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Edited Transcript of PPL earnings conference call or presentation 1-Nov-18 2:00pm GMT

Q3 2018 PPL Corp Earnings Call

Allentown Nov 2, 2018 (Thomson StreetEvents) -- Edited Transcript of PPL Corp earnings conference call or presentation Thursday, November 1, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andy Ludwig

PPL Corporation - Director of IR

* Gregory N. Dudkin

PPL Corporation - President of PPL Electric Utilities Corporation

* Vincent Sorgi

PPL Corporation - Senior VP & CFO

* William H. Spence

PPL Corporation - Chairman, President & CEO

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Conference Call Participants

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* Abe C. Azar

Deutsche Bank AG, Research Division - VP in the United States Utilities & Power Equity Research Team and Associate Analyst

* Ali Agha

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Nicholas Joseph Campanella

BofA Merrill Lynch, Research Division - Research Analyst

* Paul Patterson

Glenrock Associates LLC - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the PPL Corporation Third Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. At this time, I would like to turn the conference over to Andy Ludwig, Director of Investor Relations. Please go ahead, sir.

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Andy Ludwig, PPL Corporation - Director of IR [2]

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Thanks, Denise, and good morning, everyone. Thank you for joining the PPL conference call on third quarter results as well as 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 the forward-looking statements. A discussion of factors that could cause actual results 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 reconciliations to the GAAP measures, you should refer to the press release, which has been posted on our website and furnished to the SEC.

At this time, I would like to turn the call over to Bill Spence, PPL Chairman, President and CEO.

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William H. Spence, PPL Corporation - Chairman, President & CEO [3]

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Thank you, Andy, and good morning, everyone. We're pleased that you've joined us for our third quarter earnings call.

With me on the call today are Vince Sorgi, PPL's Chief Financial Officer; Greg Dudkin and Paul Thompson, the heads of our U.S. utility businesses; and Phil Swift, head of our operations at Western Power Distribution in the U.K.

Moving to Slide 3. Given we will see many of you at EEI in little over a week we plan to keep our prepared remarks brief this morning.

Our agenda begins with highlights of our 2018 third quarter results, including an update to our 2018 earnings guidance. Vince will then provide an overview of our third quarter 2018 segment earnings results. As always, we'll leave ample time to answer your questions at the end.

Turning to Slide 4. Today, we announced strong third quarter reported earnings of $0.62 per share resulting in a total of $2.01 per share through the first 9 months of 2018.

Adjusting for special items, primarily related to unrealized gains on our U.K. earnings hedges, third quarter earnings from ongoing operations were $0.59 per share, up over 5% from the $0.56 per share a year ago.

On a year-to-date basis through September, ongoing earnings were $1.88 per share, up about 11% from the $1.70 per share a year ago, driven by higher earnings across all of our business segments. Given our strong year-to-date results, we have further narrowed our 2018 guidance range from $2.30 per share to $2.40 per share raising the midpoint to $2.35 from $2.33 per share.

In addition to delivering these strong financial results in the third quarter, we took steps at our Louisville Gas and Electric and Kentucky Utilities businesses that support continued infrastructure investment that benefit our customers.

LG&E and KU filed rate requests with the Kentucky Public Service Commission on September 28, seeking approval for a combined revenue increase of about $170 million in electricity and gas base rate.

A more detailed breakdown of our rate request can be found in the appendix of today's presentation. The requested increases will support continued monitorization of the grid to strengthen grid resilience as well as upgrades to LG&E's natural gas system to enhance safety and reliability.

In addition, the increases will support continued investment in our power plants to improve performance and to minimize our impact on the environment. Our rate request also includes a proposed Green Tariff aimed at spurring renewable energy growth and economic development in Kentucky. The Green Tariff will roll LG&E and KU's existing green energy program and solar offerings into 1 tariff to attract and retain businesses seeking these types of options.

If approved by the commission, LG&E and KU's requested revenue increases would take effect in May of 2019.

Even with the increases associated with these proposed investments, LG&E and KU rates would remain well below national average.

Shifting the focus to Pennsylvania, PPL Electric Utilities ranked among the top 10% of utilities nationwide in a key reliability measure according to a report issued in the third quarter.

The report, issued by the Institute of Electrical and Electronics Engineers, found PPL Electric had a lower rate of power outages than all but 5 of 93 utilities nationwide and the lowest outage frequency of utilities tracked in the Mid-Atlantic region.

It's also worth noting that LG&E and KU are ranked in the top quartile nationally in terms of outage frequencies according to the same report. This achievement reflects the value of PPL Electric's continued investments in its Smart Grid technology, powerline upgrades, vegetation management and data analytics that help drive improvement.

The company's reliable service also has led to higher customer satisfaction.

In the area of power quality and reliability, for example, PPL Electric Utilities ranked third in customer satisfaction in a recent national survey. These are just a couple of examples of the excellent operational performance we continue to demonstrate across all of our businesses. And it's that strong performance that gives us confidence in our ability to achieve 5% to 6% compound annual earnings per share growth from 2018 through 2020, measured against our original 2018 ongoing earnings midpoint.

Looking ahead, we remain well positioned to deliver both competitive earnings growth and a secure and growing dividend for our shareowners. With that, I'll now turn it over to Vince for a more detailed financial overview.

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Vincent Sorgi, PPL Corporation - Senior VP & CFO [4]

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Thank you, Bill, and good morning, everyone. Let's begin on Slide 6 with an overview of third quarter segment results.

PPL's third quarter earnings from ongoing operations increased by $0.03 per share over the prior year, driven by higher earnings in the U.K. and Pennsylvania segment.

As a result of the warmer weather during the third quarter, we saw higher volumes in both Pennsylvania and Kentucky, which resulted in a $0.03 per share benefit for the quarter compared to 2017.

Corporate and other was lower by $0.05 per share, primarily due to higher income tax expenses, which includes the timing impact of recording annual estimated taxes in 2017.

Through the first 9 months of the year, earnings are $0.18 higher than the prior year due to higher adjusted gross margins at our U.S. segments and higher currency rates in pension income in the U.K.

On a year-to-date basis, weather has now contributed $0.11 of favorable earnings per share versus the prior year and $0.07 favorable compared to our original forecast.

I'll also note that in September, we drew down approximately $520 million from the May equity forward transaction, resulting in a total of $0.04 of dilution year-to-date versus last year. We expect to draw the remaining portion of the equity in 2019. And as Bill mentioned, PPL's continued strong performance in 2018 enables us to narrow the guidance range and increase the midpoint to $2.35 per share.

Let's move to a more detailed review of the segment earnings drivers starting with the U.K. results on Slide 7.

Our U.K. Regulated segment earned $0.30 per share in Q3 2018, a $0.06 increase compared to a year ago. The increase in U.K. earnings was primarily due to higher foreign currency exchange rates compared to 2017 as the realized weighted average exchange rate for Q3 '18 was $1.34 per pound compared to $1.18 per pound in Q3 '17. Higher adjusted gross margins due to the April 1, 2018, price increase and higher other income due to pensions. These positive drivers were partially offset by dilution of $0.01 per share.

Moving to Pennsylvania on Slide 8. Our Pennsylvania Regulated segment earned $0.16 per share in the third quarter of 2018, a $0.03 increase versus a year ago.

Excluding the impacts on margins from lower income tax recovery, our Pennsylvania segment delivered higher adjusted gross margins of about $0.03 per share due to higher transmission margins from additional capital investments and higher distribution margins from increased electricity sales, primarily due to weather. The positive margins were partially offset by higher depreciation from additional utility plant addition.

Consistent with prior quarters this year, our results reflect an offsetting variance due to the estimated income tax savings for our customers from U.S. tax reform reflected in both adjusted gross margins and income taxes of $0.04.

Moving to Kentucky, on Slide 9. Our Kentucky Regulated segment earned $0.17 per share in the third quarter of 2018, a $0.01 decrease compared to a year ago. Excluding the impacts on margins from lower income tax recovery, Kentucky's adjusted gross margin was higher by about $0.02 from higher sales volumes due to favorable weather and returns on additional environmental capital investment.

This positive variance was more than offset by higher O&M and dilution of $0.01 per share.

Similar to our Pennsylvania segment, there are offsetting variances for the quarter in the adjusted gross margin and income tax line items of approximately $0.04 per share due to tax reform. That concludes my prepared remarks. I'll turn the call back over to Bill for the question-and-answer period. Bill?

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William H. Spence, PPL Corporation - Chairman, President & CEO [5]

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Thank you, Vince. In closing, PPL's strong performance continued in the third quarter as we executed on our strategy for growth and success. Once again, we delivered solid financial results for the quarter, and once again, we increased the midpoint of our annual guidance. Our strong financial and operational performance highlights the value of our investments, and what they are delivering to both our customers and our shareowners. We're well-positioned to deliver on our 2018 earnings guidance and our future growth projections.

With that, operator, let's open the call up for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Ali Agha of SunTrust.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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First question. I noticed that if I saw it right, you did not increase any FX hedges for 2020. Just wondering what your current thoughts are on your hedging strategies there?

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William H. Spence, PPL Corporation - Chairman, President & CEO [3]

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Sure. That's correct, and I'll ask Vince to comment further on that.

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Vincent Sorgi, PPL Corporation - Senior VP & CFO [4]

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Sure, Ali. You are correct, we haven't added additional hedges during the quarter. The pound continues -- really from a historical perspective, it's trading at net historical lows. And we think it makes sense, and we can afford to be patient as we've kind of think through the hedging strategy here. We talked last quarter about -- because we hedged so much in 2018 and '19 and half of '20, that we were actually outside of the bands of our risk management guidelines, and so we've kind of worked our way back into those bands due to completion of third quarter into October. So I would expect that we'll start to layer on hedges to be more consistent with our historical practices in -- with our risk management policy. But we don't see the need today to load up on a lot of hedging in the out years at this rate.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [5]

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Okay. And second question, just wondering, what's your visibility right now on sustaining this earnings growth beyond 2020? And just from a high-level perspective, given what we know today, I mean, any sense of how your earnings profile changes when we transition to RIIO-2 in '23? Just from a high-level perspective.

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William H. Spence, PPL Corporation - Chairman, President & CEO [6]

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So maybe I'll comment on the first part of your question, on the earnings growth beyond 2020. As you -- I think you're probably aware, we would typically address earnings for 2021 or the year forward of our current 3-year forecast on the fourth quarter earnings call. So we would continue to use that practice, so we wouldn't really have a lot to say today on the growth for 2020 or beyond 2020.

Having said that, we -- showing you some capital in the plan, we're going to be updating that capital, our expenditure program probably through the fourth quarter of this year, be able to comment on that as well and update that more after the first of the year. So relative to the transition after RIIO-ED2, Vince, do you want to make some comments around that?

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Vincent Sorgi, PPL Corporation - Senior VP & CFO [7]

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Sure. So I think we'll -- at EEI, we'll provide some additional color and disclosures around what we see are the pluses and minuses going into ED2 as it relates to the ED1 plan.

Ali, I think as it relates to earnings guidance beyond 2020, I think the CapEx rate base projections are a good baseline to start with. But there are other considerations that we need to take into account, obviously, interest rates, taxes, foreign currency, pensions are a big one as well. When we look at the pension plans in the U.K., they are performing quite well from a return perspective, and we have our upcoming review with the pension regulator in March of '19. That takes some time to get through but that will ultimately determine how much pension deficit revenues we will be collecting post March of 2021. So all of those things, we will continue to monitor and at the appropriate time, provide I think that guidance.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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I understand. Last question, Bill, just wanted to get your latest thoughts. There's still a huge valuation gap between your stock and your U.S. peers. Just wondering, what your thinking there is is, is this one of those hunker down and wait for things to play out Brexit, et cetera? Or something proactive on your end? Just what your latest thoughts there are?

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William H. Spence, PPL Corporation - Chairman, President & CEO [9]

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Sure. I think at this point, given where Brexit sits, we're closing in, hopefully, on a deal for the exit from the EU, and that's -- that negotiation between the U.K. government and the EU parliament is ongoing. And it does seem that our take is that a deal will ultimately probably get done, but we'll know one way or the other here in the next few months on that. I think we're also seeing positive commentary around the value that the networks have been providing to consumers in the U.K. both in terms of lower cost, better customer service. And I think there's a growing recognition in the U.K. that there have been great benefits from privatization, particularly of the electric network. So I think -- I sense that things are moving in a more positive direction on that front. So I think for now, as I said previously, we're always open to strategic options that would create value for shareowners.

But at this time, we don't see any of those adding shareowner value so. So we're going to continue to focus on the strong business plan that we have for high growth in EPS relative to the peers. And I think there's no need for us to make any dramatic moves at this point.

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Operator [10]

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The next question will be from Julien Dumoulin-Smith of Bank of America Merrill Lynch.

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Nicholas Joseph Campanella, BofA Merrill Lynch, Research Division - Research Analyst [11]

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It's Nick Campanella on for Julian. I was just curious on the year-to-date drivers on Slide 11 that the $0.20 that you kind of call out in the footnote. Is that more timing related with tax reform and just like thinking about the 2019 drivers, this isn't something that we back out for your ongoing earnings, right? This is all timing?

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William H. Spence, PPL Corporation - Chairman, President & CEO [12]

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Vince is looking at it...

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Nicholas Joseph Campanella, BofA Merrill Lynch, Research Division - Research Analyst [13]

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$0.20 year-to-date related to income tax savings owed to customers?

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Vincent Sorgi, PPL Corporation - Senior VP & CFO [14]

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Yes, Nick, that's just the adjustment in revenues and the reduction in income tax expense. So it just drives the variance in those 2 line items but they net to 0, that's all we were trying to highlight there.

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Nicholas Joseph Campanella, BofA Merrill Lynch, Research Division - Research Analyst [15]

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And then just quick on the Talen lawsuit with Colstrip, just any color on your position and the timing for resolution there?

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William H. Spence, PPL Corporation - Chairman, President & CEO [16]

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Sure. Given that this is pending litigations, this is what I'll say regarding that. We flatly disagree with Talen but we're confident we acted appropriately in all the transactions related to either the sale of PPL's Montana, hydroelectric, generating assets or the spinoff of PPL's competitive generation business.

And further, we believe that PPL Montana was solvent upon distribution of those proceeds. It's been more than 5 years since the sale of the Hydro assets were announced and almost 4 years since the sale was completed.

Under the separation agreement, related to the spinoff of PPL's competitive generation business in June of 2015, you may recall that Talen Energy and affiliates of Riverstone, which is a private investment firm that acquired 35% of Talen in the spin and later took Talen private, definitively agreed that PPL was entitled to retain these proceeds from the sale of the Hydro asset.

I don't think that is in any way in question. At all times prior to the spinoff, we operated PPL Montana in a prudent manner consistent within industry standards and PPL had no control or responsibility for what happened to the company after the spin.

These businesses and all associated to assets and liabilities belong entirely to Talen and its owner, Riverstone. Regarding the issue of pension obligations raised by Talen, I think it's worth noting that PPL's pension liability related to the Montana pension assets was nearly fully funded at the time of the spinoff of PPL Energy Supply, in fact, it was 96% funded. And we ensured this when PPL made a large contribution to the PPL Montana pension fund prior to the spin transaction. So overall, we're very proud of the record we established in maintaining and operating PPL Montana assets of our environmental stewardship including expensive environmental upgrades that we did at Colstrip and of our efforts to strengthen communities during our time in Montana. In summary, we're going to defend ourselves very vigorously against any of these claims.

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Operator [17]

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And the next question will be from Abe Azar of Deutsche Bank.

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Abe C. Azar, Deutsche Bank AG, Research Division - VP in the United States Utilities & Power Equity Research Team and Associate Analyst [18]

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What do you think is driving the strong sales growth, weather normalized in Pennsylvania? And do you expect it to continue? And does that change your strategy there at all?

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William H. Spence, PPL Corporation - Chairman, President & CEO [19]

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Let's go to Greg Dudkin, President PPL Electric Utilities to answer that question.

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Gregory N. Dudkin, PPL Corporation - President of PPL Electric Utilities Corporation [20]

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Yes, I would say that the strong sales growth is really still weather-related. I'm not sure that our weather normalization algorithm is really picking up everything. Just to give you an idea, our heating degree days, 17% to 18%, went up 15% and our cooling degree days were up 26% year-to-year. So we still believe that the sales forecast is going to be flat to a little negative on a ongoing basis and that this increases as far as we're driven by weather.

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Abe C. Azar, Deutsche Bank AG, Research Division - VP in the United States Utilities & Power Equity Research Team and Associate Analyst [21]

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Got it. And just following up on that, how much of a help was weather in the quarter and year-to-date for the whole business?

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Gregory N. Dudkin, PPL Corporation - President of PPL Electric Utilities Corporation [22]

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Just 1 second, sir.

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Vincent Sorgi, PPL Corporation - Senior VP & CFO [23]

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So for the quarter, this is Vince. For the quarter year-over-year was $0.03 positive versus expectation or budget was $0.02 positive. And then year-to-date versus prior year was $0.11 positive and versus our 2019 was $0.07 positive.

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Operator [24]

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(Operator Instructions) The next question will be from Paul Patterson of Glenrock Associates.

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Paul Patterson, Glenrock Associates LLC - Analyst [25]

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So just -- I know you guys feel a little bit constrained on what you're going to say about the lawsuit. But just on the timing of it, it does seem a little odd to me. What do you think triggered the timing at this late date for these issues that -- as you noted, were sort of -- well, quite some time ago?

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William H. Spence, PPL Corporation - Chairman, President & CEO [26]

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Well, as I mentioned, it's been almost 4 years since the sale was completed that could have be -- a little bit later this month, we'll have the fourth year. So my guess is, it's probably a statute of limitations type of strategy.

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Paul Patterson, Glenrock Associates LLC - Analyst [27]

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Okay. And then there's this alternative ratemaking thing going on in Pennsylvania. Could you elaborate a little bit more about what you think that might -- what opportunities might be there for you, particularly with the fact that it sounds like you guys already sort of are performing pretty well there from what you were describing. So I'm just wondering, what do you think -- how should we think about the potential benefits or risks associated with alternative ratemaking?

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William H. Spence, PPL Corporation - Chairman, President & CEO [28]

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Sure. I'll ask Greg to take that question.

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Gregory N. Dudkin, PPL Corporation - President of PPL Electric Utilities Corporation [29]

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Yes. So Paul, the -- what the legislation will allow us to do is to put forth rate plans for approval to the PUC for the things like revenue decoupling, performance-based rates, those types of things. There's a lot of talk about nonwires alternatives we believe that, that concept can be handled under this legislation as well. So we're in -- we just the PUC issued some tentative order, we've just supplied some comments within the last couple of weeks, but we believe this provides us more flexibility on a going forward basis.

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Paul Patterson, Glenrock Associates LLC - Analyst [30]

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Okay, but then just in terms of the performance-based ratemaking and what have you -- is there -- I guess what would -- should we -- do you have an idea that -- so financially what we might be looking at?

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William H. Spence, PPL Corporation - Chairman, President & CEO [31]

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Yes. That's -- we're still too early in the process to be able to comment on that at this point.

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Paul Patterson, Glenrock Associates LLC - Analyst [32]

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Okay. And then back to the U.K., you mentioned that there was -- there seem to be less -- some more recognition associated with the benefits of privatization. Have -- has there been any further discussion about nationalization? Or anything that -- any update there?

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William H. Spence, PPL Corporation - Chairman, President & CEO [33]

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So not anything I would say earth shattering or, very significant, but I think what my perspective is, just to give you a little flavor on this is, our senior team and our Board of Directors were in England last week and we had some very productive discussions with members of Parliament, Ofgem and some of our external political and legal advisers. And my takeaway was there is growing recognition and understanding that the electric distribution networks have performed very well under privatization and probably importantly that there's recognition that these networks are key to delivering on governments' green agendas. And so while labor continues to speak of renationalization, it's clear that rail, water and the mail are the areas of focus. Relative to energy, there's been little detail about how any type of renationalization might be accomplished, and whether distribution networks are even a target this point.

And I believe that's all the calls we have for today. So we appreciate everyone's time and look forward to seeing everyone at EEI's financial conference in San Francisco. Thank you.

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Operator [34]

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Thank you, Mr. Spence. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.