Joseph P. Bergstein - Director-Investor Relations William H. Spence - Chairman, President & Chief Executive Officer Vincent Sorgi - Chief Financial Officer & Senior Vice President Victor A. Staffieri - Chairman, President & Chief Executive Officer, Kentucky Utilities Co. Rick L. Klingensmith - President, PPL Global, Inc..

Dan L. Eggers - Credit Suisse Securities (USA) LLC (Broker) Julien Dumoulin-Smith - UBS Securities LLC Greg Gordon - Evercore ISI Paul Patterson - Glenrock Associates LLC Gregg Gillander Orrill - Barclays Capital, Inc. Keith T. Stanley - Wolfe Research LLC Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc. Brian J.

Russo - Ladenburg Thalmann & Co., Inc. (Broker).

Good morning, and welcome to the PPL Corporation's Second 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 event is being recorded. I would now like to turn the conference over to Joe Bergstein, Vice President, Investor Relations.

Please go ahead..

Thank you, Emily, 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 to 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 from ongoing operations or ongoing earnings and other non-GAAP measures on this call.

For reconciliations to the GAAP measures, you should refer to the press release which has been posted on our website and has been filed with the SEC. 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 joined us this morning. With me on the call today are Vince Sorgi, PPL's Chief Financial Officer; and the presidents of our three business segments. Moving to slide 3, you'll see an agenda for today's discussion.

As we typically do, we'll provide an overview of our quarterly and year-to-date earnings results, which I'm pleased to say include significant growth in earnings from ongoing operations.

We'll discuss our 2015 earnings forecasts, which we are increasing, along with our dividend, based on the continued strong performance of our utilities, and I'll provide an operational overview as well. Vince will review our segment results and provide a more detailed financial overview.

And as always, we'll have plenty of time to answer your questions. But before we dive into the quarter results, I'd like to share with you my thoughts about the new PPL. As you know, June 1st marked a major milestone in our company's history. On that day, we completed the spinoff of our competitive supply business.

And in doing so, we completed a strategic transformation of PPL that began with our acquisition of two regulated utilities in Kentucky, followed by the expansion of our utility operations in the United Kingdom.

It's a transformation that has been exceptionally well executed, provides earnings and dividend growth potential, will create significant value for our share owners, and positions PPL well for continued growth and success. Today, in our first earnings call since the spinoff of the supply segment, our focus has never been clearer.

Our ability to control our own destiny through our proven track record of execution has never been greater. And I, without a doubt, have never been more excited about where we're headed. Moving to slide 4, let me expand on some of the reasons why.

PPL is now a pure play, regulated utility investment, made up of seven high-performing, award-winning, and growing utility companies. Year in and year out, these utilities prove themselves to be among the best in our industry. They are diverse and located in different regions with different regulatory structures.

They offer a mix of regulated assets you'd be hard-pressed to find anywhere else in our sector. Each utility operates in what we consider to be a premium jurisdiction. In addition, all of our utilities are investing heavily in infrastructure, producing robust rate base growth for PPL.

In fact, organic growth in our domestic utilities is among the strongest in the U.S. utility sector with 8% to 10% earnings growth expected through 2017. We expect our combined rate base in the U.S. alone to grow by 47% over the next five years. That's the equivalent of adding another major utility to our portfolio.

Our balance sheet is strong and so are our cash flows, credit ratings and very competitive dividend. The bottom line, we believe the new PPL, with its strong growth profile, a solid dividend and a diverse mix of holdings, is a unique and very compelling investment option in the U.S. utility sector.

Looking at slide 5, you can see that robust rate base growth, combined with jurisdictions that permit near real-time recovery of our infrastructure investments, is what will drive our targeted 4% to 6% earnings growth.

I want to point out that the 2017 $2.35 of earnings per share shown here represents a projection based on the mid-point of our 4% to 6% compound annual growth target off our 2014 adjusted earnings. It does not represent earnings guidance for 2017.

Across the portfolio, over $10 billion in CapEx spending is expected to produce compound annual rate base growth of more than 7% or $5 billion by the end of 2017. For 2015 through 2017, over 80% of that CapEx earns a return within 12 months and approximately 76% in less than six months.

This combination creates a very strong foundation for future earnings growth. Let's turn to slide 6. This slide offers additional detail on why we feel our U.S. operations in Pennsylvania and Kentucky operate in constructive regulatory environments. Domestically, we have favorable allowed ROEs in both Pennsylvania and Kentucky.

When coupled with the numerous recovery mechanisms that reduce regulatory lag, including the DISC in Pennsylvania and the ECR in Kentucky, we are well positioned to achieve our earnings growth targets.

We have excellent growth in transmission with allowed base ROEs of 11.68% to the formula rate and a 12.93% allowed ROE for the $630 million Susquehanna-Roseland project as well as a return on CWIP for the $335 million Northeast Pocono reliability project in Pennsylvania.

It's this list of trackers and recovery mechanisms that drive the rapid recovery I described on the prior slide of 76% of our CapEx earning and return in less than six months and over 80% earning return in less than 12 months. Turning to slide 7, we provide a more detailed look at why we also believe the UK offers a superior regulatory jurisdiction.

The RIIO-ED1 framework in the UK provides long-term, inflation-adjusted rate certainty without volumetric exposure and Ofgem has accepted our business plans, which include total spend of over $19 billion over the eight-year regulatory period. About $11 billion of that spend will drive growth in our regulated asset value, or RAV.

It also offers the potential to outperform through performance incentives which, as you know, WPD has been very successful at earning in the past, and it offers us the opportunity to earn an adjusted expected return on equity in the mid to upper teens through 2017.

We're uniquely positioned with our history of strong performance and innovation to earn these favorable returns in this premium jurisdiction. Our utilities in the UK are the four best performers in the country. They were the only utilities to be approved for fast tracking of their business plans under RIIO.

This enables them to collect additional revenue of about $43 million annually and retain 70% of cost efficiencies, compared to about 55% for the slow track DNOs. And the UK business is self-funding and does not require any equity from PPL. In fact, we have the flexibility to dividend between $300 million and $500 million of cash back to the U.S.

annually in a tax efficient manner. Turning to slide 8, our board approved an increase in our common stock dividend, raising it from $1.49 to $1.51 per share on an annualized basis. This marks PPL's 13th dividend increase in 14 years.

The quarterly dividend of $0.3775 per share will be payable October 1 to shareowners of record as of September the 10th. The increase in the dividend is consistent with our prior messaging that we would look to raise the dividend after the completion of the spin.

Turning to slide 9, in summary, we're confident in our ability to achieve our 4% to 6% earnings growth targets through at least 2017.

We expect 8% to 10% growth in our domestic utility earnings and approximately 2% growth coming from our corporate restructuring efforts which, combined, are more than offsetting relatively flat earnings expectations in our UK business over this time period.

There are several key drivers to our organic growth in the domestic utilities, and these include strong transmission rate-based growth of 18.9% through 2017 in Pennsylvania; limited volumetric risk in our distribution operation in Pennsylvania due to our rate structures and recovery mechanisms; environmental spending and favorable rate case outcomes contribute to our growth in Kentucky.

And outside the U.S., the UK spending program of $4.8 billion, along with our projected incentive return, support our overall RAV growth and strong financial performance. Before turning to our quarterly results, I want to reiterate how optimistic I am about PPL's future.

I believe PPL's diverse mix of assets, our low overall business and regulatory risk and our proven track record of earnings performance and transparency set us apart from our peers. It's a new day for PPL, but we'll continue to deliver for our customers and our shareowners.

Turning to slide 11, today we reported a second quarter 2015 loss of $757 million or $1.13 per share. This reflects a $1 billion loss or $1.50 per share from discontinued operations associated with the June 1st spinoff of our competitive supply business.

The loss from discontinued operations included an $879 million loss reflecting the fair value of the supply business at the time of the spinoff compared to the recorded value of the segment. Vince will address the loss from discontinued operations in more detail in his remarks.

By comparison, second quarter 2014 reported earnings were $229 million or $0.34 per share. The reported loss for the first six months of 2015, which also reflects the loss on discontinued operations, was $110 million or $0.17 per share compared with reported earnings of $545 million or $0.83 per share for the same period in 2014.

Adjusting for special items, including results from discontinued operations, second quarter of 2015 earnings from ongoing operations were $0.49 per share, up 11% from second quarter 2014 adjusted results. And year-to-date, ongoing earnings of $1.26 per share is 15% higher than 2014.

As you'll see on slide 12, because of the strong performance of our utilities year-to-date, primarily in the UK and Kentucky, we are raising the mid-point of our 2015 earnings forecast by $0.05. That increases the midpoint to $2.20 per share, an 8.4% increase from our 2014 adjusted ongoing earnings of $2.03 per share.

For the full year, we see an improvement in our UK regulated segment as a result of lower depreciation expense, partially offset by the cost incurred to re-price some of the 2015 foreign currency hedges and lower operating and maintenance expense, coupled with supportive weather in our Kentucky regulated segment.

Now, let's turn to slide 13 for an operational update. In Pennsylvania, PPL Electric Utilities continues to meet with various state and federal agencies regarding its proposed compass regional transmission project and to study potential options for the transmission line.

The project announced in July of 2014 would involve construction of a new multi-state transmission line that would improve electric service reliability, enhance grid security and provide cost savings to millions of consumers in the PJM and New York ISO regions. We will continue to provide updates as this project moves further along.

Also in Pennsylvania, we're awaiting a decision from the Pennsylvania Public Utility Commission on PPL Electric Utilities' request to replace its $1.4 million electric meters with new, more advanced meters.

The company has proposed replacing its meters between 2017 and 2019 to provide expanded benefits to customers and to comply with state-mandated regulations on metering technology, estimated to cost about $450 million, of which $328 million is expected to increase rate base. A PUC administrative law judge has recommended approval of that plan.

In addition, PPL Electric Utilities' March 31 distribution rate case remains pending before the Pennsylvania PUC. As part of this regulatory process, the company has engaged in ongoing settlement discussions with the parties. We'll of course keep you updated as the case proceeds.

The company has requested an increase of $167.5 million in annual base distribution revenues. The request is driven by continued investments required to renew, strengthen and modernize our Pennsylvania distribution network.

We've already seen significant improvement in system reliability based on the investments made to-date as we're experiencing 38% fewer outages than five years ago. And the average length of time our customers are without power has been reduced by 43%.

The investment being requested in this rate case is expected to further improve system reliability by another 20% over the next five years. We expect the revenue increase to take effect January 1st of 2016.

In Kentucky, the Kentucky PUC in late June issued final orders that resulted 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 new rates became effective July 1st as anticipated.

And after more than two years and over two million construction hours, the new $530 million 640-megawatt Cane Run Unit 7 combined cycle gas plant is now commercially available. This unit is the first of its kind in the state and represents our commitment to put resources in place to meet the future energy needs of our customers.

Since the start of the operations, the unit has been running as a baseload unit. Finally, our WPD subsidiaries in the UK transitioned to the new eight-year price control period, RIIO-ED1, on April 1, 2015. While it's only been a few months under RIIO-ED1, so far, we're performing very well in either meeting or exceeding our performance targets.

With that, I'll turn the call over to Vince to provide a more detailed look at our financial performance.

Vince?.

Our revenues, our O&M expenses, and the interest expense on index-linked debt. For 2017, since this is the first year we see the RPI true-up in revenues, a 2015-2016 RPI of 50 basis points below our budgeted rate, or an RPI of about 2.1%, would have a negative effect on earnings of about $0.02 per share in 2017.

As noted in the footnote, we updated the sensitivity to include the partial O&M and interest expense offsets in the sensitivity. Let's move to slide 20. As Bill mentioned earlier in his remarks, we have announced an increase in our common stock dividend to $1.51 per share on an annualized basis.

We have received several questions regarding our ability to fund and continue to grow our dividend during this period of high CapEx spending. We're providing a new disclosure this quarter which presents how we view our domestic cash flow picture.

We start with our domestic cash from operations and subtract the domestic maintenance CapEx as represented by depreciation expense. We then add the cash distributions we received from the UK. But as you can see in the table, we have sufficient domestic cash flows to fund our maintenance capital and the common stock dividend.

So, the debt and equity issuances in the U.S. are funding our domestic growth CapEx and ongoing debt maturities. From a cash perspective, we believe this is the appropriate way to look at it since the UK is a completely self-funding business.

Before I turn the call back over to Bill for the Q&A, I'd like to reiterate Bill's comments that we are confident in our ability to achieve our stated 4% to 6% earnings growth target through at least 2017.

This growth directly reflects our robust capital expenditure plan combined with very constructive regulatory structures at significantly reduced regulatory lag, driving an expected 8% to 10% EPS growth at our domestic utilities.

That level of growth, combined with lower corporate and other costs, which will add an additional 2% earnings growth over this period, more than offsets the relatively flat earnings growth profile expected from UK during the period. We continue to believe that U.K.

is a premium jurisdiction, given an eight-year rate cycle with revenue and RAV index to inflation and an incentive-based model that, given our historical best-in-sector performance, provides us the opportunity to continue to earn very strong ROEs in the UK, expected to be in the mid to upper teens through 2017.

We also believe our common stock dividend is not only very competitive, but very secure and poised for future growth. That concludes my prepared remarks, and I'll turn the call over to Bill for the Q&A period.

Bill?.

Thank you, Vince, and operator, we are now ready for questions, please..

Thank you. We will now begin the question-and-answer session. Our first question is from Daniel Eggers of Credit Suisse. Please go ahead..

Hey. Good morning, guys..

Good morning, Dan..

Thanks for all the updates today. I guess, you know, always been a little bit greedy, you talk about through at least 2017. When we kind of look beyond that, the UK should be through the transition period as far as the normalization of incentives. When we look at the U.S.

utilities, how do you guys think about the growth, and I guess with CPP coming today, how are you guys sort of think about layering that into your capital budgeting?.

Sure. Well, with the Clean Power Plan just being released today, obviously, we're going to need a little bit of time, as I think you are, to kind of look through what this all means. But I think as you noted in your note this morning, I think it does support potentially higher CapEx for the utilities segment, generally speaking.

And I think the pieces that I've read about the Clean Power Plan are pretty consistent with what we would have expected. I think in Kentucky, we'll need to study it a little bit more closely to kind of see what the impact on our Kentucky operations might be.

But I think going beyond 2017, clearly, we're going to look to incorporate whatever we may need to do to respond to the Clean Power Plan.

And I think in PPL's case, as I indicated in my prepared remarks, we do have the Compass program or project which is obviously a fairly large chunk of transmission spend that potentially start to come into our capital plans post-2017. So, we'll continue to monitor that specific project and any other transmission projects as we go forward.

So, I think those would be kind of the key drivers, Dan..

And I guess, Bill, anything about the CPP? I know it's early, but how do you – what kind of dialogs are you having with the states particularly in Kentucky? And how are you planning to work with those different states and trying to devise plans or work with them to try and meet with the EPAs laying out from a goal perspective?.

Sure. Relative to Kentucky, I'll ask Vic Staffieri to give you more color on that. Go ahead, Vic..

Yes. We have been meeting with the state, as have the other utilities, to try to develop a program that best accommodates the earlier draft of the CPP. We now understand that the new one is coming out today. There may be some stricter requirements.

I'm confident that we'll go back to the commission and work with them to find a way that meets those requirements and in best interest of all of our stakeholders. I think we have, in place, the regulatory structures to allow us to recover the cost. We were looking at a power plant that we were going to put in place in 2018.

We've delayed that a little bit, and we still have – we know where we want to put it. We know where the transmission would be. And those are kinds of some the options we would look at. We have a very favorable DSM program in recovery. If we have to accelerate that, we can.

So, I think we have the regulatory tools to accommodate it, but until I see the final – we see the final requirements today, it's hard for us to comment definitively. But we do have a good relationship with our commission. We have been working on putting in place a program to accommodate the previous draft of the CPP.

And I'm confident that we'll work again once we get these final regulations out..

Great. Thanks. I just want to ask one additonal one on the UK performance. Obviously, you guys keep doing better each quarter than probably we were expecting or even where guidance has fallen out.

Can you just give a little color, more holistically, as to what's going on in the UK that allows you guys to keep exceeding expectations? And are you set up in a way where you're going to maybe do better than this normalized flat growth over the next couple of years?.

Rick, why don't you take that question? I think overall, Dan, that the UK continues for us to be a tremendous success story. I think you've seen us consistently outperform, and, obviously, we believe we're the best network operator in the UK. And clearly, our integration of the central networks went exceptionally well and really was just flawless.

So, Vince commented that we believe it's a premium jurisdiction and it's really going to help bring cash back. It's going to help fund our domestic growth as well and support the dividend. So, in terms of outperformance going forward, maybe Rick, you could talk about some of the things that might drive the outperformance as we look to the future..

Now, Bill, as you mentioned, the outperformance, especially in customer service, customer reliability, that we have announced in the last Q1 earnings call about $130 million of incentive revenue that resulted from our performance for the regulatory year ending in March.

This year, though, as you look at our outperformance, we had also discussed that, in Vince's remarks, that in Q1, we did talk about an asset life extension. We had a major engineering study that we had performed at the end of our last regulatory period here as we head into RIIO-ED1.

And as a result, we did extend the asset lives of a number of our assets. And so the 2015 outperformance and the reason we can increase guidance for 2015 was really driven by the lower depreciation expense than what we had expected or planned for, for this year..

Got it. Thank you, guys..

Thank you, Dan..

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

Hi. Good morning..

Good morning..

Morning..

Excellent. So, first, quick question here, just where do we stand on synergies and parent cost guidance after the spin here? I suppose that's a first consideration? Then in tandem with that, I'd also be curious, given the charge today, how do you think about tax benefits and ability to bring back cash from UK to the consequence of the charge as well.

How did that play into your tax planning, if you will?.

Sure. Let me start and then I'll ask Vince to supplement my comments. But I think first on the corporate shared services cost or what we've called dyssynergies of the spin transaction, we've done an excellent job of identifying how we were planning to reduce many of those shared services costs that otherwise would be stranded.

And we're well on track, if not ahead of plan on that. We're actually looking at opportunities for additional synergies or cost reductions as we go forward. So, I think we've done a really great job of addressing what could have been a drag on earnings.

And as I mentioned in my initial remarks, part of the growth, domestically, that we're going to see comes from corporate shared services costs coming in lower than we had originally expected. So with that brief bit of background, maybe Vince, you want to put some more details around those two questions..

Sure. So, Julien, let me cover your tax question. So, the spin, as I think you know, was designed to be a tax-free spin, so the $875 million loss was a pre and post tax number. There was no tax consequence of that, so the whole thing was treated as a tax-free transaction. So, really, no impact on our future tax position.

I think extending bonus is probably the biggest item that would favorably, actually, impact our tax position going forward..

Great. Thanks, Vince..

And then just last one, it's actually a little detailed question here. As you look at your FX hedging program, you've obviously shifted the – I suppose, the contango in the – or perhaps this contango that emerged in your hedging program for FX.

Can you talk to that? Basically, in the quarter, did you shift hedges on FX or is this really just what's arrived that we're organically layering in FX hedges against each of the respective years 2015, 2016, 2017?.

We did, Julien. We did shift some hedges from 2015 now into 2016 and 2017. The total impact for 2015 is about $0.035..

Got it.

And would it be fair to say that's pretty similar to what the uplift is in subsequent years?.

It is. Yeah..

Okay. Great. Well, thank you, guys..

Thanks, Julien..

Our next question is from Greg Gordon of Evercore ISI. Please go ahead..

Thanks. Just a quick follow-up on Julien's last question.

So, essentially, the way I think about the hedged disclosure is you're doing well enough this year in terms of meeting your earnings guidance, that you're able to raise lower end of the guidance range while still moving some of the impact – moving essentially some of the benefits of hedging out a year, is that right?.

That's correct, Greg..

Oh, that's good. Great. The second question is, as I think about the slide where you talked about the cash sources and uses, you give us a projection for 2015. If I look at that going out into 2016, it is right that the cash flow being repatriated back from U.K. rises to between $300 million and $500 million..

That's correct..

Okay. Fantastic. And then finally, the....

Wait. I'm sorry. What – rephrase the question..

Yeah. You've got – page 16 of your cash repatriation guidance for the UK Regulated segment....

Right..

...has cash coming back going from $290 million to between $300 million to $500 million?.

Oh, yes..

So, all I'm saying is you show $290 million on the slide associated with cash coming back from the UK on that new cash sources and uses, on page 20..

Yes..

And that goes up to somewhere between $300 million and $500 million as they go out to 2016 to 2018..

Yeah. I would expect the next few years to look – if you look at that cash available for reinvestment line, that $250 million, I would suspect it will be around that level improving a little bit over that period. Don't forget, we also had net about $130 million that we received from supply.

So, that'll go away in the 2015 number, and that'll be replaced by the higher dividends from the UK. So....

Okay. Got it. Got it. Great. Okay. Thank you. And then, my final question is the CapEx and rate base forecast for 2019.

I just want to be clear, does that include or exclude this potential Compass project in Pennsylvania?.

That excludes it, Greg. It's not in there..

Okay. Great. Congratulations on the quarter..

Thanks very much, Greg. Appreciate it..

Our next question is from Paul Patterson of Glenrock Associates. Please go ahead..

Good morning.

How are you?.

Morning, Paul. Very good..

My question has been answered, really. But just – could you just go over again what happened in terms of the charge associated with supply? Just if you could just break it down like what exactly is causing it to – what's actually driving that? I mean, if you could you just sort of break it down sort of layman's terms..

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

Good morning, Paul. So, yeah. So, what happened was, we need to do an estimate of fair value at the date of spin, and then, compare that to the book value. And what we did was we used the combination of thee different valuation methodologies, basically two market approaches and one income approach which is a discounted cash flow approach.

One of the market approaches was the use of a Talen market value of their equity as of the spinoff date which was the last day, as you know, of their when issued trading period. And so, that number – and we waited about a 50% weighting to that because it was publicly available information.

And that was a lower number than we were expecting to end up at the end of when issued. So that, I think, drove some of the decrease in fair value, say, since year end and then just power prices have come off in PJM.

So, I think when you look at the DCF, that was lower and the market approach was lower than what we were expecting combined resulted in about a $3.2 billion fair value against the $4.1 billion book value..

Okay. Great.

And is that pretty much over? We shouldn't expect anything going forward on this?.

Yeah. No. Yeah. That's it..

Okay. Thanks so much..

You're welcome..

Our next question is from Gregg Orrill of Barclays. Please go ahead..

Good morning, Gregg.

Gregg?.

Mr. Orrill, your line....

Sorry. I was on mute there. Sorry about that..

That's okay. Go ahead..

I was wondering if you could talk a little bit more about the pay-out policy. As you look out into 2016 and beyond, I know you've talked about getting below a payout of the U.S. businesses and the cash flows from the UK.

How are you looking at that going forward?.

Just to be clear, Gregg, are you talking about the dividend payout ratio for the total dividend or just the dividends coming back from the UK?.

I guess really the dividend policy 2016, 2017, et cetera..

Yeah. Yeah. So, I think where we sit today in the 65% to 70% range is, I think, a comfortable range for us to continue to be in.

So, I think as Vince and I have stated in the past, we'll continue to look for opportunities to modestly raise the dividend, particularly as we're going through a fairly large CapEx spending program and post that large program look to see if we could enhance it even more.

But I think where we are in terms of the dividend payout ratio today is fairly consistent with our new peer group, and we're fairly comfortable with it..

Great. Thank you..

Sure..

Our next question is from Keith Stanley of Wolfe Research. Please go ahead..

Hi. Good morning. One quick clarification on the asset life extension and depreciation changes in the UK this year. I think it was a $0.10 benefit for this year.

How much of that benefit was in your initial 2015 guidance and is it fair to assume it's fully baked into the updated guidance now?.

So, there was $0.10 year-over-year that represented about $0.06 better than expectation and yes, we have that. That basically continues going forward. So, that is in our updated guidance..

Okay. So, there's $0.06 increment from the initial guidance to the updated guidance..

Yes..

Okay. Thank you..

Okay..

Our next question is from Neel Mitra of Tudor Pickering. Please go ahead..

Hi. Good morning. I had a question on the ROE in the UK. You guys mentioned that it's roughly 15% to 18% through 2017.

What's your overall target, I guess, once the UK earnings start to grow off at the 2017 base for that ROE?.

Well, go ahead, Vince. I'll let you take a stab at that one..

Sure.

Neel, when you say 'target', you mean where do we think ROEs are going to be kind of in the middle of RIIO?.

Yeah.

After you start growing there again since, I guess, there's three years of flat earnings there?.

Yes. So, I would say we kind of stay in the low to mid-teens out through 2019 would be our expectation. I think we're going out a little – a little too far even at that level, to be honest with you, to give you ROE projections. But still quite healthy ROEs as, I would say, even throughout RIIO..

Okay.

And is 2017 the last year, I guess, of flat earnings, you start growing off of that base or could there be further years out where there's flat earnings?.

So, I think on the previous calls, we've really just talked about it being flat earnings through the 2017 period. And beyond that, beginning in 2018, we'll kind of assess as we go forward. Obviously, a key, in terms of earnings, for bringing back to the U.S. is going to be what the FX rates are, the RPI.

There'll be a lot of other moving factors that could help or hurt the projection of earnings per share coming from the UK. So, I think it's a little early to make any significant projection at this point..

Got it.

And last question, with the RPI, if that were to come down, would there be some sort of – kind of pass-through with just lower O&M cost from your side or are you guys kind of managing the business as efficient as you can right now?.

We're always managing as efficient as we can. But I think to the extent that inflation is driving the RPI down, that could have a ripple effect – a positive ripple effect on our cost of maintaining the networks through lower contracted cost for either labor or material. So, yes, it could have a potential offset..

And that's not included in your sensitivity?.

No. We did – we updated the sensitivity to include all three components..

Okay. Great. Thank you..

You're welcome. Operator, we have time for one more question, please..

Our last question is from Brian Russo of Ladenburg Thalmann. Please go ahead..

Hi. Good morning..

Good morning, Brian..

Just referencing slide 5 and the pie chart with capital recovery and earning on investment, does that imply that you got a high level of confidence that you can earn your allowed ROEs or is there any sort of structural lag that we should incorporate in our outlooks?.

I think with the regulatory mechanisms we now have in place in Pennsylvania and Kentucky, our ability to earn near the authorized levels is greater than it's ever been, quite honestly. And so, I think the regulatory lag is minimal, probably, looking forward.

And I'd also point to the fact that in both Pennsylvania and Kentucky, we're using forward test years which is the first time we've done that, historically. So, I think, those, combined with the regulatory mechanisms that we have all would suggest that we should be able to earn near the authorized levels with pretty minimal regulatory lag..

So, you probably – so after the conclusion of the current pending Pennsylvania rate case and with the recent Kentucky rate case outcome, do you think you could stay out for a few years given the mechanisms you have in place?.

I think, in Kentucky, probably not because, number one, we're going to have to comply with the Clean Power Plan as talked to earlier on the call, which probably will drive some different decisions that are not incorporated in the plan today.

In Pennsylvania, that potential depending on the outcome, how strong the outcome is of the current rate case would be a possibility. But until we get the outcome from the rate case, it's kind of hard to tell at this point..

Okay.

And just lastly, can you quantify the lower amount of depreciation at the UK year-over-year?.

Yeah. We had indicated it was about $0.10 per share year-over-year..

Okay..

For the full year. On a full-year basis..

Okay. Got it..

Soon, we'll be asset realized. I mean we are continuing to spend CapEx in the business, and so there is higher depreciation resulting from our additional spend. But just due to the engineering study that resulted in the asset realized, that the amount of $0.10 per share year-on-year change..

Okay.

And lastly – and forgive me if I missed this earlier – but what's the total potential upside of, on an annual basis, for performance incentive revenues in the UK?.

We indicated what we have built into our plan at this point. I believe we laid those numbers out on the last call. And if you go to slide 9 in the deck, you can see there for 2015, it's $125 million; 2016, it's $122 million to $130 million; in 2017, $80 million to $100 million; and 2018, $60 million to $90 million.

So, the upper ends of those ranges would be kind of our expectation of kind of the upper end of the outperformance. It's not necessarily the maximum, but it's kind of our guesstimate, if you will, at this point or best estimate of the ranges that we will likely fall into..

Okay. Great. Thank you very much..

No problem..

Okay. Well, thanks, everyone, for joining us today and appreciate the questions and look forward to speaking with you on the next earnings call. Thank you, operator, as well..

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