賓州電力 (PPL) 2013 Q2 法說會逐字稿

Good morning, and welcome to the PPL Corporation second-quarter earnings conference call.

All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Joe Bergstein, Vice President Investor Relations.

Please go ahead.

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 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, President and CEO.

Thank you, Joe.

Good morning, everyone.

Thanks for joining us on the call today.

As is our normal practice, joining me on today's call is Paul Farr, PPL's Executive Vice President and Chief Financial Officer, as well as the Presidents of our four business segments.

Following my overview of remarks on earnings and operations, Paul will review the financial results in more detail.

Today, we are reporting strong earnings for both the second quarter and through the first six months of the year.

Our quarter-to-date and year-to-date earnings from ongoing operations were driven by strong performance from our regulated utility businesses in Kentucky, Pennsylvania, and United Kingdom.

Turning to slide 4, second-quarter reported earnings per share were $0.63, up from $0.46 in the same quarter of 2012.

Earnings from ongoing operations for the quarter were $0.49 per share, compared with $0.51 per share in the same period last year.

Earnings from ongoing operations on a per-share basis are slightly lower than a year ago because of the accelerated share recognition of the 2010 and 2011 equity units.

That is a topic we discussed in detail on our last quarterly call.

For the first half of the year, our reported earnings were $1.28 per share, compared with $1.39 per share in the first six months of 2012.

Ongoing earnings were $1.20 per share for the first half of the year versus $1.21 per share last year.

Our strong performance has enabled us to increase the midpoint of our 2013 ongoing earnings forecast to $2.32 per share from the previous midpoint of $2.27 per share.

On slide 5, we provided updated forecasts for each of our segments.

Specifically, we're increasing the earnings forecast from our UK regulated segment to $1.28 per share, based on its strong performance year to date.

We are slightly decreasing the supply segment forecast to $0.34 per share due to various items, including added schedules for some of the generating stations.

Let's move to slide 6 for a brief operational overview.

As we explained on our July 1 analyst call, WPD has submitted eight-year business plans for our four electric distribution networks in England and Wales, as part of the RIIO process.

In this process, we're expecting fast-track treatment, which would provide us a number of benefits, including early certainty regarding the outcome and additional revenue equivalent to 2.5% of total annual baseline expenditures.

The regulator, OFGEM, plans to make an initial determination on which companies could be fast tracked in November.

It is scheduled to publish a final determination on the fast-track companies in March of 2014.

You can follow developments regarding this process on the Investor section of our website.

In an important development in Pennsylvania, the state Public Utility Commission approved PPL Electric Utility's request for accelerated recovery of certain distribution system reliability improvements.

The Pennsylvania PUC had approved the Company's five-year $700-million long-term infrastructure improvement plan in January.

The cost recovery mechanism will be adjusted quarterly, providing more timely recovery of necessary system improvement expenditures.

Construction work is continuing on the Susquehanna-Roseland transmission line.

We expect to complete the line and be in service by the summer of 2015.

Also on the Pennsylvania transmission front, we're increasing our capital spending plan for our Northeast-Pocono reliability project.

The increased cost is primarily related to higher material and labor costs and additional scope due to revised construction standards.

Moving to slide 7, you will see that weather-normalized second-quarter sales in Pennsylvania increased by about 1.5% over the same period a year ago.

The Pennsylvania increase was driven by a 4.5% increase in industrial sales, due to increased activity and customer billing adjustments from the first quarter.

Commercial sales in Pennsylvania were flat in the second quarter and residential sales increased by 1.3%.

In Kentucky, weather-normalized industrial sales were up 2.8% because of industrial customer expansions and increased production levels at certain of our customers' facilities.

There were decreases, however, of 3.8% in the residential category and 5.5% among commercial customers, influenced by regional economic conditions.

On a 12-month trailing basis, weather-normalized sales are up about 0.5% in Kentucky and down just slightly in Pennsylvania.

Turning to slide 8, we've completed outages on both units at the Susquehanna plant, as we address turbine issues that have affected plant operations over the past two years.

The units are currently running at normal levels.

We continue to monitor and evaluate the turbine performance data since our outages were completed.

We have not observed any blade cracking thus far.

Turning to the Western fleet, as you may have seen, we issued an 8-K in July providing information on repairs that we are making to the Colstrip 4 generator in Montana.

While we expect repairs to take at least six months, the estimated total pretax economic impact is between $5 million and $10 million and will not be material to the Company.

In summary, we are pleased with our year-to-date results and feel good about our ability to deliver strong results for the full year.

We're effectively managing major construction projects in Kentucky and Pennsylvania, and have completed the Rainbow hydroelectric expansion project in Montana.

We have submitted excellent eight-year business plans in the UK, with a goal of receiving fast-track treatment under RIIO.

And, we're continuing to earn very high marks for customer service.

In the past quarter, our competitive energy supplier, PPL EnergyPlus and our Pennsylvania delivery company, each earned JD Power Awards for customer satisfaction.

In total, PPL Companies in Pennsylvania and Kentucky have earned 36 JD Power Awards, far more than any other company in our sector.

Our UK electric distribution networks hold four of the top five rankings in the country for quality of customer service.

Our proven ability to execute on our plans and deliver superior service to our customers, gives us every reason to be optimistic about our prospects for growing value for our shareowners.

I look forward to your questions.

Now, I'm going to turn the call over to Paul Farr.

Paul?

Thanks, Bill.

Good morning, everyone.

Let's move to slide 9. PPL second-quarter earnings from ongoing operations increased over last year, driven by improved earnings at all three regulated segments.

The supply segment experienced an earnings decline, as expected, primarily due to lower hedged wholesale power prices.

Per-share earnings from ongoing operations declined slightly in the second quarter, due to more than 80 million additional shares being included in our share count year over year, which equated to an impact of $0.04 per share for the period.

On the first-quarter call, we discussed at length the change to if-converted accounting for the shares to be issued under the convert securities.

Let's start the segment review with Kentucky results on slide 10.

Kentucky earned $0.08 per share in the second quarter, a $0.01 increase compared to last year.

This increase was driven primarily by higher margins, due to new base rates that went into effect January 1 of this year, partially offset by lower volumes driven by more temperate weather this year.

Moving to slide 11, our UK regulated segment earned $0.35 per share in the second quarter, a $0.04 increase over last year.

This increase was due to higher utility revenues, primarily driven by the April 1, 2013, price increase and higher volumes due to weather.

These positive earnings drivers were partially offset by higher depreciation, higher income taxes and other expense, which is primarily driven by exchange rates, and dilution of $0.03 per share.

Turning to slide 12, our Pennsylvania regulated segment earned $0.07 per share in the quarter, a $0.02 increase compared to last year.

This increase was the result of -- higher delivery margins, primarily due to new rates that went into effect January 1 this year; and increased transmission investment; lower O&M; and dilution of $0.01 per share.

Moving now to slide 13, our supply segment earned $0.01 per share in the second quarter, a decrease of $0.07 compared to last year.

This decrease was primarily the net result of -- lower Eastern Energy margins, driven by lower baseload energy prices, partially offset by higher capacity prices and increased baseload unit availability; lower Western Energy margins, primarily due to lower wholesale energy prices; and higher depreciation.

These negative drivers were partially offset by lower O&M at Susquehanna and lower outage costs at the Eastern fossil and hydroelectric plants.

That completes the more detailed financial review.

I will now turn the call back over to Bill for the Q&A period.

Okay.

Operator, we're ready for the questions.

(Operator Instructions)

Dan Eggers, Credit Suisse

First question, when I look at the weather-normalized load trends, obviously, there were some signs of good and not so good in the second quarter.

But the year trends are not as bad as we've seen elsewhere.

When you dig further into the data and you look at usage trends, are you seeing the structural improvements once you parse away weather issues?

Where do you see bright spots and concerns right now?

Sure.

I would say, Dan, overall it is a slightly better situation than we have probably seen over the last few years.

So, there is some improvement when you parse through all the data.

Having said that, I think our long-term view is still that growth would be somewhat less than 1% on a longer term run rate, based on some of the energy efficiency programs that are out there and just customer usage, as we have seen it through the past cycles -- over the past five years.

I can ask the folks to comment more specifically and maybe provide a little bit more color.

But Vic, why don't you talk a little bit about Kentucky and what you're seeing there?

Our industrial load continues to grow and new investment is being made.

As you can tell from the statistics, our industrial load is growing nicely.

Where we're seeing some issues is in the commercial side, which really is being affected by the economy.

I do think there's some efficiency gains in our residential customers.

But I have to tell you that our housing starts are up materially year-over-year, 2011 -- 2011 was about 16%.

Year-to-date, we're probably 18% higher than we were last year.

So, we're starting to see a little bit of momentum now, probably driven by own employment, which is down.

So I think by and large, we are okay.

It is not robust, but I think we're moving smartly ahead and driven by our industrial load, frankly.

Greg?

In Pennsylvania, I would say that year-to-year -- this year compared to last year will probably be almost flat.

Then our long-term, we're looking at about a 0.5% CAGR.

So we don't see too much of a big opportunity for low growth in our area.

What we're seeing by rate class is that we are starting to see some growth in the residential market.

I believe that is due to starting construction, kind of like what Vic said.

Our small C&I has been relatively flat.

The large C&I is down year-to-year about 1%.

Great.

Thank you.

Greg, I guess, if we could -- maybe Bill, turn the conversation to supply.

With power prices down again this quarter with RPM results, you have pretty disappointing, out in 2016, 2017.

Are you guys rethinking where you expect trough to come out from an earnings perspective on supply?

Where you think that business is going to bottom out given what we know today?

Sure.

Our focus remains as it has been, which is to maintain a slightly positive to flat earnings profile for the supply business, meaning, the target is to not allow to go negative from an EPS perspective.

That has not changed.

We certainly understand the challenges, the competitive generation sector faces and the expectations on declining profitability.

Because of the strong growth in the utility businesses, we're obviously able to offset a lot of the declines that we've seen in the supply.

We still believe that the 2014, 2015 time period is likely to be the trough, assuming that market conditions don't worsen.

The Management team, as you know, has had a clear track record.

In our view of insightful analysis of those challenges, we have taken very decisive actions to create and defend shareowner value over the years.

We do think there is inherent value in the supply business.

We're very focused on our shareholders getting the benefit of that value.

All right.

I guess, one last question.

It is on the UK tax rates coming back end.

Is there -- with this court decision, is there something more structural, where it's going to run at a lower repatriated rate than we would have expected?

Or is this, unique to the period and we'll catch up?

Are you talking about the windfall profits tax, Dan?

Yes.

Yes.

No, that came through as a special item credit in the period and has no effect on ongoing re-patriated tax expense.

Great.

Thank you guys.

Thanks, Dan.

Kit Konolige, BGC.

Just to follow a little, at the supply business.

I wonder if you could give us some color on what you're guys thoughts of the capacity auction in May.

What they saw as drivers there.

If there are any structural things that you would like to see changed, et cetera.

Sure.

I will comment first.

Then ask Dave DeCampli to provide a little bit more color.

Overall, it came out a little lower than we had expected.

If you recall, on our last earnings call, we indicated that we expected it to come in slightly lower than the previous auction.

It came in a little lower than that.

Fundamentally, pretty much in line with our expectations.

Again, just a little bit lower.

As we parse through the results from the last auction, Dave probably has some comments he would like to make on what our insights were there.

Dave?

Yes.

Thanks, Bill.

Kit, I would say that in the end, when we look back, we would say the pricing that came out of the auction was rational, given flat demand growth and increases in supply from both imports and new generation that were a little bit of a surprise.

Going forward, it is just difficult for us to model, since we have such limited transparency in this process with the issues like the imports without firm transmission and MOPR assuming to continually be changing.

Absent anything else, to move capacity prices, we expect they may be somewhere in the same general area the next auction around.

We would like to see some progress in PGM's intent or plans to reform their limits and speculative arbitrage between the BRA and the incremental auctions as well.

We are hoping and supporting, in the stakeholder process, some of these changes as we go forward.

Okay.

Thanks for that.

One other question on the RIIO process.

It sounds like you are expecting that all four of your units would get fast-track treatment.

Is that a fair read of your comments?

Or would you not want to go that far?

No, I think that is correct, Kit.

When we look at the performance of those businesses in the UK, they are clearly the superior performers in that structure.

We think, if anyone deserves to be fast-tracked, it would be our four distribution Companies.

Very good.

Thank you.

You're welcome.

Brian Chin, Merrill Lynch.

A follow-up question on the fast-track.

For the draft determination in November, how final is this determination?

Is there any sort of precedent for OFGEM changing its view from draft to final and prior to liberations?

In the event, we don't get fast-track status in the draft versions, what processes can we follow to help change that draft view towards a better finalized view?

Sure, I will ask Rick Klingensmith, President of our Global Business to respond to that question.

Good morning, Brian.

The initial determination that auction will make in the November time frame in identifying the potential companies that could be fast-tracked is one that they will then follow through with that process.

So, that if you do not make the list of a potential to be fast-tracked in that November consultation, then there is not a chance for you to revise your business plan.

Then try to influence OFGEM in a way to get your Company on that list to be fast-tracked.

They will identify those business plans that they believe are well justified and will continue through their evaluations to the March timeframe where they will then either accept all of the companies that they had initially determined could be fast-tracked or even narrow that list down a bit when their final determination comes out in March.

Understood.

Very clear.

Then if I could just ask one separate question on supply.

We have seen some of your peers talk about how the ARR and FTR issues -- how pricing of that has been dislocated from realtime congestion issues.

Are you guys seeing any similar issues this year on ARR and FTR dislocations versus congestion?

Dave, why don't you take that question?

Sure.

We have seen that approaching, Brian.

From a strategy point of view, we have significantly reduced our utilization of FTR's as a hedge because of the lack of any real resolution around the whole under funding issues that's going on with those.

So, we backed all of that into our plan.

For us, that is all delivering in accordance to plan this year.

So, it is disappointing.

We certainly hope that PGM would come up with a suitable solution, so we can resume, in earnest, the use of these tools as an effective way to mitigate basis risk.

Understood.

Thank you.

You're welcome.

Paul Patterson, Glenrock.

Just some quick things.

First of all -- I'm sorry.

I missed, in Kentucky, what the environmental -- the economic conditions were that led to the decrease in commercial and residential?

Go ahead, Vic.

This is Vic Staffieri.

We have -- that's just the natural economy.

We have not seen a come back in our commercial.

Also, I think the impact of some efficiency gains in our hospitals and educational institutions.

That is where we're seeing some of the runoff in our commercial.

It is really pure economics.

I think there is some efficiencies going on in the commercial sector.

We have gotten, as I said before, progress in our industrial sector.

We are getting reinvestment by Toyota, by Ford, by General Electric.

That's helping our employment picture, it should spillover eventually to our residential and ultimately our commercial customers.

But it is going to take some time.

Okay.

So, the economy sounds like it is pretty good.

It just sounds like for some reason, we're just seeing decreases in that area that are sort of, because, I guess, efficiency?

Is that the way to think about it?

I would say there's a lot of efficiency going on.

When you look at our largest commercial customers, they're doing a pretty good job in getting more efficient, making the investments that make sense.

You can see it in our hospitals.

As I said, you see it in some of our educational institutions.

Then, of course, you're seeing the economic impact -- spending, retail spending on some of the malls and those kind of commercial customers.

But, Kentucky's economy never really busted.

It never really boomed.

So, we've been steady as you go.

Housing starts, as I indicated earlier, are up.

They've been up for two years now, after a real period of lull.

So I have some reason -- some cautious optimism that we're on the path to recovery, but it is not as robust as, obviously, as we would like.

Okay.

Then on Slide 21, it looks to me like the projected regulated rate base growth is up a couple -- 7.9% versus 7.7%.

Just anything in particular there?

Or just sort of what is going on?

Sure.

I think Paul has the detail on that.

Yes.

Paul, we updated that slide to reflect RAV pursuant to the RIIO filing that we did on July 1. So, you will see the numbers in green on the bottom -- a little bit more robust.

That is really effectively the only change that we have made.

We're still in the throes of our normal business planning process.

We would expect -- I don't expect it would be in any material changes, but modest changes as we get through that.

That will be in Q3 or on the year end call.

Okay.

Then the UK has had some headlines not really associated with distribution, at least as I read it.

But more or less associated with the wholesale market and issues of transparency and issues of cost.

There was a report from Parliament and what have you.

Is there any concern that might, in some way, spillover into the distribution regulatory setup, if you follow me?

Is there -- I'm sure you guys are familiar with it.

Just any thoughts about -- how that may or may not relate to you guys?

We are familiar with it.

Thus far, we don't see any risk of a spillover.

I think the distribution side is very transparent with the process that the UK regulator has there.

Thus far, that has not even been raised in any publications or any discussions we've seen thus far.

So, I don't think it will have an impact at all.

Okay.

Great.

Then just finally, trading?

What was the numbers for this year?

What was the contribution this year -- this quarter -- Six-months?

Year-to-date and for the quarter?

Just any outlook, with the accept to that?

I do not have a the year-to-date figure in front of me, but our plan for this year is about $50 million in total, which is similar to last year's plan.

Okay.

Thanks so much.

You're welcome.

Neel Mitra, Tudor, Pickering, Holt

With the disc mechanism now implemented in Pennsylvania, roughly what percentage of your distribution CapEx now is covered through a track or you get a contemporaneous recovery with?

Sure.

Let me ask Greg Dudkin to comment on that.

Yes.

So, I would say it is probably around 30% to 40%.

So, the disco's focused on reliability related investments.

So it's in the 30% to 40% range.

Okay.

Then second, on Kentucky, can you comment on the supply/demand situation post 2015, when the coal plants retire from MATS?

Is the Cane Run CCGT enough to fulfill the load?

Or would you envision building new plants?

Or possibly acquiring some of the coal plants that have come up for sale in your service territory?

Let me comment on that.

You may recall, we issued an RFP for generation supply.

That begins in about 2017, 2018.

We're in the process of evaluating -- we had about 30 bids come in, including from Western Kentucky, Big Rivers.

We are in the process of evaluating those things.

It appears to us that we begin to show its efficiency in -- about 2018.

So, we'll put something in place to meet those requirements.

As I say, we are evaluating the RFP -- the results from the RFP -- against a self build option as well.

But that analysis is not complete.

We have a little time before we have to do that.

We will be in a position to talk about that by the end of the year.

So, you would foresee a needed capacity coming online in 2018 as the first year --

I'm sorry.

Could you repeat that?

Sure.

Is 2018 the first year that you would need the additional capacity after Cane Run?

Or would you need it prior to that?

About 2018 is when we would begin to show a deficiency.

Also VAR -- we have a reserve margin of about 15%.

That is where we begin to show a deficiency in the reserve margin.

That is the period of time, we're focusing on right now.

Great.

Then, one last question on supply.

How are you looking at hedging longer term now that we are seeing some of the Marcellus gas dislocate versus Henry Hub.

Obviously that sets the price of power for your Pennsylvania plants.

Are you looking to hedge a little farther out or is it just too early to tell?

I would say overall our hedging program generally speaking has not changed.

We have been, as you know, very aggressive in hedging the output, which has resulted in significant benefits to shareowners.

As we look at our fundamental analysis, that guides us as to how aggressively we want to hedge or not hedge.

Dave, do you want to provide any other comments on our hedging?

Yes.

I'd just supplement, Bill, that we have, at this point no plans to change the percentage targets we have put out in the past for future years, starting with 2015, in this case.

So, really, no change intended at this point in time.

I think to some degree, we have constraints with liquidity in the market.

So, even if we wanted to hedge three to five years out, let's say, the liquidity just doesn't exist to allow us to effectively do that.

Okay, great.

Thank you very much.

Greg Gordon, ISI Group.

Most of my questions have actually been answered.

But I wanted to circle back to a comment that you made about being focused on the idea that there is value in your generation fleet.

And you're trying make sure that's preserved so that your shareholders benefit from it.

You have clearly done that through hedging well.

But, do you think that your fleet is scaled?

Do you think that one of the ways that you might preserve and create value in the long run would be to seek to become a more scaled entity that would benefit more from an ultimate recovery of power markets?

Or the flip side being, at least capitalize the benefits of being able to have more sustained reduced costs?

Sure.

A fair question.

As I have mentioned on previous calls, in supply, our focus has been and will continue to be on an aggressively controlling, both our O&M and capital costs.

We will continue to evaluate other options that could increase value.

But that is really nothing new in terms of our approach and how we have thought about strategic options over the years.

So I think we continue to explore options for all the businesses that would maximize value.

Thank you.

Michael Lapides, Goldman Sachs.

A couple of questions, a little bit unrelated.

First, there is been some discussion out of DC regarding tax code related changes.

One of the things that always comes up is the potential impact -- the potential treatment of offshore cash that gets repatriated.

Can you just give high-level comments about how much cash you maintain offshore?

How much of it you could actually bring back to the US if that tax code were -- if there was a tax code change versus what you need to keep offshore to be able to fund CapEx in the UK?

Sure.

Paul?

Yes.

There's not -- we don't -- given the growth and investment in the UK, don't maintain significant offshore cash balances.

We've kind of said it in the past that, if we find ourselves in a situation where we have got cash there in excess of our targeted cap structures and in excess of planned reinvestment, we sweep that cash back to the states, irrespective of tax outcomes.

Given the way that we very efficiently tax structured the acquisitions, there is not any material US incremental tax that comes with those repatriations for the intermediate term.

At times, if you look at the P&L and you would see cash balances there, it is because we do benchmark fundraising.

So, we'll, over time, eat into our liquidity facilities, do a benchmark transaction and then use that to fund a year or now multi-year set of investment options there.

So there is not room in the cap structure to lever up.

There is not significant excess cash sitting on the ground.

Got it.

A follow-up for you Paul.

If you just look at the balance sheet in your earnings release, the balance of short-term debt at the end of the second quarter is almost roughly 80% to 90% higher than it was at the end of 2012.

What is the plan?

Transactions, a GBP400 million transactions later this year in the UK.

Then we've got $250 million to $300 million FNBs at both KU and LG&E

We did a transaction in July as well.

When you look at the quarter-end statements, we did a FNB in electric utilities as well.

The utilities, much like the comment that I made about the UK, where we have a liquidity facility that we use and eat into and then replace that with longer term debt balances.

We cycle through that.

Especially -- you'll see bigger movements with the big construction programs than you would see on a normal run rate where you've only got maintenance CapEx kind of a cycle.

Nothing concerning on that front at all.

You will see some more capital markets debt transactions as we make our way through the balance of the year.

Got it.

Then last item.

You all talked in the prepared comments about an increase in the Pocono's transmission project.

How big of an increase?

What is the driver, and what years does that impact?

Sure.

Let me ask Greg Dudkin to respond to that.

Yes.

So the increase went from $200 million to $335 million.

The three categories were material and labor.

Combining those, that was about $45 million of the change.

The scope -- when I say scope, when we put together the original investment, we have not finalized on the pad.

So, it's finalizing on the pad, increase right away.

We changed the construction standards, so the remainder is in that area.

This project, basically, is scheduled over the next few years, all the way through to 2017.

The increase is basically throughout those years.

Got it.

I was just curious because when I was looking at the CapEx slide, I think it was Page 20.

I didn't really see much of a change in front of that red bar in Pennsylvania transmissions.

So I didn't know if you were cutting somewhere else.

Yes.

No, there is no cuts.

I made the comment earlier that we hadn't fully updated that to reflect the business planning changes, which the increase in this transmission project would fall into.

So you'd see those updates from us later in the year.

Got it.

Thanks, guys.

Much appreciated.

You're welcome.

Julien Dumoulin-Smith, UBS.

Bill, first question here.

We've talked about it a little bit, but on the Marcellus and gas basis, obviously that has kind of taken an acceleration of late.

What are you seeing just with respect to PGM West pricing?

Obviously, your cousins to the East were fairly good in the quarter.

But for yourselves, how are you seeing this play out given spot prices as low as they are on gas?

I think overall, I wouldn't say there's a significant change from our plan.

Of course, we came into the year very highly hedged.

But overall, we understand the impact.

We're following the basis very closely.

It has been slightly negative thus far, which, again, was consistent with our thought coming into the year.

Dave, I don't know if you have any further comments?

Julien, we expect that to persist into the future and with our enveloping that into our plans for 2014 and beyond.

Essentially, we are accepting reality here and just incorporating into our forward going plan.

Then secondly, could you talk a little bit about the change in UK guidance?

I suppose pushing it back around after a couple of different changes here, if you will?

Sure.

Rick, why don't you comment?

Sure.

Good morning, Julien.

We've experienced a number of small favorable variance in a number of our income statement line items, like interest expense, and depreciation, and maintenance expense.

With probably our largest variance in revenue.

That's where we do favorable price in volume variances, including weather, as Paul had mentioned in his remarks earlier.

So, our revised forecast for the year, incorporates this higher level of revenue that we will see for the remainder of the year in both pricing and the past volume variances that we have realized already on a year-to-date basis.

Interesting.

Would it push it down initially, if you can remind us?

I'm sorry.

The question again, Julien?

Would it push the outlook down if you will, initially?

The outlook that went down was due to the revised share count that we had at the end of Q1.

Yes, at the beginning of the year, it was higher, but the entire change was just due to the reflection of the share difference at the end of Q1.

There was no operational effects that resulted in that difference in forecast at the end of Q1.

Great.

Thanks for clarifying that.

Okay.

You're welcome.

Steven Fleishman, Wolfe Research.

Follow-up on that last question.

Should we think that some of the drivers that raised the 2013 guidance for the UK, would benefit the 2014 guidance you gave as well for the UK?

Or are they more specific to this year, such as weather?

Go ahead, Rick.

Yes.

Steven, good morning.

A big part of the positive variance that we're seeing for this year was weather.

That is probably $0.03 a share that is in our numbers on a year-to-date basis.

That is more of a one-time item because in the UK we may have volume variances within the year, but those get normalized over the long-term.

Some of that will be given back in tariffs in the subsequent year.

At this stage, it is hard to identify all the changes that will take place in our tariff calculation.

So we have not changed our forecast or guidance for 2014 as it relates to the UK regulated segment.

Steve, we set the business plan late in 2012.

Some of the positive things that we have been seeing, we factored into the numbers that we provided in July.

We had the benefit of six-months of experience at that point in time versus when the plan got finalized.

So, some of that was baked in there as well.

That's right because you did raise the 2014 when you did the update in July, if I recall a little bit.

Yes.

Okay.

My other question, this is just a clarification.

Bill, when you talk about the trough in earnings, 2014, 2015.

Are you referring specifically still to just the supply business, or the overall PPL earnings?

I was really speaking to the overall PPL -- consolidated EPS.

Okay.

Which obviously, some of that is driven by the fall-off on the supply earnings.

Right.

Okay.

Thank you.

Anthony Crowdell, Jefferies.

Just two quick housekeeping issues.

On Slide 21, you give the projected regulated rate based growth.

Are those average or year-end totals?

The second thing, I know you talk on a percentage basis, but for your incentive revenues for the UK business, what are you assuming in millions of dollars in 2016, 2017?

Okay.

On the slide, those are year-end numbers.

Rick, why don't you comment on the incentives?

Yes, as we showed on our July 1 presentation, there was an incentive slide that was baked in there that gave a bit more detail.

We have estimated $100 million in incentive revenue that we have earned throughout the rest of this regulatory period.

But given the regulatory lag in how you recover those revenues, those will then slip into 2016, and partially into 2017 for our recovery period.

But that is our forecast for the incentive revenues for that period.

Great.

Thank you.

You're welcome.

(Operator Instructions)

Gregg Orrill, Barclays.

I just wanted to ask about coal transportation costs to your PGM fleet and kind of longer term, what you're seeing in terms of trends there?

How you're addressing it?

On the coal transportation front, for our major rail supplier, we had renegotiated a longer term contract.

I think it was either -- I think it was late the year before last.

That contract goes out still a number of years yet.

In terms of our trend, it is really just following the contract terms as we negotiated it.

I don't know that I have any more color on where the trends are today.

We are happy with the contract.

It is performing pretty much as we expected it to perform.

Thank you.

Sure.

Rajeev Lalwani, Morgan Stanley.

Just a question on the UK operations.

Can you talk about what it takes to get fast-tracked?

What impact having good customer service has on that?

Sure, Rick?

The fast-track in process is one that OFGEM will look at, how its companies performed in the current rate period with regards to what you had promised to deliver.

Promising deliver is the investment plan that had been set forth in this current five-year period, as well as your performance against the regulatory metrics, including customer service and reliability, safety and a number of other items.

So how you have performed is a key factor that goes into the fast-track decision.

The other side of that decision is then providing a well-justified business plan.

A justified business plan that is backed up by cost benefit analysis, technical analysis of what you need to spend over the next eight-year period.

A review of all of your cost basis to ensure that there's levels of efficiency in your cost base.

As well as then having your business plan influenced by a significant stakeholder engagement program.

We have an extensive stakeholder program, where we have had over 4,200 different stakeholders, a number of working groups that have been spread out across our territory to get input from our customers, to get input from our stakeholders with regards as to what do they deem to be most important in the delivery of the service that we provide them.

Then we take that input and include it into the business plan determination and prioritizing our investment that is consistent with our stakeholder views.

So that is an important factor that the regulator will review as well.

It's performance in the current period and a well-justified business plan that we believe then, sets us forth to be fast-tracked through the process.

Thanks, Rick.

Great.

Then just a question on the supply business.

Can you talk about your commitment to infuse equity into supply, just to improve the balance sheet and help pay down some debt?

Particularly in the light of what we have seen in the markets.

Maybe some better opportunities elsewhere within the Company, as far as regulated investments, et cetera?

Sure.

Paul?

Yes.

We have got significant capital in terms of equity coming into the Company.

We had the $1.150 billion convert at the beginning of the third quarter here.

We had the equity forward conclude itself and convert over to shares in Q2.

There is new equity coming, $978 million, April of next year from the converts issued to finance the UK acquisition.

We did -- at the beginning of the quarter, we had a maturity in supply of $300 million that got paid off.

We are, again, in the throes of our business planning process.

There is not a -- use the term capital commitment.

We are trying to target and expect to achieve investment grade credit ratings across the enterprise.

We have eliminated equity on a going -- needs on a going forward basis.

So with the very robust capital spending plans of all three of the utility segments, the capital is called for and spoken for at this point in time.

But we do massage things as we move through time.

We are cognizant of the statement that Bill made earlier about looking at all the options to try to increase share value.

That will factor into our financing plans as we finalize those as part of normal business planning.

This concludes our question-and-answer session.

I would like to turn the conference back over to Bill Spence for any closing remarks.

Okay.

Thanks, operator.

Thank you all for joining us today and look forward to your questions on our next quarterly earnings call.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.