PPL Corporation

Good morning, everyone, and welcome to the PPL Corporation's first quarter earnings conference call. All participants will be in a 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 and then one using a touchtone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Andy Ludwig, Vice President of Investor Relations. Sir, please go ahead.

Thank you, and good morning, everyone. Welcome to the PPL Corporation conference call on first quarter 2022 financial results. We provided slides for this presentation in our earnings release issued this morning on the investor section of our website. Before we get started, I'll draw your attention to slide two and a brief cautionary statement. Our presentation today contains forward-looking statements about future operating results or other future events. Actual results may differ materially from these forward-looking statements. Please refer to the appendix 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 reconciliations to the comparable GAAP measures, please refer to the appendix. Participating on our call this morning are Vince Sorge, PPL President and CEO, Joe Bergstein, Chief Financial Officer, and Greg Dudkin, Chief Operating Officer. With that, I'll now turn the call over to Vince.

Thank you, Andy, and good morning, everyone. We appreciate you joining us for our first quarter investor update. Moving to slide three in the agenda for today's call, I'll begin this morning with highlights of our first quarter performance and an update on the status of our planned acquisition of Narragansett Electric in Rhode Island. Joe will then provide a detailed review of first quarter financial results. And as always, we'll leave ample time for your questions. Turning to slide four, today we announced first quarter reported earnings of 37 cents per share. Adjusting for special items, first quarter earnings from ongoing operations were 41 cents per share, compared with 28 cents per share a year ago. These results were in line with our expectations and provide a strong start to the year, as we remain focused on repositioning PPL for long-term growth and success. Moving to Rhode Island, we received approval in late February from the Rhode Island Division of Public Utilities and Carriers to acquire Narragansett Electric from National Grid. In its detailed decision, the Division found that PPL met the statutory standard for approval. The Rhode Island Attorney General's Office appealed the Division's order to the state's Superior Court and obtained a stay of the approval until the appeal could be heard. On April 26th, the Superior Court heard oral arguments on the Attorney General's appeal. The Attorney General contends that the Division misapplied the statutory standard for approval and, in particular, the state's public interest requirements. The Attorney General also contends that the Division failed to adequately consider Rhode Island's Act on Climate in its analysis and decision. We disagree and believe the extensive record and evidence in this case demonstrate that the Division properly applied the statutory standard and correctly approved the transaction. At the April 26th hearing, the Attorney General's office asked Judge Stern to remand the matter back to the Division with instructions to address the issues raised by the Attorney General. The Attorney General's Office did not ask the judge to reverse or vacate the decision. We anticipate Judge Stern will issue a decision on the appeal relatively soon because he publicly stated that a quick and timely resolution of this matter is in the best interest of all parties. In the meantime, we are actively engaged in settlement discussions with the Attorney General's Office and remain prepared to close promptly with national grid. As we've shared all along, we are eager and excited about the opportunity to work with the talented team at Narragansett Electric to drive significant value for Rhode Island customers and support the state's decarbonization efforts. We continue to believe Narragansett Electric is an excellent fit for PPL, and that PPL is an excellent fit for the state of Rhode Island. We remain confident that we will reach a positive outcome in the proceeding. Given the pending litigation, we are not in a position to provide additional details at this time, And I have said all I can say about this matter on today's call. I appreciate you respecting the process when we get to the Q&A session. Turning to slide five and a few operational highlights. Our Kentucky utilities continue to seek opportunities to advance clean energy options and support Kentucky's growing economic development. In late February, LG&E and KU joined the state's new hydrogen hub initiative. which focuses on making hydrogen a low-carbon solution for the future. The initiative is part of a new energy strategy announced last fall by Kentucky Governor Andy Beshear and the Kentucky Energy and Environment Cabinet. LG&E and KU's commitment to promote hydrogen supports a key pillar of PPL's clean energy strategy, which is to drive digital innovation and R&D to enable new technologies. The commitment is also consistent with our sponsorship of EPRI's Low Carbon Resources Initiative and LG&E&KU's partnership with the University of Kentucky Center for Applied Energy Research. EPRI's Low Carbon Resources Initiative seeks to advance clean energy technology and low carbon energy carriers such as hydrogen. Meanwhile, LG&E&KU's carbon capture partnership with the University of Kentucky includes a novel project focused on capturing CO2 from natural gas combined cycle plants and directly from the air, as well as producing hydrogen and oxygen as value-added streams. We're excited to join this new Hydrogen Hub initiative, and we will continue to engage with the Kentucky administration and other stakeholders as the state's clean energy strategy evolves. We're also very excited to support continued economic development in Kentucky, which is coming off a banner year for attracting new business and manufacturing in the state. As we highlighted on our third quarter call, Kentucky's success in 2021 included Ford's announcement that it will build a $6 billion battery manufacturing complex within our LG&E and KU service territories. The complex, to be built in Glendale, Kentucky, will help put the state at the forefront of the auto industry's transformation to electric vehicles, and the state has called it the single largest economic development project in its history. In support of this effort in Glendale, Kentucky Utilities recently requested regulatory approval to build two 345 kV and two 138 kV power lines and two new substations. LG&E plans to construct an interconnection gas regulation facility and nearly a half mile of gas lines to serve the Glendale project. The estimated capital cost to support the Glendale economic development project is $150 to $200 million. The Kentucky Public Service Commission has set a procedural schedule that will support our ability to meet Ford's construction timeline. In addition to these initiatives, we also remain focused on advancing technology and innovation. Each of our utilities were recently recognized for these efforts by EPRI, winning technology transfer awards. In Pennsylvania, CPL Electric Utilities received this award for application of an adaptive tool. which through automation further increases the overall safety, reliability, and efficiency of the electric grid. This tool expands on one of the most advanced grids in the nation as we continue to develop a safer, smarter, self-healing grid of the future. In Kentucky, LGN and KU were recognized for the use of EPRI's electrification portfolio assessment tool to identify high-impact electrification technologies to reduce natural gas use and related emissions. This technology research project identified more than 1 million megawatt hours of electrification opportunities for LG&E and KU industrial and commercial customers to reduce emissions and lower costs. These awards are just another example of our continued efforts to lead in the research and development space while progressing towards our sustainability goals. Across our businesses, we are also very focused on improving the customer experience by expanding self-service options. and our progress in this area continues to be well received by our customers. In February, PPL Electric Utilities ranked first in J.D. Power's annual Utility Digital Experience Study. The study assesses how customers interact online and through mobile apps with the 36 largest electric, natural gas, and water utilities in the U.S. PPL Electric's score in the study improved significantly in 2022, while a majority of the companies surveyed experienced declining scores. Improving customers' digital experience is yet another way we continue to use technology to drive value for our customers. Shifting to our final update on slide five, we continue to make progress across PPL in advancing key environmental, social, and governance initiatives. On April 14th, we published our annual sustainability report, which addresses our approach to a wide range of ESG issues and highlights our 2021 performance and progress. As highlighted in the report, we have expanded on our commitment to achieve net zero carbon emissions by committing to not burn unabated coal by 2050. This new commitment reflects our continued discussion and expectations around the future of our coal fleet and its transition. Based on our current retirement schedule, we expect our coal capacity to be reduced from just over 4,700 megawatts today to approximately 550 megawatts in 2050. The 550 megawatts are associated with our highly efficient Trimble County 2 coal-fired facility, which was completed in 2011. There are any number of technology developments, regulatory mandates, or circumstances that could impact the timing of the end of this plant's economic life. We believe that research and development is the key to our clean energy future and fully expect that innovation, technological advances, and the relative economics of other cleaner energy sources will support the company's commitment to not burn unabated coal at this facility by 2050. In other highlights from our sustainability report, we created and filled a new chief diversity officer position to lead our DEI strategy enterprise-wide and build on the progress we made in 2021. Finally, I would note that we have added political contributions to the oversight function of our board's governance, nominating and sustainability committee. PPL's transparent disclosures in this area have earned us a trendsetter ranking by the CPA Zicklin Index, which benchmarks the political disclosures and accountability policies and practices of leading U.S. public companies. Oversight by the Governance Nominating and Sustainability Committee will further strengthen our governance in this area. That concludes my strategic and operational overview. I'll now turn the call over to Joe for the financial update. Joe?

Thank you, Vince, and good morning, everyone. I'll cover our first quarter segment results on slide six. As Vince noted, we reported 2022 first quarter gap earnings of 37 cents per share. Special items in the first quarter were 4 cents per share, primarily due to integration expenses associated with the planned acquisition of Narragansett Electric. Adjusting for these items, first quarter earnings from ongoing operations were 41 cents per share. Turning to the ongoing segment drivers, our Pennsylvania regulated segment earned 19 cents per share, a 3-cent year-over-year increase. The improved earnings results in Pennsylvania were primarily driven by higher peak transmission demand, returns on additional capital investments in transmission, and higher sales volumes. The increases were partially offset by higher operation and maintenance expense, including higher than expected storm costs. Turning to our Kentucky segment, we earned 25 cents per share in the first quarter, seven cent increase over comparable results one year ago. The increase was primarily due to higher base retail rates effective July 1st, 2021. Partially offsetting this increase was higher depreciation due to additions to PP&E. Results at corporate and other were three cents higher compared to the prior year. Factors driving earnings results at corporate and other primarily included lower interest expense, primarily resulting from the recapitalization of the balance sheet following the sale of WPD. Finally, included in the segment results, as reflected on this slide, is a two cent increase in our first quarter 2022 EPS due to share accretion resulting from the $1 billion of buybacks completed in 2021. That concludes my prepared remarks, and I'll turn the call back over to Vince for some closing comments.

Thank you, Joe. As I noted earlier in my remarks, we continue to work diligently through the state appeals process in Rhode Island. While the appeal has delayed the closing of the acquisition, we are confident we will complete this transaction. And we look forward to introducing a new PPL, a PPL that is built for the future, an innovative, best-in-class utility operator, positioned to deliver competitive earnings and dividend growth, backed by one of the strongest balance sheets in our sector, employees to lead the clean energy transition while keeping energy service affordable and reliable for our customers. And we continue to look forward to sharing a strategic update, including long-term growth projections at an investor day following the Rhode Island closing. With that operator, let's open the call for Q&A.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speaker phone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to ask a question. We'll pause momentarily to assemble the roster. And our first question today comes from Char Perez from Guggenheim Partners. Please go ahead with your question.

Hey guys. Good morning.

Morning, sir.

So Vince starting, I guess with Rhode Island, if the superior court rules in favor in your favor, I guess the AG could appeal to the state Supreme court. Any general thoughts on timing? If that were to occur, is it an immediate filing? And then would you wait for the court to deny or stay? Um, assume you would not close while this process is still underway, right?

Yeah, sure. Let me just reiterate that we are in active litigation in Rhode Island. And as I said, we're engaged in settlement discussions with the Rhode Island AG's office. So I really can't say any more than what I've already said in my prepared remarks. I'll just reiterate that we're confident that we'll close the transaction in a timely fashion. And again, look forward to rolling out the new PPL at any investor day. shortly following the close. Look, I appreciate that you may have some questions about the matter, but I really need you to respect where we are in this process.

No, that's fair. I appreciate that. And then just maybe a question for Joe on housekeeping. Can you just remind us what the approximate unallocated cash balance is at this point following the buybacks, which you just highlighted, and the 3Q CapEx increase that you had? I guess, how are you thinking about the toggle between buybacks and more capex as we approach the finish line here in Rhode Island?

Yeah, so, Char, we'll lay out all the details at the investor day when we have it. I mean, clearly, we have cash available for the acquisition of an eco when we include that process. But anything beyond that, we'll discuss at the investor day.

Okay, got it. And then just one last one for me, and then I'll jump back in the queue, is just As we're thinking about the analyst day, you know, the topic of Kentucky does pop up here and there, and obviously there's a trajectory that's out there with the prior IRP that's filed. But is there an opportunity to maybe take a slightly more aggressive approach as you're thinking about the coal outlook within that state versus what you just recently filed?

Well, I'll just say that at the investor day, we'll provide a comprehensive update on the company's outlook, our strategy. And again, we're calling it the new PPL for a reason, Char. So I know it's been a while since we've had some detailed financial projections out there, but we're really looking forward to laying all of this out for the market. It'll provide the investment opportunities in each of the jurisdictions where we see the near-term and long-term growth going and really how that translates into earnings and dividend growth projections. So we'll cover all of that at the investor day for sure.

No, that's helpful. I mean, I think there's some trepidations around what the base earnings could be and what you would grow off of that. So it'd be very welcome. So thank you so much, guys. I appreciate it.

Yeah, I'll just say, look, we're focused on, you know, growing, you know, having our earnings growth, you know, very competitive. And, you know, we'll lay all that out with the investor day. We're confident.

Fantastic, guys. I'll see you soon. Thanks again, Vince. Bye. Thanks.

Our next question comes from Nicholas Campanella from Credit Suisse. Please go ahead with your question.

Hey, everyone. Good morning. Thanks for taking the time. I just wanted to follow up on Kentucky, actually, again, and just, you know, thinking through the portfolio and the amount of undepreciated book value that's kind of still in rate base today. I don't know if you would be able to kind of quantify that now or not, but that would be helpful. And then just thinking through the options for, you know, long-term retirements or even any potential acceleration options. Can you just discuss the framework that's in place there? Because I believe it's changed since you came out of the most recent rate case there. Thanks.

Yeah, so on the retirements, we have the 2024 retirement and then additional retirements in 2028, and then the next round are in kind of the mid-2030s, as outlined in the IRP. We are actively engaged with the Commission and other parties responding to questions around the IRP. But as we think about really the 2028 retirements, going from kind of the theoretical that was in the IRP, again, that's a point in time analysis, to actually putting together the generation replacement plan. We're actively working on that now. That will become part of the interaction that we have with various stakeholders around the IRB. Ultimately, that will culminate in a CPCN probably within the next year around what we think that generation replacement will look like. But Nick, to your point, there's opportunity to look at those retirement dates and potentially pull those in, but those will all be part of the CPCN request that we'll be working on here in the near term.

Joe, anything you want to add on the rest of his question?

I think, Nick, the other part of your question was the current rate base.

And that was the other part of your question. That's about $5 billion today.

Okay, $5 billion. Thank you. I appreciate that. And then just... You know, core business today, you know, what are you seeing in terms of just inflation impacts? How are you feeling on labor pressures, financing costs, and just how should we kind of be thinking about how that affects the base business today? Thanks.

Yeah, well, it's certainly an area that we're keeping an eye on. In both PA and Kentucky, we've seen some increase in prices due to inflation. However, we expect to be able to manage that. really where you're seeing the largest impact of inflation is on the cost of energy. So the energy purchases, the fuel purchases, and even though that they don't necessarily impact the P&L because those are pass-through costs, they certainly impact affordability for our customers, and that continues to be a key area that we're focused on in ensuring that our energy remains affordable for our customers. One of the key aspects of our business plan, and we'll get into a lot more detail on this at the investor day, is to drive efficiency across the entire business. Some of the parts of that strategy are centralizing our shared services functions. We're further leveraging our supply chain function. And as we've talked about, continuing to use technology and work optimization to reduce our overall costs. On the affordability side, In addition to just maintaining and driving efficiency across the enterprise on the cost side, we are very focused on ensuring that our customers are aware of all the programs that are available to them as they think about paying their utility bills. We'll likely need to provide flexible payment plans to our customers just like we did during the pandemic, so All of these activities, Nick, we think are going to serve us well in this inflationary environment as, again, we continue to look to maintain affordability for our customers.

Thanks a lot. Looking forward to the analyst day. Chat soon. Thank you.

And our next question comes from Steve Fleischman from Wolf Research. Please go ahead with your question.

Yeah, thanks. One brief one. Just When you talk to a competitive earnings and dividend growth rate, you know, I would say the average in the sector right now is to 7% generally. Is that kind of a fair reflection of what you see as the average in the sector?

Sorry, Steve. You cut out when you stated your range or number. Say it again.

Five to 7% generally viewed as the average I'd say right now. Is that kind of the bogey that you would be looking

Well, that's consistent with what we see as well, yes.

Okay. That's it. Thank you.

Sure. And our next question comes from Anthony Crawdell from Mizuho. Please go ahead with your question.

Hey, great. Good morning. Thanks for taking my question. It's been a tough outcome on Tuesday, so hopefully get better luck tonight. Just, I guess, quickly, on, I guess, slide four, and I don't know if you could answer this, and if you can, just please tell me, but on one of the bullets, you highlighted that the Attorney General is requesting just, I guess, for man with instruction versus vacating the approval decision. I guess, what is the distinction there that you're trying to make on that bullet?

Yeah, so, Anthony, that's just... That just means that the Attorney General's Office is not looking for the judge to strike down in totality the decision that the division made to approve the transaction, and then we basically start from scratch. What was requested was that they remand the decision back to the division with instruction to address the issues that the Rhode Island Attorney General's Office had. It's just making reference to what was being requested by the Attorney General's office. It's not a complete redo.

So am I fair to say from that bullet that there's actually no challenge to actually, there's no challenge to the DPUC approval, but the DPUC approved the transaction, and right now there's no pending legal, I guess, matter that's challenging that approval that DPUC gave?

No, no. As I said in my prepared remarks, really the two issues that the Attorney General's office is challenging within the decision is whether or not the Act on Climate was adequately reviewed and analyzed in providing the approval, and then whether the public interest requirement was met. So those were the two primary challenges that the Attorney General had around the decision.

Great. And then lastly, if I could just pivot, I guess, to maybe Pennsylvania. It's all kind of like customer bill impact and will load growth be impacted? You know, if I think in Pennsylvania, I think customers maybe had an increase in December due to higher commodity prices. And then I believe new rates go into effect in June. So you get a kind of a pancake of maybe a, you know, a sizable increase. I guess one is, what level of increase are you forecasting customers may face in Pennsylvania in June versus maybe a year ago? And then do you think that could impact either customer load growth, which looks very attractive when I look on the slides, or maybe if it postpones any capex? And I'll leave it there.

Yeah, Greg, do you want to talk about that? I mean, at a high level, the increase is a are significant as you're describing. As we know, commodity prices are way up this year versus last year. And again, that's a pass-through cost for us, but it's upwards this year versus last around, could be as much as 50, 60%. So it is very significant. We are actively reaching out to our customers to help them, whether it's shopping or, as I talked earlier about, flexible payment plans, et cetera. So making sure that they have the full suite of options at their disposal. When you look at the total increase, it's really the generation side, Anthony. I think T&D is actually going down, so it's really a generation issue, but it's certainly an area that we're focused on helping our customers deal with. But, Greg, any further details or insights you have on that?

Yeah, so to Vincent's point, compared to June of last year, the overall bill for residential will go up about 30%. And again, it's driven by basically a doubling of the generation costs. So the impact on sales going forward, you know, we'll have to see, but it's, you know, that's a big impact. We are really pushing for, because we're a competitive state, there may be generation providers that have a lower rate than that. So in our communication to customers, we're really pushing for them to go shop. And if there's a lower generation charge or deal out there, they should sign up for it.

Great. Thanks so much for taking my questions and looking forward to the analyst type.

Great. Thanks, Anthony.

And our next question comes from Paul Zimbardo from Bank of America. Please go ahead with your question.

Hi. Good morning. Thank you. First, I just want to clarify quick with the affordability questions. There's no plans in moderating the capital plans in Pennsylvania or Kentucky that you've put out before.

Well, we'll lay out our new capital plan on the investor day call. But specifically related to the old plans, they're not being impacted by that.

Okay. Great. I just wanted to check on that. And then just since all the inflation questions, what is the long-term O&M targets for Pennsylvania and Kentucky and just as you're seeing more pressure to change the rate case plans in Pennsylvania?

Well, overall, again, we'll get into the details on the investor day, but as I mentioned, part of our strategy is to become more efficient across the entire enterprise, especially after we close Rhode Island and we're able to really leverage the IT systems that we have here in Pennsylvania around the T&D operations. As we've talked, we need to just bring Rhode Island onto those systems. They're not coming with systems because they're integrated with National Grid. So we'll be able to take advantage of spreading all the fixed costs of those systems over more customers and more employees. In addition to that, like I said, we're centralizing our services, organizations, their functions and looking to even further optimize our supply chain efforts across the entire portfolio. And again, bringing in the opportunity with Rhode Island will enable us to do that even further. So we see a fairly significant opportunity there to reduce O&M over the planning horizon. And again, we'll lay all that out on the investor day, but it's significant. Greg, anything you want to add to that?

Yeah, just that you mentioned PPL, electric utilities, so there's no plans in the immediate future for a rate case there.

Okay, totally understood. Thank you all. Appreciate it.

And our next question comes from Michael Lapidus from Goldman Sachs. Please go ahead with your question.

Hey, guys, easy question for you. Just curious if... I thought you had a stay out in Kentucky for a number of years, so if you ramp up capital spend there, do you have to wait until that next case to get cash recovery of it, or are there mechanisms you can utilize that would enable interim rate increases before that next case? And can you remind me, Wendy, of file that next case there?

Yeah, so last year's rent case, we had a four-year stay out provision. We do have the environmental recovery mechanism in Kentucky. So if there are any. Environmental related capital spend that that does get. Recovered Michael more real time basis. Just more broadly, we have the. The this mechanism in Pennsylvania, so even. Well, Greg just mentioned we don't have a base rate case. We do have the disk mechanism there. And then in Rhode Island, they have their capital recovery mechanism as well that does not require base rate cases. So the plan that we'll lay out in the investor day will not rely on any year-term rate cases across the entire portfolio, which we think will differentiate our plan against some of our peers.

Got it. And can you remind me, do you have, like, how much in the way of near-term, call it next three to five years, coal ash or ELT-related spend do you have to do in Kentucky?

I think that we'd probably be better off responding to that at the investor day. It's probably still a couple hundred million over that time period. Not as much as well. what we were showing, you know, the prior five years or so, Michael, but there's still a little bit to go there.

Got it. Thanks, guys. Much appreciated, Vince. Sure. Thanks.

And, ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to the management team for any closing remarks.

I just want to thank everybody for joining the call. Again, first quarter, I think a good start to the year. We remain confident in our ability to close Narragansett and really looking forward to laying out the new PPL for everybody shortly after closing. So appreciate everybody's time.

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.