PPL (PPL) William H. Spence on Q2 2016 Results - Earnings Call Transcript

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PPL Corp. (NYSE:PPL) Q2 2016 Earnings Call August 9, 2016 8:30 AM ET

Executives

Joseph P. Bergstein - Vice President-Investor Relations and Treasurer

William H. Spence - Chairman, President & Chief Executive Officer

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Robert A. Symons - Chief Executive Officer, Western Power Distribution, PPL Corp.

Analysts

Greg Gordon - Evercore ISI

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Gregg Orrill - Barclays Capital, Inc.

Michael Lapides - Goldman Sachs & Co.

Paul Patterson - Glenrock Associates LLC

Anthony C. Crowdell - Jefferies LLC

Steve Fleishman - Wolfe Research LLC

Shahriar Pourreza - Guggenheim Securities LLC

Operator

Good morning and welcome to the PPL Corporation Second Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Joseph Bergstein, Vice President of Investor Relations. Please go ahead.

Joseph P. Bergstein - Vice President-Investor Relations and Treasurer

Thank you. Good morning and thank you for joining the PPL conference call on second quarter results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com.

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to differ is contained in the appendix to this presentation and in the company's SEC filings.

We will refer to earnings from ongoing operations or ongoing earnings, a non-GAAP measure, on this call. For reconciliation to the GAAP measures, you should refer to the press release which has been posted to our website and has been furnished with the SEC.

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

William H. Spence - Chairman, President & Chief Executive Officer

Thank you, Joe. Good morning, everyone. We're very pleased that you've joined us this morning. With me on the call today are Vince Sorgi, PPL's Chief Financial Officer, and the presidents of our U.S. and U.K. utility businesses.

Moving to slide 3, our agenda this morning starts with an overview of our quarterly and year-to-date 2016 earnings results. We will also provide an update to our 2016 full-year earnings guidance, which we are reaffirming today.

We will then turn our discussion to the impact that the U.K. decision to leave the European Union has had on PPL. We are also initiating earnings guidance for 2017 and updating our long-term EPS growth rates. Following my remarks, Vince will review our segment results and provide an overview of the assumptions we've used in planning for growth through the end of the decade. As always, we'll leave time to answer your questions.

Turning next to slide 4. Today, we announced second quarter 2016 reported earnings of $0.71 per share compared with the reported loss of $1.13 per share in the second quarter of 2015. Second quarter 2015 results reflected a one-time charge of $1.50 per share from discontinued operations associated with the June 1, 2015, spin-off of our Supply business.

Year-to-date through the second quarter, reported earnings were $1.41 per share compared with a loss of $0.17 per share through the same period in 2015. Reported earnings for the first six months of 2015 reflect a loss from discontinued operations of $1.36 per share, resulting again primarily from the Supply spin-off.

Adjusting for special items, second quarter 2016 earnings from ongoing operations were $0.56 per share compared with $0.49 per share a year ago, representing a 14% increase on a per share basis. This increase was driven largely by higher base electricity rates at our Pennsylvania and Kentucky utilities along with higher transmission margins from additional transmission investments in Pennsylvania.

Through the first six months of 2016, earnings from ongoing operations were $1.23 per share compared with $1.26 per share a year ago, with the lower earnings year-to-date driven by the lower U.K. earnings in the first quarter of 2016 as a result of the RIIO-ED1 revenue reset that occurred in April of 2015. Vince will go into greater detail on second quarter results a little later in the call, but we're very pleased with the results for the second quarter and so far this year.

Moving to slide 5. Today, we're reaffirming our 2016 ongoing earnings forecast of $2.25 to $2.45 per share with a midpoint of $2.35 per share. The higher-than-expected results in all of our business units so far this year gives us a high degree of confidence in our ability to meet our 2016 earnings forecast. We continue to execute our plans for sustainable growth across our seven high-performing utilities while delivering award-winning customer service, strengthening reliability and improving our efficiencies. And to reflect the current market for the pound, our 2016 forecast now assumes $1.30 per pound on our open positions.

Turning to slide 6. Looking beyond 2016, the fundamentals of the business remain strong. And in fact, despite the recent U.K. vote to withdraw from the European Union and the resulting weakening of the British pound sterling exchange rates. The vote to leave the EU has created broader economic uncertainty in the U.K. and is clearly a unique event that has led to significant volatility in the currency and worldwide markets.

Despite this reaction, there is no change in our underlying business in the U.K. Our revenues are set for seven more years. We are essentially sheltered from an economic recession since we would be made whole in future periods for any volume variances that may result from an economic slowdown in the U.K. And as a reminder, our base revenues are also adjusted for inflation using the retail price index, or RPI. The July RPI forecast has actually already increased from the forecast published just a month ago in June. Further, we expect no change to our investment in infrastructure, since our business plans have already been accepted by Ofgem, the U.K. regulator.

The volatility created in the currency markets, however, does have an impact on our U.S. dollar financial projections. The lower pound exchange rate will impact our translated earnings and the WPD dividend coming back to the U.S.

Moving to slide 7. We know that without providing updates to our earnings growth profile, there will continue to be uncertainty for investors as to our longer term earnings profile, given the sharp decline in the British pound exchange rates. With no near-term catalyst that would signal a move higher in the pound, we took action to update our business plans to reflect current market conditions, starting with the monetization of our existing 2017 and 2018 hedges, which I'll discuss in more detail shortly.

Today, we're providing new earnings growth projections and a target dividend growth rate as well as updates to our U.K. cash repatriation and FX hedging strategies, all of which should provide clarity around our earnings and dividend targets through the end of the decade.

The post-Brexit decline in the pound sterling drove our existing foreign currency hedges to be about $450 million in the money, which we don't believe is being appropriately reflected in PPL's stock price. We believe investors are largely valuing the company on an open basis excluding the value of these hedges. As a result, we were looking for an opportunity to optimize the value of these existing hedges. We decided to monetize the gains associated with our 2017 and 2018 earnings hedges, capturing approximately $310 million in value. This monetization in combination with the higher than expected gains on the remaining 2016 hedges will offset lower expected cash repatriation amounts from the U.K. resulting from the lower expected exchange rate, providing about five to six years of coverage and will support the company's future dividend growth.

Cashing in the hedges, though, did result in us remarking our future earnings using current market rates, which is expected to result in 2017 earnings being lower than 2016 earnings. Since we didn't think we were getting credit in the stock price for the hedges, we felt it was prudent to lock in the value of those hedges and protect the dividend growth despite the resetting of our future earnings.

We have reestablished hedges for 2017 and 2018 at current foreign exchange rates at slightly higher hedge levels than existed prior to the monetization. We've updated our business plan to reflect current market conditions including $1.30 foreign currency rate on unhedged positions from 2017 through 2020.

Re-hedging about 95% of the 2017 U.K. earnings at current rates protects the 2017 earnings guidance that we are providing today against any further near-term decline in the pound, and resetting our unhedged earnings in our business plan to the $1.30 exchange rate allows for potential upside to our earnings projections if there is a recovery in the pound.

We're also announcing an update to our cash repatriation strategy, with an expectation of lower amounts being repatriated from the U.K. going forward. On an annual basis, we will determine the appropriate level of distributions from the U.K., taking into account foreign exchange rates, as well as tax rates in both the U.S. and the U.K. But in the near term, we anticipate that we would repatriate about $100 million to $200 million annually.

Vince will provide more details on this updated strategy in his prepared remarks. The actions we have taken reinforce our dividend growth projections and reestablish a baseline of PPL earnings and future earnings growth reflective of the Brexit decision, the current market, and our underlying business growth.

Today, we're providing a 2017 guidance range of $2.05 to $2.25 per share for PPL with the midpoint of $2.15 per share. We now expect per-share compound annual earnings growth of 5% to 6% from 2017 through 2020 based on the midpoint of our 2017 guidance.

Moving forward, we will continue to maintain a strong balance sheet and strong cash flows, and our investment-grade credit ratings remain unchanged with a stable outlook.

Finally, as I mentioned earlier, with the cash-out of the hedges, we are not changing our expectation of a more meaningful dividend growth beginning in 2017. We're now targeting dividend growth of about 4% annually through the end of the decade. This will result in our total return proposition being projected to be in the 8% to 10% range over this period.

While we were not expecting the U.K. to vote to leave the EU, after careful consideration and deliberation with our board of directors, we decided to take these actions now as it recognizes the reality of the current market conditions is reflective of the underlying growth of the business and it enables us to focus our attention on providing safe reliable service to customers and delivering long-term value for shareowners as opposed to being overly focused on the FX rate.

Turning to slide 8, we prepared a walk from the midpoint of our 2016 earnings forecast of $2.35 per share to the $2.15 per share midpoint of our 2017 earnings forecast. As you can see on the slide, there's a $0.20 per share decline from 2016 to 2017 directly attributable to the impact of resetting the exchange rate to the updated hedge rate of $1.32 per pound. The U.K. earnings, excluding currency, are expected to be $0.04 lower in 2017 compared to 2016 as a result of lower incentive revenues that we've discussed on prior calls.

The higher depreciation and interest expense is offset by the annual price increase under RIIO-ED1 in the UK. We are forecasting both the Pennsylvania and Kentucky regulated segments to be $0.02 higher in 2017 compared to 2016. In both cases, higher margins are driving the higher earnings. Corporate and other expenses are expected to be relatively flat year-over-year.

Moving on to slide 9, our business fundamentals and investment proposition have not changed significantly. We still expect strong compound annual rate base growth of about 5% from year-end 2016 through 2020 with rate base expected to grow to $29 billion by 2020. The constructive regulatory climate in which we do business is also the same. We still expect about 80% of our $12 billion infrastructure investment over the period to receive real-time recovery. Our core business is growing in support of our longer-term growth projection of 5% to 6% from 2017 through 2020.

At this point, I'd like to turn the call over to Vince to walk you through a detailed look at segment earnings and a full review of the detailed assumptions used in planning for our updated guidance. Vince?

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Thank you, Bill, and good morning, everyone. Let's move to slide 11. Our second quarter earnings from ongoing operations increased by $0.07 per share, driven primarily by higher earnings from the Pennsylvania Regulated segment and the Kentucky Regulated segment, while the U.K. Regulated segment remained flat compared to a year ago. Corporate and other costs were slightly favorable compared to prior year. We should note that for the second quarter compared to prior year, domestic weather was relatively flat and weather was about $0.01 positive compared to budget.

Let's move to a more detailed review of the second quarter segment earnings drivers, starting with the Pennsylvania results on slide 12. Our Pennsylvania Regulated segment earned $0.11 per share in the second quarter of 2016, a $0.04 increase compared to the same period last year. This increase was primarily driven by higher gross margins due to higher distribution margins as a result of the 2015 rate case that became effective January 1, 2016, and higher transmission margins due to additional capital investments.

Moving to slide 13. Our Kentucky Regulated segment earned $0.11 per share in the second quarter of 2016, a $0.02 increase compared to a year ago. This result was primarily due to higher gross margins from higher base rates that were effective July 1 of last year.

Turning to slide 14. Our UK Regulated segment earned $0.36 per share in the second quarter of 2016, the same as a year ago. This result was due to higher gross margins primarily resulting from higher prices due to the April 1, 2016, price increase, partially offset by one month of lower prices from the April 1, 2015, price decrease from the commencement of RIIO-ED1. Higher margins were offset by higher depreciation and interest expense as a result of continued investment in CapEx, and lower O&M expense of $0.01 was offset by unfavorable FX of $0.01.

Let's move to slide 15 and take a closer look at our earnings growth drivers. As Bill discussed, we are initiating our 2017 earnings guidance range of $2.05 to $2.25 per share, with a midpoint of $2.15 per share. We now expect a 5% to 6% long-term compound annual growth rate off of the 2017 midpoint of $2.15 through the end of the decade.

The key drivers in support of this new guidance include updating the GBP exchange rate to $1.30 per pound for all open positions and updating RPI using the July HM Treasury forecast for the U.K. economy. We have also updated our U.S. and U.K. interest rate and pension assumptions to incorporate a lower-for-longer interest rate environment. And as Bill indicated earlier, we're targeting a dividend growth rate of about 4% per year through 2020, starting in 2017.

Our assumptions for the 6% to 8% growth profile for our domestic utilities includes the same strong growth factors as previously discussed, including domestic rate base growth of about 5%, minimal load growth in both Pennsylvania and Kentucky, transmission spending under FERC formula rates in Pennsylvania of between $600 million and $700 million per year, totaling $2.6 billion over the four years, and between $350 million and $400 million a year of continued environmental investment in Kentucky at an ROE of 10%. Over the four years, we expect to spend about $1.5 billion of environmental CapEx in Kentucky.

Just this week, the Kentucky Public Service Commission approved our $1 billion environmental costs recovery plan with a 9.8% ROE. Moving to the U.K., the updates to the business plan reflect the macroeconomic impact following the U.K. referendum. We now project 4% to 6% growth in the U.K. from 2017 through 2020. The plan incorporates $1.30 per pound FX rate on our unhedged earnings from 2017 through 2020.

With the monetization of the 2017 and 2018 hedges, we entered into new hedges for those years at current market rates. I'll discuss the hedge levels and the average rates we attained when we get to the foreign currency hedging status slide. RAV growth is expected to be 5.4% through 2020, driving segment ROEs in the 12% to 14% range. We've also incorporated an update on the U.K. incentive revenue. Estimates are now $85 million for 2017, between $80 million and $100 million for 2018, and between $95 million and $115 million for 2019 and 2020.

These estimates for incentives were adjusted for the assumed change in exchange rates and RPI as well as expected performance against those targets. You will find our progress against the 2016 and 2017 regulatory year targets in the appendix to the presentation. WPD's performance continues to be very strong and is on track to beat the new target. We've incorporated new RPI assumptions to reflect the latest forecast published by HM Treasury in late July. This forecast shows a slight uptick in RPI from previous forecasts and we continue to expect an effective tax rate in the U.K. of approximately 17%.

Moving to slide 16, I'd like to review our updated cash repatriation strategy from the U.K., as this strategy has been modified beyond just the lower FX rate. Our previous guidance on cash repatriation from the U.K. was to distribute between $300 million and $500 million per year with a target of $400 million, assuming an FX rate of $1.60 per pound. We've previously indicated the amount of repatriation within that range would depend on a number of factors, including the FX rate.

The targeted $400 million per year represented distributions of about £250 million per year. That £250 million, translated at $1.30, would result in U.S. dollar distributions of about $325 million. This lower value of $75 million per year does not immediately impact us from a cash perspective, since the (20:38) money hedge value of about $450 million provides about five to six years of coverage against that lower U.S. dollar amount.

But while the hedges kept us whole from a cash perspective, with the historically low FX rate and higher corporate tax rates in the U.S. versus the U.K., we have an opportunity to optimize our cash coming back from the U.K. even further. We are currently planning to repatriate between $100 million and $200 million per year in the near term. This lower cash amount will minimize the amount of translation impact on cash coming back from the U.K. at these historically low exchange rates.

We will replace the lower repatriation level with debt in the U.S. Debt in the U.K., however, will be reduced by the same amount. Therefore, total debt at the PPL consolidated level will remain the same. This shift in borrowing from the U.K. to the U.S. captures the benefit of the tax rate differential between the two countries. This benefit becomes even more pronounced as the U.K. continues to reduce their corporate tax rates.

Since the distributions are reducing our U.K. tax basis, these lower distribution levels also extend our tax efficient cash repatriation strategy well beyond our original expectation of 2021 or 2022; and on an annual basis, we will continue to evaluate the most efficient level of cash repatriation, taking into account prospective changes in the exchange rate, tax rates in both the U.K. and the U.S., as well as our overall tax strategy.

Moving to slide 17. The primary change to our revised capital plan is updating the U.K. projections for 2017 through 2020 based on an FX rate of $1.30 compared to the $1.60 previously used and to an average rate of $1.37 for 2016. We are not projecting any impact on the U.K. capital forecast in local currency as those business plans have been accepted by Ofgem. On a U.S. dollar basis, we are now investing approximately $1 billion annually in each of our three business lines, and the five-year spending plan from 2016 through 2020, it's about $15.4 billion.

Moving to slide 18. We've also updated our rate base growth projections and have shown updated RAV balances to reflect the $1.30 FX rate assumption. Our overall growth rate of 5% has decreased slightly as we have reset our base year to 2016. And to enhance comparability, we have assumed $1.30 per pound for all periods.

Moving to slide 19. As we've discussed earlier, at the same time we monetized the 2017 and 2018 hedges, we've put new hedges on at slightly higher levels at current market rates. You can see our average hedge levels for 2017 and 2018 and the average rates we achieved when we put the new hedges on. We used forward contracts to hedge 2017, which locks in from an FX perspective the new guidance we just provided for 2017. However, we used the combination of forward contracts and zero-cost collars to re-hedge 2018, providing us with some potential upside if the pound appreciates before then. The average hedge rates noted on the slide are based on the forwards and the floors in the collars for 2018.

So we protected the downside below $1.30 but retained some upside potential above the rates shown on the slide. We've also provided updated sensitivities which show there is more upside potential for 2018 than downside risk, given the collars. But the rule of thumb of a $0.01 movement in the FX rate equaling a $0.01 movement in EPS still applies for a fully open year like 2019.

Moving to slide 20, on this slide our updated forecast assumptions are shown for RPI, again using the July HM Treasury forecast of the U.K. economy. The rates for 2017, 2018 and 2019 have been incorporated into our updated revenue projection. As a result, the RPI sensitivity for 0.5% movement is now off our updated forecast and would increase or decrease earnings by $0.02 in 2018.

I know that was a lot of information, so let me just recap. We felt the most appropriate course of action in light of Brexit was to, one, monetize the large mark-to-market value of the hedges, which enables us to preserve our dividend grow strategy for the PPL dividend; two, update our business plan to assume $1.30 per pound FX rate for all open positions, thus rebasing our earnings projections for 2017 forward; three, provide a very clear path for earnings growth beyond 2017 through the end of the decade based on the underlying growth of both the U.S. and the U.K. businesses; and four, optimize our strategy of U.K. cash distributions back to the U.S. by lowering the amount of distributions to the minimum required, capturing the tax rate differential between the U.S. and the U.K., and preserving our tax-efficient cash repatriation strategy for significantly longer. An added benefit of this approach is that if the pound or RPI increases over time, that will be upside to the new EPS forecast and growth rates we just provided.

That concludes my prepared remarks, and I'll turn the call over to Bill for the question-and-answer period. Bill?

William H. Spence - Chairman, President & Chief Executive Officer

Thank you, Vince. Before we take your questions, let me just say that we had another strong quarter, and we remain confident on our plans for future growth. I believe today's actions are very important because they provide clarity and transparency in our response to the U.K.'s decision to exit the EU.

By providing longer-term earnings expectations, our actions also illustrate the confidence we have in the strong business fundamentals of our seven high-performing utilities. It was clear to us that the volatility in our stock was correlated to changes in the pound, and the benefits of our financial hedges were not being reflected in our valuation.

By monetizing those hedges, we have not only helped to secure our dividend growth objectives, but our earnings growth is also now clarified on a foreign currency basis that is more reflective of the current market. Clearly, Brexit was a unique event, but our positive view of the U.K. business model remains unchanged. PPL's senior management team is committed to delivering 5% to 6% annual earnings growth through 2020.

The premium utility jurisdictions in which we operate provide us with confidence in our ability to deliver this growth. We will continue to build on this foundation, seeking additional ways to provide value to share owners and our customers.

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

Question-and-Answer Session

Operator

The first question comes from Greg Gordon at Evercore ISI. Mr. Gordon?

William H. Spence - Chairman, President & Chief Executive Officer

Good morning, Greg.

Greg Gordon - Evercore ISI

Oh. Hi. Good morning. Sorry about that. So, absolutely the right decision to reset the currency hedges from my perspective. I just have one clarifying question and I thought your presentation was pretty clear, but when you look at the balance sheets of the U.K. versus the U.S. entities, presumably before you were going to be leveraging up a little bit in the U.K. in order to repatriate that cash. Now, you're going to have a higher equity capitalization in the U.K.

But where on the U.S. corporate structure are you going to be issuing the incremental leverage, and how does that change in the capital structure in the U.K. flow through the U.K. earnings? Essentially because you have an eight-year deal, the real cost of capital will essentially now be slightly different than the prior projected cost of capital. I'm sorry I'm asking a belabored question, but I just want a little more details on how to bridge the cash flow.

William H. Spence - Chairman, President & Chief Executive Officer

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

Vincent Sorgi - Chief Financial Officer & Senior Vice President

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

Greg Gordon - Evercore ISI

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

William H. Spence - Chairman, President & Chief Executive Officer

Yeah, good question, Greg. No, we expect it to be relatively linear or consistent year-over-year and not lumpy or chunky over that 2017 to 2020 timeframe.

Greg Gordon - Evercore ISI

Okay. Thank you, guys.

William H. Spence - Chairman, President & Chief Executive Officer

Sure. Thank you, Greg.

Operator

The next question is from Jonathan Arnold at Deutsche Bank.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Good morning, guys.

William H. Spence - Chairman, President & Chief Executive Officer

Good morning.

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Good morning.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

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

Vincent Sorgi - Chief Financial Officer & Senior Vice President

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

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

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

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Sure, Jonathan. I think it would be fairly consistent with the approach that we've taken in the past where we would certainly be highly hedged for the upcoming period in which we give specific guidance. So, in this case, it was 2017, so we thought it was appropriate even though we issued guidance a little bit early to go ahead and hedge that up a little bit further than we normally would at this point.

So looking at 2018, we would begin hedging in or looking to hedge in the rest of 2018 sometime beginning next year, and then probably start to layer in some 2019 hedges next year as well. And we'd probably look to, depending on the volatility in the currency rate and other market conditions, we may look to do something similar with collars like we've done here to either preserve some of the upside and protect the downside or to lock in something above our plan. So to the extent that we can improve upon the growth rate by hedging in at numbers stronger than the plan, that would obviously be something we'd look closely at doing.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

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

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Yeah. A little bit, yes.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Okay. Thank you.

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Sure.

Operator

The next question is from Gregg Orrill at Barclays.

William H. Spence - Chairman, President & Chief Executive Officer

Good morning, Gregg.

Gregg Orrill - Barclays Capital, Inc.

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

William H. Spence - Chairman, President & Chief Executive Officer

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

Robert A. Symons - Chief Executive Officer, Western Power Distribution, PPL Corp.

Yes. Thanks, Bill. Very much on track in the same way as we were last year. If we have storms, then – if they're of sufficient size, then they're excluded from the numbers. So our ongoing numbers are looking very similar to the previous year. So really no worries where that's concerned at the moment.

In terms of what are we doing, we increase all the time. We're increasing the level of automation. I'm looking at new ways in terms of getting those numbers better year-on-year.

Gregg Orrill - Barclays Capital, Inc.

Great. Thanks, Robert.

Robert A. Symons - Chief Executive Officer, Western Power Distribution, PPL Corp.

One thing that has happened is that we've came top of the pops in terms of social responsibility and time to connect. There are some incentive to actually measure how well companies were doing in terms of how they treat vulnerable customers and also a hot topic in the U.K. is the time taken to connect, and we've come out with the top incentive payment in both those two areas.

William H. Spence - Chairman, President & Chief Executive Officer

Yes. So, Gregg, I would just say that the amount received for those two incentives was significantly higher than what we had originally expected. And so, we did update the incentives for that as well. It's about $10 million, $12 million or so.

Gregg Orrill - Barclays Capital, Inc.

Got it. Thank you.

William H. Spence - Chairman, President & Chief Executive Officer

Sure.

Operator

The next question is from Michael Lapides at Goldman Sachs.

Michael Lapides - Goldman Sachs & Co.

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

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Sure. So, on the revenue and the offsets on depreciation interest, some of that is a one-time transition or specifically limited to 2017. So yes, that's a little bit of an anomaly in terms of that transition, 2016 to 2017.

Relative to O&M, really I don't think there's any change expected in O&M. Much of the work that Robert and his team are doing is very predictable and very kind of standard blocking and tackling type work, so no expectation there. As I know you can appreciate, Michael, the RPI could be an uplift to us because that retail price index is expected to probably go higher as the economy in the U.K. is under some pressure. So that's a potential upside to the plan should it go beyond what we have assumed today. So other than that – and our revenues would be adjusted for that – really no other impacts on the negative side.

William H. Spence - Chairman, President & Chief Executive Officer

Yeah. It's really the last leg of the drop in the incentives that's driving this. And then we get through that in 2017 and you see the growth going forward.

Michael Lapides - Goldman Sachs & Co.

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

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Yeah.

Michael Lapides - Goldman Sachs & Co.

You're longer term – your multi-year guidance?

Vincent Sorgi - Chief Financial Officer & Senior Vice President

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

Michael Lapides - Goldman Sachs & Co.

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

William H. Spence - Chairman, President & Chief Executive Officer

Sure. No problem.

Operator

The next question is from Paul Patterson at Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

Good morning. Can you hear me?

William H. Spence - Chairman, President & Chief Executive Officer

Good morning.

Paul Patterson - Glenrock Associates LLC

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

William H. Spence - Chairman, President & Chief Executive Officer

Sure. That's a good question. So we thought that the opportunity to cash out the hedges would allow us to provide that certainty on the dividend growth rate of 4% that we noted we are committing to or at least targeting, I should say, for the 2017 to 2020 period.

So that was one of the real values of that. Plus it helps to offset from a cash perspective the lower amount that we would be repatriating back from the U.K. in light of the lower exchange rates. So, philosophically that was kind of how we looked at it. Vince, do you want to provide any additional color to that? But I think those are two of the main elements.

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Sure. I think as we've also – when we come out and kind of reset our earnings, we wanted to make sure we had a strong degree of confidence in those earnings that we were coming out within the growth rates that we've provided. As we talk with economists in the U.K., banks – a number of banks, both in the U.K. and here in the U.S. – I think there was some view that in the back half of 2016, there could be some additional pressure on the pound. I think the consensus estimate for the back half of 2016 is about $1.28, but I think there are some that show $1.20 to $1.30. And then in 2017, I would say consensus is kind of in that $1.30 to $1.35 range.

Coincidentally, the collars that we put on basically give us an effective collar of $1.30 to $1.36, so right in line kind of with consensus estimates for the pound over the next, say, year and a half. So I think from our perspective, it was a win-win; we got to take the cash. It's also the reason why we didn't take off the 2016 hedges. That's supporting our $2.35 guidance that we reaffirmed today. Plus, again, if the bias is for the pound to go down a little bit more in the short term, those hedges will be more in the money. So I think as we just took the whole position and thought about it holistically, it made sense to put the hedges back on at the current market.

Also, I think when you look at the hedge program and the way the stock trades in normal, say, FX conditions, I think the hedges work very well and we do get the credit for the hedges, except for these (42:45) extreme cases where we tend to trade on a fully open basis, and if $1.30 is the new norm, we would expect and I think investors would expect us to re-hedge.

Paul Patterson - Glenrock Associates LLC

Okay. Thanks for that. And then, just – other than on this tax differential, other than the borrowings that you're talking about, like increasing them in the U.S. versus the U.K., are there any other strategies that you guys might be thinking that could further optimize that in terms of cost shifting or there's some derivative things that could theoretically take place.

William H. Spence - Chairman, President & Chief Executive Officer

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

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Yeah. I mean, the real thing we're looking at is the after-tax cost of borrowing. And so, obviously, the interest rates play into that as well. But interest rates are fairly consistent between the two countries, and it really, at least right now, boils down to the tax effects of those – of that interest expense. But that's something we'll continue to monitor.

Paul Patterson - Glenrock Associates LLC

Great. Thanks a lot.

William H. Spence - Chairman, President & Chief Executive Officer

Sure.

Operator

The next question is from Anthony Crowdell at Jefferies.

Anthony C. Crowdell - Jefferies LLC

Guys, my question has been answered. Thank you.

William H. Spence - Chairman, President & Chief Executive Officer

Okay. You're welcome.

Operator

The next question is from Steve Fleishman at Wolfe Research.

Steve Fleishman - Wolfe Research LLC

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

William H. Spence - Chairman, President & Chief Executive Officer

So as Vince said, on a dollar basis, about $10 million to $12 million.

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Yeah. That's the social responsibility. Did we raise it above that?

Steve Fleishman - Wolfe Research LLC

Okay.

William H. Spence - Chairman, President & Chief Executive Officer

Yeah.

Steve Fleishman - Wolfe Research LLC

Sorry if I missed that.

William H. Spence - Chairman, President & Chief Executive Officer

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

Steve Fleishman - Wolfe Research LLC

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

William H. Spence - Chairman, President & Chief Executive Officer

Yeah. We do have on our transmission group several projects we're pursuing. The one that we have talked about in the past is Compass. That's a very large – if you looked at all the phases, $3 billion to $5 billion potential project. The first phase, which is Western Pennsylvania into New York, would still be material.

But most of those, Steve, would be pretty late in this decade into the next decade, so no real significant spending on those bigger projects until probably you get out to 2019, 2020, and even then it would probably be a slow build, and then really more significant in the 2021-2022 timeframe. But we continue to look at some competitive transmission projects both within PJM and outside of PJM, none of which are embedded in our guidance at all, so those projects would all be upside to the plan.

Steve Fleishman - Wolfe Research LLC

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

William H. Spence - Chairman, President & Chief Executive Officer

Yes. So, when the impact of the pound was evident, we did have conversations with the rating agencies, and their initial report was to maintain the ratings with a stable outlook. And our commitment, obviously, as I stated earlier, to maintaining the investment-grade credit ratings is solid, so we wouldn't expect any significant change.

Steve Fleishman - Wolfe Research LLC

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

William H. Spence - Chairman, President & Chief Executive Officer

Yeah, because it is such a unique event, it really doesn't change the view that we have about the strengths of the U.K. business mode, so we're not going to, obviously, overreact to any event like this. So, yeah, it really doesn't change our view of the business mix. As we stated before, to the extent that we would engage in M&A, clearly, we would probably look more significantly at domestic opportunities than we would opportunities in the U.K. But having said that, there are no plans to change the mix at this time.

Steve Fleishman - Wolfe Research LLC

Okay. Thank you.

William H. Spence - Chairman, President & Chief Executive Officer

Sure.

Operator

The next question is from Shar Pourreza of Guggenheim.

Shahriar Pourreza - Guggenheim Securities LLC

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

William H. Spence - Chairman, President & Chief Executive Officer

I think it's a combination of the different time frames. So before we were looking at the 2014 to 2018 period, the 24 (49:01) was kind of an adjusted number that we were growing off of. So we've re-based now on the 2017 guidance that we just provided through 2020, so that's probably the biggest driver is just that time period and extending, as you point out, extending it through 2019 and 2020 so – which, as I mentioned earlier, even though we've got a slightly lower growth rate, we would expect that to be fairly ratable over the years 2017 through 2020, so no real lumpiness to it. Vince?

Vincent Sorgi - Chief Financial Officer & Senior Vice President

Yeah, Shar, I would say there's probably two main points in driving the delta. One, as you may recall, we had about that $100 million of corporate restructuring in the 2014 to 2018 growth rate. That's obviously not in the 2017 to 2020 growth rate. And then we were also transitioning in Kentucky from a historical test year to a forward test year back then. Now, we're all on future test years and so you don't get that bump in the initial growth rate that we had back in the 2014 to 2018 period.

Shahriar Pourreza - Guggenheim Securities LLC

Got it. And then just one real last question here on WPD. I know we've historically talked about the business will naturally dilute itself as U.S. utilities grow. But now, it looks like U.K. and U.S. more or less growth almost similar, maybe the U.S. growth a little bit more. I just want to reinforce, Bill, like the board is still comfortable with the WPD business despite this discount continuing.

William H. Spence - Chairman, President & Chief Executive Officer

Yes, they are. I think we, again, have great confidence in the underlying fundamentals of that business and like all the attributes of the regulatory construct there that provides us recovery of and on capital as we deploy it. So I think the very positive attributes of that business really offset, to a degree, any type of downside we see. And again, we believe the Brexit was a unique event and we don't anticipate events like that coming along again in the future. But we are, yes, comfortable and the board is comfortable with the business model.

Shahriar Pourreza - Guggenheim Securities LLC

Excellent. Thanks.

William H. Spence - Chairman, President & Chief Executive Officer

Sure.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to William Spence for closing remarks.

William H. Spence - Chairman, President & Chief Executive Officer

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

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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