Feb 4, 2009
Executives
Tim Paukovits - Director, IR Jim Miller - Chairman, President and CEO Paul Farr - EVP and CFO Bill Spence - EVP and COO
Analysts
Paul Patterson - Glenrock Associates John Kiani - Deutsche Bank Danielle Seitz - Seitz Alex - Merrill Lynch Ed Tirello - Zimmer Lucas Partners Reza Hatefi - Decade Capital Ed Haines - Catapult Capital
Operator
Good morning. My name is Rachael and I will be your conference operator today.
At this time, I would like to welcome everyone to the PPL Corporation's Fourth 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) I would now like to turn the call lover to Mr.
Paukovits, Director of Investor Relations. Sir, you may begin your conference.
Tim Paukovits
Thank you. Good morning.
Thank you for joining the PPL conference call on fourth quarter and 2008 results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com.
Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements.
A discussion of factors that could cause actual results or events to vary is contained in the Appendix to this presentation and in the company's SEC filings. At this time, I would like to turn the call over to Jim Miller, PPL Chairman, President and CEO.
Jim Miller
Thanks, Tim and good morning everyone. As we normally do we will begin our call this morning with the general business update and commentary on fourth quarter and full year 2008 results and after that we will take your questions.
Joining with me this morning are Paul Farr our Chief Financial Officer and Bill Spence, our Chief Operating Officer. So today we are reporting 2008 full year GAAP earnings of $2.47 per share, compared with $3.35 per share a year ago.
Fourth quarter GAAP earnings were $0.74 per share, compared with the $1.11 per share in the fourth quarter of 2007. Primary contributors to our lower 2008 results were lower wholesale energy margins and the loss of synfuel earnings versus a year ago and the impact with special items in both years.
Driving the decline in fourth quarter and annual reported earnings is a decline in wholesale energy margins and lower international delivery earnings. As we explained in our third quarter conference call in November the company's 2008 wholesale energy margin decline was driven by unrealized losses in marketing and trading and extended average of the two of our coal-fired power plants in Pennsylvania.
The global financial crisis has had and will continue to have a significant impact on wholesale electricity markets for the foreseeable future. As a result, we are adjusting our tactics accordingly, we have already reduced our capital expenditures for 2009 and we are focusing on other areas to control and further reduce costs.
We expect 2009 will present a very challenging business environment our portfolio regulated in competitive businesses positions us to weather the challenging environment and across for win economic recovery takes hold. In the near term, we remain well hedged with respect to both fuel and power, in these volatile commodity markets; we continue to see the benefit of our hedging program.
Now let's briefly cover ongoing earnings for the full year 2008 as well as the fourth quarter. 2008 earnings from ongoing operations were $2.02 per share versus $2.60 per share a year ago.
For the fourth quarter of 2008 earnings from ongoing operations were $0.46 per share compared with $0.60 per share in the fourth quarter of 2007. Ongoing earnings for the year and quarter were affected by the same operating drivers as reported earnings and Paul, will provide more details on those drivers in his remarks.
Moving on to our earnings forecast. As we announced earlier today, we have reaffirmed our 2009 earnings forecast of $1.60 to $1.90 per share and our 2010 earnings forecast of $3.60 to $4.20 per share.
Our 2010 forecast is based on the benefits of our hedge strategy which has resulted in us having sold more than 80% of our 2010 expected baseload generation output and 100% of the available capacity, as well as having contracted fuel requirements at prices that are significantly below market. Before turning the call over to Paul, I will just take a minute or so to bring you up to date on the political front in Pennsylvania.
As you know, PPL Electric Utilities generation rate cap expires at the end of this year. We are continuing to provide customers with options to manage the increase when caps expire.
About 10% of our customer base, in Pennsylvania are participating in our pre-payment program for 2010 and more than 200,000 customers have utilized our energy use website that we have established. At this point, based on the electricity supplied at PPL Electric Utilities already has procured for 2010, the average residential customer rate will increase by about 36%.
If forward crisis remain where they are today for the remaining procurements, our estimates indicate that the increase in residential customer bills would be lower than 36% by at least a couple of percentage points. Bill, will provide more details on our procurement plans.
Pennsylvania Legislature has reconvened and we expect rate mitigation to be a topic of discussion as the state deals with a number of challenges including a significant budget shortfall. We remain open to discussing reasonable mitigation efforts with state officials as long as the plans can be implemented without harming the financial health of the company.
Now I would like to turn the call over to Paul and then Bill to provide further details on reported results, our forecast and updates on some key business items. And after that we will take your questions.
Paul?
Paul Farr
Thanks, Jim, and good morning everyone. Before I get into the numbers today I would like to remind everyone that earnings from ongoing operations include the operating results of the divested Latin American and gas delivery businesses that exclude special items related to their divestiture.
As Jim, mentioned fourth quarter earnings from ongoing operations are lower than last year primarily on lower energy margins in our supply segments and lower international segment earnings. I will review the key earnings drivers by segment for 2008 and then get into our earnings forecast.
Turning to slide, 7. Let's start with the Supply segment performance.
The Supply segment earned $0.81 per share in 2008, a $0.51 decrease compared with last year. The decrease was primarily driven by lower East energy margins as a result of realized and unrealized losses on certain trading positions, higher average fuel prices, and lower baseload generation partially offsetting these negative margin drivers for higher realized supply contract margins.
Higher West energy margins were primarily due to higher generation output and lower supply cost on lower energy prices. 2008 earnings were also impacted by the loss of $0.18 of synfuel-related earnings and higher financing costs primarily driven by higher debt levels and lower interest income on invested cash.
Lower O&M primarily due to lower outage and non-outage costs at our power plants and lower operating cost at our energy marketing center. Moving to slide 8, our Pennsylvania Delivery segment earned $0.44 per share in 2008, a $0.04 increase over 2007.
Higher electric delivery revenues at $0.09 per share resulting from PPL Electric's distribution rate increase were partially offset by higher O&M of $0.02 per share driven by higher distribution expenses, higher and collectible account expense and other inflationary impacts, as well as higher financing cost, higher income taxes and other expenses. Moving to slide 9, International Delivery Segment earned $0.77 per share in 2008 a $0.01 decreased compared to last year, the prior year.
Decrease was the net result of higher delivery revenues resulting from the annual inflation adjustment, lower O&M primarily driven by lower pension expense and lower overall costs resulting from the sales of Latin American businesses in 2007. The negative impact of currency exchange rates in the UK, lower income taxes and other including lower financing costs or lower debt levels, lower income taxes which is the net result of $0.08 US tax benefit in 2007 and a UK tax benefit of $0.06 per share recorded in 2008, and the loss $0.11 per share in earnings from the Latin American businesses which again was sold in 2007.
On slide 10, we summarize the major drivers of earnings from ongoing operations between 2007 and 2008. I am not going to specifically discuss these drivers since I just covered them in my segment review.
So, let's move on and take a look at our 2009 forecast. Today we are reaffirming our 2009 earnings forecast from $1.60 to $1.90 per share.
The earnings walk on the slide reflects the mid point to 2009 forecast with $1.75 per share as compared to $2.02 per share earned in 2008. The major drivers of 2009 earnings forecast are higher expected delivery margin of $0.27 per share primarily driven by improved power value from higher electric sales prices in the west and higher sales prices under the coal contract between PPL Energy Plus and PPL Electric Utilities.
Higher margins from marketing and trading activities, higher coal-fired and nuclear generation output, offset by higher fuel costs. The higher energy margins are more than offset by unfavorable UK exchange rates, higher O&M of $0.10 per share primarily due to additional planned outages, higher coal-fired plants and higher operating costs associated with the scrubbers, higher contractor pricing, higher cost for customer programs, higher uncollectible customer accounts at PPL Electric and higher operating costs at WPD.
Higher effective tax rate at WPD’s earnings, higher financing costs due to higher debt balances and the increased cost and credit facilities, higher depreciation due to scrubbers and precipitators that are expected to go into service during 2009, as well as the full-year depreciation expense risk covers than went into service in 2008, and higher plant and service throughout the company. Lower delivery margins of $0.04 evenly split between WPD and PPL Electric.
The other category includes 2008 discontinued operations for PPL Gas and lower projected earnings from our mechanical contractors. Turning to slide 12, in November we announced our 2010 earnings forecast of $3.60 to $4.20 per share and provided a summary of the drivers of 2010 earnings, including a significant increase in energy margins coupled with strong earnings from both our Pennsylvania International delivery segment.
I would like to take a few minutes to discuss that forecast at a high level and provide the insights into expected 2010 earnings. As Jim mentioned in his remarks our 2010 forecast of energy margins is based on the fact that we hedged over 80% of our 2010 expected baseload generation, 100% of our available capacity and about 92% of our coal requirements.
Given the success of our hedging strategy to-date, we continue to see a strong increase in energy margins between 2009 and 2010. However, since November, 2010 [forward] electricity pricing in PJM have declined about 12% to 14%.
This decline in forward prices has a direct impact on the expected returns of our unhedged position. In addition, foreign exchange rates for the British Sterling have declined about 11%.
Finally, since our November call we have received new forecast for our domestic international pension plan, both of which are expecting modest increases in expense for 2010, over the levels that we predicted in November. As a result of these factors in an economy which shows no signs of recovery in the near-term, we now expect to be in the lower half of our 2010 earnings forecast range.
Moving onto cash flow. As we had forecasted, we experienced negative free cash flow in 2008.
Given the uncertain financial times, the increase in cost of financing and our desire to preserve capital, we have maintained our CapEx at the reduced levels disclosed in the third quarter. These decreased expenditures include reductions in discretionary CapEx in the supply segment, there were no renewable commitments, the cancellation of hydro expansion opportunity and very limited nuclear development activities.
Dividends remain a very important part of total shareholder return, especially in these difficult financial times. We will evaluate the dividend level with the Board on our normal schedule later this month.
On slide 14, we provide detail on our credit facilities and collateral postings. We remain highly focused on maintaining our strong credit profile and liquidity position.
We continue to have more than $4.2 billion in credit facilities supporting the activities of our supply business and our hedging strategy. This provides us with one of the strongest liquidity positions in the sector.
We are providing more detail this quarter on the available portion of our liquidity. We have about $3.3 billion available at PPL Energy supply under the existing facilities.
Domestically, the supply segment has a diverse group of 23 banks providing credit with no bank having more than 14% in the total commitment. Planning for our liquidity needs and sources is an ongoing process for us.
We continue to look for the best and most cost effective way to address our future liquidity needs. The credit facility needs of PPL Electric Utilities and WPD are clearly not as substantial as the supply business.
However, both are in a solid liquidity position as well. On slide 15, we update the level of collateral at PPL Energy supply to December 2008.
This slide reflects the strong liquidity position we have consistently maintained. As mentioned last quarter the postings increased earlier in 2008 as power prices began to rise significantly.
When they fell from this mid-year high the significant portion of the collateral was returned to us. These credit facilities and our BBB investment grade credit rating are extremely valuable to the company as we look to further execute on our hedge strategy.
Finally on slide 16, we are providing an update on our debt maturity schedule and for the first time including a look at 2013. As we mentioned last quarter proceeds from the electric utilities issuance in October will be used to partially free fund this year’s $486 million maturity and we have no maturities in 2010.
Finally in my remarks I would like to comment and S&P's recent announcement placing us a negative outlook. A strong credit rating, as I said, an extremely valuable asset for Energy marketing business and we remain extremely committed to maintaining the investment grade credit rating, while we are disappointed in S&P's recent decision, we do not expect any material adverse impact under cost or liquidity.
And we believe the significant improvement in 2010 cash flows will warrant the elimination of the negative outlooks as we move forward. With that I would like to turn the call over to Bill for an update on operations.
Bill Spence
Thanks Paul, good morning everyone. Let’s turn to slide 17.
I will provide an update on our delivery businesses. As Jim mentioned earlier on the call, during the fourth quarter PPL Electric Utilities successfully completed another round of solicitations for 2010 default service load..
With four of the six [RFP] is now completed, PPL Electric Utilities has over 66% of its expected default supply needs under contract. Next month we will begin the fifth solicitation and bids for that installment are due March 30th and PUC approval is expected April 2nd.
We are currently evaluating the impact of Pennsylvania's Act 129 as well, which among other things requires Pennsylvania utilities to implement energy efficiency and conservation programs over the next five years. The act requires consumption reductions of 1% by mid 2011 and 3% by mid 2013 to be achieved within a cost GAAP of 2% based on 2006 annual revenues.
As a result of that 129 PPL Electric Utilities has modified its procurement plan to reflect supply needs for 2011 through mid 2013. As Jim mentioned, PPL Electric Utilities continues it's commitment to helping customers mitigate rising electricity cost.
Customers have responded very well for the prepaid plan that was implemented in 2008. In fact 10% of eligible customer signed up for the program and have already started contributing towards 2010 electric bills.
One final note on electric utilities. For 2009 overall unit sales are expected to be flat compared to 2008 sales resulting from continued negative economic conditions.
Limited residential sales growth is expected to roughly offset declines in industrial and commercial sales. On the international front, the UK's fifth Distribution Price Control Review is in process and is moving a long smoothly.
Later this month we will be submitting our detailed business plan to Ofgem, the UK regulator for their review. Ofgem is expected to publish it's initial proposals by July 2009 and final proposals in December.
The new rates would take effect April 1, 2010. Now moving on to supply, I am happy to report the construction work on Montour cooling tower was completed and unit one came back online November 15, 2008.
The project was completed safely and well ahead of our schedule. I am also pleased to report that Susquehanna nuclear plant set a new generation record in the fourth quarter.
The plant generated over 19 terawatt hours which is nearly 1 terawatt hour more than the previous record that was set in 2005. This achievement is a direct result of dedicated personnel at Susquehanna and comes on the heals of successful completion of one of the most complex outages in the plants history during the spring of 2008.
Also at Susquehanna, we are scheduled to complete and operate at unit 2 of 69 megawatts this spring. This will bring the total unit to upgrade to 1131 megawatts.
In addition a 32 megawatt upgrade at unit 1 is planned for 2010. As you are aware in December the D.C.
Circuit Court reversed an earlier decision to vacate the Clean Air Interstate Rule or CAIR. Somewhat surprisingly SO2 allowances prices have not risen as a result of this court decision.
It appears market participants are taking a wait and see approach. We of course, continue to evaluate our strategy with regard to the length we have in SO2 allowances as a result of the scrubbers we have installed on our eastern fleet.
Let's turn to slide 19 and review the results of our marketing and trading operations in 2008. During the third quarter call we discussed the trading positions we had taken and the losses we experienced.
As you can see from the chart we ended 2008 basically at a breakeven level. I have also included the amount expected from our marketing and trading operations in 2009.
As we previously discussed we scaled back our marketing and trading operations given market conditions. I would also point out that our 2009 expectations reflects the marketing transactions that have been executed prior to 2009.
In other words we had some margin backlog coming into the year. On slide 20, we have updated our hedge positions for electricity and fuel as of December 31, 2008.
I would like to remind you that this slide represents all economic generation not just baseload, I will address baseload in a moment. Our current electricity hedge position for 2010 79% an increase of 3% over the previous quarter.
We have continued to hedge 2011 and 2012 electricity sales as well with 47% hedged in 2011 and 26% hedged in 2012. On the fuel side, we have contracted for 100% of the coal needs for 2009 for our wholly-owned units and remained well hedged through 2012.
Our average hedged fuel prices for each year are below current and forward market prices and should provide significant value as we move into 2010 and beyond. This will be evident, when we review the open EBITDA positions in a few minutes.
Turning to slide 21, coal, nuclear and hydro, which are baseload generation make up more than 90% of our expected generation output in any given year and is really the value drivers for the generation fleet. For 2009, substantially all of our expected baseload generation output has committed to sales obligations.
For 2010, we have hedged over 80% of our baseload generation a small increase from last quarter, which provides a company with the solid base of earnings growth that we are forecasting. For 2011 and 12, you can see we have also hedged some significant portions of baseload generation at prices favorable to current market force.
I would also like to note that substantially our capacity has been hedged primarily through selling forward capacity and PJMs, RPM auctions through 2011. On slide 22, we provide an update of our open EBITDA positions.
Continuing with our practice of updating our open EBITDA positions with prices at the end of the quarter. Slide 22 has been updated to reflect forward prices as of the end of December, which are available on page A1 of today's presentation.
Based on oil prices at December 31st, the unhedged gross margins for the supply segment in 2010 would be about $2.6 billion with associated O&M of $859 million. This brings the value of our 2010 open EBITDA to almost $1.8 billion.
The change since the third quarter reflects the dramatic decline electricity prices partially offset by lower fuel prices. During the fourth quarter, PJM round the clock prices fell nearly $10 per megawatt hour for 2010, and coal prices fell about $53 per ton.
Our 2011 and 12 open EBITDA positions were similarly impacted. While the decline in power prices negatively effected our open EBITDA positions to the value of our hedges as one would expect have increased dramatically.
With that I would like to turn the call back over to Tim for the Q&A.
Tim Paukovits
Okay. Thanks Bill.
Operator we are ready for questions.
Operator
(Operator Instructions). Your first question comes from the line of Paul Patterson with Glenrock Associates.
Paul Patterson - Glenrock Associates
Good morning guys.
Jim Miller
Good morning.
Paul Farr
Good morning, Paul.
Paul Patterson - Glenrock Associates
Since I saw trading and marketing it looks to me, that you guys are seeing better margins, or you are expecting better margins in 2009. Is that's because the backlog that you guys were talking about and has 2010 changed at all?
Jim Miller
Our 2010 has not changed. 2009 does reflect the backlog that we had coming into the year which was roughly about $50 million of margins we had from polar deals and other transactions that were executed prior to 2009.
Paul Patterson - Glenrock Associates
Okay. So, that's kind of look.
I think before it was $65 million now it is $85 million.
Jim Miller
Yes.
Paul Patterson - Glenrock Associates
Okay. And then the 2010, stays the same at $125
Jim Miller
Yes.
Paul Patterson - Glenrock Associates
Okay. And then secondly, there is was email that was published in your local paper about cost cutting efforts.
Jim?
Jim Miller
Yes, yes.
Paul Patterson - Glenrock Associates
And I was wondering if that’s got I don’t see any change in the open EBIT number but how you see that as potentially impacting your order or is it and what has been?
Jim Miller
Well, I think Paul as we go into these 2009 and it's not too much different from a number of other years where we see a lot of economic challenges with the economy. We are trying to maintain a laser sharp focus on all necessary steps to reduce cost in a corporation.
So I think the message to our employees and to the outside world here is that we are very focused on cost containment, cost reduction and we will continue that effort as we move through the next three four weeks here and determine where we can trim cost in the corporation to deal with any of the unforeseen that hit us in a difficult economic time in the country. So, I think there is nothing at this point that would cause us to change any of our forecast one way or the other but I think it's just a message to everyone that we are a very intensely focused on delivering our numbers for 2009 and beyond and you can't maintain a focus without bringing cost in to the picture and that's exactly what we are doing.
Paul Patterson - Glenrock Associates
Okay. So that may low a cost, so we have actually got projected in the numbers now but you guys are being conservative and your estimation of that is that the way your thinking?
Bill Spence
Well I think one way of think it is there are couple of headwinds I mentioned in my remarks Paul, in terms of pension costs both domestically and at WPD the FX rate that we assumed in the plan was $1.50. We gave sensitivity around that number on the last slide in the deck.
What we are looking at from the cost control perspective would more than offset those so I guess we are trying to stay ahead of the game and trying to not predict negative outcomes but as Jim, said we're clearly focused on meeting and beating the forecast we have given you guys. So that it factors in to negative headwinds and our intent in terms of performance for the year or so.
Paul Patterson - Glenrock Associates
Okay great and then just finally the energy efficiency efforts that you guys mentioned it was inflation what have you the demand reduction efforts are? Do you see those as being achievable or do you see any problems in accomplishing those or what do you think about their attainability, we are seeing that's showing up in the legislation of our country.
I was just wondering, what do you guys think about the capability of Pennsylvania reducing demand as they I guess they hope to do in this legislation?
Jim Miller
I think they are very achievable numbers. I think the key for us obviously in the legislation was ensuring that we had our cost recovery and as there were going to be enough funds dedicated to be meaningful and I think if you look at 2% of the revenue as the number that's targeted for allocation of the programs, we do think that would be sufficient to achieve the goals that they have both on the conservation and as well as on the demand reduction end.
Paul Patterson - Glenrock Associates
Okay great thanks a lot guys.
Jim Miller
Sure.
Operator
Next question comes from the line of John Kiani with Deutsche Bank.
John Kiani - Deutsche Bank
Good morning
Jim Miller
Good morning John.
John Kiani - Deutsche Bank
Can you discuss the potential or talk a little bit about the potential 2011 through 2013 procurement and any additional rate mitigation, I know Jim you have talked about a little bit in your opening comments. But 2011 procurement at current prices be blended with the 2010 increase through some type of the deferral mechanism.
And if that's the case what will the resulting rate payer increases look like on an annual basis?
Jim Miller
I will comment on that, first I would say in terms of the current process that we are using for 2010, the gap period. We have no plans to modify that at this point.
We would of course consider other alternatives but quite frankly we have already filed a plan, it's been approved for 2010 to 2011 plan was initially submitted and recently modified to comply with the Act 129. And we think that's a well thought [province] and highly structured plan that are going to provide benefits.
If you look at core prices who knows where they are going to be, but clearly there is a potential looking at way forwards of settling for 2011 and we could be looking at a decrease for customers in 2011. And possibly decreases in the next two auctions coming up.
So the 36% that is result of the first four auctions is likely to come down, although other things being equal, but hard to predict where 2011 will fall out. The PUC did recently do a new flash cut of where they expected prices to fall for 2011 and 2010 and substantial reductions from the power flash cut that they had done.
So all-in-all I think as prices are dropping, customers could see those benefits as auctions unfold here.
John Kiani - Deutsche Bank
Okay and then could you talk a little bit about the transmission line that you recently announced from Susquehanna?
Jim Miller
Sure, just in terms of a general update.
John Kiani - Deutsche Bank
PM timing and what kind of the benefit of the line is and why you are pursuing the development of it.
Jim Miller
Sure, I think first and foremost we are constructing the line at the direction of PJM, which has forecasted the need from our reliability standpoint for that line. Secondly, we have flied with the Pennsylvania Public Utility Commission or applications and we would expect that process to take about a year.
So you would be looking at probably the end of this year at the earliest that we have approval from Pennsylvania. We have formula rates that are on file with the FERC and in the process of serving our case there, so that looks favorable, but our belief is from a reliability standpoint and there is certainly a need and I would also say that there are a lot of renewable project out there that I think everyone is focused on making sure those renewable resources get to market and this is another way to help that.
John Kiani - Deutsche Bank
Okay, that’s helpful. And then one last question.
It looks like your 2010 and '11 call had just went down a few 100 basis points? Can you talk a little bit about what happened there?
Paul Farr
Are you referring to the EBITDA slide?
John Kiani - Deutsche Bank
I am referring to slide 20.
Paul Farr
Yes, I think those are primarily coming from better number from Keystone & Conemaugh.
John Kiani - Deutsche Bank
Got you.
Jim Miller
We have estimates and than as the owner group is provided better information from the operator we are able to update the numbers.
John Kiani - Deutsche Bank
Very good, thank you.
Operator
Your next question comes from the line of Danielle Seitz with Seitz.
Danielle Seitz - Seitz
Hi. I was just wondering if you could give us an idea over the tax rate for international delivery and whether that has happened in '08 pretty much reflecting on '09, or do you see another change there?
Paul Farr
Again we did see about a $0.06 benefit coming through from resolution of an open issue that we had with inland revenue that we got resolved. Lately, that is effecting the global rate for WPD.
Let me try to get to the effective rates. Do you have another question Danielle?
Danielle Seitz - Seitz
Yes, just quickly the improvement in margins that you are anticipating for this year. How much of that will be coming from the upgrades that you are anticipating at the different nuclear plants.
If it is major portion of that or most of it is actually prices?
Paul Farr
Hello?
Danielle Seitz - Seitz
Yes.
Paul Farr
Yeah the effective rates were around 29%.
Danielle Seitz - Seitz
Okay, that is for 2009?
Paul Farr
That's correct and about roughly 30% for 2010.
Danielle Seitz - Seitz
Great, thanks a lot. And as far as the effect of the upgrades for this year regarding the nuclear plants and next year, do you feel that $0.27 that you are anticipating this year.
Is this a minimal portion of that number most of it is just prices.
Paul Farr
No the nuclear generation is about $0.03 of the total.
Danielle Seitz - Seitz
Great.
Paul Farr
So, its not the majority, again more significantly coming from improved power values from higher prices in the west and higher prices under the polar contract. And then higher margins from marketing and trading which is around $0.13 again as we built from that basically flat, net marketing and trading result in 2008 to the 85 million in gross margin that we expect in 2009.
Those are the biggest drivers.
Danielle Seitz - Seitz
Great. And the higher O&M is mostly pension on delivery that you are anticipating?
Paul Farr
That the utility more baked on customer programs and uncollectible at supply coming from additional plant outages at the coal-fired units and higher operating cost of the scrubbers which is about a nickel.
Danielle Seitz - Seitz
Thanks a lot. I appreciate.
Paul Farr
You're welcome.
Operator
Your next question comes from the line of Jonathan Arnold with Merrill Lynch.
Alex - Merrill Lynch
Hi, guys its actually Alex stepping in. I just had a question on the pension thought there.
I don’t know if you could give us a little bit better idea of what the cost increase would be from 2008 to 2009. And related question would be why we are really seeing an impact on 2010 outlook plan.
I was thinking about things from an international perspective and almost assumed that any elevated pension cost might be cooperated in the next rate review with rates implemented next spring.
Paul Farr
Okay. On a consolidated basis from '08 to '09 we are seeing about $0.03 increase in pension cost, versus where we thought, we were going to be it was about $0.01 increase, when we were going through November review.
Virtually all of that came about because of the very significant decline in AA corporate, subset of the universe that we use to discount the obligation add as everybody really saw as there was a major drive to high quality, debt securities including treasuries and the higher quality corporates in December. Rates drove down slightly in excess of 100 basis points from where we were at beginning to mid-November to where we ended up at late December and almost all of that came within the month of December.
So, it just was not predictable. We thought we were being as conservative as we could be but there is a little bit of a hit there.
From a WPD perspective, we do get recovery of a significant portion of the on-going pension cost and underperformance of assets versus liabilities. However, when they do the distribution price control reviews, they use actuarial numbers from triennial evaluation for the pension plans.
So, from a WPD perspective, which occur at mid-year, so they are going to use mid-year 2007 pension cash funding assumptions as they determine the revenue requirement instead of numbers which would come through in early to mid 2010. So, in this price control review they are using data from '07 for 2010 through 2015 revenues.
Ultimately, the 2015 revenue case would factor this in. So, it’s a relatively large gap timing issue.
The [REX] in the UK though, all of that including ourselves are trying to get Ofgem to recognize what's happened in the marketplace from an interest rate perspective and an asset performance perspective to try to adjust revenues for that item. But it's not, given that we need to be able to accomplish that.
Yes, ultimately, a significant portion of the cost of recoverable and revenue. But you can end up with timing issues and we are not on [FAS 71] for UK.
So, they hit as we go.
Alex - Merrill Lynch
Great. And just a follow-up on WPD.
I was just wondering what overall thoughts are just in terms of Ofgem, your attitude and indications on rate of return, I guess compare to last price control and also what your performance benchmark then for WPD relative to the other companies?
Jim Miller
We would expect to get similar treatments to what the gas folks saw so some slight hair-cut in the whack not significant and factored into our forecast. WPD, clearly remain frontier performer in terms of quality and service.
As well as from a cost perspective, although, we got a little more work to do there as it relates to trying to get them to normalize or I guess normalize is the right word as they do the regression analysis and comparing contrast each rack against to each other just try to get more network focused in terms of number of customers focused in that calculation. We rate very highly from a cost perspective as well as being the frontier in quality and service.
We maximized our revenue bonuses between the rate cycles each year for the last several years as well. That performance obviously we get higher expectations from Ofgem as they reset the expectation bar for the next review, but we are confident that we can continue to outperform there.
So, nothing in terms of philosophical change by Ofgem, it really are trying to find ways again with their incentive mechanism to reward performers who say that they need certain O&M cost, certain CapEx levels and then outperform the metrics. And if you do that, you get rewarded and if you don’t you get penalized and that’s how we have been treated extremely well.
We don’t expect that to change.
Operator
Next question comes from the line of [Ed Tirello] with Zimmer Lucas Partners.
Ed Tirello - Zimmer Lucas Partners
Good morning. I just have a question about low growth at the Pennsylvania Delivery segment.
You said during the call that you expect residential load to grow slightly and that will be offset by the declines in the commercial and industrial. I was wondering if you could put more specific numbers around that?
Jim Miller
Sure on a weather adjusted basis we basically saw just under 2% load growth from 2007 to 2008 and as Bill, mentioned in his remarks we would expect on a consolidated basis to be roughly flat-to-down, 0.5% from '08 to '09 virtually all of the decline that we are seeing in industrial is being slightly offset by residential and small commercial. So the numbers vary in terms of the total load by the customer classes.
So the percentage, it’s not an equal load across the universe of customer classes.
Ed Tirello - Zimmer Lucas Partners
What kind of decline are you seeing for the industrials?
Jim Miller
Just over 2% on a weather adjusted basis between '08 and '09.
Ed Tirello - Zimmer Lucas Partners
Okay and with the power prices coming down do you now expect that there will be significant customer switching going to 2010?
Jim Miller
Yeah, there is clearly the potential for that. I guess it depends upon on how quickly that market develops.
In most markets that have gone through deregulation, obviously, the commercial industrial the first is one is off and in fact they are not part of that utility fixed launch procurement program for 2010. There will be one auction late this year on their behalf and they can either opt into that program or shop.
They really require to effectively shop. So from C&I perspective I do not see any significant change for what the prior view was.
There will be system to fuel from the default supply standpoint. As it relates to the residential and small commercial industrial we will see what happens, again the prices if you use current leverage would be less than the 36% as procured thus far and as the utility conducts the next two auctions of this further declines, the likelihood of shopping is greater and that will benefit customers.
Ed Tirello - Zimmer Lucas Partners
When do you expect to file your next rate cases for the Pennsylvania delivery segment.
Jim Miller
As we see, the relatively flat load growth profile as we see rising costs, as we see relatively significantly rising CapEx on the distribution side of the business. Clearly our rate case could be warranted, even in 2009 but 2010 will be more likely as we kind of look forward with effective rates in 2000 and higher rates in 2011.
Ed Tirello - Zimmer Lucas Partners
And just one last question, what are you expecting full pension contribution in 2009?
Jim Miller
In 2009, from a domestic perspective around $44 million, from a UK perspective, we will get back to you on the UK cash one
Ed Tirello - Zimmer Lucas Partners
Okay, and the $44 million from domestic, that's close to being at the Delivery segment?
Jim Miller
Yeah that's the consolidated domestic funding expectation that's Montana, that's EU that's Gen all under being well planned.
Ed Tirello - Zimmer Lucas Partners
Thank you very much.
Jim Miller
You're welcome.
Operator
Your next question comes from the line of Reza Hatefi with Decade Capital.
Reza Hatefi - Decade Capital
Thank you very much. I was just looking at your CapEx slide A6 and noticed that why CapEx in '10 and '11 are $752 million and $790 million in '11, what does that include I thought Holtwood was not happening and yet the CapEx was still at the previous level, so remind just a big?
Bill Spence
This is Bill Spence and you are looking at 2010 levels of CapEx for the supply group?
Reza Hatefi - Decade Capital
Right the previous '10 levels were also about $700 million which I thought included Holtwood.
Bill Spence
If probably in a quality included at small amount for the front end of the project at Holtwood so that would one driver. The other thing is we have included for assistance general maintenance of the plant so we've included some and reflected some increases there year-over-year from our prior forecast.
There is only about little over a $100 million in what I would consider to be discretionary CapEx, most of it is either their sustenance environment related or regulatory driven.
Reza Hatefi - Decade Capital
Okay and these numbers just to confirm include nuclear field CapEx?
Bill Spence
It would.
Reza Hatefi - Decade Capital
And could you also may be give us a little color on what you are seeing in the coal markets obviously last year was a pretty wild year. Is it kind of getting tamer.
Are you able to do some long-term of contracting at reasonable prices. What do you see out there?
Bill Spence
Well certainly on the spot market side prices have come down substantially and I think for small train loads on a spot basis you could probably get eastern coal on $65 to $75 a ton range compared to where we are up in $140 last year. On a term basis we are as you can see from some of our hedge slides we are pretty well positioned overall.
So we are not out there actively looking at additional long term contracts of any sizable amount. It's an opportunity presents itself off course we are going to look to block some in.
But right now I think we feel pretty good with where we are sitting and do not have the exposure but for what makes this Keystone & Conemaugh don't really have any exposure on our eastern side for this year.
Reza Hatefi - Decade Capital
Thank you very much.
Bill Spence
And in the west just to add a little bit more. Prices are down a little bit but more or less holding where they were in the $16 to $18 a ton range.
Reza Hatefi - Decade Capital
Thank you.
Jim Miller
Operator do we have any other questions.
Operator
Our next question comes from the line of [Ed Haines with Catapult Capital].
Ed Haines - Catapult Capital
Good morning.
Jim Miller
Good morning.
Ed Haines - Catapult Capital
Just had a few quick questions, Paul I think you mentioned this but the sterling assumption you are using in your '09 and '10 guidance is it $1.50 is that right?
Paul Farr
That's correct a $1.50 in 2009, $1.75 in 2010.
Ed Haines - Catapult Capital
Okay.
Paul Farr
Which was baked more of, we use a series of forward what but not really forward, but forecast by various sources to try to develop of you.
Ed Haines - Catapult Capital
Got you. Okay and then you put that sensitivity now that nickel move is worth about $0.02 and EPS.
Paul Farr
That's correct.
Ed Haines - Catapult Capital
Okay, and then just on the open EBITDA can you guys disclose what sort of coal prices you are assuming in those numbers or give us a kind of idea of how much they have moved down from the last time you gave us a mark?
Paul Farr
I would say just for 2010 in general, that the prices have move down rough numbers about $5 a ton.
Jim Miller
And Mark, that would just effect pretty much the east because of the west, we got this mine now for coal strip we used contracted prices.
Ed Haines - Catapult Capital
Okay.
Jim Miller
In even number.
Ed Haines - Catapult Capital
So when you guys give the open number at 930 versus year-end '08, the coal price in ton only came down $5 a ton?
Jim Miller
And that would primarily effect the 9 million tons of coal in the east.
Ed Haines - Catapult Capital
Got you, okay, because you don’t include the west because it's hard to get a mark there.
Jim Miller
Well, because it's contracted through 2019 at a cost based contract. So, market benchmark wouldn’t be relevant.
Ed Haines - Catapult Capital
Got you. Okay, brining it down $5 a ton is that still again $90 range or so for 2010 you are assuming in the open EBITDA or is it a lot lower than that?
Jim Miller
We will probably be in that range, yes, with transportation included on delivered basis.
Ed Haines - Catapult Capital
Okay. So you are seeing spots up now in the 65 range, does that include transportation?
Jim Miller
65 to 75 that would not include transportation.
Ed Haines - Catapult Capital
Okay.
Jim Miller
Whatever you think might be an appropriate number to that.
Ed Haines - Catapult Capital
Got you. Okay, and then just the last question, I think you had kind of touched on this, but I guess the switching risk given that commodity prices have come down in the 2010 auction for residentials.
I know that residentials are kind of sticky but how much of like your 80% electricity in the east hedged in 2010 is kind of really I guess energy supply which is directly serve in the auction that could basically be at risk?
Jim Miller
The confidentiality provision as dictated by the PUC don’t permit discussion or disclosure of the level of participation or wins in the auction processes, the only out that’s provided for in the underlying contracts is if the one that, if the amount that’s garnered by a particular supplier is significant enough that they deem it necessary to disclose from a financial reporting perspective. So, we discussed in the first auction that we had one 85% of the total lots in the auction.
We have not disclosed anything since the first auction, so you can read that to be, it was immaterial amount to zero in the subsequent auctions. Remember we had 50% of the baseload hedged before utility conducted the first auction.
So from our perspective it’s not significant it would be material from a cooperate perspective.
Ed Haines - Catapult Capital
Okay. And the switching risk would only come into effect if you actually won the auction, as oppose to selling to a third party that has essentially supplied the auction, because you would not have that load variability risk.
Got you, okay. Thanks for the help.
Operator
(Operator Instructions). Your next question is a follow-up from the line of John Kiani with Deutsche Bank.
John Kiani - Deutsche Bank
Hi, thanks for taking my follow-up, one last question on the Susquehanna transmission line. Do you have a higher level estimate for how much that transmission line once it's put into service would increase the realized market heat rate or the price of power or what not at Susquehanna (inaudible).
Jim Miller
No. We don’t.
John Kiani - Deutsche Bank
Directionally, will it go up or down?
Jim Miller
I haven’t looked at it for some time. So, I would be hesitant given the dramatic declines we have seen in prices across the Board.
I want to go back and look at that before I would even venture, yes to be honest
John Kiani - Deutsche Bank
Okay. Thanks.
Jim Miller
Sure.
Operator
Your next question is a follow-up from the line of [Ed Tirello] with Zimmer Lucas Partners.
Ed Tirello - Zimmer Lucas Partners
Hi. You mentioned earlier in the call that you are seeing 2009 earnings in the lower half of your previous guidance range.
And just wondering what are the specific factors leading to that view, [on to those side of things]?
Jim Miller
In 2010, it's been driven almost entirely by the decline in value of the open power position that we have got as we all watched forward prices decline for the cal 2010 period. That’s slightly less than 20% open baseload position has impacted gross margin.
Ed Tirello - Zimmer Lucas Partners
Thank you very much. That was very helpful.
Jim Miller
You're welcome. To get back to the question that Danielle asked earlier and there is no change to those cash payment assumption in the UK from any movement in interest rates or anything like that.
It was consistent with the plan, again because the triennial evaluation, it's around $90 million in cash funding for the pension in WPD for the next year.
Operator
There are no further questions at this time. Do you have any closing remarks?
Jim Miller
Well, operator, I will just remind everyone that from our perspective at PPL these are challenging times in the economy. But rest assure we have an intense focus on doing all the taking, all the necessary steps to deal with any headwinds we see in 2009 and beyond to ensure that we deliver the numbers that we put out to the community.
Additionally, I think that in this year, this spring we will continue to work with both the PUC in the Pennsylvania legislature to complete our transition to market purchases for PPL Electric Utilities in 2010, and as well we are going to take all the necessary steps to strengthen and maintain our credit rating for the corporation. So, I thank you for your attention and we will talk to you at the end of first quarter.
Thank you.
Operator
This concludes today's conference call. You may now disconnect.