賓州電力 (PPL) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

My name is Martina, and I will be your conference operator today.

At this time I would like to welcome everyone to the PPL Corporation first quarter conference call.

(Operator Instructions) I would now like turn the call over to Director of Investor Relations Joe Bergstein.

You may begin your conference, sir.

Good morning.

Thank you for joining the PPL conference call on first-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 provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from such forward-looking statements.

The discussion of factors that could cause results or events to vary is contained in the appendix to this presentation and the Company's SEC filings.

At this time, I'd like to turn the call over to Jim Miller, PPL Chairman, President, and CEO.

Thanks, Joe, and good morning, everyone, and thanks for joining our call.

We will follow the normal practices is this morning.

I will provide a general business update and commentary on first-quarter results, and then Paul Farr, our CFO, will provide more detail on the financial review.

And then Bill Spence, our Chief Operating Officer, will provide you with an operational overview.

As always, we look forward to going through some Q&A when we finish our prepared remarks.

Today we announced our reported earnings of $0.82 per share, up from $0.66 a year ago, and ongoing earnings of $0.84 per share versus $0.94 a year ago.

On a straight net income basis, which excludes the impact of the equity issuance last June to fund the Kentucky acquisition, reported earnings rose 60%.

On an ongoing basis, net income rose 14%.

The earnings improvement was driven by the contribution of our Kentucky regulated segment and the PPL electric utilities distribution rate increase that took effect January 1.

These improvements were partially offset by expected lower energy margins in our supply segment as higher-priced hedges continue to roll off.

In the first quarter, we also announced and subsequently closed a significant immediately accretive expansion of our electricity delivery business in the United Kingdom.

By mid-April, we completed key elements of the permanent financing plan for this acquisition, including the equity portion of the financing and the UK holding company debt issuance.

Most of the proceeds from these issuances were used to repay a significant portion of the bridge facility that we drew on to close the acquisition.

Based on the successful equity issuance, Standard & Poor took PPL and it's rated subsidiaries off negative outlook.

We expect the final piece of the permanent financing, the operating Company debt issuances, will occur next week, enabling final repayment of the bridge facility.

On the integration front for WPD Midlands, all activities are proceeding fully according to plan.

We remain on target to achieve our 2011 ongoing earnings forecast, which you remember we increased last month to reflect the expected accretion from this UK acquisition.

We are forecasting ongoing earnings per share of $2.50 to $2.75 for this year.

Based on the successful acquisitions and permanent financings of our new operations in Kentucky and in the UK, we've accomplished our strategic objective of achieving a much heavier weighting of weight regulated earnings and cash flow in our business.

And significant regulated infrastructure investment should lead to sustained growth in each of our regulated businesses for years to come.

Based on needed infrastructure spending in Pennsylvania and the UK, coupled with updated assessment of Kentucky environmental compliance investments, we now expect our regulated asset base to grow at a compound annual rate of nearly 9% over the next five years.

And more than two-thirds of our planned CapEx spending in these regulated businesses will be made under regulatory structures that allow for near real-time recovery of and on those expenditures.

So this should give PPL a more predictable and transparent earnings profile going forward.

Based on projected rate-based growth, our expectations regarding earned ROEs, and the timing of general rate cases, we anticipate that by 2013, a significant majority of our earnings and cash flow will come from our regulated businesses.

We've accomplished this derisking of PPL without giving up the significant upside potential of our competitive generation business.

And we remain confident that competitive wholesale capacity and power prices will eventually rebound, and when they do, we believe our shareholders will benefit significantly.

This has clearly been a transformational and successful year for PPL.

We've migrated from a Company with more than 60% of EBITDA dependent on commodity markets to one that will by 2013 derive only 25% of its expected EBITDA from that business.

We issued a significant amount of equity and equity units to fund these acquisitions, and the response by investors has been very strong.

We are fully committed to delivering the results we projected and to earning appropriate returns in our regulated businesses.

The particularly strong response to the most recent equity offering and the performance of our stock price since then offering make it clear to us that investors like the transformed PPL, and that they believe we can deliver, and I'm confident that we will do exactly that.

With that I will turn the call over to Paul for comments on some of the financial results.

Paul?

Thanks, Jim.

Good morning, everyone.

Let's move to slide six to review our first quarter financial results.

PPL's first-quarter earnings from ongoing operations are higher than last year, driven by earnings from the Kentucky segment and the impact of the distribution rate increase of PPL Electric Utilities partially offset by expected lower energy margins of the supply segment.

Per share earnings from ongoing operations are lower due to dilution of $0.23 per share, driven by the 2010 common stock issuance to fund the Kentucky acquisition.

I'd like to highlight the Kentucky segment earnings include the operating results of LTE, interest expense associated with the equity units used to finance that acquisition, and dilution of $0.04 per share.

Let's move to the international segment earnings drivers on slide seven.

Our international segment earned $0.16 per share in the first quarter, a $0.04 decrease from last year.

This performance was the net result of higher delivery revenue, primarily driven by higher prices and a more favorable customer mix, higher interest expense resulting from the GBP400 million debt issuance in March of last year, higher income taxes and $0.04 of dilution.

Moving to slide eight, our Pennsylvania regulated segment earned $0.11 per share in the first quarter of 2011, a $0.01 increase over last year.

This increase was the net result of higher delivery margins primarily due to new distribution base rates that went into effect on January 1, and favorable weather, higher O&M expenses primarily due to higher planned spending and higher storm response costs, lower income taxes as result of the state income tax benefit of bonus depreciation, and dilution of $0.03 per share.

Turning to supply, this segment earned $0.42 per share in the first quarter of 2011, a decrease of $0.22 per share compared to last year.

The decrease was primarily due to lower energy margins resulting from lower hedge prices in the East and dilution of $0.12 per share.

Turning to slide 10, we reaffirmed our forecast of $2.50 to $2.75 per share in earnings from ongoing operations.

This slide walks you from 2010 actual to forecast 2011, updating the key factors driving the change.

We've changed the format of this slide to provide the factors that drive segment earnings between 2010 and the midpoint of our 2011 forecast, excluding the impact of dilution, which is broken out separately.

The increase in the Kentucky regulated segment reflects the full year of its earnings results and the full year of interest expense associated with the equity units issued in June 2010 to finance that acquisition.

The $0.57 increase in the international regulated segment earnings reflects a partial year of earnings from WPD Midlands and interest expense associated with the equity units associated in April to finance that acquisition.

We expect an increase in earnings in the legacy UK business primarily due to higher delivery revenue and a more favorable currency exchange rate, partially offset by higher income taxes, higher depreciation, and higher financing costs.

The $0.08 increase in the Pennsylvania regulated segment is primarily due to the distribution rate increase that went into effect in January.

We expect the supply segment to deliver earnings from ongoing operations that are $0.87 per share lower than 2010.

This decrease is primarily driven by $0.51 of lower energy margins, including an estimated $20 million to $30 million after-tax impact to inspect and repair turbine blades in Susquehanna.

Bill will discuss the Susquehanna outage extension in more detail in his remarks.

Also impacting margins are lower electricity prices, lower basis, and lower capacity prices in the East, and higher delivered fuel costs in the East and West.

We also expect higher income taxes, primarily due to the 2010 release of Pennsylvania deferred tax valuation allowances and a lower section 199 benefit, higher O&M due to increased outage costs at our fossil plants in the East and West, and finally, $0.75 per share of dilution will result from the shares issued to fund both acquisitions.

On slide 11, we've updated our projected 2011 free cash flow from operations before dividends.

The change in cash from operations for 2011 since the year-end earnings call is driven by a partial year of earnings from WPD Midlands, offset by acquisition-related expenses, the return of collateral to third parties, and a lower than expected income tax refund.

The change in free cash flow before dividends is also impacted by the projected capital expenditures of WPD Midlands, and the remarketing of pollution control bonds in Kentucky.

Turning to slide 12, as Jim mentioned earlier, we continue to focus on our dividend of the key element of total share on our return.

Our significantly more rate-regulated business platform provides strong support for our current dividend, as well as for future dividend growth.

This chart shows the improvement in earnings contribution of our regulated businesses as result of the recent acquisitions.

Projected ongoing earnings per share from our regulated businesses now more than cover our current dividend, and the Midlands acquisition clearly permits more dividend flexibility in the future.

With that, I'll turn the call over to Bill for an update on operations.

Thanks, Paul, and good morning, everyone.

Let's turn to slide 13 and start with an operational review of the first quarter.

Overall we had a very good quarter in all of our business segments, but let me start by first addressing the nuclear outage.

At our Susquehanna nuclear plant, we are currently in a scheduled outage on unit number two and have discovered defective low-pressure turbine blades during a planned inspection.

Replacement of these blades was not anticipated as part of our original scope.

This will extend the unit two outage by an estimated four to six weeks to ensure safe, reliable operations for the upcoming cycle.

As a precaution, we will also bring Susquehanna unit one offline in the coming weeks to do a similar turbine blade inspection.

However, given the strong first-quarter performance of the supply segment, and based on our preliminary expectations on the length of these outages, we believe that our supply earnings for 2011 will still be achieved.

Moving to our Kentucky regulated segment, LG&E and KU filed their integrated resource plan, or IRP, with the Kentucky PSC last week.

This plan is provided to the PSC every three years and is intended to give the commission a point-in-time look at our expectations for resource needs into the future.

It does not represent a commitment or decision by the Company nor does it represent a request for approval.

The key takeaways from the IRP are one, average annual load growth of about 1.5%, 500 megawatts of demand side management capability, the closing of three older coal plants with a combined capacity of approximately 800 megawatts due to proposed environmental regulations, and new generation in the form of combined cycle gas units.

Our current capital projections are consistent with the IRP.

However, prior to moving forward on any resource, we would have to make additional regulatory filings with the Kentucky Commission.

Our revised capital expenditure forecast for LG&E and KU also reflects our projected spending on environmental control equipment to meet the most recent proposed EPA rules.

We have informed the Kentucky PSC of our intent to file a new environmental cost recovery, or ECR plan, to address proposed air regulations.

That ECR filing is expected to be made in the second quarter.

Finally, KU filed a rate case in Virginia on April the 1st, requesting a $9.3 million annual revenue increase based on 2010 results and a return on equity of 11%.

The drivers of the case are incremental capital investments and recovery of storm-related costs.

If approved, the increase will take effect at the beginning of 2012.

Moving to the Pennsylvania regulated segment, PPL Electric Utilities won its 9th J.D.

Power and Associates Award for customer satisfaction by business customers.

This is PPL Electric Utilities' 17th J.D.

Power Award, which is more than any other utility in the country.

The employees at PPL Electric Utilities, just like our employees in Kentucky and the United Kingdom, take pride in providing the highest level of customer service, and we congratulate them on a job well done.

Finally, in our international regulated segment, as you know, we completed the acquisition of the Midlands operations, and as Jim said, the integration process is moving ahead as planned.

Let's move to slide 14 and take a look at sales volumes in Kentucky.

Residential and commercial volumes were down for the quarter due principally to mild weather, while industrial volumes increased, reflecting continued economic recovery in the service territory.

Volumes for the trailing 12-month period were up across the board, reflecting both economic recovery and weather effects.

LGE and KU had the hottest summer of the past 30 years in 2010, followed by one of the coldest Decembers.

The modeled weather-normalized volume reductions in the residential and commercial classes reflect energy efficiency measures which have not yet been offset by customer growth.

For 2011, we are projecting load growth of approximately 1.2% on a weather-normalized basis.

However, given the extreme weather in 2010, we are forecasting an actual low decline of 2.4% compared with last year.

Moving to slide 15, we provide details on sales volume variances for PPL Electric Utilities.

Our PA utility has experienced slight growth in industrial sales for the first quarter and trailing 12 months.

This industrial demand reflects the gradual economic recovery that we are seeing in the service territory, but it still remains below levels prior to the recession.

Residential sales are higher on an actual basis, reflecting higher weather-related sales compared to the prior period, but on a weather-adjusted basis, we have experienced a decline in sales.

The weather-adjusted decline in residential sales is primarily driven by higher energy prices, increased energy efficiency, energy conservation, and a slow housing market.

For 2011, we project overall load growth of less than 1% with higher industrial and commercial sales, partially offset by continued lower residential sales.

On slide 16, we provide our usual detail on the supply segment hedges.

The base load hedge levels and prices for 2011 are essentially the same as our fourth-quarter disclosure.

During this last quarter, we layered on additional power hedges in the East for 2012.

Our average hedge price for 2012 has declined somewhat as the recent transactions have been completed at energy prices lower than previous hedges.

Since new hedges were put on at prices near the levels we saw at year end, our internal projections for 2012 total gross margins have not changed materially since the mark at the end of the first quarter 2010.

Now let me turn the call back over to Jim, and we look forward to your questions.

Okay, operator, with that, let's open it up for questions.

(Operator Instructions) Your first question comes from the line of Paul Patterson from Glenrock Associates.

Your line is open.

Good morning, guys.

The turbine blade problem, what caused that?

Could you just elaborate a little bit more on that.

I'm sorry, I didn't completely understand it.

Sure, no problem.

We were doing a routine inspection as required by the vendor, and we found some cracking on some of the blades.

Our initial root cause investigation would suggest that it is fatigue related.

We are still looking into the details, but in an abundance of caution, we are actually going to replace all the rows on any row that any showed blade fatigue or failure.

So it is underway as we speak on unit two, and as I mentioned in the remarks, we will be bringing down unit one in the coming weeks, and we will inspect that unit as well.

What is the cost, I'm sorry, again, that's associated with the maintenance and the capital that you're going to be spending on this?

The maintenance, the capital, the purchase power, all of the cost of the exercise, or the financial impact of the exercise is $20 million to $30 million after tax with everything that we know right now.

That includes both units?

That's correct.

As I mentioned, with our strong first-quarter performance, out-performance to our internal plan, we think we can fully manage the costs associated with the outage, but we wanted to let you know that when you see a press release that unit one is coming off line, you would have the details in terms of why.

That's great.

The trading and marketing outlook, has that changed at all?

No, not at all.

We are fully on track to meet our expectations for this year.

I believe the total gross margin that we had in the plan was around $40 million for the year.

Okay.

And then, the market outlook for the non-regulated business, we've got the RPM auction happening pretty soon, any feelings with the most recent adjustments that have been made with respect to parameters in what you're thinking we might see?

Yes, I think our expectation is a clearing price in MAAC of about $150 to $200 per megawatt day.

That assumes the transmission-related adjustments in the RPM, modelling that PJM is undertaking as we speak, or running the auction, as well as about up to 6000 megawatt's of retirements.

As it relates to retirements, we are pretty certain that 2000 megawatt's is a given, and there's another 4000 that we would expect as part of our internal modeling.

As far as the rest of the pool, we would expect that to clear somewhere in the $30 to $50 per megawatt hour -- or megawatt day rather.

Your next question comes from the line of Steve Fleishman from Bank of America.

Your line is open.

Good morning, guys.

A couple questions.

First, could you remind what exchange rate is in your assumption for 2011?

$1.60 per Sterling.

Okay.

And then also, we've obviously had good inflation numbers from the standpoint of your inflation, is that something you anticipated in your guidance or was that positive to the guidance?

It might be slightly positive to guidance.

The way the inflation adjustment works is, we would take a 12-month rolling averages if you will, and July to July, August to August, all the way through December to December averages at the back end of this year, so the front part of the year is helpful, but we would need to see continuation of that to see, call it an X-plan or a Bump plan, outcome that would start affecting revenues April 1st of next year.

That could benefit you next year?

It could benefit next year.

The last question is, I know in the past there has been upward pressure on the coal transport, but I saw your call numbers were exactly in line, so it sounds like you're -- I know you have some diesel hedges and the like, but it sounds like you have got that pretty well in line.

Right, Steve, we are right on track.

I don't see any variances of any material amounts so far compared to the rates we gave you.

Your next question comes from Michael Lapides from Goldman Sachs.

Hey, guys, congrats on a decent quarter.

Real quick question.

Can you update financing plan and needs given the change in the 2011 free cash flow outlook?

Really nothing significant.

A big portion of the change is driven by the operating cash flow and the CapEx related to Midlands, which there has been no change.

There's a small impact, I think around $150 million or $160 million from collateral change.

I wouldn't view that as significant enough to drive any change in the financing plan we've got, and we filed for a security certificate with the PUC, a few hundred million that we plan on issuing at electric utilities to first mortgage bonds.

We've got a refi coming up later in the year at supply.

As Jim mentioned, we are in the throes of issuing the outgo financing for the UK debt.

If the market is strong there, we may end up refunding a little bit of next year's need, but it is still in the range of what we've outlined to you in the permanent financing program, so no major changes.

Got it.

When you talk about RPM and you talked about the retirements, the two gigawatt number you mentioned as a certainty, can you give a little more clarity on that?

I think that's a combination of announced retirements prior to this most recent auction, as well as our best guess, if you look at the fleet that's out there and those that are most challenged by just the markets in general, let alone the EPA regs, and you add those in and you come up to the 2,000 megawatt's.

I'm sorry, I don't have the details on exactly which unit those are, but that is generally how they categorize.

Got it.

Thank you.

Much appreciated.

I will follow up off-line.

.

Your next question comes from the line of Brian Chin from Citigroup.

Your line is open.

Good morning.

Just a clarification on the increase in CapEx at the Kentucky utilities, did you say that the environmental cost recovery mechanism that you have yet to file, that, that will include an additional amount of CapEx above and beyond what you have put on slide 19, or does slide 19 already include what you will be filing shortly?

It includes all of that.

Slide 19 includes the full amount to the CapEx that we'd expect to be seeking recovery for, and the increase is driven by environmental compliance, so all of that would be ECR eligible in terms of the filing.

Great, thank you.

Your next question comes from Carrie St.

Louis from Fidelity.

Your line is open.

I was hoping you could give an update on your energy hedges for 2013?

Sure, Carrie.

We are right now sitting at about 24% for 2013.

That's up a little bit from where we were at the end of the year.

I believe we were around 15% in that zip code at the end of last year, so we have added on a few more hedges, but we are at 24% as of today.

And do you have the split between East and West and could you also maybe talk to the average hedge price versus 2012?

I don't have that here in front of me.

We would normally provide all of that detail at the time we announced earnings for 2012 in this case.

Most companies by now have 2013 outlooks provided, so you're going to wait to do that all the way until the end of this year?

Unless we have material hedges placed by then for 2013, we would not likely update our charts and information until the third quarter.

But your hedging, your ratable hedging, would put you where you are supposed to be by the end of the year for 2013?

By end of 2011 or early 2012, it would be into 60% to 90% range.

So this 24% is going to go up to 60% to 90% by the end of this year?

That's what we would expect.

And again, the front end of the year is not where we normally see significant utility load following auctions.

We don't see seasonal spikes in gas, and one of the reasons why we hedged up is we saw some nice improvement in the out years as it relates to energy, and so we took advantage of some of that.

It's come back off, it's gone back up, and as we see the seasonal storm pattern related and summer pattern impact, things we would typically hedging more later in the year.

Maybe going to next year's free cash flow guidance, or I know there's no guidance, but maybe if you could help frame how we could think about free cash flow expectations.

Clearly the CapEx is moving materially higher like $800 million it looks like.

Year on year you're referring to?

Yes.

If I look at your prior 2011 guidance for cash from ops is about $2.4 billion, so you lowered it about $200 million.

Should we started the prior 2011 base or go off this new lower $2.2 billion.

I would say probably go off of the lower number, simply because the biggest chunk down in that number, there were two things, was the return net UK movements which we're all just simply layering on the acquisition-related impact of their operations, and CapEx needs was the $160 -- $150 million return of collateral to counter parties, that can go up and down.

And then a decrease of $50 million in the expected income tax refund, and that's simply because rules got clarified better about what qualifies for bonus depreciation and what doesn't.

That was the biggest driver there.

Again, adjusting for whatever your model indicates the operating cash flows, ex-working capital would do, whether that's the lower number or a different number based on how your modeling the utility businesses and supplies margins, you've got to factor obviously both in.

And then besides normal earnings growth, cash flow growth, are there any other items that would have impact going from 2011 to 2012?

No, not at all.

And as we indicated when we successfully completed the equity offering, we wouldn't expect to be out other than the normal small amount of $50 million to $75 million in drip, we won't be in the markets for stock until late in 2012.

So nothing outside of those comments that we've made that I would expect would be -- it sounds like you're asking if there's something unusual.

I don't see that.

Okay, so just equity late in 2012.

All right.

Your next question comes from the line of Tom O'Neill from Green Arrow Capital Management.

Your line is open.

Good morning.

I apologize if this has been asked and answered.

Two questions on the dividend.

What would be the right way to think about the timing for that consideration?

And the second is on industrial sales in Kentucky.

Just curious what was built into the original 2011 view?

I will take the dividend one, and Bill can take the industrial question.

The normal timing for a dividend adjustment is the board consideration of the dividend for the first quarter of next year.

So the April dividend next year will be our normal cycle.

Not that we have to stick to that , but that is the usual time of year we address the level of

And relative to the industrial sales for the first quarter, we are pretty much right on track with what we expected.

(Operator Instructions) Your next question comes from Ashar Khan from Visium Asset Management.

Your line is open.

Just wanted to check in, what was the sensitivity poll now for the change in currency to the earnings, I have forgotten that, what is the sensitivity for each $0.10, for growth from $1.60 to $1.65, what's the earning sensitivity?

We have not given an earnings sensitivity, Ashar, because we started the year on the legacy WPD so heavily hedged at around 75%.

We are equivalently hedged on the operating earnings from -- or ongoing earnings on Midlands now as well, the same amount.

And given where the currency is, we are actually looking at hedging up even more.

We haven't given a sensitivity, but we're getting to the point where were becoming not very sensitive.

I would say that net of all the hedges, including some of the collars that we put on, that I would expect that we would be slightly ahead of the $1.60 per sterling that we had in the business plan assumption -- or the forecast assumption.

But can you just give us, If you were totally unhedged, what would be the sensitivity?

We gave you the net income in the Roadshow book, I thought I brought a copy with me, of the net income.

If you take every year of net income for 2011, 2012 and 2013 for international was at $1.60.

So divide those net income numbers by $1.60, and that will give you the midpoint, that will give you the sterling net income, and then you can vary that a couple percent from the Roadshow deck.

Apologies, I don't have it handy with me.

Your next question comes from Ivana Ergovic from Jefferies.

Your line is open.

Good morning.

What was the basis between your plants and the PJM West for the quarter?

I'm sorry.

Were you asking what the basis was for the quarter?

Yes, the basis differential.

Yes.

The basis in the first quarter was slightly positive.

We would continue to expect basis to remain flat, meaning zero for the year, West up compared to our generation locations overall, which is what we had assumed in our plans.

So no significant change from what our expectations were.

And you are assuming the same zero for 2012?

That is correct.

Okay, and another question.

You gave your earnings walk in the fourth quarter, and now you gave the update.

There is $0.08 contribution from legacy UK business, which wasn't in the presentation in the fourth quarter.

Is this because of the synergy, and what's the reason for the change?

No, the change for -- one second, let me find my chart on that -- is driven by an expectation of some higher revenues versus year-end, based on some changes in inflation, currency exchange rates.

It was several things that built into that.

Okay.

And then there is also $0.05 extra for Kentucky.

Is it because of the weather or what's the reason?

No, it's not weather related on Kentucky.

Net -- hold on one second.

There shouldn't have been that significant a change on Kentucky.

We will check that Ivana and get you that through Joe and the team.

Okay, and the third one, I think there is a $0.05 reduction in supply margin.

Is that because of the plant outage, or what's the reason for the reduction in the margin?

It was several things that drove that, but the plant -- the outage assumptions and all the margin totality is in that number.

Your next question comes from Steve Fleishman from Bank of America.

One follow-up.

The Pennsylvania bonus depreciation change, how much was that in the quarter, and how much do expect from that for the full year?

In the quarter, it was a little more than $0.01, and so I would expect that to be roughly ratable for the year.

Okay, that was it.

Thanks.

There are no further questions in the queue.

I turn the call back over to the presenters.

Thanks, all of you, for being on the call, and I look forward to the second quarter call.

Thank you.

This concludes today's conference call.

You may now disconnect.