PPL Corporation (PPL) Q1 2010 Earnings Report, Transcript and Summary

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 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) Mr. Joe Bergstein, Manager of Investor Relations, please begin.

Good morning. Thank you for joining the PPL conference call on first quarter results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com. The company's forecasted financial information in this presentation does not reflect any impact of the recently announced agreement to acquire E.ON US, including the required financing related to that acquisition. 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 filing. At this time, I’d like to turn the call over to Jim Miller, PPL Chairman, President and CEO.

Good morning, everyone. Thank you, Joe and thanks to all of you for joining us for the second time in a week to hear some more pertinent information about our quarter and other items. We’ll start today’s call of course with our general session and commentary on first quarter and then we’ll get right into questions. And with me today Paul Farr, our Chief Financial Officer, and Bill Spence, our Chief Operating Officer. This morning, we reported GAAP earnings of $0.66 a share with $0.64 per share in the first quarter of 2009. Earnings from ongoing operations for the first quarter were up substantially from a year ago, $0.94 per share this year versus $0.60 per share in 2009. As we fully expected, we did achieve dramatically higher earnings from our supply segment in 2010 following the expiration of a decade-long contract with our electric delivery company in Pennsylvania. Supply segment earnings from ongoing operations were nearly triple what they were in the first quarter of last year. 2010 supply segment earnings are benefiting from the fact that we locked in wholesale energy crisis that are much higher than the current market crisis. The substantial gains we saw on our supply segment for the quarter were somewhat offset by lower earnings in both our delivery businesses in Pennsylvania and the United Kingdom. This morning, we also reaffirmed our 2010 forecast of $3.10 to $3.50 per share in earnings from ongoing operations. And our forecast for GAAP earnings for the year reflected special items that were recorded in the first quarter now stand at $2.82 to $3.22 per share. Although, challenges still persist in our sector, including low energy prices, lower electricity demand and some lingering economic uncertainty, we are well positioned, because we’ve hedged virtually 100% of our expected generation out for the year. And Paul will outline the other major drivers of our 2010 earnings forecast in just a moment. We continue to expect the performance of our supply business for the year will overcome lower returns from our delivery businesses, which have been pressured by somewhat higher O&M costs. Just a couple of brief comments on the announcements last week regarding our plans to acquire E.ON US. As I said at the time, the transformational transaction for PPL, the one that creates a stronger, more diversified enterprise that retains the considerable upsides from our high quality supply business from the inevitable improvements in wholesale power prices. So our plan to close this transaction by the end of the year and we’ll keep you informed regarding our progress on that effort. One more item to highlight before turning the call over to Paul and Bill. In late March, we did file a request with the Pennsylvania PUC for a 2.4% increase in revenues at PPL Electric Utilities, which would be effective January 1, 2011. So the PUC review process is underway and we expect a decision on a request late this year. Meanwhile, the transition to a competitive electricity market in the PPL Electric Utilities service area has been very successful. More than 410,000 customers have selected an alternative energy supplier and at this point nearly half of the electricity being used by PPL Electric Utilities customers is being provided by alternatives suppliers. With that I’ll turn the call over to Paul for more details.

Thanks Jim, and good morning everyone. I definitely missed being here last week for the major announcements, but my wife and I had a personal acquisition to complete in China which was successful. I very much look forward to discuss in the Kentucky transaction with you as we work through the approval process and the implementation of the ultimate financing plan for that acquisition. Let's move to slide five. Earnings from our supply business increased significantly in the first quarter as the polar contract between PPL Electric Utilities and PPL EnergyPlus expired at the end of last year. The supply business is clearly benefiting from the hedges we entered into at prices that are higher than current market prices. Partially offsetting the supply segment performance were lower earnings in both our Pennsylvania and International Delivery segments. I’ll summarize the key segment earnings drivers for the first quarter and then provide an update on our 2010 forecast. Let's start with the supply segment performance on slide six. The supply segment earned $0.64 per share in the first quarter, a $0.42 increase over a year ago. The single biggest driver of the first quarter earnings was the significantly higher realized prices for our eastern baseload generation compared to the price we received under the full requirements contracts with PPL Electric Utilities that expired again at the end of the last year. First quarter energy margins also benefited from higher baseload generation and partially offsetting these margin drivers were lower net margins from load-following agreements due to lower than expected customer demand, higher O&M expense at our Susquehanna nuclear plant due to the timing of this year’s refueling outage, higher depreciation due to the Brunner Island scrubbers that were placed into service and the absence of a gain recorded in 2009 on the repurchase of a portion of PPL Energy Supply's outstanding debt. Moving to slide seven, our Pennsylvania Delivery segment earned $0.10 per share in the first quarter, a $0.04 declined compared to last year. This decrease was the result of lower delivery margins primarily due to milder weather, modest economic growth and customers' apparent response to the increased cost of energy as well as higher O&M expenses due to increased staffing and expanded vegetation management activity. Turning to slide eight, our International Delivery segment earned $0.27 per share in the first quarter, a $0.04 decline compared to last year. The decrease was the result of higher O&M primarily driven by higher pension expense, higher interest expense on index-linked bonds as a result of higher UK inflation and higher UK income taxes. This was partially offset by higher delivery revenue driven by higher prices and a more favorable exchange rate. Turning to slide nine, as previously mentioned we are reaffirming our 2010 earnings forecast of $3.10 to $3.50 per share. We continue to expect strong earnings growth driven by significantly higher energy margins primarily based on hedge power and fuel prices as well as established capacity prices for our PJM baseload generation. These higher energy margins are expected to be partially offset by higher O&M in the supply segment primarily driven by higher labor costs and increased work at our Susquehanna nuclear station, increased operating expenses at PPL EnergyPlus and higher support group costs. Higher depreciation as well as lower earnings at WPE, which are primarily driven by higher financing costs, higher income taxes and higher pension expense. Partially offsetting these are higher delivery margins and more favorable currency exchange rates. Finally we expect higher O&M in the Pennsylvania Delivery segment due to increase funding for customer programs, increased vegetation management costs and higher bad debt expense. Factoring in all these drivers, we expect approximately 74% of our 2010 earnings will come from our supply segment, 17% from International and 9% from Pennsylvania Delivery. On slide 10, we’ve updated our 2010 free cash flow before dividend numbers from the year end call to reflect a higher level of third party collateral in our supply segment, the construction delay of the Susquehanna-Roseland transmission line, which Bill will discuss in more detail in a moment. And increase funding at our EPD pension plan. With that I’d like to turn the call over to Bill for an update on operations.

Thanks Paul and good morning everyone. Let’s turn to slide 11 and I’ll start with an update of our delivery businesses. Last month PPL Electric Utilities completed its fourth polar solicitation for the 2011 to mid 2013 power supply needs. The solicitation was a 14 month full requirements contract for about 17% of the electricity needed from January 2011 to February 2012. PPL EU has now locked in prices from suppliers for more than two/thirds of the electricity that customers are expected to need for the first quarter of next year. While too soon to predict how customers bills could change in 2011, the average price of our purchases thus far for 2011 is about 16% below the current standard offer prices. As Jim mentioned retail competition has been flourishing in the PPL Electric Utilities territory with over 410,000 customers now shopping. PPL Electric Utilities filed a distribution rate case as Jim also mentioned and I will give you some details of that filing in a minute. Finally regarding the Susquehanna to Roseland transmission line, both PPL Electric Utilities and public service electric and gas are working with the National Park Service to obtain any approvals that maybe needed throughout the line to the Delaware Water Gap National Recreation Area. The National Park Service has indicated that its review will be completed in 2012. We anticipate this process will delay the in-service date to late 2013 or early 2014. On the international front, WPD accepted Ofgem’s final proposals for the five-year price control review and new rates became effective April 1. Let’s turn to slide 12 and take a closer look at the PPL Electric Utilities rate case. PPL EU seeking a $115 million distribution rate increase to recover among other things, investments made in the distribution system over the last three years. The request represents a 2.4% increase in PPL Electric Utilities total revenues. The filing incorporates a 2010 test year and we’re requesting an 11.75% ROE on a rate base of $2.24 billion within equity ratio of 48.4%. The docket number is on the slide, so you can track the case as it progresses. Now moving on to supply and slide 13. during the first quarter we completed the previously announced sale of our Long Island assets to J-Power. Commercial availability of our generation fleet was excellent in the quarter capturing 98% of the market value available to our generating stations. Helping that figure was the performance of our Susquehanna nuclear plant, which set a record for simultaneous operation of both reactors. The two units operated together for 287 days, the streak ended when we shut down the unit one reactor to begin a planned refueling and maintenance outage. During the unit one outage we continued our power upgrade work which included installing a modern digital control system for plant equipment as well as replacement of pump turbines that provide water to the reactor vessel. The unit is currently online at approximately 80% power as it goes through a serious of testing procedures following an outage delay of more than a week. Moving on to an update of our hedging program on slide 14, we’ve updated our hedge positions as of March 31. These hedge levels have increased somewhat since the update we provided you on our fourth quarter earnings call. You will also note that the average hedge price has declined by $1 per megawatt in 2010 and $2 a megawatt hour in 2011 and 2012. The declining prices reflects the impact of lower prices associated with new hedges and an adjustment to our assumption for basis. As a result of the continued weak natural gas price environment, basis between PGA and West Hub and our plants has been weaker than we have previously forecast. Turning to slide 15, on the fuel side, we’ve contracted for a 100% of our uranium needs through 2012. For 2010, our wholly owned plants are fully hedged for coal, with only a small open position at Keystone & Conemaugh. Now I’d like to turn the call back to Jim Miller for the Q&A. Jim?

Thanks Bill. All right operator, you can open it up for questions from the callers.

Could you comment on reports we've seen out of Kentucky that the AG might push to have the pending rate cases suspended until the transaction closes. The sale agreement seems to give you an out if there's an unfavorable decision, but we're not clear where things would stand if you have no decision

Well Jonathan, it's pretty difficult to comment. I think we are aware of that and what we have, obviously attempted to do, we have been intimately involved in our due diligence of looking at the proposed or filed rate case and looked at the details of that and we feel, it’s a fare very justifiable rate case request in the sense of the history of the storms they have had there and obviously some other needed recovery. So I think we again feel that it is a logical and fair request that's been submitted and we anxiously await to working with the commission to see it through.

Would you close the transaction absent a decision in the case?

Yes we would.

There's obviously been a decent amount of public pushback on the request in the state. Can you share with us at all kind of how you've thought about modeling and how comp in your statements around accretion from the deal, et cetera? You obviously gave us the inputs in terms of rate base, et cetera, the other day, but you've assumed some kind of outcome consistent with a tennish ROE, for example, any color you can give us there?

Well Jonathan this is Paul. It is clearly large percentage of that rate request comes Trimble County 2 coming online, an already improved baseload generation facility as well as the storm cost recovery that Jim mentioned. With the future test year that was selected, if the decision was not consistent with the economic assumption that are in our base model, we would post acquisition operate the utility accordingly just like we would any other rate jurisdictional assets that we own and operate. So I clearly wouldn’t want to comment on what any assumption we made around ROEs were. The merits of the case are what they are and they are sitting in front of the commission right now. the commission has shown willingness and the capability clear to act in prior situation, so I think we just as Jim said, follow this through. We don’t own and operate the company today. so what we are at least a bit on the sideline as it relates to the pursuit of the outcome by both those utilities and at the end of day it really doesn’t matter who the owner is, the commission, we would hope, would act in understanding that all those costs are reflected to continue reliable service to customers.

(Operator Instructions). Your next question comes from Steve Fleishman with Bank of America/Merrill Lynch Steve Fleishman - Bank of America/Merrill Lynch: On the basis spread, I think previously you have been using $3. Did you reduce that to $2?

Yes, we had previously been around $3 if you looked at historical spreads, and we did reduce by a dollar our basis assumption as well as about a dollar for energy prices being weighted lower because of the new hedges put on. so if you look at the $2 that I mentioned for 2011 and 2012, it's pretty evenly split between a dollar for basis as well as dollar for just the weighted average price of a supply hedges coming down.

Your next question comes from Reza Hatefi with Decade Capital.

There's been a week since you made the announcement, and I'm sure you've gotten a lot of feedback from investors and so forth. Any new thoughts as to how you're going to do the equity issuance in terms of, is it going to be one big slug or maybe two or three smaller offerings or any new thoughts?

No, I wouldn’t say there is any new thoughts at this point. I think we try to be as transparent as we could with everybody that we talk to and we are obviously going to continue to be out there talking to all those that would like to discuss the details, but I think as we’ve mentioned we have a solid financing plan. I think there is different ways obviously and we’ve discussed and considered various ways to handle this financing, but I think at this point in time I don’t have anything necessarily new or different to talk about on the financing plan.

Also looking at your coal hedge slide 15, it seems like sometimes the fixed base price percentages shift around with the percentage collars. Like last quarter for 2012, 5% of the hedges were fixed base price, 95% were collars, and now it's 20% and 80%. Does that move around or it's just because you added more hedges in 2012 and they're all fixed base price as that percentage went up and the collars went down?

Yeah I think it probably is the latter, rather than former and yes, we do obviously forward purchase and lock in as much as we can on a fixed price basis still keeping in mind the collars. Some of it also reflects the roll forward of coal depending on units dispatching our models and obviously we are going to use the cheaper fixed price coal first. So some of it is modeling issue or coal inventories that we are high on inventories and they roll from 2010 to 2011 for example that could bump up 2011's fixed price because we dint use all the fixed price coal in 2010.

And Keystone and Conemaugh excluded, around what price levels are those hedged at?

Well I think they were probably not too far off from where some of our collared price range would be there. We don’t have all the intimate details of the contracts because we are just the partial owner clearly and we are not the operator. so I know that they have got a fairly balanced mix between spot and contract coal. Spot coal has been moving up, the supply demand fundamentals continue to be fairly strong on the coal supply side with $62 a ton or so on the balance of cal 2010 plus transportation of course. so we’re well below that on our hedges and I would expect they are probably slightly higher than our hedge levels.

And just lastly, as a reminder, transport for you guys is $13 to $16, is that right?

That would be a good historical kind of range, but I think with oil right now $84 plus or minus dollars, you are looking at probably around a $20 per ton for Northern Appalachian coal for deliveries in 2011 and 2012

So, on average, your fleet is roughly $20 transportation?

Yeah, it depends on your assumption on diesel surcharges on the rails and whatever tariff increase you want to assume for transportation next year from the rail companies.

Your next question comes from Paul Patterson with Glenrock Associates.

First, on the trading and marketing, I'm sorry if I missed this, what was the amount for the quarter and are we still looking for, I think it was $35 million for 2010?

That was the number in the plan for 2010. we were down $0.02 on load following quarter-over-quarter.

$0.02? It was negative quarter-over-quarter?

Negative quarter-over-quarter, but at this point in time, we are as it relates to that number materially for the year of our business planning assumption.

Okay. And for 2011, what should we think? Are we still in the same, what you were thinking about that? I think it was a rebound (inaudible).

Same kind of ballpark.

The other question sort of comes up, is that because we've sort of seen some volatility in the markets and what have you, how should we think about the equity financing? I think it's been asked already, are you guys thinking of any derivatives or any mechanisms that sort of lock that in or hedge that issue? How should we think about that?

Yes we still are finalizing the permitted plan. That clearly is an option. As we said last week and we’ve been out talking to folks. I would clearly expect that if the equity slug that would come out first would be the high equity content security. As it relates to kind of either dribbling or going in trenches, we recognize that there is a bit of an apprehension of folks to kind of get in front of a larger equity offering. We don’t otherwise need the equity. So what I would say is that as Jim mentioned earlier, there's not been a change to the plan and I would expect that common equity would come out much closer to the close of the transaction. We may elect to do something in advance. We are still very much working on assessing the non-core asset portfolio and trying to drive as much as we can that towards some of the cash considerations. So nothing definitive yet in terms of the specifics on forward sales or derivatives to try to lock price.

Your next question comes from Brain Chin with Citi

Just back on the merger with E.ON. Does the deal, as it's written, allow you guys to potentially exit the deal if the regulators impose particularly onerous requirements?

There is not that specific clause. The out that we would have is if there is something that would be so large, that would be a material adverse effect to the company which has a litigated if you well range, not a specific dollar amount from historical transaction, so there is not a specific dollar amounts in the contract and that's what the contract says.

A follow-up to Reza's question. Did I understand it correctly, that when you are putting in your bid for a coal dispatch into the power markets that you do it based on where your hedged prices are, as opposed to spot prices for coal in the open market? Is that right?

No, typically I was just talking about the hedge levels and the prices of the hedges that exist when we look at bidding in our units, typically we bid them in at replacement costs. So, whether that's gas or oil or coal it’s typically replacement costs.

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

My question is on the hedge disclosures. Looking in the quarterly filing, and you used to provide a 2013 number, and then I think in the third quarter it was a 2013 and 2014 number and I think it's not in the first quarter filing. Is it reasonable to assume you also added a little bit to those hedges beyond 2012? Or is that just unchanged and therefore not disclosed?

Yeah, it was a very small amount and I think we are still fairly lightly hedged for 2013. So, not a significant change in 2013.

But on the coal side, we are safe to use the number that was there before?

On the fuel price side?

On the fuel side.

Yes and just recognize those are mine amounts, or at the mine prices, so you need to add the transportation and whatever escalation assumptions you want to make on that?

Steve Fleishman - Bank of America/Merrill Lynch: Any sense you might be able to give us on where the RPM auction might come out for your max zone?

We are expecting probably in the $125 to $150 per megawatt day range. We saw some power trade for that period 13, 14 in about the $140, a little over a $140 megawatt day range. So, we think it’s going to be right in that kind of zip code. Steve Fleishman - Bank of America/Merrill Lynch: Could you remind me what you got last time for max?

I want to say $170, let me just double check that.

Yes, it was upper $120 low $130. $133 sticks in my mind.

Further 12 to 13 RPM auction. Steve Fleishman - Bank of America/Merrill Lynch: Do you have a point of view at all on the other zone?

Well, I would say a balance of pool probably in the $20 kind of range.

$20 to $50.

At this time there are no further questions. Are there any closing comments?

No, closing comments. I think thanks everyone for being on the call. As I mentioned we continue our travels to try to touch base with as many folks as we possibly can to provide any clarification or details that need discussing. So, look forward to seeing many of you in the next two weeks. And with that operator thank you and thank you all for joining the call.

Thank you, ladies and gentlemen for participating in today’s PPL Corporation first quarter conference call. You may now disconnect.