賓州電力 (PPL) 2012 Q1 法說會逐字稿

Good morning, my name is Matthew and I will be your conference operator today.

At this time I would like to welcome everyone to the PPL Corporation first quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions).

Thank you.

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

Thank you.

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

We are providing slides of this presentation on our website at www.PPLweb.com.

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from such forward-looking statements.

A discussion of factors that could cause actual results or events to vary is contained in the appendix to this presentation and in the Company's SEC filings.

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

Thanks, Joe, and good morning everyone.

Thanks for joining us on the call today.

We appreciate your continued interest in PPL, and as always, we look forward to answering your questions.

To facilitate more interaction on these calls, we're going to be condensing our prepared remarks today.

And we also have all four business unit presidents with us for the Q&A.

Joining us today are Vic Staffieri, President and Chief Executive Officer of LG&EKU, which is our Kentucky regulated segment.

Rick Klingensmith, President of PPL Global, who has responsibility for our United Kingdom regulated segment and our energy services business.

Greg Dudkin, President of PPL Electric Utilities, our Pennsylvania regulated segment.

And Dave DeCampli, President of our Competitive Market Supply segment.

And of course Paul Farr is joining us, our CFO.

First I will kick off the call with an overview of our first-quarter results and operational highlights for the first three months of the year.

Then Paul will provide more details on our segment performance for the quarter.

Following his remarks, we'll turn to your questions.

With that, let's go ahead and get started.

Today we announced reported first-quarter earnings of $0.93 per share, up from $0.82 in the first quarter of 2011.

Earnings from ongoing operations for the quarter were $0.70 per share compared with $0.84 a share in the same period last year.

Our first-quarter earnings from ongoing operations reflect $0.14 per share of dilution from our April 2011 common stock issuance to finance our acquisition of the Midlands utilities in the UK.

As you can see in our segment results for the quarter, we had very strong performance in the UK, including the successful integration of the Midlands operations.

These quarterly results demonstrate the value of our expansion into diversified regulatory jurisdictions and the attainment of a more predictable earnings profile.

While our Competitive Supply segment has become a relatively smaller piece of the pie, our Supply team continues to successfully navigate through these very challenging commodity markets.

Paul will go into additional details on a segment by segment basis, but the weather-driven weakness in our domestic regulated businesses were offset by the strength of our UK operations and very good Supply segment performance.

So, despite the impact of the mild winter, our first-quarter results keep us solidly on track to achieve our 2012 earnings forecast.

Today we are reaffirming our forecast of $2.11 -- or rather $2.15 to $2.45 per share in earnings from ongoing operations.

Now let's turn to a brief operational overview for the quarter.

Starting in the UK, Western Power Distribution has fully integrated the Midlands operations on schedule and within budget.

As you can see from the slides in the appendix to today's presentation, WPD employees have already made dramatic improvements in performance, resulting in material benefits not only for our customers but our shareholders as well.

Our current assessment indicates that annual cash cost savings for the Midlands operations will be higher than what we projected during the acquisition announcement and equity financing last spring.

These cost reductions are not coming at the expense of customer service, rather just the opposite.

In just 12 months, Midlands customers have seen a 40% reduction in customer minutes lost, an important measure of performance in the UK.

We have also accomplished a 96% reduction in customers out of service for more than 18 hours, a 26% improvement in the number of customers restored in just one hour, and a 22% improvement in the number of interruptions per 100 customers.

These customer service performance improvements will result in additional incentive revenues in the future for WPD.

We also believe that these improvements will further cement WPD's reputation as the gold standard for network operations in the UK.

We recently received some very good news on the Susquehanna-Roseland transmission line project.

The National Park Service confirmed our preferred route through the Delaware water gap as the most desirable alternative.

We expect the final record of decision from the National Park Service in October.

This timing it will allow us to have the line in service to meet the 2015 PJM peak demand.

In our Competitive Supply business, we completed the acquisition of a 700 megawatt gas fired power plant in Central Pennsylvania.

The purchase of the AES Ironwood plant represented an excellent opportunity for us to expand our gas suite at an attractive valuation and in our own backyard.

All of our Competitive power plants had high availability during the quarter, and our gas-fired units saw increased runtimes as a result of low natural gas prices and the displacement of higher-cost coal units.

Our combined cycle gas units are already seeing close to maximum runtimes.

For example, our Lower Mount Bethel was operating at a 92% capacity factor in the first quarter.

Ironwood had very strong numbers as well, but that unit underwent a planned outage during a portion of the quarter.

Our energy marketing and trading operation is driving value from these assets through our expert knowledge of market dynamics.

Our team has done an excellent job at capturing value and executing hedges at the right time.

And as you can see on our hedge disclosure slide in the appendix, we have updated it to reflect actual results through the first quarter and the termination of the Southern Montana contract.

The modest change in coal prices reflects the lower coal burns this year, shifting some of the deliveries to next year.

Our hedge levels for power in 2014 are not materially different from the 10% to 20% level we discussed on our year-end call in early February.

We have chosen to keep our hedging at this level because we don't see value locking in prices that we think are currently artificially low.

We continue to believe that current forward power prices do not appropriately reflect the cost to comply with MATS and CSAPR roles, or all anticipated coal plant closures.

We also believe we can see even further heat rate expansion as gas and power prices continued to decouple in the forward years.

Finally we see current forwards being disproportionately affected by the short-term weather, economic, and gas market dynamics.

These factors and the competitiveness of our Mid-Atlantic fleet lead us to believe that there is more upside opportunity for 2014 than downside risk at this point.

On the nuclear front, Susquehanna Unit 1 is in the midst of its refueling outage.

You may have seen our recent press release indicating we have identified several cracks on the low pressure turbine blades on Unit 1, and will be scheduling an inspection of Unit 2 turbine blades as well.

As we said in our release, the financial impact of these replacements is not expected to be material.

Moving now to the Pennsylvania Regulated segment, I'll provide you with a summary of the distribution rate case increase request that PPL Electric Utilities filed with the Pennsylvania Public Utility Commission just at the end of March.

We expect that any approved increase would go into effect January 1, 2013.

Slide 7 provides some details of the request.

We expect the PUC, following its normal procedure to announce its plans to conduct a formal proceeding on the request.

These proceedings will include technical and public input hearings during the summer, an administrative law judge recommended decision in the fall and a final PUC vote which is expected in December.

As indicated on this slide, a 1% change in the allowed ROE amounts to about $23 million in revenue.

This case does not include any request for alternative rate treatment or a disk mechanism under the new Pennsylvania Act 11 law.

That law does not permit filing of discs before January 1, 2013.

As always, we will keep you posted on the rate case developments and we have provided the docket number here so you can follow the proceeding.

As I mentioned earlier, our first-quarter results provide us with additional validation of the robustness of PPL's current portfolio.

Because of the geographic and regulatory diversity of our business, we remain on track to achieve our earnings forecast despite some of the mildest winter weather that our domestic utilities have ever seen.

Over the past several months, I have been asked numerous times about potential changes in the Company's strategy under my leadership of PPL.

I have obviously been very involved in our strategic direction for some time, and I believe time has proven the value of the steps we have taken over the past several years.

Going forward, our focus is going to be on delivering high-quality service to our customers and remaining flexible in our Competitive Supply business to respond to dynamic market conditions.

I believe our current business mix is one of the most attractive in the sector, as we have significant growth opportunities in each of our regulated business segments and a very competitive generation fleet.

With 70% of our 2012 ongoing earnings coming from growing rate-regulated businesses, we have a very solid platform for continued growth.

We are forecasting compound annual rate-based growth of about 8% over the next five years in our utility operations in the US and the UK.

The resulting $8 billion of net rate-based growth will come from infrastructure investments, much of which have already been approved by regulatory agencies or recovered in formula rates.

This includes the approved environmental cost recovery spending in Kentucky, our approved capital spending in the UK through early 2015, and transmission projects in the US.

We also received regulatory approval yesterday on the Kentucky Public Service Commission to acquire and build gas-fired generation in Kentucky.

Our regulated utilities are recognized for high-quality customer service, excellent reliability and positive storm response which, as you know, are keys to successful long-term regulatory relationships and customer satisfaction.

PPL will continue to be sharply focused on these important areas.

While many of us await improved fundamentals in the electric commodity sector, PPL's favorable mix of nuclear, coal, gas and hydro facilities gives us flexibility in the current market and will provide significant upside potential when markets ultimately recover.

In summary, I continue to believe that PPL's current strategic position is a compelling one, and our focus will be on the execution and delivery of the commitments that we made to customers and our shareholders.

I look forward to your questions following Paul's comments.

Paul?

Thanks, Bill, and good morning everyone.

Before I provide details of the earnings drivers for the first quarter, I first want to discuss the equity financing that we completed in early April through a forward transaction.

This offering, combined with our existing drip and management comp programs, fulfill the $350 million of equity need for the year that we have consistently communicated.

We decided to issue the stock through the use of a forward contract in order to de-risk the equity exposure we had, and accomplish that without affecting the expectations we set regarding share count and EPS for the year.

In fact, the EPS impact is actually pushed out slightly beyond the late 2012 timeframe that we recently communicated to you.

As part of our internal comprehensive risk management program and for the same reasons we hedge generation output, fuel, interest rates or currency for known exposures, we use this forward transaction to mitigate risk around our equity need.

Beyond the de-risking benefit, we also wanted to alleviate a potential overhang on the stock, which several of you have recently voiced as a concern.

Given the current state of commodity markets, there has been concern that we may need additional equity beyond the $350 million previously communicated.

We do not.

The regulated acquisitions we completed, combined with modest amounts of equity to fund rate-based growth, provide credit stability that will help us endure prolonged weak commodity markets.

With that, let's move to slide 8 to review our first-quarter financial results.

PPL's first-quarter earnings from ongoing operations are down from a year ago, driven by $0.14 per share of dilution associated with the April issuance last year of common stock to finance the Midlands acquisition.

Lower energy margins at the Supply segment at lower electricity sales due to the extremely mild weather experienced in our US service territories.

These negative drivers were significantly offset by strong operating results in the UK, including the Midlands operations that we acquired April 1 of last year.

Let's turn to the Kentucky Regulated segment earnings drivers on slide 9.

Our Kentucky Regulated segment earned $0.06 per share in the first quarter, a $0.09 decrease compared to last year.

This decrease was primarily driven by lower margins due to lower retail electric volumes from mild weather which impacted margins by $0.03, as well as lower off system sales.

We had higher O&M, primarily due to the increased scope of scheduled generation outages in 2012, higher depreciation due to higher plant in service, and dilution of $0.01 per share.

Moving to slide 10, our UK Regulated segment earned $0.31 per share in the first quarter, a $0.15 increase over last year.

The increase was due to the operating results of the Midlands utilities, net of interest expense associated with the 2011 equity units, and higher delivery margins in our legacy WPD operation, primarily driven by the net impact of higher prices and lower volumes.

These positive earnings drivers were partially offset by higher O&M, including higher pension expense, higher US income taxes and dilution of $0.06 per share.

Turning now to our Pennsylvania Regulated segment on slide 11, this segment earned $0.06 per share in the first quarter, a $0.05 decrease compared to a year ago.

This decrease was the net result of lower delivery margins of $0.02, primarily due to unseasonably while mild weather, modestly higher O&M, higher depreciation again due to higher plant in service, and dilution of $0.01 per share.

Moving now to slide 12, our Supply segment earned $0.27 per share in the first quarter, a decrease of $0.15 compared to last year.

This decrease was primarily the net result of lower eastern energy margins, driven by both lower energy and capacity prices, and partially offset by higher nuclear generation, higher O&M, lower income taxes primarily due to a lower state effective tax rate, and finally dilution of $0.06 per share.

And with that by way of review, I'd like to turn the call back to Bill for the Q&A period.

Okay, operator, I believe we are ready to start the call -- or the questions, rather.

(Operator Instructions).

Dan Eggers, Credit Suisse.

Good morning.

You are certainly messaging a pretty constructive or more constructive than market view on 2014 power markets.

How long do you guys feel comfortable not getting more active in the hedging program as you look out that far, I guess is question number one?

Sure, well as I mentioned in the opening remarks, we are thinking that -- at least at this point, the MATS and CSAPR impacts are not appropriately reflected.

I think we will probably learn a lot potentially from the capacity auction with the results come out and see what units are actually going to be retired.

But beyond that, there is a point at which we are going to begin to hedge in.

We won't leave it completely open until we get to 2014.

So I think, as we have done in the past, we have a fairly disciplined hedging program.

We have plenty of time at the moment to make those decisions and pick our spots when we hedge in.

And I think in the past we have done a really great job of picking those times to hedge in.

So, I think we are going to have an opportunity, and if it gets too late in the process, we will begin to selectively hedge in.

Okay, and I guess in Pennsylvania with the rate case, can you just remind on thought process not necessarily for this case, but for (technical difficulty) -- but for the next cases as far as when you are going to file against -- you are not going to get the mechanism this time through?

Does it mean that there is going to be another case shortly thereafter, so you can get the disc in place after this case gets done?

Yes, we would expect that once this case is completed we would file for the disc and then probably in future rate cases we would use a future test period.

And so you are going to file that in '13 at some point in time then?

For the disc, yes; I think for the rate case itself, that is yet to be determined.

Okay.

Got it.

I guess just comprehensively on weather for the quarter how much was the overall drag, Paul, if you were to add up all of the pieces between Supply and US utilities?

If I took the $0.03 in Kentucky plus the extra penny of off-system sales which also -- there was just outright demand construction across many systems, it was about $0.04 in Kentucky and then $0.02 in EU, so a total of $0.06.

Okay.

Thank you guys.

Kit Konolige with Konolige Research.

Good morning.

So, on the question of equity, Paul, you were pretty clear that you are not going to need additional equity related to, let's say, in a cash shortfall that might be arising from low commodity prices.

What is the outlook over the next several years?

You have a significant structural free cash flow deficit.

What is the schedule for funding that with equity?

And how should we view it overall on how equity fits into your cash needs over the next few years?

Okay there's -- I really break it in two component pieces.

We will be getting incremental cash of roughly $2 billion over the next two years from the conversion -- from the conversion of the converts.

So, that equity will provide a meaningful de-levering of supply and result in incremental cash to the Company.

On top of that, we think will still need the roughly $350 million per year for the next several years as we make our way especially through the large rate base build in Kentucky.

And after that program is complete, the cash flows are relatively robust there, the CapEx programs -- I would look at kind of projecting forward the levels of spend that we have got in both EU and in WPD.

There are strong opportunities and needs to put capital to work there.

But the big build in Kentucky is -- does have some finite end to it.

So I think we've got plenty of equity opportunity just given how we finance the two acquisitions, and then layer in that $350 million per year that we have talked about at least for the next several years.

So we should think in terms of sometime in '13 you would logically be raising equity again, and then offering similar to this one?

That is correct.

And I would be looking to late in the year like we were this year.

Very good.

Okay, one other question on the Pennsylvania segment.

What is the run rate of your actual return on equity at this point?

Yes, I will ask Greg Dudkin, the President of our Electric Utilities, to answer that.

We are running about mid-single-digits on our ROE for distribution at this point.

Okay.

Thank you.

You're welcome.

Justin McCann, S&P Capital IQ.

I have two questions -- one for Paul and one for Bill.

Paul, just to follow up on Kit's question, what do you expect the average diluted shares to be for '12, '13, and '14?

Just one second; I will pull those numbers for you.

So, for '12, it is right around 585 million shares; for '13 around 615 million; and for 2014, 670 million roughly -- 665 million to 670 million.

Okay.

Thank you.

And Bill, at the reception in New York last month and briefly this morning, you mentioned the [decline] (technical difficulty) of the gas prices [with] power prices.

If you could elaborate on that?

Sure.

I think what I am really referring there is -- to is the correlation between gas and power, which had been historically in the last decade or so very strong, is already beginning to break down.

So you are seeing improved heat rates particularly on gas units, of course, and what we are seeing there is the fundamentals of the power side beginning to take over just the strict correlation of the marginal fuel on PJM.

So, as more units are being retired and supply and demand come into closer balance, we are really seeing the fundamentals of the power market driving power prices, not just fuel input such as natural gas.

Thank you.

Sure.

Paul Patterson, Glenrock Associates.

Good morning.

I wanted to touch base with you on the tax rate.

It looked like it was a little bit lower.

I guess that was coming from Supply.

I'm not completely clear.

Could you just tell us what happened there?

Yes.

We come from a combination of Supply, which I referenced, and that was just a couple cents a share from the lower effective state tax rate.

The bigger driver year-on-year is going to come from the change in the business mix of the Company.

The UK effective tax rate for that segment is only 25%, versus the other segments that run closer to 35% to 37%.

So just the change in the business mix is going to drive a lower effective tax rate.

So -- okay, great.

And then secondly, the coal burn; you mentioned that some of it is going to be pushed into next year.

How should we think about that from an earnings perspective?

I mean, in other words, are you deferring higher-cost coal into next year's burn, so to speak?

I would say it is probably not meaningful or material from a coal burn and coal cost input side.

It -- there is delaying or pushing out of coal in the next year because we are not burning it this year.

I will ask Dave DeCampli to provide any more color on that, if you would, Dave.

Yes, Paul.

We are working very hard with our suppliers on a number of fronts -- deferrals, altering the mix in consumption schedule for the balance of 2012, and making some adjustments.

So we are calling it not material at this point, because we are in relatively good shape for 2012 inventories.

Okay, great.

And then just finally, the mark-to-market gain that you guys are going to be realizing into 2012, that is going to be going into operating earnings.

Is that correct?

It's being excluded from operating earnings?

I guess it would have been a positive.

And it's going to -- how is it going to impact 2012?

And does it go just into 2012 or does it go beyond that?

No.

It will go beyond that.

It primarily relates to correlation breakdown in our eastern hedges.

From a FAS 133 perspective, they're still very good hedges from an economic and risk perspective.

So, we'll match those periods as those contracts deliver, and it's 2012 and 2013 primarily.

Okay.

Thanks so much.

Anthony Crowdell, Jefferies & Company.

Good morning.

I wanted to focus on the Susquehanna nuclear plant and how do long you think you'll have Unit 2 down for inspection?

And if you guys -- if you do see the cracks, will you put blades in, or will it be a de-rate of the unit?

Well, first, we would absolutely replace the blades; would probably not do a de-rate.

But I will ask Dave DeCampli to talk about the timing of the Unit 2 outage.

The Unit 2 outage is scheduled later this month.

And we expect it to be somewhere around 20 days, and that will be dependent upon what we find in the turbine.

We do have the blades available on standby to replace.

We have gotten rather efficient at the inspection process at this point.

So we are thinking it will be somewhere about 20 days, depending on what we find once we get in the turbine.

Does the 20-day outage include if you had to replace the blades, or 20 days of inspection and blade replacement would be incremental?

Call the inspection process the first 10 days, once the unit cools down and we gain access to it.

And then the replacement will be very dependent upon whether we have to pull the turbine out of its saddle or not.

And that is -- will have to do with the number of blades that we find cracked.

So, on the short end it would be 20 days.

The short -- okay, great.

Thank you.

Julien Dumoulin-Smith, UBS.

Good morning.

So, first question, just kind of bouncing off what public service said the other day, do you guys -- are you anticipating higher [rows] on the Susquehanna CapEx here, just given what has happened of late first?

I didn't really see any kind of material change too much.

No.

I'm sorry, no; we don't expect too much material change in that Susquehanna-Roseland CapEx.

And then secondly, with regards to coal prices this year, it seems as if it just went up a slight hair there, $1 a ton.

Is that basically -- call it payments for taking delivery at a later point in time?

It is.

It is primarily a timing issue, yes.

Excellent.

And then broadly speaking, what are you seeing in terms on the coal side in terms of capacity factors for the balance of the year?

You would think intuitively coal to gas switching would somewhat alleviate in the summer months.

Just what kind of capacity factors are you seeing on your more baseload units?

Yes, correct; I think for the summer months we are going to see the coal units return to their traditional baseload operation.

I think in the fall, of course, it is all going to be dependent upon natural gas prices as well as coal prices.

But I would expect that we would see -- hopefully, if you see a normal weather, you'd see more run time than we saw in the first quarter.

But with the current natural gas price to coal price relationship, I would expect that the capacity factors in the fall are going to be less than what we have historically seen, but probably not as bad as the first quarter.

Interesting.

And you have commented a little bit about O&M hit this year.

Just curious to the extent to which you run your coal plants less, how much of an O&M benefit could we potentially see there?

We have heard some other companies discuss that.

Yes, there is an O&M benefit when we are off-line, and there's also a margin benefit when we are highly hedged as we are.

We are essentially able to buy power cheaper than we can produce it at those coal facilities.

So there is a dual effect there, if you will, that did help us in the first quarter, and could help us in the fall as well if we see similar conditions.

As far as an exact number on the O&M, I don't know it would be that material that I could say that -- that would be measured in pennies, probably, not nickels and dimes.

And then the last question, sort of a small detail; the Montana contract rejection -- what kind of an impact are you seeing there, just annually?

Well, of course it is all dependent on where we can place the power that otherwise was contracted for by southern Montana.

But having said that, I would say it's -- again, it's one of those things that is not extremely material.

And as we mentioned, we are maintaining and are comfortable with the midpoint of our earnings.

Okay, great.

Thank you.

Andy Bischoff, Morningstar.

Good morning.

Just two quick questions for you this morning.

On the Midlands integration, you mentioned you were trading above your initial (inaudible) savings.

Are you willing to provide a new range or any clarity on that?

I will let Rick Klingensmith, the President of our Global operation, answer that.

Good morning.

As you saw in the earnings release or the news release that came out, we have increased our forecast for this year up to $1.07 a share.

And that incorporates the additional benefits we are seeing from the integration of the Midlands operation, and that is pretty much where we are heading out thus far, for this year, in our forecast.

Okay, great.

Thank you.

And [to add] a question to the capacity factors at your gas plants, you mentioned about a [92%] factor at that one plant.

Is this a dramatic case?

Or is it safe to assume that these are factors across all of your plants?

Well, on the natural gas plant site?

Yes.

Yes, I would say -- I mentioned also that Ironwood was out on an outage for some period of time.

That still saw about a 76% capacity factor during the quarter.

So I would expect, with similar conditions, that we would be at a 90% type capacity factor.

Great.

Thank you.

Appreciate it.

Paul Ridzon, KeyBanc.

Paul, when you gave those forward-looking share counts did that contemplate new equity, or is that kind of as we sit today?

Yes, it contemplated new equity.

So it is a '13 issuance in there?

So, it would be impacted by the converts converting as well as some amount of the incremental equity for that on an annual basis, as I mentioned.

And your CapEx forecast, does that include generation in Kentucky?

Gas-fired generation?

Yes, it does.

For (multiple speakers)

Okay.

Thank you very much.

For both the combined cycle gas unit at Cane Run, as well as the LS Power acquisition.

I guess a follow-up on Susquehanna.

You said minimal impact, but is that as we sit today?

And if it does require a tear down and take the turbines out, could it be more than immaterial?

I don't -- at this point I don't anticipate that, no.

It could be, yes, of course.

I can't say it couldn't be.

But based on what we found on Unit 1, and the fact that the Unit 2 blades are relatively new, having been replaced last summer, I wouldn't anticipate that we are going to get into a situation that is significantly different from Unit 1, where we essentially replaced one row of blades.

So that would be, in my view, kind of the expectation would be if we get in there and find some damage, we would be looking at replacing one row of blades.

Is this warranty work?

We are -- the blades are under warranty, and until we determine the final root cause, we will continue to work with the vendor and work those details out.

Are there any LDs on lost opportunity?

No.

Okay.

Thank you very much.

Steve Fleishman, Bank of America.

Good morning, gentlemen.

Just -- this might be first a couple follow-ups.

The hedging effectiveness gain that you pulled out as a one-timer, when it does effectively come back, isn't it effectively kind of a loss then?

No.

Until the correlations would come back in, they couldn't be re-designated.

But the mark-to-market would start from the beginning of the period where the effectiveness reoccurred, if we elected to put them under 133 again, which we are not necessarily going to do.

So I would -- in similar ways to where we have had smaller amounts of ineffectiveness in the past, and you have seen special item debits and credits up and down, this was larger than maybe some of those historical movements have been.

And that is why we called it out for you, so you understand what was happening.

It would (multiple speakers) -- sorry, go ahead Steve.

Well, just my thought is that if you had a favorable hedge like this, and you ended up for accounting having to book the benefit upfront, when we see the hedge flow through in '12 and '13 you -- [as] the hedge effectively kind of gone, could you book that benefit upfront?

Well, I mean, ultimately all of these contracts will go to delivery.

We fully expect them to and we will settle at the contracted prices.

So the intervening mark-to-market up-and-down, which would normally be in the balance sheet only that hits the [P&L], we have carved it out.

So you won't see the loss in the future either, if you will, in the same way that the benefits have been carved out, so with the movement back to contracted price.

Okay, so that might also get booked as one-time in these next two years or --?

I would expect the mark-to-market on these to continue through contract delivery on these contracts, correct.

Okay, all right, sorry to beat that dead horse.

It's a good question.

And just to be clear, we don't expect it to -- from an ongoing earnings perspective to have any impact on our business plan.

Okay.

Secondly, could you -- what are you seeing in your region regarding basis, both in the quarter but also kind of forward any -- are you still kind of at flat basis to PJM West, or any updates there?

Yes.

We saw in the first quarter about a negative $2 basis.

Obviously there's the weather and natural gas prices and [West stub] prices had a significant impact on that number.

I guess the drivers that I have mentioned on previous calls that moved the basis around -- natural gas prices, transmission outages, new lines coming in, et cetera -- all are still in play.

And there is an awful lot of transmission work being done in the region, throughout the region.

So I think we -- our expectation is still to see some pressure on basis in the upcoming months and through the rest of this year.

We will have to reassess after the summer where we think basis is going to travel.

But for now, we think that negative $2 is what delivered in the first quarter and it is going to continue to have some pressure.

Now the good news is that we have had some very effective hedges in place that have helped offset that for us.

So, from an impact to PPL, it was really neutral during the quarter even though, had we been unhedged, it would have been a negative $2.

Okay.

And then just finally, a follow-up on coal; just how do your -- maybe a little more color on where your coal inventories stand in the various regions?

Sure.

Like a lot of folks, we have built up quite a bit of inventory.

But we still have room to go at our station, so it is not a pressing issue for us at this moment and many of our units are back online as we speak.

So, we are going to be bringing the coal pile probably down again a little bit.

But we have been pretty effective at, I think, deferring some deliveries.

We have worked very closely with our coal suppliers to really manage the inventories during this time.

So -- and then I think as you know, in the West at coal strip, it is a mine-mouth plant, so we don't have the same issues out there in terms of inventory as we do in the East.

Okay.

Thank you.

Raymond Leung, Goldman Sachs.

Just -- I think Paul mentioned that proceeds from the converts, that $2 billion, and you also mentioned about deleveraging at Supply.

Can you sort of give us some context of what you think is a right leverage metrics for Supply?

And then also staying on Supply, as you sort of look at your business, obviously you have transformed into a more regulated.

How should we think about, longer-term, the generation business as part of the overall family?

Okay, let me tackle the credit one and then I will -- Bill can comment on the more strategic perspective of generation.

From a credit perspective, as I indicated, we have got $1.150 billion that is converting in mid-2013.

We have got $950 million converting in April of 2014 related to the equity converts that we did as part of both deals.

Effectively what will happen is that equity happens at Corp, if you will, and will get injected into Supply, allowing Supply to de-lever.

The two ratings agencies, well, I'll talk about the three, but S&P -- I'll talk about two of the three.

S&P looks at PPL on a consolidated credit basis, and so they looked at consolidated FFO and consolidated debt.

That movement down to Supply would be effectively inconsequential to them, which is effectively taking debt that is at Supply and moving it up to Corp.

And in all of this, we are trying to maintain investment grade credit ratings obviously for Supply, which enables us to get the liquidity at reasonable prices to do the hedging.

For Moody's, they (multiple speakers) focused more for us on an entity by entity basis.

And I think -- I won't speak for them, but if we can maintain 20%-ish FFO to debt metrics, I think we can maintain investment grade.

I'd like to be more robust and I think by the time we get out a couple of years, we'll see some of the fundamental benefits that Bill talked about in terms of power prices, in terms of tighter capacity margins.

And that will clearly provide opportunity for the fleet.

So, on a year by year basis, you could look at things and they make look a little tight.

But I think you could put it into reasonable enough time horizon, and with the amount of incremental small equity needs that I talked about year on year, we can manage through this.

On your question on the competitive generation fleet, as I think about it -- scale, we have that.

The mix of generation is very good.

We are in a very good market here in PJM, very visible prices and, of course, a very good capacity market.

And you have to keep in mind that even if we were not looking at the competitive generation, we still have 8000 megawatts -- over 8000 regulated generation in Kentucky.

So we have a sizable fleet with around 20,000 megawatts.

We do have the scale in good markets.

And I think as Paul mentioned earlier, we have the ability to weather the down cycles now in the commodity cycle because of the robustness of the regulated businesses.

So overall, I feel like it is fit for the Company, continues to be a fit for the Company and a potential upside as we go into the future.

And just a final note from an environmental perspective, I think you are aware that on the competitive fleet side, we are very well-equipped to deal with the MATS and the CSAPR, so that we're not looking at any major new incremental investments on the environmental side.

Okay, great.

Just one follow-up question for Paul.

Would you look at -- if you were to reduce debt at Supply, would it be more just as they mature?

Or would you do something a little more proactively there?

We would probably look at as things mature and as we are closing out the construction program in the next 12 months or so, around both Rainbow and Holtwood.

So that growth CapEx, if you will, kind of goes away.

And our teams are looking very hard.

I think we have talked about in the past the cutting of roughly, over the five-year plan, around $500 million of CapEx from that segment.

We are continuing, as power prices have come down, to continue to look at O&M and CapEx there to try to help alleviate some of the stress as well.

The markets aren't viewing the value of the plants quite as highly, and we will have CapEx in line to make sure that they are available, but prudently available as these challenging markets -- as we make our way through that market cycle.

Okay, great.

Thank you guys.

Brian Chin, Citigroup.

Good morning.

Could you just walk through the rationale on your other comment about [milling] for the disc sometime in '13, and then looking at the forward test to your mechanism a little bit at some point in the future beyond that, why split those up as opposed to doing it together?

Well, I think we have got the rate case we just filed.

We would expect the outcome January 1 of -- rates to be in effect January 1.

So I think we have to balance the Company's needs with customer reaction to rate cases, just one after another after another.

So I think we have to keep that in to -- in mind and in consideration.

You know, Greg, I don't know if you have any other comments you want to make, other than maybe you can comment on the disc and how we would approach the disc.

Yes, so to supplement Bill's comments, so the rate case that we are filing -- or that we filed in March will become effective January 1.

And that is based on our 2012 capital and O&M projection.

So the disc -- the reason why we are following the -- filing the disc next year is so that we can get timely recovery of ongoing distribution investment for '13 and beyond.

So that's the rationale.

And then, should we need another base rate increase in a future year, we'd look to most likely utilize the fully future test year as the way to do that.

Yes, remember, Brian that under the new law, if you will, we -- entities can't file for the disc until one 1/1/13.

And they need to have an adjudicated ROE to be able to make that filing.

So the general rate case that we filed this year gets that piece of it done.

And then from a timing perspective, we could file beginning 1/1/13 and we would be looking to do that.

Understood.

Understood.

And I think what we would do is, we will look at -- when we get into next year we'll look at the outcome from the current rate case.

We'll look at the impact that the disc will have on the timely recovery of our CapEx and where we project our ROE, and then we'll make a decision at that time.

So I am not ruling out the possibility that we might not file another one, but we just have to be mindful of the impact on customers and so forth.

Got it.

And then one other question on -- roughly ballpark hedging on '14.

Where is the Company at?

Sure.

We are in the same -- essentially the same position we were at year-end, or on the year-end call; about 10% to 20% hedged for 2014.

If the view is that gas may decouple from power because of retirement, does it make sense to use forward gas sales to maintain your heat rate upside as opposed to just going maybe long on power?

Are there any considerations on that front?

Yes, there are some considerations on that front.

We have done some of that in the past and we'll continue to look at that as an opportunity.

Ashar Khan, Visium Asset Management.

Good morning.

Thanks.

Good results.

Can you just talk to us a little bit regarding the UK regulatory process, in terms of the fast-track?

And could you just give a little bit of a timeline?

I'm sorry I'm joining later, I don't know if this question has been asked before or not.

No, you are the first one to ask that question, so -- and we are happy to answer.

I am going to ask Rick Klingensmith to take that one.

Good morning.

Regarding the regulatory process in the UK, the real process that Ofgem has established is in full speed ahead with the transmission and the gas distribution and gas transmission sectors.

For the electricity distribution sector we are in the very early stages, and those stages are really around policy development right now, stakeholder engagement.

We will see a strategy document and consultation likely issued in the fall, issued by Ofgem, and then the decision document in perhaps the first quarter of 2013.

We will start preparing our business plans for submittal in the May/June '13 timeframe.

And then Ofgem will decide further in late '13 as to do any of the electric distribution business plans that have been submitted, will they be eligible, are they complete and robust enough to be fast-tracked through the process.

And you'll see some publications of that probably in late '13 and a final decision on electricity distribution fast tracks in early '14.

And again, our rates will be affected in first of April 2015.

You have seen just recently Ofgem in the transmission rate cases or price control reviews, they have fast-tracked two of the Scottish transmission companies, and so we view that very positively in that the process is working.

It allows those business plans to move forward and save about a year in the regulatory cycle for the price control review.

Okay, okay.

Thank you so much.

Okay.

Well, I think that wraps up the call for today.

Really appreciate everyone dialing in and look forward to talking to you on the next quarterly call.

This concludes today's conference call.

You may now disconnect.