Good morning, and welcome to the PPL Corporation third quarter 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 touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Joe Bergstein. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining the PPL conference call on third quarter results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com. Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of the 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 reconciliations 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 William H. Spence, PPL Chairman, President, and CEO.
Thanks, Joe, and good morning, everyone. We're 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. utility businesses. Also, with the recent retirement of Rick Klingensmith , the former President of PPL Global, with us today is Robert Symons, the Chief Executive of our U.K. utility, Western Power Distribution, or WPD. Welcome to the call, Robert. Moving to slide 3, you'll see our agenda for today's discussion. We'll begin with an overview of our 3rd quarter and year-to-date earnings results. We'll also address our 2015 earnings forecast, which we are reaffirming today. I'll provide an update to our earnings and dividend growth expectations through 2017, both of which we are increasing today. I'll provide a brief operational overview for our U.S. utilities.
I'll turn the call over to Robert to review some new disclosures we're making this quarter to provide more transparency on our estimates for incentive revenues at WPD under the new RIIO model. Vince will then review our segment results and provide a more detailed financial overview. As always, we'll leave time to answer your questions. Before I jump into the earnings details, however, let me tell you briefly where we stand with 3 quarters of the year behind us. Based on the solid year-to-date results, our plans for about $10 billion in infrastructure investments through 2017 and higher expected earnings from our U.K. operations, we're now confident we can achieve 6% compound annual earnings growth through 2017. We continue to execute well, and we're confident in our growth plans. The company had previously projected 4%-6% earnings growth.
Our business plan is low risk, and we're confident in our ability to execute the plan and deliver on our commitments. Moving to slide 4. Today, we announced third quarter 2015 reported earnings of $393 million, or $0.58 a share, a decrease from $497 million or $0.74 per share a year ago. Year-to-date reported earnings were $283 million or $0.42 per share, compared with $1.04 or $1.04 billion or $1.57 per share through the same period in 2014. Reported earnings for the first nine months of 2015 reflect a $915 million loss or a $1.36 per share from discontinued operations, resulting primarily from the June first spinoff of our competitive supply business.
Adjusting for special items, third quarter 2015 earnings from ongoing operations were $0.51 per share, up 16% from third quarter 2014 adjusted results. Through the first nine months, 2015 earnings from ongoing operations were $1.77 per share, up 15% from a year ago. Moving to slide 5. Driven by the strong performance of our fully regulated portfolio, today we're reaffirming our 2015 forecast range for earnings from ongoing operations of $2.15 per share to $2.25 per share. If you tracked us closely through the years, as I know many of you have, you know that we have a strong track record of not just meeting but exceeding earnings targets. As I indicated earlier in my remarks, we are now confident we can achieve 6% compound annual earnings growth through 2017.
This increase is driven primarily by higher expected earnings from our regulated operations in the U.K., driven primarily by higher expected incentive revenues and lower depreciation expense resulting from the change in depreciable lives. Robert will discuss the details of the higher incentive revenues in his prepared remarks. We now expect the U.K. earnings growth to be 1%-2% through 2017, previously projected to be flat. We expect 12%-14% growth in domestic operations, including our corporate services organization. Vince will provide an update on our U.K. earnings projections through 2016 in his prepared remarks.
Our overall earnings growth is fueled by about $3.5 billion per year of capital investments in our existing infrastructure and service territories. Combined with the constructive regulatory jurisdictions where we operate, which results in over 80% of our CapEx earning a return within 12 months and approximately 76% in less than 6 months. Regarding the dividend, we expect minimal dividend growth again for 2016 as we strive to get the payout ratio down into the mid 60% range, at which time we will target a 4%-6% dividend growth rate more in line with our earnings growth expectations. We currently expect to be in the targeted payout range by the end of 2016.
Our current expectation is that we will grow the dividend more meaningfully starting in 2017, but our current expectation for 2017 is at the low end of the 4%-6% relative to the dividend. We will expect to maintain at least that level of growth through 2017, but we will assess that when we get there. Turning to the operational overview on Slide 6 and beginning with the PPL Electric Utilities rate case, on September 3rd, we announced a settlement agreement that would provide PPL Electric Utilities an additional $124 million in revenue through a rate increase to be effective January 1st of 2016. The settlement will help fund additional reliability improvements as we continue to strengthen and modernize our Pennsylvania delivery network.
Earlier this month, an administrative law judge for the Pennsylvania Public Utility Commission recommended the commission approve this settlement. Action by the commission is expected later this year. The settlement is a black box settlement and does not specify an allowed return on equity. The agreement highlights the constructive relationships we have in the jurisdictions where we operate and our ability to work with a variety of parties to secure results that deliver both competitive returns to shareowners and significant benefits to customers. It's the second such settlement we've announced this year. Last quarter, we highlighted the Kentucky Public Service Commission's approval of rate increases for our Kentucky utilities following a successful settlement in those proceedings. In both the Pennsylvania and Kentucky jurisdictions, we utilized forward test years. This further assists in our ability to reduce regulatory lag.
Also in September, the Pennsylvania Public Utility Commission unanimously approved PPL Electric Utilities' request to invest $450 million in new, more advanced meters for its 1.4 million customers. The company plans to replace its existing meters between 2017 and 2019 to provide expanded benefits to customers and to comply with state-mandated regulations on metering technology. Costs will be recovered with little to no regulatory lag through a special rider. The replacement is expected to increase rate base by about $330 million. In Pennsylvania, I'd also like to mention that PPL Electric Utilities received another J.D. Power Award for residential customer satisfaction. The company ranked highest among large electric utilities in the Eastern U.S. It is the 4th year in a row that the PPL Electric Utilities earned the distinction and the 12th overall in that category.
The company has now won 11 J.D. Power Awards for business customer satisfaction as well. Lastly, turning to Slide 7 before I move to Kentucky, PPL Electric Utilities took an important step on its proposal to construct a major new transmission line called Project Compass that's designed to provide significant benefits for electricity consumers in the Northeast. PPL Electric Utilities has filed an interconnection request with the New York Independent System Operator to build a 95 mile transmission line between Blakely, Pennsylvania, and Ramapo, New York. The projected capital cost is expected to be $500 million-$600 million. This first section or segment is designed to help make the electric grid more reliable and secure for customers throughout the region and provide substantial savings for New York consumers.
If our interconnection request is approved by the New York ISO, additional approvals for this segment will be needed from the Pennsylvania PUC, the New York Public Service Commission, PJM, and several other agencies. PPL Electric Utilities has extensive experience, as you know, in planning and building regional transmission lines. Just this past spring, we energized the Susquehanna-Roseland transmission line, which involved the planning, approval, and construction of 101 miles of a 500 kV transmission line. On the Susquehanna-Roseland project, we demonstrated our ability to cooperate with multiple state and regulatory government agencies and to partner with the neighboring utility, which built an additional 50 miles of transmission line in New Jersey as part of that project. Expenditures for Project Compass are not included in our current capital projections.
Our proposal currently calls for this first segment to be built and placed in service by 2023. While the first segment can stand alone as a valuable grid improvement, we continue to evaluate and refine the overall plan for the rest of Project Compass. As currently envisioned and based on preliminary estimates, Project Compass, in its entirety, would extend about 475 miles from Western Pennsylvania into Southeastern New York at an estimated cost of $3 billion-$4 billion. If you turn to Slide 8, you will see the portion of the transmission line that represents the first segment between Blakely, Pennsylvania, and Ramapo, New York. Shifting south to Kentucky, we retired the final two generating units at our Green River Station on September 30th. This marks the completion of our plan to retire 800 MW of coal-fired generation in Kentucky.
We also continued to analyze the potential impact that the Clean Power Plan could have on our Kentucky operations. The precise impact is difficult to pin down at this point. The final rule was just published last Friday, October 23rd, and the final impact of the rule will not be known until the state implementation plan or the state-specific federal implementation plan has been developed. The final rule is already being legally challenged, so this could have an impact as well. In the end, we will develop a plan for our facilities in collaboration with the Kentucky Public Service Commission and the Kentucky Energy and Environment Cabinet. Any investment required to comply with the Clean Power Plan would be incremental to our current CapEx plan.
I'd now like to turn the call over to Robert Symons, CEO of our U.K. operations, who will walk us through our new disclosures on incentive revenues under RIIO-ED1. Robert?
Many thanks, Bill, and good morning. We've received several inquiries as to how the U.K. is performing against the tougher incentive targets set by Ofgem under RIIO-ED1. Moving to slide 10, as Bill mentioned earlier, we are pleased to be providing new disclosures to review our current performance. Before we get into the performance details, I would like to provide some background on the incentive framework. WPD has a long history of operational excellence, and we expect that to continue into RIIO-ED1. Our ability to execute on our plans and achieve incentive revenue has been key to our financial performance. Once again, WPD is on track to outperform its Ofgem targets in the 2015/16 regulatory year. WPD now expects to earn total incentive revenues that exceed prior estimates for 2017 and 2018.
Our original plan assumed between $80 million and $100 million for 2017, and between $60 million and $90 million for 2018. Based on our performance to date, we're raising guidance estimates for the 2017 calendar year to $90 million- $110 million, and $75 million to $105 million for 2018. One of the real benefits of being fast-tracked through price control review process is that we've had more time to ensure we were in a strong position to deliver the outputs included in the business plan submitted to Ofgem. For example, in advance of the RIIO-ED1 period, we adjusted one of our operational targets to less than 12 hours for supply and restoration, down from 18 hours, to align our performance with the new guaranteed standards in RIIO-ED1.
The fast-track award of about $43 million per year during RIIO-ED1 period, along with our ability to earn incentive revenues, are two very strong reasons that the U.K. regulatory model is considered a premium jurisdiction. Turning to slide 11, the primary schemes that contribute to incentive revenues include the interruption incentive schemes and the broad measure of customer satisfaction. Interruption incentive schemes include customer interruptions and customer minutes lost. Both of these schemes are designed to incentivize the DNOs to invest and operate their networks to manage and reduce both the frequency and the duration of power outages. The targets under RIIO-ED1 are specified in our licenses and become slightly more demanding each year. On this slide, you will find results for customer minutes lost on the top left of the slide and customer interruptions on the top right.
Customer minutes lost measures the cumulative amount of minutes customers are without electricity. In this chart, we're reporting the cumulative average performance of all four of our DNOs. The line in purple is the Ofgem target, and the dotted line is the projected result, with the vertical line showing the maximum rewards or penalties. Customer interruption measures the cumulative amount of interruptions in a customer's electricity supply per 100 customers. The chart is using the same basis for reporting, an average of all four DNOs. However, this chart represents customer interruptions per 100 customers. You will see for the first six months under RIIO-ED1, WPD is trending towards exceeding the annual targets for customer minutes lost and customer interruptions. These incentive revenues, while earned during the 2015-2016 regulatory year, will be received in the 2017-2018 regulatory year.
Now turning to slide 12. In addition to the interruption incentive schemes, the second scheme, the broad measure of customer satisfaction, measures performance against customer satisfaction. Each month, Ofgem surveys customer satisfaction for services provided by the DNOs. On a scale from 1 to 10, this chart provides results against the targets Ofgem has established for customers experiencing interruptions, requesting a new connection, or making a general inquiry. This chart shows WPD's performance through September 2015 for each DNO compared to all other DNOs combined, and demonstrates our excellent customer service. While we have only been performing under RIIO for 6 months, as I mentioned earlier, the benefit of being fast-tracked afforded us the opportunity to begin to plan our approach to delivering outputs. As we continue to execute on those plans, we are on track to meet or exceed the new targets.
We will continue to provide updates to these slides each quarter. Now Vince will walk you through a more detailed look at segment earnings.
Thank you, Robert, and good morning, everyone. Let's move to slide 14 for a review of segment earnings. Our third quarter earnings from ongoing operations increased over last year by $0.07 per share, driven primarily by higher earnings from the Kentucky Regulated segment and the U.K. Regulated segment, and lower costs in Corporate and Other resulting from the corporate restructuring. Let's briefly discuss domestic weather for the third quarter and year-to-date compared to last year and also compared to our 2015 forecast. Overall, domestic weather was slightly favorable for the quarter and flat year-to-date compared to the same periods last year. However, compared to our 2015 forecast, weather had a positive $0.03 impact year-to-date and was flat for the third quarter. Let's move to a more detailed review of the third quarter segment earnings drivers, starting with the Pennsylvania results on slide 15.
Our Pennsylvania Regulated segment earnings for the third quarter were flat compared with a year ago. This result was due to higher margins from additional transmission investments and returns on distribution improvement capital investments, offset by higher O&M expenses and higher depreciation due to asset additions. Moving to slide 16. Our Kentucky Regulated segment earned $0.16 per share in the third quarter of 2015, a $0.04 increase compared to a year ago. This result was due to higher gross margins from electric and gas, base rate increases effective July 1st of this year, returns on additional environmental capital investments, and higher volumes due to warmer weather. Moving to slide 17. Our U.K. Regulated segment earned $0.29 per share in the third quarter of 2015, a $0.01 improvement compared to the same period last year.
This increase was due to lower income taxes, primarily from lower U.S. taxes on dividends in 2015 compared to 2014, and lower depreciation expense from the asset life extension we discussed earlier this year, partially offset by increased depreciation from asset additions. These increases were partially offset by lower utility revenues as we transitioned to RIIO-ED1 on April 1st of this year, partially offset by higher volumes and higher miscellaneous revenues. Moving to slide 18. On this slide, we provide an update to our GBP hedging status for 2015, 2016, and 2017, including sensitivities for a $0.05 and $0.10 downward movement in the exchange rate compared to our budgeted rate of $1.60. We continue to be fully hedged for the remainder of 2015 at an average rate of $1.54.
For 2016 and 2017, the hedge percentages are off the higher expected U.K. earnings that Bill discussed, thus our 2016 hedge ratio came down a little. For 2017, we continued to layer on hedges during the quarter and have increased our hedge percentage from 40% at the end of the second quarter to 66% today at an average rate of $1.60. You can see from the sensitivity table that there is no exposure for the remainder of 2015, minimal exposure in 2016 and 2017 if the average hedge rate on our open positions is $1.55. These FX sensitivities do not factor in the potential positive effects from restriking existing hedges, which as you know, we've been successfully doing throughout the year.
Also on this slide, we show our RPI sensitivity, which has been updated as well. As we have discussed previously, under the RIIO model, our revenues for the 2015-2016 regulatory year were set using a 2.6% inflation rate, and our 2017-2018 revenues will reflect a true up for the actual inflation rate for the 2015-2016 period. We are now incorporating a forecasted RPI rate of 1.6% in our current planning assumptions compared to the 2.6% that we were previously using. This 1% difference results in a reduction to 2017-2018 allowed revenue and affects our 2017 calendar revenue by approximately $0.03 per share. The lower RPI rate and the revenue give back are fully reflected in our assumptions that drive the 6% EPS growth through 2017.
As a result, the 2017 RPI sensitivity for a half a percent downward movement in the 2015-2016 RPI is now off the current forecast of 1.6%. Looking ahead to November of this year, our 2016-2017 and 2017-2018 tariffs will be based on the forecasted RPI at that time. As you can see on the slide, the current RPI forecast for 2016-2017 is 2.8%, and for 2017-2018 it's 3.1%, both of which are in line with the rates used in the forecast to hit the 6% earnings growth. Before turning the call back to Bill, I wanted to provide an update on our projected U.K. earnings through 2016.
As you can see on slide 19, we have increased our earnings projections for 2015 and 2016 from a midpoint in the $1.40 per share range to a midpoint in the $1.43 per share range. The increase for 2015 is primarily driven by the lower depreciation expense from the asset life extension. The increase in 2016 is a combination of higher incentive revenues and lower depreciation. We still expect a relatively flat earnings trajectory in the U.K. through 2017. It is now off of the higher 2015 year-end forecast of a $1.43 per share. That concludes my prepared remarks, and I'll turn the call back over to Bill. Bill?
Thank you, Vince. PPL continues to be a very compelling investment opportunity within our sector. With a competitive earnings growth rate, which we just guided to 6% through 2017. Combined with better than average dividend yield at about 4.5%, and the ability to continue to grow that dividend, we believe we can deliver a top quartile total shareowner return over the next three years. I believe most importantly, that this is all supported by a low-risk business plan. With that, operator, let's open the call to questions, please.
We will now begin the question and answer session. To ask a question, you may press Star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Shahriar Pourreza of Guggenheim. Please go ahead.
Good morning.
Good morning.
Appreciate the new disclosures around the Compass Project. How should we think about the remaining miles? Are you looking to potentially segment the rest? Is there an opportunity to potentially JV with some of the neighboring utilities to smooth out the process?
Sure. I think in both cases the answer would be yes. There is an ability to continue to segment the line, as well as partnering with adjacent or utilities that the project goes through their service territory. I think in both cases, we would look to do that.
Got it. Got it. Just on the updated guidance around the growth of 6%, should we sort of think about that as a new midpoint of a new range? Or is this sort of you being able to sort of achieve the top end of the prior plan?
This is really our ability to achieve the top end of the plan for this current period, the 2015 through 2017 period. Then we will assess and report out on the fourth quarter call our expectations for how that growth rate will continue past 2017.
Got it. Just one last question under ED1, the updated disclosures, which was obviously very helpful. Is this something we can expect an update on a quarterly basis as you report earnings? Is sort of the trough earnings for that segment sort of being shifted a little bit into 2017 and potentially earlier than that?
Well, two things. One is we will continue to update on a quarterly basis where we stand relative to those incentive targets. You know, we previously had noted that the U.K. business was expected to be flat from an EPS basis. With the new disclosures and now six months behind us in terms of how well we feel about our capability to earn the incentive revenue, we're now comfortable saying that the U.K. earnings will be slightly positive, 1%-2% type growth rate off of the flat. We're now looking at that 1%-2%, you know, annual growth rate.
Excellent. Congrats on these results.
Thank you very much.
The next question comes from Julien Dumoulin-Smith of UBS. Please go ahead.
Hi, good morning. Can you hear me?
Good morning, Julien. Yes.
First quick question, if you can elaborate a little bit on the latest positive development in the U.K. Could you perhaps give us a little bit of a sense of how much of that is driven by cost savings, if you will, specifically Totex?
Sure. The increase in earnings that we're announcing today from the U.K. is primarily driven by the increase in the incentive revenues that we now expect to earn through the period. There really are some other moving parts, the biggest of which is probably the depreciable change that we had in the lives of the assets, and that's in the short term driving, you know, some cost savings there. From a Totex perspective, maybe Robert, you could indicate where we are relative to the filed business plan.
Thanks, Bill. Yeah. In terms of Totex, basically we're on target to deliver the plan. There are various variables which obviously influence that, connections and other such things, but basically we're on plan.
Great. Thank you.
Got it. All right. Excellent. Perhaps to boot with that, if you will, where do you stand with respect to solar DG interconnections into your U.K. system, and how is that impacting the Totex expectations in the near term as well as into the mid-period review?
Sure.
Do you expect to have a mid-cycle review, you know, potentially to reflect more solar interconnections?
Let me ask Robert to comment. Before he does, just to put a little perspective on this, there has been a significant increase in requests for connections for distributed generation in the U.K., predominantly driven by some very substantial feed-in tariffs that have encouraged a lot of connections. My understanding is those feed-in tariffs are coming to an end or being substantially reduced. Such that the demand for distributed generation has dropped off very significantly. Having said that, there is a lot of pent-up demand and requests on the system, and it kind of depends on which DNO you look at. I think of the DNOs that we operate, the 4, the one where we've seen the most significant request has really been in the Southwest.
With that bit of background, Robert, do you wanna provide a little bit more color, please?
Yes. Just to give you some idea of scale, the current subsidy on photovoltaic is about GBP 0.06 per unit. That's going down. Well, there's a consultation document out, and potentially that will go down to about GBP 0.01 per unit. Basically it's the FIT tariffs which actually drive demand. In terms of its impact on Totex, developers have to pay the cost of reinforcement up front. It's only the bit that possibly benefits us in other ways that is actually funded out of the Totex pot. About 95% of the cost of actually putting in or reinforcing the network in order to connect large, photovoltaics is actually met by the developer themselves. I don't see it as a real big impact on Totex.
I think if there was a change in government policy as to how this stuff was funded, that would be the trigger that would trigger a midterm review, if it was the case that companies had to make a larger contribution towards that investment. Given the current situation, I can't really see that happening.
Got it. Just to clarify here, is this a CapEx opportunity in your mind down the line? In the near term, is that one of the reasons that it prevents you from outpacing the current plan in the U.K.? Just to be very clear about it.
We work under a series of rules, Julien, and the rules say that there's no, the current rules say there's no investment ahead of need. You can't build a line, if you like, before it's actually required. That investment opportunity really isn't there under the current rules. As I stated before, I think its impact on reinforcement, expenditure detailed in the business plan is relatively small currently.
Got it. Excellent. Just the last little detail. I'd be curious, you know, you all have a good track record in the U.K. What are your thoughts to expanding the U.K. footprint, specifically, transmission is opening up for competitive bids? Obviously, we've talked a lot about that domestically. Just curious to get your initial thoughts.
Yeah. At the moment, Julien, we would not look to expand into transmission. I think, as Robert says, you know, we're great at what we do, and we wanna stick to what we know best. So that's our current plan.
Great. Well, congratulations again. Good results. Keep going.
Thank you very much.
The next question comes from Daniel Eggers of Credit Suisse. Please go ahead.
Hey, good morning, guys.
Morning, Dan.
Hey, just going back to the U.K. incentive revenues and the updates there, do I take that the new ranges for the next two couple of years, those are gonna be the high end of what you can earn based on the formulas in the U.K. because you're performing at the upper bounds of what they're allowing for?
We're not projecting to be at the very top of the band. Based on the projection, you know, we have a range there. We're near the, you know, I would say we're in the upper end of the band, but there's probably still a little bit more room to the extent we outperform even more than we're currently projecting.
Daniel Eggers, this is Vincent Sorgi. I would say the midpoint of those ranges would reflect kind of current level of performance. If WPD is able to continue to improve, that would push us probably to the high end of those bands. There's also risk that something, you know, bumps in the night, we, you know, we took that into account as well. It's based on current level of performance.
Effectively, since the last update, you guys have moved your performance from the old midpoint to the high end of the old band is basically what's happened.
That's right.
There's still room either way. Okay. Then, you know, just kind of given the shape of when you go from the old RIIO to the new RIIO, the 2019 opportunity, and I know this is far out, but just so we can kind of think about the shape of the outlook. Does the incentive revenue pool shrink when you get out to 19 given the fast track design, or does that stay at about the same level where so you can keep competing for the same amount of revenue contribution?
Robert, why don't you take that?
The pool stays the same. The incentive mechanism stays the same. The targets get slightly more difficult year on year. That varies between which of the 4 businesses you're talking about. Those sort of things have been built into the sort of information that Vince uses.
It's not, we don't have a contraction in that size. There's still opportunity for you guys to continue, you know.
No
at that level in the future.
Yes, you've got it exactly right. The opportunity still remains the same, albeit the targets get slightly more difficult as time goes on. One would hope that also an investment in tree cutting and investment in lines and all the rest of it, automation schemes, will actually produce some benefit later on.
Okay. Very good. I got that. Just on Compass real quick. You know, I know it's a ways off, does this get caught up in this Order 1000 work where because it's an economic line instead of a reliability line, do you get more competition and people prospectively bid away the cost of capital? How do you, how do you think you're gonna be able to preserve some sort of competitive advantage in this line?
I'll let Greg take that question.
Yeah, the way this is set up currently under New York law, this would not be considered a FERC Order 1000 project. We are going and making interconnection request, and we'll be filing Article VII now. If the approval path goes down that path, there may be an opportunity for competition, but the probability is a little bit lower. If the PSC opens up a economic window next year, there could be competition. We'll see how it plays out.
I think relative to the competitive nature of this, obviously just having completed a very major line, essentially in the same region, I think our capability to be very competitive, should we get to that point, should be strong.
Okay. Very good. Thank you, guys.
Sure. Thanks, Dan.
The next question comes from Michael Lapides of Goldman Sachs. Please go ahead.
Hey, guys. Congrats on a good quarter and outlook. I don't know if this is a Bill or Vince question or is both. When you think about just company-wide, what's the O&M assumption that's embedded in your guidance growth rate, the kind of the 6% off of 2014?
Sure. Thanks for the question, Michael. I'll let Vince take that one.
Sure. In general, obviously, you know we've reduced O&M quite significantly coming out of the spin with the corporate restructuring efforts, where we were targeting about $75 million, and we're comfortable that we've achieved that. However, we do continue to look at the corporate services organization as well as just operations between PA and Kentucky to see if there's opportunities for continued efficiency there domestically. WPD is already very efficient. We just continue to look at that. We built in about another $0.02 worth of opportunity through our, through 2017 in achieving the 6% growth rate.
Got it. Okay. Can you just give us the puts and takes? I mean, I know the Pennsylvania rate increase. I know the environmental cost recovery rider in Kentucky. Your U.S. utility growth rate puts you kind of well above the norm for traditional utilities. Can you talk about some of the other drivers of that besides those two items I referenced?
I think a key one would be transmission. Our transmission is growing at a compound rate of 17%, that's significant driver. You know, in terms of the outcomes that you mentioned on the rate cases, I think there were fair outcomes, not terribly inconsistent with our planning assumptions. I think as we continue to refine our co-cost structure, as Vince said, both at the corporate level as well as at the utility level, that's gonna drive some upside or some improvement there, and that does help the domestic utility growth rate. I think it's probably worth mentioning that we're not really changing the domestic utility growth rate from the utilities. What we've really changed and upped the overall is the corporate services where we're seeing lower costs.
The lower cost in the corporate services, that $0.02 that Vince mentioned, is really what's moving the domestic utilities growth rates up or, you know, everything.
Yeah.
combined together to get us to the 6%.
Got it. Last question in the U.K. Can you remind us the calendar year expected incentive revenue for 2015 and 2016?
The calendar year, so it's an April first start and then goes on to the end of March of the following year.
Yeah.
That, in terms of the dollars, is $130 million.
Well, you wanted 15 and 16, Michael?
Yeah. I'm just trying to compare what you have on slide 10.
Yeah.
-what you're expecting for 15/16. I think what you have slide 10 is calendar year, not the April to March year.
That is correct. Fifteen, we had $120, and about $125, $126 for 16.
Got it. Thanks, guys. Much appreciated.
Sure.
The next question comes from Steve Fleishman of Wolfe Research. Please go ahead.
Yeah. Hi, good morning.
Morning, Steve.
Hey, Will. Just wanna clarify some of the U.K. changes where it seems like that's where the guidance uplift is. The incentive benefit which you've given, it looks like it's about $0.01 in 2017 based on the higher on a per share, $10 million-$15 million.
Yes.
Okay. You did change your RPI guidance, you said down $0.03?
Correct. We did.
Okay.
adjust it down.
It's in the guidance, right?
Yes.
In the guidance. Is all the rest of the benefit depreciation benefit and/or O&M or some kind of O&M too, or what's?
Yeah. Steve Fleishman, I would say the 6%, as we were going through the planning process, you know, we didn't bake up until now all of that $0.06 of depreciation upside through 2017 because of the risks around RPI and FX. I would say that, you know, the RPI forecast has been holding strong in that 3% range. We're at 2.8 for 2016 and 3.1% for 2017. We're feeling pretty good. The exposure there is really only another month because once that gets set next month, that's really what it'll drive for the next 2 years. We feel comfortable with that exposure.
As we continue to layer on the hedges, I think we're extremely comfortable that we can manage the FX exposure and hedge that up to $1.60 through at least 2017. As our comfort level on both of those risk factors improved, we were able to put more of the $0.06 upside kind of into the base forecast. That $0.06 has been there all along, but we were using it as a risk mitigant up until now.
Got it. Okay. That depreciation benefit you had at the beginning of the year, there's not like a new one on top of that.
No.
That's just, you're able to see the full benefit of that 'cause you've limited some of the pressures that might have been there.
Correct.
Got it. Perfect. Okay. That was really it. Thank you.
Okay. Thanks, Steve.
The next question comes from Greg Gordon of Barclays. Please go ahead.
Yes, thank you. Can you talk a little bit about the funding needs for the CapEx plan? You know, you have almost $1 billion of cash on the balance sheet. Would one of the, you know, strategies be to work that cash balance down or how are you thinking about that?
Sure. That would be the plan. We work that down. Vince, you can probably speak more specifically to exactly how we're planning to fund the CapEx plan.
Sure. Slide, slide 26 in the appendix, Greg Gordon, really details that. It's the same slide that we went through last quarter in terms of funding the growth. In the U.K., Greg Gordon, I'll just reiterate that the U.K. business is fully self-funding. They're able with their cash from operations and their ability to borrow in country and maintain their 80%-85% debt to RAV ratios. They're able to basically self-fund and still dividend about $400 million of cash a year back to the U.S. We take that $400 million, add it to our cash from operations, fund our maintenance capital, and, you know, we still think we'll have, even after we pay the dividend, about $250 million.
Over, say, the next 3 to 5 years, that will continue to grow as the domestic cash from ops grows. That $250 million will drive either dividend growth that Bill talked about or CapEx growth. We'll use debt and a little bit of equity. We still have the $200 million of maxed equity issuances in the plan. Everything else would be funded with debt. We're able to do that and maintain our solid investment-grade credit ratings.
Thanks, Vince.
Sure.
The next question comes from Neil Mehta of Tudor, Pickering. Please go ahead.
Hi, good morning. Thanks for updating the RPI assumption. My question is, when's the next time you'll be evaluated for it? I guess for the 2016, 2017 planning year. When would the 2.8 be evaluated versus what's actually happening? And would that impact mainly 2018 earnings if there was a reset?
Yeah. The first impact would be showing up in 2018.
2018, 2019.
2019-period regulatory year. That is correct. In terms of the next end of the period, I guess, when would that be, Vince, in terms of the measurement period?
Yeah. I mean, it's the same schedule as the 2015, 2016. You know, we're truing up the $2.6 to the $1.6, and that giveback shows up 2 years later, 2 regulatory years later, in the 2017, 2018 timeframe. If 2016, 2017 comes in on an actual basis less than the $2.8, that would be given back in 2018, 2019.
Okay, great.
Also if it comes in higher, we will receive additional revenues in 2018, 2019. It's not one way.
Right. Right. Looking at the percent hedge for the currency at 66% and you're assuming $1.60 for the exchange rate, do you have any more flexibility to maybe lower 15 hedges to benefit 17 if the exchange rate doesn't go your way?
We're pretty much done with our 2015 hedges. However, our 2016 hedges are in the money as well, and there certainly could be an opportunity to restrike our 2016 hedges and move that value into 2017 and potentially even a little bit in 2018. I would say we probably have $0.03-$0.04 of opportunity to do that.
Okay, great. Directionally, can you guys provide where you are in terms of the exchange rate hedges for 2018 at this point?
We're currently 0% hedged for 2018.
Okay, great. Thank you.
You're welcome.
I think we're out of time, Joe.
Yeah, I think there's no more questions in the queue.
Okay.
Go ahead, Bill.
Okay, great. Well, thanks everyone for participating on today's call. I know several members of our senior management team and myself will be attending the EEI Financial Conference coming up in November, we look forward to seeing everyone there. Thanks.
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