賓州電力 (PPL) 2014 Q2 法說會逐字稿

Good morning and welcome to the PPL Corporation second quarter 2014 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. Now I would like to turn the call over to Joe Bergstein, the Vice President of Investor Relations. Sir, please go ahead.

Thank you. Good morning, everyone. Thank you for joining the PPL conference call on second quarter results and our general business outlook. We are providing slides of this presentation on our website at www. PPLweb.com. Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to differ is contained in the appendix to this presentation and in the Company's SEC filings. At this time I'd like to turn the call over to Bill Spence, PPL Chairman, President and CEO.

Thank you, Joe. Good morning, everyone. Thanks for joining us today. With me on the call this morning for the first time is Vince Sorgi, PPL's new Senior Vice President and Chief Financial Officer. Welcome, Vince. Also on the call to answer your questions are the presidents of our four business segments. As I noted with the Talen announcement, Paul Farr has assumed the role of president for PPL Energy Supply through the transition process and will become CEO of Talen post [spend].

Moving to slide three our agenda this morning starts with an overview of second quarter earnings and operational results, and an update on our 2014 forecast, which we have raised for the second time this year. After my remarks Vince will review our segment financial results and then Paul will provide an update on the progress of the supply spinoff. We will then open the phones to your questions.

Turning to slide four, today we announced reported earnings of $0.34 per share for the second quarter, a decrease from $0.63 per share in the second quarter of 2013. Adjusting for special items are earnings from on going operations or $0.53 per share in the quarter, an 8% increase over last year's second quarter ongoing earnings of $0.49 per share. Strong performance at each of our regulated utilities, with stronger margins from our competitive energy supply business, lead to solid results through the first half of the year.

Year to date reported earnings were $0.83 per share compared to $1.28 per share in the first half of 2013. Earnings per share from ongoing operations for the first half of the year were $1.33 per share compared with $1.20 per share in the same period a year ago. The strong year to date increase in on going earnings was driven in part by a combined $69 million from our domestic utilities, driven by returns on additional transmission investments in Pennsylvania and on power plant environmental projects in Kentucky.

Let's move to slide five for an update on our 2014 ongoing earnings forecast. I'm pleased to say that today we are increasing the forecast [from] $2.20 per share to $2.40 per share. As you can see in the segment information on this slide the forecast increase is primarily driven by strong performance from our supply segment, which is driven largely by expected margin improvements from our base load assets.

As noted in our news release this morning, we benefited from unrealized gains on certain forward commodity positions during the first half of the year, primarily in the second quarter. However, we expect the majority of this to reverse in the second half of the year and have incorporated this reversal into our updated forecast. We also see a slight uptick in the uk regulated segment.

Now let's turn to slide six for an update of our regulated operations. For the therd year in a row, PPL Electric Utilities has ranked highest among large electric utilities in the eastern United States for residential customer satisfaction in a study by J.D. Power. The award is the utility's 22nd from J.D. Power and the 11th for residential customer satisfaction alone. With this award, PPL's domestic companies, PPL Electric Utilities, LG and E, KU and PPL EnergyPlus have won a total of 38 J.D. Power awards, more than any other company in the country.

And in the UK, our four operating utilities captured the top four spots for customer service and satisfaction in the regulators' rankings for the year ended March 31, 2014. This exemplary record of customer service continues to provide benefits for our customers and for our share owners. In another key development, PPL Electric Utilities filed a plan with the Pennsylvania Public Utility Commission on June 30th seeking approval to replace existing electric meters with new smart meters that will improve service to customers and fully comply with state metering requirements. The project will cost about $450 million, of which about $300 million has been reflected in our capital expenditure forecast included in the appendix of today's presentation.

Under our proposal installation would begin in 2017 with all new meters in service by the end of 2019. Also this morning, we announced a PPL Electric Utilities proposal to PJM as part of the competitive solicitation process under FERC Order 1000. As currently proposed the 500 kV transmission line would run about 725 miles from western Pennsylvania into New York and New Jersey and also south into Maryland. The project is in the preliminary planning stages. The new line would improve electric service reliability, enhance grid security and enable the development of new gas fired power plants in the shale gas regions of northern Pennsylvania.

The proposal would create savings for millions of electric customers by delivering lower cost electricity into the region and reducing grid congestion cost. According to preliminary estimates the cost of the project, which is not yet included in our CapEx projections would be between $4 billion and $6 billion. Because of the magnitude of this proposal there is a good chance we may enter into partnerships to develop and build the project.

The preliminary time line envisions completion of the project by 2023 to 2025, assuming all necessary approvals are received and construction begins in 2017. Approvals are needed from various regulatory and regional planning entities. We'll keep you posted on any further developments. Moving to slide seven, you'll see that whether-normalized sales for the quarter in Pennsylvania and Kentucky were in line with our 0.5% load growth forecasts.

In Kentucky we're starting to see some improvement in our commercial sales and our industrial sales continue to grow, driven by expanded production from the steel and auto industrial segments. On the residential side, weather-normalized sales were lower for the quarter but were offset on an actual basis by weather effects, given the significant increase in [cooling] degree days in May and June compared to 2013. In Pennsylvania residential customer use increased due to higher customer counts compared to a year ago and higher use per account.

Industrial sales also continue to show improvements over 2013 as the steel and cement sectors posted solid increases in demand. The commercial sector slowed a bit in the quarter after a strong first quarter, which leaves weather-normalized growth flat year to date. Moving to slide eight, our supply segment performed very well in the second quarter with improved capacity factors versus last year at almost all of our major eastern facilities. Our eastern coal units operated at an average capacity factor of 64%, which was a 9% increase over the second quarter of 2013.

This was driven by an unplanned outage at Montour last year and improved demand in PJM. The combined cycle gas units also ran very well, achieving an average capacity factor of 98%, a significant improvement over last year due to a planned maintenance outage at Ironwood in 2013.

Finally, Susquehanna -- Susquehanna's nuclear capacity factor improved for the quarter by 17% due to the timing of outages in the first half of 2013 compared to 2014. On the turbine blade issues we have installed newly designed blades this spring on Unit 1 in Susquehanna during its scheduled refueling and maintenance outage. Early results have been positive, as we've seen a significant reduction in blade vibration on the turbine that received the new, shorter blades. We will continue to analyze the unit's performance over the course of the year.

Pending the results of a full analysis and the vendor's final assessment of a root cause, our plan is to install the newly designed blades on Unit 2 during its scheduled refueling outage next spring. In the meantime we will continue to monitor blade vibrations and appropriately inspect potentially cracked blades and replace them as necessary, as we've done to safely and effectively operate the facility in the past. Moving on to the pending sale of the Montana hydro facilities to NorthWestern Energy, regulatory review of the transaction continues.

The Montana Public Service Commission continues its review and recently completed its hearings as scheduled. And just last week FERC approved the transfer for the Kerr Dam hydro license, which had been pending since March when all of the others had received FERC approval to be transferred to NorthWestern. We did not expect the sale to close before the fourth quarter of 2014, and as a reminder PPL will retain the proceeds from the sale.

We're also making very good progress in our spinoff of our energy supply business, which we announced in early June. We've completed nearly all of the required regulatory filings and we have transition teams up and running. We remain on track to complete the transaction, which will create a new publicly traded company called Talen Energy in the first or second quarter of 2015.

Finally, we continue to execute at a very high level and remain focused on delivering value for share owners. I'm very pleased with our second quarter and year to date results, which allows us to increase our earnings guidance again, and we continue to target at least 4% compound annual growth in earnings per share, excluding Energy Supply. I look forward to your questions and I'll now turn the call over to Vince.

Thanks, Bill, and good morning, everyone. Great to be with you on my first earnings call. Let's start with a more detailed financial review on slide nine. PPL's second quarter earnings from ongoing operations increased over last year, driven primarily by improved earnings at our supply segment and at both of our domestic utilities. The UK-regulated segment was $0.02 lower than 2013, with weather being a contributing factor. Let's move to the detailed segment review with the UK results on slide ten.

Our UK-regulated segment earned $0.33 per share in the second quarter, a $0.02 decrease from last year. This decrease was due to higher U.S. income taxes from a positive adjustment in 2013 related to a favorable IRS ruling on prior years earnings and profits calculations. We have higher depreciation from assets placed in service and higher financing costs from higher debt balances. The decline in earnings was partially offset by higher utility revenues, due primarily to the net result of higher prices and lower volumes due to weather. We also had lower O and M, driven by lower pension expense.

Moving to slide 11, Kentucky earned $0.09 per share in the second quarter, $0.01 increase compared to a year ago. This increase was driven by higher margins from additional environmental capital investments, partially offset by higher O and M due to the timing of coal plant maintenance and higher storm expenses. Turning to slide 12, our Pennsylvania-regulated segment earned $0.08 per share in the quarter, a $0.01 increase compared to last year.

This increase was primarily the result of higher transmission margins, driven by additional capital investment. Moving to slide 13, our competitive generation segment earned $0.06 per share in the second quarter, an increase of $0.05 compared to last year. This increase was primarily the result of higher eastern energy margins, driven by improved base load availability from Susquehanna and also our coal fleet, both primarily driven by outage timing. We also had higher capacity prices and $0.04 of unrealized gains on certain [forward] commodity positions. These positive drivers were partially offset by lower hedged base load energy prices.

On slide 14, we've provided an update to the UK earnings projections for 2014 to 2016, reflecting a significant improvement from expectations in July of 2013 when we filed our RIIO business plans with Ofgem. For 2014 our strong UK performance is incorporated into the increased guidance that Bill mentioned in his remarks. Our 2015 mid point of $1.36 was communicated in June when we announced the supply business spin and provided our 2014 earnings forecast for PPL, excluding the supply business.

For 2016 we are showing an $0.11 increase from the mid point provided last July, primarily driven by lower projected O and M costs, including lower network maintenance expenses and lower pension expenses as well as a projected improved currency exchange rate, which is based on an average rate of $1.67 per pound compared to the $1.58 assumed last year. These benefits are expected to be partially offset by lower revenues from the final RIIO-ED1 revenue determination, as well as higher interest expense.

On slide 15 we showed the updated projections of cash repatriations from WPD back to the U.S. for the 2014 to 2016 time period. We continue to expect strong cash flows from WPD as we transition from the current regulatory period to RIIO-ED1 beginning in April of 2015. That completes the more detailed financial overview and I'll now turn the call over to Paul for a brief update on the progress being made on the supply spinoff. Paul?

Thanks, Vince, and good morning, everyone. My update today will be pretty quick. We've been extremely busy since the June 9th announcement and on slide 16 we outlined some of the major milestones and activities currently underway. Last week we received commitments for a new $1.85 billion five year revolving credit facility for Talen Energy that will be available when the transaction closes. Earlier this month Riverstone successfully executed its planned $1.25 billion bond offering to refinance the project level debt at Raven, Jade and Sapphire.

This debt will be assumed by PPL Energy Supply when the generation businesses are merged. The bonds carry a five year maturity and 5.125% coupon, subject to a 50 basis point step down if Talen achieves certain targeted credit ratings at the time of the merger. Finally, we completed three of the four planned regulatory filings this month.

We filed a Section 203 application with FERC, citing two separate marget mitigation proposals, an application with the NRC for the indirect transfer of the Susquehanna nuclear licenses and an application with the PaPUC here in Pennsylvania for the change of control of the IEC pipeline utility just yesterday. The DOJ filing is on schedule for the fall of this year given their review process. This progress keeps us on schedule for an expected closing of Q1 or Q2 next year, as Bill mentioned, and we'll keep you updated along the way. With that, I'll turn it over to Bill for the Q and A session.

Thank you, Paul, and, Operator, we're ready for questions.

Yes. Thank you. We will now begin the question and answer session. (Operator Instructions). The first question comes from Kit Konolige with BGC.

Good morning, guys.

Good morning, Kit.

I just wanted to follow a little bit on the new guidance with respect to supply. Can you go into a little more detail about -- I am not sure I completely understood. The second quarter showed gains on mark to market that reverses later this year, but the net is still better for the year if I understand it? And then can you also address what kind of hedging actions you took looking forward during the second quarter?

Sure. But you are absolutely right, we expect some of the gains that we experienced in the second quarter to (inaudible) in the (inaudible) of the year, but still it would be a net positive. Vince can probably provide the color on the exact numbers there. So --

Sure, Kit. Thanks for the question. The supply (inaudible) is really -- you can think of it half of it is just improved margins from the base load fleet, and the other half is improved M&P margins, $0.02 of which is coming from the unrealized gain.

Yes. Okay. And Paul do you want to cover the other part of the question?

Yeah. Kit, you will note when you look in the back, in the appendix, it will look like our hedges decreased in 2015. That's primarily because on an economic dispatch modeling basis with the improved prices that we saw in the second quarter more generation was economic, and so there's just simply more generation. Given our target hedging program, kind of one year forward, to be about 75% hedged. Looking forward to the transaction, we are pretty much on schedule with those hedge levels. So we weren't doing a significant amount of hedging for '15. We did do some for '16 on that 5% year two mark.

And, Paul, just to follow on that a little bit, do you expect the new Talen hedging strategy to be similar to that, or well that be a whole new ballgame?

Yes. That would be pretty close to that. At 75%, one year, 25%, second year. We are also doing 100% of the retail and the utility load following hedging out of the generation book, which is a little bit different. And one way to think about is we'll just simply be constrained from a liquidity perspective. We are basically increasing the amount of generation that has to be hedged by 50%, with a 50% reduction between the size and liquidity facilities and cash we've got. So it is just -- it is a liquidity targeting exercise just like it was when it was energy supply, but we had bigger facilities and a smaller fleet.

Right. Very good. Okay. Thank you.

Thank you.

Thank you. And the next question comes from Dan Eggers with Credit Suisse.

Good morning, guys.

Morning.

Bill, can you maybe get a little bit more into this transmission project today? I guess, you know, kind of how the process works from announcing looking at something to where we will see action and what kind of dollars you have to spend up front? And then if you look at the challenges you guys had with [Rowe's London, other folks have had in the past trying to building these, you know, Pennsylvania east type of transmission lines, and how you think you can approach it to make it a higher chance of success?

Sure. So the process, itself, is one that is not well been traveled in the past as you know. It is a relatively new process. So, we will continue to work with all of the stakeholders to make sure that we do everything in our power to make sure that we get this approved on a -- as timely a basis as we can. Maybe, I will ask Greg to take you through kind of what we understand to be some of the key milestones and processes we have to do to make this a reality. So, Greg?

Yes, thanks. So first off is the filings. PGM had a window that just closed recently. So this project, project compass, was filed as part of that window. As far as approvals are concerned, so this project not only as part of PGM by also goes into the New York ISO. So, we will need approvals from both entities. Also, we'll need State approvals as well as utility commission approvals. So for me what increases the probability of success is just the compelling nature of this project. When you think about what's happened in the industry over the past year, the polar vortex substation security being a big issue; coal retirements being a big issue, this project really pulls all of those issues together and provides significant benefits to the consumers in the region. So, I think it is the compelling nature of the benefits of this project that will help the project move forward. We are putting together an outreach plan. In fact, I started this morning to get people that will be involved in the project up to speed and be looking to work with others to make sure that this is a success.

So we should -- this will be I guess probably a little quiet from our perspective for, you know, in a period of time while you get your ducks in a row? Is that the way we should think about it?

I would say so. Because of all of the entities we have to work with, my sense is that we will have a better idea about the time line as far as approvals by the end of this year, but it should be fairly quiet from your perspective.

And then the money you are putting into it now, is there a root for recovery if this is not successful or is this money you guys are (inaudible) for the PPL for the time being?

This is something that is not recoverable, so we'll -- if it doesn't go forward then we will just have to eat that.

Okay. Thank you. And I guess just, Paul, just a logistical question, but with the work that you have done, Susquehanna is still next year, and the timing of the IPO, how have you guys arranged to source the funding and the capital for both the outage and the work that's got to get done?

Yes. So when we signed the transaction documents with Riverstone, basically at that time the two companies are pretty much economically tied at the hip. From from the standpoint of the cash that is generated by the business except for the payment of shared services taxes and a fixed dividend stream, the cash stays in the business. It is the cash that will be there at close. It's cash from the mitigation with whichever of the two packages we pursue and sell those assets. It is the liquidity facilities that we have in place, so there's very ample liquidity to fund an outage. And remember all of the capital expenditures that relate to equipment replacement are under warranty with Siemens and that it's on their nickel, ours.

Okay. And I guess just use -- can you remind me what the process is going to be to determine which package of assets gets chosen for sale, and what we should watch the time line for that happening?

Well, we requested two different packages, so just to remind everybody the first package is the Sapphire -- most of the Sapphire portfolio from Riverstone, and the Ironwood plant. The second package is that same Sapphire portion of the portfolio. The Crane facility in Baltimore and the Holtwood and (inaudible) pack here in Pennsylvania. We will be approaching the market even in advance of receiving approvals to gauge investor interest, and we will move forward with both packages and determine which of those has the best outcome from a perspective from Talen share owners. So look at the relative level of EBITDA and cash flow that the asset portfolios generate versus sale proceeds that we -- that we think we can secure in an auction process.

Okay. Got it. Thank you.

Thank you. And the next question comes from Greg Gordon with ISI Group.

Thanks. Good morning, gentlemen.

Good morning, Greg.

So the UK, the guidance raise in the UK, we are now at $1 -- what is it, $1.30 to $1.42, and the prior guidance range was $1.17 to $1.33. I think the last comment you made was that you'd be at the high end of that prior guidance range? So, what can you tell us in terms of how we should think about where you will fall out in 2016 within the $1.30 to the 1.42? What are the key drivers that would swing you towards the low end of the high end there ?

Let me ask Rick Klingensmith to respond to that question.

Sure. In 2016, the midpoint of the range is $1.36, and, as Vince mentioned, significant drivers that get us there have been lower revenues, but offset by O&M reductions, as well. But it has been predominantly tax planning has helped us. Currency has helped us as we are now forecasting $1.67 per pound versus $1.58 per pound, and lower pension expense has helped us, as well, to keep us within the high end and actually surpass the range that we provided you last July to where the ranges are today. And so it would really be changes in those assumptions that would drive us to the high or low end of the range that you see for 2016, around that $1.36 midpoint. So, those are the factors that were driving that.

Have you substantially hedged the position on currency or is that just sort of a mark to market?

In 2016, we are about 56% hedged at a rate of 166, and so the unhedged portion, about half of it remains as an open position for currency in 2016.

Do you have a sensitivity on the remaining position?

On the remaining position of sort of a nickel change in currency is about approximately $12 million change in earnings.

Thanks. I also noticed that the rate base slide, the rate base numbers for the total regulated side of the business are up substantially, but that's all in the UK side of the business?

That's correct, and that is all currency driven, so the change in assumption from the $1.58 to $1.67 is the change in the dollar value of those. There has been no change in the pound component of the [RAB or the CapEx.

Got you. Thanks. And a question for you, Paul, as we look at a Talen, you are one of the generating companies that's the most exposed to a widening basis and the northeast.

Yes.

Both positive and negative, lately to the negative. Can you tell your investors what is the strategy? Are you going to run substantially open in that business in order to not -- in order to capture volatility and avoid having to sort of hedge in at these weak current forward curves? How do we think about if we are trying to value that entity, and we are using the forward curve as a base case?

Yes.

You know, that's not a very good base case. So how do we get comfortable that there is a good business proposition there given current market conditions?

Well, we are siting on -- I mean on a peak basis, at least, and you focus on 15 or 16. We are sitting pretty much right between where we started the year and the peak of the prices kind of that we saw in the June-type time frame. We are still seeing, on a gas basis perspective, some of the benefits from the polar vortex in the winter period. In the summer period, if you look at gas it is a bit softer. Whether you look at [Tedco or whether you look at Marcellus-based numbers, we have simply not had � � so, we had extraordinary weather in January, and we've had literally no summer yet. We have had -- well no summer here, and we are just starting to have a summer in Texas. So, I think when you think about the pricing I still think that the low 50 to 52, 53 on a peak basis number are achievable. I think we will see another rally as we get toward winter, as we typically do in that time of the year. We are, as you said, not compulsed ahead. You know, as I mentioned, when I answered an earlier question, simply on a liquidity basis our targets are much lower than they were when inside PPL and trying to de-risk that as much as we could. We simply won't be able to given we will have lower liquidity to post as collateral against the hedge positions and we do want to run more open, as you indicated, to take advantage of price improvements when they come.

Thank you, Paul. Thanks, guys.

Very welcome.

Thank you. And the next question is from Julian Dumoulin-Smith from UBS.

Good morning. With regards to (inaudible) process, I'd be curious, why more than one gigawatt? I mean I suppose is that just driven by your analysis about what's necessary, or was there any market view there about trying to get rid of portfolios in entirety, or just any other reason there?

Julian, this is Paul. Really there is no change. When we talked about it on the day of the announcement we talked about a thousand mega watts of base load equivalent. When you look at the Sapphire portfolio, which is simple cycle and combined cycles, less efficient combined cycle plants, oil, gas, in Jersey, when you look at Ironwood today, as Bill indicated, at 98% capacity factors as more base load. The Crane plant has a very low capacity factor on an annual basis, and then the Hydros are the 5%, 60% (inaudible) river plans. Just when you do the math that gets you each of them to 1000 mega watts of base load equivalent. They happen to be roughly the same in terms of total mega watts at 1350-ish, but it's really the equivalency that we are trying to get to.

Excellent. And could you talk a little to your coal hedging? That seems to have switched around a little bit, but perhaps that might be due to the generation.

It is generation related. That's correct.

Got you. Excellent. And just to clarify here in terms of what you were saying before, the CapEx changes entirety are due strictly to the FX change, right? There is nothing fundamental underlying that at all. Is that correct?

That's correct. Right.

Excellent. And just to be clear as well when you are thinking about the process I suppose there is a little bit of uncertainty there. You wouldn't expect that the change as the rest of the process -- those who were not fast tracked, ultimately, get their decisions out, the CapEx is not likely to change at that point either?

No, there would be no change.

Okay. Excellent. Thank you.

You are welcome.

Thank you. And next call comes from Neel Metra of Tudor Pickering.

Hi. Good morning.

Good morning.

Question on the transmission project. It looks like the map you provided, the starting points are really kind of where the new CCGTs that are announced for PJM in '16 and '17 are being built. Is the -- it's kind of the economic reason for the project that some of those gas plants that are going to be built right on top of the shale, they just don't have enough transmission capacity to get to where they need to to provide reliability or is there another real economic benefit that I am not seeing?

Well, there's a number of potential benefits, and I will let Greg describe some of those. But that clearly could be one of them, there are others as well.

So I would say when we are -- when potential generators come to us one of the issues is they need to, obviously, connect to our transmission, and in some cases that can be very, very high cost, so part of the thinking on the economics is if we site it through the region, the cost to connect where those generators would be much less. Again, with potential coal retirements, we think that there is an economic advantage for that on a going forward basis. And we use pretty conservative assumptions around generation retirements, but beyond that there are reliability benefits. Again, we talked about substation security. There are benefits that actually we -- we didn't really factor in the economics, but I think there would be a significant economic benefit there, reduce congestion. So, all of that when you factor all of those together it is a significant positive economic benefit to the consumers.

Great, and then a question for Paul. With Talen I think you mentioned that you would want to expand in west PJM in Texas, I wanted just a question on, you know, how you would think about timing for acquiring assets? Would you do it before the spinoff? And what's -- when you look at the market what is the optimal time to be buying assets? Would you rather be buying right now with what is up for sale or would you rather wait until next year?

Well, we're following all of the processes that are going on right now, so we know everything that is on the market. We think we know what is coming on the market in the fall and in spring. So, we are actively following it. If there was something compelling there wouldn't be anything, provided we reached a consensus around that with Riverstone, there wouldn't be anything that would prevent us from approaching the market right now. So, I think anything that is in PJM that would have the potential to complicate any aspect of the regulatory approval process, especially when we've got known market power issues to deal with, probably wouldn't be a high probability that as wewe move through time and we secure those approvals, and they agree with the mitigation plans provided the area of PJM we would be buying in wouldn't further complicate that there would be no problem there. We are actively watching that, as we said, right now. But, as I said, we have the Hydro-sale process underway in Montana. We are looking at other potential non core asset disposals. We've got the mitigation processes we will be evaluating as well. So the deal team has quite a bit on the plate already as well, so we will be judicious.

When you talked about not complicating the divestment process would West PJM complicate that, or would that be separate from 10 of the central East PJM divestitures you are looking at?

Yes. I mean as long as we are well west of [5004, [5005, then I think that that wouldn't complicate things. So, yeah. We wouldn't be against it if the right opportunity came along.

Great, thank you.

You're welcome.

Thank you. The next question comes from Jonathan Arnold with Deutsche Bank.

Hi, good morning.

Good morning.

Just a question, I think when you announced the Talen spin you talked about an aspiration of growth out of the ongoing PPL of at least 4%. Can you talk about the new transmission project in the context of that? And are you -- are there other things you are working on that might be kind of closer at hand than this? This is obviously a fairly long way out that might enable you to give us a bit more clarity around sort of where in that north of 4% range you would expect to be over some regional period of time?

Sure. I would say that the 4% minimum that we articulated upon the announcement of the Talen spin for the regulated businesses did not reflect anything of the magnitude of this type of project that we are talking about here. So this would certainly add to that growth trajectory, if you will, should it be approved and ultimately started. Of course, it is further out on the horizon. Relative to where the growth will come from, there is nothing I think it's -- there's nothing, I think, magical about where it is going to come from. It is really executing the business plans we have. We have provided today, as you know, some updated guidance on the UK, which has improved from previous guidance.

And then we will continue to execute I think transmission and distribution opportunities in Pennsylvania as well as a lot of our environmental CapEx spending in Kentucky, all of which I think is pretty transparent and visible in the CapEx plans and the rate-based growths that we've articulated. So, I think, you know, we have a very good plan to achieve the minimum of 4%. I don't think it requires a lot of heavy lifting or Herculean assumptions for us to get there. I think it's a very achievable plan and one that we are committed to.

Hey, Bill, can you just remind me what -- did you articulate a specific base from which that was, you know, we should think about that?

Yeah, we did. The base was on 2015, so we -- I'm sorry 2014, x supply. So we provided the numbers there and so it is off that base.

Okay, thank you. And then I think, just fill in -- I think you just -- I think in another question you gave the answer to how hedged you are on UK currency for 2016. How about 2015?

2015 we are at 98% hedged at an average rate of $1.63.

Okay. Great. And then just one final thing. On the -- you know you guys have typically excluded mark to market-type moves in the supply business. What's the reason for leaving in the -- this $0.04 cents this quarter?

Let me take that one. This is Paul. We have done financial transactions supported by third party generation in the past. This one just simply didn't meet the accounting designation for carve out in that policy for us, and so just based on our internal accounting policies it flows through, but, as Vince said, there is only a very small amount of this that is in the forecast for the end of the year. And as things have come off from a price in (inaudible) perspective, even the July-type time frame some of that benefit has been reverted out since June.

Thanks a lot, guys.

Thank you. And the next question comes from Paul Patterson with Glenrock Associates.

Good morning, Paul.

Good morning. How are you?

Good.

A lot of my questions have been answered, but I know it is some way off in the future here, but when the transmission line is built, what do you expect it to do to the market? Is there any basis differential or any sort of impact you could sort of suggest that even if they are in the ballpark that would happen as a result of the major project?

Yes. As you can imagine because it is so far out and there are so many moving pieces, you know, coal retirements, you know, how many new gas pipelines may be built to move shale gas away from the constrained areas and so forth that we really don't have a forecast that we could point to to suggest which way prices would move as a result of this transmission project.

Okay. And no part of the project is going to be really done before 2023. Is that correct?

That's our target. The earliest would be 2023.

Okay. And just on the tax evaluation, I'm sorry if I missed this, what actually sort of drove that impact? What happened there, I guess?

I'll let Vince take that one.

Sure, what happened was we have net operating loss carry forwards for tax assets related to those sitting at the parent company of energy supply, and the earnings of energy supply were really supporting those assets on the books. So when we announced the spin it no longer -- we could no longer assert that those earnings and be able to support those deferred tax assets and so we took evaluation allowance against those.

Okay. Thanks a lot. All of my other questions were answered.

Great.

Thank you. And the next question comes from Michael Lapides with Goldman Sachs.

Yes. Hey, guys. Just real curious. Can you talk about PPL corp's cash tax position for 2014, and maybe the next couple years going forward through 2015, 2016? How much of a cash tax pay are you expect to be relative to GAAP taxes and does the Talen transaction impact that at all?

Yes. Vince, why don't you take that?

Sure. So, force -- on the federal basis our estimated tax position there would be basically zero as a result of all NOLs and bonus depreciation. So, you know, carryover affects from that, so very -- very little.

And when would you expect to become a cash taxpayer again at the PPL corp level post Talen spin?

I would say in the 2017, 2018 time frame?

Got it. So cash taxes, a pretty big source of cash flow. How do you think about allocating that, meaning do you anticipate you would likely be utilizing that cash flow to help pay for rate-based growth that some of the subs, to de-lever, as well? I am just trying to kind of think through that, because that's kind of a big number when you start getting to the out years.

The cash flow -- that cash flow position just goes to our sources and uses of funds, and the largest use of our funds is our CapEx program and our rate-based growth. So that cash is being used to fund that growth.

Got it. Bill, just curious when you look across the different segments, what's your thought process just in terms of rate case timing at the US regulated businesses?

Yes, so maybe I will ask Greg and then Vic to talk about Pennsylvania and Kentucky. Greg?

Yes, so as far as time for Pennsylvania, we don't at this point, obviously, see a need for a rate case in 2014, and we're looking at the possibility in 2015.

And in Kentucky, I think I said before we would anticipate some kind of rate case filed by the end of the year. And then as we continue with our capital construction program, we would anticipate filing cases, probably, every other year, thereafter. Much of our recovery of our capital expenditures is due to our environmental [post-recovery mechanism. So, I am talking about base rate cases here.

Got it. And, Greg, in Pennsylvania, you are thinking just sometime in 2015, potential file of forward-looking [test year for 2016?

That's correct. Yes. We haven't made a final determination, but if we do file it would be a forward-looking test year.

Got it. Thanks, guys. Much appreciated, and congrats on a good first half of the year.

Thanks, Michael.

Thank you. And the next question comes from Steven Fleishman with Wolfe Research.

Yes. Hi. Good morning.

Hi, Steve.

Hey, Bill, a couple of questions. First the updated guidance for 2014, how are you incorporating the kind of mild July and looks like maybe mild August if at all? Is that in there? Are you using normal?

I would say we are predominantly using normal, but I don't think, you know, it remains to be seen what August is going to be at this point, but July, I don't think is going to have a meaningful impact on the range at this point.

One other quick thing, remember we are still heavily hedged this year that to the extent that we see below normal weather. That's actually been a benefit for us, because instead of generating from some of our plants at higher prices we are buy -- having the opportunity to either buy it from the market or run our gas plants as cash, gas has been so low. So, around a number of ranges is assumption of whether we feel really good about the supply numbers.

Okay, great. Second question is I'm not sure you can provide this, but just is there anyway you can give us any sense of any kind of mark to market update numbers for Talen given what's happened with pricing?

Yes, let me --

For '15? Yes.

Yes, it is really hard for us to do. We have given you in the appendix the updates for the hedge positions on fuel and on power. Due to antitrust restrictions we are not able to have access to the Riverstone side of the equation, so until we get to very close to close we won't be able to provide updates relative to their base there.

Okay. Understood. And just in thinking about the utility growth rate, so the UK that you gave here is kind of flattish, 14 to 16. That's 60% of your earnings, roughly, I think. So that means the other 40% need to grow around 10% to get to 4%, overall. I think you have a rate-base growth to do that, but I wanted to kind of make sure I am thinking about that right and you feel good you can get to that at the non UK.

You are thinking about that exactly correctly, and that's factored into how we get to the 4%. I mean, obviously, (inaudible) the domestic utilities, growing significantly in terms of EPS over the period. And we've got that flattish growth in the UK that dilutes that a bit. But it still keeps us, I think, squarely in the ballgame in terms of many of our peers with a 4% minimum growth target for EPS. So, I -- we do feel good about our capability to achieve that even given the UK mix.

And then just lastly, thank you for the UK repatriation information on cash repatriation. Just in the context of the pure regulated company going forward you will get that money in, obviously, I think the UK, otherwise funds itself. And then you need to fund the rate based growth and the dividend. Can you just kind of talk about the overall utility funding plan without having any access to cash from supply?

Sure. Vince, go ahead.

Sure. I don't want to go too far out because, obviously, a lot of things change in terms of year to year cash flows and assumptions, but financing going into the next couple years we are pretty much set for 2014, domestically. We are not expecting any additional debt issuances there. Our funding plans do include the $1 billion of proceeds coming in 2014, about $900 [million coming from the Montana Hydro sale and we just received in July the $108 million treasury grant from Holtwood. Both of those proceeds are staying with, so they help to fund that CapEx plan significantly plan going into 2015.

We have about $1 billion of debt coming due next year in the domestic utilities, and $900 [million of that is in Kentucky and another $100 [million of that is in EUThe Kentucky debt is $400 [million up at the Holds level; we'll pay that off. We have $250 [million at each of the op-co's, first mortgage bonds. We'll just refinance those with first mortgage bond, (inaudible) utilities and same thing with the $100 million at electric utilities. We will just refinance with the first mortgage bond. We'll do as much financing down at the-cos as we can. If we need to adjust the cap structures will do that up at cap funding as we have been doing, and then we'll just maintain the credit metrics that we need to to keep our investment [great and credit ratings. Really, what we expect to come out of the uptick that we expect to get coming out of the Talen spins. No concerns from a financing plan assumption going forward..

Great. Thank you.

Welcome.

Thank you. (Operator Instructions). And we do have a question from Roger Morgan Stanley.

Good morning. Thanks for taking my question.

Morning.

My first is on the transmission project that you announced. Can you provide some insight on any competing projects that PJM is also looking at?

At the moment we are not aware of any competing projects. This is a very unique project that I'm very proud of the team here that came up with the concept and the forward thinking to put something of this nature in front of PJM. So we are not aware of any competing projects, and the requests that PJM have had have been smaller projects to basically address some relatively small reliability concerns. I think there were four or five of them and this project is not a response to some of those, but it goes well beyond that, again, with something that we think is very unique and compelling from a stakeholder process, a perspective.

All right. And just a question on the UK side. You've provided guidance through '16, and then you've got relatively flattish earnings growth. Can you talk about beyond that period as you get into I guess the new rate cycle, what you think growth can do there.

We haven't provided forward growth estimates for the uk that far out at this point, but as you can imagine there is a point at which the earnings will grow again once we get through the dip, if you will, in this period as the old rates roll off and old incentives roll off. And then as we begin to build the rate base we will see earnings growth further out in the plan. So there will be a dip and then a recovery over time, but we will provide future guidance at a future date. But for right now that's just generally speaking kind of the trajectory.

Okay. And just lastly kind of a higher level question, you talked about M&A on the Talen side. Can you talk about M&A on the standalone, or future standalone PPL side, whether you are looking to be an acquirer or maybe an acquiree? Just some thoughts there.

Sure. We will continue to look at opportunities to grow PPL post Talen spin on the regulated side, and I think there will be opportunities over time. Whether we are successful or not, obviously, remains to be seen. I think we have a very solid business plan that will, I think, improve earnings as well as our stock price over time. I can't really comment on whether we are a target or not, and if we are I think we have a very solid plan and the best thing we can do is execute the plan and continue to meet expectations, which we've got a very solid track record of doing. You know, certainly, we would consider M&A. We would want to maintain our relative size at a minimum to maintain our relevancy in the sector as a large [cap electric utility, so, I think, generally speaking that's -- is probably all I can say at this point.

Okay. That was it. Thank you.

Thanks. Operator, we are approaching our time limit, and I know it's a busy day of earnings for everybody, so we'll take one more question.

Okay. Thank you. And that comes from Angie Storozynski from Macquarie.

Thank you very much. Okay, so I have three questions. One is good you comment about your power hedges for the PPL supply beyond '15? Did you add any hedges to your '16 or '17 positions ?

Yes. I did mention earlier that we didn't do a lot of hedging activity in the quarter for '15, but we did layer in positions as we saw the strength in power prices in the quarter for '16. I mentioned a 25% target there, and we are meaningfully on our way to getting to that level.

Perfect. Separately, on the utilities, could you talk about your dividend growth prospects after the other spinoff of PPL supply?

Sure, so when we announced the Talen transaction, I mentioned on the call that we would continue to maintain the current dividend and look for opportunities to grow it over time with the expectation that meaningful growth could come after we get through the large CapEx spending plans that we have over the next several years. But our perspective on the dividend and its growth will not change from where we have been to where we will be post Talen spin.

So, roughly, the pickup and the dividends, we shouldn't expect them until what, '17? Later than '17 -- 2017?

I think, you know, probably out in that time frame is the right way to think of more meaningful growth potential for the dividend, and then in the meantime, we are going to continue to maintain and probably grow it slightly between now and then.

Okay, and lastly on the transmission project, I know it's many years out, but just start looking at how Susquehanna-Roseland went and the three year delay to cross, what, a three mile stretch through the Delaware water gap? Even though there was an existing right of way? I mean, obviously, we don't see exactly how the supposed line goes, but should we expect similar issues with siting of the transmission line?

Hey, Greg, why don't you take this one.

Sure. (Inaudible). So, certainly, when you are talking about a 725 mile line siting will be a big issue. We will work with all of the stakeholders. We have had success. You know, actually, Susquehanna-Roseland is a great example. So, it took us awhile, but we were building through a national park. I think been very successful. I think that the folks there appreciate the care we took of the park, and so I think our reputation is good in that area and that's why I think we'll be successful.

So this proposed line doesn't go through any national parks or any environmental -- shouldn't face any environmental issues?

No national parks.

Right.

Okay, thank you.

Okay, thanks, everyone for joining us on the call today and have a good rest of the day.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line. Have a nice day.