PPL Corp (PPL) — Q2 2015 Earnings Call Transcript

Thank you, Emily, and good morning, everyone. Thank you for joining the PPL conference call on second quarter results and our general business outlook. We are providing slides to 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 and other non-GAAP measures on this call. For reconciliations to the GAAP measures, 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 pleased that you joined us this morning. With me on the call today are Vince Sorgi, PPL's Chief Financial Officer; and the presidents of our three business segments. Moving to slide 3, you'll see an agenda for today's discussion. As we typically do, we'll provide an overview of our quarterly and year-to-date earnings results, which I'm pleased to say include significant growth in earnings from ongoing operations. We'll discuss our 2015 earnings forecasts, which we are increasing, along with our dividend, based on the continued strong performance of our utilities, and I'll provide an operational overview as well. Vince will review our segment results and provide a more detailed financial overview. And as always, we'll have plenty of time to answer your questions. But before we dive into the quarter results, I'd like to share with you my thoughts about the new PPL. As you know, June 1st marked a major milestone in our company's history. On that day, we completed the spinoff of our competitive supply business. And in doing so, we completed a strategic transformation of PPL that began with our acquisition of two regulated utilities in Kentucky, followed by the expansion of our utility operations in the United Kingdom. It's a transformation that has been exceptionally well executed, provides earnings and dividend growth potential, will create significant value for our shareowners, and positions PPL well for continued growth and success. Today, in our first earnings call since the spinoff of the supply segment, our focus has never been clearer. Our ability to control our own destiny through our proven track record of execution has never been greater. And I, without a doubt, have never been more excited about where we're headed. Moving to slide 4, let me expand on some of the reasons why. PPL is now a pure play, regulated utility investment, made up of seven high-performing, award-winning, and growing utility companies. Year in and year out, these utilities prove themselves to be among the best in our industry. They are diverse and located in different regions with different regulatory structures. They offer a mix of regulated assets you'd be hard-pressed to find anywhere else in our sector. Each utility operates in what we consider to be a premium jurisdiction. In addition, all of our utilities are investing heavily in infrastructure, producing robust rate base growth for PPL. In fact, organic growth in our domestic utilities is among the strongest in the U.S. utility sector with 8% to 10% earnings growth expected through 2017. We expect our combined rate base in the U.S. alone to grow by 47% over the next five years. That's the equivalent of adding another major utility to our portfolio. Our balance sheet is strong and so are our cash flows, credit ratings and very competitive dividend. The bottom line, we believe the new PPL, with its strong growth profile, a solid dividend and a diverse mix of holdings, is a unique and very compelling investment option in the U.S. utility sector. Looking at slide 5, you can see that robust rate base growth, combined with jurisdictions that permit near real-time recovery of our infrastructure investments, is what will drive our targeted 4% to 6% earnings growth. I want to point out that the 2017 $2.35 of earnings per share shown here represents a projection based on the mid-point of our 4% to 6% compound annual growth target off our 2014 adjusted earnings. It does not represent earnings guidance for 2017. Across the portfolio, over $10 billion in CapEx spending is expected to produce compound annual rate base growth of more than 7% or $5 billion by the end of 2017. For 2015 through 2017, over 80% of that CapEx earns a return within 12 months and approximately 76% in less than six months. This combination creates a very strong foundation for future earnings growth. Let's turn to slide 6. This slide offers additional detail on why we feel our U.S. operations in Pennsylvania and Kentucky operate in constructive regulatory environments. Domestically, we have favorable allowed ROEs in both Pennsylvania and Kentucky. When coupled with the numerous recovery mechanisms that reduce regulatory lag, we are well positioned to achieve our earnings growth targets. We have excellent growth in transmission with allowed base ROEs of 11.68% to the formula rate and a 12.93% allowed ROE for the $630 million Susquehanna-Roseland project as well as a return on CWIP for the $335 million Northeast Pocono reliability project in Pennsylvania. It's this list of trackers and recovery mechanisms that drive the rapid recovery I described on the prior slide. Our board approved an increase in our common stock dividend, raising it from $1.49 to $1.51 per share on an annualized basis. This marks PPL's 13th dividend increase in 14 years. The quarterly dividend of $0.3775 per share will be payable October 1 to shareowners of record as of September 10. The increase in the dividend is consistent with our prior messaging that we would look to raise the dividend after the completion of the spin. In summary, we're confident in our ability to achieve our 4% to 6% earnings growth targets through at least 2017. We expect 8% to 10% growth in our domestic utility earnings and approximately 2% growth coming from our corporate restructuring efforts which, combined, are more than offsetting relatively flat earnings expectations in our UK business over this time period. There are several key drivers to our organic growth in the domestic utilities, and these include strong transmission rate-based growth of 18.9% through 2017 in Pennsylvania; limited volumetric risk in our distribution operation in Pennsylvania due to our rate structures and recovery mechanisms; environmental spending and favorable rate case outcomes contribute to our growth in Kentucky.

Thank you, Bill, and good morning, everyone. Let's move to slide 15 for a review of segment earnings. Our second quarter earnings from ongoing operations increased over last year by $0.05 per share driven primarily by higher earnings from the UK Regulated segment and lower cost in Corporate and Other resulting from the corporate restructuring efforts which are essentially complete. As Bill mentioned earlier, PPL's reported earnings for the quarter and year-to-date reflected losses from discontinued operations associated with the June 1st spinoff of our competitive supply business. The accounting rules required us to evaluate whether the fair value of the supply segment's net asset was less than our carrying value as of the June 1st spinoff date, and we determined that it was. This resulted in a loss on spin of $875 million. In addition to the loss on spin, supply's operating results and all costs associated with the spin are classified on the income statement as discontinued operations for all current and prior periods. Overall, domestic weather was flat until last year for both the quarter and year-to-date periods. However, compared to our 2015 forecast, weather had a positive $0.03 impact year-to-date and was flat for the second quarter.

I want to reiterate how optimistic I am about PPL's future. I believe PPL's diverse mix of assets, our low overall business and regulatory risk and our proven track record of earnings performance and transparency set us apart from our peers. It's a new day for PPL, but we'll continue to deliver for our customers and our shareowners. Let's turn the call back over to Vince for the Q&A.

Hey. Good morning, guys. Thanks for all the updates today. I guess, you know, always been a little bit greedy, you talk about through at least 2017. When we kind of look beyond that, the UK should be through the transition period as far as the normalization of incentives. When we look at the U.S. utilities, how do you guys think about the growth, and I guess with CPP coming today, how are you guys sort of think about layering that into your capital budgeting?

Yes. We have been meeting with the state, as have the other utilities, to try to develop a program that best accommodates the earlier draft of the Clean Power Plan. We now understand that the new one is coming out today. There may be some stricter requirements. I'm confident that we'll go back to the commission and work with them to find a way that meets those requirements and in the best interest of all of our stakeholders. I think we have, in place, the regulatory structures to allow us to recover the cost. We were looking at a power plant that we were going to put in place in 2018. We've delayed that a little bit, and we still have – we know where we want to put it. We know where the transmission would be. These are some of the options we would look at.

Overall, Dan, the UK continues for us to be a tremendous success story. I think you've seen us consistently outperform, and, obviously, we believe we're the best network operator in the UK. And clearly, our integration of the central networks went exceptionally well and really was just flawless.

Hi. Good morning. So, first, quick question here, just where do we stand on synergies and parent cost guidance after the spin? I suppose that's a first consideration? Then in tandem with that, I'd also be curious, given the charge today, how do you think about tax benefits and ability to bring back cash from UK to the consequence of the charge as well. How did that play into your tax planning, if you will?

Thanks. Just a quick follow-up on Julien's last question. So, essentially, the way I think about the hedged disclosure is you're doing well enough this year in terms of meeting your earnings guidance, that you're able to raise lower end of the guidance range while still moving some of the impact – moving essentially some of the benefits of hedging out a year, is that right?

Good morning. How are you? Could you just go over again what happened in terms of the charge associated with supply? Just if you could you just sort of break it down sort of layman's terms?

Hi. Good morning. Just referencing slide 5 and the pie chart with capital recovery and earning on investment, does that imply that you got a high level of confidence that you can earn your allowed ROEs or is there any sort of structural lag that we should incorporate in our outlooks?