Joseph P. Bergstein - Director-Investor Relations William H. Spence - Chairman, President & Chief Executive Officer Vincent Sorgi - Chief Financial Officer & Senior Vice President Paul A. Farr - President - PPL Energy Supply and PPL Generation, PPL Corp. Rick L. Klingensmith - President, PPL Global and PPL Energy Services, PPL Corp..

Greg Gordon - Evercore ISI Daniel Eggers - Credit Suisse Securities (USA) LLC (Broker) Michael Weinstein - UBS Securities LLC Paul Patterson - Glenrock Associates LLC Michael J. Lapides - Goldman Sachs & Co..

Welcome to the PPL Corporation First Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this call is being recorded. I would now like to turn the conference over to Joe Bergstein. Please go ahead...

Thank you, Amy. Good morning, everyone. Thank you for joining the PPL conference call on first quarter results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com.

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

A discussion of the factors that could cause actual results or events to differ is contained in the appendix to this presentation and in the company's SEC filings. We will refer to earnings and ongoing operations or 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 although the registration statement has been declared effective by the SEC, we remain in a quiet period with respect to future prospects of PPL Energy Supply and Talen until the completion of the spin-off as previously announced on June 1. 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. We're pleased that you've joined us today. With me on the call are Vince Sorgi, PPL's Chief Financial Officer; and the presidents of our four business segments.

Moving to slide three, our agenda this morning starts with an overview of our 2015 first quarter earnings results, an operational overview and a discussion of our 2015 earnings forecast. After my remarks, Vince will review our segment financials. He'll also provide an update on our U.K.

operations including our improved currency hedge status, a new look at our sensitivity changes in RPI, or U.K. inflation, and our enhanced ability to repatriate cash. Then we will take your questions. The first quarter of 2015 marked a successful start to the year for PPL.

We achieved strong earnings results overall with solid performance across our regulated utility businesses. The competitive Supply segment also turned in a solid performance despite ongoing challenging market conditions. As I'll describe in more detail shortly, we're on track to complete the spinoff of Supply on June 1. Turning to slide four.

Today, we announced first quarter 2015 reported earnings of $0.96 per share, an increase of $0.47 from our first quarter 2014 results. Adjusting for special items, our regulated utility earnings from ongoing operations were $0.77 per share, up 17% from first-quarter of 2014, adjusted regulated utility results.

If you recall from our 2014 year-end earnings call, we discussed excluding the Supply segment earnings and net costs associated with the Supply spinoff from our ongoing earnings to provide results for our regulated utility operations.

This approach provides our investors with a clearer picture of the financial performance of the going forward part of our PPL portfolio. Consistent with that approach, we've adjusted the ongoing earnings on this slide to focus on our regulated utility operations.

With regard to regulated utility earnings from ongoing operations, I'm pleased with the increase we achieved in the first quarter compared with the same period a year ago. Strong first quarter earnings at our U.K. Regulated segment drove the 17% increase. Vince will provide more details on all the quarterly results during his remarks.

Let's move to slide five for a discussion of our 2015 earnings forecast. Based on first quarter performance, we're reaffirming our 2015 forecast range of $2.05 to $2.25 per share for regulated utility earnings from ongoing operations.

The midpoint of this range, $2.15 per share, is approximately 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 spinoff of Supply, including indirect O&M, interest and depreciation.

Based on the continued excellent performance of our utility operations, the organic growth from planned, and approved infrastructure investments and the results of our corporate restructuring efforts, we remain very confident in our ability to achieve compound annual growth in earnings of 4% to 6% through at least 2017.

As shown here on slide five, for 2015, we're anticipating small increases in earnings in our U.K. 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 a result of our ongoing corporate support cost reductions, including the $75 million of dissynergies we discussed at the time we announced the spinoff.

At the outset of the year, I mentioned that 2015 is very much a transitional year for PPL. On April the 1st, our U.K. Regulated segment transitioned to the new RIIO-ED1 eight-year price control period. On June 1, the spin-off of our Supply business and creation of Talen Energy will be completed.

In Kentucky, we expect our rate case to be concluded in the second quarter with new rates taking effect July 1. And in Pennsylvania, we filed a rate case in late March, and we're working through the Public Utility Commission's review process. All these 2015 initiatives are on track, and we're really pleased with the progress thus far.

Now, let's turn to slide six for an update on our Kentucky Regulated operations. We continue to make progress on our Kentucky rate proceedings, reaching a settlement agreement in April with all the parties in the base rate cases before the Kentucky Public Service Commission.

If the settlement is approved by the commission, it will result in an increase of $125 million in annual base electricity rates at Kentucky Utilities and a $7 million increase in annual base gas rates at Louisville Gas & Electric.

The settlement focuses on the total amount of costs we can recover rather than establishing a return on equity with respect to base rates. While this settlement did not establish an ROE for base rates, we will earn a 10% return on equity investment related to the environmental cost recovery mechanism and our gas line tracker mechanism.

The settlement agreement also provides for deferred cost recovery on a portion of the costs associated with pensions and Kentucky Utilities Green River plant, which is scheduled to be retired in April of 2016. We're pleased we were able to reach an unanimous settlement with the parties to the case.

As I mentioned, we anticipate that new rates will go into effect on July 1 of this year. We also continue to focus on major capital projects in Kentucky. Recent milestones include the retirement of our Cane Run Unit 6 coal-fired generating unit, the first of three units that are being retired at that facility.

The retirement comes as the company prepares to bring its new Cane Run 7 combined cycle gas-fired unit online later this quarter. Turning to slide seven. On March 31, we filed a request with the Pennsylvania Public Utility Commission for an increase of $167.5 million in annual distribution revenue requirement at PPL Electric Utilities.

This request is driven by investments we're making to renew, strengthen and modernize our Pennsylvania delivery network. If approved by the PUC, we expect the increase to take effect January 1, 2016. We're also set to energize the Susquehanna-Roseland transmission line in just a few days.

This $630 million project represents a major upgrade to the nation's electric grid. The new 500 KV power line will strengthen reliability for millions of people in the Northeast. The three-year project created significant economic development benefits in both Pennsylvania and New Jersey, including the creation of about 2,000 construction jobs.

This project was one of seven projects nationwide to be fast-tracked by the Obama Administration's Rapid Response Team recognizing its importance.

Building a major transmission line like this requires a tremendous amount of planning, communication and cooperation with many different stakeholders, including government agencies, PSEG, our neighboring utility who partner with us on the construction of the line, local officials and the public.

Many people were involved in making this project a success. I appreciate their dedication and the achievement. This project is a great example of our ability to execute major capital projects that add value for both customers and shareowners. Turning to slide eight, let's briefly discuss domestic weather-normalized sales for the year and the quarter.

In Kentucky, weather-normalized sales for the first quarter were down about 0.5% with residential, commercial, and industrial usage all lower compared to a year ago. Kentucky experienced lower sales volumes due to a longer period of cold weather in the first quarter of 2014 versus 2015 as well as more extreme weather last year compared to this year.

As you can see, first quarter weather normalized 2015 sales were also lower in Pennsylvania than in the first quarter of 2014. The decrease was driven by lower residential and industrial sales offset slightly by higher commercial sales. The 2015 weather-normalized sales are 1.2% below 2014.

Similar to Kentucky, weather-normalized sales comparisons to 2014 are difficult due to extreme weather impacts. Although the winter of 2015 was slightly colder than the winter of 2014, 2014's polar vortex was much more volatile with more temperature swings.

On a rolling 12-month basis, total weather-normalized sales in both Kentucky and Pennsylvania were essentially flat for the 12 months ending March 31, 2015, compared to the previous 12-month period.

Moving to slide nine, we continue to make significant progress related to the spinoff of our competitive generation business, which will be combined with Riverstone's competitive generation business to form Talen Energy.

We've now received all the necessary regulatory approvals to complete the transaction including from the Federal Energy Regulatory Commission, the Department of Justice, the Nuclear Regulatory Commission and the Pennsylvania Public Utility Commission. We expect to close on the transaction June 1.

Talen Energy common stock is expected to begin trading on a when-issued basis on the New York Stock Exchange under the symbol TLN WI, beginning on May 18. On June 2, regular-way trading of Talen Energy common stock will begin under the symbol TLN.

Immediately following the transaction, PPL shareowners will own 65% of Talen Energy's outstanding common stock with Riverstone's affiliates owning the remaining 35%. The PPL Board of Directors has declared a pro-rata distribution to PPL shareowners of record on May 20.

The distribution ratio is expected to be approximately 0.125 Talen shares for each PPL share and will take place on June 1. PPL will announce the definitive distribution ratio promptly after the record date based on the actual number of PPL shares outstanding on that date.

Our PPL and Talen transition teams have done a great job of coordinating a transition process that will allow Talen Energy to operate safely and efficiently on day one and result in a lower cost corporate structure for PPL going forward.

Before turning the call over to Vince, I would reiterate that we had a solid start to 2015 and we we're able to reach a settlement in the rate case in Kentucky. And as Vince is going to review shortly, PPL's got a strong foundation for future success as a pure play regulated utility company.

PPL is taking significant steps, as many of you know, to preserve and create shareowner value over the last several years.

As we approach June 1, which will consummate the formation of Talen Energy, I want to just take a moment to thank all the PPL employees and future Talen employees that have made this significant effort possible and for all the past contributions of our PPL Energy Supply employees.

I'd also like to thank Paul Farr for his leadership, not only with the spin of our Energy Supply business, but also for the seven years he spent as PPL's CFO. I appreciate all they've done and wish them much success. I'll now ask Vince to provide an update on the first quarter segment results.

Vince?.

our revenues, our O&M, and the interest expense on our index-linked debt. The lower RPI we are currently experiencing does not have a significant effect on our 2015 or 2016 U.K. earnings guidance we provided during our year-end call.

For 2017, since this is the first year we see the RPI true-up in revenues, the lower 2015-2016 RPI of 50 basis points or RPI of about 2% would have a negative effect on earnings of about $0.02 per share in 2017. Moving to slide 16, we're providing an updated view of our cash repatriation ability in the U.K.

Since our year-end update, we continue to evaluate our ability to repatriate cash from the U.K. We expect to increase our 2015 cash repatriation by about 10% over the information we provided on the year-end earnings call to about $300 million.

We believe we have additional capacity beyond that and for 2016 and 2017, we now forecast that we can bring up to $500 million per year. We're showing ranges here of $300 million to $500 million for 2016 and 2017, as we will determine the amount based on our domestic cash needs at that time. We recognize that at $300 million of U.K.

distributions per year, the domestic payout ratio to fund our dividend was over 100% beginning in 2016. With our ability to dividend between $300 million and $500 million a year from WPD over the next few years, we would target to get the domestic payout ratio back under 100% for 2016 and continue to lower that domestic payout ratio in 2017 and 2018.

We are confident we can fund the PPL dividend and continue to grow it modestly while we are in this period of high CapEx spending. Before I turn the call back over to Bill for the Q&A, I also want to provide an update on our expectations for bonus revenues in the U.K., since we receive a lot of questions on this topic.

As we enter the RIIO-ED1 price control period, we expect to earn lower bonus revenues as our ability to outperform will be more challenging, given the tighter performance targets under RIIO. Rick Klingensmith has discussed this topic on our previous call. This will result in lower bonus revenues starting in 2017.

Our business plan assumes $120 million of bonus revenues for 2015, between $120 million and $130 million for 2016, and between $80 million and $100 million for 2017. And, for 2018, when the full impact of the tighter performance targets is seen, we would expect to earn between $60 million and $90 million in bonus revenues.

That concludes my prepared remarks. And, I'll turn the call back over to Bill for the question-and-answer period.

Bill?.

Thanks, Vince. Before we get to the Q&A, and as Vince just described, PPL is continuing to optimize our U.K. plans under Rio and providing investors with enhanced disclosures. We think this additional information will be helpful to better understand our U.K. business and the exceptional value we feel it provides to our regulated portfolio.

We'll continue to enhance our disclosures in the future as well once we get to Talen spin behind us. And with that, operator, let's please open the call up for questions..

Thank you. Our first question is from Greg Gordon at Evercore ISI..

Good morning, gentlemen..

Good morning, Greg..

So, just a few questions on the regulated segments. So, you came in obviously with a big increase in Q1 in the U.K. Regulated segment.

So basically you expect the headwinds from the lower revenues to fully offset that in the next three quarters and come in flat for the year or did you come in slightly ahead or behind of your budget, what you expected in Q1?.

Vince, you want to take that question?.

Sure. How're you doing, Greg? Yeah, I would say we came in slightly ahead of budget for the quarter, but based on the forecast going through the rest of the year, we would still expect to maintain our original forecast of around $1.38..

Okay.

And then this $0.02 headwind in 2017 associated with the 50 basis point sensitivity to RPI, does that assume that you're unable to offset that with any sort of cost reductions? One would presume if inflation is tracking below trend that your costs might also be somewhat flexible and track below trend?.

Yeah, that would be net of all three components that I discussed..

Okay. Great.

In Kentucky, what percentage of that $132 million should you get approval of the settlement, would you expect to flow in the revenue in the second half of 2015?.

I'm sorry, Greg.

Could you repeat that question again?.

How much of the $132 million annualized rate increase that is codified in the settlement would actually flow into 2015 revenue if it's approved as currently proposed?.

Yeah. It would be about half, Greg..

Great. And then the timing, sorry..

Let me just rewind a bit back to the answer on the U.K..

Yeah..

I think that $0.02 that we're talking about on the RPI would not include any potential offsets that we might achieve based on lower inflation that could impact O&M..

Okay.

So, in other words, if inflation is tracking below expectations, costs might also track below expectations and mitigate that $0.02 impact?.

That is correct..

Great.

And then the timing of the decision in Pennsylvania, based on the filing, when would you expect to get a revenue decision?.

Go ahead..

Yeah, so, the based on the normal flow, it'd be December we'd get the final ruling from the PUC..

Okay. And then last question. You've given us a couple years of visibility on your expectation for U.K. earnings. Given the headwind of the expected bonus revenue decline from $125 million at the midpoint to $90 million to $75 million, when do you expect to get on a playing field in the U.K.

where you would expect to have the opportunity to show growth in the earnings power of that business? Is it the 2018 fiscal year 2019, 2020? When do we get to the point where sort all the headwinds have been mitigated and you start to grow again?.

It would really began in around the 2018 timeframe, Greg..

Okay.

So in 2018, you're confident you could overcome that last negative step-down?.

That's kind of the base year. I think that's – yeah, 2018 is kind of the base year, because that's the last year when we do the step-down or reflect the lower new bonus revenue that we just disclosed today and then it would be a trajectory off of that..

Okay.

So 2018 through the end of the current rate period?.

Yes..

Okay. Thank you, guys..

Sure. You're welcome..

The next question comes from Daniel Eggers at Credit Suisse..

Good morning, Dan..

Good morning, Dan..

Hey. Good morning. Just a couple questions. One, I guess the U.K.

elections are upon us, can you just give any thoughts of what effect that may have on your business or with the RIIO in place, are you guys well protected at this point?.

Yeah, I think we feel pretty confident that the U.K. election would have no material effect on us. We would expect, as you've probably read as well, probably a coalition government would get established. As you know, we've have already got our license, it's been approved and well in hand.

And on the distribution side of the business, we would really not expect any material change..

Okay, just wanted to make sure. And then with the load growth, you're kind of showing negative on a weather normalized basis.

Should we read much into that as it being hard to disaggregate weather in the volatile first quarters the last two years or is there something more structural going on as far as the lack of recovery in usage?.

No, I think you hit on it. I think it's just a difficult thing to model and so I wouldn't read anything through on the first quarter results at all..

If we look at the trailing 12 months versus trailing 12 months, it still has some of that same friction, is the first quarter of both years skewing that number enough that we should probably disregard those as well?.

Yes, that would be our opinion. Yeah..

And are you comfortable with kind of the low-drift forecast you guys have given previously on a normalized basis?.

We are, we've said about 0.5% per year of low growth, and we still think that's a reasonable expectation..

And I guess the U.K. looks a little bit better for this year at this point, and I'm going to guess utilities maybe a little bit behind plan, not much but a little. Are you thinking that the base of the U.K.

should cover any sort of load weakness you might have had in the first part of the year?.

Yeah. I think it has for the first quarter certainly and we didn't update, obviously, the guidance despite a really strong first quarter, just because we're early in the year.

And we've got the summer to go which, obviously, from a weather standpoint, could have a material effect potentially, depending on how the weather turns out, on utility earnings..

Got it..

Yeah. Dan, I would just add that I think the domestic utilities first quarter results are very consistent with what we were expecting. They're not behind..

Okay. Very good. Thank you, guys..

You're welcome..

The next question comes from Michael Weinstein at UBS..

Hi, good morning..

Morning..

I was wondering if you could talk about the tax consequences of the repatriation?.

Go ahead, Vince..

Sure. No incremental U.S. income tax as a result of the additional cash repatriation..

Okay. And then, a separate question on PJM's capacity auction that's coming up.

Wondering if you could kind of highlight what kinds of assets you think might be base versus capacity performance and in your own fleet as well as other assets outside of your fleet, and what you think might be the differential or would cause the differential between the pricing that will count for each category.

Sure. Let me ask Paul Farr to address that question..

Okay. For our own fleet as we think about the way the rules came out in more final form in December versus the original October white paper, other than a de-rate for the hydro facilities in PJM, I would see the entirety of our fleet qualifying on the PPL Energy Supply side, really as well as the PJM assets on the Riverstone qualifying for CP.

Which assets would be likely bid based by a generation owner based upon risk and what asset classes like DR – like limited DR that wouldn't qualify for an annual bid because it's a full-year requirement for CP, but the limited wouldn't. And I think a lot of that it would be tough to group together some of that other DR.

So I think a lot of that kind of falls out to base.

And then even though we've got really strong EFORds for our fleet, if you've got coal assets that have been very challenged economically and you've not been putting capital into the plan and you have a very hard time forecasting a forced outage rate, so it becomes very difficult to predict penalties.

I think you effectively bid those base simply because you're not willing to take the penalty exposure. And then the other assets that are in the system like our hydro assets that would get de-rated or renewables assets that get de-rated all as well kind of fall out.

And if they are bid in, they would be at fractional percentages of their base or name-plate capacity..

Right.

So you see all of your assets in the CP category?.

That's correct..

And do you think there will be a big price differential between CP and base?.

I think there will be a reasonably sized price differential between CP and base. By definition, if you're in base, if you've got your plan hedged, you still have the LMP penalty of not running your unit and you have sold forward the power. We have that today in the BRA auctions up to this point in payment.

(33:47) But because of the penalty exposure of nonperformance in CP, it's very, I think, rational and economically logical that people are going to have to bid that risk into their required results from CP and you're going to see those risks bid into prices and the CP clearing at higher than base..

Okay. Thank you very much, Paul..

You bet..

Our next question comes from Paul Patterson at Glenrock Associates..

Good morning..

Morning, Paul..

Most of my questions have been asked and answered. But just, if you could elaborate a little bit more on how you guys went about hedging the currency for 2017. Just in general, are you guys using options or did the forward actually get up to $1.60? Sorry to be so sort of – I don't have all the data in front of me..

No. It did not get up to the $1.60. It did get quite strong there for a while. It's backed off a little bit, but it's still above $1.50 and I think yesterday it was about $1.52. But I'll let Vince describe what tools we're using and how we hedged 2017..

Sure. So, Paul, what we did was for the – as you know, our 2015 hedges are well in the money, because we hedged those north of, in some cases, $1.60. And so, what we were able to do was basically reprice some of our 2015 in the money hedges, lower the strikes a little bit on those. And that enabled us to basically get in the money hedges out in 2017.

And so, the impact of doing that is actually about a $0.02 hit to 2015, but it enabled us to preserve about 20% of our hedge levels in 2017 at our budgeted rate of $1.60..

Okay. So, you guys are taking advantage of some in the money hedges this year, and swapping it into 2017, and for what seems to be kind of small cost of $0.02 a share.

Does that make, am I getting it right?.

Essentially, yes..

Yeah, that's a good summary..

Okay, great. That's it, thanks so much..

Thank you, Paul..

And our next question comes from Michael Lapides at Goldman Sachs..

Hey, guys, congrats on a good start of the year. Can you talk – now that you're beginning the first days of RIIO, I mean you've known it's coming for a while.

Can you talk about opportunities for O&M or expense management you see over the next couple years in the U.K?.

Yeah. Let me – Michael, I'll ask Rick Klingensmith to comment on that..

Good morning, Michael. You're right, as we head into RIIO, we're heading into a new regulatory regime that's primarily related with the revenue side of the equation and how the regulator is rewarding us for both costs as well as innovation and on the incentive standpoint.

From an operating cost standpoint, though, what you've seen us perform in the last couple years, especially with the Midlands properties, will just continue from an operating standpoint into the future.

So, our expectation is not a very significant or material change in the way we operate the business and the way we're performing on the business to deliver the high levels of reliability, the high levels of customer service.

We will continue to seek out areas of efficiency and use technology in any other applications that we can going forward and we will expect some level of ongoing efficiencies, but probably not at the same level you saw as we had with the changes that we made with the Midlands properties.

And so from a cost standpoint, though, it's almost pretty much business as usual as we move into the RIIO period with the major effect from RIIO affecting how the revenues are paid out..

Got it.

And then in the U.S., how are you thinking about the next cycle of rate cases, meaning you've got a Kentucky settlement, you're into the process in Pennsylvania, what happens now? Do you stay out for a number of years in both places? Do you have a limited amount of time and then you're back in filing in front of regulators? How are you thinking about just kind of the cycle?.

Well as we continue to deploy capital and look for cost efficiencies, it's an ongoing evaluation of when or if there is a need to go back in.

Clearly in Kentucky, we've still got quite a bit of work to do to meet the match rules and conclude some of the plans, but in that case the bulk of that capital is going to be through the tracker mechanisms that we have there.

And as I mentioned in my opening remarks, this settlement that we have before the Kentucky Public Service Commission would have us at a 10% ROE for that spending. So, it's really just kind of an ongoing evaluation and, at this time, as Greg just filed his rate case in Pennsylvania, that's going to take some time to play out.

So, yet to be determined what that cycle may look like in the future..

Got it. Thanks, guys, much appreciated..

You're welcome.

Operator, do we have any other questions in the queue?.

There are currently no questions in the queue, if you'd like to make any closing comments..

Okay, very good. Thanks for joining us today. We'll look to speak with you on the next quarterly earnings call. Thank you..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..