PPL Corp (PPL) — Q1 2022 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to the PPL Corporation Conference Call on First Quarter 2022 Financial Results. We provided slides for this presentation in our earnings release issued this morning on the Investors section of our website. Before we get started, I'll draw your attention to Slide 2 and a brief cautionary statement. Our presentation today 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 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 non-GAAP measures, including earnings from ongoing operations and adjusted gross margins on this call. For reconciliations to the comparable GAAP measures, please refer to the appendix. Participating on our call this morning are Vince Sorgi, PPL President and CEO; Joe Bergstein, Chief Financial Officer; and Greg Dudkin, Chief Operating Officer. With that, I'll now turn the call over to Vince.

Thank you, Andy, and good morning, everyone. We appreciate you joining us for our first quarter investor update. Moving to Slide 3 and the agenda for today's call. I'll begin this morning with highlights of our first quarter performance and an update on the status of our planned acquisition of Narragansett Electric in Rhode Island. Joe will then provide a detailed review of first quarter financial results. And as always, we'll leave ample time for your questions. Turning to Slide 4. Today, we announced first quarter reported earnings of $0.37 per share. Adjusting for special items, first quarter earnings from ongoing operations were $0.41 per share compared with $0.28 per share a year ago. These results were in line with our expectations and provide a strong start to the year as we remain focused on repositioning PPL for long-term growth and success. Moving to Rhode Island, we received approval in late February from the Rhode Island division of Public Utilities and Carriers to acquire Narragansett Electric from National Grid. In its detailed decision, the division found that PPL met the statutory standard for approval. The Rhode Island Attorney General's office appealed the division's order to the state's Superior Court and obtained a stay of the approval until the appeal could be heard. On April 26, the superior court heard oral arguments on the Attorney General's appeal. The Attorney General contends that the division misapplied the statutory standard for approval and, in particular, the state's public interest requirement. The Attorney General also contends that the division failed to adequately consider Rhode Island's act on climate in its analysis decision. We disagree and believe the extensive record and evidence in this case demonstrate that the division properly applied the statutory standard and correctly approved the transaction. At the April 26 hearing, the Attorney General's office asked Judge Stern to remand the matter back to the division with instructions to address the issues raised by the Attorney General. The Attorney General's office did not ask the judge to reverse or vacate the decision. We anticipate Judge Stern will issue a decision on the appeal relatively soon because he publicly stated that a quick and timely resolution of this matter is in the best interest of all parties. In the meantime, we are actively engaged in settlement discussions with the Attorney General's office and remain prepared to close promptly with National Grid. As we've shared all along, we are eager and excited about the opportunity to work with the talented team at Narragansett Electric to drive significant value for Rhode Island customers and support the state's decarbonization efforts. We continue to believe Narragansett Electric is an excellent fit for PPL and that PPL is an excellent fit for the state of Rhode Island. We remain confident that we will reach a positive outcome in the proceeding. Given the pending litigation, we are not in a position to provide additional details at this time. And I have said all I can say about this matter on today's call. I appreciate you respecting the process when we get to the Q&A session. Turning to Slide 5 and a few operational highlights. Our Kentucky Utilities continue to seek opportunities to advance clean energy options and support Kentucky's growing economic development. In late February, LG&E and KU joined the state's new Hydrogen Hub initiative, which focuses on making hydrogen a low-carbon solution for the future. The initiative is part of a new energy strategy announced last fall by Kentucky Governor Andy Beshear and the Kentucky Energy and Environment Cabinet. LG&E and KU's commitment to promote hydrogen supports a key pillar of PPL's clean energy strategy, which is to drive digital innovation and R&D to enable new technologies. The commitment is also consistent with our sponsorship of EPRI's Low-Carbon Resources Initiative, and LG&E and KU's partnership with the University of Kentucky Center for Applied Energy Research. EPRI's Low-Carbon Resources Initiative seeks to advance clean energy technology and low-carbon energy carriers such as hydrogen. Meanwhile, LG&E and KU's carbon capture partnership with the University of Kentucky includes a novel project focused on capturing CO2 from natural gas combined cycle plants and directly from the air as well as producing hydrogen and oxygen as value-added streams. We're excited to join this new Hydrogen Hub initiative and we will continue to engage with the Kentucky administration and other stakeholders as the state's clean energy strategy evolves. We're also very excited to support continued economic development in Kentucky, which is coming off a banner year for attracting new business and manufacturing in the state. As we highlighted on our third quarter call, Kentucky's success in 2021 included Ford's announcement that it will build a $6 billion battery manufacturing complex within our LG&E and KU service territories. The complex to be built in Glendale, Kentucky will help put the state at the forefront of the auto industry's transformation to electric vehicles, and the state has called it the single-largest economic development project in its history. In support of this effort in Glendale, Kentucky Utilities recently requested regulatory approval to build 2 345 kv and 2 138 kv power lines and 2 new substations. LG&E plans to construct an interconnection gas regulation facility and nearly half a mile of gas lines to serve the Glendale project. The estimated capital cost to support the Glendale economic development project is $150 million to $200 million. The Kentucky Public Service Commission has set a procedural schedule that will support our ability to meet Ford's construction timeline. In addition to these initiatives, we also remain focused on advancing technology and innovation. Each of our utilities were recently recognized for these efforts by EPRI, winning technology transfer awards. In Pennsylvania, PPL Electric Utilities received this award for the application of an adaptive tool, which, through automation, further increases the overall safety, reliability and efficiency of the electric grid. This tool expands on one of the most advanced grids in the nation as we continue to develop a safer, smarter, self-healing grid of the future. In Kentucky, LG&E and KU were recognized for the use of EPRI's electrification portfolio assessment tool to identify high-impact electrification technologies to reduce natural gas use and related emissions. This technology research project identified more than 1 million-megawatt hours of electrification opportunities for LG&E and KU industrial and commercial customers to reduce emissions and lower costs. These awards are just another example of our continued efforts to lead in the research and development space while progressing towards our sustainability goals. Across our businesses, we are also very focused on improving the customer experience by expanding self-service options, and our progress in this area continues to be well received by our customers. In February, PPL Electric Utilities ranked first in J.D. Power's annual Utility Digital Experience Study. The study assesses how customers interact online and through mobile apps with the 36th largest electric, natural gas and water utilities in the U.S. PPL Electric's score in the study improved significantly in 2022, while the majority of the companies surveyed experienced declining scores. Improving customers' digital experience is yet another way we continue to use technology to drive value for our customers. Shifting to our final update on Slide 5. We continue to make progress across PPL in advancing key environmental, social and governance initiatives. On April 14, we published our annual sustainability report, which addresses our approach to a wide range of ESG issues and highlights our 2021 performance and progress. As highlighted in the report, we have expanded on our commitment to achieve net-zero carbon emissions by committing to not burn unabated coal by 2050. This new commitment reflects our continued discussion and expectations around the future of our coal fleet and its transition. Based on our current retirement schedule, we expect our coal capacity to be reduced from just over 4,700 megawatts today to approximately 550 megawatts in 2050. The 550 megawatts are associated with our highly efficient Trimble County 2 coal-fired facility, which was completed in 2011. There are any number of technology developments, regulatory mandates or circumstances that could impact the timing of the end of this plant's economic life. We believe that research and development is key to our clean energy future and fully expect that innovation, technological advances and the relative economics of other cleaner energy sources will support the company's commitment to not burn unabated coal at this facility by 2050. In other highlights from our sustainability report, we created and filled a new Chief Diversity Officer position to lead our DEI strategy enterprise-wide and build on the progress we made in 2021. Finally, I would note that we have added political contributions to the oversight function of our Board's Governance, Nominating and Sustainability Committee. PPL's transparent disclosures in this area have earned us a trendsetter ranking by the CPA Zicklin Index, which benchmarks the political disclosures and accountability policies and practices of leading U.S. public companies. Oversight by the Governance, Nominating and Sustainability Committee will further strengthen our governance in this area. That concludes my strategic and operational overview. I'll now turn the call over to Joe for the financial update.

Thank you, Vince, and good morning, everyone. I'll cover our first quarter segment results on Slide 6. As Vince noted, we reported 2022 first quarter GAAP earnings of $0.37 per share. Special items in the first quarter were $0.04 per share, primarily due to integration expenses associated with the planned acquisition of Narragansett Electric. Adjusting for these items, first quarter earnings from ongoing operations were $0.41 per share. Turning to the ongoing segment drivers. Our Pennsylvania Regulated segment earned $0.19 per share, a $0.03 year-over-year increase. The improved earnings results in Pennsylvania were primarily driven by higher peak transmission demand, returns on additional capital investments in transmission and higher sales volumes. The increases were partially offset by higher operation and maintenance expense, including higher-than-expected storm costs. Turning to our Kentucky segment, we earned $0.25 per share in the first quarter, a $0.07 increase over comparable results from a year ago. The increase was primarily due to higher base retail rates effective July 1, 2021. Partially offsetting this increase was higher depreciation due to additions to PP&E. Results at Corporate and Other were $0.03 higher compared to the prior year. Factors driving earnings results at Corporate and Other primarily included lower interest expense, primarily resulting from the recapitalization of the balance sheet following the sale of WPD. Finally, included in the segment results, as reflected on this slide, is a $0.02 increase in our first quarter 2022 EPS due to share accretion resulting from the $1 billion of buybacks completed in 2021. That concludes my prepared remarks, and I'll turn the call back over to Vince for some closing comments.

Thank you, Joe. As I noted earlier in my remarks, we continue to work diligently through the state appeals process in Rhode Island. While the appeal has delayed the closing of the acquisition, we are confident we will complete this transaction, and we look forward to introducing a new PPL, a PPL that is built for the future, an innovative, best-in-class utility operator positioned to deliver competitive earnings and dividend growth, backed by one of the strongest balance sheets in our sector, employees to lead the clean energy transition while keeping energy service affordable and reliable for our customers. And we continue to look forward to sharing a strategic update, including long-term growth projections at an Investor Day following the Rhode Island closing. With that, operator, let's open the call for Q&A.

So Vince, starting, I guess, with Rhode Island, if the Superior Court rules in your favor, I guess the AG could appeal to the state Supreme Court. Any general thoughts on timing if that were to occur? Is it an immediate filing? And then would you wait for the court to deny your stay? I assume you would not close while this process is still underway, right?

Yes, Shar. Let me just reiterate that we are in active litigation in Rhode Island. And as I said, we're engaged in settling discussions with the Rhode Island AG's office. So I really can't say any more than what I've already said in my prepared remarks. I'll just reiterate that we're confident that we'll close the transaction in a timely fashion and again, look forward to rolling out the new PPL at an Investor Day shortly following the close. But look, I appreciate that you may have some questions about the matter, but I really need you to respect where we are in this process.

No, that's fair. I appreciate that. And then just maybe a question for Joe on housekeeping. Can you just remind us on what the approximate unallocated cash balance is at this point, following the buybacks, which you just highlighted in the 3Q CapEx increase that you had? I guess how are you thinking about the toggle between buybacks and more CapEx as we approach the finish line here in Rhode Island?

Yes. So Shar, we'll lay out all the details at the Investor Day when we have it. I mean clearly, we have cash available for the acquisition of NECO when we conclude that process. But anything beyond that, we'll discuss at the Investor Day.

Okay. Got it. And then just one last one for me and I'll jump back in the queue. It's just as we're thinking about the Analyst Day, the topic of Kentucky does pop up here and there. And obviously, there's a trajectory that's out there with the prior IRP that's filed. But is there an opportunity to maybe take a slightly more aggressive approach as you're thinking about the coal outlook within that state versus what you just recently filed?

At the Investor Day, we will provide a comprehensive update on the company's outlook and our strategy. We refer to it as the new PPL for a reason. It's been some time since we've shared detailed financial projections, and we are eager to present this information to the market. We will highlight the investment opportunities in each jurisdiction, along with our expectations for both near-term and long-term growth, and how these factors contribute to our earnings and dividend growth projections. We will definitely cover all of this at the Investor Day.

No, that's helpful. I mean, I think there's some trepidations around what the base earnings could be and what you would grow off of that. So it would be very welcome.

Yes. I just want to emphasize that we are focused on achieving competitive earnings growth, and we will present all the details at Investor Day. We are confident in our ability to deliver.

I wanted to follow up on Kentucky and consider the portfolio and the amount of undepreciated book value that's still in the rate base today. Could you quantify that now? It would be helpful. Also, regarding long-term retirements or any potential acceleration, could you discuss the framework in place since it has changed since the most recent rate case?

Yes. So on the retirements, we have the 2024 retirement and then additional retirements in 2028 and then the next round are in kind of the mid-2030s as outlined in the IRP. We are actively engaged with the commission and other parties responding to questions around the IRP. But as we think about really the 2028 retirements going from kind of the theoretical that was in the IRP, again, that's a point in time analysis, to actually putting together the generation replacement plan, we're actively working on that now. That will become part of the interaction that we have with various stakeholders around the IRP. Ultimately, that will culminate in a CPCN probably within the next year around what we think that generation replacement will look like. But Nick, to your point, there's opportunity to look at those retirement dates and potentially pull those in, but those will all be part of the CPCN request that we'll be working on here in the near term. Joe, anything you want to add on the rest of his question?

I think, Nick, the other part of your question was the current rate base, which is about $5 billion today.

Okay, $5 billion. I appreciate that. And then just core business today, what are you seeing in terms of just inflation impacts? How are you feeling on labor pressures, financing costs and just how should we kind of be thinking about how that affects the base business today?

Yes, we are definitely monitoring this situation. In Pennsylvania and Kentucky, we have noticed a rise in prices driven by inflation. However, we believe we can manage it. The biggest effect of inflation is observed in energy costs, particularly fuel purchases. While these do not directly affect the profit and loss statement since they are pass-through costs, they do influence our customers' affordability, which is a major focus for us. A fundamental part of our business strategy, which we will elaborate on at the Investor Day, is to enhance efficiency throughout the organization. This includes centralizing shared services and optimizing our supply chain while continuing to implement technology to lower overall costs. On the affordability front, besides focusing on operational efficiency, we are dedicated to making sure our customers are informed about available assistance programs for their utility bills. We may need to offer flexible payment plans, similar to what we did during the pandemic. All of these initiatives, Nick, should benefit us in this inflationary climate as we strive to keep energy affordable for our customers.

One brief one. Just when you talk to a competitive earnings and dividend growth rate, I would say the average in the sector right now is 5% to 7% generally. Is that kind of a fair reflection of what you see as the average in the sector?

Sorry, Steve, you cut out when you stated your range or number. Say it again.

5% to 7% generally viewed as the average, I'd say right now. Is that kind of the bogey that you would be looking to?

Yes. Well, that's consistent with what we see as well, yes.

Vince, tough outcome on Tuesday. So hopefully, get better luck tonight. Just, I guess, quickly on, I guess, Slide 4. And I don't know if you could answer this, and if you can't, just please tell me, but on one of the bullets you highlighted the Attorney General is requesting just, I guess, remand with instruction versus vacating the approval decision. I guess what is the distinction there that you're trying to make on that bullet?

Yes. So Anthony, that just means that the Attorney General's office is not looking for the judge to strike down in totality the decision that the division made to approve the transaction and then we basically start from scratch. What was requested was that they remand the decision back to the division with instruction to address the issues that the Rhode Island Attorney General's office had. So it's just making reference to what was being requested by the Attorney General's office. It's not a complete redo.

So is it accurate to say that there is no challenge to the DPUC approval? The DPUC has approved the transaction, and currently, there are no pending legal matters contesting that approval?

No. No, as I said in my prepared remarks, really the two issues that the Attorney General's office is challenging within the decision are whether or not the act on climate was adequately reviewed and analyzed in providing the approval and then whether the public interest requirement was met. So those were the two primary challenges that the Attorney General had around the decision.

Great. And then lastly, if I can just pivot, I guess, to maybe Pennsylvania. It's on kind of like customer bill impact and will load growth be impacted. If I think in Pennsylvania, I think customers maybe had an increase in December due to higher commodity prices. And then I believe new rates go into effect in June, so you get a kind of a pancake of maybe a sizable increase. I guess one is, what level of increase are you forecasting customers may face in Pennsylvania in June versus maybe a year ago? And then do you think that could impact either customer load growth looks very attractive when I look on the slides or maybe if it postpones any CapEx, and I'll leave it at that.

Yes. Greg, would you like to address that? The increases are indeed substantial, as you mentioned. Commodity prices have risen significantly this year compared to last year, and this is a cost that we pass through to our customers, with potential increases of around 50% to 60%. This is quite significant. We are actively reaching out to our customers to assist them, whether through shopping options or by offering flexible payment plans, ensuring they have a comprehensive range of choices available. When considering the overall increase, it primarily stems from the generation side. In fact, T&D costs are declining. So, we are concentrating on helping our customers navigate this generation-related issue. Greg, do you have any additional details or insights to share on that?

Yes. To Vince's point, compared to June of last year, the overall bill for residential customers will increase by about 30%. This rise is primarily due to a doubling of generation costs. The impact on future sales remains to be seen, but it is significant. We are actively encouraging customers to explore their options, as there may be generation providers offering lower rates. In our communications, we emphasize the importance of shopping around, and if a better generation charge or deal is available, customers should take advantage of it.

First, I just want to clarify quick with the affordability questions. There's no plans in moderating the capital plans in Pennsylvania or Kentucky that you put out before?

Well, we'll lay out our new capital plan on the Investor Day, Paul. But specifically related to the old plans, they're not being impacted by that.

Okay. Great. I just wanted to check on that. And then just since all the inflation questions, what is the long-term O&M targets for Pennsylvania and Kentucky, just as you're seeing more pressures change the rate case plans in Pennsylvania?

Well, overall, again, we'll get into the details on the Investor Day, but as I mentioned, part of our strategy is to become more efficient across the entire enterprise, especially after we close Rhode Island and we're able to really leverage the IT systems that we have here in Pennsylvania around the T&D operations. As we've talked, we need to just bring Rhode Island on to those systems. They're not coming with systems because they're integrated with National Grid. So we'll be able to take advantage of spreading all the fixed costs of those systems over more customers and more employees. In addition to that, like I said, we're centralizing our services organizations or functions and looking to even further optimize our supply chain efforts across the entire portfolio. And again, bringing in the opportunity with Rhode Island will enable us to do that even further. So we see a fairly significant opportunity there to reduce O&M over the planning horizon. And again, we'll lay all that out on the Investor Day, but it's significant. Greg, anything you want to add to that?

Yes. Just that you had mentioned PPL Electric Utilities, so there's no plans in the immediate future for a rate case there for today.

I'm curious if you have a stay out in Kentucky for several years. If you increase capital spending there, will you need to wait until the next case to recover those costs? Are there ways to implement interim rate increases before that next case? Also, could you remind me when you plan to file that next case?

Yes. So last year's rate case, we had a 4-year stay-out provision. We do have the environmental recovery mechanism in Kentucky. So if there are any environmental-related capital spend, that does get recovered, Michael, on a more real-time basis. But just more broadly, we have the DSIC mechanism in Pennsylvania. So even while Greg just mentioned, we don't have a base rate case, we do have the DSIC mechanism there. And then in Rhode Island, they have their capital recovery mechanism as well that does not require base rate cases. The plan that we'll lay out in the Investor Day will not rely on any near-term rate cases across the entire portfolio, which we think will differentiate our plan against some of our peers.

Got it. And can you remind me how much you need to spend on coal, ash, or ELT-related projects in Kentucky over the next 3 to 5 years?

I think that we'd probably be better off responding to that at the Investor Day. But it's probably still a couple of hundred million over that time period, not as much as what we were showing the prior 5 years or so, Michael, but there's still a little bit to go there.

Yes, I just want to thank everybody for joining the call. Again, first quarter, I think a good start to the year. We remain confident in our ability to close Narragansett and really looking forward to laying out the new PPL for everybody shortly after closing. So appreciate everybody's time.