Q3 2019 Earnings Call
Good morning, and welcome to the PPL Corporation third quarter earnings Conference call.
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I would now like to turn the conference over to Andy Ludwig Ludwig Vice President of Investor Relations. Please go ahead.
Thank you Chad good morning, everyone and thank you for joining the PPL conference call on third quarter 2019 financial results.
We provide flights this presentation and our earnings release issued this morning on the Investor section on our website.
Our presentation in earnings release, we feel that Scott during today's call contain forward looking statements about future operating results or other future events.
Actual results may differ materially from forward looking statements.
Please refer to the appendix of this presentation and PPL, that's easy 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 GAAP measure you should refer to the appendix this presentation and our early arbitration.
During the call over to build PPL, chairman and CEO .
Thank you Andy and good morning, everyone. We're pleased that you've joined US for third quarter earnings call with me today, our Vince Sorgi PPL, President and Chief Operating Officer, Joe First thing Chief Financial Officer.
Ken and Paul Thompson, the heads are U.S. utility businesses and filled Swift head of our western power distribution business and the UK.
Moving to slide three our agenda. This morning begins with highlights of our 2019 third quarter earnings results and a brief review of operational and regulatory developments.
Joe will then provide a more detailed review third quarter earnings as well as an update on our foreign currency hedging status.
As always we'll leave ample time to answer your questions.
Turning to slide four today, we announced third quarter reported earnings of 65 cents per share, resulting in total dollar 89 per share. The first nine months of 29 team.
Adjusting for special items, primarily related to unrealized gains on our UK earnings hedges third quarter earnings from ongoing operations were 61 cents per share compared with 59 cents per share a year ago.
On a year to date basis through September total ongoing earnings were $1.80 acre share, which was even with last year on a per share basis and in line with our expectations.
Based on our solid financial results through September we have narrowed our 2019 guidance range did $2.35 per share to $2 at 45 cents per share maintaining our midpoint of $2.40.
In addition, we remain on track to invest 3.3 billion and infrastructure improvements during 2019.
Looking beyond 2019 today, we also reaffirmed our projection of 5% to 6%.
Okay and annual earnings growth rate per share through 2020 measured against the midpoint of our original 2018 earnings forecast of $2.30 per share.
In addition, we maintained our 2021 earnings forecast of $2.50 to $2, an 80 cents per share.
We continue to monitor macroeconomic factors for potential impacts on our earnings projections, including impacts on currency exchange rates inflation in the UK and interest rates.
Shifting to focused operations PPL continues to modernize and reshape the grid investing in infrastructure and technology.
Further strengthening grid resilient improved service to customers and enabled the transition to a cleaner energy future.
And the third quarter PPL electric utilities near completion of a multiyear advanced meter replacement project in Pennsylvania.
This 470 million dollar project involve the installation of 1.4 million advanced meters.
These meters enable us to respond more quickly and efficiently the customer requests by remotely connecting and disconnecting service. They also provide customers with more detailed usage information to help them make wide energies that decision.
They also alert us when powers out, enabling us to respond more quickly to notify customers when they're not home and to better pinpoint problem areas.
In addition, they help us to monitor power quality and better identify and address potential problems before the impact electric service.
We expect to complete the project. This year, it's yet. Another example, our ability to execute large scale capital projects on time and on budget.
Definitely PPL electric utilities was recognized in October by the association of Edison illuminating companies for groundbreaking technology, that's safe way and automatically cuts power to down power lines protecting the public first responders as well as employees.
Safety is paramount to our everyday operations and we're very proud of our team for developing this innovative technology that will enhance the safety of her distribution network.
We expect to have this technology deployed and about 1500 locations across our Pennsylvania service territory by the end of this year.
In Kentucky, Meanwhile, the oil gas and electric company and Kentucky Utilities company continue to look for opportunities to economically I'd clean energy for our customers.
The company's completed construction of a new community solar facility in late July .
This 1400 panel rate is the first up eight plan solar share developments that will provide an option for customers to support local solar energy without installing equipment on their properties.
Were very close to the beginning to be getting the installation of the second solar share array as response from customers has been strong.
In addition, Kentucky utilities announced an agreement to build own and maintain a solar array at the makers Mark Bourbon distillery operation and Loretta, Kentucky as part of the utilities business Solar program.
The company expects to complete construction by the ended the year.
Our continuous investment in our reliable electricity system in Kentucky also enables us to continue to pursue these efforts are economically advancing renewable generation and this data Kentucky.
Shifting to the UK and a brief regulatory update as we noted on our second quarter call off Jim formerly kicked off the consultation process for the real easy to price control in early August .
We've since reviewed off gens open letter, which outlines its approach to setting the next price control and we submitted responses on behalf of all stakeholders that both western power distribution, and PPL Corporation, including our shareowners and Ppls response, we highlighted the real value that real.
Anyone has delivered and continues to deliver far you can't customers.
For example of customer interruptions are down 11% on average.
Outage durations have fallen by 9% customer service scores are very strong with distribution network operators, earning on average and 8.7 out of 10 rating from our customers. Meanwhile, Dnos have continued to invest in network improvements and innovation.
For years into the real easy one price control customers are receiving high levels of service and performance and then our view the focused in Rio 82 should be to be building building. Upon the success of REO EDI, one and refining the framework where needed.
As stated in our comments, we welcome the opportunity to support UK de carbonization and electrification initiatives that will play a critical role and achieving the government's target of net zero emissions by the your 2050.
We forecast that a significant amount of capital will be required to be invested in the distribution networks to advance these objectives.
We believe it's critical that real easy to provide dnos fair and reasonable returns no attract and sustain the investment necessary to achieve this transition to a low carbon economy.
And we believe the incentive scheme in Rio BD too must drive both innovation and outputs that create long term value for our customers and enable top performers like W.P.D. to earn strong returns.
Much of these concepts have been echoed by our investors and we provide it off Jim with a summary of that direct feedback as well.
In W.P.D. is comprehensive response to the consultation questions. We've highlighted areas for improvement and offered area ideas on how off Jim can achieve its objective of continuing to drive efficiencies, while preparing the network for the future.
Off Jim is expected to issue its framework decision by the end of the year.
As we said on our last call. We believe off Jim agrees that distribution networks are critical to enabling the shift towards a more sustainable energy future.
We expect that off Jim will produce the framework necessary for Dnos to support de carbonization objective and incentivize the level of investment required to do so.
And we believe off Jim will be focused on differentiating returns among electricity dnos, providing substantial opportunities for outstanding performers like W.P.D. as we enter into REO EDI too.
With that I'll turn it over to Joe for me more detailed financial overview Joe.
Thank you Bill good morning, everyone, let's move to slide five for an overview of third quarter segment results.
As Bill mentioned PPL delivered third quarter 2019 earnings from ongoing operations.
61 cents per share, which was two cents higher compared to third quarter of 2018 and inline with our expectations.
Our strong results more than offset two cents from share dilution and over the quarter. There was a one cents benefit from weather related variances compared to the prior period.
Well there was about two cents favorable compared to our forecast for the third quarter of 2019, primarily in Kentucky, where cooling degree days were about 30% higher compared to normalized levels.
Turning to our segment results.
Our UK regulated segment earned 28 cents per share a onetime decreased compared to the same period, a year ago, excluding the impact of dilution.
The decrease in the UK earnings was primarily due to lower sales volumes and lower realized foreign currency exchange rates compared to 2018.
Third quarter, 2019 average rate of $1.26 per pound compared to $1.34 per pound in the third quarter of 2018.
These factors were partially offset by higher prices do the April one 2019 price increase at higher other income due to higher pension income.
Moving to the Pennsylvania segment.
Our PVA regulated segment earned 16 cents per share in the third quarter of 29 team, which was even compared to the third quarter of 2018.
Higher adjusted gross margins, primarily due to return by additional capital investments and transmission are primarily offset by higher operation and maintenance expense and several other items that were not individually significant.
Turning to the Kentucky segment.
Kentucky regulated segment earned 20 cents per share in the third quarter 2019, a three cents increase compared to third quarter of 2018, excluding the impact of dilution and weather.
The increase was primarily due to higher adjusted gross margins, which reflect higher retail rates approved by the kps. The effective may one 2019, and lower operation and maintenance expense, primarily due to lower storm costs.
As positive drivers were partially offset by higher depreciation expense due to additions to PPV and higher depreciation rates.
And finally, corporate and other remain relatively even compared to the same period a year ago.
As Bill noted, we narrowed our 29 Q forecast range due to our strong third quarter performance, which positions us well for us to achieve our earnings forecast for this year for your convenience a walk for the year to date results is available in the appendix.
Before I turn the call back over to Bill Let me provide an update on our foreign currency hedging status, which is on slide six.
For the balance of 29 team, we continue to be 100% hedged for ongoing earnings at an average rate of $1.45 per pound.
For 2020, we increased our hedge percentage by 7% and our 2020 ongoing earnings are now 70% hedge.
The average rate for 2020, reflecting these new hedges remain $1.46 per pound.
We were able to maintain these average hedge rates by optimizing our hedge portfolio given the recent uplift and currency rates following the momentum surrounding Brexit and strengthen our 2019 results today.
We continue to utilize options in our hedging strategy the preserve upside to the current market rates with about one third of the 2020 hedge portfolio being option based and we remain open in 2021 as Bill mentioned, we'll continue to monitor Brexit developments and fluctuation in currency exchange rates, while we evaluate potential impacts to our earnings projection.
The flexibility our hedging program and they will have to take an opportunistic approach as we continued to assess the dynamic political situation.
We believe we're well positioned to manage this uncertainty in the near term through our hedge position.
We're optimistic that the market will rationalize the currency rates higher than we see today and continue the recent upward trend as UK moves closer to sort of Brexit resolution.
That concludes my prepared remarks, I'll turn the call back over to build for the question and answer peers, though.
Thank you Joe in closing our third quarter results exemplify our continued commitment to delivering outstanding operational performance.
We remain solidly on track to deliver on our 2019 earnings guidance as we continue to invest in a sustainable energy future as we strengthen grid resiliency and reshape electricity networks to enable a low carbon future I'm very proud of the direction. We're headed as we look to close out 2019 with continued strong performance.
With that operator, let's open the call up for questions. Please.
Thank you.
We will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad, if you're using to speakerphone. Please pick up your handset before pressing the key.
He said anytime a question has been addressed and you would like to withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble our roster.
[noise] [noise]. The first question will come from Ali Agha with Suntrust. Please go ahead.
Thank you good morning, Marni Ali.
Morning.
First question can you give us an update on your latest thinking around your UK operations and any strategic actions you may take to address the investor concerns on valuation discount that you're seeing any or stopped I know there's been some news stories out there, but anything you can share.
But does anything new opportunities on anything that you and you know you're looking at today.
I appreciate the question, but as I'm sure you can understand we don't comment on market rumors or speculation and that's consistent with our longstanding policy as for the overall strategy. We've discussed our thoughts extensively on past calls and nothing has changed from that perspective, and as we've said the company.
He continues to operate exceptionally well and we believe the current business mix and plan will generate long term shareowner value.
Understood fast enough.
Second question as you mentioned.
Expecting me.
Same book a decision from a off Jim.
To this yet.
Can you just highlight for us.
From from your vantage one what are these sort of the important.
Data points, you expect to get summed up in this decision.
As it relates to your business I'm thinking about Rio two et cetera.
Sure I'll make a general comment and then I'll turn it over to fill to maybe give you a highlight on some of the specifics that we're looking at as as we go into the framework discussion with off Jim you don't since the process just kicked off there's no major update at the moment, but we do remain encouraged by continued dialogue with all.
And as they recognize that the distribution networks are an integral part of the future of the UK energy goals to de Carbonites the country and we're going to continue to remain engaged with off jam and all stakeholders as we established.
As framework for the next price control review as for the specifics. We're looking at filled that you want to make a couple of comments there, yes, I'll take that the key things like 30 days at the moment the actual ER.
A second methodology consultation is actually nexgen, when we got more detail on on the on the financial package and everything else right now all position is very much a right.
You know folks in off jam on the body TV one he's working is working incredibly well on that for 82 should be a progression from 81 automotive sort of a step change away from it.
As bill alluded to that is in his opening remarks in terms of outcomes for our customers.
The interruptions on minutes.
Not to be diamond availability of electricity is running 99.99%.
Tend to customer service.
We continue to drive that up with W.P. denied.
I don't know around 90% Oh sector has moved up to write about 87%. So oh, okay messaging, but off gems, that's been very much around progressing into 82 with good good incentive package, reflecting the de carbonization agenda.
And we see that as the main adjustment going forward, but in terms of.
Ah decisions in terms of cost of equity and everything else. We once we won't see that into next year.
You got your last question Bill.
Yes, the 15 million of Capex that you highlighted taught us up to 23 can you give us some sense so.
As you look at customer needs et cetera, what kind all potential upside there could be.
The I'll be your line is when you receive that drawdown and no is that 4.7% rate base gave it really realistic at the end of the Dave.
Can you give us some sense of where what kind of opportunities out there on the Capex front.
Sure well the capital plan that you have in front of you today reflects only you identified projects and there are certainly opportunities that could arise as we execute the plan.
At the back end of the plan as you know.
Those potential opportunities within that five year time horizon could come from a couple sources one would be further grid resiliency efforts in both Pennsylvania, and Kentucky future am I deployment in Kentucky, which we've talked about in the past.
Potential renewables expansion I would just stay in general across the board, perhaps other generation modifications in Kentucky that could be required by any new environmental regulations I think as you probably know our capital plans in the UK are essentially said until the end of Rio EDI one.
And we do expect beyond that timeframe beyond Breo 81 that there could be very significant capital investment opportunities to meet the required electrification initiatives.
To allow the UK to achieve its recent commitment of a net zero missions by 2050.
So.
That's those are the areas that I would probably highlight at the moment.
Yeah I.
No I mean, no none of it comes to fruition, but just essential the size of that bucket. That's looking at these opportunities.
Well I would say that they would certainly be in a probably 100 million.
Dollars versus the you know tens of millions of dollars. So I think particularly as it relates to the UK. We're looking at something that that could be several hundred million dollars incremental per year.
Depending on how aggressively off Jim I would like to go for the.
Carbon reductions that are that the country is already established as a target.
Thank you you're welcome.
The next question will come from Julien Dumoulin Smith with Bank of America. Please go ahead.
Morning, guys is actually Ryan Greenfield on for Julien.
Thanks for taking my question, Germany.
So can you guys just give a little more color on the hedging strategy and the current environment. It seems like you guys are being pretty patient I can you just kind of elaborate there given the improving parents as of late.
Sure I will ask Joe to comment on that short Theres been no real significant change to our hedging strategy, we are being patient and we continue to monitor.
Brexit situation at potential impacts from the pending UK elections, and the January Brexit that line, where the prospects of no deal Brexit greatly reduced.
Current probabilities that 90% for a deal.
Or no Brexit at all for both of those would be positive to the pound. So current forecasts 0.2 upside relative to the current FX rate into $1.30 $5 40 area. So we'll go and continue to wait and see how these events play out over the next several months.
Opportunistically later on hedges that if the opportunity presents itself.
Got it that's helpful and then how real do you guys perceive nationalisation risk given the latest development.
Well I think that risk while we have always said we believed to be extremely low has has gone even lower.
Labour Party has really dropped and ER and the polls there manifesto could only be really achieved if they went out outright majority in the election that is very unlikely their best shot would be to form a coalition government and very likely.
Okay. The coalition partner that they align with would not be probably.
Likely to want to sign on to our Renationalization.
Manifesto, so we believe that.
Things from our perspective are moving into right direction that that risk continues to go even lower.
From a pretty low starting point to begin with.
Got it thanks for the time you're welcome.
The next question will be from pro full Mehta with Citigroup. Please go ahead.
Thanks, So much high guys good morning.
Hi, So maybe just on the foreign exchange side and the hedging that you talked about you reiterated your guidance for 21 can you just give us a sense of what's embedded into that in terms of the range on the foreign exchange side for 21.
Yes, we are using problem, it's Joe we're using the forecast that we had for FX rates at the time, we gave that guidance, which was a $1.35 to $1.60.
Got you said the lower end of that is $1.35, depending on where that goes obviously deep the estimates can move as well I guess.
That's correct.
Gotcha.
Alright, and then secondly in terms off the strategic side I lost the more generic question. If that's okay. That's what I'm trying to get a sense of is I know that in the boss you've looked at the UK strategically and said that the tax leakage has been a challenge.
If there is somebody who can help offset that tax leakage, but using tax assets of their own is that something you see as valuable as a strategic opportunity or do you not really consider that as a as an opportunity from your perspective.
Well as I said I'm not going to speculate on the strategic Brian .
We have mentioned in the past that we continuously look for opportunities.
You know whether their tax related or not to.
To take strategic action that could.
Certainly improve the shareowner value.
As we've done over the past decade, so from that perspective, nothing has really changed.
Gotcha and just following up on that.
Do you see.
From an end buyer interest perspective on the strategic options in the UK.
Would you consider now to be a good time or do you think that there's just so much uncertainty on Brexit that if you have to do something you're really not.
Nobody has gone really good clarity on it or do you see that Oh that is there no different perspective on timing around something to do with the UK.
Well I would say that you know we have not tested the market on an outright sale of our UK businesses at this time and I think to your point. This may not be the best as times, given we're very close.
To saying the outcome of Brexit and I think it's clear from our perspective relative to Brexit that you know either way that the.
The general election turns out we think the pound is going to strengthen our once the uncertainties of Brexit removed and and it'll be clear I think you know if you believe the polls and if they ultimately proved <unk> correct. The Conservatives will win an outright majority and it's very unlikely labor party could achieve them.
Majority and as you also probably no that one of the overhangs on all the utility businesses in in the UK has been on the threat of outside Renationalization, which as I indicated earlier.
It is dropping pretty significantly in our view.
Gotcha, that's super helpful and congratulations thank you. Thank you.
Next question will be from Greg Gordon with Evercore. Please go ahead.
Hey, good morning, good morning, Greg.
You guys I'm, you know I'm noticing that you're you're talking about in Kentucky, you know on the margin.
The you know, they're embracing more renewable energy alternatives its been a close centric state.
Can you talk about what your short medium longer term plans might look like.
You know maybe not in this next rate case, but maybe and as you think about the mid to late 2000 Twentys with regard to.
Aspirations to continue to push through a green agenda in that state and what it might mean for Rebased growth.
Sure.
Paul do you want to comment on kind of the landscape in Kentucky, and what you see on the ground there.
Certainly no again this is Paul Thompson.
We have a.
Investor I mean, a integrated resource plan that of course, we do try and land and it still has coal as our lease cost.
Resource going out into that late twenties.
Early thirtys only we might see some more change.
But aside from that we're looking at the market all the time and as Bill said earlier looking for economic advantages for the customer. So one of the thing that we're doing now as we've commented on is.
Going to test the market with an RFP for renewables.
But that out in February .
That was for upwards of 200 megawatts.
We're still processing that but.
Based on that we expect to see some filings to move forward on some more.
Renewable energy that is economic to that to the customers that.
So things like that in the near term, we're going to continue to do.
When you get out into the later 20 <unk>.
We had in our climate assessment report we've talked about.
As coal become not economic for whatever reason or ages to the point of not being able to the economically a retrofit it et cetera, we will likely be looking at renewables and or gas. The economics may dictate. So I think we're trying to stay on the forefront.
What's economic to the customer and some of this renewable certainly candy and that's what we're going to try to keep doing in state.
Yeah, I would just that Greg that I think that what we're saying based on some modeling we are doing and other things is that it may not be that we actually shut down some of these larger call stations, but we supplement them with renewable energy such that the output.
Coal based output may drop, but it could be that for the customer as Paul mentioned could be still economic to to kind of pair that base load generation with with some of that's variable generation.
And that that could be I think a win win for the customers.
Good way to balance the reliability again, yeah cleaner users.
Thank you very much guys. Okay, great. Thank you.
The next question is from Paul Patterson with Glenrock Associates. Please go ahead.
Hey, good morning, good morning, Paul.
All my questions have been answered, but there was this discussion you guys made about this innovative technology regarding down power lines and cutting off the power to it.
And.
Did you guys were talking about it in the context of a first responders and stuff but.