John R. Biggar, Executive VP and CFO, PPL Corp.
Richard Stavros is Fortnightly's Executive Editor.
Why did PPL recently revise its growth rates upward? What is driving the revised numbers?
John R. Biggar: When we reported second quarter earnings at our analysts meeting on August 2 in New York, we announced a number of things that improved the long-term outlook for the company. In this regard, we revised our long-term, annual compound growth rate from 3 to 5 percent to 6 to 7 percent in earnings per share through 2010. This is a significant increase in our growth forecast over the longer term.
There were a number of factors that we looked at in revising our forecast. We are upgrading a number of our generating assets to improve their power output. Essentially, we will be able to get 255 MW of additional capacity at the plants that we currently own and operate. The bulk of that, 177 MW, will be through a power uprate program at our Susquehanna nuclear plant. Also, we will be replacing some turbines and other equipment at our coal-fired plants, which is more efficient equipment that allows us to get more output for the same thermal input. When fully implemented by 2010, these power plant uprates are expected to result in about $100 million of additional margin annually. We are improving our power plant reliability. We currently have an equivalent availability factor of about 91 percent. We expect to get that up closer to the 94 percent range as we go out over the next several years. Each percentage improvement in equivalent availability adds about $20 million per year in margins for us. We have a number of long-term power supply agreements that have been in place for a number of years. Those power supply agreements will expire over the next several years. Because the market prices have increased dramatically from the time those contracts were put in place, we would expect to sell that power at the higher prices, reflecting current forward-price levels. In total, these factors are expected to add about $570 million in additional margins above the $1.58 billion of margins projected for this year.
What earnings are you forecasting for 2005 and 2006?
JRB: As you may know, we announced a 2-1 stock split that became effective on Aug. 24, so all of the per-share amounts I'm going to discuss are post split. Our 2005 forecast of earnings from ongoing operations before August 2 was $1.90-$2.10 per share. We have raised the lower end of the forecast range to $2.00 per share. So, the current forecast range for 2005 is $2.00-$2.10 per share, with a $2.05 per share midpoint. We also announced our earnings forecast for 2006 about four months earlier than when we normally announce the upcoming year's forecast. We are expecting earnings on a post-split basis for 2006 to be $2.15-$2.25 per share, which produces a midpoint of $2.20. That represents a 7.3 percent increase in earnings growth from 2005 to 2006. … In August we announced an increase of the dividend of about 8.7 percent. We took the annualized rate from 92 cents per share to $1.00 per share effective with the Oct. 1, 2005 dividend payment. This is the second time this year that the dividend has been increased. In December 2004, we also announced a target of hitting a 50 percent dividend payout ratio by 2007. In our August 2 analyst meeting, we announced that it is our intention to get to that 50 percent target in 2006. If you combine that statement with our 2006 earnings forecast, it would suggest that there is another meaningful dividend increase on the horizon for 2006.
PPL Corp., like a lot of other companies, has recently increased the dividend significantly. How do you think utilities will be able to manage high dividend payouts if interest rates rise or utilities must ramp up infrastructure expenditures? In other words, what if utilities' cost of capital rises or their capital expenditures/O&M costs increase dramatically? Will there still be enough left over to pay out to investors?
JRB: It is up to each company to be satisfied with its dividend-payout ratio. At PPL, we were comfortable increasing our dividend payout ratio to the 50 percent level. PPL has a very significant capital expenditure program over the next five years-including about $1.5 billion of expenditures for emissions-control equipment that we will be installing on our coal-fired plants in the eastern United States. During this period, we see very strong earnings growth, which means we will have very strong growth in retained earnings. I would expect that our retained earnings will grow on average by about $350 million annually. Our cash position is expected to improve. So, we expect to be able to fund our capital expenditure requirements with a combination of cash generated from operations and the issuance of debt securities and, at the same time, continue to pay a robust dividend. We don't expect to issue any common stock during this period of time.
A research report projects that your free cash flow will move into positive territory once the environmental costs related to scrubber installations are complete. These analysts speculate that you will repurchase shares. Why is this the best strategy, or is there another plan to use the free cash flows in other ways?
JRB:The repurchase of common stock is one of a number of alternatives, including additional investments, to improve shareowner returns. In other words, if there is an opportunity for an investment that will provide a better return for shareholders than the repurchase of stock, then the company would clearly be looking at that investment.
What is the percentage breakdown of the business line contribution to the bottom line? How do you think your earnings mix might change in the future?
JRB: Looking at 2005, we expect the supply business (our generation and marketing operations) will provide about 55 percent of our earnings from ongoing operations. Our Pennsylvania delivery business will provide about 20 percent of our earnings from ongoing operations. And our international delivery businesses will provide about 25 percent from our ongoing operations. The supply business is the growth engine for the company, so as we get out to the 2010 timeframe, we would expect the supply business to provide about 70 percent of our earnings from ongoing operations, with the balance pretty evenly split between the international delivery and Pennsylvania delivery businesses.
You have significant international investments. Do you plan to expand those operations?
JRB: We are satisfied with the level of our investment in international properties, which are essentially all electricity distribution businesses. They are providing solid earnings for us. They are providing cash flow. About three-quarters of our investment in international properties is in the United Kingdom. The balance is invested in Latin America with the bulk of that in Chile, which has a strong economy. … We think that we have added value to those companies, and they are adding to PPL. Our distribution company in the United Kingdom, for example, has won the Charter Mark Award five times for superior customer service, and we are the only electric delivery company in the United Kingdom that holds that distinction. No other electricity distribution company in the UK has won it once-and we've won it five times.
The fact that we have good customer service in the UK was reflected in the last rate review in the UK. We were awarded an extra 1 percent in revenues. ... Why have we done well? Just as we run all of our businesses, when we make an investment, we provide active management. Since 2002 our earnings from ongoing operations from our international investments have increased 133 percent. In 2002, our earnings per share from our international properties was 22 cents, and our estimate for 2005 earnings is between 50 cents and 53 cents per share. That's about $190 million of earnings.