賓州電力 (PPL) 2014 Q4 法說會逐字稿

Good morning, and welcome to the PPL Corporation fourth-quarter 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, Emily.

Good morning, everyone, and 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 differ is contained in the appendix to this presentation, and in the Company's SEC filings.

We will refer to ongoing earnings, a non-GAAP measure, on this call.

For reconciliation to the GAAP measure, you should refer to the press release, which has been posted on our website, and has been filed with the SEC.

As a reminder, Talen Energy has filed its Form S-1 Registration Statement with the SEC, and as such, we are in a quiet period with respect to future prospects of PPL Energy Supply and Talen.

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

Thank you, Joe.

Good morning, everyone.

We are pleased that you are joining us this morning.

With me on the call today are Vince Sorgi, PPL's Chief Financial Officer, and the Presidents of our four business segments.

Moving to slide 3, our agenda this morning starts with an overview of our 2014 earnings results, an operational overview, and a discussion of our 2015 earnings forecast.

After my remarks, Vince will review our segment financials, and he'll talk about the recent movement of the pound sterling, and then we are going to take your questions.

On a number of fronts, 2014 was another very successful year for PPL.

We achieved strong earnings results in our regulated utility segments; and the competitive supply segment also turned in a solid performance, despite the continued challenging market conditions.

And we made significant progress towards the spin-off of our supply business, which is designed to unlock significant value for our shareowners.

The continued excellent performance of our utility operations, and our ongoing infrastructure investments in those companies, together with the successful restructuring of our corporate support functions, give us confidence in PPL's ability to achieve compound growth in earnings of 4% to 6% through at least 2017, following the spin-off of the supply business.

Turning to slide 4, today we announced 2014 reported earnings of $2.61 per share, an increase of $0.85 from our 2013 results.

Adjusting for special items, our 2014 earnings from ongoing operations were $2.45 per share, matching the level that we achieved in 2013, despite significantly lower hedged power prices in our supply business.

I am very pleased we were able to match our 2013 ongoing earnings per share this year with the solid financial performance of our regulated abilities, primarily in Pennsylvania and the UK, offsetting the $0.10 decline we saw in supply.

For the fourth quarter, reported earnings were $1.04 per share, compared with a loss of $0.16 per share a year ago.

Earnings per share from ongoing operations were $0.58 in the fourth quarter of 2014 compared with $0.60 in 2013.

For the year, our utility operations in the United States and the United Kingdom improved their earnings from ongoing operations by a combined [$116] million or 8.5%.

The primary drivers for this impressive performance are returns on additional transmission investments in Pennsylvania, higher returns as a result of power plant environmental projects in Kentucky, and higher utility revenues resulting from UK price increases.

Vince will provide more details on segment results during his remarks.

Let's move to slide 5 for a discussion of our 2015 earnings forecast.

As we said in our news release this morning, going forward we are excluding from our forecast any earnings from our supply business, and the net costs associated with the Supply spin-off.

We believe this approach provides our investors with a clearer picture of the financial performance of the ongoing portfolio of PPL.

As we previously communicated, we are restricted in providing Supply or Talen forecasts while in registration with the SEC.

We appreciate everyone's patience during this process, and know that Paul and his team are very excited to communicate the full Talen story, which will occur as soon as possible following the spin.

We've provided an update to PPL Energy Supply's hedge profile in the appendix of today's presentation material, consistent with our prior practice.

Our 2015 forecast range for earnings from our regulated utility operations is $2.05 to $2.25 per share, unchanged from what we provided with our June announcement of the Talen transaction.

The midpoint of this range is $2.15, which is 5.9% higher than the adjusted ongoing earnings from our utility operations in 2014.

Our 2014 adjusted regulated utility earnings from ongoing operations removes Supply earnings, and includes the full impact of dissynergies related to the spin-off of Supply, including indirect O&M, interest and depreciation.

Vince will cover this in more detail during his remarks.

As I mentioned earlier, the excellent performance of our utility operations, and the organic growth from planned and approved infrastructure investments, gives us great confidence in our ability to achieve compound growth in earnings of 4% to 6% through at least 2017, following the Supply spinoff.

The slide shows that we are anticipating slight increases in earnings in our UK and Kentucky utilities, and slightly lower earnings in our Pennsylvania utility.

The slide also shows the significant improvement in the corporate and other category that we expect to realize as the result of our ongoing corporate support cost reductions, including the $75 million of dissynergies we discussed at the time of the announcement.

In addition to the Talen spin-off, 2015 is a transitional year for PPL in many other ways.

In the UK, we are moving to the RIIO regulatory construct, and we are in rate cases in Kentucky, and expect to file a rate case during the year in Pennsylvania as well.

Growth in earnings in 2015 comes largely from the corporate restructuring efforts, but growth beyond 2015 will be driven by our utility companies.

Now let's turn to slide 6 for an update on our regulated operations.

We are very pleased to note that WPD was recently named Utility of the Year by the international edition of Utility Week.

This marks back-to-back years that PPL Companies were named Utility of the Year.

In judging WPD as the winner, a panel of industry experts scrutinized the business performance in terms of customer satisfaction, stakeholder return, sustainability, and corporate social responsibility, staff development, and stakeholder relationships.

We congratulate the employees of WPD for this impressive achievement, and this recognition underscores the value we see in our UK business, as a key component of the portfolio going forward.

Back in the US, progress is continuing on our rate cases in Kentucky.

As we told you in November, we've requested increases in annual base electric rates of $30 million and $150 million at LG&E and KU, respectively, and an increase in annual base gas rates of $14 million at LG&E.

The increases are principally driven by investments in generation supply, and other infrastructure investments needed to maintain and enhance the safe and reliable delivery of electricity and natural gas to our customers, and to meet federal environmental regulations.

We anticipate that the new rates will go into effect on July 1 of this year.

A timeline for the rate case consideration is included in today's appendix.

In 2014, we also continued to focus on major capital projects in Pennsylvania and Kentucky, with capital spending for the domestic utilities of approximately $2.3 billion during the year.

In Pennsylvania, nearly $350 million was spent on our two largest transmission projects, Susquehanna-Roseland and the Northeast-Pocono projects, which are now 95% and 60% complete, respectively.

$140 million was spent on [DISCs] projects, improving the reliability of our distribution system, while earning a near real-time return.

In Kentucky, some key construction achievements were reached, as new environmental systems were completed in 2014 for two of the units at our KU gen station, and for one of the units at our LG&E Mill Creek station.

The Ghent landfill [NS] transport system also became operational during the year.

Construction of our new Kentucky combined cycle gas unit, Cane Run 7, is on schedule, with commercial operation of the unit estimated to begin by the end of May this year.

Turning to slide 7, let's briefly discuss domestic weather-normalized sales for the year and the quarter.

In Kentucky, weather-normalized sales for the year were essentially flat, with lower residential and commercial sales being offset by continued strong industrial-sector growth.

Industrial-sector growth is driven by solid production levels being maintained by several of our large manufacturing customers, amid improving economic conditions.

Fourth-quarter sales in Kentucky were lower because of a decline in residential and commercial sales that was somewhat offset by industrial growth.

The residential and commercial downturn is attributable to the continued slow growth or decline in several rural parts of Kentucky and Virginia.

As you can see, sales increased slightly in Pennsylvania in 2014, with the industrial categories showing the strongest growth.

The industrial sales growth is occurring primarily in the cement, metal and steel sectors.

Pennsylvania weather-normalized sales in the fourth quarter showed slightly higher commercial sector use than was the case last year.

That increase resulted from a higher customer count this year, as a result of improving economic conditions.

Moving to slide 8: Looking back on 2014, I'd like to highlight a few key accomplishments at the Supply segment.

In November, we completed the sale of the Montana hydroelectric facilities to Northwestern Energy for about $900 million.

As a reminder, these cash proceeds remain with PPL following the spin, and we expect to use them to fund utility infrastructure investments, and pay down Holding Company debt in Kentucky this year.

Looking at overall portfolio performance, we executed very well in 2014, outperforming our initial margin projections, due to expanded spark spreads, fleet optimization, and availability during peak load periods, and our strategic hedging program that captured incremental value, even when our units were uneconomic to dispatch.

You can see from the chart in the appendix on slide 28 that we experienced some coal-to-gas switching this year, as low gas prices enabled our combined cycle gas units to continue to run like base load units.

Further, we see market reforms, such as PJM's proposed capacity performance product, the shift in the variable resource requirement curve, and a recent increase in the offer cap as constructive signals supporting the competitive power business in PJM for the future.

Next, I would like to talk about our significant progress related to the spin-off of our competitive generation business, which will be combined with Riverstone's competitive generation business to form Talen Energy.

Last week, we submitted a response to the Federal Energy Regulatory Commission, accepting their proposed mitigation plan to address potential market power issues in the mid-Atlantic region.

The approval process is moving ahead as expected with the Nuclear Regulatory Commission, and the Pennsylvania Public Utility Commission, and we continue to anticipate approvals within our original projected timelines.

The Talen Energy transition team, headed by Paul Farr, President of PPL Energy Supply, has completed its staffing plan, and continues to work towards their targeted synergies.

We expect to close the Talen transaction in the second quarter of 2015.

Before we move on to Vince, I'll briefly provide you with an overview of our key objectives for 2015, which you will see on slide 9. Our primary objective obviously for this year is the completion of the Energy Supply spin-off.

In the UK, our folks are focused on executing the new business plan that was accepted as part of the RIIO-ED1 process, which begins April 1 of this year.

In Kentucky, as mentioned earlier, we're moving forward with the efforts on our rate cases; and in Pennsylvania, while we don't yet have details on our filing, we do expect to file a distribution base case during the year.

In Kentucky, the major focus continues to be the execution of our generation and environmental construction projects, which are on schedule and on budget.

In Pennsylvania, we're also focused on executing the large capital expenditure plan to continue to strengthen both our transmission and distribution systems.

And finally, we're very focused on implementing the corporate restructuring currently under way.

We're confident that 2015 will be another solid year for PPL, as our employees implement our business plans to provide excellent service to customers, and to continue to invest in infrastructure improvements.

I would like to take this opportunity to say that PPL employees have done an excellent job in designing and implementing a transition process that will launch a strong and streamlined corporate structure for the new PPL, as well as set Talen Energy on course to operate safely and efficiently on day one.

2014 was obviously an eventful year for PPL, one in which we began to blaze new paths in growing value for our shareowners, even while we continue to provide the highest quality of service to our customers.

Our high level of performance during this challenging year further strengthens my confidence that both PPL and Talen Energy will be very successful companies for years to come.

PPL has a strong record of strategic and financial execution.

As we enter a new phase of our evolution, we're confident that we will continue to provide shareowners with competitive returns, and our customers with best-in-class reliability and service at reasonable cost.

As a pure-play electric utility going forward, we believe our three regulatory jurisdictions provide predictable earnings opportunities, with timely recovery of investments.

Our transmission business has grown rapidly, and we continue to identify additional projects that will drive further growth in that part of the Business.

We expect the transmission business to be the fastest-growing part of our Business for the foreseeable future.

Finally, despite the recent decline in the British pound, we're confident in our ability to achieve an earnings growth rate of 4% to 6%, given our current hedge levels and long track record of successful hedging programs that have helped drive our ability to meet or exceed earnings expectations.

I look forward to your questions after we hear some additional earnings details from Vince Sorgi.

Vince?

Thank you, Bill, and good morning, everyone.

Let's move to slide 10.

Our fourth-quarter earnings from ongoing operations decreased slightly over last year, driven primarily by lower earnings at our competitive supply and Kentucky regulated segments, partially offset by higher earnings from the UK and Pennsylvania regulated segments.

Full-year 2014 earnings from ongoing operations were the same as last year, both at $2.45 per share.

Higher earnings in the UK and Pennsylvania regulated segments were offset by lower earnings from the supply segment, and corporate and other.

The $0.03 reduction in corporate and other is primarily driven by tax-related items, and higher financing and other costs.

Let's move to a more detailed review of 2014 segment earnings drivers, starting with the UK results on slide 11.

Our UK regulated segment earned $1.37 per share in 2014, a $0.05 increase compared to 2013.

This increase was due to higher utility revenue, due primarily to higher prices, partially offset by lower volumes due to weather, and lower O&M due to lower pension expense.

These positive drivers were partially offset by higher US income taxes due to an increase in 2014 taxable dividends, and from a 2013 positive adjustment related to an IRS ruling on our earnings and profits calculation.

We also had higher depreciation from assets placed in service and other of $0.03 per share.

One other item of note for the UK regulated segment: In an attempt to provide you with additional visibility and transparency into the UK business, we will provide you unaudited consolidated financial information for PPL Global LLC.

PPL Global is primarily the UK regulated segment, exclusive of the after-tax effect of allocated interest from the debt issued at PPL Cap Funding for the Midlands acquisition.

We will footnote those amounts so you can reconcile the PPL Global LLC results to the results of the UK regulated segment presented here today.

We hope you will find this additional disclosure useful.

We're still assessing the format in which to provide this information, which we expect to furnish separately in an 8-K, to be filed at the time we file our 10-K.

Moving to slide 12, our Kentucky regulated segment earned $0.47 per share in 2014, a $0.01 decrease from 2013.

This decrease was due to higher O&M, driven predominantly by timing of generation maintenance outages, storm-related expenses, and higher uncollectible accounts.

Higher depreciation from assets placed in service, higher financing costs from higher debt balances to fund CapEx, and other of $0.03 per share.

This decrease in earnings was almost fully offset by higher gross margins from returns on environmental capital investments and higher sales volume due to favorable weather.

The other variances of negative $0.03 for both the Kentucky and UK regulated segments is related to the way we compute diluted earnings per share, using the if-converted method of accounting for the debt component of the equity units.

Not to get too technical, but the interest add-back to net income in 2013 was higher than the add-back in 2014; and with no change in the number of shares outstanding, this has the effect of reducing EPS this year compared to last year.

Turning to slide 13, our Pennsylvania regulated segment earned $0.40 per share in 2014, a $0.09 increase over 2013.

This increase was due to higher delivery margins in both transmission and distribution, from higher returns on additional capital investments, and lower O&M.

These increases were partially offset by higher depreciation due to asset additions and higher financing costs from higher debt balances to fund CapEx.

Finishing our segment review with supply on slide 14, this segment earned $0.29 per share in 2014, a year-over-year decrease of $0.10 per share.

This decrease was primarily due to lower energy margins driven by lower energy and capacity prices, partially offset by favorable base load asset performance, gains on certain commodity positions, and the net benefits of unusually cold weather in the first quarter of 2014.

Lower margins were partially offset by lower financing costs, primarily due to the repayment of the Lower Mount Bethel debt in December of 2013 when we exited a lease and acquired that plant, and lower income taxes, driven by chewing up our state effective tax rate at year-end 2014, and evaluation allowance adjustment recorded in 2013 related to deferred tax assets for state net operating losses.

Turning to slide 15, we have prepared a walk from our 2014 ongoing earnings of $2.45 to our 2014 adjusted utility earnings from ongoing operations of $2.03, which adjusts for the supply segment, and are related to synergies from the spin, as Bill described.

This adjusted 2014 earnings amount is the starting point from which we are basing our 4% to 6% compound annual growth rate.

Starting from $2.45, we remove the current-year supply earnings of $0.29.

We then adjusted for the $0.07 of O&M dissynergies previously disclosed.

This is the $75 million of indirect corporate costs that were allocated to supply, but do not go with Supply as part of the spin-off.

As we've discussed, corporate restructuring effort currently under way is intended to eliminate this dissynergy.

We also adjusted for the $0.05 of interest on the $880 million of debt at PPL Cap Funding that was previously allocated to supply, but will remain with PPL Corp.

This is a permanent dissynergy.

Finally, we adjusted the depreciation dissynergies down from $0.03 previously disclosed to $0.01, since by the time we get to 2017, there's only $0.01 of depreciation dissynergy remaining, as these assets are generally IT systems that have short useful lives, and some of the assets become fully depreciated over this time period.

Turning to slide 16, we have prepared a walk from our 2014 adjusted regulated utility ongoing earnings of $2.03 to the $2.15-per-share midpoint of our 2015 ongoing regulated utility forecast.

Corporate and other is forecasted to contribute $0.11 to the improvement in the 2015 earnings.

As we implement the corporate restructuring, we expect to reduce the O&M dissynergies of $0.07; and in 2014, we incurred about $0.02 of deferred tax asset adjustments that we do not expect to incur in 2015.

In the UK, as discussed previously, utility revenues will decrease by about $0.14, primarily due to revenue profiling and a lower weighted average cost of capital, partially offset by inflation and other items, as we move into the RIIO-ED1 price control period beginning April 1 of this year.

Offsetting lower revenues are lower US income taxes, as a result of a decrease in taxable dividends, and a higher British Pound exchange rate for 2015, as a result of our hedging program.

The hedged rate for 2015 is about $1.63 compared to a realized hedge rate of $1.60 in 2014.

In Kentucky, we anticipate a slight increase in earnings, with rate increases effective July 1. Higher margins are expected to be partially offset by increases in O&M due to higher pension and other labor-related costs, higher depreciation on the increased plant and service, and higher interest expense to fund the capital growth in Kentucky.

In Pennsylvania, we expect lower earnings in 2015, due primarily to higher O&M, higher depreciation, and higher financing costs.

These negative drivers are expected to be partially offset by improved margins, driven by increased transmission margins, and returns on distribution improvement capital investments.

On slide 17, we provide updates on our free cash flow before dividend; actual 2014 free cash flow before dividends was in line with the projection we provided last February, which, if you recall, included the proceeds from the sale of the Montana hydro facilities.

Looking at 2015, we are projecting a decrease in our free cash flow, primarily driven by the $900-million Montana hydro sale proceeds that we received in 2014, and the free cash flows of Energy Supply that are included in 2014 of about $200 million.

2015 cash from operations and capital expenditures exclude the supply segment, except for $191 million of distributions to be received by Corp at the end of the first quarter, with no additional distributions from Supply thereafter.

Moving to slide 18, our planned capital expenditures for 2015 through 2019 are detailed on this slide, with regulated utility investment totaling almost $18 billion over that period.

This includes previously announced initiatives, such as UK spending for our accepted RIIO-ED1 business plan; executing on our environmental compliance plans in Kentucky to meet EPA regulations; as well as focusing on system reliability and generation capacity replacement with the retirement of some of our coal fleet in Kentucky; updating and modernizing aging infrastructure in Pennsylvania, including programs that identify areas to strategically improve system performance and reliability.

Our revised capital plan reflects incremental investment of approximately $900 million in Pennsylvania through 2018, including $500 million for transmission investments, including line rebuilds, new substations, and substation security; and $200 million for distribution improvements, the smart meter replacement program, and upgrades to our facilities.

Most of the increased distribution spend is recoverable through rate mechanisms, including the DISC and the smart meter rider.

The revised plan also includes an increase of over $270 million from 2015 to 2018 in Kentucky environmental spending, due to increases in scope to meet effluent water guidelines and other projects related to coal combustion residuals, including ash pond closures.

This increase partially offsets a net reduction of about $600 million of spend from 2015 to 2018, from the deferral of the Green River 5 CCGT plant.

And finally, our capital plan is based on identified projects across the portfolio, and does not include unidentified growth projects.

Turning to slide 19: Our updated investment plan drives a CAGR of about 7% in our projected rate base to 2019, driving value for both our customers and our shareowners.

Turning to slide 20, as Bill mentioned earlier in the call, we are targeting to achieve compound annual growth in earnings per share of 4% to 6% through at least 2017.

At this time, I will highlight certain key assumptions used for each segment that supports the 4% to 6% earnings CAGR.

For the Pennsylvania regulated segment, assumptions contributing to this growth include the successful execution of our capital plans for both transmission and distribution.

Earnings growth through 2017 is based on transmission CapEx spend of $2.1 billion, and distribution CapEx spend of $1.2 billion, with DISC and smart meter CapEx contributing $530 million and $160 million, respectively; a successful distribution base rate case planned for 2015, with new rates effective in early 2016; and we are assuming minimal load growth over the period.

For the Kentucky regulated segment, key assumptions include the successful execution of our environmental CapEx program of $1.3 billion and the completion of the Cane Run combined cycle (inaudible) of $1.3 billion, and the completion of the Cane Run combined cycle natural gas-fired plant; successful completion of the current base rate cases with new rates effective July 1 of 2015; and once again, we are assuming minimal load growth over the period.

For the UK regulated segment, of course, executing on the Ofgem-accepted RIIO-ED1 business plan has been built into the growth assumptions, and provides eight years of base revenue certainty, continued opportunity to outperform targets, and the ability to true up certain costs, such as the annual change in the cost of debt and inflation, as determined by the UK RPI.

We have also assumed a budgeted currency rate of $1.60 per pound; and for RPI, under the Ofgem methodology, the forecasted inflation rate used for the 2015/2016 regulatory year is 2.6%, which will be trued up for the actual realized inflation in the 2017/2018 regulatory year.

Our long-range RPI assumption beyond 2015/2016 is 3%.

Incentive revenues are assumed to be slightly higher for the 2014/2015 regulatory year, compared to the $125 million we earned for the regulatory year ended in March 2014.

We assume incentive revenues decline from there, given the tighter performance targets under RIIO-ED1.

For corporate and other, we have built into the growth rate achieving the full $75 million in corporate support cost savings.

At this point, we fully expect to be able to achieve this level of savings.

We also assume equity issuances of $200 million annually, which is an increase of $100 million per year from our prior disclosure.

This increase is to help fund the additional CapEx in the plan, while maintaining our strong credit metrics.

Moving to slide 21: We know many of you have been focused on the recent movement in the British pound to US dollar exchange rate, and would like to understand the effect it has on our earnings from WPD.

The next couple slides present information on our hedge levels, and provide details that help us set a budgeted rate of $1.60 per pound.

On this slide, we detail our hedging status for 2015 and 2016, including sensitivities for a $0.05 and $0.10 downward movement in the exchange rate compared to our budgeted rate of $1.60.

First, we are nearly fully hedged at 97% for 2015, at an average rate of $1.63.

For 2016, we are 70% hedged at an average rate of $1.61.

Since our third-quarter update, we have layered on additional hedges for 2016, using collars to help protect against a further decline, but preserve some upside should the pound strengthen from its current position.

You can see from the sensitivity table that there is basically no exposure in 2015, given our 97% hedged level, then minimal exposure in 2016, even if rates stay at their current levels.

Turning to slide 22: As I just indicated, our business plan uses $1.60 as the budgeted rate for our open positions.

While this rate is higher than the current spot rate, we believe it is indicative of a longer-term exchange rate based on historical data.

First, the five-year average GBP rate was $1.59, and the 10-, 15-, and 20-year averages were all above $1.65.

Over the last three years, when the exchange rate dipped below $1.50, it was short-lived, as seen by the blue line.

In the last 20 years, only 20 days went below $1.40; and about 90% of the time, the exchange rate was $1.50 or higher.

Similar to the commodity hedge program we use to hedge our supply business, our foreign currency hedging program sets ranges as guidelines that provide flexibility to take advantage of periods of pound strengthening, as we did earlier in 2014, by increasing our hedge levels for 2015 and 2016, and does not require us to fully hedge our exposure at lower levels.

As you are aware, we have been very successful with this strategy on the commodity side of our Business; and as I detailed, the strategy has positioned us well for 2015 and 2016.

I know that was a lot, but that concludes my prepared remarks, and I'll turn the call over to Bill for the question-and-answer period.

Bill?

Thank you, Vince.

And, operator, we are ready take questions, please.

(Operator Instructions)

Neel Mitra, Tudor, Pickering, Holt.

I had a question basically around slide 21: Can you disclose the 2017 hedge levels for the currency?

And basically, are you using the $1.60 exchange rate for 2017 as well, to get to the 4% to 6% earnings growth?

Thanks for the question, Neel.

For 2017, we are not hedged at all, at the moment.

It is $1.60 in our forecast, as I think Vince commented on one of the slides, that is used for all of the years in the business plan for open positions.

And, of course, 2017 is fully open.

And when you look at the $1.60 exchange rate, and I guess where we're at right now with the forward curves around $1.50 or a little bit higher, is the 4% to 6% growth phased through 2017 under the current forward curves, or is it more, on your point of view, at the $1.60 level?

Certainly for 2015 and 2016, it would have minimal impact, as shown on slide 21 here.

Vince, do you want to comment on 2017?

Sure.

Neel, we look at the forwards, as well as historical data, when we look at our exchange rates, and there's quite a variability, as I'm sure you know.

They range from around $1 -- out for 2017, around $1.40 to -- all the way up to $1.75.

When you look forward, clearly I think we think there will be opportunity for pound strengthening, so that we could hedge at higher levels.

The sensitivity, as we have discussed in the past, for 2017, for every $0.05 movement is about $0.04.

We will continue to execute our hedge strategy, layering in hedges as we go through the next 18 months; and with periods of spiking, we'll hedge up higher, like we did back in 2014.

Great, thank you.

The additional $100 million in equity -- can you explain what that's going to be used for?

And is that going to be issued through a DRIP program or how is that going to be rolled out?

Vince, why don't you take that one?

Sure, Bill.

We discussed last time the $100 million would primarily be DRIP and management comp.

We'll likely be doing a dribble program, in addition to the DRIP and management comp, to get to the $200 million.

That extra $100 million is really being used to fund the incremental CapEx that Vince talked about, and a lot of that is transmission in Pennsylvania, as well as some increased spending in the other utility businesses.

Right, okay, great.

Thank you.

Dan Eggers, Credit Suisse.

The first question, following up on Neel's question, is just from a hedging perspective on FX.

Is it one of these things that you are going to wait for a point of view to get something to a better exchange rate before you put something on in 2017, given the time horizon before 2017 actually happens?

Yes, we obviously have quite a bit of time before we get to 2017, given our high hedge levels for 2015 and 2016.

Not unlike what we've done, Dan, in our commodity hedging programs, we look at it as a fairly dynamic process.

We set targets.

In this case, we've obviously set a target of $1.60.

Given the volatility we've seen in the past, we think there will be points in time where we reach that, and we can take advantage of that.

So, that's kind of a marker that we have.

Obviously, as we get further into 2015 and 2016, we will continue to assess our outlook for 2017.

We've got plenty of time, and we think we will have opportunity to hedge it in over that period of time.

Bill, on the update to the rate base numbers, on slide 19, the Pennsylvania piece has grown quite a bit, it's like 11% I think CAGR on rate base growth (multiple speakers) an uptick in the back end.

Can you talk about maybe a little bit of what's gotten layered in from last quarter to this quarter, and those expectations, and what the visibility is on delivery on that CapEx?

I will ask Greg Dudkin, President of our Electric Utilities in Pennsylvania, to take that question.

Thanks, Bill.

So, it's primarily transmission-related expense or capital investment, and when you take a look at transmission -- Vince mentioned in his comments that we're looking to update or -- we have a lot of assets that are reaching the end of their useful life.

So, circuit breakers, transformers -- we even have some transmission lines that were built in the 1920s.

A lot of that planned investment is to upgrade those.

We're also investing a lot in improving the systems reliability through automation, through wood coal replacements, et cetera.

So, it's primarily on the transmission end.

We're also doing some extra investment in the distribution space; talked about the smart meter plan.

We're doing a lot of things smart grid-related, smart switches.

What we call tie lines, which basically ties circuits together, which further enables smart grids.

So, those are the principal components of the additional investment.

Okay, so, none of the prospective Compass CapEx is included in those numbers?

That's correct.

Okay, and one last question, just on the UK side: There's been a lot of movement in RPI, but what is the sensitivity maybe to like a 1% move in RPI or something, just so we can think about how to calibrate that back to your model?

The major move that we would anticipate, Dan, is going to be in the pound sterling versus the RPI.

So, we articulated what that movement is, so, clearly, the RPI one would be less.

I would say we probably don't what to get into trying to give sensitivities on every element that could move the revenue or the cost line.

But what I would say also is that we've got some index-linked bonds that are also going to be somewhat of an offset to a move down in the RPI.

So, it's a little bit of a dynamic exercise to go through and figure out what might be moving the RPI, and how much it could impact revenues.

I'm not trying to necessarily dodge the question, Dan, but we're really focused on the major uncertainty in the UK, which is the pound.

Okay, got it.

Thank you.

Julien Dumoulin-Smith, UBS.

A quick question here on the utility side first: Bonus depreciation -- how much was that in terms of an impact here, if you could quantify it?

Vince?

So, Julien -- it's Vince -- the impact of bonus is included in our earnings guidance for 2015, and is also included in our 4% to 6% growth targets.

It wasn't that significant for either PA or Kentucky.

I would say maybe around $0.01 in each case; so, nothing significant.

And then just cutting back to the actual capital expenditures themselves -- first, am I hearing from you right in Kentucky that these -- the coal ash rules and especially the effluent side seems to actually be adding some real dollars?

And then secondly, on the Pennsylvania side, I heard you delineate some of the individual pieces, but is Compass included within the broader scheme over the longer-term here?

Starting with the last question first, Compass is not included.

And correct on the Kentucky side that the evolving environmental regulations are driving our need for additional investment in the Kentucky business.

Great.

Shifting to supply real quickly, your west numbers, at least on the hedge number there for 2017, came down pretty big of late.

What's going on, if you can comment?

I'll ask Paul Farr to take that question.

Julien, this is Paul.

On a wholesale power price basis, prices in the near term have been hanging in the [low-$30s], which is not completely logical, given where snow pack is, so we've done basically a straight mark.

We've offset some of that with some retail hedges that were at prices much more beneficial than what the wholesale indicates, but that's just running it on a straight mark.

So, with prices in the [low-$30s] and the open position that we've got, that drills that roughly $4 movement.

Got it.

Lastly, just a clarification on what Dan was asking about before: Your RPI assumptions -- are they at market?

And separately, just to be clear, it's less than the unhedged 2017 impact, just to be clear.

It's not versus your nearer-term hedged FX, right?

That is correct.

That's right.

And the RPI is at market there, as far as you calculate it?

I provided the RPI assumptions in my remarks, Julien; it was 2.6% for 2015/2016, and 3% thereafter.

RPI really doesn't have a major impact in 2015/2016 in the guidance that we provided in the appendix for the UK earnings.

All right.

Great.

Thanks for bearing with me.

Anthony Crowdell, Jefferies.

Just to jump on Julien's question, how much is -- is it correct description -- inflation revenues did you receive in 2014 or that you expect to receive in 2015?

Well, the 2015 would be the -- first off, we should clarify that these are regulatory years that we typically deal in with RPI adjustments versus calendar years.

So, they don't change as of the first of the year.

And I believe so, for the last period, which will end this March, it's going to be the 2.6% number that Vince talked about.

And then we're assuming a 3%, which we won't know if that's the correct RPI or not for the 2015/2016 year.

Was there an inflation rate percentage of the last published year, which would be -- was it 2014/2015?

I will ask Rick Klingensmith to answer that piece of the question.

Sure.

Good morning.

No, for the 2014/2015 regulatory year, the inflation was fixed at about 2.5%, and so we are realizing that in the current period.

And then as Bill and Vince have indicated, the inflation has been set for the 2015/2016 regulatory year at 2.6%.

Ofgem has actually changed their methodology from the current regulatory period into the RIIO period, where they are using a forecast going forward in setting the tariffs that are reset on April 1. That forecast is what is published by the HM Treasury in November, prior to that April period.

And then, as Vince indicated in his remarks, there will be a true-up after the 2015/2016 period, as to any under-recovery or over-recovery will get captured in the 2017/2018 regulatory year.

So, for 2014/2015, we're fixed at 2.5%; for 2015/2016, we're fixed at 2.6%; and our assumption going further out in time is 3%.

Great.

And just lastly, I guess more of a bigger picture question: Some utilities have looked at maybe building out some gas infrastructure, rate base, where your subsidiaries are located: Kentucky, Pennsylvania.

It seems that maybe there is some investment opportunities there for you.

Is that something you have looked at or thought about?

Are you thinking more from an M&A perspective on the gas side?

No, more of like a rate base, either rate-basing reserves, like some southeastern utilities, or building out on top of the shale plays, but not M&A.

I don't think, for us, that's much of an opportunity, given the transmission projects that we already have identified.

However, what I would say is the Compass project, which is not included in our CapEx program, would be a program, or a project if you will, that would take advantage of some of the opportunities in the Marcellus shale, to basically, instead of bringing the gas pipelines across, we would be bringing electric lines across to the potentially new power stations that could be built.

That would be our opportunity, if you will, that's shale gas-related.

Great, thank you very much.

Greg Gordon, Evercore ISI.

Not to beat a dead pound -- I mean, a dead horse.

But on the pound -- that was a joke, actually.

If I look at 2016, you're hedged 70% at $1.61, and the pound is currently at $1.53.

So if the pound didn't move, effectively you would be at $1.58, $1.59 realized.

So, the headwind into 2017 over 2016, if you realize $1.53, would be -- am I right, $0.06, maybe $0.07 that you'd have to overcome, if, in fact, the pound just stayed at this level for the next three years?

Vince?

For which year, Greg, are you referring?

2016 bridging to 2017, given the guidance you gave on what your exposure is to a $0.05 change in currency.

Yes, we said $0.05 is about $0.04.

It would be $0.04 plus half again, so $0.06 or $0.07?

I think that's right.

So, that would be the headwind you'd have to overcome?

Great.

And then, my second question goes to the earnings guidance.

You're saying 4% to 6% through at least 2017, off the $2.03 of earnings?

Yes.

But your guidance range for 2015 is $2.05 to $2.25, right?

Whereas 4% to 6% would be like $2.10 to $2.15.

Why is the guidance range so demonstrably wider than what you think your long-term earnings path is for 2015?

I would say it's just a transition year, and knowing that we've got the spin and the timing of the spin, and some of these dissynergies that Vince talked about that we're working to remove.

We want to make sure we get through that process, but I think your point is a good one.

Going forward, it is probably going to be a bit more predictable once we know -- we get through that first full year, if you will, of the pure-play electric and gas utility business.

Okay, and would one of the other major variables also be the outcome of the Kentucky case?

You've obviously got a placeholder in your guidance for what you think might happen, but only a $0.01 of incremental earnings from what looks like a pretty substantial need in terms of the CapEx you've made.

That seems to be a fairly conservative placeholder, or am I wrong that that's a key variable in the guidance?

That is a key variable in the guidance, for sure.

We have been reasonably successful in the past, so we think this is a very straightforward base rate case in our opinion.

But we are using a forward test year in the state, so we will see what the outcome is.

I think we picked what we believe is a reasonable outcome for planning purposes.

Obviously, I can't state what that is.

So, time will tell whether it's conservative or not, I guess is the answer to your real question.

Yes, Greg, I would just add that I think the effect you're really seeing is it's a mid-year.

The rates don't go into effect until July.

We're not getting the full year's revenue uptick from the rate case.

Great, and then should we be concerned at all about sales trends in Kentucky, as it relates to your ability to continue to have what has been a constructive dialogue with the regulator?

If your customer base is shrinking, it's just a bigger and bigger burden on the existing customers?

I'll ask Vic Staffieri to comment on Kentucky.

I think the notion that our energy requirements will be -- it's fairly flat, if you will -- less than 1% -- does create some pressure.

I have to say that we're really encouraged by the industrial growth we're seeing.

We haven't seen the follow-on yet in the commercial and residential sectors, that are experiencing obviously some [natural efficiencies].

We're pretty bullish.

Actually, the unemployment rate in Kentucky is probably at a low -- 5.1% -- hasn't been that low in many years.

I think there's actually some optimism from us on the economy.

Okay, one last question, shifting over to the UK: When we look at the new regulatory scheme, the first year where your incentive -- potential to collect incentive revenues and the way the incentive revenues are calculated changes -- is it 2016/2017, or 2017/2018?

I forget.

If you were to maximize the revenue, the bonus revenues in that year, as you have historically, how significant of a potential overall decline in incentives would you see, given that they're going to tighten down those calculations under the new scheme?

Good question.

Let me ask Rick Klingensmith to comment.

Sure.

Greg, the incentives, as you just mentioned, are going to be reset starting April 1 in our new RIIO construct.

The targets that we have are being reduced.

They're being reduced about 27% for customer interruptions, and about 42% for customer minutes lost.

As we go through the period starting April 1, and see our performance against those lower targets, we do expect lower revenues to be received.

However, those lower revenues will not be realized until the FY17 time period, when it's the 2017/2018 regulatory period, where incentive revenues will be captured at that point.

So, it's 2017/2018.

All things being equal, if you maxed out your incentives, how much lower would they be than the 2016/2017 year?

We're not prepared at this point to discuss the magnitude of the decline in revenues that might be possible, as we're working to try to maximize everything we can under the new targets.

Okay, thank you.

Paul Patterson, Glenrock Associates.

Just a few quick ones, and I apologize if you went over this.

The expected regulated ROE in Pennsylvania and Kentucky for 2015 -- what was that?

We did not go over that, so that is a new question.

Do you have a comment on that?

In 2015, we are assuming an ROE somewhere below 9%.

For which jurisdictions?

This is Kentucky, I'm sorry.

Okay.

And Pennsylvania?

Pennsylvania, from a GAAP perspective, we're expecting to be a little bit over 9% in 2015.

Okay.

And then sales growth, you mentioned that the load growth over the long term looks minimal.

I was just wondering if you could just give a little bit more flavor as to what minimal means.

I would say it is 0.5% in each case.

Okay.

And finally, the spinoff: Any more clarity on a specific date or closer sort of range of dates, now that we've gotten through so much?

I will ask Paul Farr to comment on that.

This is Paul.

Really nothing's changed from the standpoint of the initial indications that we gave.

We kind of early on said the NRC approval because of the process that we go through there, and then the PA PUC, again, because it is process driven, we actually did reach a settlement in December in Pennsylvania.

But just because of what the ALJ has to do, and then the normal commission uptake cycle, that took us, in both of those instances, into mid- to late-March, maybe early April time frame.

Nothing has changed from our standpoint there.

Okay, great, thanks so much.

Paul Ridzon, KeyBanc.

You're forecasting a $0.10 loss at corporate for 2015, but I would imagine that's got a ramping effect of your initiatives.

What do you think the run rate will be by the end of the year?

Vince?

It's around $0.10, $0.11.

On a run-rate basis.

So, it should be flat for the next few years at a $0.10 loss?

Yes, I would say the next few years, as we get further out and [reach a bar up at] Cap Funding to stabilize the cap structures of the utilities, we'll start to see some interest expense creep in there.

But I think for the next couple of years, $0.10 is probably a good proxy.

On your earnings walk from 2014 to 2015 at UK, there was a $0.06 uptick from currency.

Could you explain what's driving that again?

That is just the $1.63 hedged rate versus the $1.60 realized rate for 2014.

Okay.

Lastly, on the UK -- I guess not lastly, I have one more follow-up.

Just in 2015, as far as the shape of the UK earnings, given the rate case timing, I assume that first quarter should be up, and then flattish throughout the rest of the year?

Yes, that is correct.

And then, I know you don't have a geographic overlap on the shale, but what is your exposure to falling energy prices as far as suppliers, or just suppliers to the shale, I guess?

It's pretty minimal.

There's really no impact in Kentucky, and then very minimal impact in Pennsylvania.

Because you're so much further east in the shale?

Correct.

Okay, thank you very much.

Michael Lapides, Goldman Sachs.

If I go back in time to when you first entered the UK market years ago, 2000-ish, 2001-ish time frame, one of the things that happened was you continued to show strength in being able to manage O&M.

Just curious: It's been 2, 2.5, 3 years since the last UK acquisition.

What inning do you think you are in, in terms of managing the cost structure since you've taken control?

Are we talking still early innings in terms of getting that done, or are we talking eighth or ninth inning, and what you're able to take out and save from a cost perspective, you've already realized?

I'll comment first, Michael, and then I'll turn it over to Rick.

I think our UK team was very aggressive from the very outset at looking for opportunities in this last regulatory period.

And as we described in previous calls, in the first six months I think we took out a third of the cost, and a third of the employee base to make it much more efficient.

I think we're probably in the latter innings, if you want to use that analogy.

But that doesn't mean that there aren't still some opportunities for some hits here and there.

With that kind of intro, Rick, you can go ahead and comment as well.

Michael, thank you for the history and the recognition of what the team has been able to do in the UK.

Bill's right, we're probably in the latter innings.

As we went into this RIIO process, we provided a business plan that had our operating costs, the realization of all the efficiencies into that business plan, and that's what we provided Ofgem for the next eight years.

And that was actually a major factor in why we were fast-tracked and others were not, was because of the cost efficiencies that we had already realized.

But what was also in the plan was another about a 1% a year efficiency.

We are in the latter years, but we have about that 1% ongoing inefficiency that we are looking to achieve out into the future.

Got it.

One other question -- this is maybe more strategic in nature.

You have never been bashful about transacting when -- or just doing something at the corporate level as a way to either reduce risk or highlight value you think is embedded within the Company.

Post the spin-off of Talen, a large portion, more than 50%, will come from the UK, and historically, there have been very decent differences in valuation methodologies investors have used for your non-US utilities versus US utilities.

At what point do you take a step back post-spin, and say, what are the range of options to help highlight the value of the UK business to the broader investment community, and how do you think about what those kind of options are, if the market doesn't give it what you think the appropriate value of that business is?

I think the market will ultimately put an appropriate value on it, as we exit the spin transaction, if you will, and have the opportunity to spend a lot more time just focusing on the core utility businesses, including the UK.

As Vince mentioned in his remarks, we're providing some income statements for the UK business unaudited, to give more transparency.

And as we go forward, we're also looking at other ways in which we can highlight to investors the real significant value that we believe exists in the UK business.

And some of that value has obviously shown itself through our fast-track that Rick just mentioned, as well as the fact that we're entering into a full eight-year period, upon which we have great deal of certainty on the revenues and the cost side.

We think it's a great business; it fits well with our portfolio.

To the extent that we cannot overcome maybe questions or concerns that investors have, we obviously, as you point out, want to try to engage in activities that would either highlight that value, or re-weight the portfolio.

But at this point, I don't think there's a need or desire to do any of that.

And I would also mention that, because our US businesses are growing much faster than the UK business, over time, the weighting is going to come down for the UK, just through our organic growth in the US.

I think, over time, we'll continue to highlight the value in the business and make sure it is appropriately valued, and look at any opportunity we need to, to make sure that shareowners get that value out of it.

Got it.

One last one, and this one may be a Vince question.

Can you remind us, what is your cash tax versus statutory tax or GAAP tax rate going forward?

Or more importantly, do you expect to pay much, if any, in the way of significant cash taxes over the next few years?

Sure.

With bonus, Michael, I would say we're not a full taxpayer for the foreseeable future -- certainly through the plan period.

For 2015, we don't have a minimal tax burden.

I would say it is about $20 million.

It is around $100 million for the next couple years after that.

Meaning cash taxes will be a very small percent of total GAAP taxes?

It ends up -- yes.

We have NOLs and credits that bring that down.

I think of the amount of cash we are paying on our taxable income is about 25%, as opposed to 35%.

Got it.

Okay.

Thank you very much.

Appreciate you taking my questions.

Emily, we're past our time limit here, but we will go ahead and take one more question.

Brian Chin, Bank of America Merrill Lynch.

As we get a couple steps closer to the Talen spin being completed, any marginal updated thoughts on dividend policy for the PPL Parent utility?

So, we still do not have a formal dividend policy or dividend pay-out ratio that we're targeting, Brian.

But as we said, post-spin, our intent is to continue to maintain the same level of dividend prior to the spin.

And we will look at opportunities, where appropriate, to grow it, if we can.

So, that's still the game plan going forward.

Thank you.

Thanks, everyone, for joining us, and have a good day.

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