Q2 2019 Earnings Call
Good morning, and welcome to the PPL Corporation second quarter 2019 earnings Conference call.
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I would now like to turn the conference over to Andy <unk>, Vice President Investor Relations. Please go ahead.
Thank you Gary Good morning, everyone and thank you for joining the PPL conference call on second quarter 2019 financial results.
We provide fly for this presentation and our earnings release issued this morning on the investors section of our website.
Our presentation and earnings release, with which we will discuss today during today's 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 does he see 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.
A reconciliation 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's fast PPL chairman and CEO .
Thank you Randy and good morning, everyone. We're pleased that you've joined US for a second quarter earnings call with me today are Vince Sorgi. It was promoted to PPL, President and Chief operating Officer effective July 1st Joe Bergstein, who was promoted to PPL, Chief Financial officer, succeeding Vince and the CFO role and Greg can and Paul Thompson, the heads of our U.S. utility businesses.
Phil swept the head of our western power distribution business in the UK is not able to join US This morning.
Moving to slide three our agenda. This morning begins with highlights of our 2019 second quarter results and a brief review of operational and regulatory developments.
Joe will then provide a more detailed review second 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 second quarter reported earnings of 60 cents per share, resulting in a total of $1.24 cents cents per share through the first half of 2019.
Adjusting for special items, primarily related to unrealized gains on our UK earnings hedges second quarter earnings from ongoing operations were 58 cents per share compared with 55 cents per share a year ago.
On a year to date basis through June total ongoing earnings were $1.27 cents per share compared with $1.29 per share a year ago, which is in line with our expectations.
Based on our solid financial results through June remember remain very confident in our ability to deliver on our 2019 guidance range of $2.30 to two hours and 50 cents per share with a midpoint of $2.40.
In addition, we remain on track to invest 3.3 billion and infrastructure improvements during 2019, as we must work to make the grid smarter more reliable and more resilient.
Looking beyond 2019 today, we also reaffirmed our projection of 5% to 6% compound annual earnings growth per share through 2020 measured against the midpoint of our original 2018 earnings forecast.
In addition, we maintained our 2021 earnings forecast of 2015 to $2, an 80 cents per share.
We continue to monitor our foreign currency exchange rates for potential impacts on our earnings projections, which Joe will discuss in his update.
Shifting the focus to operations PPL continues to deliver excellent service across all of our distribution networks.
Both PPL electric utilities, and Kentucky utilities, both received JD power awards for residential customer satisfaction in July achieving the highest overall marks in their respective categories and regions based on customer surveys.
This year marks the eighth and fourth straight years, respectively that PPL electric utilities, and Kentucky utilities I've earn this distinction.
All told Ppls utilities have received 49 JD power awards and the two decades since the organization has studied customer satisfaction with electric utilities.
And the UK W.P.D. was also recognized recently by off Jim as the top ranked network for the stakeholder engagement and consumer vulnerability incentive and achievement measured against all gas and electricity networks in the UK.
This is the eighth consecutive year that WPP led the industry in this category.
Ppls track record of customer service Excellence is a testament to the outstanding teams, we have throughout our business and it reflects our strategic focus on delivering best in sector operational performance and other highlights PPL Electric utilities was also named the 2019 power players investor owned utility of the year by the Smart electric power lines during the second quarter.
The award recognized PPL electrics work to create a smart grid distribution management system that supports greater adoption of distributed energy resources on the grid.
This includes behind the meter resources, such as private solar and energy storage utilities, New distributed energy resources management system is just one of the many ways PPL companies are working to advance a cleaner energy future.
Additionally, in PPL electric utilities was named one of the most trusted utility brand in the country by recent study conducted by ask on a human behavior and analytics firm in this survey PPL electric utilities earned the top spot among electricity only utilities in the eastern United States.
This recognition is yet another example of PPL electric its commitment to top tier reliability and service to its customers.
Last but not least low gas and electric recently received the American gas associations accident Prevention Award for safety excellence among its peers LG in a finished 2018 with the lowest rate of incidence, resulting in lost time or restricted time at work where price proud of LG anyones accomplishment and we remain committed across our us and UK operations to continuous safety improvement.
Turning to a brief regulatory update in the UK off Jim in late May confirm its Rio two price control methodology for the gas distribution gas transmission and electricity transmission subsectors.
While the announced methodology does not apply to the electricity distribution sector, which off Jim has continually emphasize we welcome the opportunity to share our views on some key issues.
Broadly we believe this update with this step in the right direction and look forward to our ongoing engagement with off Jim as we plan. Our next price control a process that kicked off formally this morning with the open letter consultation.
The latter was generally in line with our expectations and consistent with recent conversations with off Jim.
Vince and I were in the UK last weekend held another series of productive meetings with members of off Jim Senior leadership team, including Chairman Martin Cave.
We discussed the successes of REO 81 regulation and how there has been real value to deliver to customers and the first four years of the price control.
We also highlighted some of the areas for improvement and how often can achieve their objectives of continuing to drive efficiencies, while preparing the network for the future.
Overall, we're in agreement that the distribution networks are critical to the ongoing development of the UK is energy infrastructure, specifically to achieve the electrification and de carbonization initiatives.
Network development has become even more important as the UK recently announced its commitment to achieving net zero carbon emissions by the year 2015.
This comment and further enhances the opportunities for Dnos like W.P.A. to continue their leading roles and building the electricity grid of the future and connecting significant levels of renewable energy sources.
We expect that off Jim will provide the framework necessary for electricity distribution companies to support these objectives and incentivize the level of investment required to do so as they have done historically.
Our recent dialogue supports our belief that often will be focused on differentiating returns among the electricity pianos and still provide substantial opportunities for outstanding performers like WP. During the next kind of price control period with that I'll turn it over to Joe for a more detailed financial overview Joe.
Thank you Bill and good morning, everyone, let's move to slide five for an overview of second quarter segment results as Bill mentioned PPL delivered second quarter 2019 earnings from ongoing operations of 58 cents per share, which was three cents higher compared to the second quarter of 2018 and in line with our expectations.
Our strong second quarter, our strong results more than offset two cents from share dilution and five cents of weather related variances compared to the prior period four cents of the weather variance was related to strong volumes experienced in the second quarter of 2018 and weather was about a penny unfavorable compared to our forecast for the second quarter of 2019.
Scooting dilution and whether we saw higher earnings age of our utility segments. This quarter.
Our UK regulated segment earned 36 cents per share of four cents increase compared to the same period, a year ago, excluding the impacts of dilution and weather.
The increase in the UK earnings was primarily due to higher adjusted gross margins from higher prices as a result of the April 1st 2019 price increase partially offset by lower sales volume higher other income due to higher pension income and higher realized foreign currency exchange rates compared to 2018 with second quarter 2019, the average rates of $1.36 per pound compared to $1.33 in the second quarter of 2018.
Moving to Pennsylvania, our Pennsylvania regulated segment earned 13 cents per share in the second quarter, putting 19, a three cents increase compared to the second quarter of 2018, excluding weather. The increase was primarily due to higher adjusted gross margins, primarily due to returns on additional capital investments in transmission and the timing impact related to use tax reform in 2018, and lower operation and maintenance expense, primarily due to lower support costs.
These factors were partially offset by higher depreciation expense due to additions to PPD.
Moving to Kentucky.
I could talk you regulated segment earned 13 cents per share in the second quarter of 2019, a three cents increase compared to the second quarter of 2018, excluding the impact of weather. The increase was primarily due to higher base rates effective may onest 2019, and lower income taxes due to a state tax credit. This was partially offset by higher depreciation expense due to additions to PPV and higher depreciation rates and higher interest expense due to higher interest rates and increased borrowings.
And finally, corporate and other remain flat over the quarter compared to the same period a year ago as Bill noted our solid second quarter performance positions us well to achieve our earnings forecast for this year and we provided a similar walk of year to date results in the appendix for your reference.
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 2019, we continue to be a 100% hedged for our ongoing earnings at an average rate of $1.41 per pound for 2020, we increased our hedge percentages to 63% compared to 55% on our first quarter call.
The average rate for 2020, reflecting these new hedges is $1.46 per pound just slightly lower than the previous average of $1.47.
We continue to utilize options in our hedging strategy that preserve upside to the current market rates with about one third of the 2020 hedge portfolio being option based.
We remain open in 2021 and as Bill mentioned, we recognize the recent weakness in the exchange rates and continue to monitor potential impacts to our earnings projections. However, independent forecasts of future exchange rates remain within the range of assumptions used for a 2021 projections.
While near term fluctuations in the currency are expected given the current political environment. The majority of analysts projected recovering the currency rates following the Brexit resolution and finally, we have flexibility in our hedging program that does not require us to add additional hedges at this time and allows us to take an opportunistic approach to hedging as we monitor the dynamics of the political situation and move towards the Brexit deadline in October that concludes my prepared remarks, I'll turn the call back over to Bill for the question and answer period.
Thanks, Joe in closing all of our PPL companies continue to execute adding extremely high level as evidenced once again by the accolades earned from our customers and industry groups. We remain focused on delivering on our low risk business plan to build tomorrow's infrastructure and advance a sustainable energy future and our strong financial performance keeps us solidly on track to achieve our 2019 earnings forecast.
These operational successes are underpinned by an exceptional workplace that cultivates and inclusive and diverse workforce I'd like to briefly highlight a couple of recent honors recognizing these efforts that exemplify the constructive culture and life blood of our company.
In June our Kentucky operations were awarded the highest US government honor to employers for providing exceptional support of National Guard and reserve employees. The employer support of the guard and reserve our SG Our Freedom Award.
We were one of 15 recipients of this prestigious award selected by the Department of Defense out of nearly 2500 nominations this year.
And just last month PPL was named a best place to work for people with disabilities for the second straight year, earning a top score 100% on the disability equality index for its commitment to creating and accommodating and inclusive environment for people with disabilities.
At PPL, we went all individuals to reach their full potential and believe that our employees colleagues and friends and the community of all abilities help us grow and thrive.
We're extremely honored and proud of these achievements and we will continue to advance and these efforts for an inclusive empowering environment for all employees to drive energy forward with that operator, let's open the call for questions. Please.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Okay.
The first question comes from Ali <unk> with Suntrust. Please go ahead.
Thank you good morning.
Good morning.
Morning.
First question below Joe just to understand the.
Off Jim process from here onwards, so I know that in the schedule. This open led to that consolidation. This started.
Currently that didn't have a decision on the open letter in November what is to be expected what will they decide.
At that time in November and when are you expecting that the key parameters.
Cost of equity et cetera will be firmed up is that when the strategy.
Consultation decision comes to dislike layout or what we should expect in November on this open letter decision.
Sure.
So I wouldn't have November they are going to provide us with the framework and within that framework that will be details and I'll I'll, let Vince maybe comment on us since Easter falling this pretty closely.
In terms of what those details are likely to include events.
Sure how are you doing Ali.
The the process really going forward around the open letter, we would expect auction to make certain decisions on.
The question is that paid posts so.
Confirming the five year term the next price control versus some other time.
Confirming that they're going to stick with cap and similar to what they are using for.
Gas and transmission I would not expect that they would.
In November put forth any numbers in terms of what that happen.
Process would result for for electric distribution that we would we would project to see when they do the sector methodology consultation.
Which would kick off mid next year I think they'll also.
Talk about the the framework that they're thinking about in terms of transitioning to deal. So what type of incentive mechanisms might be in place to drive the dnos to to that outcome.
Discussion around whole system outcomes, so things like that as opposed to the actual return numbers I think it would be expecting.
I think.
Between now and November what the process really is a collection of knowing the answers the questions that they post but also additional stakeholder feedback will take all of that though then propose a broad framework with more specifics around what their thought is based on all of that that input and then that will carry forward into next year.
Which will provide a much more specificity on things like are we and incentive frameworks.
Okay second question I had can you remind us how much of your earnings in this quarter and year to date.
Thats come from UK pension income the non cash pension income and any update on how you're thinking about that.
You know as it opens up in 2021.
So we had a two cents a pension income in the quarter compared to higher pension income in the quarter compared to last year as far as the process for.
Pension deficit funding and the amount that's needed going forward. We're we're in the process of updating our assumptions and negotiating the expected funding levels with our pension trustees.
We expect that to be completed by year end will then work with off Jem and the UK pension regulator offered off Jim's review and determination of future deposit funding will be known we expect by November of 2020, but our expectations at this time probably haven't changed.
The year end and our 2021 forecast, we're expecting about a five cents.
Per share reduction in 2021, due to lower pension deficit funding needs.
Right last question Bill as I look at the Big picture in the UK, you got Brexit uncertainty potentially political uncertainty.
You got the currency, obviously extremely weak.
As you look at all of this I mean is there much that you can do about it Oh. These macro political factors, that's going to play themselves out and BP I, just hunkered down and.
Which for these events to unfold that anything proactively DPL can do given the backdrop that you have out there.
Yes, it is a challenging political and.
Regulatory backdrop at the moment, but there are there are some efforts that we have had underway in the UK.
Two as basically educate.
Many of those.
Ministers of Parliament that may not be familiar with specifically with the electricity networks.
Great track record and that track record includes.
Much lower cost than when the systems were nationalised.
Better reliability, much better reliability to the tune of about 60%.
Better reliability than when they were under state control and and also customer satisfaction, which is at the highest level. It's ever been so we have a great story to tell and.
Another data point is which is on the on the positive side.
Is that the Labor party has really continued to lose momentum politically and as you know they were one of the well the only political party that had proposed.
Bringing some of the networks back under state control.
As well as rail and mail on and and so forth and water. So.
So we think that the the risk well was already very low is even lower than it previously was as the labor Party has really fail to gain any momentum politically and certainly.
There's there's a always.
Probability that they could regain some of their footing, but in our view very unlikely so.
The other thing that we've been doing is we have a.
Our political consulting firm that we use in the UK has been very helpful for us to reach out to some of the other stakeholders outside the.
Parliament to again educate and inform our local community leaders and so forth. So I think we're doing what we can to combat.
Some of the broader political forces that play.
But.
It is it is rather challenging.
Understood. Thank you.
You're welcome now.
The next question comes from Anthony Crowdell with Mizuho. Please go ahead.
Good morning, Joe Joe and Vince Congratulations on promotions.
Thank you.
First question I guess, if I could think of that guidance for 2021, a 250 to 80.
What is the assumption of pension deficit revenues in the 215 to 80 number or that's the same boy.
Pension deficit revenues are not changing that range.
Yes, we have assumed a five cents reduction in the range for.
Pension at the midpoint of the pension deficit at the midpoint of the 21 forecast as a five cent reduction the pension deficit funding.
At the low end of that range. So is there a lot.
Now a bigger decline in pension deficit revenues.
No not materially though the range is really driven by FX rates.
Got it.
If I could think about repatriation of cash from the UK.
What what do you repatriating now and I guess is there a sensitivity on currency or on the exchange rate.
With that.
Right now our forecast through the planning period, how does the expectation of $3 million to $500 million.
Per year, so when we think about the impact on currency relative to our cash repatriation and cash position is really very minor so even at current levels of the pound in the low dollar twentys. It's only about a 40 million dollar impact to our cash repatriation, so really very minor and very manageable in the Grand scheme of our cash position.
Great and lastly, just the company gives out we have I guess five 5% to 6% growth rate through 20.
When when could we expect to get growth rate post 2020, given the UK playing goes out till 2023 could we expect something sooner to find out what the growth rates post 2020.
Well I think we'll have to consider the currency situation and where we are in the Brexit process and if there is any clarity around that because.
As you're aware currencies, obviously, a big driver of our forecast. So we'll have to wait and see when we provide that longer term guidance Anthony.
Given the currency situation the political backdrop.
Great. Thanks for taking my question is yes.
Sure.
Again, if you have a question. Please press Star then one.
The next question comes from Sharper Rosa with Guggenheim Partners. Please go ahead.
Hey, guys, it's actually James for sure.
Good morning, James.
Good morning, I, just wanted to ask could you remind us whether or not you can tell us under the hedging program. When will you have to start for 2021.
Sure go ahead, Joe when we have flexibility on our hedging program and as we stated in the prepared remarks at this point, we're not required to add any additional hedges through October so we can really see how.
Brexit plays out as we approach that October end of October deadline.
Okay, and then are you still assuming a range I think it was 135 to 160 in your 2021 gun.
We are independent analysts forecast continued to support that range and they are within the range that we provided when we provided that guidance. So we're maintaining that at this point.
Got you.
And I guess the stateside.
In Kentucky, any updated thoughts on going back for am I.
I'll ask Paul Thompson, who heads up our Elgin NK you business to answer that.
Yes, we continue to evaluate that and we have under the prior commission ruling.
Expanded our testing our pilot testing work in both Eldeen can you use that we have.
Now over 10000.
And my meters in each utility and to your question really we would anticipate.
Currently that the next rate case whenever that might be maybe the time that we would put the am I back into the the request for approval on that.
Got it thanks, guys. That's all I had.
Thanks James.
This concludes our question and answer session I would like to turn the conference back over to Bill Smith for any closing remarks.
Thank you operator, and thanks for joining us today and look forward to speaking with everyone on the third quarter earnings call.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.