賓州電力 (PPL) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sean, and I will be your conference operator today. At this time I would like to welcome everyone to the PPL Corporation second quarter conference call. All lines have been placed on mute to prevent background noise. After speakers' remarks there will be a question-and-answer session, (Operator Instructions). Thank you.

Mr. Joe Bergstein, Director of Investor Relations, you may begin your conference call.

Thank you. Good morning. Thank you for joining the PPL conference call on second quarter results and our general business outlook. We are providing slides for this presentation at our website at www.pplweb.com.

Any statements made in this presence about future operating results or other future events and 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 would I will turn the call over to Jim Miller, PPL Chairman and CEO.

Okay, thank you, Joe. Good morning, everyone. And with me today, as usual, I have Bill Spence, our now President and COO, and Paul Farr, our Chief Financial Officer. And a quick congratulations to Bill. As we've expanded the Company, Bill will certainly be busy with -- working with the two new acquisitions in Kentucky and in the UK,and we look forward to really driving significant value out of those two businesses as we grow the Company.

Always, we'll cover some brief remarks by myself. Paul Farr will go through our detailed financials, and Bill will go through the operational aspects, and then we'll go to Q&A.

So with that, as you've seen by now in the announcement this morning, reported earnings of $0.35 per share, up from $0.22 a year ago. For the first half of the year our reported earnings were $1.14 per share, compared to $0.88 for the same period last year. Ongoing earnings for the second quarter were $0.45 per share, versus $0.62 in the second quarter last year. And ongoing earnings for the first half of 2011 were $1.26 per share, compared to $1.56 in 2010.

The 2011 earnings performance was given by the contribution of our Kentucky regulated segment, strong international segment performance, and by the PPL electric utilities distribution rate increase that took effect January 1 of this year. These improvements, however, were more than offset by lower energy margins in our supply segment driven by higher priced hedges rolling off, as well as unplanned outages to replace turbine blades at our Susquehanna nuclear units and dilution from the equity issues to finance our two large regulated utility acquisitions.

During the second quarter, we did successfully complete the permanent financing for the Midlands acquisition, and the integration of this business is proceeding according to plan. While the integration is still at a relatively early stage, we've already seen positive movement in key operational metrics and financial results in the first four months of ownership. For example, prior to our acquisition, fewer than 65% of Midland's customers had power restored in under 60 minutes following a high voltage outage. By June, we had restored power following such an outage to more than 75% of customers in less than 60 minutes. This is only one statistic, but it's representative of the value our UK team is already delivering to the customers in the UK.

Moving to slide five, today we're reaffirming our 2011 forecast of $2.50 to $2.75 per share in earnings from ongoing operations. I feel very good about our prospects for the year, as we expect to largely mitigate the $60 million to $65 million earnings impact of the Susquehanna outages with strong performance from our UK business and positive results in our aspects of our competitive supply business. Our ability to absorb the impact of such a significant unplanned event illustrates the value of our larger business platform. And we expect to plan significant regulated infrastructure investment will lead to sustained growth in each of our regulated businesses for years to come.

Our compound annual growth rate in the consolidated regulated asset base is about 9% over the next five years. In more than two-thirds of our planned capital spent will be made under structures that allow for near real-time recovery of those expenditures.

Beyond the attractive growth in our regulated businesses, supply segment remains well positioned for the eventual rebound of competitive wholesale capacity and power prices. We now believe this rebound could even occur sooner than we previously expected. The recent finalization of Cross-State Air Pollution Rules, affirming spark spreads and potential for recovering economy point to higher power prices beginning in late 2013 or early 2014.

So before turning it over to Paul, let me say that I'm very optimistic about the short and long term prospects for PPL. We've completed the two major acquisitions that allowed us to reposition our portfolio, and we created a larger, stronger enterprise. So I look forward to the questions after we hear from Paul and Bill on the operational side.

Now I'll turn the call over to Paul.

Thanks Jim and good morning, all. Let's move to slide six to review our second quarter financial results.

Second quarter earnings from ongoing operations were lower than last year, primarily due to dilution resulting from the common stock issued in June 2010 and April 2011 to fund our two large acquisition, and lower margins in our supply segment. These drivers were partially offset by the operating results of required utilities and the impact of the PPL EU distribution rate increase that Jim referred to already.

While there is no comparator for 2010 performance for Kentucky, as the deal hadn't yet closed for this period, I would like to highlight that the Kentucky segment earnings include the operating results of KU and LGE, interest expense associated with the 2010 equity unit issuance, and dilution of $0.2 per share.

Let's move to the international segment earnings drivers on slide seven. Our international regulated segment earned $0.21 per share in the second quarter, a $0.06 increase over last year. This performance was the net result of the operating results of the Midlands utilities, including interest expense of $0.02 per share associated with 2011 equity issuance and bridge facility draw; higher earnings at WPD's legacy businesses resulting from higher delivery revenue, primarily due to higher prices;higher interest expense on our index linked bonds; higher income taxes; and dilution of $0.10 per share.

Moving on to slide eight. Our Pennsylvania regulated segment earned $0.06 per share in the second quarter of 2011, a $0.02 increase over last year. This increase was the net result of higher delivery margins, primarily due to the new distribution rates that went into effect January 1, and higher transmission revenue due to both increased rate base and cost of capital benefits from additional equity invested there, lower OEM expense and dilution of $0.03 per share.

Turning now to supply. This segment earned $0.12 per share in the second quarter, a decrease of $0.31 per share compared it last year. Primary drivers of lower Q2 earnings were the timing of Susquehanna's planned refueling and upgrade outage and the financial impact of unplanned turbine blade replacement outages that affected both units. This quarter was also impacted by anticipated lower energy and capacity prices in the East as hedges rolled off, and higher delivered coal prices. Partially offsetting the negative drivers were higher margins of full-requirement sales contracts and better run times and margins from our intermediate and peaking unit. And, finally, dilution impacted of the segment $0.06 per share.

On slide 10 we've updated our projected 2011 free cash flow before debited forecast. This graph excludes the impact of the Midlands purchase, as we're finalizing some of those details now. The change in cash from operations for 2011 since the first quarter earnings call is primarily driven by a higher than expected return of collateral to third parties, higher noncash income item, and additional pension payment at WPD. Cash flows are also impacted by slightly lower projected capital expenditures.

Turning to slide 11. We continue to focus on the dividend as a key obvious element of total shareholder in return. We're very well positioned to cover the dividend out of rate regulated business earnings, as we indicate on the slide, and clearly the combination of the Midlands acquisition and the growth prospects of our utility businesses permit dividend flexibility into the future.

Now I'll turn the call over to Bill for an update on operations.

Thanks, Paul, and good morning, everyone. Let's turn to slide 12 now and start with an operational review of the second quarter.

In Kentucky, LG&E and KU both made environmental cost recovery, or ECR, filings with the Kentucky PSC in June. These filings cover a total of $2.5 billion of environmental costs, primarily as a result of the new EPA regulations. The proceeding is under way, and we are in the discovery phase of the process. We would expect a decision by the KPSC by year-end.

Moving to the supply segment, both units at our Susquehanna nuclear facility returned to service following the unplanned turbine blade replacement outages. The units are running at full output and were online during the recent extreme hot weather we experienced in the region. With the update to Susquehanna unit two, we are now operating the two largest boiling water reactors in the US. In total we have added another 217 megawatts at Susquehanna.

As noted in an 8-K filed with the SEC, PPL discovered several cracked blades during its scheduled inspection of low pressured turbines during unit two's planned outage. [Conservative] actions were taken to not only replace several blade rows on unit two, but also to take unit one off line for an inspection, wheresimilar cracking was discovered. PPL has installed enhanced monitoring equipment to help determine the cause of the blade cracking.

Moving on to coal related issues. As you know, the EPA recently finalized the Casper Rules related to sulfur dioxide and nitrogen dioxide emissions. The rules apply to fossil fuel power plants in 28 states, including Pennsylvania and Kentucky. Montana is not affected by these rules. The competitive supply segments compliance strategy for meeting the emission requirements of the former care rules have positioned the Company well to meet the new Casper requirements.

Since 2005, about $1.6 billion has been invested in environmental upgrades at our coal fire plants in Pennsylvania and Montana, including $1.3 billion for scrubbers at the Keystone, Montour and Brunner Island plants. We continue to evaluate the timing for potential addition of SCR at Brunner Island. The cost of this is included in the CapEx plans we've provided to you in the past and in the appendix to today's presentation. Overall, we do not see the need to increase capital expenditures to comply with the Casper requirements. Overall, PPL's competitive supply fleet is well positioned with respect to these rules and could clearly benefit from coal plant retirements that will tighten up the supply situation in PJM. We expect to begin seeing benefits to our fleet by 2014.

Let's move to slide 13 for an update on the international regulated segment. The synergy plan for the integration of the Midlands operation is on track, and the organizational structure and reorganization plans have been finalized. We are in the process of implementing our organizational plans to ensure the most efficient operations possible. The transition will result in a smaller support structure, the elimination of duplicate work and implementation of streamlined work procedures. We plan to complete the vast majority of the organizational and system changes during the fourth quarter.

Moving to slide 14, we've outlined sales volumes by major customer class for Kentucky. Slower than expected economic growth lowered energy sales over the past year and is apparent in the second quarter of 2011 compared to the second quarter of 2010. In Kentucky, real disposable income decreased as inflation has outpaced income growth, and unemployment in the state continues to be above the national average. As a result, the number of residential customers is essentially flat year over year, and average consumption per customer is slightly down. While some indications have been hopeful for the commercial sector in Kentucky, commercial electricity sales indicate relatively slow economic growth.

In the industrial segment, Q2 sales in 2011 were lower than prior year, due mainly to customer specific factory issues. Industrial sales are up for the 12 month period ended June 30, 2011, versus the same period a year ago due to increased production over that period from a couple of the utility's largest customers.

Moving to slide 15, we provide details on sales volume variances for PPL electric utilities. Weather normalized residential sales were higher for the quarter compared to the prior year due to modest load growth and the addition of new customers. This was partially offset by the effect of higher energy prices on sales and increased energy efficiency and conservation. Commercial and industrial sales were higher for quarter, reflecting gradual economic recovery in the region. For the full year 2011, we project overall load growth between 1% and 2%, driven primarily by higher residential, industrial and commercial sales.

On slide 16, we provide our normal detail on the competitive supply segment hedges. The baseload hedge levels and prices for 2011 are essentially the same as our first quarter disclosure. We have adjusted our expected output levels for 2011 to reflect actual results through June and our forecast for the remainder of the year. The decline in our expected Eastern baseload generation is primarily driven by the Susquehanna nuclear outage, which is partially offset by higher intermediate and peaking generation. The expected Western generation reflects lower coal generation, partially offset by higher hydro generation due to above normal river flows in the Pacific Northwest.

During the quarter, we layered additional power hedges in the East for 2012 and 2013, which we are providing today for the first time. As you can see, our 2013 hedge profile is approximately 70%. By the end of 2012, we would have expected to be 60% to 90% hedge for 2013. We are obviously currently ahead of that schedule, as we took advantage of recent power price rallies motivated by firming gas forwards as well as impacts from EPA's Casper. Most of the 2013 hedges were done with collars, so we stand to capture upside on these hedges if prices move higher, but we have protected against the downside if Casper's delayed or forward natural gas prices soften. That said, 30% of our projected baseload production and 80% of our gas fired capacity stands poised to capture the full benefits of any further strengthening of power prices in the 2013 delivery year.

As 2014 comes on the horizon, we are essentially fully open and are of the view that the confluence of the Casper implementation, prospects for a better economic recovery, and firming gas prices also reduce reserve margins and further expand [heat] rates. Our generation business is expected to do very well in that environment.

Now let me turn the call back to Jim, and I look forward to your questions.

Okay. Thanks, Bill. So, operator, let's move into the Q&A.

(Operator Instructions). The first question in the queue comes from the line of Ameet Thakkar Bank of America Merrill Lynch. Your line is now open.

Good morning, guys.

Good morning.

Just a quick question on I guess the updated hedge disclosures on slide 16. Does your, I guess, new or updated hedge prices, does that include any kind of, I guess, basis spread to the PDM west hub, or are these all kind of your hedge prices at the west hub?

These would be essentially all prices at the west hub, yes. And as I indicated on prior calls, our expectation is for basis to be flat in the next several years to the west hub --our generating units to the west hub.

Okay. And I just noticed that, I guess, you're still under negotiations for kind of the rail or I guess the coal portion of your 2013 fuel needs. But when do you think you might have an update on how that has kind of proceeded?

Sure. It is primarily driven by the negotiations under way on the rail contract with NS. And we would hope that perhaps by the end of the year we would be in a position to report out on 2013 hedges for the east.

Okay and then just real quickly I guess on the integration of Central Networks. I was just wondering when you might have I guess a firmer handle on, I guess, what kind of severance cost you will incur, and when you might be able to provide, I guess, an update on the synergies that you outlined when you announced the transaction?

Yes, Ameet, this is Paul. We will probably be in the position to do that when we announce Q3 earnings. We would expect to have most of the systems implementation and organizational implementation done by early in the fourth quarter. If it's not at that time, it would be shortly thereafter. The problem is that -- I shouldn't say problem, but there's a big range of outcomes, depending upon the years of service and the age of the personnel in the 600 to 800 people that leave the organization.

You'll notice when you look at the queue that we've given -- so the people didn't think it was an uncapped number, if you will, in terms of exposure -- that at the extreme, meaning if 800 people would leave and they're the 800 people that have the longest tenure with the organization the highest age, it could be up to $120 million for that element. And I think we gave a number of around $110 million in the road show deck that included the IT piece as well, but if you go to the other end of the spectrum, and it's younger folks that have fewer -- less time in the organization, it could be less than $10 million. So it's a broad range that's heavily depended upon who actually departs.

Okay, and one last question on the hedges. Does that include any kind of full requirements premium? And I think you mentioned in your prepared remarks that some of the offsets to the outages was from full-requirements [businesses]? I thought you guys had kind of -- participated less in full-requirements options?

You are correct. We have participated much less. Most of the full-requirements contracts that we do have are legacy contracts that are rolling off this year, or they're short-term contracts. In the new hedge disclosures for 2013, there are essentially no full requirements contracts in there. If there are any, it would be very small.

Okay. Thank you.

Sure. Sure.

Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is now open.

Good morning.

Good morning, Paul.

The collars that you have on the hedges for 2013, you've got upside protection -- upside participation. Is there any downside participation? I mean you mentioned protection, but I mean if prices go down, could the number go down?

Well, the range that we've provided there, I think, captures essentially both the upside and the downside there. So the $53 and $56 in the east that range, I think, captures pretty much the downside. So I think while it could go down a little bit more if you get on the tail of a distribution, we feel pretty good about the lower end of $53.

Okay, so --

That $53, Paul, would be if all the collars priced at the bottom end of the range, because we obviously enter into these at different times. And same thing with the upside of $56. If everything hit at the top end of the range.

Right.

Okay. So -- and where is it right now, I guess? I mean I guess we can [still] look it up. I'm wondering -- because obviously they're are different products and what have you, I would think. Where would you be, I guess, in the range right now?

I would say probably towards the lower end, just with gas, as of yesterday, coming off in 2013 by about 2% and based on where we set the hedges cat a very favorable price. But we would probably still be towards the lower end of that. But I think we feel really good about it. And as of the end of second quarter, the hedges were $200 million in the money, and I would suspect that as of today, they're even further in the money. So I think they're very favorably priced hedges.

Okay. Great. Now, on weather, I'm sorry if I missed this, but what was the weather impact for the year to date versus normal? In other words, I mean, because we look at some of these -- the Kentucky numbers and stuff. I assume, maybe or maybe not, that there's some weather perhaps in there. I'm just wondering whether or not there's a potential -- what -- how we stand in terms of the weather performance?

Yes. Well, the charts are weather normalized. But on the chart --

Oh, are they?

Yes. So they're weather normalized, but you can see it in the detail below the chart the actuals. So the actuals, because of unfavorable weather, were actually more negative than the weather normalized in the case of Kentucky.

Okay.

Kentucky's off by a penny or two versus planned because of weather offset, a very modest amount by some additional [offsets] in sales.

Okay. Great.

And in the case of Pennsylvania, it's the opposite. The actual weather was more favorable than the weather normalized. So a little different geography, obviously.

Okay. And then on the trading and marketing, are we still, I think what was it $40 million that you guys were expecting for 2011

Still tracking well to that, probably ahead of that at this point.

Okay. And then any change with Casper and stuff maybe for 2014 and stuff?

No. I think we still, as Jim mentioned and I mentioned in my prepared remarks, we're still looking at 2014 as the years that a lot of retirements begin to take effect. The emission credits begin to get priced into power. So we're looking at 2013 as a transition year to the higher prices in 2014.

There are no trades yet that have obviously taken place, and there's real big bid offers on those. So it's clear when you look at the pricing that it looks like most is on the bid side and not the offer, so we do think there is clearly more upside to those margins and to those prices as transactions actually take place and allowances get allocated.

Okay. Great. Thanks a lot.

Sure.

Your next question comes from the line of Greg Gordon from ISI Group. Your line is now open.

Thanks. Good morning.

Good morning.

When we look at the decline in industrial demand in Kentucky, can you give us a little more color as to specifically what sectors of the industrial segment there are pulling back year over year?

Sure. If you're looking specifically, Greg, at the second quarter, those were really driven by two things. One was auto manufacturing production levels a little bit less than the year prior. And there was also one of the largest customers of the Kentucky utilities that had a fire and shut down the plant completely. So those are really the specific factory issues that I mentioned in the open comments. So I think it's helpful to probably look at the year over year numbers, and I believe we still feel the production levels on the auto will come back up to higher levels. And we're probably tracking still on favorable side on the industrial sales.

Is that factory that had a fire coming back, or is it shut permanently.

It's coming back. It was a 40 megawatt load pre the explosion, the carbide plant, and coming back at 25 megawatts early next year. So it will be down a bit. All of this obviously gets socialized out once we hit our 8-Ks, but it does have a near term impact.

Great. And then you may have answered this before so I apologize, butin the press release you talk about offsetting the Susquehanna outage in other aspects of your competitive supply business, quote unquote. Can you extrapolate on that a bit?

Sure. A couple things there. One is the performance of our peaking and intermediate units during the outages. Performed very well, and we captured additional margins that weren't in our plan to help offset that. Our marketing and trading activities have been very strong. As Paul mentioned in his remarks, our full-requirements contracts, those that are left, have been performing very well. So a number of things like that have really helped offset what otherwise was, obviously, a big hole that we had to fill.

Okay. And then you also say that -- strong performance from the UK businesses. So when I think about trying to model this going forward, clearly those things that are happening to offset Susquehanna might not be structurally repeatable. We know that what's happening in Kentucky is kind of hopefully just a little bit of a speed bump between rate cases at least. But on the UK side, should we presume that the positive performance relative to your plan is -- we can count on that as a base off of which you'll then grow the business into next year?

Yes, we're great. We're clearly --

Or are there one-time items there that are not structural?

No. What we're trying to do is, when we came up the with acquisition pro forma, it was actually relatively high level on an annual basis, and we're trying to determine whether the monthly data that we're seeing is going to be consistent and repeatable into the future. We had debated, actually, pulling back again and giving you the sensitivity analysis that we did at year-end around the new consolidated bigger business. We're going to try to do that at the end of Q3 so you have got a basis for being able to do the modeling, but we're clearly hopeful that this is performance that can be repeated

So better than expected, but for now you want to see if it's -- if there's some follow through.

Yes, we just got to get through the monthly analysis. We do have the annual data now completed in terms of the quality of service performance for both the legacy and the acquired business, and we'll be analyzing that and finishing the audits with Ofgem and be able to report on it at the end of Q3, the outcome in terms bonus revenues on both pieces as well.

Thanks guys good quarter.

Sure.

Thanks.

Your next question comes from the line of Michael Lapides from Goldman Sachs. Your line is now open.

Hey, guys, congrats on a good quarter. Real quick question on Pennsylvania demand at your regulated business. Little surprising the weather norm data in the quarter -- positively surprising -- given what some of your peers in the state -- I'll give an example -- PECO's weather normalized demand was pretty modest at best. Just curious, what you guys seeing, both on the residential side and industrial side in Pennsylvania that some of the others in the state may not be?

Well, I think as I mentioned earlier, Michael, I wouldn't focus a lot of attention just on a quarterly number, because there are individual specific industry events. Industrial customers, for example, that move in and out quarterly. So I focus more on the 12 months ended figures, which are on the bottom chart there. But I think relative to Kentucky, for example, the unemployment rate in Pennsylvania is better than the national average, where it's actually the reverse in Kentucky.

I don't know that there's anything structurally different in our service territory than in the PECO territory. The one caveat or exception to that is the Marcellus Shale drilling. There is some infrastructure being built in a very small section of our western territory that is seeing positive impact as a result of some more housing starts and other services coming into that territory. But we're on the very fringe of that. So I wouldn't expect that to drive the numbers significantly.

But as I mention in my remarks, we are expecting about a 1% to 2% load growth year over year by year end.

And most of that would come from (inaudible -- multiple speakers).

And a follow-up question unrelated. Since the environmental rules started coming out, meaning with MAC coming out in the spring and Casper in the summer, just curious, is there any different tone in the discussions with the coal suppliers about pricing? Meaning everybody can look at what the financial forwards are, but pricing that could be a decent bit below that if you're willing to lock up supply if you have scrubbed assets.

Well, I think everyone is following the impact of it. I think in terms of just the overall big picture, clearly compared to where we were in 2007 and 2008, power prices even though they look to be much -- or somewhat improved if not much improved by 2013, 2014, 2015, they're still low compared to those historical periods. So clearly as we look at the economics of our coal plants, there's still some challenges out there. So I think both the coal suppliers as well as the rail companies recognize the challenges that are there.

I think the bigger driver to the energy price, at the end of the day is really going to be -- and Paul mentioned this -- the SO 2 and the NOX emissions credit levels, and we're assuming what could be a little bit on the low side, about $1,400 a ton on the SO2 side and about $500 on the NOX side. And we've seen some pretty big spreads out there, upwards of 5,000 in the SO2 case and 9,000 on the NOX case. And so I think that's probably, at the end of the day, going to be a key driver to how much lift we see in prices when we get out to the 2013, 2014 time frame.

Got it. Okay. Thank you, guys. Much appreciated.

Yes.

Your next question comes from the line of Julian Dumoulin-Smith from UBS. Your line is now open.

Good morning.

Good morning.

First with respect to Susquehanna, did I read -- if you read between the lines there, did you say $60 million to $65 million now versus prior $50 million to $60 million in terms of the ultimate impact?

Yes.

Correct.

What drove the incremental level there was (inaudible -- gap in audio) power?

Yes, it was just what the ultimate power prices wound up being and the lost opportunity. About 90% of the cost that we experienced, if you will, was margin related or margin losses. The rest was O&M related.

Great. And then, secondly, if I can read between the lines on your comments on Casper, you've locked up more on 2013. Is that more to say less positive on the earlier stages of Casper and more bullish -- call it -- the second half or stage two?

Yes, I think that's right. And also, as I mentioned, we think 2013 is really a transition year, and there's still volatility out there. I mean, just looking at what happened in the markets yesterday, both the stock market, driven by the economy, and then the commodity markets yesterday, it continues to be volatile. So recognizing that, and seeing that we had a couple rallies in the quarter -- second quarter, we were able to take advantage of that and lock in what we thought were pretty decent prices for 2013. And as I mentioned, we still got the upside from the collars and the open positions for the rest of the fleet in 2013 and then 2014 is essentially all fully open.

And, Julian, what I would say -- and while I wouldn't say these moves would be dramatic, I wouldn't look at what our hedge levels are as simply being a steady March up. To the extent that we're able to layer in hedges at very good prices and we see weakness in the market, you could see a quarter on quarter movement where the numbers would move down. So I wouldn't look at it as we just simply lock and then never touch them again either. So we do look to take advantage of the portfolio as we move through time.

Great. And finally, it looks like the projected base rate numbers have ticked up just a bit here. Is all of the Kentucky CapEx at this point baked into your projection? I mean, what changed quarter on quarter? And I'm addressing Kentucky specifically.

Just at the end of the day it was very small movements. Everything we can see from a Kentucky perspective is in there. Everything that we see from a Pennsylvania perspective, if we're evaluating a likelihood of alternative rate mechanism and creating some attractiveness around additional spend, is in there. All of the hydro projects are bullish. They both all are on budget and on schedule, so we don't see any deviations there. Small movements as we look through time on maintenance CapEx around the supply business. Those get moderated a little bit as we get into the numbers, but no big movements.

Great. Thank you very much.

You're welcome.

Your next question comes from the line of Marc De Croisset from FBR Capital Markets. Your line is now open.

Thank you. Good morning. Just a couple questions on Kentucky. Are you able to kind of have a sense of what the trailing ROEs are in Kentucky?

Yes. We don't typically report on a quarterly basis on that, and its difficult because we've only owned the asset for a very short period of time. I think what we've indicated in the past is, and I know this isn't really answering your question narrowly, but clearly when we see ROEs dip down to the low nine rage, we'd be expecting to go in for a rate case. It's a little bit of an artificial period now because of the agreed stay out.

But we're -- we are seeing some softness from a sales perspective. We're doing what we can from a cost standpoint to try to recoup some of that net loss value there. But we don't report on a quarterly basis, and we've got new financing in versus the legacy financing that E.ON had, so even looking back 12 months, when we've a dead IPO, we've recap the entities, it wouldn't be a very good compare -- or a mix, part our capital structure, part the legacy.

Right. Understood. And do you have a sense, though, how that business might -- how it's going to operate with Casper in 2012? Are the Kentucky utilities going to be -- will they need credits? Will they -- how will they comply with the Casper Rules in 2012?

Well, I don't think -- we -- first off -- yes. I think we've got everything built into our plans that we know about right now relative to Casper, and we think that's pretty solid. I can't see anything unforeseen, if that's kind of what you're looking at.

Yes, I was just getting a sense for whether or not they were generally in compliance. The -- my general sense about Kentucky is that the SO2 reductions -- I think it's in Kentucky -- tend to be pretty tough as well, and I was wondering how the utilities were positioned to adapt to that.

Well, I -- yes. It's a good question. I think in general for the larger stations, we have a lot of equipment on there. There are a couple of stations where we're going to have to upgrade for SO2 compliance. But the bulk of the investments are really going to be in baghouses to deal with mercury and particulates, in addition to some SCR-type equipment. But overall, we've tried to include in the ECR filing everything that we believe is going to maintain our compliance. There -- we did also indicate earlier in an IRP, integrated resource plan filing, that there could be up to 800 megawatts of generation that could potentially be retired, that probably would not be economic to put on environmental controls to comply.

A couple of those large units that have to have that first generation set of scrubber's replaced with a new generation, to the extent that -- and as they look at the economic generation, it's absolutely lowest cost generation that goes to server the customer base. The entities' are now a net long generation with the 600 megawatts net to their interest come from the 800 megawatt Trimble County two unit, which is fully scrubbed with current compliant scrubbers that would be able to satisfy that load. So if there's any impact, it would likely potentially be a smaller amount of off-system sales, and it shouldn't be -- we shouldn't be seeing anything from a cost perspective that's not recoverable from the customer, even in the short term like 2012, that would be meaningful.

Right. Okay. Thank you very much for that color.

No problem.

Your next question comes from the line of Paul Ridzon from Keybanc. Your line is now open.

Good morning.

Good morning.

What are you seeing in regards to shopping in Pennsylvania?

Shopping does continue in our territory to increase. We were, as of the end of last month, at about 550,000 customer shopping, representing I believe about 72% or 73% of the total retail load, so most of the, of course, the C&I customers have been shopping for quite some time. So we're up to continuing to see shopping go forward, and I think it's -- while it's probably leveled off somewhat, it's still incrementally expanding.

Switching gears to the UK, a lot of why Midlands made sense with the back leverage. Is that fully set up? Is there more potential upside from financing creativity you could do there?

I don't think there's any more from financing creativity. We'll obviously continue to work on over the long term kind of tax strategies around repatriation. But we basically mimicked -- the legacy WDP debt structure was 80% debt to rev when you combine the OpCo debt with the HoldCo debt. That kind of-- in optimized level, to maintain a BAA3 rating, an investment grade rating at the two respective HoldCos; the one that owns the legacy, the one that owns Midlands. And I wouldn't expect us -- unless the rating agencies would evolve their view over time to let us put on additional debt. We've been vacillating over the last six or seven years at [WPDF] between low 70%, the low 80% HoldCo debt to rev. And I wouldn't expect that we would be moving meaningfully out of that range. So I think we've optimized as best we can at this point.

Thank you very much.

Your next question comes from the line of Jonathan Arnold from Deutsche Bank. Your line is now open.

Jonathan?

Mr. Arnold, if your line is on mute, please unmute.

Your next question comes from the line of Raymond Leung from Goldman Sachs. Your line is now open. Mr. Leung, if line is on mute, please unmute.

Your next question comes from the line of Daniele Seitz from Seitz Research. Your line is now open.

Thank you. I just was wondering if the 1% to 2% growth includes above normal weather in July?

No.

That would be weather normalized growth.

Okay. Thanks. The other questions were answered. Thank you very much.

Okay. You're welcome.

Your next question comes from the line of, again, Jonathan Arnold from Deutsche Bank. Your line is now open.

Jonathan?

Mr. Arnold, if your line is on mute, please unmute.

Your following question comes from the line of Michael Lapides from Goldman Sachs.

Hey, guys, just figured out how to work the mute button here. Real quick question. Financing update on equity side. Can you just provide an update given the slight change you've made in CapEx, et cetera, in terms of your kind of multi-year equity financing.

Yes, it's not in any way meaningfully different than we disclosed in the past. It might have upticked a very small amount, but still we're talking modest amounts through drip dribble at the market. Late 2012, late 2013. We kind of got everything we needed for the 18 month period through the equity raise that we did by upsizing that in April. So it's in -- it's still in that same zip code that we talked about in the past.

Got it. Thank you guys.

You're welcome.

Your next question comes from the line of Ivana Ergovic from Jefferies. Your line is now open.

Hi, good morning. I'm just wondering whether you're going to have extra SO2 allowances to sell in 2012 and 2013 in Pennsylvania, given than that your generation is scrubbed.

We do -- ifyou look at the al location for the EPA has provided, we do have excess allowances in 2012, but then we are short in 2014. There are some limitations on how much we can bank, but our initial strategy would likely be to try to bank those that we can and use them in future periods. For those that are not able to be banked, we would look to sell those.

So what happens in 2014? So would you use those from 2012 in 2014 and forward?

Correct. To the extent we could. And to the extent they cannot be carried over, then we would sell them in the near term, meaning if they're available in 2012 and we couldn't carry them to 2013, 2014, we'd sell them to others that need them.

Okay. And what about Kentucky?

Kentucky, I believe, is not in a similar position. I believe they were either flat or maybe just slightly over in 2012, and then also short allowances in 2014.

Okay. And is there a deadline by which Kentucky commission has to ensure a final decision in your environmental rate case?

In the ECR mechanism we would expect a determination late this year, in December -- by mid-December.

But there is no deadline? Or that's the deadline?

That would be the normal time line to rule on that filing.

Okay. Another quick question. Did you provide some updates on your transmission lines [Susquehanna]-Roseland?

Sure. We continue to look for a record of decision in October of next year, with construction to begin shortly thereafter. The majority of the construction would be in 2014 and 2015, with an in-service date targeted around mid-2015.

We would expect our portion of the line to be complete in the mid-2014 type time frame.

Okay. Thank you.

Your next question come from the line of Lauren Duke from Deutsche Bank. Your line is now open.

Hi. Good morning.

Good morning.

I had a question on the hedging. I know you mentioned that some of the additional hedges were it take advantage of price spikes related to the Casper Rules, and I was wondering, because it seems -- I know in your slide it says hedges are as of June 30. So does that just mean you saw some run up ahead of the rule being finalized, or some of these hedges have taken place after what we see on this slide?

No, these would have been put on prior to the end of that quarter, so they do not reflect any activity since the end of the quarter. And we did see prices run up in the anticipation of the final rule coming out, even though it didn't come out until July.

Okay. Great. Thank you so much.

Sure.

Your next question comes from the line of Tom O'Neill from Green Arrow. Your line is open.

Good morning. I apologize if I missed this, but on the rail contract that's up for renegotiation, I was wondering if you could scope the issue a little bit more for us? Is this -- like, 9 million tons is about the right number, and then just what the current price is?

Well, we don't disclose the actual prices, but what we've disclosed in the past is that the rail for contracts for 2011 were expected to be -- the cost -- about in the low $20 per ton range. And we would expect -- and that contract ends in 2012. So we're in negotiations in advance of the expiration of that at the end of next year. So we still have time on the contract. In terms of anything else, I would just say we're in discussions right now, and I really don't want to comment much further on it at this point this time.

Okay. And the volume, is that about right?

The volume I believe is actually a little bit lower than that. I think we're probably talking -- because in our total volumes of 9 million, that includes Keystone and [connema], so I believe it's about 7 million -- let me see if I can pick it up for you. I think it's about 7 million tons. It would be -- it looks like around 8 million tons roughly.

Perfect. Thank you.

Okay. You're welcome.

(Operator Instructions). Your next question comes from the line of Reza Hatefi from Decade Capital. Your line is now open.

Thanks again. Just another follow-up on slide 16. The new hedge disclosure for 2013, is that around the clock prices for PJM East, or is more peak weighted?

It is a combination of peak and off-peak, and it is probably more slightly waited to the on-peak side. So it's kind of a waited average, and it's not precisely an around the clock. But probably a little heavier wait I weighted on the on-peek, but not -- it's not that it's all on-peek, clearly.

I guess looking at slide 20, around the clock and PJM is -- in 2013, is about $48, and that's kind of where it's been roughly all year. And you guys were 10% to 15% hedged, I think, coming into the year for 2013? So I guess I'm just trying to figure out what else could have driven that average hedge price from $53 to $56 when 2013 prices have been in the $48 ballpark for this year.

Yes,I think first you hit on one of them, which is I believe we're about 20% hedge coming into the year at higher levels than average $48 around the clock, so that's one driver. And then the other is just the fact that it's a little bit more heavily waited to on-peak in terms of the levels of hedging that are included in this number versus off-peak.

And there were periods, Reza, in the quarter where we did see price spikes where we did take advantage of. $2 to $3 dollar prices moves. So that does blend in as well, even if they have came back off of those levels, and I think that's why Bill referenced it. If we look in total, it's $200 million as -- slightly more than $200 million in money as of the end of the quarter.

$200 million in the money at the end of the quarter. Okay. Thank you very much.

(Operator Instructions). There are no further questions in the queue at this time. I'll turn the call back over to the presenters.

Okay. Well, thank you all for being on the call. We feel we had a good quarter. Very pleased with our performance and the ability to offset some unexpected outages at Susquehanna. Both units are back up running, so we're looking forward to talking to you at the end of the third quarter. Thank you very much.

This concludes today's conference call. You may now disconnect.