賓州電力 (PPL) 2018 Q1 法說會逐字稿

Good morning, and welcome to the PPL Corporation First Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Joe Bergstein, Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning, everyone, and thank you for joining the PPL conference call on first quarter results as well as our general business outlook.

We're 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 the forward-looking statements.

A discussion of factors that could cause actual results to differ is contained in the appendix to 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.

And for reconciliation to the GAAP measure, you should refer to the press release, which has been posted on our website and furnished to the SEC.

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

Thank you, Joe, and good morning, everyone.

We're pleased that you joined us for our first quarter earnings call.

With me on the call today are Vince Sorgi, PPL's Chief Financial Officer; Greg Dudkin and Paul Thompson, the heads of our U.S. utility businesses; and Phil Swift, WPD's Operations Director, who is filling in for Robert Symons today.

Moving to Slide 3, our agenda for this morning begins with highlights of our 2018 first quarter results and a brief review of regulatory developments in the U.K. Vince will then review our first quarter 2018 segment earnings results and provide a more detailed financial overview.

As always, we'll leave ample time to answer your questions.

Turning to Slide 4. Today, we announced strong first quarter reported earnings of $0.65 per share compared with $0.59 per share a year ago.

Adjusting for special items, first quarter earnings from ongoing operations were $0.74 per share, up almost 20% from $0.62 per share a year ago.

This increase was driven by higher earnings in our U.S. segments, partially offset by expected lower earnings in the U.K. segment.

We performed very well against our business plans in Q1, putting PPL solidly on track to deliver on our 2018 earnings forecast of $2.20 per share to $2.40 per share.

Today, we are also affirming our long-term projection of 5% to 6% compound annual earnings growth per share from 2018 through 2020, off of our 2018 forecast midpoint.

In addition, we're updating our expected equity needs.

On our year-end call, we communicated an equity need of between $2 billion and $3 billion from 2018 to 2020.

That was approximately $1 billion to $2 billion higher than our prior plans as a result of tax reform.

We are now targeting to be near the low end of our previously announced range, driven primarily by revisions to our business plan as we've continued to assess and revise our expectations regarding the impact of tax reform.

Achieving our updated equity target would result in an earnings growth rate at the high end of the 5% to 6% range.

Turning to a U.K. regulatory and political update on Slide 5. On April 30, Ofgem announced that they've determined that no mid-period review is necessary for RIIO-ED1.

We believe Ofgem through their consultation process arrived at the best outcome for all stakeholders.

We appreciated the opportunity to share our views with Ofgem during the consultation phase and that they ultimately decided to adhere to the regulatory construct they developed with the distribution companies.

We believe this is an important signal of support for U.K. regulation, which we continue to view as one of the premier jurisdictions.

We look forward to continuing to deliver positive outcomes for customers and fair returns for our shareowners.

I should also note that WPD has agreed to voluntarily return to customers GBP 77 million related to the rail electrification project -- projects rather, in WPD's territories that were curtailed by the government in mid-2017.

This voluntary return will not have a material impact to PPL and was outside of the scope of the mid-period review.

As Ofgem noted, this voluntary return of funds to customers by WPD was a key consideration in their decision not to conduct an extension of the mid-period review.

Ofgem also noted that adjusting network returns would damage investor confidence and could increase financing cost for networks.

We believe Ofgem's decision is a very positive step for the industry, as it demonstrates that Ofgem understands the need to balance all stakeholders' needs.

In other U.K. regulatory developments, Ofgem released its RIIO-2 framework consultation document on March 7 with yesterday marking the deadline for stake owner responses.

As we've stated, the consultation was in line with our expectations, and we believe WPD can continue to provide customer benefits while still meeting shareowner expectations.

Ofgem has determined that the current framework is generally working for customers, and we agree.

We shared in our consultation response that our view is that RIIO-1 has worked well so far in controlling costs to consumers, strengthening customer service and reliability, improving customer satisfaction, spurring network investment and fostering greater innovation.

For example, the sector continued to reduce the number of power cuts across Great Britain during the 2016-2017 regulatory year.

Since privatization, there has been a 50% reduction in the number of customer interruptions and a 60% reduction in the length of customer interruptions.

On the innovation front, the industry accommodated a 60% increase in small-scale generation connections during the 2016-2017 regulatory year.

More than 2.8 gigawatts was connected to the electric distribution network over that period.

Finally, customer satisfaction is at a record high since RIIO network sector annual reports began tracking these metrics.

It's clear from these examples that there is already strong evidence in the first 2 years of RIIO-ED1 that demonstrates the RIIO strategy is on course to deliver on its objectives.

Ultimately, we think the wide range of proposals in the RIIO-2 consultation document offers us an opportunity to help shape the regulation in ways that are supportive of high-performing and innovative networks such as WPD's.

We focused our response to the consultation on 4 key areas: fair returns, incentives, the cost of debt and the cost of equity.

Relative to the potential for lower returns on equity, I would point out that we are in a period where the U.K. risk-free rate is negative by approximately 100 basis points.

This is about 200 basis points lower than the 10- and 20-year averages.

WPD's cost of equity will be set during the electric distribution consultation that will take place in 2020-2021 time frame.

By that time, we would expect the risk-free rate to be in positive territory, more in line with historical rates.

In addition, we expect significant opportunities for continued investment throughout the next price-control period as the U.K. continues to advance its initiative related to electrification and infrastructure requirements to support renewable energy resources.

And we have ample time to prepare for any changes that could be made for RIIO-ED2 with our business plan submissions not due until the mid-2021 period.

We remain confident in the U.K. regulatory framework and our ability to develop a high-quality plan for the future that will benefit customers and shareowners.

The next step in the RIIO-ED2 process is Ofgem's decision regarding the broader RIIO-2 framework consultation, which is expected later this summer following their review of stakeholder responses.

Finally, on the political front, we see an improved environment with Brexit moving forward and radical calls for renationalization beginning to fade.

In addition, the pound has strengthened considerably over the past 12 to 18 months, and we have been able to hedge into this strength, as Vince will share in a few moments.

On Slide 6, we provide an example of our RIIO-ED1 execution outlining our strong U.K. incentive performance for the 2017-2018 regulatory period.

As you can see, WPD's operating companies once again earned the top 4 rankings in terms of customer satisfaction among all the distribution network operators in the U.K. with an average rating of 8.9 out of 10.

In addition, we achieved more than 70% of the potential maximum reward across all incentive categories, reflecting our continued drive to deliver value for our customers.

This translates into future returns for our shareowners as we earned approximately $100 million of incentive revenues for the regulatory period, consistent with our historical performance and our expectations.

Now I'll turn the call over to Vince for a more detailed financial overview.

Vince?

Thank you, Bill, and good morning, everyone.

As Bill mentioned, we delivered strong first quarter results compared to both last year and compared to budget that positions us well for the remainder of the year.

We are not updating our 2018 annual earnings guidance at this point given that we are only through Q1, but we are very confident that we can deliver the midpoint of our 2018 ongoing earnings guidance and are tracking above that midpoint today.

Let's move to Slide 8 for an overview of first quarter segment results.

Our first quarter earnings from ongoing operations increased by $0.12 over the prior year, driven by strong results at our domestic utilities.

Our Pennsylvania Regulated segment improved by $0.09 and Kentucky Regulated improved by $0.05 compared to 2017.

Corporate and other was also higher by $0.06, primarily due to the timing impact of recording annual estimated taxes in Q1 of 2017.

These improved domestic earnings were partially offset by expected lower earnings at the U.K. Regulated segment of $0.08.

Before we discuss segment details, I'll review the impact of weather on our Q1 results.

Overall, we saw about a $0.02 improvement compared to the prior year due to weather with domestic weather driving a $0.04 improvement from Q1 2017, partially offset by $0.02 of unfavorable weather in the U.K. The U.S. returned to more normal weather in Q1 2018 compared to last year's mild winter temperatures.

As a result, our Kentucky operations experienced a 30% increase in heating degree days, while we saw more than a 10% increase in Pennsylvania quarter-over-quarter.

Weather was not a significant factor compared to our budget for the first quarter 2018.

Let's move to a more detailed review of the segment earnings drivers starting with the Pennsylvania results on Slide 9. Our Pennsylvania Regulated segment earned $0.21 per share in the first quarter of 2018, a $0.09 increase compared to the same period a year ago.

This result was driven primarily by higher transmission margins from additional capital investments and higher peak transmission system demand in 2018, higher distribution margins from increased electricity sales volumes due to weather, lower operation and maintenance expenses due to lower corporate services costs as well as lower payroll, and lower income taxes resulting from the lower federal tax rate from U.S. tax reform.

Moving to Slide 10.

Our Kentucky Regulated segment earned $0.19 per share in the first quarter of 2018, a $0.05 increase compared to the first quarter 2017.

This increase was primarily due to higher adjusted gross margins from higher base electricity and gas rates effective July 1, 2017, and higher sales volumes due to favorable weather, as I mentioned earlier, partially offset by higher depreciation due to asset additions.

Note that for Kentucky, the impact of lower federal tax rate is reflected on the income taxes in other line item with the offset being lower revenues reflected in adjusted gross margins, both being about $0.03.

Moving to Slide 11.

Our U.K. Regulated segment earned $0.37 per share in Q1 2018, an $0.08 decline compared to a year ago.

The reduction in U.K. earnings was primarily due to higher U.S. income taxes, driven by a tax benefit that we recorded in Q1 2017 related to accelerated pension contributions that did not recur in 2018, and higher U.K. income taxes due to accelerated tax deductions in Q1 2017.

In addition, we experienced lower adjusted gross margins in the U.K., driven by the April 1, 2017, price decrease of $0.01 and lower sales volume of $0.01.

The price decrease was due to true-up mechanisms, primarily for interest and inflation, and was partially offset by higher base demand revenue from the normal annual price increases.

These lower results were partially offset by higher foreign currency exchange rates in 2018 compared to 2017.

Before I turn the call back over to Bill, let me just provide a quick update on our foreign currency hedging status on Slide 12.

The pound has continued to show strength versus the U.S. dollar, and we layered on additional hedges since year-end.

We have increased our hedge position in 2020 to about 50% at an average rate of $1.49 per pound.

The chart on the right shows the trend of improving rates over the past year with the current forward curve continuing to be well above our budgeted rate of $1.40 per pound.

That concludes my prepared remarks.

I'll turn the call back over to Bill for the question-and-answer period.

Bill?

Thank you, Vince.

In closing, we had an outstanding quarter as we continued to execute our plans and deliver on our commitments.

Our strong operational and financial performance is testament to the fact that our investments are providing positive results for our customers and our shareowners.

We're pleased to have the potential of a mid-period review behind us.

We believe Ofgem's decision demonstrated the regulatory discipline that's made the U.K. a premium regulatory jurisdiction.

We will continue to engage with Ofgem regarding RIIO-2 to achieve the best possible outcome for customers and shareowners, and finally, we remain confident in our ability to deliver competitive projected earnings growth and a secure and growing dividend as we invest responsibly in a sustainable energy future.

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

(Operator Instructions) Your first question will be from Ali Agha of SunTrust.

Bill or Vin, can you update us when you talk about the equity needs over the 3 years now being $2 billion, how should we think about how they get distributed over the 3 years?

Previously, you were talking about $1 billion this year and then the variance was really in the outer years.

Is that still the case?

And how much equity have you issued this year versus your target?

Sure.

We are still targeting approximately $1 billion in 2018.

To date, we've issued about $160 million, primarily through our DRIP and ATM program.

Okay.

So the outer years, we should now think about as being $500 million per year, the lower end of your previous ranges?

That would be correct, yes.

Okay.

And with regards to equity for the rest of the year, Bill, what is the plan?

Are you continuing to utilize ATMs?

Some of your peer utilities have gone out and done a block trade just to get the overhang behind them.

Just curious how you are thinking about the various ways to complete the $1 billion this year.

Sure.

We're continuing to utilize the ATM program, and there is more than sufficient liquidity, and it is a very cost-effective means to do so.

Having said that, we'll also continue to look at other means to effectively and efficiently issue the equity.

So that's where we are on that.

Okay.

And then my other question was, on the year-end call, you had mentioned that you had built your 5% to 6% growth rate assuming that you were at the high end of the $2 billion to $3 billion plan.

And if you ended up on the low end, you could actually exceed the 5% to 6% growth rate.

Today, you were telling us you're at the low end of the equity plan, but you'd at the -- within the 5% to 6% at the higher end.

So what changed between the commentary from year-end to today?

Sure.

Well just fine -- and maybe just to make sure I answer the question.

You're really asking what changed in terms of the reduction to the equity need or was it just differently?

No.

The growth rate.

Because if I recall correctly, I think the message was, if we end up at the low end of the equity need, we would exceed the 5% to 6% EPS growth rate.

And today, you are saying that you would be within the 5% to 6%.

So what changed in terms of reducing your growth rate expectations?

We would be at the high end of the 5% to 6%.

If you looked at -- and this may have been the question on the Q4 call, was, if you looked at factoring in the forwards, then that would really take us above the 6%.

So if you assume today, all other things being equal, that we have $1 billion less of equity need and the forwards continue to hold where they are, we'd actually be in the 6.5% to 7% EPS growth through 2020.

I see.

Okay.

So you're basing it on your $1.40 exchange rate budget, but the actual forwards would take it higher.

That's the way to think about it?

Correct.

That is exactly right.

The next question will come from Greg Gordon of Evercore ISI.

It's actually Durgesh Chopra on for Greg.

So just in terms of -- I just wanted to ask the hedges.

So your plan assumes you basically settling those hedges in the respective years.

So now the fact that you have 50% hedged versus 35% in the last call.

How is that -- does that mean you're in a -- so from a EPS growth perspective, does that mean you're in a better position now?

Is that the right way to think about it?

Yes.

And if you look at the average hedge rate of $1.49, clearly, that's above the $1.40 that was in the original plan.

So that incremental hedging activity helps solidify, if you will, the growth rate that we're projecting.

I see.

And still, when we are modeling this, we should still be modeling as if you're going to settle those hedges in those respective years?

That's correct.

We would settle those in the respective years.

Okay, perfect.

And then just one follow-up for Vince.

The income tax.

I know, Vince, you did go over this in detail, but just to rehash that, in Kentucky that adjustment was basically the $0.03.

Was the implication there that, that $0.03 incremental EPS from lower income tax is -- has an incremental lower revenue in the gross margin of $0.03?

Was that what you're trying to imply there?

Yes.

So going from 35% to 21% reduced our income tax expense by $0.03 with a corresponding reduction in revenue and gross margin by $0.03.

So no impact on net EPS, but those 2 line items were each impacted by $0.03.

Got it.

So the number -- the $0.03 number, just on that slide, and bear with me as I get to that slide, the $0.03 number on Kentucky, that is net of the lower revenues?

That's correct.

The explanations I provided would be $0.06 in gross margins, excluding the lower revenues on -- from income tax.

The next question will come from Jonathan Arnold of Deutsche Bank.

Bill, can I -- just on the -- so just revisiting the equity question for a second.

Obviously, the $1 billion is the 2018 number and then you've got '19 and '20.

Would you -- can you see a scenario where you consider trying to address everything preemptively?

Or should we really think of it as an '18 as a discrete period and then '19 and '20 kind of thereafter?

I would say, we're going to look -- we'll continue to look at means to efficiently issue the equity, and clearly, the ATM is the means by which we're doing it today.

So we'll continue to assess, but it is very cost effective to do it this way, and there seems to be sufficient liquidity to do it without affecting the stock price.

Okay.

And if I could just refresh you, you said that you don't see the need beyond 2020 currently.

Is that correct?

Beyond DRIP and management comp, yes.

Yes, that's correct.

Less than $100 million.

Yes.

Yes.

Okay.

And then just sort of to the U.K. and obviously, you've had a positive data point here on the MPR, but as you think about ways to perhaps address the disconnect perhaps in the stock versus what I imagine is your view of value and where it's reflected today in your stock.

Would you consider something like a sale of a stake to a third party that might accomplish a few objectives, like providing a value mark and maybe raising some equity in another means and then rebalancing the business a little bit.

Is that sort of something that -- is there any reason why you couldn't do that?

Well, I don't know that there is a fundamental reason that we couldn't do it.

I think we believe there are benefits to keeping the business mix as it currently stands, as it does diversify our political risk, the macroeconomic risk, and of course, our regulatory risk.

Divesting the U.K. either in part or whole continues to be value destructive due to significant tax leakage and some other issues.

And we've got a fairly long history of this U.K. business being under a premier regulatory jurisdiction, and I think Ofgem's recent decision not to conduct an MPR further supports that view.

So our belief is that U.K. concerns will dissipate longer term, and we see value in waiting that out at the moment.

Yes.

I wasn't suggesting full separation, Bill.

It's more of the idea that a small stake might potentially sort of maybe get someone else to support your view of value.

That was more of the idea.

Yes.

I think it's a matter of timing and just knowing that there's been an unusual amount of regulatory and political uncertainty over the last 6 to 12 months, in particular.

I think that our plan is to continue to wait it out.

And Jonathan, it's Vince.

I'm sure you've seen some market markers on some sales of gas assets in the U.K. and...

Well, that's what prompted the question, so yes.

Yes.

And so we think there are some market indications there for value, and again, we think the electric business has better growth than the gas business, and so that would support a higher multiple that we are seeing in our stock than where we've historically traded.

Okay.

And then Bill, could you -- you mentioned in your prepared remarks that you felt that the sort of the focus on nationalization was waning.

Can you -- is there anything specific you can point to that would help us feel more comfortable about that?

Yes.

Well, I think it's -- the Labour Party's recent missteps, I'll say, have taken their currency, if you will, down quite a bit from what I can see and read and hear, and that certainly is a big factor.

But on the flip side, on the Conservative Party side, I think, Theresa May, her currency has gained some ground.

And as Brexit, I think, moves forward at a -- in a positive direction, our view is she will continue to probably gain ground.

So I think, those are kind of macro factors that I see.

So it was more of a comment on the sort of relative political fortunes of the 2 parties and for the Labour somehow changing its view on this.

Yes.

Well -- although I would say, and this held true previously, that the remaining in the Labour Party that did not agree that renationalization was feasible, even feasible, let alone something that was desirable.

So I think -- so even if the Labour leader party was to -- or the leader of the Labour Party was to push that agenda, I'm not quite sure how far we'd get anyway.

The next question will be from Steve Fleishman of Wolfe Research.

Sorry to repeat some of the same questions, but just what is -- how much do you have available still on your shelf to do ATM?

I'm looking to Vince to answer that question.

I think, we did at $3 billion.

Okay.

(inaudible) or planning?

Roughly.

Yes, roughly at $3 billion.

Yes.

And then can you just remind me outside of ATM how much equity can you do internally through DRIP and any other internal programs per year?

About $100 million a year.

Okay.

And then, could you maybe give a little more color on the additional information that you kind of had on your plan to be at the low end of the $2 billion to $3 billion in tax reform and the like?

Was that something more discussion with the rating agencies or just tax planning or other things?

Yes.

I'll let Vince provide a couple more details, but following our Q4 call, we had a constructive dialogue with Moody's on our updated business plan post tax reform and the related equity needs, and we've continued to refine that plan and are more confident that we can target the lower end of the previously announced equity range.

And Vince can give you a couple of details as to why and kind of what's changed since Q4 call.

Yes, Steve, I would say that tax reform, it required significant amount of analysis and calculations in a very short period of time at year-end while we were closing the books, trying to redo the business plan in preparation for the year-end call.

And to be honest, given that is why we issued a range of equity between $2 billion to $3 billion, given how much we tried to get done in a relatively short period of time.

Subsequent to the call, we just went back and continued to refine the analysis with a strong focus on FFO.

Because as we've talked in the past, FFO carries a lot more weight in the FFO to debt metric than reducing debt does.

It's about an 8x multiple on the leverage that you get there.

And -- so as we kind of reiterate -- or iterated the plan, we found we were a bit too conservative in the way we modeled some depreciation aspects and how that kind of flowed through the cash flows and the earnings.

That was, to be honest with you, the bulk of it and then there was just a little bit in a bunch of other line items that we found.

So -- but it was specifically related to the impacts of tax reform that I think we overmodeled in that initial go at it.

Okay.

I mean, better safe than sorry, I guess.

And if I recall, you were never put on negative outlook.

So...

We would never.

That's correct.

So I guess, again -- and which I assume this updated plan has been cleared with the agencies in that light.

We've had initial dialogue.

We'll be going back with the -- all the final numbers we shared some preliminary information with them so that, that will happen in a couple of months probably.

Okay.

And then my last question is on equities.

My recollection is that you -- part of the -- this higher equity was just a front-end loading of equity that was already planned, like in years 4 and 5 of your 5-year plan.

Is that still the case so that when this is all done...

Yes.

And we're pretty much done.

So, yes.

So once we're into 20 -- or past 2020, through 2020, we'll essentially be done.

We'll just have the management comp and DRIP and that's it.

The next question will be from Julien Dumoulin-Smith of Bank of America Merrill Lynch.

So perhaps to pick up where Steve left off.

If I can ask you to elaborate a little bit on where this positions your FFO to debt, where within the targets does this put you given the reduced equity?

And then secondly, can you just quantify a little bit more?

How much of this was a shift in cash flows versus just kind of exactly squaring your debt balances?

Maybe a little bit of a rehash on the last one.

Go ahead, Vince, if you want to answer that.

Sure.

So to answer your second question first, it was all pretty much related to cash flows in terms of -- it's about $40 million a year of additional FFO to achieve the reduction in $1 billion of equity over a 3-year period.

And so we were able to get that with fine-tuning the modeling and dialing back some of those assumptions, specifically related to tax reform.

And then Julien, what was the first part of your question again?

Sorry.

Where does this put you on an FFO to debt basis through the forecast period?

Yes.

So very similar metrics to what we were targeting on the year-end call.

Mid- to upper-12s for this year, and then quickly getting to 13% by 2020.

We're a little closer to 13% in '19 than we were in the original plan, but basically getting to 13% in the '19, '20 time frame.

Got it.

Excellent.

And then if I can follow up a little bit.

When you talk about cash flows here on Slide, I think it's 20, of the deck, can you contrast that a little bit with how you would see that kind of similar metrics for the international side of the house?

I don't know if that -- you can kind of talk about that on the fly.

Maybe talk about the net cash flows in and out when you think about the business.

Yes.

I'm not prepared to do that, Julien.

I apologize.

No worries.

And then maybe just a kind of follow-up.

I think this was Jonathan's question.

When you think about some of the media reports out there regarding M&A in the sector, domestically, right, in the U.S., how do you think about your own positioning?

I mean, clearly, you have view of your own currency, but at the same time, I suppose, if you look at your CapEx forecast, it's somewhat backwardated.

How do you think about sort of finding and establishing the next round of CapEx opportunities?

You all have been fairly successful organically historically, but at the same time, I suppose I've got to ask.

Yes.

So you're correct.

Our focus clearly is on delivering the long-term value through organic growth with our high-performing utilities, and at the same time, now we're focused on strengthening the balance sheet.

As I said before, we don't need to do a deal to be successful, and we believe there is going to be ample opportunities to continue our growth rate beyond 2020.

We mentioned -- or I mentioned in some of my prepared remarks about the U.K. and how we believe going into the RIIO-ED2 process, we think there is going to be some increased capital requirements and opportunities to meet some of the electrification goals that the government has.

Relative to the states, we would continue to look at large projects and smaller ones on the transmission side.

We've been very successful at what I would consider kind of mid-sized transmission projects.

We still have the Compass Project out there that we continue to work on.

So something like that could be very meaningful from an EPS and growth perspective going forward.

So those are the kind of things that we -- opportunities we see post 2020, let's say.

But not necessarily actively looking in the U.S.?

From a M&A perspective?

Or just from a...

Yes.

Yes, correct.

No, absolutely.

Yes, we're focused on growing organically, not on M&A.

The next question will be from Paul Patterson of Glenrock Associates.

Just, you made some comments about the negative risk-free rate of return, and I just wondered if you could just -- if you could bear with me just sort of elaborate a little bit more about what you're seeing and what you're expecting again.

Sure.

So when Ofgem initially came out with their kind of initial range of -- if they set the cost of equity today, it would be in a range, and that range was based on the current market conditions, which are negative in terms of the risk-free rate, negative by about 100 basis points.

If you look historically at the 10- and 20-year averages, it's not been negative except for, really, the last 12 to 18 months.

So this is an anomaly that we're seeing.

And clearly, Ofgem is not going to set that rate for us today.

So that rate for us will not be set until roughly 2021.

So by that point, we would think that Brexit would be well behind us that the Bank of England would be not fundamentally doing what they've been doing to kind of keep interest rates low, very low and that the situation would improve.

So we think this is a kind of a very temporary period of time and it was really just a comment that the rates are not going to be set today while there's a risk-free rate that's negative.

We don't -- and we don't believe it's going to be negative by the time we get to that 2021 period.

Just for the sort of the Central Bank sort of activity there though, I mean, is it so formulaic that like if there is a major quantitative -- if there is a major interference, I guess is a better way to sort of put it, in the market, is that going to be -- would that be taken into account at all?

Or is it just so formulaic that they simply say, "Well, this is a risk-free rate of return and this is how our formula comes out and that's sort of it?" Or do you think that there's going to be -- sorry, go ahead.

Yes.

Great question.

So I think there would be either -- 1 of 2 things.

Either it would be directly taken into account in maybe adjusting the ROE, or as we've seen in the past, to ensure that the companies are financeable, which is part of the Ofgem requirement, as well as provide opportunities for fair returns to shareowners.

Ofgem has in the past adjusted other things, whether it is the fast pot, slow pot or how quickly you recover depreciation expense, et cetera.

They've adjusted those to provide the opportunity or on the incentive front, to provide the opportunity that shareowners would be able to earn in the past the double-digit ROE.

Okay.

Great.

And then just finally, Jonathan brought up the nationalization thing.

And I guess, what I'm -- it's been some time, but as I recall, there was a lot of sort of inefficiencies that were driven out.

This is a long time ago, so bear with me, but when they did privatize initially, and I'm just sort of wondering, what is the value proposition that the people in Labour see?

What's driving the nationalization talk that doesn't come -- that doesn't seem intuitive to me at the moment?

It's not intuitive, and in fact, it's not consistent with the actual facts.

Since privatization, customer reliability and interruptions has improved by over 50%.

And at the same time, the real cost has gone down of delivering power to consumers, and customer satisfaction in the electric distribution segment is at an all-time record high.

I think that's not the case for other networks, and not to pick on the water companies, but I think the water companies have had a more difficult time of it with customer satisfaction and other things.

So I think that and the mail service, which was privatized, are 2 of the -- I guess, the poster childs, if you want to call that, of what Jeremy Corbyn was focused on at the time of his call for some renationalization.

So we weren't -- we, the distribution companies on the electric side, were clearly not a target, and the facts would not justify going back to nationalization.

The next question will come from Paul Ridzon of KeyBanc.

Just to rehash on the lower equity.

You didn't pull any CapEx to get there.

Is that correct?

That is correct.

We did not.

For us, that's really not a great option because we have the ability to recover our investments on a real-time or near real-time basis.

So that for us didn't make sense.

Yes.

And when you talked about Kentucky, you talked about offsetting revenue to account for the taxes.

Did you also do that in Pennsylvania?

Shall I take that?

Yes.

Go ahead, Vince.

Yes.

Sure.

So Pennsylvania is slightly different.

We are currently in the process of dialoguing with the PaPUC on exactly how the industry and specific companies will handle the effects of tax reform.

On March 15, the commission -- actually, before that, they had sent out a secretarial letter requesting information from all of the utilities.

We responded to that.

On March 15, they set rates to be temporary and then basically, 6 months with the option to extend it another 6 months and they are now really assessing the impacts.

They also asked if the utilities had either capital or other projects that we could redeploy the revenues that we were collecting from the higher tax rate.

And so we've submitted ideas around that.

So at this point, we're not sure if or when we would have to give the revenue back on the distribution side.

And then, on transmission, we filed our formula rate, June 1 -- effective June 1, and that's when we will make the reduction from 35% to 21% in that filing.

And then, just back to Kentucky.

I mean, you had a gross margin improvement of $0.06, kind of.

Can you just run through those drivers, again?

Sure.

So the -- yes, the 2 main points are the higher rates from the rate case that was effective in July of last year, and that was about $0.03, and then weather was about $0.03.

Correct.

And how much was weather in Pennsylvania?

About $0.01.

Total weather was $0.04.

The next question will come from Michael Lapides of Goldman Sachs.

Just curious.

Somebody asked a question about capital spend and how it's kind of backward, meaning, tails off in the back end of the years.

Just curious when you think about your balance sheet and your financing plan, is there a part of -- is there something that might say, "Hey, let's let it roll down for a few years, like, that -- maybe that's not such a bad thing and then, we'll generate a lot more free cash flow, use that free cash." I would assume you generate a lot more free cash flow if CapEx comes down, and use that cash to shore up the balance sheet?

Yes, Michael, this is Bill.

Yes, that certainly would be an option.

It would generate a lot more free cash flow.

It's something we'll take a look at and always do as we develop our capital plans.

Some of the capital plans are driven by either customer needs.

So we would want to continue to do those that we think are imperative for the customers.

In the case of the U.K., we've already pretty much put forth a plan that was approved through 2023, early 2023.

So that plan from a capital perspective is already pretty much set.

Got it.

And just curious.

And this may be a Vince question.

When you look out to, like, 2021 or 2022, are you in a position where maybe cash from operations actually becomes higher than cash from investing activities?

And that's kind of rare for utility, but it almost seems that, that may be the direction you're heading.

We're getting close to that, Michael.

Free cash flow does turn positive about that time actually.

I don't have it specifically in front of me, but that sounds about right.

Okay.

Thanks to everyone for joining us on the call today, and we look forward to talking to you on the Q2 call.

Thank you, sir.

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