PPL Corp (PPL) — Q4 2019 Earnings Call Transcript

Thank you, Rocco. Good morning everyone and thank you for joining the PPL conference call of fourth quarter and full year 2019 financial results. We provided slides for this presentation. And our earnings release issued this morning on the Investors section of our website. Our presentation and earnings release, which we'll discuss during today's call contain 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 and CEO.

Thank you, Andy, and good morning everyone. We are pleased that you joined us for our 2019 year-end earnings call. With me today are Vince Sorgi, PPL President and Chief Operating Officer and Joe Bergstein, Chief Financial Officer. Moving to Slide 3, our agenda this morning begins with an overview of 2019 results and PPL's business outlook for 2020. Vince will then review some of PPL's recent operational highlights and outlook for 2020, as well as discuss PPL's clean energy transition strategy, including our decision to set a more aggressive goal to reduce PPL's carbon emissions. Following Vince's remarks, Joe will provide a more detailed financial review of 2019 and 2020 along with our updated earnings forecast for 2021. I'll conclude by taking a few moments to highlight what has truly been a decade of transformation and growth for PPL. PPL is marking its 100th anniversary thanks to our employees' hard work and dedication and the unparalleled support of our communities. As always, we'll leave ample time to answer your questions. Turning to Slide 4, in 2019 PPL continued to deliver on its commitments to the shareholders, customers, and the communities we serve. We remain steadfast in our strategy to deliver best in sector operational performance, invest in a sustainable energy future, provide superior customer service, maintain a strong financial foundation, and engage and develop our people. Our results in 2019 reflect this strategy. We exceeded the midpoint of our earnings guidance for the 10th straight year delivering growing earnings of $2.45 per share. We remained committed to dividend growth, increasing our dividend for the 17th time in 18 years and returning more than $1 billion in dividends to shareholders. As we delivered on these financial commitments, we continue to extend our track record of operational excellence. We maintain strong transmission and distribution reliability across all of our utilities. In addition, we achieved top decile generation reliability in Kentucky. At the same time, we remain as focused as ever on providing superior customer service. In fact, our utilities remain among the very best for customer satisfaction in the regions we serve. Our U.S. utilities earned four JD Power awards for customer satisfaction, raising their combined total to 51 since JD Power began assessing utility customer satisfaction in 1999. Meanwhile, our U.K. utilities all achieved a 9 out of 10 rating in Ofgem's broad measure of customer satisfaction review. In addition, Western Power Distribution earned the U.K's customer service excellence award for the 27th consecutive year. The company was also ranked by the industry regulator as best in stakeholder engagement and support for vulnerable customers for the 8th straight year. These achievements and more reflect our shared values and common purpose across PPL to deliver without fail for our customers, to exceed their expectations, and to continuously improve. Aware of the tremendous opportunity we have to make a positive impact on society not only today but for years to come, PPL also invested more than $3 billion in infrastructure improvements. Our continued investments are aimed at strengthening grid resiliency in the face of worsening storms, incorporating automation, replacing and rebuilding power lines and substations, and reshaping electricity networks to support the growth of renewables and other distributed energy resources. In regulatory matters, we remained focused in 2019 on achieving balanced regulatory outcomes that will benefit our customers and our shareholders. In Kentucky, we received public service commission approval of a combined $187 million revenue increase, which supports additional improvements to the grid, our natural gas lines, and our generation fleet. New rates took effect May 1st. And in the U.K., we continued to actively engage with Ofgem to advance a balanced regulatory framework that will provide real value to customers, support the U.K's electrification and decarbonization initiatives, and provide fair and reasonable returns to investors when the next price control review period begins in 2023. Our engagement over the past year included meeting with Ofgem leadership and submitting responses to Ofgem's open letter consultation on behalf of both PPL and WPD including our shared interests. I'll note that the RIIO-ED2 framework released by Ofgem in December was largely in line with our expectations. In summary, we are proud of our many achievements over the past year on behalf of PPL shareholders and customers. Our performance is reflected in the numerous awards received throughout the year. Looking ahead, we're committed to building on this momentum and adding to our long-term track record of financial and operational excellence. Now turning to Slide 5 and our 2020 outlook. Today, we initiated formal 2020 earnings guidance of $2.40 per share to $2.60 per share. This reflects our updated foreign currency hedge position, which we increased following the U.K. election that finally led to Brexit last month. Given the election result, we expect the U.K. business climate to remain strong as it has historically been. Turning to our dividend, today, we announced we were raising the annualized dividend to $1.66 per share. The increase announced today represents our 18th dividend increase in the last 19 years, and we remain committed to dividend growth. In terms of network investment in 2020, we plan to invest an additional $3.3 billion in all of our utilities. These investments will continue to support our efforts to improve customer experience and grid reliability and advance a cleaner energy future. Finally, as I touched upon earlier, we will remain engaged on the regulatory front to achieve balanced outcomes that benefit customers and shareholders. Last week, the new CEO of Ofgem, Jonathan Brearley, announced his decarbonization program action plan. Ofgem's plan over the next 18 months to make low-cost decarbonization a reality shows that the DNOs will play a critical role in the significant investment required to deliver clean energy and the U.K's net-zero carbon emissions target by the year 2050. This supports what we've been saying that we see real long-term growth opportunities with our WPD business as the DNOs lead many of the decarbonization initiatives that will enable a net-zero carbon economy. I will now turn the call over to Vince for our operational updates.

Thanks Bill. As we turn to a new year and a new decade, I just want to express how proud I am of the operational excellence that our seven utilities continue to deliver for our customers. Our sector continues to rapidly evolve and our teams are meeting the challenges and finding opportunities to leverage technological advancements and decarbonization initiatives that are driving real value for our customers. We believe that PPL is well positioned to further enhance its networks and continue to build these utilities of the future as we look ahead. I'd like to highlight some of the operational developments from this past year and briefly discuss our strategic priorities for each segment for 2020 and beyond. I'll also provide an update on our five-year capital expenditure plan. Turning to Slide 7, starting with the U.K. during 2019, WPD continued to demonstrate this leadership in support of the U.K.C carbonization goals. WPD was the first U.K. network operator to publish an electric vehicle strategy building on knowledge gained through the company's electric nation easy smart charging initiative. The company has begun to proactively prepare its network for increasing numbers of electric vehicles, anticipating the potential for up to 3 million EVs in our service territory by 2030. WPD also continues to deliver an industry-leading innovation program, including finding ways to connect more distributed generation to local networks. Through 2019, WPD connected nearly 10 gigawatts of distributed generation to its network, about six gigawatts of which was renewable energy. In addition, WPD is leading the way in developing markets for flexibility services and demand response solutions to help maintain grid resiliency and control costs for U.K. customers. These flexibility solutions should enable the deferral of some network spending, which Ofgem is keen to see the DNOs deliver. As we look to the upcoming year, it's important to review how we are performing against our real easy one business plan, and I'm proud to say that WPD continues to perform extremely well in RIIO-ED1. In the most recent Ofgem annual report for electric distribution, WPD ranked first in customer satisfaction and customer minutes lost and ranked second in time to connect customers. Our returns are middle of the pack with an RORE expectation of 8.4% on a real basis over the 18 period. I'll note that this equates to a nominal RORE of about 11% when including RPI inflation. As we've indicated in the past, as the only fast-track company in RIIO-ED1, we think the fact that we are the top performing DNO group in the sector and only earning average returns will serve us well going into RIIO-ED2. Our strategic priorities moving forward are to continue this high level of performance and continue our engagement with Ofgem to help develop the sector-specific methodology. Our objective is to ensure RIIO-ED2 provides the appropriate incentives for DNOs to deliver on the initiatives required to achieve net zero carbon emissions by 2050. Turning to Slide 8, in Pennsylvania, PPL electric utilities continue to demonstrate its leadership in the deployment of smart grid solutions. We currently have 4,500 smart switches installed on our grid, and since 2015, this technology has helped us eliminate over 900,000 outages for our customers. As we've discussed during the year, PPL electric has received numerous awards this year for its operational excellence and commitment to innovation, including the deployment of a new distributed energy resource management system or DERMS and the development of groundbreaking technology that safely and automatically cuts power to downed power lines protecting the public, first responders, and our employees. In addition, PPL electric utilities were awarded the most improved utility of the decade by PA consulting. The company is also substantially complete with the multi-year nearly $500 million project to install 1.4 million advanced meters for our customers. Looking ahead for 2020, we remain focused on executing our substantial electric transmission and distribution investment plan. The majority of the spend this year remains in our transmission business, which has been the fastest-growing business in our portfolio for a number of years now due to the ongoing needs to upgrade and modernize our transmission system. This includes upgrading transmission lines and substations, replacing wood poles with steel poles, and building new substations. We've also invested considerably in our distribution network, also adding smart grid devices to the network, hardening the system, targeting our tree trimming efforts, and investing in new systems to automate how the network is controlled. This investment has also resulted in significant reductions in the number and duration of outages for our customers. Going forward, we'll continue to deploy digital and cloud-based technology solutions to further automate the system to improve service even further for our customers. From a rates perspective, our retail rates continue to remain competitive in the mid-Atlantic region. Thanks to our ongoing emphasis on integrating technology and efficiently managing costs, especially since we haven't had a base rate case since 2016. Over the past decade, we've held our operating costs to less than a 1% decrease on average each year. We'll look to continue our efforts in this area as we don't expect another rate case to be effective within the earnings guidance period. Moving to Kentucky on Slide 9, Louisville Gas and Electric and Kentucky Utilities continue to make progress on a multi-year $800 million project that includes ash bonds at our coal-fired power plants. Overall, we are about 80% complete with the enclosure program. We also retired 272 megawatts of coal-fired generation at our EDW round facility, raising the amount of retired coal generation to nearly 1,200 megawatts since 2010. In addition, we secured public service commission approval of a green energy tariff for businesses and continue to enhance our solar offerings for all of our customers. We completed the construction of the first phase of our subscription-based solar share program, and we have fully subscribed the second phase with construction expected to be completed in Q2 of this year. Following up on a renewable energy RFP conducted in 2019, in January, we requested approval of contracts to supply an additional 100 megawatts of available solar power to Kentucky customers. As we move into 2020, we see a balanced mix of investment across our Kentucky utilities. Over the past decade, we've had a significant portion of our capital devoted to improving the environmental profile of our generating units, which has supported reductions of SO2 and NOx emissions by approximately 90% and about 80% respectively. We'll be completing the majority of these environmental projects to comply with current regulations within the next couple of years. As the environmental capital requirements have begun to decline, we've been able to deploy capital to improve our electric and gas distribution networks with a focus on system reliability and automation that are already delivering real value for our customers, as evidenced by 120,000 interruptions that have been prevented to date from our smart grid solutions. All of these investments have supported rate-based growth of over 7% per year on average over the past 20 years in Kentucky. As we look forward, we are focused on a number of initiatives including customer focus programs such as our green energy tariff, as well as planning for the future investment cycle as it relates to generation resource planning. We'll also be working on updating our integrated resource plan with a new IRP to be filed with the commission in late 2021. We expect the new IRP will provide a better sense of timing for the next wave of capital deployment in Kentucky related to the replacement of our coal-fired generating fleet. I'll touch on this further in a few minutes. Turning to Slide 10, as the world focuses on climate change, PPL remains committed to advancing a cleaner energy future while maintaining safety, reliability, and affordability for those we serve. Today we are updating our goals to reduce PPL CO2 emissions. Specifically, we raised our goal of reducing PPL's carbon emissions to at least 80% from 2010 levels by 2050 from our previous target of 70%. The company also accelerated its previous 2050 target by a decade and we are now targeting reducing carbon emissions by at least 70% by 2040. PPL has already reduced its carbon emissions by over 50% since 2010, exiting the competitive generation business in 2015 including nearly 4,000 megawatts of coal-fired generation and retiring 1,200 megawatts of coal in Kentucky. We expect to achieve these further reductions through a variety of actions including the replacement of Kentucky coal-fired generation over time with a mix of renewables and natural gas while meeting our obligations to provide least cost and reliable service to our Kentucky customers. Our updated targets are based on our ongoing resource planning activities and updated market data and trends in Kentucky. Assuming we receive KPSC approval for the previously mentioned renewable PPA and if technology continues to improve and drive down the cost of renewables, it is certainly possible that we can achieve even greater carbon reductions in these targets, while at the same time ensuring the best value and reliability for our customers. We are confident, however, that these targets are achievable under current legislation and regulation as well as current technology and current economics. Turning to Slide 11, we also wanted to provide an overview of the near-term and longer-term opportunities to economically shift our business mix away from coal-fired generation. As you can see from the chart on the left side of the slide, PPL's rate-based already consists of more than 80% transmission, distribution, and non-coal-fired generation. Given that our significant planned investments over the next five years are heavily weighted toward additional transmission infrastructure, the percentage of rate-based from coal-fired assets is expected to decrease even further in the near term. In fact, only about 5% of our $17 billion of our $14 billion capital plan is for investments related to coal-fired generating assets. Our current files, IRP supports the transition to cleaner energy driven by technology and economics consistent with current policy and regulations. As you can see based on the chart on the right of the slide, based on certain scenarios from our latest IRP filed back in 2018, we could see some additional coal retirements in the back half of the 2020s, with significantly more coal retirements in the 2030. These scenarios continue to evolve, and we are starting to see more momentum for renewables in the state as evidenced by the results of the recent renewable RFP where we are proposing to economically add a lower-cost renewable generation resource while reducing the amount of output from some of our higher-cost fossil units. We are not at a point where renewables can compete on a replacement capacity basis as renewable plus storage options are not even competitive with our gas generation. With that said, it is clear that these factors are rapidly changing as we move through time, which requires us to continuously assess the most proven strategy that's in the best interest of our customers. Moving to Slide 12, we've updated our capital expenditure plan and continue to see significant investment opportunities in our networks over the next five years totaling about $14 billion. We've increased our 2020 and 2021 projections by approximately $200 million each year from our prior estimates, primarily due to additional fluid limitation guidelines spend in Kentucky and timing-related investments in the U.K. Our U.K. capital plan projects that we will be within 1% of our Ofgem approved business plan for ED1; this will strengthen our credibility with Ofgem when we file our RIIO-ED2 business plan. Note that changing the assumed tax rate from $1.40 per pound to $1.30 per pound on our U.K. spend reduced the five-year CapEx projections by about $300 million. We have not included the $300 million Kentucky AMI project in our forecast at this time, but that remains a potential upside opportunity for us as well as the other areas of opportunity noted on the slide, including decarbonization-related spending in the U.K. We believe these additional opportunities could be as much as another $500 million above what's in the five-year capital plan. Long-term, we expect more than an incremental billion dollars of investment to be required over the five-year RIIO-ED2 period to achieve electrification initiatives based on our initial estimates. As I previously noted, we also believe the transition of our coal-fired generation fleet will be the next significant investment opportunity in Kentucky. While this opportunity is outside of our five-year capital plan under current scenarios, it's important to remember that this plan reflects assumptions based on today's use of future prices and market conditions that could rapidly change. What will not change is our commitment to our customers to continue to optimize our fleet and exceed their expectations as we lead the evolution of our Kentucky operation, including the transition to less carbon-intensive generation resources. So, as we look at the diverse portfolio of businesses that we have, it's important to point out that each business is in a different stage of its investment cycle. While U.K. rate-based growth has been a strong 4% to 6% in ED1, we see that growth accelerating into ED2 beginning in 2023 as we fund the U.K. electrification initiatives. In Kentucky, we see the initial stages of the Kentucky coal generation replacement strategy likely starting in the mid-2020s, which will begin another period of significant capital investment. And in Pennsylvania, we are expecting growth to likely slow in the next couple of years following an extensive period of transmission spending over the last five years at almost $700 million per year. It's the diversity of our portfolio that, combined with our culture of operational excellence and continuous improvement, will continue to deliver long-term value for our shareholders. With that, I'll turn it over to Joe now to cover the financial review.

Thanks, Vince, and good morning everyone. I'll begin with a brief financial overview on Slide 14. While PPL delivered an outstanding quarter of financial performance earning $0.57 of ongoing earnings per share, I'll focus my review this morning on our full-year results. We have included a walk in the appendix of today's presentation and our news release for additional details on fourth-quarter results. Looking at the full year, we achieved 2019 reported earnings of $2.37 per share compared with $2.58 per share a year ago. Adjusting for special items, primarily reflecting mark-to-market changes related to unrealized foreign currency, economic hedges, 2019 earnings from ongoing operations of $2.45 per share exceeding the midpoint of our forecast by $0.05 per share. This compares to $2.40 per share that we earned last year, which included significant weather benefits of about $0.08 per share. Looking forward to 2020, we announced the formal guidance range of $2.40 to $2.60 per share which reflects updates for current market conditions and our foreign currency hedge position. We also are updating our 2021 estimates primarily reflecting changes to foreign currency forecast which are lower than our prior forecast. Let's turn to Slide 15 for an update on our earnings results for the full year. Walking from our 2018 results on the left, we first make weather adjustments for compatibility purposes of the underlying businesses. As I mentioned, weather was $0.08 favorable compared to normalized weather results in 2018. For 2019, we experienced slightly favorable weather. The net result for the $0.07 per share decline year-over-year across all of our utilities. We also adjust for the effect of dilution. We settled the remaining 43 million shares on our forward equity transaction in November of 2019, which is the primary driver of the $0.10 per share of dilution year-over-year. Segment allocation of dilution is included on the slide for your reference. Turning to the individual segment drivers which exclude the impact of these items starting with the U.K. Our U.K. regulated segment earned $1.40 per share, a $0.12 year-over-year increase. The increase in the U.K. earnings was primarily due to higher adjusted gross margins, primarily driven by higher prices due to the April 1, 2018 and 2019 price increases, partially offset by lower sales volumes and higher pension income. In Pennsylvania, we earned $0.62 per share which was $0.05 higher than our results in 2018. Our Pennsylvania results were primarily driven by higher adjusted gross margins, primarily resulting from returns on additional capital investments in transmission, partially offset by year-over-year differences in reduced income tax rates due to U.S. tax reform. The higher adjusted gross margins were partially offset by higher depreciation expense. Turning to our Kentucky regulated segment, we earned $0.59 per share in 2019, a $0.05 increase over our results one year ago. The increase was primarily due to higher adjusted gross margins, primarily resulting from higher retail rates effective May 1, 2019, and lower income taxes primarily due to the Kentucky recycling credit recorded in the second quarter. Partially offsetting these items were higher depreciation expense and higher interest expense due to higher interest rates and increased borrowing. Results in corporate and other were consistent compared to the prior year. The results were primarily driven by higher other income offset by higher operations and maintenance expense. Turning to Slide 16, our financial outlook for 2020 feels growth is underpinned by continuing operational excellence and organic investment at our regulated utilities. Walking from our strong 2019 results on the left to the slide, I'll note that whether this past year was not significant compared to our forecast of normal conditions and resulted in only a $0.01 per share adjustment for compatibility purposes. We also projected dilution of about 11 cents due to the November 2019 settlement of our May 2018 equity forward offering, which increases our 2020 average shares outstanding compared to 2019; the allocations by segment are provided on the slide for your reference. Excluding these two factors, we project growth across all of these business segments. The U.K. segment is expected to experience growth primarily driven by higher base demand revenues due to the annual April 1 increases and expected higher foreign currency exchange rates reflecting our solid hedge position for 2020. These positive drivers in the U.K. are expected to be partially offset by lower revenues from true-up mechanisms related to the cost of debt recovery, property taxes, and sales volumes totaling about 10 cents lower pension income primarily due to the significant decline in discount rates in the U.K. and a combination of other miscellaneous drivers such as higher depreciation, financing costs, and taxes. In Pennsylvania, we project an increase driven primarily by higher returns on transmission investments. Turning to Kentucky, we project an increase from 2019 driven by higher retail rates, partially offset by higher depreciation expense. In corporate and other, we projected improved earnings driven by a number of items, including lower interest expense due to lower short-term debt post the settlement of our equity forward. These drivers result in the midpoint of our guidance range of $2.50 per share. Turning to slide 17, we've also updated our 2021 projections to account for the current foreign currency forecast. Our prior earnings forecast of $2.50 to $2.80 per share reflected a foreign currency range of $1.35 per pound to $1.60 per pound, which was consistent with bank FX forecasts at the time we initiated the earnings range. Our updated earnings forecast of $2.40 to $2.60 per share includes an updated foreign currency range of $1.25 to $1.40 per pound, which is below the current forwards and market forecasts. We're using these lower rates for the FX range given the expected near-term volatility as the U.K. works through the Brexit transition period during 2020 and we will be heading into 2021 during this time period. The other drivers for 2021, highlighted in our previously announced forecast, remain largely unchanged with rate base still expected to grow at 5% to 6% and our expectation to continue to earn near or long-term returns. Our 2020 and 2021 forecasts continue to assume an immaterial amount of equity issuances as previously indicated. Let me provide an update on our foreign currency hedging status, which is on Slide 18. For 2020, we were actively hedging during the fourth quarter and increased our hedge percentage by another 20%, bringing our hedge position to 90% of the 2020 forecast ongoing earnings. The average rate for 2020 reflecting these new hedges is $1.48 per pound. We were able to slightly improve on the average 2020 hedge rates by optimizing our hedge portfolio given the brief uplift in currency rates following the positive U.K. election outcome and the strength in our 2019 results. We continue to utilize options in our hedging strategy that preserve upside of the current market rates with about one-third of the 2020 hedge portfolio being option-based. For 2021, our hedge position is at 5% of forecasted earnings at an average rate of $1.33 per pound. Again, we expect to continue layering in 2020 hedges for 2021 going forward. Turning to Slide 19, as we continue our efforts to invest in our networks and earn our authorized returns, we remain committed to paying dividends to shareholders as we've done over the past century. The January 1st dividend represents the 296 consecutive quarterly dividends paid to shareholders. As Bill mentioned, we remain committed to dividend growth and today announced we are raising the annualized dividend to $1.66 per share, and we will continue to assess the rate at which we grow the dividend going forward in the context of our yield and pay out relative to our peers. That concludes my prepared remarks, and I'll turn the call back to Bill for some closing comments.

Thank you, Joe. Before we open up the call for Q&A, I'd like to take a moment to reflect on what has truly been a remarkable decade for PPL. Over the past 10 years, we've doubled our market cap. We've unfailingly exceeded the midpoint of our earnings forecast, we've grown our dividend by 18%, we've won 21 JD Power awards for customer satisfaction in the U.S., we've consistently ranked highest for customer satisfaction among the network operators in the U.K., we've invested $27 billion to make our network smarter, to improve reliability, and to advance a cleaner energy future, we've cut average customer interruptions by over a third in the U.K. and by more than 20% in the U.S. since 2010. All the while we've kept electricity costs reasonable for our customers and remain deeply engaged with the communities we serve. And last but not least, we have dramatically transformed PPL. A decade ago we were primarily a Pennsylvania hybrid utility facing stiff headwinds in competitive markets. Today, we are one of the nation's largest investor-owned utility companies with 100% of our earnings driven by stable, high-performing regulated businesses. In short, we are stronger today than we were a decade ago. We're better positioned to invest in the future, and as we celebrate our Centennial, we are poised to power progress for another hundred years. When our Directors first met a century ago, they did so at a pivotal time. The country was beginning to move from a patchwork quilt of isolated lighting companies to a coordinated network of regional utilities, power plants, and transmission lines. And in that moment, PPL would help drive that change, extending electricity service throughout the regions we serve, expanding to meet the needs and demands of rapid industrial growth, and just helping to improve the quality of life for generations of customers. Today, we again find ourselves at a pivotal moment for our industry, which is investing in new technologies to reshape not only how we deliver power, but how we produce it as well. In this moment, we remain as committed as ever to powering progress, to fostering innovation, to creating long-term shareholder value, and to making a positive impact on society. In closing, I'm proud of our past achievements. I'm equally excited about our future and I'm convinced that PPL's best days are ahead. With that operator, let's open the call for questions please.

First question, I wanted to clarify your 2020 guidance of 2.40 to 2.60 with the numbers you had been presenting for some time, which showed a projected range of 2.54 to 2.58 for 2020. When I consider the midpoints, I understand there was a narrower range, but the midpoint you provided was definitely higher than what you're presenting today. Can you explain what led to the changes from the previous numbers?

Sure. I'll make a couple of opening comments and I'll pass it on to Joe. As one of the things you just pointed out was the very tight range that we had established for 2020. Having said that, we still are kind of within that range but towards the lower end. Operationally, when you look at the assumptions behind the 2020, we're largely consistent with the prior forecast, the primary change was really a significant decline in corporate bond rates in the U.K. resulting in some lower discount rates, which had a negative impact on our U.K. pension obligations. Those factors really resulted in about a $0.06 impact compared to our prior plan. But as I mentioned, despite this, we're still in the prior range for 2020. Joe, did you want to say anything more?

Yes. We saw a sharp decline in corporate bond rates in the U.K. that lowered the discount rates, resulting in the increased U.K. pension obligations under U.S. GAAP. The discount rates declined by more than 100 basis points. It went from about 3% to less than 2%, and that's really what's causing the difference from our prior forecast. Again, to Bill’s point, operationally, everything else remains unchanged.

I got it. Then, second question, Vince, I just wanted to be clear when you talked about the CapEx opportunities that you're seeing across the different utility segments did I hear it right that over this five-year period, '19 through '24 or '20 through '24, I should say, that you're seeing potentially another 800 million of additional CapEx or was the number even larger than that? I just wanted to be very clear. What's the opportunity size that you see that's not yet embedded in your official CapEx numbers?

Yes. Sure. Ali, in my remarks, I indicated that was about $500 million. So $500 million.

500 million, and I think separately, you also talked about 300 million of AMI. That's not yet in that, is that correct?

Yes. That's part of the $500 million.

Well that's part of the $500. I got you. Okay. Right. And last question Bill, I know in the past you've talked about from your vantage point, you still think that the U.K. business is disproportionally too big as a contributor to earnings for PPL. Just wondering how you look at that today and is there any new tools available to you or what's your thinking on how to correct that today, if you still think that it's disproportionately too large of a business mix for you?

Sure. Well, first I'd say we are comfortable with the current business mix and believe it will deliver long-term value for our shareholders and that there are many opportunities as Vince described in his remarks. As I have said in the past, the unprecedented U.K. volatility that we've been experiencing over the past few years, I would have preferred to be less weighted towards the U.K. But quite frankly, we probably share a similar view for any jurisdiction where we've got a significant weighting such as in the U.K. I do think for those things that were within our control we've got a great track record of operational excellence and financial investments that I think are going to pay dividends for the future. And I think the opportunities we outlined today will continue to enable us to be successful for a very long time.

I just wanted to touch on the guidance in your outlook just a little bit deeper. And obviously if you just kind of look at your out of year plan, the CapEx steps down and remains flat, Kentucky rate-based kind of declines. There's a modest step up in Pennsylvania. Can you maybe just give a little bit more details in the puts and takes and what could move you higher? And I'm kind of curious on when you can present the timing of an update, understanding that you guys are very, very conservative when it comes to the outer years i.e., the capital opportunities associated with EV deployment in the U.K. Why not have included some of the stuff in your capital outlook today? Like why, why take such a conservative stance?

Yes. So I'll make a comment or two and then turn it to Vince. If you look at the overall CapEx plan, the rate base growth that's associated with that, looking at in my view, a minimum of 4% rate-based growth with earnings that will follow that with the caveat that of course, exchange rates and pension deficits funding can push that higher or lower. But I think in my view, because of the upsides that Vince talked about, I look at the plan as a minimum of 4% probably more in the 4% to 6% over the longer term as we fill in some of the gaps with more certain projects and really scrub things a little bit better in the outer years. As you indicated, we have historically been pretty conservative with our forecast. And we continue to be really driven by what we know about current projects, but also what we see is the current FX rate which has been pretty volatile over time. And again, I mentioned earlier that I believe we have a skew to the upside with the FX rate as the Brexit process becomes a lot more clear. Vince, do you want to add anything to the potential upside?

To your question about U.K. EV spending and our approach to updates, the $200 million a year we've projected is essentially part of a billion-dollar increment related to our initial estimates for electrification initiatives that will be funded by the DNOs. Looking ahead to the RIIO 2 process, the sector methodology consultation is expected in Q2 or Q3 of this year. The methodology decision will come in Q4, and the companies will submit our proposals in Q2 of 2021. Currently, we are planning for those proposals and consulting with Ofgem on the methodology. We need to navigate this process a bit further before revising our outlook on EV or electrification spending for ED2. However, I agree there may be opportunities for additional capital, particularly following Jonathan Brealey's decarbonization plan on his first day. We believe this aligns well with our discussions, but we need to complete the ongoing process before expanding beyond our initial estimates.

Got it. And then just sticking sort of with your conservative theme here just around the FX. I mean you did highlight, obviously you're taking a little bit more of a conservative stance, but your assumptions do trail sort of consensus and forwards. So just maybe talk a little bit about that at a deeper level. And then what's sort of the timing of the '21 hedging program? Are there any sort of any mandated thresholds or you're able to keep it open based on kind of your fundamental views?

Joe, do you want to talk about the FX to start?

So I guess the first part of your question, Shar, on our forecast range relative to market spot rates and market forecast, we are lower than those for the reasons I said in my prepared remarks. We expect volatility in the exchange rate during 2020 as the U.K. continues through the transition period. And we'll be hedging 2021 during that time period. The other drivers for 2021 highlighted in our previously announced forecast remain largely unchanged with rate base still expected to grow at 5% to 6% and our expectation to continue to earn near or long returns.

Got it. And then just one last one is, Bill, I know, you may or may not want to answer this, but I know the board has been obviously very patient around how you guys are thinking about the stock and the valuation. But it does kind of still continue to trade even if you look at it from a sum of the parts, multiple wrap basis post-Brexit. Is there any other strategic steps that you can take to maximize value for shareholders outside of the plan you sort of present today and outside of the obviously incremental opportunities given the fact that your plan is very conservative?

Well, obviously, I'm not going to speculate on potential M&A, but when I look at the overall strategy for the things that we can control, it's actually worked really well. I think in terms of meeting all of the things that we do control, we obviously can't control the politics in the U.K. or the exchange rate. I think that as we look forward, particularly as we get through 2020, it's very likely that we'll know a lot more about where Brexit ultimately lands and what the currency landscape looks like for sure. Having said that, we're always looking at strategic improvements to the base case that we can make that would create shareholder value. So we'll continue to do that as a Board and as a management team wherever and always if there are opportunities I think to create some additional shareholder value. But we are always on the lookout for how do we improve the base case and the plan that we have and I will continue to do that.

Thanks. Actually, Shar set me up reasonably well there. When I look at like what you can control, obviously, operationally you guys are still top-notch across all your businesses. But given the things that you can't control in '20 and '21 and then the other thing you can only to some degree control in '22, which is the reset of under RIIO-ED2. If I step back and look at this from a high level, is it fair to look at the big picture as the next few years; you've got some earnings challenges that could create a more or less flat earnings profile, but the setup going into '22 and beyond creates a lot of growth opportunities from a decarbonization perspective on both your platforms to start growing the business again at a pretty steady and long trajectory?

Yes, Greg. I would say overall, with the guidance we just gave here today from '20 to '21, at least looking at the midpoints, looks flat. As we indicated, depending on the FX rates, in particular, that could move up and show some growth. I think the underlying businesses, kind of to your point, continue to grow. The rate base is continuing to grow. And I think we are going to be set up well going into both decarbonization opportunities in the U.K. as well as domestically. So I think that, depending on your outlook for the FX, will dictate whether there's growth from 2020 to 2021.

I guess if we just look at the underlying business, absent FX, sort of all else equal, given we are talking about 2022 we would see growth in the businesses. And really the reason we're flat from 2020 to 2021 based on the midpoints is because of our strong hedge position for 2020 relative to the hedge position we have in 2021.

Yes. Greg, it's Vince. Just also the RIIO2 transition is 2023, not 2022.

Oh gosh, sorry. Got you. I think back to the strategic decisions made when you chose to aggressively diversify by acquiring more utility assets in the U.K. and the Kentucky business, which was done at a really opportune time to reduce your exposure to the declining margin outlook for merchant power. I believe the decarbonization opportunity will be significant for your company in both Kentucky and the U.K. Building on Shar's question about strategic options, could this influence your decision to consider scaling up with a partner to better execute on that transition?

I will not speculate on mergers and acquisitions. However, I agree with your perspective on the decarbonization opportunity. In the U.K., this is one of the reasons we maintain a positive outlook. We have managed to withstand some significant challenges, particularly the threats of renationalization, which are no longer a concern following the strong election results. That risk is behind us, although Brexit continues to create some market uncertainty. I believe that beyond these factors, things will stabilize. We will have a clearer understanding not only of RIIO-ED2 but also of where foreign exchange rates will settle. Overall, I think our business is positioned very well for the future.

Continuing with the strategic theme, one key takeaway from the responses is that there is potential to benefit from reducing the share of the U.K. business. I understand there are issues related to selling the U.K. business because of tax implications and potential losses. If there were an opportunity to partner with another entity to expand the company while decreasing the U.K. segment, what tax or other constraints should we consider that could restrict strategic decisions regarding this?

Well, again, I'm not going to speculate around M&A. However, as we've indicated in the past, an outright sale either in full or partially of the U.K. business does create multiple challenges, all of which destroy shareholder value. If you look at the valuation of the company today, I think it's even more challenging today than it probably was when our stock was in the upper $28 to $30 range, so in the upper 20s. So, I think with where we are today, that strategic decision continues to be a big challenge for us. In terms of where the renationalization risk being removed, clearly you've seen the values of the U.K. utilities move up significantly after the election, and we still have what we believe is one of the strongest, if not the strongest distributor network operator in the U.K. So we believe, on its own, its value has increased. But again, for us to de-weight and sell the business, that would be destructive to shareholders.

Yes. I get that and I remember that. What I'm asking is, if rather than selling the U.K. business, PPL as a whole would partner with somebody else and that way reducing the proportion of the U.K. business, do those same constraints apply on the tax side or any other side that we should be thinking about as we think about the strategic direction?

Yes. Let me ask Joe to comment on that.

Hi, Praful. I think that's a very hypothetical question and it would depend on the other party and many factors, so it's really hard to provide a clear answer. I would say that we look at various ways to create shareholder value, and the tax implications and how that affects shareholder value is something we closely monitor. However, it would be quite challenging to speculate on a hypothetical situation depending on who the other party might be.

Fair enough. And that makes sense. Just a couple of quick cleanup questions. On Slide 25, when I look at the rate base growth that you've projected through '24, I saw a meaningful decline in rate base growth both for the U.K. business and Kentucky. Obviously, this was slightly different timing; '18 to '23 versus '19 to '24. But I'm just trying to understand. The U.K. sounds like mostly pension related and exchange rate and mostly exchange rate, I guess and Kentucky, you guys have talked about. Is there anything else we should be thinking about around the rate base growth profile as you think about the different segments?

So looking at that Slide 25, you can see there that the rate base growth in the U.K. is about 5.5%. It's not materially different, I don't believe, from where it was previously. I think it might have been as high as 6%. I think the biggest decrease is really in the Kentucky operation, where we're only projecting a 1.5% growth much about or much because of the reasons that Vince articulated in his opening remarks. And in the PA transmission, that's really been probably the larger decrease when you look at the overall mix because for a period of time we were growing double digits there. And then on the distribution side, I think it's been fairly consistent in the 4% to 6%. So I think the two big changes are lower in Kentucky and lower on the Pennsylvania transmission side.

Yes. Thanks. Sorry, I did mean Pennsylvania transmission. Sorry, so thanks for that. And finally, just on Slide 26, when I look at incentive revenues, there has been a slight decrease in that projection as well for the U.K. So I just want to understand, is that also exchange rate or anything else on the incentive side?

It's purely exchange rate.

Hey, team, well done, again. And just going to play cleanup here on some of the last questions. So can we talk a little bit more specifically on the timeline here for AMI and Kentucky? You talked about $300 million. Sort of procedurally, how do we get that done, when I know there's been some talk historically about that? And also, perhaps more importantly, decarbonization in the U.K. How do you think about that, the timeline be able to reflect some of that and how would that manifest itself in terms of CapEx here? Just to be a little bit more specific on that process. And I got a follow-up.

Okay. Sure. Vince, go ahead.

Sure, Julien. We would likely align the AMI implementation with the next rate case. As you know, in Kentucky, we operate on an every other year rate case cycle. The last rate case had new rates effective May 1, 2019. If we maintain this schedule, a new rate case would take effect in the first half of 2021. Therefore, we would consider AMI in that upcoming rate case. I apologize, could you remind me of the second part of your question?

How does the decarbonization in the U.K. get reflected? How does that manifest itself? What kind of order of magnitude of spending we're talking about? I know you guys talked about $500 million upside in the five-year outlook. I mean, when you think about decarbonization, that probably seems like a bigger number here. But I don't want to put words in your mouth. And what time period? Are we talking about in the current ED? Are we talking about the next one, if you can provide some context?

Sure. So, the bulk of the incremental electrification CapEx we've included in the ED2 initial estimate. So we have about $1 billion over five years, call it $200 million a year in that five-year period. And again, that's based on our initial assumptions. The team is working through our business plan submission, and that will be filed mid-2021 as part of the RIIO2 process. I would say depending how aggressive the government initiatives and Ofgem's policies become on the tail end of ED1, we could see deploying some capital in our current business plan time frame on electrification initiatives. We think we have enough leeway within the existing plan that we would be able to divert some spending towards that. Therefore, it wouldn't be a drag on the returns because, as you know, the revenues are kind of set for the ED1 period. So we would have to basically shift capital away from other things to EVs. We have innovation capital. Other things that I would say are placeholders that we could redeploy there. So I think we have enough flexibility in the back end of ED1 and you'll see a significant uptick in ED2, which could once we get the business plans done, could be higher than what we're currently projecting at that $1 billion over the five years.

Yes. It's probably obvious, but anything that we would shift from the current ED1 to ED2 to accommodate any electrification initiatives would wind up showing up in ED2 because presumably it's all work that is necessary to be done, not necessarily for electrification but for reliability and customer service reasons.

I want to follow up on Greg's earlier question. If I think of 2021 and '22 earnings, in order to see some growth there, in order to see like an earnings growth that matches rate base growth, do I need to see an improvement in the exchange rate?

No.

I’m curious about the currency situation. Some of the currency hedges are set up as options that allow for potential gains. Why aren’t we locking in earnings for 2021 now? It seems there aren't many variables affecting 2021 earnings with the rate cases, and also for 2022. You just mentioned Kentucky, so why not secure those options now to preserve potential gains while also ensuring a baseline, especially considering any potential issues in the U.K.?

The options, Anthony, are for 2020 not in 2021. So I think, given where the options are priced and where the spot rate is, we'll prefer to see what happens within those option rates because we're protected on the downside. Clearly, you could see some appreciation on the upside, but they are in 2020, not 2021.

Sorry, just to add to that. To the extent that we wanted to put options on for the bulk of 2021, that can be pretty expensive. So we probably wouldn't look to do that unless there were some shifts in our thoughts around the currency. But for now, I think we'll look opportunistically to hedge in at $1.30 and above wherever we can. And we'll start to ramp up a lot of our hedging by probably mid-year.

And just lastly, if you could update us on the pension assumptions. I don't believe there are major changes in your pension assumptions in the U.K. I thought there was like 10% degradation from 2020 to 2021, but I just wanted to double-check with you guys.

We had projected about a $0.05 change from 2020 to 2021, and our assumptions haven't changed materially around that at this point.

Okay. Thank you, Rocco. And thanks everyone for joining us today. We'll visit with you again on the first quarter earnings call. Thank you.