PPL Corp (PPL) — Q2 2016 Earnings Call Transcript

Thank you. Good morning and thank you for joining the PPL conference call on second quarter results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com. Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to differ is contained in the appendix to this presentation and in the company's SEC filings. We will refer to earnings from ongoing operations or ongoing earnings, a non-GAAP measure, on this call. For reconciliation to the GAAP measures, you should refer to the press release which has been posted to our website and has been furnished with the SEC. At this time, I would like to turn the call over to Bill Spence, PPL's Chairman, President and CEO.

Thank you, Joe. Good morning, everyone. We're very pleased that you've joined us this morning. With me on the call today are Vince Sorgi, PPL's Chief Financial Officer, and the presidents of our U.S. and U.K. utility businesses. Moving to slide 3, our agenda this morning starts with an overview of our quarterly and year-to-date 2016 earnings results. We will also provide an update to our 2016 full-year earnings guidance, which we are reaffirming today. We will then turn our discussion to the impact that the U.K. decision to leave the European Union has had on PPL. We are also initiating earnings guidance for 2017 and updating our long-term EPS growth rates. Following my remarks, Vince will review our segment results and provide an overview of the assumptions we've used in planning for growth through the end of the decade. As always, we'll leave time to answer your questions. Turning next to slide 4. Today, we announced second quarter 2016 reported earnings of $0.71 per share compared with the reported loss of $1.13 per share in the second quarter of 2015. Second quarter 2015 results reflected a one-time charge of $1.50 per share from discontinued operations associated with the June 1, 2015, spin-off of our Supply business. Year-to-date through the second quarter, reported earnings were $1.41 per share compared with a loss of $0.17 per share through the same period in 2015. Reported earnings for the first six months of 2015 reflect a loss from discontinued operations of $1.36 per share, primarily from the Supply spin-off. Adjusting for special items, second quarter 2016 earnings from ongoing operations were $0.56 per share compared with $0.49 per share a year ago, representing a 14% increase on a per share basis. This increase was driven largely by higher base electricity rates at our Pennsylvania and Kentucky utilities along with higher transmission margins from additional transmission investments in Pennsylvania. Through the first six months of 2016, earnings from ongoing operations were $1.23 per share compared with $1.26 per share a year ago, with the lower earnings year-to-date driven by the lower U.K. earnings in the first quarter of 2016 due to the RIIO-ED1 revenue reset that occurred in April of 2015. Vince will go into greater detail on second quarter results a little later in the call, but we're very pleased with the results for the second quarter and so far this year. Moving to slide 5. Today, we're reaffirming our 2016 ongoing earnings forecast of $2.25 to $2.45 per share with a midpoint of $2.35 per share. The higher-than-expected results in all of our business units so far this year give us a high degree of confidence in our ability to meet our 2016 earnings forecast. We continue to execute our plans for sustainable growth across our seven high-performing utilities while delivering award-winning customer service, strengthening reliability, and improving our efficiencies. And to reflect the current market for the pound, our 2016 forecast now assumes $1.30 per pound on our open positions. Turning to slide 6. Looking beyond 2016, the fundamentals of the business remain strong. Despite the recent U.K. vote to withdraw from the European Union and the resulting weakening of the British pound sterling exchange rates, there is no change in our underlying business in the U.K. Our revenues are set for seven more years. We are essentially sheltered from an economic recession since we would be made whole in future periods for any volume variances that may result from an economic slowdown in the U.K. Our base revenues are also adjusted for inflation using the retail price index, or RPI. The July RPI forecast has actually already increased from the forecast published just a month ago in June. Further, we expect no change to our investment in infrastructure since our business plans have already been accepted by Ofgem, the U.K. regulator. The volatility created in the currency markets, however, does have an impact on our U.S. dollar financial projections. The lower pound exchange rate will impact our translated earnings and the WPD dividend coming back to the U.S. Moving to slide 7. We know that without providing updates to our earnings growth profile, there will continue to be uncertainty for investors regarding our longer-term earnings profile, given the sharp decline in the British pound exchange rates. With no near-term catalyst suggesting a move higher in the pound, we took action to update our business plans to reflect current market conditions, starting with the monetization of our existing 2017 and 2018 hedges, which I'll discuss in more detail shortly. Today, we're providing new earnings growth projections and a target dividend growth rate as well as updates to our U.K. cash repatriation and FX hedging strategies, all of which should provide clarity around our earnings and dividend targets through the end of the decade. The post-Brexit decline in the pound sterling drove our existing foreign currency hedges to be about $450 million in the money, which we don't believe is being appropriately reflected in PPL's stock price. We believe investors value the company largely on an open basis, excluding the value of these hedges. As a result, we were looking for an opportunity to optimize the value of these existing hedges. We decided to monetize the gains associated with our 2017 and 2018 earnings hedges, capturing approximately $310 million in value. This monetization, in combination with the higher-than-expected gains on the remaining 2016 hedges, will offset lower expected cash repatriation amounts from the U.K. due to the lower expected exchange rate, providing about five to six years of coverage and supporting the company's future dividend growth. Cashing in the hedges resulted in us remarking our future earnings using current market rates, which is expected to result in 2017 earnings being lower than 2016 earnings. Since we didn't believe we were receiving credit in the stock price for the hedges, we felt it was prudent to lock in their value and protect our dividend growth despite the resetting of our future earnings. We have reestablished hedges for 2017 and 2018 at current foreign exchange rates at slightly higher hedge levels than existed prior to the monetization. We've updated our business plan to reflect current market conditions, including a $1.30 foreign currency rate on unhedged positions from 2017 through 2020. Re-hedging about 95% of the 2017 U.K. earnings at current rates protects the 2017 earnings guidance that we are providing today against any further near-term decline in the pound, and resetting our unhedged earnings in our business plan to the $1.30 exchange rate allows for potential upside to our earnings projections if there is a recovery in the pound. We are also announcing an update to our cash repatriation strategy, with an expectation of lower amounts being repatriated from the U.K. going forward. On an annual basis, we will determine the appropriate level of distributions from the U.K., considering foreign exchange rates as well as tax rates in both the U.S. and the U.K. In the near term, we anticipate that we would repatriate about $100 million to $200 million annually. Vince will provide more details on this updated strategy in his prepared remarks. The actions we have taken reinforce our dividend growth projections and reestablish a baseline of PPL earnings and future earnings growth reflective of the Brexit decision, the current market, and our underlying business growth. Today, we're providing a 2017 guidance range of $2.05 to $2.25 per share for PPL with a midpoint of $2.15 per share. We expect per-share compound annual earnings growth of 5% to 6% from 2017 through 2020 based on the midpoint of our 2017 guidance. Moving forward, we will continue to maintain a strong balance sheet and strong cash flows, and our investment-grade credit ratings remain unchanged with a stable outlook. Finally, as I mentioned earlier, with the cash-out of the hedges, we are not changing our expectation of a more meaningful dividend growth beginning in 2017. We're now targeting dividend growth of about 4% annually through the end of the decade. This will forecast our total return proposition to be in the 8% to 10% range over this period. While we did not anticipate the U.K. will vote to leave the EU, after careful consideration with our board of directors, we decided to take these actions now as it recognizes the reality of the current market conditions and reflects the underlying growth of the business, allowing us to focus on providing safe, reliable service to customers and delivering long-term value for shareholders instead of being overly focused on the FX rate. Turning to slide 8, we prepared a walk from the midpoint of our 2016 earnings forecast of $2.35 per share to the $2.15 per share midpoint of our 2017 earnings forecast. As shown on the slide, there's a $0.20 per share decline from 2016 to 2017 directly attributable to the impact of resetting the exchange rate to the updated hedge rate of $1.32 per pound. The U.K. earnings, excluding currency, are expected to be $0.04 lower in 2017 compared to 2016 due to lower incentive revenues discussed on prior calls. The higher depreciation and interest expense are offset by the annual price increase under RIIO-ED1 in the U.K. We forecast both the Pennsylvania and Kentucky regulated segments to be $0.02 higher in 2017 compared to 2016 due to higher margin drivers. Corporate and other expenses are expected to be relatively flat year-over-year. Moving on to slide 9, our business fundamentals and investment proposition have not changed significantly. We still expect strong compound annual rate base growth of about 5% from year-end 2016 through 2020 with the rate base expected to grow to $29 billion by 2020. The constructive regulatory climate in which we do business remains the same. We still expect about 80% of our $12 billion infrastructure investment over the period to receive real-time recovery. Our core business continues to grow, supporting our longer-term growth projection of 5% to 6% from 2017 through 2020. At this point, I'd like to turn the call over to Vince to walk you through a detailed look at segment earnings and a full review of the detailed assumptions used in planning for our updated guidance. Vince?

Thank you, Bill, and good morning, everyone. Let's move to slide 11. Our second quarter earnings from ongoing operations increased by $0.07 per share, driven primarily by higher earnings from the Pennsylvania regulated segment and the Kentucky regulated segment, while the U.K. regulated segment remained flat compared to a year ago. Corporate and other costs were slightly favorable compared to the prior year. We should note that for the second quarter compared to the prior year, domestic weather was relatively flat and weather was about $0.01 positive compared to budget. Let's move to a more detailed review of the second quarter segment earnings drivers, starting with the Pennsylvania results on slide 12. Our Pennsylvania regulated segment earned $0.11 per share in the second quarter of 2016, a $0.04 increase compared to the same period last year. This increase was primarily driven by higher gross margins due to higher distribution margins resulting from the 2015 rate case that became effective January 1, 2016, and higher transmission margins due to additional capital investments. Moving to slide 13. Our Kentucky regulated segment earned $0.11 per share in the second quarter of 2016, a $0.02 increase compared to a year ago. This result was primarily due to higher gross margins from higher base rates effective July 1 of last year. Turning to slide 14. Our U.K. regulated segment earned $0.36 per share in the second quarter of 2016, the same as a year ago. This result was due to higher gross margins primarily resulting from higher prices due to the April 1, 2016, price increase, partially offset by one month of lower prices from the April 1, 2015, price decrease from the commencement of RIIO-ED1. Higher margins were offset by higher depreciation and interest expense as a result of continued investment in CAPEX, and the lower O&M expense of $0.01 was offset by unfavorable FX of $0.01. Let's move to slide 15 and take a closer look at our earnings growth drivers. As Bill discussed, we are initiating our 2017 earnings guidance range of $2.05 to $2.25 per share, with a midpoint of $2.15 per share. We now expect a 5% to 6% long-term compound annual growth rate off of the 2017 midpoint of $2.15 through the end of the decade. The key drivers in support of this new guidance include updating the GBP exchange rate to $1.30 per pound for all open positions and updating RPI using the July HM Treasury forecast for the U.K. economy. We have also updated our U.S. and U.K. interest rate and pension assumptions to incorporate a lower-for-longer interest rate environment. As Bill indicated earlier, we're targeting a dividend growth rate of about 4% per year through 2020, starting in 2017. Our assumptions for the 6% to 8% growth profile for our domestic utilities include the same strong growth factors as previously discussed, including domestic rate base growth of about 5%, minimal load growth in both Pennsylvania and Kentucky, transmission spending under FERC formula rates in Pennsylvania of between $600 million and $700 million per year, totaling about $2.6 billion over the four years, and between $350 million and $400 million a year of continued environmental investment in Kentucky at an ROE of 10%. Over the four years, we expect to spend about $1.5 billion of environmental CAPEX in Kentucky. Just this week, the Kentucky Public Service Commission approved our $1 billion environmental costs recovery plan with a 9.8% ROE. Moving to the U.K., the updates to the business plan reflect the macroeconomic impact following the U.K. referendum. We now project 4% to 6% growth in the U.K. from 2017 through 2020. The plan incorporates a $1.30 per pound FX rate on our unhedged earnings from 2017 through 2020. With the monetization of the 2017 and 2018 hedges, we entered into new hedges for those years at current market rates. I'll discuss the hedge levels and the average rates we attained when we get to the foreign currency hedging status slide. RAV growth is expected to be 5.4% through 2020, driving segment ROEs in the 12% to 14% range. We've also incorporated an update on the U.K. incentive revenue. Estimates are now $85 million for 2017, between $80 million and $100 million for 2018, and between $95 million and $115 million for 2019 and 2020. These estimates for incentives have been adjusted for the assumed change in exchange rates and RPI as well as expected performance against those targets. You will find our progress against the 2016 and 2017 regulatory year targets in the appendix to the presentation. WPD's performance continues to be very strong and is on track to exceed the new target. We've incorporated new RPI assumptions to reflect the latest forecast published by HM Treasury in late July. This forecast shows a slight uptick in RPI from previous forecasts and we continue to expect an effective tax rate in the U.K. of approximately 17%. Moving to slide 16, I'd like to review our updated cash repatriation strategy from the U.K., as this strategy has been modified beyond just the lower FX rate. Our previous guidance on cash repatriation from the U.K. was to distribute between $300 million and $500 million per year with a target of $400 million, assuming an FX rate of $1.60 per pound. We previously indicated the amount of repatriation within that range would depend on several factors, including the FX rate. The targeted $400 million per year represented distributions of about £250 million per year. That £250 million, translated at $1.30, would result in U.S. dollar distributions of approximately $325 million. This lower value of $75 million per year does not immediately impact us from a cash perspective, since the money hedge value of about $450 million provides about five to six years of coverage against that lower U.S. dollar amount. The hedges kept us whole from a cash perspective, and with the historically low FX rate and higher corporate tax rates in the U.S. versus the U.K., we have an opportunity to optimize our cash coming back from the U.K. even further. We are currently planning to repatriate between $100 million and $200 million per year in the near term. This lower cash amount will minimize the amount of translation impact on cash from the U.K. at these historically low exchange rates. We will replace the lower repatriation level with debt in the U.S. Debt in the U.K., however, will be reduced by the same amount. Therefore, total debt at the PPL consolidated level will remain unchanged. This shift in borrowing from the U.K. to the U.S. captures the benefit of the tax rate differential between the two countries. This benefit becomes more pronounced as the U.K. continues to reduce their corporate tax rates. Since the distributions are reducing our U.K. tax basis, these lower distribution levels also extend our tax-efficient cash repatriation strategy well beyond our original expectation of 2021 or 2022; and on an annual basis, we will continue to evaluate the most efficient level of cash repatriation, taking into account prospective changes in the exchange rate, tax rates in both the U.K. and the U.S., as well as our overall tax strategy. Moving to slide 17. The primary change to our revised capital plan is updating the U.K. projections for 2017 through 2020 based on an FX rate of $1.30 compared to the $1.60 previously used and the average rate of $1.37 for 2016. We are not projecting any impact on the U.K. capital forecast in local currency as those business plans have been accepted by Ofgem. On a U.S. dollar basis, we are now investing approximately $1 billion annually in each of our three business lines, and the five-year spending plan from 2016 through 2020 is about $15.4 billion. Moving to slide 18, we have also updated our rate base growth projections and shown updated RAV balances to reflect the $1.30 FX rate assumption. Our overall growth rate of 5% has decreased slightly as we have reset our base year to 2016. To enhance comparability, we have assumed $1.30 per pound for all periods. Moving to slide 19, as discussed earlier, at the same time we monetized the 2017 and 2018 hedges, we implemented new hedges at slightly higher levels at current market rates. You can see our average hedge levels for 2017 and 2018 and the average rates achieved when we imposed the new hedges. We used forward contracts to hedge 2017, which locks in the new guidance provided for 2017 from an FX perspective. We employed a combination of forward contracts and zero-cost collars to re-hedge 2018, protecting the downside below $1.30 while retaining some upside potential above the rates shown on the slide. We've also provided updated sensitivities showing there is more upside potential for 2018 than downside risk, given the collars. Still, the rule of thumb of a $0.01 movement in the FX rate equating to a $0.01 movement in EPS still applies for a fully open year like 2019. Moving to slide 20, our updated forecast assumptions are shown for RPI, again using the July HM Treasury forecast of the U.K. economy. The rates for 2017, 2018, and 2019 have been incorporated into our updated revenue projection. The RPI sensitivity for a 0.5% movement is now off our updated forecast and would increase or decrease earnings by $0.02 in 2018. I know that was a lot of information, so let me just recap. We felt the most appropriate course of action in light of Brexit was to, one, monetize the large mark-to-market value of the hedges, preserving our dividend growth strategy for the PPL dividend; two, update our business plan to assume a $1.30 per pound FX rate for all open positions, thus rebasing our earnings projections for 2017 forward; three, provide a clear path for earnings growth beyond 2017 through the end of the decade based on the underlying growth of both the U.S. and U.K. businesses; and four, optimize our strategy of U.K. cash distributions back to the U.S. by lowering the amount of distributions to the minimum required, capturing the tax rate differential between the U.S. and U.K., and preserving our tax-efficient cash repatriation strategy for considerably longer. An added benefit of this approach is that if the pound or RPI increases over time, that will be upside to the new EPS forecast and growth rates we just provided. That concludes my prepared remarks, and I'll turn the call over to Bill for the question-and-answer period. Bill?

Thank you, Vince. Before we take your questions, let me just say that we had another strong quarter, and we remain confident in our plans for future growth. I believe today's actions are very important because they provide clarity and transparency in our response to the U.K.'s decision to exit the EU. By providing longer-term earnings expectations, our actions illustrate the confidence we have in the strong business fundamentals of our seven high-performing utilities. It was clear to us that the volatility in our stock was correlated to changes in the pound, and the benefits of our financial hedges were not being reflected in our valuation. By monetizing those hedges, we have not only secured our dividend growth objectives, but our earnings growth is now clarified on a foreign currency basis that more accurately reflects the current market. Clearly, Brexit was a unique event, but our positive view of the U.K. business model remains unchanged. PPL's senior management team is committed to delivering 5% to 6% annual earnings growth through 2020. The premium utility jurisdictions in which we operate provide us with confidence in our ability to deliver this growth. We will continue to build on this foundation, seeking additional ways to provide value to shareholders and our customers. With that, operator, let's open the call to questions, please.

Good morning, Greg.

Oh. Hi. Good morning. Sorry about that. So, absolutely the right decision to reset the currency hedges from my perspective. I just have one clarifying question and I thought your presentation was pretty clear, but when you look at the balance sheets of the U.K. versus the U.S. entities, presumably before you were going to be leveraging up a little bit in the U.K. in order to repatriate that cash. Now, you're going to have a higher equity capitalization in the U.K. But where on the U.S. corporate structure are you going to be issuing the incremental leverage, and how does that change in the capital structure in the U.K. flow through the U.K. earnings? Essentially because you have an eight-year deal, the real cost of capital will essentially now be slightly different than the prior projected cost of capital. I'm sorry I'm asking a belabored question, but I just want a little more details on how to bridge the cash flow.

Sure. No, I understand. Just a couple of comments, and then I'll turn it over to Vince. Yeah, you're absolutely right. The capitalization program for the U.K. is going to be different. As you recall in the past, we were looking at leverage at the U.K. holding company over time approaching 80% to 85%. That's more likely now to be down around the 75% level. That's going to give us about $1 billion, roughly, of headroom for future investments from the U.K. once the exchange rates settle out and we look at the financial strategy for the U.K. going forward. So that's one – clearly one piece of it. Maybe Vince, you can take the other elements of the question.

Sure, and I'll just follow up on that. So that borrowing, generally, Greg, was up at the WPD holding company level, so it wasn't part of the rate-making within the U.K. It did help drive the higher ROEs at the segment level because the debt was up at the holding company level, but it doesn't really impact the revenue projections within the U.K. And then the U.S. entity would be PPL Capital Funding, which would be the one issuing that debt to replace the lower amounts coming back.

Great. And then my second to last question, when I think about post-2017 total earnings growth, the aspiration is 5% to 6%. I know you're through sort of the big reset years in the U.K. under the new rate scheme in terms of having the incentives come down, having to reset, and you want to have the incentives come down as you transition, and I see the rate base growth profile in the U.S. Based on your current assumptions and understanding things could change a lot as we move forward in time, do you expect that the earnings growth path to be somewhat linear inside that 5% to 6% growth path or are there like sort of chunky CapEx rate base rate-making assumptions we have to think about between 2017 and 2020?

Yeah, good question, Greg. We expect it to be relatively linear or consistent year-over-year and not lumpy or chunky over the 2017 to 2020 timeframe.

Okay. Thank you, guys.

Sure. Thank you, Greg.

Good morning, guys.

Good morning.

Good morning.

Two things. I think I heard you mention that you'd changed the – you'd adjusted the pension to the expectation of lower for longer with the guidance reset. So can I just clarify? Does that mean you've put the pension assumption where rates are currently into 2017?

Yes. This is Vince, yes. We're assuming a below-4% discount rate in both the U.S. and the U.K., and actually our 2017 U.K. discount rate is even below 3%.

Okay. Great. Thank you for that. And then just can I – also on hedging strategy going forward, you're obviously 50% covered on 2018 with this kind of upward – upside bias and the way you've done it. How should we think about your willingness to keep currency open as we move forward? And are you likely to – is this kind of 50% of this effectively the third year where you would expect to be, say, on 2019 by this time next year or are you kind of ahead of where you'd expect to be, some feel for how you'll do this going forward?

Sure, Jonathan. I think it would be fairly consistent with the approach taken in the past where we would certainly be highly hedged for the upcoming period in which we give specific guidance. In this case, it was 2017, and we thought it was appropriate even though we issued guidance a little bit early to go ahead and hedge that up a little bit further than we normally would at this point. Looking at 2018, we would begin hedging in the rest of 2018 sometime beginning next year and then probably start to layer in some 2019 hedges next year as well. We may look, depending on the volatility in the currency rate and other market conditions, to employ collars like we've done here to either preserve some of the upside and protect the downside or to lock in something above our plan. To the extent that we can improve the growth rate by hedging in at numbers stronger than planned, that would be something we'd closely consider.

Great. So we should think of you as being a little ahead of what the typical plan will be at this point.

Yeah, a little bit, yes.

Okay. Thank you.

Sure.

Good morning, Gregg.

Good morning. Thank you. Just, again, your thoughts on how you're doing with the U.K. incentive scheme and program and if there was any notable change outside of FX for your assumptions.

Yeah. We're very happy with the performance. Obviously, we've got one full year behind us. We're into the second year, which started April 1, 2016. The team in the U.K. is doing a great job. I'll let Robert Symons, the CEO of our U.K. business, comment on expectations going forward and what we've built into the plan here.

Yes. Thanks, Bill. We're very much on track in the same way as we were last year. If we have storms, then if they're of sufficient size, then they're excluded from the numbers. Our ongoing numbers look very similar to the previous year. No worries there. In terms of what we're doing, we're continuously increasing the level of automation and exploring new ways to improve those numbers year-on-year.

Yes. Gregg, I would say that the amount received for those two incentives was significantly higher than what we had originally expected. We updated the incentives for that as well; it's about $10 million, $12 million.

Got it. Thank you.

Sure.

Hey, guys. Just looking at the bridge for 2016 versus 2017 guidance, and one of the things that stands out is the U.K., not the currency side, but the expectation that D&A and taxes other than income taxes, interest will all offset any revenue change. Just curious, do you view that $0.04 headwind in the U.K. as a one-off deal in 2017; and then beginning in 2018, you'll see earnings growth out of the U.K.? Can you also talk about expectations for O&M, just local currency, not currency-adjusted, in the U.K. in 2017 and beyond?

Sure. On the revenue and the offsets on depreciation interest, some of that is a one-time transition or specifically limited to 2017. Yes, that's a little bit of an anomaly in transitioning from 2016 to 2017. Relative to O&M, I don't think there's any change expected in O&M. Much of the work that Robert and his team are doing is very predictable and consists of standard blocking and tackling type work, so no expectation there. As you can appreciate, Michael, the RPI could provide an uplift since the retail price index is expected to increase as the U.K. economy comes under pressure. That could be potential upside to the plan should it exceed our assumptions today. Other than that, our revenues would be adjusted for that and no other negative impacts.

It’s really the last leg of the drop in the incentives that's driving this. We get through that in 2017, and you'll see growth going forward.

Got it. So in 2018, how much would you like – I'm trying to think about growth in the U.K., because we know based on the Ofgem data what's expected on the D&A and taxes other than income taxes side. How much revenue growth on a cents-per-share basis do you expect like in 2018 and beyond on an annualized basis? What's in your guidance regarding that?

Yeah. On the top line, I don't have that handy, Michael. But I would say just like the 5% to 6% growth is levelized or linear, so is the U.K.'s growth, their 4% to 6% that we provided. We expect on a net income basis relatively consistent growth starting in 2018 off of 2017 and through the rest of the guidance period we provided.

Got it. Okay, guys. I'll follow up offline. Thank you.

Sure. No problem.

Good morning. Can you hear me?

Good morning.

Just a philosophical question, I guess. I mean, if you're basically canceling out your hedge and taking the money, why re-hedge, I guess? Do you follow me? I mean, is it just because of near-term volatility and the idea that investors want some protection versus being way out of the money? If you could just elaborate a little bit on that, I'd like that.

Sure. That's a good question. We thought that the opportunity to cash out the hedges would allow us to provide that certainty on the dividend growth rate of 4% that we noted we are targeting for the 2017 to 2020 period. So that was one of the real values of that. Plus, it helps to offset from a cash perspective the lower amount that we would be repatriating back from the U.K. in light of the lower exchange rates. So, philosophically, that was how we looked at it. Vince, do you want to provide any additional color to that? But I think those are two of the main elements.

Sure. As we've also come out and reset our earnings, we wanted to ensure that we had a strong degree of confidence in those earnings we're providing. As we talked with economists in the U.K., banks—numerous banks, both in the U.K. and the U.S.—there was some view that in the back half of 2016, there could be additional pressure on the pound. The consensus estimate for the back half of 2016 is about $1.28, but some predict $1.20 to $1.30. In 2017, the consensus is in the $1.30 to $1.35 range. Coincidentally, the collars we implemented provide an effective collar of $1.30 to $1.36, aligning with consensus estimates for the pound over the next year and a half. From our perspective, it was a win-win; we got to take the cash. It's also the reason we didn't take off the 2016 hedges supporting our $2.35 guidance we reaffirmed today. If the pound drops further in 2016, those hedges will be more in the money. We viewed it holistically, and it made sense to put the hedges back on at the current market. Also, when considering our hedge program, the way the stock trades in normal FX conditions, we find that the hedges work well, and we generally receive credit for the hedges, except for these extreme cases where we tend to trade on a fully open basis; if $1.30 is the new norm, we would expect and think investors would expect us to re-hedge.

Okay. Thanks for that. And then, just—other than the tax differential, are there any strategies that you guys might consider that could further optimize that in terms of cost shifting or there are some derivative things that could theoretically take place?

I wouldn't think there'd be any significant or material amount. I think we'll continue to tweak the strategy and seek other optimization. But at the moment, I can't envision something that would be very significant. But we'll continue to look at it.

Yeah. I mean, the real concern is with the after-tax cost of borrowing. Obviously, interest rates play into that as well. Interest rates are fairly consistent between the two countries, and it boils down to the tax effects of that interest expense. We're monitoring it closely.

Great. Thanks a lot.

Sure.

Guys, my question has been answered. Thank you.

Okay. You're welcome.

Yeah. Hi. Good morning. A couple of quick questions. First, just to clarify a prior answer on the incentives, if you exclude currency and the like, how much have the incentives increased on a non-currency basis from your last guidance?

As Vince said, on a dollar basis, it's about $10 million to $12 million.

Okay.

That's okay. So, Steve, it would be $10 million to $12 million.

Okay. And just in terms of your overall rate base growth plan through 2020, are there some— I recall you in the past talking about some projects or opportunities, maybe, that could be added to rate base growth over time. Are there some things in the hopper that are not included in this plan to 2020 right now?

Yes. We do have several projects we're pursuing in our transmission group. The one we have talked about is Compass. That's a very large—if you looked at all the phases, it's a $3 billion to $5 billion potential project. The first phase, which connects Western Pennsylvania to New York, would still be material. Most of these projects would be later in this decade into the next decade, so no significant spending on those until about 2019, and then more significantly in the 2021-2022 timeframe. But we continue to look at competitive transmission projects both within PJM and outside of it, none of which are embedded in our guidance at the moment, so those will all be upside to the plan.

Okay. And then just curious, are the rating agencies comfortable with your updated U.K. distribution plan, issuing debt at the parent and the cash from the hedges, all that? I'm curious about their reaction to it, if at all?

Yes. When the impact of the pound became evident, we spoke with the rating agencies, and their initial report was to maintain the ratings with a stable outlook. Our commitment to maintaining the investment-grade credit ratings remains solid, so we wouldn't expect any significant change.

Okay. And then one last question just strategically. Obviously, this is a bit of a freak event, but I'm curious, Bill, either you or the board, how does this influence your view on wanting to strategically get more domestically oriented in terms of mix of earnings, if at all?

Since this is such a unique event, it really doesn't change the view we have about the strengths of the U.K. business model, so we're not going to overreact to any event like this. It really doesn't change our view of the business mix. As we stated before, if we engage in M&A, we would likely look more significantly at domestic opportunities than the U.K. But at this time, there are no plans to change the mix.

Okay. Thank you.

Sure.

Hey, guys. Most of my questions were answered. But on domestic growth, it looks like utility growth is slightly down. I'm having trouble finding out whether that is just a function of rolling forward to 2019 and 2020 versus your prior plan, or is the CapEx kind of leveling off in 2019 and 2020?

It's a combination of different time frames. We were previously looking at the 2014 to 2018 period. The 2014 number was an adjusted figure we were growing off of. We've now re-based on the 2017 guidance that we provided through 2020, so that's probably the biggest driver is just the time period and extending it into 2019 and 2020, which, as I mentioned earlier, despite a slightly lower growth rate, we expect this to remain consistent over the years 2017 through 2020.

There are likely two main factors in driving the delta. First, we had about that $100 million of corporate restructuring in the 2014 to 2018 growth rate, and that's not included in the 2017 to 2020 growth rate. Secondly, we were transitioning in Kentucky from a historical test year to a forward test year back then. Now, we're all using future test years; therefore, you don't see that initial bump in the growth rate that we had back in the 2014 to 2018 period.

Got it. And just one last question on WPD. I know we've historically discussed that the business will naturally dilute itself as U.S. utilities grow. However, it appears U.K. and U.S. growth are now almost similar, with the U.S. growth slightly more. I want to affirm that the board is still comfortable with the WPD business despite this continuing discount.

Yes, they are. We have great confidence in the underlying fundamentals of that business and all the attributes of the regulatory structure providing us recovery on our investment. The positive traits of that business really offset any type of downside we observe. We believe Brexit was a unique event and expect no similar occurrences in the future. Yes, we are comfortable with the business model.

Excellent. Thanks.

Sure.

I'd like to thank everyone for joining us today. As I mentioned, we believe that the steps we took today are absolutely the right ones for shareholders, and we look forward to executing on our new plans for 2020 and appreciate the support of shareholders as we move forward. Thank you very much.