PPL Q1 2022 Earnings Call Transcript

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May 5, 2022

There are 8 speakers on the call.

Operator

Good morning, everyone, and welcome to the PPL Corporation's First Quarter Earnings Conference Call. All participants will be in a listen only mode. Please Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Andy Ludwig, Vice President of Investor Relations. Sir, please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to the PPL Corporation Conference Call on First Quarter 2022 Financial Results. We provided slides this presentation and our earnings release issued this morning on the Investors section of our website. Before we get started, I'll draw your attention to Slide 2 and a brief cautionary statement. Our presentation today contains forward looking statements about future operating results or other future events.

Speaker 1

Actual results may differ materially from these forward looking statements. Please refer to the appendix and PPL's SEC filings for a discussion of factors that could cause actual results to differ from the forward looking statements. We will also refer to non GAAP measures, including earnings from ongoing operations and adjusted gross margins on this call. For reconciliations to the comparable GAAP measures, please refer to the appendix. Participating on our call this morning are Vince Sorgi, PPL President and CEO Joe Bergstein, Chief Financial Officer And Greg Dudkin, Chief Operating Officer.

Speaker 1

With that, I'll now turn the call over to Vince.

Speaker 2

Thank you, Andy, and good morning, everyone. We appreciate you joining us for our Q1 investor update. Moving to Slide 3 and the agenda for today's call. I'll begin this morning with highlights of our Q1 performance and an update on the status of our planned acquisition of Narragansett Electric in Rhode Island. Joe will then provide a detailed review of Q1 financial results.

Speaker 2

And as always, we'll leave ample time for your questions. Turning to Slide 4. Today, we announced Q1 reported earnings of $0.37 per share. Adjusting for special items, Q1 earnings from ongoing operations were $0.41 share compared with $0.28 per share a year ago. These results were in line with our expectations and provide a strong start to the year as we remain focused on repositioning PPL for long term growth and success.

Speaker 2

Moving to Rhode Island. We received approval in late February from the Rhode Island Division of Public Utilities and Carriers to acquire Narragansett Electric from National Grid. In its detailed decision, the division found that PPL met the statutory standard for approval. The Rhode Island Attorney General's Office appealed division's order to the state superior court, and obtained a stay of the approval until the appeal could be heard. On April 26th, the superior court heard oral arguments on the attorney general's appeal.

Speaker 2

The attorney general contends that the division misapplied the statutory standard for approval, and in particular the state's public interest requirement. The attorney general also contends that the division failed to adequately consider Rhode Island's Act on Climate in its analysis and decision. We disagree and believe the extensive record and evidence in this case demonstrate that the division properly applied the statutory standard and correctly approved the transaction. At the April 26th hearing, The attorney general's office asked Judge Stern to remand the matter back to the division with instructions to address the issues raised by the attorney general. The attorney general's office did not ask the judge to reverse or vacate the decision.

Speaker 2

We anticipate Judge Stern will issue a decision on the appeal relatively soon because he publicly stated that a quick and timely resolution of this matter is in the best interest of all parties. In the meantime, we are actively engaged in settlement discussions the Attorney General's office and remain prepared to close promptly with National Grid. As we've shared all along, we are eager and excited about the to work with the talented team at Narragansett Electric to drive significant value for Rhode Island customers and support the state's de carbonization efforts. We continue to believe Narragansett Electric is an excellent fit for PPL and that PPL is an excellent fit for the state of Rhode Island. We remain confident that we will reach a positive outcome in the proceeding.

Speaker 2

Given the pending litigation, we are not in a position to provide additional details at this time, and I have said all I can say about this matter on today's call. I appreciate you respecting the process when we get to the Q and A session. Turning to Slide 5 and a few operational highlights. Our Kentucky utilities continue to seek opportunities to advance clean energy options and support Kentucky's growing economic development. In late February, LG and E and KU joined the state's new Hydrogen Hub Initiative, which focuses on making hydrogen a low carbon solution for the future.

Speaker 2

The initiative is part of a new energy strategy announced last fall by Kentucky Governor Andy Beshear and the Kentucky Energy and Environment Cabinet. LG and E and KU's commitment to promote hydrogen supports a key pillar of PPL's clean energy which is to drive digital innovation and R and D to enable new technologies. The commitment is also consistent with our sponsorship of EPRI's Low Carbon Resources Initiative and LG and E and KU's partnership with the University of Kentucky Center For Applied Energy Research. EPRI's low carbon resources initiative seeks to advance clean energy technology and low carbon energy carriers such as hydrogen. Meanwhile, LG and E and KU's carbon capture partnership with the University of Kentucky includes a novel project focused on capturing CO2 from natural gas combined cycle plants and directly from the air, as well as producing hydrogen and oxygen as value added streams.

Speaker 2

We're excited to join this new hydrogen hub initiative, and we will continue to engage with the Kentucky administration and other stakeholders as the state's clean energy strategy evolves. We're also very excited to support continued economic development in Kentucky, which is coming off a banner year for attracting new business and manufacturing in the state. As we highlighted on our Q3 call, Kentucky's success in 2021 included Ford's announcement that it will build a $6,000,000,000 battery manufacturing complex within our LG and E and KU service territories. The complex to be built in Glendale, Kentucky will help put the state at the forefront of the auto industry's transformation to electric vehicles, and the state has called it the single largest economic development project in its history. In support of this effort in Glendale, Kentucky Utilities recently requested regulatory approval to build 2 345 kV and 2138 kV power lines and 2 new substations.

Speaker 2

LG and E plans to construct an interconnection gas regulation facility and nearly half mile of gas lines to serve the Glendale project. The estimated capital cost to support the Glendale Economic Development Project is $150,000,000 to $200,000,000 The Kentucky Public Service Commission has set a procedural schedule that will support our ability to meet Ford's construction timeline. In addition to these initiatives, we also remain focused on advancing technology and innovation. Each of our utilities were recently recognized for these efforts by winning technology transfer awards. In Pennsylvania, DPL Electric Utilities received this award for application of an adaptive tool, which through automation further increases the overall safety, reliability and efficiency of the electric grid.

Speaker 2

This tool expands on one of the most advanced grids in the nation as we continue to develop a safer, smarter, self healing grid of the future. In Kentucky, LG and KU were recognized for the use of EPRI's Electrification Portfolio Assessment tool to identify high impact electrification technologies to reduce natural gas use and related emissions. This technology research project identified more than 1,000,000 megawatt hours of electrification opportunities for LG and E and KU industrial and commercial customers to reduce emissions and lower costs. These awards are just another example of our continued efforts to lead in the research and development space while progressing towards our sustainability goals. Across our businesses, we are also very focused on improving the customer experience by expanding self-service options, and our progress in this area continues to be well received by our customers.

Speaker 2

In February, PPL Electric Utilities ranked 1st in J. D. Power's annual utility digital experience study. The study assesses how customers interact online and through mobile apps with the 36 largest electric, natural gas and water utilities in the U. S.

Speaker 2

PPL Electric score in the study improved significantly in 2022, while a majority of the company surveyed experienced declining scores. Improving customers' digital experience is yet another way we continue to use technology to drive value for our customers. Shifting to our final update on Slide 5. We continue to make progress across PPL in advancing key environmental, social and governance initiatives. On April 14, we published our annual sustainability report, which addresses our approach to a wide range of ESG issues and highlights our 2021 performance and progress.

Speaker 2

As highlighted in the report, we have expanded on our commitment to to achieve net zero carbon emissions by committing to not burn unabated coal by 2,050. This new commitment reflects our continued discussion and expectations around the future of our coal fleet and its transition. Based on our current retirement schedule, We expect our coal capacity to be reduced from just over 4,700 megawatts today to approximately 5 50 megawatts in 2,050. The 550 megawatts are associated with our highly efficient Trimble County 2 Colt fired facility, which was completed in 2011. There are any number of technology developments, regulatory mandates or circumstances that could impact the timing of the end of this plant's economic life.

Speaker 2

We believe that research and development is the key to our clean energy future and fully expect that innovation, technological Advances in the relative economics of other cleaner energy sources will support the company's commitment to not burn unabated coal at this facility by 2,050. And other highlights from our sustainability report, we created and filled a new Chief Diversity Officer position to lead our DEI strategy enterprise wide and build on the progress we made in 2021. Finally, I would note that we have added political contributions to the oversight function of our Board's governance, nominating and sustainability committee. PPL's transparent disclosures in this area have earned us a trendsetter ranking by the CPA Ziclan Index, which benchmarks the political disclosures and accountability policies and practices of leading U. S.

Speaker 2

Public companies. Oversight by the Governance, Nominating and Sustainability Committee will further strengthen our governance in this area. That concludes my strategic and operational overview. I'll now turn the call over to Joe for the financial update. Joe?

Speaker 3

Thank you, Vince, and good morning, everyone. I'll cover our Q1 segment results on Slide 6. As Vince noted, we reported 2022 1st quarter GAAP earnings of $0.37 per share. Special items in the Q1 were $0.04 per share, primarily due to integration expenses associated with the planned acquisition of Narragansett Electric. Adjusting for these items, 1st quarter earnings from ongoing operations were $0.41 per share.

Speaker 3

Turning to the ongoing segment drivers, Our Pennsylvania regulated segment earned $0.19 per share, a $0.03 year over year increase. The improved earnings results in Pennsylvania were primarily driven by higher peak transmission demand, returns on additional capital investments in transmission and higher sales volumes. The increases were partially offset by higher operation and maintenance expense, including higher than expected storm costs. Turning to our Kentucky segment, we earned $0.25 per share in the Q1, a $0.07 increase over comparable results 1 year ago. The increase was primarily due to higher base retail rates effective July 1, 2021.

Speaker 3

Partially offsetting this increase was higher depreciation due to additions to PP and E. Results at Corporate and Other were $0.03 higher compared to the prior year. Factors driving earnings results at Corporate and Other primarily included lower interest expense, primarily resulting from the recapitalization of the balance following the sale of WPD. Finally included in the segment results as reflected on this slide in our Q1 2022 EPS due to share accretion resulting from the $1,000,000,000 of buybacks completed in 2021. That concludes my prepared remarks, and I'll turn the call back over to Vince for some closing comments.

Speaker 2

Thank you, Joe. As I noted earlier in my remarks, we continue to work diligently through the state appeals process in Rhode Island. While the appeal has delayed the closing of the acquisition, we are confident we will complete this transaction. And we look forward to introducing a new PPL, a PPL that is built for the future, an innovative best in class utility operator positioned to deliver competitive earnings and dividend growth, backed by one of the strongest balance sheets in our sector, employees to lead the clean energy transition, while keeping energy service affordable and reliable for our customers. And we continue to look forward to sharing a strategic update, including long term growth projections at an Investor Day following the Rhode Island closing.

Speaker 2

With that operator, let's open the call for Q and

Operator

A. Ladies and gentlemen, at this time, we'll begin the question and answer session. And our first question today comes from Shahriar Pourreza from Guggenheim Partners. Please go ahead with your question.

Speaker 4

Hey guys, good morning. Good morning, Shar. So Vince, starting, I guess, with Rhode Island, if The superior court rules in favor in your favor, I guess, the AG could appeal to the state Supreme Court. Any general thoughts on timing if that were to occur? Is it an immediate filing?

Speaker 4

And then would you wait for the court to deny or stay? Assume you would not close while this process is still underway, right?

Speaker 2

Yes, sure. Let me just reiterate that we are in active litigation in Rhode Island. And as I said, we're engaged in settlement discussions with So I really can't say any more than what I've already said in my prepared remarks. I'll just reiterate that We're confident that we'll close the transaction in a timely fashion. And again, look forward to rolling out the new PPL at an Investor Day shortly following the close.

Speaker 2

Look, I appreciate that you may have some questions about the matter, but I really need you to respect where we are in this process.

Speaker 4

No, that's fair. I appreciate that. And then just maybe a question for Joe on housekeeping. Can you just remind us what the approximate unallocated cash balances at this point following the buybacks, which you just highlighted And the 3Q CapEx increase that you had, I guess, how are you thinking about the toggle between buybacks and more CapEx as we approach the finish line here in buyout?

Speaker 3

Yes. So Shar, we'll lay out all the details at the Investor Day when we have it. I mean, clearly, we have cash available for the acquisition of And we'll include that process, but anything beyond that we'll discuss at the Investor Day.

Speaker 4

Okay, got it. And then just one last one for me and I'll jump back in the queue. It's just as we're thinking about the Analyst Day, the topic of Kentucky does pop up here and there. And obviously, there's a trajectory that's out there, with the prior IRP that's File, but is there an opportunity to maybe take a slightly more aggressive approach as you're thinking about The coal outlook within that state versus what you just recently filed?

Speaker 2

Well, I'll just say that at the Investor Day, we'll provide a comprehensive update on the company's outlook, Our strategy and again, we're calling it the new PPL for a reason, Shar. So

Speaker 3

I think it's

Speaker 2

been a while since we've had some detailed financial projections out there, but we're really looking forward to laying all of this out for the market. It will provide the investment opportunities in each of the jurisdictions, where we see the near term and long term growth going and really how that translates into our earnings and dividend growth projections. So we'll cover all of that at the Investor Day for sure.

Operator

No, that's helpful. I mean,

Speaker 4

I think there's some trepidations around what the base earnings could be and what you would grow off of that. So it'd be very welcome. So thank you so much guys. I appreciate it.

Speaker 2

Yes. I'll just say, look, we're focused on growing, having our earnings growth very competitive And we'll lay all that out at the Investor Day. We're confident we'll be able to deliver.

Speaker 4

Fantastic, guys. I'll see you soon. Thanks again, Vince. Bye.

Speaker 2

Thanks.

Operator

Our next question comes from Nicholas Campanella from Credit Suisse. Please go ahead with your question.

Speaker 5

Hey, everyone. Good morning. Thanks for taking the time. I just wanted to follow-up on Kentucky actually again And just thinking through the portfolio and the amount of undepreciated book value that's kind of still in rate base today. Can you I don't know if you would be able to kind of quantify that now or not, but that would be helpful.

Speaker 5

And then just thinking through the options for long term Entirements or even any potential acceleration, can you just discuss the framework that's in place there? Because I believe it's changed since you came out of the most recent rate case there? Thanks.

Speaker 2

Yes. So on the retirements, we have the 2024 Retirement and then additional retirements in 2028 and then the next round are in kind

Speaker 4

of the

Speaker 2

mid-2030s As outlined in the IRP, we are actively engaged with the commission and other parties responding to questions around the IRP. But as we think about Really the 2028 retirements, going from kind of the theoretical that was in the IRP. Again, that's a point in time analysis to actually putting together the generation replacement plan. We're actively working on that now. That will become part of the interaction that we have with various stakeholders around the IRP.

Speaker 2

Ultimately, that will culminate in a CPCN Probably within the next year around what we think that generation replacement will look like. But Nick to your point, There's opportunity to look at those retirement dates and potentially pull those in, but those will all be part of The CPCN request that we'll be marking on here in the near term. Joe, anything you want to add on

Speaker 6

I think Nick, the other part of your question was the current rate base.

Speaker 3

And that's the other part of your question. That's about $5,000,000,000 today.

Speaker 5

Okay. Dollars 5,000,000,000 Thank you. I appreciate that. And then just core business today, What are you seeing in terms of just inflation impacts? How are you feeling on labor pressures, financing costs and just how should we kind of be thinking about how that affects the base business today.

Speaker 5

Thanks.

Speaker 2

Yes. Well, it's certainly an area that we're keeping an eye on. In both PA and Kentucky, we've seen Some increase in prices due to inflation. However, we expect to be able to manage that. Really where you're seeing The largest impact of inflation is on the cost of energy.

Speaker 2

So the energy purchases, the fuel purchases, And even though that they don't necessarily impact the P and L because those are past due costs, They certainly impact affordability for our customers and that continues to be a key area that we're focused on in ensuring that our energy remains affordable for our customers. So one of the key aspects of our business plan and we'll get into a lot more detail on this at the Investor Day is to drive efficiency across the entire business. Some of the parts of that strategy are centralizing our shared services functions. We're further leveraging our supply chain function and as we talked about continuing to use technology and work optimization to reduce our overall costs. On the affordability side, in addition to just maintaining and driving efficiency across the enterprise on the cost side, We are very focused on ensuring that our customers are aware of all the programs that are available to them as they think about paying their utility bills.

Speaker 2

And we'll likely need to provide flexible payment plans to our customers just like we did during the pandemic. So all of these activities, Nick, we think They're going to serve us well in this inflationary environment as again, we continue to look to maintain affordability for our customers. Thanks a lot. Looking forward

Speaker 5

to the Analyst Day. Chat soon.

Speaker 2

Thanks, Nick.

Operator

And our next question comes from Steve Fleishman from Wolfe Research. Please go ahead with your question.

Speaker 6

Yes, thanks. One brief one. Just When you talk to a competitive earnings and dividend growth rate, I would say the average in the sector right now is To 7% generally, is that kind of a fair reflection of what you see as the average in the sector?

Speaker 2

Sorry, Steve, you cut out when you stated your range or number. Say it again.

Speaker 6

5% to 7% generally viewed as the average, I'd say right now, is that kind of the bogey that you would be looking?

Speaker 2

Yes. Well, that's consistent with what we see as well. Yes.

Speaker 6

Okay. That's it. Thank you.

Speaker 2

Sure.

Operator

And our next question comes from Anthony Kraldahl from Mizuho. Please go ahead with your question.

Speaker 4

Hey, great. Good morning. Thanks for taking my question and Finn's tough outcome on Tuesday, so hopefully get better luck tonight. Just I guess quickly on I guess Slide 4 and I don't know if you could answer this and if you can't just please tell me, but one of the bullets You highlighted that the Attorney General is requesting just, I guess, for men with instruction versus vacating the approval decision. I guess, what is the distinction there that you're trying to make on that bullet?

Speaker 2

Yes. So Anthony, that just means that The Attorney General's office is not looking for the judge to strike down in totality The decision that the division made to approve the transaction and then we basically start from scratch. What was requested was that they remand The decision back to the division with instruction to address the issues that the Rhode Island Attorney General's office had. So

Speaker 4

it's just

Speaker 2

making reference to what was being requested by the Attorney General's office. It's not a complete redo.

Speaker 4

So there so am I fair to say from that bullet that There's actually no challenge to actually there's no challenge to the DPUC approval, but the DPUC approved the transaction. And right now, there's no pending legal, I guess, matter that's challenging that approval that DPUC gave?

Speaker 2

No, no. As I said in my prepared remarks, really the two issues that the Attorney General's office is challenging within the decision is whether or not the act on climate was adequately reviewed and analyzed in providing the approval And then whether the public interest requirement was met. So those were the 2 primary challenges that the Attorney General had around the decision.

Speaker 4

Great. And then lastly, if I could just pivot, I guess, maybe Pennsylvania. It's on kind of like customer bill impact And will load growth be impacted? If I think in Pennsylvania, I think customers maybe had an increase in December due to higher commodity prices. And then I believe new rates go into effect in June, so you get a kind of a pancake of maybe a sizable increase.

Speaker 4

I guess one is What level of increase are you forecasting customers may face in Pennsylvania in June versus maybe a year ago? And then do you think That could impact either customer load growth, it looks very attractive when I look on the slides or maybe if it postpones any CapEx and I'll leave it at there.

Speaker 2

Yes. I'll Craig, do you want to talk to that? I mean, at a high level, the increases are Significant as you're describing. As we know commodity prices are way up this year versus last year. And again, that's a pass through cost for us, but it's Upwares this year versus last around could be as much as 50%, 60%.

Speaker 2

So it is very significant. We are actively reaching out to our customers to help them, whether it's shopping or as I talked earlier about flexible payment plans, etcetera. So making sure that they have the full suite of options at their disposal. When you look at the total It's really the generation side, Anthony. I think T and D is actually going down.

Speaker 2

So it's really a generation issue. But it's certainly an area that we're focused on helping our customers deal with. But Greg, any further details or insights you have on it?

Speaker 6

Yes. So To Vincent's point, compared to June of last year, the overall bill for residential will go up about 30%. Again, it's driven by basically a doubling of the generation costs. So the impact on sales going forward, We'll have to see, but it's that's a big impact. We are Really pushing for because we're a competitive state, there may be generation providers that To have a lower rate than that.

Speaker 6

So in our communication to customers, we're really pushing for them to go shop. And if there's a lower Generation charge for deal out there, they should sign out for it.

Speaker 4

Great. Thanks so much for taking my questions and looking forward to the Analyst Day.

Speaker 2

Great. Thanks, Anthony.

Operator

And our next question comes from Paul Zimbardo from Bank of America. Please go ahead with your question.

Speaker 2

Hi, good morning. Thank you. First, I just want to clarify quick with the affordability questions. There's no plans in moderating The capital plans in Pennsylvania or Kentucky that you put out before? Well, we'll lay out our new capital plan on the Investor Day, Paul.

Speaker 2

But Specifically related to the old plans, they're not being impacted by that. Okay, Great. And I just wanted to check on that. And then just since all the inflation questions, what is the long term O and M Targets for Pennsylvania and Kentucky, just as you're seeing more trends, could this change the rate case plans in Pennsylvania? Well, overall, again, we'll get into the details on the Investor Day.

Speaker 2

But as I mentioned, part of our strategy is to become more efficient across the entire enterprise, especially after we close Rhode Island and we're able to really leverage the IT systems that we have here in Pennsylvania around the T and D operations. As we've talked, we need to just bring Rhode Island onto those systems. They're not coming with systems because they're integrated with National Grid. So we'll be able to take advantage of spreading all the fixed costs of Those systems over more customers and more employees. In addition to that, like I said, we're centralizing our services organizations or functions and looking to even further optimize our supply chain efforts across the entire portfolio.

Speaker 2

And again, bringing in The opportunity with Rhode Island will enable us to do that even further. So we see a fairly significant opportunity there to reduce So, again, over the planning horizon. And again, we'll lay all that out on the Investor Day, but it's significant. Greg, anything you want to add to that?

Speaker 6

Yes. Just you had mentioned PPL, electric utilities, so there's no plans immediate in the immediate Future for a rate case there, I would say.

Speaker 2

Okay. Totally understood. Thank you all. Appreciate it.

Operator

And our next question comes from Michael Lapides from Goldman Sachs. Please go ahead with your question.

Speaker 7

Hey guys, easy question for you. Just curious if I thought you had a stay out in Kentucky for a number of years. So if you ramp up capital spend there, do you have to wait until that next case to get cash recovery of it? Or are there mechanisms you can utilize That would enable interim rate increases before that next case. And can you remind me when do you file that next case there?

Speaker 2

Yes. So last year's rate case, we had a 4 year stay out provision. We do have the environmental recovery mechanism in Kentucky. So if there are any environmental related Capital spend that does get recovered, Michael, on a more real time basis. Just more broadly, we have The DISC mechanism in Pennsylvania, so even while Greg just mentioned, we don't have a base rate case, we do have the DISC And then in Rhode Island, they have the their capital recovery mechanism as well That does not require base rate cases.

Speaker 2

So the plan that we'll lay out in the Investor Day will not rely on any Near term rate cases across the entire portfolio, which we think will differentiate our plan against some of our peers.

Speaker 7

Got it. And can you remind me, do you have like how much in the way of near term, call it, next 3 to 5 years, coal ash or ELT related spend do you have

Speaker 2

That we'd probably be better off responding to that at the Investor Day. It's probably still a couple of $100,000,000 over that time period, Not as much as what we were showing in the prior 5 years or so, Michael, but there's still a little bit to go there.

Speaker 7

Got it. Thanks guys. Much appreciated, Vince.

Speaker 2

Sure. Thanks.

Operator

And ladies and gentlemen, with that, we will be I'd like to turn the floor back over to the management team for any closing remarks.

Speaker 4

Yes.

Speaker 2

I just want to thank everybody for joining the call. Again, Q1, I think, good start to the year. We remain confident in our ability to close Narragansett and really looking forward to laying out the new

Operator

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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