賓州電力 (PPL) 2017 Q2 法說會逐字稿

Good morning, and welcome to the PPL Corporation Second 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.

Please go ahead.

Thank you.

Good morning, everyone.

Thank you for joining the PPL conference call on second quarter results as well as 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 provisions 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 Chairman, President and CEO.

Thanks, Joe, and good morning everyone.

We're pleased that you've joined us this morning.

With me on the call today are Vince Sorgi, PPL's Chief Financial Officer; as well as the heads of our U.S. and U.K. utility businesses.

Moving to Slide 2. Our agenda this morning starts with an overview of our quarterly and our year-to-date 2017 earnings results.

We'll provide an update to our full 2017 year earnings guidance as well as the brief -- a brief operational overview, including an overview of off-chance RIIO-2 process.

Vince will then review our segment results and provide a more detailed financial review.

As always, we'll leave time to answer your questions.

Turning to Slide 3. PPL had another strong quarter with very solid results to the first half of the year, and we are reaffirming our earnings guidance for 2017.

PPL's earnings for the quarter and year-to-date are lower compared to 2016, as expected, primarily driven by lower foreign currency exchange rates in 2017.

Today, we announced second quarter 2017 reported earnings of $0.43 per share compared with $0.71 per share a year ago.

Year-to-date through the second quarter, reported earnings were $1.01 per share compared to $1.41 per share through the first half of 2016.

Adjusting for special items, second quarter 2017 earnings from ongoing operations were $0.52 per share compared with $0.56 per share a year ago.

Lower foreign currency exchange rates negatively impacted second quarter 2017 earnings from ongoing operations by $0.07 per share compared to 2016.

The remaining quarterly increase in earnings from ongoing operations of $0.03 per share was due to lower operating and maintenance expenses in Kentucky and in the U.K.

Through the first 6 months of 2017, earnings from ongoing operations were $1.14 per share.

This compares with $1.23 per share through the same period a year ago.

Lower foreign currency exchange rates negatively impacted 2017 year-to-date earnings from ongoing operations by the amount of $0.17 per share compared with last year.

The remaining increase in year-to-date earnings from ongoing operations of $0.08 per share was primarily due to the April 1, 2016 annual price increase in the U.K., partially offset by unfavorable weather in Kentucky.

Vince will go on to greater detail on second quarter results later in the call.

Moving now to Slide 4. Today, we're reaffirming our 2017 ongoing earnings forecast of $2.05 to $2.25 per share with a midpoint of $2.15 per share and are providing an updated segment breakdown.

We've revised our Kentucky segment ongoing earnings projection for 2017 to $0.56 for the year compared primarily as a result of lower electricity sales volumes due to unfavorable weather.

At the same time, the earnings for the U.K. Regulated segment are expected to come in stronger for the year.

We are now projecting $1.20 per share in the U.K. due to lower operating and maintenance expenses and lower income taxes.

Looking beyond 2017, we continue to expect 5% to 6% compound annual earnings per share growth from 2017 through 2020 as we execute our business plans, including more than $13 billion in infrastructure investment through 2020.

As we look forward, we also continue to target annual dividend growth of about 4% a year through 2020.

Now let's turn to Slide 5 for an update on our Kentucky utility operations.

In June, the Kentucky Public Service Commission authorized a combined rate increase of $116 million for Kentucky Utilities and Louisville Gas and Electric, with new rates taking effect on July 1. The commission authorized a 9.7% return on equity.

Consistent with the base rate case, the commission also lowered the ROE on our environmental cost recovery mechanisms from 10% and 9.8% to 9.7%.

We've incorporated the final outcome of the Kentucky rate cases into our earnings forecasts, including the lower ROE and the deferred advanced meter capital expenditures of approximately $300 million.

We remain confident that we will be solidly within the 5% to 6% compound annual earnings growth range that we projected through 2020.

The revenue increase approved by the commission will support continued investments in safe, reliable electricity and natural gas service.

Also in Kentucky, LG&E recently completed its 540-mile 20-year gas main replacement, which strengthens the safety and reliability of gas service in Louisville.

The project replaced wrought-iron and bare steel natural gas pipelines with durable plastic pipelines.

LG&E's project began 15 years before stringent federal regulations were adopted requiring such placements.

Many utilities only began making these types of upgrades within the last 5 years.

Last but not least, our domestic utilities continue to lead the way in customer satisfaction in their regions, according to J.D. Power.

Kentucky Utilities ranked the highest among midsized electric utilities in the Midwest, with Louisville Gas and Electric coming in 2nd.

Turning to Slide 6 for a Pennsylvania operational update.

Just as we recognized -- we were recognized for superior customer service in our Kentucky Utilities, PPL Electric Utilities ranked highest among large utilities in the East.

In all PPL's U.S. utilities have one and combined 45 J.D. Power awards among the best utility companies in the nation.

In other highlights, PPL Electric Utilities continues to enhance its Smart Grid capabilities.

Prior to this spring, the company already had one of the nation's most advanced distribution automation systems in the country.

We've added hundreds of additional Smart Grid devices to prevent power outages and make our system even more resilient.

Similar improvements made in 2016 prevented more than 100,000 customer interruptions last year.

We expect our latest enhancements to yield additional benefits for our Pennsylvania customers as we move forward.

PPL Electric Utilities also continues to make good progress on its $471 million advanced meter replacement project.

This includes the replacement of all 1.4 million meters in our Pennsylvania service territory.

Approximately 280,000 meters have been replaced to date and we expect that number to rise to more than 520,000 by the end of the year.

Moving to Slide 7 and the U.K. Our U.K. regulator, Ofgem, issued an open letter seeking feedback from stakeholders as it begins the process of constructing a framework for RIIO-2.

This is a standard course for Ofgem.

Responses to the open letter are due September 4 and will help guide the proposed RIIO-2 consultation process to begin in the first quarter of 2018.

We are very early on in the process and as you know, any changes for WPD would not take effect until RIIO-ED2 begins in April 2023.

We view Ofgem's action as a positive development in that we will have the opportunity to participate constructively in shaping the framework associated with RIIO-2.

We've worked well with Ofgem in the past and delivered positive results for WPD and we have no reason to believe that we would not continue to benefit from the consultation process and the final framework of RIIO-2.

The purpose of this review is to build on lessons learned from the current price controls in the gas, transmission and distribution businesses and to develop a framework that will be adaptable to meeting the needs of an evolving U.K. energy sector.

To continue with Slide 8. Any changes to the RIIO framework are expected to focus on giving customers a stronger voice in setting outputs and assessing business plans, providing fair returns for share owners and good value for consumers, properly reflecting business risks and prevailing market conditions, while incentivizing companies to drive value, innovation and efficiency.

To mention a few of the specifics, Ofgem indicated they will consider the length of the price control, which for WPD is currently 8 years, potentially aligning the price controls for gas transmission and distribution in terms of timing and the engagement process.

And the process for how it sets cost of capital given the change in market conditions that could occur over a price control period.

As a reminder, the current price control period for WPD RIIO-ED1 runs through March of 2023 and will not be impacted by this RIIO-2 consultative process.

Ofgem has a long history of constructive regulatory frameworks and we believe the consultation process will result in a fair outcome.

We have been successful in the past at navigating through new price controls and we believe there is ample time to effectively prepare for the start of RIIO-ED2.

You may recall that we were very successful at mitigating a revenue reset to obviate a sharp decline in our U.K. segment earnings at the start of RIIO-ED1 back in 2015.

And in fact, we accomplished earnings growth compared to 2014.

Given how early Ofgem is starting the review process for RIIO-2, we have time to plan for potential changes for the framework.

Our strategy for RIIO-2 will be to provide comments on the open letter, have a high level of engagement during the formal consultation process, which begins next year and construct well-justified business plans that appropriately balance the needs of all of our stakeholders, including our U.K. customers, and of course, our PPL share owners.

Moving to Slide 9. Ofgem also initiated the process of assessing the need for a midyear review for RIIO-ED1.

As previously determined by Ofgem, the scope of any midyear review -- mid-period review would be to look at any necessary changes to WPD's expenditures due to a change in government policy or new outputs required by customers since the start of RIIO-ED1.

There have been no government policy changes or changes to outputs that would result in changes to WPD if a mid-period review is conducted.

At this point, I'm going to turn the call over to Vince for a more detailed look at our quarterly segment earnings.

Vince?

Thank you, Bill, and good morning, everyone.

Let's move to Slide 11.

Our second quarter earnings from ongoing operations were lower by $0.04 per share, driven by lower earnings from the U.K. Regulated segment of $0.05, partially offset by $0.01 in the Kentucky Regulated segment.

The Pennsylvania Regulated segment and Corporate and Other results remained flat compared to a year ago.

Weather was not a significant factor for the quarter compared to bulk budget for prior year.

However, domestic weather has negatively impacted our year-to-date results by about $0.03 compared to bulk budget in the prior year, primarily in Kentucky.

Let's move to a more detailed review of the second quarter segment earnings drivers starting with the Pennsylvania results on Slide 12.

Our Pennsylvania Regulated segment earned $0.11 per share in the second quarter of 2017, flat compared to the same period last year.

This result was due to higher transmission margins of $0.01 offset by higher depreciation of $0.01.

Higher transmission margins resulted from additional capital investments but were partially offset by a lower peak load billing factor.

Moving to Slide 13.

Our Kentucky Regulated segment earned $0.12 per share in the second quarter of 2017, a $0.01 increase compared to a year ago.

This result was driven by lower operation and maintenance expense due to timing and the scope of planned outages and lower plant operating costs.

Turning to Slide 14.

Our U.K. Regulated segment earned $0.31 per share in the second quarter of 2017, a $0.05 decrease compared to the same period a year ago.

The lower results were from lower foreign currency exchange rates in 2017 compared to 2016 of $0.07, partially offset by a decrease in O&M primarily from lower pension expense.

Gross margins in the U.K. were flat for the quarter primarily due to the April 1, 2017 price reset, which includes lower revenues from true-up mechanisms primarily related to lower cost of debt recovery offset by the normal price increase in base demand revenues.

The April price increase and the lower revenues from the true-up mechanisms were all incorporated in our original 2017 earnings per share guidance.

Moving to Slide 15.

As we've mentioned on prior calls, we have incremental hedge value in 2018 and 2019 above our budgeted rate of $1.30 per pound, and we've since added hedges in 2020 that are above budget.

So we're able to use this value to protect against potential volatility in the exchange rate during the Brexit negotiations.

During the second quarter, we started moving some of the 2018 hedge value into 2019 while maintaining the same level of incremental value overall.

The 2020 hedges were done by using about $0.01 of 2017 restrikes and enabled us to hedge 7% of our 2020 expected U.K. earnings and an average rate of $1.48 per pound, significantly above our budgeted rate of $1.30.

Now that we've begun to layer on hedges for 2020, we can achieve the low end of our 5% to 6% EPS growth rate even if the pound hits parity with the dollar.

Moving to Slide 16.

We've refreshed our currency forecast slide and have included the forward curve as well.

The forecasts have not moved significantly since last quarter and the variance SKU is still around $1.40 for 2020.

And as you can see, the forward curve, which is indicative of the rates at which we can actually hedge, is above our budget assumption of $1.30 per pound, with the current spot rating for the pound around $1.31.

If forward curves stay at this level, they could provide us further opportunity to layer on additional 2020 hedges above our budgeted rate while retaining the incremental hedge value that we've been able to create.

That concludes my prepared remarks.

I'll turn the call back over to Bill for the question-and-answer period.

Bill?

Thank you, Vince.

In summary, we had another good quarter, and PPL remains on track to deliver on its 2017 earnings forecasts.

We remain confident in our ability to deliver 5% to 6% compound annual earnings growth per share from 2017 through 2020.

As you know, we raised the dividend 4% earlier this year and we continue to target annual dividend growth of about 4% through 2020.

We're executing very well on our low-risk business plans and we continue to deliver for our customers, as evidenced by our industry-leading customer satisfaction awards.

With that, operator, let's open the call to questions.

(Operator Instructions) The first question is from Greg Gordon at Evercore ISI.

So -- I mean, I have a hard time not seeing how you are, at this point, either just given how successful you've been in hedging currency and the lack of any material near to medium-term regulatory exposures in terms of rate filings, how you're not theoretically above the 6% earnings growth rate at -- given how successful you've hedged the currency.

And so does that mean that we should assume that you are going to take the value in excess of what would drive the 6% earnings growth rate and just continue to roll that forward into the next decade?

Or are there other -- how are you contemplating using that sort of -- that dry powder?

Yes, so that is one option, rolling forward the value into 2020 and beyond, but you are correct.

If things stayed as they are today, with the forward curve being above our targeted budgeted rate of $1.30, we would be at the high-end of our earnings forecast.

So you're absolutely correct on that.

I would say that probably as we finalize our hedging for 2020, we'll be able to give a little bit more color around how we expect to use the value to the extent it continues to sit out in the forward years and whether we're going to adjust our earnings forecast or -- through 2020 or push that value forward into future years.

Okay, that's great.

And then, I guess, the tension in the stock from my perspective, and you clearly have tried to address that in your scripted comments, is that while the earnings outlook looks incredibly robust and with great visibility for the next 3 to 4 years, there's this -- now there's this overhang of potentially more a stringent return environment in the U.K. So what are the things that you did?

Maybe you could give us some examples of the ways that you managed through the last transition so people can understand the tools that you have at your disposal should you face some sort of reset in terms of base or return on equity or shaping of revenue streams like you did last time.

Sure.

Well, a couple of things there.

One is, the tools that we've used in the past, I would say our tax planning and pension planning.

So those are things that we've been effective at doing in the past.

You mentioned shaping the revenue profile.

That's something as we go through the consultation process we'll look at how we develop our plan and whether that's an appropriate avenue to pursue as well.

Vince, I don't know if you have any other comments around that and then I can ask Robert as well.

Yes, I would say that one of the items within the framework itself is how you set what we call fast pot versus slow pot.

And that's -- you may recall that the U.K. cost recovery structure is called tow tax.

It's not capital and OEM.

It's just total expenditures.

And then, within the business plans, each distribution company can determine how much you want of that tow tax to go towards rate base growth and how much you want in current period recovery.

WPD was at the high end of the slow pot ratio under RIIO-ED1 at 80%, basically going to the rate base growth and 20% going through the current P&L.

That definitely improves the long-term intrinsic value of the company because you're growing rate base, which is the engine that generates return.

However, many of our peers were in the 70%.

Even some were in the low 60%.

So that's an item that if returns were, for some reason, to be impacted, maybe we would have to dial that back commensurate with what our peers were doing through RIIO-ED1.

But it would be something that we would have to look at in totality.

The business plans are put together understanding the rules for the new price control in totality.

And so I wouldn't sit here today and say we were going to do that, but really it -- it is the lever that we could potentially pull down into RIIO-2.

Yes.

I think Vince has got a good point in that, you have to look at the whole thing in the round.

There are so many different things within the price control.

And cost of capital is one of them, but as Vince has pointed out as a mix of OpEx and CapEx.

Also, when you think about the future, you also would consider what's happening in the U.K., and that's a move towards electrification of vehicles.

And Michael Gove announced a couple of weeks ago that from 2040, there will be no more petrol and diesel vehicles produced in the U.K. And that, from a national group point of view, their estimate is that generation will have to go up by 50%.

Its impact on distribution businesses will be quite massive.

And so maybe CapEx plans will be much larger, looking at RIIO-ED2 than they have been in RIIO-ED1.

The next question is from Michael Lapides at Goldman Sachs.

I actually want to turn attention to the U.S. businesses.

And especially when you look at Slide 18, which is the slide -- and I'm kind of looking at the 12-month rolling not the 3-month, because lots of variations happen in every quarter.

Weather-normalized demand in your service territories have been extremely challenging.

And it's not just a short-term issue; it's been a couple of years now.

How do you think about how you want to change the regulatory construct in both jurisdictions in order to be able to manage an environment where potentially is -- where demand is at best flat, if not down?

So, Michael, I think you may recall that we basically took our load assumption, which was from 0.5% to 1% in the previous business plan down to flat based on the trends we were seeing at the time.

So our current earnings per share forecast through 2020 does include flat earnings growth on a -- and as you know, sometimes weather adjustments are difficult at best.

So in terms of the regulatory construct, there are tools that we could look at.

And in Pennsylvania, for example, it would be a true-up based on volume.

As you know, in the U.K., we already have true-ups based on how the weather turns out or the economies were made whole in terms of the impact to revenue.

So the Pennsylvania PUC is kind of looking at a broad set of -- looking at the energy environment as it's pretty dynamic at the moment, what changes to their policies and practices might make sense for the utilities that they regulate.

So I think there's probably more to come.

I don't think in Kentucky we have a near-term concern.

Vic, maybe you want to comment?

I think the best tool for us to deal with demand, which is flat, is our forward rate years.

So we take that into account every time we file.

You all know we've been filing every 2 years.

And so I'd expect that to be the best way for us to capture any changes in the flattening low demand.

Okay.

Okay, operator, it looks like there are no one -- no other questions rather in the queue.

So I would just thank everyone for joining us today, and look forward to talking on the third quarter earnings call.

The conference has now included.

Thank you for attending today's presentation.

You may now disconnect.