Good morning. Welcome to PPL Corporation fourth quarter 2015 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Joe Bergstein, Vice President of Investor Relations and Treasurer. Please go ahead, sir.
Thank you. Good morning, everyone, and thank you for joining the PPL conference call on fourth quarter and year-end 2015 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 a reconciliation to the GAAP measure, you should refer to the press release, which has been posted on our website and has been filed with the SEC.
This time, I'd like to turn the call over to Bill Spence, PPL Chairman, President, and CEO.
Thank you, Joe. Good morning, everyone. We're very pleased that you could join us. With me on the call today are Vince Sorgi, PPL's Chief Financial Officer, as well as the President of our US and UK utility businesses. Moving to slide three, our agenda this morning starts with an overview of our 2015 earnings results, an operational overview, and a discussion of our 2016 earnings forecast and our priorities for this year. After my remarks, Vince will review our segment financials and provide a more detailed financial overview. Before I go any further, however, let me simply say that 2015 was a remarkable year for PPL. We successfully spun off our competitive generation business. In doing so, we better positioned PPL for future growth and capped our strategic transformation into a purely regulated utility business.
We delivered more than $3 billion in infrastructure improvements, investments that are driving earnings growth, and improving service to our 10 million customers. We secured favorable outcomes in our Kentucky and Pennsylvania rate cases. Successfully transitioning to RIIO-ED1 in the U.K., we increased our dividend for the 13th time in 14 years. We've delivered strong earnings results. Moreover, our stock outperformed our peers, the UTY, and the S&P 500 Utilities Index. PPL's total share and return of 6.2% on the year was higher than any other utility in the UTY. All were significant accomplishments during a time of significant change for our company and our industry. Today, we're announcing a plan to achieve compound annual earnings growth of 5%- 6% through 2018 off of our 2014 adjusted EPS of $2.03 per share.
The continued excellent performance of our utilities gives us confidence in our ability to deliver competitive earnings growth and a strong dividend. Turning to slide four, today we announced 2015 reported earnings of $1.01 per share compared with $2.61 per share in 2014. Our 2015 results reflect a loss from discontinued operations of $921 million or $1.36 per share, resulting primarily from the June 1st spinoff of our competitive supply business. Adjusting for special items, our 2015 earnings from ongoing operations were $2.21 per share. That's an increase of 9% from 2014 adjusted results of $2.03 per share. For the fourth quarter of 2015, reported earnings were $0.59 per share compared with $1.04 per share a year ago. Earnings per share from ongoing operations were $0.43 in the fourth quarter compared with $0.49 a year ago.
The 9% or $140 million year-over-year improvement in earnings from ongoing operations was driven primarily by the benefits of our corporate restructuring, lower income taxes and depreciation expense in the U.K., higher returns on capital investments, and the mid-year Kentucky rate increases. Vince will provide more details on segment results in his remarks. Let's move on to slide five for an update on our utility operations. On November 19th, the Pennsylvania Public Utility Commission approved a rate increase for PPL Electric Utilities. The action followed a settlement agreement that we reached with parties to our rate case. The increase, which took effect January 1st, will provide an additional $124 million in revenue and help fund additional reliability improvements as we continue to strengthen and modernize our Pennsylvania delivery network. The settlement was a black box settlement and does not specify an allowed return on equity.
Turning to Kentucky, Louisville Gas and Electric and Kentucky Utilities filed environmental compliance and cost recovery plans with the Kentucky Public Service Commission on January 29th. The applications seek approval and environmental cost recovery rate treatment for $1 billion in upcoming environmental improvement projects. These projects will ensure compliance with the US Environmental Protection Agency's new Coal Combustion Residuals rule that became effective last year. The projects will involve capping and closing remaining ash ponds at our coal-fired power plants, building process water facilities, and completing the second phase of a dry storage landfill project at our E.W. Brown generating station. We expect to begin these investments in these environmental improvements in 2016. They will continue through 2023. Looking to the U.K., WPD wrapped up the DPCR5 price control period March 31st, 2015.
WPD was the top performer over the period and earned $478 million by outperforming its incentive targets. We were consistently the best performer for customer service in all categories: customer satisfaction, customer complaints, and stakeholder engagement. During the price control period, WPD went through a major transformation, acquiring two lower-performing Central Networks operations in 2011, and very quickly improved their performance, which helped drive the significant incentive revenues earned under DPCR5. Turning to the new RIIO-ED1 price control period, WPD continues to outperform its 2015-2016 performance targets and is on pace to be near the maximum incentive reward for customer minutes lost and customer interruptions. In addition, we're on pace to be near or at the maximum reward levels for customer satisfaction. During our last call, we raised our guidance estimates for the incentive revenues we expect to earn for the calendar years 2017-2018.
Based on our continued strong performance to date, we expect incentive revenues for 2016 to be at the high end of our $120 million-$130 million range. You may recall, incentives for the 2015-2016 regulatory year will be received in revenues beginning in the 2017-2018 regulatory year, as there is a two-year lag. Details on WPD performance and incentives are included in today's appendix. To slide six, our 2016 earnings forecast is $2.25-$2.45 per share. The midpoint of this range, $2.35 per share, represents growth of 6.3% compared to our 2015 earnings from ongoing operations of $2.21 per share.
As I highlighted in my opening remarks, the continued excellent performance of our utility operations and the organic growth from planned and approved infrastructure investments give us great confidence in our ability to achieve compound annual growth in earnings of 5%-6% through 2018, again off of our 2014 adjusted EPS of $2.03 per share. We expect EPS growth of 11%-13% through 2018 from our US operations, with 1%-3% growth expected in the U.K. Vince will cover this in more detail during his remarks. Turning to slide seven, I'm also pleased to announce our board-approved increase in our common stock dividend, raising it from $1.51- $1.52 per share on an annualized basis. This marks PPL's 14th dividend increase in 15 years.
This is consistent with our prior guidance of a modest dividend increase in 2016 as we work our way into the mid-60% payout range. We expect to grow the dividend more meaningfully beginning in 2017, at which time we will target in the 4% range. Now let's move to slide eight and highlight some of PPL's objectives in 2016. A primary objective of ours is executing on our planned capital investment program of $3.5 billion. This includes expenditures to strengthen transmission and distribution networks and to make continued environmental improvements in Kentucky. In Pennsylvania, we're focused on advancing Project Compass, which is designed to provide significant benefits for electricity consumers in the Northeast. In October, we filed an interconnection request with the New York ISO to build the first segment of Project Compass, a 95mi transmission line between Blakely, PA., and Ramapo, New York.
We expect to start the next step in approvals in the first quarter of 2016, New York's Article VII application process, which is a full siting and needs application. We're also focused on completing our Northeast Pocono transmission line, a $350 million improvement project that includes 70mi of new transmission lines, three new substations, as well as additional improvements. We expect to conclude that project this May, which is about a year ahead of our original schedule. In Kentucky, a major focus will be approval of compliance plans and cost recovery for the environmental construction projects that I highlighted earlier. Another key objective is to work with the state of Kentucky to address the Clean Power Plan in the best interest of our customers and our shareholders. In the U.K., our team is focused on continued regulatory performance and adding to our long history of operational excellence.
We'll also look to continue to hedge our 2018 British Pound currency exposure beyond the 20% that we've been able to hedge to date at or near our budgeted rate of $1.60 per pound. We built some capacity in our business plan to further hedge 2018, and at the current spot rate for the pound of about $1.46, we feel confident that we will be able to achieve our stated earnings growth rates through 2018. Turning to slide nine, we expect infrastructure investment to continue to drive rate base and EPS growth in the coming years. We plan to invest nearly $10 billion from 2016 through 2018 to modernize and strengthen our transmission and distribution systems and to address environmental regulations in Kentucky. Instructive rate mechanisms in the premier jurisdictions where we operate allow near-real-time recovery of much of that investment.
More than 80% of our regulated capital expenditures are subject to minimal or no regulatory lag. Based on planned infrastructure spending, we expect our rate base to grow by $4.3 billion from 2015- 2018. We expect compound annual EPS growth through 2018 of 5%-6% for 2014 earnings from ongoing operations of $2.03 per share. As you know, prior to the year-end 2015, passage of the PATH Act by Congress extended 50% bonus depreciation from 2015 through 2017, with a phased-out reduction in bonus to 40% in 2018 and 30% in 2019, with 0% thereafter. The impacts of the bonus depreciation extension are factored into our earnings projections. Vince will speak more about this in just a bit.
We're confident we will be able to achieve this growth rate given our low-risk business plan, the premium jurisdictions in which we operate, and our demonstrated ability to manage our foreign currency exposure in the U.K. I look forward to your questions after we hear some additional earnings details from Vince Sorgi. Vince?
Thank you, Bill, and good morning, everyone. Let me slide 11 for a review of segment earnings. Full year 2015 earnings from ongoing operations increased over the prior year. From 2014 adjusted earnings of $0.03 per share to $0.21 per share, slightly ahead of the midpoint of our earnings guidance range. The main drivers of growth were higher earnings in the UK Regulated and Kentucky Regulated segments, as well as lower costs in Corporate and Other, partially offset by lower earnings from the Pennsylvania Regulated segment. The favorable $0.10 in Corporate and Other is primarily driven by the corporate restructuring efforts. Before I get into the segment details, let's briefly discuss the fourth quarter results as well as domestic weather for the year compared to the prior year and compared to our 2015 budget.
Our fourth quarter earnings from ongoing operations decreased over last year by $0.06 per share, driven primarily by lower earnings from the UK Regulated segment as a result of transitioning to the RIIO-ED1 regulatory period. Pennsylvania Regulated and Kentucky Regulated segments were both slightly negative this year versus last, reflecting the impact of unfavorable weather, and corporate and other was better this year resulting from the corporate restructuring. Overall, domestic weather was flat compared to the prior year and had a positive impact compared to budget by about $0.02. Favorable weather for the first nine months of the year was partially offset by the warmer weather experienced primarily in December. Let's move to a more detailed review of the 2015 segment earnings drivers, starting with the Pennsylvania results on slide 12. Our Pennsylvania Regulated segment earned $0.37 per share in 2015, a $0.03 decrease compared to 2014.
This decrease was due to higher O&M expenses as a result of higher service company allocations due to the spinoff of the supply business. Our strong performance throughout the year provided us the opportunity to take advantage of additional spending opportunities focused primarily on improving grid reliability, which should benefit future periods. Depreciation was higher due to asset additions, and we had higher financing costs related to prior year debt issuances. Partially offsetting these negative factors were higher margins from additional transmission investments and returns on distribution improvement capital investments, and lower taxes primarily due to the settlement of a 2011 gross receipts tax audit resulting in a $0.02 benefit this year. Moving to slide 13, our Kentucky regulated segment earned $0.51 per share in 2015, a $0.04 increase from 2014.
This increase was due to higher gross margins, which is the net effect of electric and gas base rate increases effective July 1st of 2015 and returns on additional environmental capital investments, partially offset by lower volumes due to warmer weather in November and December of this year compared to the prior year and lower industrial sales. While the first quarter was colder than average, it was not as cold as the polar vortex-driven weather in 2014. These net positive results were partially offset by higher O&M expenses, including costs associated with the retirement of the Cane Run coal-fired facility of $0.02 and higher financing costs related to the September 2015 debt issuances. Moving to slide 14, our UK Regulated segment earned $1.44 per share in 2015, a $0.07 improvement compared to 2014.
This increase was due to lower US income taxes, primarily from lower taxes on dividends in 2015 compared to 2014, and lower UK income taxes resulting from a lower effective tax rate in the U.K. due to a reduction in the statutory tax rate. Lower depreciation expense from the asset life extension we discussed earlier this year also contributed to the improvement, which was partially offset by increased depreciation from asset additions. These increases were partially offset by lower gross margin as we transitioned to RIIO-ED1 on April 1st of this year, partially offset by the April 1st, 2014 price increases, and higher O&M expenses. Before we move to the next slide, I wanted to mention that similar to last year, we will provide you unaudited consolidated financial information for PPL Global, LLC, for 2015.
We expect to furnish those statements separately in an 8-K to be filed at the time we file our 10-K in a couple of weeks. Turning to slide 15, we have prepared a walk from our 2015 ongoing earnings of $2.21 per share to the $2.35 per share midpoint of our 2016 earnings forecast. Our Pennsylvania Regulated segment is forecast to contribute $0.10 to the improvement in 2016 earnings. This increase is primarily driven by the distribution base rate increase, which became effective January 1st, 2016, and higher transmission margins and lower O&M. These positive drivers are expected to be partially offset by higher depreciation, higher financing costs to fund the capital growth in Pennsylvania, and the tax benefit received in 2015 from the release of a gross receipts tax reserve. Our Kentucky Regulated segment also projects higher earnings of $0.06 per share.
This increase is primarily driven by realizing a full year of electric and gas base rate increases that became effective July 1st, 2015, and higher returns on additional environmental capital investments, and higher retail load and other margins. Higher margins are expected to be partially offset by higher depreciation on the increased plant in service, and higher interest expense to fund the capital growth in Kentucky. In the U.K., we project slightly lower segment earnings due to higher financing costs, primarily from a full year of interest expense on the December 2015 debt issuances, higher depreciation expense from asset additions, higher taxes and other, and unfavorable effects of foreign currency as we execute some 2016 restrikes to hedge 2018 earnings near our budgeted rate of $1.60. These negative drivers are partially offset by lower O&M, including pension expense and higher gross margins from price increases.
Corporate and other is expected to be relatively flat year-over-year, with slightly higher interest expense in 2016 driving the penny decrease. In addition, for the UK R egulated segment, you will see in the appendix on slide 27 that we have provided one additional year of earnings projections. Our UK earnings guidance range for 2017 is $1.40 per share to $1.50 per share, with a midpoint of $1.45 per share. Turning to slide 16, as Bill mentioned earlier in the call, we are confident in our ability to achieve our 5%-6% earnings growth targets through 2018 off of our 2014 adjusted ongoing earnings of $2.03 per share.
We now expect 9%-11% growth in our domestic utility earnings and approximately 2% growth coming from our corporate restructuring efforts. We increased our expectations slightly in our UK business over this time period to 1%-3% growth, up from 1%-2% growth. The 1%-3% represents growth off of 2014 earnings of $1.37 per share, which incorporates the lower depreciation expense from the asset life extension and our updates on incentive revenues, as well as lower net pension expense, in part due to updating our pension discount rate methodology to utilize the spot rate method recently approved by the SEC to measure both service costs and interest costs.
This change in pension discount rate methodology was only applied to the UK pension plan, as the method we use in the U.S. to set our discount rates did not qualify for the spot rate method approved by the SEC. Several key drivers to our organic growth in the domestic utilities include strong transmission rate base growth of 14% through 2018 in Pennsylvania. Favorable rate case outcomes contribute to our growth in both Pennsylvania and Kentucky. The successful execution of our CapEx plans is critical for all three of our business segments. We continue to assume minimal load growth over the period in both Kentucky and Pennsylvania. Also included in our 5%-6% earnings growth forecast is the full five-year extension of bonus depreciation. As a reminder, when we updated our 2017 earnings growth target to 6% last quarter, we had assumed a two-year extension of bonus depreciation.
Incorporating the full five years of bonus depreciation did not have a significant incremental effect on our 2018 earnings. While extending bonus depreciation is a net negative to earnings, it is positive from a credit perspective, especially in the back end of the planning period. Over the next five years, we expect bonus depreciation to reduce our federal cash tax position by about $270 million, and we do not expect to be a significant cash tax payer through at least the next five years. The increase in available cash, combined with our stronger earnings growth, has enabled us to reduce our equity needs from $200 million per year- $100 million per year and maintain our targeted credit metrics.
For the UK R egulated segment, of course, executing on the Ofgem accepted RIIO-ED1 business plan has been built into the growth assumptions and provides eight years of base revenue certainty with continued opportunity to outperform targets. We have also assumed a budgeted currency rate of $1.56 per pound for 2016, $1.58 per pound for 2017, and $1.60 per pound for 2018, which includes existing hedge positions. The inflation rate used for the 2015-2016 regulatory year tariff was 2.6%, which will be trued up for actual inflation in the 2017-2018 regulatory year. We are now assuming the actual inflation rate for 2015-2016 will be 1.3%, and the adjustment to true up the 2.6% down to the 1.3% has been included in our 2017 and 2018 earnings forecast and affects 2017 revenue by approximately $0.03 per share.
We have provided additional details on the true-up mechanisms to base revenue on slide 30 in the appendix. Our RPI assumptions for 2016-2017 are now 2.3% and 3.1% for 2017-2018, consistent with the HM Treasury forecast. We have increased our incentive revenue estimate for 2016 to the high end of our previous $120 million-$130 million range. We are assuming the same incentive revenues as last quarter for 2017 and 2018, and finally, we are assuming an effective tax rate in the U.K. of about 17%. For corporate and other, we have built into the growth rate achieving the full $75 million in corporate support cost savings and an additional $0.02 per share improvement by 2017. On slide 17, we are providing an update to our view of domestic cash flows for 2015 and 2016.
As you can see in the table, we expect to have sufficient domestic cash flows to fund our maintenance capital and the common stock dividend, with almost $300 million left over in 2016 to fund dividend growth and growth CapEx. We have no domestic debt maturities in 2016, the debt and equity issuances in the U.S. will fund the rest of our growth CapEx. Moving to slide 18, our planned capital expenditures for 2016 through 2020 are detailed on this slide, with regulated utility investment totaling about $16 billion over the period and about $3.2 billion-$3.3 billion per year.
This includes previously announced initiatives such as UK spending for our accepted RIIO-ED1 business plan, executing on our environmental compliance plans in Kentucky to meet EPA regulations, updating and modernizing aging infrastructure in Pennsylvania, including programs that identify areas to strategically improve system performance and reliability, and this capital plan still excludes any impacts of the Clean Power Plan. Moving to slide 19, our revised capital plan reflects generally the same spending levels in the U.K. as last year's plan, except for some slight increased spending on faults and overhead repairs in 2016. We reduced investment of approximately $650 million in Kentucky as we deferred a projected natural gas combined cycle plant. However, new gas- fired generation may ultimately be part of our Clean Power Plan compliance strategy, which, as noted on slide 18, is not included in our projections.
This was partially offset by additional reliability-based programs in the transmission and distribution businesses in Kentucky, while environmental spending has remained fairly consistent with the prior plan. In Pennsylvania, we are experiencing higher than expected increases in reliability based on all the capital investment we've made to date. As a result, we now believe we can achieve our targeted reliability with about $270 million less of distribution capital compared to last year's plan. Anticipated transmission spend remained relatively consistent with the prior plan. These investments are expected to result in additional improvements in reliability over the next five years. Consistent with last year's plan, our capital plan is based on identified projects across the portfolio and does not include unidentified growth projects.
Turning to slide 20, our rate base is now expected to grow at a 5.3% CAGR over the next five years, which incorporates the five-year extension of bonus depreciation and the deferral of the second combined cycle gas turbine in Kentucky. Finally, moving to slide 21, on this slide, we provide an update to our GBP hedging status for 2016, 2017, and 2018, including sensitivities for a $0.05, $0.10, and $0.15 downward movement in the exchange rate compared to our budgeted rate of $1.60 on our open position. We are 95% hedged for 2016 at an average rate of $1.56. For 2017, we have continued to layer on hedges during the quarter and have increased our hedge percentage from 66% at the end of the third quarter to 89% today at an average rate of $1.58.
You can see from the sensitivity table that there's no exposure for 2016 and minimal exposure for 2017. We've also started to hedge our 2018 earnings and are now 20% hedged at an average rate of $1.60. It's important to note as well that included in our earnings guidance ranges is enough dry powder to hedge about 50% of our 2018 UK earnings. After we get about 50% hedged for 2018, our risk program would not require us to layer on additional hedges until about mid-2017. Switching to RPI, also on this slide, we show our RPI sensitivity, which has been updated as well. As I discussed earlier, we are now incorporating a 1.3% RPI rate in our current 2015-2016 planning assumptions compared to the 2.6% included in our tariffs.
The 2017 RPI sensitivity for a half a percent downward movement in the 2015-2016 RPI is now off the current budget of 1.3%. In November of 2015, we set our 2016-2017 and 2017-2018 tariffs based on the forecasted RPI at that time, consistent with Ofgem's guidance. We've completed the tariff setting process for the next two regulatory years, in November of 2016, only one additional year of tariffs for 2018-2019 will be set based on the RPI forecast at that time. We're confident in our ability to manage our FX exposure, and we've incorporated the low RPI environment into our earnings growth projections. That concludes my prepared remarks, and I'll turn the call over to Bill for the Q&A period.
Great. Thank you, Vince. Operator, let's open the call for questions, please.
Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star, then one one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If your question has been addressed, you may withdraw from the queue by pressing star then two. And our first question will come from Dan Eggers of Credit Suisse. Please go ahead.
Hey, good morning, guys.
Good morning, Dan.
Hey, Bill, can you just maybe share some thoughts? You guys laid out a lot of the CapEx details, but obviously the Clean Power Plan's one of these yet-to-be-determined, potentially a big deal, particularly for Kentucky. Given the fact the state's in opposition, Pennsylvania's kind of just in a passive functionality, how do you guys see your two states playing through as far as coming up with plans? When do you think you're going to get a better handle on how you guys are going to try and work to comply?
Sure. Let me give some general comments, and I'll ask Vic to talk specifically about Kentucky. I think in both states' cases, while they may be opposed and legally challenging the Clean Power Plan, I think pragmatically speaking, they both recognize that probably beginning to work on a state implementation plan would be a prudent thing to do compared to just waiting for perhaps a federal implementation plan to be visited upon them. I think generally speaking, both states, I believe, will constructively work with their utilities to come up with an alternative should their efforts to overturn the rule fail. With that little bit of background, Vic, did you want to talk specifically about Kentucky?
Yes. Just recently, our governor has announced that notwithstanding the fact that Kentucky will continue to litigate, as will our company, we will, in fact, be filing for an extension of time in September to push out our compliance plans for at least an additional two years. I think in the interim, we will continue to work with them to develop a plan that will be in the best interests of Kentucky consumers. We will be working with the Kentucky Public Service Commission, of course, to get a plan that's acceptable. From our perspective, I would anticipate us perhaps contemplating another combined cycle plant later in the planning in fact, outside this planning period, probably by 2022.
I do think Kentucky realizes that it would like to maintain the flexibility both to develop its own plan and not be subject necessarily to the auspices of the federal implementation plan, and second, be in a position to alter its own plan to the extent litigation should be successful in part or in total. That's where we are, and I think it will be a constructive exercise for all of us. I think the state recognizes the need to maintain its flexibility.
Okay. Thank you. I guess should we just take from that that we're probably not going to see a lot of incremental layering in a CapEx in Kentucky until there's more action on this front since that's kind of the next chapter?
I think that our funding suggestion would suggest we don't have to do anything until 2022, so you wouldn't see any CapEx as a run-up to a new power plant until after the 2018 or 2019 that you're looking at now.
Okay. Thank you for clarifying that. I guess on the FX calculation, I think you guys said that you could hit the 2018 number even if you were to clear at 146 on the pound right now. If I look at your sensitivities, it looks like there's about $0.10 of exposure if you were to mark to today. Is there that much room in that pretty narrow 1% growth rate band to cover $0.10 of downside, or do you guys have a lower FX number kind of embedded in that $2.52 than what's on the table on slide 21?
Yes, Dan. We are very confident that we can still hit the 5%-6% even under today's pretty weak pound. I think we do have levers to pull, O&M and some other things that we've looked at. I think, yes, we are still very confident that even with this weak pound, that we can maintain that 5%-6%.
Okay. Got it. Thank you.
Dan, it's Vince. I think if we had to hedge up everything at $1.46, we would be at the lower end of the 5%-6% range, but we still think we'll be in that range.
On the hedging, so you needed to get up to about 50%, so 30% more kind of in the first half of 2016, and then you have one year until you have to do the rest. Is that what that risk parameter would allow for?
I mean, I would say throughout 2016, we'll execute on the rest of the restrikes that we've embedded in the plan.
Yeah. Generally speaking, that's correct.
Okay. Thank you, guys.
The next question will come from Shar Pourreza of Guggenheim Partners. Please go ahead.
Good morning, Vince, and Bill.
Good morning.
Good morning.
Just a quick clarification. The slightly lower growth in the U.S., that's a function of the bonus depreciation extension or the pushing out of the CCGT too?
It's primarily bonus.
Okay. Got it. Just lastly, just focusing on Compass, it is obviously a little bit of an undertaking here, and you announced the first segment. Were you at all, or if you are going to JV, parts of this line, especially the New York portion, are you looking for partners? How should we sort of think about the other segments being announced and whether the CODs of the other segments could be earlier than 2023?
Sure. Let me ask Greg Dudkin, the president of our PPL Electric Utilities, to take that question.
With regard to potential JVs, we're prepared to go this alone, but if there's a JV that makes sense, we'll certainly look at that. As far as the other segments of the line are concerned, right now, we are focused on this segment, and we'll continue to evaluate the other segments to make sure that we have the right costs, the right plans, the right modeling. As we get to a point where we believe that we have an exceptional project, we will then release that similar to the way we did on the first segment.
Got it. That's helpful. Just to confirm, this is completely added into your growth suggestion?
That is correct.
Excellent. Thanks so much.
You're welcome.
The next question will come from Julien Dumoulin-Smith of UBS. Please go ahead.
Hi. Good morning.
Morning, Julien.
Perhaps just following a little bit up on the last questions here. As you're thinking about spending opportunities, obviously, you're shifting things down a little bit, but in light of the bonus depreciation, is there any ability to accelerate some of the other spend that you would have otherwise had out in the future just to kind of take advantage of those tax benefits and perhaps argue to some of the constituents here that there's a real tangible benefit to doing so?
It is certainly possible. Just having seen this change here at the end of last year, we will look to that opportunity for additional spending once we begin the planning process again for this year, taking us out through 2019. For now, we believe we have got a really solid plan with all completely identifiable projects through 2018 that we are highly confident we can execute on, and we will continue to look to see if there is additional projects we can bring into that window or the window just beyond 2018.
Got it. Just to get a little bit more clarity on the change in the projected T&D, I suppose you called it reliability spend in Pennsylvania, how much of that reduction is tied to the negative sales normalized trend that we saw last year? Is it really just about a narrow view of reliability and how effective it is, or how much does it tie into the sales forecast itself?
Yeah. Relative to the sales forecast, typically, I think what you're probably referring to is new customer load predominantly. That's pretty small, very small in the context of the large capital plan that we have. It would not be a major factor in moving the CapEx around one way or the other.
Got it. All right. Thank you, guys.
You're welcome.
The next question will come from Greg Gordon of Evercore ISI. Please go ahead.
Hey, Vince. Good morning.
Good morning, Greg.
I don't want to be a nitpicker, but I wanted to follow up on a couple of questions that were already asked. If I look at your slide 21 and I just take the sensitivities that oh, sorry, slide 27. I was looking at your last deck. I just take the sensitivities to heart today, especially in 2018 on the GBP, it would basically imply an $0.11 negative delta, which would still put you at a little over a 4% earnings growth rate from 2003- 2018, which, given the hits other companies have taken from bonus depreciation, would still put you guys in the winning column. How are we getting from the low fours-five under that scenario? You guys seem pretty confident you have the levers.
Yeah. Part of it, as I mentioned, would be operating and maintenance expense timing so we could move things around. I think also, as we've seen in the past, when we have years where we've got strong earnings either driven by weather or other events, we've taken that ability to go ahead and do restrikes on the hedges or set in new hedges. I know we have built into the plan some restrikes, some funds, if you will, for basically moving hedges around in time periods to meet our plan. I think the combination of those two would probably be the two levers that would most likely get pulled to keep us at that minimum 5% EPS growth rate that we're confident we can hit.
Thank you. My second question is also if I just take to heart the 5%-6% earnings growth range off 2003, you've rolled out a 2018 earnings aspiration of $2.52, but you sort of left a gap in the 2017 time frame. In the last presentation you gave at my conference in early January, there was a sort of notional target of $2.42. It looks like if you just look at the midpoint of 5%-6%, that number would be more like $2.38 now. Am I overthinking it, or is there just a modest drag from bonus depreciation in 2017 that we need to think about?
No. I would say the 2017 guidance hasn't really changed from what we had talked about prior.
Okay. Thanks. I just wanted to make sure. Have a great day.
You too. Thanks, Greg.
The next question will come from Jonathan Arnold of Deutsche Bank. Please go ahead.
Good morning, guys.
Good morning.
Just want to follow up quickly on the dry powder headroom that you referred to in talking about the FX exposure. Is that all within the UK segment, or are you talking about more broadly across the business? If you could clarify that.
This is Vince. Some of that we have about $0.05 or $0.06 kind of built into the plan to do restrikes and further hedge up 2018. Some of that's embedded in the UK guidance. I think some of it's probably sitting up at corporate and other as well, in total, it's about $0.05 or $0.06.
Beyond that, you'd be talking about cost management holistically across the company?
That's correct.
Great. Thank you, guys.
Okay.
Our next question will come from Brian Chin of Merrill Lynch. Please go ahead.
Hi. Good morning.
Morning.
On the hedge restrike comment, I just want to make sure I understand conceptually. That would be, for example, monetizing hedges that are in the money today and using that to put on hedges in place in 2018 to some degree. Is that conceptually what you're thinking about?
Exactly right, Brian.
Okay. Great. Just going back to the Kentucky NatGas plant deferral, just to be clear, was it the state's position on CPP that was the driving factor behind the plant deferral, or was there some other factors that helped drove that? The reason why I'm asking is I'm wondering, is there a risk of any other large asset deferrals in Kentucky or elsewhere?
Sure. Let me ask Vic Staffieri to comment on that.
No, Brian, it was purely a matter of we had some large municipals that are coming off the system later in the period, five years from now. That's why we made the change. We would do that application last year. It had nothing to do with this Clean Power Plan. We do not have any other generation in this plant either. No, it had nothing to do with the Clean Power Plan, and there are no other anticipated deferrals of capital spend.
Let me make sure I get that right. You have large municipalities, you said, that were coming off the system, as in they are self-powered on their own, and so the plant isn't needed. Is that right?
That's correct. They gave us those they had a five-year termination period. They gave us those to termination about 300 MW . They gave it to us last year. We've noted it before. As a result, we had into the commission looking for approval to build the plant. We withdrew that approval when the municipals notified us that they were coming off of our system and were contemplating going elsewhere. To the extent we have lost that revenue, we'll make it up in the rate case timing that we have. I think that's April of 2019, just now? Yes. It's now April of 2019. That's the only reason for the deferral of the power plant.
Understood. Then lastly, what's the sales growth assumptions that are embedded in the 2016 guidance? Can you break that down?
Yeah. Give us. Is it 2016 guidance?
Yeah.
Kentucky, we're using an average over the period of less than about 0.5% over the period. I think for Pennsylvania, aren't you flat?
Yeah. Pennsylvania's flat year-to-year, basically.
Okay. Actually, I see that here in the slide deck. My apologies. Thanks. That's all I got.
Okay.
Our next question will come from Michael Lapides of Goldman Sachs. Please go ahead.
Hey, guys. Congrats on a great transformational year. One or two simple questions. First of all, can you talk about what's assumed in guidance for earned ROE in both Pennsylvania and Kentucky? Second, on both sides, can you just talk about what kind of headwinds and/or tailwinds to earning authorized are in both places?
Sure. Vic Staffieri, why don't you take the Kentucky ROEs, and then we'll pass it over to Greg Dudkin.
In Kentucky, for the period, Michael, we're somewhere within 50 basis points of the allowed 10% ROE. Headwinds for us, not a whole lot because we're going to be in rate case cycle. Most of our returns are coming either from rate cases or ECRs. We're usually using future rate years, which we take into account of any economic issues, which are the only things that I could see. Other than that, it's a pretty solid plan for us.
Yeah. Pennsylvania's Greg Dudkin. Our expected GAAP combined ROE is 9.7%, and we don't really see any headwinds, particularly in 2016, because in the distribution case, we had a fully projected future test year. We're very confident we'll be able to achieve that.
We're in the same place for 2016. Kentucky, we're in the same place for 2016. We just finished up our rate case also using a future rate year. As we noted earlier, we've already made our filing on the ECR, we're in pretty good shape.
Got it. Okay. One other question. Just company-wide, O&M, can you just talk about what puts and takes are for O&M 2015 over 2016, kind of what's embedded in guidance, where the biggest O&M saves and where the biggest O&M pressures are in 2016 versus 2015?
Well, generally speaking, on the increase side, the typical major driver are general wage increases, many of which are already known and quantifiable through bargaining unit agreements and so forth. That's one of the major pluses. I think it depends on each of the companies on other things. For example, in Kentucky, as we build more assets out on the environmental cost side, there are costs associated with running new types of equipment, whether it's scrubbers or other things like that. Any other color in Kentucky, Greg?
No. I think, though, you're right. Remember, we're using future rate years now, so all of these costs are embedded, and we have no plans other than what we filed with the Commission. I'm not sure there are no really unknown puts or takes. I think, again, that's why we say it's pretty solid because our rates were based on a future rate year that extended, in this case, our case, through the middle of next year. Our plans are pretty solid. There's not a whole lot of puts and takes, or we're going to do what we told the Commission we're going to do.
Those general wage increases and other factors are already being applied?
Other factors. Wage increases impacting additional manpower to meet SIP requirements, things like that. They're all embedded in our rates.
When you do look at 2015- 2016, that's where you would see it in those categories.
Got it. Last.
Oh, go ahead.
Just real quick. Last thing on the U.K. Are you expecting O&M down in the U.K.? Is the 17% tax rate that you mentioned in the slides, that's a GAAP tax rate, and is that a lower number versus prior guidance as well?
Can I say that?
Yeah. Go ahead, Vince.
Hey, there, Michael Lapides. It's Vince Sorgi. Just first on the tax rate, 17%, I think, is pretty much where we've been guiding the last few calls. I would say that's consistent, and we pretty much see it at around 17% going out for a few years now. On the O&M, if you look at slide 15, it kind of shows the walk from the $221 to the $235. You'll see O&M is really not a major driver except for the U.K. It's $0.02, sorry, it's $0.07 down. About $0.05 of that is that pension methodology change. Outside of that, I would say O&M is really not a major driver year-over-year.
Got it. Thanks, guys. Much appreciated.
Hey, Michael. Thank you.
The next question will come from Anthony Crowdell of Jefferies. Please go ahead.
Hey. Good morning, guys. A quick question on PPL Capital Funding . You have a maturity, I guess, in 2018. Do you plan, I guess, with maybe more cash from bonus, maybe CapEx tailing down a little, do you plan to retire the debt in Capital Funding or keep using that as a vehicle for access to capital?
Yeah. I would say at this point, Anthony, we would likely refi that as opposed to just paying it down.
How much debt is that Capital Funding?
In total?
Yes, please.
We'll get that number for you.
Okay. I'll follow up with Joe after the call. Thanks for taking my question.
You're welcome.
The final question will come from Andy Levi of Avon Capital Advisors. Please go ahead.
Thought you guys were going to forget me.
Good morning, Andy. Never forget you.
How are you doing?
Good.
Actually, I thought it was a really good rundown to just FYI on that and very good handout too. Just a couple of questions. On the high end for 2016, how do you achieve the high end? What are the drivers relative to the midpoint?
Vince, you want to take that one?
Yeah. On 2016, I would say weather, load growth, O&M management. Currency's pretty much locked in, that's really not driving much of the exposure there. Those are the main drivers.
Yeah. I would agree. I think those are the key ones.
It's really cost and sales, basically.
Yep. Basically. Yep.
Okay.
There's a hedging that drives it the opposite, right?
Yeah. Okay. Got it. Then just on the hedging in the UK stuff, just to make sure because you got a bunch of questions on it. I don't know why it was so hard for people to understand. Basically, what you're saying is, if I understand it correctly, is that through restrikes, you're basically saying that you're 50% hedged for 2018 even though your table says 20%. Is that kind of what you're trying to convey?
I think that's a fair way to look at it. We've not executed those yet, but we have the ability in the room to do that. I think that's a fairly fair way to look at it.
That would take, obviously, those sensitivities down?
Correct.
Got it. The last question or point that I'd like to bring up, which I find interesting after going through a week and a half of earnings and looking at companies like Southern and Dominion needing to take down their numbers because of bonus depreciation here in the U.S. Just to be clear, there's no bonus depreciation in the U.K., is there?
No. Not in the way we would think about it here. Correct.
Right. In a sense, you could argue that by being two-thirds in the U.K. again, we obviously know the currency risks, at the same time, not having bonus depreciation in the U.K. is actually a very large benefit for you relative to some of the other US utilities who have seen their earnings power significantly go lower because of bonus depreciation.
Yeah. I think that's true. Yeah.
Okay. Thanks a lot.
Yeah. Thank you, Andy. Just to get back on was it Anthony's question on how much debt is that CapEx funding? $3.6 billion.
Okay. Makes sense. Okay. Thanks, everyone, for your participation on today's call. I would just summarize by saying that 2015 was an extremely pivotal year for PPL for many of the reasons I mentioned at the outset of my remarks. I think it's incredible. If you look at where we are since the spin, we've raised EPS growth rate guidance. We've achieved two favorable rate outcomes in Pennsylvania and Kentucky. We've raised our guidance on UK incentive revenue. We lowered our exposure to the pound. We've signaled meaningful increases in our dividend growth, we've lowered our equity needs. I can't think of another company that has accomplished so much in such a short period of time. Throughout this transformation, we've continued to execute at a high level, consistently delivered on our earnings forecast, exceeding the midpoint of our forecast for the sixth year in a row.
Our assets are diverse. We operate in premium jurisdictions, continuing to invest heavily in our businesses to improve service for customers as well as grow value for shareowners. I think we've demonstrated a proven ability to execute very large capital projects and managing our foreign currency exposure. Looking forward, I believe we're very well positioned to continue to deliver on these commitments to shareowners, offering competitive earnings growth and an above-average dividend yield. With that, thank you very much for being on the call today, and look forward to our next earnings call. Thank you.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.