PPL Corporation (PPL) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Matthew, and I will be your conference operator today. At this time, I'd like to welcome everyone to the PPL Corporation First Quarter Conference Call. [Operator Instructions] Thank you. Joe Bergstein, you may begin your conference.

Thank you. Good morning. Thank you for joining the PPL conference call on first 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. At this time, I'd like to turn the call over to Bill Spence, PPL Chairman, President and CEO.

Thanks, Joe, and good morning, everyone. Appreciate you joining us this morning. Here with me today are Paul Farr, PPL's Executive Vice President and Chief Financial Officer; as well as our 4 business segment presidents who will participate in the Q&A session later today -- later on the call. To kick off the call this morning, I'll provide an overview of our first quarter results, some commentary on our 2013 earnings forecast and an operational overview. Following my remarks, Paul will provide a more detailed financial overview. Turning to Slide 4, I'm pleased to report that we delivered strong growth in each of our regulated segments in the first quarter. Combined, the regulated businesses delivered a growth of 40% in earnings from ongoing operations. And earnings per share from ongoing operations increased by $0.01 despite lower earnings in our Supply business, as well as the impact of accelerated share recognition from the 2010 and 2011 equity units. This is a topic I'll discuss in more detail in a minute. On a net income basis, earnings from ongoing operations increased about 11% in the first quarter versus the same period a year ago. Reported earnings were lower than last year, mainly due to net mark-to-market adjustments on economic hedges in the Supply segment and foreign currency hedges we have in place on future U.K. earnings. Now, let's turn to a discussion of our 2013 earnings forecast, which you'll find on Slide 5. We're updating our forecast to reflect the impact of accelerated share recognition from the equity units we issued in 2010 and 2011, in connection with our Kentucky and U.K. acquisitions. Our original guidance only reflected a partial year impact of the shares related to the 2010 equity units that settle midyear 2013. Late in the first quarter, we finalized our financing plans for the required remarketing of debt securities related to these equity units, allowing us to hedge our interest rate exposure for both equity units at attractive rates, rates that improved as we moved through the quarter. Those activities caused us to reflect the full expected impact of common stock underlying both series of equity units in our calculation of earnings per share effective January 1 of this year. The accelerated share recognition impacted first quarter ongoing earnings by $0.06 per share and is expected to impact full year 2013 ongoing earnings by $0.10 per share. As a result, we're adjusting our ongoing earnings forecast to $2.15 to $2.40 per share. We also announced this morning, a reduction in future equity needs of approximately $100 million per year. We believe we can maintain our rate base growth plans and targeted credit metrics even in light of this equity reduction. We clearly view both actions as positive for share owners. I want to stress that our view of 2013 net income from ongoing operations remains unchanged since our original forecast, and we feel very good about the forecast after delivering a very strong first quarter. Paul will provide additional details on what I just covered in a few minutes. But first, let me highlight a few operational things on Slide 6. Moving to Slide 6, our U.K. subsidiary is preparing for a price control review under a new regulatory approach called RIIO. WPD is finalizing detailed business plans for each of our 4 distribution networks, and we'll submit those plans to Ofgem, the regulator, by July 1. Our objective is to be selected for fast-track consideration by Ofgem, which would enable us to conclude WPD's price control review early in 2014. This would provide greater certainty in base revenues and financial incentives. You can follow key developments and filings in this process on the Investor section of our website. In January, PPL Electric Utilities filed a request with the Pennsylvania Public Utility Commission for accelerated recovery of certain distribution system reliability improvements. We expect the decision from the PUC later into spring, with implementation of the DSIC cost recovery mechanism beginning July 1. Also in Pennsylvania, construction work continues on the Susquehanna-Roseland transmission line. We've updated our cost estimate to $630 million based upon final contract costs. In March, PPL Electric Utilities began construction of the 500 KV Lackawanna Substation, a critical component of the project. We continue to expect the line will be completed and in service by the summer of 2015. This project is a major part of our regulated infrastructure investment program that will improve regional electric reliability, create jobs and provide a significant regional economic boost. Moving to the sales volumes for the quarter on Slide 7, in Kentucky, weather normalized sales increased about 1.5% for the first quarter of 2013 compared to 2012. The increase was primarily driven by residential sales, which were up more than 5% due to customer growth and improved economic conditions. Industrial sales were slightly higher in the first quarter of 2013 as several large industrial customers in the chemical and automotive industries experienced increased volumes. In Pennsylvania, weather normalized sales declined slightly on increased energy efficiency, energy conservation and a challenged industrial sector. However, we did see a 3% increase in residential sales over 2012, driven by increased customer usage and a small increase in customer count. Turning to the competitive Supply segment on Slide 8, in April, we began a scheduled refueling and maintenance outage on Unit 2 at our Susquehanna nuclear plant. During this outage, we will replace the turbine hose to improve airflow and reduce blade vibration. In addition, we are installing new blades to have stronger metallurgical properties. We expect this to provide a long-term solution to the turbine blade issues that have affected Susquehanna operations over the last 2 years. Later in the spring, we plan to take Susquehanna Unit 1 out of service for the upgrades needed to address its turbine blade issues. On a final nuclear note, we had excellent performance from both Susquehanna units during the first quarter with 100% availability. In April, we also reached commercial operation on the upgraded Rainbow hydro electric plant. The project increased generating capacity of the Rainbow plant by 70% and spurred considerable business activity in the Great Falls area of Montana. In summary, we're off to a very good start in 2013 with solid financial results that keep us firmly on track to meet ongoing earnings. We continue to take proactive steps to efficiently finance our growth plans by locking in low interest rates and reducing our equity needs, while still maintaining our targeted credit metrics. We also remain very optimistic about our ability to execute on the major construction programs, delivering solid results for customers and growing share owner value. I look forward to your questions and now, turn the call over to Paul Farr.

Thanks, Bill, and good morning, everyone. I'll begin my remarks by providing some additional color on the EPS impact we are reporting in Q1 and that will impact our full-year 2013 EPS related to the 2010 and 2011 equity units. The decline in interest rates we observed during the quarter incented us to finalize remarketing plans for the $2.1 billion debt component of the equity units. After finalizing the plans, we hedged about 90% of the treasury, interest rate exposure and locked in what we consider attractive rates with a weighted average duration that is somewhat longer than we had originally planned. The combination of our financing plan and the significant downward movement in interest rates since the equity units were originally issued, caused us to change from the treasury stock method to if-converted accounting in calculating diluted earnings per share. This change affects EPS beginning in the first quarter of this year, and no prior periods are affected by the change in accounting. Further, the terms of the equity units have not changed and the actual issuance of the common stock still are scheduled to occur July 1 of this year and May 1, 2014, for the 2010 and 2011 equity units, respectively. The accelerated share recognition only impacts the 2013 calculation of diluted earnings per share, and our underlying net income forecast has not changed as Bill just indicated. Let's move to Slide 9, where we show the combined impact year-on-year share count for the change in equity unit accounting and the decision not to issue common stock to fund our DRIP in management comp needs in 2013 and beyond. We've outlined both our original projection of weighted average common shares outstanding as provided on the year-end 2012 earnings call and our revised estimates. The net impact on 2013 is approximately 50 million of additional shares included in the weighted average share count. Our original projection basically had a half year impact from the 2010 equity units that will settle midyear this year and no impact from the 2011 equity units due to the treasury method treatment we had used in the past. You can see that there's no net impact on 2014 versus our prior projection, and the outright increase over 2013 is primarily driven by a full year impact of the equity forward that settles in Q2 of this year. The elimination of approximately $100 million per year in planned new share issuance clearly benefits 2015 and beyond as 10 million fewer shares are outstanding starting in 2015. Let's now move to Slide 10 where we have provided an updated 2012 to 2013 earnings walk reflecting these changes. The net $0.10 decline from our original 2013 EPS guidance is driven by $0.18 from the impact of additional shares for the if-converted treatment of the equity units, partially offset by a $0.07 adjustment in the earnings per share calculation for the interest expense associated with the debt component of the equity units under if-converted accounting, and a $0.01 benefit from the removal of new issuance for DRIP and management comp from our 2013 financing plan. Again, our forecast of underlying net income and the EPS forecast is unchanged. Now, let's move to Slide 11 to review our first quarter financial results. PPL's first quarter earnings from ongoing operations increased over last year, primarily driven by substantially improved earnings at all 3 of our regulated business segments. This was partially offset by lower earnings in the Supply segment, primarily due to lower hedged wholesale power prices. Let's begin our segment review with the Kentucky regulated segment on Slide 12. Kentucky earned $0.14 per share in the first quarter, an $0.08 increase compared to last year. This increase was primarily driven by higher margins due to new base rates that went into effect on January 1, higher retail electric volumes as a result of colder weather in 2013 and additional revenues from environmental investments. O&M was lower primarily due to the timing and scope of scheduled generation outages for 2013. Partially offsetting these positive drivers were higher depreciation and dilution of $0.01 per share. Moving to Slide 13, our U.K. regulated segment earned $0.37 per share in the first quarter, a $0.06 increase over last year. This increase was due to higher utility revenues, primarily driven by higher prices, and lower U.K. income taxes driven by a slightly lower effective tax rate. These positive earnings drivers were partially offset by higher O&M and dilution of $0.04 per share. Turning now to Slide 14, our Pennsylvania regulated segment earned $0.10 per share in the quarter, a $0.04 increase compared to last year. This increase was the result of higher delivery margins, primarily due to new rates that went into effect on January 1, and higher sales volumes due to mild weather in 2012, lower O&M and lower interest charges. These positive earnings drivers were partially offset by dilution of $0.01 per share. Moving to Slide 15, our Supply segment earned $0.11 per share in the first quarter, a decrease of $0.16 compared to last year. This decrease was primarily the net result of lower Eastern energy margins driven by lower baseload energy prices, partially offset by increased baseload unit availability, higher capacity prices and higher margins on intermediate and peaking units. Lower Western energy margins, primarily due to lower wholesale energy prices, higher depreciation, higher income taxes, primarily due to a 2012 state tax rate adjustment, and dilution of $0.01 per share. These negative drivers were partially offset by lower O&M due to lower outage costs. That completes the more detailed financial overview, and I'll now turn the call back over to Bill for the Q&A period.

Thanks, Paul. Operator, we're ready for questions, please.

[Operator Instructions] Your first question comes from the line of Dan Eggers with Crédit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Just on the Supply side of the business, can we maybe talk kind of beyond 2014? I know on the last call, you guys suggested that '14 represent the trough. But can you maybe shed the light on where hedging is right now for '15 and beyond, and maybe kind of what pricing trends you're seeing in those numbers to give confidence to a better outlook there?

Sure. I'll make a couple of comments, then I'll turn it over to Dave DeCampli, who's President of our Supply business. Clearly, 2014 prices and '15 have improved over the last few months, along with heat [ph] rates kind of. But I think overall, our view of the 4 power fundamentals remains pretty much as it has been, which was we continue to see upside of $3 to $5 per megawatt hour in the '15, '16 timeframe, mostly driven by MATS compliance cost, as well as retirements. They're expected to begin in that type of timeframe. I think overall, we continue to see the strength. It's shown itself a little bit here in the quarter, but I don't think quarterly movements are all that indicative per se. I think we'd still rely predominantly on our fundamental views. With that being said, Dave, do you want to provide any other color commentary?

Well, sure. Dan, on the hedging strategy, our target range for 2015 is to be between 0% and 30% hedged. We're sitting between 10% and 20% right now. We've benefit -- we're on the lower end of that actually. So that's where we sit today. Bill's comments on forward prices, we're still viewing the market as being having $3 to $5 upside in it for 2015 at this point. That's what our fundamentals are dictating. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And I guess just with RPM closing in, what are your expectations as you guys look out at the market today?

Now, all the parameters are out now. So we are viewing that as -- so we're sticking to our assumption that it will come in lower than the previous auction. The parameters have not yielded any material changes in our opinion on that, so we're seeing that 16, 17 auction being a bit lower than the previous 1. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And I guess, Bill, can you just share your thoughts on dividend policy? With the -- you're going to cut back on the DRIP and that sort of thing, the decision to raise less equity rather than maybe more of that money toward a dividend increase on a sustainable basis?

Dan, I really don't think that decision has any impact on our ability to grow the dividend. I think we're still very comfortable with growing the dividend as we grow the Regulated segment earnings. Dan Eggers - Crédit Suisse AG, Research Division: So when do you guys expect to -- if you sit down with the board and talked about the strategy of when you revisit, what is the next point [ph] where that discussion comes up and what do you think the board needs to see? Is there a level of confidence in the U.K. outlook with the RIIO process that has to get done before they feel like the growth trajectory is fully confident to cement in the dividend?

Yes, Dan, this is Paul. Yes, we normally -- the board normally entertains the annual dividend adjustment early in the year. So we just went through that process in the January-type timeframe for the April 1 increase, and everybody's kind of seen that. What we have said is there are large commitments to growth from a regulated rate base perspective. And so as we look forward, as Bill indicated, I wouldn't look at the $100 million new issuance reduction as impacting what we can do from a dividend perspective. It's really the capital call on the capital that we got and our ability to massage the balance sheet. So I would still expect that we'd be able to deliver modest dividend increases as we make our way through the meatiest part of the CapEx rate base growth plan, primarily in transmission in Pennsylvania and the environmental investments in Kentucky. Those -- as you can see on our 5-year CapEx slide that's in the deck, those really start to trail off after the '13-, '14-, '15-type timeframe, and that would provide more flexibility starting in '16 and beyond as it relates to the dividends.

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

So first quick question here and I apologize. What are the projected new average share counts, if you will, especially for '13 here? Has that changed? Or I imagine it has, obviously.

Yes, Julien, this is Paul. There is a -- right in front of my comments in the deck on Page...

Slide 9, I think.

Slide 9. There's -- we go from 615 million weighted average for '13 to 665 million. 2014 is unchanged, 670 million the old [ph] forecast, 670 million revised. And for 2015, the original was 680 million shares and now, it's down to 670 million shares. So really, after the -- you get the full weighted average effects from the forward that settled in Q2, there's no change in the share count going forward.

And I presume the '15 changes, that's just because of the lower equity issuance comments earlier?

That's correct. That's the cumulative effect of basically 300 million in lower issuances, 100 million each of '13, '14 and '15.

Great. Second question here. In RIIO, you alluded to a potential Fast-Track. Is this -- is there any potential for the individual utilities to get Fast-Tracked or would this be an all-or-nothing kind of thing?

It would be the individual DNOs would each have the opportunity to be Fast-Tracked. So conceivably and hopefully, we can have all 4 of the DNOs Fast-Tracked.

Great. And then moving back to the Supply segment for a quick second. You alluded to your fundamental view on upside, but obviously, DAR [ph] expense have really improved here. What is your view on coal? Obviously, you haven't locked in too much from what I can tell. How do you think about those pricing trends from here?

Sure. Dave, do you want to take a shot at that?

I would say overall, if I look at where the coal market has been, it's been relatively soft here in the short term. I would expect, with the retirements, it's going to continue to be somewhat challenged then. And so we have not taken a lot of steps to hedge forward beyond '14. I mean, we're still pretty heavily hedged in '13 and '14. But I think we're waiting to see how things settle out on the forward coal price side. But I wouldn't expect that our forward view on coal markets would have changed that much. I haven't looked at it lately, but I think we're pretty much in the same ballpark as where we were previously.

Yes, and in the shortest term, we've seen material improvements within the quarter from a dispatch perspective on both coal-fired and our combined cycle units. So we saw strong performance at Susquehanna, about a 20% increase in capacity factors from coal and very strong performance from the gas units as well.

Great. And then just a little nuance here. When you talk about '14 being the trough, is that really based on your market view or your fundamental view?

Well, right now, because we're well over 60% hedged in 2014, so it's a combination in '14 of where we are already hedged, as well as our kind of mark-to-market view of where the forwards are today. When you get out to '15, I think the mark-to-market is less relevant for us and we really switch over -- begin switching over in '15 to more of a fundamental view.

But still, on a mark-to-market basis, you would still be higher at '15 versus '14, correct?

I think it will be closer to flat, '14 to '15, if you looked on a mark-to-market only basis.

Your next question comes from the line of Neel Mitra with Tudor Pickering. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: A question on the U.K. In your projections, you still use exchange rate of $1.58 per pound. That's obviously been moving around a little bit. What are you embedding kind of in '15 and beyond for the exchange rate? And then more philosophically, how do you look at hedging that?

So from a forward perspective, our business -- our internal 5-year business plan would use a relatively constant rate of that $1.58. We are about 90% hedged in 2013 earnings, and 60% to 70% hedged on next year's earnings, and we started to layer some hedges in the following year. That's our normal 3-year approach to things, very similar, again, to the way that we hedge the generation from the plants. So I'd expect that we continue on that. I would say that our hedges for both '13 and '14 are slightly ahead of that $1.58 number. '15 and beyond is a little bit down off of plan, but nothing material at this point. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay, great. And then moving to the Supply side, the $3 to $5 uplift versus the forwards in '15 and beyond, how do you look at all those new builds that are being announced in -- or in Pennsylvania on top of the Marcellus? And what's your view on the probability that those get built and how they would actually impact the forward curve?

Sure. Well, I think first off, it will be interesting to see if they clear in the capacity market auction firstly. And I think that will dictate for some of those units if they move forward or not. I think secondly, when we look at the economics of new builds, we still can't get there in terms of the numbers. So I think you have to have a pretty aggressive forward view on a significant recovery in power prices and a pretty good view on capacity prices to really clear what we think would be reasonable hurdle rates. But that's PPL's view. So we're continuing to follow that, we continue to follow the PJM rule changes that we believe are necessary to make sure that all generation is being bid in on a level playing field, and meaning no subsidies. So we're continuing to follow that very closely. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Great. And then one last quick question. Has your view on basis changed? Is it still flat going out or we've seen some basis moves this quarter obviously. What are your thoughts on that?

For 2013, we have built into our plan about $1 negative basis for our units. I get -- I think we expect that to continue until a lot of the transmission work in PJM gets done, which would really take us out to the 2015 timeframe. And then we would expect some improvement on a go-forward basis from there.

Your next question comes from the line of Paul Ridzon with KeyBanc.

I just want to clarify, what drove the accounting change to or from the treasury method?

A combination of the types of securities that we actually ultimately plan to issue to, call it, refinance the remarketing or to do the remarketing and the decline in interest rates. But the test that we have to use for accounting measurement purposes keep us in a relatively tight band of net present value of cash flows and the combination of the decline in interest rates outright across all tenors, plus the tenors we selected ended up having us breach those bands and not let us defend them, and pushed us into having to use if-converted accounting.

Okay. And then what drove your ability to take $100 million of equities? Did you just -- blocking and tackling and a little finer detail work on the credit metrics?

That's correct. Yes, we're getting ready to start our annual business signing process for the year, and the treasury and business planning team looked at the numbers and we felt good about our ability to be able to remain strong FFO metrics and be able to accomplish the growth plan without the equity. And so as we've kind of been telling you guys for at least a couple of years, we're very not just committed to that, but incented to try to reduce that because we don't think that the share price reflects full fundamental value of the generation. So again, every time we were out needing to issue shares with that value not reflected, it was diluting the value that we think will show up for the current share base. And so we've been doing everything we can to try to whittle that issuance down. We started at 300, we moved to 100, and now, we've been able to eliminate it in full.

But was it a change in the fundamental outlook? I mean, did you see FFO improving or was it a combination of things?

No, I think it's just our ability to manage other operating cash flow line items to be able to accomplish similar objectives in FFO.

Okay. And lastly, any update on whether you consider the Western assets still to be core?

As we've said in the past, we don't comment on those types of activities, so we won't start today.

Your next question comes from the line of Steven Fleishman with Wolfe Research.

Just a question. First, a detailed question on Supply. The -- it looked like your expected generation in '13 is down like 1.3 million megawatt hours versus year-end plan for baseload?

Yes, that's correct.

What's driving that?

Dave?

Yes. Primarily, a couple of forced outages, which were minor, but the primary drivers, the transmission construction activity and economics have pushed a couple of our coal plants offline a little bit more than we expected in the first quarter. And that is the difference.

Okay. So that already happened in the first quarter?

That's correct, yes.

Okay. And with respect to -- if I recall, you guys did a lot of like option hedging, generally, in your collars?

We have in the past, yes...

Is that -- I guess did prices move enough that you're -- it doesn't look like you're really -- your hedge price has really moved. Is that because prices didn't move enough within the collars or they did move and it just kind of gets averaged -- rounded out?

I think it's really, probably a combination of both, depending on when we put those collars in place, Steve. But yes, I think generally speaking, that's the case.

Okay. And then just -- I know you can't comment on the Montana assets directly, but just in thinking -- in the update on the equity issuance plans that you gave today, did that incorporate any view of potential strategic action there or is that just status quo as you are?

As status quo as we are, that's really just fine-tuning our financing plan and looking to be as effective and efficient on the balance sheet as we possibly can. And so just trying to be proactive, it's not embedded anything new on the strategic front into those forward numbers.

Okay. And then one last quick question. Just the view that RPM is going to be down, is that just -- could you just give a little more color why you think that's the case? Is it just new generation, MISO generation, what are the drivers?

I think there's probably multiple drivers, but I think the ones that kind of I could tick off my head, and then Dave can comment, would be probably a lower demand for a while than we had previously expected overall; a little bit more supply coming in the stack and I think possibly, a little less retirements in that timeframe. But I think those would be the drivers. And DSM continues to be, I think, a factor as we get to the saturation point probably here in this next auction. But I think it's still a factor in this auction. So those would be the drivers.

Plus, we would expect some participation from price responsive demand, recently approved by FERC. And we -- for modeling purposes, here, we're assuming a range of somewhere between $136 and $148.

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

Just some -- and this may be for Paul, some broader questions regarding the balance sheet, capitalization ratios and cash flows. Once the converts convert, meaning the actual transactions happen, so the second one coming in May of 2014, what do you think that does to your debt to cap? Meaning right now, your total debt to cap is around 60%, but how do you think about what your capitalization ratios will be once the conversions play out?

Michael, I don't focus as much on capitalization at corp. Clearly, from the perspective of the cap ratio that the utilities, the 65% that's wrapped [ph] in the U.K, the 51% to 52% in PA, the -- a little over 53% in Kentucky in both opcos, none of those get changed by the court decision on the share issuance or by the converts converting. When that additional cash shows up, we will, as we said in the past, defease off a bit of debt that's maturing at Supply. But a substantial amount of that will go into EU and into LKE for the 2 operating companies in Kentucky to be able to finance the growth plan. So from a corporate FFO metric change perspective, if you will, I don't see that. We got the equity credit really upfront in those. This is just now fully showing up on the GAAP balance sheet. So I -- I don't think if I'm -- sorry if I'm not answering your questioning perfectly, but we don't really think about it from a capitalization perspective at corp. We concern ourselves most with the FFO metrics at the subsidiary, and then FFO consolidated, obviously, for S&P.

Got it. And when we think longer-term, meaning past 2014, like if I look at your CapEx slide in you earnings deck today, so CapEx in '15 is $1 billion less than 2013.

Right.

And your depreciation, I assume, will start making a sizable step-up after -- I mean, you'll be putting a lot of this CapEx in the service, and therefore, D&A will be up. So let's say the swing is $1.2 billion to $1.5 billion range. That is a good amount of the incremental capital that you're currently deploying that will now turn into cash flow available to you. How do you think about sources and uses of that cash flow over time really beginning in 2015, 2016 timeframe?

Yes, that was the -- that goes back to the comment that I made about the dividend question earlier and that Bill made about the dividend question earlier in that -- and your relative order of magnitude of the math is correct. We have really both of the sets of domestic utilities going from huge capital consumers [ph] to -- at least in the instance of Kentucky, Greg will still be consuming capital in his distribution rate base reliability plan. But we go from -- they go from relatively large consumers to either being flat or positive from a cash flow perspective. That's what creates that capability to look at the dividends more, not aggressively, but more, call it, more constructively, more -- increase it at a higher rate than we're likely going to be able to over the next several years. That's really where that cash flow starts to show up after we get through the meatiest part of the CapEx growth plan.

But I mean that's a sizable swing in cash, $1 billion plus swing? Are you also planning significant de-leveraging either at the holdco or at Supply using some of that incremental free cash flow?

Yes, I think it depends upon what we see as our investment alternatives at that point in the regulated utilities. Yes, I guess we see a capability potentially in the future to have additional maybe calls on the capital. But to the extent that it's surplus to the needs, I would expect the capability to do a combination of de-leveraging and stock buybacks to be able to support the balance sheet and the targeted credit metrics that we have today. So if we can find things to invest in that provide a greater return than returning the capital or shrinking the balance sheet a bit, we'll do that. And if not, we'll return it, either through bigger dividend increases or buybacks.

Meaning come 2015, 2016, you could actually be in a position to shrink the equity component of the balance sheet?

It's really in the '16-type timeframe and forward, correct.

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

So when I look at the -- at Slide 7 of your handout, you guys posted a pretty strong weather normalized sales growth in Kentucky. And not so good in Pennsylvania, but when I compare that to your commentary from the fourth quarter call, it looks like you're ahead of what you would've expected in Kentucky but sort of on plan in Pennsylvania because you said in the fourth quarter call, you were looking at a decrease of about 0.5% year-over-year on a volume basis in Pennsylvania, growth of a little under 1% in Kentucky. So can you go through, in more granular detail, what's driving outperformance or underperformance versus your plan in each segment?

Sure. I will start with Vic in Kentucky, provide a little bit of commentary.

Kentucky, you see the residential up 5.2% weather normalized. And I think economic conditions in Kentucky are improving slowly but surely. Our unemployment is down, our new housing starts, '12 over '11, were up 16%. And I'm pleased to say, in the first quarter of 2013, they were up 12%. So we're starting to see the better housing starts, housing prices are going up, unemployment is coming down. And there might even be some spillover from our industrial growth because we're getting more reinvestment now in the Commonwealth. You may have heard Toyota has -- is going to put some more money in there. General Electric has just opened another line. Ford is running at full capacity now. So there were spinoffs from the industrial as well. There are jobs, there are ancillary businesses that are deploying. So -- from -- and I would say the fourth quarter and now, the first quarter have been just very good to us. And so we have some reasonable optimism that the economy in Kentucky is progressing nicely. I should point out though that in the past, Kentucky has kind of -- it hasn't come down as quickly as the rest of the nation, and generally, it doesn't go up. It's a little more steady as you go, and I suspect we're seeing that here now kind of coming back slowly but steadily, particularly on the industrial side. And we're getting some benefits now from unemployment decreases and new housing starts on the residential side.

But not to debate you here live, but what you're showing here in the first quarter is not slow and steady, it's double your expectation for the year.

I'll have a better view on this after the third quarter if it continues, Greg. How does that sound?

Fair enough.

Greg, any comments from Pennsylvania?

Yes, just on Pennsylvania, I'd say there's -- on the residential side, we are, I'd say, outperforming. And what we're seeing, really, the first time fairly [indiscernible], average use per customer has actually increased. So some nice trends on the growth there. On the small C&I and industrial side, I think the economy is still hurting us there. And that's why we're a little bit underplan on those areas.

You were down 7.8% in the first quarter on industrial. Is that like one big customer that went out or a series of things? Is that like a lumpy item or is that indicative of a trend?

Well, I guess similar to what Vic said, we're going to be taking a look at that over the next quarter. I don't think that'll continue, but we'll have to see.

Your next question comes from the line of Raymond Leung with Goldman Sachs.

Greg actually asked my question on the sales growth, but could we talk a little bit about your financing plans? You show a pretty large negative free cash. Can you sort of elaborate on your thoughts on the remarketing and equity units and how you will fill in the blanks on the financing plans?

Yes, Ray, the -- when you're looking at the charts that I think you're referring to in the cash flow chart in the back, we've got $1.150 billion that obviously shows up in the second quarter to early third quarter as new cash flow. We've got the equity forward that settled in the second quarter, which is -- it was originally $250 million. We actually net settled about $50 million of that to handle the DRIP and the management comp that actually went out in the first quarter. But that shows up as new cash flow, and then the retained earnings from the company net is where the equity sources of cash come from to finance the utilities.

Okay. Any thoughts on debt financings? You have the remarketing, we know, and then I know you did hybrid earlier this year. But what are you thinking for the balance to cover up the shortfall?

I would expect that we're doing -- we'd be doing a significant number of first mortgage bonds at LG&E and KU. We've got one planned for Greg's team as well at Electric Utilities. Again, as they ratably grow their balance sheet, they'll be financing at those 53% and 51%, 51.5% equity ratios, and the balance comes from new debt issuance. I think we have one issuance planned later in the year for Supply, like $300 million or $400 million. But that would be it other than, again, all of that cash showing up midyear from the converts converting and this equity forward settlement that happened in Q2.

Okay. And that's -- on terms of Supply financing, that's somewhat new. Is that sort of impartial refinancing that 750 maturity?

A big chunk of that will actually get absorbed by or defeased off by $1.150 billion that shows up. So the issuance is right around, I think, $300 million for later this year in Supply. It's not all that significant.

Your next question comes from the line of Paul Patterson with Glenrock Associates.

Just a lot of questions have been answered, but just back to sort of the RPM. I guess the MOPR decision on the revisions, you don't expect that one way or the other, at this point in time, to have an impact on the auction results, is that right?

Yes, Paul, we're not expecting that. As every day ticks by, it's less likely. So the range, the sensitivity range I mentioned earlier, is not inclusive of that outcome.

Okay. And if it were to happen today, it still wouldn't be able to impact it. Is that the way to think about it? Or are you hearing more from -- I'm just trying to get some sense on that, I'm sorry.

No, I think you have it right.

Okay. And then in terms of -- there was a mention of price responsive demand having impact on the RPM Auction. And I was wondering, I think of that as more of an energy product if I'm looking at the same thing you are. Why does it have an impact on the RPM auction? If you could just help me out with that.

Well, it's capped for the BRA, but we think that it would actually lower the demand in the auction, which would tend to lower the clearing price. So it would have an effect on the demand.

Okay. So you think that price responsive demand will lower the demand from -- in terms of the RR curve or how should we think of that? Maybe I'll follow up after, offline.

Yes, that -- why don't we do that? It's a pretty technical type of question, so let's go...

Do you see price response demand, since it's sort of an energy thing, do you see that -- this year versus last year, any changes you see with respect to that, just your outlook or expectation?

No, not really. Not from last year to this year, Paul.

Your next question comes from the line of Ashar Khan with Visium.

I just wanted to say congratulations, and Paul, I really like this move of getting the dilution out of the way and clearing it for the stockholders. I think it provides a good trajectory for growth going forward. And I think that's a brilliant move, thanks.

Your next question comes from the line of Michael Goldenberg with Luminus Management.

My questions have been asked and answered.

We have no further questions.

Okay. Thanks, operator, and thanks, everyone, for joining us on the call. We'll talk to you on the second quarter earnings call. Thanks.

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