賓州電力 (PPL) 2013 Q1 法說會逐字稿

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

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

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

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

(Operator Instructions)

Joe Bergstein, you may begin your conference.

Thank you.

Good morning.

Thank you for joining the PPL conference call on first quarter results and our general business outlook.

We are providing slides for 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 the factors that could cause actual results or events to differ 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 and President and CEO.

Thanks, Joe, and good morning, everyone.

Appreciate you joining us this morning.

Here with me today are Paul Farr, PPL's Executive Vice President and Chief Financial Officer, as well as our four business segment presidents who will participate in the Q&A session later on the call.

To kick off the call this morning I will provide an overview of our first quarter results, some commentary on our 2013 earnings forecast, and an operational overview.

Following my remarks Paul will provide a more detailed financial overview.

Turning to slide 4, I'm pleased to report that we delivered strong growth in each of our regulated segments in the first quarter.

Combined, the regulated businesses delivered a growth of 40% in earnings from ongoing operations.

Earnings per share from ongoing operations increased $0.01 despite lower earnings in our supply business as well as the impact of accelerated share recognition from the 2010 and 2011 equity units.

This is a topic I will discuss in more detail in a minute.

On a net income basis, earnings from ongoing operations increased about 11% in the first quarter versus the same period a year ago.

Reported earnings were lower than last year mainly due to net mark-to-market adjustments on economic hedges in the Supply segment and foreign currency hedges we have in place on future UK earnings.

Now let's turn to a discussion of our 2013 earnings forecast, which you will find on slide 5. We're updating our forecast to reflect the impact of accelerated share recognition from the equity units we issued in 2010 and 2011 in connection with our Kentucky and UK acquisitions.

Our original guidance only reflected a partial-year impact of the shares related to the 2010 equity units that settle mid year 2013.

Late in the first quarter we finalized our financing plans for the required re-marketing of debt securities related to these equity units allowing us to hedge our interest rate exposure for both equity units at attractive rates.

Rates that improved as we moved through the quarter.

Those activities caused us to reflect the full, expected impact of common stock underlying both series of equity units in our calculation of earnings per share effective January 1 of this year.

The accelerated share recognition impacted first quarter ongoing earnings by $0.06 per share and is expected to impact full-year 2013 ongoing earnings by $0.10 per share.

As a result, we are adjusting our ongoing earnings forecast to $2.15 to $2.40 per share.

We also announced this morning a reduction in future equity needs of approximately $100 million per year.

We believe we can maintain our rate base growth plans and targeted credit metrics even in light of this equity reduction.

We clearly view both actions as positive for share owners.

I want to stress that our view of 2013 net income from ongoing operations remains unchanged since our original forecast and we feel very good about the forecast after delivering a very strong first quarter.

Paul will provide additional details on what I just covered in a few minutes, but first let me highlight a few operational things on slide 6.

Moving to slide 6, our UK subsidiary is preparing for a price control review under a new regulatory approach called RIO.

WPD is finalizing detailed business plans for each of our four distribution networks and will submit those plans to Ofgem, the regulator, by July 1. Our objective is to be selected for fast-track consideration by Ofgem, which would enable us to conclude WPD's price control review early in 2014.

This would provide greater certainty and base revenues and financial incentives.

You can follow key developments and filings in this process on the Investor Section of our website.

In January, PPL Electric Utilities filed a request with the Pennsylvania Public Utility Commission for accelerated recovery of certain distribution system reliability improvements.

We expected the decision from the PUC later in the spring with implementation of the DSIC cost recovery mechanism beginning July 1. Also in Pennsylvania, construction work continues on the Susquehanna-Roseland transmission line.

We've updated our cost estimate to $630 million based upon final contract costs.

In March, PPL Electric Utilities began construction of the 500 kV Lackawanna substation a critical component of the project.

We continue to expect the line will be completed and in service by the summer of 2015.

This project is a major part of our regulated infrastructure investment program that will improve regional electric reliability, create jobs and provide a significant regional economic boost.

Moving to the sales volumes for the quarter on slide 7, in Kentucky, weather normalized sales increased about 1.5% for the first quarter of 2013 compared to 2012.

The increase was primarily driven by residential sales, which were up more than 5% due to customer growth and improved economic conditions.

Industrial sales were slightly higher in the first quarter of 2013 as several large industrial customers in the chemical and automotive industries experienced increased volumes.

In Pennsylvania, weather normalized sales declined slightly on increased energy efficiency, energy conservation and a challenged industrial sector.

However, we did see a 3% increase in residential sales over 2012 driven by increased customer usage and a small increase in customer count.

Turning to the competitive supply segment on slide 8, in April we began a scheduled refueling and maintenance outage on Unit 2 at our Susquehanna nuclear plant.

During this outage we will replace the turbine hoods to improve airflow and reduce blade vibration.

In addition, we are installing new blades that have stronger metallurgical properties.

We expect this to provide a long-term solution to the turbine blade issues that have affected Susquehanna operations over the last two years.

Later in the spring, we plan to take Susquehanna Unit 1 out of service for the upgrades needed to address its turbine blade issues.

On a final nuclear note, we had excellent performance from both Susquehanna units during the first quarter with 100% availability.

In April, we also reached commercial operations on the upgraded Rainbow hydroelectric plant.

The project increased generating capacity at the Rainbow plant by 70% and spurred considerable business activity in the Great Falls area of Montana.

In summary, we're off to a very good start in 2013 with solid financial results that keep us firmly on track to meet ongoing earnings.

We continue to take proactive steps to efficiently finance our growth plans by locking in low interest rates and reducing our equity needs while still maintaining our targeted credit metrics.

We also remain very optimistic about our ability to execute on the major construction programs delivering solid results for customers and growing shareowner value.

I look forward to your questions are now turn the call over to Paul Farr.

Thanks, Bill, and good morning, everyone.

I will begin my remarks by providing some additional color on the EPS impact we're reporting in Q1 and that will impact our full-year 2013 EPS related to the 2010 and 2011 equity units.

The decline in interest rates we observed during the quarter incented is to finalize re-marketing plans for the $2.1 billion debt component of the equity units.

After finalizing the plans, we hedged about 90% of the treasury interest rate exposure and locked in what we consider attractive rates with the weighted average duration that is somewhat longer than we had originally planned.

The combination of our financing plan and the significant downward movement in interest rates since the equity units were originally issued caused us to change from the treasury stock method to if-converted accounting in calculating diluted earnings per share.

This change affects EPS beginning in the first quarter of this year and no prior periods are affected by the change in accounting.

Further the terms of the equity units have not changed and the actually issuance of the common stock still are scheduled to occur July 1 of this year and May 1, 2014 for the 2010 and 2011 equity units respectively.

The accelerated share recognition only impacts the 2013 calculation of diluted earnings per share and our underlying net income forecast has not changed as Bill just indicated.

Let's move to slide 9 where we show the combined impact, year-on-year share count for the change in equity unit accounting and the decision not to issue common stock to fund our DRIP and management comp needs in 2013 and beyond.

We've outlined both our original projection of weighted average common shares outstanding as provided on the year-end 2012 earnings call and our revised estimates.

The net impact on 2013 is approximately 50 million of additional shares included in the weighted average share count.

Our original projection basically had a half-year impact from the 2010 equity units that will settle mid year this year and no impact from the 2011 equity units due to the treasury method treatment we had used in the past.

You can see that there is no net impact on 2014 versus our prior projections and the out right increase over 2013 is primarily driven by a full-year impact of the equity forward that settles in 2/2 of this year.

The elimination of approximately $100 million per year in planned new share issuance clearly benefits 2015 and beyond as 10 million fewer shares our outstanding starting in 2015.

Let's now move to slide 10 where we have provided an updated 2012 to 2013 earnings lock reflecting these changes.

The net $0.10 decline from our original 2013 EPS guidance is driven by $0.18 from the impact of additional shares for the if-converted treatment of the equity units partially offset by a $0.07 adjustment in the earnings per share calculation for the interest expense associated with the deck component of the equity units under if-converted accounting and a $0.01 benefit from the removal of new issuance for DRIP and management comp from our 2013 financing plan.

Again, our forecast of underlying net income in the EPS forecast is unchanged.

Now let's move to slide 11 to review our first quarter financial results.

The PPL's first-quarter earnings from ongoing operations increased over last year primarily driven by substantially improved earnings at all three of our regulated business segments.

This was partially offset by lower earnings in the Supply segment primarily due to lower hedged wholesale power prices.

Let's begin our segment review with the Kentucky Regulated segment on slide 12.

Kentucky earned $0.14 per share in the first quarter an $0.08 increase compared to last year.

This increase was primarily driven by higher margins due to new base rates that went into effect on January 1, higher retail electric volumes as a result of colder whether in 2013, and additional revenues from environmental investments.

O&M was lower primarily due to the timing and scope of scheduled generation outages for 2013.

Partially offsetting these positive drivers were higher depreciation and dilution of $0.01 per share.

Moving to slide 13, our UK Regulated segment earned $0.37 per share in the first quarter, a $0.06 increase over last year.

This increase was due to higher utility revenues primarily driven by higher prices and lower UK income taxes driven by slightly lower effective tax rate.

These positive earnings drivers were partially offset by higher O&M and dilution of $0.04 per share.

Turning now to slide 14, our Pennsylvania Regulated segment earned $0.10 per share in the quarter, a $0.04 increase compared to last year.

This increase was the result of higher delivery margins, primarily due to new rates that went into effect on January 1 and higher sales volumes due to mild weather in 2012, lower O&M, and lower interest charges.

These positive earnings drivers were partially offset by dilution of $0.01 per share.

Moving to slide 15, our Supply segment earned $0.11 per share in the first quarter a decrease of $0.16 compared to last year.

This decrease was primarily the net result of lower eastern energy margins driven by lower base-load energy prices partially offset by increased base-load unit availability; higher capacity prices and higher margins on intermediate and peaking units; lower western energy margins, primarily due to lower wholesale energy prices; higher depreciation; higher income taxes, primarily due to a 2012 state tax rate adjustment; and dilution of $0.01 per share.

These negative drivers were partially offset by lower O&M due to lower outage costs.

That completes the more detailed financial overview and I'll now turn the call back over to Bill for the Q&A period.

Thanks, Paul.

Operator, we're ready for questions, please.

(Operator Instructions)

Dan Eggers, Credit Suisse.

On the Supply side of the business, can we may be talking beyond 2014?

On the last call you guys suggested that '14 would represent the trough.

Can you maybe shed light on where hedging is right now for '15 and beyond?

And what pricing trends you're seeing in those numbers to give confident to a better outlook there?

I will make a couple comments, then I'll turn it over to Dave DeCampli, who is President of our Supply business.

Clearly, 2014 prices, and '15, have improved over the last few months along with HEAP rates.

I think overall our view of the four power fundamentals remains pretty much as it has been, which was we continue to see upside of $3.00 to $5.00 per megawatt hour in the '15, '16 timeframe mostly driven by MATS compliance costs as well as retirements that are expected to begin in that timeframe.

I think overall we continue to see the strength, it is showing itself little bit here in the quarter, but I do not think quarterly movements are all that indicative per se.

I think we still rely predominately on our fundamental views.

With that being said, Dave, do want to provide any other color commentary?

Sure, Dan, on the hedging strategy, our target range for 2015 is to be between 0% and 30% hedged.

We are sitting between 10% and 20% right now.

We have been a bit on the lower end of that actually.

That is where we sit today.

Bills comments on forward prices, we are still viewing the market as being having $3 to $5 upside in it for 2015, at this point.

That is what our fundamentals are dictating.

With RPM closing in, what are your expectations as you guys look out of the market today?

All the parameters are out now.

We are viewing that as -- we're sticking to our assumption that it will come in lower than the previous option.

The parameters have not yielded any material changes in our opinion on that, so we are seeing the '16, '17 auction being a bit lower than the previous one.

Okay.

Bill, can you share your thoughts on dividend policy with the cutback and the DRIP and that sort of thing?

The decision to raise less equity rather than maybe put more of that money toward a dividend increase on a sustainable basis?

I really do not think that decision have any impact on our ability to grow the dividend.

I think we are still very comfortable with growing the dividend as we grow the regulated segment earnings.

When do you guys expect to -- if you sit down with the Board and talked about the strategy of when you revisit, what is the next plant where that discussion comes up?

What do you think the Board needs to see?

Is there a level of confidence in the UK outlook with the RIO process that has to get done before they feel like the growth trajectory is a fully confident to cement it in the dividend?

Dan, this is Paul.

The Board normally entertains the annual dividend adjustment early in the year, so we just went through that process in the January type timeframe for the April 1 increase, and everybody has kind of see that.

What we have said is, there are large commitments to growth from a regulated rate-based perspective.

As we look forward, as Bill indicated, I wouldn't look at the 100 million new issuance reduction as impacting what we can do from a dividend perspective.

It is really the capital call on the capital that we have got and our ability to massage the balance sheet.

I would still expect that we would be able to deliver modest dividend increases as we make our way through the meatiest part of the CapEx rate-based growth plan, primarily in transmission in Pennsylvania and environmental investments in Kentucky.

As you can see on our five-year CapEx slide that is in the deck, those really start to trail off after the '13, '14, '15 type timeframe and that would provide more flexibility starting in '16 and beyond, as it relates to the dividends.

Julien Dumoulin-Smith, UBS.

First quick question here, and I apologize, what are the projected new average share counts, if you will, especially for '13 here, has that changed?

I imagine it has obviously.

Julian, this is Paul.

There is a -- right in the front of my comments in the deck on slide 9, we go from 615 million weighted average for '13 to 665 million.

2014 is unchanged, 670 million full forecast, 670 million revised.

For 2015, the original was 680 million shares and now it is down to 670 million shares.

Really after you get the full, weighted-average affects from the forward that is settled in Q2, there is no change in the share count going forward.

I presume the '15 change was just because of lower equity issuance comments earlier?

That is correct.

That is the cumulative effect of basically 300 million in lower issuances, 100 million each of '13, '14 and '15.

Great.

Second question here on RIO, you alluded to a potential fast track.

Is there the potential for the individual utilities to get fast tracked, or would this be an all or nothing kind of thing?

It would be the individual D&Os would each of the opportunity to be fast tracked, so conceivably, and hopefully, we can have all for of the D&Os fast tracked.

Moving back to the Supply segment for a quick second.

You alluded to your fundamental view on upside, but obviously dark spreads have really improved here.

What is your view on coal?

Obviously, you haven't locked in too much from what I can tell.

How do you think about those pricing trends from here?

Sure, Dave do want to take a shot at that?

I would say, overall, if I look at where the coal market has been, it has been relatively soft here in the short term.

I would expect with the retirements, it's going to continue to be somewhat challenged.

So, we have not taken a lot of steps to hedge forward beyond '14.

We're still pretty heavily hedged in '13 and '14.

I think we're waiting to see how things settle out on the forward coal price side.

I wouldn't expect that our forward view on coal markets would have changed that much.

I haven't looked at it lately, but I think we're pretty much in the same ballpark as where we were previously.

In the shortest term, we have seen materially improvements within the quarter from a dispatch perspective on both coal fired and our combined cycle units.

We strove to build that strong performance in Susquehanna, about 20% increase in capacity factors for the coal, and very strong performance from the gas units as well.

Just a little nuance here, we talk about the '14 being the trough.

Is that really based on your market view or your fundamental view?

Right now because we are well over 60% hedged in 2014, so it is a combination in '14 of where we are already hedged, as well as our mark-to-market view of where the forwards are today.

When you get out to '15, I think the mark-to-market is less relevant for us and we really begin switching over in '15 to more of a fundamental view.

Still on a mark-to-market basis, you would still be higher in '15 versus '14, correct?

I think it would be closer to flat '14 to '15, if you looked on a mark-to-market, only, basis.

Neel Mitra, Tudor, Pickering.

Question on the UK, in your projections you still use exchange rate of $1.58 per pound.

That is obviously been moving around a little bit.

What are you embedding in '15 and beyond for the exchange rate?

Then, more philosophically, how do you look at hedging that?

From a forward perspective, our internal five-year business plan would use a relatively constant rate of that $1.58.

We are about 90% hedged in 2013 earnings and 60% to 70% hedged on next year's earnings and we started to layer some hedges in the following year.

That is our normal three-year approach to things.

Very similar, again, to the way we hedge the generation from the plants, so I would expect that we continue on that.

I would say that our hedges for both '13 and '14 are slightly ahead of that $1.58 number.

'15 and beyond is a little bit down off of plan, but nothing material at this point.

Moving to the Supply side, the $3 to $5 uplift versus the forwards in '15 and beyond, how do you look at all those new builds that are being announced in Pennsylvania on top of the Marcellus?

What is your view on the probability that those get built and how they would actually impact the forward curve?

I think first off, it will be interesting to see if they clear in the capacity market auction, firstly.

I think that will dictate for some of those units if they move forward or not.

Secondly, when we look at the economics of new builds we still can't get there in terms of the numbers.

You'd have to have a pretty aggressive forward view on a significant recovery in power prices and a pretty good view on capacity prices to really clear what we think would be reasonable hurdle rates, but that is PPL's view.

We're continuing to follow that.

We continue to follow the PTM rule changes that we believe are necessary to make sure that all generation is being bid in on a level playing field, meaning no subsidies.

We're continuing to follow that very closely.

One last quick question.

Has your view on basis changed, is it still flat going out?

We've seen some basis moves this quarter, obviously.

What are your thoughts on that?

For 2013, we've built into our plan about $1 negative basis for our units.

I think we expect that to continue until a lot of the transmission work and PTM gets done, which would really take us out to the 2015 timeframe.

Then we would expect some improvement on a go-forward basis from there.

Paul Ridzon, KeyBanc.

Congratulations, it was a really solid quarter.

Thank you.

I just want to clarify, what drove the accounting change to or from the treasury method?

A combination of the types of securities that we actually ultimately plan to issue to, call it refinance, re-marketing or to do the re-marketing, and the decline in interest rates.

The test that we have use for accounting measurement purposes keep us in a relatively tight band of net present value at cash flows and the combination of the decline in interest rates outright across all tenors plus the tenors we selected, ended up having us breach those bands and not let us defend them and pushed it into having to use [if] converted accounting.

What drove your ability to take $100 million of equity, did you just blocking and tackling and little finer detail work on the credit metrics?

That is correct.

We're getting ready to start our annual business planning process for the year.

Treasury and business planning team looked at the numbers and we felt good about our ability to be able to remain strong FFO metrics and be able to accomplish the growth plan without the equity.

As we have been telling you guys for at least a couple of years, we are very, not just committed to that, but incented to try to reduce that because we don't think that the share price reflects full fundamental value with the generation.

Again, every time we were out needing to issue shares with that value not reflected, it was diluting the value that we think will show up for the current share base.

So, we've been doing every thing we can to try to whittle that issuance down.

We started at the $300 million, moved to $100 million and now we have been able to eliminated in full.

Was it a change in the fundamental outlook?

Did you see FFO improving, or was it a combination of things?

No, it is just our ability to manage other operating cash flow line items to be able to accomplish similar object is in FFO.

Lastly, any update on whether you consider the western assets still to be core?

As we've said in the past, we don't comment on those types of activities, so we won't start today.

Steven Fleishman, Wolfe Research.

Just a question, first a detailed question on Supply.

It looked like your expected generation in '13 is down like 1.3 million megawatt hours versus year-end plan for base load?

Yes, that's correct.

What is driving that?

Primarily a couple of forced outages, which were minor, but the primary driver is the transmission construction activity and economics that pushed a couple of our coal plants off line a little bit more than we expected in the first quarter.

That is the difference.

Okay, so that already happened in the first quarter?

That is correct.

Yes.

With respect to -- every call you guys did a lot of option hedging --

We have in the past.

generally, in your collars.

Yes.

Is that, did prices move enough that you are --?

It doesn't look like your hedge prices really moved.

Is that because prices did not move enough within the collars, or they did move and it just gets averaged rounded out?

I think it is really probably combination of both depending upon when we put those collars in place, Steve.

Yes, I think generally speaking, that is the case.

I know you can't comment on the Montana assets directly, but in the update on the equity funds plans at you give today, does that incorporate any view of potential strategic actions there?

Or is that just status quo as you are?

That is status quo as we are.

That is just really fine tuning our financing plan, looking to be as effective and efficient on the balance sheet as we possibly can.

So, just try to be proactive and it is not embedded anything new on the strategic front into those forward numbers.

Then one last quick question.

The view that RPM is going to be down, is that just, could you just give a little more color why you think that is the case?

Is it new generation, MISO generation, what are the drivers?

I think there is probably multiple drivers, but think the ones that I can tick off my head, and then Dave can comment, would be probably lower demand profile than we had previously expected, overall, a little bit more supply coming in the stack, and possibly a little less retirements in that timeframe.

I think those would be the drivers and DSM continues to be a factor as we get to the saturation point probably here in this next auction, but I think it is still a factor in this auction.

Those would be the drivers.

Plus, we would expect some participation from price responsive demand recently approved by Burke.

For modeling purposes here, we are assuming a range of somewhere between $136 and $148.

Michael Lapides, Goldman Sachs.

This may be for Paul, some broader questions regarding balance sheet capitalization ratios and cash flows.

Once the converts convert, meaning the actual transactions happen, so the second one coming in May of 2014.

What do you think that does to your debt to cap, meaning right now your total debt to cap is around 60%?

How do think about what you're capitalization ratios will be once the conversions play out?

Michael, I don't focus as much on capitalization at Corp.

Clearly, from the perspective of the cap ratios at the utilities, the 65% debts we have in the UK, the 51% to 52% in PA, the little over 53% in Kentucky in both op cos.

None of those get changed by the decision on the share issuance or by the converts converting.

When additional cash shows up, we will, as we said in the past, the fees off a bit of debt that is maturing at supply, but a substantial amount of that will go into EU and into LKE for the two operating companies in Kentucky to be able to finance the growth plans.

From a corporate FFO metric, change perspective if you will, I don't see that -- we've got the equity credit really upfront in those.

This is just now fully showing up on the GAAP balance sheet.

I don't think, sorry if I'm not answering your question perfectly, but we don't really think about it from a capitalization perspective at Corp.

We concern ourselves most with the FFO metrics at the subsidiary and then FFO consolidated obviously for SMP.

Got it.

When we think longer term, meaning past 2014, like if I look at your CapEx slide in your earnings deck today, CapEx in '15 is $1 billion less than 2013?

Right.

Your depreciation, I assume, will start making a sizable step up after 2014, I mean you will be putting a lot of this CapEx in the service and therefore D&A will be up.

So, let's say the swing is $1.2 billion to $1.5 billion range.

That is a good amount of incremental capital that you're currently deploying that will now turn into cash flow available to you.

How do you think about sources and uses of that cash flow over time really beginning in 2015, 2016 timeframe?

That goes back to the comments that I made about the dividend question earlier, and that Bill made about the dividend question earlier.

That, and your relative order of magnitude of the math is correct, we have really both of the sets of domestic utilities going from huge capital consumers to -- at least in the instance of Kentucky, Greg will still be consuming capital in his distribution rate base reliability plan.

They go from relatively large consumers to either being flat or positive from a cash flow perspective.

That is what creates that capability to look at the dividends more, not aggressively, but more, they call it more constructively, increased it at a higher rate than we're likely going to be able to over the next several years.

That is really were that cash flow starts to show up after we get through the meatiest part of the CapEx growth plan.

That's a sizable swing in cash, $1 billion plus swing.

Are you also planning significant deleveraging either at the Hold Co or at Supply using some of that for incremental free cash flow?

I think it depends on what we see as our investment alternatives at that point in the regulated utilities.

I guess we see a capability, potentially in the future, to have additional maybe calls on the capital, but to the extent that it is a surplus to the needs I would expect the capability to a combination of deleveraging and stock buybacks to be able to support the balance sheet and the targeted credit metrics that we have today.

If we can find things to invest in that provide a greater return than returning the capital, or shrinking the balance sheet a bit, we will do that.

If not, we will return it either through bigger dividend increases are buybacks.

Meaning come 2015, 2016 you could actually be in a position to shrink the equity component of the balance sheet?

It is really in the '16 type timeframe and forward, correct.

Greg Gordon, ISI.

When I look at slide 7 of your handout, you guys posted a pretty strong weather normalized sales growth in Kentucky and not so good in Pennsylvania.

When I compare that to your commentary from the fourth-quarter call, it looks like your ahead of what you would have expected in Kentucky but on plan in Pennsylvania.

Because you said in the fourth-quarter call, you're looking at a decrease of about 0.5% year over year on a volume basis in Pennsylvania, growth of a little under 1% in Kentucky.

Can you go through in more granular detail what is driving out performance or under performance versus your plan in each segment?

We will start with Vic in Kentucky to provide a little bit of commentary.

Kentucky, you see the residential up 5.2%, weather normalized.

I think economic conditions in Kentucky are improving slowly but surely.

Our unemployment is down.

On new housing starts, '12 over '11, were up 16%.

I am pleased to say in the first quarter of 2013 they are up 12%.

We're starting to see better housing starts, housing prices are going up, unemployment is coming down.

There might even be some spillover from our industrial growth, because we're getting more reinvestment now in the Commonwealth.

You may have heard Toyota is going to put some more money in there.

General Electric has just opened another line.

Ford is running at full capacity now.

There is spinoffs from the industrial as well.

There are jobs.

There are ancillary businesses that are deploying.

I would say the fourth quarter, and now the first quarter, have just been very good to us.

We have some reasonable optimism that the economy in Kentucky is progressing nicely.

I should point out though that in the past Kentucky hasn't come down as quickly as the rest of the nation and generally it does not go up.

It is a little more steady as you go.

I suspect we're seeing that here now, coming back slowly but steadily particularly on the industrial side.

We are getting some benefits now from unemployment decreases and new housing starts on the residential side.

Not to debate you hear live, but what you're showing here in the first quarter is not slow and steady, it is a double your expectation for the year?

I will have a better view on this after the third quarter if it continues, Greg.

How does that sound?

Fair enough, thank you.

Greg, any comments on Pennsylvania?

Yes, just on Pennsylvania on the residential side, we are, I'd say, outperforming.

What we are seeing, really the first time in a fairly long time, average use for customers actually increased.

Some nice trends on a growth there.

On the small C&I and industrial side, I think the economy is still hurting us there and that is why we are a little bit under plan on those areas.

You were down 7.8% on the first quarter on industrial.

Is that like one big customer that went out, or is it a series of things?

Is that a lumpy item or is that indicative of a trend?

I guess similar to what Vic said, we're going to be taking a look at that over the next quarter.

I don't think that will continue, but we will have to see.

Raymond Leung, Goldman Sachs.

Greg, actually asked my question on the sales growth.

Could we talk a little bit about your financing plans?

You show a pretty large negative free cash.

Can you elaborate on your thoughts on the re-marketing at equity units and how you will fill in the blanks on the financing plans?

Ray, when you are looking at the chart I think you are referring to in the cash flow chart in the back.

We have got $1.150 billion that shows up in the second quarter to early third quarter as new cash flow.

We have got the equity forward that settled in the second quarter, which was originally $250 million.

We actually net settled about $50 million of that to handle the DRIP in the management comp that actually went out in the first quarter.

That shows up as new cash flow.

Then, the retained earnings from the Company net is where the equity starts and the cash comes from to finance the utilities.

Any thoughts on debt financings?

You had the re-marketing, we know.

I know you did hybrid earlier this year.

What are you thinking for the balance to cover up the shortfall?

I would expect we would be doing significant number of first mortgage bonds at LG&E, at KU.

We've got one planned for Greg's team as well at Electric Utilities.

Again, as they ratably grow their balance sheet, they will be financing at those 53% and 51%, 51.5% equity ratios.

The balance comes from new debt issuance.

I think we have one issuance planned later in the year for Supply at like $300 million of $400 million, but that would be it other than, again, all of that cash showing up mid year from the converts converting and this equity-forward settlement that happened in Q2.

On terms of supply financing, that is somewhat new.

Is that impartial refinancing of the $750 million maturity?

A big chunk of that will actually get absorbed by or defused off by the $1.150 billion that shows up.

The issuance is right around, I think, $300 million for later this year in Supply.

It is not all that significant.

Paul Patterson, Glenrock Associates.

A lot of questions have been answered, but just back to the RPM.

I guess the MOPR decision on the revisions, you don't expect that one or the other at this point in time to have an impact on the auction results, is that right?

Yes, Paul, we are not expecting that as every day ticks by it is less likely.

The range, the sensitivity range I mentioned earlier is not inclusive of that outcome.

If it were to happen today, it still wouldn't be able to impacted it.

Is that the way to think about it?

Or are you hearing more from -- I'm just trying to get some sense on that?

I think you have a right.

In terms of, there was a mention of price responsive demand having an impact on the RPM auction.

I was wondering, I think about it as more of an energy product, if I'm looking at the same think you are.

Why does it have an impact on the RPM auctions if you could help me out with that?

It's capped for the BRA, but we think that it would actually lower the demand in the auction, which would tend to lower the clearing price.

It would have an effect on the demand.

You think the price response demand will lower the demand in terms of the RR curve, or how should we think of that?

Maybe I will follow up off-line.

Yes, why don't do we do that.

It is pretty technical type of question.

Let's follow up.

Do you see price response demand, since it is an energy thing, do you see that this year versus last year?

Any changes you see with respect to that?

As far as you outlook or expectation?

Not really, not from last year to this year, Paul.

Ashar Khan, Visium.

I just wanted to say congratulations, Paul, I really like this move of getting the dilution out of the way and clearing it for the stockholders.

I think that provides a good trajectory for growth going forward.

I think that's a brilliant move, thanks.

Thanks, Ashar.

Thank you.

Michael Goldenberg, Luminous Management.

My questions have been asked and answered, thank you.

We have no further questions.

Thanks, operator, and thanks, everyone, for joining us on the call.

We will talk to you on the second quarter earnings call.

Thanks.

This concludes today's conference call.

You may now disconnect.