PPL Corporation

Good day and welcome to the PPL Corporation Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on any touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Andy Ludwig, Vice President, Investor Relations. Please go ahead.

Andy Ludwig Good morning, everyone, and thank you for joining the PPL conference call on third quarter 2020 financial results. We have provided slides for this presentation and our earnings release issued this morning on the investor section of our website. Our presentation and earnings release, which we will discuss 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 non-GAAP measures, including earnings from ongoing operations and adjusted gross margins on this call. For reconciliation to the comparable gap measures, you should refer to the appendix of this presentation. I'll now turn the call over to Vince Sorge, PPL President and CEO.

Thank you, Andy, and good morning, everyone. We appreciate you joining us for our third quarter earnings call. With me today are Joe Bergstein, our Chief Financial Officer, Greg Dudkin, the head of our Pennsylvania utility business. Paul Thompson, the head of our Kentucky utility business. And Phil Swift, the head of our UK electric distribution business. Moving to slide three. I'll begin this morning with brief highlights on third quarter earnings results and our continued strong performance during the COVID-19 pandemic. I'll share a few updates on regulatory and ESG related matters. And Joe will then provide a more detailed overview of the third quarter financial results. And as always, we'll leave ample time for your questions. Turning to slide four, today we announced third quarter reported earnings of 37 cents per share. Adjusting for special items, primarily a deferred tax adjustment in the UK based on the 2020 Finance Act and unrealized losses on foreign currency economic hedges. Third quarter earnings from ongoing operations were $0.58 per share, compared with $0.61 per share a year ago. At a high level, results for the quarter were in line with our expectations. I'll note that the lower earnings compared to last year include $0.02 of lower volumes in the UK, which will recover in future periods, and $0.01 due to the timing of our estimated federal income tax computation, which will reverse in Q4. Joe will cover the financial results in more detail in his sections. Regarding a COVID update, throughout the quarter, we continue to deliver strong operational performance, providing outstanding customer service and reliability. At the same time, we've remained focused on innovation and building for the future. In September, we launched a new digitalization strategy in the UK. The strategy focuses on transforming the way we develop and operate the network to empower customers, drive greater efficiency, and deliver faster decarbonization. And in Pennsylvania, during Q3, we reached the 1 million mark for customer outages avoided as a result of our investments in automated power restoration technology. Regarding customer sales during the quarter, residential load continued to be stronger than our weather normalized forecast, driven by sustained work-from-home measures in all of our service territories. Conversely, C&I demand remained lower in all three business units, albeit less pronounced in Q3 than it had been earlier in the pandemic. From a financial perspective, we are well positioned to weather the continued economic downturn. We've maintained a strong liquidity position of over $4 billion. Our cash receipts remain steady, and our capital plans remain largely intact. And as the moratoria are starting to lift across our U.S. service territories, We will comply with all state utility commission requirements and continue to work with our customers to maintain uninterrupted electricity and gas service. This means offering flexible payment plans, connecting our customers with agencies and programs that can provide assistance, and working with them to address overdue balances before they become unmanageable. Service terminations are always a last resort. Overall, we continue to believe the full year impacts of COVID-19 will be manageable as we close out the year. As a result, we've narrowed our forecast range to $2.40 to $2.50 per share from the prior range of $2.40 to $2.60 per share. We continue to expect to track towards the lower end of this guidance range due to the impacts of COVID-19 and warmer than normal weather during the first quarter. Lastly, on this slide, I would note that the UK sale process remains on track and we continue to expect to announce a transaction in the first half of 2021. Moving to slide five and starting with key regulatory developments. On October 1st, WPD responded to Ofgem's Rio ED2 sector-specific methodology consultation, advocating for the continuation of a strong incentive-based regulatory regime that supports the best outcomes for our customers in terms of low prices and high quality service. We believe Rio ED1 largely achieved this balance and that the basic structure of the Rio ED1 regime should broadly remain intact under ED2. WPD's response to the consultation focused on several areas where we believe Ofgem should reconsider its position and the robustness of its supporting evidence before making its methodology decision. In the end, we continue to believe and Ofgem has made it clear that DNOs will be critical to supporting decarbonization efforts in the UK to deliver a net zero economy. Based on our discussions with Ofgem, we expect the incentive scheme for ED2 to continue to play a significant role in the overall returns for electric distribution companies. And we expect that WPD will have the opportunity to earn reasonable returns and invest significant amounts of capital during Rio ED2 and beyond. Moving forward, WPD will remain very focused and engaged with its stakeholders and Ofgem to ensure it delivers a plan that will achieve the UK's ambitious carbon reduction goals. Ofgem is expected to issue its Rio ED2 sector-specific methodology decision in December. In other UK developments, the Competition and Markets Authority, or CMA, issued a recent provisional ruling that supports more stable returns for regulated utilities in the UK to incentivize appropriate levels of investment. The CMA ruling concluded that the water sector regulator, OFWAT, went too far in its efforts to sharply reduce returns for water utilities. We expect the provisional ruling will be one that OFGEM studies closely as it nears its decision on the Rio 2 final determinations for the gas and electric transmission sectors and ultimately for the electric distribution sector. Turning to the U.S., The FERC on October 15th issued an order and a complaint filed by a third party challenging PPL Electric Utility's base return on equity for transmission. The FERC order sent the complaint to settlement procedures. If no settlement can be reached, the case will go to a public hearing. We continue to believe that PPL Electric Utility's current transmission return on equity is just and reasonable, and that complaint is without merit and based on flawed assumptions and calculations. Also in the U.S., on October 23rd, LG&E and KU notified the KPSC of the company's intent to file a rate request later this month. As part of the rate case, we will be applying for approval to deploy advanced metering to further enhance grid automation and reliability in the state. Assuming the maximum suspension period for such a proceeding, the resulting base rate changes would be effective July 1st, 2021. Shifting gears to a few notable highlights related to our sustainability efforts and governance updates, in August, we announced that we joined an exciting new initiative to accelerate the development of low-carbon technology. The Low Carbon Resources Initiative, led by the Electric Power Research Institute and the Gas Technology Institute, focuses on identifying, developing, and demonstrating affordable pathways to economy-wide decarbonization. PPL is an anchor sponsor for the five-year program, which supports our clean energy strategy. At a high level, that strategy is focused on decarbonizing PPL's own generation, decarbonizing our non-generation operations, enabling third-party decarbonization, and advancing research and development into clean energy technologies. As we've shared previously, PPL has set a goal to reduce its carbon emissions by at least 80% by 2050. We're confident this goal is achievable with today's technology. At the same time, we recognize that going further faster will require new ideas, new technology, and new systems that can be delivered at scale safely, reliably, and affordably for those we serve. We also remain squarely focused on diversity, equity, and inclusion as part of our long-term corporate strategy. I'm pleased to share that PPL has been named a best place to work for people with disabilities. In July, the company earned a top score of 100% on the 2020 Disability Equality Index, the nation's most comprehensive annual benchmarking tool for disability inclusion. PPL's top score is the result of policies and practices that we've put in place to promote the success of those with disabilities. And it's just the latest recognition of PPL policies focused on ensuring all employees have the opportunity to succeed. Earlier this year, for example, PPL was named the best place to work for LGBTQ equality by the Human Rights Campaign after achieving a perfect score on their corporate equality index. Moving forward, we will continue to work with employee-led affinity groups to better enable all employees to reach their full potential. In other updates, PPL recently earned a trendsetter ranking by the CPA Zicklin Index, which benchmarks political disclosure and accountability policies and practices of leading U.S. public companies. We believe it's important to be transparent on these matters, highlighting one of our core values of integrity and openness and our overall compliance and ethics commitment that is supported by robust internal controls. Lastly, PPL's board of directors appointed Art Beatty as a new director effective October 1st. Art brings to the board a wealth of knowledge and experience with regulated utilities and the energy industry, and we're certainly glad to have him on board as we strategically reposition PPL for the future. With that, I'll now turn it over to Joe for a more detailed financial update. Joe?

Thank you, Vince, and good morning, everyone. I'll cover our third quarter segment results on slide six. First, I would like to highlight that the estimated impact of COVID on our third quarter results was about four cents per share, which was primarily due to lower sales volumes in the UK and lower demand revenue in Kentucky. This is less than the $0.06 impact we experienced during the second quarter, primarily due to the improving electricity demand that Vince mentioned earlier in his remarks. As a reminder, the majority of this impact is recoverable via the UK decoupling mechanism, which adjusts revenues on a two-year lag. Turning to the quarterly walk, starting with the Q3 2019 ongoing results on the left, We first separate the impact of weather and dilution for comparability purposes of the underlying businesses. During the third quarter, we experienced a $0.02 unfavorable variance due to weather compared to the third quarter of 2019, primarily in Kentucky. We experienced substantially higher degree days in Kentucky during the third quarter of 2019 that led to a favorable variance last year. Weather in the third quarter of 2020 was about one cent favorable overall compared to planned, primarily due to stronger load in Pennsylvania versus normal due to the warmer conditions in July. In terms of dilution, during the third quarter, we continued to recognize the impact of the November 2019 draw on our equity forward contracts, which resulted in dilution of about three cents per share for the quarter. Moving to the segment drivers, excluding these items, our UK regulated segment earnings increased by one cent per share compared to a year ago. Factors driving the UK earnings results include higher foreign currency exchange rates compared to the prior period, with Q3 2020 average rates of $1.54 per pound compared to $1.26 per pound in Q3 2019. and lower interest expense primarily due to lower interest on index-linked debt. These increases were partially offset by lower sales volumes primarily due to the impact of COVID-19, lower other income due to lower pension income, and higher income taxes. Moving to Pennsylvania, segment earnings were two cents per share higher than our comparable results in Q3 2019. The increase was primarily driven by higher adjusted gross margins, primarily resulting from returns on additional capital investments in transmission. And as we saw in Q2, our customer mix mitigated the impact on sales from COVID-19 as our positive impact from our significant residential base in Pennsylvania and fixed charges more than offset lower demand in the CNI sectors. Turning to our Kentucky regulated segment, Results were flat to the comparable results one year ago. Factors impacting the results include lower commercial industrial demand due to the impact of COVID-19, offset by factors that were individually not significant. Results at corporate and other were one cent per share lower compared to a year ago, driven primarily by higher income taxes due to timing, which is expected to reverse in the fourth quarter. Turning to slide seven, we again outlined the changes in weather normalized sales for each segment by customer class as we did last quarter. And like Q2, we saw lower demand in the CNI sectors, partially offset by higher residential load in each of our service territories. Demand in the CNI sector, while still lower than last year, has been steadily recovering as certain COVID restrictions have been lifted. In Pennsylvania, Demand improved from about an 11% decline in C&I load in the second quarter to a 4% decline during Q3 compared to a year ago. C&I declines in Pennsylvania continue to be primarily in retail trade and services industry and manufacturing, respectively. Our large industrial customers have generally returned to pre-COVID operations and are not expecting future reductions at this time. Moving to Kentucky, our Kentucky segment reported about a 7% C&I load decline during Q3 compared to the greater than 14% decline we saw last quarter versus the prior year. And like Pennsylvania, the services industry, such as restaurants, retail, and hotels, continue to be negatively impacted in our commercial sector in Kentucky. Much of the improvement we experienced during Q3 was on the industrial side as many manufacturing companies were able to reopen after temporarily being forced to shut down in Q2. Specifically, industrial volumes were driven in part by auto manufacturing volumes returning to pre-COVID levels. Coal mining and non-auto manufacturing continued to be more negatively affected. Finally, in the UK, C&I load improved to about a 14% decline in the third quarter compared to a 20% decline that we experienced last quarter versus a year ago, as government restrictions put in place in late March were further eased throughout the month of July. The primary driver of the increase was seen in the large industrial and manufacturing sectors that had largely closed during the full lockdown phase and have since opened, albeit not quite to pre-COVID levels. It's clear on this slide that the UK demand has not recovered as sharply as our US service territories, which underscores the value of the effective decoupling mechanism there. We remain encouraged by the recovery we've observed in each of our service territories during the third quarter, but we'll continue to monitor load impacts as we move into the winter months, including the impact of additional temporary lockdowns should they arise, such as the lockdowns we are currently experiencing in England and Wales. At this time, the current lockdown is not as stringent as what we experienced early in the year, as workers that are not able to work from home can still go to work and many retail establishments can still provide takeout options. In addition, strong residential demand is expected to continue to act as a hedge to lower C&I demand. Now, I know I just stated a lot of percentages, so let me take a moment to summarize the impact of COVID-19 on our ongoing results in 2020. We experienced a 10 cent per share impact to the end of the third quarter. 70% of that relates to lower UK sales volumes that will be recovered through the UK decoupling mechanism. The remaining 3 cent impact is primarily from lower demand in Kentucky, and we have been able to offset the majority of that through effective cost management. Overall, we believe our strong regulatory constructs, balanced rate structures, and customer mix positions PPL well to continue to operate at a high level in this challenging environment. That concludes my prepared remarks. I'll turn the call back over to Vince.

Thanks, Joe. In closing, I remain very proud of how our teams across PPL have risen to the challenge of COVID-19. We continue to deliver electricity and gas safely and reliably to our customers. At the same time, we remain as focused as ever on innovation, and continuous improvement as we position the company for future success. With that, operator, let's open the call for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Ryan Greenwald at BOA. Please go ahead.

Good morning, everyone. Appreciate the time. Good morning. Can you guys just talk about your confidence and conviction levels and how they've kind of evolved over the last few months around being able to reach constructive deal terms between the CMA findings and what you're seeing internally? And how are you thinking about additional upcoming off-gem data points in terms of ability to really further improve sentiment and drive renewed interest?

Sure. As you can appreciate, we are in the middle of a competitive process, so I don't think it's appropriate to get into too much detail in terms of the process that is currently underway. But to your point, I think the CMA decision for the water company, the provisional decision was certainly positive as we think about overall returns in the UK regulated utility sector. I think it should play well into what we would expect for gas and transmission coming here in about a month or so. That should be coming out early December. We also have the government's white paper on decarbonization that should be coming out They said autumn, so that could be this month or early December as well. And then the CMA final decision. So I think, to your point, things seem to be progressing in a positive light in the UK regulatory construct, and I would expect that to translate positively in our process, but don't want to get into a lot of detail in terms of where we are with potential bidders.

Got it. Fair enough. How are you guys thinking about your hedging strategy ahead of any transaction and corresponding cash proceeds, just given the latest backdrop? I'm curious if you can kind of frame your thoughts around any internal forecasts you guys have on the currency over the next several months. Sure. Joe, you want to talk about that a little bit?

Yeah, well, as far as hedging the proceeds of the transaction, that is something that we're considering at this time. Nothing really to update at this point, but if and when appropriate, we'll provide an update then. I think how the pound moves here could depend on, well, would depend, we think, on our U.S. election results and which way that goes. So certainly watching the pound closely and giving consideration to hedging.

Got it. Appreciate the time. Thanks, Ryan.

And our next question today comes from Dhrigesh Chopra with Evercore ISI. Please go ahead.

Hey, team. Good morning. Who do you think is going to win the election? I'm just kidding. Maybe just can you talk about, you know, you mentioned asset swaps or asset exchange wins in the past, and Joe. So maybe just talk about where that stands. And then in light of that, I do have a follow-up question, but maybe just address that, and then I have a follow-up as it relates to sort of possible future M&A.

Yeah, Durgash, I don't think it's appropriate to get into, you know, we're kind of getting into the process now with potential buyers, so just not appropriate to get into any kind of detail around the process.

Okay, that's fair, Vince.

Totally understandable. And then maybe can you talk about, you know, just maybe, you know, there's the reason why I ask is there's obviously CenterPoint earlier today talked about, you know, putting one to two gas LVCs in their, you know, infrastructure, in their asset base on market next year. You know, KnifeSources, another, you know, one of their peers has made that commentary. Maybe can you talk about you know, the M&A growth opportunities in the U.S., outside of this whole deal with the U.K., just how do you think about potential consolidation opportunities, your views on electric versus gas, and geographies that you might be interested in? Anything that you can sort of speak to that?

Sure. So, you know, overall, I would say we are interested in

acquiring regulated utilities. We do have a preference towards electric, but electric and gas utilities are also attractive to us. In terms of geography, I'm not sure that contiguous service territories or anything like that is necessarily something that we put a high emphasis on. So at this point, I would say we're We're pretty open to, you know, opportunities that may come up in the market. Again, where, you know, our base case is, you know, fix the balance sheet. Not really fix the balance sheet, but improve the balance sheet from where we are to kind of the mid-teens. And then, you know, share buybacks, right? It would be kind of the base case that we would look at M&A as potential to improving value above that. Renewables is also another area that I think we're seriously considering. We did acquire Safari Energy back in 2018. Hasn't been a significant component of the PPL earnings profile to date. However, when we come out of the WPD sale, we could possibly be a cash taxpayer at that time, which obviously would put us in a good position around the renewables business. I think we have opportunity to organically grow that business given kind of how we've positioned the DER business that we acquired a couple years ago, but also there could be possibility or potential to do some M&A there as well.

Great. Super helpful. I'll let others ask. Thank you.

Thanks for your question.

Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1. Today's next question comes from Paul Patterson at Glenrock Associates. Please go ahead.

Hey, good morning. Morning, Paul. I appreciate you guys in the middle of the process. Obviously, you can share only what you can share. Can you give us any flavor as to the level of interest? In other words, have there been a lot of people who have been showing interest in the property and You mentioned these regulatory events in the UK. Are these things that people are looking to see, I guess, before they show interest? Can you give us any flavors, or at least how optimistic you feel about what you've encountered so far?

Paul, I would say that the process and the level of interest is progressing as we would have expected. I did talk about in August when we made the announcement that I did expect there to be quite a bit of interest in WPD, given the quality of the assets, the quality of the management team. And again, we think electric distribution is the premier sector in the utility industry in the UK, given its role and where it's going to play in the decarbonization efforts to get to net zero in the UK. At this point, I would say nothing that I'm seeing would kind of alter that view, and things are progressing as we had expected.

Awesome. Thanks so much.

And our next question today comes from Ryan Levine of Citi.

Please go ahead.

Good morning. So as a salesperson, As the sale process continues to move forward, is there any more color you're able to share around the tax attributes of the portfolio for sale?

Yeah, no update at this point, but Joe, I don't know if you want to mention anything on thoughts on tax strategy.

No, nothing to update at this time or any additional details at this time, Ryan. We'll give an update. on that when appropriate, but I don't think it's appropriate to do so now, given where we are in the process.

Okay. And then to follow up on the comments about being open to gas utility deals, curiously about your long-term ESG strategy and your views on decarbonization.

Sure. So, you know, our stated goals are, right, to reduce our carbon emissions by 80% by 2050, 70%, at least 70% by 2040. As of 12-31-2019, so at the end of last year, we've already delivered about a 56% reduction compared to 2010, and that compares to about a 45% reduction for the sector. We're feeling very, very good about our transition strategy and the glide path that we're on to achieve that at least 70% by 40 and at least 80% by 50. Our reduction targets are, we think they're comparable to our industry peers, even some of those peers that have indicated a net zero target by 2050. They've indicated that they see a pretty clear path to 80% reduction but would require incremental technological improvements to get the remaining 20%. That's very consistent with how we're seeing things as well. It's one of the reasons why we joined the EPRI GTI LCRI R&D project over the next five years to really try to identify that technology to actually get to net zero by 2050. Again, as we're thinking about the declining costs of renewable energy, we think there'll be continued opportunity to accelerate decarbonization, even in Kentucky, even without retiring coal plants. To the extent that the LCOE of solar continues to come down, it could end up being cheaper than the variable cost of generating in Kentucky. But again, the long-term carbon reduction goals for us is around the retirement of the coal fleet, but we will continue to do that in a very balanced way. We're focused on working with the Commission, making sure that the power that we continue to generate in the state is affordable and reliable for our customers. That is critical. Relatively cheap electric in the state of Kentucky is an important component of their economic development strategy. So again, as we think about our carbon reduction strategy, it's in a very balanced way to make sure that we're keeping our customers and our regulators in mind. And again, we think we're in a good position to balance all of those things. If technology were to improve or the cost curves continue to come down significantly, what we've noticed and experienced in Kentucky is that The Commission has been very supportive of coal retirements when it makes economic sense to do so. They are not supportive when it does not make economic sense. Just to remind everybody, we've retired over 1,200 megawatts of coal fire generation since 2010, and that was all based on economics. We think, again, the regulatory construct is supportive down there, but it's all based on economics, and right now the economics are not quite there to accelerate the retirement. But as that continues to progress, certainly, you know, our team in Kentucky is looking at that. We think the commission will continue to be supportive of things like that as well. I think just the key there is to ensure that the generation is reliable and affordable. And again, I think we're in a good position to balance all of those factors.

But just a thought, I mean, how does adding or potentially adding a gas utility to your portfolio fit within that framework?

Well, I don't want to specifically indicate whether or not we would be interested in just a gas LDC on its own. My preference would be an electric and gas utility. Again, I think over time, you know, gas will be de-emphasized as we think about a longer term carbon transition strategy for the U.S. And so that's why I like electric and gas a little better because you can build in that direct hedge. for electrification there, but I wouldn't say today that we wouldn't take a look at that.

Appreciate it. Thank you.

Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for the final remarks.

Great. Just want to thank everybody for joining us on the call today, and we'll see you all at EEI virtually next week. Thanks, everyone.

And thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.