賓州電力 (PPL) 2013 Q4 法說會逐字稿

Good morning, and welcome to the PPL Corporation fourth quarter 2013 earnings conference call.

(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 fourth quarter results and our general business outlook.

We are providing slides of this presentation on our website at www.pplweb.com.

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from such forward-looking statements.

A discussion of factors that could cause actual results or events to vary is contained in the appendix to this presentation and in the Company's SEC filings.

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

Thanks, Joe.

Good morning, everyone, and thanks for joining us today.

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

Rick Klingensmith was unable to join us today.

My opening remarks will cover 2013 earnings, our 2014 earnings forecast and operational highlights.

I'll ask Paul to cover our financial results in more detail including the performance by segment.

And of course, we look forward to your questions at the end.

Let's start with the announced dividend increase effective with the April 1 payment.

The new annualized rate will be $1.49 per share, up from $1.47 per share previously.

This increase represents the 12th increase in 13 years and reflects a 181% increase over that period.

Turning to earnings, today we announced 2013 reported earnings of $1.76 per share compared to $2.60 per share a year ago.

Adjusting for special items our earnings from ongoing operations were $2.45 per share, exceeding both the top end of our 2013 forecast and our 2012 earnings from ongoing operations.

The most significant special item was a fourth quarter after-tax charge of $0.62 per share related to the termination of a lease agreement for the Colstrip power plant in Montana.

That lease termination will facilitate the previously announced sale of our Montana hydroelectric assets to NorthWestern Energy.

For the fourth quarter, we had a reported loss of $0.16 per share including the Colstrip lease termination charge.

Quarterly earnings from ongoing operations were $0.60 per share, an increase from $0.49 per share a year ago.

We exceeded the top end of our 2013 ongoing earnings forecast range because of the exceptional performance of each business segment.

We saw increased earnings from each of the three regulated segments and continued aggressive measures in our competitive energy supply business to reduce operating expenses and optimize the value of our competitive generating facilities.

I am very pleased with our execution to deliver on these significant efforts while preserving PPL's high standards to operate in a safe and reliable manner.

Turning to slide 5, today we're announcing a 2014 earnings forecast of $2.05 per share to $2.25 per share with a midpoint of $2.15 per share.

The strength of our regulated businesses provides a solid foundation for Company earnings with substantial, well-defined prospects for future growth.

Paul will provide details on the earnings forecast by segment in his prepared remarks.

On slide 6, we have highlighted some of the key operational accomplishments of our regulated businesses.

We have been committed to improving earned returns across all of our jurisdictions, and in Kentucky, our earned regulatory ROE was 10.17% for 2013.

The solid performance was driven by an increase in base rates, partially offset by regulatory lag on non-ECR spending and inflationary increases.

In the UK, we continue to deliver solid returns with an earned ROE, including the effects of goodwill, of 17.8% in 2013, a direct result of our frontier operational performance.

And in Pennsylvania, we improved our transmission and distribution combined regulatory ROE to 10.42% through effective cost management and higher revenues.

Of course, our GAAP ROE is a bit lower in Pennsylvania dues to some items that are not recoverable in rates.

In November, we learned that the eight-year business plans for all four of our Western Power Distribution subsidiaries were found suitable for accelerated condition, or fast-tracking, under REO ED-1.

Our well-justified business plans reflect WPD's operational excellence on reliability, cost, and customer satisfaction which our UK management has delivered for years, and continues to achieve today.

Our WPD subsidiaries are ranked as the top four distribution network operators in Ofgem's broad measure of customer satisfaction thus far in the current regulatory year.

Turning back to the US, we continue progress on major infrastructure projects including the Susquehanna-Roseland transmission line in Pennsylvania, environmental upgrades at our Kentucky power plants, and construction of a combined cycle natural gas generating plant at our Cane Run facility in Louisville.

Our companies also recently achieved significant regulatory milestones for two other important infrastructure projects.

The Pennsylvania PUC has approved construction of a $335 million reliability upgrade in the Pocono Mountain region that includes approximately 60 miles of new transmission lines and three new substations.

And in January, we filed a request with the Kentucky Public Service Commission for approval of a second natural gas combined cycle power plant and a 10-megawatt solar energy facility.

These generation projects total more than $700 million and will provide our Kentucky customers with reliable low-cost generation that meets the latest EPA regulations.

Turning to Distribution sales on slide 7, you'll see the total weather-normalized sales in the fourth quarter increased in both Kentucky and Pennsylvania from a year ago driven by higher industrial load.

In Kentucky, some of our automotive and steel customers maintained production levels in the fourth quarter with fewer maintenance shutdowns than we had in 2012.

In Pennsylvania, higher industrial sales were primarily a result of increased usage from the steel and cement industries due to commercial and industrial expansion projects in the region.

On annual basis, sales in both states were relatively flat driven by energy efficiency measures and regional economic conditions.

For 2014, we project load growth between 0.5% to 1% at both our Kentucky and Pennsylvania utilities.

Taking a look at slide 8, I have already mentioned the agreement to sell PPL Montana's 11 hydro plants to NorthWestern Energy.

The net proceeds from that sale will enable us to reduce financing needs for future capital investment in our rate regulated business segments.

Our Susquehanna nuclear plant achieved record output in the fourth quarter operating at a capacity factor of 100%.

We increased our total generation output at the facility by 12% in 2013 as we continue to analyze and assess detailed information on the performance of the turbines for both units.

We will be installing additional modifications this spring to address blade cracking issues with the goal to allow the units to run without repair for their full two-year operating cycles.

Finally, we continued our management of operating expenses at our Supply business by reducing costs by $40 million in 2013.

We expect to keep O&M essentially flat through 2016.

Before turning over the call to Paul, I would like to give you a summary of some of our 2014 objectives.

I have already mentioned approval of the northeast Pocono transmission line by the PA PUC in January.

This is a key step towards strengthening reliability in the region.

And our Susquehanna-Roseland transmission project remains on budget and on time for a mid-2015 in-service date.

In the UK, we expect the final determination from Ofgem on fast-track business plan approval for all four of our distribution networks by the end of February, and a decision on the cost of equity review the week of February 17.

In Kentucky, we're analyzing the potential for a rate case filling to keep pace with our significant investment in the state.

And we will continue to invest in our regulator infrastructure to ensure safe, reliable electric delivery.

Finally, we will continue our focus to manage cost at Supply and maintain positive earnings in that business.

So in summary, 2013 was an exceptional year for PPL.

We executed very well on our extensive construction plans and delivered strong earnings results including ROEs above 10% at all three of our utility businesses.

We continue to deliver on our commitments to customers as well with numerous awards in 2013 for our outstanding customer service, safety, and reliability, positioning the Company for continued success.

For 2014, we're confident in our ability to achieve our earnings forecast and the colder weather has provided a good start.

I look forward to your questions, and I'll now turn the call over to Paul.

Thanks, Bill, and good morning, everyone.

Let's move to slide 10.

Our strong fourth quarter reflects higher earnings from each of our operating segments compared to 2012.

Quarterly earnings at our regulated businesses increased driven by improved gross margins due to higher base rates in Kentucky, higher UK revenues on higher prices, and higher transmission margins in Pennsylvania due to capital investments and grid infrastructure.

In the Supply business, we experienced improved quarterly earnings, primarily due to higher nuclear generation output and higher capacity prices, partially offset by lower baseload energy prices.

Full year 2013 earnings from ongoing operations increased over last year due to strong performance from our domestic and UK utilities.

This performance was partially offset by the expected lower Supply segment earnings and dilution of $0.27 per share.

Let's move now to a more detailed review of 2013 segment earnings drivers starting with Kentucky on slide 11.

Kentucky earned $0.48 per share in 2013, a $0.15 increase compared to 2012.

This increase was due to higher retail margins, primarily due to higher base rates that went into effect on January 1 last year for LG&E and KU and higher earnings from environmental CapEx.

These positive margin drivers were partially offset by higher depreciation and dilution of $0.04 per share.

Moving to slide 12, our UK business earned $1.32 per share in 2013, a $0.13 increase over 2012.

This increase was due to higher utility revenue, primarily due to the April 1 price increases that impacted all four of our utilities and lower UK income taxes as a result of a lower effective tax rate, partially offset by higher O&M expense, largely due to higher network maintenance costs, higher depreciation due to higher network investments and dilution of $0.14 per share.

Turning now to slide 13, our Pennsylvania regulated segment earned $0.31 per share in 2013, a $0.09 increase over 2012.

This increase was due to higher distribution rates that went into effect on January 1, 2013, higher transmission margins and lower O&M primarily due to lower storm and support group costs, partially offset by higher depreciation and dilution of $0.04 per share.

Finishing with Supply on slide 14 for the detailed driver review, this segment earned $0.39 for share in 2013, a year over year decrease of $0.29 per share.

This decrease was primarily due to lower energy margins driven by lower energy prices, partially offset by higher capacity prices and increased nuclear generation output, higher depreciation and higher income taxes primarily due to state tax rate changes.

Partially offsetting these drivers was lower O&M primarily due to lower outage spending.

Segment results also include dilution of $0.05 per share.

Turning to slide 15, we have prepared a walk from our $2.45 per share in actual 2013 ongoing earnings to the $2.15 per share midpoint of our 2014 forecast.

Starting with Pennsylvania regulated, we expect higher margins to drive a significant increase in earnings in 2014 primarily due to transmission investments including a substantial amount of work on the Susquehanna-Roseland line.

In addition, we expect an increase in distribution revenue due to a full year benefit of the disc mechanism in 2014.

In the UK, we anticipate flat earnings year over year including a $0.04 negative impact as a result of our voluntary agreement with the UK Department of Energy and Climate Change and Ofgem to voluntarily reduce residential customer bills by GBP5 per customer on an annual basis.

As a reminder, these revenues will be collected in future regulatory years including a full carrying charge for the deferral.

UK regulated segment earnings drivers are a net result of increased revenues due to higher prices and higher incentive revenues, lower O&M due to reduced pension expense, higher depreciation, higher financing costs and higher income tax expense.

In Kentucky, we expect lower earnings in 2014 primarily due to higher O&M, higher depreciation and higher financing costs, partially offset by improved margins driven by environmental CapEx and modest retail load growth.

Finally, in Supply, we expect lower earnings primarily due to lower energy margins as a result of lower energy and capacity prices and higher depreciation expense.

These negative drivers in Supply are partially offset by lower financing costs and lower income taxes.

One additional data point for you regarding Supply for 2014.

Our forecast assumes a sale of the Montana hydro portfolio at the end of third quarter of this year.

On slide 16, we provide updates on our free cash flow before dividends.

Actual 2013 free cash flow before dividends was about $325 million higher than the projection we provided last February.

The primary drivers of the net increase include higher cash from operations at our regulated businesses including the benefit of higher anticipated earnings and lower capital expenditures at our Supply segment, partially offset by payments related to the termination of the Colstrip power plant lease.

Looking at 2014, we are projecting an increase in our free cash flow primarily driven by proceeds from the pending sale of the Montana hydro facilities.

In addition, we expect cash from operations to increase due to lower deferred taxes and lower pension contributions, and we also expect slightly lower capital expenditures in 2014 mainly in Kentucky.

Our planned capital expenditures for 2014 through 2018 are detailed on slide 17 with regulated utility investment totaling almost $17 billion over that period.

This includes previously announced initiatives such as UK spending per our filed REO ED-1 business plans, executing on our environmental compliance plans in Kentucky to meet EPA regulations, and the construction of two combined gas facilities, as well as updating and modernizing aging infrastructure in Pennsylvania.

In addition, our revised plan reflects incremental transmission investment of over $650 million in Pennsylvania through 2017 including $400 million for our improved system reliability programs that identify areas to strategically improve system performance including adding more automation to our transmission assets, and $250 million for our asset optimization programs to enhance or rebuild existing transmission assets to ensure their continued reliable performance.

Turning to slide 18, our updated investment plan drives a CAGR of about 7% in our projected rate base through 2018 driving value for both customers and share owners.

Finally, on slide 19, our Board approved a $0.02 increase in our common stock dividend increasing it to $1.49 per share on an annualized basis, as Bill mentioned, effective with the April 1 dividend.

This dividend level represents a 69% payout ratio based on the midpoint of our 2014 earnings forecast and the dividend is solidly covered by earnings from our rate regulated businesses.

That's the end of my prepared remarks.

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

Thank you, Paul.

And, operator, we're now ready to accept questions.

Thank you.

(Operator Instructions)

Kit Konolige, BGC Partners.

Good morning, gentlemen.

Good morning, Kit.

So to follow a little bit on the projection of cash flow and CapEx.

So in 2014, as you have described, Paul, the proceeds from the sale of the hydro assets gets you into positive territory on free cash flow before dividends.

In our projections going forward after 2014, you would continue to have a pretty significant deficit in that free cash flow before dividends.

Can you talk a little bit about your financing plans for the significant rate base growth that you are talking about?

Sure, and I think we've kind of covered this in prior calls.

We front-ended quite a bit of the equity with the convert securities.

We had the $1.15 billion that converted this past year, mid-year.

And we have another almost $1 billion, plus the equity forward that we did this past year, and then we have got almost $1 billion that is converting mid-year this year.

You talked about the $900 million pre-tax that is expected from the sale of the hydro facilities.

So as we look at our target credit metrics, we look at the internal cash flow, which as we move towards the back end of the plan from a domestic regulated utility perspective, gets much more -- much improved from where we sit today given that we are starting to harvest cash from these significant investments that we are making in the infrastructure.

We do get real-time recovery of a very significant majority of the CapEx across the regulated utilities base, the regulated utilities segment.

So at this point in time, we don't forecast the need for equity beyond basically what we have already got committed to the Company.

Okay.

And can you talk to us a little bit about the outlook for rate cases in Kentucky and Pennsylvania and the latest on the REO proceedings?

I think we have that update at the end of February, I think, from REO on the ROE issue.

Yes, starting with the UK on that point, Kit, we do expect the week of February 17 to have some signal on the ROE and then a final determination for our fast-tracking by the end of the month.

I'll ask Vic Staffieri to cover the Kentucky rate case outlook, and then following that Greg Dudkin for the PA outlook.

Sure.

Kit, we are looking at a rate case.

We are analyzing the notion rate case filing sometime in 2014 and we are the process of that analysis right now.

We are taking into account, of course, the capital constructions that are not otherwise covered by our [reis bar] as well as the test period that we are looking at right now.

We haven't made a determination when we would file or the amount, but it's something we are certainly considering for 2014.

And this is Greg Dudkin, Pennsylvania.

We do not intend to file a rate case in 2014, and we'll continue to look at the needs beyond 2014.

Okay, thank you.

Thanks.

And from Dan Eggers of Credit Suisse, please go ahead.

Hey, good morning, guys.

Good morning, Dan.

Hey, good morning, guys.

Wrong phone.

Just, I guess, real quick on the filing or the fast-track decision, what information do you guys expect Ofgem to provide as far as detailed financials and rate structure?

And kind of the transparency into what that full package looks like relative to what you guys gave last July when you provided the earnings outlook?

Well, I think just as a general proposition we don't expect a lot of changes because the plans themselves have been deemed as accepted as filed.

So I think the key piece that we are looking for is what they may decide on an ROE basis.

We do expect that to be a constructive outcome.

We know that based on our past experience that they have been very balanced.

They recognize our need to finance these companies and maintain strong financial metrics across the board both for equity as well as for the debt side.

So we're hopeful that the outcome, when we get it the week of February 17, will be a constructive one.

Okay, and, I guess, Bill, just on the force and drag this year because of the customer rebate.

Do we add $0.04 onto next year so this is a one-time re-calibration down and then you guys should earn that back to normalize where the UK is?

Yes.

This is Paul.

It will be spread over a couple of years.

But, yes, we'll get full recovery of that including an equity carry component to the charge.

It's really just pulling forward some of the benefit of the rate reduction that was otherwise going to happen with the shaping of revenues.

And, again, as long as we're able to get that full carry we were economically neutral and we're happy to do it.

Got it.

And, I guess, just, maybe, Paul, or Bill could give an update on the thought process around Supply, kind of evaluating your options and where you see that business fitting out and maybe when we'll get a decision on strategic future?

Sure.

As you know, our current plan is to optimize the plants and we're continuing to aggressively look at our cost structure and our operations to optimize the value to the fleet.

Having said that, we're certainly open to other opportunities and routinely assess the potential for adding further value in the Supply business and with the overall portfolio in total.

So we are willing to execute on opportunities as evidenced by our decision to sell the Montana hydroelectric plants.

Do you think there's a point, though, where you guys make an affirmative decision whether Supply is part of PPL on a long-run basis, or whether it's not part of PPL, I guess, for lack of a better word?

Or is this going to be a wait and see, and we're going to bug you with this question every quarter?

I do get this question every quarter.

And I think -- we do think there's inherent value in this high quality fleet that we operate and upside potential when we see the energy markets begin to recover.

We're continuing on the plan to maintain a positive EPS contribution from that business to the Company and continue to believe that can be accomplished.

But we're looking for opportunities to enhance the value all the time and continue to assess options.

I think it's an ongoing process.

There's no end date in mind, it's continuous, and we'll continue to assess options for that business.

Okay, got it, thank you, guys.

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

Hi.

Good morning.

Can you hear me?

Yes, good morning.

Excellent, my first question is the implied ROEs on your 2014 guidance for the Pennsylvania and Kentucky utility?

Could you talk about that for a quick second?

Vic, you want to --

Sure.

For 2014, we are looking between 8.5% and 9%.

And, Greg, in Pennsylvania?

Yes, from a regulatory perspective both combining T&D, it's about 10.8%.

Excellent.

And then, going back to the Supply business, could you talk a little bit more about the blade situation?

Just what the game plan is here for the spring in terms of outage, timing, and impact perhaps, if you could talk about that?

Sure.

I'll ask Dave DeCampli to cover that.

Yes, Julien, there's two outages planned for this spring.

We'll be taking one unit off just to do some modifications for the turbine blade situation.

That will be a relatively short outage during the month of March.

Physically, we're going inside the turbine housings and removing some of the ribbing in there that disrupts the steam flow.

We'll also be replacing the turbine blades in that unit to assure that we can get a full year run until its next refuel cycle in the spring of 2015.

Unit 1 comes off for its refuel outage and within the scope of the refuel outage, we'll actually be doing a different modification to this last row of suspect turbine blades.

We'll be installing a shorter redefined blade that we believe will be likely part of the permanent solution.

So these shorter blades will be installed and it will be done inside the confines of the refuel outage duration in April and into early May.

So we're doing two modifications, one on one unit, one on the other unit, both of which we think will contribute to the permanent solution to run two-year cycle to cycle.

Great.

Actually, could you talk about how much that costs just in terms of -- in your CapEx budget and perhaps from an EPS perspective?

If you were to normalize that out in the [1500s] just to make sure we're not capturing that on a go-forward basis?

Sure.

The impact last year with the multiple outages we had to take was about $30 million net income after tax impact.

The forecast going forward for 2014 would be a little more than half of that.

And then, of course, in performance year 2015, we expect to run full cycle.

The maintenance CapEx around those [6's] is not significant relative to the normal budget for Susquehanna.

Excellent.

Actually, since we're on the subject of CapEx, could you talk about a little bit about the shift in your 2014 CapEx budget, what exactly drove that?

It looks like it's WPD?

WPD was a small amount.

We provided that update at the time we filed the business plan in July.

It has gone up a small amount.

Most of the rest of it is relatively consistent with what the prior expected spending was.

We did add, as I said earlier, between 2014 and 2017 $650 million of transmission CapEx, so the maroon bar on slide 17.

That's a little more back ended but you do see some level of increased spending starting in 2014.

Great.

And just, lastly, from a CapEx perspective, on timing of Susquehanna-Roseland CapEx here.

Should we expect another disproportionate jump in earnings at the Pennsylvania utility changes?

Just trying to make sure we capture that project coming online and all that.

It's about -- of the improvement, the significant increase in margins that I talked about for 2014 on that earnings walk slide.

Susquehanna-Roseland was about $0.04 to $0.05 of that total amount.

It's the single biggest driver and then the disc program was about $0.02.

Great, and this should be continuing year-over-year, right?

Just to be clear.

Yes.

That's correct.

Great.

Thank you, guys.

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

Please go ahead.

Hi.

Good morning.

Good morning, Neel.

Paul, you referenced the $650 million increase in CapEx for transmission.

Could you talk more about what those projects entail, if they are smaller projects, and whether you need approval or you can just file them through formula rates?

Sure.

Let me have Greg address that.

Yes, these are all projects on our existing facilities, so it's basically rebuilding our older facilities.

We have some transmission lines that were built in the 1920s.

So it's basically rebuilding those lines, re-conductoring those lines, as well as about $400 million for improving reliability.

Which means things like having the automated switches, transmission switches, better relays, that type of thing.

They are all going to be recovered through the formula rate.

And what ROE are you assuming you get on these?

Well, the allowed is 11.68%.

And then, are there more projects on the horizon that you think you could add, or is this kind of the end with $650 million?

Well, this is our best look right now at our plans, so this is what we see as a prudent investment.

If there are other opportunities that arise, we'll take a look at those.

Got it.

And then around O&M optimization at the Supply business, could you talk about what you're specifically targeting, whether it's reducing O&M around Susquehanna?

And maybe what the normalized O&M inflation will be going forward at Supply?

Sure, as I indicated earlier, we did take out $40 million in cost last year in 2013.

The items are really more related to the fossil fleet than they are to Susquehanna.

We are not reducing O&M costs at Susquehanna.

And on an ongoing basis we are expecting flat O&M at the moment, but having said that, we're going to continue to look aggressively at ways we can reduce costs even below taking out the inflationary pressure.

Great, thank you.

Our next question is from Paul Patterson of Glenrock Associates.

Please go ahead.

Good morning.

Good morning, Paul.

A lot of questions have been asked and answered.

I just wanted to, just in terms of the trading volume that you guys see in 2014 versus 2013, just the Polar Vortex, or what have you, some more volatility.

Any change in the outlook or anything that you could share with us?

I would say the only change there is more volatility, obviously, in the forwards which to some degree we have taken advantage of by layering in some more hedges for 2015.

We are already fairly highly hedged coming into 2014, but we were able to take advantage of that at hedge price levels that are at or above our business plan, so that had a positive impact.

If you look at the overall mix between our generation and retail, the net effect of the weather in January we expect to be positive, although we have not closed the books yet for January.

But on a net basis, we still expect January to be positive to our EPS.

Okay.

And then what is sort of the forecast for trading of volume in 2014 versus 2013?

Has there been a change in that or how should we feel about that?

No, pretty much the same.

No change.

As you know, for us it's a fairly immaterial part of the overall earnings and business mix.

Okay.

Now, with respect to the transmission spend, should we expect a significant change in transmission capability?

Or is this just pretty much reliability kind of spending when you are talking about this re-conductoring or what have you?

Well, I think from a capability, Susquehanna-Roseland is a big piece.

The other ones are improved reliability of our system.

So it is improving the reliability of supply within our system within PJM.

Okay, so we won't see a big change.

Then finally, the RPM outlook.

Given that we now have that DR ruling, planning parameters come out, mopar exemptions.

Would you like to share with us what your thoughts are about what's going to be coming up here a minute?

Well, with the planning parameters having just come out, we're still in the process of assessing and modeling what does it mean for PPL and the pool in general.

We haven't completed that work yet, but we're continuing to take a look at what all this is likely to mean.

So unfortunately, I can't give you even a best guess at this point about what we think until we finish that modeling.

Okay, great.

Thanks a lot.

Our next question is from Paul Ridzon of KeyBanc.

Please go ahead.

Thank you.

Could you just -- I don't want to beat on Montana too much, but have you had expressions of interest?

Have you shopped it around?

And where in the process are we?

Well, on the hydro asset sale, let me just start there.

That process is moving ahead as we had anticipated.

Both state and federal applications have been filed.

Back in late December, NorthWestern Energy submitted their application to the Montana PSC, and there will be a discovery process followed by a public hearing which is scheduled for early July at this point.

We would expect the final FERC order by June which is what we have requested.

And we expect the Montgomery PSC to rule, hopefully, by around the September timeframe.

For the rest of the assets remaining out there, we are just continuing to assess what options we have for those and there's really no new update on that front at the moment.

And Paul Patterson touched on this a little bit but how much did the volatility hurt the retail business?

Well, again, on a net basis for us with the fleet that we have and with the retail, it's a net positive for us, but clearly there is a drag on the retail end.

I don't really have figures on exactly, as I mentioned, we haven't closed the books yet for January so it's really premature to give you a number.

But, clearly, we expect to get the net drag on the retail front, offset by a very positive outcome on the generating fleet side.

We're only between load following and retail, Paul, only a couple thousand megawatts.

If you go back to the 2008 shopping timeframe experience and everything that happened in that window when the liquidity drained up.

Retail and load followings are a relatively small component of the total hedge book and we expect we can keep it at those levels growing it organically and modestly.

You may be trying to triangulate what others are experiencing, but it's a small piece for PPL.

Got it.

Sounds like it was a good month to be net long.

Yes.

Thank you very much.

Our next question is from Steven Fleishman of Wolfe Research.

Please go ahead.

Yes, hi, guys.

Just a question on the CapEx and rate base slides.

It looks like your CapEx over the next four years is up over $1 billion but the rate-based numbers are actually pretty much the same or even a little lower in the initial years.

Could you explain that?

Yes.

I'm just kind of taking a quick look at those slides right now.

The UK is up a bit in terms of some improved FX assumptions and other things that we've layered on.

I talked about at the front end, the $650 million.

Actually, when you wrap in 2018 versus where we originally thought 2018 was going to be at, transmission and distribution reliability in Pennsylvania is up by almost $1 billion.

We'll have to get back to you in terms of that net increase and looking at 2017.

We were at roughly 28.

Some of this transmission spend does go in more towards the back end, so you wouldn't start to see that totally being feathered in until we get closer to the back end.

But we can get back to you on the differential on the net rate base.

Okay.

Great.

And then on the -- could you just maybe update us on your currency hedge position?

Yes, so for 2014, we're -- between the actuals in the books and where we sit with hedges -- we're in excess of 90%, 92%, actually, hedged for the current year.

And we're very materially hedged in the 70% to 80% range for 2015, as well.

Right around $1.59 for this year's hedges and close to $1.61 on next year's.

Okay.

Great, thank you.

Thanks, Steve.

Sure.

The next question is from Michael Lapides of Goldman Sachs.

Please go ahead.

Hey, guys.

Congrats on a good quarter.

Got a question for you.

How are you thinking about O&M and cost management once you kind of get the final ruling out of Ofgem in the UK?

Over the years, you have been one of the best -- you've been basically the best operator from an O&M and cost per megawatt-hour and other metric performance.

How are you thinking about the ability and the direction O&M will take over the seven or eight years in the UK?

I will let Paul answer on that one.

I would expect that we'd maintain the spending per our plans including what was filed with the REO ED-1 plan.

A lot of the cost efficiency that we were able to get out of the Midlands has been taken out.

I am certain that there are some modest things that we can do around continued supply chain optimization and other things.

But we spend the dollars on the network to create the reliability which drives our opportunity to outperform the bonus revenue targets.

And so everything that we look at is done on a complete cost benefit basis, not for short-term drivers.

And the spending that we're doing in the Midlands now, some of it is literally catch-up spending that E.ON hadn't performed, and we'll continue through that through the end of the DPCR5 period.

And then, again, the plan is to spend pursuant to the things that we're driving, the net income numbers that we provided on July 1 last year.

We'll update those numbers once we can internalize the final REO ED-1 outcome from a fast-track perspective.

But I wouldn't see cost reduction efforts being material in the UK as we move forward.

Okay.

And I want to ask a question about lag in Kentucky.

I know you get the environmental cost recovered via the ECR.

What about the cost recovery on the two combined cycles?

Is that only recovered via traditional GRCs or rate cases, or given that some of that is being built to replace some of the retiring coal units?

Any chance they eventually get recovery via a fast return mechanism?

No.

Today, they will only be recoverable both through general rate cases.

Okay.

Thanks, guys.

Sure.

Our next question is from Gregg Orrill of Barclays.

Please go ahead.

Thanks.

I guess you've really touched on this already, but in Kentucky, drivers for the rate case filing that you're going to be making?

The driver is the new construction, the combined cycle that we just discussed very briefly there.

It's going to be the, how much capital investment we will spend between now and the end of the year.

We want to recover that, obviously.

And so we are looking at what is the optimum time to file the case given the extreme of expenditures as well as the test period and whether or not a future rate years are in the offing.

Those are the analysis.

But it really will be driven by the capital investment that is not recoverable through the ECR.

Thanks.

You're welcome.

Our next question is from Nathan Judge of Atlantic Equities.

Please go ahead.

Hi.

I just had a question on Kentucky, as well.

What is the earned ROE for the last 12 months?

10.2%.

10.2%.

So is the reduction earned ROE that you expect in 2014 related to regulatory lag or, because that sounds like quite a bit?

It's got a lot.

It has increased O&M expenses because we have inflation.

We have wage increases.

We have got some additional outages that we didn't have in the 12 months ended 12/31/13.

And then, of course, the additional capital spend that's not otherwise recoverable through the ECR.

Those are the drivers.

As well as when we have modest load growth.

Using about 0.5%.

We don't have that much load growth to offset inflation and wage increases and the like.

That is what is going to be driving it.

Okay.

And so kind of just sticking beyond through 2015 and the flow-through of a rate case.

If you file this in 2014, when would we see returns get back to those levels that would be more acceptable?

We generally look to file rate cases when we fall below 9% on an ROE basis.

So we would -- if we filed in June of 2014, new rates would go in effect on 1/1/2015.

So it's about a six-month lag between the filing of the case and the new rates going into effect.

Okay.

Just generally, on the overall Company, could you give us an idea of the swing in pension expense this year versus last?

Yes.

For 2014, we'd expect across all the segments about a $0.07 improvement in pension running through the P&L, about $0.05 of that in the UK.

And then about $0.02 pretty much evenly split between Kentucky and then the balance of EU and Supply.

Okay, thank you.

And just finally on the Supply business, especially on the retail.

Given that it is a small part, we've seen some of your peers that it's not providing the kind of returns in invested capital that other opportunities are posing for them.

So how do you think of that business given how small it is and the kind of returns it's obviously providing right now?

Well, the biggest value for us is really on the ability to hedge the output of some of our fleet.

So we look at it really as a tool that we can use among other tools to place the generation into the marketplace.

So that is the primary purpose of it.

I think in terms of incremental investments to go beyond that, it is not something that we are focused on.

We're, obviously, very focused on the regulated side of the business and any incremental capital that we have is going into the regulated side of the business.

Is the capital employed in that retail business more or less than what it would be if you went out and hedged it?

It would be -- it would be less than if we went out and just did straight forwards or collars where we'd, on a mark-to-market basis, to the extent that prices go against us and rise after we lay in those hedges.

We are posting collateral at the ICE and NYMEX and the exchange is given at the OTC side of things has pretty much dried up.

I f we use the traditional hedges and we do, as we do expect to see a rise in price environment we would be drawing on LCs and cash postings to be able to meet those calls.

On a working capital basis, it consumes less.

So how much of your retail provides a hedge to your overall generation then?

Oh, less than 20%.

9% in 2014.

9% in 2014.

So conversely then it would make sense for you to increase that business, right?

Well, again, we have lived through -- we just got done answering a couple of questions on what retail load experienced here in the month of January, which has clearly been negative.

Because the weather has been -- we forecast normal weather ranges around the volatility in that load plus volatility around things like shopping.

The weather has truly been exceptional in January and even the front part of February here.

So, as I said earlier in my comments, we have lived through some of this volatility in the past in 2008 and 2009 when shopping levels were high.

We'll plan to keep this business to be relatively modest in size.

It's a good natural hedge because most of the hedging we're doing is to customers right in the same neighborhood that this generation has been hedging since it has been built.

So I wouldn't look for us to be aggressive in adding to that.

But there will be periods of time when that retail book provides better return opportunities than the gen does and periods like in January and February where the gen provides the better value proposition, if you will, the total margins.

But we'll continue to be modest in retail.

I would just add that when we look at retail, you have got to look, of course, at what are the margins that that business can achieve based on the competition in the marketplace.

Is that incremental margin compared to your other opportunities worth the incremental risk that you're picking up.

So, as Paul mentioned, on the positive side, you can lock in basis that you can't necessarily lock with standard products.

You don't have the collateral.

It's a good match for us to our generation.

Those are the positives, but on the negative side, your margins may not be commensurate with the risks that you are taking on.

We have to balance all that and then assess what is the proper and appropriate level of hedging we want to do via the retail market.

Okay.

Thank you very much.

Our next question is from Anthony Crowdell of Jefferies.

Please go ahead.

Good morning.

I just want to ask the 100th question on Supply O&M.

Just trying to get more granularity on maybe how you can manage this and how low it could go.

What is a good range if I wanted to model out for the power plants?

A good, like say, O&M per kW for nuclear and coal assets that you guys have?

Well, on the nuclear side, as I mentioned earlier, we're not looking to necessarily cut the O&M.

That is a unique asset, and we don't want to take any chances with not fully supporting the plant.

When you look at the O&M on a kW basis on the other facilities, the fossil and the hydro, that is something we continue to benchmark and look at best practices.

I don't have a number off the top of my head that I can give you.

I would just say that we are going to continue to look for opportunities to aggressively cut costs where we can.

And I think what we did in 2013 with the $40 million is an appropriate level and it's probably in that kind of a range that you're going to see going forward that maybe we can continue to target taking out.

But beyond that, very hard to answer that question without more benchmarking.

We do -- this is Dave DeCampli.

We do have verified on our nuclear assets that we benchmark extremely well in O&M cost per kWh or kW as compared to other fleet units, dual-unit fleets, and dual-unit standalone facilities as well.

So we are really well in the game with our O&M costs at the nuclear facility.

How about kind of like taking a second bite of the same question.

When I look at, say, 2012 O&M for Supply, it was like $1.040 billion.

You knocked off $40 million, so 2013 is about $1 billion.

How much of that is for power plant maintenance versus maybe other stuff that is in that line item?

Yes, it's about -- it's about an 80/20 split between, 80% being that applied more direct to the Supply business.

20% being more of the corporate and other overheads.

And of that 80%, probably I'd say about $600 million to $700 million of that is direct O&M associated with plant operations.

Great.

Thank you.

You're welcome.

Our next question is from Jonathan Arnold of Deutsche Bank.

Please go ahead.

Good morning, guys.

Good morning.

Just quickly on the UK, you said that you are hopeful of a constructive outcome on cost of equity.

Can you give us a sense of does that mean it's constructive in your mind?

No change from what you filed or constructive sort of in line with the suggested 80 basis points that they talked about when they came out with the initial fast-tracking.

Any color on that relative to your guidance ranges?

Yes, constructive to me would be something less than the outcome that they saw in Ireland.

So -- and I would say that our expectation it is hard to gauge, but would be that Ofgem would take a look at our specific performance and, accordingly, grant us something that is reasonable.

I would say if it came out somewhere in between we'd just kind of have to assess.

But I would expect that if it is not the status quo, meaning no change, it's going to be something -- I would hope it's something less.

And we would just have to assess once we get to that point what that means and what actions, if any, we would take as a result.

And when you say lesser and less significant a reduction?

Yes.

Okay.

And then on -- just in terms of, so I understand the process.

Have you effectively been fast-tracked sort of pending accepting an outcome on the ROE piece, so it's sort of in your court when that decision comes out or has that decision already been taken?

I can't remember what your options are at that point?

We could -- right now, we're waiting for February 17, that week, for an outcome on the ROE.

We'll then assess what our options are at the end of that period.

However, my understanding is that we could go the slow-track route if we weren't happy with the outcome.

But I think that might be unlikely given the value and the benefit of the incremental revenues that you get by fast-tracking.

I would think that that's a low probability, but, again, we'd have to wait and see what Ofgem tells us in the outcome on the week of the 17th and assess where we are at that point.

Great.

Thank you, Bill.

Sure.

Our next question is from Brian Chin of Merrill Lynch.

Please go ahead.

Hi.

Good morning.

Good morning.

Just a follow-up on Jon's question.

In the, let's hope, unlikely event that the ROE decision is not as constructive as you deem.

Can you give a sense about how long your assessment period might be before you'd notify, what your course of action is going to be?

I think it would be relatively quick, probably within the week.

Okay.

And then I did hear your -- as a second separate question -- I did hear your answer to Paul Patterson on RPM.

Just one small question RPM still.

We did notice that the PPL region was broken out separately by PJM and they have indicated that regions that were broken out separately were due to potential future generator deactivations in each LDA.

Now it doesn't look like the PPL region is particularly transmission constrained, so it would seem as though potential future generator deactivations is what they are concerned about.

Any color as to why the PPL region was one of the three regions that PPL broke out because of that thought process?

Yes, I really don't know why.

I would not think that it is driven, at least not predominantly, by generator deactivations.

I am not aware of any significant generators that are planning to retire and it's certainly none of the PPL generators.

So until we get more clarity on that, I'm not exactly sure why they believe it could break out.

Very helpful.

Thank you.

Okay.

Sure.

The next question is from Shahriar Pourreza of Citigroup.

Please go ahead.

Good morning, everyone.

Good morning.

Most of my questions have been answered, but let me ask you on your fuel hedges.

Despite the move that we have seen in gas, you have seen coal prices kind of come off, but your hedge profile hasn't really changed, at least at the long end of the curve.

Could you maybe just comment on whether you have been able to layer on some more fuel hedges, at least on the coal side post-Q4?

Sure.

Dave?

Yes, our coal hedges for 2014 are standing at about 94% and 2015 about 63%.

Beyond that, we're just continuing to take a look at the price of coal, market prices for energy, and we'll hedge in as appropriate.

But we stand currently at 94% and 63% for 2014 and 2015.

Okay, and your coal hedges haven't changed for 2015, right, since EEI?

No, not materially.

The last couple of years we have rolled some coal in contracts and piled into the subsequent years.

So, again, depending upon where we see capacity factors, especially this spring and fall, you could see some movement ultimately between the years, as well.

The value of the hedges is the value of the hedges so we have captured that.

We're cognizant of the trending in the decline in coal prices and we'll monitor that.

But I don't think we're going to be out actively pursuing significant increases in these hedge levels in the near term.

Got you.

And just one last question.

Have you, in your native load around the service territory, have you seen any third party retail providers exit the system?

Given their recent volatility?

I don't know that we have seen any material ones.

I think we've heard of a few very small providers going out of business, but we don't really have a lot of data points to be honest.

Okay.

Thanks very much.

Operator, we're coming up on the 60-minute mark here, so we'll take one more question, please.

Our last question is from Brian Russo of Ladenburg Thalmann.

Please go ahead.

Hi.

Good morning.

Could you update us on the closure of Unit 4 repairs?

Have they been concluded and is the unit back on line?

Yes, this is Dave DeCampli.

Colstrip Unit 4 came back on line full power in late January, so it is returned to service.

Great, thank you.

Okay, you're welcome.

Okay, operator, I believe that's it.

And thanks, everyone, for joining us today.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.