PPL Corporation (PPL) Q2 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Sean, and I will be your conference operator today. At this time, I would like to welcome everyone to the PPL Corporation Second Quarter Conference Call. [Operator Instructions] Mr. Joe Bergstein, Director of Investor Relations, you may begin your conference call.

Thank you. Good morning. Thank you for joining the PPL conference call on second quarter results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com. Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the appendix to this presentation and in the company's SEC filings. At this time, I'd like to turn the call over to Jim Miller, PPL Chairman and CEO.

Okay. Thank you, Joe. Good morning, everyone. And with me today, as usual, I have Bill Spence, our now President and COO; and Paul Farr, our Chief Financial Officer. And a quick congratulations to Bill. As we've expanded the company, Bill will certainly be busy with working with the 2 new acquisitions in Kentucky and in the U.K., and we look forward to really driving significant value out of those 2 businesses as we've grown the company. Always, we'll cover some brief remarks by myself. Paul Farr will go through our detailed financials, and Bill will go through the operational aspects, and then we'll go to Q&A. So with that, as you've seen by now in the announcement this morning, reported earnings of $0.35 per share, up from $0.22 a year ago. For the first half of the year, our reported earnings were $1.14 per share compared to $0.88 for the same period last year. Ongoing earnings for the second quarter were $0.45 per share versus $0.62 in the second quarter last year. And ongoing earnings for the first half of 2011 were $1.26 per share compared to $1.56 in 2010. The 2011 earnings performance was driven by the contribution of our Kentucky-regulated segment, strong International segment performance and by the PPL Electric Utilities distribution and rate increase that took effect January 1 this year. These improvements, however, were more than offset by lower energy margins in our Supply segment, driven by higher-priced hedges rolling off, as well as unplanned outages to replace turbine blades at our Susquehanna nuclear units and dilution from the equity issued to finance our 2 large regulated utility acquisitions. During the second quarter, we did successfully complete the permanent financing for the Midlands acquisition, and the integration of this business is proceeding according to plan. While the integration is still at a relatively early stage, we've already seen positive movement in key operational metrics and financial results in the first 4 months of ownership. For example, prior to our acquisition, fewer than 65% of Midlands' customers had power restored in under 60 minutes following a high-voltage outage. By June, we'd restored power following such an outage to more than 75% of customers in less than 60 minutes. This is only one statistic, but it's representative of the value our U.K. team is already delivering to the customers in the U.K. Moving to Slide 5. Today, we’re reaffirming our 2011 forecast of $2.50 to $2.75 per share in earnings for ongoing operations. I feel very good about our prospects for the year as we expect to largely mitigate the $60 million to $65 million earnings impact of the Susquehanna outages with strong performance from our U.K. business and positive results in other aspects of our competitive Supply business. Our ability to absorb the impact of such a significant unplanned event illustrates the value of our larger business platform. And we expect the planned significant regulated infrastructure investment will lead to sustained growth in each of our regulated businesses for years to come. Our compound annual growth rate in the consolidated regulated asset base is about 9% over the next 5 years. And more than 2/3 of our planned capital spend will be made under structures that allow for near-realtime recovery of those expenditures. Beyond the attractive growth in our regulated businesses, the Supply segment remains well-positioned for the eventual rebound of competitive wholesale capacity and power prices. We now believe this rebound could even occur sooner than we previously expected. The recent finalization of cross-state air pollution rules, the firming spark spreads and the potential for a recovering economy point to higher power prices beginning in late 2013 or early 2014. So before turning it over to Paul, let me say that I'm very optimistic about the short- and long-term prospects for PPL. We've completed the 2 major acquisitions that allowed us to reposition our portfolio, and we've created a larger, stronger enterprise. So I look forward to the questions after we hear from Paul and Bill on the operational side. Now, I'll turn the call over to Paul.

Thanks, Jim, and good morning, all. Let's move to Slide 6 to review our second quarter financial results. Second quarter earnings from ongoing operations were lower than last year, primarily due to dilution resulting from the common stock issued in June 2010 and April 2011 to fund our 2 large acquisitions and lower margins at our Supply segment. These drivers were partially offset by the operating results of the acquired utilities and the impact of the PPL EU distribution rate increase that Jim referred to already. While there is no comparator for 2010 performance for Kentucky as the deal hadn't yet closed for this period, I'd like to highlight that the Kentucky segment earnings include the operating results of KU and LG&E, interest expense associated with the 2010 equity unit issuance and dilution of $0.02 per share. Let's move to the International segment earnings drivers on Slide 7. Our International regulated segment earned $0.21 per share in the second quarter, a $0.06 increase over last year. This performance was the net result of the operating results of the Midlands utilities, including interest expense of $0.02 per share associated with the 2011 equity unit issuance and the bridge facility draw. Higher earnings at WPD's legacy business is resulting from higher delivery revenue, primarily due to higher prices, higher interest expense and our index-linked bonds, higher income taxes and dilution of $0.10 per share. Moving on to Slide 8. Our Pennsylvania regulated segment earned $0.06 per share in the second quarter of 2011, a $0.02 increase over last year. This increase was the net result of higher delivery margins, primarily due to the new distribution rate that went into effect on Jan 1, and higher transmission revenue due to both increased rate base and cost of capital benefits from additional equity investment there. Lower O&M expense and dilution of $0.03 per share. Turning now to Supply. This segment earned $0.12 per share in the second quarter, a decrease of $0.31 per share compared to last year. The primary drivers of the lower Q2 earnings were the timing of Susquehanna's planned refueling and upgrade outage and the financial impact of unplanned turbine blade replacement outages that affected both units. This quarter was also impacted by anticipated lower energy and capacity prices in the East as hedges rolled off and higher delivered coal prices. Partially offsetting the negative drivers were higher margins on full-requirement sales contracts and better runtimes and margins from our intermediate and peaking units. And finally, dilution impacted the segment by $0.06 per share. On Slide 10, we've updated our projected 2011 free cash flow before dividends forecast. This graph excluded the impact of the Midlands purchase as we're finalizing some of those details now. The change in cash from operations for 2011 since the first quarter earnings call is primarily driven by a higher-than-expected return of collateral to third parties, higher non-cash income items and an additional pension payment at WPD. Cash flows are also impacted by slightly lower projected capital expenditures. Turning to Slide 11. We continue to focus on the dividend as a key obvious element of total shareowner return. We're very well positioned to cover the dividend out of rate-regulated business earnings, as we indicate on the slide, and clearly, the combination of the Midlands acquisition and the growth prospects of our utility businesses permit dividend flexibility into the future. Now I'll turn the call over to Bill for an update on operations.

Thanks, Paul, and good morning, everyone. Let's turn to Slide 12 now and start with an operational review of the second quarter. In Kentucky, LG&E and KU both made environmental cost recovery, or ECR filings, with the Kentucky PSC in June. These filings cover a total of $2.5 billion of environmental costs, primarily as a result of the new EPA regulations. The proceeding is underway, and we are in the discovery phase of the process. We'd expect a decision by the KPSC by year end. Moving to the Supply segment. Both units at our Susquehanna nuclear facility returned to service following the unplanned turbine blade replacement outages. The units are running at full output and were online during the recent extreme hot weather we experienced in the region. With the update to Susquehanna Unit 2, we are now operating the 2 largest boiling water reactors in the U.S. In total, we have added another 217 megawatts at Susquehanna. As noted in an 8-K filed with the SEC, PPL discovered several cracked blades during a scheduled inspection of its low-pressure turbines during Unit 2's planned outage. Conservative actions were taken to not only replace several blade rows on Unit 2, but also to take Unit 1 offline for an inspection where similar cracking was discovered. PPL has installed enhanced monitoring equipment to help determine the cause of the blade cracking. Moving on to coal-related issues. As you know, the EPA recently finalized the CSAPR rules related to sulfur dioxide and nitrogen dioxide emissions. The rules apply to fossil fuel power plants in 28 states, including Pennsylvania and Kentucky. Montana is not affected by these rules. The competitive supply segment's compliance strategy for meeting the emission requirements of the former care rules have positioned the company well to meet the new CSAPR requirements. Since 2005, about $1.6 billion has been invested in environmental upgrades at our coal-fired plants in Pennsylvania and Montana, including $1.3 billion for scrubbers at the Keystone, Montour and Brunner Island plants. We continued to evaluate the timing for a potential addition of an FDR [ph] at Brunner Island. The cost of this is included in the CapEx plans we provided to you in the past and in the appendix to today's presentation. Overall, we do not see the need to increase capital expenditures to comply with the CSAPR requirements. Overall, PPL's competitive supply fleet is well-positioned with respect to these roles and can clearly benefit from coal plant retirements that will tighten up the supply situation in PJM. We would expect to begin seeing benefits to our fleet by 2014. Let's move to Slide 13 for an update on the international regulated segment. The synergy plan for the integration of the Midlands operation is on track, and the organizational structure and reorganization plans have been finalized. We are in the process of implementing our organizational plans to ensure the most efficient operations possible. The transition will result in a smaller support structure, the elimination of duplicate work and the implementation of streamlined work procedures. We plan to complete the vast majority of the organizational and system changes during the fourth quarter. Moving to Slide 14, we've outlined sales volumes by major customer class for Kentucky. Slower-than-expected economic growth lowered energy sales over the past year, and it’s apparent in the second quarter of 2011 compared to the second quarter of 2010. In Kentucky, real disposable income decreased as inflation has outpaced income growth. And unemployment in the state continues to be above the national average. As a result, the number of residential customers is essentially flat year-over-year, and average consumption per customer is slightly down. While some indications have been hopeful for the commercial sector in Kentucky, commercial electricity sales indicate relatively slow economic growth. In the industrial segment, Q2 sales in '11 were lower than prior year due mainly to customer-specific factory issues. Industrial sales are up for the 12-month period ended June 30, 2011, versus the same period a year ago due to increased production over that period from a couple of the utilities' largest customers. Moving to Slide 15. We provide details on sales volume variances for PPL Electric Utilities. Weather-normalized residential sales were higher for the quarter compared to the prior year due to modest load growth and the addition of new customers. This was partially offset by the effect of higher energy prices on sales and increased energy efficiency and conservation. Commercial and industrial sales were higher for the quarter, reflecting gradual, economic recovery in the region. For the full year 2011, we project overall load growth between 1% and 2%, driven primarily by higher residential, industrial and commercial sales. On Slide 16, we provide our normal detail on the competitive supply segment hedges. The baseload hedge levels and prices for 2011 are essentially the same as our first quarter disclosure. We have adjusted our expected output levels for '11 to reflect actual results through June and our forecast for the remainder of the year. The decline in our expected Eastern baseload generation is primarily driven by the Susquehanna nuclear outage, which is partially offset by higher intermediate and peaking generation. The expected Western generation reflects lower coal generation, partially offset by higher hydro generation due to above-normal river flows in the Pacific Northwest. During the quarter, we layered on additional power hedges in the East for 2012 and 2013, which we are providing today for the first time. As you can see, our 2013 hedge profile is approximately 70%. By the end of 2012, we would have expected to be 60% to 90% hedged for 2013. We're obviously currently ahead of that schedule, as we took advantage of recent power price rallies motivated by firming gas forwards, as well as impacts from EPA's CSAPR. Most of the 2013 hedges were done with collars, so we stand to capture upside on these hedges if prices move higher, but we have protected against the downside if CSAPR is delayed or forward natural gas price has softened. That said, 30% of our projected baseload production and 80% of our gas forward [ph] capacity stands poised to capture the full benefits of any further strengthening of power prices in the 2013 delivery year. As 2014 comes on the horizon, we are essentially fully open and are of the view that the confluence of the CSAPR implementation, prospects for better economic recovery and firming gas prices will reduce reserve margins and further expand heat rates. Our generation business is expected to do very well in that environment. Now let me turn the call back to Jim, and I look forward to your questions.

Okay, thanks, Bill. So operator, let's move into the Q&A.

[Operator Instructions] And the first question in the queue comes from the line of Ameet Thakkar from Bank of America Merrill Lynch.

Just a quick question on, I guess, the updated hedge disclosures on Slide 16. Does your, I guess, new or updated hedge prices, does that include any kind of, I guess, basis spread to the PJM West Hub, or are these are all just kind of your hedged prices at the West Hub?

These would be essentially all prices at the West Hub, yes. And as I've indicated on prior calls, our expectation is for basis to be flat in the next several years to the West Hub, our generating units to West Hub.

Okay. And I just noticed that, I guess, you're still under negotiations for kind of the rail or, I guess, the coal portion of your 2013 fuel needs. But when do you think you might have an update on how that has kind of proceeded?

Sure. It is primarily driven by the negotiations underway on the rail contract with NS. And we would hope that, perhaps, by the end of the year, we would be in a position to report out on 2013 hedges for the East.

Okay. And then just real quickly on, I guess, the integration of Central Networks. I was just wondering when you might have, I guess, a firmer handle on, I guess, on what sort of kind of a severance costs that you will incur and when you might be able to provide, I guess, an update on kind of the synergies that you outlined when you announced the transaction?

Yes. Ameet, this is Paul. We'll probably be in a position to do that when we announce Q3 earnings. We would expect to have most of the system's implementation and organizational implementation done by early in the fourth quarter. If it's not at that time, it would be shortly thereafter. The problem is that, and I shouldn't say problem, but there's a big range of outcomes depending upon the years of service and the age of the personnel in the 600 to 800 people that leave organization. You'll notice, when you look at the Q, that we've given, so that people didn't think it was an uncapped number, if you will, in terms of exposure, that at the extreme, meaning if 800 people would leave, and they’re the 800 people that have the longest tenure with the organization and the highest age, it could be up to $120 million for that element. And I think we gave a number of around $110 million in the road show deck that included the ITPs as well. But if you go to the other end of the spectrum and it's younger folks that have fewer, less time in the organization, it could be less than $10 million. So it's a broad range that's heavily dependent upon who actually departs.

Okay, and sorry, one last question on the hedges. Does that include any kind of full requirements premium? And I think you mentioned in your prepared remarks that some of the offset to the outages was from full requirements business? I thought you guys had kind of participated less in full requirements auctions?

You are correct, we have participated much less. Most of the full requirements contracts that we do have are legacy contracts that are rolling off this year, or they're short-term contracts. In the new hedge disclosures for 2013, there are essentially no full requirement contracts in there. If there are any, it would be very small.

And your next question comes from the line of Paul Patterson from Glenrock Associates.

The collars that you have on the hedges for 2013, you've got upside participation. Is there any downside participation? I mean, you mentioned protection, but I mean, if prices go down, could the number go down?

Well, the range that we've provided there I think captures essentially both the upside and the downside there. So the $53 and $56 in the East. That range, I think, captures pretty much the downside. So I think while it could go down a little bit more, if you get on the tail of the distribution, we feel pretty good about the lower end of $53.

And that $53, Paul, would be if all the collars price at the bottom end of the range. Because we obviously enter into these at different times, and the same thing with the upside at $56 if everything hit at the top end of the range.

Right.

Okay. And where is it right now, I guess? I mean, I guess we can sort of look it up, but I'm just wondering sort of -- because obviously, they're different products and what have you, I would think. Where would you be, I guess, in the range right now?

I would say probably towards the lower end, just with, I guess, as of yesterday, coming off in '13 by about 2% and based on where we set the hedges at a very favorable price. But we'd probably still be towards the lower end of that. But I think we feel really good about it. And as of the end of the second quarter, the hedges were $200 million in the money. And I would suspect that, as of today, they're even further in the money. So I think they're very favorably priced hedges.

Okay, great. Now, on weather. I'm sorry that I missed this, but what was the weather impact for the year-to-date versus normal? In other words, I mean -- because I mean, we look at some of these, the Kentucky numbers and stuff, I assumed, maybe or maybe not, that there's some weather perhaps in there that -- just wondering whether or not there's a potential, how we stand in terms of the weather performance?

Yes. Well, the charts are weather-normalized. But on the chart, you...

Oh, are they?

Yes, yes. So they're already weather-normalized. But if you can see in the detail below the chart, the actuals. So the actuals, because of unfavorable weather, were actually more negative than the weather-normalized in the case of Kentucky.

Yes. Kentucky's off by a $0.01 or $0.02 versus plan because of weather, offset a very modest amount by some additional off-system sales.

And in the case of Pennsylvania, it's the opposite. The actual weather was more favorable than the weather-normalized. So it's a little different geography obviously.

Okay. And then on the trading and marketing, are we still, I think, what was it, $40 million that you guys were expecting for 2011?

Yes. We're still tracking well to that, probably ahead of that at this point.

Okay. And then any change with the CSAPR and stuff maybe for 2014 and stuff?

No. I think we still -- as Jim mentioned and I mentioned in my prepared remarks, we're still looking at 2014 as the years that a lot of the retirements begin to take effect. The emission credits begin to get priced into power. So we're looking at '13 as the transition year to the higher prices in '14.

There are no trades yet that have obviously taken place, and there's real big bid offers on those. So it's clear when you look at the pricing that it looks like most is on the bid side and not the offer. So we do think that there's clearly more upside to those margins and to those prices as transactions actually take place and allowances get allocated.

Your next question comes from the line of Greg Gordon from ISI Group.

When we look at the decline in industrial demand in Kentucky, can you give us a little more color as to specifically what sectors of the industrial segment there are pulling back year-over-year?

Sure. If you're looking specifically, Greg, at the second quarter, those were really driven by 2 things. One was auto manufacturing production levels, a little bit less than the year prior. And there was also one of the largest customers of the Kentucky utilities that had a fire and shut down the plant completely. So those are really the specific factory issues that I mentioned in the opening comments. So I think it’s more helpful to probably look at the year-over-year numbers. And I believe we still feel that the production levels on the auto will come back up to higher levels. And we're probably tracking still on the favorable side on the industrial sales.

Is that factory that had a fire coming back? Or is it shut permanently?

It's coming back. It was a 40-megawatt load pre the explosion, the carbide plant, and it's coming back at 25 megawatts early next year. So it will be down a bit. All of this obviously gets socialized out once we get a rate case, but it does have a near-term impact.

Great. And then you may have answered this before, so I apologize. But in the press release, you talk about “offsetting the Susquehanna outage in other aspects of your competitive supply business.” Can you extrapolate on that a bit?

Sure. A couple of things there. One is the performance of our peaking and intermediate units during the outages, performed very well, and we captured additional margins that weren't in our plan to help offset that. Our marketing and trading activities have been very strong. As Paul mentioned in his remarks, our full requirements contracts, those that are left, have been performing very well. So a number of things like that have really helped offset what otherwise was obviously a big hole that we had to fill.

Okay. And then you also say that -- strong performance from the U.K. business. So when I think about trying to model this going forward, clearly, those things that are happening to offset Susquehanna might not be structurally repeatable. We know that what's happening in Kentucky is kind of, hopefully, just a little bit of a speed bump between rate cases at least and -- but on the U.K. side, should we presume that the positive performance relative to your plan is sort of -- we can count on that as a base off of which you'll then sort of grow the business into next year?

Yes, we're great. We're...

Clearly, there are one-time items there that are not structural.

No. What we're trying to do is -- when we came up with the acquisition pro forma, it was actually a relatively high level on an annual basis. And we're trying to determine whether the monthly data that we're seeing is going to be consistent and repeatable into the future. We had debated, actually, pulling back again and giving you the sensitivity analysis that we did at year end around the new consolidated bigger business. We're going to try to do that at the end of Q3 so that you've got a basis for being able to do the modeling. But we're clearly hopeful that this is performance that can be repeated.

Okay. So better-than-expected, but for now, you want to see if it’s -- there’s some follow through?

Yes. We just got to get through the monthly analysis. We do have the annual data now completed in terms of the quality of service performance for both the legacy and the acquired business, and we'll be analyzing that and finishing the audits with option and be able to report on that at the end of Q3, the outcome in terms of bonus revenues for next year on both pieces as well.

Your next question comes from the line of Michael Lapides from Goldman Sachs.

Real quick question on Pennsylvania demand at your regulated business. A little surprising, the weather-norm data in the quarter. Positively surprising, given what some of your peers in the state -- like, I'll give an example, PECO's weather-normalized demand was pretty modest at best. Just curious, what are you guys seeing both on the residential side and on the industrial side in Pennsylvania that some of the others in the state may not be?

Well, I think as I mentioned earlier, Michael, I wouldn't focus a lot of attention just on a quarterly number, because there are individual-specific industry events, industrial customers, for example, that move in and out quarterly. So I would focus more on the 12 months ended figures, which are on the bottom chart there. But I think relative to Kentucky, for example, the unemployment rate in Pennsylvania is better than the national average where it's actually the reverse in Kentucky. I don't know that there's anything structurally different in our service territory than in the PECO territory. The one caveat or exception to that is the Marcellus Shale drilling. There is some infrastructure being built in a very small section of our Western territory that is seeing positive impact as a result of some more housing starts and other services coming into that territory. But we're on the very fringe of that, so I wouldn't expect that to drive the numbers significantly. But as I mentioned in my remarks, we are expecting about a 1% to 2% load growth year-over-year by year end.

[indiscernible]

And a follow-up question, unrelated. Since the environmental rules started coming out, meaning, with MAAC coming out in the spring and CSAPR in the summer, just curious, is there any different tone in the discussions with the coal suppliers about pricing? Meaning, everybody can look at what the financial forwards are, but pricing that could be a decent bit below that if you're willing to lock up supply if you have scrubbed assets?

Well, I think everyone is following the impact of it. I think in terms of just the overall big picture, clearly, compared to where we were in 2007 and '08, our prices, even though they looked to be much or somewhat improved, if not much improved, by '13, '14, '15. They're still low relative to those historical periods. So clearly, as we look at the economics of our coal plants, there are still some challenges out there. So I think both the coal suppliers as well as the rail companies recognize the challenges that are there. I think the bigger driver to the energy price at the end of the day is really going to be, and Paul mentioned this, the SO2 and the NOx emissions credit levels. And we're assuming what could be a little bit on the low side, about $1,400 a ton on the SO2 side and about $500 on the NOx side. And we've seen some pretty big spreads out there, upwards of $5,000 in the SO2 case and $9,000 on the NOx case. So I think that's probably, at the end of the day, going to be a key driver to how much lift we see in prices when we get out to the '13, '14 timeframe.

Your next question comes from the line of Julien Dumoulin-Smith from UBS.

First, with respect to Susquehanna, did I -- if you read between the lines there, did you say $60 million to $65 million now versus a prior of $50 million to $60 million in terms of the ultimate impact?

Yes. Correct.

What drove just the incremental there? Was it versus power?

Yes, it was just what -- the ultimate power prices wound up being a lost opportunity. About 90% of the cost that we experienced, if you will, was margin-related or margin losses. The rest was O&M related.

Great. And then secondly, if I can read between the lines on your comments on CSAPR, you've locked up more on '13. Is that more to say less positive on the earlier stages of CSAPR and more bullish on, call it, the second half or stage 2?

Yes. I think that's right. And also, as I mentioned, we think '13 is really a transition year, and there's still volatility out there. I mean, just looking at what happened in the markets yesterday, both the stock market, driven by the economy, and then the commodity markets yesterday, it continues to be volatile. So recognizing that and seeing that we had a couple of rallies in the quarter, second quarter, we're able to take advantage of that and lock in what we thought were pretty decent prices for '13. And as I mentioned, we've still got the upside from the collars and the open positions for the rest of the fleet in '13. And then '14 is essentially all fully open.

And Julien, what I would say -- and while I wouldn't say these moves would be dramatic, I wouldn't look at what our hedged levels are as simply being a steady march up. To the extent that we're able to layer in hedges at very good prices, and we see weakness in the market, you could see a quarter-on-quarter movement where the numbers would move down. So I wouldn't look at it as, we just simply lock and then never touch them again either. So we do look to take advantage of the portfolio as we move through time.

Great. And then finally, it looks like the projected rate base numbers have ticked up just a bit here. Is all of the Kentucky CapEx at this point baked into your projections? I mean, what changed quarter-on-quarter, perhaps addressing Kentucky specifically?

At the end of the day, it was very small movements. Everything that we can see from a Kentucky perspective is in there. Everything that we see from a Pennsylvania perspective if we're evaluating the likelihood of an alternative rate mechanism and creating some attractiveness for an additional spend is in there. All of the hydro projects are bullish. They both all are on-budget and on-schedule. So we don't see any deviations there. Small movements as we look through time on maintenance CapEx around the Supply business. Those get moderated a little bit as we get new numbers, but no big movements.

Your next question comes from the line of Marc de Croisset from FBR Capital Markets. Marc de Croisset - FBR Capital Markets & Co.: Just a couple of questions on Kentucky. Are you able to kind of have a sense of what the trailing ROEs are in Kentucky?

Yes. We don't typically report on a quarterly basis on that. And it's difficult because we've only owned the asset for a very short period of time. I think what we've indicated in the past is, and I know this isn't really answering your question narrowly, but clearly, when we see ROE dip down into the low 9 range, we'd be expected to go in for a rate case. It's a little bit of an artificial period now because of the agreed stay out. But we are seeing some softness from a sales perspective. We're doing what we can from a cost standpoint to try to recoup some of that lost value there. But we don't report on a quarterly basis, and we've got new financing in versus the legacy financing that E.ON had. So even looking back 12 months when we've done on a dead IPO, we've recapped the entities, it wouldn't be a very good comparator to mix part our capital structure, part the legacy. Marc de Croisset - FBR Capital Markets & Co.: Right. Understood. And do you have a sense though how that business might -- how it's going to operate with CSAPR in 2012? Are the Kentucky utilities going to be -- will they need credits? Will they -- how will they comply with the CSAPR rules in 2012?

Well, I don't think -- first off, yes, I think we've got everything built into our plans that we know about right now relative to CSAPR. And we think that's pretty solid. I can't see anything unforeseen if that's kind of what you're looking at. Marc de Croisset - FBR Capital Markets & Co.: Yes, I was just getting a sense for whether or not they were generally in compliance, the -- my general sense about Kentucky is that the SO2 reductions, I think it’s in Kentucky, tend to be pretty tough as well. And I was wondering how the utilities were positioned to adapt to that.

Well, yes, it's a good question. I think in general, for the larger stations, we have a lot of equipment on there. There are couple of stations where we're going to have to upgrade for SO2 compliance. But the bulk of the investments are really going to be on bag houses to deal with mercury and particulates in addition to some SCR-type equipment. But overall, we've tried to include in the ECR filing everything that we believe is going to maintain our compliance. We did also indicate earlier in an IRP, integrated resource plan find, that there could be up to about 800 megawatts of generation that would potentially be retired that probably would not be economic to put on environmental controls to comply.

A couple of those large units that have to have that first generation set of scrubbers replaced with new generation to the extent that -- and as they look at the economic generation, it's absolutely the lowest-cost generation that goes to a certain customer base. The entities are now a net long generation with a 600 megawatts net to their interest coming from the 800-megawatt Trimble County 2 Unit, which is fully scrubbed with current compliant scrubbers would be able to satisfy that load. So if there's any impact, it would likely potentially be a smaller amount of off-system sales. And it shouldn't be -- we shouldn't be seeing anything from a cost perspective that's not recoverable from the customer, even in the short term like 2012 that would be meaningful.

Your next question comes from the line of Paul Ridzon from Keybanc.

What are you seeing with regards to shopping in Pennsylvania?

Yes, shopping does continue in our territory to increase where we're -- as of the end of last month, at about 550,000 customers shopping, representing, I believe, about 72% or 73% of the total retail loads. So most of the -- of course, the C&I customers have been shopping for quite some time. So we're up to -- continuing to see shopping go forward. And I think it's -- well, it's probably leveled off somewhat. It's still incrementally expanding.

Just switching gears to U.K. A lot of -- why Midlands made sense was the back leverage. I mean, is that fully set up? Is there more potential upside from financing creativity you could do there?

I don't think there's any more from financing creativity. We'll obviously continue to work on, over the long-term, kind of tax strategies around repatriation. But we basically mimicked the legacy WPD debt structure with 80% debt to RAV. When you combine opco debt with the holdco debt, that's kind of -- in optimized levels and maintain a Baa3 rating, an investment grade rating at the 2 respective holdcos, the one that owns the legacy, the one that owns Midlands. And I wouldn't expect us -- unless the rating agencies would evolve their view over time, to let us put on some additional debt. I think we've been vacillating over the last 6 or 7 years at WPD at between low-70s to low 80% holdco debt to RAV, and I wouldn't expect that we'd be moving meaningfully out of that range. So I think we've optimized as best we can at this point.

And your next question comes from the line of Jonathan Arnold from Deutsche Bank. [Technical Difficulty]

And your next question comes from the line of Raymond Leung from Goldman Sachs. [Technical Difficulty]

And your next question comes from the line of Daniele Seitz from Seitz Research.

I just was wondering if the 1% to 2% demand growth includes above normal weather in July?

No. That would be weather-normalized growth.

And your next question comes from the line of, again, Jonathan Arnold from Deutsche Bank. [Technical Difficulty]

Your following question comes from the line of Michael Lapides from Goldman Sachs.

A real quick question, financing update on the equity side. Can you just provide an update given the slight change you've made in CapEx, et cetera, in terms of your Trimble to your equity financing?

Yes, it's not in any way meaningfully different than we've disclosed in the past. It might have up-ticked a very small amount. But still, we're talking modest amounts through drip dribble [ph] at the market, late '12, late '13. We kind of got everything that we needed for the 18-month period through the equity raise that we did upsizing that in April. So it's still in that same zip code that we talked about in the past.

Your next question comes from the line of Ivana Ergovic from Jefferies. Ivana Ergovic - Jefferies & Company, Inc.: I'm just wondering whether you're going to have an extra SO2 allowance to sell now and 2012 and 2013 Pennsylvania given that your generation is current?

We do. If you look at the allocations that EPA has provided, we do have excess allowances in '12, but then we are short in '14. There are some limitations on how much we can bank, but our initial strategy would likely be to try to bank those that we can and use them in future periods. For those that are not able to be banked, we would look to sell those. Ivana Ergovic - Jefferies & Company, Inc.: So what happens in '14? So you would use those from 2012 and 2014 and forward?

Correct, to the extent we could. And to the extent they cannot be carried over, then we would sell them in the near term. Meaning, if they're available in '12 and we couldn't carry them to '13, '14, we'd sell them to others that need them. Ivana Ergovic - Jefferies & Company, Inc.: Okay. And what about Kentucky?

Kentucky, I believe, is not in a similar position. I believe they were either flat or maybe just slightly over in '12 and then also short allowances in '14. Ivana Ergovic - Jefferies & Company, Inc.: Okay. And is there a deadline by which Kentucky commission has issue a final decision in your environmental rate case?

In the ECR mechanism, we'd expect a determination late this year in December -- by mid-December. Ivana Ergovic - Jefferies & Company, Inc.: But there is no deadline? Or that's the deadline?

That would be the normal timeline to rule on that filing. Ivana Ergovic - Jefferies & Company, Inc.: Okay. And just another quick question. Could you provide some update on your transmission line, Susquehanna-Roseland?

Sure. We continue to look for a record of decision in October of next year with construction to begin shortly thereafter. The majority of the construction would be in '14 and '15 with an in-service date targeted around mid-'15.

We would expect our portion of the line to be completed in the mid-'14 type timeframe.

Your next question comes from the line of Lauren Duke from Deutsche Bank.

I had a question on the hedging. I know you mentioned that some of the additional hedges were to take advantage of price spikes related to the CSAPR rules. And I was wondering, because it seems -- I know in your slide is says the hedges are as of June 30. So does that just mean you saw some run up ahead of the rule being finalized? Or some of these hedges have taken place after what we see on this slide?

No. These would've been put on prior to the end of that quarter. So they do not reflect any activity since the end of the quarter. And we did see prices run up in anticipation of the final rule coming out, even though it didn't come out till July.

And your next question comments from the line of Tom O'Neil from Green Arrow.

Apologize if I missed this, but on the rail contract that's up for renegotiation, just wondering if you could scope the issue a little bit more for us? Just is this -- like 9 million tons is about the right number? And then just what the current price is?

Well, we don't disclose the actual prices. But what we've disclosed in the past is that the rail for contracts for 2011 were expected to be -- they've cost about in the low $20 per ton range. And we would expect -- and that contract ends in 2012. So we're in negotiations in advance of the expiration of that at the end next year. So we still have time on the contract. In terms of anything else, I'd just say we're in discussions right now, and I really don't want to comment much further on it at this point in time.

Okay. And the volume, is that about right?

The volume, I believe, is actually a little bit lower than that. I think we're probably talking -- because in our total volumes of 9 million, that includes Keystone and Conemaugh. So I believe it’s about 7 million -- let me just see if I can pick it up before you. I think it's about 7 million tons. It would be like around 8 million tons roughly.

[Operator Instructions] Your next question comes from the line of Reza Hatefi from Decade Capital.

Just another follow-up on Slide 16, the new hedge disclosure for 2013, is that around-the-clock prices for PJM East? Or is it more peak-weighted?

It is a combination of peak and off-peak, and it is probably slightly weighted to the on-peak side. So it's kind of a weighted average, and it's not precisely in around-the-clock. But probably a little heavier weighted on the on-peak, but it's not that it's all on-peak clearly.

And I guess, looking at Slide 20, around-the-clock and PJM in 2013 is about $48, and that's kind of where it's been roughly all year. And you guys were 10% to 15% hedged, I think, coming into the year for 2013? So I guess I'm just trying to figure out what else could have driven that average hedged price to $53 to $56 when 2013 prices have been in the $48 ballpark for this year?

Yes. I think it's -- first, you hit on one of them, which is I believe we’re about 20% hedged coming into the year at higher levels than average $48 around-the-clock. So that's one driver. And then the other is just the fact that it's a little bit more heavily weighted to on-peak in terms of the levels of hedging that are included in this number versus off-peak.

And there were periods, Reza, in the quarter where we did see price spikes that we did take advantage of, $2 to $3 price moves yet. So that does blend in as well, even if they've come back off of those levels. And I think that’s why Bill referenced that when we look at it in total, it's $200 million. Actually, it's slightly more than $200 million in the money as of the end of the quarter.

[Operator Instructions] And there are no further questions in the queue at this time. I'll turn the call back over to the presenters.

Okay. Well, thank you all for being on the call. We feel we had a good quarter, very pleased with our performance and the ability to offset some unexpected outages to Susquehanna. Both units are back up running, so we're looking forward to talking to you at the end of the third quarter. Thank you very much.

This concludes today's conference call. You may now disconnect.