賓州電力 (PPL) 2019 Q4 法說會逐字稿

Good morning, and welcome to the PPL Corporation fourth quarter earnings conference call.

(Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Andy Ludwig, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Rocco.

Good morning, everyone, and thank you for joining the PPL Conference Call on Fourth Quarter and Full Year 2019 Financial Results.

We've provided slides for this presentation and our earnings release issued this morning on the Investors section of our website.

Our presentation and earnings release, which we will discuss today during the call, contain forward-looking statements about future operating results or other future events.

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

Please refer to the appendix of this presentation and PPL's SEC filings for a discussion of factors that could cause actual results to differ from the forward-looking statements.

We will also refer to earnings from ongoing operations or ongoing earnings, a non-GAAP measure on this call.

For reconciliations to the GAAP measure, you should refer to the appendix of this presentation and our earnings release.

I'll now turn the call over to Bill Spence, PPL Chairman and CEO.

Thank you, Andy, and good morning, everyone.

We're pleased that you've joined us for our 2019 year-end earnings call.

With me today are Vince Sorgi, PPL, President and Chief Operating Officer; and Joe Bergstein, Chief Financial Officer.

Moving to Slide 3. Our agenda this morning begins with an overview of 2019 results and PPL's business outlook for 2020.

Vince will then review some of PPL's recent operational highlights and outlook for 2020 as well as discuss PPL's clean energy transition strategy, including our decision to set a more aggressive goal to reduce PPL's carbon emissions.

Following Vince's remarks, Joe will provide a more detailed financial review of 2019 and 2020, along with our updated earnings forecast for 2021.

I'll conclude by taking a few moments to highlight what has truly been a decade of transformation and growth for PPL.

And PPL is marking its 100th anniversary, thanks to our employees' hard work and dedication and the unparalleled support of our communities.

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

Turning to Slide 4. In 2019, PPL continued to deliver on its commitments to shareowners, customers and the communities we serve.

We remain steadfast in our strategy to deliver best-in-sector operational performance, invest in a sustainable energy future, provide superior customer service, maintain a strong financial foundation, and engage and develop our people.

Our results in 2019 reflect this strategy.

We exceeded the midpoint of our earnings guidance for the 10th straight year.

Delivering ongoing earnings of $2.45 per share.

We remain committed to dividend growth, increasing our dividend for the 17th time in 18 years and returning more than $1 billion in dividends to shareowners.

As we delivered on these financial commitments, we continued to extend our track record of operational excellence.

We maintained strong transmission and distribution reliability across all of our utilities.

In addition, we achieved top-decile generation reliability in Kentucky.

At the same time, we remain as focused as ever on providing superior customer service.

In fact, our utilities remain among the very best for customer satisfaction in the regions we serve.

Our U.S. utilities earned 4 J.D. Power awards for customer satisfaction, raising our combined total to 51, since J.D. Power began assessing utility customer satisfaction in 1999.

Meanwhile, our U.K. utilities all achieved a 9 out of 10 rating in Ofgem's Broad Measure of Customer Satisfaction review.

In addition, Western Power Distribution earned the U.K.'s customer service excellence award for the 27th consecutive year.

The company was also ranked by the industry regulator as best in stakeholder engagement and support for vulnerable customers for the eighth straight year.

These achievements and more reflect our shared values and common purpose across PPL to deliver without fail for our customers, to exceed their expectations and to continuously improve.

Aware of the tremendous opportunity we have to make a positive impact on society, not only today, but for years to come, PPL also invested more than $3 billion in infrastructure improvements.

Our continued investments are aimed at strengthening grid resiliency in the face of worsening storms, incorporating automation, replacing and rebuilding power lines and substations and reshaping electricity networks to support the growth of renewables and other distributed energy resources.

In regulatory matters, we remain focused in 2019 on achieving balanced regulatory outcomes that will benefit our customers and our shareowners.

In Kentucky, we received Public Service Commission approval of a combined $187 million revenue increase, which supports additional improvements to the grid, our natural gas lines and our generation fleet.

New rates took effect May 1.

And in the U.K., we continued to actively engage with Ofgem to advance a balanced regulatory framework that will provide real value to customers, support the U.K.'s electrification and decarbonization initiatives and provide fair and reasonable returns to investors when the next price control review period begins in 2023.

Our engagement over the past year included meeting with Ofgem leadership and submitting responses to Ofgem's open letter consultation on behalf of both PPL and WPD, including our shareowners.

I'll note that the RIIO-ED2 framework released by Ofgem in December was largely in line with our expectations.

In summary, we're proud of our many achievements over the past year on behalf of PPL shareowners and customers.

Our performance is reflected in the numerous awards received throughout the year.

Looking ahead, we're committed to building on this momentum and adding to our long-term track record of financial and operational excellence.

Now turning to Slide 5 and our 2020 outlook.

Today, we initiated formal 2020 earnings guidance of $2.40 per share to $2.60 per share.

This reflects our updated foreign currency hedge position, which we increased following the U.K. election that finally led to Brexit last month.

Given the election result, we expect the U.K. business climate to remain strong as it has historically been.

Turning to our dividend.

Today, we announced we are raising the annualized dividend to $1.66 per share.

The increase announced today represents our 18th dividend increase in the last 19 years, and we remained committed to dividend growth.

In terms of network investment in 2020, we plan to invest an additional $3.3 billion in all of our utilities.

These investments will continue to support our efforts to improve customer experience and grid resiliency and advance a cleaner energy future.

Finally, as I touched upon earlier, we will remain engaged on the regulatory front to achieve balanced outcomes that benefit customers and shareowners.

Last week, the new CEO of Ofgem, Jonathan Brearley, announced his decarbonization program action plan.

Ofgem's plan over the next 18 months to make low-cost decarbonization a reality shows that the DNOs will play a critical role in the significant investment required to deliver clean energy and the U.K.'s net 0 carbon emissions target by the year 2050.

This supports what we've been saying that we see real long-term growth opportunities with our WPD business as the DNOs lead many of the decarbonization initiatives that will enable a net 0 carbon economy.

I'll now turn the call over to Vince for an operational update.

Vince?

Thanks, Bill.

As we turn to a new year and a new decade, I just want to express how proud I am of the operational excellence that our 7 utilities continue to deliver for our customers.

Our sector continues to rapidly evolve, and our teams are meeting the challenges and finding opportunities to leverage technological advancements and decarbonization initiatives that are driving real value for our customers.

We believe that PPL is well positioned to further enhance its networks and continue to build these utilities of the future as we look ahead.

I'd like to highlight some of the operational developments from this past year and briefly discuss our strategic priorities for each segment for 2020 and beyond.

I'll also provide an update on our 5-year capital expenditure plan.

Turning to Slide 7. Starting with the U.K., during 2019, WPD continued to demonstrate its leadership in support of the U.K.'s decarbonization goals.

WPD was the first U.K. network operator to publish an electric vehicle strategy, building on knowledge gained through the company's Electric Nation EV Smart Charging initiative.

The company has begun to proactively ready its network for increasing numbers of electric vehicles, anticipating the potential for up to 3 million EVs in our service territory by 2030.

WPD also continues to deliver an industry-leading innovation program, including finding ways to connect more distributed generation to local networks.

Through 2019, WPD connected nearly 10 gigawatts of distributed generation to its network, about 6 gigawatts of which was renewable energy.

In addition, WPD is leading the way in developing markets for flexibility services and demand response solutions to help maintain grid resiliency and control costs to the U.K. customers.

These flexibility solution should enable the deferral of some network spend, which Ofgem is keen to see the DNOs deliver.

As we look to the upcoming year, it's important to review how we are performing against our RIIO-ED1 business plan, and I'm proud to say that WPD continues to perform extremely well in RIIO-ED1.

In the most recent Ofgem annual report for electric distribution, WPD ranked first in customer satisfaction and customer minutes lost and ranked second in time to connect customers.

Our returns are middle of the pack with an RORE expectation of 8.4% on a real basis over the ED1 period.

I'll note that this equates to a nominal RORE of about 11% when including RPI inflation.

As we've indicated in the past, as the only fast track company in RIIO-ED1, we think the fact that we are the top-performing DNO group in the sector and only earning average returns will serve us well going into RIIO-ED2.

Our strategic priorities moving forward are to continue this high level of performance and continue our engagement with Ofgem to help develop the sector-specific methodology.

Our objective is to ensure RIIO-ED2 provides the appropriate incentives for DNOs to deliver on the initiatives required to achieve net 0 carbon emissions by 2050.

Turning to Slide 8. In Pennsylvania, PPL Electric Utilities continued to demonstrate its leadership in the deployment of smart grid solutions.

We currently have 4,500 smart switches installed on our grid.

Since 2015, this technology has helped us eliminate over 900,000 outages for our customers.

As we've discussed during the year, PPL electric has received numerous awards this year for its operational excellence and commitment to innovation including the deployment of a new distributed energy resource management system or DERMS and the development of groundbreaking technology that safely and automatically cuts power to downed power lines, protecting the public, first responders and our employees.

In addition, PPL Electric Utilities was awarded the most improved utility of the decade by PA Consulting.

The company is also substantially complete with the multiyear nearly $500 million project to install 1.4 million advanced meters for our customers.

Looking ahead, for 2020, we remain focused on executing on our substantial electric transmission and distribution investment plan.

The majority of the spend this year remains in our transmission business, which has been the fastest-growing business in our portfolio for a number of years now due to the ongoing needs to upgrade and modernize our transmission system.

This includes upgrading transmission lines and substations, replacing wood poles with steel poles and building new substations.

We've also invested considerably in our distribution network, also adding smart grid devices to the network, hardening the system, targeting our tree-trimming efforts and investing in new systems to automate how the network is controlled.

This investment has also resulted in significant reductions in the number of and duration of outages for our customers.

Going forward, we'll continue to deploy digital and cloud-based technology solutions to further automate the system to improve service even further for our customers.

From a rates perspective, our retail rates continue to remain competitive in the Mid-Atlantic region, thanks to our ongoing emphasis on integrating technology and efficiently managing costs, especially since we haven't had a base rate case since 2016.

Over the past decade, we've held our operating costs to less than a 1% increase on average each year.

We'll look to continue our efforts in this area as we don't expect another rate case to be effective within the earnings guidance period.

Moving to Kentucky on Slide 9. Louisville Gas and Electric and Kentucky Utilities continued to make progress on a multiyear $800 million project at cap and close ash ponds at our coal-fired power plant.

Overall, we are about 80% complete with the cap and closure program.

We also retired 272 megawatts of coal-fired generation at our E.W. Brown facility, raising the amount of retired coal generation to nearly 1,200 megawatts since 2010.

In addition, we secured Public Service Commission approval of a green energy tariff for businesses and continued to enhance our solar offerings for all of our customers.

We completed construction of the first phase of our subscription-based Solar Share program, and we have fully subscribed the second phase with construction expected to be completed in Q2 of this year.

Following up on a renewable energy RFP conducted in 2019.

In January, we requested approval of contracts to supply an additional 100 megawatts of as-available solar power to Kentucky customers.

As we move into 2020, we see a balanced mix of investment across our Kentucky utilities.

Over the past decade, we've had a significant portion of our capital devoted to improving the environmental profile of our generating units, which has supported reductions of SO2 and NOx emissions by approximately 90% and 80%, respectively.

We'll be completing the majority of these environmental projects to comply with current regulations within the next couple of years.

As the environmental capital requirements have begun to decline, we've been able to deploy capital to improving our electric and gas T&D networks with a focus on system reliability and automation that are already delivering real value for our customers as evidenced by 120,000 interruptions that have been prevented to date from our smart grid solutions.

All of these investments have supported rate base growth of over 7% per year, on average, over the past 20 years in Kentucky.

As we look forward, we are focused on a number of initiatives, including customer-focused programs, such as our green energy tariff as well as planning for the future investment cycle as it relates to generation resource planning.

We'll also be working on updating our integrated resource plan with a new IRP to be filed with the commission in late 2021.

We expect the new IRP will provide a better sense of timing for the next wave of capital deployment in Kentucky, related to the replacements of our coal-fired generating fleet.

I'll touch on this further in a few minutes.

Turning to Slide 10.

As the world focuses on climate change, PPL remains committed to advancing a cleaner energy future while maintaining safety, reliability and affordability for those we serve.

Today, we are updating our goals to reduce PPL's CO2 emissions.

Specifically, we raised our goal of reducing PPL's carbon emissions to at least 80% from 2010 levels by 2050 from our previous target of 70%.

The company also accelerated its previous 2050 target by a decade, and we are now targeting reducing carbon emissions likely 70% by 2040.

PPL has already reduced its carbon emissions by over 50% since 2010, exiting the competitive generation business in 2015, including nearly 4,000 megawatts of coal-fired generation and retiring 1,200 megawatts of coal in Kentucky.

We expect to achieve these further reductions through a variety of actions including replacement of Kentucky coal-fired generation over time with a mix of renewables and natural gas, while meeting our obligations to provide least cost and reliable service to our Kentucky customers.

Our updated targets are based on our ongoing resource planning activities and updated market data and trends in Kentucky.

Assuming we receive KPSC approval for the previously mentioned renewable PPA and if technology continues to improve and drive down the cost of renewables, it is certainly possible that we can achieve even greater carbon reductions than these targets, while at the same time, ensuring the best value and reliability for our customers.

We are confident, however, that these targets are achievable under current legislation and regulation as well as current technology and current economics.

Turning to Slide 11.

We also wanted to provide an overview of the near-term and longer-term opportunities to economically shift our business mix away from coal-fired generation.

As you can see from the chart on the left side of the slide, PPL's rate base already consists of more than 80% transmission and distribution in noncoal-fired generation.

Given that our significant planned investments over the next 5 years are heavily weighted towards additional T&D infrastructure, the percentage of rate base from coal-fired assets is expected to decrease even further in the near term.

In fact, only about 5% of our 17 -- of our $14 billion capital plan is for investments related to coal-fired generating assets.

Our current filed IRP supports the transition to cleaner energy, driven by technology and economics consistent with current policy and regulation.

As you can see, based on the chart on the right of the slide, based on certain scenarios from our latest IRP filed back in 2018, we could see some additional coal retirements in the back half of the 2020s with significantly more coal retirements in the 2030s.

These scenarios continue to evolve, and we are starting to see more momentum for renewables in the state, as evidenced by the results of the recent renewable RFP, where we are proposing to economically add a lower cost as available renewable generation resource, while reducing the amount of output from some of our higher cost fossil units.

We are not at a point where renewables can compete on a replacement capacity basis, as renewable plus storage options are not even competitive with our peaking gas plant.

With that said, it is clear that these factors are rapidly changing as we move through time, which requires us to continuously assess the most prudent strategy that's in the best interest of our customers, something we've always demonstrated.

Moving to Slide 12.

We've updated our capital expenditure plan and continue to see significant investment opportunities in our networks over the next 5 years, totaling about $14 billion.

We've increased our 2020 and 2021 projections by approximately $200 million each year from our prior estimates, primarily due to additional effluent limitation guidelines spend in Kentucky and a mix of timing-related investments in the U.K.

Our U.K. capital plan projects that we will be within 1% of our Ofgem-approved business plan for ED1.

This will strengthen our credibility with Ofgem when we file our RIIO-ED2 business plan.

Note that changing the assumed FX rate from $1.40 per pound to $1.30 per pound on our U.K. spend, reduced the 5-year CapEx projections by about $300 million.

We have not included the $300 million Kentucky AMI project in our forecast at this time, but that remains a potential upside opportunity for us as well as the other areas of opportunity noted on the slide, including decarbonization-related spending in the U.K. We believe these additional opportunities could be as much as another $500 million above within the 5-year capital plan.

Long term, we expect more than an incremental $1 billion of investment to be required over the 5 year RIIO-ED2 period to achieve electrification initiatives based on our initial estimates.

As I previously noted, we also believe the transition of our coal-fired generation fleet will be the next significant investment opportunity in Kentucky.

While this opportunity is outside of our 5-year capital plan under current scenarios, it's important to remember that this plan reflects assumptions based on today's views of future prices and market conditions, which could rapidly change.

What will not change is our commitment to our customers to continue to optimize our fleet and exceed expectations as we lead the evolution of our Kentucky operation, including the transition to less carbon-intensive generation resources.

So as we look at the diverse portfolio of businesses that we have, it's important to point out that each business is in a different stage of its investment cycle.

While U.K. RAV growth has been a strong 5% to 6% in ED1, we see that growth accelerating into ED2, beginning in 2023 as we fund the U.K. electrification initiatives.

In Kentucky, we see the initial stages of the Kentucky coal generation replacement strategy, likely starting in the mid-2020s, which will begin another period of significant capital investment.

And in Pennsylvania, we are expecting growth to likely slow in the next couple of years, following an extensive period of transmission spending over the last 5 years at almost $700 million per year.

It's -- the diversity of our portfolio of businesses combined with our culture of operational excellence and continuous improvement that will continue to deliver long-term value for our shareowners.

With that, I'll turn it over to Joe now to cover the financial review.

Joe?

Thanks, Vince, and good morning, everyone.

I'll begin with a brief financial overview on Slide 14.

And while PPL delivered an outstanding quarter of financial performance, earning $0.57 of ongoing earnings per share, I'll focus my review this morning on our full year results.

We have included a walk in the appendix of today's presentation and our news release for additional details on fourth quarter results.

Looking at the full year, we achieved 2019 reported earnings of $2.37 per share compared with $2.58 per share a year ago.

Adjusting for special items, primarily reflecting mark-to-market changes related to unrealized foreign currency economic hedges, 2019 earnings from ongoing operations were $2.45 per share, exceeding the midpoint of our forecast by $0.05 per share.

This compares to the $2.40 per share that we earned last year, which included significant weather benefits of about $0.08 per share.

Looking forward to 2020.

We announced the formal guidance range of $2.40 to $2.60 per share, which reflects updates for current market conditions and our foreign currency hedge position.

We also are updating our 2021 estimates, primarily reflecting changes to foreign currency forecast, which are lower than our prior forecast.

Let's turn to Slide 15 for an update on our earnings results for the full year.

Walking from our 2018 results on the left, we first made weather adjustments for comparability purposes of the underlying businesses.

As I mentioned, weather was $0.08 favorable compared to normalized weather results in 2018.

For 2019, we experienced slightly favorable weather.

The net result was a $0.07 per share decline year-over-year across all of our utilities.

We also adjust for the effect of dilution.

We settled the remaining 43 million shares on our forward equity transaction in November of 2019, which is the primary driver of the $0.10 per share of dilution year-over-year.

Segment allocation of dilution is included on the slide for your reference.

Turning to the individual segment drivers, which exclude the impact of these items, starting with the U.K. Our U.K. regulated segment earned $1.40 per share, a $0.12 year-over-year increase.

The increase in the U.K. earnings was primarily due to higher adjusted gross margins, primarily driven by higher prices due to the April 1, 2018 and 2019 price increases, partially offset by lower sales volumes and higher pension income.

In Pennsylvania, we earned $0.62 per share, which was $0.05 higher than our results in 2018.

Our Pennsylvania results were primarily driven by higher adjusted gross margins, primarily resulting from returns on additional capital investments in transmission, partially offset by year-over-year differences and reduced income tax rates due to U.S. tax reform.

The higher adjusted gross margins were partially offset by higher depreciation expense.

Turning to our Kentucky-regulated segment.

We're at $0.59 per share in 2019, a $0.05 increase over our results 1 year ago.

The increase was primarily due to higher adjusted gross margins, primarily resulting from higher retail rates effective May 1, 2019, and lower income taxes, primarily due to the Kentucky recycling credit recorded in the second quarter.

Partially offsetting these items were higher depreciation expense and higher interest expense due to higher interest rates and increased borrowings.

Results in corporate and other were consistent compared to the prior year.

The results were primarily driven by higher other income offset by higher operations and maintenance expense.

Turning to Slide 16 and our financial outlook for 2020.

PPL's growth is underpinned by continued operational excellence and organic investment at our regulated utilities.

Walking from our strong 2019 results on the left of the slide, I'll note that weather this past year was not significant compared to our forecast of normal conditions and results in only a $0.01 per share adjustment for comparability purposes.

We also project dilution of about $0.11 due to the November 2019 settlement of our May 2018 equity forward offering, which increases our 2020 average shares outstanding compared to 2019.

The allocations by segment are provided on the slide for your reference.

Excluding these 2 factors, we project growth at each of PPL's business segments.

The U.K. segment is expected to experience growth, primarily driven by higher base demand revenues due to the annual April 1 increases and expected higher foreign currency exchange rates, reflecting our solid hedge position for 2020.

These positive drivers in the U.K. are expected to be partially offset by lower revenues from true-up mechanisms related to cost of debt recovery, property taxes and sales volumes totaling about $0.10.

Lower pension income, primarily due to the significant decline in discount rates in the U.K. and a combination of other miscellaneous drivers such as higher depreciation, financing cost and taxes.

In Pennsylvania, we project an increase driven primarily by higher returns on transmission investments.

And turning to Kentucky, we project an increase from 2019, driven by higher retail rates, partially offset by higher depreciation expense.

In corporate and other, we project improved earnings driven by a number of items, including lower interest expense due to lower short-term debt post the settlement of our equity forward.

These drivers result in the midpoint of our guidance range of $2.50 per share.

Turning to Slide 17.

We have also updated our 2021 projections to account for current foreign currency forecasts.

Our prior earnings forecast of $2.50 to $2.80 per share reflected a foreign currency range of $1.35 per pound to $1.60 per pound, which was consistent with bank FX forecast at the time we initiated the earnings range.

Our updating earnings forecast of $2.40 to $2.60 per share includes an updated foreign currency range of $1.25 to $1.40 per pound, which is below the current forwards and market forecasts.

We are using these lower rates for the FX range given the expected near-term volatility as the U.K. works through the Brexit transition period during 2020, and we will be hedging 2021 during this time period.

The other drivers for 2021 highlighted in our previously announced forecast remained largely unchanged, with rate base still expected to grow at 5% to 6% and our expectation to continue to earn near our allowed returns.

Our 2020 and 2021 forecast continue to assume an immaterial amount of equity issuances, as previously indicated.

Let me provide an update on our foreign currency hedging status, which is on Slide 18.

For 2020, we were actively hedging during the fourth quarter and increased our hedge percentage by another 20%, bringing our hedge position to 90% of 2020 forecasted ongoing earnings.

The average rate for 2020, reflecting these new hedges is $1.48 per pound.

We were able to slightly improve on the average 2020 hedge rates by optimizing our hedge portfolio given the brief uplift in currency rates, following the positive U.K. election outcome and the strength in our 2019 results.

We continue to utilize options in our hedging strategy that preserve upside to the current market rates with about 1/3 of the 2020 hedge portfolio being option-based.

And for 2021, our hedge position is at 5% of forecasted earnings at an average rate of $1.33 per pound.

Again, we expect to continue layering in 2020 -- 2021 hedges going forward.

Turning to Slide 19.

As we continue our efforts to invest in our networks and earn our authorized returns, we remain committed to paying dividends to shareowners as we've done over the past century.

The January 1 dividend represents the 296th consecutive quarterly dividend paid to shareowners.

As Bill mentioned, we remain committed to dividend growth and today, announced we are raising the annualized dividend to $1.66 per share.

We will continue to assess the rate at which we grow the dividend going forward in the context of our yield and payout relative to our peers.

That concludes my prepared remarks.

And I'll turn the call back to Bill for some closing comments.

Bill?

Thank you, Joe.

Before we open up the call for Q&A, I'd like to take a moment to reflect on what has truly been a remarkable decade for PPL.

Over the past 10 years, we've doubled our market cap.

We've unfailingly exceeded the midpoint of our earnings forecast.

We've grown our dividend 18%.

We won 21 J.D. Power awards for customer satisfaction in the U.S. We've consistently ranked highest for customer satisfaction among the network operators in the U.K. We've invested $27 billion to make our network smarter, to improve reliability and to advance a cleaner energy future.

We've cut average customer interruptions by over 1/3 in the U.K. and by more than 20% in the U.S. since 2010.

All the while, we've kept electricity costs reasonable for our customers and remained deeply engaged with the communities we serve.

And last but not least, we have dramatically transformed PPL.

A decade ago, we were primarily a Pennsylvania hybrid utility facing stiff headwinds in competitive markets.

Today, we are one of the nation's largest investor-owned utility companies with 100% of its earnings, driven by stable, high-performing regulated businesses.

In short, we are stronger today than we were a decade ago.

We're better positioned to invest in the future.

And as we celebrate our centennial, we are poised to power progress for another 100 years.

When our directors first met a century ago, they did so at a pivotal time.

The country was beginning to move from a patchwork quilt of isolated lighting companies to a coordinated network of regional utilities, power plants and transmission lines.

Born in that moment, PPL would help drive that change, extending electricity service throughout the regions we serve, expanding to meet the needs and demands of a rapid industrial growth and just helping to improve quality of life for generations of customers.

Today, we again find ourselves at a pivotal moment for our industry, which is investing in new technologies to reshape not only how we deliver power, but how we produce it as well.

In this moment, we remain as committed as ever to powering progress, to fostering innovation to creating long-term shareowner value and to making a positive impact on society.

In closing, I'm proud of our past achievements, I'm equally excited about our future, and I'm convinced that PPL's best days are ahead.

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

(Operator Instructions) Today's first question comes from Ali Agha of STRH.

First question, I just wanted to reconcile your 2020 guidance of $2.40 to $2.60?

With the numbers you've been showing us for quite a while up until recently, a 2020 projected range of $2.54 to $2.58.

I guess, when I think about the midpoint, I know that was a narrower range, but the midpoint was certainly higher than what you're showing us today.

Could you just reconcile what changed from the numbers you've been sharing with us?

Sure.

I'll make a couple of opening comments, and I'll pass it on to Joe.

As -- and one of the things you just pointed out was the very tight range that we had established for 2020.

Having said that, we still are kind of within that range, but towards the lower end.

Operationally, when you look at the assumptions behind the 2020, we're largely consistent with the prior forecast.

The primary change was really a significant decline in corporate bond rates in the U.K., resulting in some lower discount rates, which had a negative impact on our U.K. pension obligations.

Those factors really resulted in about a $0.06 impact compared to our prior plan.

But as I mentioned, despite this, we're still in the prior range for 2020.

Joe, did you want to say anything more?

Yes, we -- Ali, we saw a sharp decline in corporate bond rates in the U.K. that lowered the discount rates resulting in the increased U.K. pension obligations under U.S. GAAP.

The discount rate declined by more than 100 basis points.

It went from about 3% to less than 2%.

And that's really what's causing the difference from our prior forecast.

And again, to Bill's point, operationally, everything else remains unchanged.

Got it.

Then second question, Vince, I just wanted to be clear, when you talked about the CapEx opportunities that you are seeing across the different utility segments.

Did I hear it right that over this 5-year period, '19 through '24 -- or '20 through '24, I should say, that you're seeing potentially another $800 million of additional CapEx?

Or was the number even larger than that?

I just wanted to be very clear, what's the opportunity size that you see that's not yet embedded in your official CapEx numbers?

Yes, sure, Ali.

In my remarks, I indicated that was about $0.5 billion, so $500 million.

$500 million.

But -- and I think separately, you also talked about $300 million of AMI.

That's not yet in there.

Is that correct?

Yes, that's part of the $500 million.

Oh, that's part of the $500 million.

I got you.

Okay.

And then last...

And the other thing I would note is that just changing that FX assumption from $1.40, our previous assumption down to $1.30, as indicated on our Slide 12, cut about $300 million from the forecast.

So depending on when we get out, particularly to 2022 and beyond to the extent the FX rate goes back up, that will come back into the forecast.

And we do think that there's a skew to the upside when it comes to the FX rate, given where we see Brexit today and U.K. political front.

So we're expecting some of that may come back in.

But that was $300 million alone.

Right.

And last question, Bill, to you.

I know in the past, you've talked about from your vantage point, you still think that the U.K. business is disproportionately too big as a contributor to earnings for PPL.

Just wondering how you look at that today, and is there any new tools available to you?

Or what's your thinking on how to correct that today, if you still think that it's disproportionately too large of a business mix for you?

Sure.

Well, first, I'd say we are comfortable with the current business mix and believe it will deliver long-term value for our shareowners and that there are many opportunities, as Vince described in his remarks.

As I have said in the past, the unprecedented U.K. volatility that we've been experiencing over the past few years, I would have preferred to be less weighted towards the U.K. But quite frankly, we probably share a similar view for any jurisdiction where we've got a significant weighting, such as in the U.K. I do think for those things that we -- were within our control, we've got a great track record of operational excellence and financial investments that I think are going to pay dividends for the future.

And I think the opportunities we outlined today will continue to enable us to be successful for a very long time.

Our next question today comes from Shahriar Pourreza of Guggenheim Partners.

I just want to just touch on sort of the guidance and your outlook, just a little bit deeper.

And obviously, if you just kind of look at your outer year plan, the CapEx steps down and remains flat, Kentucky rate base kind of declines.

There is a modest step-up in Pennsylvania.

Can you maybe just give a little bit more details and the puts and takes and what could move you higher?

And I'm kind of curious on when you can present the timing of an update understanding that you guys are very, very conservative when it comes to the outer years, i.e., like with the capital opportunities associated with EV deployment in the U.K. Why not have included some of this stuff in your capital outlook today?

Like why take such a conservative stance?

Yes.

So I'll make a comment or 2 and then turn it to Vince.

If you look at the overall CapEx plan, it's about -- and the rate base growth that's associated with that.

You're looking at, in my view, a minimum 4% rate base growth with earnings that will follow that with the caveat that, of course, exchange rates and pension deficits funding can push that higher or lower.

But I think in my view, because of the upsides that Vince talked about, I look at the plan, as a minimum 4%, probably more in the 4% to 6% over the longer term as we fill in some of the gaps with more -- certain projects and really [scrub] things a little bit better in the outer years.

As you indicated, we have historically been pretty conservative with our forecast, and we continue to be really driven by what we know about current projects, but also what we see as the current kind of FX rate, which, as you know, has been pretty volatile over time.

And again, I mentioned earlier that I believe we have a skew to the upside with the FX rate as the Brexit process becomes a lot more clear.

Vince, do you want to add anything to the potential upside?

Yes.

And Shar, specific to your question about kind of U.K. EV spend and how we're thinking about that, when we would update.

So the $200 million a year that we've included, so basically an incremental $1 billion that we're expecting over RIIO-ED2.

That's based on our initial estimates going into the electrification initiatives that would be required to be funded by the DNOs.

When you look at the process going forward for RIIO-2, right?

The sector methodology consultation will be coming out Q2, Q3 of this year -- this is on Slide 28, by the way, in the deck.

The methodology decision wouldn't be coming out until Q4, then the companies will be submitting our submissions in Q2 of 2021.

So to be honest with you, we're going through the process right now on planning for those submissions -- the business plan submissions, while we're consulting with Ofgem on the methodology.

And so I think we just need to get through that process a little more Shar, before we would, I think, update the view of EV or electrification spending going into ED2.

But to your point, I think there certainly could be an opportunity there for incremental capital, especially coming out of what Jonathan Brearley published really on his first day on the job with his decarbonization plan.

So we think that all fits very nicely into what we've been talking about.

But I think we need to get through the process a little more before we would go beyond our initial estimate.

Got it.

And then just sticking sort of with your conservative theme here just around the FX.

I mean you did highlight, obviously, you're taking a little bit more of a conservative stance.

But your assumptions do trail sort of consensus and forwards.

So just maybe talk a little bit about that at a deeper level?

And then what's sort of the timing of the '21 hedging program?

Are there any sort of any mandated thresholds?

Or are you able to keep it open based on kind of your fundamental views?

Joe, do you want to talk about the FX for -- to start and...

Yes.

So I guess, the first part of your question, Shar, on our forecast range relative to forward market spot rates and market forecast, we are lower than those for the reasons I said in my prepared remarks because we expect volatility in the exchange rate during 2020 as the U.K. continues through the transition period, and we will be hedging 2021 during that time period.

Bank forecasts are in a range of $1.35 to $1.45 for 2021.

So there's certainly some potential upside to our forecast.

And as we look to 2022, those bank forecasts are actually in the mid-1.40s range.

So the sensitivity of $0.01 of FX to $0.01 of earnings, that's $0.15 of upside if the bank forecasts are accurate in 2022 relative to where we sit today.

Got it.

And then just one last one.

Bill, I know you may or may not want to answer this, but I know the Board has been obviously very patient around how you guys are thinking about the stock and the valuation, but it does kind of still continue to trade, even if you look at it from a sum of the parts, multiple RAV basis, post Brexit.

Is there any other strategic steps that you can take to maximize value for shareholders outside of the plan you sort of present today and outside of the, obviously, incremental opportunities, given the fact that your plan is very conservative?

Well, obviously, I'm not going to speculate on potential M&A.

But when I look at the overall strategy for the things that we can control.

It's actually worked really well.

I think in terms of meeting all the things that we do control.

We obviously can't control the politics in the U.K. or the exchange rate.

I think that as we look forward, particularly as we get through 2020, it's very likely that we'll know a lot more about where Brexit ultimately lands and what the currency landscape looks like for sure.

Having said that, we're always looking at strategic or improvements to the base case that we can make that would create shareowner value.

So we'll continue to do that as a Board and as a management team, wherever -- and always -- if there's opportunities, I think, to create some additional shareowner value.

But we are always on the lookout for how do we improve the base case and the plan that we have, and we'll continue to do that.

And the next question today comes from Greg Gordon at Evercore ISI.

Actually, Shar actually set me up reasonably well there, we didn't even plan this.

When I look at the -- what you can control, obviously, operationally, you guys are still top-notch and -- across all your businesses.

But given the things that you can't control in '20 and '21.

And then the other thing you can only, to some degree, control in '22, which is the reset of under RIIO-ED2.

If I step back and look at this from a high level, is it fair to look at the big picture as the next few years.

You've got some earnings challenges that could create a more or less flat earnings profile, but the setup going into '22 and beyond creates a lot of growth opportunities from a decarbonization perspective both -- on both your platforms to start growing the business again at a pretty steady and long trajectory?

Yes, Greg, I would say, overall, the earnings from -- with the guidance we just gave here today from '20 to '21, at least looking at the midpoints looks flat as we indicated, depending on the FX rates, in particular, that could move up and show some growth.

I think the underlying businesses kind of to your point, continue to grow.

The rate base is continuing to grow.

And I think we are going to be set up well going into both decarbonization opportunities in the U.K. as well as domestically.

So I think that depending on your outlook for the FX, will dictate whether there's growth from 2020 to 2021.

Right.

And then, look, 2022, I know you haven't given guidance, so I'm not trying to bait you into giving me guidance, but we do -- we did go through -- in RIIO-ED1 when you transitioned, there was a reset year on revenues that you had to overcome?

And you've talked about on prior calls, how you can manage through fast pot, slow pot allocations and how you think that because you're a best-in-class operator, you'll do better-than-average on the outcome and that hopefully, the DNOs will do better on the margin than some of the other utility segments.

But it is fair to say that '22 has its own set of challenges as well that you're going to have to manage, correct?

Well, I think -- again, I think it really depends on what the forecast that you want to use for foreign currency rates because I think we're, in my view, kind of towards the low end.

If you look at what FX rates have done really since the election, there was a temporary bounce, but we really stayed around $1.30, it's pretty much been range bound for the last couple of months.

And you look at the forward forecast and a lot of them, as Joe indicated, are $1.35 and better, particularly much better when we get to 2022.

So I would expect just on the strength of the FX, that by the time we get to 2022, we'll see some earnings growth.

Joe, I don't know if you wanted to add.

If we just look at the underlying business absent FX, sort of, all else equal, given that we are talking about 2022, we would see growth in the businesses.

And really, the reason we're flat from 2020 to 2021 based on the midpoints is because of our strong hedge position for 2020 relative to the hedge position we have in 2021.

So that's really what's showing a flat year-over-year earnings is because we actually have a decline in the FX rate that's hedged and assumed in 2020 compared to what we've used in the forecast for 2021.

So I think there is -- on the underlying businesses we see growth, and then we'll have to see what FX does.

But certainly, as we move through 2020, you expect some clarity on the transition, get back into what we would expect and hope to be more normal times around the FX rate that could add additional growth on top of that.

Yes, Greg, it's Vince.

Just also the RIIO-2 transition is 2023, not 2022.

Oh gosh, sorry.

Yes, I think Bill or Joe's point on expected growth into 2022 is right on the money.

Got you.

And then I think back to the strategic decisions that you guys made when you decided to aggressively diversify and you bought the -- you bought more utility assets in the U.K., and you bought the Kentucky business, and you did it at a really opportune time to diversified away quite well from your exposure to the declining margin outlook for merchant power.

And I can't help but think that this decarbonization opportunity, which is going to be huge for your company in the -- in Kentucky and in the U.K. is also a huge opportunity and to build a little bit on Shar's question on strategic options, would that play into a decision to think about how you could potentially scale up with a partner to better -- potentially better execute on that transition?

Well, again, I probably I won't.

I shouldn't say, probably, I will not speculate on M&A.

But in terms of your underlying thesis around the decarbonization opportunity.

I agree with that.

And I believe that, particularly in the U.K., it's one of the reasons why we continue to have a positive outlook on the U.K. We've weathered probably the strongest of the storms so far, particularly with renationalization threats, which are now, obviously not a threat at all, given the strong election outcome in the U.K. So that risk is now behind us, and we still have the risk of Brexit that's keeping the markets a little bit jittery.

But beyond that, I think things will stabilize.

We'll have a much better view of not only RIIO-ED2, but also where the FX starts to land.

And I think for the going forward setup for the businesses, I think we're in very good shape.

Our next question today comes from Praful Mehta of Citigroup.

So maybe staying unfortunately with the theme on the strategic side.

And I guess one of the points that I took away from all the answers was, clearly, you would look to or at least benefit from reducing the proportion of the U.K. business.

So I just wanted to understand, I know that there was a constraint around selling the U.K. business because of tax and the leakage there.

If you were to partner up and use that to increase the size of the company, effectively reducing the proportion of the U.K. business, what kind of constraints should we think about on the tax side or other side that could limit any kind of strategic decisions around that decision?

Well, again, I'm not going to speculate around M&A.

However, as we've indicated in the past, an outright sale, either in full or partially of the U.K. business does create multiple challenges, all of which destroys shareowner value.

And if you look at the valuation of the company today, I think it's even more challenging today than it probably was when our stock was in that upper $28 to $30 range.

So in the upper 20s.

So I think with where we are today, that strategic decision continues to be a big challenge for us.

In terms of where the renationalization risk being removed, clearly, you've seen the values of the U.K. utilities move up significantly after the election.

And we still have what we believe is one of the strongest, if not the strongest distributed network operator in the U.K. So we believe, on its own, its value has increased.

But again, for us to deweight and sell the business, it would be destructive to shareowners.

Yes.

No, I get that.

And I remember that.

What I'm asking is, if rather than selling the U.K. business, PPL, as a whole were to partner with somebody else.

And that way, reducing the proportion of the U.K. business, do those same constraints apply on the tax side or any other side that we should be thinking about as we think about the strategic direction?

Yes.

Let me ask Joe to comment on that.

Praful, I mean, I think it's a very hypothetical question, and it would be dependent on the other party and a lot of aspects of them.

So it's really hard to give an answer in that.

I would say, we -- to Bill's earlier point, we look at all sorts of ways to create shareowner value, and obviously, tax implications and what that would do to shareowner value is something that we focus closely on.

But I think it would be very difficult to say in a hypothetical situation, and dependent on who the other party may be.

Fair enough.

And that makes sense.

Just a couple of quick cleanup questions.

On Slide 25, when I look at the rate base growth that you've projected through '24, I saw a meaningful decline in rate base growth, both for the U.K. business and Kentucky.

Obviously, this was slightly different timing, '18 to '23 versus '19 to '24.

But I'm just trying to understand the U.K. sounds like mostly pension-related and exchange rate and mostly exchange rate, I guess, and Kentucky, you guys have talked about.

Is there anything else we should be thinking about around the rate base growth profile as you think about the different segments?

So looking at that Slide 25, you can see there that the rate base growth in the U.K. is about 5.5%.

And it's not materially different, I don't believe, from where it was previously.

I think it might have been as high as 6%.

I think the biggest decrease is really in the Kentucky operation, where we're only projecting a 1.5% growth much about or much because of the reasons that Vince articulated in his opening remarks.

And in PA transmission, that's really been probably the larger decrease when you look at the overall mix, because for a period of time, we were growing double-digit there.

And then on the distribution side, I think it's been fairly consistent in the 4% to 6%.

So I think the 2 big changes are lower in Kentucky and lower on the Pennsylvania transmission side.

Yes.

Sorry, I did mean Pennsylvania transmission, sorry.

And then -- and finally, just on Slide 26.

When I look at incentive revenues, there's been a slight decrease in that projection as well for the U.K. So I just wanted to understand, is that also exchange rate or anything else on the incentive side?

It's purely exchange rate.

And our next question today comes from Julien Dumoulin-Smith of Bank of America.

Team, well done again.

And just going to play a little cleanup here on some of the last questions.

So can we talk a little bit more specifically on the time line here for AMI in Kentucky?

You talked about $300 million.

What's -- sort of procedurally, how do we get that done?

When?

I know there's been some talk historically about that.

And also, perhaps more importantly, decarbonization in the U.K., how do you think about that, the time line to be able to reflect some of that?

And what would that -- how would that manifest itself in terms of CapEx here, just to be a little bit more specific on that process?

And I got a follow-up.

Okay.

Sure.

Vince, go ahead.

Sure.

Julien, on the AMI, we would likely time that with the next rate case.

As you know, in Kentucky, we've been on this every other year rate case cycle.

The last rate case, new rates were affected May 1 of 2019.

If we were to continue that cadence (inaudible) you would see a rate case becoming effective in the first half of 2021.

So AMI, I would say we would factor that into that upcoming rate case.

And then I apologize, what was the second part of your question?

How does the decarbonization in the U.K. get reflected?

How does that manifest itself?

What kind of order of magnitude of spending are we talking about?

I know you guys talked about a $500 million upside in the 5-year outlook.

I mean when you think about decarbonization that probably seems like a bigger number here.

But I don't want to put words in your mouth.

And what time period?

Are we talking about in the current ED?

Are we talking about the next one, if you can provide some context?

Sure.

So the bulk of the incremental electrification CapEx, we've included in the ED2 initial estimate.

So we have about $1 billion over 5 years, call it, $200 million a year in that 5-year period.

And again, that's based on our initial assumptions.

The team is working through our business plan submission and that will be filed mid-2021 as part of the RIIO-2 process.

I would say depending how aggressive the government initiatives and Ofgem's policies become on the tail end of ED1, we could see deploying some capital in our current rate -- our current business plan time frame on electrification initiatives.

We think we have enough leeway within the existing plan that we would be able to divert some spending towards that.

Therefore, it wouldn't be a drag on the returns because, as you know, the revenues are kind of set for the ED1 period.

So we would have to basically shift capital away from other things to EVs.

We have innovation capital, other things that I would say are placeholders that we could redeploy there.

So I think we have enough flexibility in the back end of ED1, and you'll see a significant uptick in the ED2, which could -- once we get the business plan done, could be higher than what we're currently projecting at that $1 billion over the 5 years.

Yes.

It's probably obvious, but anything that we would shift from the current ED1 to ED2 to accommodate any electrification initiatives would wind up showing up in ED2 because presumably, it's all work that is necessary to be done, not necessarily for electrification, but for reliability and customer service reasons.

And our next question today comes from Anthony Crowdell of Mizuho.

I wanted to follow-up on Greg's earlier question.

If I think of '21 -- 2021 and '22 earnings.

In order to see some growth there, do I need to see -- in order to see like an earnings growth that matches rate base growth, do I need to see an improvement in the exchange rate?

No.

And then also on currency for, I think, some of the currency hedges are options where it preserves the upside.

Any thought on why not locking in '21 now since I don't know if there's many moving parts to '21 earnings with rate cases and also '22, I think you just mentioned, Kentucky, not locking those options now and preserving the upside, but maintaining a base versus if there's any further fallout in the U.K.?

The options, Anthony, are for 2020, not in 2021.

So I think given where the options are priced and where the spot rate is, we'll -- we prefer to let and see what happens within those option rates because we're protected on the downside.

Clearly, I could see some appreciation on the upside, but they're in 2020, not 2021.

Just to add to that, to the extent that we wanted to put options on for the bulk of 2021, that can be pretty expensive.

So we probably wouldn't look to do that unless there was some shift in our thoughts around the currency.

But for now, I think we'll look opportunistically to hedge in at $1.30 and above wherever we can.

And you'll see -- we'll start to ramp up a lot of our hedging by probably midyear.

And just lastly, if you could update us on the pension assumptions.

I don't believe there's a major change in the pension assumptions in the U.K., I thought it was like a 10% degradation from 2020 to 2021, but I just wanted to double check with you guys?

It's -- we had projected about $0.05 change from 2020 to 2021, and our assumptions haven't changed materially around that at this point.

And ladies and gentlemen, this concludes the question-and-answer session.

I'd like to turn the conference back over to Bill Spence for any final remarks.

Okay.

Thank you, Rocco, and thanks, everyone, for joining us today.

We'll visit with you again on the first quarter earnings call.

Thank you.

And thank you, sir.

Today's conference has now concluded.

We thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.