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Executives

Joe Bergstein

William H. Spence - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Paul A. Farr - Chief Financial Officer and Executive Vice President

David G. DeCampli - President of PPL Electric

Victor A. Staffieri - Chairman of LKE, Chief Executive Officer of LKE and President of LKE

Analysts

Paul Patterson - Glenrock Associates LLC

Kit Konolige - Konolige Research, LLC

Justin C. McCann - S&P Equity Research

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Anthony C. Crowdell - Jefferies & Company, Inc., Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

Ashar Khan

PPL (PPL) Q3 2012 Earnings Call November 8, 2012 9:00 AM ET

Operator

Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the PPL Corporation Third Quarter Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to your Vice President and Director of Relations, Mr. Joe Bergstein.

Joe Bergstein

Thank you. Good morning, everybody, and thank you for joining the PPL conference call on third 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 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 Bill Spence, PPL Chairman, President and CEO.

William H. Spence

Thanks, Joe, and good morning, everyone. And thanks for dialing in. Joining me on the call today are Paul Farr, PPL's Executive VP and Chief Financial Officer, as well as the presidents of our 4 business segments, who will participate in the Q&A session today. To get started, I'll provide an overview of our third quarter results and a few operational highlights. Then Paul will provide more details on our segment performance for the quarter. We will try to keep this call brief and focus primarily on the events of the quarter, as I know your day is full of earnings calls and we'll see many of you next week at EEI.

But before turning to earnings, I'll update you on the impact of Hurricane Sandy. The hurricane caused considerable damage in parts of Eastern Pennsylvania served by our PPL Electric Utilities affiliate. This was the largest storm to hit PPL Electric Utilities-serviced territory, causing outages to over 500,000 customers. PPL Electric Utilities assembled the largest workforce in its history, more than 5,000 people, to undo Sandy's damage. By Sunday night, power had been restored to 99% of the affected customers, the remaining work wrapped up on Tuesday. Some of our neighboring utilities closer to the coast fared significantly worse. We have sent contractor crews that have completed work for PPL Electric Utilities to New Jersey and New York utilities to assist in the rebuilding of their devastated communities.

I know this was a very trying time for our customers, and I'd really like to thank them for their understanding and patience as we work diligently to restore their power. The PA Governor's Office and PUC showed strong leadership in working with the utility industry to ensure we had solid communications and very well coordinated assistance, especially through FEMA and community emergency management organizations. I'd also like to recognize the hard work of PPL employees from Pennsylvania to Kentucky, as well as workers from out-of-state utilities, who assisted us in our restoration efforts.

So now let's move onto earnings. Today, we announced third quarter reported earnings of $0.61 per share compared with $0.76 in the same quarter of 2011. Earnings from ongoing operations for the quarter were $0.72 per share versus $0.76 per share in the same period a year ago. For the first 3 months of the year, our reported earnings were $2 per share, up from $1.91 per share in the first 9 months of 2011. Ongoing earnings were $1.93 per share for the first 3 quarters of the year versus $2.02 per share in the same period last year.

Our results in the third quarter and through the first 9 months of the year are strong evidence that we are delivering on the promises of our transformational acquisitions in 2010 and 2011. As expected, our rate-regulated businesses are providing financial stability as we continue to effectively manage through challenging wholesale market power crisis. I'm very pleased with both our financial and operational performance, given what the markets and Mother Nature have challenged us with.

Now turning to Slide 5. Strong earnings from the U.K. utilities and the ability of our supply group to manage outage challenges at our Susquehanna nuclear plant have put us in a position to raise the midpoint of our 2012 earnings forecast. In fact, we're updating our 2012 forecast range to $2.30 to $2.40 per share and earnings from ongoing operations, making the midpoint of our guidance $2.35 per share.

Before we move to Paul's comments, let me take a few minutes for an operational overview. Starting in Kentucky. Now that we've signed contracts with various vendors, we've updated our estimate of capital spending necessary to complete our previously discussed environmental compliance projects. We now estimate these projects will come in closer to $2.5 billion, a reduction of $500 million from our original forecast. We're able to deliver these savings to customers in Kentucky because we proactively addressed EPA regulations and were able to secure bids before others. These savings will contribute significantly to our objective of reducing equity needs over the next few years. Paul will provide more details on this effort in a few moments, including other CapEx reductions, higher dividend flows from the U.K. and O&M savings.

Despite the capital spending reductions, we expect our rate base in Kentucky to grow at a compound annual rate of over 8% through 2016. In addition, it's likely we will need to deploy capital in the 2016 and 2017 time frame to replace the Bluegrass facility and potentially other coal-fired generation capacity. But we'll clearly have the internal cash flow to support such investments at that time.

As for the rate case proceedings in Kentucky, we are moving along as planned. A settlement conference has been scheduled for November 13 and 14 with public hearing scheduled to take place later this month. We continue to anticipate an order from the commission in late December or early January with new rates effective shortly thereafter.

I've mentioned on previous calls that our management team in the U.K. has dramatically improved the customer service performance of our Midlands utilities. This improved performance continues to translate into benefits for WPD customers, as well as PPL shareowners. I'm pleased to report that WPD is forecasting for the regulatory year ended March 31, 2012 to have earned over $80 million in performance bonuses for the 4 U.K. utilities, most of which comes from the Midlands businesses. This was due to our ability to deliver reliability to customers at front tier-level performance. These bonuses will be reflected in our revenues in the 12-month period starting April 1, 2013. We can say with pride that our 4 network utilities are now among the best customer service providers in Great Britain.

Turning to the domestic operations in Pennsylvania. In early October, PPL Electric Utilities received final approval from the National Park Service to route the Susquehanna-Roseland Transmission Line through the park. This was the final permit required for this major grid upgrade that will improve electric service for millions of people in the Northeast, saving consumers more than an estimated $200 million per year and creating about 2,000 jobs during its construction. The rate case in Pennsylvania is proceeding, headed towards a final commission decision in December. We're of course disappointed by the ALJ's recommended decision that would produce an allowed return on equity of 9.74%. The ALJ recommendation would result in a $64 million increase in distribution revenues compared with the $104 million increase we had proposed when we filed our case. Today, we are filing detailed exceptions to this ALJ recommendation. We remain hopeful that the PUC's final decision will reflect a higher return on equity than this recommendation, especially in light of our need to continue replacing aging infrastructure and our strong customer service record.

At our supply segment, we resumed generating electricity from Unit 1 of the Susquehanna nuclear plant yesterday. We shut down the unit October 20 to inspect the Unit 1 turbine. The inspection confirmed data obtained from diagnostic equipment we installed earlier in this year to monitor for conditions that could lead to turbine blade crash. This is good news because it confirms the root cause analysis and enables us to move forward with a long-term solution. During the just-completed outage on Unit 1, we replaced a small number of cracked blades. Based on similar data from the diagnostic equipment on the Unit 2 turbine, we plan to shut that unit down for inspection and replace any cracked blades we discover. We're finalizing our plans with a vendor on a long-term solution that we believe will resolve the cracking issue and can be implemented starting in the first half of 2013. We're revising the estimated after-tax financial impact of these inspections to $25 million to $30 million, as we've been able to complete them more rapidly than initially expected.

On Slide 7, we provide updated detail on the competitive supply segment hedges. We've adjusted our expected output levels for 2012 to reflect the actual results through September 30 and our forecast for the remainder of this year. The decline in our expected Eastern baseload generation is primarily driven by the Susquehanna outage. For 2013, we've reduced our coal hedges in the East as we continue to manage our coal levels by working with coal suppliers to defer, renegotiate or buy out existing coal contracts. We've also provided our 2014 hedge details for the first time as we've layered on additional power hedges and have hedged now approximately 1/2 of our 2014 baseload output. By the end of 2012, we would expect to be 60% to 90% hedged for 2014.

In conclusion, we're very pleased with our results through the first 9 months and confident this business mix is producing the shareowner benefits we expected. The Midlands acquisition continues to prove to be highly successful. The supply segment continues to perform well and manage through the current market and operational challenges. And our domestic regulated segments are progressing through the rate proceedings and executing on the rate base growth opportunities. I'll look forward to your question following Paul's comments.

Paul?

Paul A. Farr

Thanks, Bill, and good morning, everyone. Let's move the Slide 8 to review our third quarter financial results. PPL's third quarter earnings from ongoing operations were lower than last year, primarily driven by lower earnings at the supply segment as a result of lower energy margins, higher O&M and higher depreciation, which were partially offset by higher earnings in the U.K., primarily driven by higher delivery revenue.

We've outlined on Slide 9 the Kentucky regulated segment earnings drivers. Our Kentucky regulated segment earned $0.12 per share in the third quarter, a $0.01 decrease compared to last year. This decrease was primarily driven by lower retail margins as a result of lower residential consumption, partially offset by higher industrial load compared to a year ago.

Moving now to Slide 10. Our U.K. regulated segment earned $0.28 per share in the third quarter, a $0.06 increase over last year. This increase was due to higher earnings at WPD Midlands and higher delivery revenue at WPD South West and South Wales, primarily driven by higher prices. These positive earnings drivers were partially offset by higher pension expense at the 2 legacy companies and less favorable currency exchange rates.

Turning to our Pennsylvania regulated segment on Slide 11. This segment earned $0.06 per share in the quarter, a $0.01 increase compared to last year. This increase was primarily due to higher transmission and distribution margins and lower financing costs, partially offset by higher O&M.

Moving to Slide 12. Our supply segment earned $0.26 per share in the third quarter, a decrease of $0.10 compared to last year. This decrease was driven by lower Eastern energy margins, primarily due to lower hedged energy prices; lower Western energy margins, primarily due to lower volumes; higher O&M; higher depreciation; and higher financing costs.

Turning to Slide 13. We have updated our CapEx plan to reflect the changes for the lower projected ECR capital spending in Kentucky. As Bill discussed, this represents a $500 million reduction for 2012 to 2016 from our original plan. We are still finalizing our business planning process, but have identified an additional $200 million to $300 million of supply CapEx that can be eliminated over the next several years that is not currently reflected in this chart. These capital reductions will provide additional financial flexibility while we continue to manage through a low commodity price environment.

Turning to Slide 14. We have updated our rate base growth projections with the only change being the reduced ECR spending in Kentucky. We now project to more than $7.5 billion in increase in rate base from 2012 to 2016 resulting in a 7.5% compound annual growth rate. We realized the reduced capital spending in Kentucky has an impact on future EPS, but this is significantly offset by the elimination of the equity needed to fund those investments. Obviously, the almost $700 million to $800 million in reduced CapEx in supply and Kentucky is a major driver to eliminating equity needs beyond our DRIP issuance. We also expect to repatriate an additional $30 million to $50 million per year above our previous expectations from the U.K. driven by our forecast of strong annual revenue bonuses and performance ahead of plan on cost synergies. We continue to evaluate our level of O&M spending and have made progress on that front. But Fukushima-related costs and the need for additional outages at Susquehanna over the next few years to implement the permanent fix for the blade cracking issue are expected to absorb that benefit in the near term. Beyond this time frame, we do see opportunity to reduce supply O&M.

Given the significant attention dividends have received during this earnings season, let me end with our commitment to the dividend, which we view as an extremely important piece of our total shareowner return. The current dividend level represents a 61% payout ratio based on the midpoint of our revised 2012 earnings forecast and is much more than covered by our rate-regulated earnings. As we have been indicating, we expect modest increases to the dividend through the low parts of the commodity cycle and as we deploy significant capital on our rate-regulated utility businesses. This intention is reflected in the dividend increase that we announced earlier this year. Our dividend is secure and we clearly see added flexibility for future growth as we execute on our rate-regulated growth strategy.

With that by way of review, I'd like to turn the call back over to Bill for the Q&A period.

William H. Spence

Thank you, Paul. And operator, we're now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from Paul Patterson.

Paul Patterson - Glenrock Associates LLC

On the nuclear cost side there, you mentioned some -- could you just give us a little bit more of a flavor? I mean, you said $25 million to $30 million for the inspection. But what kind of costs are we talking about with respect to the actual repair of the blade cracks and any of the sort of Fukushima -- or any other basic costs that you're seeing? The other sort of question related to that is that Exxon mentioned on their call that they were looking at annual refueling cycle potentially to at least some of their plants, I think, help out with their fuel expense. I was just wondering what your thoughts are about that with respect to Susquehanna.

William H. Spence

Sure. I don't think we would change our refueling outages at this point or the timing of them. Related to cost for Fukushima, we're still in the process of determining that. But as we've mentioned on previous calls, we think the capital costs will be very manageable and the real question or open question at the moment is whether the industry would be required to install filtered nets on the units, and that would be a little bit more costly. But again, I don't think in the overall context of PPL that those costs of capital would be unmanageable. As for your first part of your question on the costs to replace the blades and the ultimate fix, on the replacement side, the costs for the O&M associated with the outage, as well as the replacement costs, those have been already factored into the numbers that we have provided today, that $25 million to $35 million after-tax. In terms of the fix, we're still determining exactly what those costs would be. But again, I don't think that they're going to be unmanageable for us.

Paul Patterson - Glenrock Associates LLC

Okay. And then with respect to the filtered venting issue, what kind of -- I mean you mentioned it's manageable for you guys. Is there any sort of sense as to roughly speaking what the impact could be there?

William H. Spence

I'll ask Dave DeCampli to comment on that.

David G. DeCampli

Yes. First of all, we believe the commission, NRC, will be wrestling with this issue shortly, probably by the end of the month, as to whether that filtered vent will be included in the package of improvements or changes we'll have to make at the unit. Filtered vent, though we do not have a solid enough estimate on it at this point in time, we do have an estimate for the balance of the other changes we believe will be necessary, and that's somewhere between $60 million and $85 million.

William H. Spence

Yes.

Paul A. Farr

Of capital.

Paul Patterson - Glenrock Associates LLC

But that doesn't include the vents. Is that right?

William H. Spence

That's correct. That's right. And I think...

Paul Patterson - Glenrock Associates LLC

Well, my understanding was that the staff was going to be maybe issuing a recommendation for these filtered vents. And I'm just sort of trying to get a sense as to what the impact of those would be.

William H. Spence

Sure. Yes, I think we'll know more obviously by the end of the month, once we find out exactly what they're looking for and the time frame they're looking for.

Paul Patterson - Glenrock Associates LLC

Okay. And these are sort of capital expenses. Is O&M considerably more or less or a big factor in all of this?

William H. Spence

Yes. It really wouldn't factor in any meaningful way. It would be capital.

Paul Patterson - Glenrock Associates LLC

Okay. And then just on industrial sales in Kentucky. It looked like they've been very strong. What's going on there?

William H. Spence

Sure. I'll ask Vic Staffieri to comment.

Victor A. Staffieri

Our capital -- our sales on industrials are up 9% quarter-over-quarter and about 6% for the year. And that's just -- we've just had some good, robust industrial sales in the automotive sector and in the North American stainless and the return to service of a facility that was out of service last year. So we've had good, steady industrial sales growth in Kentucky this year, 6% over last year.

Paul Patterson - Glenrock Associates LLC

And just in terms of trading, just to revisit on that, how is the outlook for trading in your forecast now looking with your current experience and just what you're seeing out there?

William H. Spence

We're right on plan. I don't think there's any change.

Paul Patterson - Glenrock Associates LLC

Okay. And then just finally the Kentucky case. It looks like you guys are going to be having settlement discussions pretty soon. Any sense as to how those are shaping up or the outlook for those?

William H. Spence

The settlement, the hearings are scheduled to begin next week, and it will be too early for me to speculate. We haven't had a chance to sit down with interveners yet. The big issues, as you might imagine, are return on equity and there's some depreciation, a little bit of skirmishing around O&M expenses. But it's really the return on equity.

Operator

The question will come from Kit Konolige.

Kit Konolige - Konolige Research, LLC

So a couple of questions. Paul, I think in the past, you've talked about your belief that earnings from the supply business would not drop below 0 at the bottom of the cycle. Is that still the case as you start to hedge out into '14 now?

Paul A. Farr

Yes. As I think about the hedges that we've layered in and I think about the balance of the business plan, which again is getting close to final, we continue to believe that we can keep the supply earnings at that neutral to positive for the tougher years of the cycle that you're referencing.

Kit Konolige - Konolige Research, LLC

Okay. Excellent. And on WPD then, you said that $1 million [ph] in performance bonuses. This is the relative to the -- I think, in the past, you've talked about $60 million or better that you expected here. That's the kind of data point that we're following here?

Paul A. Farr

Yes, that's correct.

Operator

Your next question will come from Justin McCann.

Justin C. McCann - S&P Equity Research

A question for Paul. What is your current projection of average outstanding shares for '13 and '14 and also your expected effective tax rate both for the U.K. and on a consolidated basis for those years?

Paul A. Farr

Yes. On a consolidated basis on the ETR for '12 and '13, we are around 28% to 30% for '12 and '13 and that goes blending [ph] across all of -- actually, a little lower than that, closer to 25% for '12, 28% to 30% for 2013. And let me pull the share amounts for it. 2012 weighted average around 586 million. We'll get back to you on the '13 number.

Operator

Your next question will come from Julien Dumoulin.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So congratulations again on the U.K. here. It just seems like it never stops. I'd be curious to what extent are the year-to-date benefits or above plan that you recognized in your guidance? Are those going to go forward? Or is this really driven by kind of a one-time tax benefit this year? If you could kind of parse that apart, I'd appreciate it.

William H. Spence

Sure. I would say it's really a combination of great operational performance, good customer service, and reliability that's going to drive some of the performance on a go-forward basis, and then there are some tax benefits. But I think basically, it's small and it's really driven by the fundamentals of the business, not any one-time items.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And then secondly on supply, kind of going back to the first question there on the nuclear costs, if you could just -- in aggregate, what kind of cost increases are we talking about? And then secondly, just flagging I suppose to the extent to which on a go-forward basis '12, '13, '14, what kind of costs are we talking about? At what point will we recognize this O&M benefit?

William H. Spence

Sure. Well, on the cost for Fukushima-related, as we mentioned, the first part of it is pretty well known. And that's making changes to everything but the filtered vents, the items that the NRC and the industry is on the same page with, which will allow us to respond a bit better in an unlikely event of a challenge to off-site power in particular, as well as maintaining proper levels and understanding where the water levels are and the spent fuel pools, as well as the temperature. So those instrumentation changes are relatively small and low capital cost items. So all of that, as Dave mentioned, I think in the $50 million to $60 million kind of range. The bigger unknown is around the filtered vents, which as I commented earlier, we don't have a good estimate yet because we're not exactly sure what the NRC maybe looking for. When it comes to the turbine blades, the majority of our expense to do the permanent fix will probably come next year. That will come with some unscheduled outages, so we're going to have on the units, it's not in the refueling, we'll have a special outage to put in the permanent fix. And then the scheduled outage may -- hopefully wouldn't take much longer, but it could be a little bit longer. So O&M for 2013 will be a bit higher now. As I mentioned on the last call, we have a number of initiatives underway to trim our O&M and capital expenses, particularly in the supply segment. And there, we would expect some of the O&M savings for 2013 would be offset by the increased outage that we have to take next year. So that's kind of a rundown of where we see the supply business from an O&M and capital perspective.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Excellent. And perhaps a last quick one here, more strategic. On the supply business overall, how are you thinking about it from an ownership perspective, particularly given some of the comments from some of your peers of late?

William H. Spence

Sure. We still like the business mix that we have. We have no plans to make a strategic change with the supply business. And we're happy with its performance through the good part of the cycle, and we'll manage it well through the down cycle.

Operator

Your next question will come from Jonathan Arnold.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Just on the additional CapEx cuts, I think, Paul, you mentioned in your speech $200 million to $300 million of additional CapEx you might take out over the next several years. Are you saying that you're planning to go through with these? Or that's something you have sort of obviously to manage through prolonged down cycle? Or is that something we're going to actually see you do?

Paul A. Farr

Yes. I would say that as we look at the -- responding to the lower commodity environment, that those are actions that make economic sense to take. We would try to take those in the final business plan that our board will approve later this year. So I don't think [indiscernible] the margin.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

So that's something that's going to be in the plan, but just wasn't on the slide?

Paul A. Farr

Correct. We typically only update the chart in full of CapEx on an annual basis, and then provide you -- throughout the years as we make changes, we provide you the deltas. We'll reassess whether or not we actually go ahead and update that going forward just so you have it all in one spot.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Okay. And then you talked about -- I think it was about $500 million of lower spending on environmental CapEx and because you've moved early on getting this stuff moving. To what extent was it a function of the final rules being less severe than maybe the initial proposal? Was that a piece of it or not?

Paul A. Farr

No, that was a very small piece. It was $30 million to $40 million of the total spending to optimize around gas. But it was heavily driven by the mercury rules, so not driven by that at all.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

So you're just being more conservative about what you assume it would cost?

Victor A. Staffieri

I'm sorry, this is Vic Staffieri. I would say it's not a question of conservatism. We had a plan that we laid out with the regulatory commission in Kentucky. We applied pursuant to our environmental cost recovery mechanisms. We had projections of what we thought the compliance costs were. And we were just very fortunate that with the commission's support, we were able to get out early, get our estimates in, get it all bid, everything was bid here, including all the commodities. And all of these bids have come back very favorable, and that's really the genesis of the $500 million in savings.

Operator

Your next question will come from Anthony Crowdell.

Anthony C. Crowdell - Jefferies & Company, Inc., Research Division

Just a quick question on you had, I guess, there's additional dividends being repatriated from the U.K. properties. I mean, is that additional -- is that going to be absorbed by the higher expenses that you have at the other business units?

Paul A. Farr

No. I would say that, that's a straight increment in terms of additional cash flow that we've got in the U.S. that we're then able to deploy to the regulated utilities, primarily here that have the equity needs as they're growing rate base so strongly. So yes, we don't have a forecast out for '13. So I don't want to talk about things on a net basis per se that, that's not being absorbed and is incremental to the cash we have to invest in the domestic rate-regulated.

Anthony C. Crowdell - Jefferies & Company, Inc., Research Division

All right. And lastly, it looks like you have the potential to wrap up the cases early -- late December, early next year both in Kentucky and in Pennsylvania. I mean does the company think they could earn your allowed return in these 2 jurisdictions once these rate proceedings are finished? Or there'll still be lag where you'll still underearn?

William H. Spence

Well, since we're still in a pretty heavily capital-intensive building program infrastructure and replacements, there's going to be immediately some type of lag. But we can manage some of that hopefully through O&M and other levers that we have to try to keep it close to or near the ROE. But I think as we've said in the past, with the type of the spending we need to do on a traditional general rate case basis that we'd be probably looking at needing to file every few years. Now I would probably just remind you that a lot of the spending that we are planning to do has real-time or near-real-time recovery, particularly in Kentucky with the environmental spend. Of course in the U.K., it's all returned off and on immediately as we spend it. And then in Pennsylvania, we have a new law that was passed early this year that will allow us to file for some of the capital, about 1/3 or more of the capital, that had we planned to spend under a new ratemaking mechanism, which will allow more timely recovery. So I think overall, we feel good about our ability to keep the returns close to the authorized level because of the ratemaking constructive arrangements that we have in both Pennsylvania and Kentucky.

Paul A. Farr

The other thing I'd chime in with is -- the other thing that's a driver that's a bit going against us is Pennsylvania, we're dealing with still with Act 129, and that's corrupting the kilowatt hour sales growth that would more organically be there. We talked about strength of industrial in Kentucky, but we've seen some soft residential. So a lot of our ability to stay out for longer periods will be dictated by how strongly the economy recovers and getting back to more normal load growth profiles as well.

Operator

Your next question will come from Paul Ridzon.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Do you have any recourse to the vendor on the turbine blades? Are they going to share some of this cost? Or is it all going to be expensed by you?

William H. Spence

At this point, we have not made that determination. I think we are both focused on ensuring that we know the root cause and putting in a permanent fix. And in terms of the commercial sharing of the cost, that will come at a later date. But I think we're very focused on just making sure that we get the permanent fix into the unit as quickly as possible.

Operator

Your next question will come from Michael Lapides.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Just wanted to make sure one thing. Am I following -- are you expecting multiple years of higher nuclear O&M and capital cost of suppliers? Or is this more of a one-time thing related to Fukushima, meaning a 1 year where you'll see higher expense, and then things kind of normalize beyond that?

William H. Spence

We would be looking at this as a one-time expense. We're hopeful that for the Susquehanna turbine outage blade-cracking issue, we can accomplish much of what we need to do in 2013. We'll know better by the end of the year. But yes, we would look at these as one-time events.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. And just want to make sure I follow, the potential CapEx reductions at supply are not on the slide deck that you put out. That's not on the slide deck you put out today, but maybe something you put out when you give guidance for '13, as well as any potential O&M reductions you do at supply.

William H. Spence

Exactly right, yes.

Operator

Your next question will come from Steve Fleishman.

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Just a couple of questions. First on the hedging strategy, you guys ramped up a lot of hedging for '14 the last 2 quarters. Are you kind of planning to do more ratably hedged from here on because you left open it for a while, ramp it up? Is it kind of back to more ratable hedging from here?

William H. Spence

I think probably because we're getting closer to the period in which we'd want to have 2014 more highly hedged, it will probably tend to be more ratable, Steve. But just as we've done in this last rally, we're going to look to pick our spots as to when we hedge. So I would say we're kind of leaning in that direction to be more ratable, but we're going to certainly take advantage of any market opportunities as we see them. I'd also say that we just completed our own internal fundamental analysis. And I would say the team is more bullish on '14 and '15 than they've been for a while now. So that would tend to have us leave it open a little bit more than we otherwise would. But again, as we drive closer and closer to '14, we'll want to have a pretty heavily hedged book by then.

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Okay. One other question on Susquehanna. Is the outage cost expected to be similar to this year? Or is it just kind of uncertain?

William H. Spence

Go ahead, Dave. Why don't you answer that?

David G. DeCampli

Yes. The cost this year included -- will include 3 additional outages, really. We had a refueling outage. But in addition to that, we had an inspection outage for the other unit in the spring plus the outage we just accomplished plus a short upcoming outage to the other unit soon to start. So this year, we experienced 3 what we'll call maintenance or inspection outages to deal with the turbine [ph] rate issue. We expect just 1 of those next year in addition to the refueling outage. So next year's O&M cost would be about 1/3 of what they would have been this year.

Operator

Your next question will come from Brian Chin. [Operator Instructions] Our next question will come from Raymond Leung.

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

Just Paul, can you just give us an update on the latest thoughts on the equity proceeds from the equity units? I think you talked about down streaming again down to supply in terms of reducing that there. Any updates on thoughts, given that you've been able to sort of maybe potentially reduce some cost and CapEx. Does that change your view there?

Paul A. Farr

Yes. It really doesn't change the view there, per se. It lightens up -- in '13 and '14, the equity needs a little bit in Kentucky, but we have around 700 -- north of a $700 million refinancing that was otherwise due at supply next year. So we'll downstream cash for that. We will equitize appropriately Kentucky and PPL Electric Utilities to help finance those rate base growth plans. So I wouldn't say really anything has changed with respect to that. To the -- sorry to hijack the question. But the individual that asked about the 2013, the weighted average share count of 614 million shares for that year. But Ray, I wouldn't expect that we'd be changing the plan materially. And again, those cuts are coming across a 4- to 5-year window so in any given year, they're not all that significant.

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

Okay. And just a sidebar question. Can you talk a little bit about PPL Montana and what's going on down there? I think one of the agencies changed the outlook the other day. Is it just all margin pressure and lack of contracts?

Paul A. Farr

Yes. If you read the S&P report, it's reduced levels of contracting as we go out over the next couple of years. So very heavily hedged this year and next year, less hedged in '14 and '15. And those are the years like we see with respect to the entire supply business, where we do see some pressure on it. And given the project finance nature of that sale-leaseback, they've put a negative outlook on the BBB-.

Operator

[Operator Instructions] Your next question will come from Ashar Khan.

Ashar Khan

I just wanted to -- I guess, Bill, you mentioned in the beginning of your comments that there might be some more additional CapEx at Kentucky in '16 and '17. Could you just tell us the amount and when will that be firmed up? I guess it's not in your projections right now.

William H. Spence

It is not in the projections right now, Ashar, and we don't have a preliminary number yet. But maybe Vic can talk to what we're thinking about it in terms of projects.

Victor A. Staffieri

We're in the process now of an RFP. We just got the offers in last week to meet [indiscernible]. We have some capacity requirements in '17 and '18. We've had the Bluegrass turbines originally we were going to use to meet that. We haven't done that. Those capital savings were reflected in 2012. And until we evaluate the bids that we just received and we will also take into account any self-build options for '17 and '18, still early for us to make an estimate on what those capital requirements might be.

Ashar Khan

Okay. But when will you get to know? Is it like a year down the road? Or when should we expect you having a clearer idea of those?

Victor A. Staffieri

Well, I think we could handle it by the first quarter of next year when we're done with the evaluation of the RFPs.

William H. Spence

Okay. Operator, if there are no more questions in the queue -- apparently not. Okay. Well thanks, everyone, for joining us today. And we'll see many of you at EEI. And safe travels.

Operator

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

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