Joe Bergstein - William H. Spence - Chairman, Chief Executive Officer, President and Chairman of Executive Committee Vincent Sorgi - Chief Financial Officer and Senior Vice President Paul A. Farr - President of PPL Energy Supply Gregory N. Dudkin - Principal Executive Officer, President and Director Rick L.

Klingensmith - President of PPL Energy Services Group LLC and President of PPL Global Victor A. Staffieri - Chairman of LG&E & KU Energy LLC, Chief Executive Officer of LG&E & KU Energy LLC and President of LG&E & KU Energy LLC.

Kit Konolige - BGC Partners, Inc., Research Division Daniel L. Eggers - Crédit Suisse AG, Research Division Greg Gordon - ISI Group Inc., Research Division Julien Dumoulin-Smith - UBS Investment Bank, Research Division Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division Jonathan P.

Arnold - Deutsche Bank AG, Research Division Paul Patterson - Glenrock Associates LLC Michael J. Lapides - Goldman Sachs Group Inc., Research Division Steven I. Fleishman - Wolfe Research, LLC Rajeev Lalwani - Morgan Stanley, Research Division Angie Storozynski - Macquarie Research.

Good morning, and welcome to the PPL Corporation Second Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. Now I'd like to turn the conference over to Joe Bergstein, Vice President of Investor Relations. Sir, please go ahead..

Thank you, and 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 4 business segments.

As I noted with the talent announcement, Paul Farr has assumed the role of President for PPL Energy Supply through the transition process and will become CEO of Talen, post spin. Moving to Slide 3.

Our agenda this morning starts with an overview of second quarter earnings and operational results and an update on our 2014 earnings forecast, which we have raised for the second time this year. After my remarks, Vince will review our segment financial results, 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 4. 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 ongoing operations were $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 led to very solid results through the first half of the year. Year-to-date, reported earnings were $0.83 per share, compared to a $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 ongoing 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 5 for an update on our 2014 ongoing earnings forecast.

I'm pleased to say that today we are increasing the forecast to $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 baseload 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 U.K. Regulated segment. Now let's turn to Slide 6 for an update of our regulated operations. For the third year in a row, PPL Electric Utilities has ranked highest amount large electric utilities in the Eastern United States for residential customer satisfaction in a study by J.D. Power.

The award is the Utilities' 22nd from J.D. Power and the 11th for residential customer satisfaction alone. With this award, PPL's domestic companies, PPL Electric Utilities, LG&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 U.K., our 4 operating utilities capture the top 4 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 shareowners.

In another key development, PPL Electric Utilities filed a plan with the Pennsylvania Public Utility Commission on June 30, 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-congesting 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 timeline 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 7. You'll see that weather-normalized sales for the quarter in Pennsylvania and Kentucky were in line with our 0.5% load growth forecast.

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 a significant increase in cooling degree days in May and June, compared to 2013.

In Pennsylvania, residential customer use increased due to higher customer accounts 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 8. 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 Nuclear's 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 at 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 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 do 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 call 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 shareowners. I am 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 9. 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 U.K.

Regulated segment was $0.02 lower than 2013, with weather being a contributing factor. Let's move to the detailed segment review with the U.K. results on Slide 10. Our U.K. 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 year's earnings and profits calculation. We had 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&M driven by lower pension expense. Moving to Slide 11. Kentucky earned $0.09 per share in the second quarter, a $0.01 cent increase compared to a year ago.

This increase was driven by higher margins from additional environmental capital investment, partially offset by higher O&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 baseload 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 hedge baseload energy prices. On Slide 14, we provided an update to the U.K. earnings projections for 2014 to 2016, reflecting a significant improvement from expectations in July of 2013, when we filed our real business plans with Ofgem. For 2014, our strong U.K.

performance is incorporated into the increased guidance that Bill mentioned in his remarks. Our 2015 midpoint of $1.36 was communicated in June, when we announced the Supply business spin and provided our 2015 earnings forecast for PPL, excluding the Supply business.

For 2016, we are showing an $0.11 increase from the midpoint provided last July, primarily driven by lower projected O&M cost, including lower network maintenance expenses and lower pension expenses, as well as the projected improved currency exchange rate, which is based on an average rate of $1.67 per pound compared to $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 show the updated projections of cash repatriations from WPD back to the U.S. for the 2014 to '16 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 will 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 9 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 5-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 5-year maturity and a 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 3 of the 4 planned regulatory filings this month.

We filed a Section 203 application with FERC, citing 2 separate market 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 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 will turn it over to Bill for the Q&A session..

Thank you, Paul. And operator, we're ready for questions..

[Operator Instructions] And the first question comes from Kit Konolige with BGC..

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're absolutely right. We expect some of the gains that we experienced in the second quarter, there were -- in the middle of the year. But still it would be a net positive. Vince can probably provide a bit color on the exact numbers there. So....

Sure, Kit. Thanks for the question. Yes, the Supply, $0.06 is really -- you could think of it, half of it is just improved margins from the baseload, $0.03. And the other half is improved M&T margins, $0.02 of which is coming from the unrealized gains..

Yes. Okay.

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

Yes. Kit, when you look in the back, in the appendix, that it looked like our hedges decreased in 2015. That's primarily because on a economic dispatch modeling basis, with the improved prices that we saw in the second quarter, more generation was economic. And so, there just simply more generation.

Given our target hedging program, kind of 1 year forward to be about 75% hedged, looking forward to the transaction, we're 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, though, on that 25% year-to-mark..

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

Yes, that will be pretty close to that at 75%, 1 year; 25%, second year. We're also doing 100% of the retail in utility load following hedging out of the generation book, which is a little bit different. And one way to think about that is, we'll just simply be constrained from a liquidity perspective.

We're basically increasing the amount of generation that has to be hedged by about 50%, with a 50% reduction between the size of liquidity facilities and cash that we've got. So it's just -- it's a liquidity-targeting exercise. Just like it was when it was Energy Supply, but we had bigger facilities and a smaller fleet..

And the next question comes from Dan Eggers with Crédit Suisse..

Bill, can you maybe get a little bit more into this transmission project today? I guess, kind of how the process works from announcing, looking at something to where we'll see action.

What kind of dollars you have to spend upfront? And then, if you look at the challenges you guys had with Roseland and other folks have had in the past, trying to build these new Pennsylvania East type of transmission lines, how you guys think you're going to approach it to make it a higher chance of success?.

Sure. So the processes itself is one that's not been well traveled in the past, as you know. It's a relatively new process. So we'll continue to work with all 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'll 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. So PJM had a window that just closed recently. So this project, Project Compass, was filed as part of that window. As far as the approvals are concerned, so this project not only is part of PJM, but also goes into the New York ISO, still 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 those issues together and provides significant benefits to the consumers in the region. So I think it's 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've 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..

Okay. So we should -- this will be, I guess, probably a little quiet from our perspective for -- in a period of time, while you get your ducks in a row.

Is that kind of how we should think about it?.

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

And then the money you guys are putting into it now, is there a route for recovery if this is not successful or is this money you guys are burying on PPL for the time being?.

Yes, this is something that is not recoverable. So we'll -- if it doesn't go forward, then we'll just had to eat that..

Okay.

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

Yes. So when we signed the transaction documents with Riverstone, basically at that time, the 2 companies are pretty much economically tied at the hip. From the standpoint of the cash that's generated by the business, except for the payment of shared services, taxes and a fixed dividend stream, the cash stays in the business.

So it's the cash that will be there at close. It's cash from the mitigation with whichever of the 2 packages we pursue and sell those assets. It's 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's on their nickel and not ours..

Okay.

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

Well, we requested 2 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 than same Sapphire portion of the portfolio, the Crane facility in Baltimore and the Holtwood Wallenpaupack facilities here in Pennsylvania.

We will be approaching the market even in advance of receiving approvals to gauge investor interest and we'll move forward with both packages and determine which of those has the best outcome from a share and value perspective for Talen shareowners.

They look at the relative level of EBITDA and cash flow that the asset portfolios generate versus sale proceeds that we think we can secure in an auction process..

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

So the U.K., the guidance range in the U.K. to now at $1, was it $1.30 to a $1.42, and the final 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'll fall out in 2016 within the $1.30 or $1.42? What are the key drivers that would swing you towards the low end or the high end there?.

Okay, 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's been predominantly tax planning has helped us, currency has helped us as we're 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 major 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're about 56% hedged at a rate of about $1.66. 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 $0.05 change in currency, it's about approximately $12 million change in earnings..

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 on the U.K.

side of the business?.

That correct and that's all currency driven. So the change in assumption from that $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 RAV or the CapEx..

Got you. And a question for you, Paul. As we look at Talen, you're one of the generating companies that's the most exposed to a widening basis in the Northeast, both positive and negatively lead to the negative.

Can you tell your investors sort of what's 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? I mean, how do we think about it, if we're trying to value that entity and we're using the forward curve as a base case? That's not a very good base case, so how do we get comfortable that there's a good business proposition there, given current market conditions?.

Where we're sitting, I mean, on a peak basis at least, do you focus on '15 or '16. We're 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're 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's a bit softer, whether you look at TETCO or whether you look at Marcellus base numbers, we have not simply not had. So we had extraordinary weather in January, and we've had literally no summer yet. So we've had no -- while no summer here and we're just starting to have a summer in Texas.

So I think when you think about the pricing, I still think that the low 50 -- 50 to 52, 53 on a peak basis numbers are achievable. I think we'll see another rally as we get towards winter, as we typically do in that time of the year. We are, as you said, not compulse to hedge.

And 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 derisk that as much as we could. We simply won't be able to given that we'll 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..

And the next question is from Julien Dumoulin-Smith of UBS..

So with regards to divestment process.

I'd be curious, why more than 1 gigawatt? I mean, I suppose, is this just driven by your analysis about what's necessary? Or was there kind of any market view there about trying to get rid of portfolios in the entire of the year, just -- any other reason there?.

Julien, this is Paul. There really is -- there's no change. When we talked about it on the day of the announcement, we talked about a 1,000 megawatts of baseload equivalent. When you look at the Sapphire portfolio, which is simple cycle and combined cycle, it's less efficient combined cycle plants, oil and gas in Jersey.

When you look at Ironwood today, as Bill indicated, at 98% capacity factor, has more baseload. The Crane plant has a very low capacity factor on an annual basis. And then the hydros are 55% to 60% run on river plants. It's just when you do the math, that gets you each of them to a 1,000 megawatts of baseload equivalent.

They happen to be roughly the same in terms of total megawatts at 13 50-ish but, but it's really the equivalency that, that we're trying to get to..

Excellent.

And could you talk a little bit to your coal hedging? I mean, that seems to switch around a little bit here, but perhaps that might be due to the generation?.

It's 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, right?.

That's correct..

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

The CapEx is not likely change at that point either?.

No, there would be no change..

And the next question comes from Neel Mitra of Tudor, Pickering..

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 -- is 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 shales, 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'm not seeing?.

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

Got it. And 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 sited through the region, the cost to connect for those generators would be much less.

So again with potential coal retirements, we think there's 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 didn't really factor in the economics. But I think there'll be a significant economic benefit there, reduced congestion. So all that, when you factor all 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'd want to expand in west PJM in Texas, and wanted just to question on how you think about timing for acquiring assets? Would you do it before the spinoff? And what's -- when you look at the market, what's the optimal time to be buying assets? Would you rather be buying right now with what's up for sale? Or would you rather wait till next year?.

Well, we're following all the processes that are going on right now. So we know everything that's on the market. We think we know what's coming on the market in fall and in spring. So we're actively following it, and if there was something that was 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's in PJM that would have the potential to complicate any aspect of the regulatory approval processes, especially when we've got known market power issues to deal with, it probably wouldn't be a high probability.

But as we move through time and we secure those approvals and they agree with the mitigation plans provided that the area of PJM we'd be buying in, wouldn't further complicate that, there'd be no problem there. So we're actively watching that, as we said, right now. But as I said, we've got the hydro sale process underway in Montana.

We're looking at some other potential noncore asset disposals. We've got the mitigation processes that we're going to be evaluating as well, so the deal team has quite a bit on the plate already, as well. So we'll be judicious..

So when you talk 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're looking at?.

Yes. I mean, as long as we're well west of 50 or 4 50 or 5, then I think that wouldn't complicate things. So yes, we wouldn't be against it if the right opportunity came along..

And the next question comes from Jonathan Arnold with Deutsche Bank..

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 projects in the context of that? And are you -- are there other things you're 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'd expect to be over some reasonable period of time?.

Sure. I would say that the 4% minimum that we articulated upon the announcement of Talen spin for the regulated businesses did not reflect anything of the magnitude of this type of project that we're 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, I think, it's -- there's nothing, I think, magical about where's it going to come from. It's really executing the business plans we have. We've provided today, as you know, some updated guidance on the U.K., which is improved from previous guidance.

And then, we'll 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 base growths that we've articulated.

So I think we have a very good plan to achieve the minimum 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're committed to..

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

Yes, we did. The base was on 2015, so -- I'm sorry, 2014, x Supply, so we provided the numbers there. And so it's off that base..

Okay. And then, just on -- I think you just -- I think in another question, you gave the answer to how hedged you are on U.K. currency for 2016.

How about 2015?.

2015, we're at 98% hedged at an average rate of $1.63..

Okay. Great. And then just one final thing on there. You guys have typically excluded mark-to-market type moves in the Supply business.

What's the reason for leaving in this $0.04 this quarter?.

Yes, let me take that one. This is Paul. So we've 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 it that is in the forecast for the end of the year. And as things have come off from a price and smart-grid perspective, even in the July-type time frame, some of that benefits already been reverted out since June..

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

A lot of my questions have been answered.

But just -- and I know it's 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 sort of in the ballpark, that would happen as a result of these major projects..

Yes, as you can imagine, because it is so far out and there's so many moving pieces, coal retirements, 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 you 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. So with it, the earliest would be 2023..

Okay. And then just on the tax valuation. I'm sorry if I missed this.

What actually sort of drove that impact? What happened there?.

Sure. I'll let Vince take that one..

Sure. What happened was we have net operating loss carryforwards 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.

And so when we announced the spin, it no longer -- we can no longer assert that those earnings would be able to support those deferred tax assets. And so we took the valuation allowance against those..

And the next question comes from Michael Lapides of Goldman Sachs..

Just real curious.

Can you talk about PPL Corp.'s cash tax position for 2014 and maybe the next couple of years going forward through 2015, 2016, meaning how much of the cash taxpayer you expect to be relative to GAAP taxes? And does the Talen transaction impact that at all?.

Yes, Vince wants to take that..

Sure. So on a federal basis, our estimated tax position there would be basically 0, as a result of NOLs. And bonus depreciation still carryover effects from that, so it's 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 '17, '18 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 base growth of some of the subs, to delever as well? I'm just trying to kind of think through that, because that's kind of a big number when you start getting to the out years..

Yes, so the cash flow -- that cash flow position just goes into our sources and uses of funds. And the largest use of our funds is our CapEx program and our rate base growth. And so, those -- that cash is being used to fund that growth..

Got it. Bill, just curious, when you walk across the different segments, what's your thought process just in terms of rate case timing at the U.S.

Regulated businesses?.

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

Greg?.

Yes, so as far as timing for Pennsylvania, we don't at this point, obviously, see a need for a rate case in '14, and we're looking at the possibility in '15..

And in Kentucky, I think I've 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.

But we never -- much of our recovery of our capital expenditures is through our environmental recovery mechanism, so I'm talking about base rate cases here..

Got it.

And Greg, in Pennsylvania, you're thinking just sometime in 2015 potential file of forward-looking test year for 2016?.

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

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

Bill, a couple of questions. First, the updated guidance for '14.

How are you incorporating the kind of mild July and it looks like maybe mild August, if at all, is that in there? Or are you using normal?.

I would say, we're predominantly using normal, but I don't think -- 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..

This is Paul.

One other quick thing, remember, we're so 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're 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 and assumptions 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 any way you can give us any sense of kind of mark-to-market update numbers for Talen, given what's happened with pricing, for '15?.

Yes, let me ask Paul..

Yes, that's -- it's really hard for us to do. We've given you in the appendix the updates to the hedge positions on fuel and on power. Due to any trust restrictions, we're 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 U.K. that you gave here is kind of flattish, '14 to '16. That 60% of your earnings, roughly, I think.

So that mean the other 40% need to grow around 10% to get the 4%, overall? And I think you have a rate base growth to do that, but I just wanted to kind of make sure if I'm thinking about that right. And you feel good, you can get to that at the non-U.K..

No, you're thinking about that exactly, correctly. And that's factored into how we get to the 4%. I mean, obviously, if we look at the domestic utilities, they're growing significantly in terms of EPS over the period. And we've got that flattish growth in U.K., that dilutes that a bit.

But this still keeps us, I think, squarely in the ballgame in terms of many of our peers with the 4% minimum growth target for EPS. So we do feel good about our capability to achieve that even given the U.K. mix..

Just in the context of the peer regulated company going forward, you'll get that money in. Obviously, I think the U.K., otherwise funds itself. And then, you need to fund these rate base 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. So 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 putting financing going into the next couple of years, we're pretty much set for 2014, domestically. We're not expecting any additional debt issuances there.

Our funding plans do include the $1 billion of proceeds coming in 2014 about 900 coming from the Montana hydro sale, and then we just received in July the $108 million treasury grant from Holtwood. Both of those proceeds are staying with Corp. [ph], so they helped to fund that CapEx plan significantly going into '15.

We have about $1 billion of debt coming due next year in the domestic utilities. And 900 of that is in Kentucky, another 100 of that is in EU. The Kentucky debt is 400 up at wholesale level. We'll just pay that off. And then we have 250 at each of the opcos first mortgage bonds.

We'll just refinance those with first mortgage bonds down with the utilities, and the same thing with the $100 million at Electric Utilities, we'll just refinance with first mortgage bonds. So we'll do as much financing down at the opcos, as we can. If we need to adjust the cap structures, we'll do that up at cap funding, as we have been doing.

And then we'll just maintain the credit metrics that we need to keep our investment-grade credit ratings really what we expect to come out of the uptick that we expect to get coming out of the Talen spin. No concerns from a financing plan assumption going forward..

[Operator Instructions] And we do have a question from Rajeev Lalwani from Morgan Stanley..

My first question 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're 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're 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 4 or 5 of them. And this project and I 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 -- perspective..

Right. And just a question on the U.K. side. You've provided guidance through '16, and 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 do you think growth can do there?.

Yes, we haven't provided forward growth estimates for the U.K. 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'll see earnings growth further out in the plan. So there will be a dip and then a recovery over time.

But we'll 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 this standalone or future standalone PPL side, whether you're looking to be an acquirer or maybe an acquiree? Just some thought there..

Sure. While we would continue to look at opportunities to grow PPL post-Talen spin on the regulated side and think there will be opportunities over time whether we're 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.

So I can't really comment on whether we're 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, so. But certainly, we would consider M&A.

We don't 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 is probably all I can say at this point. Operator, we're approaching our time limit. And I know it's a busy day of earnings for everybody, so we'll take one more question..

And that comes from Angie Storozynski with Macquarie..

Okay, so I have 3 questions. One is, could you comment about your power hedges for the PPL Supply beyond '15.

Did you add any hedges to your '16 or '17 positions?.

Paul?.

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're 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 to buy?.

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 it's growth will not change from where we have been to where we will be post Talen spin..

So roughly, the pickup in the dividends, we shouldn't expect until what? '17, later than 2017?.

I think. 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're 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 looking at how the Susquehanna-Roseland went and the 3-year delay to cross, what, a 3-mile stretch through the Delaware Water Gap even though there was an existing right of away.

I mean, obviously, we don't see exactly how this proposed line goes, but should we expect similar issues with siting of the transmission line?.

Greg, do want to take one?.

Sure. Thanks. So certainly, when you're talking about a 725 mile line, siting is going to be a big issue. So we will work with all the stakeholders. We've had success, actually Susquehanna-Roseland is a great example. So it took us a while, but we were building through a national park. And I think it had been very successful.

I think 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 -- that shouldn't face any environmental issues?.

No national parks..

Right. Okay. Thanks everyone for joining us on the call today. And have a good rest for the day..

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