PPL - Earnings Call - Q3 2017

Transcript

Speaker 0

Good day, and welcome to the PPL Corporation Third Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. I would now like to turn the conference over to Joe Bergstein, Vice President, Investor Relations.

Please go ahead, sir.

Speaker 1

Thank you. Good morning, everyone. Thank you for joining the PPL conference call on third quarter results as well as our general business outlook. We're providing slides of this presentation on our website at www.pplweb.com. Any statements made in this presentation about future operating results or other future events are forward looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from these forward looking statements. A discussion of factors that could cause actual results to differ is contained in the appendix to this presentation and in the company's SEC filings. We will refer to earnings from ongoing operations or ongoing earnings, a non GAAP measure on this call. For reconciliations to the GAAP measure, you should refer to the press release, which has been posted on our website and furnished to the SEC. At this time, I'd like to turn the call over to Bill Spence, PPL Chairman, President and CEO.

Speaker 2

Thank you, Joe, and good morning, everyone. We're pleased that you've joined us this morning. With me on the call today are Vince Sorge, PPL's Chief Financial Officer and the heads of our U. S. And UK utility businesses.

Since we will see many of you at EEI next week and considering the number of earnings calls being held this week, we plan to keep our prepared remarks brief and move quickly to the Q and A. Moving to Slide two, our agenda this morning starts with an update to our 2017 full year earnings guidance, which we are increasing today and a brief discussion of our longer term growth trajectory. Vince will then provide an overview of our quarterly and year to date earnings results along with a more detailed financial review. Then we'll get right to your questions. Turning to Slide three, based on our strong performance year to date, we're raising the midpoint of our 2017 ongoing earnings guidance despite the unfavorable effects of weather in Kentucky and Pennsylvania.

We're updating our 2017 forecast range from the previous $2.5 to $2.25 per share to $2.1 to $2.25 per share, increasing the midpoint of our forecast from $2.15 to $2.18 per share. Strong year to date earnings in The UK regulated segment give us the confidence to raise the low end of our guidance. Drivers behind the strong UK performance include higher sales volumes primarily from weather, lower operating and maintenance expense and lower income taxes. As a result, we updated the segment forecast since the second quarter call by increasing The UK regulated segment by $04 and by lowering the Kentucky regulated segment a penny due to the continued impacts of unfavorable weather, which Vince will comment on later in his remarks. The Pennsylvania segment and corporate and other are expected to deliver in line with the second quarter earnings forecast.

We continue to expect 5% to 6% compound annual earnings per share growth from 2017 through 2020, measured against the original 2017 ongoing earnings forecast midpoint of $2.15 per share. We're in the process of updating our business plans now and we will provide earnings guidance for 2018 and an update to our longer term growth rate on the year end call. Our current plan includes investing more than $16,000,000,000 in infrastructure from 2017 through 2021 and achieving essentially real time recovery for more than three quarters of that investment. Our investments are focused on expanding and modernizing the grid, adding smart grid technology and automation as well as strengthening physical and cyber security. We also continue to target annual dividend growth of about 4% a year through 2020.

And as I've indicated in the past, the strength of our growth plan is built on the low risk nature of our business plans and is supported by the strength of our hedging program and our stable stream of utility earnings and cash flows. Now, I'll turn the call over to Vince to cover the financial highlights. Vince?

Speaker 3

Thank you, Bill and good morning everyone. Let's move to Slide five for a review of our financial results. Today, announced third quarter twenty seventeen reported earnings of $0.51 per share compared with $0.69 per share a year ago. Year to date through the third quarter, reported earnings were $1.53 per share compared to $2.11 per share through the first nine months of twenty sixteen. Adjusting for special items, third quarter twenty seventeen earnings from ongoing operations were $0.56 per share compared with $0.63 per share a year ago.

The $07 per share decrease was driven by lower earnings from The UK regulated segment of $0.11 per share, primarily due to $07 from lower foreign currency exchange rates in 2017. Corp and Other was positive by $04 per share due to the partial reversal of the timing impact created in the first quarter related to recording our annual estimated income taxes. I'll cover the quarterly segment earnings drivers in more detail in a moment. Moving to the bottom table, earnings from ongoing operations were $1.7 per share through the 2017 compared with $1.86 per share through the same period a year ago. Our year to date earnings from ongoing operations were lower by $0.16 per share, driven by lower earnings from The UK regulated segment of $0.10 lower earnings from our Kentucky and Pennsylvania segments $0.02 each and an unfavorable variance for corp and other of $02 again due to the timing impact created in the first quarter related to recording annual estimated income taxes.

Expected lower foreign currency exchange rates resulted in $0.24 per share of lower earnings in 'seventeen compared to 'sixteen. We've included to the right additional drivers contributing to our year to date earnings variance. The 04/01/2016 price increase in The UK, the base rate increases in Kentucky and additional transmission margins in Pennsylvania partially offset the negative effects of the lower foreign currency exchange rate, lower sales volumes and higher depreciation and interest expense resulting from continued capital investment. Before getting into the segment details, let me just highlight the impact of weather for both the quarter and year to date. For the quarter, mild domestic weather resulted in a $03 negative impact compared to the prior year and a $01 negative impact compared to budget.

And on a year to date basis, domestic weather negatively impacted our results compared to prior year by $05 and $04 compared to budget. In The UK, on a year to date basis, weather was favorable by $02 compared to budget and flat compared to 2016. Let's move to a more detailed review of the second quarter segment earnings drivers starting with the Pennsylvania results on Slide six. Our Pennsylvania regulated segment earned $0.13 per share in the third quarter of twenty seventeen, flat compared to the same period last year. These results were due to higher transmission margins resulting from additional capital investments and lower operation and maintenance expense.

These favorable drivers were primarily offset by lower distribution margins due to mild weather of $0 and higher depreciation expense. Moving to Slide seven, our Kentucky regulated segment earned $0.18 per share in the third quarter of twenty seventeen, also flat compared to a year ago. These results were driven by higher base electricity and gas rates that were effective July 1. These were offset by lower sales volumes due to unfavorable weather of $02 and higher depreciation expense. Turning to Slide eight, our UK regulated segment earned $0.24 per share in the third quarter of 'seventeen, an $0.11 decrease compared to the same period a year ago.

The lower results were primarily from lower foreign currency exchange rates in 2017 compared to 'sixteen of $07 which was expected, lower gross margins resulting from lower sales volumes, higher financing costs due to higher interest expense on index linked debt and higher income taxes. These results were partially offset by lower operation and maintenance expense primarily from pensions. Moving to Slide nine for a hedging update, we fully hedged our UK earnings through 2019 at rates above the 1.3 per pound budgeted rates in our EPS growth targets. Since the second quarter call, we've continued to reposition our hedge value for 2018 and 'nineteen and have further hedged 2020, which is now 15% hedged at an average rate of $1.47 per pound. With hedges above our budgeted rate in 2018, 'nineteen and 'twenty, we have incremental hedge value of about $0.14 across the three years.

Our current plan is to maintain this incremental hedge value to protect against potential depreciation in the exchange rate during Brexit negotiations or any other geopolitical event that could result in a negative currency impact. We have the hedges in place to derisk our business plan, providing us a high degree of confidence in our ability to achieve the 5% to 6% EPS growth rate through 2020. And as you know, we have a dynamic hedging program that we evaluate regularly, which really enables us to be responsive to changing market conditions and risks. Moving to Slide 10, we have refreshed the foreign currency forecast through September 30. The bearish view for 2020 remains around 1.4 per pound and the bullish case much higher.

You can see by the green line, the forward curve is still above our budgeted rate through 2020. We will continue to be opportunistic in layering on additional hedges to limit future earnings volatility and provide transparent earnings stability to our shareholders. If the pound continues to trade at levels above our budgeted rate, we would expect to be able to achieve the high end of our guided growth range. That concludes my prepared remarks. I'll turn the call back over to Bill for the Q and A period.

Speaker 2

Thank you, Vince. In summary, we're confident we can deliver on our 2017 earnings forecast. We're also confident in our ability to deliver the 5% to 6% compound annual earnings growth off of the $2.15 per share through 2020. And we remain confident in our ability to deliver targeted annual dividend growth of about 4% through the same period. Before we open the call to questions, I would like to recognize and thank the men and women of PPL for their hard work and dedication in supporting the storm response efforts from hurricanes Harvey and Irma.

We have used our industry's mutual assistance program in the past, especially during Superstorm Sandy, and we're proud to provide that much needed support to our friends in Texas and Florida. With that, operator, let's open the call to questions please.

Speaker 0

Absolutely. We will now begin the question and answer session. Today's first question comes from Julien Dumoulin DUMOULIN Smith SMITH:] of Bank of America Merrill Lynch. Please go ahead.

Speaker 2

Hey, good morning. JULIEN Good morning, Julien.

Speaker 0

JULIEN Hey, so I suppose the best

Speaker 4

way to frame this is, can you

Speaker 0

give us a little bit

Speaker 4

of context into the what's going on in The UK with respect to the bill, let's call it bill inflation and everything with respect to the retailers. So how and if to what degree would you ever expect that to impact you all? I perceive a good degree of confidence. Can you expand on that confidence on your side?

Speaker 2

Sure. So just so folks on the call are aware, I think in The UK, there's been a lot of concern on behalf of some consumer advocates in particular about the total effect of electricity and natural gas prices in The UK and the focus has been predominantly on the suppliers. So in The UK, every consumer has to pick an independent gas or electric supply source. Most of those come from fairly good sized marketers. So there's been a lot of focus on the volatility and the overall cost associated with the supply component of the bill.

So obviously the distribution component is much lower supply being typically about 70% of the bill. So thus far, we still feel confident as you described Julian, not only because the focus has predominantly been on the suppliers, but also because there's a great track record with Ofgem and the value that their process regulatory framework has provided to the ultimate consumers. That value is measured directly and very openly and transparently to consumers through things like customer service metrics, reliability metrics and the overall very reasonable cost to deliver power to the customers. So again, we feel confident that the overall framework regulatory framework will remain intact and as you know, we're really set up for continuing to deliver on the approved plan through 2023. So we have a long runway yet on the current process and the new process for beyond 2023 is just now kicking off.

Speaker 4

Right. That's actually a perfect segue into the next question just real quickly as a follow-up. Can you give us any color on the ongoing workshops surrounding the RIIO two point zero, the published framework in 1Q twenty eighteen? What do you think will be the focus?

Speaker 2

Sure. So the stakeholder responses to the first element, if you will, of the new of the process was an open letter that Ofgem published back in the late summer. Responses to that letter, which essentially asked for comments on how various stakeholders felt about the current processes not only for the electric companies, but also for the gas companies. Specifically for the electric companies, the responses were due on September 4. We didn't see anything in the responses that concerned us in the stakeholder comments that we read.

The purpose of the framework review is really to build on the lessons learned from the current price control review and develop a framework that would be adaptable to meeting the needs of kind of the evolving UK energy sector. As you're aware, we've been successful in the past at navigating through new price controls and feel there's ample time to effectively prepare for the start of RIIO ED2, which is the next process we get into. We're very early in that process. And as I mentioned, no changes would take effect until 2023, it'd be April. So again, we've got a lot of opportunity to participate constructively and shape the framework associated with 03/2002 to have an outcome that we think is fair to share owners as well as stakeholders in The UK.

Speaker 4

Great, excellent. Thank you very much.

Speaker 2

You're welcome, Julian.

Speaker 0

And our next questions come from Ali Agha of SunTrust. Please go ahead.

Speaker 5

First question, as you're looking at this mid period review on RIIO-one, can you again clarify, of course, you're still confident you don't expect anything to change for you through that process? And what's the key milestone or date in your mind to get full clarity on this mid period review?

Speaker 2

Sure. We don't see any justification for an adjustment to our RIIO ONE business plan and that's based upon the criteria that they've set out for any types of adjustments, but also our past experience where we haven't seen anything meaningful be adjusted in the past. I would also point out that we were fast tracked the only companies to be fast tracked in The UK and that basically was because we had fully justified very sound business plan. Again, we feel there's no justification at this time for any adjustment. As far as when the clarity comes, we do have a slide in the deck, think it's Slide 22 that shows the indicative timetable.

So if you look at kind of a go no go decision, we're looking at something probably in early twenty eighteen timeframe.

Speaker 5

Okay. And on the RIIO-two process, Bill, as you mentioned, that goes on until for you until April 2023 when things turn. As you know, the water utilities and the gas transmission release obviously have earlier dates coming up. How significant in your mind are the parameters that will be set, for example, for the water companies that will be still a few years ahead of you as far as read through to your parameters, cost of equity, etcetera? Or do you think that given the timeframe difference, you wouldn't extrapolate from that?

How are you thinking about that?

Speaker 2

Yes. So relative to the water companies, OFFWAT, which is

Speaker 5

a different

Speaker 2

regulator than OFFJEM that regulates the electric and gas utilities. OFFWAT has a different process and the way in which they deal with things like cost of capital has historically been different. So we haven't seen an ability to kind of do a read across or read through from outcomes and Off White in the past and I would suspect that it would be difficult as well given as you mentioned, there's a time difference number one, but number two, the framework and the way that they deal with the water companies has historically been quite a bit different than on the electric and gas side.

Speaker 5

Last question again on The UK, Bill, a lot of speculation that at some point maybe whenever the elections come up, the opposition party may come to power. Any read on views on the sector from that side that would concern you as you're thinking about any political change in The UK?

Speaker 2

Sure. I think the framework itself has worked historically very, very well. So there's great track record to defend, if you will, the framework. And I think to kind of put toothpaste back in the tube, if you will, to try to change the model very significantly would be a very big challenge. I'm sure you can appreciate that in general, it's easy for politicians to make promises and much harder for them to deliver on those promises given the realities of some of these situations.

So it could change, we could see some pressure. I don't think that in the end, because of the great track record that this framework has delivered for customers that you're going to see a major shift.

Speaker 5

I see. Thank you.

Speaker 1

You're welcome.

Speaker 0

And our next question today comes from Jonathan Arnold of Deutsche Bank. Please go ahead.

Speaker 6

Yes. Good morning,

Speaker 2

Good morning, Jonathan.

Speaker 6

Same topic, I'm afraid, but I saw a stat the other day that public opinion now apparently almost 80% in favor of electric sector being under national ownership or public ownership. What do you make of that? And just how are they going to why are you so confident that things stay on the current track when you've got those kind of numbers floating around?

Speaker 2

Yes. Well, I think that number one is I'm not sure that the public probably has the full picture of how the framework exists or works today, not that they have been educated on it at all. So it's not surprising. I think that in the end, Ofgem is an independent regulatory body. So they're

Speaker 6

going

Speaker 2

to be the ones making the decision whether the framework gets changed or not. Now politically, someone could propose legislation and either change that process so that it's not independent as it is today. But again, that would take significant movement in parliament on both sides. So even if the labor party were to come to power in an election and start to change things, it's still got to go through a process, a fairly lengthy process. Given that that's going to be a lengthy process and given that we've seen changes in the political landscape, significant ones just in the last five years and we are we've still got six years to run on the current timeframe till we get to 2023.

So, I guess my view is a lot of things are likely to change between now and 2023. It's going to be a long and I think a difficult process to put that toothpaste back in the tube as I described it after a very long and successful kind of run with the framework. That's kind of our opinion on it. Obviously, continue to monitor it and I think once we know what the outcome might be in any kind of new political regime, we'll then begin to reach out and make sure that all those on the political side are aware of the positive track record and what this really means if they were to move in a different direction.

Speaker 6

Okay. But what do you make of the recent consultant report the government commissioned and which raised the possibility of intervening in RIIO-one prior to the end of the period. And kind of also had this concept, I think they called it arm twisting, where it would be policy to try and pressure network owners into some sort of preemptive concession. If someone else was to kind of cave to that kind of pressure, how do you think you would handle that?

Speaker 2

Well, I think it would depend on the specific circumstances. If for example, one of the other companies is significantly under spending, I believe there was already an adjustment made on the transmission side because there was a very large transmission project that's not going to go forward that was included in the transmission revenue construct. So a major project like that maybe that arm twisting as you put it could be effective. I think in our case, first, as I mentioned earlier, we're the only companies to be fast tracked, meaning that we had a very well justified business plan. And therefore, we don't see any justification for an adjustment based on the rules that are set forth today.

If one of our peers on the distribution side were to acquiesce, if you will, and adjust the revenues downward, we have to look at their circumstance. I think if you look at what we're delivering compared to the business plan we put forth, we're right on track, if not slightly ahead. So I think we're well positioned to defend any type of challenge to an adjustment to our plan.

Speaker 6

So your strong operating performance would give you at least a stronger position to argue from, I would guess?

Speaker 2

Absolutely.

Speaker 6

Yes. Okay. And then can I just ask Bill sort of related topic, but given all of this focus, which doesn't seem to be showing any signs of dying down, does it change your sort of level of comfort with the current mix in the business and potential appetite to sort of address that through maybe M and A domestically?

Speaker 2

No, we're very confident in the business mix. We think for the long term, it's the right type of balance that we have. And we do think that in the longer term, this is going to work itself out and the jurisdiction as it exists today and even with some tweaks we think is still going to be a premium jurisdiction that's going to provide really great returns for our shareowners. So we're happy with the business mix, don't see any need to change it at this time.

Speaker 6

Thank you very much.

Speaker 5

You're welcome.

Speaker 0

And our next question today comes from Michael Lapides of Goldman Sachs. Please go ahead.

Speaker 7

Hey, guys. I want to cover The U. S. Business for

Speaker 3

a second.

Speaker 7

And when we look at both Pennsylvania and Kentucky, one of the things that stands out really in both states is neither state has very much in the way of renewable supply. Just curious how you're thinking about whether the generation portfolio mix in the state and in one state, Kentucky, you own the generation and rate base and the other you obviously don't. But just curious how you think the supply mix changes over time, meaning five, seven, eight years and what's your role if any is in the changing of that supply mix?

Speaker 2

Sure. So let me touch on Kentucky first and I'll turn it over to Vic Stafiri to maybe comment on that. So Vic, do you want to take that? Yes. In Kentucky, we're driven by the regulatory process, which is at least cost basis.

And so we'll be within the control of the economics, And so we would see over time migration more towards natural gas depending upon the pricing. Right now, we don't show a customer need for additional generation, but I would expect in the future that it would move more towards gas just given the economic framework and the regulatory process, which is a least cost approach.

Speaker 5

And I

Speaker 2

do think Michael, we're well positioned in Kentucky. We have the largest solar facility in the state that was approved by the commission as Vic mentioned. We do have to go through a process there. It's an integrated resource plan that we put together roughly every three years. We've also got customer options that are available to them for solar if they choose to install it.

We can do that within the regulated framework. So I think we're well positioned should customers want additional solar either on their own or as we go through the regulatory process. We'll look to see what's the most economic thing to do for our customers. Relative to Pennsylvania, I'll let Greg comment, but maybe just to mention that as you're aware, we do not own generation any longer in the state of Pennsylvania. We are required to purchase for those that don't shop for their electricity, we're required to purchase a component of renewable energy based on some guidelines that the state has put forth.

Those haven't been that significant over time in terms of specifically solar and wind. We are seeing a bit more activity on the solar front. Maybe Greg, you could comment about how you see things from a renewable energy mix based on what you're seeing in Pennsylvania.

Speaker 8

Yes. So I guess, so we are just as Bill said, when we purchase our default supply, we go up for bids and the mix, we have to have a certain percentage of renewables in that mix and that's set by legislation. Beyond that, we're seeing an uptick in solar applications on the part of our customers. So, it's we're starting to see the impact in our business already. So we see it continuing just like it is across the country.

Speaker 7

Got it, guys. Thank you. Much appreciated.

Speaker 5

You're welcome. Okay.

Speaker 0

And our next question comes from Steve Fleishman of Wolfe Research. Please go ahead.

Speaker 2

Yes. Just Bill, you mentioned you'll be reviewing the 2018 growth rate on the year end call. Just any high level color on the trend in the capital plan, I guess, in particular? I mean, it seems like it's pretty stable overall, but just is there any kind of upward movement at all in capital needs in the utilities? No, I think it is, Steve, pretty stable.

So I don't see any significant changes once we update the plan on the capital side.

Speaker 4

Okay. Thank you.

Speaker 2

Okay. You're welcome. Okay. Well, thanks everyone for your participation on today's call and we look forward to seeing everyone at EEI next week. Thank you.

Speaker 0

And thank you, sir. The conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.