PPL Corporation (PPL) Q2 2012 Earnings Report, Transcript and Summary

Joseph P. Bergstein – Investor Relations William H. Spence – Chairman, President and Chief Executive Officer Paul A. Farr – Executive Vice President and Chief Financial Officer Rick L. Klingensmith – President, PPL Global and PPL Energy Services David G. DeCampli – President, PPL Energy Supply Gregory N. Dudkin – President, PPL Electric Utilities Victor A. Staffieri – Chairman, Chief Executive Officer and President, LG&E and KU Energy

Paul Patterson – Glenrock Associates LLC Justin McCann – S&P Capital IQ Paul T. Ridzon – KeyBanc Capital Markets Julien Dumoulin-Smith – UBS Jonathan Arnold – Deutsche Bank Securities Inc. Leslie B. Rich – JPMorgan Asset Management, Inc. Andrew Bischof – Morningstar Research Michael J. Lapides – Goldman Sachs & Co. Brian J. Russo – Ladenburg Thalmann Securities Steve Fleishman – Bank of America Brian James Chin – Citigroup Global Markets Greg Gordon – International Strategy & Investment Group, Inc. Raymond M. Leung – Goldman Sachs & Co. Anthony C. Crowdell – Jefferies & Co., Inc. Ashar Khan – Visium Asset Management LP Reza Hitucki – Decade Capital Management LLC

Good morning. My name is Melissa, 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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Joe Bergstein, Vice President, Director of Investor Relations, you may begin your conference.

Thank you. Good morning, everyone. Thank you for joining 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 of this presentation and in the company’s SEC filings. At this time, I’d like to turn the call over to Bill Spence, PPL’s Chairman, President and CEO.

Thanks, Joe, and good morning, everyone. We appreciate your participation in this morning’s call. I’m joined on the call this morning by Paul Farr, PPL’s Executive Vice President and Chief Financial Officer. Also joining us for the Q&A session are the Presidents of all business segments; Vic Staffieri, President and CEO of LG&EKU, our Kentucky Regulated business; Rick Klingensmith, President of PPL Global, who has responsibility for UK regulated operations and our Energy Services businesses; Greg Dudkin, President of PPL Electric Utilities, our Pennsylvania Regulated segment; and Dave DeCampli, President of our competitive market Supply segment. To get started today, I have an overview of our second quarter results and a few operational highlights, then Paul will provide more details on our segment performance in the quarter and following his remarks we will turn to your questions. Today we announced the second quarter reported earnings of $0.46 per share up from $0.35 in the same quarter a year ago. Earnings from ongoing operations for the quarter were $0.51 per share compared with $0.45 per share in the same period last year. For the first six months of the year, our reported earnings were $1.39 per share, up from $1.13 per share in the first six months of 2011. Ongoing earnings were $1.21 a share for the first half of the year versus $1.26 per share in the same period a year ago. Our second quarter earnings from ongoing operations include $0.02 per share dilution from the common stock issued and April 2011 financed acquisition of the Midlands utilizes in the UK. For the first six months, dilution amounted to $0.13 per share. Strong results from our UK operations were a major drag from the improvement in both ongoing and reported earnings in the second quarter. Strong earnings from the UK…

Thanks, Bill. Good morning, everyone. Let’s move to Slide 7 to review our second quarter financial results. PPL’s second quarter earnings from ongoing operations were higher than last year primarily driven by strong operating results from the UK including a full quarter of earnings from the Midlands businesses versus two months of results that were included in our second quarter last year. This positive drive was partially offset by lower earnings in the Supply segment as a result of flat energy margins and higher O&M compared to a year ago. Let’s turn to the Kentucky Regulated segment earnings drivers on Slide 8. Our Kentucky Regulated segment earned $0.07 per share in second quarter, $0.01 increase over last year. This increase was primarily driven by higher sales volumes resulting from newer (inaudible) compared to the year ago. Moving now to Slide 9, our UK Regulated segment, earned $0.31 per share in the second quarter a $0.10 increase over last year. This increase was due to the operating results of the Midlands utilities that included an additional month of operations as well as performance improvements. Higher delivery revenue at WPD Southwest and South Wales is primarily driven by higher net prices and lower financing costs. These positive earnings drivers were partially offset by higher O&M, including higher pension expense, less favorable currency exchange rates and dilution of $0.01 per share. Turning to our Pennsylvania Regulated segment on Slide 10, this segment earned $0.05 per share in the quarter, $0.01 decrease compared to last year. This decrease was primarily due to higher O&M as a result of higher payroll related expenses and higher legislation management costs. Moving now to Slide 11, our Supply segment earned $0.03 per share in the second quarter a decrease of $0.04 compared to last year. This decrease was driven by the net result of lower West energy margins, primarily as a result of the termination of a seven-month (inaudible) contract in connection with that company’s bankruptcy. Higher Eastern Energy margins driven by higher nuclear generation partially offset by lower baseload energy and capacity prices, higher O&M primarily at the Susquehanna nuclear station, higher depreciation and dilution of $0.01 per share. With that, I will turn the call back to Bill for the Q&A period.

Thank you, Paul, and with that, operator, we’re ready to open the call for questions.

(Operator Instructions) Your first question comes from the line of Paul Patterson from Glenrock. Your line is now open. Paul Patterson – Glenrock Associates LLC: Hi, guys, can you hear me.

We can. Good morning, Paul. Paul Patterson – Glenrock Associates LLC: Good morning. Couple of things. First, the National Grid got some rulings from Ofgem and they seem somewhat disappointed with them. I was just wondering if you could sort of compare and contrast their situation compared to yours?

Sure, Paul. And that was the preliminary leave on their plan that was filed with Ofgem, but Rick Klingensmith can get into the details for you.

Good morning, Paul. As a way of background, in the Regulated businesses in the UK, the electricity transmission, the gas transmission and the gas distribution are undergoing a price controlled review under what Ofgem has called to (inaudible) process. And as part of the real process, there was a set of initial proposals that you referred to that was just published by Ofgem that sets forth. Ofgem’s view of strong order and the recurrence required for those Regulated businesses. They will go through the process through the rest of this year with some final proposals that will be published in the November and December timeframe. As you commented, the grid did come out with a service disappointment, and it asked for additional capital to be spent in their [networks], as well as they have requested the higher (inaudible) initial proposals that came out of Ofgem what we see are they are really coming in line with what we are currently seeing for electricity distribution price control review that we are currently operating in. The cost effective returns, the weighted average cost of capital, the efficiencies as noted are right in line with where we are today with electricity distribution. So, we aren’t surprised by the result, that’s what we had expected. Paul Patterson – Glenrock Associates LLC: Okay, great. And then with respect to the expected generation, it seems like that’s come down a bit and it looks like you guys have a little bit more coal hedged than you actually have for expected generation. Could you comment on how that’s going to work both sort of practically and financially with respect to how you are going to deal with that excess coal, I guess, is what it looks like?

Yeah. Sure, Paul. You are correct on the both counts and I’ll ask Dave DeCampli to provide some more color on that.

Sure, Paul. Our generation baseload forecast, it is down, yes. However, our intermediate and peaking forecast is up partially offsetting that. And, as we would always do, we will buy from the markets while our costs to generate to make up any differences there. The bottom line on generation it’s about neutral plus, and on the coal management side you will see on Slide 21, I believe we are over hedged in coal for 2012. We are managing that primarily just through inventory, and for 2013 we’re continuing to work with our suppliers on a number of arrangements either through differing or renegotiating or buying out contracts. So 2013 still has a little bit of work to do, but 2012 we will manage primarily through inventory managing. Paul Patterson – Glenrock Associates LLC: Okay. Then financially how should we think about how that will impact I guess EPS in 2013, I mean you sort of managing these contracts and what have you given what’s happened with the coal?

Yes, Paul this is Paul Farr. It depends upon the mechanics that we ultimately used to get rid out of the excess position. To the extent that it’s a contract buyout, you would see a chart coming through the P&L related to that. To the extent that we differ, it’s simply a deferral and shows up in future periods in the pile cost and the compensatory management. Again, it just blends into the pile, and we would absorb that. As soon as we get through 2013, we do have a capability to absorb that in ‘14 and beyond. So it’s just simply a matter in terms of the financial impact what mechanical way we used to get out of that excess position.

And I think Paul, at this point, we believe that it will be relatively immaterial to 2013. Paul Patterson – Glenrock Associates LLC: Okay, great. And then just finally Act 129, there has been some activity at the Pennsylvania PUC and I was wondering, if you could comment on that? Also there was, I guess, one demand response provider is indicating that with respect to the curtailments that happened in the third quarter that has lowered prices in some of the Pennsylvania areas in the real-time markets and just how we should think about the impact of demand response Act 129 on the wholesale market outlook for you guys?

Sure. I would say overall, Act 129 is coming into play pretty much as we would have expected it. It has prompted obviously a lot more conservation and a lot of – plus peak demand than you otherwise get. And certainly the PJM demand response program has contributed to that in addition to Act 129. So I think overall it’s not a surprise necessarily and I think power prices have in real-time reflected the implementation of some of those demand response programs in addition to some of the other energy efficiency programs in the State of Pennsylvania. So overall, I would say no major surprises from our perspective. Paul Patterson – Glenrock Associates LLC: Okay. So with the changes at the PUC or the activity that’s happened there recently, should we expect any change to any of these activities going forward or does it serve to wait and see? Do you know what I’m saying, this reiteration of the 129?

Let me ask Greg Dudkin, President of our Electric Utilities for Pennsylvania there to comment on that.

Yes. Paul, so at the end of last week the Public Utility Commission came out with their curriculum on how well to handle Act 129 beyond the year 2013. And there really weren’t any surprises. So it’s – we have an idea of the expected reductions that they are looking for and we will be putting into our plans in order to meet those objectives. Paul Patterson – Glenrock Associates LLC: Okay, great. Thanks a lot.

Your next question comes from the line of Justin McCann from S&P Capital IQ. Your line is now open. Justin McCann – S&P Capital IQ: Good morning. Congratulations on a strong quarter. The UK has obviously made enormous contribution to your performance this year, and you’re expected to account for roughly 45% of consolidated earnings for the full year, up from the nearly 32% in 2011. I would like to know what is the expected effective tax rate for both the UK and the consolidated company for this year, and given the lower tax rates for the UK, if we assume a higher proportion of free tax earnings from the UK in 2013, do you believe it could account for more than 50% of net income in 2013?

Okay, this is Paul. I will really try to bite those off in pieces. The effective rate on the UK segment earnings is roughly 22%, 23%. On a consolidated basis, blending in the higher domestic and federal and state rates, we get close to 30%. We’re very heavily hedged for 2013, both power as well as our fuel. We are very heavily hedged from an earnings translation perspective on UK earnings at this point as well. I would not see us crossing the 50% threshold at all for 2013. As we execute on the rate base growth plans, which are a little robust in the domestic utilities than they are in the UK business, these are further offset, and again as Bill mentioned earlier, we’re into rate cases with both domestic utilities perhaps to try to get those utilities back for utilities back towards more accessible levels of earned R&D. So there’s a lot to go out of dynamics that will also help call it a rate base as we go through plans. Justin McCann – S&P Capital IQ: Okay. Thank you.

You are welcome.

Your next question comes from the line of Paul Ridzon from KeyBanc. Your lines is now open. Paul T. Ridzon – KeyBanc Capital Markets: Good morning. How are you?

Good morning, Paul. Paul T. Ridzon – KeyBanc Capital Markets: Trailing 12-year, your $2.68, can you kind of give a profile of what the back half of the year is going to look like?

Sorry, say it again Paul? Paul T. Ridzon – KeyBanc Capital Markets: On a trailing 12-month basis, you’ve earned $2.68. Can you just kind of reconcile that against your guidance and your expectations for the second half of ‘12?

Yeah, let me – maybe come at it – and I don’t really think of things usually from a 12-month trailing perspective. So it’s the dynamic that we’ve been talking about, the lower commodity interest from the hedge perspective because we are moving through size. The hedges that we have got in place are at lower levels than we have hedged the prior 12 months when they were – they were a little robust. The regulated utilities are under earning, but we are in for rate cases on both of those domestically. WPD is executing very strongly against the plan that we have when we acquired utilities. So that’s fairly steady as she goes.

Then I would add share dilution is a factor.

Share dilution is a factor, roughly at $0.13 for this year. So those are probably the biggest drivers year-on-year. Paul T. Ridzon – KeyBanc Capital Markets: Haven’t we already know the share dilutions?

Just a couple of cents, but just (inaudible) less, but yes. Paul T. Ridzon – KeyBanc Capital Markets: What’s the seasonality in the UK? Because I think you are looking for about $1 for the full year and you are already well above $0.60?

Yeah. As we outlined in the release, it’s closer to $1.07. There is some seasonality to the earnings. There is some planned spend towards the back half of the year that’s a bit higher than the second half of the year and we do have in the forecast an expectation for a tax disclosure to hit the P&L that may or may not transpire. But that’s in that $1.07 that remains that we have guided in the press release. Paul T. Ridzon – KeyBanc Capital Markets: Okay. And then back to Paul Patterson’s question, your base load is down 3.4 million megawatt hours, but your peaking is up 1.7 million megawatt hours, how should we think about that from a – what the net-net of that is on earnings?

Well, I think overall with the strong hedge position we have in 2013 even with those levels of hedge generation and the upward projections that we have obviously some of that means that we’re going to be buying generation from the market at a lower price than we can produce it for. So, that has a net positive effect. So overall, I don’t really see any material change to the overall earnings picture for 2013 compared to what it was previously. Paul T. Ridzon – KeyBanc Capital Markets: Okay. Thank you very much.

You are welcome.

Your next question comes from the line of Julien Dumoulin-Smith from UBS. Your line is now open. Julien Dumoulin-Smith – UBS: Hi, good morning. Can you hear me?

We can Julian. Good morning. Julien Dumoulin-Smith – UBS: Yes. Good morning. Excellent. With regards to Kentucky, just wanted to get an updated thought process after the decision on the peaker here. What about new rate base build and also how does that play into timing of any potential rate cases as we think about the outer years here and beginning them to service?

Sure. I’ll ask Vic Staffieri to comment on that.

Yes, we did turn down the deal for the peakers based upon the first quarter, which ranks consistent with how the Commission will – the Kentucky Commission wanted to operate the facility. So what we will be doing is we will probably be billing out an RFP later this year and we’ll combine it with looking at self-builds and some other plants and purchases going out to address what the peaker is going to cost us in 2017. It maybe that will be build another power plant, but it will be until the 2017 time. Julien Dumoulin-Smith – UBS: Okay. So in terms of rate case schedules as it stands right now, is it still kind of every couple of years? Is that a good status quo?

Yes. Julien Dumoulin-Smith – UBS: All right great.

Remember the bulk of our capital spend is coming in through the environmental costs recovery mechanism rather than to the general rate cases. Julien Dumoulin-Smith – UBS: Right, absolutely. And then maybe a second question here on basis. Basis was perhaps a little weaker and then you guys had talked about previously in the second quarter. What is your latest expectation on a go forward basis? Is it still that $1 megawatt hour off of West hub?

We have for the year-to-date, it’s been really relatively flat for us with the hedges that we had put in place. I believe we are just slightly positive on basis for the year-to-date. And as we look at the year end and what we expect for the year, we would expect again with the hedges we have in place to come out near neutral near zero, maybe slightly positive or negative, but not anything in either direction at this rate then. So I think its playing out as we expected it – as we articulated at the beginning of the year, expect them to basically be flat to slightly negative through West hub. Julien Dumoulin-Smith – UBS: All right. Thank you very much.

Your next question comes from the line of Jonathan Arnold from Deutsche Bank. Your line is now open. Jonathan Arnold – Deutsche Bank Securities Inc.: Hi, good morning, guys.

Good morning, Jonathan. Jonathan P. Arnold – Deutsche Bank Securities, Inc.: My question relates just to the Midlands and the UK in general, and how you are tracking versus the original guidance waterfall from Q4? You have $0.28, and it looks like you’ve got $0.34 under the bridge in the first half from Midlands, but then revenues you were $0.14 for the year, and they were up $0.04, and then the other was expected to be kind of $0.13 negative, and it was only negative $0.02. Can you just us a bit more of a sense of where you are ahead and behind plan in aggregate, and what exactly is driving the Midlands piece?

Sure. I’ll ask Rick to respond.

Jonathan, thank you. On the $0.28 that we had forecasted at the beginning of the year, that was also on a different share count than the $0.34, and so we kind of take the $0.34 of actual performance on a year-to-date basis, kind of reset that, put it on a cost on shares, that’s $0.06 differences, really only about $0.03. So it’s happened over on the Midlands activities that the additional four months coming in at about that area we have projected, but then we see some out flowings of about $0.01 a share as a result of the actions and the efficiencies that we’ve been able to replace in the full six months of this year. Jonathan P. Arnold – Deutsche Bank Securities, Inc.: Okay, thank you.

Your next question comes from the line of Leslie Rich from JPMorgan. Your line is now open. Leslie B. Rich – JPMorgan Asset Management, Inc.: Thank you. I wondered if you could repeat your comments about equity issuance. Bill, I think you said something about, you were making some adjustments to the plan, therefore equity issuance may not be necessary in the magnitude that you had originally forecast. I wondered if you could just walk through that for 2012 through 2014, and understanding that, you have converts maturing obviously.

Yeah, a good point. Yeah, with the forward sale we have not only the converts, but the forward sale on the equity that we did this year or coming into play next year. But yeah, my comment was that, based on some preliminary planning that we’ve done, and knowing that this has been a concern to many investors on the equity raise, and the level and what it would be, we’re looking at every way we can to reduce that equity need down to basically just Europe, and the needs for management comp. So that would be our objective, I believe the group of management comp together, we’ve got $100 million. So we previously indicated, we’d up $350 million of equity of these, so Europe we got $250 million reduction net to what we previously expected. Leslie B. Rich – JPMorgan Asset Management, Inc.: And you’re doing that through CapEx cuts or O&M or how are you managing that?

It would be a combination of, it’d be a number of a variety of things, but certainly our CapEx and O&M will be a component, yes. Leslie B. Rich – JPMorgan Asset Management, Inc.: Okay, thank you.

You’re welcome.

Your next question comes from the line of Andrew Bischof from Morningstar. Your line is now open. Andrew Bischof – Morningstar Research: Hi, good morning. UK regulated segments are doing very well for you; I was hoping if you could breakup the Midlands’ additional month, and how that attributed to your quarter?

Well, for the quarter as you saw in Paul’s remarks that we were a positive $0.10 a share for this quarter due to the Midlands. Of that $0.10, $0.08 was due to the extra month, and $0.02 was due to accruals. Andrew Bischof – Morningstar Research: Okay, thank you.

You’re welcome. Andrew Bischof – Morningstar Research: That’s all I had.

Okay.

Your next question comes from the line of Michael Lapides from Goldman Sachs. Your Line is now open. Michael J. Lapides – Goldman Sachs & Co.: Just want to follow up from Leslie Rich’s question on cost reductions or cost management. Can you give us just some insight, when you look at your CapEx slide for the little component for supply, it’s like $600 million or $700 million a year, what do you view as just maintenance CapEx at the supply business for the existing facilities, and facilities that will be online by the end of this year?

Well, it’s a very good question, and I think, certainly in our Supply business, we are looking very aggressively at cutting O&M and capital in light of the low power prices. What is being the maintenance CapEx, that kind of depends on really how you expect the units to perform, and so for example with the coal plants, if we’re expecting them to be just past a lot more – and less for level than previously, that means the maintenance CapEx that we’ve been submitting is going to go down. So I think that we’re still early in our planning process, so I can’t give you specific plant-by-plant or even group-by-group numbers at this point. What I can say is that, we’re vertically optimistic where we can make some meaningful measures and savings on CapEx as well as on the O&M side. Michael J. Lapides – Goldman Sachs & Co.: Got it. One other thing, when the Midlands acquisition occurred you outlined potential for synergy savings. Can you just give an update on where that’s tracking, meaning how you are versus the original plan when you made the UK transaction, and whether you see upside or downside to synergy savings there?

As we look at the results of the UK regulated segment in both forecasts that we have established at the beginning of the year as well as $1.7 that you will see here, you’ll notice that, that’s tracking much at the high end of the synergy forecasts that we had provided back in the April of last year when we were making the acquisition. So we’ve been able to significantly outperform through cash savings, cost savings across the enterprise in outsource, reducing outsourcing contrasts, reducing labor costs, improved financing. So any area that we’ve been able to affect has been very positive, and $1.7 that we’re forecasting for the year is at the high end of that range.

And Mike, I’d like to say that, remember that headcount reduction ended up being at very high end of the range of numbers that we provided, and we also indicated back in April that those numbers didn’t include bonus revenues which we’re kicking off around $30 million. This year, we’ve said that, that would at least double to $60 million next year. So the out performance is coming both on the cost side and the revenue side. Michael J. Lapides – Goldman Sachs & Co.: Meaning though, when do you get confirmation about the year-over-year increase, and the bonus revenues. I know, it’s like an April start each year, but when does that process kick in where you get certainty around that?

Yeah. Our license modifications that provide certainty on our actual results for the year ending March would likely be in the October, November timeframe. So we are anticipating that on the third quarter of earnings release that we’d be able to provide an exact number that we are able to achieve. But as Paul mentioned, we were expecting to double this year’s results of [$20 million]. Michael J. Lapides – Goldman Sachs & Co.: Got it, okay. Thanks and congrats on a good quarter.

Thanks, Michael.

Your next question comes from the line of Brian Russo from Ladenburg, your line is now open. Brian J. Russo – Ladenburg Thalmann Securities: Hi, good morning.

Good morning, Brian. Brian J. Russo – Ladenburg Thalmann Securities: Could you maybe just discuss the strategy of keeping Montana with the Supply contracts that are rolling off in early to mid-2014?

Sure. I’ll ask Dave DeCampli to comment on that.

Are you specifically referring to the Southern Montana contracts that recently were rejected in the bankruptcy quarter or it’s another specific contract you were referring to in 2014? Brian J. Russo – Ladenburg Thalmann Securities: The 200 plus megawatts of both contracts roll off that you have with NorthWestern Energy?

On NorthWestern, okay. I think on that front, we continue to look for alternative markets for that close to that, I’m sure if NorthWestern will be one of those potential customers. But in addition there are many as you know, relative costs in that region and we just hope that to continue as well, the retail CapEx where some were finders and some of the other world class end users out in Montana. Brian J. Russo – Ladenburg Thalmann Securities: Okay, and would the asset sales also be considered to support the strategy of less ongoing equity needs?

In the past, we have not commented on specific asset sales, so I don’t really want to start that process at this point, and as I mentioned, I think earlier certainly O&M and capital savings will be a big piece of our ability to hopefully reduce that equity need. Brian J. Russo – Ladenburg Thalmann Securities: Okay, understood. And then lastly, just can you add some color on the hedges, the foreign exchange currency hedges you have with the British pound in ‘12, and maybe ‘13?

Sure. Yeah, we are basically north of 90% hedged, 90% to 95% hedged for 2012, and 80% to 85% hedged for 2013. Brian J. Russo – Ladenburg Thalmann Securities: Okay, and at what price?

At level slightly above the $1.57 that we had communicated over the last year or so, so slightly better than those numbers. Brian J. Russo – Ladenburg Thalmann Securities: Okay, thank you very much.

Your next question comes from the line of Steve Fleishman from Bank of America. Your line is now open. Steve Fleishman – Bank of America: A very warm good morning.

Good morning. Steve Fleishman – Bank of America: Bill, just on your comments early on, actions that you might take at the Supply business, I think you mentioned that you’re going to be doing things to make sure you can, if prices fall from where they are, to cut costs, or other actions to make sure that the business stays positive. Is that the message?

That’s exactly the message, Steve, and we don’t plans in place already and some other analysis that we’re actively working on to make sure we meet that objectives. As I also commented, while we don’t expect that to happen, we also obviously cannot predict where the power cuts are going to be in 2014 and ‘15, so we want to be well prepared in advance should our markets not recover, as we expect them to, but we want to be prepared. Steve Fleishman – Bank of America: Just to clarify, as I was thinking about your comments in another way, based on the current forwards, the business is earnings positive in ‘14, ‘15?

Yes. Steve Fleishman – Bank of America: Okay. Great, thank you.

(Inaudible).

Your next question comes from the line of Brian Chin from Citigroup. Your line is now open. Brian James Chin – Citigroup Global Markets: Hi, Bill. Good morning.

Good morning. Brian James Chin – Citigroup Global Markets: Just going back to the question on the equity issuance reduction, if we walked away from the call with an assumption of 50-50 O&M cuts versus CapEx cuts, did you say that that’s a reasonable assumption to make?

I can’t really give you a precise breakdown of how much that would be at this point, as I indicated in my opening remarks. We are still in the preliminary stages of our planning though. We do believe it’s a realistic objective to cut $250 million out of the equity raise, and then just leaving that in the management comp. So I think – exactly where it’s going to come from, which business line, we are still in that process of determining that, but again, I think based on the preliminary numbers, we think that it’s very achievable.

And Brian – hi this is Paul. One other think I’d mention is, it’s on the soft side, but the strong performance in the UK could also cause us to be able to extract higher dividend levels from there, which should contribute to that in and of itself. And so it’s costs and that out, we’re looking to UK (inaudible). Brian James Chin – Citigroup Global Markets: Understood, understood. And then lastly on ‘14, just any sort of rough commentary on hedging levels for ‘14. I know you don’t put it in those performance slides, but any color there would be great.

Sure, on the last call, we indicated that for 2014, we’re at 10% to 20% hedged. We’re now in the 20% to 30% hedged range, would be more towards in the 30% and the 20%, and we’ve obviously taken the opportunity with some of the strength that we’ve seen here at rates that we’re hedging to more of these efforts. So we’ve made some progress during the quarter, and obviously we’d be reporting out on this again in the next earnings call. Brian James Chin – Citigroup Global Markets: Great. Much appreciated. Thank you.

Your next question comes from the line of Greg Gordon from ISI Group. Your line is now open. Greg Gordon – International Strategy & Investment Group, Inc.: Thanks. Sorry to beat the dead horse here guys, but when we think about where the capital reductions are going to come from, obviously they can come from four places, they come from the Supply business, they can come from UK, they can come from two regional utilities here in the U.S. So are we looking at the potential for reduced capital spending here in the U.S. at the regional utilities as part of this CapEx reduction or is it mainly coming from Supply or is it mainly coming from the UK or is it a mix of all of them?

It’s certainly a mix, and I would said on the domestic front certainly both utilities would be included in that potential, and I think as we look at it while it has the potential to reduce the rate base growth in utilities by cutting back saving on CapEx in the domestic utilities. On the flipside of it, we think it’s going to be earnings accretive, and certainly the short-term view of that even though if they cut back the rate base a bit, they’re obviously going to have benefit in the west region. So we think that, that is going to be positive, and it would, as we mentioned a variety of assets to go off over those declines and it’s combination of UK as come in all of increased dividends, our factories do that… Greg Gordon – International Strategy & Investment Group, Inc.: Great, thank you.

You’re welcome.

Your next question comes from the line of Raymond Leung from Goldman Sachs. Your line is now open. Raymond M. Leung – Goldman Sachs & Co.: Hey guys, in terms of your cash flow you are showing a pretty large negative number this year, and that’s before dividends. Can you just refresh our memory on financing plans for the year, and I’ll start with that first? Thank you.

Okay. In terms of the – on the equity front again we did the proper transaction that will settle early next year at the back end of Q1. That really allows us to drift into the management comp next year the equity side of things. But balance of the funding we’ve done and issuance earlier this year in the UK we got an issuance that we completed mostly recently domestically at around $400 million. Other than a few hundred million that we’ve got (inaudible) probably that’s around about the financing for the year. Don’t stick with the plan. Raymond M. Leung – Goldman Sachs & Co.: Okay, and if you think about ‘13 the equity units are supposed to bring in about $1.1 billion, but does that sort of cover you in terms of external financing needs for ‘13?

It does, relatively significantly. We’ve got around $700 million coming due at Supply which will effectively deplete or pay that off $1.150 billion of proceeds. There is financing expected in the UK next year, there is financing expected of around 30 million pound, there is financing in Kentucky as it grows its balance sheet and really starts to execute on the construction program for ETR spending, and it’s relatively modest at electric utilities. I think we are in a good shape for a year and a half there. Raymond M. Leung – Goldman Sachs & Co.: Okay. And can you just help us out on what the – you said you are under-earning at the utilities. What the returns on equities are at the Kentucky utilities in Pennsylvania?

Sure. Rick, do you want to start on the Kentucky side?

Yeah, I would for 2012, it will amount to 8% or so, that’s why we are in the rate case.

And Greg?

In Pennsylvania, we filed our – in my testimony, we identified we expect we will have mid-6% at the end of the year. Raymond M. Leung – Goldman Sachs & Co.: Wonderful. Great, thanks a lot.

Your next question comes from the line of Anthony Crowdell from Jefferies. Your line is now open. Anthony C. Crowdell – Jefferies & Co., Inc.: Hey, good morning. I was trying to make sure I understand it correctly where the equity used to be, because I must have a horrible phone connection, it’s just tough to hear. The converts still occur but you think your equity needs to lighten up by, I think roughly maybe $200 million, what type of share count should we be modeling for say 2014? I think you’ve given it before or if you’re able to, 2015 when take in your lesser equity needs?

In 2014, we are around 675 billion shares. So if you take 200 million off that at some (inaudible) share price and that will get you at a levels versus where that assumption really lies. Anthony C. Crowdell – Jefferies & Co., Inc.: Okay, I just want to clarify I think the comments to Greg’s question that although you cut back on CapEx, the mix of the utilities in domestic, but you’re still confident that it’s accretive although you’re going to have the less rate base earn on it, is that accurate?

Yes. It is. I wouldn’t say the levels that we would be talking about for the domestic utilities are huge in size. Obviously, Rick talked about earlier the fact that the Bluegrass plant and associated transmission and some other spend on consultancy (inaudible) that doesn’t really come back in and plan until 2017, when at that point in time the ETR sales is done, ECGT is constructed and those utilities are generating significant cash flow instead of absorbing cash internally. So yeah, there is some modest decreases that we’ll be looking at for select facilities so they wouldn’t be outside and causing dramatic reductions in the regulated growth profile. Anthony C. Crowdell – Jefferies & Co., Inc.: Great. Thanks for the clarification.

Sure.

Your next question comes from the line of Ashar Khan from Visium. Your line is now open. Ashar Khan – Visium Asset Management LP: Congratulations, just wanted to get a sense, as you look out the next two or three years, and I guess you’re trying to plan through the process, which year in your mind is the trough year in the landscape, can I ask?

We don’t Ashar have guidance, and I think the way that people are modeling things as we look at sell side research and people look at mostly in ‘15, you can see where the softness is relative to larger units in the (inaudible) the fuel prices and like we prefer not to give numbers or even the pattern if you will. On average I don’t think people are par. Ashar Khan – Visium Asset Management LP: Okay. Thank you so much.

Your next question comes from the line of Paul Ridzon from KeyBanc. Your line is now open. Paul T. Ridzon – KeyBanc Capital Markets: My questions have been answered. Thank you.

Thanks, Paul.

Your next question comes from the line of John Alli from Decade Capital. Your line is now open. Reza Hitucki – Decade Capital Management LLC: Thank you. It’s actually Reza. Could you remind us going forward how much cash you expect to bring from the UK annually?

We were – based on the model that we had share around April of last year in the $150 million to $200 million range. It seemed less up front because we were using some of the cash flow to fund some of the synergy cost side of things. So it could be in that $150 million to $200 million range. Reza Hitucki – Decade Capital Management LLC: And then, I know the UK earnings have a lot of puts and takes, and you’re having a good year thus far, but looking out to 2013, there should be further growth in UK in ‘13 versus ‘12. Is that correct?

Yeah, that is correct. If you look at also how Ofgem has phased our revenues over time, we’re actually seeing a 5.5% real increase year-on-year, so that will also come into play in 2013. And as we had already discussed in previous answers, we also expect some additional revenue from incentives for performance starting April 1, of next year as well.

So, that’s 5.5% or less whatever your assumption is on inflation, this is a nominal increase in revenues plus bonus revenues offset by some level of cost escalation. Reza Hitucki – Decade Capital Management LLC: Right, and so net-net it should be incremental to the $1.07 this year?

That’s correct. Reza Hitucki – Decade Capital Management LLC: Thank you very much.

I mean, again that’s adjusting for share count on the convert next year, so net of that, you got to factor that in as well. Reza Hitucki – Decade Capital Management LLC: Okay. So net income should be higher and then I should adjust for the share count, and then I guess to see where that lands.

That’s correct. Reza Hitucki – Decade Capital Management LLC: Okay. Thank you.

Your next question comes from line of [Andrew Levy] from Avon Capital. Your line is now open.

Hi, good morning.

Good morning.

Just back on the Montana generation assets versus kind of just – kind of a bigger picture question, but obviously NorthWestern has articulated interest in assets, and in the past things have improved, but let’s just say Montana hasn’t been the friendlier state of all the states that you do business with to you guys. Why not bring in a local partner to kind of help man-in end of the part of the game and have you thought about that?

Well, I think, we think about all the options available to us while as we go through our strategic planning process and as I indicated earlier, we’ve really not commented on specific asset sales or strategic options. And as I indicated on the last call, we’re very happy with the business mix we have today, and our focus is really on executing the plan that we’ve gotten in front of us, and in my view, we’ve done an excellent job on all fronts in supply, and all the utilities are executing the plan and I think our results reflect that. We’re very optimistic about the future with the offset of that with some business mix we have.

Okay, thank you.

Your next question comes from the line Michael Lapides with Goldman Sachs. Your line is now open. Michael J. Lapides – Goldman Sachs & Co.: Hey guys, two quick follow-ups. One Pennsylvania, I know you’re in a rate case now, so it may be a little early to think about it, but thoughts about whether you will file for the distribution rider next year or whether you would wait and maybe to file a true forward rate case a year or so later?

Sure, I’ll ask Greg to comment.

Yeah, our intent is to file for the debt as early as fall 2013, so we just got our implementation order rate late last week from the PUC and that’s (inaudible) have us file a long-term improvement plan in the third quarter, and file for this again as early as possible as we can in 2013.

And then, I think we would be looking to file likely a fully (inaudible) for the next general rate case proceeding in Pennsylvania. Michael J. Lapides – Goldman Sachs & Co.: And you would file for a forward test year in ‘14 for ‘15 timeframe, something like that?

That sounds it will be in that timeframe, so they’re not – obviously the disc – they’re not too exclusive. So, we’d be doing a combination of the two. Michael J. Lapides – Goldman Sachs & Co.: Got it. And is there any lag associated with the disc or does the disc basically remove lag on distribution CapEx?

It’s basically just a few months lag. So we put plan into service, and then we start recovering within I believe its’ four months.

On a portion of the distribution CapEx, it doesn’t cover all CapEx’s reliability basis then. So… Michael J. Lapides – Goldman Sachs & Co.: Got it, guys. Thank you. Much appreciated.

Thanks.

Okay, we really appreciate the questions today and with that I thank you for the call. I think it was a great quarter, and appreciate all the questions, and we’ll talk to you next quarter. Thank you.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.