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PPL (NYSE:PPL)

Q1 2011 Earnings Call

May 05, 2011 9:00 am ET

Executives

Paul Farr - Chief Financial Officer and Executive Vice President

James Miller - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and President of PPL Energy Supply

Joe Bergstein -

William Spence - Chief Operating Officer, Executive Vice President and President of PPL Generation

Analysts

Michael Lapides - Goldman Sachs Group Inc.

Paul Patterson - Glenrock Associates

Ashar Khan - SAC Capital

Ivana Ergovic - Jefferies & Company, Inc.

Tom O'Neil

Unknown Analyst -

Brian Chin - Citigroup Inc

Steven Fleishman - BofA Merrill Lynch

Operator

Good morning, ladies and gentlemen. My name is Martina, and I will be your conference operator today. At this time, I would like to welcome everyone to the PPL Corporation First Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to Director of Investor Relations, Joe Bergstein. You may begin your conference, sir.

Joe Bergstein

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

At this time, I'd like to turn the call over to Jim Miller, PPL Chairman, President and CEO.

James Miller

Thanks, Joe, and good morning, everyone. And thanks for joining our call. We'll follow the normal practices this morning. I'll provide a general business update and commentary on the first quarter results, and then Paul Farr, our CFO, will provide a little more detail on the financial review. And then Bill Spencer, Chief Operating Officer, will provide you with an operational overview. As always, we look forward to going through some Q&A when we finish our prepared remarks.

Today, we announced a reported earnings of $0.82 per share, up from $0.66 a year ago and ongoing earnings of $0.84 per share versus $0.94 a year ago. On a straight net income basis, which excludes the impact to the equity issuance last June to fund the Kentucky acquisition, reported earnings rose 60%. On an ongoing basis, net income rose 14%. The earnings improvement was driven by the contribution of our Kentucky regulated segment and a PPL Electric Utilities' distribution rate increase that took effect January 1. These improvements were partially offset by expected lower energy margins in our Supply segment as higher priced hedges continue to roll off.

In the first quarter, we also announced and subsequently closed a significant immediate accretive expansion of our electricity delivery business in the United Kingdom. By mid-April, we completed key elements with a permanent financing plan for this acquisition, including the equity portion of the financing and the U.K. holding company debt issuance. Most of the proceeds from these issuances were used to repay a significant portion of the bridge facility that we drew on to close the acquisition. Based on the successful equity issuance, Standard & Poor's took PPL and its rated subsidiaries of negative outlook. We expect the final piece of the permanent financing, the operating company debt issuances will occur next week, enabling final repayment of the bridge facility.

On the integration front for WPD Midlands, all activities are proceeding fully according to plan. We remain on target to achieve our 2011 ongoing earnings forecast, which you remember we increased last month to reflect the expected accretion from this U.K. acquisition. We're forecasting ongoing earnings per share of $2.50 to $2.75 for this year.

Based on the successful acquisitions and permanent financings of our new operations in Kentucky and in the U.K., we've accomplished our strategic objective of achieving a much heavier weighting of rate regulated earnings and cash flow in our business, and significant regulated infrastructure investment should lead to sustained growth in each of our regulated businesses for years to come. Based on needed infrastructure spending in Pennsylvania and the U.K., coupled with updated assessment of Kentucky environmental compliance investments, we now expect our regulated asset base to grow at a compound annual rate of nearly 9% over the next five years. And more than two thirds of our planned CapEx spending in these regulated businesses will be made under regulatory structures that allow for near-realtime recovery of and on those expenditures. So this should give PPL a more predictable and transparent earnings profile going forward.

Based on projected rate base growth, our expectations regarding earned [indiscernible] in the timing of general rate cases, we anticipate that by 2013, a significant majority of our earnings and cash flow will come from our regulated businesses. We've accomplished this de-risking of PPL without giving up the significant upside potential of our competitive generation business and we remain confident that competitive wholesale capacity and power prices will eventually rebound. And when they do, we believe our shareholders will benefit significantly.

This has clearly been a transformational and successful year for PPL. We've migrated from a company with more than 60% of EBITDA dependent on commodity markets to one that will by 2013, derive only 25% of its expected EBITDA from that business. We issued a significant amount of equity and equity units to fund these acquisitions and the response by investors has been very strong.

We're fully committed to delivering the results we've projected into earning appropriate returns in our regulated businesses. A particularly strong response to the most recent equity offering and the performance of our stock price since that offering make it clear to us that investors like the transformed PPL and that they believed we can deliver. And I'm confident that we'll do exactly that.

With that, I'll turn the call over to Paul for comments on some of the financial results. Paul?

Paul Farr

Thanks, Jim. Good morning, everyone. Let's move to Slide 6 to review our first quarter financial results. PPL's first quarter earnings from ongoing operations are higher than last year driven by earnings from the Kentucky segment and the impact of the distribution rate increase at PPL Electric Utilities, partially offset by expected lower energy margins of the Supply segment. Per share earnings from ongoing operations are lower due to dilution of $0.23 per share, driven by the 2010 common stock issuance to fund the Kentucky acquisition. I'd like to highlight that the Kentucky segment earnings include the operating results of the LKE, interest expense associated with the equity to use to finance that acquisition and dilution of $0.04 per share.

Let's move to the International segment earnings drivers on Slide 7. Our International segment earned $0.16 per share in the first quarter, a $0.04 decrease from last year. This performance was the net result of higher delivery revenue, primarily driven by higher prices and a more favorable customer mix, higher interest expense resulting from the GBP 400 million debt issuance in March of last year, higher income taxes and $0.04 of dilution.

Moving to Slide 8. Our Pennsylvania regulated segment earned $0.11 per share in the first quarter of 2011, a $0.01 increase over last year. This increase was the net result of higher delivery margins primarily due to new distribution base rates that went into effect on January 1 and favorable weather. Higher O&M expenses primarily due to higher plan spending and higher storm response cost, lower income taxes as a result of the state income tax benefit of bonus depreciation and dilution of $0.03 per share.

Turning to Supply. This segment earned $0.42 per share in the first quarter of 2011, a decrease of $0.22 per share compared to last year. The decrease was primarily due to lower energy margins resulting from lower hedge prices in the east and dilution of $0.12 per share.

Turning to Slide 10. We reaffirmed our forecast of $2.50 to $2.75 per share in earnings from ongoing operations. This slide walks you from 2010 actual to forecast 2011, updating the key factors driving the change. We've changed the format of this slide to provide the factors that drive each segment's earnings between 2010 and the midpoint of our 2011 forecast, excluding the impact of dilution, which is broken out separately.

The increase in the Kentucky regulated segment reflects a full year of its earnings results and a full year of interest expense associated with the equity units issued in June 2010 to finance that acquisition. The $0.57 increase in the International regulated segment earnings reflects a partial year of earnings from WPD Midlands and interest expense associated with the equity units issued in April to finance that acquisition. We expect an increase in earnings from the legacy U.K. business, primarily due to higher delivery revenue and a more favorable currency exchange rate, partially offset by higher income taxes, higher depreciation and higher financing costs.

The $0.08 increase from the Pennsylvania regulated segment is primarily due to the distribution rate increase that went into effect on January. We expect the Supply segment to deliver earnings from ongoing operations that are $0.87 per share lower than 2010. This decrease is primarily driven by $0.51 of lower energy margins, including an estimated $20 million to $30 million after tax impact to inspect and repair turbine blades at Susquehanna. Bill will discuss the Susquehanna outage extension in more detail in his remarks.

Also impacting margins are lower electricity prices, lower basis and lower capacity prices in the east and higher delivered fuel cost in the east and west. We also expect higher income taxes primarily due to the 2010 release of Pennsylvania deferred tax valuation allowances at a lower Section 199 benefit. Higher O&M due to increased outage costs at our fossil plants in the east and west. And finally, $0.75 per share of dilution will result from the shares issued to fund both acquisitions.

On Slide 11, we've updated our projected 2011 free cash flow from operations before dividends. The change in cash from operations for 2011 since the year end earnings call is driven by a partial year of earnings from WPD Midlands, offset by acquisition-related expenses, the return of collateral to third parties and the lower-than-expected income tax refunds. The change in free cash flow before dividends is also impacted by a projected capital expenditures of WPD Midlands and the remarketing of pollution control bonds in Kentucky.

Turning to Slide 12. As Jim mentioned earlier, we continue to focus on our dividend as a key element of total shareholder return. Our significantly more rate regulated business platform provides strong support for our current dividend, as well as our future dividend growth. This chart shows the improvement in earnings contribution of our regulated businesses that's a result of the recent acquisitions. Projected ongoing earnings per share from our regulated businesses now more than cover our current dividend and the Midlands acquisition, clearly, permits more dividend flexibility in the future.

With that, I'll turn the call over to Bill for an update on operations

William Spence

Thanks, Paul, and good morning, everyone. Let's turn to Slide 13 and start with an operational review of the first quarter.

Overall, we had a very good quarter in all of our business segments but let me start by first addressing the nuclear outage. At our Susquehanna nuclear plant, we're currently in a scheduled outage on Unit #2 and have discovered defective low pressure turbine blades during a planned inspection. Replacement of these blades was not anticipated as part of our original scope, this will extend the unit to outage by an estimated 4 to 6 weeks to ensure safe, reliable operations for the upcoming cycle. As a precaution, we will also bring Susquehanna Unit #1 offline in the coming weeks to do a similar turbine blade inspection. However, given the strong first quarter performance of the Supply segment and based on our preliminary expectations on the length of these outages, we believe that our Supply earnings for 2011 will still be achieved.

Moving to our Kentucky regulated segment, LG&E and KU filed their integrated resource plan or IRP with the Kentucky PSC last week. This plan is provided to the PSC every three years and is intended to give the Commission a poignant time to look at our expectations for resource needs into the future. It does not represent a commitment or a decision by the company nor does it represent a request for approval. The key takeaways from the IRP are: one, average annual low growth of about 1.5%; 500 megawatts of demand side management capability; the closing of three older coal plants with a combined capacity of approximately 800 megawatts due to proposed environmental regulations; and new generation in the form of combined cycle gas units.

Our current capital projections are consistent with the IRP. However, prior to moving forward on any resource, we'll have to make additional regulatory filings with the Kentucky Commission. Our revised capital expenditure forecast for LG&E and KU also reflects our projected spending on environmental control equipment to meet the most recent proposed EPA rules. We have informed the Kentucky PSC of our intent to file a new environmental cost recovery or ECR plan to address proposed regulations. That ECR filing is expected to be made in the second quarter.

Finally, KU filed a rate case in Virginia on April 1, requesting a $9.3 million annual revenue increased based on 2010 results and return on equity of 11%. The drivers of the case, are incremental capital investments and recovery of storm-related costs. If approved, the increase will take effect at the beginning of 2012.

Moving to the Pennsylvania regulated segment. PPL Electric Utilities won its ninth J.D. Power and Associates' award for customer satisfaction by business customers. This is PPL Electric Utilities' 17th J.D. Power award, which is more than any other utility in the country. The employees of PPL Electric Utilities, just like our employees in Kentucky and the United Kingdom, take pride in providing the highest level of customer service and we congratulate them on a job well done.

Finally, in our International regulated segment, as you know, we completed the acquisition of the Midlands operations. And as Jim said, the integration process is moving ahead as planned.

Let's move to Slide 14 and take a look at sales volumes in Kentucky. Residential and commercial volumes were down for the quarter due principally to mild weather while industrial volumes increased, reflecting continued economic recovery in the service territory. Volumes for the trailing 12-month period were up across the board, reflecting both economic growth recovery and weather effects.

LG&E and KU had the hottest summer in the past 30 years in 2010 followed by one of the coldest Decembers. The modeled weather-normalized volume reductions in the residential and commercial classes reflect energy efficiency measures which have not yet been offset by customer growth.

For 2011, we're projecting load growth of approximately 1.2% on a weather-normalized basis. However, given the extreme weather in 2010, we're forecasting an actual load decline of 2.4% compared with last year.

Moving to Slide 15. We provide details on sales volume variances for PPL Electric Utilities. Our PA utility has experienced slight growth in industrial sales for the first quarter and trailing 12 months. This industrial demand reflects the gradual economic recovery that we're seeing in the service territory but it still remains below levels prior to the recession. Residential sales are higher on an actual business, reflecting higher weather-related sales compared to the prior period. But on a weather-adjusted basis, we've experienced a decline in sales. The weather-adjusted decline in residential sales is primarily driven by higher energy prices, increased energy efficiency, energy conservation and a slow housing market. For 2011, we project overall load growth of less than 1% with higher industrial and commercial sales partially offset by continued lower residential sales.

On Slide 16, we provide our usual detail on the Supply segment hedges. The baseload hedge levels and prices for 2011 are essentially the same as our fourth quarter disclosure. During this last quarter, we layered on additional power hedges in the east for 2012. Our average hedged price for 2012 has declined somewhat as the recent transactions have been completed at energy prices are lower than previous hedges. Since new hedges were put on at prices near the levels we saw at year end, our internal projections for 2012 total gross margins have not changed materially since the mark at the end of the first quarter 2010.

Now let me turn the call back over to Jim, and we look forward to your questions.

James Miller

Okay, operator. With that, let's open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Paul Patterson from Glenrock Associates.

Paul Patterson - Glenrock Associates

The turbine blade problem, what caused that? Could you just elaborate a little more on that? I'm sorry, I didn't completely understand that.

Paul Farr

Sure, no problem. We were doing a routine inspection as required by the vendor and we found some cracking on some of the blades. Our initial root cause investigation would suggest that it's fatigue related. We're still looking into the details. But in an abundance of caution, we're actually going to replace all the rows, on any row that showed any blade fatigue or failure. So it's underway as we speak on Unit 2. And as I mentioned, in the remarks, we will be bringing down Unit 1 in the coming weeks and we'll inspect that unit as well.

Paul Patterson - Glenrock Associates

And what's the cause, I'm sorry, again, that's associated with the maintenance and the capital that you're going to be spending on?

William Spence

The maintenance, the capital, the purchase power, all of the cost of the exercise, if you will, our financial impact of the exercise is $20 million to $30 million after tax with everything that we know right now.

Paul Patterson - Glenrock Associates

And that includes both units?

Paul Farr

That's correct.

William Spence

That's correct. And as I mentioned, with our strong first quarter performance -- out performance to our internal plan, we think we can fully manage the costs associated with the outage. But wanted to let you know that when you see a press release, the Unit 1 is coming offline, you would have the details in terms of the why.

Paul Patterson - Glenrock Associates

That's great. Now the trading and marketing outlook and stuff, has that changed at all?

Paul Farr

No, not at all. We're fully on track to meet our expectations for this year. I believe the total gross margin that we had in the plan was around $40 million for the year.

Paul Patterson - Glenrock Associates

And then just to serve market outlook for the non-regulated business, we've got the RPM auction happening pretty soon. Any feelings with the most adjustments that have been made with the effect of brand versus stuff, what's your thinking you might see?

James Miller

Yes, I think our expectation is a clearing price in Mac of around $150 to $200 per megawatt day. That assumes the transmission-related adjustments in the RPM modeling that PGM is undertaking as we speak or running the option, as well as about up to 6,000 megawatts of retirements. As it relates to retirements, we're pretty certain that 2,000 megawatts is a given. And there's another 4,000 that we would expect as part of our internal modeling. As far as rest of the pool, we would expect that to clear somewhere in the $30 to $50 per megawatt hour -- or megawatt day rather.

Operator

Your next question comes from the line of Steve Fleishman from Bank of America.

Steven Fleishman - BofA Merrill Lynch

A couple questions. First, could you remind what exchange rate is in your assumption for 2011?

Paul Farr

$1.60 per sterling.

Steven Fleishman - BofA Merrill Lynch

And then also, you've obviously had pretty good well, well good inflation numbers from the standpoint of your inflation in taxing. Is that something that you anticipated in your guidance or was that a positive to the guidance?

Paul Farr

Well, we actually wouldn't -- it would be -- it might be slightly positive to guidance. The way that the inflation adjustment works is we would basically take a 12-month rolling average, if you will, kind of July-to-July, August-to-August, it's all the way through December-to-December, averages at the back end of this year. So the front part of the year is helpful, but we need to see a continuation of that to see call it a ex plan or above plan outcome, that would start affecting revenues April 1 of next year.

Steven Fleishman - BofA Merrill Lynch

So that could benefit you next year then?

Paul Farr

It could benefit next year.

Steven Fleishman - BofA Merrill Lynch

Okay. And then last question is I know in the past there's been upward pressure on the coal transport. But I saw your coal numbers were exactly in line, so it sounds like your kind of -- I know you have some diesel hedges and the like, but it sounds like you've got that pretty well in line.

James Miller

Right, Steve. We're right on track. I don't see any variances of any material amounts so far compared to the rates we gave you.

Operator

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

Michael Lapides - Goldman Sachs Group Inc.

Real quick question, can you update just the financing plan and needs given the change in the 2011 free cash flow outlook?

Paul Farr

Sure. Really nothing significant, a big portion of the change is driven by the operating cash flow and the CapEx related to Midlands, which there's been no change. There's a small impact. I think it was around $150 million, $160 million from collateral change. I wouldn't view that as significant enough to drive any change in the financing plan. We've gotten -- we filed for a security certificate with the PUC, a few hundred million that we plan on issuing at electric utilities to your first mortgage bonds. We've got a refi coming up later in the year at Supply. As Jim mentioned, we're on the throes of issuing the ATCO [ph] financing for the U.K. debt. If the market is strong there, we may end up pre-funding a little bit of next year's need, but it's still within the range of what we've outlined to you in the permanent financing program, so no major changes.

Michael Lapides - Goldman Sachs Group Inc.

Got it. And when you talk about RPM and you talk about the retirements, the 2 gigawatt number you mentioned that's a certainty. Can you give a little more clarity on that?

James Miller

I think that's a combination of announced retirements prior to this most recent auction, as well as our best guess, if you look at the fleet that's out there and those that are most challenged by just the markets, in general, let alone the EPA regs. You add those in and you come up to the 2,000 megawatts. I'm sorry. I don't have the details on exactly which units those are but that's generally how they categorize.

Operator

Your next question comes from the line of Brian Chin from Citigroup.

Brian Chin - Citigroup Inc

Just a clarification. On the increase in CapEx at the Kentucky utilities, did you say that the environmental cost recovery mechanism that you have yet to file that, that will include an additional amount of CapEx above and beyond what you've already put on Slide 19? Or does Slide 19 already include what you will be filing shortly?

Paul Farr

It includes all of that. Slide 19 includes the full amount of the CapEx that we're expecting to be seeking recovery for and the increase is driven by environmental compliance, so all of that would be ECR eligible in terms of the filing.

Operator

Your next question comes from the line of Carrie St. Louis [ph] from Fidelity.

Unknown Analyst -

I was hoping you can give an update on your energy hedges for 2013.

James Miller

Sure, Carrie. We're right now sitting at about 24% for 2013. That's up a little bit from where we were at the end of the year. I believe we're around 15% in that zip code at the end of last year. So we've added on a few more hedges but we're at 24% as of today.

Unknown Analyst -

And do you have the split between the east and the west? And could also maybe talk to the average hedge price versus like 2012?

James Miller

I don't have that here in front of me, Carrie. We would normally provide all that detail at the time we announce earnings for 2012, in this case.

Unknown Analyst -

Well, I mean, most companies by now have '13 outlooks provided, so you're going to wait to do that all the way until the end of this year?

James Miller

Unless we have material hedges placed by then, for 2013, we would not likely update our charts and information until the third quarter.

Unknown Analyst -

But your hedging, your ratable hedging would put you where you're supposed to be by the end of the year for '13?

James Miller

It would be in the -- by end of 2011 or early 2012, we'd be in the 60 to 90 range, 60% to 90%.

Unknown Analyst -

So this 24% is going to go up to 60% to 90% by the end of this year?

James Miller

That's what we expect, right. And again, it's -- the front end of the year is not when we normally see significant utility load following auctions. We don't see seasonal spikes in gas. And one of the reasons why we have hedged up is we saw some nice improvement in the outyears as it relates to energy and so we took advantage of some of that. It's come back off and it's going back up. And as we see the seasonal storm pattern related and summer patterns impact things, we would typically be hedging more later in the year.

Unknown Analyst -

Okay. And then maybe going to next year's cash flow, free cash flow guidance or I know there's no guidance, but maybe just if you could kind of help frame how we could can think about free cash flow expectations? Clearly, the CapEx is moving materially higher like $800 million, it looks like.

James Miller

Year-on-year, you're referring to?

Unknown Analyst -

Yes.

James Miller

Yes.

Unknown Analyst -

So if I look -- your prior 2011 guidance for cash from ops was about $2.4 billion, so you lowered it about $200 million. Should we start with that prior '11 base or go off of this new lower 2.2?

James Miller

Well, I would say probably go off for the lower numbers simply because the biggest chunk down in that number -- there were two things: it was the return of net of the U.K. movements, which were all just simply layering on the acquisition-related impact of their operations and CapEx needs was $160 million, $150 million return of collateral to counter parties that can go up or down; and then a decrease of $50 million in the expected income tax refund. And that's simply because rules got clarified better around what qualifies for bonus depreciation and what doesn't. That was the biggest driver there. So I would, again, adjusting for whatever your model indicates the operating cash flows x working capital would do whether that's the lower number, a different number based on how you're modeling the utility businesses and supplies margins, you've got to factor obviously both in.

Unknown Analyst -

Yes. And then besides normal, like your earnings growth, the cash flow would grow. Are there any items that would have impact going from '11 to '12?

James Miller

No, not at all. And as we indicated, when we successfully completed the equity offering, we wouldn't expect to be out other than the normal, small amount of kind of $50 million, $75 million in drift. We won't be out in the markets for stock not until late in 2012. So nothing outside of those comments that we've made that I would expect that would be -- it sounds like you're asking if there's something unusual. I don't see that.

Unknown Analyst -

Okay. So just equity late in 2012? All right. Thank you very much.

Operator

Your next question comes from the line of Tom O'Neil from Green Arrow.

Tom O'Neil

Just two questions on the dividend. What would sort of be the right way to think about the timing for that consideration? And then the second is on industrial sales in Kentucky, just curious what was built into the original 2011 view?

James Miller

I'll take the dividend one and then Bill could take the industrial question. The normal timing for a dividend adjustment is the Board consideration of the dividend for the first quarter of next year. So the April dividend next year would be our normal cycle, not that we have to stick that, but that's the usual time of the year that we address the level of dividend.

William Spence

And relative to the industrial sales for the first quarter, we're pretty much right on track with what we expected.

Operator

[Operator Instructions] Your next question comes from the line of Ashar Khan from Visium Asset Management.

Ashar Khan - SAC Capital

Just wanted to check, what was the sense of doing poll now [ph] for the change in currency to the earnings? I have forgotten that. What is the sensitivity for each I guess $0.10, if it goes from $1.60 to $1.65? What's this earnings sensitivity?

James Miller

Yes, we've not given an earnings sensitivity, Ashar, because we started the year on the legacy WPD, so heavily hedged at around 75%. We are equivalently hedged on the operating earnings from our ongoing earnings on Midlands now, as well as the same amount. And given where the currency is, we're actually looking at hedging up even more. So I haven't -- we haven't given a sensitivity but we're getting to the point, where we're becoming not very sensitive. I would say that net of all the hedges, including some of the colors that we put on that I'd expect that we would be slightly ahead of the $1.60 per sterling that we had in the bid [ph] assumption -- for the forecast assumption.

Ashar Khan - SAC Capital

But can you just give us, if you are like totally unhedged, what would be the sensitivity?

James Miller

Well, we gave you the net income in the road show book. I thought I brought a copy with me of the net income. If you just take though every year of net income for '11, '12 and '13 for international, is that a $1.60? So divide those numbers, those net income numbers by $1.60, that will give you the midpoint, that will give you the sterling net income and then you can vary that a couple percent from the road show deck. Apology, I don't have it handy with me.

Operator

Your next question comes from the line of Ivana Ergovic from Jefferies.

Ivana Ergovic - Jefferies & Company, Inc.

What was the basis between your plans and the PGM West for the quarter?

James Miller

I'm sorry, were you asking what the basis was for the quarter?

Ivana Ergovic - Jefferies & Company, Inc.

Yes, basis potential.

James Miller

Yes, the basis in the first quarter was slightly positive. We would continue to expect basis to remain flat, meaning zero for the year west up compared to our generation locations overall. So which is what we had assumed in our plan. So no significant change from what our expectations were.

Ivana Ergovic - Jefferies & Company, Inc.

You're assuming the same zero for 2012?

James Miller

That's correct.

Ivana Ergovic - Jefferies & Company, Inc.

Okay. And another question, you gave your earnings walk [ph] in the fourth quarter and now, you gave the update. And there is it $0.08 contribution from legacy U.K. business, which wasn't in the presentation in the fourth quarter. Is this because of the synergies? What's the reason for the change?

James Miller

No, the change for -- one second, let me find my chart on that -- is driven by an expectation of some higher revenues versus year end based on some changes in inflation, currency exchange rates, it was several things that built into that.

Ivana Ergovic - Jefferies & Company, Inc.

Okay. And then there is also $0.05 extra for Kentucky if this -- is it because of the weather? Or what's the reason?

James Miller

No, it's not weather-related on Kentucky. Net -- one second. Well, there shouldn't have been that significant a change in Kentucky. We'll check that, Ivana, and get you that through Joe and the team.

Ivana Ergovic - Jefferies & Company, Inc.

Okay. And the third one, I think there is a $0.05 reduction in supply margin. Is that because of the front end outage? Or what's the reason for the reduction in the margin?

James Miller

It was several things that drove that. But the plants, the outage assumptions and all of the margin totality is in that number.

Operator

Your next question comes from Steve Fleishman from Bank of America.

Steven Fleishman - BofA Merrill Lynch

One follow-up. The Pennsylvania bonus depreciation change, how much was that in the quarter and how much do you expect from that for the full year?

James Miller

In the quarter, it was a little more than a $0.01 and so I'd expect that to be roughly ratable for the year.

Operator

There are no further questions in the queue. I turn the call back over to the presenters.

James Miller

All right. Thank you, operator. And thanks to all of you for being on the call, and we look forward to our second quarter call. Thank you.

Operator

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

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