Logo of jester cap with thought bubble.

Image source: The Motley Fool.

PPL Corp  (NYSE:PPL)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the PPL Corporation Third Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

At this time, I would like to turn the conference over to Andy Ludwig, Director of Investor Relations. Please go ahead, sir.

Andy Ludwig -- Director of Investor Relations

Thanks Reece (ph) and good morning everyone. Thank you for joining the PPL conference call on third quarter results, as well as our general business outlook. We're providing slides for 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 & Chief Executive Officer

Thank you Andy and good morning everyone . We're pleased that you've joined us for our third quarter earnings call.

With me on the call today are Vince Sorgi, PPL's Chief Financial Officer; Greg Dudkin and Paul Thompson, and the heads of our U.S. utility businesses; and Phil Swift, Head of our Operations at Western Power Distribution in the UK.

Moving to slide 3 , given we will see many of you at AI in a little over a week. We planned to keep our prepared remarks brief this morning. Our agenda begins with highlights of our 2018 third quarter results, including an update to our 2018 earnings guidance. Vince will then provide an overview of our third quarter 2018 segment earnings results. As always, we'll leave ample time to answer your questions at the end.

Turning to slide 4, today we announced strong third quarter reported earnings of $0.62 per share, resulting in a total of $2.01 per share through the first 9 months of 2018.

Adjusting for special items primarily related to unrealized gains on our UK earnings hedges, third quarter earnings from ongoing operations were $0.59 per share, up over 5% from the $0.56 per share a year ago. On a year-to-date basis through September, ongoing earnings were $1.88 per share, up about 11% from the $1.70 per share a year ago, driven by higher earnings across all of our business segments.

Given our strong year-to-date results, we have further narrowed our 2018 guidance range from $2.30 per share to $2.40 per share, raising the midpoint to $2.35 from $2.33 per share. In addition to delivering these strong financial results in the third quarter, we took steps at our Global Gas and Electric and Kentucky Utilities businesses to support continued infrastructure investment that benefit our customers.

LG&E and KU filed rate request with the Kentucky Public Service Commission on September 28, seeking approval for a combined revenue increase of about $170 million in electricity and gas base rates. A more detailed breakdown of our rate request can be found in the appendix of today's presentation. The requested Increases will support continued modernization of the grid to strengthen grid resilience as well as upgrades to LG&E's natural gas system to enhance safety and reliability.

In addition, the increases will support continued investment in our power plants to improve performance and to minimize our impact on the environment. Our rate request also includes the proposed green tariffs aimed at spurring renewable energy growth and economic development in Kentucky. The Green Tariff overall LG&E and KU's existing green energy program and solar offerings into one tariff to attract and retain businesses seeking these types of options.

If approved by the commission, LG&E and KU's requested revenue increases will take effect in May of 2019. Even with the increases associated with these proposed investments, LG&E and KU rates would remain well below national averages. Shifting the focus to Pennsylvania, PPL Electric Utilities ranked among the top 10% of utilities nationwide and a key reliability measure, according to a report issued in the third quarter.

The report issued by the Institute of Electrical and Electronics Engineers, found PPL Electric had a lower rate of power outages, than all but 5 of 93 utilities nationwide and the lowest outage frequency of utilities tracked in the middle Atlantic region. It's also worth noting that LG&E and KU are ranked in the top quartile nationally in terms of outage frequency, according to the same report.

This achievement reflects the value of PPL Electric's continued investments in smart grid technology, power line upgrades, vegetation management and data analytics that help drive improvement. The company's reliable service also has led to higher customer satisfaction. In the area of power quality and reliability, for example, PPL Electric Utilities ranked third in customer satisfaction in recent national survey. These are just a couple of examples of the excellent operational performance, we continue to demonstrate across all of our businesses. And it's that strong performance that gives us confidence in our ability to achieve 5% to 6% compound annual earnings-per-share growth from 2018 through 2020 measured against our original 2018 ongoing earnings midpoint.

Looking ahead, we remain well positioned to deliver both competitive earnings growth and a secure and growing dividend for our share-owners.

With that, I'll now turn it over to Vince for a more detailed financial overview.

Vincent Sorgi -- Chief Financial Officer

Thank you, Bill and good morning everyone. Let's begin on slide 6 with an overview of third quarter segment results. PPL's third quarter earnings from ongoing operations increased by $0.03 per share over the prior year, driven by higher earnings in UK and Pennsylvania segments. As a result of a warmer weather during the third quarter, we saw higher volumes in both Pennsylvania and Kentucky, which resulted in a $0.03 per share benefit for the quarter compared to 2017.

Corporate and Other was lower by $0.05 per share, primarily due to higher income tax expenses, which includes the timing impact of recording annual estimated taxes in 2017. Through the first 9 months of the year, earnings are $0.18 higher than the prior year due to higher adjusted gross margins at our US segments and higher currency rates in pension income in the UK. On a year-to-date basis, weather has now contributed $0.11 of favorable earnings per share, versus the prior year and $0.07 favorable compared to our original forecast.

I'll also note that in September, we issued down approximately $520 million from the May equity forward transaction resulting in a total of $0.04 of dilution year-to-date versus last year.

We expect to draw the remaining portion of the equity in 2019. And as Bill mentioned, PPL's continued strong performance in 2018, enables us to narrow the guidance range and increase the midpoint to $2.35 per share.

Let's move to a more detailed review of the segment earnings drivers starting with the UK results on slide 7. Our UK Regulated segment earned $0.30 per share in Q3 2018, a $0.06 increase compared to a year ago. The increase in UK earnings was primarily due to higher foreign currency exchange rates compared to 2017, as the realized weighted average exchange rate for Q3 '18 was $1.34 per pound compared to $1.18 per pound in Q3 '17.

Higher adjusted gross margins due to the April 1, 2018 price increase and higher other income due to pensions. These positive drivers were partially offset by dilution of $0.01 per share.

Moving to Pennsylvania on slide 8. Our Pennsylvania Regulated Segment earned $0.16 per share in the third quarter of 2018, a $0.03 increase versus a year ago. Excluding the impacts on margins from lower income tax recovery, our Pennsylvania segment delivered higher adjusted gross margins of about $0.03 per share due to higher transmission margins from additional capital investments and higher distribution margins from increased electricity sales primarily due to weather.

The positive margins were partially offset by higher depreciation from additional utility plant addition. Consistent with prior quarters this year, our results reflect an offsetting variance due to the estimated income tax savings for our customers from US tax reform reflected in both adjusted gross margins and income taxes of $0.04.

Moving to Kentucky on slide 9. Our Kentucky Regulated Segment earned $0.17 per share in the third quarter of 2018, a $0.01 decrease compared to a year ago. Excluding the impacts on margins from lower income tax recovery, Kentucky's adjusted gross margin was higher by about $0.02 from higher sales volumes due to favorable weather and returns on additional environmental capital investments. This positive variance was more than offset by higher O&M and dilution of $0.01 per share.

Similar to our Pennsylvania segment, there are offsetting variances for the quarter in the adjusted gross margin and income tax line items of approximately $0.04 per share due to tax reform. That concludes my prepared remarks. I'll turn the call back over to Bill for the question and answer period. Bill?

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

Thank you, Vince. In closing, PPL's strong performance continued in the third quarter as we executed on our strategy for growth and success. Once again, we delivered solid financial results for the quarter and once again we increased the midpoint of our annual guidance. Our strong financial and operational performance highlights the value for our investments and what they are delivering to both our customers and our share-owners. We're well positioned to deliver our 2018 earnings guidance and our future growth projections. With that, operator, let's open the call up for questions, please.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And your first question will be from Ali Agha of SunTrust. Please go ahead.

Ali Agha -- SunTrust -- Analyst

Thank you. Good morning.

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

Good morning Ali.

Ali Agha -- SunTrust -- Analyst

Good morning. First question, I noticed that, if I saw it right. You did not increase any FX hedges for 2020. Just wondering what your current thoughts are on your hedging strategy there?

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

Sure. That's correct. And I'll ask Vince to comment further on that.

Vincent Sorgi -- Chief Financial Officer

Sure. Ali, you are correct, we haven't added additional hedges during the quarter. The pound continues really from a historical perspective, is trading at historical lows and we think it makes sense. We can afford to be patient as we've kind of think through the hedging strategy here. We talked last quarter about -- because we hedged so much in 2018 and '19 and half of '20 that we were actually outside of the bands of our risk management guidelines, and so we've kind of worked our way back into those bands (ph) due to completion of the third quarter into October. So I would expect that we'll start to later on hedges to be more consistent with our historical practices in with our risk management policies. But we don't see the need today load up on a lot of a hedging in the out years at these rates.

Ali Agha -- SunTrust -- Analyst

And second question, just wondering what's your visibility right now on sustaining this earnings growth beyond 2020 and just from a high level perspective, given what we know today. I mean, any sense of how your earnings profile changes when we transition to RIIO-2 in '23 just from a high level perspective?

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

So maybe I'll comment on the first part of your question on the earnings growth beyond 2020. As you -- I think you're probably aware we would typically address earnings for 2021 or the year forward of our current three year forecast on the fourth quarter earnings call. So we would continue to use that practice. So we would not really have a lot to say today on the growth for 2020 or beyond 2020. Having said that, we showing you some capital in the plan. We're going to be updating that capital expenditure program, probably through the fourth quarter of this year. Be able to comment on that as well and update that more after the first of this year. So relative to the transition after RIIO-ED2. Vince, do you want to make some comments around that?

Vincent Sorgi -- Chief Financial Officer

Sure. So, I think we'll -- will provide some additional color and disclosures around what we see are the pluses and minuses is going into ED2 as it relates to the ED1 plan.

Ali, I think as it relates to earnings guidance beyond 2020. I think the CapEx and rate based projections are a good baseline to start with, but there are other considerations that we need to take into account. Obviously interest rate, taxes, foreign currency, the pensions are a big one as well. When we look at the pension plans in the UK, they are performing quite well from a return perspective. And we have our upcoming review with the Pension Regulator in March '19 that takes some time to get through. But that will ultimately determine how much pension deficit, revenues, we will be collecting post March of 2021. So all of those things, we will continue to monitor and at the appropriate time provide, I think, that guidance.

Ali Agha -- SunTrust -- Analyst

I understand. Last question, Bill, just wanted to get your latest thoughts, there's still a huge valuation gap between your stock and your US peers. Just wondering what you're thinking there is -- if this one of those hunker down and wait for things to play out Brexit et cetera or something proactive on your end. Just what your latest thoughts there are?

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

Sure . I think at this point given where Brexit sets where we're closing in hopefully on a deal for the exit from the EU and that negotiation between the UK government and EU parliament is ongoing. And it does seem that our take is that as you will ultimately probably get done. But we'll know one way or the other here in the next few months on that. I think we're also seeing positive commentary around the value that the networks have been providing to consumers in the UK, both in terms of lower cost, better customer service, and I think there's a growing recognition in the UK that there have been great benefits from privatization particularly of the electric network.

So, I think -- I sense that things are moving in a more positive direction on that front. So I think, for now, as I've said previously, we're always open to strategic options that will create value for share-owners. But at this time, we don't see any of those adding share and value. So we're going to continue to focus on the strong business plan we have, the high growth in EPS relative to the peers and I think there is no need for us to make any dramatic moves at this point.

Ali Agha -- SunTrust -- Analyst

Thank you.

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

You're welcome.

Operator

The next question will be from Julien Dumoulin-Smith of Bank of America Merrill Lynch, please go ahead.

Nick Kevin -- Bank of America Merrill Lynch -- Analyst

Hey, it's Nick Kevin (ph) on for Julian. Good morning.

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

Good morning, Nick.

Nick Kevin -- Bank of America Merrill Lynch -- Analyst

Hey, congrats on the quarter.I was just curious on the year-to-date drivers on slide 11. That the $0.20 that you kind of call out in the footnote, is that more timing related with tax reform. And just like thinking about the 2019 drivers. This isn't something that we back out for your ongoing earnings right, this is all timing?

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

Vince is looking at the note.

Nick Kevin -- Bank of America Merrill Lynch -- Analyst

$0.20 year-to-date related to income tax savings owed to customers?

Vincent Sorgi -- Chief Financial Officer

Yeah, Nick, that's just the adjustment in revenues and the reduction in income tax expense. So it just drives a variance in those 2-line items that the net is zero. That's all we were trying to highlight there.

Nick Kevin -- Bank of America Merrill Lynch -- Analyst

Thank you. And then just quick on the Talen lawsuit with coal strip, just any color on your position and the timing for resolution there?

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

Sure. Given that this is pending litigation, this is what I'll say regarding that we flatly disagree with Talen. We're confident we acted appropriately in all the transactions related to either the sale of PPL's Montana hydroelectric generating assets or the spin off of PPL's competitive generation business and further we believe that PPL Montana was a solvent (p) upon distribution of those proceeds. It's been more than 5 years since the sale of the hydro assets we've announced and on the 4 years since the sale was completed. Under the separation agreement related to the spin off of PPL's competitive generation business in June of 2015, you may recall that Talen Energy and affiliates of Riverstone, which is a private investment firm that acquired 35% of Talen in the spin and later took Talen private definitively agreed that PPL was entitled to retain these proceeds from the sale of the hydro assets. I don't think that is in any way in question.

At all times prior to the spin-off, we operated PPL Montana in a prudent manner consistent within industry standards and PPL had no control or responsibility of what happened to the company after the spin. These businesses and all associated assets and liabilities belong entirely to Talen and its owner Riverstone.

Regarding the issue of pension obligations raised by Talen, I think it's worth noting PPL's pension liability were related to the Montana pension assets was nearly fully funded at the time of the spin off of PPL Energy Supply. In fact , it was 96% funded and we ensured this when PPL made a large contribution to the PPL Montana pension fund prior to the spin transaction. So overall, we're very proud of the record we established in maintaining and operating PPL Montana assets, of our environmental stewardship, including extensive environmental upgrades that we did at coal strip and of our efforts to strengthen communities during our time in Montana.

In summary, we're going to defend ourselves very vigorously against any of these claims.

Nick Kevin -- Bank of America Merrill Lynch -- Analyst

Got it. That was very clear, I'll see you guys in a weak or so.

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

Thank you.

Operator

And the next question will be from Abe Azar of Deutsche Bank. Please go ahead.

Abe Azar -- Deutsche Bank -- Analyst

Good morning and congratulations on another solid quarter.

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

Thank you.

Abe Azar -- Deutsche Bank -- Analyst

What do you think is driving the strong sales growth, weather normalized in Pennsylvania and do you expect it to continue. And does that change your strategy there at all?

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

I'll let Greg Dudkin, President of PPL Electric Utilities to answer that question.

Gregory N. Dudkin -- President, PPL Electric Utilities

Yeah, I would say that the strong sales growth is really still weather related. I'm not sure that our weather normalization algorithm is really picking up everything, just to give an idea our heating degree days 17-18 went up 15% and our cooling degree days were up 26% year-to-year. So we still believe that the sales forecast is gonna be flat to low negative on an ongoing basis and that this increases is marginally driven by weather.

Abe Azar -- Deutsche Bank -- Analyst

And just following up on that, how much of a help was weather in the quarter and year-to-date for the whole business?

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

Just one second.

Vincent Sorgi -- Chief Financial Officer

Sure. So for the quarter. This is Vince. For the quarter year-over-year was $0.03 positive versus expectation or budget was $0.02 positive and then year-to-date versus prior year was $0.11 positive and versus our plan was $0.07 positive.

Abe Azar -- Deutsche Bank -- Analyst

Great, thanks. That's all I have.

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

Thank you.

Operator

And as a reminder, if you would like to ask a question please press star then one. The next question will be from Paul Patterson of Glenrock Associates. Please go ahead.

Paul Patterson -- Glenrock Associates -- Analyst

Good morning.

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

Good morning Paul.

Paul Patterson -- Glenrock Associates -- Analyst

So just, I know you guys are still a little bit constrained on what you're going to say about the lawsuit, but just on the timing of it, that seems a little odd to me, what do you think triggered the timing at this late date for, for these issues that as you noted were sort of well or quite some time ago?

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

Well, as I mentioned, it's been almost 4 years since the sale is completed. In fact, that would be a little bit later this month, we'll have the fourth year, so my guess is, it's probably a statute of limitations type of strategy.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. And then there is the alternative rate making thing going on in Pennsylvania. Could you elaborate a little bit more about what you think that, that might -- what opportunities might be there for you, particularly with the fact that it sounds like you guys already sort of are performing pretty well there from what you were describing. So I'm just wondering, what do you think -- how should we think about the potential benefits or risks associated with alternative rate making?

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

Sure, I'll ask Greg to take that question.

Gregory N. Dudkin -- President, PPL Electric Utilities

Yeah. So, Paul, the -- what legislation will allow us to do is to put forth rate plans for approval to the PUC for things like revenue decoupling, performance based rates, those types of things. There's a lot of talk about non-wires alternatives, we believe that, that concept can be handled under this legislation as well.

So we're in the -- we just the PC issued some tentative order, we've just supplied some comments within the last couple of weeks, but we believe this provides us more flexibility on a going forward basis.

Paul Patterson -- Glenrock Associates -- Analyst

Okay, but then just in terms of the performance based rate-making and what have you -- is there -- I guess what -- do you have any idea that sort of financially what we might be looking at?

Gregory N. Dudkin -- President, PPL Electric Utilities

Yeah, that's -- we're still too early in the process to be able to comment on that at this point.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. And then back to the UK, you mentioned that there seemed to be less, some more recognition associated with the benefits of privatization, has there been any further discussion about nationalization or anything that, any update there?

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

So, well it's not anything I would say or shattering or very significant, but I think what my perspective is that just to give you a little flavor on this is, our senior team and our Board of Directors were in England last week and we had some very productive discussions with members of Parliament Ofgem and some of our external political and legal advisors and, and my takeaway was, there is growing recognition and understanding that the electric distribution networks have performed very well under privatization and probably importantly that there is recognition that these networks are key to delivering on government screen agendas.

And so while labor continues to speaker renationalization, it's clear that rail, water and the mail are the areas of focus. Relative to energy, there's been little detail about how any type of renationalization might be accomplished and whether distribution networks are even a target at this point.

Paul Patterson -- Glenrock Associates -- Analyst

Okay, thanks so much. Rest of my questions were answered. Thanks so much.

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

All right, thank you. And I believe that's all the calls we have for today. So we appreciate everyone's time and look forward to seeing everyone at AI Financial Conference in San Francisco. Thank you.

Operator

Thank you, Mr. Spence. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 27 minutes

Call participants:

Andy Ludwig -- Director of Investor Relations

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

Vincent Sorgi -- Chief Financial Officer

Ali Agha -- SunTrust -- Analyst

Nick Kevin -- Bank of America Merrill Lynch -- Analyst

Abe Azar -- Deutsche Bank -- Analyst

Gregory N. Dudkin -- President, PPL Electric Utilities

Paul Patterson -- Glenrock Associates -- Analyst

More PPL analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.