賓州電力 (PPL) 2016 Q3 法說會逐字稿

Welcome to the PPL Corporation third-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Joe Bergstein, Vice President of Investor Relations and Treasurer. Please, go ahead.

Thank you. Good morning, everyone. Thank you for joining the PPL conference call on third-quarter results and our general business outlook. We are 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 provision of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements.

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

Thank you, Joe. Good morning, everyone. We appreciate you joining us for today's call. With me are Vince Sorgi, PPL's Chief Financial Officer, as well as the Presidents of our US and UK utility businesses. Starting with slide 3, our agenda this morning begins with an overview of our quarterly and year-to-date 2016 earnings results. Following that, I'll address our 2016 and 2017 earnings forecast, as we are raising the midpoint of our 2016 forecast and reaffirming our 2017 guidance. I'll provide a brief operational overview, as well as an update on our UK currency hedging. Following my remarks, Vince will review our segment results and provide a more detailed financial overview. As always, we'll leave time to answer your questions.

Turning to slide 4, today we announced third-quarter 2016 reported earnings of $0.69 per share, compared with reported earnings of $0.58 per share in the third quarter of 2015. Year-to-date through the third quarter, reported earnings were $2.11 per share, compared with $0.42 per share through the same period a year ago. Reported earnings for the first nine months of 2015 reflected a loss from discontinued operations of $1.36 per share, which resulted primarily from the spinoff of our competitive generation business. Adjusting for special items, third-quarter 2016 earnings from ongoing operations were $0.63 per share, compared with $0.51 per share a year ago. That represents a 23% increase on a per-share basis.

The increase was driven largely by an April 1, 2016 price increase in the UK, higher base electricity rates and higher transmission earnings from additional transmission capital investments in Pennsylvania, and higher sales volumes due to favorable weather in Kentucky. Through the first nine months of 2016, earnings from ongoing operations were $1.86 per share, compared with $1.77 per share a year ago. Higher earnings year-to-date were primarily driven by higher base rates in Kentucky and Pennsylvania and returns on additional capital investments. Vince will go into greater detail on third-quarter results a little later in the call, but we are pleased with the strong results across our business units.

Moving to slide 5, based on our strong performance year-to-date, we've narrowed our guidance range from the previous $2.25 to $2.45 per share to $2.30 to $2.45 per share, increasing the midpoint of our 2016 ongoing earnings forecast from $2.35 per share to $2.38 per share. Vince will provide a walk on the drivers contributing to this 2016 increased performance later in his remarks. As we discussed on our October 12 call, we took steps to significantly reduce our exposure to foreign currency risk by restriking our remaining in the money 2016 hedges. The impact to 2016 ongoing earnings was a negative $0.06, but because of our strong business line results, we are increasing our 2016 earnings guidance, even as we have leveraged the strength of our 2016 performance to minimize future currency risk.

We also discussed on the October 12 call, the opportunity to further leverage 2017 hedged gains targeting no more than $0.05 of EPS exposure for 2019, even at an exchange rate of $1.15 per pound. As of today, we have completed all the restrikes for 2016 and 2017. We've achieved our targeted hedge levels. Vince will provide the details of our updated hedge positions in his remarks. The higher than projected earnings of 2017 that enabled us to restrike a portion of our 2017 hedges was partially driven by lower than anticipated UK property taxes.

In the revised earnings guidance we provided on our second quarter call, we were expecting fairly significant property tax increases starting next year and continuing through 2020. But based on the property tax valuation recently completed by the UK government, our property tax increases are lower compared to our previous expectation. Additionally, some of the earning's strength we are experiencing in 2016 as a result of lower O&M in the UK is expected to continue into 2017.

These positive factors provide us with the confidence to reaffirm our 2017 earnings forecast of $2.05 to $2.25 per share, with a midpoint of $2.15 per share, despite executing about $0.06 of 2017 hedge restrikes. Lastly, we remain confident in our ability to deliver on our long-term growth projections. We expect to achieve 5% to 6% compound annual earnings growth from 2017 to 2020 and are targeting annual dividend growth of about 4% over the same period.

Let's move to slide 6. Kentucky Utilities and Louisville Gas and Electric are announcing today that they intend to file rate requests on November 23 with the Kentucky Public Service Commission. KU and LG&E expect to seek revenue increases of $103 million and $93 million respectively, through adjustments to annual base electric rates. LG&E, meanwhile, anticipate seeking a revenue increase of $14 million in annual base natural gas rates. In total, we are expecting to seek a revenue increase of approximately $210 million.

The requested increases are driven by additional capital investments that are focused on enhancing our reliability programs across the operational groups, along with technology and infrastructure investments in our customer service areas. This will allow us to continue to provide safe, reliable electric and gas service to customers while meeting federal regulations. Even with the increases, it's anticipated that LG&E and KU rates will remain well below national averages. If approved by the Commission, the increases would take effect in July of 2017.

Now, let's turn to slide 7 for some additional operational highlights. In Kentucky, KU and LG&E will be seeking approval to invest in an advanced metering system and a distribution automation program as part of their rate case proceeding. They will include applications for [specifics] of public convenience and necessity for implementing these new initiatives, which focus on enhancing service offerings to customers with a continued emphasis on our reliability. In recognition of continued efforts to focus on the customer experience, LG&E ranked highest among midsize gas utilities in the Midwest in JD Powers 2016 survey of residential customer satisfaction.

This JD Power award is the third by a PPL utility this year and the 41st overall for PPL Companies, demonstrating our commitment to provide customers with the highest level of service. As we highlighted on our second-quarter call, both PPL Electric Utilities and Kentucky Utilities earned JD Power awards in July. In Pennsylvania, PPL Electric Utilities is on track to execute more than $1 billion in capital improvements to modernize the grid and strengthen reliability for our customers.

The Company's automated power restoration system has now restored within minutes more than 58,000 customer since that system became fully operational this past June. We also continue to add new smart devices to extend these benefits and improved grid resiliency even more. The Company is also completing preparations to replace 1.4 million meters in Pennsylvania with new smart meters. The meter replacements are expected to begin before the end of the year and the full $471 million project is expected to be completed by 2019. Transmission expansion also continues, with additional investments focused on reinforcing, expanding and hardening the bulk power system, adding redundancy and making the grid more secure.

In the UK, we continued to execute on our plans. While there is still considerable time left in the current regulatory year, we are on pace to achieve our projected performance against the 2016/2017 incentive targets for customer minutes lost and customer interruptions. In addition, we are on pace to be at or near the maximum reward levels for customer satisfaction. We've provided updates to our incentive revenue performance in slides 20 to 22 of the appendix. Also in the UK, we are leading the way, according to the regulator ofgem, in connecting renewable generation to local distribution networks. To-date, we've connected or offered to connect almost 20 gigawatts of renewable power. We've already connected approximately 200,000 private solar installations, along with 7,500 commercial distributed generation facilities.

The Company has also launched what we believed to be the world's largest electric vehicle trial, to explore charging patterns and the ability of markets to influence those patterns. The trial involving up to 700 vehicles will inform future network planning. Finally, as I've already discussed, we have taken steps to reduce our 2018 and 2019 exposure to foreign currency. Vince will now walk you through a more detailed look at earnings and our hedging strategy. Vince?

Thank you, Bill. Good morning, everyone. Let's move to slide 9. Our third-quarter earnings from ongoing operations increased by $0.12 per share, driven by $0.05 of higher earnings from the Pennsylvania regulated segment, $0.02 from the Kentucky regulated segment and $0.06 from the UK regulated segment. We should note that for the third quarter we saw warmer weather compared to last year. As a result, domestic weather was favorable $0.03 compared to last year. Weather was about $0.02 positive compared to budget. However, with a warmer winter earlier this year, on a year-to-date basis, domestic weather is only positive about $0.01 compared to budget. Year-to-date weather in the UK is negative $0.01 compared to the prior year and negative $0.02 compared to budget. So for the Company in total, weather has not been a significant driver of our financial performance this year.

Let's move to a more detailed review of the second-quarter segment earnings drivers, starting with the Pennsylvania results on slide 10. Our Pennsylvania regulated segment earned $0.13 per share in the third quarter of 2016, a $0.05 increase compared to the same period last year. This increase was primarily driven by higher gross margins due to higher distribution margins, as a result of new rates going into effect January 1 of this year, higher transmission margins due to additional capital investments, and the favorable effects of weather.

Moving to slide 11, our Kentucky regulated segment earned $0.18 per share in the third quarter of 2016, a $0.02 increase compared to a year ago. This result was primarily due to higher gross margins due to favorable weather.

Turning to slide 12, our UK regulated segment earned $0.35 per share in the third quarter of 2016, a $0.06 increase compared to a year ago. This result was primarily driven by higher gross margins, primarily resulting from higher prices from the April 1, 2016 price increase, partially offset by lower volumes due to weather, and lower O&M expense, including pension expense.

Moving to slide 13, as Bill mentioned, strong performance at each of our Regulated Utilities led to very solid results through the first nine months of the year compared to our plan, enabling us to raise our 2016 guidance. This slide provides a walk from the midpoint of our original 2016 earning's guidance of $2.35 per share to our new forecasted midpoint of $2.38 per share. The $0.03 improvement in the forecast is coming from $0.02 in Pennsylvania and $0.01 in Kentucky. While we were experiencing better than expected earnings in the UK as well, that was fully offset by the $0.06 of 2016 restrikes.

The out performance in the UK is driven by higher margins, as well as lower operating expenses. In Pennsylvania, we are expecting higher margins from favorable weather and usage, as well as higher transmission margins. In Kentucky, we are expecting slightly lower operating expenses. Additionally across all the segments, we are seeing lower interest expense from lower interest rates and deferrals of debt issuances, in part, due to cashing in $310 million of 2017 and 2018 UK earnings hedges.

Moving to slide 14, as we discussed on our October 12 call, we took action in early October to re-strike our remaining in the money 2016 hedges to hedge more of our 2018 exposure. Since the call, we have taken additional action and have completed the execution of the 2017 restrikes, further increasing our hedge levels for 2018. You can see, we are now hedged 94% for 2017 at an average hedged rate of $1.25 per pound. We are well-hedged for 2018 as a result of the actions we have taken. The combined result of the 2016 and 2017 restrike is that we have increased our 2018 hedge levels to 93% at an average hedged rate of $1.42 per pound.

This creates the flexibility to restrike about $0.12 of 2018 hedge gains to help hedge 2019 earnings at our budgeted rate of $1.30 per pound. The 2019 hedge attainment table reflects the targeted hedge levels in 2019, assuming we restrike 2018 hedge gains and layer on 2019 hedges at our budgeted rate. So if market rates are around $1.20 per pound when we execute the 2018 restrike, we would be able to hedge 100% of 2019 earnings at our budgeted rate, leaving no additional currency exposure for 2019.

If market rates were to drop to $1.15 per pound at the time we execute the 2018 restrike, we would be able to hedge about 73% of 2019 earnings, leaving about $0.04 of exposure on the remaining open position. In the bottom right part of the chart, we also show sensitivities on the open position at various market rates from $1.15 to $1.45 per pound. To the extent the incremental hedge value that we have created in 2018 is not needed to hedge 2019 earnings, which would be the case if the pound rebounds closer to our budgeted rate, we could use it to hedge 2020 earnings.

Before I turn the call back over to Bill, you will find an update on RPI in the appendix on slide 23. That slide has been updated for the October RPI forecast from HM Treasury and is consistent with our forecasted assumptions. That concludes my prepared remarks. I'll turn it back over to Bill for the question-and-answer period. Bill?

Thanks, Vince. To summarize, we continue to perform very well across all three of our business segments. We are solidly on track to deliver on our increased 2016 earnings guidance. Even with the $0.06 of restrikes we've executed for 2017, we are reaffirming our 2017 earnings guidance. The actions we've taken as part of our foreign currency hedging strategy have substantially minimized foreign-currency risk through 2019 and provide greater assurance to our earnings growth targets. We are confident in our ability to achieve competitive earnings growth of 5% to 6% a year from 2017 through 2020. The strength of our underlying business plans also provide us with confidence in targeting about 4% annual dividend growth beginning in 2017 and running through 2020. With that, operator, let's open the call for questions.

(Operator Instructions)

Neel Mitra, Tudor Pickering.

I had a question as to how often you plan to file rate cases within the US, both in Pennsylvania and Kentucky, now that the capital spending is coming down to some degree, given that transmission in Pennsylvania and the ECR in Kentucky is somewhat coming to an end? How often do you need to file in order to avoid under-earning? What is the criterion which you'll go in for a rate case? Or what your earned ROE needs to be before you go in to take that risk?

Sure, let me begin with Pennsylvania. So on the transmission side, we are continuing to build out many projects. Those projects are included in our five-year capital spending plan that is included in the appendix of our presentation today. So that work will continue on. Relative to Pennsylvania distribution operations, that capital spending is coming down. We would not expect the need to go in for a rate case in Pennsylvania during our forecast period. In Kentucky, I'll let Vic comment on our plans there.

As we just announced today, we just filed this morning. So I expect I'd like to see the outcome of this case before I speculate on when we would file again. But generally speaking, when we get below 10% or so, we'd begin to look at whether or not another case is required. I should also point out that given the current status environment of regulation, I still would expect there to be substantial expenditures associated with our ECR, both in terms of the $1 billion that was just recently authorized by the Commission to meet some of our coal combustion residual requirements. Then also now we have some water issues that are going to require us to file under the ECR. So I still think there will be a lot of money running through the ECR. Let's get the outcome of this case. Generally speaking, when we get below 10%, we begin to look at additional cases.

Thanks, Vic. Just one addition, some of this could be dependent also on the results of the clean power plant and how that may rollout into the future in terms of at least the Kentucky operations.

Can you remind me -- the rider that you have in place for ECR? How much that covers regarding contemporaneous spend?

Sure, go ahead, Vic.

Under the terms of the statute, we're entitled to recover cost, both capital and O&M associated with the Clean Air Act. Generally speaking, that handles most of the things associated with, not only the clean power plant you've discussed but the match requirements and all of those types of expenditures. I don't have a breakdown with me of how much are the in rates now and how much will be in rates, but generally speaking, it's pretty broadly addressed as almost all of the environment requirements associated with our coal combustion facilities.

It's near real-time.

It is near real-time. We file it and we recover on a forward-looking basis -- I'm sorry, we recover it almost instantaneously. I think it's about a 60-day delay.

Got it. So, the Kentucky rate case that you are filing now, is that more for distribution spend? Is that the way we should look at it?

It's for everything not associated with environmental spend. So it would be things not associated with the ECR filing. So, for example, as Bill pointed out, we are looking for things like additional reliability on distribution system, additional automation on our distribution system, additional rebuild of our transmission systems. So it's really driven by bricks and mortars associated with distribution and transmission. There is some capital in there that's not associated necessarily with coal combustion.

Got it. Then quickly, could you just update us where you are with any compass approvals? Where you are in the progress with that project, just with the first phase?

Sure. I'll ask Greg Dudkin, President of our Pennsylvania Utilities to address that one.

Sure. Yes, so where we are is we have filed an interconnection request with New York ISO. We are expecting a response shortly on that. For New York transmission projects, you have to go through something called Article VII, which is environmental citing and need process. We're in the process of starting that up. I should add that Article VII process normally takes two to three years.

Got it. Thank you very much.

Okay, thanks.

(Operator Instructions)

Abe Azar, Deutsche Bank.

When do you expect new rates will be in place for the Kentucky utilities? Can you remind us what your history is of settling rate cases there?

Sure. The expected rates would go into effect if approved by the Commission in July of next year. Our history of settling has been very solid. We operate, we believe, in a very constructive jurisdiction in Kentucky. I think all of our spending in the past has been well justified. We've had what I think are fair and balanced outcomes through settlements. So that's been the pattern thus far.

Great, that's all I have. Thank you.

Sure. You're welcome.

(Operator Instructions)

David Paz, Wolfe Research.

I heard earlier, someone there mentioned water issues. I just wanted to make sure I understood, what are the water issues you referenced earlier with respect to capital spending? How much is that? Is that already in your five-year plan?

Yes, those are water effluent guidelines that have been issued by the EPA, so it's not a new issue. We are looking to see if we have a breakdown of exactly how much that is. We may not have it here at hand, but we can get that to you.

This is Vic Staffieri. I should also comment that we're in the process now of reviewing those regulations. They only recently promulgated. So those regulations and how we're going to comply with them. We're also finalizing those estimates. I suspect we'll be in a better position to comment on that at the next call.

Great, okay. Then I presume on the next call is when you will update your five-year plan to include, I guess, 2021? Is that correct?

That's correct, yes.

Okay, great. Then just on the 2019 -- specifically 2019 hedges, I just want to make sure I understand, what has changed since the October 12 call?

Just really the fact that we were able to execute the plan that we talked about on the October 12 call. We had outlined what the strategy was. We had executed some of that plan, but now we have completed the restrikes for 2016 and 2017. We were able to do that at the rates that are shown on slide 14, which shows and as Vince commented, that when we get out to 2018, we've got hedges on at $1.42, well above our $1.30 that is embedded in our earnings expectations, the 5% to 6% earnings growth. So that gives us $0.12 of potential value that we could move to hedge 2019 if need be.

Got you. Okay. As long as the pound is within $1.15, $1.25, you are relatively protected in 2019. To the extent there is any raises above $1.30 or so, $1.35 that's when you say you move to 2020 protection?

Well, we would -- first off, let me just comment on -- if the pound stays at, let's just say, $1.20 and above, what you can see on this slide is at $1.20, we would effectively be able to use that $0.12 from 2018 and hedge up 100% of the 2019 exposure. To the extent that we don't meet 2018 value to hedge 2019, we would then look forward to 2020. We could use some of that value for 2020 if we needed to.

Got you. Okay, perfect. Thank you.

Sure.

John Barta, KeyBanc.

Just two quick ones. The AMI in Kentucky, that's going to go through the rate case?

Yes.

Okay. Then when did you say you were going to be filing the domestic rate cases? Is that today?

Yes. We are now seeing that -- we're -- actually the filing would be on November 23, I believe it was.

Okay, that's all. Thank you.

Okay. You're welcome.

Okay, operator. I think that's all the questions that are in the queue. So let me just close the call by thanking everyone for your participation on today's call. I will note that several members of our senior management team and I will be attending the EEI conference next week. We look forward to seeing everyone there. Thanks, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.