賓州電力 (PPL) 2012 Q4 法說會逐字稿

Good morning, my name is Janice and I will be your conference operator today. At this time, I would like to welcome everyone to the PPL Corporation fourth 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. I would now like to turn the call over to Joe Bergstein, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining the PPL conference call on fourth quarter and year-end results and our general business outlook. We are providing slides of the 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. We appreciate your participation in today's call. Joining me on the call are Paul Farr, PPL's Executive Vice President and Chief Financial Officer, as well as the presidents of our four business segments who will participate in the question-and-answer session. To get started, I will provide an overview of our fourth quarter and year-end 2012 results, as well as a few operational highlights. Then Paul will provide more details on our segment performance for the fourth quarter and for the full year.

Let me start by highlighting this morning's announcement of a dividend increase beginning with the April 1 payment. The new annualized rate will be $1.47 per share, up from $1.44 per share previously. This increase represents the 11th increase in 12 years and reflects a 177% increase over that period. Turning to earnings today, we announced year-end 2012 earnings that exceeded our forecasted range. Reported earnings for 2012 were $2.60 per share compared with $2.70 per share in 2011.

Earnings from ongoing operations were $2.42 per share compared to $2.73 per share a year ago. Reported earnings for the fourth quarter were $0.60 per share, down from $0.78 per share a year ago. And our ongoing earnings for the fourth quarter were $0.49 per share compared with $0.71 per share a year ago. Our year-over-year decrease in ongoing earnings was driven predominantly by lower supply business margins as a result of falling power prices.

We are pleased with these results as each of the segments performed better than their forecast midpoints, with the UK achieving the strongest out performance at $0.04 per share. Keys to our success is a strong focus on business plan execution by the people in each of our business and service groups. As I will discuss shortly in my operational overview, 2012 was a very busy year in which we accomplished significant milestones that position PPL well over the next several years. Now let's turn to a discussion of our 2013 earnings forecast which we also announced today.

We are forecasting 2013 earnings of $2.25 per share to $2.50 per share resulting in a midpoint of $2.37 per share. This 2013 forecast reflects the combination of higher revenues from our three regulated businesses following recent rate proceedings and automatic adjustments resulting from prior proceedings and lower energy margins from our supply business as our higher price hedges are rolling off. The forecast also includes an additional scheduled outage at our Susquehanna nuclear plant as we have accelerated our plans to implement a long-term solution to the turbine blade issues.

In addition, our forecast includes dilution of $0.11 per share associated with common stock issuances which were related to the Company's 2010 equity units and the 2012 forward stock sale. Even though 2012 is now in the rear view mirror, I'd like to review a number of key accomplishments from last year which set us up well for 2013 and beyond. In Kentucky, we reached a very positive settlement on rate cases that resulted in an allowed return on equity of 10.25% and annual revenue increases of about $100 million. The new rates went into effect January 1.

In the United Kingdom, our management team successfully completed the integration of the Midlands operations, dramatically improving the customer experience in that region and we believe that level of performance will continue. Under the regulatory rules in the UK, this improved performance translates directly into benefits for PPL share owners. WPD earned more than $80 million in performance bonuses for the four UK utilities, most of which comes from the Midlands business. These bonuses will be reflected in our revenues in the regulatory year starting April 1, 2013.

The four network utilities operated by WPD are now among the best customer service providers in Great Britain. Turning to our Pennsylvania utility operations, we received a favorable decision on our rate increase request. The Pennsylvania Public Utility Commission granted and allowed return on equity of 10.4% and an increase in annual revenues of $71 million. At that level of return on equity, we expect to be able to make significant distribution investments over the next several years to replace aging infrastructure which is going to result in more jobs, greater levels of local tax base and improving levels of reliability for our Pennsylvania customers.

Also just last month, PPL Electric Utilities filed a request with the Pennsylvania Public Utility Commission to implement a distribution system improvement charge to accelerate recovery of about $700 million in new capital investments that will improve system reliability over the next five years. PPL Electric Utilities was the first Pennsylvania electric company to file for this mechanism after having our long-term infrastructure improvement plan approved just last month. 2012 also marked a year of operational excellence for PPL Electric Utilities.

The utility received its 18th J.D. Power award, ranked highest among large utilities in the eastern US for residential customer satisfaction. And just recently, PPL Electric Utilities received another J.D. Power award for business customer satisfaction, bringing the total to 19 awards. In addition, PPL Electric received very good reviews for its effort in restoring service to more than 500,000 customers affected by Hurricane Sandy. We thank both our Pennsylvania and Kentucky employees for their exceptional performance in the restoration process. The total cost for the storm repairs was about $66 million.

Finally, on the transmission front, the 145-mile Susquehanna-Roseland transmission line project received its final approval in 2012 and PPL Electric made a Pennsylvania PUC filing for approval of a new project called the Northeast/Pocono Transmission Project. This involves construction of three new electrical substations and a new 230kV power line. Turning to our supply business, we have significantly adjusted operations of our coal fired plants in the northeast and in Montana to meet the challenging market realities. Gas fired plants in the northeast are performing very well and are running as base load units with 2012 capacity factors of 70% at our Lower Mount Bethel facility and 75% at the Ironwood plant.

At Susquehanna Nuclear, we have plans in place to address the turbine blade issue and we are currently running smoothly [following] our outages at Unit 2 in the fourth quarter. The ability to overcome the challenges in 2012 exhibits supplies effective portfolio optimization and our ability to aggressively respond by leveraging our diverse generating assets. Before turning to Paul, let's talk about PPL's key focus areas for 2013. At Supply, a primary focus will be instituting operational and regulatory improvements at our Susquehanna Nuclear facility. As I mentioned earlier, we plan to address turbine blade issues on both units this spring.

The extension of the Unit 2 outage and the maintenance outage for Unit 1 are estimated to have an after-tax earning impact of about $0.05 per share which is now included in our 2013 forecast. Dave DeCampli, President of the Supply Group, and his team, will also be working to reduce costs throughout the fleet, developing the best strategy to steer PPL's Supply business through the current down cycle. In the UK, we will be working closely with Ofgem, the electricity regulator, on its new rate setting process which is scheduled to go into effect in 2015. Under the new process, network operators would have their base revenues established for an eight-year period.

One primary objective this year will be to provide Ofgem with a solid well-justified business plan for each of the four UK network businesses in order to become fast tracked. This is a process that concludes up to nine months ahead of the standard timetable. In Kentucky, we will be focused on executing the various environmental projects that have been approved by the Kentucky Public Service Commission and we will be recovered through the ECR mechanism, as well as the construction of a new combined cycle gas plant that should be available for service in the spring of 2015.

We continue to expect compound annual rate base growth of almost 9% in Kentucky through 2017. In Pennsylvania, we expect to make significant progress on our distribution infrastructure projects, approved through the [DEIS] mechanism as well as our Susquehanna-Roseland transmission project. In March, we will begin a major step in the Susquehanna-Roseland project with construction starting on the 500kV Lackawanna Substation.

We continue to expect this $560 million project to be in service by mid-2015. As we make these substantial investments in our US utilities, Greg Dudkin and Vic Staffieri are focused not only in improving the earned returns, but also on improving reliability and customer service. We believe this is critical to achieving successful regulatory outcomes as we saw in 2012.

Each of our objectives for 2013 will require the type of superior effort that is the hallmark of employees throughout the PPL family of companies. Our success depends on an excellent understanding of the business, attention to detail and a commitment to operational excellence. And on the basis of that knowledge, I feel very confident and we are well prepared for another successful year in 2013. I look forward to your questions following Paul's comments. Paul?

Thanks, Bill, and good morning, everyone. Let's move to slide 8 to review fourth quarter and year-end 2012 results. Our fourth quarter results include lower Supply segment earnings driven by lower energy margins, higher O&M and higher income taxes. Full-year 2012 earnings from ongoing operations benefited from strong financial performance by our UK utilities, but the UK results were more than offset by the combination of lower Supply segment energy margins and higher O&M depreciation and income taxes in our three domestic segments.

This year's results include dilution of $0.14 per share resulting from the common stock issuance Bill mentioned earlier. Let's move to the Kentucky Regulated segment earnings drivers on slide 9. Our Kentucky Regulated segment earned $0.33 per share in 2012, a $0.07 decrease compared to 2011. This decrease was due to lower retail margins primarily due to unfavorable weather during the first four months of 2012, higher O&M driven by increased (inaudible) scheduled generation outages in 2012, higher depreciation, higher property taxes, losses from an equity method investment, and dilution of $0.02 per share.

Our UK Regulated segment earned $1.19 per share in 2012, a $0.32 increase over 2011. That was significantly impacted by an additional four months of earnings from --

Ladies and gentlemen, this is the operator. We are experiencing technical difficulties. Please stand by.

This is the operator, please stand by. The conference call will resume momentarily. Thank you for your patience.

Okay, we seemed to have experienced some technical difficulty. We apologize for that. I think we were cut off somewhere in the middle of slide 10. So we are going to go back to slide 10 on the UK Regulated segment earnings drivers. Paul, go ahead.

Okay. Let me start back over at the beginning of slide 10. Again, apologies, folks. Our UK Regulated segment earned $1.19 per share in 2012, a $0.32 increase over 2011. This increase was due to four additional months of earnings contributions from the Midlands Utilities a full 12 months versus eight months in 2011, higher utility revenue primarily due to higher prices, partially offset by higher depreciation, higher income taxes, higher financing costs, a less favorable currency exchange rate, and dilution of $0.07 per share.

Moving to slide 11, our Pennsylvania Regulated segment earned $0.22 per share in 2012, a $0.09 decrease compared with 2011. This decrease was the net result of higher O&M primarily due to a greater amount of maintenance work compared to 2011, higher vegetation management costs, higher PUC reportable storm expense, and higher [sport coup] costs, higher depreciation primarily due to capital investment, and higher income taxes. These were partially offset by higher transmission revenue and lower financing costs due to the redemption of preferred securities.

Segment results also included dilution of $0.01 per share. Turning now Supply on slide 12. This segment earned $0.68 per share in 2012, a decrease of $0.47 per share compared to the prior year. Lower earnings were primarily driven by lower energy margins as a result of lower Eastern energy and capacity prices, lower Western energy margins primarily due to a contract termination related to the bankruptcy of the Southern Montana Electric Co-op, higher O&M at Susquehanna, as well as at our gas, coal-fired and hydroelectric stations, and higher shared service costs, higher depreciation, higher income taxes and higher financing costs as well as dilution of $0.04 per share.

Turning now to slide 13, as Bill had previously mentioned, we are announcing our 2013 earnings forecast range of $2.25 to $2.50 per share, with a midpoint of $2.37 per share. This slide shows the change in earnings looking at the key drivers for each segment. The dilution impact of $0.11 has been isolated from the segment earnings. In addition, you will notice a new non-operating category that we referred to as Corporate and Other. As we have evolved our business mix to a much more regulated focus, our future financing strategy will include utilization of securities issuance from PPL Capital Funding which will be the primary driver of this category, as well ascertain other corporate costs not directly allocable to the operating segments.

The four operating segments will continue to be Kentucky Regulated, UK Regulated, Pennsylvania Regulated and Supply. Moving to the specific 2013 drivers, we expect higher earnings from the Kentucky Regulated segment primarily due to electric and gas base rate increases that went into effect January 1, higher expected retail load growth, and returns on additional environmental capital investment. Partially offsetting these positive earnings drivers is higher O&M. We expect higher earnings in the UK primarily driven by higher prices and lower income taxes, partially offset by higher O&M, higher depreciation and higher financing costs,

We expect higher earnings from our Pennsylvania Regulated segment as a result of higher distribution revenue from new base rates that became effective on January 1 and higher transmission revenue as a result of increased rate base, partially offset by higher depreciation. We expect lower earnings from our Supply segment primarily due to lower energy margins as a result of lower energy prices and hedges rolling off, partially offset by higher capacity prices and higher nuclear generation output, higher O&M at our Eastern and Western fleets, higher depreciation, and higher financing costs.

Let's move to slide 14. Given the difficulties some of you have expressed in modeling the UK segment we are providing updated modeling parameters related to future earnings. We will use the segment income statement format provided in the MD&A of our SEC filings as the basis of our calculations. Since the 2012 10-K has not yet been filed, we provided the ongoing numbers on this slide and a reconciliation to GAAP numbers in the appendix to today's presentation. Let's begin with revenues which are projected to increase by an average of 3.5% per year plus inflation for the balance of the price control review period that ends on March 31 2015 plus annual incentive awards. This revenue increase includes Regulated revenues that increase at 5.5%, as well as revenues driven by pass-through costs such as transmission charges, low carbon network charges, and other non-Regulated revenues.

While most of our operating costs, excluding pension expense, increase with inflation, we will additional O&M in 2013 due to higher tree trimming and maintenance expense to continue our recovery from pre-acquisition spending levels related to the Midlands businesses. We do expect this spending will be supportive of our continued ability to outperform on customer service and reliability metrics that generate bonus revenue potential. Pension expense is expected to be GBP20 million in 2013. Pension expense in 2014 will obviously be driven by a return on plant assets in '13, discount rate changes, as well as other factors.

Until those drivers are finalized, we have assumed that pension expense remains at GBP20 million in 2014 in these numbers. Depreciation expense will increase about 11% per year due to planned levels of investment. In calculating interest expense, most of our debt is fixed rate except for about GBP380 million that is inflation linked. In addition, we anticipate a new debt issuance in the fall of this year of about GBP400 million. Finally, we expect the 2011 equity units to convert in April in 2014 and the underlying debt will be remarketed at prevailing rates at that time. And for the remainder of the price control period, our consolidated effective tax rate is expected to be about 22%.

Combining all of these drivers with the foreign currency translation rate, you should be able to reasonably estimate the UK Regulated segment's future earnings contribution. These modeling parameters should result in approximately $770 million of ongoing earnings for 2013, consistent with the midpoint of our 2013 forecast for the UK Regulated segment. For 2014, we are provided an ongoing earnings range for the UK Regulated segment of $825 million to $875 million. On slide 15, we provide updates on our free cash flow before dividends.

Our actual 2012 free cash flow before dividends was $556 million higher than the 2012 projection we provided last February. The primary drivers for the increase were lower capital expenditures at our Kentucky Regulated and Supply segments totaling about $630 million which we have discussed on previous calls, as well as higher earnings at our UK Regulated segments. Partially offsetting these drivers were funding for the purchase of Ironwood and lower cash from operations primarily due to higher pension funding by all segments.

The largest driver of 2013 free cash flow before dividends is projected capital expenditures of $4.5 billion, primarily in our rate regulated businesses. The details of our projected capital expenditures and rate base growth can be found in the appendix to today's presentation. Cash from operations reflects strong earnings from all of our rate regulated businesses and the impact of non-cash expenses such as depreciation. Cash from operations also reflects projected pension contributions of about $550 million this year.

Finally, turning to slide 16, our Board approved a 2% increase in our common stock dividend, increasing it to $1.47 per share on an annualized basis, as Bill mentioned, effective with the April 1 dividend. This dividend level represents a 62% payout ratio based on the midpoint of our 2013 earnings forecast. This chart shows the security of our current dividend in that projected ongoing earnings per share from our regulated businesses much more than covers our increased dividend level. With that, by way of review, I'd like to turn the call back over to Bill for the Q&A period.

Okay, thank you, Paul, and, operator, we are ready for questions, please.

(Operator Instructions) Your first question is from Justin McCann of S&P Capital and IP.

Good morning. I have two questions for Paul and one for Bill. For Paul, the effective tax rate for the UK is expected to be 22%. What will it be for the consolidated?

On a consolidated basis for '13, between 27% and 28% for 2013.

Okay. And after the exchange of the [2025, 8.5 sevens], for [2021 4.6s], what is your current weighted average cost of capital? Where are you targeting for by the end of '13?

The -- from an interest expense level, we will basically end up with same level of P&L interest expense on the converted notes at the higher par balance than we were sitting on with the notes that were at Ironwood. Your question on weighted average cost of capital is at what segment or at what -- or at Corporate?

Yes, at Corporate.

I don't have that number off the top of my head right now.

Okay, all right.

Using a market implied rate across all of the segments and blending that and looking at the average debt levels, especially with the holdco leverage that we've got in the UK and in Kentucky and the bit that we have at cap funding that includes convertible securities it is going to be in the 7% to 8% range.

Okay, okay. And for Bill, what kind of impact do you now see the MATS-related plant retirements by 2015, having on forward power prices and when do you see this taking place?

Sure. I would say in terms of forward prices we haven't yet fully seen the MATS impact reflected. We do believe that that impact should be in the range of $3 to $5 per megawatt hour in addition to where forward prices are today. From a overall coal plant retirement perspective, we would expect based on the MATS, as well as the CARE and Casper EPA rules that you may get up to the 60,000 to 70,000 gigawatt retirement levels overall.

So I believe that's about 20% -- a little over 20% of the US coal fleet could be impacted ultimately by MATS. I think the real question is one of timing. We would expect somewhere between the 2015 to 2017 time frame that all those units that would ultimately would be impacted would announce retirements in that range.

All right, okay. Thank you.

You're welcome.

The next question is from Dan Eggers of Credit Suisse.

Good morning, guys. Paul, could you just give an update on where you guys are standing on the cost reduction and the capital reduction programs, and you kind of, how that is fitting into plan and what are the major buckets you are seeing a benefit right now?

I think when you look at the CapEx chart that we included in the presentation that we've reflected the -- it's about $250 million of reduction for the Supply segment. Most all of the major projects that are sitting in Kentucky have been fully contracted at this point in time. I would not expect that we would see much variability in that forecast. The UK is always pretty right on. Greg and his team at EU are always pretty right on.

It would really take another downward movement in power prices before we would have to address CapEx in an even more significant way than we have already taken over the last two or three planning cycles to cause that to go down. On the O&M front, as Bill mentioned in the up front remarks, we've included in the plan a $0.05 impact roughly for extra outages and extended outage in the refuel for Unit 2 at Susquehanna and a planned outage now for Unit 1 as well.

We had said back in fall that the combination of potential additional outages, plus the Fukushima-related work was really going to absorb some of the cost reduction measures that we had already been putting in place at our shared services units. Some of the spending increase that you are seeing coming through the plan this year, as I indicated for the EU, was being driven by really trying to continue the out performance on the customer service metrics and to get the condition of the network back to the level that it should have been at had the prior owner been spending where they should have been spending.

In addition, Vic and his team cut somewhere around $50 million of O&M last year just to respond to what we were seeing from really bad weather at the front end of the year. So there is a restoration of some level of spend there, as well. In the very short term in 2013, I think there are some things that happened in '12 and that are going to continue into '13 that will have an impact. We are always focused on trying to operate the business in the most cost efficient manner that we can and we will continue to strive to find ways to do that. I don't think that I would expect that you should expect to hear from us on a large scale O&M reduction downsizing effort, at least as we look at our business prospects right now.

Okay. And then, I guess, just on Susquehanna, if you guys look at the two outages planned for this year, what is your level of confidence this will fix the ongoing issues and kind of get this plant back to a normal operating level going forward?

Sure, Dan. I think we are highly confident. We have a very detailed root cause analysis that we have worked on for the last year in conjunction with the vendor. We believe the equipment changes we are making will, in fact, fix this for the long term. So we are very optimistic that this can be put in place in the spring outage and take care of us on a go-forward basis.

Okay, and could I ask one last question. Just on demand growth trends and what you guys are seeing. Power demand, weather normalized is down in part last year. What are you guys expecting kind of in guidance and in looking forward against a CapEx program for volume gains for '13 and maybe a long-term outlook?

Sure. For the plan in 2013, in the Kentucky utility business, on a weather-normalized basis we are looking at a little more than 0.5% growth, so around 0.7% growth. In Pennsylvania, because of energy efficiency requirements in the state, we're actually looking at a decrease of about 0.5% on a volumetric basis. Again, weather normalized. That's for 2013. On a longer-term basis, we would expect growth in about the 1% range on a year-over-year basis on a go-forward basis.

Okay. Thank you, guys.

You're welcome.

Your next question is from Kit Konolige of BGC.

Thanks. Good morning, guys.

Good morning, Kit.

Question, I guess this would be for Paul. With regard to the cap funding entity, so as you indicate, you will be breaking that out separately. Can you give us an indication of, I think you raised $400 million at that level last October. What was the use of those funds and can you give us an idea of what kind of level of funding you expect at that entity going forward?

Okay, again, as the models kind of transition here a little bit. If we go back to even a couple of years ago when we did the Kentucky transaction, the reason that we used Kentucky holdco's financing was it was cheaper to do it at that level than it was given the relative level of business mix at that time. Given the steps that we have taken over the past couple of years, we are now comfortable with replacing the Kentucky holdco financing with a single holdco at PPL Cap Funding which comes with a PPL Corp. guarantee.

The $400 million issuance last year was actually originally planned at Supply, and so we primarily used that level of financing to delever the Supply business. I would expect that as we remarket the convert securities, the piece of which -- the $1.150 billion that will convert in June we'll remarket at that level, and then the $977 million to $978 million that will convert in April of the following year will also be remarketed at that level. Those are existing outstanding securities.

And then I would look, again, as we kind of grow the balance sheet and as we are trying to maintain target credit metrics at the opcos -- it won't be an over reliance on cap funding. It will be the right balance between on the domestic front, primarily first mortgage bonds, some modest level of holdco issuance, all the kind of key targeted metrics and cap structures at the regulated utilities plus the investment grade credit rating at Corp.

Great. And one other somewhat related to that, Paul, so on Supply segment reported earnings, you talked to the past about wanting to ensure that earnings at Supply don't go negative as a segment. Is that still the outlook and what year would you expect the bottom to be, and would you be -- if we included this $0.04 that looks like it arguably could be a sign to Supply -- would that also be the case?

That would be the case, and as I think of the business planning here horizon, as we look at our numbers, 2014 looks like the trough period for us. We need to see, obviously, as we continue our hedging program and execute on our retail and other platforms we need to see those forwards play out. There is more work to do, if you will. But, yes, we would continue to see those levels.

And I think the good news there, Kit, is that with all of the strategic acquisitions that PPL has done over the past few years we've really significantly shielded ourselves from commodity market volatility. So I think as we look forward, we have a very stable and predictable platform of earnings drivers that I think really position us well.

And just to follow and to be clear, Paul, you are saying EPS segment reported at Supply would not go below zero as you see it at this point?

Correct.

Thank you.

You're welcome, Kit.

Your next question is from Paul Ridzon of KeyBanc.

Good morning. Paul, could you remind us what your expected '13 and '14 share counts are?

Yes, they are actually in the appendix to the material --

I will dig them up.

Okay, no problem.

And then with the maturities coming due have you taken any proactive steps to hedge out any interest rate risk around those [re-fies]?

We actually have a very active hedging program around both interest rates and FX. And we are right on in terms of where I would expect those hedge levels to be around expected issuances. We actually are most active in kind of on the interest expense inside the 24-month window, but definitely one year out which we are active.

Great. Thank you very much.

You're welcome.

Your next question is from Neel Mitra of Tudor, Pickering.

Hey, good morning. Question on Supply, now that you are running your coal plants less, are you looking to blend some PRB or lower cost coal into the Northern [add] mix and how would that affect your current coal contracts and transport agreements?

Sure, I will ask Dave DeCampli, President of our Supply Group to take that question.

Yes, Neel, we are experimenting with the use of lower quality coal in some of our coal units. We need to determine technically the impact on the boilers over the long term, so during the year, late year 2012, we were doing a lot of test burning. We do expect to be able to burn some lower spec coal going forward. And that is reflected in a little bit of our increase in our expected base load generation from the coal units, and it's priced in as well. With regard to PRB coal, with the transportation costs, we just don't anticipate that being much of a player for us.

Okay. And then just additional question on the Susquehanna outages, the way I understand it is that you have two planned outages in the spring and one is a refueling outage and you are going to try to do the work on the unit during the refueling outage. Should we expect that there could be a possible additional outage in the fall or do you expect to be able to get all of the work done in the spring?

There are two outages scheduled for the spring. One is the refueling outage that was previously scheduled. And we'll couple on to that the modifications, or the initial modifications, to that unit within the same time frame. With one week of overlap we're going to take the second unit off and do the same modifications to it. So we expect to be done in the spring period with both units coming out of service. Again, one for refueling plus modification, and then the other unit just for modification.

Got it. Thank you.

You're welcome.

Your next question is from Julien Dumoulin-Smith of UBS.

Hi, good morning. Can you hear me?

Yes, good morning.

First question, going back to the UK, if you will, I just wanted to get a little bit of a sense, I know you talked about 2014. Obviously, you have been outperforming thus far and going forward. How do you think about 2015, the rate review just, again, earned ROEs, et cetera, how do you think of that in the context of the new rate design here as well?

Sure, I'll answer --

And revenue profiling rates specifically, as well.

Yes. I will ask Rick Klingensmith, President of our Global and Energy Services Group to take that question.

Good morning, Julien. As we look at 2015 and the [REO] approach to the regulatory framework as we reach to that period of time, there really are a number of factors that come into the determination of what our revenues are going forward. You mentioned profiling, which is the way the revenues have been shaped during this rate review period, will likely be different as to how we see perhaps a more unprofiled approach in the next rate review period.

That element is just one variable, but there will be other variables that will come into play, as well, including the weighted average cost of capital, incentive revenues, our capital expenditures, and our cost plans going forward into that next eight-year period. We are still working on our business plans at the moment to put all of those variables together and we will be submitting those to Ofgem in July of this year. Hard to say what the ultimate outcome will be from that [REO] effect, but we will have a better idea of the various parameters and its effects with our business plans submittal in July.

Great. And then in terms of the, I suppose, early notification, the accelerated business plan or what have you, if you were to get that, shall we say, would we have a better view on '15 earlier, shall we say?

You may have a better view of '15 as -- Ofgem has announced that they would come out in October of this year with an assessment of the business plans that have been filed and an assessment of were any of those business plans of sufficient justification for them to be fast-tracked through the process. To the extent we are fast-tracked through the process, and is that our goal, to have each of our four distribution operating companies fast-tracked through the process, that it would be February '14 that we would have a final determination on a set of final proposals from Ofgem for the fast-tracked entities. That would be about nine months sooner than the normal process that would happen toward the end of '14.

And, sorry, just to clarify, just ask it directly. What kind of earned ROE are we talking about at the utility last year -- at the UK utility?

The UK utility was in the 17% range as far as the earned ROE for the last year.

And that's on the holding company basis?

That's in the UK. If you were to look at our UK Regulated segment, which incorporates the interest costs associated with our equity units, you would find that and some extra costs that are allocated here on domestic side, you would find our UK Regulated segment ROE, as we've reported, to be about 16%, 16.1% in 2012.

Great. And, apologies, just one clarification from the last question there, I think Neel asked. The kind of coal, Dave, that you are experimenting with, it's not PRB? It's Illinois Basin? I am sorry, I just wanted to clarify on behalf of Neel here.

Well, we were working with a couple of suppliers for lower stack coal. It's not PRB.

Great. Thanks.

You're welcome.

Your next question is from Angie Storozynski of Macquarie.

Thank you. What is your realized ROE for Kentucky embedded in your midpoint of the '13 guidance?

It's on a regulatory ROE basis. It would be about 9.5%, so that would exclude the goodwill and some other things that -- in the purchase accounting -- that wouldn't be embedded in a normal calculation.

Okay. And if you were to include it? Is it like closer to -- is it below 9%?

It would be below 9%, it would be closer to 8%. There is roughly $1 billion of goodwill on Kentucky.

Okay. That's fine. Secondly, I know that you are not showing us any power hedges for '15. But can you give us at least a sense if you have any hedges in both on power and the coal side?

Sure. We typically will report on that forward year, that third year, if you will, later this year based on past practice. So we don't have a lot of hedges out there in 2015 at this point. We are probably in the 10% to 20%-type range right now which is very typical of where we would be at this point in time for a year like 2015.

So the comment that the '14 is an earnings trough for Supply, so '15 seeing some pick up is just purely a function of forward power curve?

Predominantly, yes.

Okay. And then lastly, you are showing a slide with the share count, with the average share count. It seems to me at least that it's a little higher than what we heard from you during the third quarter earnings call. Am I mistaken?

No, it should be pretty much right on top of those numbers. Because at that time we knew that we would be able to constrain the future equity issuances after the equity forward settles here at the end of Q1 and then the two converge to basically just drip in management comp. So that was embedded at that point in time, as well. It should be very close to those numbers.

Okay. I will follow up offline. Thank you.

Thank you.

Your next question from Michael Lapides of Goldman Sachs.

Hi, guys. Couple of questions. First on O&M at the non-regulated PPL Supply business. We have seen a lot of your peers, whether it's Exelon, whether it's FirstEnergy, several others, some of the IPPs, talk about increased focus on O&M cost management given kind of a multi-year down cycle. We've seen you reduce capital spending costs and we know that 2013 is a little unusual because you have the Susquehanna outages. Just curious how you are thinking, kind of second half of '13 or for the next few years about your, I guess, the actions you are likely to take given the power market conditions?

Sure. I think as I mentioned in my opening remarks, Michael, we are very focused on managing the O&M as we look at the next few years in particular. And, Dave, why don't you comment on some of the specific things we are doing?

Michael, in 2012 on the fossil and hydro side of the business, we were able to reduce O&M about $40 million. Some of that was offset in 2012 due to the Susquehanna outages, and you commented some of that will occur in 2013, as well. We continue to work through the whole fleet and very, very carefully work through a whole number of items to trim O&M costs going forward. I would expect level or slightly reduced O&M in the plan for the next five years.

Got it. Okay. Another thing, you mentioned pension cash contributions in the $550 million range. What is the impact of bonus depreciation across your segments and at the entirety of the business?

The impact from -- what it does from a cash perspective?

Cash and which segments could it be an offset to rate base?

Okay. We have -- based upon the level of spend for next year plus some carryover from the prior years, it would be about a $400 million deferred tax asset. Now remember that we purchased north of $1 billion of net operating losses from the Kentucky acquisition that we have not been able to use at this point of time, given the number of years that we've now been having bonus depreciation.

We were not going to be a federal level cash taxpayer until 2016 without the incremental bonus depreciation we've been given. That now pushes us out into at least 2017. So we would not have had cash taxes planned prior to the gift of bonus depreciation that we got right at year end here. But it will push out another year before we are cash taxpayer.

Got it. And then finally on Susquehanna, the $0.05, is that mostly O&M or is that lost megawatt hours? And then when we think about the future years, should we back that out or do you expect to see future recurring higher nuclear O&M costs?

It is a combination of both O&M as well as lost margin due to the days that we were planning to be out. On a go-forward basis, the level of adjustment, if you will, in O&M should be minimal, meaning that we should come back to more or less a normal run rate with just our planned outage schedules, and any follow-up work that we need to do on turbine blade-type modifications we would do in the context of scheduled outages as we go forward.

Got it. Okay. Thanks, guys. Much appreciated.

You're welcome.

Your next question is from Andy Bischof of Morningstar Financial.

Hi, good morning. Thanks for the parameters around the [matter] in the UK segment. I was wondering if you could just give a little more guidance around the incentive awards in the UK business, and kind of looking at this year's level, is that a pretty good range of run rate going forward and opportunities for further incentives?

Sure. As we noted, we were able to generate a little over $80 million, I believe it was $83 million, in incentives in the last regulatory cycle which would kick in April 1 of this year. And maybe, Rick, you could comment on how we look at the future in terms of incentive bonus?

Yes, as we look out into the future, as Bill mentioned, for the regulatory year that ended in March of 2012, that we will get recovery starting in April 1 of this year for the 12 months following April 1 of this year, it was about $83 million. And about 80% of that incentive revenue was earned at the Midlands business, 20% of our legacy business is in Southwest and South Wales. As we look into the future, we are expecting and forecasting at least that same level of out performance here over the next two years, regulatory years, before heading into our [REO] period when the metrics are reset at that point in time. We are confident that we will be able to earn at least that same level of $83 million in bonus revenues going forward. So the net income guidance -- the new net income guidance that we provided for 2013 and '14 reflect the $83 million of bonuses that we expect to continue.

Great. Thanks for the clarity.

Sure.

Your next question is from Jonathan Arnold of Deutsche Banc.

Good morning, Paul.

Good morning, Jonathan.

Can you hear me all right?

Yes, yes.

My question on the UK, just you talked a little about this fast track process. Could you describe a little more when you would expect to know if you will be going down that path and how that works?

Yes. As Rick mentioned, I think on one of the previous answers to a question, it was in the October time frame in '13 with a final knowledge in February-type time frame of 2014.

Okay, great. Sorry, I missed that.

No problem.

And then I wanted to clarify on one of the other answers you gave on another question. You talked about '14 being the bottom and cyclical in the power business for you. But you also said you needed the curves to cooperate or something along those lines. Are you saying that '14 is the bottom of today's forward curve or '14 is the bottom assuming your view of the curve which might be different?

At that point in our five-year plan we wouldn't have a significant blending yet of a PPL fundamental view. So there might be some modest expectation in there of some recovery, but it's much more toward years four and five of our plan where we would clearly expect to see recovery in E-rates and retirement of the units that Bill had talked about. So not anything significant. It's pretty much the market.

So you see '15 as an up year based off the curves that are on the screen today?

We would expect to clearly see by '15 some level of correction in terms of things getting more rational.

And there is, even in the forward curve for '15 now a slight increase, '14 to '15, there is already built in in the forwards some increase there already. So I think what Paul is saying is that our current plan and outlook for '14 and '15 really reflect the forward prices that are posted out there.

Okay. I'm still not clear if '15 is an up year based off the actual market curve.

It is. Yes, it is, slight increase.

Okay. Thank you, guys.

Sure.

Your next question is from (inaudible) of (inaudible.)

Yes, hi, good morning, most of my questions have been asked. But just one clarifying point. I think you talked about the ROE you expected or will earn in Kentucky for 2013. What about Pennsylvania?

Sure. I will ask Greg Dudkin, President of our PPL Electric Utilities to answer that.

Yes, similar to what Paul answered for Kentucky, based on our regulated rate base for the distribution business we expect about a 9.3% ROE for the distribution business. And then on a GAAP perspective, including both our transmission distribution business, we will be around 8%, and the difference being that we have non-earning regulatory assets, primarily deferred taxes are deferred storm costs and cash working capital.

Okay. So if you, I guess, if you stripped that out, just look more on an apples-to-apples basis with how you view the distribution how would you look at that ROE then?

The 9.3% I think is how -- on a regulatory basis how you would look at it and we would be in the low 11% range around transmission.

Right. The 9.3% equates to the 10.4% that we were granted in the rate case.

Right. But if I think about all of the Pennsylvania assets on a regulatory basis, so you are saying 9.3% on the distribution side and closer to 11% on transmission? Is that fair.

Correct.

Yes.

Yes.

And then in terms of the rate case schedule, I know you just resolved cases in both jurisdictions this past year, but would you expect again to file on '14 for new rates in '15 in both Pennsylvania and Kentucky?

In Pennsylvania, yes.

With the low levels of load growth that Bill referred to earlier and the level of capital spend that we've got, not all of which gets a tracker-based recovery on it, especially and including the combined cycle unit that is under construction now in Kentucky, we would expect an any every other year -- so 2015 new rates would be effective. Correct.

Okay, all right. Thank you.

Sure.

Your next question is from Anthony Crowdell of Jefferies & Company.

Hi, good morning, guys. First an outage in the Super Bowl and now the PPL earnings call. It's really impressive. Two questions, one is on the UK, you talked about what you guys earned or realized ROE in 2012 and you've given out parameters until the end of '14. But when I try to model '15 and beyond, do you think Ofgem has an ROE target where when you bake in incentives and everything else and you add it all in that they are comfortable with. Or is it just that if you get incentives and you could earn 16%, or 17% or 18%, that's fair game?

Go ahead, Rick.

This is Rick Klingensmith. As you look at what they have done in the past, the upside potential is there because ultimately the ability to outperform also is helping customers. And so in the past, Ofgem has not been concerned about the out performance that might be available for your levels of performance because it's ultimately benefiting customers. As we move into [REO] that will likely be the case. But they will also look at the weighted average capital that's required for the business to finance the capital investment in the costs going forward. So they will reset sort of all of the revenues based upon that finance-ability of our business plan going forward, but I do believe that their process around out performance will remain in the [REO] time period.

Great. And just quickly on Supply. I know people are beating up '14 and '15, whether it's a trough or not. I was just wondering, are you seeing enough liquidity in the power markets right now to lock in the '14 or '15 to increase your hedges and any comment on liquidity of that market?

For '14, there is a liquidity. I think when you get out to '15 and '16 that's when you start to see pretty thin markets there. No real issues locking down more hedges for '14. But as we get into -- further here into '13 liquidity will increase, I'm sure, for '15. We always look for opportunities to hedge in when the markets are available and at a price we think is fair.

Great. Thanks for your time, guys.

Good.

And your final question comes from Steven Fleishman, a private investor.

Good morning, Steve.

Steve?

Sir, if your line is muted, please unmute it at this time.

Well, I guess --

There is no response from that line, sir.

No response there. Okay, well, I think with that, operator we will close the call and I thank everyone for joining us today and look forward to our next call.

This concludes today's PPL Corporation fourth quarter conference call. You may now disconnect.