賓州電力 (PPL) 2012 Q2 法說會逐字稿

Good morning.

My name is Melissa, 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.

(Operator Instructions).

Thank you.

Mr. Joe Bergstein, Vice President and Director of Investor Relations, you may begin your conference.

Thank you.

Good morning, everyone.

Thank you for joining the PPL conference call on second-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 of this presentation and in the Company's SEC filings.

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

Thanks, Joe, and good morning, everyone.

We appreciate your participation in this morning's call.

I am joined on the call this morning by Paul Farr, PPL's Executive Vice President and Chief Financial Officer.

Also joining us for the Q&A session are the Presidents of our four business segments -- Vic Staffieri, President and CEO of LG&E/KU, our Kentucky related business; Rick Klingensmith, President of PPL Global who has responsibility for UK regulated operations and our Energy Services businesses; Greg Dudkin, President of PPL Electric Utilities, our Pennsylvania Regulated segment; and Dave DeCampli, President of our Competitive Market Supply segment.

To get started today, I will provide an overview of the second-quarter results and a few operational highlights.

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

And following his remarks, we will turn to your questions.

Today we announced second-quarter reported earnings of $0.46 per share, up $0.35 in the same quarter of 2011.

Earnings were [long] going up for the quarter for $0.51 per share compared with $0.45 per share in the same period last year.

For the first (technical difficulty) of the year, our reported earnings were $1.39 per share, up from $1.13 per share in the first six months of 2011.

Ongoing earnings were $1.21 a share for the first half of the year, which is $1.26 per share in the same period a year ago.

Our second-quarter earnings from ongoing applications includes $0.02 per share of dilution from the common stock issued in April of 2011 to finance the acquisition of the Midlands utilities in the UK.

For the first six months, dilution amounted to $0.13 per share.

Strong results from our UK operations were a major driver of the improvement in both ongoing and reported earnings for the second quarter.

Strong revenues from the UK operations and the ability of our supply group to effectively manage unplanned outages at our Susquehanna nuclear plant had (technical difficulty) to achieve our 2012 earnings forecast.

We are reaffirming our forecast of $2.50 into $2.45 per share in earnings from ongoing operations.

Before we go into a more detailed discussion of our financial results, I will provide a [basic look] at our operational overview for the quarter.

As I mentioned on previous calls, our management team in the UK has dramatically improved the customer service performance of our Midlands utility.

I'm pleased to tell you that we recently learned that all four of our distribution companies have now been awarded the Customer Service Excellence Standard, the highest customer service honor in the UK.

This is the first [award] for our Midlands [companies] and the 20th year for our legacy [SouthWest] company (technical difficulty)--.

As we continue to see improved performance related to the number and duration of customer outages and regulatory metrics, this performance improvement is detailed for you in the appendix.

Turning to the domestic operations, PPL's electric delivery operation in Pennsylvania once again has ranked highest among large electric utilities in the Eastern United States for residential customer satisfaction in a survey conducted by J.D. Power and Associates.

The award is the Company's 18th overall since J.D. Power and Associates began studying customer satisfaction among electric utilities.

Kentucky Utilities and Louisville Gas and Electric were part of the J.D. Power report on midsize utilities in the Midwest region and also had strong customer satisfaction scores.

There also was some good news at the Susquehanna nuclear plant where an inspection concluded that no indications of cracking were found on Unit #2's turbine blades at the facility.

We returned the unit to service on June 15 after the inspection outage that was prompted by discovery of small cracks on some Unit #1 blades.

Unit #1 at Susquehanna returned to service on June 7 after a refueling outage, and that has included the replacement of a small number of turbine blades that did have cracks.

We've installed additional diagnostic equipment from both turbines to validate respective problems that are clearly under review, and we will conduct an additional inspection next year on Unit #1.

The utilities in Kentucky have each requested rate increases to be effective in January 2013.

Louisville Gas & Electric has requested a $62.1 million increase in electric rates and a $17.2 million increase in natural gas rates.

Kentucky Utilities is requesting an $82.4 million increase in electric rates.

The requested [ORE] in each case is 11%.

New rates are expected to take effect January 2013.

In Pennsylvania, consideration of PPL Electric Utilities rate increase request is continuing.

An administrative law judge appointed by the state Public Utilities Commission has held public input hearings on the Company's $104 million increase request.

Evidentiary hearings are being held this week, and we expect a decision by December.

Also on the operational front, it is worth noting that PPL's powerplants and electric delivery systems in Pennsylvania and Kentucky have performed very well during a prolonged heat spell this last couple of months.

Generally our powerplants are available in (technical difficulty)-- generation, and our transmission and distribution systems handle the stress (technical difficulty) very well.

We overcame some significant challenges in the second (technical difficulty) across all four segments.

Our supply business continues to do a pretty good job in managing through challenging commodity markets.

We continue to be optimistic that we will see some modest increase in wholesale energy prices by 2013.

Finally, I would like to update you on a couple of initiatives we continue to refine internally.

As you are aware, we have talked about the need to raise equity over the next 12 years to fund a very robust capital plan at all of our regulated utilities.

We are looking very closely at ways to significantly reduce and potentially eliminate equity needs beyond normal DRIP issuances and share issued for management comp.

We are in the initial planning process now, and this is a key focus.

We will provide you with specific details at an appropriate time, but we believe this objective is very realistic based on our preliminary planning.

Additionally the supply segment continues to refine its plans on how to protect (technical difficulty) should power markets decline further.

The directive is to develop plans to maintain positive earnings in the supply segment should profits worsen compared to (technical difficulty)--.

I want to be clear, however, that we do not believe this will happen, but forming this analysis is informative and should (technical difficulty), we will be well prepared.

I'm confident both of these initiatives will address some of your concerns, and we will certainly provide specific details as our plans are firmed up.

In conclusion, we are very pleased with ourselves to date.

The Midlands acquisition continues to prove to be highly successful.

The supply segment continues to perform well and manage through its challenges, and our Domestic Regulated segments are progressing through the rate fees.

We have solid plans in place that stress value through a variety of economic conditions, and we are optimistic about the future prospects.

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

With that, I will turn it over to Paul.

Thanks, Bill, and good morning, everyone.

Let's flip to slide seven to review our second-quarter financial results.

PPL's second quarter earnings from ongoing operations were higher than last year, primarily driven by strong operating results in the UK, including a full quarter of earnings in the Midlands businesses versus two months of results that were included in our second quarter last year.

This positive driver was virtually offset by lower earnings at the supply segment as a result of flat energy margins and higher O&M compared to a year ago.

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

Our Kentucky Regulated segment earned $0.07 per share in the second quarter, a $0.01 increase over last year.

This increase was primarily driven by higher sales volumes, resulting from newer (technical difficulty)-- year results.

Moving down to slide nine, our UK Regulated segment earned $0.31 per share in the second quarter, a $0.10 increase over the last year.

This increase was due to the operating results at the Midlands utilities that included an additional month of operations as well as performance improvements.

Higher delivery revenue at WPD Southwest and South Wales is primarily driven by higher net prices and lower financing costs.

These positive earnings drivers were partially offset by higher O&M, including higher pension expense, less favorable currency exchange rates and dilution of $0.01 per share.

Turning to our Pennsylvania Regulated segment on slide 10, this segment earned $0.05 per share in the quarter, $0.01 lower as compared to last year.

This decrease was due mainly to higher O&M as a result of higher payroll-related expenses and higher vegetation management costs.

Moving down to slide 11, our supply segment earned $0.08 per share in the second quarter, a decrease of $0.04 compared to last year.

This decrease was driven by the net result of lower [operating] energy margins, primarily as a result of the termination of a seven-month [Canelectric] contract in connection with that Company's bankruptcy, higher Eastern energy margins driven by higher nuclear generation, partially offset lower [baseload] energy and (technical difficulty), higher O&M primarily at the Susquehanna nuclear station, higher depreciation and dilution of $0.04 per share.

With that by way of a feel, I will turn the call back over to Bill for the Q&A period.

Thank you, Paul, and with that, operator, we are ready to open the call for questions.

(Operator Instructions).

Paul Patterson, Glenrock Associates.

Good morning.

A couple of things.

First, the National Grid got some, I guess, rulings from Ofgem, and they seem somewhat disappointed with them.

I was just wondering if you could compare and contrast their situation compared to yours?

Sure, Paul.

That was the preliminary leave on their plan that was filed in the (technical difficulty), but Rick Klingensmith can get into the details for you.

Good morning, Paul.

As a way of background, in the regulated businesses in the UK, the electricity transmission, the gas transmission and the gas (technical difficulty)-- are undergoing a price control review under what Ofgem has called to repeal (technical difficulty).

And, as part of the real process, there was a set of initial proposals that you referred to that was just published by Ofgem that sets forth Ofgem's view of strong order and the recurrence required for those regulated businesses.

They will go through the process through the rest of this year with some final proposals that will probably be based in the published in the November/December timeframe.

As you commented, the grid did come out with a service disappointment, and it asked for additional capital to be spent in their [networks], as well as they had requested the higher (technical difficulty)-- the initial proposals that came out of Ofgem.

What we see are they are really coming in line with what we are currently seeing for electricity distribution price control review that we are currently operating in.

The cost-effective returns, the weighted average cost of capital, the efficiencies as noted are right in line with where we are today with electricity distribution.

So we were not surprised by the results (technical difficulty)-- that we had expected.

Okay, great.

And then with respect to the expected generation, it seems like that has come down a bit, and it looks like you guys have a little bit more coal hedged than you actually have for expected generation.

Could you comment on how that is going to work both sort of practically and financially with respect to how you are going to deal with that excess coal, I guess, is what it looks like?

Yes.

Sure, Paul.

You are correct on both counts, and I will ask Dave DeCampli to provide some more color on that.

Sure, Paul.

On our generation base load capacity, it is down yes.

However, our intermediate and peaking forecast is up, partially offsetting that.

And, as we would always do, we will buy from the markets while our costs to generate to make up any differences there.

The bottom line on generation it's about neutral for us.

On the coal energy side, you will see on slide 21, I believe, we are totally hedged in coal for 2012.

We are managing that primarily just through inventory, and for 2013 we are continuing to work with our suppliers on a number of arrangements either through deferring or renegotiating or buying out contracts.

So 2013 still has a little bit of work to do, but 2012 we manage primarily through inventory managing.

Okay.

And then financially how should we think about how that will impact, I guess, EPS in 2013, I mean sort of managing these contracts and what have you, given what has happened (multiple speakers) with the coal?

This is Paul Farr.

It depends upon the mechanics that we ultimately use to get rid of the excess position.

To the extent that it is a contract buyout, you would see a charge coming through the P&L related to that.

To the extent that we defer, it is simply a deferral and shows up in future periods in the [biosoft] and the compensatory management.

Again, it just blends into the pile, and we would absorb that.

As soon as we get through 2013, we do have a capability to absorb that in 2014 and beyond.

So it's just simply a matter in terms of the financial impact what mechanical way we use to get out from under that excess position.

And I think, Paul, at this point, we believe that would be relatively immaterial to 2013.

Okay, great.

And then just finally, Act 129, there has been some activity at the Pennsylvania PUC, and I was wondering if you could comment on that?

And, also, there was -- I guess one demand response provider is indicating that with respect to the curtailments that happened in the third quarter that has lowered prices in some of the Pennsylvania areas in the real-time market AND just how we should think about the impact of demand response, Act 129, on the wholesale market outlook for you guys?

Sure.

I would say overall Act 129 is coming in to play pretty much as we would have expected it.

It has prompted obviously a lot more conservation and a lot less peak demand than you otherwise would get.

Certainly the PJM Demand Response program has contributed to that, in addition to Act 129.

So I think overall it is not a surprise necessarily, and we think power prices have in real-time reflected the [implementation] of some of those demand response programs in addition to some of the other energy efficiency programs in the state of Pennsylvania.

So overall I would say no major surprises from our perspective.

Okay.

And so with the changes at the PUC or the activity that has happened there recently, should we expect any change to any of these activities going forward, or does it serve to wait and see?

Do you know what I'm saying, this (multiple speakers) reiteration of the 129?

Let me ask Greg Dudkin, President of our Electric Utilities in Pennsylvania, to comment on that.

Yes, Paul, so, at the end of last week, the Public Utilities Commission came out with their quotes on power to handle Act 129 (technical difficulty) 2013, and there really were not any surprises.

So we have an idea of the expected reductions that they are looking for, and we will be putting their plans in order to meet those objectives.

Okay.

Great.

Thanks a lot.

Justin McCann, S&P Capital IQ.

Good morning.

Congratulations on a strong quarter.

The UK has obviously made enormous contribution to your performance this year, and you expected to account for roughly 45% of consolidated earnings for the full year, up from nearly 32% in 2011.

I would like to know what is the expected effective tax rate for both the UK and the consolidated company for this year?

And given the lower tax rates for the UK, if we assume a higher proportion of pretax earnings from the UK in 2013, do you believe it could account for more than 50% of net income in 2013?

Okay.

This is Paul.

Let me try to bite those off in pieces.

The effective rate on the UK expected earnings is roughly 22%, 23%.

On a consolidated basis, running in the higher domestic and federal and state rates, we get close to 30%.

We are very heavily hedged for 2013, both power as well as our field.

We are very heavily hedged from an earnings translation perspective on UK earnings at this point as well.

I would not see us crossing the 50% threshold at all for 2013.

As we execute on the rate base road plants, which are more robust in the domestic utilities than they are in the UK business, you will see some further offsets.

Again, as Bill mentioned earlier, we are in for rate cases with both domestic utilities set to try to get those utilities back towards more accessible levels of earned R&D.

So there is a lot of dynamics that will also help call it a rate base as we go through plans.

Okay.

Thank you.

Paul Ridzon, KeyBanc.

Good morning.

Trailing 12, you are at $2.68.

Can you give us a profile of what the back half of the year is going to look like?

Sure.

Say that again, Paul?

On a trailing 12-month basis, you have earned $2.68.

Can you reconcile that against your guidance and your expectations for the second half of 2012?

Yes.

Let me maybe come at it -- and I don't really think of things usually from a 12-month trailing perspective.

But the dynamics that we have been talking about, the lower commodity interest from the hedge factors are moving through size.

The hedges that we have got in place are at lower levels than we have hedged the prior 12 months, and they were (technical difficulty) robust.

The regulated utilities are underearning, but were in for rate cases on both of those domestically.

WPD is executing very strongly again against the plan that we have when we acquired the utilities.

So that is fairly steady as she goes.

And then I would add share dilution is a factor.

Share dilution is a factor of roughly $0.13 for this year.

So those are probably the biggest drivers year on year.

Haven't we already eaten all the share dilution?

Just a couple of cents, but that (technical difficulty) but yes.

And what is the seasonality in the UK because I think you are looking for about $1.00 for the full year, and we are already well above $0.60?

Yes, as we outlined in the release, it is closer to $1.07.

There is some seasonality to the earnings.

There is some planned spend towards the back half of the year that is a bit higher than the front half of the year.

And we do have in the forecast an expectation for a tax disclosure to hit the P&L.

That may or may not transpire.

But that is in that $1.07 that remains that we have guided in the press release.

Okay.

And then back to Paul Patterson's question, your base load is down 3.4 million megawatt hours, but your peaking is up 1.7.

How should we think about that from a -- what the net-net of that is on earnings?

Well, I think overall with the strong hedge position we have in 2013, even with those levels of hedge generation and the output projections that we have, obviously some of that means that we are going to be buying generation from the market at a lower price than we can produce it for.

So that has a net positive effect.

So overall I don't really see any material change to the overall earnings picture for 2013 compared to what it was previously.

Okay.

Thank you very much.

Julien Dumoulin-Smith, UBS.

Good morning.

Excellent.

With regards to Kentucky, I just wanted to get an updated thought process after the decision on the peaker here.

What about new rate-based build, and also how does that play into timing of any potential rate cases as we think about the outer years here and getting that into service?

Sure.

I will ask Vic Staffieri to comment on that.

Yes, we did turn down the deal for the peaker based upon the first quarter, which ranked in fifth to a power commission, a public Kentucky commission who wanted to operate the facility.

So what we will be doing is we will probably be billing out an RFP later this year, and we will combine it with looking at self-builds and some other plants and purchases going out to address what the peaker is going to cost us in 2017.

It may be that we will build another power plant, but it will not be until the 2017 timeframe.

Okay.

So, in terms of rate case schedules as it stands right now, is it still kind of every couple of years?

Is that a good status quo?

Yes.

All right.

Great.

Remember, the bulk of our capital spend is coming in through the environmental cost recovery mechanism rather than to the general rate cases.

Right, absolutely.

And then maybe a second question here on basis.

Basis was perhaps a little weaker than you guys had talked about previously in the second quarter.

What is your latest expectation on a go forward basis?

Is it still that $1.00 a megawatt hour off of West hub?

We have for the year-to-date, it has been really relatively flat for us with the hedges that we had put in place.

We were just slightly positive on basis for the year-to-date.

As we look at the year-end and what we expect for the year, we would expect again with the hedges we have in place to come at near neutral, near zero.

It could be slightly positive or negative, but not anything in either direction at this point.

So I think it is playing out as we expected it.

As we articulated at the beginning of the year, we expect it basically to be flat to slightly negative to West hub.

All right.

Thank you very much.

Jonathan Arnold, Deutsche Bank.

Good morning, guys.

My question relates just to the Midlands and the UK in general and how you are tracking versus the original guidance order from Q4.

You had $0.28, and it looks like you have got $0.34 under the bridge in the first half but for Midlands.

But then revenues you were at $0.14 for the year and then up $0.04, and then the other was expected to be kind of $0.13 negative and certainly negative, too.

Can you just give us a bit more of a sense of where you are ahead and behind plan in aggregate, and what exactly is driving the Midlands piece?

Sure.

I will ask Rick to respond.

Jonathan, thank you.

On the $0.28 that we had forecasted at the beginning of the year, that was also on a different shirt count than the $0.34.

So if we take the $0.34 as actual performance on a year-to-date basis, kind of reset that, put it on a constant shares, that $0.06 difference is really only about $0.03.

And so what has happened over on the Midlands activity is that the additional four months coming in at about that area that we had projected, but then we see some outperformance of about (technical difficulty)-- as a result of the actions and the efficiencies that we have been able to put into place in the first six months of this year.

Okay.

Thank you.

Leslie Rich, JPMorgan.

Thank you.

I wondered if you could repeat your comments about equity issuance.

Bill, I think you said something about you are making some adjustments to the plan, therefore equity issuance may not be necessary in the magnitude that you had originally forecast.

I wondered if you could just walk through that for 2012 through 2014, understanding that you have converts maturing obviously?

Yes, good point.

Yes, with the forward sale, we have not only the converts but the forward sale and the equity that we did this year are coming into play next year.

But yes, my comment was that based on some preliminary planning that we have done and knowing that this has been a concern of many of the investors on the equity raise in the level of what would it be, we are looking at every way we can to reduce that equity need down to basically just the direct equity needs for management comp.

So that would be our objective.

I believe the DRIP and management comp together are about $100 million.

So we had previously indicated we would be up $350 million of equity raised, and so you are looking at a $250 million reduction net to what we previously expected.

And you are doing that through CapEx cuts or O&M, or how are you managing that?

It would be a combination.

It would be a number of a -- a variety of things, but certainly CapEx and O&M would be a comp, yes.

Okay.

Thank you.

Andy Bishof, Morningstar.

Good morning.

UK Regulated segments are doing very well for you.

I was hoping you could break out the Midlands additional month and how that attributed to your quarter?

Well, for the quarter, as you saw in Paul's remarks, we were a positive $0.10 a share for this quarter due to the Midlands.

Of that $0.10, $0.08 was due to the extra month, and $0.02 was due to -- (technical difficulty).

Okay.

Thank you.

That is all I had.

Michael Lapides, Goldman Sachs.

I just want to follow up from Leslie Rich's question on cost reductions or cost management.

Can you just give us an inside, when you look at your CapEx slide for the little component for supply, it is like $600 million or $700 million a year.

What can you view as just maintenance CapEx at the supply business for the existing facilities and facilities or uprates that will be online by the end of this year?

Well, it is a very good question, and I think certainly in our supply business, we are looking very aggressively at cutting O&M and capital in light of the lower power producers.

What is being the maintenance CapEx, that kind of depends on really how you expect the units to perform.

And so, for example,e with the coal plants, if we are expecting them to be dispatched at a lot more leveled than previously, that being the maintenance CapEx that we have been submitting is going to go down.

So I think that it is still early in our planning process, so I cannot give you specific plant by plant or even group by group numbers at this point.

But what I can say is that we are very optimistic that we can make some meaningfully measures in savings on CapEx, as well as on the O&M side.

Got it.

One other thing.

When the Midlands acquisition occurred, you outline potential for synergy savings.

Can you just give an update on where that is tracking?

Meaning, how you are versus the original plan when you made the UK -- made the paid transaction or whether you see upside or downside to synergy savings there?

Sure.

As you look at the results of the UK Regulated Segment in both forecasts that we had established at the beginning of the year, as well as the $1.07 that you will see here, you will notice that that is tracking much at the high-end of the synergy forecast that we had provided back and ahead of last year when we're making the acquisition.

So we have been able to significantly outperform through cost -- tax savings, cost savings, across the enterprise in outsource, releasing outsourcing contracts, reducing labor costs, improved financing, so any area that we have been able to affect, which is very positive.

And the $1.07 that we are forecasting for the year is at the high end of that range.

And the forecast might say that, remember, that headcount reduction ended up being at the very high end of the range of numbers that we provided.

And we also indicated back in April that those numbers did not include bonus revenues, which were clicking off at around $30 million this year.

We said that one at least doubled to $60 million next year.

So the outperformance is coming both on the cost side and the revenue side.

Meaning, though, when do you get confirmation about the year-over-year increase in the bonus revenues for -- I know it is like an April start each year, but when does that process kick in where you get certainty around that?

Yes, our license market patients that provide certainty on our actual results for the year ending March would likely be in the October/November timeframe.

So we are anticipating that on the third-quarter earnings release that we will be able to provide the exact number that we were able to achieve.

But, as Paul mentioned, we are expecting to double this year's results of $30 million.

Got it.

Okay.

Thanks, guys.

Congrats on a good quarter.

Brian Russo, Ladenburg Thalmann.

Good morning.

Could you maybe just discuss the strategy in Montana with the supply contracts that are rolling off in early to mid 2014?

Sure.

I will ask Dave DeCampli to comment on that.

Are you specifically referring to the Southern Montana contacts that recently were rejected in the bankruptcy court, or is there another specific contractor you are referring to in 2015?

Yes, the 200 plus megawatts of contract rolloff that you have with NorthWestern Energy.

NorthWestern, okay.

I think on that front, we continue to look for alternatives markets for that, both through NorthWestern will be one of those potential customers.

But, in addition, there are many, as you know, duties and costs in that range that we sold from the past to continue as well.

The retail contracts are some of the refiners and some of the other large end users out in Montana.

Okay.

And would asset sales also be considered to support the strategy of less ongoing equity needs?

In the past, we have not commented on specific asset sales, so I don't really want to start that process at this point.

As I mentioned, I think earlier certainly O&M and capital savings will be a big piece of our ability to hopefully reduce that equity need.

Okay.

I understood it.

And then lastly, can you add some color on the hedges, the foreign exchange currency hedges you have with the British pound in 2012 and maybe 2013?

Sure.

Yes, we are basically north of 90% hedged, 90% to 95% hedged for 2012, and 80% to 85% hedged for 2013.

Okay.

And it looked like (multiple speakers)

And at levels that are slightly above the $1.57 that we had communicated over the last year or so.

So slightly better than those numbers.

Okay.

Thank you very much.

Steve Fleishman, Bank of America.

Yes, good morning.

Bill, just on your commentary on actions that you might take at the supply business, I think you mentioned that you are going to be doing things to make sure you can -- if prices fall from where they are -- to cut costs or other actions to make sure this business stays positive.

Is that the message?

That is exactly the message, Steve, and we have plans in place already in some other analyses that we are actively working on to ensure we meet that objective.

Okay.

And (multiple speakers) -- go ahead, I'm sorry.

As I also commented, while we don't expect that to happen, we also obviously cannot predict where the power markets are going to be in 2014 and 2015.

So we want to be well prepared in advance should power markets not recover, as we expect them to do, but we want to be prepared.

Okay.

Just to clarify, though, taking your comments another way, based on the current forward, the business is earnings positive in 2014 and 2015?

Yes.

Okay.

Great.

Thank you.

Brian Chin, Citigroup.

Good morning.

Just going back to a question on the equity issuance reduction, if we walked away from the call with an assumption of 50-50 O&M cuts versus CapEx cuts, would you say that that is a reasonable assumption to make?

I cannot really give you a precise breakdown of how much that would be at this point, as I indicated in my opening remarks.

We are still in the preliminary stages of our planning, but we do believe it is a realistic objective to cut two more $50 million out of the equity raise and leave it at the discretion of management comp.

So I think where exactly it's going to come from and which business line, we are still not positive to determining that, but again I think based on the preliminary limits, we think that is very achievable.

This is Paul.

One other thing I would mention is, it is on the thought side that the strong performance in the UK could also cause us to be able to extract higher dividend levels from there, which could contribute to that as well.

And so it is cost, and that outperformance in the UK is another topic that we have.

Understood, understood.

And then lastly on 2014, just any rough commentary on hedging levels for 2014?

I know you don't put it in the formal slides, but any color there would be great.

Sure.

On the last call, we indicated that for 2014 we were 10% to 20% hedged.

We are now in the 20% to 30% hedged range, more towards the 30% than the 20%.

We've obviously taken the opportunity with some of the strength that we have seen here at Lake to hedge in some more of the output.

So we have made some progress during the quarter, and we will obviously be reporting out for this again in the next earnings call.

Great.

Much appreciated.

Thank you.

Greg Gordon, ISI Group.

Thanks.

Sorry to beat a dead horse here, guys, but when we think about where the capital reductions are going to come from, obviously they are going to come from four places.

They can come from the supply business.

They can come from the UK.

They can come from your two regional utilities here in the US.

So are you looking at the potential for reduced capital spending here in the US at the regional utilities as part of this CapEx ,reduction or is it mainly coming from supply, or is it mainly coming from the UK, or is it a mix of all of them?

It is really a mix, and I would say on the domestic front certainly both utilities would be included in that potential.

And I think when you look at it, while it has the potential to reduce the rate base growth and the utilities by cutting back the saving on CapEx in the domestic utilities, on the flip side of it, we think it is going to be earnings accretive and certainly in the short term to do that.

You know, as we cut back our rate base growth on a (technical difficulty)-- we will obviously have the benefit of less dilution.

So we think that that can be a positive, and it would, as we mentioned, be a variety of efforts across all the business lines.

And, as Paul mentioned, in the UK, we have commented on level of increased dividends back to the US.

Great.

Thank you.

Raymond Leung, Goldman Sachs.

Hey, guys.

In terms of your cash flow, you are showing a pretty large negative number this year, and that is before dividends.

Can you just refresh our memory on financing plans for the year?

Let's start with that first.

Thank you.

Okay.

In terms of the equity front, again, we did the forward transaction.

That will settle early next year at the backend of Q1.

That really allowed the DRIP, and the management comp takes care of the equity side of things.

The balance of the funding we have done in issuance earlier this year in the UK, we have got an issuance that was created mostly recently domestically at around $400 million.

Other than a few hundred million that we have got coming up at [NPLX] facilities, that's probably a roundabout the financing for the year.

(multiple speakers) (technical difficulty)-- the plan.

Okay.

And, if we think about 2013, the equity units are supposed to bring in about $1.1 billion.

Does that cover you in terms of external financing you need for 2013?

It does relatively significantly.

We have got around $700 million coming due at supply, which will effectively defease or pay that off with that $1.150 billion of proceeds.

There is financing expected in the UK next year.

There is financing expected of around GBP100 million.

There is financing in Kentucky as they close its balance sheet and really start to execute on the construction program for the ETR spending, and it is relatively modest at Electric Utilities.

I think we are in real good shape for a year and a half there.

Okay.

And can you just help us out on what -- you said you are underearning at the utilities -- what the returns on equities are at the Kentucky Utilities and Pennsylvania?

Sure.

Vic, do you want to start on the Kentucky side?

Yeah, I would put 2012 around 8% or so, and that is why we are in the rate case.

Yes, and Greg?

In Pennsylvania we filed -- in my testimony, we identified -- expect to be about a 6%, mid-6% at the end of the year.

Okay.

Great.

Thanks, guys.

Anthony Crowdell, Jefferies.

Good morning.

I guess I'm trying to make sure I understand it correctly with the equity, just because I must have a horrible phone connection.

It is tough to hear.

The converts still occur, but you think your equity needs lighten up by, I think, roughly maybe $200 million.

What type of share count should we be modeling for, say, 2014?

I think you have given it before, or if you were able to 2015, like when you take in your lesser equity needs?

Okay.

In 2014 we were around 675 million shares.

So, if you take 200 million off that at somewhere not far off the share price, that will get you a (technical difficulty)--

Okay.

And I just wanted to clarify, I think, comments to Greg's question that, although you cut back on CapEx and the mix of the utilities in domestic, but you are still confident that it is accretive, although you are going to have less rate base to earn on it.

Is that accurate?

It is, and I would not say the levels that we would be talking about for the domestic utilities are huge in size.

Obviously Vic talked about earlier the fact that the bluegrass plans and associated transmission and some other spend on the results (technical difficulty) power goes away, and that does not really come back into the plant until 2017 when at that point the planned ECR build is gone, ECGT is constructed, and those utilities are generating significant cash flow instead of absorbing cash in general.

So yes, there are some modest decreases that we would be looking at for Electric Utilities, but they would not be outsized and causing dramatic reductions in the regulated growth profile.

Great.

Thanks for the clarification.

Ashar Khan, Visium.

Congratulations.

I just wanted to get a sense of, as you look out the next two or three years and I guess you are trying to plan for the process, what in your mind is the trough year in the landscape?

Can I ask?

We don't have guidance, and I think the way that people are modeling things, as we look at sell-side research and people have looked at 2014, 2015, you can see where the softness is relative to margins, the contango and fuel prices, and, like I said, we would prefer not to give some loser even the pattern, if you will.

But, on average, I don't think people are -- (technical difficulty).

Okay.

Thank you so much.

KeyBanc.

My questions have been answered.

Thank you.

John Alli, Decade Capital.

It is actually Reza.

Could you remind us going forward how much cash you expect to bring back from the UK annually?

We were based on the model that we had shared around April of last year in the $150 million to $200 million range.

There is a little less upfront because we were using some of the cash flow to fund some of the synergy cost side of things.

But, again, that $150 million to $200 million of ongoing.

And then I know the UK earnings have a lot of puts and takes, and you are having a good year thus far.

But looking out to 2013, there should be further growth in UK in 2013 versus 2012, is that correct?

No, that is correct.

If you look at also how Ofgem has phased our revenues over time, we are actually seeing a 5.5% real increase year on year.

So that will also come into play for 2013.

And, as we have already discussed in previous answers, we also expect to some additional revenue from acceptance and performance, starting April 1 of next year as well.

So that 5.5% because of plus, whatever your assumption is on inflation, this is a nominal increase of revenues, plus bonus revenues, offset by some level of cost escalation.

Right.

And so net-net it should be incremental to the $1.07 this year?

That is correct.

Okay.

Thank you very much.

Again, Reza, adjusting for share count from the convert next year, so net-net you have got to factor that in as well.

Okay.

So net income should be higher, and then I should adjust for the share count and then, I guess, see where that lands?

That is correct.

Okay.

Thank you.

Andy Levi, Avon Capital.

Good morning.

Just back on the Montana generation assets, this is kind of just a bigger picture question.

But obviously NorthWest has articulated interest in those assets.

Why not -- in the past things have improved, but let's just say Montana has not been the friendliest state of all the states that you do business in to you guys.

Why not bring in a local partner to help on that end of the game, and have you thought about that?

Well, I think we think about all the options available to us as we go through our strategic planning process.

And, as I indicated earlier, we have really not commented on specific active sales or strategic options.

And, as I indicated on the last call, we are very happy with the business mix we have today, and our focus is really on executing the plan that we have got in front of us.

And in my view, we have done an excellent job on all fronts in the supply and all the utilities are executing the plan, and I think our results reflect that.

And we are very optimistic about the future with the offset of assets and business mix we have.

Okay.

Thank you.

Michael Lapides, Goldman Sachs.

Hey, guys.

Two quick follow-ups.

One, Pennsylvania, I thought -- I know you are in a rate case now, so it may be a little early to think about it.

But thoughts about whether you will file for the distribution rider next year or whether you would wait and maybe file a true forward rate case a year or so later?

Sure.

I will ask Greg to comment.

Yes, our intent is to file for the DSIC as early as possible in 2013.

So we just got an implementation order late last week from the PUC (technical difficulty) and they would have us file a long-term improvement plan in the third quarter and file for a DSIC again as early as possible again in 2015.

And then we would be looking to file likely a fully blown debt to test year for the next general rate case proceeding in Pennsylvania.

And you would file for a forward test year in 2014 for 2015 timeframe, something like that?

That would be in that timeframe, so they are not filing for the DSIC in the forward test year mutually exclusive, so we would be doing a combination of the two.

Got it.

And is there any lag associated with the DSIC, or does the DSIC basically remove lag on distribution CapEx?

It is basically just a few months lag.

So we put plan into service, and then we still recovering within, I believe, it is four months.

On a portion of the distribution CapEx, it does not cover all CapEx.

It is reliability-based spend.

So a third -- (multiple speakers)

Part of our distribution cap spend would be applicable in the DSIC.

Got it, guys.

Thank you.

Much appreciated.

Okay.

We really appreciate the questions today, and with that, I thank you for the call.

I think it was a great quarter, and we appreciate all the questions.

We will talk to you next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.