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PPL Q2 2022 Earnings Call Transcript


View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Andy Ludwig
    Vice President, Investor Relations
  • Vincent Sorgi
    President and Chief Executive Officer
  • Joseph P. Bergstein, Jr.
    Executive Vice President and Chief Financial Officer

Analysts

Presentation

Operator

Good morning, and welcome to the PPL Corporation Second Quarter 2022 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Andy Ludwig, VP, Investor Relations. Please go ahead.

Andy Ludwig
Vice President, Investor Relations at PPL

Thank you. Good morning, everyone, and thank you for joining the PPL conference call on second quarter 2022 financial results.

We 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's President and CEO; and Joe Bergstein, Chief Financial Officer. Greg Dudkin, 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 2 and a 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. For reconciliations to the comparable GAAP measures, please refer to the appendix.

I'll now turn the call over to Vince.

Vincent Sorgi
President and Chief Executive Officer at PPL

Thank you, Andy, and good morning, everyone. Welcome to our second quarter investor update.

Turning to Slide 4, 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 derisked the company and created a compelling portfolio of domestic regulated utilities.

Our company has one of the best operating track records in the industry. 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 base growth driving our earnings growth later in the decade, with a total capital investment need of at least $27 billion through 2030. 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 were 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 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 opportunities stemming from the Federal Infrastructure Investment and Jobs Act or the IIJA. 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 plan period.

We also have an opportunity to lead the clean energy transition as we move through the plan 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 is a pivotal part of our broader clean energy strategy, in addition to delivering the utilities of the future, utilities that are designed to efficiently enable and manage distributed energy resources and large 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 PPL. My team and I are ready and committed to deliver for our customers and our shareowners.

Turning to Slide 5 and the highlights of our second quarter results. Today we announced second quarter reported earnings of $0.16 per share. Adjusting for special items, second quarter earnings from ongoing operations were $0.30 per share compared with $0.19 per share a year ago. Strong second quarter earnings have us 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 25.

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 plans that will drive our O&M savings targets. I'll discuss the details of these initiatives on the next slide.

The final major highlight I'll note this morning is the RFP that LG&E and KU recently issued for replacement generation in Kentucky. As a reminder, company is expected to retire at least 1,000 megawatts of coal-fired generation by 2028. The RFP is open to a variety of generation sources, which I'll touch on further in a few minutes.

Turning to Slide 6. As I mentioned, our strategy moving forward focuses 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 take shape, we expect the savings to step up to a cumulative 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 and 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 costs 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. I just want to treat Canopy is expected to reach a certain power line and we'll need to be trimmed or cut down. We spent several years honing our PA 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 network, 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 PA 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 improved customer satisfaction. We're also projecting lower O&M in other areas of our operations, including the Generation & 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 in 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 and licensing costs and improve overall operating efficiency. This also includes leveraging our increased buying power from centralized supply chain operation, procure equipment and materials enterprise wide as well as other savings from consolidating our other Shared Services function.

In summary, we believe our strategy which leverages operating efficiency, data science and advanced technology differentiates PPL by supporting competitive earnings and dividend growth of 6% to 8%, while remaining 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 a proven operating model, are technology driven and our spread over several areas of the business over several years, with achievable targets and plans in each area.

Turning to Slide 7. 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 1,000 megawatts of coal by 2028, and an additional 1,000 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, LG&E and KU 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 baseload 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 our 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. This 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 plan including the Good Neighbor Rule. The Good Neighbor Rule could potentially advanced 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?

Joseph P. Bergstein, Jr.
Executive Vice President and Chief Financial Officer at PPL

Thank you, Vince, and good morning, everyone. Turning to Slide 9, as Vince noted, we reported 2022 second quarter GAAP earnings of $0.16 per share. Special items in the second quarter were $0.14 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 $0.30 per share, an improvement of $0.11 per share compared to last year. This strong quarter brings our year-to-date GAAP earnings to $0.53 per share. Adjusting for special items of $0.18 per share, our ongoing earnings results are $0.71 per share through the first half of 2022, compared to $0.47 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 $0.03 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 $0.03 per share year-over-year, excluding accretion. The increase was primarily due to higher base retail rates effective July 1, 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 $0.01 per share for the quarter, reflecting our one month of ownership. Results of Corporate & Other were $0.03 higher compared to the prior year, driven by lower interest expense, primarily resulting from the recapitalization of the balance sheet following the sale of WPD. Finally, we experienced $0.01 increase in our second quarter 2022 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.

Vincent Sorgi
President and Chief Executive Officer at PPL

Thank you, Joe. As I said at the outset of my remarks, I'm excited about the prospects for the new PPL. Through our strategic transactions, we position the company to deliver consistent, sustainable, top-tier returns for our shareowners an exceptional results for our customers. We 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.


Questions and Answers

Operator

Thank you. [Operator Instructions] And the first question will be from Durgesh Chopra from Evercore ISI. Please go ahead.

Durgesh Chopra
Analyst at Evercore ISI

Hey...

Vincent Sorgi
President and Chief Executive Officer at PPL

Good morning, Durgesh.

Durgesh Chopra
Analyst at Evercore ISI

Good morning, Vince. Thanks for the update. Hey, just wanted to kick things off with the Inflation Reduction Act. Your peers have kind of talked about implications. Maybe -- 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?

Vincent Sorgi
President and Chief Executive Officer at PPL

Yeah, sure. So for the most part, we think the Act is positive for the company. First, in the ability to elect the production tax credit instead of the ITC for solar, 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 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 the 15% EMT provision to have a significant impact on our business. So, 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 will also be good in general for for the industry and for accelerating our clean energy transition. It simplifies the structure of the deals significantly.

Durgesh Chopra
Analyst at Evercore ISI

Got it. What effective cash tax rate are you currently at?

Vincent Sorgi
President and Chief Executive Officer at PPL

Yeah, Joe, do you want to.

Joseph P. Bergstein, Jr.
Executive Vice President and Chief Financial Officer at PPL

Yeah, sure. So I would kind of expect it to be around the 15% range through the planning period.

Durgesh Chopra
Analyst at Evercore ISI

Got it. Okay, all right. So the EMT is not going to impact the cash flow sort of metrics in the plan. Okay, then just switching gears to the -- and by the way, thank you for sharing the details on Slide 6 on the O&M trajectory. That's really helpful by year. Just switching to Slide 7 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 -- do we expect a formal approval for the commission or what are the kinds of things that we should be watching for?

Vincent Sorgi
President and Chief Executive Officer at PPL

Yeah, so the -- there could be various filings that we'll need to make. It will really depend to cash on the generation replacement strategy. So to the extent we are going to be building generation, we will need a CPCN for that, and that will go into the commission, there'll be a period of months, approval process. There is no statutory requirement on that, but it will take some months for the commission to get through that. If it's through PPAs for renewable energy, those contracts also require approval from the commission. And so the form of the filings will take shape depending on the ultimate generation source that we come up with in terms of that replacement generation, but both generally, will require filings.

Durgesh Chopra
Analyst at Evercore ISI

Got it. And then just one last one and I'll pass the opportunity for others to ask questions. Is any of this capex coming out of these RFPs would be incremental to our current plan, correct?

Vincent Sorgi
President and Chief Executive Officer at PPL

It's incremental to the $12 billion in the five-year capex plan. We do have $1 billion to $2 billion of capex for generation replacement in the $27 billion that we showed through 2030.

Durgesh Chopra
Analyst at Evercore ISI

Alright. Thanks, guys.

Vincent Sorgi
President and Chief Executive Officer at PPL

Sure.

Operator

And the next question is from Ryan Greenwald from Bank of America. Please go ahead.

Ryan Greenwald
Analyst at Bank of America Merrill Lynch

Hey, good morning, everyone.

Vincent Sorgi
President and Chief Executive Officer at PPL

Good morning.

Ryan Greenwald
Analyst at Bank of America Merrill Lynch

Appreciate the time. Just to maybe piggyback on Durgesh's question around the IRA, how do you -- how does this kind of influence the way you guys think about unregulated renewables?

Vincent Sorgi
President and Chief Executive Officer at PPL

I mean, obviously it will help the economics around that business. Again, it's a very small component of our overall business. So I don't see it earning safari into a material driver of our earnings in the near term. But obviously, it will simplify the deal structures and make those projects more economic.

Ryan Greenwald
Analyst at Bank of America Merrill Lynch

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 can factor in the rate case dynamics and how long you guys are able to stay out?

Vincent Sorgi
President and Chief Executive Officer at PPL

Yeah, I'll let Joe talk about the specifics on that. I mean, the reduction going from 9.99% to 4.99% is over a period of years. I think it concludes in 2031. So in any one year, the impact is insignificant. But Joe, do you want to talk about that?

Joseph P. Bergstein, Jr.
Executive Vice President and Chief Financial Officer at PPL

Yeah, sure. So, the current corporate income tax rate is Pennsylvania is 9.99%. That's going to be reduced to 8.99% on January 1, 2023. And then from there, it decreases by 0.5 percentage point annually until it reaches 4.99% in 2031, it's been said. So the impact is not material. I don't think that it 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 not a material impact of the business.

Vincent Sorgi
President and Chief Executive Officer at PPL

But it's good. We're glad to see the reduction in the rate just for general business purposes. It's good to see, for sure.

Ryan Greenwald
Analyst at Bank of America Merrill Lynch

Absolutely. I will leave it there. Thanks so much.

Vincent Sorgi
President and Chief Executive Officer at PPL

Great. Thanks, Ryan.

Operator

And the next question is from Michael Lapides from Goldman Sachs. Please go ahead.

Vincent Sorgi
President and Chief Executive Officer at PPL

Hey, Michael.

Michael Lapides
Analyst at The Goldman Sachs Group

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 of at least $150 million targeted by 2025. Do you see upside to that $150 million. And if so, kind of where do you think that upside -- kind of which of the buckets could that emerge from?

Vincent Sorgi
President and Chief Executive Officer at PPL

Yeah. So as we've discussed the -- if you look at the disclosure that we provided on the Investor Day and you take the benchmarking metrics that we had just for the T&D operations where EU was just outside the top quartile in Kentucky and Rhode Island were 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 move EU into the first quartile, that is worth more than $150 million.

In addition to that, we have the generation reductions that we're disclosing today. So the opportunity is more than the $150 million. The $150 million through 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 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 is 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 plan. To-date, it hasn't had a material impact, but if that were to shift, we think that upside could help offset that or it could provide upside to the EPS growth rate.

Michael Lapides
Analyst at The Goldman Sachs Group

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 rule impact the energies that would come from existing coal plants or what do you think more of it as it would drive more of your existing coal plants into retirement, therefore create a need for both energy and capacity?

Vincent Sorgi
President and Chief Executive Officer at PPL

Yeah, so the Good Neighbor rule is basically the Cross State Pollution Rule, and so from our perspective, it's really around back-end technology and the need for it. So we still have a plant in -- that's scheduled to retirement in 2034, that would require some back-end pollution control equipment under this proposed rule. And so, Michael, what we would have to do, based on the final language in that, is determine the most economic way to address that regulation. 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 address that. But it certainly could drive us potentially to retire that plant sooner than 2034.

Michael Lapides
Analyst at The Goldman Sachs Group

Got it. And if I think about not just the timeline of this, the RFPs that are already underway in Kentucky, probably don't address the incremental potential coal retirements that could get moved up that you'd either -- if you needed a place for that coal plant, you'd either have to host another RFP sometime next year or the following?

Vincent Sorgi
President and Chief Executive Officer at PPL

I don't think so. I mean, we're getting a number of responses. And so, really, I think what you're describing is are we replacing a 1,000 megawatts or 1,500 megawatts of coal capacity, and we'll just back the responses accordingly to come up with the most economic way to address either 1,000 or 1,500 megawatts. So that's how we're thinking about it. I don't think we'd have to run another RFP.

Michael Lapides
Analyst at The Goldman Sachs Group

Got it. And the incremental megawatts is just an extra 500.

Vincent Sorgi
President and Chief Executive Officer at PPL

Let's say, it's just shy of 500 megawatts of capacity of that plant.

Michael Lapides
Analyst at The Goldman Sachs Group

Got it. Thank you, guys. Much appreciated, Vince.

Vincent Sorgi
President and Chief Executive Officer at PPL

Sure. Thanks, Michael.

Operator

[Operator Instruction] Next question comes from Gregg Orrill with UBS. Please go ahead.

Vincent Sorgi
President and Chief Executive Officer at PPL

Hey, Greg.

Gregg Orrill
Analyst at UBS Securities

Hey, thank you. Just a follow-up on if you might be able to sort of state what the Pennsylvania regulatory strategy is, or do you have a rate case that you're thinking about?

Vincent Sorgi
President and Chief Executive Officer at PPL

So as -- I think Joe discussed on our Investor Day call, we don't have an imminent rate case in the plan for Pennsylvania. That is something we always look at when we look at all of our jurisdictions. Of course, we've committed to staying out of base rate cases both in Rhode Island and Kentucky, at least till mid 2025. We do not have that commitment in Pennsylvania. Again, based on the optimization strategy, we think we can hold off a bit in PA, but that's something that we're always looking at when the best time to go in is. So just to reiterate what Joe said, we don't have anything imminent in the plan.

Gregg Orrill
Analyst at UBS Securities

Great, thanks. Congratulations.

Vincent Sorgi
President and Chief Executive Officer at PPL

Great. Thanks, Greg.

Operator

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.

Vincent Sorgi
President and Chief Executive Officer at PPL

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.

Operator

[Operator Closing Remarks]

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