Good morning, and welcome to the PPL Corporation Second Quarter 2019 Earnings Conference Call.
All participants will
be in
listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Andy Ludwig, Vice President, Investor Relations. Please go ahead.
Thank you, Gary. Good morning, everyone, and thank you for joining the PPL conference call on Q2 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 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 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. Thank you, Andy, and
good morning, everyone. We're pleased that you've joined us for our Q2 earnings call. With me today are Vince Sorgi, who was promoted to PPL President and Chief Operating Officer effective July 1 Joe Bergstein, who was promoted to PPL Chief Financial Officer, succeeding Vince in the CFO role and Greg Doug Kent and Paul Thompson, the heads of our U. S. 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 Q2 results and a brief review of operational and regulatory developments. Joe will then provide a more detailed review of 2nd 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 2nd quarter reported earnings of $0.60 per share, resulting in a total of 1.24 dollars per share through the first half of twenty nineteen. Adjusting for special items primarily related to unrealized gains on our UK earnings hedges, 2nd 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 $3,300,000,000 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 marked the 8th and 4th straight years respectively that PPL Electric Utilities and Kentucky Utilities have earned this distinction. All told, PPL's utilities have received 49 J. D.
Power awards in the 2 decades since the organization has studied customer satisfaction with electric utilities. In the UK, WPD was also recognized recently by Ofgem as the top ranked network for the stakeholder engagement and consumer vulnerability incentive, an achievement measured against all gas and electricity networks in the UK. This is the 8th 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 Q2.
The award recognized PPL Electric's 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 utility's 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 Electric's 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 and E finished 2018 with the lowest rate of incidents resulting in lost time or restricted time at work. We are proud of LG and E's accomplishment and we remain committed across our U. S.
And UK operations to continuous 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 subsectors. While the announced methodology 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 was a step in the right direction and look forward to our ongoing engagement with Of Jim as we plan our next price control, a 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's 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 1st 4 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 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 2,000 and 50. 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?
Thank you, Bill, and good morning, everyone. Let's move to Slide 5 for an overview of 2nd quarter segment results. As Bill mentioned, PPL delivered Q2 2019 earnings from ongoing operations of $0.58 per share, which was $0.03 higher compared to the Q2 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 Q2 of 2018 and weather was about $0.01 unfavorable compared to our forecast for the Q2 of 2019.
Excluding dilution and weather, we saw higher earnings at each of our utility segments 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 impact 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 1, 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, quarter 2019 average rate of $1.36 per pound compared to $1.33 in the Q2 of 2018. Moving to Pennsylvania. Our Pennsylvania regulated segment earned $0.13 per share in the Q2 of 2019, a $0.03 increase compared to the Q2 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 U. S. Tax reform in 2018 and lower operation and maintenance expense, primarily due to lower support costs. These factors were partially offset by higher depreciation expense due to additions to PP and E. Moving to Kentucky.
Our Kentucky regulated segment earned $0.13 per share in the Q2 of 2019, a $0.03 increase compared to the Q2 of 2018, excluding the impact of weather. The increase was primarily due to higher base rates effective May 1, 2019, and lower income taxes due to a state tax credit. This was partially offset by higher depreciation expense due to additions to PP and 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 Q1 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 dollars We continue to utilize options in our hedging strategy that preserve upside to the current market rates with about 1 third of the 2020 hedge portfolio being option based.
We remain open in 2021. And as Bill mentioned, we recognize the recent weakness in the exchange rates and continue to monitor potential impacts to our earnings projections. However, independent forecasts of future exchange rates remain within the range of assumptions used for our 2021 projections. While near term fluctuations in the currency are expected given the current political environment, the majority of analysts project a recovery in the currency rates following a Brexit resolution. And finally, we have flexibility in our hedging program that does not require us to add additional hedges at this time and allows us to take an opportunistic approach hedging as we monitor the dynamics of the political situation and move towards a Brexit deadline in October.
That concludes my prepared remarks. And I'll turn the call back over to Joel for a question and answer period.
Thanks, Joe. In closing, all of our PPL companies continued 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 awarded the highest U. S. Government honor to employers for providing exceptional support of National Guard and Reserve employees. The Employer Support of the Guard and Reserve or 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 2nd straight year, earning a top score of 100% on the Disability Equality Index for its commitment to creating and accommodating an 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.
We will now begin the question and answer The first question comes from Ali Agha with SunTrust. Please go ahead.
Thank you. Good morning.
Good morning.
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 has 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, etcetera, will be firmed up? Is that when the strategy consultation decision comes? Just like layout what we should expect in November on this open letter decision?
Sure. So in November, they're going to provide us with the framework. And within that framework, there'll 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?
Sure.
How are
you doing, Ali? The process really going forward around the open letter, we would expect Of to make certain decisions on the questions that they've posed. So confirming the 5 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 the 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.
I think between now November, what the process really is, is a collection of not only the answers to the questions that they post, but also additional stakeholder feedback. We'll take all of that. They'll 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 much more specificity on things like ROE and incentive frameworks.
Okay. 2nd question I had, can you remind us how much of your earnings in this quarter year to date have come from U. K. Pension income, the non cash pension income? And any update on how you're thinking about that as it opens up in 2021?
So we had $0.02 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, 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. Ofgem's review and determination of future deficit funding will be known, we expect, by November of 2020.
But our expectations at this time probably haven't changed. At 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.
Right. Last question, Bill. As I look at the big picture in the UK, you've 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 BPL 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?
Yes. It is a challenging political and regulatory backdrop at the moment, but there are some efforts that we have had underway in the UK to 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 Labor Party has really continued to lose momentum politically.
And as you know, they were one of the well, 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 water. So we think that the risk, while it was already very low, is even lower than it previously Labor Party has really failed to gain any momentum politically. And certainly, there's 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 that's 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 that play, But it is rather challenging.
Understood. Thank you.
You're welcome, Nell.
The next question comes from Anthony Crodel with Mizuho. Please go ahead.
Good morning. Joe and Vince, congratulations on promotions. First question, I guess, if I could think of the guidance for 2021 of $250,000,000 to $280,000,000 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 are not changing that range?
We've assumed a $0.05 reduction in the range for at the midpoint of the pension deficit. At the midpoint of the 2021 forecast, there's a $0.05 reduction to pension deficit funding.
At the low end of the range though, is there a bigger decline in pension deficit revenues?
No, not materially. The range is really driven by FX rates.
Got it. If I could think of a repatriation of cash from the U. K, what are you repatriating now? And I guess, is there a sensitivity on currency or on the exchange rate with that?
Right now, our forecast through the planning period has an expectation of $300,000,000 to $500,000,000 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 $20,000,000 it's only about a $40,000,000 impact to our cash repatriation. So really very minor and very manageable in the grand scheme of our cash position.
Great. And lastly, just the company gives out we have, I guess, 5% to 6% growth rate through 2020. When could 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?
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're aware, currency is obviously a big driver of our forecast. So we'll have to wait and see when we provide that longer term guidance, Anthony, given the currency situation and the political backdrop.
Great. Thanks for taking my question, Michel.
Sure.
The next question comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead.
Hey, guys. It's actually James for Shar.
Good morning, James.
Good morning. I just wanted to ask, could you remind us whether or not you can tell us under the hedging program when will you have to start for 2021?
Sure. Go ahead, John.
Yes. 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.
Okay. And then are you still assuming a range, I think it was 135 to 160 in your 2021 guidance?
We are independent analyst forecasts, 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.
Got you. And I guess just state side, in Kentucky, any updated thoughts on going back for AMI?
I'll ask Paul Thompson, who heads up our LG and E and KU business to answer that.
Yes, we continue to evaluate that, and we have, under the prior commission ruling, expanded our testing our pilot testing work in both LG and E and SKU. 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.
Got it. Thanks, guys. That's all I had.
Thanks, James.
This concludes our question and answer session. I would like to turn the conference back over to Bill Spence for any closing remarks.
Thank you, operator, and thanks for joining us today, and look forward to speaking with everyone on the Q3 earnings call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.