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PPL Corp (NYSE:PPL)
Q2 2019 Earnings Call
Aug 6, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the PPL Corporation Second Quarter 2019 Earnings Conference Call. [Operator Instructions]

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

Andy Ludwig -- Vice President, Investor Relations

Thank you, Gary. Good morning, everyone and thank you for joining the PPL conference call on second quarter 2019 financial results. We provided slides for this presentation and our earnings release issued this morning on the Investors section of our website. Our presentation on earnings release which we will discuss today -- during today's call contain forward-looking statements about future operating results or other future events. Actual results may differ materially from these forward-looking statements. Please refer to the appendix of this presentation and PPL's SEC filings for a discussion of factors that could cause actual results to differ from the forward-looking statements. We will also refer to 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 appendix of this presentation and our earnings release.

I'll now turn the call over to Bill Spence, PPL Chairman and CEO.

William H. Spence -- Chairman and Chief Executive Officer

Thank you, Andy, and good morning, everyone. We're pleased that you've joined us for our second quarter earnings call. With me today are Vince Sorgi, who was promoted to PPL President and Chief Operating Officer effective July 1st; Joe Bergstein, who was promoted to PPL Chief Financial Officer, succeeding Vince in the CFO role; and Greg Dudkin and Paul Thompson, the Heads of our US Utility Businesses; Phil Swift, the Head of our Western Power Distribution business in the UK is not able to join us this morning.

Moving to Slide 3 , our agenda this morning begins with highlights of our 2019 second quarter results and a brief review of operational and regulatory developments. Joe will then provide a more detailed review of second quarter earnings as well as an update on our foreign currency hedging status. As always we'll leave ample time to answer your questions.

Turning to Slide 4, today we announced second quarter reported earnings of $0.60 per share, resulting in a total of $1.24 per share through the first half of 2019. Adjusting for special items primarily related to unrealized gains on our UK earnings hedges, second quarter earnings from ongoing operations were $0.58 per share compared with $0.55 per share a year ago. On a year-to-date basis through June total ongoing earnings were $1.27 per share compared with $1.29 per share a year ago, which is in-line with our expectations.

Based on our solid financial results through June, we remain very confident in our ability to deliver on our 2019 guidance range of $2.30 to $2.50 per share with a midpoint of $2.40. In addition, we remain on track to invest $3.3 billion in infrastructure improvements during 2019, as we work to make the grid smarter, more reliable and more resilient.

Looking beyond 2019, today we also reaffirmed our projection of 5% to 6% compound annual earnings growth per share through 2020 measured against the midpoint of our original 2018 earnings forecast. In addition, we maintained our 2021 earnings forecast of $2.50 to $2.80 per share. We continue to monitor foreign currency exchange rates for potential impacts on our earnings projections, which Joe will discuss in his update.

Shifting the focus to operations. PPL continues to deliver excellent service across all of our distribution networks. Both PPL Electric Utilities and Kentucky Utilities both received J.D. Power awards for residential customer satisfaction in July, achieving the highest overall marks in their respective categories and regions based on customer surveys. This year mark the eighth and fourth straight years respectively that PPL Electric Utilities and Kentucky Utilities have earned this distinction.

All-to-all PPL's utilities have received 49 J.D. Power awards in the two decades since the organization has steady customer satisfaction with electric utilities. In UK, WPD was also recognized recently by Ofgem as the top-ranked network for the stakeholder engagement and consumer vulnerability incentive and achievement measured against all gas and electricity networks in the UK. This is the eighth consecutive year that WPD led the industry in this category.

PPL's track record of customer service excellence is a testament to the outstanding teams we have throughout our business and it reflects our strategic focus on delivering best-in-sector operational performance. In other highlights, PPL Electric Utilities was also named the 2019 power players Investor-Owned Utility of the Year by The Smart Electric Power Alliance during the second quarter. The award recognized PPL Electrics [Phonetic] work to create a smart grid distribution management system that supports greater adoption of distributed energy resources on the grid. This includes behind-the-meter resources, such as private solar and energy storage.

The Utilities new distributed energy resources management system is just one of the many ways PPL companies are working to advance a cleaner energy future. Additionally, PPL Electric Utilities was named one of the most trusted utility brands in the country by a recent study conducted by Escalent, a human behavior and analytics firm. In this survey, PPL Electric Utilities earned the top spot among electricity-only utilities in the Eastern United States. This recognition is yet another example of PPL Electrics commitment to top-tier reliability and service to its customers.

Last but not least, Louisville Gas and Electric recently received the American Gas Association's Accident Prevention Award for safety excellence. Among its peers, LG&E finished 2018 with the lowest rate of incidents resulting in lost time or restricted time at work. We are proud of the LG&E's accomplishment and we remain committed across our US and UK operations to continue a safety improvement.

Turning to a brief regulatory update in the UK, Ofgem in late May confirmed its RIIO-2 price control methodology for the gas distribution, gas transmission and electricity transmission sub-sectors. While the announced methodology does not apply to the electricity distribution sector, which Ofgem has continually emphasized, we welcome the opportunity to share our views on some key issues. Broadly, we believe this update with a step in the right direction and look forward to our ongoing engagement with Ofgem as we plan our next price control. Our process that kicked-off formally this morning with the open letter consultation. The letter was generally in line with our expectations and consistent with recent conversations with Ofgem.

Vince and I, were in the UK last week and held another series of productive meetings with members of Ofgem senior leadership team, including Chairman, Martin Cave. We discussed the successes of RIIO-ED1 regulation and how there has been real value delivered to customers in the first four years of the price control. We also highlighted some of the areas for improvement and how Ofgem can achieve their objective of continuing to drive efficiencies, while preparing the network for the future. Overall, we're in agreement that the distribution networks are critical to the ongoing development of the UK's energy infrastructure, specifically to achieve the electrification and decarbonization initiatives.

Network development has become even more important as the UK recently announced its commitment to achieving net-zero carbon emissions by the year 2050. This commitment further enhances the opportunities for DNOs, like WPD, to continue their leading roles in building the electricity grid of the future and connecting significant levels of renewable energy sources. We expect that Ofgem will provide the framework necessary for electricity distribution companies to support these objectives and incentivize the level of investment required to do so as they have done historically. Our recent dialogue supports our belief that Ofgem will be focused on differentiating returns among electricity DNOs and still provide substantial opportunities for outstanding performers like WPD during the next price control period.

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

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

Thank you, Bill, and good morning, everyone. Let's move to Slide 5 for an overview of second quarter segment results. As Bill mentioned, PPL delivered second quarter 2019 earnings from ongoing operations of $0.58 per share, which was $0.03 higher compared to the second quarter of 2018, and in line with our expectations. Our strong results more than offset $0.02 from share dilution and $0.05 of weather-related variances compared to the prior period. $0.04 of the weather variance was related to strong volumes experienced in the second quarter of 2018 and weather was about $0.01 unfavorable compared to our forecast for the second quarter of 2019. Excluding dilution in weather, we saw higher earnings in each of our utility segment this quarter. Our UK regulated segment earned $0.36 per share, a $0.04 increase compared to the same period a year ago, excluding the impacts of dilution and weather. The increase in the UK earnings was primarily due to higher adjusted gross margins from higher prices as a result of the April 1st, 2019 price increase partially offset by lower sales volume, higher other income due to higher pension income and higher realized foreign currency exchange rates compared to 2018. For the second quarter 2019 average rate of $1.36 per pound compared to $1.33 in the second quarter of 2018.

Moving to Pennsylvania. Our Pennsylvania regulated segment earned $0.13 per share in the second quarter of 2019, a $0.03 increase compared to the second quarter of 2018, excluding weather. The increase was primarily due to higher adjusted gross margins, primarily due to returns on additional capital investments in transmission and the timing impact related to US tax reform in 2018 and lower operation and maintenance expense primarily due to lower support cost. These factors were partially offset by higher depreciation expense due to additions to PP&E.

Moving to Kentucky. Our Kentucky regulated segment earned $0.13 per share in the second quarter of 2019, a $0.03 increase compared to the second quarter of 2018, excluding the impact of weather. The increase was primarily due to higher base rates effective May 1st, 2019, and lower income taxes due to a state tax credit. This was partially offset by higher depreciation expense due to additions to PP&E and higher depreciation rates and higher interest expense due to higher interest rates and increased borrowings.

And finally, Corporate and Other remained flat over the quarter compared to the same period a year ago. As Bill noted, our solid second quarter performance positions us well to achieve our earnings forecast for this year. We provided a similar walk of the year-to-date results in the appendix for your reference.

Before I turn the call back over to Bill, let me provide an update on our foreign currency hedging status, which is on Slide 6. For the balance of 2019, we continue to be 100% hedged for our ongoing earnings at an average rate of $1.41 per pound. For 2020, we increased our hedge percentage to 63% compared to 55% on our first quarter call. The average rate for 2020 reflecting these new hedges is $1.46 per pound just slightly lower than the previous average of $1.47. We continue to utilize options in our hedging strategy that preserve upside to the current market rates to develop one-third of the 2020 hedge portfolio being option-based.

We remain open in 2021, and as Bill mentioned, we've recognized the recent weakness in the exchange rates and continue to monitor potential impacts to our earnings projections. However, independent forecast of future exchange rates remain within the range of assumptions used for 2021 projections. So near term fluctuations in the currency are expected given the current political environment, the majority of analyst trajectory we cover in the currency rates falling of Brexit resolution. And finally, we have flexibility in our hedging program that does not require to add additional hedges at this time and allows us to take an opportunistic approach to hedging as we monitor the dynamics of the political situation and move toward the Brexit deadline in October. That concludes my prepared remarks.

I'll turn the call back over to Bill for the question-and-answer period.

William H. Spence -- Chairman and Chief Executive Officer

Thanks, Joe. In closing, all of our PPL companies continue to execute at an extremely high level as evidenced once again by the accolades earned from our customers and industry groups. We remain focused on delivering on our low-risk business plan to build tomorrow's infrastructure and advance a sustainable energy future. And our strong financial performance keeps us solidly on track to achieve our 2019 earnings forecast. These operational successes are underpinned by an exceptional workplace that cultivates an inclusive and diverse workforce. I'd like to briefly highlight a couple of recent honors recognizing these efforts that exemplify the constructive culture and lifeblood of our company.

In June, our Kentucky operations were rewarded the highest US government honor to employers for providing exceptional support of National Guard and Reserve employees. The employer support of the Guard and Reserve are ESGR Freedom Award. We were one of 15 recipients of this prestigious award selected by the Department of Defense out of nearly 2,500 nominations this year. And just last month, PPL was named a Best Place to Work for people with disabilities for the second straight year, earning a top score of 100% on the disability equality index for its commitment to creating an accommodating and inclusive environment for people with disabilities.

At PPL, we want all individuals to reach their fullest potential and believe that our employees, colleagues and friends in the community of all abilities help us grow and thrive. We're extremely honored and proud of these achievements and we will continue to advance in these efforts for an inclusive empowering environment for all employees to drive energy forward.

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ali Agha with SunTrust. Please go ahead.

Ali Agha -- SunTrust -- Analyst

Thank you. Good morning.

William H. Spence -- Chairman and Chief Executive Officer

Good morning.

Ali Agha -- SunTrust -- Analyst

Good morning. First question. Bill or Joe, just to understand the Ofgem process from here onwards, so I know that in the schedule this open letter, that consultation they started currently that they'll have a decision on the open letter in November, what is to be expected? What will they decide at that time in November? And when are you expecting that the key parameters cost of equity, etc., will be firmed up? Is that when the strategy, the consultation decision come? So just like layout what we should expect in November on this open letter decision?

William H. Spence -- Chairman and Chief Executive Officer

Sure. So in November, they're going to provide us with the framework and within that framework there will be details and I'll let Vince maybe comment on this since he's been following this pretty closely in terms of what those details are likely to include. So Vince?

Vincent Sorgi -- President and Chief Operating Officer

Sure. How you doing, Ali?

Ali Agha -- SunTrust -- Analyst

Great.

Vincent Sorgi -- President and Chief Operating Officer

The process really going forward around the open letter we would expect Ofgem to make certain decisions on the questions that they post. So confirming the five-year term of the next price control versus some other term, confirming that they're going to stick with CAPM similar to what they're using for gas and transmission. I would not expect that they would, in November put forth any numbers in terms of what that CAPM process would result for electric distribution. That we would project to see when they do the sector methodology consultation, which would kick off mid next year. I think, they'll also talk about the framework that they're thinking about in terms of transitioning to DSO, what type of incentive mechanisms might be in place to drive the DNOs to that outcome discussion around whole system outcomes. So things like that as opposed to the actual return numbers that they would be expecting.

William H. Spence -- Chairman and Chief Executive Officer

I think between now and November, what the process really is, is a collection of knowing the answers to the questions that they post but also additional stakeholder feedback. We'll take all of that though then propose a broad framework with more specifics around what their thought is based on all that input and then that will carry forward into next year, which will provide a much more specificity on things like ROE and incentive [Phonetic] frameworks.

Ali Agha -- SunTrust -- Analyst

Okay. Second question I had can you remind us how much of your earnings in this quarter and year-to-date have come from UK pension income, the non-cash pension income? And any update on how you're thinking about that as it opens up in 2021?

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

So we had $0.02 [Phonetic] of pension income in the quarter compared to higher pension income in the quarter compared to last year. As far as the process for pension deficit funding and the amount that's needed going forward were -- we're in the process of updating our assumptions and negotiating the expected funding levels with our pension trustees. We expect that to be completed by year-end. We'll then work with Ofgem and the UK pension regulator off a Ofgem's review and determination of future deficit funding will be known -- we expect by November of 2020. But our expectations at this time, well, we haven't changed the year-end and our 2021 forecast we're expecting about a $0.05 per share reduction in 2021 due to lower pension deficit funding needs.

Ali Agha -- SunTrust -- Analyst

Right. Last question, Bill. As I look at the big picture in the UK, you got Brexit uncertainty, potentially political uncertainty, you've got the currency, obviously extremely weak. As you look at all of this, I mean is there much that you can do about it, or are these macro-political factors that's going to play themselves out and PPL just hunkers down and waits for these events to unfold. Is there anything proactively PPL can do, given the backdrop that you have out there?

William H. Spence -- Chairman and Chief Executive Officer

Yeah. It is a challenging political and regulatory backdrop at the moment, but there are some efforts that we have -- had under way in the UK to -- as basically educate many of those ministers of Parliament that may not be familiar with, specifically with the electricity networks, great track record and that track record includes much lower cost than when the systems were nationalized, better reliability -- much better reliability to the tune of about 60% better reliability than when they were under state control. And also customer satisfaction, which is at the highest level it's ever been. So we have a great story to tell and another data point is, which is on the positive side is that the Labour Party has really continue to lose momentum politically. And as you know they were one of the -- one of the only political party that had proposed bringing some of the networks back under state control as well as rail and mail and so forth and more.

So we think that the risk, while it was already very low is even lower than it previously was as the Labour Party has really failed to gain any momentum politically and certainly there is a -- always a probability that they could regain some of their footing, but in our view very unlikely. So the other thing that we've been doing is, we have a political consulting firm that we use in the UK has been very helpful for us to reach out to some of the other stakeholders outside the parliament to again, educate and inform local community leaders and so forth. So I think we're doing what we can to combat some of the broader political forces at play, but it is rather challenging.

Ali Agha -- SunTrust -- Analyst

Understood. Thank you.

William H. Spence -- Chairman and Chief Executive Officer

You're welcome, Ali.

Operator

The next question comes from Anthony Crowdell with Mizuho. Please go ahead.

Anthony Crowdell -- Mizuho Securities -- Analyst

Good morning, Joe and Vince. Congratulations on the promotions.

Vincent Sorgi -- President and Chief Operating Officer

Thank you.

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

Thank you.

Anthony Crowdell -- Mizuho Securities -- Analyst

First question I guess, if I could think of the guidance for 2021 of $2.50 to $2.80, what is the assumption of pension deficit revenues in the $2.50 and $2.80 number, or that's the same -- or pension deficit revenues have [Phonetic] not change in that range?

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

Yes. We've assumed a $0.05 reduction in the range for -- at the midpoint of pension deficit -- at the midpoint of the '21 forecast is a $0.05 reduction in the pension deficit funding.

Anthony Crowdell -- Mizuho Securities -- Analyst

At the low end of the range though is there a bigger decline in pension deficit revenues?

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

No. Not materially. The range is really driven by FX rates.

Anthony Crowdell -- Mizuho Securities -- Analyst

Got it. If I can think about repatriation of cash from the UK, what are you repatriating now? And I guess is there a sensitivity on currency or on the exchange rate with that?

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

Right now our forecast through the planning period has an expectation of $300 million to $500 million per year. So when we think about the impact on currency relative to our cash repatriation and cash position, it's really very minor. So even at current levels of the pound in the low $1.20 [Phonetic], it's only about a $40 million impact to our cash repatriation. So really very minor and very manageable in the grand scheme of our cash position.

Anthony Crowdell -- Mizuho Securities -- Analyst

Great. And lastly, just the company gives out -- we have, I guess 5% to 6% growth rate through '20. When can we expect to get growth rate post 2020, given the UK plan goes out till 2023? Could we expect something sooner to find out what the growth rate is post-2020?

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

Well, I think, we'll have to consider the currency situation and where we are in the Brexit process and if there's any clarity around that because as you are aware currency is obviously a big driver of our forecast. So we'll have to wait and see when we provided that longer-term guidance Anthony, given the currency situation of the political backdrop.

Anthony Crowdell -- Mizuho Securities -- Analyst

Great. Thanks for taking my questions, Joe.

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

Sure.

Operator

[Operator Instructions] The next question comes from Shar Pourreza with Guggenheim Partners. Please go ahead.

James -- Guggenheim Partners -- Analyst

Hey, guys. It's actually James for Shar.

William H. Spence -- Chairman and Chief Executive Officer

Good morning, James.

James -- Guggenheim Partners -- Analyst

Good morning. I just wanted to ask, could you remind us whether or not you can tell us under the hedging program when we have to start for 2021?

William H. Spence -- Chairman and Chief Executive Officer

Sure. Go ahead, Joe.

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

Yeah. Well, we have flexibility under our hedging program and as I stated in the prepared remarks, at this point we're not required to add any additional hedges through October, so we can really see how Brexit plays out as we approach that October, end of October deadline.

James -- Guggenheim Partners -- Analyst

Okay. And then are you still assuming a range, I think it was $1.35 to $1.60 in your 2021 guidance?

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

We are independent analyst forecast continue to support that range and they're within the range that we provided when we provided that guidance. So we're maintaining that at this point.

James -- Guggenheim Partners -- Analyst

Got you. And I guess just stateside in Kentucky, any updated thoughts on going back for AMI?

William H. Spence -- Chairman and Chief Executive Officer

I'll ask Paul Thompson who heads up our LG&E and KU business to answer that.

Paul W. Thompson -- Chairman, Chief Executive Officer and President, LG&E and KU Energy LLC

Yes. We continue to evaluate that and we have under the prior commission ruling expanded our testing, our pilot testing work in both LG&E and KU, so we have now over 10,000 AMI meters in each utility. And to your question, really we would anticipate currently that the next rate case, whenever that might be, maybe the time that we would put the AMI back into the request for approval on that.

James -- Guggenheim Partners -- Analyst

Got it. Thanks guys. That's all I had.

William H. Spence -- Chairman and Chief Executive Officer

Thanks, James.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Spence for any closing remarks.

William H. Spence -- Chairman and Chief Executive Officer

Thank you, operator, and thanks for joining us today, and we look forward to speaking with everyone on the third quarter earnings call.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Andy Ludwig -- Vice President, Investor Relations

William H. Spence -- Chairman and Chief Executive Officer

Joseph P. Bergstein -- Senior Vice President and Chief Financial Officer

William H. Spence -- Chairman and Chief Executive Officer

Vincent Sorgi -- President and Chief Operating Officer

Paul W. Thompson -- Chairman, Chief Executive Officer and President, LG&E and KU Energy LLC

Ali Agha -- SunTrust -- Analyst

Anthony Crowdell -- Mizuho Securities -- Analyst

James -- Guggenheim Partners -- Analyst

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