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PPL Corporation (NYSE:PPL)
Q4 2017 Earnings Conference Call
Feb. 22, 2017, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the PPL Corporation Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your touchtone phone. To withdraw your question, please press * then 2. Please also note, today's event is being recorded.

I'd now like to turn the conference over to Joe Bergstein, Vice President of Investor Relations. Please, go ahead, sir.

Joseph P. Bergstein -- Vice President of Investor Relations

Thank you. Good morning, everyone. Thank you for joining the PPL conference call on fourth quarter and year-end 2017 results as well as our general business outlook. We're providing slides to this presentation on our website at www.pplweb.com.

Any statements made in this presentation about future operating results or other future events are forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from the forward-looking statements.

A discussion of factors that could cause actual results to differ is contained in the Appendix to this presentation and in the company's SEC filings. We will refer to earnings from ongoing operations or ongoing earnings, a non-GAAP measure, on this call. For reconciliations to the GAAP measure, you should refer to the press release, which has been posted on our website and furnished to the SEC.

At this time, I'd like to turn the call over to Bill Spence, PPL Chairman, President, and CEO.

William H. Spence -- Chairman, President, and Chief Executive Officer

Thank you, Joe, and good morning, everyone. We're pleased that you joined us. With me on the call, today are Vince Sorgi, PPL's Chief Financial Officer; and the Heads of our U.S. and U.K. Utility businesses.

From Kentucky, that includes Vic Staffieri, LG&E and KU Energy Chairman and CEO, and Paul Thompson, President and Chief Operating Officer of our Kentucky segment. As we announced in early January, Vic will be retiring in March after 17 years at the helm of LG&E and KU and 26 years with those businesses. Paul, who joined LG&E in 1991, will succeed Vic. Vic's provided outstanding leadership to our Kentucky segment, and he's been a very valued member of PPL senior leadership team. We appreciate his many contributions to PPL. With our strong focus on succession planning, Paul is more than ready to step into this role, and we're pleased to have him joining us on today's earnings call. Congratulations to you both.

Moving to slide 3, our agenda for this morning begins with highlights of our 2017 results and a look at 2018 and beyond in light of US Tax reform. I'll discuss the strength of our dividend and our commitment to dividend growth. I will also provide an update on the UK regulatory environment. Vince will then review our 2017 segment earning results and provide a more detailed financial overview of our updated financial outlook. As always, we'll leave time to answer your questions.

On slide 4, very briefly I'd like to start with the state of our business in light of US tax reform. Tax reform will be beneficial to our domestic customers as lower corporate income taxes will be reflected in rates. The credit impacts of tax reform on PPL were more than we were expecting given the enacted tax rate of 21% compared to our expectation of 25%. We've taken steps to mitigate the impact of the lower corporate tax rate on earnings and our cash flows. In short, we've added an additional equity to our plan in 2018. We've increased our cash distributions from the UK, and we're utilizing the excess value in our foreign currency hedges in 2018 and 2019 and 2020. We'll discuss each of these in more detail as we move through the presentation this morning.

While there have been a number of changes with respect to our business plan, there are a number of items that actually have not change. We still expect to grow earnings per share by 5% to 6% through 2020 off of our new 2018 base year. Our updated plan reflects higher projected 2020 earnings per share compared to our previous estimate despite the effects of tax reform. We're committed to continued dividend growth, and today we announced the 4% increase in the dividend consistent with our prior expectations. We are intent on maintaining solid credit ratings as well. We maintained a significant level of capital investment that also drives our long-term value, and we strive for operational performance excellence each day. And we will deliver on our commitments to customers and share earners. The state of our business remains strong even as we've addressed the impacts of US tax reform.

Turning to slide 5, today we announced that we achieved the high end of our 2017 on-going earnings guidance range or $2.25 per share. This was the eighth consecutive year that PPL exceeded the midpoint of its ongoing earnings forecast, which highlights the operational excellence of our pure play, regulated utilities. The $0.07 improvement over the midpoint of our prior guidance of $2.18 per share was due to lower O&M expenses in the US and UK and favorable weather in the US during the fourth quarter.

Turning to 2018, we've updated our business plan to reflect the impacts of US tax reform and our mitigation actions and have announced our formal 2018 guidance range of $2.20 a share to $2.40 per share with a midpoint of $2.30 per share. Vince will take you through a detailed walk of 2017 actual ongoing earnings to the 2018 midpoint later during his remarks, but in summer, despite tax reform, our 2018 midpoint is $0.05 higher than our very strong 2017 results.

Looking longer term, our objective with this updated business plan is to continue to provide 5% to 6% percent earnings-per-share growth through 2020 while improving our credit metrics. We've established the 2018 midpoint as the new baseline for the 5% to 6% growth to coincide with the effective date of tax reform. As expected, the largest adverse effect of US tax reform was on our projected credit metrics with FFO-to-debt dropping into the low 12% range over the planned period prior to any mitigation effects. In order to support our current ratings with S&P and Moody's, we're targeting to get back to an FFO-to-debt ratio of 13% by the end of 2019. We've taken several steps laying the groundwork to achieve this goal.

First, we are utilizing the excess hedge value in 2018 through 2020 to mitigate the near-term tax impact to earnings and cash flow by letting our current hedges settle in their respective years. We feel comfortable with this revised strategy given the strength of where the pound is trading against the dollar today. Secondly, we plan to issue about $1 billion of equity in 2018 compared to our prior guidance for equity issuances of $350 million per year. Our additional equity needs beyond 2018 will be dependent upon the performance of our businesses, foreign currency, and regulatory outcomes.

Currently, we expect to issue between $500 million and $1 billion of equity in 2019 and 2020 with very minimal equity needs beyond 2020. We will work to minimize the amount of additional equity needed in 2019 and 2020. Even at the high end of the equity range, we are confident in our ability to achieve the midpoint of our 5% to 6% earnings growth through 2020, and at the low end of the range, we would actually exceed our EPS growth of 5% to 6% guidance through 2020.

Turning to the dividend, I want to reiterate that our dividend is secure, and we remain committed to dividend growth. In every quarter since 1946, we have paid a dividend to our shareowners, and PPL's dividend continues to be an important piece of our overall share on a return. This year is no exception. We announced the 4% dividend increase for 2018 with an annualized rate of $1.64 per share. I should point out that given our yield is significantly above our pure average, we will continue to monitor this as we consider the growth rate moving forward. We believe the disconnect between our yield and that of our peers is temporarily driven by the current political and regulatory uncertainty that exists in the UK.

I want to reiterate our position on the UK regulatory model in that it remains a premium jurisdiction. Vince and I, along with Robert Simmons, recently had a very constructive meeting with the most senior members of Ofgem, the regulator in the UK. Following that meeting, we feel even more confident that WPD is well positioned for long-term success under the RIIO regulatory framework and that the midperiod review will not be a material event for WPD or for PPL. I'll talk more about my thoughts on the UK in a few minutes.

Let's turn to slide where we outline some of our significant accomplishments in 2017. In addition to our strong financial results, from an operations standpoint, we continued to invest in the future successfully executing on $3.5 billion worth of infrastructure improvements. These investments continue to make our US and UK networks smarter, more reliable, more sustainable, and more resilient.

In Pennsylvania, we installed about 600,000 advance meters, completed significant transmission projects, including the first phase of our $160 million greater Scranton transmission reliability project, and added hundreds of additional smart grid devices to enhance distribution automation and strengthen grid resilience and reliability.

In Kentucky, we completed a 20-year, 540-mile gas main replacement project in the Louisville area and made significant progress of more than $800 million in environmental upgrades as part of a 10-year project to cap and close ash ponds at our coal-firing power plants.

And in the UK, we continued to make progress on our asset replacement and fault management plans as well as advancing nearly two dozen low-carbon network projects to enable increased adoption over noble energy resources.

As we executed these investment plans, we remained focused on continuous improvement and value for our customers. In Pennsylvania, PPL Electric Utilities recorded its best year ever for safety, reliability, and customer satisfaction. PPL Electric Utilities also achieved the lowest OSHA recordable injury rate as well as the highest customer satisfaction rate in our company's history. The company finished the year near the top decile of public utilities nationwide in limiting the average number of outages per customer. In 2017, our Pennsylvania customers experienced 550,000 fewer power outages than they did just ten years ago.

In Kentucky, LG&E and KU achieved the company's lowest OSHA recordable injury rate in their history finishing among the best in a group of comparable utilities nationwide while also improving reliability for our customers. In 2017, LG&E and KU also had their best performance for customer reliability in more than a decade. Since 2010, our Kentucky utilities have reduced both the frequency and duration of customer outages by 35% and 34% respectively.

On the generation side of the business, the utilities achieved their lowest combined, annual forced-outage rate since 2004, once again putting us in the top quartile of our peers forced-outage metric for the year.

And in the UK, WPD remains on track to achieve its 2017, 2018 performance incentive targets, which include reliability and customer satisfaction metrics with its four distribution network operators maintaining the top four spots for customer satisfaction among all the UK DNOs. This is a testament that the capital dollars we are spending across all three of our business lines are providing real value for customers.

Also in 2017, LG&E and KU received Kentucky Public Service Commission approval for a combined rate increase of $116 million with new rates taking effect July 1st of last year.

As we executed on our business plans in 2017, we also remained committed to transparency and sustainability. In November, PPL released a detailed scenario-based climate assessment report examining the potential impact of climate policies on PPL consistent with a shareowner request for increased disclosure. In December, we issued our completed Edison Electric Institute Environmental, Social, and Governance reporting template. PPL was one of the number of EEI member companies that helped to develop the template to provide investors a condensed, consistent look at sustainability metrics across our sector.

In January of this year, we announced a new goal to cut the company's carbon dioxide emissions 70% from 2010 levels by the year 2050. We expect to achieve these reductions by economically replacing Kentucky coal fire generation over time with a mix of renewables and natural gas, improving our energy efficiency, reducing substation greenhouse gas emissions, and cutting vehicle fleet emissions. We also announced our intent to respond to CDP's annual climate survey.

In summary, once again in 2017, we demonstrated execution across our US and UK businesses as we position the company for continued growth and success.

Turning to slide 7, I want to spend a bit of time on the UK regulatory update as political and regulatory uncertainty in the UK affected our stock price performance during the second half of 2017. We continue to believe, based on Ofgem's public comments and our meeting with them earlier this month, that we will have the opportunity to earn double-digit, real returns in RIIO 2 as the top performer among electric DNOs in the UK. Our meeting with Ofgem was very constructive, and I think both parties really listened to what the others had to say. Ofgem communicated to us that while they are pleased with the outputs being generated by regulated networks under RIIO 1, they believe customers are paying too much for those outputs.

This was especially evident in the transmission and gas distribution businesses where the cost of equity was set much higher than for the electric DNOs and overall returns on regulated equity in those sectors are higher than our sector. However, even for the electric DNOs, they were expecting a much wider distribution of returns among the companies. As a result, we believe Ofgem's goal for RIIO 2 will be to bring the overall regulatory returns down for transmission and gas distribution and force much more differentiation for electric distribution while preserving the ability for the top performers to still earn a double-digit real return on regulated equity.

Therefore, as we've been saying, while we agree the second in general will likely see lower returns, it is far too early to say that WPD will experience lower returns as the top performing DNO. From our side, we communicated to Ofgem the concerns we have been hearing directly from our investors about the uncertainty of the UK regulation and the impact it's having on investor confidence. We are also aware that some of our investors are actively engaging with Ofgem and expressing their views and concerns to them directly. I would encourage you to continue that direct engagement and to respond to the formal consultation processes as we have done for the midperiod review and plan to do on the RIIO 2 consultation.

As many of you know, the consultation process is under way to determine if a midperiod review for ED1 is required with a decision expected in the spring of 2018. Ofgem notes that the MPR mechanism was intended to be very limited in scope and that they have not identified any issues that meet the original scope definition. Given that fact, we firmly believe that an MPR with an extension of scope would ultimately lead to increased cost for customers as regulatory uncertainty will likely drive higher equity risk premiums and higher financing cost. We have made that clear to Ofgem on behalf of our share earners and other stakeholders in our formal consultation response, and they acknowledge that they have heard the same message from many others as well. Based on everything we are aware of to date, we do not expect the MPR to have a material impact on our future results.

Regarding RIIO-ED2, we believe it's far too early to predict any outcomes as the rules have not yet been developed by Ofgem. However, with Ofgem's statements that the best-performing companies should still be able to earn double-digit returns and that they want to drive more differentiation between the best and worst performing DNOs, we believe WPD is very well positioned to succeed in that type of regulatory construct in RIIO-ED2. Ofgem expects to consult with stakeholders in early 2018 on the proposed structure for the broader RIIO 2 framework. WPD and PPL will have an opportunity to share our views with Ofgem during this phase similar to prior price control reviews.

Finally, I would like to add that we still have five years before the next rate period takes effect, which begins in April of 2023. We've been very successful in the past at navigating through new price controls and mitigating earnings impacts. As we move forward, we will work constructively with Ofgem to continue to deliver positive outcomes for customers and fair returns for our share earners. In addition, we will keep investors informed of the ongoing regulatory processes and provide great visibility into UK regulation and financial results. In fact, we are providing expanded disclosures on the UK regulated segment in the business section of our 10-K that will be filed later today.

Moving to slide 8, we've updated this slide to reflect our rate base and earnings growth post tax reform. We expect US rate base to be higher relative to our prior plan due to the lower tax rates and the elimination of bonus depreciation for regulated utilities. We now project our combined regulated rate base to grow by 6.4% through 2020 increasing to $31 billion. We continue to expect to receive near real-time recovery for about 80% of the $10 billion in infrastructure investment we plan to make during that period, which supports our 5% to 6% EPS growth.

Now I'll turn it over to Vince for a more detailed financial overview. Vince?

Vincent Sorgi -- Chief Financial Officer

Thank you, Bill, and good morning, everyone. Let's move to slide 10 for a review of our financial results. Today we announced fourth quarter 2017 reported earnings of $0.11 per share compared with $0.68 per share a year ago. Full-year 2017 reported earnings were $1.64 per share compared to $2.79 per share a year ago. Lower reported earnings for the quarter and the year reflect a current year non-cash loss of $321 million or $0.47 per share due to the impact of US tax reform legislation enacted in December of 2017. This loss was driven by a reduction to deferred tax assets related to net operating loss carryforward of about $120 million and pension and other compensation-related liabilities of about $90 million to reflect the decrease in the US corporate income tax rate from 35% to 21%. In addition, we established evaluation allowance of about $100 million related to foreign tax credit associated with the transition from a worldwide to a territorial approach to taxing foreign earnings.

Adjusting for special items, including the effective tax reform, fourth quarter 2017 earnings from ongoing operations were $0.55 per share compared with $0.60 per share a year ago. The $0.05 per share decrease was driven by lower earnings from the UK regulated segment of $0.11 primarily due to higher income taxes due to a benefit recorded in the fourth quarter of 2016 for the utilization of foreign tax credit and lower foreign currency exchange rates in 2017. The lower UK results were partially offset by higher domestic gross margins in both Pennsylvania and Kentucky and lower operation and maintenance expense in Pennsylvania.

Moving to the bottom table, full-year earnings from ongoing operations were $2.25 per share placing us at the top of our 2017 ongoing earnings guidance range compared with $2.45 per share for 2016. I'll cover the year-over-year segment earnings drivers in more detail in a moment, but first, let me just highlight the impact of weather for the quarter and the year. For the quarter, we experienced the [penny] of favorable domestic weather compared to the prior year and compared to budget mostly from Kentucky. And for the year, domestic weather negatively impacted our results by $0.04 compared to the prior year and $0.03 compared to budget. In the UK for the year, weather was flat compared to '16 and favorable by $0.02 compared to budget.

Let's move to a more detailed review of the full year segment earnings drivers starting with the Pennsylvania results on slide 11. Our Pennsylvania regulated segment earned $0.51 per share in 2017, a $0.01 increase over 2016 results. This year-over-year increase was primarily due to higher gross margins primarily resulting from additional transmission capital investment and lower operation and maintenance expense. This was partially offset by higher depreciation due to asset additions, higher financing cost, and higher income taxes and other.

Moving to slide 12, our Kentucky regulated segment earned $0.57 per share in 2017, a $0.01 decrease from 2016. This year-over-year decline was primarily driven by higher gross margins from higher base electricity and gas rates effective July 1st, 2017 of about $0.05, partially offset by lower sales volumes due to unfavorable weather of -$0.03 and higher depreciation expense due to asset additions.

Turning to slide 13, our UK regulated segment earned $1.28 per share in 2017, a $0.21 decrease compared to the same period a year ago. The lower year-over-year results were primarily due to lower foreign currency exchange rates in 2017 compared to 2016 of $0.27, which we were expecting, increased depreciation expense from asset additions, and higher financing cost due to higher interest expense on index-linked debt. This was partially offset by higher gross margins driven by the April 1, 2016, price increase, partially offset by lower sales volumes; lower operation and maintenance expense, primarily from higher pension income; and lower income taxes, primarily due to lower UK income taxes; and a 2017 US tax benefit from accelerated pension contributions, partially offset by a US tax benefit recorded in 2016 for the utilization of foreign tax credits.

Moving to slide 15 and a more detailed review of the impact of US tax reform, as Bill mentioned, US tax reform will be beneficial to our domestic customers as lower corporate income taxes will be reflected in rate. The final legislation included many of the provisions we and other electric utilities advocated for including the preservation of interest deductibility for utilities paid for by foregoing bonus depreciation. However, tax reform does negatively impact earnings and credit through the lower tax shield on holding company interest expense and reduced cash flows at our domestic utilities as we pass through to customers the lower cost of federal income taxes. And since PPL is not a current federal taxpayer, we will see no immediate corporate cash benefit from the reduced tax rate.

The net result in our credit metrics was a reduction in our FFO-to-debt metrics into the low 12% range over the planning period, which pressures our current credit rating. Therefore, in response, we expect to settle the foreign currency hedges over the next few years to help mitigate near-term earnings and cash flow impact, and we now plan to increase our equity issuances in 2018. In terms of the UK segment, tax reform's shift to a territorial tax system for foreign entities is not expected to have a material impact on PPL. We were able to successfully mitigate the legislation's one-time, incremental tax on accumulated foreign earnings with existing net operating losses and foreign tax credits.

In addition, the fact that US parent corporations will generally no longer be subject to an incremental US tax on cash repatriation. This provides us with greater flexibility long term to repatriate cash from the UK. As referred to in earlier remarks, we've increased the projected amount of cash repatriation from the UK to pre-Brexit levels of between $300 and $500 million per year compared to our prior plan of $100 to $200 million a year, which also results in a corresponding shift in borrowing from the US to the UK segment.

While there is now great long-term flexibility with regards to repatriation, this decision was primarily driven by the change in the US tax rate and the strengthening of the pound. Overall, the impact of US tax reform was a net benefit to our federal cash tax paying status as we don't expect to be a federal cash taxpayer now until 2022 or 2023.

Lastly, on the regulatory front, on January 29th, LG&E and KU reached a settlement agreement subject to approval by the KPSC to commence returning savings related to tax reform to their customers. In Pennsylvania, the PUC requested comments regarding the impacts of tax reform on customer rates last week. We are preparing our responses to this request and will wait for formal guidance from the commission. At this point, we have not received formal guidance from FERC. We will continue to work closely with the applicable regulatory bodies to appropriately reflect and incorporate the impact of federal tax reform in our rate.

Turning to a discussion of our updated plan, on slide 16 we show a walk from our 2017 actual ongoing earnings of $2.25 per share to the midpoint of our 2018 forecast prior to tax reform of $2.33 per share. We then continue the walk reflecting the impacts of tax reform and end at our current 2018 ongoing earnings forecast midpoint of $2.30 per share. In summary, our 2018 midpoint is still $0.05 per share higher than our strong 2017 results despite the effects of tax reform.

Looking at the detailed operational drivers on the left hand side of the slide, our UK segment is expected to deliver higher earnings of $0.08 compared to 2017, primarily resulting from a higher foreign currency exchange rate and a higher pension income primarily due to continued pension funding required by our pension trustees, partially offset by higher taxes, primarily the result of $0.11 of tax benefit recorded in 2017 that are not expected to repeat in 2018.

In Pennsylvania, we are projecting higher transmission margins, partially offset by higher depreciation due to continued capital investment. In Kentucky, we're projecting higher margins of $0.12, partially offset by higher operation and maintenance expense, higher depreciation, and higher financing cost. In terms of our Kentucky margins, the positive projection includes a full year's worth of rate base benefit along with the assumption back to normal weather. Our pre tax reform plan included equity issuances of $350 million per year, which results in about $0.05 of dilution for 2018 compared to 2017.

Moving to the effects of tax reform on the right-hand side of the slide, as expected, earnings were impacted by about $0.06 from the lower tax shield on holding company interest expense. However, this was more than offset by higher earnings on higher domestic rate base, higher foreign currency rates, as we shifted our hedge strategy to let the excess hedge values flow through each year, effectively eliminating the restrike strategy that we were deploying prior to tax reform and other factors. Finally, we see about $0.05 of incremental dilution from the additional $650 million of equity relative to our prior assumption, net of the benefits from lower debt financing.

Moving to slide 17, our planned capital expenditures for 2018 through 2022 are detailed on this slide with infrastructure investment totally $15 billion over the period. Our revised capital plan increased by about $180 million compared to the prior plan, primarily driven by an increase in Pennsylvania distribution spending to maximize reliability. This incremental distribution capital should be subject to recovery under the disc mechanism, and it is consistent with our most recently approved LTIP filing. We also slightly increased our reliability-based capital spending in 2018 through '21 in Kentucky, while shifting some of our environmental spending out to later years.

We currently project our capital investments to be slightly lower in the back end of the plan compared to current levels due to the completion of advanced metering projects in both Pennsylvania and Kentucky, which is consistent with prior capital plans. We also reflect lower transmission spend in Pennsylvania in '21 and '22 as we only include identified projects in our capital plan. There could be further capital spending opportunities as we often identify projects during the execution of our plan. I'll also point out that this five-year capital plan does not include Project Compass.

And, finally, moving to slide 18 for a foreign currency update, post tax reform we have updated our hedge portfolio to incorporate the lower tax rate of 21% down from 35%. We are now 100% hedged for the remainder of 2018 at an average of $1.34 per pound and 100% hedged for 2019 at an average rate of $1.39. And since the third quarter call, we've continued to layer on additional hedges for 2020 and are now 35% hedge at an average rate of $1.46. To help offset the earnings and credit impacts from tax reform, we expect to let our current hedges settle in their respective years without significant additional restrikes going forward. The restrike strategy served its purpose to provide some stability and flexibility as the pound was under a lot of pressure immediately following the Brexit vote in 2016.

Looking forward and given the strength of the pound, we would expect to hedge more in line with the ranges established by our risk-management framework on a rolling 36-month basis. As a reminder, we target 70% to 100% hedged in year one, 30% to 70% hedged in year two, and 0% to 30% hedged in year three. As I mentioned, we've increased our budgeted rate on 2020 open positions to be more reflective of current market rates. However, this remains a conservative assumption as the current average forward rate for 2020 is well above $1.40.

That concludes my prepared remarks, and I'll turn the call back over to Bill for the question and answer period. Bill?

William H. Spence -- Chairman, President, and Chief Executive Officer

Thanks, Vince. Before turning to your questions, I want to reiterate a couple of things. First, we believe that we have a solid low-risk, organic growth plan that we can deliver on. Delivering on this plan, in fact, has been our strategic focus since the spinoff of our competitive generation business, and that focus has not changed. Our attention is squarely on delivering long-term earnings growth, on strengthening our balance sheet, and on reaching a positive resolution on the midperiod review in the UK, all of which we are making progress toward.

We believe PPL continues to be a very compelling investment opportunity within our sector. The underlying fundamentals of our business are strong. Nothing we see on the horizon changes that view. We continue to project competitive earnings growth and a secure and com-- growing dividend even post tax reform. We continue to demonstrate an ability to mitigate challenges that affect our business as we did with Brexit last year and now again with US tax reform. Our utilities remain among the very best in the regions they serve, and we're continuing to invest responsibly to make the grid smarter, more reliable, more resilient, and to advance a cleaner energy future.

The bottom line is we will continue to deliver on our commitments to customers and shareowners, and we will continue to deliver long-term value to those who invest in PPL.

With that, operator, let's open the call up for some questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your touchtone phone. If you're using a speakerphone, we ask you to please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

Today's first question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please, go ahead.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

So perhaps let me just start off on the obvious questions around tax reform and FFO-to-debt. Can you elaborate a little bit more about the longer term here? So, obviously, you're targeting 13% here in kind of the medium term. How do you think about that in the longer term sense? Is this kind of still the right range for you to think about? And then in tandem with that, can you comment a little bit about equity needs beyond just this next few years here?

William H. Spence -- Chairman, President, and Chief Executive Officer

Sure. So, I do think getting back to about 13% by next year is very important to maintain the current ratings that we have, which we think is important for the overall strength of the business. So, we do believe that credit FFO-to-debt metrics, in particular, will continue to improve even beyond 2019. As far as equity needs post-2020, we think they're gonna be very minimal, probably just the DRIP, $100 million or less per year. So, in effect, we've accelerated a lot of the $350 million a year that we would have had otherwise in 2021 and 2022. So, that's been kind of pulled forward, and as we indicated, we're very confident that even at the high end of the equity range that we gave for 2019 and 2020 that we can still achieve the midpoint of our 5% to 6% earnings-per-share growth.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

But 13%, you kind of allude to some improvement beyond the end of 2019. How much better do you think you're getting as you look at your plan over the forecasted period?

William H. Spence -- Chairman, President, and Chief Executive Officer

I'd say it'd probably be another 100 basis points by the end of the period as we get out in time.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. And that's a more sustainable level in your mind over the long term.

William H. Spence -- Chairman, President, and Chief Executive Officer

I think certainly north of 13% would be a sustainable level that we're targeting.

Vincent Sorgi -- Chief Financial Officer

Hey, Julien, it's Vince. So, as Bill said, the credit metric will continue to improve once we get the 13% in '19 and '20. We think it's important to continue to show strength in the FFO-to-debt as we move toward that taxpaying status of '22, '23 because we don't want to drop below 13% at that time and have to issue additional equity. So, I think building up a little strength as we go through the next five years will certainly serve us well longer term.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Right. Excellent. And just perhaps following from there real quickly, as you think about sort of the near years, you've got a 5% to 6% through 2020, but you've got a rate base category that goes through the 2022 period. What are the kind of puts and takes if you're not ready to kind of roll forward your EPS CAGR in those next couple years? Obviously, you've got the dynamics in the UK, but can you talk about maybe the FX and any other kind of puts and takes there?

William H. Spence -- Chairman, President, and Chief Executive Officer

Yeah, sure. So, FX is probably one of the key ones, and the forward curve currently for 2021 is $1.49. So, clearly, that's $0.09 above where we're currently projecting 2020 earnings or based on our earnings on 2020 at $1.40. So, there's clearly significant upside should the forward curve continue to show that kind of strength. In terms of other puts and takes, you mentioned the rate based growth. That will continue. I believe over the entire period it's just above 6%. That, in the 5% to 6% range, will continue beyond 2020. So, that's gonna be a key driver of earnings as well as just I would say overall cost management, cost containment, which we've done a really good job of managing over time. So, I think those are a couple of the key factors.

Operator

And ladies and gentlemen, our question today comes from Ali Agha of SunTrust. Please, go ahead.

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

First question, the extra $650 million of equity that you're planning for this year, will that be covered from internal programs like DRIP, ATM, or would that require some kind of block issuance? What's the thought there?

William H. Spence -- Chairman, President, and Chief Executive Officer

Our thought is the DRIP and ATM would be probably the most efficient and that we'd think that given the incremental $650 is not that significant overall. We could issue probably much more than $1 billion overall for the year under the ATM and DRIP program. So, we think it's very doable, and, as always, we'll look at other means and use the most efficient means. But ATM is the most likely mechanism.

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

I see. And then, Will, you made this point in your slide. This is the eighth consecutive year where you've actually exceeded the midpoint of your guidance. Should we assume given that track record and trend that there is a healthy dose of conservatism built into your '18 guidance?

William H. Spence -- Chairman, President, and Chief Executive Officer

Well, I think certainly we have had a track record that's been very positive of delivering above our midpoint of our earnings guidance. I think we've put together what we believe are very solid business plans. They have proven to be conservative, I guess, in the past if you look back at the track record, but one of the reasons we gave you a range for the equity issuances for '19 and '20 of $500 million to $1 billion was the fact that we have delivered in excess of the midpoint. So, taking that into account, as well as some of the other moving parts-for example, we don't have the regulatory outcomes yet in Pennsylvania nor at FERC-we think that there is some upside there not only just in delivering but that that $500 million is probably achievable in terms of the equity in '19 and '20 if things fall in place as they could. So, again, kind of being conservative, we wanted to point out that even at the very high end, the $1 billion of equity in each of the three years, we can still meet the midpoint of the 5% to 6%. And if we can lower the equity raised, then we're going to be above that range.

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

And then, lastly, just clarifying your comments, you laid out your 2022 CapEx plan, which equates to a 5.4% CAGR on rate base per your math. And as you point out, the forward exchange rates are much higher today than the $1.40 that you're budgeting. So, given conditions as they are today, is it fair to say that that 5% to 6% should be sustainable through 2022 given what we know today?

William H. Spence -- Chairman, President, and Chief Executive Officer

Given what we know today and the forward curve at $1.49, we could maintain the 5% to 6%, yes, but we're not issuing formal guidance right now. But with those assumptions that you outlined that would be achievable, correct.

Operator

And our question today comes from Jonathan Philip Arnold of Deutsche Bank. Please, go ahead.

Jonathan Philip Arnold -- Deutsche Bank Securities, Inc. -- Analyst

Just one question, can you give us a little sense of what you're sort of most likely option for executing on the equity is?

William H. Spence -- Chairman, President, and Chief Executive Officer

Sure. I think it would be the combination of ATM and DRIP, and we think that that's very doable in the current environment. And particularly as we get beyond the midperiod review and some of the initial RIIO 2 framework, we think we'll see some strength in the stock and some of the uncertainty removed. And so I think ATM, for now, is our assumption and probably a pretty good one from our perspective.

Jonathan Philip Arnold -- Deutsche Bank Securities, Inc. -- Analyst

Okay, and the DRIP, I think you said, it's about 100.

William H. Spence -- Chairman, President, and Chief Executive Officer

That's correct.

Jonathan Philip Arnold -- Deutsche Bank Securities, Inc. -- Analyst

Okay. And then I had a question on the walk from 2017 to '18 that was on slide 16. I'm sure this is obvious, and I apologize for the question if so, but why is it that the impact of tax reform on Kentucky is negative then on Pennsylvania it's positive?

William H. Spence -- Chairman, President, and Chief Executive Officer

Vince, you want to?

Vincent Sorgi -- Chief Financial Officer

Sure. So, Jon, I think Kentucky has holding company debt as well where PA has none. So, they, in addition to cap funding, are losing the tax shield ongoing from 35% to 21% on their holding company debt.

Jonathan Philip Arnold -- Deutsche Bank Securities, Inc. -- Analyst

Is that encompassed within the number you've given, sort of overall holding company debt impact? But its just in that segment. Is that correct?

Vincent Sorgi -- Chief Financial Officer

It's in the $0.06 that I talked about on that first bucket. So, the lower tax shield on HoldCo interest, it's in that $0.06. That's cap funding and LK.

Jonathan Philip Arnold -- Deutsche Bank Securities, Inc. -- Analyst

Okay, and it's sort of segment allocation. Okay, and then just one other question on the 13% you're talking about around FFO-to-debt, is that the threshold that you currently have? Or is that the way you feel you need to be to be comfortable? I guess we didn't see you guys put on negative outlooks, so we don't have a clear sense of exactly where your threshold might be.

William H. Spence -- Chairman, President, and Chief Executive Officer

Yeah, so the threshold previously as indicated by Moody's was 12% to 15% FFO-to-debt. With tax reform, we would be skating the bottom of that range, and we felt that it's probably not the best place to be. And in conversations with the rating agencies, we felt that it was probably most prudent to add some more equity into the plan. And given we had the hedge value that we could utilize to maintain our EPS growth rates, we felt that that was the best way to do it.

Vincent Sorgi -- Chief Financial Officer

Jonathan, that is one of the open items as we think about the $500 to $1 billion for '19 and '20. We've had initial discussions with the agencies, but I would not say we've had fulsome discussions in detail with either of them. And so we need to do that, and so ultimately we'll flesh out where that ultimately needs to be to maintain our credit ratings with both agencies. But at this point, we're assuming 13% will be a comfortable area.

Jonathan Philip Arnold -- Deutsche Bank Securities, Inc. -- Analyst

Great, thank you. And just to be sure I've fully understood you on equity, we're saying in '19 and '20 it's at least $500 each year, but it could be up to $1 billion each year?

William H. Spence -- Chairman, President, and Chief Executive Officer

That's correct.

Vincent Sorgi -- Chief Financial Officer

It is. But if we're at the $500, that will simply be pulling forward '21 and '22 because we're moving from $350 to basically less than $100 in those years.

Operator

And, ladies and gentlemen, as a reminder, if you would like to ask a question, please press * then 1 on your touchtone phone. Once again, that's * then 1 if you have a question.

Today's next question comes from Michael Lapides of Goldman Sachs. Please, go ahead.

Michael Lapides -- Goldman Sachs & Co. LLC -- Analyst

Hey, guys, just kind of a bigger picture question. Given a few factors, meaning tax reform in the US, higher interest rates overall, how do you think those two things change your competitive positioning relative to other US and European utilities? And how does that trickle into your view of whether further consolidation on either continent is both value-added and worthwhile?

William H. Spence -- Chairman, President, and Chief Executive Officer

Well, let me take the last part of your question first, Michael. On the M&A front, I don't really think that tax reform overall is gonna have a significant effect within our sector, whether that's in the EU or here in the US. I think the one effect it could have is it does remove the uncertainty about what tax reform might have been. So, from that perspective, it might create some more opportunity for some, but I don't think the fundamentals of the business overall have changed much because everyone's pretty much on the same level playing field. Now having said that for PPL specifically because 50% of our business is in the UK and 50% is here, as interest rates rise in the US, we've got somewhat of a hedge against rising interest rates here vis a vi the UK. So, to the extent that the UK interest rates remain much lower than they are here in the US, that could be a positive to the stock.

And I think overall we don't see a whole lot of change from the PPL perspective in our view of M&A. So, what we've said in the past is that we can be successful with the organic growth plan that we have. We don't need M&A to be successful. I think we've been pretty transparent that as we think about M&A, our objective has been to strengthen our EPS growth rate and credit metrics if we were to engage in M&A. Said another way, I'm unaware of any transaction that would meet these objectives today. Our focus is clearly on delivering long-term earnings growth, which we can do organically. I'd also mention that currently, we think our stock is undervalued, and we believe that transaction multiples currently continue to be pretty excessive and would not allow us to achieve our objectives in any M&A kind of scenario.

I was just gonna say seeing no other names in the queue, we'll just say thanks to everyone for joining us today, and we'll catch up with you on the next earnings call if not before. Thank you.

...

Operator

And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may not disconnect your lines and have a wonderful day.

Duration: 53 minutes

Call participants:

Joseph P. Bergstein -- Vice President of Investor Relations

William H. Spence -- Chairman, President, and Chief Executive Officer

Vincent Sorgi -- Chief Financial Officer

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

Jonathan Philip Arnold -- Deutsche Bank Securities, Inc. -- Analyst

Michael Lapides -- Goldman Sachs & Co. LLC -- Analyst

 

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