PPL Corporation (PPL) Q3 2013 Earnings Report, Transcript and Summary

Joe Bergstein William H. Spence - Chairman, Chief Executive Officer, President and Chairman of Executive Committee Paul A. Farr - Chief Financial Officer and Executive Vice President Victor A. Staffieri - Chairman of LKE, Chief Executive Officer of LKE and President of LKE Rick L. Klingensmith - President of PPL Energy Services Group LLC and President of PPL Global David G. DeCampli - President of PPL Electric Supply

Kit Konolige - BGC Partners, Inc., Research Division Dan Eggers - Crédit Suisse AG, Research Division Julien Dumoulin-Smith - UBS Investment Bank, Research Division Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division Paul Patterson - Glenrock Associates LLC Jonathan P. Arnold - Deutsche Bank AG, Research Division Shahriar Pourreza - Citigroup Inc, Research Division Michael J. Lapides - Goldman Sachs Group Inc., Research Division Rajeev Lalwani - Morgan Stanley, Research Division Steven I. Fleishman - Wolfe Research, LLC Gregg Orrill - Barclays Capital, Research Division Anthony C. Crowdell - Jefferies LLC, Research Division Angie Storozynski - Macquarie Research Nathan Judge - Atlantic Equities LLP

Good morning, and welcome to the PPL Corporation Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Bergstein, Vice President of Investor Relations. Please go ahead.

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

Thanks, Joe. Good morning, everyone, and thanks for joining us today. With me on the call are Paul Farr, PPL's Executive Vice President and Chief Financial Officer; and the Presidents of 3 of our 4 business segments. Greg Dudkin, President of PPL Electric Utilities, is not able to join us today. I'll start today's call with an overview of third quarter and year-to-date results, briefly review operational highlights, and then I'll discuss the increase to our midpoint of the 2013 earnings forecast that we announced this morning. Following my remarks, Paul will review the financial results in more detail. Today, we're reporting solid earnings for the third quarter and year-to-date. Quarterly earnings from ongoing operations increased by 3% over 2012 on a net income basis, driven by continued growth in our regulated business segments in the United Kingdom, Pennsylvania and Kentucky. Through 9 months, earnings from ongoing operations are 6% higher than a year ago. On Slide 4, you'll notice that on a per-share basis ongoing earnings are slightly lower than 2012 for both the quarter and year-to-date, primarily due to the increased share count associated with the 2010 and 2011 equity units, which we've discussed in some detail in previous calls. I'd also like to note that third quarter and year-to-date 2013 earnings were negatively affected by $0.06 per share due to a noncash adjustment deferred tax asset. Paul will address this item in more detail shortly. Excluding those items, ongoing earnings per share from our regulated business segments are up by 23% year-to-date compared to the first 9 months of 2012. The regulated business segments represent almost 90% of PPL's ongoing earnings on a year-to-date basis. Moving to Slide 5. Today, we're announcing an increase to the midpoint of our 2013 earnings forecast as a result of the continuing strong performance of our regulated business segments. Specifically, we're increasing the midpoint of our ongoing earnings forecast to $2.35 per share from the previous midpoint of $2.32 per share. The increase is driven primarily by a $0.04 improvement in projected earnings from our U.K. Regulated segment. Our U.K. business continues to deliver superior results both financially as well as operationally. Let's move to Slide 6 for a review of some of the operational highlights of the quarter. We recently received work from the U.K. Office of Gas and Electricity Markets that it expects to announce its initial business plan assessment and fast track draft determination on November 22. In that announcement, we will learn whether any of our 4 U.K. subsidiaries will receive accelerated consideration of their business plans under the RIIO-ED1 process. Subsequent to the submittal of our business plans on July 1, we have met with Ofgem staff and the committee of its board in accordance with Ofgem's schedule, and we continue to believe that our well-justified plans support the fast tracking of all 4 of our distribution network operators. Another recent highlight for our U.K. Regulated segment was the determination of the 2012 and 2013 annual incentive awards for WPD. Beginning April 1, 2014, we expect to collect about $110 million in bonus revenue due to our strong operating metrics, which is a 30% increase to what we received for the 2011-2012 regulatory year. Included in that award was more than $10 million for customer satisfaction measures, an element of the annual perform metrics where customers are surveyed regarding outages, connections and general inquiries. And in the current regulatory year, our outstanding performance has continued as the WPD subsidiaries hold the top 4 positions in Ofgem's broad measure of customer satisfaction. Moving on to our Kentucky Regulated segment. We recently completed an evaluation of bids for future energy supply needs. Louisville Gas and Electric and Kentucky Utilities plan to file for Certificate of Public Convenience and Necessity to build a 700-megawatt combined-cycle natural gas power plant and a 10-megawatt solar energy facility. We expect that filing to occur by the end of the year. These 2 projects totaling about $725 million will provide our Kentucky customers with reliable, low-cost generation that meets the latest Environmental Protection Agency regulations. Finally, in Pennsylvania, we continue to execute our major initiatives to upgrade the transmission system for safety and reliability. We are more than 50% complete on the $630 million Susquehanna-Roseland project and reached the construction milestone just this week. By energizing a 17-mile segment of the line. We continue to estimate completion of the Pennsylvania portion by June of 2015. Also, we recently received good news for the $335 million Northeast/Pocono transmission project. The Pennsylvania PUC administrative law judge issued a recommend decision concluding that PPL met its burden on all issues and recommended that the commission approve the siting applications, 2 zoning petitions and the remaining eminent domain applications. We expect to final PUC order in the first quarter of 2014. Turning to distribution sales on Slide 7. You will see that weather-normalized sales in the third quarter were down slightly in both Kentucky and Pennsylvania from a year ago. In Kentucky, weather-normalized residential sales were lower in the quarter but remained higher for the 12-month period ending September 30. Although Kentucky commercial sales were up almost 1% in the quarter, the 12-month period reflects the struggles of small businesses in the Louisville area and the economic impact of the mining industry downturn in Eastern Kentucky. Kentucky industrial volumes decreased, primarily reflecting planned maintenance shutdowns and lower production from some of our largest customers. In Pennsylvania, improved economic conditions led to higher weather-normalized sales in the commercial sector in the quarter, which were offset by reductions in the residential and industrial sectors due largely to customers implementing energy efficiency measures. On an actual basis, the more temperate summer weather in the quarter compared to 2012 led to lower kilowatt hour sales in both regions. We expect total electric sales for both Kentucky and Pennsylvania for 2013 to be relatively flat year-over-year. Now turning to Slide 8 for an update on the supply business. In September, we announced an agreement to sell PPL Montana's 11 hydroelectric plants to NorthWestern Energy for $900 million. The agreement is subject to regulatory approvals, including the Montana Public Service Commission and FERC and is expected to close in the second half of 2014. The net process of about $623 million will enable us to reduce financing needs for our future capital investment in our rate-regulated businesses. In the East, we recently completed a turbine blade inspection outage on Susquehanna Unit 2 at the Susquehanna nuclear plant. Based on our engineering analysis of the Unit 1 turbine in Susquehanna, we're not planning any outage until its planned refueling in the spring of 2014. In the appendix of today's presentation, we provided an update to our forecasted generation and hedge disclosures, including the addition of our 2015 hedge levels. Lastly, we're encouraged by 2 recent favorable decisions from the federal courts, invalidating state attempts to subsidize new generation in PJM. In these cases, federal judges agreed with us that New Jersey and Maryland unconstitutionally infringed on FERC's exclusive authority to regulate the wholesale power market. These decisions, in our view, reinforce the integrity of competitive generation markets. In closing, we're pleased with the earnings growth from our regulated business segments and the ability of our supply business to manage through challenging power market conditions. The efforts to the entire organization and our expectations of continued strong perform enabled us to increase our 2013 earnings forecast. We remain very optimistic about our prospects for growing shareowner value through strong operational performance, disciplined financial management and superior execution of our regulated growth opportunities. I look forward to your questions, and now we'll turn the call over to Paul Farr. Paul?

Thanks, Bill, and good morning, everyone. Let's move to Slide 9. PPL's third quarter earnings from ongoing operations increased over last year, driven by improved earnings in all 3 regulated business segments. The supply segment experienced an earnings decline as we expected, primarily due to lower hedged wholesale power prices. On an earnings-per-share basis, earnings declined in the third quarter due to additional shares included in our share count year-over-year. The higher share count impacted ongoing earnings per share by $0.08 for the period. Let's start the segment review with Kentucky results on Slide 10. Kentucky earned $0.14 per share in the third quarter, a $0.02 increase compared to last year. This increase was primarily driven by higher margins due to new base rates that went into effect January 1 and increased environmental investments partially offset by lower volumes driven by more temperate weather this year. Kentucky's positive margins were partially offset by dilution of $0.02 a share. Moving to Slide 11. Our U.K. Regulated segment earned $0.31 per share in the third quarter, a $0.03 increase over last year. This increase was due to higher utility revenue, primarily driven by the annual price increase on April 1 partially offset by an accrual for overrecovery of current year revenues and lower volumes due to weather. Income taxes are lower, primarily as a result of the decrease in corporate income tax rates in the U.K. These positive earnings drivers were partially offset by higher network maintenance expense and dilution of $0.03 per share. Turning to Slide 12. Our Pennsylvania Regulated segment earned $0.08 per share in the quarter, a $0.02 increase compared to last year. This increase was the result of higher delivery margins, primarily due to a new distribution rates but went into effect on January 1, as well as the increased transmission investment. The margin improvement was partially offset by dilution of $0.01 per share. Moving to Slide 13. Our supply segment earned $0.14 per share in the third quarter, a $0.12 decline compared to last year. This decrease was primarily the net result of lower energy margins, driven by lower baseload energy prices and lower baseload generation partially offset by higher capacity prices, higher O&M, higher income taxes primarily resulting from a noncash adjustment to deferred tax assets that Bill mentioned previously. During the third quarter, we conducted a preliminary assessment of our ability to utilize Pennsylvania net operating loss carryforwards. Our long-range forecast of taxable income has declined since last year, reducing our ability to utilize these NOLs in the future. In prior years, we had recorded adjustments to this deferred tax item in the fourth quarter, and we will perform a final assessment in Q4. Finally, dilution impacted supply earnings by $0.02 per share. 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, and operator, we're now ready to take our first question.

[Operator Instructions] And the first question comes from Kit Konolige of BGC.

Couple of different areas. First of all, just on the sale of the hydro plants in Montana, you didn't sell Colstrip at the same time. What's the future of Colstrip at this point? Do you expect to hold that indefinitely? Or is that something you'd like to sell if you could? Or can you give us a little color on what led to the transaction taking that shape?

Sure. Well, I'd say, relative to Colstrip, they are well-run environmentally compliant assets, and they do provide both positive cash flow, as well as positive earnings to the corporation. So we're happy to continue to run them in a safe and cost-effective manner. In terms of the sale to NorthWestern, I think, in that case, it was just a mutual agreement that, that made sense for them, provide a good value to PPL. So we were able to strike what we think is a very fair deal for both parties. So we'll continue to evaluate Colstrip, but for the time being, our plan is to continue to run it.

Okay. And if I could, Paul, could you go through a little bit more that the issue with the use of the NOLs? I didn't quite catch -- did you say the projection of future earnings, is that earnings at supply is expected to be lower than previously thought?

Yes, most of that impact of the $0.06 does hit the supply segment. About $0.04 of the $0.06 was at supply. The other $0.02 was at corp. As we project, margins, look at cost for running the business, that's declined year-over-year. And this is a 20-year forecast, basically of utilizing these net operating loss carryforwards. And again, based upon where capacity prices cleared at, where we see forward energy prices, year-on-year, things have come down a bit, and so that valuation adjustment impacts not just book earnings, the taxable earnings as well. And that's just decreased our ability to use the net operating losses versus what our view was last year.

Does the guidance still stand that you don't expect supply to report EPS contribution below 0?

Yes, that's correct. That's correct.

Okay. And then one final other area, on the -- to follow a little bit on your mention of the court victories regarding the state subsidies for new power plants, I think pretty clearly that -- but I'd like your feedback. I don't think that should affect the auctions over the next -- certainly, the next couple or 3 years. And can you give us a rough view of your thinking on kind of early outlook on next May's auction, whether you expect it, let's just say, to be up or down relative to this last auction?

Yes, so on the wins in New Jersey and Maryland, at the federal level, those outcomes will be challenged. So it will take some time to go through the next phase of those proceedings, but we think we have an extremely strong case and that those early outcomes will be upheld. I think that it will -- and I think already has discouraged, both the states and potential suppliers from proposing new projects or new mechanisms, so I think it's had an effect already and will continue to have a positive effect as it relates to the competitive markets. On the future of the RPM for the next auction, there are a number of changes, I think, that you're aware of that PJM is considering along with feedback from many of the market participants. And those changes include reassessing import capabilities, how much demand response should be allowed into the auctions and other modeling changes potentially. So it's really hard to say, at this point, how all that may play into the next auction since we're still early in that process, if you will, of looking at potential changes. I think, the positive from my perspective is that PJM is listening to the market participants that have concerns and making sure that their focus continues to be on their #1 priority, which is a reliable supply for the grid. So I think they understand that role that they play and take it, obviously, very seriously.

The next question is from them from Dan Eggers of Crédit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Just kind of maybe following up on supply and decision to exit Montana hydro, can you just maybe share your current thinking on the future of supply in this totality for you guys? And as that business gets smaller, there's a lot of overhead associated with it. Is there a cost-cutting opportunity or a need to get more scale to help optimize the structure?

Well, I think, there is a cost-cutting opportunity, and we continue to execute that on. Dave DeCampli and his team have done a great job, thus far, and they continue to find opportunities there. As we answered one of the call -- or the questions previously, our current plan for 2014 and 2015 not only does it reflect the current forwards as they were at the end of the quarter, but we still see our supply business as an EPS positive contributor to the corporation overall. So I think I have also mentioned that we're always looking at opportunities to enhance the value potential for each of the businesses, as well as shareholder value for PPL as a whole. And we've proven that through the strategic actions we have taken over the past several years. So those actions allow us the flexibility to fully assess our position without having to make rushed decisions. In supply, our focus will continue to be on aggressively controlling both O&M and capital costs. But we're going to continue to evaluate other options that could increase value, but that's nothing new, quite frankly, in terms of our approach. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And then, I guess, just on the U.K. with the higher incentive revenues and continued better performance probably than we had expected, is that going to have any bearing on the outlook for earnings with the REO process completion relative to what you guys outlined this summer when you filed the REO case?

I don't -- yes, I don't think it would have a substantial impact on it, I think, other than to continue to show to Ofgem our capability to meet and beat their metrics and prove that, hopefully, that we are worthy of fast tracking of all the 4 distribution network operations. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And I guess, just one more. If you jump back to Slide 20 in your deck where you guys show the -- your kind of a fading CapEx outlook in '15, '16, '17, Bill, as you look out, are there opportunities to spend more capital or more projects that could layer into that number to lift up the grow rate, to lift up that level of reinvestment and what's in the bars, things like the Kentucky generation investment and that sort of stuff that we'll see these reinflate over coming quarters?

Yes. I think there will be opportunities, Dan. Specifically, I think in Pennsylvania, there will be transmission opportunities that aren't in the current forecast. I think in Kentucky, there'll probably be further opportunities as we go through time. So yes, I think there will be of those opportunities, and we'll just assess where do we best place the capital, the incremental capital that we want to spend and put it in the right spots. Dan Eggers - Crédit Suisse AG, Research Division: And I mean, do you see that being generation driven in Kentucky? Or is there more transmission distribution work that need to get done that maybe has gotten crowded out, for lack of better word, as you've had to spend a lot of money on generation?

Let me have Vic respond to that question.

The generation -- the new generation that we announced and Bill referenced in his earlier comments are reflected in the capital budgets that you see on Slide 20, I guess. Yes, there probably are some additional transmission and distribution opportunities out there, but the other thing that will drive us, frankly, will be new environmental requirements. Landfill, who knows what's going on with the EPA? And so I think you'll see us -- again, as we have done in the past, move forward on environmental expenditures. I would expect changing laws will create new opportunities for us on the capital side for our generation portfolio.

The next question is from Julien Dumoulin-Smith of UBS.

So perhaps just following up on Dan's question on the U.K. here, it looks like very robust expectations for 2013. Congratulations on that. Just kind of looking forward even here prior to the next reset, in '14 here, would you expect at least some of the benefits from this year to at least roll forward to next year? I mean, your guidance, I suppose, from the midpart of this year had $1.32 at the top end of that range, if you could just speak to that a little bit, particularly in light of the added revenues from the bonus side?

Sure. I think some but not all would carry over into next year, but let me ask Rick Klingensmith to give you a little more color on that.

Our range in forecast for next year was $825 million to $875 million, and we still forecast to be within that range. As Bill mentioned, we will see some benefits continuing into next year. The incentive revenues that we had announced here this morning helped in next year's performance, especially -- it's a partial year, so you'll get some of that benefit, and that will be mixed in with the $82 million that we had earned the previous year. And so that would be a nice blended element for us for next year. But you also have to recall that, over the years, volume does get normalized. So we don't have upside or downside related to volume, although we may see that within a year and that we're seeing that this year. If you recall back in our first 2 quarters earnings calls, we had mentioned that the long cold winter has benefited us this year. We will need to get some of that back next year in the tariff reset that occurs April 1. So when you kind of mix the carryforward of some of the good items that have occurred this year and net that with some of the tariff adjustments due to over recovery this year, we find ourselves still within that range of $825 million to $875 million for '14.

Excellent. Much appreciated. And then turning back to the supply business if you could, just on the Unit 1 at Susquehanna, just perhaps, do you -- is it that you don't perceive there to be issues at that first unit to the extent to which you did the latest testing? Or is it more that it is sufficiently safe to continue operating until the next refueling outage? Just give us an update overall on the blade issue?

Sure. It's really the latter rather than the former. But specifically, what we're -- we've been doing is monitoring the unit very carefully, and we have very strict parameters within which we're planning to operate the unit. And once we go outside the margin that we have identified as a safe margin, we would then have to look to make decision whether to bring unit offline. But so far, we're steady with the blade vibrations. And our outlook is that we're going to be able to continue to run the unit safely and reliably until the refueling outage in the spring of next year.

Great. And then quickly, in terms of maintenance CapEx, I mean, there's a lot of focus of late, obviously, on supply. Just what's a good run rate number there to think about for that business? I mean, obviously, a $400 million to $500 million in your disclosure's a bit just kind of on a run-rate basis.

Yes. It's $400 million to $500 million on the disclosure, but that also includes around $160 million to $170 million of nuclear fuel each year. So you have to back that off those numbers, so Julien,it's probably close to something in the $300-ish million range. It'll go up and down based upon major outages that we've got at the coal plants.

Got you. And last quick clarification, when you were talking about supply contributing positively to the corporate -- corporation in its entirety for the foreseeable future, just wanted to clarify that, that is prior to any contemplated cost cuts because I heard that, the same paragraph there.

That would include cost cuts that are either in play now or that would be impacting 2014 and 2015. But we have identified specific areas where Dave and his team believe we can get additional cost out. But we're very confident in those actions. They're doable actions and things that we've done in the past and believe we can do in the future.

Yes. And okay, one more clarification. That is excluding or assuming the sale of the Montana business, correct?

Yes, that is. Correct.

The next question is from Neel Mitra of Tudor, Pickering. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: A question on supply. Where would you say you're tracking on your hedging plan relative to your ratable strategy? It seems like you're about half of what you were hedged going into EI relative to last year. Is that something consistent with your past or maybe taking a view on the market in '14 and '15?

I think it's relatively consistent. We don't have, per se, a ratable program. We have more ranges that we look at in years 1, 2, and 3. Having said that, we're a little bit lighter hedged in 2015 than we might have been that third year, if you will, than we have been in the past. And some of that's just due to the lower floor prices that we're seeing and the view that we have that there will be opportunities between now and then to hedge at more favorable prices. And so for example, you saw 2015 prices hit the upper $40 on-peak range earlier this year. We took advantage of that, layered in a few more hedges. And we expect, with the volatility we have seen in the past in gas prices and power prices, that we'd continue to probably see those opportunities pop up from time to time, and we'll take advantage of those. So that's really what goes into our thought process when we look to hedge that far out. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay, great. And then could you maybe give us your updated thoughts on what the basis is between your plans and PJM West now that we have some cheap Marcellus gas pricing impacting your zone?

Sure, maybe I'll ask Dave DeCampli to comment on that.

Sure. Obviously, we're constantly monitoring TETCO M3 to Henry Hub discount. We take advantage of that basis differential on a number of ways. One, our -- of course, our gas plants benefit from that. Secondly, if economically we do end up having to curtail operations at a coal plant and buying back, that's a good thing for us as well, particularly in a year in which we're well hedged. On the downside, that impact, of course, continues to depress overall energy prices. But our diverse portfolio, we're able to work around that and take advantage of that situation. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: So longer term, I think, you guys said that you would be flat going forward maybe after 2015. What's your long-term base assumption?

Yes. I think we would continue to see it as being flat, and I think if some of the proposed pipelines taking gas from the Marcellus to other markets actually come to pass in that 2015-2016 time frame, I think that would be a reasonably good prediction if you will, but there are so many factors that play into basis differentials, as you know, that it is very difficult to predict those things. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay, great. And then just one last question. Paul, how much debt at the parent supports the supply business right now?

Yes. I wouldn't say any really debt at the parent supports the supply business, I think the debt at the parent was primarily issued to finance. The acquisitions, I think about it more on a total balance sheet perspective. We're targeting the investment-grade credit ratings across the complex. S&P looks at us in a total asset flow to debt basis. Moody's looks at the individual registrants and then steps back and looks at it in entirety as well. So I'm not clearly uncomfortable with the level of debt that's there. We're paying down debt and supply this year a bit, a little bit currently in the plan for next year as well. That plan was put into place well before we had an agreement to sell the Montana assets and to realize the almost $630 million in after-tax proceeds that Bill talked about. So the plan will get modified, if you will, and is fluid as we move through time and experience things like asset sales as well. So -- but I wouldn't look at it that it's there to support supply. I think it's really the 90%-ish of regulated earnings and those cash flows, as well as anything that really, if you want to call it supporting supply, that's really supporting the risk profile, the entire organization which supplied the benefit from.

Our next question is from part Paul Patterson of Glenrock Associates.

Just on the NOLs that forced an impact, how does that work out going forward? I mean, is that -- it means -- how should we think about the tax rate and how the $0.04 -- how we should see that sort of showing up next year and what have you?

Yes. So, Paul, you might recall back to 2010, we had a relatively significant release of tax reserves in that year. It's around $70 million, $75 million. We've rolled back a few cents of that each in the last 2 years. And with this $0.06 impact this year, there's only $0.01 remaining in terms of total exposure on the balance sheet that could get rolled back in if we saw a further decline. Basically, we'll have fully reserved up the NOLs and you wouldn't see a balance sheet exposure for us and, therefore, there wouldn't be future negative EPS exposure either.

Okay. So it's sort of a one-timer.

Correct. And that's kind of how we highlighted in 2010 as well. We, historically, haven't carved out or special item-treated tax items, unless it's a tax law change like the statutory rate decrease in the U.K. So we call those out for you when we experience them, but it's not -- it doesn't impact ongoing -- as I said in a response to some of these earlier questions, this is a 20-year forward-look at and looking at the useful life of these NOL carryforwards, and so it's relatively small movement that can have somewhat of a material impact, but it is noncash and not ongoing, if you will.

Okay, great. And then, when we look at the -- what are the NOLs net of reserves that you guys have left on your balance sheet?

So on this PA NOLs, the state-based NOLs, it's around $1 billion. Again, that's fully reserved up. On an NOL, I call it an NOL equivalent basis, so in excess of $1 billion that we purchased effectively in the Kentucky acquisition, all of this bonus depreciation that's been -- that's been impacting us for the last several years were a little under $3 billion in NOL equivalent value that we, on a federal basis, that we got warehoused. That's one of the reasons, for example, why there is no cash tax paid on the sale of Montana asset is we can shelter that with the NOLs.

Okay. With the sales growth outlook now given the last couple of years what we've seen and what have you, what do you guys think now going forward?

Sure. On an overall basis, looking at Kentucky and Pennsylvania, we would see sales being flat to slightly positive on an ongoing basis. And it's going to be clearly reflective of the strength that the economy is as we get to '14, '15, '16. But we do think that our expectations should be more conservative compared to where they were a couple of years ago, because all of the energy efficiency conservation, other impacts to demand that I think are more systemic than just purely economically driven.

Great. And then you were talking about the RPM Auction and all the things that are happening there, and you also mentioned sort of transmission opportunities, which made me think about this recent IPSAC meeting at PJM regarding mark-to-market congestion between MISO or another market -- between MISO and PJM and sort of transmission opportunities. And I was wondering what your thoughts are with respect to sort of dozens and dozens of projects sort of aimed at alleviating the mark-to-market congestion. This is outside the rule changes that they're potentially talking about with DFAX and everything. I'm talking about just the efforts to sort of resolve that physical constraint, the seams issues, so to speak, and what it might mean for the long-term outlook for supply and whether that's figured into your EPS positive outlook?

Sure. It is figured in to the extent we know about the projects, and many of them we do because they take so long to plan and engineer and then construct. So we have pretty good visibility I think into those projects. I think in terms of the transmission opportunities side, it's really a question of will those congestion pockets, if you will, continue into the future and how long into the future. Some of the congestion or negative basis that we've seen is driven by the transmission projects that are underway today. So as we experienced outages on a grid to take care of some of these congestion issues, it's creating what I would say are temporary congestion sometimes in a different direction than we've seen in the past. So I think you have -- taking all that into account, I don't know that there is a material impact in the next several years on our supply business output. Longer-term, difficult to say.

Okay. And then just finally on the environmental, you guys mentioned that there was a potential additional environmental CapEx associated with, I guess, coal ash and what have you. And I was wondering is that sort of regulated like in Kentucky? Or is that sort of non-regulated or any sense as to where you're looking at those CapEx issues?

Yes. That would be on the regulated side in Kentucky that we were discussing earlier. And really, I think in response to what may come out of greenhouse gas initiatives by the EPA for existing units, of course they made some proposals on new units but, as Rick also mentioned, there's still, I would say, debates and discussion around 316(b) water issues as well as coal ash handling and storage issues.

Our next question is from Jonathan Arnold of Deutsche Bank.

Could you guys give some sort of a sense of how you see the net impact of the Montana sale and the reworking of the Colstrip lease in terms of earnings?

Sure. We would expect the transaction to be modestly accretive to earnings and cash flow.

So that's on a -- starting in 2014 basis, Bill?

Probably 2015 would be the first full year. 2014, we would expect the transaction to close some time in the second half. So I would look at the first full year of impact would be 2015.

And could you guys kind of give us a little more insight into the components of that analysis?

Paul, do you want to...

Yes. It would come from kind of multiple perspectives. When would you look at on a forward basis, where the margins minus the O&M and depreciation were in the assets, we worked hugely positive on that front. And then from an outright financing perspective, with the payoff of the Colstrip lease and basically refinancing that future obligation at much lower rates factor everything in, as Bill said, both cash flow earnings positive for us.

Okay. Since it's kind of neutral on the hydro contribution and then gets positive on the refinance on the lease, basically?

Yes. Really, all of Montana, as we were getting -- as were intimating and keeping all of supply positive, the West was not any materially different than the East in terms of the flat to slightly positive earnings going out into the future. So those were Runner River hydro assets, very good assets. That earnings profile of that subset of supply was -- looked just like supply in entirety so.

Our next question is from Shahriar Pourreza of Citigroup.

Two questions just focusing on the U.K. With the initial assessment being potentially being released at the end of November, is there still an opportunity for you to make the final determination if you don't make the initial assessment in what would Ofgem use as a prerequisite to potentially add you, in case you don't make it?

I'll ask Rick to comment on that.

Yes. If you don't make the initial assessment on the fast-track draft determination, it is a not possible for you then to make the fast-track determination. In essence, so Ofgem will be creating a short list of those that could be fast tracked and continue through the process to get that final determination in February of 2014.

Got it, got it. And then just one question on the U.K. policy, there's been a lot of chatter as far as trying to curtail electricity rates. And a lot of what you're hearing is everything from government intervention to windfall taxes to potential tariff freezes. And a lot of it has just, for now, been really focused on generation. The question is, can you see that being secant to the distribution and transmission business? Or do you think a lot of what you're hearing from the Labour Party is really focused on generation?

You're correct. It has been focused on generation and marketing companies as well. It has not thus far been on the infrastructure itself. And Cameron's recent comments around his look at the picture, what's really focused on some of the green initiatives and the incremental cost in the tariff of the green programs. So thus far it has not been a focus for our segment of the business. And as you can imagine on the total bill side, the distribution component of the bill, is literally one of the smallest pieces of the bill. So it's probably reasonable to assume that they would focus on where the greatest portion of the bill is coming from.

Our next question is from Michael Lapides of Goldman Sachs.

A couple of items, supply and then bigger picture stuff. First at supply, I noticed that the 2015 coal -- delivered coal price is actually down from the '13 and '14 levels. Just curious, is that rail or is that the actual cost of tonnage?

Sure Michael. Let me ask David DeCampli to comment on that.

It's primarily actually the cost of the coal itself.

Got it, okay. Second, have you ever quantified the potential for O&M cost management and supply?

We -- Yes, sure. We have -- Dave, do you want to talk about some of your targets and...

Yes, sure. In supply, we -- of course, we have 2 streams of O&M cost in the business. One is those within supply then the corporate services cost. We got initiatives in play to reduce cost in both sides of the formula and had good success over last year and in the forecast plan as well. In reducing cost, it's also affected operations. We've been able to take O&M growth to 0 at our nuclear facility, for instance, through streamlining and cost-cutting initiatives. Of course, our coal fleet has taken a good brunt of those reductions with it seeing some reduced operations, installed efficiencies and things like that. But we're not leaving any stone unturned in the business or for those who support our business.

Okay. So I mean, when you think about O&M at supply in x Montana, like apples-to-apples comparison, up, down, flat, neither, something else kind of just big picture directional over multi-years.

Well, very slightly with Montana. It will be a little bit of a push up in overhead over the remaining assets. We'll still be operating our marketing operation in Butte. We'll still need some of the overhead support for Colstrip and Corette, as long as we run Corette. There will be a little bit of the pick-up impact there, but I wouldn't call it material. We'll be able to able to handle that. So overall, it's probably safe to say that our target, our plan is to maintain cost at or below where they currently are today.

Including inflationary impact...

Yes. That's right. So net-net, the direction would be flat to negative.

Got it. Real quick, Paul, you commented a little bit on cash taxes. Do you expect to be a full noncash taxpayer? And if so, for how long?

I wouldn't expect that we will be paying taxes at the federal level until 2018, at the earliest.

Okay. So you see kind of tax -- the delta between GAAP taxes and cash taxes as being kind of a sizable cash flow benefit.

That's correct, that's correct. And we obviously don't know yet on our corporate tax reform basis what they're going to do, if you will. If they're going to extend any of the current 50% bonus, that's not been necessarily a benefit to this sector. Anyway, I don't think it's driven $1 of incremental spending, but we need to see how that plays out as well. If they extended any of that, that could push it out even further.

Got it. And finally, Bill, when you look across the industry and think longer terms, I mean, you guys were one of the -- only a handful of companies who I think made very transformative M&A-related transactions that literally changed the shape of the company. When you look now, a couple of years removed from those transactions, how are you thinking about where the opportunity sets, if any exists across regulated, nonregulated U.S., non-U.S. electric and gas or other businesses, kind of how are you thinking about what you want the shape and where the opportunities lie, if any, in regards to long-term M&A?

Sure, I will. We're fortunate that with all of our 3 regulated entities, U.K., Kentucky, Pennsylvania, we have great internal growth opportunities, so organic growth, if you will. We can see that through our CapEx spending plans that we discussed earlier on the call. We don't see that as something that's going to, all of a sudden, just hit a cliff. So I think there's going to be ongoing opportunities just within the businesses themselves to grow on a reasonable basis. In our case, we have one of the higher growth rates in the sector, almost an 8% CAGR. So we would continue to see that. I think in the supply area, our guess is that there's going to be more consolidation if gas prices continue to stay, and power prices, at the low levels that we're seeing them in the forwards and today. So I would fully anticipate more M&A in that area of the industry than I would in the regulated side. Not to say that there couldn't be M&A on the regulated side, but as you're well aware, those premiums that are required to engage in an acquisition can be difficult to overcome through synergies when many times you have to give some of that synergy back to the rate-making process. So that can be difficult to accomplish on an accretive basis. So beyond that, clearly, there is a potential in the country with low gas prices to see more industry coming to the areas that have the lowest cost natural gas prices. And we we're seeing some of that. I guess how much of that we see is going to be depended on a lot of things, including taxes, local market conditions, labor, et cetera. So we'll see how that all transpires. We do see a trend, I guess, in people converting vehicles to natural gas. So I mean, that's a trend that we would expect to continue. Same on the electric side with electric vehicles, not necessarily in our territory per se, but overall we see that as a trend. So that's just a couple of general thoughts.

The next question is from Rajeev Lalwani of Morgan Stanley.

Just -- the first question is on the U.K. In the event you're not fast tracked, would it be possible -- or not fast tracked entirely, would it be possible, just based on how you filed your business plans for at least some of the utilities there to be fast tracked? And then a follow-up on the supply side.

Sure. It is a possible one or more of the distribution network operators could be fast tracked. It doesn't have to be -- it's not an all or nothing.

Okay. And then just based on how you filed the actual business plan, is there much of a difference between the various utilities there?

There is not. I think all the initiatives across the network are very common and the spending is also pretty levelized across the companies.

Okay, got it. And then just on the supply side, it seems like you've done a great job with finding costs to offset the weakness in gas prices. But just generally, as you've seen prices come down, how has it changed your view in terms of the -- your strategic thinking around those assets longer term?

Well, it certainly places a higher risk level on the assets and the business overall than we might have expected going back a couple of years. However, we recognized that we need to be resilient and flexible in our approach and that's what I think you hear us saying. When I look at every opportunity and as Dave DeCampli has said he's going to leave no stone unturned in terms of finding additional value in the business. So as I mentioned in previous remarks, we're going to continue to look at opportunities in the business to make it leaner and as profitable as it can be. And other opportunities and even options we'll continue to look at as well. Anything that could increase the value we're going to look at.

The next question is from Steven Fleishman of Wolfe Research.

My questions are answered.

The next question is from Gregg Orrill of Barclays.

I was wondering if you can talk about your performance in the recent U.K. storms?

Sure, Greg. I'll let Rick comment on that.

Yes. The St. Jude storm that we saw at the beginning of this week was probably the most severe storm that has affected England in over 10 years. Over the storm period, we experienced wind gusts up to 75 miles an hour and we saw power outages for about 53,000 of our customers. In all, about 200 of those customers were restored within 12 hours and all customers were restored within 18 hours, which is the Ofgem standard for this type of event. The damage and the effects of the storm were much more severe in South and Southeast England versus in our territory. And we were able to provide over 100 staff to help restoration efforts in the U.K. power networks territory.

The next question is from Anthony Crowdell of Jefferies.

Just 2 quick questions, a follow-up on a debt question earlier, I just want to know what the level of debt at the parent is. I guess you said there's some debt at the parent that helped finance the whole organization. If you can tell me something the level of that debt. And the second question is related to the regulated utilities. What's your earned ROE at your Pennsylvania, Kentucky and, if you had, for the U.K. utilities?

Sure. On the Pennsylvania side, it's probably in the upper 9% range on a regulated basis, on the kind of the regulatory filing basis. Vic, do you want to...

The Kentucky, this year, will be between 9% and 10%.

And the -- in the U.K., Rick?

Yes. Though in the U.K. we're about 18% including the effects of goodwill in that formula.

And at the parent company, there's roughly $2.5 billion of that -- $2 billion, $2.1-ish billion that came as a result of the acquisitions: the $1.150 billion for Kentucky; and a little less than $1 billion, $988 million, $987 million for the U.K. acquisition; and then we've got a deeply subordinated deal that we did earlier this year that was around $400-ish million.

Great. And this is like a follow-up on the U.K. ROE, the -- just I'm not sure, how does the goodwill impacting? I mean, is the goodwill -- you're saying you're earning off the goodwill portion, is it like in RAV? Is it-- am I thinking that the right back?

No, we're not. And none of the jurisdiction is goodwill an assets that you can earn or return on, so that's basically all equity-financed and you see that driving the, I'll call it the "with goodwill" ROE down.

The next question is from Angie Storozynski of Macquarie.

I have 2 questions. First, on the supply business, your hedge disclosures continue to include the hydro assets. If I were to strip them out, is there going to be any meaningful change as far as the percentages of hedged volumes and prices for the baseload west?

Yes. That would come down somewhat of the roughly 8 million megawatt hours a year that we get in Montana, about 3 -- what, maybe 3.2 now with the rain [indiscernible] upgrade of the hydro system.

But how about prices hedged?

There will not be a differential in the in the hedged price. And if you recall, one element of the agreement with Northwestern is that at close of the transaction, we would just let settle any mark-to-market so that they did not end up with extra length in their book to serve customers. So that'll get -- that'll come down to the extent that there are material hedges with them outstanding at that point in time.

Okay. And now back to the U.K. I mean, your RIIO is still a new mechanism, and if I understand correctly, the fast track, the approval of the fast track means that your request, as far as new revenue levels is basically accepted as is? And if I compare your applications to applications of other utilities in the U.K., it seems like you're asking about slightly higher returns than your peers. So I mean, how do you -- do you think that, that more aggressive of a filing might impact the or ability to actually get -- to get fast tracked?

Well, first part of your question, if you're fast tracked, it is accepted as is, so that your plan as filed is deemed to have been fully justified. But we are not requesting a different ROE than anyone else. It's a generic make up of the debt and equity in the rate-making process there. So the cost to capital is kind of plain vanilla. And everyone really is measured on the same basis. And I think we're required to file on per the instructions of Ofgem.

I'll just add, the filing that we had made was for a 6.7% real cost of equity and I believe the majority -- maybe all but one have that same request for that return on equity.

But how about incorporating all other incentives -- performance incentives, et cetera, et cetera? Wouldn't that actually give you a slightly higher margin your operations versus what we can see in other filings?

Well, the other filings were not necessarily incentives included. There are targets for your levels of performance into the future and you may have the opportunity to surpassed those targets in the future, but there's no specific values associated with the incentives that you'll see in RIIO plan.

Yes. It's not in the base revenue that you see in the plan.

Our last question today will come from Nathan Judd -- I'm sorry, Judge of Atlantic Equities.

I just wanted to ask a little bit more on the disclosure supply. You have brought back your generation expected generation from -- in the east. Can you just give me why that's the case? Is that Susquehanna, or what's driving that?

Sure. Dave, you wan to...

Yes. There's 2 primary drivers. One, of course, was the line outages at Susquehanna, and we also had an unexpected outrage in our Brunner Island station that affected it as well. Those are the 2 prime drivers.

Going forward in 2014 and '15?

Could you repeat your question for '14 and '15. please?

Sure. So I believe when you presented last -- you had a presentation which showed 50.4 million megawatt hours with 41.8 terrawatt hours in the east. And you're looking for kind of 40.6. And I'm just kind of wondering why you're bringing down your projected forecast for output in 2014 and '15?

Yes. It's the extension of these turbine blade outages intended for Susquehanna that is the primary driver for the lowering of that for 2014 and '15 at this point.

When I look at how your coal plants have performed year-to-date, your production from those coal plants are obviously down from last year, how are you seeing, given the low power price, and how do we think about the variability in the coal production?

Well, the -- if there is a -- the variability is primarily driven by our choice to economically take them out of service. At times when prices would dictate, we're able to take advantage of that buyback from the market and do well that way. I think you should be able -- you should expect that type of variability in the future. We can't always predict what those periods exactly will be. So expect a little bit of volatility in those numbers as the years unfold.

So that -- your hedging...

Sorry. So that reduction that you referenced between the previous forecast and the current does reflect both our forecast of coal plant output, and onetime, based on economics and with lower gas prices, you're going to see a little bit less run time and also changes at Susquehanna. So those 2 things combined are really driving the lower output on a period-to-period basis.

How much [indiscernible] can you take that down given your core hedges? 77%? I mean, at certain point, you've got to run your coal plants. At what point do we see economic losses begin to be realized?

I don't think in the forecast we would even get close to that type of a situation. And we have built into some of our coal contracts' flexibility. And to the extent that the flexibility is not already built-in, we've been successful at working with our coal suppliers to manage our inventories and our burn. So I think this far, we don't see that as a potential problem. Okay. Thanks, everyone, for joining us today. And we look forward to our next quarterly call.

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