and you were also 100% hedged in '08. The price was $47.50. Could you walk us through what changed there?

Paul M. Barbas - President and Chief Executive Officer

Leon, what did we have there, I think various comparability going over the last two quarter is optimizing our coal position with the performance of the Scrubber at both Killen and Stuart. We were able to burn some of the higher sulfur, lower cost coals and we've been able to essentially remarket some of the higher priced coals that we've (inaudible) previously, so we anticipate that activity going on for not just remainder of 2008, but through the forecast period here. And I think that's really been the beauty of getting the Scrubbers on-line early. It does allow us to optimize our positions and that's something we are doing very aggressively.

Leon Duval - Catapult

So, if we look at the 2009 numbers, those have the potential of still coming down as well?

Paul M. Barbas - President and Chief Executive Officer

We will continue, like I said, to optimize. We would love to be successful in '09 as we have been in '08 and we will continue to focus upon that, but we are aggressively optimizing to the best of our ability.

Leon Duval - Catapult

Fair enough. Okay, thank you.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Leon, the other thing I might add to that is just in case people are doing it, the straight math calculation of that difference and then the amount of tons we burn, part of that as Paul indicated is optimizing both the coals we can burn and the decision to whether we dispatch our plants or purchase power. So part of the reason for purchase power increase in cost or that it didn't go down as much as we hoped is that we were buying power not running our plants but selling excess or high cost coal and getting a net benefit. But it's not nearly to the extent of getting the ability to keep the full $6 a ton.

Leon Duval - Catapult

I see. Okay, that's helpful. Thank you.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

You are welcome.

Operator

And our next question will come from the line of Andrew Levy with Braden Corp. Please proceed. And Mr. Levy, please check the mute feature of your phone. Your line is now open. Our next question will come from the line of Neil Stein with Levin Capital. Please proceed.

Neil Stein - Levin Capital

Good morning.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Good morning, Neil.

Neil Stein - Levin Capital

My question just expanding on what Leon was asking about. I realize you are not getting the full benefit of the $6 per ton lower coal cost. But your guidance isn't going up at all. So I'm wondering what other offsets might there be?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Again, Neil that's why interject [ph] that at the end because it's basically an economic dispatch decision. And if you again do the straight math, it looks like if you just took $6 change times tons you have burnt, 7 million tons you would think that is $42 million. It's not nearly that. You make a decision, we're making decisions whether to dispatch our plants or purchase power and we've done a substantial amount of additional purchase power and not dispatching our plants because we were able to sell the coal. Just, again an economic analysis we did and it would not -- we are getting benefits but not enough to move us to a point where we would increase our earnings guidance.

Neil Stein - Levin Capital

Okay. Paul had also mentioned that your part of this was you are buying cheaper, higher sulfur coal and selling the more expensive lower sulfur coal. And maybe I didn't hear properly?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Yes. That's correct.

Neil Stein - Levin Capital

Is that part of it?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

The original $47.50 was provided back probably close to a year ago when we weren't really sure as you know what the boilers could handle. So as we are getting more confidence around that with Killen, we are finding that we can buy higher sulfur coals now, sell contracts we have for lower sulfur coals. Make some margin on that. But it also affects how we dispatch the plants.

Neil Stein - Levin Capital

Okay. And then for 2010 it looks like you are fully contracted now which is great. Could you give us a feel for kind of directionally where your average price is going?

Paul M. Barbas - President and Chief Executive Officer

We -- Neil this is Paul. We've got a lot of work to do around 2010 in total. So we're we will be talking about that later this year or early next year. But we are doing the same thing. We are working our way through our existing contracts. We have shored up most of that during the second quarter and going through the optimization process. So it's probably a little early for us to talk about that but we will talk about it when we issue our 2010 guidance.

Neil Stein - Levin Capital

Okay and then -- I guess within your 2009 guidance, I guess that still assumes that you are at around $49.90 per ton on coal. Should we assume there is potential for benefit there from any time of switching? Or should it be -- will it be like '08 where may be you get a little bit around the edges but does not have a meaningful benefit.

Paul M. Barbas - President and Chief Executive Officer

We will continue to I think do exactly what John was talking about in terms of making those economic decisions. We think in total those decisions have resulted in what approximately a nickel. So again, not big enough to move the range and, but we are going to continue to fine-tune that process as we go.

Neil Stein - Levin Capital

Okay. Thanks very much.

Paul M. Barbas - President and Chief Executive Officer

Okay, you're welcome.

Operator

And our next question will come from the line of Paul Ridzon with KeyBanc. Please proceed.

Paul Ridzon - KeyBanc Capital Markets

That $0.05 benefit you just discussed, is that in '08? I take it?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Yes.

Paul Ridzon - KeyBanc Capital Markets

And then I know it's extremely early and is a tremendous amount of uncertainty, but could you give your view on kind of the next steps with what's going to happen to care and just maybe your view of how and when we get some resolution here?

Paul M. Barbas - President and Chief Executive Officer

Sorry for reading the same thing you have Paul. It doesn't appear it will be any congressional activity this year. So that is if a problem wants of be an issue that will be discussed early next year either in congress or with a new administration, whoever that might be. So it's pretty foggy I would say at this point in time.

Paul Ridzon - KeyBanc Capital Markets

And then any I guess the question is already asked, no discussion on your average '010 coal hedge until you get the p[portfolio cleaned up?

Paul M. Barbas - President and Chief Executive Officer

Yeah we got to re-work the portfolio and that would be obviously a big component of our 2010 guidance.

Paul Ridzon - KeyBanc Capital Markets

Thank you very much.

Paul M. Barbas - President and Chief Executive Officer

Okay.

Operator

And our next question will come from the line of Eric Beaumont with Copia capital. Please proceed.

Eric Beaumont - Copia Capital

Good morning guys. A little different tact here. Obviously usage was down, we know what weather was. Can you explain what portion was probably weather related and there is pretty a substantial drop in industrial? Did you have any large industrial customers out there got their plant systems being shut down and what's driving that?

Paul M. Barbas - President and Chief Executive Officer

Yes. We -- again -- and in all these things, it's pretty much approximate, but weather probably had an impact of summer -- and again weather was -- its weather compared to last year which was above normal. So weather was on retail side of our business was somewhere in the neighborhood of 8 to $10 million. And then volume was also down. We did lose a number of large industrial customers. So that will probably make up most of the difference. Its really just two components, it's going to be changing weather or to change in total sales.

Eric Beaumont - Copia Capital

And have you done, just as far as average use per customer was down slightly? Is that more -- again, expectation that's weather or are we seeing conservation?

Paul M. Barbas - President and Chief Executive Officer

I really can't speak to the conservation aspect of it. I would say that industrial is down mainly because of what we have heard including in our area with plants, GM plant being closed. There is some lower residential and commercial usage below the level, but that's due to economy or conservation, I just don't know.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

The economic news in the area, the GM plant, they have talked about phasing out through 2010, and -- but they have already begun to try to slow down some of the production there. So we are seeing some of the impact and I believe there is about 130 suppliers in the region. So certainly it's having an impact on them as well.

Eric Beaumont - Copia Capital

Okay. Appreciate the call, guys. Thank you.

Operator

And our next question will come from the line of Paul Patterson with Glenrock Associates. Please proceed.

Paul Patterson - Glenrock Associates

Good morning.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Good morning, Paul. Hi, Paul

Paul Patterson - Glenrock Associates

Just the follow-ups on the care stuff. You guys are planning $20 million in emission sales in your guidance for 2009. And is that just assuming the -- what the prices were earlier? In other would the decrease that we have seen, is that the sensitivity that we are seeing because of the care decision? Or that's just what you had totally booked for so therefore be some portion less if so -- if the SO2 or NOx market were to stay the same?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Let me try to answer it this way. If I don't get it correctly, you can ask the question again. But when we came out with guidance for 2008 and 2009, we indicated that we had about $6 million of allowance sales between SO2 and annual NOx allowances that we knew we had that were excess. And then we also indicated we had -- we were anticipating about 20 million of sales in 2009.

We were looking at -- the bottom line was we were purely looking at what we expect the market prices to be, figuring that if we got a good price for these allowances at the right time we would sell them. If the prices got better we would sell more which is what we did in 2008. As the prices did not look like they were the right price then we would sell less.

So for 2008, we planned 6 million but we ended up having about 30 million of sales in 2008. For 2009, we planned 20 million of both SO2 and annual NOx allowances to be sold. The SO2 market has dropped precipitously to a point where we are not anticipating right now at these prices that we would sell much or any. And the annual NOx market is, there is no -- there are no trades taking place at all.

So there is not a price. So therefore we are waiting to see what happens with the care rules, whether the market rebounds in some fashion. And we will keep that -- keep an eye on it as we go forward.

Paul Patterson - Glenrock Associates

Right. But if it doesn't rebound, I guess, worst case scenario we are talking about the absence of the 20 million that you guys had in your guidance previously. Is that about right?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

For us, yes, that will be the worst case relative to the guidance we gave. Yes.

Paul Patterson - Glenrock Associates

Okay. And then, just sort of follow-up on the weather situation, what was it versus normal again?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Versus normal, weather on a normalized basis was about right. Weather, relative to last year, I believe was down about 5%.

Paul Patterson - Glenrock Associates

Okay.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Yes. It was down about 5%. Weather last year was better than normal.

Paul Patterson - Glenrock Associates

Okay. And the economic conditions had to do with one time -- with the GM plant going down? Is that right? Is that correct on the industrial closing?

Paul M. Barbas - President and Chief Executive Officer

No, and it hasn't gone completely down. But they are cutting back in terms of production. And in our region, the entire state of Ohio is fairly heavily dependent on manufacturing.

So I think we are seeing the impact of just the general economic slowdown. The -- but not to paint a completely dark picture of that, one of the shining stars in the local economy where we are starting to see activity is Wright-Patt Air Force Base and they have actually continued to add missions there from the at Brack process, the base realignment process. So we are seeing some pick up related to the activity there. So -- but in general, I would say we've had a slower economy and will probably see the same impact as other parts of the country here throughout the remainder of '08 and into '09.

Paul Patterson - Glenrock Associates

Okay, great. And then, finally SB221, the comments that were made to the staff's proposed rules or draft rules, I guess, it seems that different parties have considerably different viewpoints potentially. I haven't read all of them, but it seems that people have different viewpoints in terms of the earnings test and what have you. I guess there is vagueness in legislation.

Can you comment in terms what -- I know it's early in the process and I hate to raise the specter of litigation. But, do you see that as being potential here or just part of the process that you'd have with rule drafting, I guess. Do you follow me?

Paul M. Barbas - President and Chief Executive Officer

Yeah. One of -- I think one of the things that we prided ourselves on is having very good and strong relations with the commission. And our intention is to retain and continue to strengthen and work on those. So, I think to even talk about that topic to me would be very premature. It's not even something that we were discussing here.

We intend to work as close as we can with the commission and through the process and I think there will be a lot of contentious issues with all of the different interested parties. I think that's just a normal part of the regulatory process. But our intention is to continue to maintain and if possible enhance our relationship with the commission.

Paul Patterson - Glenrock Associates

Great. Thanks a lot, guys.

Paul M. Barbas - President and Chief Executive Officer

Okay.

Operator

And our next question will come from the line of Jeff Coviello with Duquesne Capital. Please proceed.

Jeffrey R. Coviello - Duquesne Capital

Good morning. How are you?

Paul M. Barbas - President and Chief Executive Officer

Good, Jeff.

Jeffrey R. Coviello - Duquesne Capital

I just had sort of related to the Paul's question. The Ohio front, I've got on the call a little late and I don't know if you said when you might think about filing your plan. If you had any update on that. And then, as kind of a follow-up question, I don't know if you guys have looked at the total amount of regulatory rate bases in Ohio at any time recently. I was wondering if you have that number, if you could please give it.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer.

I'll let Paul take the first part. The second part, we have not had a rate case, say a full-blown rate case in Ohio since 1991. So, it's not rate based numbers, it's not something we would have off the top of our head now.

Jeffrey R. Coviello - Duquesne Capital

Okay.

Paul M. Barbas - President and Chief Executive Officer

And regarding our plans, we will be submitting a filing in the fall in our approval legislation our RSP rates remain intact through 2010. We are evaluating on top of those existing rates filing for riders that would help us comply with some the new regulations around efficiency, renewables and any other potential infrastructure investments.

So, we will be filing I guess as we described a little bit internally probably an ESP lite. So it's not a full-blown ESP that the other utilities will be filing given that their rates terminate at the end of this year. Ours are essentially preserving our rate plant through 2010 and what other items we need to recoup do comply with the existing legislation.

Jeffrey R. Coviello - Duquesne Capital

Got it. So you'll file up an -- sort of ESP in this fall to get you through the end of the plan and maybe sometime next year you file a more complete ESP, is that right?

Paul M. Barbas - President and Chief Executive Officer

It will probably be after next year. Our existing case or our existing rate plan extends through 2010. So, probably looking at a test period somewhere '08 and 2010 and filing subsequent to that. We have not firmed that up.

Jeffrey R. Coviello - Duquesne Capital

Great.

Paul M. Barbas - President and Chief Executive Officer

Okay.

Jeffrey R. Coviello - Duquesne Capital

Thank you very much.

Paul M. Barbas - President and Chief Executive Officer

Thanks, Jeff.

Operator

And our next question will come from the line of Alberto Medina with GLG [ph]. Please proceed.

Unidentified Analyst

Hi guys, this is actually (inaudible), how are you?

Paul M. Barbas - President and Chief Executive Officer

Good. How are you?

Unidentified Analyst

Good. You guys talked about burning of 7 million tons of coal on average per year. And I don't have -- unfortunately I can't access the slides but it was, your prize realized was in the low to mid-40s for 2008, is that correct?

Paul M. Barbas - President and Chief Executive Officer

Well, we are estimating our costs for the year would be is $41.25.

Unidentified Analyst

And what portion of that is transportation versus actual coal per ton cost? And basically how does that -- when you shift from Central APP to Illinois basin, does it become more or less expensive to transport the coal?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

I don't have the break out of the transportation costs that is, as you know that is of all in cost $41.25. Our transportation contracts are locked in contracts. So other than, it can fluctuate a little bit because in the transportation contracts there is a fuel adjustment sort of clause in those contracts. But even some of that we hedged out to protect ourselves there.

And there is a cost, I mean if you do take the barge a longer distance from Illinois basin than you would from the CAPP or the NAPP regions, but I don't have the breakout of that. I would say that the difference between the transportation costs from one area to the other is really more incremental than it is the real value of the lower cost of the product itself.

Unidentified Analyst

Absolutely. The other question is, of the 7 million tons that you have burned and or that you burn and when you look at 2010, I know you don't give guidance around price, but how many were contracted prior to going into the second quarter and how many did you contract in the second quarter?

Paul M. Barbas - President and Chief Executive Officer

Again, when you do get access to the slides that should help you with that, we were, the last time we reported in March of '08 we were 73% hedged position. So between March and June of '08, we went up 100%.

Unidentified Analyst

Thank you very much.

Paul M. Barbas - President and Chief Executive Officer

You're welcome.

Operator

And our next question will come from the line of Kevin Fowlen with Belnum Capital Management. Please proceed.

Kevin Fowlen - Belnum Capital Management

Good morning, Just a question on your assumption on cap factors for your fleet in '08 and '09.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

What factors? I am sorry.

Kevin Fowlen - Belnum Capital Management

The capacity factors on the fleet.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Okay.

Kevin Fowlen - Belnum Capital Management

What is the, what's assumed in your guidance?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

It's around 80%.

Kevin Fowlen - Belnum Capital Management

In both years?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Yes.

Kevin Fowlen - Belnum Capital Management

And has that changed in light of the decision to monetize some of the coal contracts you've had?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

That could be impacted by the decision to monetize the coal, yes.

Kevin Fowlen - Belnum Capital Management

So the cap factor would drop a little bit to offset the gain from the coal sale?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

That's correct.

Kevin Fowlen - Belnum Capital Management

And what is the assumed allowance sale amount in 2008 now?

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Actually it's not assumed at this point. It's actual. In 2008 we had $30 million of allowance sales.

Kevin Fowlen - Belnum Capital Management

Okay.

Paul M. Barbas - President and Chief Executive Officer

We are not assuming any for the rest of the year.

Kevin Fowlen - Belnum Capital Management

Okay. And just in conceptual terms, who knows what going to happen to the successful earnings test in the state in Ohio going forward, but conceptually what types of things would you guys look to do if you faced that at the utility?

Paul M. Barbas - President and Chief Executive Officer

I think there is a couple of things that I think one of the other earlier questions discussed the vagueness of the legislation certainly as it talks about including for comparative purposes, companies with similar risk profile both within and from outside the industry, so we have to take I think a fairly good look at that. The legislation continues to provide for aggregation in choice, so there is still a healthy amount of risk I think that all of the utilities will face. But the other I think interesting component of legislation is that it will take also into account our future planned investment beyond the 2010 for us as they look at, okay, what is that the base of the rate base of the company going forward. So, I think there are couple pretty significant issues like that that will have a good opportunity to I think gain some insight as the other companies work through their ESPs during the fall and early part of next year.

Kevin Fowlen - Belnum Capital Management

Well on the lines of those capital builds, is there anything more specific that you can talk, just as it build more generation? Is it a transmission line? What type of things could you do?

Paul M. Barbas - President and Chief Executive Officer

Well, I mean, there is certainly some compliance issues that we are analyzing right now, specifically around efficiency for one efficiency and conservation, so what types of investments in our system do we need to make and what types of programs will we need to offer to customers and what type of investments we have to make up all the way through the meter to meet some of those requirements.

And then on the renewable side it's an area, we are just beginning to explore, but fairly aggressive renewable portfolio standards that we probably will initially meet through wrecks although that's certainly not cast in concrete but again over time we need to comply with that component of the legislation as well. So, those are two areas and we will always, we will certainly look at continuing to investment in our plants to improve their efficiency and output as well.

Kevin Fowlen - Belnum Capital Management

Thank you very much.

Paul M. Barbas - President and Chief Executive Officer

You're welcome.

Operator

And our next question comes from the line as a follow-up from Paul Ridzon from KeyBanc. Please proceed.

Paul Ridzon - KeyBanc Capital Markets

Given the [care] ruling, could you in theory turn off the scrubbers? Or do you have a consent decree with the EPA?

Paul M. Barbas - President and Chief Executive Officer

We don't, we do not have a consent decree, we're currently continuing to try to drive toward some type of negotiated settlement, but there is not one in place. We still have emission limits that we need to continue to meet. The Killen scrubber specifically is, it was installed. It's not by-passable, although that could be changed over time to Stuart units and we can bypass the scrubber, but again we have to make those decisions in light of our environmental requirements as well, Paul.

Paul Ridzon - KeyBanc Capital Markets

Could you just give a little more flavor as to what other requirements?

Paul M. Barbas - President and Chief Executive Officer

In terms of the specific limits, I don't have those handy. We would have to get back with you on that.

Paul Ridzon - KeyBanc Capital Markets

Okay. That's fine. Thanks.

Operator

(Operator Instructions). And at this time we have no questions in queue. I would like to turn the call back over John Gillen for closing remarks.

John J. Gillen - Senior Vice President, Chief Financial Officer and Treasurer

Well, we want to thank everyone for joining us this morning. And we look forward to seeing you again in the near future.

Paul M. Barbas - President and Chief Executive Officer

Thank you.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day

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Source: DPL, Inc. Q2 2008 Earnings Call Transcript

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