Joseph P. Bergstein - Director-Investor Relations William H. Spence - Chairman, President & Chief Executive Officer Robert A. Symons - Chief Executive Officer, Western Power Distribution, PPL Corp. Vincent Sorgi - Chief Financial Officer & Senior Vice President Gregory N. Dudkin - President, PPL Electric Utilities, PPL Corp..

Shah Pourreza - Guggenheim Securities LLC Julien Dumoulin-Smith - UBS Securities LLC Daniel Eggers - Credit Suisse Securities (USA) LLC (Broker) Michael J. Lapides - Goldman Sachs & Co. Steven Isaac Fleishman - Wolfe Research LLC Gregg Gillander Orrill - Barclays Capital, Inc. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc..

Good morning, and welcome to the PPL Corporation Third 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, that this event is being recorded. I would now like to turn the conference over to Mr. Joe Bergstein, please go ahead..

Thank you. Good morning, everyone and thank you for joining the PPL conference call on third 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 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..

Thanks, Joe and good morning everyone. We're pleased that you've joined us this morning. With me on the call today are Vince Sorgi, PPL's Chief Financial Officer and the Presidents of our U.S. Utility businesses.

Also with the recent retirement of Rick Klingensmith, the former President of PPL Global, with us today is Robert Symons, the Chief Executive of our U.K. Utility Western Power Distribution or WPD. Welcome to the call, Robert. Moving to slide 3, you'll see our agenda for today's discussion.

We'll begin with an overview of our third quarter and year-to-date earnings results. We'll also address our 2015 earnings forecast which we are reaffirming today. I'll provide an update to our earnings and dividend growth expectations through 2017 both of which we are increasing today. And I'll provide a brief operational overview for our U.S.

utilities. Then I'll turn the call over to Robert to review some new disclosures we are making this quarter to provide more transparency on our estimates for incentive revenues at WPD under the new real model. Vince will then review our segment results and provide more detailed financial overview, as always we'll leave time to answer your questions.

Before I jump into the earnings details, however, let me tell you briefly where we stand with three quarters of the year behind us. Based on the solid year-to-date results, our plans for about $10 billion in infrastructure investments through 2017 and higher expected earnings from our U.K.

operations, we're now confident we can achieve 6% compound annual earnings growth through 2017. We continue to execute well and we are confident in our growth plans. The company had previously projected 4% to 6% earnings growth. Our business plan is low risk and we are confident in our ability to execute the plan and deliver on our commitments.

Moving to slide four. Today we announced third quarter 2015 reported earnings of $393 million or $0.58 a share, a decrease from $497 million or $0.74 per share a year ago. Year to date reported earnings were $283 million or $0.42 per share compared with $1.04 billion or $1.57 per share to the same period in 2014.

Reported earnings for the first nine months of 2015 reflect $915 million loss or a $1.36 per share from discontinued operations resulting primarily from the June 1 spin-off of our competitive Supply business.

Adjusting for special items, third quarter 2015 earnings from ongoing operations were $0.51 per share up 16% from third quarter 2014 adjusted results. Through the first nine months 2015 earnings from ongoing operations were $1.77 per share up 15% from a year ago.

Moving to slide five, driven by the strong performance of our fully regulated portfolio today we are reaffirming our 2015 forecast range for earnings from ongoing operations of $2.15 per share to $2.25 per share.

If you've tracked us closely through the years, as I know many of you have, you know that we have a strong track record of not just meeting but exceeding earnings targets. And as I indicated earlier in my remarks, we are now confident we can achieve 6% compound annual earnings growth through 2017.

This increase is driven primarily by higher expected earnings from our regulated operations in the U.K. driven primarily by higher expected incentive revenues and lower depreciation expense resulting from the change in depreciable lives. Robert will discuss the details of the higher incentive revenues in his prepared remarks. We now expect the U.K.

earnings growth to be 1% to 2% through 2017, previously projected to be flat. And we expect 12% to 14% growth in domestic operations including our corporate services organization. Vince will provide an update on our U.K. earnings projections through 2016 in his prepared remarks.

Our overall earnings growth is fueled by about $3.5 billion per year of capital investments in our existing infrastructure and service territories, combined with the constructive regulatory jurisdictions where we operate, which results in over 80% of our CapEx earning a return within 12 months and approximately 76% in less than six months.

Regarding the dividend, we expect minimal dividend growth again for 2016 as we strive to get the payout ratio down into the mid-60% range, at which time we will target a 4% to 6% dividend growth rate, more in line with our earnings growth expectations. We currently expect to be in the targeted payout range by the end of 2016.

So our current expectation is that we will grow the dividend more meaningfully starting in 2017, but our current expectation for 2017 is at the low end of the 4 to 6% relative to the dividend. We will expect to maintain at least that level of growth through 2017 but we will assess that when we get there.

Turning to the operational overview on slide six, and beginning with the PPL Electric Utilities rate case, on September 3, we announced the settlement agreement that would provide PPL Electric Utilities an additional $124 million in revenue through a rate increase to be effective January 1, 2016.

The settlement will help fund additional reliability improvements as we continue to strengthen and modernize our Pennsylvania delivery network. Earlier this month an administrative law judge from the Pennsylvania Public Utility Commission recommended the Commission approve this settlement. Action by the Commission is expected later this year.

The settlement is a black box settlement and does not specify an allowed return on equity. The agreement highlights the constructive relationships we have in the jurisdictions where we operate and our ability to work with a variety of parties to secure results that deliver both competitive returns to shareowners and significant benefits to customers.

It's the second such settlement we've announced this year. Last quarter, we highlighted the Kentucky Public Service Commission's approval of rate increases for our Kentucky Utilities following a successful settlement in those proceedings.

In both the Pennsylvania and Kentucky jurisdictions, we utilized forward test years which further assists in our ability to reduce regulatory lag. Also in September, the Pennsylvania Public Utility Commission unanimously approved PPL Electric Utilities' request to invest $450 million in new, more advanced meters for its 1.4 million customers.

The company plans to replace its existing meters between 2017 and 2019 to provide expanded benefits to customers and to comply with state mandated regulations on metering technology. Costs will be recovered with little to no regulatory lag through a special rider. The replacement is expected to increase rate base by about $330 million.

In Pennsylvania, I'd also like to mention that PPL Electric Utilities received another J.D. Power Award for residential customer satisfaction. The company ranked highest among large electric utilities in the Eastern United States.

It is the fourth year in a row that the PPL Electric Utilities earned the distinction and the 12th overall in that category. The company has now won 11 J.D. Power Awards for business customer satisfaction as well.

Lastly, turning to slide seven before I move to Kentucky, PPL Electric Utilities took an important step on its proposal to construct a major new transmission line called Project Compass. It's designed to provide significant benefits for electricity consumers in the Northeast.

PPL Electric Utilities has filed an interconnection request with the New York Independent System Operator to build a 95-mile transmission line between Blakely, Pennsylvania and Ramapo, New York. The projected capital cost is expected to be $500 million to $600 million.

This first section or segment is designed to help make the electric grid more reliable and secure for customers throughout the region and provide substantial savings for New York consumers.

If our interconnection request is approved by the New York ISO, additional approvals for this segment will be needed from the Pennsylvania PUC, the New York Public Service Commission, PJM and several other agencies. PPL Electric Utilities has extensive experience, as you know, in planning and building regional transmission lines.

Just this past spring, we energized the Susquehanna-Roseland transmission line which involved the planning, approval and construction of 101 miles of a 500-kV transmission line.

On the Susquehanna-Roseland project, we demonstrated our ability to cooperate with multiple state and regulatory government agencies and to partner with a neighboring utility, which built an additional 50 miles of transmission line in New Jersey as part of that project.

Expenditures for Project Compass are not included in our current capital projections. Our proposal currently calls for the first segment to be built and placed in service by 2023. While the first segment can stand alone as a valuable grid improvement, we continue to evaluate and refine the overall plan for the rest of Project Compass.

As currently envisioned and based on preliminary estimates, Project Compass in its entirely would extend about 475 miles from Western Pennsylvania into Southeastern New York at an estimated cost of $3 billion to $4 billion.

If you turn to slide eight, you will see the portion of the transmission line that represents the first segment between Blakely, Pennsylvania and Ramapo, New York. Shifting south to Kentucky, we retired the final two generating units at our Green River station on September 30.

This marks the completion of our plan to retire 800 megawatts of coal-fired generation in Kentucky. We also continue to analyze the potential impact that the Clean Power Plan could have on our Kentucky operations. The precise impact is difficult to pin down at this point.

The final rule is just published last Friday, October 23, and the final impact of the rule will not be known until the state implementation plan or the state's specific federal implementation plan has been developed. The final rule is already being legally challenged, so this could have an impact as well.

In the end, we will develop a plan for our facilities in collaboration with the Kentucky Public Service Commission and the state Energy and Environment Cabinet. Any investment required to comply with the Clean Power Plan would be incremental to our current CapEx plan. I'd now like to turn the call over to Robert Symons, CEO of our U.K. Operations.

He will walk us through our new disclosures on incentive revenues under RIIO-ED1.

Robert?.

Many thanks, Bill and good morning. We've received several inquiries as to how the U.K. is performing against the tougher incentive targets set by Ofgem under RIIO-ED1. Moving to slide 10 as Bill mentioned earlier, we are pleased to be providing new disclosures to review our current performance.

But before we get into the performance details, I would like to provide some background on the incentive framework. WPD has a long history of operational excellence. And we expect that to continue into RIIO-ED1. Our ability to execute on our plans and achieve incentive revenue has been key to our financial performance.

And once again, WPD is on-track to outperform its Ofgem targets in the 2015/2016 regulatory year. And WPD now expects to earn total incentive revenues that exceed prior estimates for 2017 and 2018. Our original plan assume between $80 million and $100 million for 2017 and between $60 million and $90 million for 2018.

Based on our performance to-date we are raising guidance estimates for the 2017 calendar year to $90 million to $110 million and $75 million to $105 million for 2018.

One of the real benefits of being fast tracked through price control review process is that we've had more time to ensure we were in a strong position to deliver the output included in the business plan submitted to Ofgem.

For example, in advance to the RIIO-ED1 period, we adjusted one of our operational targets to less than 12 hours for supply restoration down from 18 hours to align our performance with the new guaranteed standards in RIIO-ED1.

The fast-track award of about $43 million per year during RIIO-ED1 period along with our ability to an incentive revenues are two very strong reasons that the UK regulatory model is considered a premium jurisdiction.

Turning to slide 11, the primary schemes that contribute to incentive revenues include the interruption incentive schemes and the broad measure of customer satisfaction. Interruption incentive schemes include customer interruptions and customer minutes lost.

Both of these schemes are designed to incentivize the DNOs to invest and operate their networks to manage and reduce both the frequency and the duration of power outages. The targets under RIIO-ED1 are specified in our licenses and become slightly more demanding each year.

On this slide you will find results for customer minutes lost on the top-left of the slide and customer interruptions on the top-right. Customer minutes lost measures the cumulative amount of minutes customers are without electricity. In this chart, we are reporting the cumulative average performance of all four of our DNOs.

The line in purple is the Ofgem target and the dotted line is the projected result, with the vertical line showing the maximum reward or penalties. Customer interruption measures the cumulative amount of interruptions in the customers electricity supply per hundred customers.

The chart is using the same basis for reporting an average of all four DNOs, however, this chart represents customer interruptions for 100 customers. You will see for the first six months under RIIO-ED1, WPD is trending towards exceeding the annual targets for customer minutes lost and customer interruptions.

These incentive revenues while earned during the 2015/2016 regulatory year will be received in the 2017/2018 regulatory year. So now turning to slide 12. In addition to the interruption incentive schemes, the second scheme, the broad measure of customer satisfaction measures performance against customer satisfaction.

Each month Ofgem surveys customer satisfaction for services provided by the DNOs. On a scale from 1 to 10, this chart provides results against the targets Ofgem has established for customers experiencing interruptions, requesting a new connection or making a general inquiry.

This chart shows WPD's performance through September 2015 for each DNO compared to all other DNOs combined, and demonstrates our excellent customer service.

While we have only been performing under RIIO for six months, as I mentioned earlier the benefit of being fast-track afforded us the opportunity to begin to plan our approach to delivering outputs. As we continue to execute on those plans, we are on track to meet or exceed the new targets.

We will continue to provide updates to these slides each quarter. And now Vince will walk you through a more detailed look at segment earnings..

Thank you, Robert and good morning everyone. Let's move to slide 14 for a review of segment earnings.

Our third quarter earnings from ongoing operations increased over last year by $0.07 per share, driven primarily by higher earnings from the Kentucky Regulated segment and the UK Regulated segment and lower cost in corporate and other resulting from the corporate restructuring.

Let's briefly discuss domestic weather for the third quarter and year-to-date compared to last year and also compared to our 2015 forecast. Overall, domestic weather was slightly favorable for the quarter and flat year to date compared to the same periods last year.

However, compared to our 2015 forecast, weather had a positive $0.03 impact year-to-date and was flat for the third quarter. Let's move to a more detailed review of the third quarter segment earnings drivers starting with the Pennsylvania results on slide 15.

Our Pennsylvania Regulated segment earnings for the third quarter were flat compared with a year ago. This result was due to higher margins from additional transmission investments and returns on distribution improvement capital investments offset by higher O&M expenses and higher depreciation due to asset additions.

Moving to slide 16, our Kentucky Regulated segment earned $0.16 per share in the third quarter of 2015, a $0.04 increase compared to a year ago.

This result was due to higher gross margins from electric and gas base rate increases effective July 1 of this year, returns on additional environmental capital investments and higher volumes due to inclement weather.

Moving to slide 17, our UK Regulated segment earned $0.29 per share in the third quarter of 2015 a $0.01 improvement compared to the same period last year. This increase was due to lower income taxes primarily from lower U.S.

taxes on dividends in 2015 compared to 2014 and lower depreciation expense from the asset life extension we discussed earlier this year, partially offset by increased depreciation from asset additions.

These increases were partially offset by lower utility revenues as we transitioned to RIIO-ED1 on April 1 of this year partially offset by higher volumes and higher miscellaneous revenues.

Moving to slide 18, on this slide we provide an update to our GBP hedging status for 2015, 2016, 2017 including sensitivities for a $0.05 and $0.10 downward movement in the exchange rate compared to our budgeted rate of $1.60. We continue to be fully hedged for the remainder of 2015 at an average rate of $1.54.

For 2016 and 2017 the hedge percentages are off the higher expected U.K. earnings that Bill discussed. Thus our 2016 hedge ratio came down a little. For 2017, we continued to layer on hedges during the quarter and have increased our hedge percentage from 40% at the end of the second quarter to 66% today at an average rate of $1.60.

You can see from the sensitivity table that there is no exposure for the remainder of 2015, minimal exposure in 2016 and 2017, if the average hedge rate on our open positions is $1.55.

These FX sensitivities do not factor in the potential positive effects from restriking existing hedges which, as you know, we've been successfully doing throughout the year. Also on this slide, we show our RPI sensitivity, which has been updated as well.

As we've discussed previously, under the RIIO model, our revenues for the 2015/2016 regulatory year were set using a 2.6% inflation rate and our 2017/2018 revenues will reflect a true-up for the actual inflation rate for the 2015/2016 period.

We're now incorporating a forecasted RPI rate of 1.6% in our current planning assumptions compared to the 2.6% that we were previously using. This 1% difference results in a reduction to 2017/2018 allowed revenue and affects our 2017 calendar revenue by approximately $0.03 per share.

The lower RPI rate and the revenue giveback are fully reflected in our assumptions that drive the 6% EPS growth through 2017. As a result, the 2017 RPI sensitivity for 0.5% downward movement in the 2015/2016 RPI is now off the current forecast of 1.6%.

Looking ahead to November of this year, our 2016/2017 and 2017/2018 tariffs will be based on the forecasted RPI at that time. As you can see on the slide, the current RPI forecasts for 2016/2017 is 2.8% and for 2017/2018 it's 3.1%, both of which are in line with the rates used in the forecast to hit the 6% earnings growth.

Before turning the call back to Bill, I wanted to provide an update on our projected U.K. earnings through 2016. As you can see on slide 19, we have increased our earnings projections for 2015 and 2016 from a midpoint in the $1.40 per share range to a mid-point in the $1.43 per share range.

The increase for 2015 is primarily driven by the lower depreciation expense from the asset life extension; the increase in 2016 is a combination of higher incentive revenues and lower depreciation. We still expect a relatively flat earnings trajectory in the U.K. through 2017.

However, it is now off of the higher 2015 year-end forecast of $1.43 per share. That concludes my prepared remarks and I'll turn the call back over to Bill..

Thank you, Vince.

PPL continues to be a very compelling investment opportunity within our sector, with competitive earnings growth rate, which we just guided to 6% through 2017, combined with better than average dividend yield at about 4.5% and the ability to continue to grow that dividend, we believe we can deliver a top quartile total shareowner return over the next three years.

And I believe most importantly that this is all supported by a low risk business plan. With that, operator let's open the call to questions, please..

[Operator Instruction] The first question comes from Shah Pourreza of Guggenheim. Please go ahead..

Good morning..

Good morning..

I appreciate the new disclosures around the Compass Project.

So how should we think about the remaining miles? Are you looking to potentially segment the rest? And then, is there an opportunity to potentially JV with some of the neighboring utilities to smooth out the process?.

Sure. I think in both cases the answer would be yes. So there's an ability to continue to segment the line as well as partnering with adjacent or utilities that the project goes through their service territory. So I think in both cases we would look to do that..

Got it. And then just on the updated guidance around the growth of 6%.

Should we sort of think about that as a new midpoint of a new range, or is this sort of you being able to sort of achieve that top end of the prior plan?.

This is really our ability to achieve the top end of the plan for this current period, the 2015 through 2017 period, and then we will assess and report out on the fourth quarter call our expectations for how that growth rate will continue past 2017..

Got it. And then just one last question, under ED1 the updated disclosures which was obviously very helpful.

Is this something we can expect an update on a quarterly basis as you report earnings? And is this sort of the trough earnings to that segment sort of being shifted a little bit into 2017 and potentially earlier than that?.

Well, two things, one is we will continue to update on a quarterly basis where we stand relative to those incentive targets. We previously had noted that the U.K. business was expected to be flat from an earnings per share basis.

With the new disclosures and now six months behind us in terms of how well we feel about our capability to earn the incentive revenue, we are now comfortable saying that the UK earnings will be slightly positive 1% to 2% type growth rate off of the flat. So we are now looking at that 1% to 2% annual growth rate..

Excellent. Congrats on these results..

Thank very much..

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

Hi, good morning.

Can you hear me?.

Good morning, Julien, yes..

So first quick question, if you can elaborate a little bit on the latest positive development in the UK? Could you perhaps give us a little bit of a sense of how much of that is driven by cost savings, if you will, specifically TotEx?.

Sure. The increase in earnings that we are announcing today from the U.K. is primarily driven by the increase in the incentive revenues that we now expect to earn through the period.

There really are some other moving parts, the biggest of which is probably the depreciable change that we had in the lives of the assets, and that's in the short-term driving some cost savings there.

From a TotEx perspective maybe Robert, you could indicate where we are relative to the filed (29:26) business plan?.

Thanks, Bill. Yeah, in terms of TotEx basically, we are on target to deliver the plan. There are various variables, which obviously influence that, connections and other such things, but basically we are on plan..

Great. Thank you..

Got it. All right. Excellent. And then perhaps to boot with that, if you will. Where do you stand with respect to solar DG interconnections into the your U.K.

system? And how is that impacting the TotEx expectations in the near-term as well as into the mid-period review? And do you expect to have a mid-cycle review potentially to reflect more solar interconnections?.

Let me ask Robert to comment, but before he does just to put a little perspective on this. There has been a significant increase in request for connections for distributed generation in the U.K. predominantly driven by some very substantial feed in tariffs that have encouraged a lot of connections.

My understanding is the feed in tariffs are coming to an end are being substantially reduced, such that the demand for distributed generation has dropped off very significantly. Having said that, there is a lot of pent-up demand and request on the system and it kind of depends on which DNO you look at.

I think of the DNOs that we operate, the four DNOs, the one DNO where we're seeing the most significant request has really been in the Southwest.

So with that bit of background, Robert, do you want to provide a little bit more color, please?.

Yes, just to give you some idea of scale, the current subsidy on photovoltaic is about £0.06 per unit. That's going down. There's a consultation document out, and potentially that will go down to about £0.01 per unit. So basically it's the FIT tariffs which actually drive demand.

In terms of its impact on TotEx, developers have to pay the cost of reinforcement upfront, and it's only the bit that possibly benefits us in other ways, but it's actually funded out of the TotEx part.

So that 95% of the cost of actually putting in or reinforcing the network in order to connect large photovoltaics is actually met by the developer themselves. So I don't see it as a real big impact on TotEx.

I think if there was a change in government policy as to how this stuff was funded then that would be the trigger that would trigger a midterm review if it was the case that companies had to make a larger contribution towards that investment. But given the current situation, I can't really see that happening..

Got it. But just to clarify here, is this a CapEx opportunity in your mind down the line and in the near-term is that one of the reasons that it prevents you from outpacing the current plan in the UK? Just to be very clear about it..

Well, we work under a series of rules, Julien and the rule say that there is no – the current rule say there's no investment ahead of need. So you can't build a line if you like before it's actually required. So that investment opportunity really isn't there under the current rules.

And as I stated before, I think its impact on reinforcement expenditure detailed in the business plan is relatively small currently..

Got it. Excellent. Just the last little detail, I'd be curious you all have a good track record in the UK, what are your thoughts to expanding the UK footprint specifically transmission is opening up for competitive bid, obviously we talk a lot about that domestically, just curious to get your initial thoughts..

Yeah, at the moment Julien, we would not look to expand into transmission. I think as Robert said, we are great at what we do and we want to stick to what we know best, and so that's our current plan..

Great. Well, congratulations again. Good results. Keep going..

Thank you very much..

The next question comes from Dan Eggers of Credit Suisse. Please go ahead..

Hi, good morning guys..

Good morning, Dan..

Just going back to the UK incentive revenues and the updates there, do I take that the new ranges for the next couple of years, those are going to be the high end of what you can earn based on the formulas in the UK because you're performing at the upper bounds of what they're allowing for?.

We're not projecting to be at the very top of the band, but based on the projection – you know we have a range there. So we're near that – I would say we are in the upper end of the band, but there is probably still a little bit more room to the extent we outperform even more than we are currently projecting..

Yeah, Dan. This is Vince. I would say, the midpoint of those ranges would reflect kind of current level of performance, so if WPD is able to continue to improve that would push us probably to the high-end of those bands. But there's also risk that something bumps in the night, and so we took that into account as well.

But it's based on current level of performance..

So effectively since the last update you guys have moved your performance from the old midpoint to the high end of the old band. Is this basically what's happening into the (35:17) either way. Okay.

And then just kind of, given the shape of when you go from the old RIIO to the new RIIO, the 2019 opportunity, and I know this is far out, but just so we can kind of thinking about the shape of the outlook to the incentive revenue pool, does that shrink when you get out to 2019 given the fast-track design or does that stay about the same level, which you can keep competing for the same amount of revenue contribution?.

Robert, why don't you take that?.

The pool stays the same, the incentive mechanism stays the same, the targets get slightly more difficult year-on-year and that varies between, which of the full businesses you were talking about, but those, sort of, things have been built into sort of information that Vince chooses..

Okay. So we don't have a contraction in that size.

There is still opportunity for you guys to continue and be able to reach the top level in the future?.

Yes, you got it exactly right. The opportunity still remains the same albeit the targets get slightly more difficult as time goes on. But one would hope that also investment and (36:24) investment in line and all the rest of it. Automation schemes will actually produce some benefit later on..

Okay. Very good. I got that. And then just on Compass real quick.

I know it's ways off, but does this get caught up in this Order 1000 workout because it's an economic line instead of a reliability line? Do you get more competition, and people prospectively bid away the cost of capital? Or how do you think you're going to be able to reserve some sort of competitive advantage in this line?.

I'll let Greg take that question..

Yes. So the way this is set up currently under New York law, this would not be considered a FERC 1000 Project, so we are going and making interconnection requests and will be filing our Article VII now. So if the approval path goes down that path there may be an opportunity for competition, but the probability is little bit lower.

If the PSC opens up economic window next year then there could be competition, so we'll see how it plays out..

I think relative to the competitive nature of this, obviously just having completed a very major line essentially in the same region, I think our capability to be very competitive should we get to that point should be strong..

Okay. Very good. Think you guys..

Sure. Thanks Dan..

The next question comes from Mike Lapides of Goldman Sachs. Please go ahead..

Hey, guys. Congrats on a good quarter and outlook.

I don't know if this is Bill or Vince question or both, when you think about just companywide what's the O&M assumption that's embedded in your guidance growth rate the kind of 6% off of 2014?.

Sure, Thanks for the question, Michael. I'll let Vince take that one..

Sure. So in general coming – so obviously you know we've reduced O&M quite significantly coming out of the spin with the corporate restructuring efforts where we're targeting about $75 million and we are comfortable that we've achieved that.

However, we do continue to look at the corporate services organization as well as just operations between PA and Kentucky so see if there is opportunities for continued efficiency there domestically. WPD is already very efficient.

And so we just continue to look at that and we built in about another $0.02 worth of opportunity through 2017 in achieving the 6% growth rate..

Got it. Okay. And can you just give us the puts and takes? I mean I know the Pennsylvania rate increase, I know the environmental cost recovery rider in Kentucky. But your U.S. utility growth rate puts you kind of well above the norm for traditional utilities.

Can you talk about some of the other drivers of that besides those two items I referenced?.

Yeah, I think a key one would be transmission. Our transmission is growing at a compound rate of 17%, so that's a significant driver. In terms of the outcomes that you mentioned on the rate cases, I think they were fair outcomes, not terribly inconsistent with our planning assumptions.

I think as we continue to refine our cost structure, as Vince said, both at the corporate level as well as at the utility level, that's going to drive some upside or some improvement there, and that does help the domestic utility growth rate.

But I think it's probably worth mentioning that we're not really changing the domestic utility growth rate from the utilities. What we've really changed and up the overall is the corporate services where we're seeing lower costs.

So the lower costs in the corporate services, that $0.02 that Vince mentioned, is really what's moving the domestic utilities growth rates up or everything is combined together to get us to the 6%..

Got it.

Last question in the UK, can you remind us the calendar year expected incentive revenue for 2015 and 2016?.

The calendar year, so it's an April 1 start and then it goes on to the March – the end of March of the following year, and that in terms of the dollars is $130 million..

You wanted 2015 and 2016, Michael?.

Yeah.

I'm just trying to compare, what you have on slide 10 to what you are expecting for 2015, 2016, and I think what you have in slide 10 is calendar year not the April to March year?.

That is correct. So 2015 we had $120 million and about $125 million, $126 million for 2016..

Got it. Thanks, guys. Much appreciated..

Sure..

The next question comes from Steve Fleishman of Wolfe Research. Please go ahead..

Yeah. Hi, good morning..

Good morning, Steve..

Hey, Bill. Just want to clarify some of the UK changes where it seems like that's where the guidance uplift is.

So the incentive benefit which you've given, it looks like it's about $0.01 in 2017 based on the higher on a per share, $10 million or $15 million?.

Yes..

Okay.

And then you did change your RPI guidance, you said down $0.03?.

Correct, we did flex it down..

In the guidance, right..

Yes..

In the guidance.

So is then all the rest of the benefit, depreciation benefit or some kind of O&M to or what's...?.

Year, so Steven, I would say the 6% as we were going through the planning – or the $0.06, as we were going through the planning process, we didn't bake, up until now, all of that $0.06 of depreciation upside through 2017 because of the risks around RPI and FX. I would say that the RPI forecast has been holding strong in that 3% range.

So we're at 2.8% for 2016 and 3.1% for 2017, so we are feeling pretty good. The exposure there is really only another month because once that gets set next month, that's really what it will drive for the next two years. So we feel comfortable with that exposure.

And then as we continue to layer on the hedges, I think we are extremely comfortable that we can manage the FX exposure and hedge that up to $1.60 through at least 2017. So as our comfort level on both of those risk factors improved, we were able to put more of this $0.06 upside kind of into the base forecast.

So that $0.06 has been there all along, but we were using it as a risk mitigant up until now..

Got it. Okay. So that depreciation benefit you had at the beginning of the year, there's not like a new one on top of that. That's just you're able to see the full benefit of that because you've limited some of the pressures that might been there..

Correct..

Got it. Got it. Perfect. Okay. That was really it. Thank you..

Okay. Thanks Steve..

Your next question comes from Gregg Orrill of Barclays. Please go ahead..

Yes, thank you. Can you talk about a little bit about the funding needs for the CapEx plan? You have almost $1 billion of cash on the balance sheet.

Would one of the strategies be to work that cash balance down? Or how are you thinking about that?.

Sure, that would be the plan. We work that down. Vince, you can probably speak more specifically to exactly how we are planning to fund the CapEx plan..

Sure. So slide 26 in the appendix, Gregg, really details that. It's the same slide that we went through last quarter in terms of funding the growth.

So in the UK, I'll just reiterate that the UK business is fully self funding variable with their cash from operations and their ability to borrow in country and maintain their 80% to 85% debt to rev ratios. They are able to basically self fund (45:06) dividends about $400 million of cash a year back to the state.

We take that $400 million, add it to our cash from operations, fund our maintenance capital and we still think we'll have even after we pay the dividend about $250 million and over say the next three years to five years that will continue to grow as the domestic cash from ops grows.

So that $250 million will drive either dividend growth that Bill talked about or CapEx growth, and then we'll use debt and a little bit of equity. We still have the $200 million of maxed equity issuances in the plan. Everything else would be funded with debt and we are able to do that and maintain our solid investment-grade credit ratings..

Thanks, Vince..

Sure..

The next question comes from Neel Mitra of Tudor, Pickering. Please go ahead..

Hi, good morning. Thanks for updating the RPI assumption.

My question is when is the next time, you will be evaluated for? I guess for the 2016/2017 planning years? So when would the 2.8% be evaluated versus what's actually happening? And would that impact mainly 2018 earnings, if there was a reset?.

Yeah, the first impact would be showing up in 2018 and 2019 period. It's the regulatory year. So that is correct.

And in terms of the next end of the period, I guess when would that be, Vince, in terms of the measurements?.

Yeah. I mean, it's the same schedule as the 2015/2016, so we are truing up the 2.6% to the 1.6% and that giveback shows up two years later, two regulatory years later, so in the 2017/2018 timeframe. So if 2016/2017 comes in on an actual basis less than the 2.8% that would be given back in 2018/2019..

Okay. Great..

But also if it comes in higher, we will receive additional revenues in 2018/2019, so it's not one way..

Right, right.

And then looking at the percent hedged for the currency at 66%, and you are assuming $1.60 for the exchange rate, do you have any more flexibility to maybe lower 2015 hedges to benefit 2017, if the exchange rate doesn't go your way?.

Yeah. So we are pretty much done with our 2015 hedges. However, our 2016 hedges are in the money as well, and there certainly could be an opportunity to re-strike our 2016 hedges and move that value into 2017 and potentially even a little bit in 2018. I would say we probably have $0.03 or $0.04 of opportunity to do that..

Okay. Great.

And then directionally can you guys provide where you are in terms of the exchange rate hedges for 2018 at this point?.

So we are currently 0% hedged for 2018..

Okay. Great. Thank you..

You're welcome. And I think we're out of time Joe..

Yeah, I think there is no more questions in the queue. So go ahead, Bill..

Okay. Great. Well, thanks everyone for participating on today's call. I know several members of our senior management team and myself will be attending the EEI Financial Conference coming up in November, so we look forward to seeing everyone there. Thanks..

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