賓州電力 (PPL) 2011 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the PPL Corporations third-quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions) Thank you.

Mr Joe Bergstein, you may begin.

Good morning.

Thank you for joining the PPL conference call on third-quarter results and our general business outlook.

We are providing slides to this presentation on our website at www.PPLweb.com.

Any statements made in this presentation about future operating results or other future events or 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 vary is contained in the appendix of this presentation and in the Company's SEC filings.

At this time, I would like to turn the call over to Jim Miller, PPL chairman and CEO.

Thanks, Joe.

Good morning, everyone.

I'll just make a few general business comments and then I'll turn it over to Paul Farr, our Chief Financial Officer.

He'll provide a much more detailed financial overview and then Bill Spence, our President and Chief Operating Officer for an in-depth operations overview.

Then we'll go to questions.

Today we announced reported third-quarter earnings of $0.76 per share, an increase of $0.25 from the same period a year ago.

For the first 9 months of the year, our reported earnings are $1.91 per share compared to $1.40 through the first 3 quarters of 2010.

Ongoing earnings for the third quarter were also $0.76 per share versus $0.74 in the third quarter of '10.

Ongoing earnings through the 3 quarters of 2011 are $2.02 per share compared with $2.29 a year ago.

We noted in our release this morning that per share ongoing earnings for both periods were affected by the issuance of common stock to fund our recent acquisitions in Kentucky and the UK.

During the quarter, our solid performance from our newly acquired businesses in Kentucky and United Kingdom helped overcome earnings pressure on our competitive supply business and our Pennsylvania delivery business and we remain highly confident in our ability to achieve the economic performance we projected for the expanded UK business.

Through the first 9 months of the year, earnings performance was driven by the contribution of our Kentucky regulated segment, strong international segment performance, and by the PPL Electric Utilities distribution rate increase that took effect January 1.

The improvements were offset by lower energy margins in our supply segment, driven by higher priced hedges rolling off, unplanned outages to replace turbine blades at our Susquehanna nuclear units, and higher storm restoration expenses in Pennsylvania and the dilution I spoke of from the equity issuances for the acquisitions.

The integration of our new operations in the UK has been extremely successful to date.

A new operating model is in place for WPD Midlands and our UK team is showing significant positive results for customers and share owners.

We remain on track to complete this integration by the end of the year and at a cost below our estimate at the time we announced the acquisition in April.

Let's turn to the 2011 forecast.

We're pleased to announce that we're increasing the 2011 ongoing earnings forecast to $2.55 to $2.75 per share from the previous $2.50 to $2.75 per share.

The increase was made possible by the strong performance of our portfolio regulated businesses, coupled with the ability of our competitive supply business to overcome the margin impact of the unexpected outages at the Susquehanna nuclear plant.

So clearly, the larger, more regulated PPL has provided significant advantages for our share owners, and our significant regulated infrastructure investment opportunities are expected to provide sustained growth in each of our regulated businesses for the years to come.

Compound annual growth rate in the consolidated regulated asset base projected to be about 9% over the next 5 years.

Further to that, more than two-thirds of the planned CapEx as we've mentioned earlier will be made under regulatory structures that allow for near real-time recovery of those expenditures.

It's important to note that we've made some progress in this quarter on legislation in Pennsylvania that will allow the regulator to consider methods to reduce the frequency of rate cases and reduced regulatory lag on distribution investments made by utilities in the commonwealth.

We're hopeful that this legislation, which already has passed the statehouse, will receive senate approval and governor Corbitt's signature by the end of the year.

Also, our supply segment remains well positioned for the eventual rebound of competitive wholesale capacity and power prices.

There's good news for our investors here as well.

The recent finalization of cross-state air pollution rules, firming spark spreads and the potential for a recovering economy point to higher power prices beginning in late '13 or early '14.

And now I'll turn the call over to Paul for detailed financial results.

Paul?

Thanks, Jim.

Good morning, everyone.

Let's start with Slide 6 to review our third-quarter results.

Third-quarter earnings from ongoing operations were higher than last year, primarily due to the performance of our newly acquired utilities.

These positive drivers were significantly offset by dilution resulting from the common stock issued in April of this year to fund our Central Networks acquisition, lower margins in our supply segment, and higher storm restoration expenses in our Pennsylvania regulated segment.

While there is no comparator for 2010 performance for Kentucky, as that acquisition didn't close until November 1 of last year, I would like to remind everyone that the Kentucky segment earnings include the operating results of KU and LG&E, holding company costs at LKE, interest expense associated with the 2010 equity unit issuance, and dilution of $0.03 per share.

Let's now move to the international segment earnings drivers on Slide 7.

Our international regulated segment earned $0.22 per share in the third quarter, a $0.10 increase over last year.

This increase was due to the operating results of the Midlands utility, including interest expense of $0.02 per share associated with the 2011 equity unit issuance, higher earnings in WPV's legacy businesses, resulting from higher delivery revenues, primarily due to higher prices, partially offset by higher pension and other operating expenses, higher income taxes, and dilution of $0.04 per share.

Moving to Slide 8, our Pennsylvania regulated segment earned $0.05 per share in the third quarter of 2011, a $0.03 decline from last year.

The decrease was the net result of higher delivery margins, primarily due to the distribution of page rate increase that went into effect on January 1, higher O&M, primarily due to higher storm restoration expenses, and dilution of $0.01 per share.

Turning now to Slide 9 for supply.

This segment earned $0.36 per share in the third quarter of 2011, a decrease of $0.18 per share compared to last year.

Lower Q3 earnings were driven by lower energy and capacity prices in the east and higher delivered coal prices, partially offset by higher margins on full requirement sales contracts, and higher base load generation, higher income taxes, and finally dilution of $0.07 per share.

On Slide 10, we've updated our projected 2011 free cash flow before dividends.

The change in cash from operations since the second quarter earnings call is driven by slightly higher expected operating results and a change in working capital, including lower expected return of collateral to third parties.

Cash flows are also impacted by lower projected capital expenditures, primarily in the Kentucky regulated and supply segments.

Turning to Slide 11, our dividend clearly remains a key element to total shareholder return and as we outlined here, the current dividend is covered out of rate regulated business earnings.

The combination of the Midlands acquisition and the growth prospects of our utility businesses that Jim mentioned clearly permit us flexibility to look at dividend growth.

Moving over to Slide 12 now, and as we indicated we would do in the second quarter earnings call, we're providing some modeling parameters for the enlarged WPD related to future earnings.

I would like to remind everyone that we provided WPD net income figures for 2011 to 2013 in the road show materials earlier this year.

Let's begin with revenues, which are projected to increase by an average of 5.5% per year plus inflation for the balance of the price control review period that ends on March 31, 2015, plus any annual incentive awards earned through performance.

After achieving the Midlands integration efficiencies from that acquisition, most of the operating costs should increase with inflation.

Although depreciation expense will increase at a higher rate due to increased levels of capital investment.

Pension expense is expected to increase from GBP20 million in 2011 to GBP50 million by 2013, and then decrease modestly thereafter.

In calculating interest expense, most of our debt is fixed rate debt, except for about GBP365 million of the deflation link.

I will expect that we will maintain our current cap structure as we grow the UK rate base and balance sheet which is comprised of 65% debt to RAV at the [alcoves] and 80% debt to RAV at the whole coal levels.

And for the foreseeable future, our consolidated effective tax rate is expected to be about 24% for that segment.

Combining these drivers with the foreign currency translation rate should be able to reasonably determine the international regulated segment's future earnings contribution.

Again, we provided the projected net income figures for 2011 through '13 back earlier this year when we announced a deal and subsequently issued the equity, using a $1.60 per sterling translation rate.

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

Thank you, Paul.

And good morning, everyone.

Let's turn now to Slide 13 to start with an operational review of the third quarter.

Overall, as Paul noted, we had another very good quarter of financial performance.

In Pennsylvania, we had a couple major regulatory developments this past month in both the distribution and transmission businesses.

On October 4, the Pennsylvania House of Representatives passed House Bill 1294, with strong bipartisan support by a vote of 183 to 18.

This bill is intended to clarify the authority of the Pennsylvania PUC to approve requests for alternative rate-making mechanisms by regulated utilities such as PPL.

We strongly support the bill in its current form, as we believe that it will help reduce regulatory lag currently experienced on certain distribution-related capital expenditures, and add meaningful benefits for our customers.

House Bill 1294 has been referred to the state senate, where it will work through a similar process as the house.

We're hopeful the bill will pass the senate this year and will be sent to the governor for signature.

With respect to Pennsylvania transmission, on October 5, President Obama announced the initial list of projects under the newly formed Federal Rapid Response Ream for transition.

PPL's Susquehanna-Roseland power line was named to this initial list.

The Rapid Response Team is expected to accelerate review and permitting of transmission line projects to increase reliability and save consumers money by modernizing the grid.

Susquehanna-Roseland remains under review by the National Parks Service, which is performing an environmental impact statement.

We look forward to working with the Rapid Response Team, as we have been with the National Park Service, to ensure a thorough and comprehensive review in a timely manner that will support availability at the new line by early 2015.

The fact that Susquehanna-Roseland was added to the initial list shows the Obama administration recognizes the importance of the new power line and the need for swift action on federal permits.

We continue to be very optimistic about an in-service date in the spring of 2015, with heavy construction to begin in 2013.

In addition to positive regulatory developments in Pennsylvania, we also saw positive operational execution during the quarter after some of the worst storms the East Coast has seen in quite sometime.

In late August, Hurricane Irene left significant damage to the electrical equipment, downing trees on wires and destroying poles.

It was the second worst storm our Pennsylvania utility has experienced in the past 20 years.

Our skilled and dedicated work force was up to the task of restoring power to more than 400,000 customers in a 3-day time period.

We thank the crews from other utilities that came assist in the restoration efforts.

In particular, we would like to thank the crews from LG&E and K.

Unfortunately, the same folks have been put to the test this past week.

We've experienced our fourth major storm of 2011 last Saturday, with ice and heavy snow accumulation on trees and power lines, which affected 10 transmission lines and scores of distribution lines in the Lehigh Valley, causing 320,000 total customers to lose power.

Once again, crews have been doing a great job recovering from in some areas, and even more devastating storm than Hurricane Irene.

We do not expect a significant impact to our earnings as a result of all these storms.

Some costs will be capitalized or covered by insurance.

And for the remaining costs, we will seek deferral for future consideration.

Moving to Kentucky, we filed a Certificate of Public Convenience with the KPFC on September 15.

This certificate requested approval to build a 640-megawatt natural gas combined cycle generating unit at the existing Cane Run site, as well as approval to purchase 3 simple cycle natural gas turbines from Bluegrass Generation Company.

These turbines will provide up to 495-megawatts of peaking generation.

These requests were filed to cost effectively meet new stricter EPA regulations.

It will likely be necessary for us to retire 3 coal-fire generating stations at Cane Run, Green River, and Tyrone, totalling 800-megawatts.

We requested that the KPFC rule on the CPHCN by April of 2012.

Let's move to Slide 14 for an update on the international regulated segment.

Execution on the integration plan for the Midlands operations remains solidly on track in all respects.

The organizational structure and reorganizational plans have been finalized and implementation has already begun.

The total estimated cost of the reorganization is $102 million pre-tax.

The integration is progressing as scheduled and we've already seen positive movement in key operational metrics and financial results in the first 7 months of ownership.

As originally contemplated, we are on plan to complete the final organizational and system changes during the fourth quarter.

Completion of this work will allow us to achieve the efficiency savings that we shared with investors when we announced the acquisition in April.

We will provide you with a more detailed update at the EPI Financial conference next week.

We plan to illustrate how our UK team, including the Midlands employees are already beginning to deliver value to customers and share owners.

Moving to Slide 15, we've outlined sales volumes by major customer classes in Kentucky.

In summary, retail sales for the quarter were relatively in line with the prior year on a weather-normalized basis, but remain challenged by lack luster economic conditions.

Residential and commercial volumes both declined somewhat over the most recent 12-month period.

Customer growth has not materialized and usage rates per customers has also declined.

Industrial sales are generally driven by specific plant issues.

For the 12-month period, we saw increased production at some of our larger industrial customers compared to the prior 12-month period.

Moving to Slide 16, we provide details on sales volume variances for PPL Electric Utilities.

Weather-normalized residential sales were higher for the quarter compared to the prior year, due to modest load growth and the addition of new customers.

Commercial industrial sales were lower for the quarter, reflecting slower economic recovery in the region from levels experienced in 2010.

On Slide 17, we provide our normal detail in the competitive supply segment hedges.

The base load power hedge levels for the remainder of 2011 are at 100% and prices are essentially the same as our previous disclosure.

We've adjusted our expected generation outputs for 2011 to reflect actual results through September 30 and our forecast for the remainder of the year.

During the quarter, we adjusted some power hedges in the east for 2012, but we anticipate being fully hedged before we start the year.

For 2013, our hedge profile is now at 72%, as we've layered in some additional hedges.

By the end of this quarter, we would expect to be 60% to 90% hedged for 2013.

We are of course ahead of that schedule somewhat as we took advantage of favorable power price rallies.

Over 50% of the 2013 hedges were done with collars, so we do stand to capture upside on hedges, should prices move higher.

But of course we protected against the downside if the cash per impact is less than expected or forward natural gas prices soften further.

Of course we would still have the remainder of our unhedged 2013 base load production and most of our gas rate capacity available to capture benefits of strengthening power prices should that occur.

As Jim mentioned, we maintain an optimistic view for 2014, believing that the confluence of cash per implementation, prospects for an economic recovery, and firming gas prices could further expand heat rates.

Our generation business is expected to benefit in that type environment.

Now I'll turn the call back to Jim, and I look forward to your questions.

All right, operator, would you please open the call for Q&A.

(Operator Instructions) Dan Eggers, Credit Suisse.

This is actually Kevin.

I guess on your comments on supply, you indicated that you're looking at being more opportunistic on the hedging program in 2014.

Can you give us a flavor of what that really means, and then on the rail side, I realize you're in negotiations, but can you just kind of put us in the right direction of will it be in line with the current contract or a little below?

Well, it's hard on the call contract, rail contract first, really hard to predict at the moment.

We are, as you pointed out, in negotiations.

So I really prefer not to comment on that.

But on the, on the hedges for 2014, we do have an open book for 2014.

I think we're going to wait and see how the Casper regulations really translate into market prices, as well as keep a close eye on natural gas prices.

And I think we'll have a better feel for that, of course, once we get into early 2012.

Okay.

I guess maybe changing focus a little bit, on Kentucky, can you kind of offer a little more color on what's going on there, and just kind of what the dialogue is on the ground?

And are they looking at maybe considering less retrofits in favor of new gas or to maybe do a little bit more purchase power versus rate basing?

No, I think, Kevin, the plan that we filed both with respect to the certificate that Bill mentioned for the gas fire generation, when you combine that filing with the IRP and with the ECR, everything that we've contemplated in that consolidated set of filings brings together the least cost compliant program for the consumer.

If we were to retire more generation on an MPV basis, that would result in our view in a much higher cost for the consumer and that last plant that cleared the hurdle, if you will, in terms of making retrofits, again, on an MPV basis, would not result in the most economic decision on the behalf of customers.

So I think we're in good shape there.

So as it relates to, as it relates to the consumer end of it, it's the right decision and we're simply going through that ECR filing, we'll get the certificate in April of next year, but the ECR should be done by mid-December this year and those hearings are going take place in the next couple of days here, that 2-day hearing starting on the 9 of November, fully as expected.

So that's pretty much by way of update.

Will the ultimate level of the ECRR, will you be subject to this filing, or is that a different process?

The ROE is susceptible to being addressed, but again, as we look at where the movements have gone both with respect to the GRCR lease and the ECRR lease, they've moved on a modest basis over past cycles and we wouldn't expect anything different here.

Okay, thank you, guys.

Kit Konolige, Ticonderoga.

Can you give us any sense in the UK what the bonus revenue situation is looking like for 2012?

Yes, we got the results signed off by Ofgem in September.

And a consolidated UK basis, it's approximately $30 million.

That would begin to be collected April 1 of next year through 3 31 of 2013, slightly ahead for both the WPD legacy component, as well as the acquired utility as to what we thought would be earned.

And again, recognize that we got a substantial amount of I believe it was almost GBP50 million of upfront revenue bonus for the legacy WPD property in the filing for accepting tougher in the price control review decision by accepting tougher targets.

So it will be, it will be -- you have to combine for legacy WPD both the upfront award and the interim bonus to be able to get the total award, if you will.

Can -- just to be clear on that, so the legacy award is already in place, so that's showing up in current earnings, and then there will be another $30 million -- go ahead.

Well, for both utilities, what Ofgem signed off on in September of last year is being earned April 1 this year through 3 31 of '12.

That will fall away then, and then the bonus outcome that was awarded or determined, if you will, in the September sign-off this year, will kick in and we'll begin to earn those revenue bonuses.

We'll actually have a chart at EEI where you'll see the revenue bonuses for legacy and for Midland that goes back over the past I think it's 6 or 7 years.

Very good.

Okay, and I'm being dense on this, I know, but so is the change in next April and the next round kicks in, is that a negative delta at that point?

No, it should be a positive delta because the outcome at WPD legacy, that net decrease was, I believe, offset by the increase that we saw at Midland.

Midland saw improved performance from the prior owner that we inherited as this outcome.

Great.

Okay, thank you.

Paul Ridzon, KeyBanc.

When you upped your midpoint of guidance, does that incorporate the impact of the recent storms or are you going to carve that out as a special item?

It's, it's included in the results for Q3.

There was a $0.01 or $0.02 of impact in EU within the quarter that was, again, in excess of -- from an expense perspective, in excess of the insurance limits under the policy that we got for that program.

So we would expect to carve out that, plus the impact of what we're going to experience here in Q4 within Q4.

As again, we would expect to defer the costs.

In fact, there was a filing already made for the Irene costs and we'll be making likely a subsequent filing for deferral for the Halloween storm.

Great, and if HB 1294 were to pass in its present form, can you kind of give us a sense of what the impact would be from a lag standpoint?

Well, I think, it's hard to tell, but we like the current form.

I think it's in good shape for what we had hoped to achieve, and I think our expectation would be to get something that looked more like formula rate type mechanism in place.

But until we see the final bill and it's approved by the governor's office, we'll make subsequent filings and adjust as we need to.

We wouldn't expect, Paul, that we have a material adjustment to our forecast of D CapEx until we get out until at least late '13 or early '14, just given the amount of activity that's currently going on in transmission work, both with regard to Susquehanna-Roseland as well as several other material projects.

So I wouldn't expect in terms of the impact on the lag that we see, that.

One, until we get it approved as part of a filing next year for our D-rate case and, two, until we adjust the actual CapEx spending plan.

And then one of the drivers you indicated in supply was improved trading and marketing.

Can you kind of give us book ends as to how much that improved?

Sure.

As we mentioned on previous call, we had planned about $40 million in the marketing and trading arena and we were slightly ahead that have coming out of the second quarter.

We added to that probably another $10 million to $20 million during the third quarter.

So the favorable market conditions gave us some opportunities, particularly around our midmerit assets, the load as Paul mentioned in his opening remarks, the load volume contracts that we had performed better than expected, even though they are fairly small compared to -- and we have had very positive experience with our retail book.

You may recall that we started more aggressively selling in the PPL and other Pennsylvania territories locally here to mass market, as well as C&I customers.

In as much as Federal Rapid Response is an oxymoron, how incrementally positive do you think Susquehanna-Roseland being added to that is?

Well, I think it does add a considerable amount of weight behind our project.

There are just a few projects that are included on that list and we're happy that ours is one of them, but I think it illustrates the importance of that line to the region.

So we feel good about it and think that it is a real positive.

You have a high degree of confidence in the spring of '15?

We do.

Okay, thank you very much.

Bill Appicelli, ISI Group.

Just a question regarding the organizational structure and rework costs, the $102 million pre-tax.

You made some comments already that things were going better there.

How does that number stack up with what you guys had thought back in April?

Well, we had thought back in April, I think the numbers we outlined was $109 million of costs this year and $36 million next year, so it's going to be around $145 million.

85% of that number was going to roughly be redundancy costs and the balance would be basically IP infrastructure spending plus a few other items.

As Jim mentioned I think we'll come in modestly below the cost expectations for both this year and next and then I would expect that we would be able to slightly, or modestly outperform some of the synergy numbers we outlined, given the amount of costs that we're taking out is slightly ahead of plan as well.

Okay.

But you still feel comfortable that, with the net income targets that you gave back in the road show, that those are achievable and if not, maybe some upside?

Yes, very.

And again, I think you need to factor in the comments that I made back I think it was Kit that asked or I forget who that we did not embed the $30 million pre-tax of revenue bonus for the '13 to '14 fiscal year in those numbers, and then again, yes, we're going to be slightly outperforming on the cost basis.

Now, we do at the local entity levels, end up capitalizing quite a bit of costs for construction related activities, so it doesn't all fall to the bottom-line, but there should be some tailwinds to those numbers that we provided.

Okay.

Thanks.

And then just switching gears, looks like the hedging profile for the east, the amount of volumes hedged in 2012 came down a bit.

Is that right?

And can you give us some color behind that?

Yes, we did lower it just slightly by about 6% overall.

That just really reflects minor adjustments that reflect our view on market and dispatch conditions, nothing really more than that.

But it's a profile I guess we would expect to likely close out by the end of the year, we did open up the book a bit to take advantage of what we see as an opportunity for some improvement in '12 pricing.

Okay, thank you.

As I mentioned in my opening remarks and Paul reiterated, we would expect to be close to 100% by the end of the year.

Great, thanks.

Ashar Khan, Visium Asset Management.

Good morning, and congrats on a nice quarter.

Can I just -- Paul, just based on your hedges and capacity prices and everything, is it fair to say that the generation earnings will have their, I guess their low point next year and from there, it should be a positive trajectory?

Yes, yes, when you look at the effect of gas prices that the hedges are in, I would think that's reasonable.

Now, obviously total margins are dependent upon power and that curve is in Contango and as Bill mentioned, we're pretty much fully open in the east from '14 and beyond.

Generally, I would expect that just marking it to a curve and with what we think will happen and what we've already booked in terms of our added outcomes in capacity options, I think that's pretty accurate.

I think Ashar, if you look at the energy only, setting aside capacity for a moment, the energy only and the average hedge prices for '12 and '13 are pretty consistent.

So energy only would be, if these prices hold, would be relatively flat.

And then you're left with capacity price increase.

Okay, okay.

That's fair.

And then this Midlands -- can I ask you, so how much of accretion should we expect this year?

I mean, there was a pretty strong accretion in the third quarter.

What is accretion level expected this year, can I ask?

We announced the transaction, it was $0.10 to $0.15.

I think we're probably moving slightly ahead of that to the midpoint of that figure at this point.

But I would expect that range to hold.

We may be at the upper end, but that's the range.

Okay, and then finally, if I can ask, Paul, how are you taking the currency risk?

Have you for next year, could you just go over how you're hedging your currency going forward?

Yes, very consistent with what we've done in the past, and that's as we approach the end of the year, getting into the beginning of a year, we try to be approximately 75% hedged on translating that year's earnings so that we can provide a narrower guidance range.

We're basically at those levels already for next year.

We've done a decent amount of collars.

If we mark those at the floors of the collars, we're probably in what we have hedged in the $1.59-ish type range for next year on that 75%.

We used $1.60 for sterling in the net income numbers for '12 that we gave in the road show material.

So pretty much right on top of that.

You can see where we sit today at $1.60 to $1.61 wherever we stand from a prop-month basis, so we're right in line with those numbers.

Okay, okay.

Thank you so much.

I appreciate it.

(Operator Instructions) There are no further questions in queue.

Okay.

Well, then I thank you all for joining us this morning.

I know there's a number of calls this morning.

So we feel very good about a strong quarter and working towards finalizing this year's earnings and we're very pleased with our status of our acquisitions and as well, we're very pleased with the potential we see in the UK for bonus situation.

So thanks again, and see you at EEI.

This does conclude today's conference call.

You may now disconnect.