賓州電力 (PPL) 2013 Q3 法說會逐字稿

Good morning and welcome to the PPL Corporation Third Quarter Earnings Conference Call.

All participants will be in listen-only mode.

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 of Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone.

Thank you for joining the PPL conference call on third 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 the factors that could cause actual results or events to differ is contained in the appendix to this presentation and in thecompany's SEC filings.

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

Thanks, Joe.

Good morning, everyone, and thank you for joining us today.

With me on the call are Paul Farr, PPL's Executive Vice President and Chief Financial Officer, and the President of three of our four business segments.

Greg Dudkin, President of PPL Electric Utilities, is not able to join us today.

I'll start today's call with an overview of third quarter with year-to-date results, briefly review operational highlights and then I'll discuss the increase to our midpoint of the 2013 earnings forecast that we announced this morning.

Following my remarks, Paul will review the financial results in more detail.

Today we're reporting solid earnings for the third quarter and year-to-date.

Quarterly earnings from ongoing operations increased by 3% over 2012 on a net income basis, driven by continued growth in our regulated business segments in the United Kingdom, Pennsylvania and Kentucky.

Through nine months, earnings from ongoing operations are 6% higher than a year ago.

On slide four, you'll notice that on a per share basis, ongoing earnings are slightly lower than 2012 for both the quarter and year-to-date, primarily due to the increased share count associated with the 2010 and 2011 equity units, which we've discussed in some detail in previous calls.

I'd also like to note the third quarter and year-to-date 2013 earnings were negatively affected by $0.06 per share due to a non-cash adjustment to deferred tax assets.

Paul will address this item in more detail shortly.

Excluding those items, ongoing earnings per share from our regulated business segments are up by 23% year-to-date, compared to the first nine months of 2012.

The regulated business segments represent almost 90% of PPL's ongoing earnings on a year-to-date basis.

Moving to slide five, today we are announcing an increase to the midpoint of our 2013 earnings forecast as a result of the continuing strong performance of our regulated business segments.

Specifically, we're increasing the midpoint of our ongoing earnings forecast to $2.35 per share from the previous midpoint of $2.32.

The increase is driven primarily by a $0.04 improvement in projected earnings from our UK regulated segment.

Our UK business continues to deliver superior results, both financially as well as operationally.

Let's move to slide six for review of some of the operational highlights for the quarter.

We recently received word from the UK Office of Gas and Electricity Markets that it expects to announce its initial business plan assessment and fast track draft determination on November 22nd.

In that announcement, we'll learn whether any of our four UK subsidiaries will receive accelerated consideration of their business plans under the RIIO-ED1 process.

Subsequent to the submittal of our business plans on July 1st, we have met with OFGEM staff and a committee of it's board in accordance with OFGEM's schedule, and we continue to believe that our well-justified plans support the fast tracking of all four of our distribution network operators.

Another recent highlight for our UK regulated segment was the determination of the 2012 and 2013 annual incentive awards for WPD.

Beginning April 1st 2014, we expect to collect about $110 million in bonus revenue due to our strong operating metrics, which is a 30% increase from what we received for the 2011 to 2012 regulatory year.

Included in that award, was more than $10 million for customer satisfaction measures, an element of the annual performance metrics where customers are surveyed regarding outages, connections, and general inquiries.

And in the current regulatory year, our outstanding performance has continued, as the WPD subsidiaries hold the top four positions in OFGEM's broad measure of customer satisfaction.

Moving on to our Kentucky regulated segment; we recently completed an evaluation of bids for future energy supply needs.

Global Gas and Electric and Kentucky Utilities plan to file for a Certificate of Public Convenience and Necessity to build a 700 megawatt combined-cycle natural gas power plant and a 10 megawatt solar energy facility.

We expect that filing to occur by the end of the year.

These two projects, totaling about $725 million, will provide our Kentucky customers with reliable, low-cost generation that meets the latest Environmental Protection Agency regulations.

Finally, in Pennsylvania, we continued to execute our major initiatives to upgrade the transmission system for safety and reliability.

We're more than 50% complete on the $630 million Susquehanna Roseland project and reached a construction milestone just this week by energizing a 17-mile segment of the line.

We continue to estimate completion of the Pennsylvania portion by June of 2015.

Also, we recently received good news for the $335 million Northeast Poconos Transmission project.

The Pennsylvania PUC Administrative Law Judge issued a recommended decision concluding that PPL met its burden on all issues, and recommended that the commission approve the siting application, two zoning petitions and the remaining eminent domain applications.

We expect the first PUC order in the first quarter of 2014.

Turning to distribution sales on slide seven, you'll see that weather normalized sales in the third quarter were down slightly in both Kentucky and Pennsylvania from a year ago.

In Kentucky, weather-normalized residential sales were lower in the quarter but remain higher for the 12-month period ending September 30th.

Although Kentucky commercial sales were up almost 1% in the quarter, the 12-month period reflects the struggles of small businesses in the Louisville area and the economic impact of the mining industry downturn in Eastern Kentucky.

Kentucky industrial volumes decreased, primarily reflecting planned maintenance shutdown and lower production from some of our largest customers.

In Pennsylvania, improved economic conditions led to higher weather-normalized sales in the commercial sector in the quarter, which were offset by reductions in the residential and industrial sectors due largely to customers implementing energy efficiency measures.

On an actual basis, the more temperate summer weather in the quarter compared to 2012 led to lower kilowatt hours sales in both regions.

We expect total electric sales for both Kentucky and Pennsylvania for 2013 to be relatively flat year-over-year.

Now turning to slide eight for an update on the supply business.

In September, we announced an agreement to sell PPL Montana's eleven hydro-electric plants to Northwestern Energy for $900 million.

The agreement is subject to regulatory approvals, including the Montana Public Service Commission and FERC, and is expected to close in the second half of 2014.

The net proceeds of about $623 million will enable us to reduce financing needs for our future capital investment in our rate regulated business.

In the East, we recently completed a turbine blade inspection outage on Susquehanna Unit 2 at the Susquehanna Nuclear Plant.

Based on our engineering analysis of our Unit One turbine at Susquehanna, we are not planning any outage until it's planned refueling in the spring of 2014.

In the appendix of today's presentation, we provided an update to our forecasted generation and hedge disclosures, including the addition of our 2015 hedged levels.

Lastly we're encouraged by two recent favorable decisions from the federal courts invalidating state attempts to subsidize new generation in PJM.

In these cases, federal judges agreed with us that and New Jersey and Maryland unconstitutionally infringed on FERC's exclusive authority to regulate the wholesale power market.

These decisions, in our view, reinforce the integrity of competitive generation markets.

In closing, we're pleased with the earnings growth from our regulated business segments and the ability of our supply business to manage through challenging power market conditions.

The efforts of the entire organization and our expectations of continued strong performance enabled us to increase our 2013 earnings forecast.

We remain very optimistic about our prospects for growing shareowner value through strong operational performance, disciplined financial management and superior execution of our regulated growth opportunities.

I look forward to your questions.

Now we'll turn the call over to Paul Farr.

Thanks, Bill.

Good morning, everyone.

Let's move to slide nine.

PPL's third quarter earnings from ongoing operations increased over last year, driven by improved earnings at all three business segments.

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

On an earnings-per-share basis, earnings declined in the third quarter due to additional shares included in our share count year-over-year.

The higher share count impacted ongoing earnings per share by $0.08 for the period.

Let's start the second review, with Kentucky results on slide ten.

Kentucky earned $0.14 per share in the quarter, a $0.02 increase compared to last year.

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

Kentucky's positive margins were partially offset by dilution of $0.02 per share.

Moving to slide 11; our UK regulated segment earned $0.31 per share in the third quarter, a $0.03 increase over last year.

This increase was due to higher utility revenue, primarily driven by the annual price increase on April 1, partially offset by an accrual for over-recovery of current year revenues and lower volumes due to weather.

Income taxes are lower, primarily as the result of the decrease in corporate income tax rates in the UK.

These positive earnings drivers were partially offset by higher maintenance expense and dilution of $0.03 per share.

Turning to slide 12; our Pennsylvania regulated segment earned $0.08 per share in the quarter, a $0.02 increase compared to last year.

This increase was a result of higher delivery margins, primarily due to new distribution rates that went into effect on January 1, as well as increased transmission investment.

The margin improvement was partially offset by dilution of $0.01 per share.

Moving to slide 13; our supply segment earned $0.14 per share in the third quarter, a $0.12 decline compared to last year.

This decrease was primarily the net result of lower energy margins, driven by lower baseload energy prices and lower baseload generation, partially offset by higher capacity prices.

Higher O&M -- the higher income taxes primarily resulting from a non-cash adjustment to deferred tax assets that Bill mentioned previously.

During the third quarter, we conducted a preliminary assessment of our ability to utilize Pennsylvania net operating loss carry-forwards.

Our long-range forecast of taxable income has declined since last year, reducing our ability to utilize these NOLs in the future.

In prior years, we have recorded adjustments to this deferred tax item in the fourth quarter and we will perform a final assessment in Q4.

Finally, dilution impacted supply earnings by $0.02 per share.

That completes the more detailed financial overview.

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

Thanks, Paul.

And Operator, we are ready to take our first question.

(Operator Instructions).

The first question comes from Kit Konolige of BGC.

Please go ahead.

Good morning, guys.

Good morning.

Couple of different areas.

First of all, just on the sale of the hydroplants in Montana, you didn't sell Colstrip at the same time.

What's the future of Colstrip, at this point?

Do you expect to hold that indefinitely?

Or is that something you would like to sell if you could?

Could you give us color on what led to the transaction taken that shape?

I would say relative to Colstrip,they are well run, environmentally-compliant assets.

And they do provide both positive cash flow, as well as positive earnings to the corporation.

We are happy to continue to run them in a safe and cost effective manner.

In terms of the sales to Northwestern, I think in that case, it was just a mutual agreement that that made sense for them, provided good value to PPL, so we were able to strike what we think is a very fair deal for both parties.

We'll continue to evaluate Colstrip, but for the time being, our plan is to continue to run it.

Okay.

And if I could, Paul, could you go through a little bit more that -- the issue with the use of the NOLs -- I didn't quite catch, did you say the projection of future earnings -- is that earnings at supply is expected to be lower than previously thought?

Yes, most of that impact of the $0.06 does hitthe supply segment.

About $0.04 of the $0.06 was at supply, the other $0.02 was atcorporate.

As we project margins, look at costs of running the business;that has declined year-over-year.

This is a 20-year forecast, basically, of utilizing these operating loss carry-forwards.

And again, based upon work capacity prices cleared out, where we see forward energy prices, year-on-year, things have come down a bit.

So that valuation adjustment impacts not just book earnings but taxable earnings as well.

That has decreased our ability to use the net operating losses versus what our view was last year.

Does the guidance still stand that you don't expect supply to report EPS contribution below zero?

Yes, that's correct.

That's correct.

And then one final other area.

On the -- to follow a little bit on your mention of the court victories regarding the state subsidies for new power plants.

Pretty clearly -- but I would like your feedback, I don't think that should affect the options over the next couple or three years.

Could you give us a rough view of your thinking on early outlook on next May's option, whether you expect it, let's just say, it to be up or down relative to this last auction?

Yes.

On the wins in New Jersey and Maryland at the federal level, those outcomes will be challenged.

So it will take some time to go through the next phase of those proceedings.

But we think we have an extremely strong case, and that those early outcomes will be upheld.

I think that it will -- and I think already has discouraged both the states and potential suppliers from proposing new projects or new mechanisms.

So I think it's had an affect already and will continue to have a positive effect as it relates to the competitive markets.

On the future of the RPM for the next auction, there are a number of changes that I think that you're aware of that PJM is considering, along with the feedback from many of the market participants.

And those changes include reassessing import capabilities, how much demand response should be allowed into the auctions, and other modeling changes potentially.

So it's really hard to say, at this point, how all that may play into the next auction, since we're still in that process in looking at potential changes.

I think the positive, from my perspective, is that PJM is listening to the market participants who have concerns, and making sure that their focus continues to be on their number one priority, which is a reliable supply for the grid.

So I think they understand that role that they play and take it, obviously, very seriously.

Okay, thank you.

You're welcome.

The next question is from Dan Eggers of Credit Suisse.

Please go ahead.

Good morning, guys.

Good morning, Dan.

Following up on supply and the decision to ex the Montana hydro; could you share current thinking on the future of supply in its totality for you guys?

And as that business gets smaller, there is a lot of overhead associated with it.

Is there a cost-cutting opportunity or a need to get more scaled to help optimize the structure.

I think there is a cost-cutting opportunity, and we continue to execute that on -- Dave DeCampli and his team have done a great job thus far.

And they continue to find opportunities there.

We answered one of the questions previously --our current plan for 2014 and 2015, not only does it reflect the current forwards as they were at the end of the quarter, but we still see our supply business as an EPS positive contributor to the corporation overall.

I have also mentioned we're always looking at opportunities to enhance the value potential for each of the businesses, as well as sharing their value for PPL as a whole.

And we've proven that through the strategic actions we've taken over the past several years.

These actions allow us the flexibility to fully assess our position without having to make rush decisions.

In supply, our focus will continue to be on aggressively controlling both O&M and capital cost.

But we will continue to evaluate other options that could increase value.

That's nothing new, quite frankly, in terms of our approach.

Okay, and then just on the UK with the higher incentive revenues and the continued better performance than we probably had expected; is that going to have any bearing on the outlook for earnings with the RIIO process completion route that you outlined this summer when you filed the RIO case.

I don't think it will have a substantial impact on it, other than to continue to show to OFGEM our capability to meet and beat their metrics and prove that, hopefully, we're worthy of fast tracking all four of the distribution network operations.

One more.

If you jump back to slide 20, where you show -- you had a [fading] CapEx outlook in 2015, 2016, and 2017.

As you look out, are there opportunities to spend more capital or more projects that could layer into that number to lift up the growth rate or to lift up that level of reinvestment than what's in the bars?

Things like the Kentucky generation investment, and that sort of stuff, that we'll see these reinflate over coming quarters?

Yes, I think there will be opportunities, Dan, specifically in Pennsylvania, there will be transmission opportunities that aren't in the forecast.

I think in Kentucky there will be further opportunities as we go through time.

So yes, I think there will be those opportunities.

And we'll just assess where do we best place the capital, incremental capital, that we want to spend and put it in the right spots.

And do you see that being generation driven in Kentucky?

Or is there more transmission distribution work that needs to be done that maybe has been crowded out, for lack of a better word, as you've had to spend a lot of money on generation?

Let me have Vic respond to that question.

The generation -- the new generation that we announced and that Bill referenced in his earlier comments, are reflected in the capital budget that you see on slide 20.

Yes, there are probably some additional transmission and distribution opportunities out there.

The other thing that will drive us, frankly, will be new environmental requirements, landfills, who knows what is going on with the EPA.

And so I think you'll see us, again as we have done in the past, move forward on environmental expenditures.

I would expect changing laws will create new opportunities for us on the capital side for our generational portfolio.

Thank you, guys.

You're welcome.

The next question is from Julien Dumoulin-Smith of UBS, please go ahead.

Good morning.

Good morning, Julian.

Following up on Dan's question on the UK here.

It looks like very robust expectations for 2013.

Congratulations on that.

Just looking forward even here -- prior to the next reset in 2014 here; would you expect there would be some of the benefit from this year to roll forward to next year?

Your guidance from the mid part of this year had $1.32 at the top end of that range.

Could you speak to that a little bit, particularly in light of added revenues from the bonus side?

Some but not all would carry over into next year.

But let me ask Rick Klingensmith to give you more color on that.

Yes, good morning, Julien.

Our range and forecast for next year was $825 million to $875 million, and we still forecast to be within that range.

As Bill mentions, we'll see some benefits continuing into next year.

The incentive revenues that we had announced here this morning help in next year's performance, especially -- it's a partial year so you'll get some of that benefit.

It will be mixed in with the $82 million that we had earned the previous year.

That will be a nice blended element for us next year.

But you have to recall that over the years volume does get normalized.

So we don't have upside or downside related to volume, although we may see that within a year.

And that we're seeing that this year, in you recall back to the first two quarters earnings calls, we had mentioned that the long, cold winter has benefited us this year.

We will need to give some of that back next year in the tariff reset that occurs April 1st.

When you mix the carry-forward of some of the good items that have occurred next year and net that with some of the tariff adjustments due to over recovery this year, we find ourselves still within that range of $825 million to $875 million for 2014.

Excellent.

Much appreciated.

And then turning back to the supply business if you could, on Unit One of Susquehanna, just perhaps -- is it that you don't perceive there to be issues at the first unit to the extent with which you did the latest testing?

Or is it more than it is sufficiently safe to continue operating until the next refueling outage?

Just to give us an update overall on the blade issue.

Sure, it's really the latter rather than the former.

Specifically, what we've been doing is monitoring the unit very carefully, and we have very strict parameters within which we're planning to operate the unit.

Once we go outside the margin that we have identified as a safe margin, we would then have to look to make the decision whether to bring the unit offline.

So far we're steady with the blade vibrations.

And our outlook is that we're going to be able to continue to run the unit safely and reliably until the refueling outage in the spring of next year.

Great, and then quickly in terms of maintenance CapEx, there is a lot of focus as of late on supply; what is a good run rate number there to think about for that business?

Obviously, a $400 million to $500 million in your disclosures; but just on a run rate basis?

It's $400 million to $500 million on the disclosure, but that also includes around $160 million to $170 million of nuclear fuel each year.

So you have to back that off those numbers.

Julian, it's probably closer to something in the $300ish million range.

It will go up and down based on major outages that we've got at the coal plants.

Got you.

And last clarification, when you were talking about supply contributing positively to the corporation in its entirety for the foreseeable future;just wanted to clarify that that is prior to any contemplated cost cuts?

Because I heard that in the same paragraph.

That would include cost cuts that are either in flight now or would be impacting 2014 and 2015.

But we have identified specific areas where Dave and his team believe we can get additional cost out.

We're very confident in those actions.

They are doable actions, and they are things that we've done in the past, and believe we can do in the future.

And okay -- one more clarification, that is excluding or assuming the sale of the Montana business, correct?

Yes, that is.

Correct.

Thank you.

You're welcome.

A the next question is from Neel Mitra of Tudor Pickering.

Please go ahead.

Good morning.

A question on supply; where would you say you're tracking on your hedging plan relative to your rateable strategy?

It seems like you're about half of what you were hedged going into -- relative to last year.

Is that something consistent with years past?

Or maybe taking a view on the market in 2014 and 2015?

I think it's relatively consistent.

We don't have a ratable program, we have more ranges that we look at in years one, two and three.

Having said that, we're a little bit lighter hedged in 2015 than we might have been that third year, if you will, then we have been in the past.

Some of that is just due to the lower forward prices that we're seeing, and the view that we have that there will be opportunities between now and then to hedge it more favorable prices.

For example, you saw 2015 prices hit the upper $40 onpeak range earlier this year.

We took advantage of that, layered in a few more hedges.

And we expect with the volatility we have seen in the past on gas prices and power prices, that we will continue to probably see those opportunities pop up from time to time.

And we'll take advantage of those.

That's really what goes into our thought process when we look to hedge that far out.

Okay, great, could you maybe give us your updated thoughts on what the basis is between your plans on PJM west, now that we have some cheap Marcellus gas pricing impacting your zone?

Sure, maybe I'll ask Dave DeCampli to comment on that.

Sure.

Obviously, we're constantly monitoring the [Tecelan 3] to Henry Hub discount.

We take advantage of that basis differential in a number of ways.

Of course, our gas plants benefit from that.

Secondly, if economically we do end up having to curtail operations at a coal plant and buying back, that's a good thing for us as well, especially in a year which we're well hedged.

On the down side, that impact continues to depress overall energy prices.

But with our diverse portfolio, we're able to work around that and take advantage of that situation.

So longer term, I think you guys said that you would be flat going forward after 2015.

What's your long-term basis assumption?

Yes, I think we can continue to see it as being flat.

And I think if some of the proposed pipelines taking gas from the Marcellus to other markets actually come to pass in that 2015-2016 time frame, I think that would be a reasonably good prediction.

But there are so many factors that play in the basis different actuals, as you know, that it's difficult to predict those things.

Okay, great.

One more question, Paul, how much debt at the parent supports the supply business right now?

I wouldn't say any really debt at the parent supports the supply business.

I think the debt at the parent was primarily issued to finance the acquisitions.

I think about it more on a total balance sheet perspective.

We're targeting the investment-grade credit ratings across the complex.

S&P looks at us in a total FFO to debt basis.

Moody's looks at the individual [registras] and then steps back and looks at it in its entirety, as well.

I'm not clearly uncomfortable at all with the level of debt that's there.

We're paying down debt at supply this year, a bit.

Currently more in the plan for next year as well.

That plan was put in place both before we had an agreement to sell the Montana assets and to realize the almost $630 million in after-tax proceeds that Bill talked about.

The plan will get modified, if you will, and as fluid as we move through time and experience, both our gas upsells as well.

But I wouldn't look at it as there to support supply.

I think it's really the 90% dish of regulated earnings and those cash flows, as well as anything -- if you want to call it supporting supply, it's really supporting the risk profile, the entire organization, which supply does benefit from.

Okay, great, thank you.

Our next question is from Paul Patterson of Glenrock Associates, please go ahead.

Hi there, how are you?

Good.

Just on NOLs that forced an impact; how does that work out going forward?

How shall we think about the tax rate and how the $0.04 -- how we should see that showing up next year and what have you?

Yes, so Paul, you might recall back to 2010, we had a relatively significant release of tax reserves in that year.

It was around $70 million to $75 million.

We've rolled back a few cents of that each of the last two years.

And with this $0.06 this year, there is only $0.01 remaining in terms of total exposure on the balance sheet that could get rolled back in if we see a further decline.

Basically, we'll have fully reserved up the NOLs and you wouldn't see a balance sheet exposure for it.

And therefore, there wouldn't be future negatives EPS exposure either.

Okay, so it's sort of a one-timer.

Correct, that's how we highlighted in 2010 as well.

We historically haven't carved out or special-item treated tax items, unless it's a tax law change like the statutory rate decrease in the UK.

We call those out when we experience them, but it's not an impact ongoing.

This is a 20-year forward look at the useful life of these NOL carry-forwards.

It's relatively small movements that can have somewhat of a material impact, but it is non-cash and non-on going, if you will.

Great.

When we look at -- what are the NOLs net of reserves that you guys have left on your balance sheet?

On these state-based NOLs, is around $1 billion.

Again, that's fully reserved up.

On an NOL equivalent basis, the in excess of $1 billion that we purchased in the Kentucky acquisition, all of this bonus depreciation that has been impacting us for the last several years;we're a little under $3 billion in NOL equivalent value, on a federal basis, that we've got warehoused.

That's one of the reasons, for example, why there is no cash tax paid on the sale of Montana assets.

We can shelter that with the NOLs.

Okay, with the sales growth outlook given the last couple of years that we've seen and what have you, what do you guys think now going forward?

Sure, on an overall basis, looking at Kentucky and Pennsylvania, we would see sales being flat to slightly positive on an on going basis.

And it's going to be clearly reflective of the strength of the economy as we get to 2014, 2015, 2016.

We do think that our expectations should be more conservative compared to where they were a couple of years ago, because of all the energy efficiency conservation, other impacts to demand that I think are more systemic than just purely economically driven.

Great.

And then you were talking about the RPM auction and all the things happening there, and you also mentioned the transmission opportunities, which made me think about this recent IPSAC meeting at PJM of mark-to-market congestion between NYISO and PJM and transmission opportunities.

I was wondering what your thoughts are with respect to dozens and dozens of projects aimed at alleviating the mark-to-market congestion.

This is outside the rule changes that they are potentially talking about with [DFACs] and everything.

I'm talking about just the efforts to resolve that physical constraint, the seams issues, so to speak, and what it might mean for the long-term outlook for supply?

And whether that is figured in to your EPS positive outlook?

Sure.

It is figured in, to the extent we know about the projects, and many of them do because they take so long to plan, engineer and then construct.

So we have pretty good visibility into those projects.

In terms of the transmission opportunities side, it's really a question of will those congestion pockets, if you will, continue into the future, and how long into the future.

Some of the congestion or negative basis that we've seen is driven by the transmission projects that are underway today.

So as we experienced outages on the grid to take care of these congestion issues, it's creating what I would say, a temporary congestion, sometimes in a different direction than we've seen in the past.

So I think you have to take all that into account.

I don't know that there is a material impact in the next several years on our supply business output.

Longer term, difficult to say.

Okay, finally on the environmental, you guys mentioned there was a potential additional environmental CapEx associated with coal ash and what have you.

I was wondering is that regulated in Kentucky?

Or is that non-regulated?

Any sense as to where you're looking at those CapEx issues?

Yes, those are on the regulated side in Kentucky, as we discussed earlier, and really, as a response of what may come out of greenhouse gas initiatives by the EPA for existing units.

Of course, they've made proposals on new units.

But as Vic also mentioned, there are still debates and discussion around the 316-b order issues as well as coal ash handling and storage issues.

Okay, great.

Thanks a lot, guys.

Sure.

Our next question is from Jonathan Arnold from Deutsche Bank, please go ahead.

Good morning.

Good morning.

Could you guys give some sort of sense of how you see the net impact of the Montana sale, and the reworking of the Colstrip lease, in terms of earnings?

Sure, we would expect the transaction to be modestly accretive to earnings and cash flow.

So that's on a -- starting in 2014 basis, Bill?

Yes, probably 2015 will be the first full year.

2014, we would expect the transaction to close some time in the second half.

I would look at the first full year of impact would be 2015.

Okay.

Could you give us a little more insight into the components of that analysis?

Paul, do you want to -- ?

Yes, it would come from multiple perspectives.

When you look at, on a forward basis, where the margins minus the O&M and depreciation were in the assets, we weren't hugely positive on that front.

From an outright financing perspective, with the pay off of the Colstrip lease and financing that future obligation at much lower rates, factor everything in, as Bill said, both cash flow and earnings positive for us.

So it's kind of neutral on the hydro contribution, and then gets positive on the refinance on the lease, basically?

Yes, really all of Montana, as we were getting -- as we were intimating in keeping all the supply positive, the west was not any materially different than the east in terms of flat to slightly positive earnings going out into the future.

Those were Runner River hydro assets.

Very good assets.

But that earnings profile of that subset of supply looked just like supply in its entirety.

Great, thank you for all that.

There are other things that were answered.

Thanks.

Our next question is from Shahriar Pourreza of Citigroup, please go ahead.

Good morning, everyone.

Good morning.

Two questions just focusing on the UK.

With the initial assessment potentially being released at the end of November, is there still an opportunity for to you make the final determination if you don't make the initial assessment in what would use prerequisite potentially add you?

In case you didn't make it?

I'll ask Rick to comment on that.

Yes, good morning.

If you don't make the initial assessment on the fast track draft determination, it is not possible for you then to make the fast track determination.

In essence, OFGEM will be creating a short list of those that could be fast tracked and continue through the process to get that final determination in February of 2014.

Got it.

Just one question on the UK policy, there has been a lot of chatter as far as trying to curtail electricity rates.

A lot of what you're hearing is everything from government intervention to windfall taxes to potential tariff freezes.

A lot of it, for now, has really been focused on generation.

The question is, can you see that being seeped into the distribution and transmission business?

Or do you think a lot of what you're hearing from the Labour Party is really focused on generation?

You're correct.

It has been focused on generation and marketing companies, as well.

It has not thus far been on the infrastructure itself.

And Cameron's recent comments around his look at the picture was really focused on some of the green initiatives and the incremental costs in the tariff of the green programs.

Thus far, it has not been a focus for our segment of the business.

As you can imagine, on the total bill side, the distribution component of the bill is literally one of the smallest pieces of the bill.

So it's probably reasonable to assume that they would focus on where the greatest portion of the bill is coming from.

Okay, great.

Thanks so much.

You're welcome.

Our next question is from Michael Lapides of Goldman Sachs.

Please go ahead.

Hey, guys.

Congrats on a good quarter.

A couple of items -- supply and then bigger picture stuff first.

First on supply, I noticed that the 2015 coal -- delivered coal price is actually down from the 2013 and 2014 levels.

Just curious, is that rail or the actual cost of tonnage?

Sure, Michael, let me ask Dave DeCampli to comment on that.

It's primarily the cost of the coal itself.

Got it, okay.

Second, have you ever quantified the potential for O&M cost management and supply?

Yes, sure, we have -- Dave, do you want to talk about some of your targets?

Sure, in supply we -- of course, we have two streams of O&M costs into the business.

One of those within supply and the corporate services costs.

We have initiatives in flight to reduce cost in both sides of the formula, and had good success over last year and in the forecast plan, as well, in reducing costs.

But it's also affected operations.

We've been able to take O&M growth to zero at our nuclear facility, for instance, through streamlining and cost cutting initiatives.

Of course our coal fleet has taken a good brunt of those reductions with seeing some reduced operations, installed efficiencies and things like that.

But we're not leaving any stone unturned in the business or for those who support our business.

Okay, so when you think about O&M at supply in ex Montana, apples to apples comparison, up, down, flat, neither, something else -- kind of just big picture directional over multi years?

Very slightly with Montana, it will be a little bit of a push up in overhead over the remaining assets.

Because we'll still be operating our marketing operation in Butte.

We'll still need some of the overhead support for Colstrip and Corette, as long as we run Corette.

There will be a little bit of an impact there, but I wouldn't call it material.

We'll be able to handle that.

It's safe to say that our target -- our plan is to maintain cost at or below where they currently are today.

Including inflationary impact.

Yes, so net-net the direction would be flat to negative.

Got it, thank you.

Real quick, Paul, you commented a little bit on cash taxes.

Do you expect to be a full non-cash taxpayer?

And if so, for how long?

I wouldn't expect that we would be paying taxes at the federal level until 2018, at the earliest.

Okay, so you see the delta between GAAP taxes and cash taxes as being a sizable cash flow benefit?

That's correct.

And we obviously don't know yet on a corporate tax reform basis what they're going to do, if you will, or if they're going to extend any of the current 50% bonus.

That's not necessarily been a benefit to this sector in any way.

I don't think it's driven a dollar of incremental spending, but we need to see how that plays out as well.

If they extend that, that could push it out even further.

Got it.

Bill, when you look across the industry and think longer terms, you guys were one of only a handful of companies who I think made very transformative M&A related transactions that literally changed the shape of the company.

When you look now, a couple of years removed from those transactions, how are you thinking about where the opportunity sets, if any, exist across regulated, non-regulated US, non-US, electric and gas or other businesses; how are you thinking about what you want the shape and where the opportunities lie, if any, in regards to long-term M&A?

Sure, well, we're fortunate with all three of our regulated entities UK, Kentucky, Pennsylvania, we have great internal growth opportunities for organic growth, if you will.

We can see that through our CapEx spending plan that we discussed earlier on the call.

We don't see that as something that's going to all of a sudden hit a cliff.

So I think there is going to be ongoing opportunities just within the businesses themselves to grow on a reasonable basis.

In our case, we have one of the higher growth rates in the sector, at almost an 8% [keeger].

So we continue to see that.

In the supply area, our guess is that there is going to be more consolidation if gas prices continue to stay -- and power prices -- at the lower levels that we're seeing them in the forwards and today.

I would fully anticipate more M&A in that area of the industry than I would on the regulated side.

Not to say that there couldn't be M&A on the regulated side.

But as you're well aware, those premiums that are required to engage in an acquisition can be difficult to overcome through synergies, when many times they have to give some of that synergy back through the rate-making process.

So that can be difficult to accomplish on an accretive basis.

Beyond that, clearly there is a potential in the country with low gas prices to see more industry come into the areas that have the lowest cost natural gas prices.

And we were seeing some of that.

How much of that we see will be dependent on a lot of things, including taxes, local market conditions, labor, et cetera.

We'll see how that all transpires.

We do see a trend in people converting vehicles to natural gas.

That's a trend that we would expect to see continue.

Same on the electric side with electric vehicles.

Not necessarily in our territory, per se, but overall we see that as a trend.

Just a couple of general thoughts.

Got it, thank you guys, much appreciated.

The next question is from Rajeev Lalwani of Morgan Stanley.

Please go ahead.

Good morning.

First, just a question on the UK.

In the event you're not fast tracked, would -- not fast tracked entirely, would it be possible, just based on how you filed your business plans, for at least some of the utilities there to be fast tracked?

And then a follow-up on the supply side.

Sure, it is possible, one or more of the distribution network operators could be fast tracked.

It's not an all or nothing.

Okay, and then just based on how you filed the actual business plan, is there much of a difference between the various utilities there?

There is not.

I think all that the initiatives across the network are very common.

And the spending is also pretty levelling across the companies.

Okay, got it.

And then just on the supply side, it seems like you've done a great job with finding costs to offset the weakness in gas prices.

Just generally, as you've seen prices come down, how has it changed your view, in terms of your strategic thinking around those assets, longer term?

Well, it certainly places a higher risk level on the assets and the business overall than we might have expected, going back a couple of years.

However, we recognize that we need to be resilient and flexible in our approach, that's what I think you hear us saying.

We're going to look at every opportunity.

Dave DeCampli said, he's going to leave no stone unturned, in terms of finding additional value in the business.

As I mentioned in previous remarks, we're going to continue to look at opportunities in the business to make it leaner and as profitable as it can be.

And other opportunities and options we will continue to look at as well.

Anything that could increase the value we're going to look at.

Great, thank you.

Sure.

The next question is from Steven Fleishman of Wolfe Research.

Please go ahead.

Hi, thanks, my questions are answered.

Thank you.

Okay, thanks, Steve.

Next question is from Gregg Orrill of Barclays, please go ahead.

Thanks.

I was wondering if you would talk about your performance in the recent UK storms?

Sure, I'll let Rick comment on that.

Gregg, good morning.

Yes, the St.

Jude storm that we saw at the beginning of this week was probably the most severe storm that has affected England in over ten years.

Over the storm period, we experienced wind gusts up to 75 mph, and we saw power outages for about 53,000 of our customers.

And all but about 200 of those customers were restored in 12 hours.

And all customers were restored in 18 hours, which is the OFGEM standard in this type of event.

The damages and effects of the storm were much more severe in South and Southeast England versus in our territory.

And we were able to provide over 100 staff to help in the restoration efforts in the UK power networks territory.

Thank you.

Sure.

The next question is from Anthony Crowdell of Jefferies, please go ahead.

Good morning, guys.

Two quick questions, a follow-up on a debt question earlier -- I just want to know what the level of debt at the parents is.

I guess you said there was debt at the parent that helped finance the whole organization.

And if you can tell me the level of that?

And the second question is related to regulated utilities.

What is your earned ROE at your Pennsylvania, Kentucky and UK utilities?

Sure, on the Pennsylvania side, it's probably in the upper 9% range on a regulated basis -- on the regulatory filing basis.

Vic, do you want to?

The Kentucky this year will be between 9% and 10%.

The UK, Rick?

In the UK, we're about 18%, including the effects of goodwill in that formula.

And at the parent company, there is roughly $2.5 billion of debt.

$2.0 billion to $2.1 billion of debt that came as a result of the acquisitions;$1.150 billion for Kentucky, and a little less than $1 billion -- $988,000, $987,000 for the UK acquisition.

And then we've got a deeply subordinated deal that we did earlier this year, that was around $400ish million.

Following up on the UK ROE, how does the goodwill impact?

You're saying you are earning off the goodwill portion in [rav]?

Am I thinking the right way?

No, we're not.

In none of the jurisdictions is goodwill an asset that you can earn a return on.

That's all equity financed, you see that driving the risk goodwill ROE down.

Great, thank you.

You're welcome.

The next question is from Angie Storozynski of Macquarie.

Please go ahead.

Thank you.

I have two questions.

First on your supply business, your hedge disclosures continue to include the hydro assets.

If I were to strip them out, is there going to be any meaningful change as far as the percentages of hedged volumes and prices for the rural baseload west?

Yes, that would come down somewhat.

Of the roughly 800 megawatt hours a year that we get in Montana, about maybe 3.2 now with the Rainbow upgrade of the hydrosystem.

What about prices hedged?

There would not an differential in the hedged price.

If you recall, one element of the agreement with Northwestern is that at the close of the transaction, we would let settle any mark-to-market, so they would not end up with extra length in their book to serve customers.

That will come down, to the extent that there are material hedges with them outstanding at that point in time.

Okay.

And now back to the UK.

RIIO is a still a new mechanism, and if I understand correctly, the approval of the fast track means that your request, as far as new revenue levels is basically accepted as is?

And if I compare your applications to applications of other utilities in the UK, it seems like you're asking for slightly higher returns than your peers.

So how do you -- do you think that more aggressive of a filing might impact your ability to actually get fast tracked?

Well, first part of your question -- if you're fast tracked, it is accepted as is.

So your plan as filed is deemed to have been fully justified.

But we are not requesting any different ROE than anybody else.

It is a generic make-up of the debt and equity in the rate making process there.

The cost to capital is kind of plain vanilla, and everyone is really measured on the same basis.

I think we're required to file on -- per the instruction of OFGEM.

I'll just add -- the filing that we had made was for a 6.7% real cost of equity.

And I believe the majority, maybe all but one had that same request in for that return on equity.

But how about incorporating all other incentives -- performance incentives, et cetera?

Wouldn't that give you a slightly higher more margin over your operations versus what we can see in other filings?

Well, the other filings -- they're not necessarily incentives included.

There are targets for your levels of performance into the future.

And you may have the opportunity to surpass those targets in the future.

But there are no specific values associated with incentives that you'll see in the plans.

Yes, it's not in the base revenues, what you see in the plan.

Well, those filings are difficult to compare anyway.

I'll follow up offline.

Operator, I think we have time for one more question.

Our last question today will come from Nathan Judge of Atlantic Equities.

Please go ahead.

Good morning, I just wanted to ask more on the disclosure supply.

You have brought back your expected generation from the east.

If you could just give me -- why is that case?

Is that Susquehanna, or what is driving that?

Sure.

Dave, do you want to -- ?

There are two primary drivers.

There was one at Susquehanna, and we also had an unexpected outage at our Brunner Island that affected it,as well.

Those are the two prime drivers.

(inaudible) -- going forward in 2014 and 2015?

Could you repeat your question for 2014 and 2015, please?

Yes, I believe when you presented last -- you had a presentation which showed 50.4 million megawatt hours with 41.8 terrawatt hours in the east.

And you are looking for 40.6.

And I'm just wondering why you bringing down your projected forecast for output in 2014 and 2015?

It is the extension of the turbine blade outages intended for Susquehanna that is the primary driving for the lowering of that for 2014 and 2015, at this point.

When I look at how your coal plants have performed year-to-date, your production from those coal plants are obviously down from last year, how are you seeing, given the low power price, and how do we think about the variability in the coal production?

Well, the variability -- variability is primarily driven by our choice economically to take them out of service at times when prices would dictate.

And we're able to take advantage of that and buy back from the market and do well that way.

I think you should be able -- you should expect that type of variability in the future.

We can't always predict what those periods will be.

So expect a little bit of volatility in those numbers as the years unfold.

Your hedging --

Sorry -- so that reduction that you referenced between the previous forecast and the current does reflect both our forecast of coal plant output based on economics, and with lower gas prices, you're going to see a little bit less run time, and also changes at Susquehanna.

Those two things combined are really driving the lower output on a period-to-period basis.

How much variability can you take that down, given your coal hedges?

77%?

At a certain point, you've got to run your coal plants.

At what point do we see economic losses begin to be realized?

I don't think in the forecast we would even get close to that type of a situation.

And we have built into some of our coal contracts flexibility.

And to the extent that the flexibility is not already built in, we've been successful at working with our coal suppliers to manage our inventories and our burn.

So I think thus far, we don't see that as a potential problem.

Great, thank you.

You're welcome.

Okay, thanks everyone for joining us today, and we look forward to our next quarterly call.

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