Aug 7, 2008
Operator
Good morning. My name is Jessica and I will be your conference operator today.
At this time I would like to welcome everyone to the PPL Corporation's Second Quarter Earnings 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] I would now like to turn the cal lover to Mr.
Paukovits director of investor relations.
Timothy J. Paukovits
Thank you. Good morning.
Thank you for joining the PPL conference call and second quarter results and our general business outlook. We are providing slides of this presentation on our website at www pplweb.com.
Any statements made in this presentation about future operating results or other future events are forward looking statements under the Safe Harbor provisions of the Private 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
Good morning. Thanks, Tim.
Good morning to everyone. Today we will follow our customary format and first we will provide you with a general business update and commentary on the second quarter 2008 results we announced this morning.
Following that, we will take your questions. Joining me on the call today are Paul Farr our Chief Financial Officer and Bill Spence our Chief Financial Officer.
Today we are reporting second quarter GAAP earnings of $0.50 per share compared with $0.88 per share in the same period a year ago when we recorded a significant gain on the sale of one of our electric delivery businesses in Latin America. For the first six months of 2008, on a reported basis, we earned is $1.19 compared with $1.41 per share a year ago.
Other major factors contributing to the second quarter and year-to-date declines in reported earnings include; the loss of operating earnings from our Latin American delivery companies that were sold last year, a 2007 US tax benefit that did not recur in 2008, rising fuel costs and the loss of Synfuel related earnings. Turning to earnings from ongoing operations; second quarter earnings declined from a year ago, coming in at $0.50 per share this year, compared to $0.63 per share a year ago.
For the first half of the year our earnings from ongoing operations were $1.11 per share versus $1.28 per share a year ago. These results for the first half were on plan for us to this point in the year, and were previously indicated that we expected earnings pressure in the first half of the year due to the loss of several 2007 earnings contributors.
While we continue to expect stronger balance of the year margins in our supply business segment compared to the first six months, these stronger margins will not be enough to overcome the continued unprecedented rise in coal commodity and transportation prices, and lower results than planned from our marketing and trading activities. These drivers are causing us to reduce our forecast of 2008 earnings from ongoing operations to $2.25 to $2.35 per share, a $0.10 decrease from our previous forecast.
Paul will provide more details on our second quarter financial performance and expectations for the full year. Before we hear from him, I would like to talk briefly about our forecast beyond this year.
As we indicated in our news release this morning, we anticipate that rising fuel and other commodity costs dramatically reduced prices for SO2 allowances and the completion of our scrubber construction program will create challenges for us in 2009. We anticipate that our intensive efforts to mitigate these cost pressures will not be enough to avoid a decline in 2009 earnings compared with what we expect to achieve in 2008.
We will have more details when we formally initiate our 2009 guidance later this year. Beyond 2009, however, we continue to see upside in our earnings potential.
Based on the hedging we already have completed and the prices that we are seeing in the marketplace, we see upside to the earnings outlook for 2010 that we established last year and will update you on that look at the end of the third quarter. We anticipate that for 2010 and beyond, our strong generating assets, and marketing, and trading operations will allow us to continue to increase value for the shareowner even in the face of higher fuel and other commodity costs.
I would like to provide a brief update on our asset growth initiatives; on the nuclear front, in October, we expect to file a construction and operating license application for a new nuclear unit in northeast Pennsylvania. We also are moving forward with an application for DOE loan guarantees, a critical requirement for us to move forward with construction.
And we are continuing negotiations with potential partners in the new unit. In addition, to the possibility of building a new unit near Susquehanna, we are continuing to explore opportunities to invest in new nuclear facilities at other sites.
We are continuing to explore other generation opportunities as well, including more aggressive additions to our growing renewable energy portfolio. However, renewable energy and conservation alone will not be sufficient to meet the energy needs for the future.
The nation needs new, large scale electricity generation. And we can't wait for a decade.
Provided the Federal Government provides the necessary incentives for new nuclear units or other acceptable financing alternatives emerge, I'm confident that PPL will be among the companies' building new generation sources that the country needs, benefiting consumers and providing value for our shareowners. As part of finalizing Pennsylvania's 2008 and 2009 budget Legislators and Governor Randall reached a compromise on an energy fund, which will provide money for clean energy projects, such as energy efficient buildings and a large solar energy program for homeowners and businesses.
There was no agreement, however, on several other energy related issues; those include demand side management and conservation, rules governing electric distribution company's acquisition of provider of last resort electricity, and mitigation of rate increases as generation caps expire beginning in 2010 for PPL electric. All of the remaining energy issues could be considered in a legislative session that begins in mid September.
There appears to be general agreement regarding conservation, DSM programs and provider of last resort procurement issues. Methods for mitigating the impact of rate cap expirations, however, continue to be a matter of debate.
Unfortunately the state PUC has continued to postpone action on PPL Electric Utilities rate phase-in proposal. In our view this proposal was a critical tool for customers who need help in mitigating the price increases coming in 2010.
We will continue to work with all parties involved to facilitate the transition, to a competitive marketplace in Pennsylvania. I remain hopeful that the special legislative session will result in reasonable governmental action that encourages wise energy use, smooth rate impacts on customers, establish clearer procurement guidelines and ensure reliability electric delivery service in Pennsylvania.
In the meantime PPL Electric Utilities is continuing to purchase default energy supply that its customers will need for 2010. Company has purchased one-half of that supply and has another RFP scheduled for this fall.
While there is significant uncertainty, volatility and cost pressure in the US energy business these days, PPL is well positioned for long-term success. We believe our approach to increasing our generating capacity, layering on hedges for our portfolio and building on an already beneficial carbon footprint will allow us to take full advantage of opportunities as they emerge.
With that, I would like to turn the call over to Paul for the financial overview and I look forward to your questions. Paul?
Paul A. Farr
Thanks, Jim, and good morning everyone. Second quarter earnings from ongoing operations are lower than last year, due to the loss of Synfuel benefits, higher depreciation in the supply segment and lower international earnings.
International segment earnings were lower due to a US economic tax benefit recorded in 2007 and the sale of our Latin American portfolio last year. I would like to remind everyone that earnings from ongoing operations include operating results of the Latin American natural gas delivery businesses, but excludes special items related to their divestiture.
Turning to Slide 8, I will discuss the supply segment in more detail. The supply segment earned $0.26 per share in the second quarter of 2008 a $0.04 cent decrease compared to a year ago.
Higher east and west energy margins were more than offset by higher depreciation in the loss of Synfuel benefits. Higher energy margins in the east were primarily the net results of improved margins from marketing and trading activities, higher average fuel prices and lower base-load generation.
Higher energy margins in the west were primarily the net result of higher wholesale prices and lower hydrogen ration. These favorable earnings results were more than off set by higher depreciation expense of $0.02 per share due to completion of the Montour scrubbers and the operator Susquehanna handling Unit 1 that went into service during the second quarter of ' 08.
This first phase of the operate added 50 mega watts with the remaining 109 mega watts to be added in early 2009 and early 2010. Also offsetting the margin gains was a $0.02 loss in synfuel benefits which include the loss of earning from synfuel production as well as the cost of replacing synfuel consumed our Eastern power plants in '07.
Turning to slide 9, our Pennsylvania delivery segment earned $0.08 per share in the second quarter of 2008, a $0.01 increase over a year ago. This increase was driven by higher electric delivery revenues as a result of PPL electric base rate increase that was effective January 1, 2008 as well as customer load growth.
OEM cost are up modestly due to general inflationary increases. Moving to slide 10, our international delivery segment earned $0.16 per share in the second quarter of 2008, a $0.10 decrease compared to a year ago.
The decrease was the result of an $0.08 US income tax benefit recorded in '07 that I already mentioned and the loss of earnings from our Latin American portfolio partially offset by higher UK delivery revenues reflecting the benefit of the annual inflation adjustment factor and higher sales volume and lower pension expense. As Jim mentioned we are revising our 2008 ongoing earnings forecast from 2.35 to 2.45 to 2.25 to 2.35 per share.
This weak forecast is driven by the continued increase in delivered coal prices we are experiencing including transportation costs and coal contract adjustment clauses as well as reduced expectations for our marketing and trading operation for the balance of the year. Bill will speak more about these drivers in his remarks.
The earnings block in this slide reflects our current expectations for 2008 over what we achieved in 2007. We now expect supply segment energy margins to be flat compared to 2007.
Increased margins from higher margin, wholesale energy contracts and higher base-load generation are expected to be off set by higher coal commodity and transportation costs and lower results from our marketing and trading activities. Our 2008 ongoing earnings are expected to benefit from higher delivery margins of $0.06 per share as a result of PPL's new electric distribution rate that became effective January 1 as well as customer load growth and lower OEM of $0.02 per share driven by lower pension expense in WPD but partially offset by higher expenses in the supply in Pennsylvania delivery segment.
These positive earnings drivers will be more than offset by the $0.18 per loss of synfuel contribution combining the loss of the earnings from synfuel production with the increased costs for fuel for replacing synfuel consumed at our Eastern plants. A decrease of $0.08 per share as a result of the sale of our Latin American portfolio, $0.08 per share in tax benefits recorded in '07 and higher depreciation expense primarily in the supply business segment due to scrubbers coming online in '08 and next year Susquehanna handled Unit 1 operate project.
As a net result of all of these items, we now expect 50% of our 2008 earnings from ongoing operations to come from the supply segment, 30% from international delivery and 20% from Pennsylvania delivery. While we expect to initiate formal 2009 earnings guidance later this fall, I would like to comment on a few of the drivers we expect to affect that forecast.
We expect that 2009 earnings will be negatively impacted by the continued rise in delivered coal and higher operating expenses as a result of the commercial operation of the Brunner Island scrubbers coupled with the impact of the lower SO2 allowance prices. Our business case are building the scrubbers assumed that the additional operating expenses of the scrubbers could have been offset in whole or in part by gains from the potential sale of SO2 allowances, at prices higher than we are seeing in the marketplace now.
In fact our original plan for 2009 was to achieve the 240 per share midpoint of our original 2008 forecast leaving '09 flat over 2008. The combined effect of increases in delivered coal cost and reduced expectation for SO2 allowance gains for 2009 is approximately $210 million pretax with $100 million related to coal and $110 million related to SO2 gains.
We now believe the pressure of these factors on earnings coupled with 2009 being the final year of PPL energy productions commitment to supply all of PPL's electric load requirements under the polar contract at below market prices will result in 2009 earnings being lower than our revised 2008 earnings forecast. Again we expect to provide formal guidance for 2009 earnings on our third quarter earnings call.
At the same time as we see near term pressures, we are more optimistic about our 2010 earnings outlook than we were a year ago when we established the current 2010 earnings forecast range of $4.00 to $4.60 per share based on our significantly hedged portfolio and the prices we currently see in the marketplace. We anticipate that for 2010 and beyond, our generation portfolio and marketing expertise will provide growth and EPS and share owner value even in the face of higher fuel and operating expenses.
We expect to update the 2010 forecast later this year as well as provide you with a mark on our open and hedged EBITDA for the following few years beyond 2010. Turning to slide 12, our free cash flow before dividend forecast has been updated to reflect the impact lower margins and emission allowance gains in '08 and '09.
Our business plan continues to incorporate planned common stock buybacks, which we continue to view as a place holder for other growth opportunities that can add greater share owner value. The current annualized dividend rate of a $1.34 per share brings PPL's payout ratio to 58% based on the $2.30 pre share mid point of our revised 2008 earnings forecast.
Despite the short-term challenges that we see for 2009, we still expect to grow our dividend next year and we plan to address any potential change in the dividend on our normal schedule early next year. With that I would like to turn the call over to Bill for an update on key issues affecting the businesses.
William H. Spence
Thanks, Paul and good morning, everyone. As I am sure aware, last month the D.C.
Circuit Court vacated the Clean Air Interstate Rule or care program. This ruling eliminated the scheduled reductions in SO2 for 2010 and 2015 and vacated the annual NOx program.
The seasonal NOx program was unaffected. We are still evaluating the financial and operational impacts of this decision, but we anticipate all of our annual NOx allowance purchases will be impaired as a result of the care decision.
Both units at Montour are in service and operating well and construction remains on budget and on schedule for the units at Brunner Island. We will have our evaluate to way we operate the scrubbers and way the variable cost of our operation versus the market price of allowances.
We believe the care rolling has some implications for the Pennsylvanian mercury requirements and we are assessing our options in that regard. If that rule is maintained, the scrubbers and SCRs will be vital in helping us to meet the 2010 Pennsylvania mercury reductions.
Moving to slide 16, I would like to provide some comments on the energy markets and the recent volatility we have seen in prices. As you are probably aware natural gas and electricity has moved downward, while global demand for coal continues to provide upward pressure on US coal prices particularly in the east.
Gas and power prices have fallen more than 20% since early July, NYMEX prices for Eastern coal on the other hand have moved from $55 a ton at the end of ' 07 to about $80 a ton at the end of the first quarter and then peaking at $140 a ton on June 30th. In recent week, synfuel and coal prices have retreated somewhat, but are still well above our original business plan assumptions.
And the emission allowance markets are still absorbing the negative implications of the recent DC circuit court ruling regarding the care decision. Clearly there was an immediate impact also to off peak power prices in addition to the emission markets themselves.
Along with the recent price volatility, we are also seeing a large decrease in power market liquidity with forward bid and ask offers actually disappearing in some cases. Specifically, many banks and hedge funds have pulled back from the market.
Accordingly we are lowering our margin expectations for PPLs marketing and trading operation at least in the short-term. All these factors are pressuring our earnings in the near term as you heard from Jim and Paul, while we remain under generation rate caps.
Turning to slide 17, our hedge positions for electricity and fuel have been updated to reflect our position as of June 30th. We continue to receive our coal supply schedule without interruption and we have not experienced any supply defaults.
We have added detail to provide you with our estimated open Eastern coal positions for wholly owned plants and I will be providing more detail on our 2008 coal position in a moment. As I mentioned on the first quarter call, we are evaluating options to help mitigate coal price increases and utilize the flexibility afforded by our scrubbers at Montour.
We completed our first test burn test burn of Illinois basin coal at the Montour plant. That test went very well and we plan additional testing later this month.
We are also continuing with the engineering work needed to utilize PRB coal in the east. We hope to have some of this capability in place by 2009.
I'd like to give you some more specifics now regarding our 2008 coal position. Since we currently expect our West coal expense to be close to plan, I'm going to focus my comments today on the coal issues in the East.
Of the total East projected coal use of 9.3 million tons, 1.4 million tons relate to our share of the Keystone and Conemaugh power plants and 7.9 million tons are for our wholly-owned Montour and Brunner Island power stations. First a few comments about 2008 contract terms that impacted delivered costs of coal for our two wholly-owned plants.
The majority of these coal supply contracts specify a fixed base price. Some however have provisions for passing on increases in mine-related diesel fuel expenses and a smaller number include a collar on prices.
Virtually all of our contracts have provisions for regulatory and legislative taxes like those related to mine safety and all of the tons are of course impacted by a fuel surcharge component on our rail transportation contracts. So while we came into the year highly hedged at 94%, the dramatic rise in oil and coal prices still has had a material impact on our delivered coal costs.
And the last few small contracts we have signed to cover our remaining 2008 needs have of course been at much higher price levels. We are currently projecting a $40 million increase in fuel expense as compared to our original 2008 plan that formed the basis of our prior earnings guidance.
$26million of this is related to base price increases. $13 million of that is from increases at our wholly-owned plants and an estimated $13 million is expected from our share of Keystone and Conemaugh.
And finally a total of $14 million is projected increases from the various surcharges net of oil hedges that we put in place to mitigate some of that exposure. With regard to our longer-term coal position, we have all of our coal supply for coal strip units 1, 2 and 4 in Montana under contract through 2019.
This amounts to approximately 3 million tons of coal. In the East we have a contract with CONSOL for an additional 3 million tons of high-sulfur coal that runs through 2018.
These long-term coal hedges in the West and in the East equate to about 6 million tons hedged through 2018. Therefore, about 50% of our coal requirements are hedged through 2018 at prices that are obviously very favorable compared to those currently.
Moving onto slide 19, continuing with our practice of updating our 2010 Open EBITDA position with prices at the end of the quarter. Slide 18 has been updated to reflect forward prices at the end of June which are available on page A-1 of today's presentation.
Based on all prices at that time the unhedged or implied gross margin for the supply segment in 2010 would be about $4.3 billion, with associated O&M of approximately $814 million. This brings the value of our Open EBITDA to $3.5 billion, an increase of $600 million from our March 31, 2008 update.
You will also notice that the change in mark-to-market of our hedges since the first quarter reflects the higher forward electricity prices at the end of June. However, with the large move down in electric prices over the past few weeks, the numbers on this slide would probably be more in line with the numbers we presented to you on the first quarter call.
Again, as mentioned, our long-term view for the power markets is strong and we remain optimistic about PPL's long-term earnings growth potential. Now I would like to turn the call back over to Jim Miller for the Q&A.
Paul A. Farr
Okay thanks, Bill. Operator, let's open the meeting up for questions.
Question and Answer
Operator
[Operator Instructions] Your first question comes from the line of Ashar Khan.
Ashar Khan
I wanted to get a sense as to… you had mentioned going forward, could you give us some sensitivity as to… at what prices the coal contracts were bought at this quarter, so we could get some sense… I'm assuming you are buying it at a discount to spot prices, would that be fair?
James H. Miller
Yes, that's a fair comment. Go ahead.
William H. Spence
Ashar, I think it is a very safe assumption that yes, absolutely we are buying them at a discount to spot clearly, but I don't think we are in the position to really talk about the exact prices that we are buying them at.
Ashar Khan
Okay. And Jim, looking forward, do you think we will get commission to act on this proposal for the phase in or what is your optimism level because the timeframe is shrinking as every day goes by and I guess… if it doesn't get… from my view, if it doesn't get acted in the next month or so, the impact of having a phase in with 2010 so close becomes very minimal.
Wanted to get your thoughts.
James H. Miller
I think… that is sure the way I look at it, you are exactly right that as time ticks away, you do lose benefit from the proposal that we have placed in the hands of the PUC which of course was on opt-in program. Customers could choose to pay ahead a bit and then those funds held and paid interest on for the customer would be used to offset their particular rate increase.
But remember, I think that there are other rate mitigation proposals as well being proposed in legislation that has been drafted. So I would say that there ultimately… the PUC, I think ultimately will act on our proposal.
It will be somewhat dampened by the timeframe that is lost when they do act on it. But I should point out there were also, I suspect the other mitigation proposals that have been designed by other legislators.
So I think the customer ultimately will end up with a choice of several mitigation proposals in the form of opt-in programs.
Ashar Khan
Okay. Okay.
Thank you very much.
Operator
Your next question comes from the line of Paul Patterson.
Paul Patterson
Good morning.
James H. Miller
Good morning, Paul.
Paul A. Farr
Good morning, Paul.
Paul Patterson
How are you? Just… I wanted to briefly go over the 2009, the SO2 and Brunner impact.
I don't know if I got that completely. There was $110 million because of less SO2 gains.
Could you review that briefly again, I am sorry?
James H. Miller
The impact of coal in terms of the total $210 million that I mentioned, coal was $100 million in terms of higher expectation of costs than we had at this time last year and we had planned SO2 transactions that would generate around $110 million in gains from the sale of length given that we would have the forward position, given that we had the scrubbers on line. By order of magnitude in '08 over '09 with all of the scrubbers on for the last…coming on at least a portion of the year is slightly in excess of a $100 million year-over-year.
Paul Patterson
Okay.
James H. Miller
Over the '08 combination of depreciation, interest expense, O&M, limestone, oxload [ph] all of that.
Paul Patterson
I got you. Now I guess what, I'm wondering when we look at these hedged numbers for coal, obviously there is some variability because of the things that you mentioned at and Conemaugh and Keystone and et cetera.
How should we think about the variability of price or is there any rule of thumb associated with diesel or any of these things that we can think about because it seems there is some flexibility in the pricing there?
William H. Spence
Yeah, Paul, this is Bill Spence. I think we try to give you a sense for that by calling out those percentages of the load or the coal tonnage that are subject to those price movements.
So the 23% that I noted is really what is going to be fluctuating based on oil prices as well as the collars that exist in the contracts. I think overall I'm really very pleased and I think we have done an excellent job of managing our procurement and deliveries and minimizing our exposure.
As I mentioned we came into the year at 94% hedged and the increase that we are talking about here, two-thirds of it is related to Keystone, Conemaugh and transportation and the other third reflects some of the increases we are seeing in spot prices and some of the unhedged portions. So I think we can certainly think about maybe providing some sensitivities down the road as to how these would potentially move under different price expectations.
I don't have that in front of me. But I do think that as we look at our long-term contracting, what we have in place, I think not only are we well below the mark, but I think for 2008 and 2009, we are still going to be at a very competitive level I think if I look at 2008, we are probably going to come in at less than $45 a ton at the mine and probably next year in the low $50 per ton at the mine.
So these other surcharges are the thing that really tend to drive our price points up and have the variance that under these polar generation rate caps, we don't have a lot of flexibility to deal with that right now.
Paul Patterson
Okay. Just the trading and marketing, could you give us a little bit more of a flavor as to what you actually expect as a total contribution for 2008?
William H. Spence
Sure. Typically, we have a fairly low expectation I guess around marketing and trading as it relates to our total gross margin in the 5% to 8% of our total gross margin would come from asset optimization of marketing and trading.
The actual decline we are expecting here is really about $15 million after tax. It is not a very large number.
We have a fairly conservative shop and what we are really seeing is really an exit from the market from a lot of the players that created the… particularly in the forward markets, so a lot of the liquidity, the hedge funds and banks have really pulled back with this big downward move in the volatility as well as the financial crisis and their access to credit for margin calls at trading. They are just not in the market and with what we see, the summer is the time that we would expect to have the best opportunities for that… for the shop and with the lack of players out there to trade with, it is really hard for me to sit here and expect we are going to get that 5% to 8% of our gross margins.
But again a fairly small amount in the grand scheme of our supply gross margin, but we thought, we are going to call it as we see it and let you know what we are thinking right now.
Paul Patterson
Okay and you expect that to rebound in 2009?
William H. Spence
I do. I think and the possibility quite frankly existed later in the year, things could change and we could have… we could be back on plan, but again I think the prudent thing to do in our view is just call it like we see it and let you know what the drivers are.
Paul Patterson
Okay.
James H. Miller
In the front end of the market, Paul, you saw Allegheny's approval in terms of their procurement plan. I think you will see the other large utilities in the state that come out and the 11coming out as well and where maybe the financial players created some debt, we will see some physical load there and be able to take advantage of those opportunities as well.
Paul Patterson
Okay and then just finally, coal strip, I heard there was an outage there I believe in… have you heard anything about that?
William H. Spence
Well, of course, we have but I can't… I don't want to comment on current outages, but I can say that… there is nothing of an unusual nature about any of the outages we are seeing right now. So yes, there have been some recent issues, but we are talking about a couple days worth of outage, not anything significant.
Paul Patterson
Okay, great and just finally, the upside to 2010, can you give us a little bit more flavor as to what… anymore of a flavor as to what you see in 2010?
James H. Miller
Yeah really, it is a combination of again the coal hedging that we were able to get in place and improve the position there and then as prices rose fairly steadily at the front end of the year, especially during Q2, we were able to layer in some of the collar strategy that we have been using options to lock in floors, if not above floor levels and at prices better than we had expected in that original plan. So again the net of the… the open position on both power and fuels and as well the hedge position that we are were able to layer in.
They were at better prices than we had in the original plan.
Paul Patterson
Okay, great and thanks a lot.
James H. Miller
Yup.
Operator
Your next question comes from the line of Paul Ridzon.
Paul Ridzon
Wondering when you get out to '10, what kind of exposure do you have to, what we are seeing here with fuel and transportation and price re-openers on the coal?
James H. Miller
Sure, Paul. I think when we get out there, we are balancing ourselves and making sure that as we lock in the electricity sales, we are also locking in the fuel.
So we obviously are off of the polar fixed-price contract regime that we have been under and I think if you look at our electricity sales that we have locked in out there, in the coal that we have locked in, we are feeling pretty good about, where we are for 2010 and quite frankly, we have locked in a lot of the dark spread into some of these higher coal… power prices that we've see and of course as I mentioned we had already locked up a major long-term coal contract with CONSOL. So again, I think we are pretty… feeling pretty comfortable right now with 2010 and what we are seeing.
Paul Ridzon
But do those contracts have escalators that can be reopened?
James H. Miller
Some do, but again most of them, if they have any kind of opener from a price perspective, they tend to have a collar with a floor and ceiling in them. So not a lot of them have like what I would consider just total price re-openers in them.
William H. Spence
But most of the ones that have collars, if we took those out to the max each year on the collars, even the longest tenured contract that Bill mentioned that we have got would still be at a price substantially below current market forwards for the near-term years. So, they are extremely…?
Paul Ridzon
And just I know it is totally beyond your control and…but how do you see CAIR evolving from here. I guess the EPA said it might have appealed by the end of July that didn't happen.
What is your read on what is happening?
James H. Miller
Well it is… we were a bit I think… our speculation was that and still is I believe that there won't be a successful appeal process. That being said, no one knows for certain, but my sense of it with what I see going on politically in EPA and the election et cetera… we don't feel1931, this as necessarily a long-term situation because I think there is going to be tremendous pressure from the states over the environmental side of this, impacts of this ruling, but near term… I think it is fair to say there is no near-term quick fix for this issue.
I think from our perspective, from a shareholder perspective, there is absolutely no reason to obviously rush out there and destroy value, potential shareholder value by attempting to move allowances at much lower prices. So I think we see this issue being reversed over the long haul, but at the same time, we feel that our allowances obviously will increase in value over time.
Paul Ridzon
Do you think there is an awareness that the existing… whatever happens has to preserve the credibility of the existing allowances?
James H. Miller
I think in the end… no matter what program comes forth, facilities across the US are going to be required to utilize allowances to run. Not everyone is scrub, not everyone has reached their reduction levels.
So I don't… in my own mind, I think it is more of an issue of how the law is fashioned to deal with states impacting other states. Quite frankly, our view was that and this is sort of irrelevant in the sense that it occurred, it occurred, the court ruled what it ruled, but the court could have solved the problem that was raised by North Carolina without eliminating the entire program, but that being said, we are where we are, but I think ultimately the allowances will be usable and I think they will increase in value over time once the program is redefined.
Paul Ridzon
Thank you very much.
Operator
Your next question comes from the line of Edward Haines [ph].
Steve Fleishman
It is Steve Fleishman, can you hear me?
James H. Miller
Yes.
William H. Spence
Yes.
Steve Fleishman
Hey, guys, a couple of questions. First on the share buyback that you have mentioned still in your long-term plan, is that something you still think you could do in '09 or is that more likely '10?
James H. Miller
I think we are assessing the timing right now, but given the order of magnitude of the impacts it would be reasonable to assume that that would be deferred to some extent.
Steve Fleishman
Okay. Secondly, I know Bill gave the numbers on gross margin for trading but just… I don't know if he gave like percent of gross margin, but just from a rough… maybe millions of dollars, what in '08 is your rough range for marketing and trading within your guidance?
James H. Miller
Pretax would be would be $100 million to $150 million in that range.
Steve Fleishman
Okay. One other logistical question, just in your Open EBITDA do you… I know you use market prices for power.
What do you use on your coal? Do you open up all your coal contracts in the Open EBITDA?
James H. Miller
No, in the… because of the minemouth's [ph] contract at coal strip, that's reflected in the open, but the benefit of the… and then we marked the rest of, basically the Eastern coal to market and then the hedges go down in the hedge line for the coal.
Steve Fleishman
Okay and are the Eastern hedges done at like NYMEX prices or they done where you kind of know where you can think you can get it to your plant?
James H. Miller
Well the… if you are talking about the hedges, it is the actual contracts that we have got in place with the transportation agreements that we have got in place.
Steve Fleishman
I'm sorry, I meant the open position, the open… when you open up the coal…?
James H. Miller
It is your question, how do we mark that?
Steve Fleishman
Yes.
James H. Miller
Compared to market?
Steve Fleishman
Right.
James H. Miller
I think we look at the forward prices as best we can tell for… in both NYMEX as well as in the, over-the-counter market and then we try to apply some reasonable judgment to it. So it is probably a blend of both.
Steve Fleishman
The basis plus delivery?
James H. Miller
Yes.
Steve Fleishman
Okay. One last quick question on the scrubbers, when you make a decision on whether to operate these or not can this rolling…are there contracts and other limitations related to operating that, where you have to operate them?
For example, some of the… I don't know if you were making gypsum out of it or something like that, but do you have commitments that need to be met or can you just not operate them?
James H. Miller
Those scrubbers for instance at Montour, they are placed in service. Bill, you can expand on this.
Once you place them in service, you are then under your new regulations and they must run. So as to Bill's point, we are evaluating steps to be taken regarding the Brunner Island units.
Bill?
William H. Spence
Yes and yes, there are some requirements that we have to produce the gypsum for the US gypsum plant and I think what I was referring to was more operating them at less than full load, but still within our permit requirements because once we turn them on, we are under new permit requirements and I think in the long term, clearly we are still going to need scrubbers. Whatever comes out of the next son of [ph] CAIR or whatever it is going to be called, which I think it is going to be a legislative derived fix, if you will, but I think it is going to be equal to or probably more stringent than what we had under the care rule and I think the decision to put the scrubbers in is still the right one for the long term and still the right thing to do for the environment and just in the interim here as Jim mentioned in the short term, we need to just look at, are there modes of operation that we can use that would still meet all of our contract requirements and permit requirements and just see what flexibility that exist and we are evaluating that right now.
Steve Fleishman
Okay, great. Thank you.
James H. Miller
Sure.
Operator
Your next question comes from Leslie Rich.
Leslie Rich
All my questions have been asked and very thoroughly answered. So thank you.
James H. Miller
Great.
Operator
The next question comes from Jonathon Arnold.
Jonathan Arnold
Good morning. One of my questions that hasn't been answered was really on strategy with the trading business.
You sort of begun to emphasize it as more of a story going forward, you have obviously had a change of leadership there. Can you talk a little bit about what kind of things you are doing, how you see that business evolving over the next two or three years.
James H. Miller
Well Jonathan, I think regarding change of leadership, I don't think that has in anyway changed our view of how we choose to set our expectations of our trading floor. As we have said, we continue to I think implement the policy of being principally an asset-backed company.
We don't choose to get heavily involved in large percentages beyond our base-load assets. Yet we try to focus on optimizing around the deals we put in place to sell our power.
We do trade beyond… a bit beyond our assets, but… and I think a very nominal and conservative approach. And I don't see us changing that.
Our view is… our strategy going forward is to continue to find good shareholder value by adding generation to our portfolio, but remaining relatively in the same realm of trading beyond our assets a slight amount. We just don't choose to move to that higher risk posture of high levels of trading beyond our assets.
Jonathan Arnold
On another subject… back to the open EBITDA disclosure, you talked about it being more consistent with the Q1 disclosures of these late July prices, but then you have also said in your release that you feel that you have upside versus that original range you put out on earnings. Is that statement put based of the June pricing and the presentation or more where prices are currently.
Paul A. Farr
Yes, now that was where prices are currently, given hedges that were done in the front half of the year and where we see current forward prices, for both fuels and the open positions on power.
Jonathan Arnold
And when you talk about these hedges, these clearly have value in 2010. To what extent was that hedging activity out into the 11, 12 period, beyond just the one year?
William H. Spence
We did execute hedges as we have been for 11, 12 and even some maybe a little bit further, but that's… 11 is… I think it is safest to say significantly less hedged than 10 is and 12 less than 11, but we have taken advantage of the opportunity as the market had liquidity and as the liquidity will come back we will do the same thing and as prices evolve and give us good price points, trying to lock in additional contracts.
Jonathan Arnold
Thanks, Paul.
Operator
Your next question comes from Daniel Seitz.
Danielle Seitz
You mentioned a certain increase in transportation costs for '08, is the order of magnitude for '09, I assume relatively the same?
Paul A. Farr
I think Danielle, the best way to look at that was the number of around… well that was versus plan number I guess.
James H. Miller
Well I think the order of magnitude is actually higher… not only in terms of absolute dollars as Paul mentioned, $100 million of increase compared to our original business plan, but I think the expectation right now with oil prices where they are that affects both the mine related surcharges as well as the transportation related surcharges net of our hedges is still a fairly sizeable increase year-over-year.
Paul A. Farr
The number that I gave Danielle of around $100 million…
Danielle Seitz
Right.
Paul A. Farr
In terms of an increase is approximately the right number to focus on and that would be inclusive of open and higher hedged priced commodity as well as transportation including some estimate of the oil adjustments that affect the mine operations themselves.
James H. Miller
We had, Danielle, some increase imbedded into our 2009 plan, but not at the levels that we are talking about now.
Danielle Seitz
Okay and I guess it is too early to talk about breakdown in 2009, do you see some major changing in the distribution of earnings in '09 or it is pretty much in line with '08?
Paul A. Farr
I guess I would see some level of change from the revise… we talked about 2009 coming likely coming in below the '08… the '08 was going to be 50 supply, 30 international, 20 delivery. Clearly the cost pressures that caused us to think that '09 will come in below '08 would all reside in the supply segment, so that mix would be slightly less or less supply and then the result would be higher international and domestic delivery.
Danielle Seitz
Great. Thanks a lot.
Paul A. Farr
Yes.
Operator
Your next question comes from Scott Thomas.
Scott Thomas
Good morning, guys.
James H. Miller
Good morning.
Scott Thomas
Both of my questions have been answered. But I did want to zero in on something that I think Bill Spence went through on slide 18, the impact of base pricing… the plan.
Was that… was that just marketing unhedged or position at the beginning of the year for the market for the rest of the year or was that re-openers or either indexes for the hedged portion… can you give some color on that?
James H. Miller
For which year. I'm sorry, I didn't catch that.
Scott Thomas
Sorry, just in terms of the slide's talking about, '08 versus the plan I think.
James H. Miller
Yeah that is… it is a combination really of the surcharges, the Keystone and Conemaugh and some of it is fixed prices higher than we what we had in the plan and increase is really driven just by the unhedged piece we had coming into this year that we have now hedged a 100%... up to the 100% level now at much higher prices than in the plan.
So there is a component of that fixed price which really related to at the time when we planned to buy in the open spot market. So it is now our best guess as to what all these fixed price plus the adders will come in between now and the end of the year.
Scott Thomas
Okay, just related to Danielle's question on the fuel surcharges.
James H. Miller
Yes.
Scott Thomas
That's how real time that works, is it a maximum percentage increase per year based on where diesel is? Is it by quarter?
How does that flow through?
James H. Miller
Some of them are based on indices that come out after the fact, so there would be a lag period, but we try to estimate where we think the indices are going to come in based on the forward prices. So that's the one case and the other case of some of the contracts that have collars in them, we are assuming that are we are going to be at the maximum price… that ceiling price that the suppliers would receive because we are so far up above where we would have expected in the industry and so I think we will be at the max level of the collars.
Scott Thomas
Okay. So I understand that $100 million pre-tax number that I think Paul referenced was your estimate of the increase next year that would wrap up those max dollar transportation cost and the mark-to-market of the rest of the unhedged coal prices at Thursday?
James H. Miller
That's correct.
Paul A. Farr
Yes.
Scott Thomas
Okay. Thanks, guys.
James H. Miller
Yes.
Operator
Your next question comes from the line of Yiktat Fung. [ph]
Yiktat Fung
Good morning.
James H. Miller
Good morning.
Yiktat Fung
First question I think in the previous conference call, the management team talked about maybe perhaps testing, burning PRB coal at some of the Eastern plants to diversify coal mix.
James H. Miller
Yes.
Yiktat Fung
I was wondering if there has been any progress on that front?
James H. Miller
Yes there has… in that we continue to do the engineering work necessary to understand what the cost would be capital, as well as O&M, as well as the D rate because of the BTU content of the Western coal versus the East to make sure that A, the economics work and B, that we can actually effectuate the changes and I think so far we are cautiously optimistic that we can make the modifications with a fairly reasonable cost and being in an ability some time next year to begin to blend the PRB coal. My expectation is you are probably talking about blending in the 10 to 15, maybe at the outside, 20% of the actual coal and we would anticipate doing this in Montour right at the moment.
Yiktat Fung
Is there any estimate as to the capital costs in order to enable this, would you?
James H. Miller
My expectation we haven't finished the engineering yet, but it is probably less than $20 million.
Yiktat Fung
When will PPL file its 2011 procurement plan in Pennsylvania?
William H. Spence
What did he say?
James H. Miller
The team has I think a recommendation completed. Senior management is going through our review right now.
So I would expect that would be filed relatively quickly.
Yiktat Fung
Is it going to be significantly different than the way the power is procured in 2010, is it going to be built through like an R&P process?
William H. Spence
It would and I think the differences would be instead of 2010 being a one-year bridge plan to get us up to the rest of the peer group, the 11 and beyond plan would be a multi-year plan. So that will be probably like others some expectation of a portfolio of contracts that would be bid out.
Yiktat Fung
Okay.
James H. Miller
Further still we try to take advantage of the flexibility that the PUC left in their ruling on long-term statewide procurement plans a few years ago when they came out with their ruling. We will try to… our plan will try to utilize, I think the wise flexibility that they provided in that ruling.
Yiktat Fung
And just one last question. I was wondering if there are any updates at the United Kingdom delivery segment in terms of other… is there a like a rate case coming up or anything like that?
James H. Miller
Yes, distribution price control review 5 would be effective in April 2010, so WPD as well as the rest of the RECs in the UK are in process now and preparing capital plans to be filed with the regulator here in August and all of the various kind of committees and activities that go into preparation for this five-year cycle review are well underway.
Yiktat Fung
Thank you very much. That's helpful.
James H. Miller
Yep.
Operator
Your next question comes from the line of Carrie St. Louis [ph].
Carrie St. Louis
I just want to focus back on the '09 guidance, this $210 million of pretax impact. I guess I calculated on the after-tax basis, that is roughly $0.35.
Paul A. Farr
That's about right, Carrie [ph].
Carrie St. Louis
Okay, are there offsets to that or should we go ahead and assume if you said your '09 target was 240 that it would now imply your '09 number would be roughly 205?
James H. Miller
I wouldn't imply that at this point of time. We do expect offsets by way of margin enhancements by our focus on O&M.
but we are still in the throes of our normal annual business planning process, so the real goal of providing that level of detail was just to show you kind of order of magnitude of two very significant drivers, what the impact of those would be and then as I said and I think Bill said too, we will provide that guidance on the Q3 call, the formal guidance.
Carrie St. Louis
Okay what I would hope that you really work to improve your hedging guidance because it really looked like you were pretty significantly hedged and you wouldn't see the size of cash flows changes going forward. And to follow-up on that point, the 77%, 23% split on fixed and kind of reopen coal contracts.
I'm ascertaining that basically that split is going to stay constant going forward? It is not like that will change significantly such that your percentage of like potentially re-open contracts isn't go going to increase up to like 30% or 40% in any outer years, but that split should remain more or less constant?
James H. Miller
I think that is actually subject to market conditions, Carrie. So while we strive to be as… and narrowly define the costs as best as possible to the extent that others in the industry negotiate certain terms and those become market, we are compelled to negotiate market, so we make every attempt to and in fact in Bill's discussion in terms of the variability of some of this pricing… even including the oil, we did have significant amounts of oil hedges in place that really did economically isolate us from a much bigger order of magnitude impact that could have been felt, but it is really trying to get arms around these… the more narrow-mine related costs, rather than just there use of diesel, rather than diesel used to transport it from the mine to the plant.
So, we try in great success possible to do that, as well to keep the collars themselves when there are re-openers as tight as we can but that is all a provider by provider negotiation.
Carrie St. Louis
And I guess when you just see something like 94% hedged and then you have $100 million fluctuation, it just doesn't seem to jive real well. So I would implore you to kind of step up the disclosure in terms of what the hedge definition actually refers to if at all possible in the future and then I just wanted to talk about the cash flow statement and cash flows from investing activities.
It appears like you had a large expenditure for intangible assets and then a large increase in restricted cash or decrease in restricted cash, I just want to know what those two items relate to?
James H. Miller
This typically the restricted cash would relate to NYMEX postings that we have for exchange traded contracts and I think we did talk about earlier in the quarter the consummation of the purchase of the toll, the Ironwood toll from Bear energy and that's a significant component of that one line item.
Carrie St. Louis
Okay, so that's the value of that. Okay.
James H. Miller
It is a contract, so it is by definition intangible.
Carrie St. Louis
Okay. Thank you.
Operator
Your question comes from [Inaudible]
Unidentified Analyst
Good morning. My questions have been asked and answered.
Thank you.
James H. Miller
You are welcome.
Operator
The next question comes from the line of Tom O'Neill [ph].
Tom O'Neill
The question on the CNX contract, does that have a re-opener every three years to the 15% CapEx hitting and I'm just curious what you are showing up is that... showing up in 2009.
James H. Miller
I am sorry, didn't get which contract were you asking?
Tom O'Neill
The CONSOL.
James H. Miller
I really -- we are under a confidentiality provisions under that contract, so I really can't speak to specific contracts, I am sorry.
Tom O'Neill
Okay and it was, but that was signed in 2005?
James H. Miller
2006… either late 2006 or early 2007, I can't recall now, it was not 2005.
Tom O'Neill
Okay.
James H. Miller
Yes.
Tom O'Neill
And then on the rail, just curious what exactly you are seeing or is it just mainly a coal issue?
James H. Miller
No, it is both. On the rail side, we have seen some fairly significant increases on the order of magnitude of about $5 a ton, so I think last numbers I saw we were previously paying about $11 per ton to deliver some of our eastern coal and that's up to about $16 a ton, so it is pretty sizeable on a percent increase.
Tom O'Neill
And just one last question on the coal contracts. To date you haven't really seen anybody break like a price measure type of situation on coal contracts.
This is just sort of the levers that sit inside the existing contracts that are hitting?
James H. Miller
That's correct. Yes.
Tom O'Neill
Okay, thank you.
James H. Miller
Sure.
Operator
Your next question comes from the line of Shalini Mahajan
Shalini Mahajan
You have slated some amount of… small amount of hedging in 2010, I was just wondering if you could integrate… give some indication on the pricing there and then broadly how should we be thinking about your 2010 hedging philosophy on your electric sales especially on the Eastern side? Is there any target of, assessing target on how hedged you want to be as you enter '09 or get towards the end of the year?
James H. Miller
'09 I think we are still under our affiliate agreement in '09. So that is sort of not a good year to talk about hedging philosophy, but I think what we have said in the past concerning hedging, there is a lot of ingredients that go into a hedging philosophy at 2011 and beyond.
We, in fact, are assessing that and taking the steps necessary. We obviously want to find ourselves in a pretty reasonably hedged position as we approach the year in question.
We don't necessarily want to be fully hedged, but I think to leave some room for upside based on the fundamentals of the market we see. But I think generally speaking with posting considerations and the like, there is a number of ingredients, but I would say on balance, we believe in… our company has believed in a more high percentage hedge as you approach the years versus a lower percentage hedge counting on gaining a bunch of upside that maybe there.
We would rather bring more certainty to the year in question than doubt.
Shalini Mahajan
But just given the impact that you are seeing from both the fuel surcharges and coal prices hitting the collars, would it make sense to be more open and or would you also look… and also would you look to just to maybe hedge your diesel oil, kind of doing oil hedging for that just mitigate the impact that you could see in the future?
James H. Miller
I think certainly on the oil hedging side, we will continue to do that within… quite a bit of that and it has really helped and we will continue that. On the surcharges side, I guess in the overall portfolio, when you think about the Open EBITDA that I mentioned earlier in the 4… over $4 billion when you are talking about the surcharges… they are measurable and they are important and we focus on them, but in the kind of grand scheme of how we approach hedging our margins, it is a relatively small factor in the overall equation to be honest.
William H. Spence
And certainly we, I would add that in this today's world with a number of the geopolitical events going on that you cannot predict, we are certainly not in any thought process that we want to be at all open, significantly on the fuel side certainly.
Shalini Mahajan
Okay.
James H. Miller
Which is why we are really focused on the fixed price components, the base coal and as Paul mentioned earlier, we are subject to where the market is and try to factor that in and do as much homework on the fundamentals in the coal markets. So we have a good sense of where they are headed and I think the wild card in a lot of this is just where oil prices are going to fall out, more than anything.
Shalini Mahajan
Okay thanks and I might have missed this, but have you guys indicated how much of blending you could do using Western coal… I mean is it a percentage that you guys are targeting or you could achieve without a loss of efficiency?
James H. Miller
Yeah, I think we are right now still in the midst of our engineering studies, but 10% to 20% would be the range.
Shalini Mahajan
Okay, great. Thank you so much.
James H. Miller
Sure.
Operator
[Operator Instructions]. Your next question tomorrow from the line of Raymond Leung.
Raymond Leung
Hi, how are you?
James H. Miller
Hi.
Raymond Leung
Most of my questions have been answered, but just a housekeeping question in terms of you have a fairly large short-term debt balance. Can you talk a little bit about what that is comprised of, is that mostly a collateral posting?
And maybe if there is some maturity to talk about financing plans for the remainder of this year and maybe in to next year.
James H. Miller
Yes, in terms of… we do have a relatively modest additional debt issuance planned for later this year. I'm not sure if it has creeped into the window yet or not there is about a $600 million refinance [ph] for electric utilities next year, the balance would be collateral posting and given where prices were at $6.30, those were obviously more significant than they are today by a pretty significant amount, so…
Raymond Leung
Is there a breakdown of what was collateral and what wasn't?
James H. Miller
No.
Raymond Leung
What portion was collateral?
Paul A. Farr
Just one second, just to see if I had that handy.
Raymond Leung
Thanks, Paul.
Paul A. Farr
Yes, between commercial paper and other things out affecting the NYMEX type contracts and things like that, we are about… somewhere between $200 million and 300 million. I don't have the details beyond that.
We will have to get back to you on that, Raymond.
Raymond Leung
Okay great. Thank you, guys.
James H. Miller
Yes.
Operator
[Operator Instructions]. There are no more questions at this time.
James H. Miller
Okay. Well thank you all for attending the call.
As we said, we have given you I think the best information we have with us at this time. Obviously 2009 will be the last year of our rate cap period.
It presents its form of challenges in many ways. On the 2010 and beyond as I said we will update you at the third quarter call on our view of 2010.
We feel very good about 2010 and also things are looking positive for 11 and 12. So with that, thank you for attending.
Operator
This concludes today's conference call. You may now disconnect.