Q2 2022 PPL Corp Earnings Call
Good morning, and welcome to the P. P. L Corporation's second quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Andy Ludwig VP Investor Relations. Please go ahead.
Thank you good.
Good morning, everyone and thank you for joining the P. P. L conference call on second quarter 2022 financial results.
We've provided slides for this presentation and our earnings release issued this morning on the investors section of our website.
We'll begin today's call with updates from Vince Sorgi, PPL, President and CEO , and Joe Bergstein, Chief Financial Officer.
Greg Gutting, Chief operating officer will also be available for the Q&A session. Following our prepared remarks.
Before we get started I'll draw your attention to slide two in our brief cautionary statement.
Our presentation today contains 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 some of the 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 reconciliations to the comparable GAAP measures please refer to the appendix.
I'll now turn the call over to Vince.
Thank you Andy and good morning, everyone welcome to our second quarter Investor update.
Turning to slide four.
As we shared with you in June we are extremely excited about ppl's compelling investment proposition, which is driven by our strategic repositioning.
The completion of the sale of our UK utility business and acquisition of Rhode Island Energy has de risked the company and created a compelling portfolio of domestic regulated utilities.
Our company has one of the best operating track records in the industry.
And this operating expertise enables us to further optimize our new portfolio to deliver growth and create shareowner value.
The result is a strategy and a new business plan that is anchored in operational efficiencies in the near term with stronger rate based growth driving our earnings growth later in the decade with a total capital investment need of at least $27 billion to 23.
This strategy also keeps affordability front and center as we've committed to stay out of rate cases in Kentucky, and Rhode Island until at least mid 2025.
We expect our optimization strategy to deliver at least $150 million of O&M savings through 2025.
I'll discuss these savings opportunities in more detail during today's presentation.
But I want to emphasize that these optimization initiatives, where the starting point for our new business plan.
We believe this is an effective strategy for the company to manage risks associated with high inflation and high commodity costs, which have increased the cost of energy for our customers.
At the same time, our plan support top tier EPS and dividend growth of 6% to 8% per year with levers that mitigate risk and potentially provide upside.
These include incremental O&M savings above the targeted 150 million.
And higher sales growth relative to the assumptions that we modeled in our plan.
We also develop the capital investment plans required to deliver a more reliable and resilient network.
And to advance our clean energy future for our customers, while earning near our allowed returns by 2025.
We see potential opportunities to invest more than our $12 billion capital plan over the next five years with incremental upside opportunity stemming from the federal infrastructure investment and jobs Act or the IH II.
Importantly, about 55% of our current five year Capex plan is expected to be recovered from riders and formula rate significantly mitigating regulatory lag and supporting our credit metrics.
This positions us to maintain a strong balance sheet, which will fuel organic growth without the need for equity issuances throughout our planning period.
We also have an opportunity to lead the clean energy transition as we move through the planned period and begin to make the necessary investments to effectively transition our coal fired generation fleet in Kentucky.
This is a massive opportunity for both customers and shareowners.
And as a pivotal part of our broader clean energy strategy.
In addition to delivering the utilities in the future.
Utilities that are designed to efficiently enable and manage distributed energy resources.
Our scale renewables connected to our networks.
We're on the leading edge of these efforts with the work we've done in Pennsylvania and are confident this proven strategy will continue to drive further savings and capital investment opportunities moving forward.
Even in Pennsylvania, where it is already well underway.
We've combined this innovative approach with our culture of delivering operational excellence.
And we have a superior track record, which we demonstrated with the Pennsylvania playbook slides on our Investor day call.
In summary.
We're excited to translate our track record of best in class operational excellence into top tier returns for our shareowners.
The actions we've taken over the past 18 months were designed to do just that and I'm confident they will.
We've hit the ground running with the new P. P L.
My team and I are ready and committed to deliver for our customers and our shareowners.
Turning to slide five and the highlights of our second quarter results.
Today, we announced second quarter reported earnings of <unk> 16 per share.
Adjusting for special items second quarter earnings from ongoing operations were <unk> 30 per share compared with 19 cents per share a year ago.
The strong second quarter earnings have a solidly on track to achieve the earnings guidance, we shared during our Investor day and today, we reaffirmed our 2022 ongoing earnings forecast range of $1 30 to $1 45 per share with a midpoint of $1 37 per share.
This forecast reflects a partial year estimate of contributions from Rhode Island energy.
Following our completion of the acquisition on May 25th.
Today, we also reaffirmed our projected compound annual earnings per share and dividend growth rates of 6% to 8% through at least 2025.
Our per share growth target is based off the midpoint of our 2022 pro forma forecast range of $1 40 to $1 55 per share or $1 48 per share.
The pro forma forecast range reflects a full year of earnings contributions from Rhode Island energy.
In addition to delivering strong quarterly results. We've also been hard at work, enabling the asset optimization and centralization plants that will drive our O&M savings targets out.
I will discuss the details of these initiatives on the next slide.
The final major highlight I'll note. This morning is the RFP that LGD Ku recently issued for replacement generation in Kentucky.
As a reminder.
The companies expect to retire at least 1000 megawatts of coal fired generation by 2028.
F P. It's open to a variety of generation sources, which I'll touch on further in a few minutes.
Turning to slide six.
As I mentioned, our strategy moving forward focus is on efficiency and affordability as we build the networks and make the investments necessary to deliver a clean energy future.
Today, we're providing more detail on the savings opportunities that support our strategy.
We expect to deliver $50 million to $60 million or about a third of the savings target in 2023.
As our investments in technology takes shape.
We expect the savings to step up to accumulative total of $120 million to $130 million by the end of 2024.
Achieving the full $150 million of targeted savings by the end of 2025.
The timing and ranges reflect our planned implementation of various systems and processes.
Including the further use of data science to become more efficient.
Turning to the right side of the slide there are two key areas to this optimization strategy operations and shared services.
Regarding operations. The first piece is replicating our Pennsylvania playbook for electric T&D operations across Kentucky in Rhode Island, which we expect will drive about $80 million of savings by 2025.
To accomplish this objective, we will deploy smart grid technology to enhance reliability and reduce cost.
And leverage data science to maximize our resource allocation.
We're also improving our vegetation management approach.
Leveraging models and satellite imagery to assess individual predictions of risk.
Such as when a tree canopy is expected to reach a certain power line and will need to be trimmed or cut down.
We've spent several years honing our P. A playbook and we've built our electric T&D operating model to be scalable.
Over the past decade, we grew our Pennsylvania rate base and earnings at about 10% a year, all while keeping O&M relatively flat offsetting about $100 million of inflation over that period.
And driving significant improvements in reliability and customer satisfaction.
At the same time, we built one of the nation's most advanced energy networks, one that incorporate self healing technology and supports the growth of renewable energy.
We believe the best is yet to come as we replicate our P. A playbook enterprise wide with additional upside as we continue to find ways to scale technology and drive further innovation.
Another key source of O&M savings in our T&D operations will be the opportunity to leverage advanced technologies and our customer service function.
This includes expanding and improving convenient self service options for customers that reduces call handling and improves customer satisfaction.
We're also projecting lower O&M and other areas of our operations, including the generation and gas LDC businesses totaling about $35 million by 2025.
We see the majority of this opportunity through greater efficiency in our generation fleet, including outage optimization and coal plant retirements.
The second area of focus is the centralization of shared services, which includes the consolidation of our supply chain function and it systems and platforms.
We expect to drive savings in this area of about $35 million by 2025.
By deploying common systems and platforms across our operations, we expect to reduce software licensing costs and improve overall operating efficiency.
It also includes leveraging our increased buying power from centralized supply chain operations to.
To procure equipment and materials enterprise wide as well as other savings from consolidating our other shared services functions.
In summary.
We believe our strategy, which leverages operating efficiency data science and advanced technology differentiates P. P. L by supporting competitive earnings and dividend growth of 6% to 8%.
While it remained focused on affordability as we make the investments needed to deliver the clean energy transition.
We're confident we will achieve our O&M reduction targets as they are driven by our proven operating model, our technology, driven and are spread over several areas of the business over several years with achievable targets and plans in each area.
Turning to slide seven.
We continue to evaluate opportunities to advance the transition of our Kentucky generation fleet, which presents an exceptional investment opportunity.
Under our current plan, we expect to retire 1000 megawatts of coal by 2028, and an additional thousand megawatts by 2035.
As we plan for the future we continue to evaluate supply options and technologies that will best deliver value for our customers over the long term.
While advancing cleaner sources and maintaining secure reliable and low cost energy in the state, which is key to supporting Kentucky's robust economic development.
As I noted earlier L. G. D. K you recently issued an RFP for replacement generation to address potential EPA regulations load growth coal plant retirements and greater diversification of our Kentucky generation portfolio.
The RFP is open to a variety of generation sources, including renewables battery storage, and peaking or base load natural gas.
We're seeking proposals for capacity and energy to be available no earlier than 2025.
Proposals are due in mid August and we expect to complete our evaluation by the end of October .
This will allow us to submit a required regulatory filings either in Q4, this year or Q1 of 2023.
Results from the RFP will also inform further analysis, we're undertaking regarding the transition of our coal fired fleet to cleaner sources based on our continued engagement with shareowners.
This analysis will include various clean energy scenarios, including an assessment of the financial and operational implications of achieving an 80% clean energy portfolio by 2030.
We expect to complete the analysis and share our results by the end of the year.
As you know we issued two significant reports in the fall of 2021 with our integrated resource plan and climate Assessment report.
Its latest analysis to be completed later this year reflects our continued evaluation of clean energy transition options.
Lastly on this slide.
I would note that we continue to closely monitor the Epa's proposed regulations for potential impacts to our transition plans, including the good neighbor rule.
The good neighbor rule could potentially advance nearly 500 megawatts of coal fired retirement.
From 2034 into the 2026 to 2028 timeframe.
As a result, we are closely monitoring that regulation, which we expect will become final later this year or in 2023.
With that I'll now turn the call over to Joe for the financial update Joe.
Thank you Vince and good morning, everyone.
Turning to slide nine as Vince noted, we reported 2022 second quarter GAAP earnings of 16 cents per share spur.
Special items in the second quarter were <unk> 14 per share primarily due to integration expenses associated with the acquisition of Rhode Island Energy.
Adjusting for these special items second quarter earnings from ongoing operations were <unk> 30 per share an improvement of <unk> 11 per share compared to last year.
The strong quarter brings our year to date GAAP earnings to <unk> 53 per share.
Adjusting for special items of <unk> 18 per share our ongoing earnings results are 71 cents per share through the first half of 2022 compared to 47 cents in the first half of 2021.
As Vince mentioned these results put us firmly on track to achieve our 2022 earnings forecast of $1 30 to $1 45 per share.
Turning to the ongoing segment drivers on slide 10.
Our Pennsylvania regulated segment results improved by <unk> <unk> year over year, excluding accretion.
The increased earnings in Pennsylvania were primarily driven by higher peak transmission demand.
And returns on additional capital investments in transmission.
Our Kentucky segment also improved by <unk> <unk> per share year over year, excluding accretion.
The increase was primarily due to higher base retail rates effective July one 2021.
And higher sales volumes, primarily due to favorable weather.
Partially offsetting these increases were higher O&M expenses, primarily due to plant outages and storm restoration costs.
And higher depreciation due to additions to PP&E.
Our Rhode Island segment earned <unk> <unk> per share for the quarter, reflecting our one month of ownership.
Results of corporate and other were <unk> <unk> higher compared to the prior year driven by lower interest expense, primarily resulting from the recapitalization of the balance sheet. Following the sale of W. P D.
Finally, we experienced one cent increase in our second quarter 2020 to EPS due to share accretion, resulting from the $1 billion of buybacks completed in 2021.
That concludes my prepared remarks, and I'll turn the call back over to Vince.
Thank you Joe.
As I said at the outset of my remarks, I'm excited about the prospects for the new P. P L.
Through our strategic transactions, we have positioned the company to deliver consistent sustainable top tier returns for our shareowners and exceptional results for our customers.
Look forward to seeing many of you during our upcoming marketing events over the next few months as we continue to share our story with that operator, let's open it up for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from drew Geis Chopra from Evercore ISI. Please go ahead.
Hey, good morning. Good morning, Thanks for the update just wanted to kick things off with the inflation reduction Act.
Appears have kind of talked about implications, maybe you know I know, it's pretty early but just what are you thinking of the tax credits the generation tax credits and then the impacts on cash taxes of the alternative minimum tax.
Yeah sure. So for the most part we think the act is a positive for the company.
First.
The ability to elect the production tax credit instead of the ITC.
For solar well.
Improved economics of our self build options as we look at renewables as a potential source of replacement generation in Kentucky.
In addition, the extension of the renewable tax credits should lower the cost of renewables overall that'll.
That'll be good for.
Not only our RFP process in Kentucky, but also.
Our customers in Rhode Island, as we procure clean energy to meet the 100% renewable energy by 2033 requirement that was just enacted into law up in Rhode Island.
As you know we are now a federal cash taxpayer.
So we're not anticipating that the 15% empty provision to have a significant impact on our business. So no no real headwind there and then I just think the.
The transferability provisions around tax credits.
Also makes it more likely that renewables will be built.
And that that will also be good in general for now for the industry.
<unk> and four.
Accelerating our clean energy transition simplifies the structure of the deals significantly.
Yeah.
Got it what.
What effective cash tax rate.
You are currently at.
Yes, Joe do you want to yeah, sure. So I would kind of expect to be around the.
The 15% range through the planning period.
Got it okay, alright, so the MTS is a is not going to impact the cash flow.
What sort of metrics in the plan.
Okay, then just switching gears to the buy rate. Thank you for sharing the details on slide six on the O&M trajectory. That's that's really helpful. By you just switching to slide seven really quickly on the Kentucky RFP. So what are the next steps in terms of after the regulatory filing that is in Q4 this year or early next year what what.
We expect a formal approval from the commission or what are the kind of things that we should be watching for.
Yeah, so there could be.
Various filings that we'll need to make it will really depend or gash on the generation replacement strategy. So.
To the extent we are.
We are going to be building generation, we will need a CPC and for that and that will go into the commission there'll be.
Period of months.
Approval process, there's there's no statutory requirement on that but it will take some months for the commission to get through that.
If it's through.
Our ppas for for renewable energy those contracts also require approval from the commission.
And so so the form of the filings will take shape, depending on the ultimate.
You know generation source that we come up with in terms of that.
That replacement generation, but both generally won't require filings.
Got it and then just one last one and I'll pass the opportunity for others to ask questions at all any of this capex coming out of these rfps would be incremental to your current plan correct.
It's incremental to the to the 12 billion in the five year Capex plan. We do have you know $1 billion to $2 billion of Capex for generation replacement in the 27 million that we showed through 2030.
Got it thanks guys.
Sure.
And the next question is from Ryan Greenwald from Bank of America. Please go ahead.
Hey, good morning, everyone.
Good morning appreciate the time.
Maybe to piggyback on <unk> question around the IRA how do you how does this kind of influence the way you guys think about unregulated renewables.
I mean, obviously it.
It'll it'll help the economics around that business again, it's.
It's a very small component of our of our overall business. So I don't see it.
Turning safari into a material driver of our earnings in the near term, but but obviously it will it will simplify the deal structures.
Make those projects.
A more economic.
Understood. Thank you and then any initial expectations on benefits that could accrue to you guys from the recent move by the governor to reduce the tax rate in Pennsylvania, and how that could kind of factor into a rate case dynamics and how long you guys are able to stay out.
Yeah, I'll, let Joe talk about the specifics on that I mean, the reduction going from 999 to 499 is over a period of years I think it's concluded in 2031. So in any one year the impact isn't isn't too significant but Joe do you want to talk about.
Yeah sure so the current.
Corporate income tax rate in Pennsylvania is 999% that's going to be reduced to $8, 99% on January one 2023.
And then from there it decreases by half a percentage point annually until it reaches $4 99 and 2031 its been said so.
The impact is not material I don't think that it would.
Would impact our rate case timing or strategy around that.
Certainly we'll have to see what the PUC would do regarding the reduction but it's.
It's not a material impact to the business.
But it's good we're glad to see we're glad to see the reduction in the rate.
Just for general business purposes, it's got it good to say for sure.
Absolutely I will leave it there thanks so much.
Great. Thanks, Ryan.
And the next question is from Michael Lapidus from Goldman Sachs. Please go ahead.
Hey, guys. Congrats hey, guys. Congrats on a good quarter and look forward to seeing you next week.
I had a question about O&M savings, which is you used the language in today's slide deck.
<unk> hundred 50 million targeted by 2025, do you see upside to that $1 50, and if so kind of where do you think that upside kind of which of the buckets could that a merger.
Yeah. So as we've we've discussed the if you look at that.
The disclosure that we provided on the Investor day, and you take the <unk>.
Benchmarking metrics that we had just for the T&D operations, where EU was just outside the top quartile in Kentucky in Rhode Island, where.
We're in the third quartile.
The ability to move.
Rhode Island in Kentucky to where EU is today and then of course, we're projecting to to move you into the first quartile of that is that is worth more than $150 million.
In addition to that we have the generation.
Reductions that were disclosing today.
So the opportunity is is more than the 150 the.
The $1 50 to 2025 is what we believe is achievable through 2025, given the integration efforts that are ongoing in Rhode Island, which takes a significant amount of attention and resources from from both our company and national grid.
To get all that done in the two year timeframe. So.
That's why we've indicated we believe there's there's further optimization opportunity beyond 2025.
And if there is opportunity to extract more than that through 2025.
We could see that either being used as a potential offset to inflationary pressures if that continues to persist and ultimately has an impact on our on our plan to date it hasn't had a material impact, but if that were to shift.
We think that upside could could help offset that where it could.
Provide upside to the EPS growth rate.
Got it. Thank you for that and then one question the good neighbor rule.
Can you just walk us through how you think about whether if the rule is finalized as proposed by the EPA and I know, we're still in the comment period and so forth. So we have some time, but just curious how you're thinking about does that.
The impact of energy that would come from existing coal plants would you think more a bid as we drive more of your existing coal plants in retirement, and therefore create a need for both energy and capacity.
Yeah. So the good neighbor rule is basically the cross state pollution rule.
And and.
So from our perspective, it's really around.
Backend technology and the need for so we still have a plant in it that's scheduled to retirement.
In 2034 that would require some some back backend pollution control equipment under under this proposed rule and so.
Michael we what we would have to do based on the final language in that is determined.
Right, the most economic way to to address that.
<unk> and so it could drive.
That plant being retired sooner or it could require some other.
Solution, but we really need to wait for that rule to be finalized to determine.
The best way in which we would we would address that but it certainly could.
Could drive us.
Potentially to retire that plant.
I think 2034.
Got it and if I think about just the timeline of the Rfps that are already underway in Kentucky.
Probably don't address the incremental potential coal retirement that could get moved up that you'd either if he needed to replace that coal plant you would either have to host another RFP sometime next year or the following.
I don't think so I mean, where we're getting a number of.
Responses and so really I think what you're describing is are we replacing 1000 megawatts or 500 megawatts of coal capacity and we'll just stack the responses accordingly to come up with the most economic way to address either 1000 or 1500 megawatt. So that's how we're thinking about I don't think we'd have to run another.
The RFP.
Got it and the incremental megawatts took an extra 500.
It's yeah, it's just shy of 500 megawatts of capacity at that plant.
Got it. Thank you guys much appreciate it.
Sure. Thanks, Michael.
And again, if you have a question. Please press Star then one.
The next question comes from Greg Real with UBS. Please go ahead.
Hi, Greg Hey, Thank you just a follow up on.
If if you might be able to.
Towards the state what the Pennsylvania regulatory strategy is or do you have a rate case that you are thinking about.
So as I think Joe discussed on our Investor Day call. We don't have any eminent rate case in the plan for Pennsylvania.
Yeah that is that is something we always look at when we look at all of our jurisdictions.
Curious sections of course, we've committed to staying out of base rate cases, both in Rhode Island in Kentucky at least till mid 2025, we do not have that commitment in Pennsylvania.
Again based on the optimization strategy.
We think we can we can.
Hold off a bit in NPA, but yes that.
That's something that we're always looking at when the best time to go in it so.
Just to reiterate what Joe said, we don't have anything imminent in the plant.
Alright, thanks congratulations.
Great. Thanks, Greg.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Vince Sorgi for any closing remarks.
Great. Thanks, everyone for joining the call and we look forward to seeing many of you as we're out doing marketing over the next couple of months. So thanks again for joining.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
[music].