Q3 2020 PPL Corp Earnings Call
Good day and welcome to the PPL Corporation third quarter earnings Conference call.
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I would now like to turn the call <unk> Vice President Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining the PPL conference call on third quarter 2020 financial results.
It provides watching this presentation and our earnings release issued this morning on the investors section of our web site.
A presentation and earnings release.
Which we'll discuss during today's call.
James 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 that Tc pipelines for.
For a discussion of factors that could cause actual results to differ from the forward looking statements.
We will also refer to non-GAAP measures, including earnings from ongoing operations and adjusted gross margins on this call.
A reconciliation to the comparable GAAP measures.
If you refer to the appendix of this presentation.
I'll now turn the call over to Vince Sorgi, PPL, President and CEO.
Thank you Andy and good morning, everyone.
We appreciate you joining us for our third quarter earnings call.
With me today are Joe Bergstein, our Chief Financial Officer.
Got you and the head of our Pennsylvania utility business.
All tops in the head of our Kentucky utility business.
Elsewhere, well ahead of our UK electric distribution business.
Moving to slide three.
Begin this morning with brief highlights on third quarter earnings results and our continued strong performance during October 19 pandemic.
I'll share a few updates on regulatory BSG related matters.
And Jeff will then provide a more detailed overview of the third quarter financial results and as always we'll leave ample time for your questions.
Turning to slide four.
Today, we announced third quarter reported earnings of 37 cents per share.
Adjusting for special items and.
Merrily deferred tax adjustment in the UK based on the 20, Twond finance and an unrealized losses on foreign currency economic hedges third quarter earnings from ongoing operations were 58 cents per share compared with 61 cents per share a year ago.
At a high level results for the quarter were in line with our expectations.
I'll note that the lower earnings compared to last year includes two cents of lower volumes in the UK, which will recover in future periods.
And one cents due to the timing of our estimated federal income tax computation, which will reverse in Q4 Joe.
Joe will cover the financial results in more detail in his section.
Regarding a co good update.
Throughout the quarter, we continued to deliver strong operational performance, providing outstanding customer service and reliability.
At the same time, we remain focused on innovation and building for the future.
In September we launched a new digitalization strategy to me.
Strategy focuses on transforming the way, we develop and operate the network.
Power customers drive greater efficiency and deliver faster de carbonization.
And in Pennsylvania. During Q3, we reached the 1 billion Mark for customer outages avoid as a result of our investments in automated power restoration technology.
Regarding customer sales during the quarter residential load continues to be stronger than our weather normalized forecast driven by sustained work from home measures and all of our service territories.
First we see United demand remained lower in all three business units, albeit less pronounced in Q3 than had been really even the pandemic.
From a financial perspective, we are well positioned to weather. The continued economic downturn, we've maintained a strong liquidity position of over $4 billion.
Cash receipts remain steady and our capital plans remain largely intact.
And that's the moratorium are starting to look across our U.S. service territories, we will comply with all state utility Commission requirements and continue to work with our customers to maintain uninterrupted electricity and gas service.
This means offering flexible payment plans connecting our customers with agencies and programs that can provide assistance and working with them to address overdue balances before they become a manageable.
Service terminations are always the last resort.
Overall, we continue to believe the full year impacts of code at 19 will be manageable as we close out the year.
As a result, we narrowed our forecast range to $2 and $42.50 per share.
The prior range of $2 and $42.60 for sure.
We continue to expect to track towards the lower end of its guidance range due to the impact of code at 19 and warmer than normal weather during the first quarter.
Lastly on this slide I would note that the UK sale process remains on track and we continue to expect to announce a transaction in the first half of 2021.
Moving to slide five.
Starting with key regulatory developments.
On October 1st W.P.D. responded to auctions RIIO edone to sector specific methodology consultation.
Indicating for the continuation of a strong incentive based regulatory regime that supports the best outcomes for our customers in terms of low prices and high quality service.
We believe REO you do one largely achieved this balance and that the basic structure up the real easy one regime should probably remain intact under you chip.
Have you produce responses to the consultation focused on several areas, where we believe off gentry reconsider its position and the robustness of its supporting evidence before making its methodology decision.
In the end we continue to believe in off Jim has made it clear that dnos will be critical to supporting decarbonization efforts in the UK to deliver a net dot com.
Based on our discussions with off Jen, we expect the incentive scheme for 82 to continue to play a significant role in the overall returns for electric distribution companies.
And we expect that W.P.D. will have the opportunity to reasonable returns and invest significant amounts of capital Caribbean 82 and beyond.
Moving forward W.P.D. will remain very focused engaged with its stakeholders and auction.
To ensure it delivers a plan that will achieve ukase ambitious carbon reduction goals.
Well, Jeff is expected to issue its really easy to sector specific methodology decision in December.
Another UK developments, the competition and markets authority or see it may issue.
She had a recent provisional ruling that supports more stable returns for regulated utilities and the UK to incentivize appropriate levels of investment.
C N a ruling concluded that the water sector regulator awful lot went too far in its efforts to sharply reduce returns for water utilities.
We expect the provisional ruling will be one that ofgem studies closely as it nears its decision on the Rio two final determinations for the gas and electric transmission sectors and ultimately for the electric distribution sector.
Turning to the U.S. the FERC on October 15th issued an order in a complaint filed by a third party challenging PPL electric utilities base return on equity for transmission.
The FERC order sent to complain to settlement procedures.
No settlement can be reached the case will go to the public hearing.
We continue to believe that PPL electric utilities current transmission return on equity is just and reasonable and that complaint is without merit and based on flawed assumptions and calculations.
Also in the U.S. on October 23rd LG any k. you notified the K.P.S.C. at the company's intent to file a rate request later this month.
As part of the rate case, we.
We will be applying for approval to deploy advanced metering to further enhance grid automation and reliability in the state.
Assuming the maximum suspension period for such a proceeding the resulting base rate changes would be effective July 1st 2021.
Shifting gears to a few notable highlights related to our sustainability efforts and governance update.
In August we announced that we joined in exciting new initiative to accelerate the development of low carbon technology.
The low carbon resources initiative led by the electric Power Research Institute and the gas Technology Institute focuses on identifying developing and demonstrating affordable pathways to economy wide de carbonization yeah.
Yeah, Alyson anchor sponsor for the five year program, which supports our clean energy strategy.
At a high level that strategy is focused on decarbonizing ppls own generation.
Carbonize anymore non generation operations, enabling third party de carbonization, and advancing research and development into clean energy technologies.
As we've shared previously PPL has set a goal to reduce its carbon emissions by at least 80% by 2050.
We're confident this goal is achievable with today's technology at the same time, we recognize that going for faster will require new ideas, new technology and new systems that can be delivered at scale safely reliably and affordably for those we serve.
We also remain squarely focused on diversity equity and inclusion as part of our long term corporate strategy.
I'm pleased to share that PPL has been named best place to work for people with disabilities.
In July the company earned top score of 100% on the 2020 disability equality index the nation's most comprehensive annual benchmarking tool for disability inclusion.
Yeah. Its top scores that are sold to policies and practices that we've put in place to promote the success of those with disabilities.
And it's just the latest recognition of PPL policies focused on ensuring all employees have the opportunity to succeed.
Earlier. This year for example, PPL was named the best place to work for LGBTQ quality by the human rights campaign after achieving a perfect score on their corporate equality.
Moving forward, we will continue to work with employee led affinity groups better enable all employees to reach their full potential.
In other updates PPL recently earned a trendsetter ranking by the Cpis declined index, which benchmarks political disclosure and accountability policies and practices, leading U.S. public company.
We believe it's important to be transparent on these matters highlighting one of our core values of integrity and openness and our overall compliance and ethics commitment that is supported by robust internal controls.
Lastly, Ppls board of directors appointed our baby as a new director effective October 1st.
That brings to the board a wealth of knowledge and experience with regulated utilities and the energy industry and we're certainly glad to have him on board as we strategically repositioned PPL for the future.
With that I'll now turn it over to Joe for a more detailed financial update John.
Thank you Vince and good morning, everyone.
I'll cover our third quarter segment results on slide six.
First I would like to highlight that the estimated impact of covert on our third quarter results was about four cents per share, which was primarily due to lower sales volumes in the UK and lower demand revenue in Kentucky.
This is less than the six cent impact we experienced during the second quarter.
Merely due to the improving electricity demand that Vince mentioned earlier in his remarks.
As a reminder, the majority of this impact is recoverable fire the UK decoupling mechanism, which adjusts revenues on a two year lag.
Turning to the quarterly walk starting with the Q3 2019 ongoing results on the left we first separate the impact of weather and dilution for comparability purposes of the underlying businesses.
During the third quarter, we experienced a two cents unfavorable variance due to weather compared to the third quarter of 2019, primarily in Kentucky.
We experienced substantially higher degree days in Kentucky during the third quarter 2019 that led to a favorable variance last year.
Weather in the third quarter of 2020 was about one cents favorable overall compared to plan, primarily due to stronger load in Pennsylvania versus normal due to the warmer conditions in July.
In terms of dollars dilution during the third quarter, we continued to recognize the impact of the November 2019 draw on our equity forward contracts, which resulted in dilution of about three cents per share for the quarter.
Moving to the segment drivers excluding these items.
UK regulated segment earnings increased by one cents per share compared to a year ago.
Factors driving the UK earnings results include higher foreign currency exchange rates compared to the prior period.
With Q3, 2020 average rates of $1.54 per pound compared to $1.26 per pound in Q3 2019.
And lower interest expense, primarily due to lower interest on index linked debt.
These increases were partially offset by lower sales volumes, primarily due to the impact of COVID-19.
Lower other income due to lower pension income.
And higher income taxes.
Moving to Pennsylvania segment earnings were two cents per share higher than our comparable result in Q3 2019.
Hello.
C N I declines in Pennsylvania continue to be primarily in retail trade in services industry and manufacturing respectively.
A large industrial customers have general generally returned to pre covid operations and are not expecting future reductions at this time.
Moving to Kentucky, or Kentucky segment reported about a 7% C&I load decline during Q3 compared to the greater than 14% decline, we saw last quarter versus the prior year.
Like Pennsylvania, the services industry, such as restaurants retail and hotels continue to be negatively impacted and our commercial sector in Kentucky.
Much of the improvement we experienced during Q3 was on the industrial side as many manufacturing companies were able to reopen after temporarily being forced to shut down and cute too.
Specifically industrial volumes were driven in part by auto manufacturing volumes returning to pre covid levels.
Coal mining and non automatic manufacturing continue to be more negatively affected.
Finally in the U K C and I load improved to about a 14% decline in the third quarter compared to a 20% decline that we experienced last quarter versus a year ago I've government restrictions put in place in late March where further east throughout the month of July.
The primary driver of the increase was seen in the large industrial and manufacturing sectors that had largely closed during the full lockdown phase and have since opened albeit not quite the pre covid levels.
It's clear on this slide that the UK demand has not recovered as sharply as R. U S service territories, which underscores the value of the effective decoupling mechanism there.
We remain encouraged by the recovery we've observed in each of our service territories during the sore third quarter, but we'll continue to monitor load impacts as we move into the winter months, including the impact of additional temporary lockdowns should they arise such as the Lockdowns. We are currently experiencing in England and Wales.
At this time the current lockdown is not as stringent as what we experienced early in the year as workers that are not able to work from home can still go to work and many retail establishment cause can still provide takeout options.
In addition, strong residential demand is expected to continue to act as a hedge to lower CNI demand.
Now I know I just stayed at a lot of percentages. So let me take a moment to summarize the impact of COVID-19 on an ongoing results in 2020.
We experienced at 10 cents per share impact to the end of the third quarter.
70% of that relates to lower UK sales volumes that will be recovered through the UK decoupling mechanism.
The remaining three sent impact is primarily from lower demand in Kentucky.
And we have been able to offset the majority of that through effective cost management.
Overall, we believe are strong regulatory construct balanced rate structures and customer mix physicians P. P. L well to continue to operate at a high level and this challenging environment.
So that concludes my prepared remarks, I'll turn the call back over to Vince.
Thanks, Joe and.
In closing I remain very proud of how our teams across P. P. L have risen to the challenge of COVID-19, we continue to deliver electricity and gas safely and reliably to our customers at the same time and remain is spelled just as ever on innovation and continuous improvement is in position the company for future success.
With that operator, that's open to call for Q&A.
Thank you we will be getting a question and answer session.
Ask you a question with a stove and one on your touch though so.
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Today's first question comes from running Greenwald it'd be away. Please go ahead.
Good morning, everyone. Appreciate the time Warner.
Morning.
Can you guys just talk about your confidence and conviction levels and how did it kind of evolved over the last few months surround being able to reach a constructive deal terms between the C N a finding and what you're seeing internally and how are you thinking about additional upcoming off Tim data points in terms of ability to really further improve sentiment and drive renewed interest.
<unk>.
Sure So [laughter].
You can appreciate we are in the middle of a competitive process. So don't think I think.
I don't think it's appropriate to get into too much detail in terms of the process.
That that we're currently.
Currently underway, but to your point I think the CMA decision you know for the water company that provisional decision was that was certainly positive as we think about overall returns in the UK regulated utility sector I think it should play well into.
While we would expect for gas and transmission coming.
Here in about a month or so I shouldn't that that should be coming out early December we also have the <unk>.
Government's white paper, RMP carbonization that should be coming out.
They said autumn so that could be this month or early December as well.
And then the CMA final decision. So I think to your to your point things seem to be progressing in a positive light in the UK regulatory contrast.
I would expect that to translate positively or process, but we don't want to get into a lot of detail in terms of where we are.
With potential bidders.
Got it fair enough.
How are you guys thinking about your hedging strategy ahead of any transaction a corresponding cash proceeds just give them the latest backdrop.
Curious that you can kind of primary thoughts around any internal forecast you guys have on the currency over the next several months.
John you Wanna talk about that with it yeah, well as far as hedging the proceeds of the transaction that is something that we're considering at this time.
Nothing really to update at this point, but if if and when appropriate we'll we'll provide an update then.
How the pound Moose here could depend on would depend we think on are you a selection results in which way that goes so.
Certainly watching the pound closely and giving consideration to hedging.
Got it I appreciate your time.
Thanks Bye.
And all those questions today it comes from <unk> with a record I was please go ahead.
A team good morning, who do you think is gonna win the election and I'm just kidding [laughter].
Maybe just can you talk about you mentioned asset swaps are asked exchanged events and the best and Joe So maybe just talking about where that stands.
And then in light of that I do have a follow up question, but maybe just address that and then I have a follow up but as it relates to sort of possible to germinate.
Yeah Yeah.
Don't think it's appropriate to get into.
We're kind of getting into the process now with potential buyers. So.
Just not appropriate to get into any kind of detail around the process. So.
Okay. That's pregnant totally understandable and then maybe can you talk about you know you know just maybe you know there's no reason why I asked if there's obviously centerpoint earlier today talked about you know putting one to two gas L V. C's in there in there you know.
Restructure in their asset based on market next year nice sources. Another one confuses me that commentary maybe can you talk about you know the Yemeni growth opportunities in the U S O.
Outside of this this whole deal with UK, just how do you think about potential consolidation opportunities your views on electric versus gas and and geography that you might be interested in any anything that you can sort of speak to that.
Sure so.
Overall I would say.
We are interested in acquiring regulated utilities, we do have a preference towards.
Electric, but electric and gas utilities are also attractive to us.
In terms of geography, I'm not sure that that.
That contiguous.
Service territories or anything like that is necessarily something that we put a high.
Emphasis on.
So.
At this point I would say, we're we're pretty open to.
Opportunities that may come up and the market again, where are based cases.
Fix the balance sheet, not really fixed the balance sheet would improve the balance sheet from where we are to kind of the mid teens and then.
Share buybacks right it would be the kind of the base case that we would look at M&A as potential to improving value of about that.
Renewables is also another area that I think we're we're.
Seriously considering we did acquire Safari energy back in 2018 hasn't been a significant component of the PPL earnings profile to date, however, when we come out of that Wpb's sale.
We could possibly be a cash taxpayer at that time.
Which obviously would put us in a good position around the renewables business. So I think we have opportunity to organically grow that business given kind of how we position.
The deep DDR business that we acquired a couple of years ago, but also there could be a.
Possibility or potential to do some M&A there as well.
Great Super helpful. When so I'll, let others. Thank you.
Thanks again.
Hey, ladies and gentlemen, as a reminder, would you'd like to ask a question. Please press lower than one today's next question comes from four powder sort of Glen Rock Associates. Please go ahead.
Hey, good morning.
Good morning, Florida.
Uhm just.
I. Appreciate you guys are in the middle of the process and the obviously if if you can surely what you can share, but can you give us any flavor I mean as to.
Sort of the the the level of interest to me in other words, there's been a lot of people who've been showing interest in the in the in the in the property and.
And what.
I mean, you mentioned these regulatory events in the U K.
Or is.
Are these things that people were looking to see I guess before they do before they.
They show interest or can you give us any flavors too or at least how optimistic you feel about what <unk>, what you've encountered so far.
Yeah.
So Paul I would say that the process and the level of interest.
Is progressing as we would have expected.
I did talk about in August when we made the announcement that I did expect there to be.
Quite a bit of interest in.
WPB given the quality of the assets the quality of the management team.
And again, we think electric distribution is the.
Is the premier sector in the in the utility industry in the UK, given its role and where it's going to play in the day carbonization efforts to get to net zero in the UK. So at this point I would say nothing that I'm seeing.
Kind of altered that view.
And things are progressing as as we had expected.
Awesome. Thanks, so much.
Another question today comes from where I'm living in the city. Please go ahead.
Hi, good morning.
[laughter] itself as a sale process continues to move forward is there any more color you're able to share around the attacks attributes of the portfolio of herself.
Yeah, No no update at this point, but yeah I don't know if you want to mention.
Mentioned anything on.
[noise] thoughts on tax strategy no nothing nothing to update at this time or any additional details at this time, Ryan will give an update on that one when appropriate but I don't think it's appropriate to do so now given where we are in the process.
Okay, and then to follow up on the comments about being open to gas utility deals.
Curiously about your a longterm ESG strategy and your views on the carbonization.
Sure so.
Our our stated goals are.
Great to reduce our carbon emissions by 80% by 2050.
70% at least 70% by 2040.
As of 12 31, 2019, so as of the end of last year.
We've already delivered about 56% reduction.
Compared to 2010 and that compares to about a 45% reduction for the sector. So we're feeling very very good about our transition strategy and the glide path that we're on to achieve that at least 70% by 40 and at least 80% by 50.
R. R reduction targets are we think they're comparable to our industry peers even.
Some of those peers that have indicated and net zero target by 2050, they've indicated that they see a pretty clear path to 80% reduction but would require.
Incremental technological improvements to get the remaining 20% that's very consistent with how we're seeing things as well. It's one of the reasons why we joined the every GTI LCI R&D.
Project over the next five years too.
To really try to identify that technology to actually get to net zero by by 2050 again as we're thinking about the declining costs of renewable energy.
We think there'll be continued opportunity to.
Accelerate T carbonization, even in Kentucky, even without retiring coal plants.
To the extent that.
<unk>.
Solar continues to come down it could end up being cheaper than the variable cost of generating in Kentucky.
But again it down as a long term carbon reduction.
Goals for US is around the retirement of the coal fleet, but we will continue to do that in a very balanced way.
We're focused on working with the commission, making sure that the the power that we continue to generate and the state is affordable and reliable for our customers that is critical.
Relatively cheap electric in the state of Kentucky is an important component of their economic development strategy. So.
Again, as we think about our carbon reduction strategy.
It's in a very balanced way to make sure that we're keeping our customers and our regulators in mind and again, we think we're we're in a good position to balance all of those things.
If technology, where to prove or the cost curves continue to come down significantly what we've noticed an experienced in Kentucky is that the commission has been very supportive of coal retirements. When it makes economic sense to do so they are not supportive when it does not make economic sense.
Just to remind everybody. We've retired over 1200 megawatts of coal fired generation since 2010 and that was all based on economics. So.
We think again.
The regulatory construct is.
Supportive down there, but it's all based on economics and as the right now the economics or not quite Derek to accelerate the retirement, but is that continues to progress.
Certainly our team in Kentucky is looking at that we think the commission will continue to be supportive of things like that as well I think just the key there is to ensure that.
The generation is reliable and affordable and again I think we're in a good position to balance all of those factors.
Just the thought I mean, how does adding or potentially adding a gas utility to your portfolio fit within that framework.
Well I don't want to specifically.
Indicate whether or not we would be interested in just a gas LDC on its own my preference would be in.
An electric and gas utility again, I think over time.
Gas will be deemphasize as we think about a longer term.
Carbon transition strategy for the U S.
And so that's why I like electric and gas a little better because you can you can build in that direct edge.
For electrification, there, but I wouldn't say.
Today that we wouldn't we wouldn't take a look at that.
I appreciate it thank you.
Alright. This includes a question and answer session I'd like to turn the conference back over to the management team, Please auto home or.
Great just want to thank everybody for joining us on the call today, and we will see you all at EI virtually next week. Thanks, everyone.
Okay. Thank you. This concludes today's conference call well. Thank you all for attending today's presentation.
I just want some orange and have a wonderful day.