PPL - Earnings Call - Q2 2016
August 9, 2016
Transcript
Speaker 0
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.
Speaker 1
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 of 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 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.
Speaker 2
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 Sorge, PPL's Chief Financial Officer and the President of our U. S.
And UK utility businesses. Moving to Slide three, 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 UK decision to leave the European Union has had on PPL. We're 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 four. Today, announced second quarter twenty sixteen reported earnings of $0.71 per share compared with a reported loss of $1.13 per share in the second quarter of twenty fifteen. Second quarter twenty fifteen results reflected a one time charge of $1.5 per share from discontinued operations associated with the 06/01/2015 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 twenty fifteen 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 twenty sixteen 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 twenty sixteen, 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 UK earnings in the 2016 as a result of the RIIO ED1 revenue reset that occurred in April.
Vince
Speaker 3
will
Speaker 2
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 five. 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 $1.3 per pound on our open positions. Turning to Slide six, looking beyond 2016, the fundamentals of the business remain strong and intact despite the recent UK 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 UK 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 UK. Our revenues are set for seven more years.
We are essentially sheltered from economic recession since we would be made whole in future periods for any volume variances that may result from an economic slowdown in The UK. 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 UK 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 seven, we know that without providing updates to our earnings growth profile, there would 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 catalysts 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 UK 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 $450,000,000 in the money, which we don't believe is being appropriately reflected in PPL 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 $310,000,000 in value. This monetization in combination with the higher than expected gains on the remaining twenty sixteen hedges will offset lower expected cash repatriation amounts from The UK 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 point dollars 3 foreign currency rate on unhedged positions from 2017 through 2020. Re hedging about 95% of the 2017 UK earnings at current rates protects the 2017 earnings guidance that we're providing today against any further near term decline in the pound. Resetting our unhedged earnings in our business plans to the $1.0.3 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 UK going forward. On an annual basis, we will determine the appropriate level of distributions from The UK taking into account foreign exchange rates as well as tax rates in both The US and The UK.
But in the near term, we anticipate that we would repatriate about $100,000,000 to $200,000,000 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 a 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 UK 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 eight, 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 UK earnings excluding currency are expected to be $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 $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 nine, our fundamental businesses business fundamentals rather 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 $29,000,000,000 by 2020. The constructive regulatory climate in which we do business is also the same.
We still expect about 80% of our $12,000,000,000 infrastructure investment over the period to receive near 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? Thank you, Bill, and
Speaker 4
good morning, everyone. Let's move to Slide 11. Our second quarter earnings from ongoing operations increased by $07 per share, driven primarily by higher earnings from the Pennsylvania Regulated segment and the Kentucky Regulated segment, while The UK 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 $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 twenty sixteen, a $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 01/01/2016 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 twenty sixteen, a $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. Turning to Slide 14. Our UK Regulated segment earned $0.36 per share in the second quarter of twenty sixteen, the same as a year ago. This result was due to higher gross margins, primarily resulting from higher prices due to the 04/01/2016 price increase, partially offset by one month of lower prices from the 04/01/2015 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 and M expense of $01 was offset by unfavorable FX of $0 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 $2.5 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 $1.3 per pound for all open positions and updating RPI using the July Treasury forecast for The UK economy. We have also updated our U.
S. And UK 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 600,000,000 and $700,000,000 per year, $2,600,000,000 over the four years and between $350,000,000 and $400,000,000 a year of continued environmental investment in Kentucky at an ROE of 10%. Over the four years, we expect to spend about $1,500,000,000 of environmental CapEx in Kentucky.
Just this week, the Kentucky Public Service Commission approved our $1,000,000,000 environmental cost recovery plan with a 9.8% ROE. Moving to The UK. The updates to the business plan reflect the macroeconomic impacts following the UK referendum. We now project 4% to 6% growth in The UK from 2017 through 2020. The plan incorporates 1.3 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 UK incentive revenue. Estimates are now 85,000,000 for 2017, between 80,000,000 and $100,000,000 for 2018 and between 95,000,000 and $115,000,000 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 twenty sixteen-twenty seventeen 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 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 UK of approximately 17%.
Moving to Slide 16. I'd like to review our updated cash repatriation strategy from The UK as this strategy has been modified beyond just the lower FX rate. Our previous guidance on cash repatriation from The UK was to distribute between $300,000,000 and $500,000,000 per year with a target of $400,000,000 assuming an FX rate of $1.6 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 $400,000,000 per year represented distributions of about £250,000,000 per year.
That £250,000,000 translated at $1.0.3 would result in U. S. Dollar distributions of about $325,000,000 This lower value of $75,000,000 per year does not immediately impact us from a cash perspective since the in the money hedge value of about $450,000,000 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 $100,000,000 and $200,000,000 per year in the near term. This lower cash amount will minimize the amount of translation impact on cash coming back from The UK at these historically low exchange rates. We will replace the lower repatriation level with debt in The U. S.
Debt in The UK, 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 UK to The U. S. Captures the benefit of the tax rate differential between the two countries.
This benefit becomes even more pronounced as The UK continues to reduce their corporate tax rates. Since the distributions are reducing our UK 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 perspective changes in the exchange rate, tax rates in both The UK 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 UK projections for 2017 through 2020 based on an FX rate of $1.3 compared to the 1.6 previously used and to an average rate of 1.37 for 2016. We are not projecting any impact on The UK capital forecast in local currency as those business plans have been accepted by Ofgep. On a U. S.
Dollar basis, we are now investing approximately $1,000,000,000 annually in each of our three business lines and the five year spending plan from 2016 to 2020, it's about $15,400,000,000 Moving to Slide 18. We've also updated our rate base growth projections and have shown updated RAV balances to reflect the $1.0.3 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 1.3 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 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 twenty eighteen, 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've protected the downside below 1 point dollars 3 but retained some upside potential above the rate 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
Speaker 5
rule of thumb of a $01
Speaker 4
movement in the FX rate equaling a $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 Treasury forecast of The UK economy. The rates for 2017, 2018 and 2019 have been incorporated into our updated revenue projection. As a result, the RPI sensitivity for 05% movement is now off our updated forecast and would increase or decrease earnings by $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 growth strategy for the PPL dividend two, update our business plan to assume $1.3 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 UK businesses and four, optimize our strategy of UK 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 UK 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?
Speaker 2
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 UK'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 UK business model remains unchanged. PPL 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 shareowners and our customers.
With that, operator, let's open the call to questions please.
Speaker 0
The first question comes from Greg Gordon at Evercore ISI.
Speaker 2
Good morning, Greg.
Speaker 6
Hi, good morning. Sorry about that. So absolutely the right decision to reset the currency hedges from my perspective. I just I 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, specifically, 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.
Speaker 2
Sure. No, I understand. So just a couple of comments and then I'll turn it over So yes, you're absolutely right. So the capitalization program for The UK is going to be different.
So as you recall in the past, we were looking at leverage at The UK holding company over time approaching 80% to 85%, that's more likely now to be down around the 75% level. That's gonna give us about a billion dollars roughly of headroom if you will for future investments from The UK once the exchange rates settle out and we look at this financial strategy for The UK going forward. That's one clearly one piece of it. Maybe Vince, you can take the other elements of the question. Sure.
Speaker 4
And I'll just follow-up on that. So that borrowing generally, Greg, was up at the WPT 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 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.
Speaker 6
Great. And then my second and last question. When I think about post 2017 total earnings growth, the aspiration 5% to 6%, I know you're through sort of the big reset years in The UK under the new rate scheme in terms of having the incentives come down, having the reset in year one, having the incentives come down as you transition. And I see the rate based growth profile in The US. 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?
Speaker 2
Yes, good question, Greg. No, we expect it to be relatively linear or consistent year over year and not lumpy or chunky over that twenty seventeen to twenty twenty timeframe.
Speaker 6
Okay. Thank you, guys.
Speaker 2
Sure. Thank you, Greg.
Speaker 0
The next question is from Jonathan Arnold at Deutsche Bank.
Speaker 7
Good morning, guys.
Speaker 4
Good morning. Good morning.
Speaker 7
Two things. I think I heard you mentioned 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 kind of put the pension assumption where rates are currently into 2017?
Speaker 4
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%.
Speaker 7
Okay. Great. Thank you for that. And then just can I also on hedging strategy going forward, you obviously 50% covered on 2018 on with this kind of upward upside bias in 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 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? Just some feel for how you'll do this going forward.
Speaker 2
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. We'd probably look to depending on the volatility and 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, would obviously be something we look closely at doing.
Speaker 7
Great. So we should think of you as being a little ahead of what the typical plan would be at this point?
Speaker 2
Yes, a little bit,
Speaker 5
yes. Okay.
Speaker 7
Thank you.
Speaker 2
Sure.
Speaker 0
The next question is from Greg O'Real of Barclays.
Speaker 2
Just
Speaker 5
again, thoughts on how you're doing with The U. K. Incentive scheme there and the program and if there was any notable change outside of FX for your assumptions?
Speaker 2
Yes. 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. So I think the team in The UK is doing a great job.
And I'll let Robert Simons, the CEO of our UK business comment kind of expectations going forward and what we've built into the plan here.
Speaker 8
Yes. Thanks, Bill. Very much on track in the same way as we were last year. If we have storms, then if there are sufficient size, 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 we're increasing the level of automation and looking at new ways in in terms of getting those numbers better year on year.
Speaker 2
Great. Thanks, Robert. Thanks.
Speaker 8
One thing that has happened is that we've, came top of the pops in terms of, social responsibility and time to connect. There's an incentive, to actually measure how well companies were doing in terms of how they treat vulnerable customers and also a hot topic in The UK is the time taken to connect and we've come out with the top incentive payment in both those two areas.
Speaker 4
Yeah. So, Greg, I I would just say that the 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 $1,012,000,000 dollars or so.
Speaker 2
Got it. Thank you. Sure.
Speaker 0
The next question is from Michael Lapides at Goldman Sachs.
Speaker 9
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 and A and taxes other than income taxes, interest will all offset any revenue change. Just curious, do you view that $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 and M, just local currency, not currency adjusted in The UK in 2017 and beyond?
Speaker 2
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 'sixteen to 'seventeen. Relative to O and M, really I don't think there's any change expected in O and M. Of the work that Robert and his team are doing is very predictable and very kind of standard blocking and tackling type work.
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 UK is under some pressure. 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.
Speaker 4
Yes, 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.
Speaker 9
Got it. So in 2018, how much would you like I'm just trying to think about growth in The UK because we kind of know based on the off Jim data what's supposed to happen on the DNA and taxes up on the 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 for that, your longer to your multiyear guidance?
Speaker 4
Yes. On the top line, I don't have that handy, Michael, but I would say that just like the 5% to six growth is relatively levelized or linear, so is The UK's growth, their four to six 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.
Speaker 9
Got it. Okay, guys. I'll follow-up offline. Thank you.
Speaker 2
Sure. No problem.
Speaker 0
Next question is from Paul Patterson at Glenrock Associates.
Speaker 4
Good morning. Can you hear me? Good
Speaker 10
morning. Just
Speaker 3
a philosophical question, 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, 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 just elaborate a little bit on that, I'd like that.
Speaker 2
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 twenty seventeen to twenty twenty 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 UK in light of the lower exchange rate.
So philosophically, was kinda how we looked at it. Vince, if you wanna provide any additional color to that, but I think those are two of the main elements.
Speaker 4
Sure. I you know, 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 provided. As we talk with economists in The UK, banks, a number of banks both in The UK and here in The US, 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 128, but I think there are some that that show one twenty to one twenty to one thirty. And then 17, I would say consensus is kind of in that one thirty to one thirty five range.
Coincidentally, the collars that we put on basically give us an effective collar of 1.3 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 twenty sixteen hedges that's supporting our February 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 hedge back on at the current market. Also, 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. It's in these extreme cases where we tend to trade on a fully open basis. And if one thirty is the new norm, we would expect and I think investors would expect us to rehedge.
Speaker 3
Okay. Thanks. Thanks for that. And then just other than on this 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 just derivative things that could theoretically take place?
Speaker 2
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.
Speaker 4
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 we'll continue to monitor.
Speaker 3
Great. Thanks a lot. Sure.
Speaker 0
The next question is from Anthony Crowdell at Jefferies.
Speaker 2
Guys, my question has been answered. Thank you. Okay. You're welcome.
Speaker 0
The next question is from Steve Fleishman at Wolfe Research.
Speaker 5
Yes. Hi, good morning. 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?
Speaker 2
So as Vince said, on a dollar basis, about 10,000,000 to 12,000,000
Speaker 4
Yes. That's the social responsibility. Could we raise it above that?
Speaker 5
Sorry if I missed that.
Speaker 2
No, that's okay. So Steve, it would be 10 to 12,000,000
Speaker 5
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 opportunities maybe that could be additive to rate base growth over time. Are there some things in the hopper that are not included in this plan to 2020 right now?
Speaker 2
Yes, we do have in 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 to $5,000,000,000 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. No real significant spending on those bigger projects until probably you get out to 2019, 2020 and even then it would probably be pretty a slow build and then really more significant in the twenty twenty one-twenty twenty two 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. Those projects would all be upside to the plan.
Speaker 5
Okay. And then just curious just other rating agencies kind of comfortable with your updated UK distribution plan, issuing debt at the parent, the cash from the hedges, all that. I'm just curious kind of their reaction to it, if at all.
Speaker 2
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. Our commitment obviously as I stated earlier to maintaining the investment grade credit ratings is solid. So we wouldn't expect any significant change.
Speaker 5
Okay. And then one last question just strategically does 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?
Speaker 2
Yes, because it is such a unique event, it really doesn't change the view that we have about the strengths of The UK business model. So we're not gonna 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 and A. Clearly we would probably look more significantly at domestic opportunities than we would opportunities in The UK. But having said that, there are no plans to change the mix at this time.
Okay. Thank you.
Speaker 3
Sure.
Speaker 0
The next question is from Shar Pourreza at Guggenheim.
Speaker 10
Hey guys. Just most of my questions were answered, but on domestic growth, 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
Speaker 2
versus your prior plan or is
Speaker 10
it CapEx sort of leveling off in 2019 and 2020?
Speaker 2
I think it's a combination of the different timeframes. So before we were looking at the 2014 to 2018 period, the 2024 was kind of an adjusted number that we were growing off of. So we've rebased 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?
Speaker 4
Yes, Shar. I would say there's probably two main points in driving the delta. One is you may recall, we had about that $100,000,000 of corporate restructuring in the twenty fourteen to twenty eighteen growth rate. That's obviously not in the seventeen to twenty 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 twenty fourteen to twenty eighteen period.
Speaker 10
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 those like the Board is still comfortable with the WPD business despite this discount continuing?
Speaker 2
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 provide this 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.
Speaker 4
Excellent. Thanks.
Speaker 2
Sure.
Speaker 0
This concludes our question and answer session. I would like to turn the conference back over to William Spence for closing remarks.
Speaker 2
Okay. I'd just like to thank everyone for joining us today. As I mentioned, believe that steps we took today were absolutely the right ones for shareowners and we look forward to executing on our new plan through 2020 and appreciate the support of shareowners as we go forward. Thank you very much.
Speaker 0
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.