賓州電力 (PPL) 2016 Q2 法說會逐字稿

Good morning and welcome to the PPL Corporation's second-quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Joseph Bergstein, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and thank you for joining the PPL conference call on second-quarter results and our general business outlook. We are providing slides to this presentation on our website 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 differ is contained in the appendix of this presentation and in the Company's SEC filings.

We will refer to earnings from ongoing operations or ongoing earnings, a non-GAAP measure, on this call. For a reconciliation to the GAAP measures you should refer to the press release which has been posted to our website and has been furnished with the SEC.

At this time I'd like to turn the call over to Bill Spence, PPL's Chairman President and CEO.

Thank you, Joe. Good morning, everyone. We are very pleased that you've joined us this morning. With me on the call today are Vince Sorgi, PPL's Chief Financial Officer and the Presidents of our US and UK utility businesses.

Moving to slide 3, our agenda this morning starts with an overview of our quarterly and year-to-date 2016 earnings results. We will also provide an update to our 2016 full-year earnings guidance, which we are reaffirming today. We will then turn our discussion to the impact that the UK decision to leave the European Union has had on PPL.

We are also initiating earnings guidance for 2017 and updating our long-term EPS growth rates. Following my remarks, Vince will review our segment results and provide an overview of the assumptions we have used in planning for growth through the end of the decade. As always, we will leave time to answer your questions.

Turning next to slide 4, today we announced second-quarter 2016 reported earnings of $0.71 per share compared with a reported loss of $1.13 per share in the second quarter of 2015. Second-quarter 2015 results reflected a one-time charge of $1.50 per share from discontinued operations associated with the June 1, 2015 spinoff of our supply business.

Year to date through the second quarter, reported earnings were $1.41 per share compared with a loss of $0.17 per share for the same period in 2015. Reported earnings for the first six months of 2015 reflect a loss from discontinued operations of $1.36 per share resulting, again, primarily from the supply spinoff.

Adjusting for special items, second-quarter 2016 earnings from ongoing operations were $0.56 per share compared with $0.49 per share a year ago, representing a 14% increase on a per share basis. This increase was driven largely by higher base electricity rates at our Pennsylvania and Kentucky utilities, along with higher transmission margins from additional transmission investments in Pennsylvania.

Through the first six months of 2016, earnings from ongoing operations were $1.23 per share compared with $1.26 per share a year ago, with the lower earnings year to date driven by the lower UK earnings in the first quarter of 2016 as a result of the RIIO-ED1 revenue reset that occurred in April 2015. Vince will go into greater detail on second-quarter results a little later in the call, but we are very pleased with the results for the second quarter and so far this year.

Moving to slide 5, today we are reaffirming our 2016 ongoing earnings forecast of $2.25 to $2.45 per share, with a midpoint of $2.35 per share. The higher than expected results in all of our business units so far this year gives us a high degree of confidence in our ability to meet our 2016 earnings forecast.

We continue to execute our plans for sustainable growth across our seven high-performing utilities, while delivering award-winning customer service, strengthening reliability and improving our efficiencies. And to reflect the current market for the pound, our 2016 forecast now assumes $1.30 per pound on our open positions.

Turning to slide 6, looking beyond 2016, the fundamentals of the business remains strong and intact despite the recent UK vote to withdraw from the European Union and the resulting weakening of the British pound sterling exchange rates. The vote to leave the EU has created broader economic uncertainty in the UK and is clearly a unique event that has led to significant volatility in the currency and worldwide markets.

Despite this reaction, there is no change in our underlying business in the UK. Our revenues are set for seven more years. We are essentially sheltered from economic recession since we would be made whole in future periods for any volume variances that may result from an economic slowdown in the UK.

And as a reminder, our base revenues are also adjusted for inflation using the retail price index, or RPI. The July RPI forecast has actually already increased from the forecast published just a month ago in June. Further, we expect no change to our investment in infrastructure since our business plans have already been accepted by OFGEM, the UK regulator.

The volatility created in the currency markets, however, does have an impact on our US dollar financial projections. The lower pound exchange rates will impact our translated earnings and the WPD dividend coming back to the US.

Moving to slide 7, we know that without providing updates to our earnings growth profile, there would continue to be uncertainty for investors as to our longer-term earnings profile given the sharp decline in the British pound exchange rates. With no near-term catalyst that would signal a move higher in the pound, we took action to update our business plans to reflect current market conditions, starting with the monetization of our existing 2017 and 2018 hedges, which I will discuss in more detail shortly. Today we are providing new earnings growth projections and a target dividend growth rate, as well as updates to our UK cash repatriation and FX hedging strategies, all of which should provide clarity around our earnings and dividend targets through the end of the decade.

The post Brexit decline in the pound sterling drove our existing foreign currency hedges to be about $450 million in the money, which we don't believe is being appropriately reflected in PPL's stock price. We believe investors are largely valuing the company on an open basis, excluding the value of these hedges.

As a result, we were looking for an opportunity to optimize the value of these existing hedges. We decided to monetize the gains associated with our 2017 and 2018 earnings hedges, capturing approximately $310 million in value. This monetization, in combination with the higher than expected gain on the remaining 2016 hedges, will offset lower expected cash repatriation amounts from the UK resulting from the lower expected exchange rate, providing about five to six years of coverage, and will support the Company's future dividend growth.

Cashing in the hedges, though, did result in us remarketing our future earnings using current market rates, which is expected to result in 2017 earnings being lower than 2016 earnings. Since we didn't think we were getting credit in the stock price for the hedges, we felt it was prudent to lock in the value of those hedges and protect the dividend growth despite the resetting of our future earnings.

We have reestablished hedges for 2017 and 2018 at current foreign exchange rates at slightly higher hedge levels that existed prior to the monetization. We have updated our business plan to reflect current market conditions, including $1.30 foreign currency rate on unhedged positions from 2017 through 2020.

Re-hedging about 95% of the 2017 UK earnings at current rates protects the 2017 earnings guidance that we are providing today against any further near-term decline in the pound. And resetting our unhedged earnings in our business plan to the $1.30 exchange rate allows for potential upside to our earnings projections if there is a recovery in the pound.

We also announcing an update to our cash repatriation strategy with an expectation of lower amounts being repatriated from the UK going forward. On an annual basis, we will determine the appropriate level of distributions from the UK, taking into account foreign exchange rates as well as tax rates in both the US and the UK. But in the near term, we anticipate that we would repatriate about $100 million to $200 million annually. Vince will provide more details on this updated strategy in his prepared remarks.

The actions we've taken reinforce our dividend growth projections and reestablish a baseline of PPL earnings and future earnings growth reflective of the Brexit decision, the current market, and our underlying business growth. Today we are providing a 2017 guidance range of $2.05 to $2.25 per share for PPL with a midpoint of $2.15 per share. We now expect per share compound annual earnings growth of 5% to 6% from 2017 through 2020 based on the midpoint of our 2017 guidance. Moving forward, we will continue to maintain a strong balance sheet and strong cash flows, and our investment grade credit ratings remain unchanged with a stable outlook.

Finally, as I mentioned earlier with the cash out of the hedges, we're not changing our expectation of a more meaningful dividend growth beginning in 2017. We are now targeting dividend growth of about 4% annually through the end of the decade. This will result in our total return proposition being projected to be in the 8% to 10% range over this period.

While we were not expecting the UK to vote to leave the EU, after careful consideration and deliberation with our Board of Directors, we decided to take these actions now as it recognizes the reality of the current market conditions, is reflective of the underlying growth of the business, and it enables us to focus our attention on providing safe reliable service to customers and delivering long-term value for shareowners as opposed to being overly focused on the FX rate.

Turning to slide 8, we've prepared a walk from the midpoint of our 2016 earnings forecast of $2.35 per share to the $2.15 per share midpoint of our 2017 earnings forecast. As you can see on the slide, there is a $0.20 per share decline from 2016 to 2017 directly attributable to the impact of resetting the exchange rate to the updated hedge rate of $1.32 per pound. The UK earnings, excluding currency, are expected to be $0.04 lower in 2017 compared to 2016 as a result of lower incentive revenues that we've discussed on prior calls.

The higher depreciation and interest expense is offset by the annual price increase under RIIO-ED1 in the UK. We're forecasting both the Pennsylvania and Kentucky regulated segments to be $0.02 higher in 2017 compared to 2016. In both cases, higher margins are driving the higher earnings. Corporate and other expenses are expected to be relatively flat year over year.

Moving on to slide 9, our business fundamentals and investment proposition have not changed significantly. We still expect strong compound annual rate base growth of about 5% from year-end 2016 through 2020, with rate base expected to grow to $29 billion by 2020.

The constructive regulatory climate in which we do business is also the same. We still expect about 80% of our $12 billion infrastructure investment over the period to receive real-time recovery. Our core business is growing in support of our longer-term growth projection of 5% to 6% from 2017 through 2020.

At this point I'd like to turn the call over to Vince to walk you through a detailed look at segment earnings and a full review of the detailed assumptions used in planning for our updated guidance. Vince?

Thank you, Bill, and good morning, everyone. Let's move to slide 11. Our second-quarter earnings from ongoing operations increased by $0.07 per share, driven primarily by higher earnings from the Pennsylvania regulated segment and the Kentucky regulated segment, while the UK regulated segment remained flat compared to a year ago. Corporate and other costs were slightly favorable compared to prior year. We should note that for the second quarter compared to prior year, domestic weather was relatively flat and weather was about $0.01 positive compared to budget.

Let's move to a more detailed review of the second-quarter segment earnings drivers, starting with the Pennsylvania results on slide 12. Our Pennsylvania regulated segment earned $0.11 per share in the second quarter of 2016, a $0.04 increase compared to the same period last year. This increase was primarily driven by higher gross margins due to higher distribution margins as a result of the 2015 rate case that became effective January 1, 2016, and higher transmission margins due to additional capital investment.

Moving to slide 13, our Kentucky regulated segment earned $0.11 per share in the second quarter of 2016, a $0.02 increase compared to a year ago. This result was primarily due to higher gross margins from higher base rates that were effective July 1 of last year.

Turning to slide 14, our UK regulated segment earned $0.36 per share in the second quarter of 2016, the same as the year ago. This result was due to higher gross margins primarily resulting from higher prices due to the April 1, 2016 price increase, partially offset by one month of lower prices from the April 1 price decrease from the commencement of RIIO-ED1. Higher margins were offset by higher depreciation and interest expense as a result of continued investment in CapEx. And lower O&M expense of $0.01 was offset by unfavorable FX of $0.01.

Let's move to slide 15 and take a closer look at our earnings growth drivers. As Bill discussed, we are initiating our 2017 earnings guidance range of $2.05 to $2.25 per share, with a midpoint of $2.15 per share. We now expect a 5% to 6% long-term compound annual growth rate off of the 2017 midpoint of $2.15 through the end of the decade.

The key drivers in support of this new guidance include updating the GBP exchange rate to $1.30 per pound for all open positions and updating RPI using the July HM Treasury forecast for the UK economy. We've also updated our US and UK interest rate and pension assumptions to incorporate a lower-for-longer interest rate environment. And as Bill indicated earlier, we're targeting a dividend growth rate of about 4% per year through 2020, starting in 2017.

Our assumptions for the 6% to 8% growth profile for our domestic utilities includes the same strong growth factors as previously discussed, including domestic rate base growth of about 5%, minimal load growth in both Pennsylvania and Kentucky, transmission spending under FERC formula rates in Pennsylvania of between $600 million and $700 million year, totaling $2.6 billion over the four years, between $350 million and $400 million a year of continued environmental investment in Kentucky at an ROE of 10%. Over the four years we expect to spend about $1.5 billion of environmental CapEx in Kentucky. Just this week the Kentucky Public Service Commission approved our $1 billion environmental cost recovery plan with a 9.8% ROE.

Moving to the UK, the updates to the business plan reflect the macroeconomic impact following the UK referendum. We now projects4% to 6% growth in the UK from 2017 through 2020. The plan incorporates $1.30 per pound FX rate on our unhedged earnings from 2017 through 2020.

With the monetization of the 2017 and 2018 hedges, we entered into new hedges for those years at current market rates. I will discuss the hedge levels and the average rates we obtained when we get to the foreign currency hedging status slide. RAV growth is expected to be 5.4% through 2020, driving segment ROE in the 12% to 14% range.

We've also incorporated an update on the UK incentive revenues. Estimates are now $85 million for 2017, between $80 million and $100 million for 2018, and between $95 million and $115 million for 2019 and 2020. These estimates for incentives were adjusted for the assumed change in exchange rates and RPI, as well as expected performance against those targets. You will find our progress against the 2016-2017 regulatory year targets in the appendix to the presentation.

WPD's performance continues to be very strong and is on track to beat the new target. We've Incorporated new RPI assumptions to reflect the latest forecast published by HM Treasury in late July. This forecast shows a slight uptick in RPI from previous forecasts, and we continue to expect an effective tax rate in the UK of approximately 17%.

Moving to slide 16, I would like to review our updated cash repatriation strategy from the UK as this strategy has been modified beyond just the lower FX rate. Our previous guidance on cash repatriation from the UK was to distribute between $300 million and $500 million per year, with a target of $400 million assuming an FX rate of $1.60 per sound.

We've previously indicated the amount of repatriation within that range would depend on a number of factors, including the FX rate. The targeted $400 million per year represented distributions of about GBP250 million per year. That GBP250 million translated at $1.30 would result in US dollar distributions of about $325 million. This lower value of $75 million per year does not immediately impact us from a cash perspective since the in-the-money hedge value of about $450 million provides about five to six years of coverage against that lower US dollar amount.

But while the hedges kept us whole from a cash perspective, with the historically low FX rate and higher corporate tax rates in the US versus the UK, we have an opportunity to optimize our cash coming back from the UK even further. We are currently planning to repatriate between $100 million and $200 million per year in the near term. This lower cash amount will minimize the amount of translation impact on cash coming back from the UK at these historically low exchange rates.

We will replace the lower repatriation level with debt in the US. Debt in the UK however will be reduced by the same amount. Therefore, total debt at the PPL consolidated level will remain the same.

This shift in borrowing from the UK to the US captures the benefit of the tax rate differential between the two countries. This benefit becomes even more pronounced as the UK continues to reduce their corporate tax rate. Since the distributions are reducing our UK tax basis, these lower distribution levels also extend our tax-efficient cash repatriation strategy well beyond our original expectation of 2021 or 2022. And on an annual basis, we will continue to evaluate the most efficient level of cash repatriation taking into account perspective changes in the exchange rate, tax rates in both the UK and the US, as well as our overall tax strategy.

Moving to slide 17, the primary change to our revised capital plan is updating the UK projections for 2017 to 2020 based on an FX rate of $1.30 compared to the $1.60 previously used, and to an average rate of $1.37 for 2016. We are not projecting any impact on the UK capital forecast in local currency as those business plans have been accepted by OFGEM. On a US dollar basis, we are now investing approximately $1 billion annually in each of our three business lines, and the five-year spending plan from 2016 to 2020 is about $15.4 billion.

Moving to slide 18, we've also updated our rate base growth projections and have shown updated RAV balances to reflect the $1.30 FX rate assumption. Our overall growth rate of 5% has decreased slightly as we have reset our base year to 2016. And to enhance comparability, we've assumed $1.30 per pound for all periods.

Moving to slide 19, as we've discussed earlier, at the same time we monetized the 2017 to 2018 hedges, we have put new hedges at slightly higher levels at current market rates. You can see our average hedge levels for 2017 and 2018 and the average rates we achieved when we put the new hedges on. We used forward contracts to hedge 2017, which locks in from an FX perspective the new guidance we just provided for 2017.

However, we used the combination of forward contracts and zero cost to re-hedge 2018, providing us with some potential upside if the pound depreciates before then. The average hedge rates noted on this slide are based on the forwards and the floors in the collars for 2018. So, we've protected the downside below $1.30 but retain some upside potential above the rate shown on this slide.

We've also provide updated sensitivities which show there is more upside potential for 2018 than downside risk given the collars. But the rule of thumb of a $0.01 movement in the FX rate equaling a $0.01 movement in EPS still applies for a fully open year like 2019.

Moving to slide 20, on this slide our updated forecast assumptions are shown for RPI, again using the July HM Treasury forecast of the UK economy. The rates for 2017, 2018 and 2019 have been Incorporated into our updated revenue projection. As a result, the RPI sensitivity for 0.5% movement is now off our updated forecast and would increase or decrease earnings by $0.02 in 2018.

I know that was a lot of information so let me just recap. We felt the most appropriate course of action in light of Brexit was to, one, monetize the large mark-to-market value of the hedges, which enables us to preserve our dividend growth strategy for the PPL dividend; two, update our business plan to assume $1.30 per pound FX rate for all open positions, thus rebasing our earnings projections for 2017 forward; three, provide a very clear path for earnings growth beyond 2017 through the end of the decade based on the underlying growth of both the US and UK businesses; and, four, optimize our strategy of UK cash distributions back to the US by lowering the amount of distributions to the minimum required, capturing the tax rate differential between the US and the UK, and preserving our tax-efficient cash repatriation strategy for significantly longer.

An added benefit of this approach is that if the pound or RPI increases over time, that will be upside to the new EPS forecast and growth rates we just provided.

That concludes my prepared remarks and I will turn the call over to Bill for the question-and-answer period. Bill?

Thank you, Vince. Before we take your questions, let me just say that we had another strong quarter and we remain confident on our plans for future growth. I believe today's actions are very important because they provide clarity and transparency in our response to the UK's decision to exit the EU.

By providing longer-term earnings expectations, our actions also illustrate the confidence we have in the strong business fundamentals of our seven high-performing utilities. It was clear to us that the volatility in our stock was correlated to changes in the pound, and the benefits of our financial hedges were not being reflected in our valuation. By monetizing those hedges, we've not only helped to secure our dividend growth objectives, but our earnings growth is also now clarified on a foreign currency basis that is more reflective of the current market.

Clearly, Brexit was a unique event, but our positive view of the UK business model remains unchanged. PPL senior management team is committed to delivering 5% to 6% annual earnings growth through 2020. The premium utility jurisdictions in which we operate provide us with confidence in our ability to deliver this growth. We will continue to build on this foundation seeking additional ways to provide value to shareowners and our customers.

With that, operator, let's open the call to questions, please.

(Operator Instructions)

Greg Gordon, Evercore ISI.

Good morning. Absolutely the right decision to reset the currency hedges, from my perspective. I just have one clarifying question. I thought your presentation was pretty clear. When you look at the balance sheets of the UK versus the US entities, presumably before you were going to be leveraging up a little bit in the UK in order to repatriate that cash. Now you're going to have a higher equity capitalization in the UK. But where on the US corporate structure are you going to be issuing the incremental leverage? And how does that change in the capital structure in the UK flow through the UK earnings, essentially, because you have an eight-year deal? The real cost of capital will essentially now be slightly different than the prior projected cost of capital. I'm sorry I'm asking a belabored question but I just want a little more detail on how to bridge the cash flow.

I understand. Just a couple of comments and then I will turn it over to Vince. Yes, you're absolutely right. The capitalization program for the UK is going to be different. As you recall, in the past we were looking at leverage at the UK holding company over time approaching 80% to 85%. That's more likely now to be down around the 75% level.

That's going to give us about $1 billion, roughly, of headroom, if you will, for future investments from the UK once the exchange rates settle out and we look at the financial strategy for the UK going forward. So that's clearly one piece of it. Maybe, Vince, you can take the other elements of the question.

Sure, and I'll just follow up on that. That borrowing generally, Greg, was up at the WPD holding company level, so it wasn't part of the rate making within the UK. It did help drive the higher ROEs at the segment level because the debt was up at the holding company level, but it doesn't really impact the revenue projections within the UK.

And then the US entity would be PPL Capital Funding, would be the one that's issuing that debt to replace the lower amounts coming back.

Great. And then my second and last question, when I think about post 2017 total earnings growth, the aspiration 5% to 6%, I know you are through the big reset years in the UK under the new rate scheme in terms of having the incentives come down, having to reset year one after the incentives come down as you transition. And I see the rate base growth profile in the US. Based on your current assumptions, and understanding things could change a lot as we move forward in time, do you expect the earnings growth path to be somewhat linear inside that 5% to 6% growth path, or are there are chunky CapEx rate base rate-making assumptions we have to think about between 2017 and 2020?

Good question, Greg. We expect it to be relatively linear or consistent year over year and not lumpy or chunky over that 2017 to 2020 timeframe.

Okay. Thank you, guys.

Jonathan Arnold, Deutsche Bank.

Good morning, guys. Two things. I think I heard you mention that you'd adjusted the pension to expectation of lower for longer with the guidance reset. So, can I just clarify -- does that mean you've put the pension assumption where rates are currently into 2017?

This is Vince. Yes. We were assuming a bellow 4% discount rate in both the US and the UK, and actually our 2017 UK discount rate is even below 3%.

Okay, great. Thank you for that. And then can I also -- on hedging strategy going forward, you're obviously 50% covered on 2018 with this upside bias and the way you've done it. How should we think about your willingness to keep currency open as we move forward? Is this 50% of effectively third year where you would expect to be 2019, by this time next year? Or are you ahead of where you would expect to be? Just some feel for how you will do this going forward.

Sure Jonathan. I think it would be fairly consistent with the approach that we've taken in the past where we would certainly be highly hedged for the upcoming period in which we give specific guidance. In this case it was 2017, so we thought it was appropriate, even though we issued guidance a little bit early, to go ahead and hedge that up a little bit further than we normally would at this point.

Looking at 2018, we would begin hedging in or looking to hedge in the rest of 2018 sometime beginning next year, and then probably start to layer in some 2019 hedges next year, as well. We probably look to, depending on the volatility in the currency rate and other market conditions, we may look to do something similar with collars, like we've done here, to either preserve some of the upside and protect the downside or to lock in something above our plan. To the extent that we can improve upon the growth rate by hedging in at numbers stronger than the plan, that would obviously be something we would look closely at doing.

Great. So, we should think of you as being a little ahead of what the typical plan would be at this point.

Yes a little bit yes.

Okay. Thank you.

Gregg Orrill, Barclays.

Good morning. Thank you. Just, again, your thoughts on how you're doing with the UK incentive scheme there and program, and if there was any notable change outside of FX for your assumptions.

We're very happy with the performance. Obviously, we've got one fell year behind us. We're into the second year which started April 1 of 2016. So, I think the team in the UK is doing a great job. I will let Robert Symons, the CEO of our UK business, comment on expectations going forward and what we've built into the plan here.

Thanks, Bill. Very much on track in the same way as we were last year. If we have storms, then if they are of sufficient size then they are excluded from the numbers. So, our ongoing numbers are looking very similar to the previous year. So, really, no worries where that's concerned at the moment.

In terms of what are we doing, all the time we're increasing the level of automation and looking at new ways in terms of getting those numbers better year on year.

Great. Thanks, Robert.

One thing that has happened is that we came top of the pops in terms of social responsibility and time to contact. There's an incentive to actually measure how well companies were doing in terms of how they treat vulnerable customers. And, also, a hot topic in the UK is the time to connect. And we've come out with the top incentive payment in both those two areas.

Gregg, I would just say that the amount received for those two incentives was significantly higher than what we had originally expected. And, so, we did update the incentives for that, as well. It was about $10 million or $12 million or so.

Got it. Thank you.

Michael Lapides, Goldman Sachs.

Guys, just looking at the bridge for 2016 versus 2017 guidance, one of the things that stands out a little bit is the UK, not the currency side but, honestly, the fact that your expectation that D&A and taxes other than income taxes, interest will all offset any revenue change. Just curious, do you view that $0.04 headwind in the UK as a one-off deal in 2017 and then beginning in 2018 you will get earnings growth out of the UK? And, also, can you talk about expectations for O&M, just local currency not currency-adjusted, in the UK in 2017 and beyond?

Sure. On the revenue and the offsets on depreciation, interest, some of that is a one-time transition or specifically limited to 2017. So, yes, that's a little bit of an anomaly in terms of that transition 2016 to 2017.

Relative to O&M, really, I don't think there is any change expected in O&M. Much of the work that Robert and his team are doing is very predictable and very standard blocking and tackling type work. So, no expectation there.

As I know you can appreciate, Michael, the RPI could be an uplift to us because that retail price index is expected to probably go higher as the economy in the UK is under some pressure. So, that's potential upside to the plan should it go beyond what we have assumed today. Other than that -- and our revenues would be adjusted for that -- really no other impact on the negative side.

It's really the last leg of the drop in the incentives that's driving this. And then we get through that in 2017 and you see the growth going forward.

Got it. So, in 2018, I'm just trying to think about growth in the UK, because we know based on the OFGEM data what's supposed to happen on the D&A and taxes, other than income taxes, side. How much revenue growth on a cents per share basis do you expect in 2018 and beyond on an annualized basis? What's in your guidance for that, your multi-year guidance?

On the top line I don't have that handy, Michael, but I would say that, just like the 5 to 6 growth is relatively levelized or linear, so is the UK's growth there, 4 to 6, that we provided. So, we would expect on a net income basis relatively consistent growth starting in 2018 off of 2017 and through the rest of the guidance period we provided.

Got it. Okay, guys, I will follow up off-line. Thank you.

Paul Patterson, Glenrock Associates.

Good morning. Just a philosophical question. If you are basically canceling out your hedge and taking the money, why re-hedge? Do you follow me? Is it just because of near-term volatility and the idea that investors want some protection in that versus being way out of the money? If you could just elaborate a little bit on that, I'd like that.

Sure. That's a good question. We thought that the opportunity to cash out the hedges would allow us to provide that certainty on the dividend growth rate of 4% that we noted we are committing to, or at least targeting, I should say, for the 2017 to 2020 period. So, that was one of the real values of that.

Plus, it helps to offset from a cash perspective the lower amount that we would be repatriating back from the UK in light of the lower exchange rates. Philosophically, that was how we looked at it. Vince, if you want to provide any additional color to that, but I think those are two of the main elements.

Sure. I think when we come out and reset our earnings, we wanted to make sure we had a strong degree of confidence in those earnings that we were coming out with in the growth rates that we provided. As we talked with economists in the UK, thanks, a number of banks both in the UK and here in the US, I think there was some view that in the back half of 2016 there could be some additional pressure on the pound.

I think the consensus estimate for the back half of 2016 is about $1.28, but I think there are some that show $1.20 to $1.30. And then 2017 I would say consensus is in that $1.30 to $1.35 range. Coincidentally, the collars that we put on basically give us an effective collar of $1.30 to $1.36, so right in line with consensus estimates for the pound over the next year and a half.

I think from our perspective, it was a win-win. We got to take the cash. Also the reason why we didn't take off the 2016 hedges. That's supporting our $2.35 guidance that we reaffirmed today. Plus, again, if the bias is for the pound to go down a little bit more in the short term, those hedges will be more in the money. So I think as we just took the whole position and thought about it holistically, it made sense to put the hedges back on at the current market.

Also, I think when you look at the hedge program and the way the stock trades in normal, say, FX conditions, I think the hedges work very well. And we do get the credit for the hedges. It's in these extreme cases where we tend to trade on a fully open basis. And if $1.30 is the new norm, we would expect, and I think investors would expect us to re-hedge.

Okay. Thanks for that. And then, other than on this tax differential, other than the borrowings that you're talking about, like increasing the US versus the UK, are there any other strategies that you guys might be thinking that could further optimize that in terms of call shifting or derivative, things that could theoretically take place?

I wouldn't think that there would be anything of a significant or material amount. I think we will continue to look to tweak the strategy and look for other optimization. But I think at the moment I can't envision something that would be very significant. But we will continue to look at it.

The real thing we're looking at is the after-tax cost of borrowing. And so obviously the interest rates play into that, as well. But interest rates are fairly consistent between the two countries, and it really, at least right now, boils down to the tax effects of that interest expense. But that's something we will continue to monitor.

Great, thanks a lot.

Steve Fleishman, Wolfe Research.

Hi, good morning. A couple quick questions. First, just to clarify a prior answer on the incentives. If you exclude currency and the like, how much have the incentives gone up on a non-currency basis from your last guidance?

As Vince said, on a dollar basis, about $10 million to $12 million.

That's the social responsibility -- did we raise it above that.

Okay. Sorry if I missed that.

That's okay. So, Steve, it would be $10 million to $12 million.

Okay. And then just in terms of your overall rate base growth plan through 2020, are there some -- I recall you in the past talking about some projects or opportunities, maybe, that could be additive to rate base growth over time. Are there some things in the hopper that are not included in this plan to 2020 right now?

We do have in our transmission group several projects we are pursuing. The one that we have talked about in the past is Compass. That's a very large -- if you look at all the phases, $3 billion to $5 million potential project. The first phase, which is Western Pennsylvania into New York, would still be material.

But most of those, Steve, would be pretty late in this decade into the next decade. So, no real significant spending on those bigger projects until probably you get out to 2019-2020. Even then it would probably be a slow build and then really more significant in the 2021-2022 timeframe.

But we continue to look at some competitive transmission projects, both within PJM and outside of PJM, none of which are embedded in our guidance at all. So, those projects would all be upside to the plan.

Okay. And then, just curious, are the rating agencies comfortable with your updated UK distribution plan issuing debt at the parent, the cash from the hedges, all that? I'm just curious their reaction to it, if at all.

When the impact of the pound was evident, we did have conversations with the rating agencies. Their initial report was to maintain the ratings with a stable outlook. And our commitment, obviously, as I stated earlier, to maintaining the investment grade credit ratings, is solid. So, we wouldn't expect any significant change.

Okay. And then one last question, just strategically. Obviously this is a bit of a freak event, but I'm curious, bill, either you or the Board, how does this maybe color your view on wanting to strategically get more domestically oriented in terms of mix of earnings, if at all?

Because it is such a unique event, it really doesn't change the view that we have about the strengths of the UK business model. So, we're not going to obviously overreact to any event like this. So, yes, it really doesn't change our view of the business mix.

As we stated before, to the extent that we would engage in M&A, clearly we would probably look more significantly at domestic opportunities than we would opportunities in the UK. But, having said that, there are no plans to change the mix at this time.

Okay. Thank you.

(Operator Instructions)

Shar Pourreza, Guggenheim.

Most of my questions were answered. But on domestic growth, it looks like utility growth is slightly down. I'm having trouble finding out, is that just a function of rolling forward to 2019 and 2020 versus your prior plan, or is the CapEx leveling off in 2019 and 2020?

I think it's a combination of the different timeframes. So, before we were looking at the 2014 to 2018 period, the 24 was the adjusted number that we were growing off of. So, we've rebased now on the 2017 guidance that we just provided through 2020. That's probably the biggest driver, is just that time period, and, as you point out, extending it through 2019 and 2020.

As I mentioned earlier, even though we've got a slightly lower growth rate, we would expect that to be fairly ratable over the years 2017 through 2020. So, no real lumpiness to it. Vince?

Share, I would say there's probably two main points in driving the delta. One is, you may recall, we had about that $100 million of corporate restructuring in the 2014 to 2018 growth rate. That's obviously not in the 2017 to 2020 growth rate. And then we were also transitioning in Kentucky from a historical test year to a forward test year back then. Now we are all on future test years and so you don't get that bump in the initial growth rate that we had back in 2014 to 2018.

Got it. And then just one real last question here on WPD. I know we've historically talked about the business will naturally dilute itself as US utilities grow. But now it looks like UK and US, more or less, growth almost similar, maybe the US growth a little bit more. I just want to reinforce, Bill, the Board is still comfortable with the WPD business despite this discount continuing?

Yes, they are. I think we, again, have great confidence in the underlying fundamentals of that business and like all the attributes of the regulatory construct there that provide this recovery [oven on] capital as we deploy it. So, I think the very positive attributes of that business really offset, to a degree, any type of downside we see.

And, again, we believe the Brexit was a unique event, and we don't anticipate events like that coming along again in the future. But we are, yes, comfortable, and the Board is comfortable, with the business model.

Excellent, thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to William Spence for closing remarks.

Okay, I'd just like to thank everyone for joining us today. As I mentioned, we believe that the steps we took today were absolutely the right ones for shareowners. And we look forward to executing on our new plan through 2020. And I appreciate the support of shareowners as we go forward. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.