PPL Corp (PPL) — Q1 2019 Earnings Call Transcript

Thank you, Robert. Good morning, everyone, and thank you for joining the PPL conference call on first quarter 2019 financial results. We have provided slides for this presentation in our earnings release issued this morning on the Investors section of our website. Our presentation on earnings release, which we'll discuss during today's call, contains forward-looking statements about future operating results or other future events. Actual results may differ materially from these forward-looking statements. Please refer to the appendix of this presentation and PPL's SEC filings for a discussion of factors that could cause actual results to differ from the forward-looking statements. We will also 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 appendix of this presentation and our earnings release. I'll now turn the call over to Bill Spence, PPL Chairman, President and CEO.

Thank you, Andy, and good morning, everyone. We're pleased that you've joined us for our first quarter earnings call. With me today are Vince Sorgi, PPL's Chief Financial Officer; Greg Dudkin; and Paul Thompson, the Heads of our U.S. Utility businesses; and Phil Swift, Head of our Western Power Distribution business in the U.K. Moving to Slide 3. Our agenda this morning begins with highlights of our 2019 first quarter results, and a brief review of our operational and regulatory developments. Vince will then provide a more detailed review of first quarter earnings as well as an update on our foreign currency hedging status. As always, we'll leave ample time to answer your questions. Turning to Slide 4. Today, we announced first quarter reported earnings of $0.64 per share, in line with earnings from the same period a year ago. Adjusting for special items, the first quarter earnings from ongoing operations were $0.70 per share compared with $0.74 per share a year ago. The decrease in ongoing earnings was driven primarily by share dilution and weather with lower earnings at PPL's U.S. segments, partially offset by higher earnings in the U.K. Vince will provide a more detailed overview in his remarks. PPL's performance in the first quarter keeps us solidly on track to deliver on our 2019 earnings forecast of $2.30 per share to $2.50 per share. In addition, we remain on track to invest $3.3 billion in infrastructure improvements in 2019, as we work to make the grid smarter, more reliable and more resilient. We remain confident in our ability to execute our business plans moving forward. As a result, today, we reaffirmed our projection of 5% to 6% compound annual growth per share through 2020 measured against the midpoint of our regional 2018 earnings forecast. In addition, we reaffirmed our 2021 earnings forecast guidance of $2.50 to $2.80 per share. Turning our focus to regulatory matters. Earlier this week, the Kentucky Public Service Commission authorized the combined revenue increase of $187 million for Kentucky Utilities and Louisville Gas and Electric, inclusive of elimination of $110 million bill credit associated with the Tax Cuts and Jobs Act. New rates took effect on May 1. And it's a decision the commission ruled on open issues and approved the settlement among the parties, including a 9.725% return on equity. The revenue increase approved by the commission will support continued investments in safe, reliable electricity as well as natural gas service for our customers. Also in Kentucky, we continue to advance a more sustainable generation fleet in the state with the retirement of an additional 300 megawatts of coal generation at the E.W. Brown facility in February, and initiated construction of the first 500 kilowatts section of the company's solar share program. Shifting to the U.K. We continue to engage with Ofgem regarding the rules that may shape the framework for the next rate control. That price control will begin in April of 2023 for electric distribution. In mid-March, PPL responded to Ofgem's RIIO-2 sector specific methodology consultation for the gas distribution, gas transmission and electric transmission networks. While the current consultation does not apply to electricity distribution, and Ofgem has maintained that this consultation should not be read as applying to WPD or the other DNOs, we welcome the opportunity to express our views on a range of key issues that we see as critical for the overall RIIO-2 framework. We also welcome the opportunity to provide feedback that we've heard from our investors. In the appendix to today's presentation, we summarized a number of the key points made in our response letter. Looking ahead to April of 2023 and beyond, we continue to believe that Ofgem will be focused on differentiating returns among the electricity distribution network operators while providing substantial opportunities for outstanding performers like WPD. In addition, we expect significant investment in growth opportunities for WPD over the next decade, as the DNOs work to support U.K. electrification and carbon reduction initiatives. This expectation is supported by continued policy developments in the U.K. In March, for example, the U.K. government's Chief Financial Minister announced plans to introduce a new future home standard, which prohibits gas heating systems in new homes beginning in 2025. This comes as the government looks to decarbonize heating. This move is expected to usher in a shift to energy efficient electric heat pumps. And like policy seeking a dramatic shift to electric vehicles in the U.K. by 2030, this policy is also expected to boost demand on our electricity networks. For our part, we continue to plan ahead for these and other changes. In March, for example, our U.K. companies became the first DNOs to launch an electric vehicle infrastructure strategy. Developed with a wide range of stakeholders, the strategy lays out targeted commitments for 2019 and 2020 as well as innovative projects that WPD will pursue to ensure EV-charging can be accommodated efficiently and affordably on our local networks. Our plan projects that 217,000 EV chargers will be connected to our network by 2023. And we believe there is potential for an even faster uptake that will be required to meet the U.K.'s 2040 deadline for banning sales of gasoline and diesel cars. This could translate into more than 3 million electric vehicles in WPD's service territory alone by 2030. All of this is expected to create additional investment opportunities for WPD in RIIO-ED2 compared to RIIO-ED1. Turning to Slide 5. WPD continues to demonstrate the value of its strong operational performance for both our customers and our shareholders. All 4 of the DNOs continued their premier service for the recently concluded 2018-2019 regulatory period, and have once again earned robust incentive revenues in return. WPD achieved over 80% of the potential maximum reward across all incentive categories, which equated to approximately $110 million for the regulatory period, which is better than our historic performance and expectations, as we continue our focus on delivering best-in-sector operational results. WPD's operating companies also continue to improve on their already outstanding customer satisfaction performance, with each DNO earning a 9 out of 10 on customer satisfaction ratings. As you can see, the rest of the industry continues to elevate its performance as well under RIIO-ED1, with the peer average climbing to 8.8 from 8.7 a year ago. These results continue to highlight the overall value that the electricity distribution networks are providing to our customers. Moreover, WPD's results demonstrate that RIIO-ED1 is working well and delivering value to customers as we deliver on the business plan outputs that were developed through significant stakeholder engagement. We believe this evidence coupled with the significant investment opportunities from the U.K's decarbonization initiatives positions WPD for continued success. And we will continue to work with Ofgem to ensure our investors are appropriately compensated for providing the capital needed to support such investments. With that, I'll turn the call over to Vince for a more detailed financial overview.

Thank you, Bill, and good morning, everyone. Let's move to Slide 6 for an overview of first quarter segment results. As Bill mentioned, PPL delivered first quarter 2019 earnings from ongoing operations of $0.70 per share, which was in line with expectations and positions us well to achieve our earnings forecast for the year. Looking at the year-over-year walk, PPL's first quarter earnings from ongoing operations decreased by $0.04 per share from Q1 2018 primarily driven by $0.03 of share dilution and less favorable weather this quarter compared to last year. Weather was about $0.02 negative compared to Q1 2018, and about a $0.01 negative to budget for the quarter. Excluding dilution and weather, higher earnings at our U.K. segment were partially offset by lower earnings at our domestic businesses. Our U.K. Regulated segment earned $0.42 per share in the first quarter of 2019, an $0.08 increase compared to the same period a year ago, excluding the impacts of dilution and weather. The increase in U.K. earnings was primarily due to higher adjusted gross margins from higher prices as a result of the April 1, 2018 increase, partially offset by lower sales volumes. Higher other income, due to higher pension income and higher realized foreign currency exchange rates compared to 2018, with Q1 2019 average rates of $1.34 per pound compared to $1.26 per pound in Q1 2018. Moving to the Pennsylvania segment, our Pennsylvania Regulated segment earned $0.17 per share in the first quarter of 2019, a $0.03 decrease compared to the first quarter of 2018, excluding dilution. This decrease was primarily due to lower adjusted gross margins, primarily due to reduced income taxes recovered in rates as a result of U.S. tax reform. This was $0.04, $0.02 in transmission, $0.02 in distribution, which was partially offset by returns on additional capital investments in transmission. Higher operation and maintenance expenses, primarily due to storm-related costs and higher depreciation expenses due to additions to PP&E. Moving to the Kentucky segment, our Kentucky Regulated segment earned $0.16 per share in the first quarter of 2019, a $0.02 decrease compared to the first quarter of 2018, excluding the impact of weather. This decrease was primarily due to higher operational and maintenance expenses and higher depreciation expenses due to additions to PP&E. And finally, Corporate and Other declined by $0.02 per share primarily due to higher income taxes and other. Before I turn the call back over to Bill, let me just provide a quick update on our foreign currency hedging status on Slide 7. We maintained our hedging strategy consistent with our risk management program and layered on additional hedges since our last update. For the balance of 2019, we are 100% hedged for our ongoing earnings at an average rate of $1.41 per pound. For 2020, we increased our hedge percentage slightly to 55% using options, which preserves the upside to the currency. The new average rate for 2020 reflecting these options is $1.47 per pound. We remain open in 2021 with the forward rates holding in the mid $1.30 per pound range. We will continue to assess the political and economic situation in the U.K. in the context of our hedging program, and we'll remain opportunistic in layering on additional hedges over time. That concludes my prepared remarks. I'll turn the call back over to Bill for the question and answer period.

Thanks, Vince. As I mentioned, PPL's solid performance during the first quarter keeps us on track to deliver on our 2019 earnings guidance. We continue to invest in infrastructure that both benefits customers as well as shareholders. And we remain well positioned to deliver on our future growth projections. And with that, operator, let's open the call up for questions, please.

First question. As I recall, this month in the U.K., Ofgem is supposed to be firming up its cost of equity expectations for the gas and electric transmission companies. Obviously, not for you guys, but it's an early read on their thinking. Just wondering, based on your own conversations, et cetera, what are you expecting there? I think the thought from their last communication was that it may come down to as much as 4% starting point. So just curious what you're hearing? And what we should be expecting when that comes out?

Sure. As you mentioned, the midpoint of the initial range they discussed was between 3% and 5%, which is 4%. They have been seeking feedback on that figure and the overall framework for the cost of capital. We have provided our comments as have many others. Several of our investors have also submitted their own feedback, particularly regarding the financial parameters, especially about the return on equity and the concern that 4% may be too low given the risks we anticipate in the U.K. As of now, they have not yet released their final return on equity numbers, which we expect to be available by the end of this month. Phil Swift, do you want to add anything? Phil has been deeply engaged in this process along with his team.

No. There's no additional information, Bill. The target for the consultation response was the end of the month. In fact, Ofgem were expected to publish all the responses, and I don't know if they have done that yet.

Okay. Very good.

I mean just from conversations you've had, do the comments that you and others have put in, are you getting a sense if that's making a difference? I mean any feedback from them on those conversations?

Yes. Good question. I would say, no. I'll turn it over to Phil. That we had a more positive read across from the conversations we've had with them and recognition that to meet the U.K.'s goals on carbonization will require a lot more investment in the electricity networks, very different perhaps from the gas networks. Phil, did you want to...

Yes. The conversations we've had are very much around, we shouldn't read across directly, and that there's recognition on the decarbonization objectives as alluded to there. And in terms of incentive income, very much. It's an open door at the moment to put forward potentially incentive-based ratings to get that return. But back into the area that it is currently. I am actually meeting with Ofgem's Director next Thursday. We were actually talking about those issues.

I see. Separate question. When I look at your CapEx forecast and the corresponding rate base growth, there is a pretty big tapering off in the outer years. And I know in the past, you guys have talked about customer rate impacts as one of the impediments as you're thinking about planning out CapEx spend. Just wondering, are there ways for you to create headroom that could increase the spending in the outer years? And just potentially what is the pool of capital potentially that you could spend for improving the system, et cetera, that may not be currently reflected in these $15 billion five-year forecast you've given us?

Sure. Regarding the headroom question, part of it depends on the overall price of power. If wholesale commodity prices drop, which we've seen happen with natural gas, it leads to lower power prices and creates potential headroom for us. Additionally, if we can achieve cost savings in our operating and maintenance expenditures, that can also provide headroom, enabling us to increase CapEx without a significant rise in rates. However, our current capital plan only includes the projects we've identified so far, and there are certainly more opportunities we could pursue in the future. Some of these, which are not included in the five-year plan, could be enhanced resiliency initiatives in Pennsylvania and Kentucky, such as the automated meter project and potential renewables expansion. There are also other necessary modifications to power plants in Kentucky due to new environmental regulations. For 2023 and beyond, we've discussed electrification initiatives in the U.K., where our capital plans are essentially fixed until the end of RIIO-ED2, so those projects are set and won't change significantly.

Yes. Bill, lastly, is there a way to just quantify this pool of capital? I know that not all of it will be spent, maybe none of it, but just to give us a sense of opportunity there.

Yes, it's difficult to determine the total amount. The AMS project alone is estimated at $350 million to $400 million. We also have the ELG regulations coming up, which may require additional funding, adding a couple of hundred million to our plans. Bill mentioned the flexibility in Pennsylvania, where wholesale power prices impact us more than they do in Kentucky. Our strategy in Pennsylvania is to avoid rate cases, particularly during the guidance period we've outlined, so we're already managing O&M effectively to support this strategy. It's challenging to assign a precise figure over the next five years, but there are significant sums that we may expect in return.

What are you thinking about in terms of distributions from the U.K. in guidance?

Sure, Vince. Do you want to discuss distributions from the U.K.?

We provided the range of $300 million to $500 million coming back from the U.K. over time, really no change at this point to that guidance.

I know this isn't directly affecting you, but it does have an impact on your customers. You made some comments about the proposed nuclear legislation in Pennsylvania, and I would like to hear more about what you anticipate could happen there and your current thoughts on the matter.

Sure, Paul. I'll make a couple of comments, and then I'll ask Greg Dudkin, President of our Electric Utilities in Pennsylvania, to provide some perspective as well. We are supportive of efforts to reduce carbon and maintain and grow jobs in Pennsylvania. However, we question whether the subsidies to the entire nuclear sector in Pennsylvania are the best solution. As proposed, our customers would face a significant rate increase. Greg has recently shared his views publicly in some op-eds and has also given direct input to some of our legislators on a couple of other aspects of this. Greg, could you highlight some of those key points?

Thank you, Bill. At a high level, as Bill mentioned, we strongly believe that nuclear energy is important for Pennsylvania's future. For the past 20 years, customers in the state have benefited from a strong competitive market. However, we are concerned that the current proposals in both the House and Senate would result in a $140 million impact on our customers due to subsidies for both plants that need support and others that do not. We feel this is a complex issue that requires thorough consideration. We have suggested holding hearings, which are currently taking place in the House and Senate, and we appreciate that. We are engaged in a thoughtful process and are looking forward to a more comprehensive solution.

That, we'll see.

Time will tell, but that's the current setup.

Do you think that if legislation is introduced, it's more likely to be means-tested, similar to what they're discussing in Harrisburg regarding nuclear subsidies?

We have certainly received many comments regarding the need for each plant to show financial necessity for customer-funded financial support. I believe this aspect is likely to be considered, if not directly included, in any legislative outcome that may arise. This topic has been widely discussed. While we are still in the early stages of this process, I expect there will be extensive discussions in the coming weeks and possibly months.

With the performance period now locked, what do you expect for pension revenue in the U.K. in 2021? And can you remind us what is embedded in the low end and the high end of the guidance range, please?

Okay, sure. Overall, the impact that we expect is about $0.05 a share. Within that, I don't recall the exact range that we gave or is embedded. I don't know that we had it specifically identified in the low and the high end of arrangements.

Sure. So Abe, in 2020, we have about $0.20 to $0.23 of pension deficit earnings and so that $0.05 would be about $0.18 in 2021. Our '21 guidance for all true-up mechanisms including pension deficit, interest under recovery, etc., was in that $0.05 to $0.10 range and that kind of balance the high and the low that we talked about.

Got it. And then on the RIIO-2 sector-specific methodology, what would be a good outcome in the decision when it comes in the coming weeks? And what would be incrementally negative from your perspective?

Well, I would say, a good outcome would be something that's fairly balanced, meaning that the financial parameters are improved from where they are today, which we think is not balanced. And that the overall incentive scheme is maintained with, I would say, incremental improvements, meaning, I don't think there is an attempt or should not probably be an outcome where Ofgem, kind of, blows up the incentive scheme per se, but hopefully improves upon it in a way that allows companies with the incentive mechanisms to achieve something we think is much more reasonable in line with what we've been earning, which is in the 9% to 10% ROE type range. So I don't know, on the downside, incrementally negative side, if you can think of anything, in particular. I think it be probably on the financial front or the ROE front, if they maintain, kind of, where they are, that would be, kind of, incrementally negative from our view.

Yes. I think the key for us is if the incentive income, which, obviously, gives us an opportunity to outperform in the sector. We have far more activity in distribution than they had in transmission and gas. So it isn't a direct read across, certainly maintaining a sensible package of incentives is what we'll be looking for.

Paul has actually touched on the question that I had around Pennsylvania legislation, but is there any other options outside of a means test that would sort of satisfy what you're looking for? Or is it sort of more focused around the means test, which I guess would just impact TMI?

I think it's mainly about finding some justification and continuing to evaluate the situation. If the markets improve, we want to ensure that any subsidies are adjusted fairly moving forward. But I’m not sure, Greg, if you have any additional insights on that?

No. I think that's good. So energy policy, as everybody knows, is very complex and, kind of, the way that's happening is sort of ad hoc. I think everybody would agree it'll be better to have a comprehensive energy policy that would include factors of nuclear and renewables. So whether it's means testing, or whether it's other market mechanisms, I think that will be a better approach for all involved.

Have you conducted any studies or analyses regarding the impact of the TMI closing on rates?

You mean, if it was just TMI...

Right.

The subsidy, what will the impact be to our customers.

So we have done that. I just don't remember what the number is.

Okay. But was it a material impact or not?

Well, it's much less. It's all relative to your customer.

Okay. With that, we appreciate everyone joining us on today's call. Thank you very much.