Good morning. Welcome to the PPL Corporation fourth 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 one on your touch-tone phone. To withdraw your question, please press star two. Please note, today's event is being recorded. I would now like to turn the conference over to Joe Bergstein, Vice President, Investor Relations. Please go ahead, sir.
Thank you. Good morning, everyone. Thank you for joining us. The PPL conference call on fourth quarter and year-end 2017 results, as well as our general business outlook. We're providing slides of this presentation on our website at www.pplweb.com. Any statements made in this presentation about future operating results or other future events are forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from forward-looking statements. A discussion of the factors that could cause actual results to differ is contained in the appendix to this presentation and in the company's SEC filings. We will refer to earnings from ongoing operations or ongoing earnings, a non-GAAP measure for this call. For reconciliation to the GAAP measure, you should refer to the press release, which has been posted on our website and furnished to the SEC.
At this time, I'd like to turn the call over to Bill Spence, PPL Chairman, President and CEO.
Thank you, Joe. Good morning, everyone. We're pleased that you've joined us. With me on the call today are Vince Sorgi, PPL's Chief Financial Officer, and the heads of our U.S. and U.K. utility businesses. From Kentucky, that includes Vic Staffieri, LG&E and KU Energy Chairman and CEO, and Paul Thompson, President and Chief Operating Officer of our Kentucky segment. As we announced in early January, Vic will be retiring in March after 17 years at the helm of LG&E and KU and 26 years with those businesses. Paul, who joined LG&E in 1991, will succeed Vic. Vic's provided outstanding leadership to our Kentucky segment, and he's been a very valued member of PPL's senior leadership team. We appreciate his many contributions to PPL.
With our strong focus on succession planning, Paul is more than ready to step into this role, and we're pleased to have him joining us on today's earnings call. Congratulations to you both. Moving to slide three. Our agenda for this morning begins with highlights of our 2017 results and a look at 2018 and beyond in light of U.S. tax reform. I'll discuss the strength of our dividend and our commitment to dividend growth. I will also provide an update on the U.K. regulatory environment. Vince will then review our 2017 segment earning results and provide a more detailed financial overview of our updated financial outlook. As always, we'll leave time to answer your questions. On slide four, very briefly, I'd like to start with the state of our business in light of U.S. tax reform.
Tax reform will be beneficial to our domestic customers as lower corporate income taxes will be reflected in rates. The credit impacts of tax reform on PPL were more than we were expecting, given the enacted tax rate of 21% compared to our expectation of 25%. We've taken steps to mitigate the impact of the lower corporate tax rate on earnings and our cash flows. In short, we've added an additional equity to our plan in 2018. We've increased our cash distributions from the U.K., and we're utilizing the excess value in our foreign currency hedges in 2018, 2019, and 2020. We'll discuss each of these in more detail as we move through the presentation this morning. While there have been a number of changes with respect to our business plan, there are a number of items that actually have not changed.
We still expect to grow earnings per share by 5%-6% through 2020 off of our new 2018 base year. Our updated plan reflects higher projected 2020 earnings per share compared to our previous estimate, despite the effects of tax reform. We're committed to continued dividend growth, and today we announced the 4% increase in the dividend consistent with our prior expectations. We are intent on maintaining solid credit ratings as well. We maintain the significant level of capital investment that also drives our long-term value, and we strive for operational performance excellence each day. We will deliver on our commitments to customers and shareowners. The state of our business remains strong even as we've addressed the impacts of U.S. tax reform. Turning to slide five. Today, we announced that we achieved the high end of our 2017 ongoing earnings guidance range, or $2.25 per share.
This was the eighth consecutive year that PPL exceeded the midpoint of its ongoing earnings forecast, which highlights the operational excellence of our pure-play regulated utilities. The $0.07 improvement over the midpoint of our prior guidance of $2.18 per share was due to lower O&M expenses in the U.S. and U.K. and favorable weather in the U.S. during the fourth quarter. Turning to 2018, we've updated our business plan to reflect the impacts of U.S. tax reform and our mitigation actions and have announced our formal 2018 guidance range of $2.20 per share-$2.40 per share, with a midpoint of $2.30 per share. Vince will take you through a detailed walk of 2017 actual ongoing earnings to the 2018 midpoint later during his remarks. In summary, despite tax reform, our 2018 midpoint is $0.05 higher than our very strong 2017 results.
Looking longer term, our objective with this updated business plan is to continue to provide 5% to 6% earnings per share growth through 2020 while improving our credit metrics. We've established the 2018 midpoint as the new baseline for the 5% to 6% growth to coincide with the effective date of U.S. tax reform. As expected, the largest adverse effect of U.S. tax reform was on our projected credit metrics, with FFO to debt dropping into the low 12% range over the plan period prior to any mitigation effects. In order to support our current ratings with S&P and Moody's, we're targeting to get back to an FFO to debt ratio of 13% by the end of 2019. We've taken several steps laying the groundwork to achieve this goal.
First, we are utilizing the excess hedge value in 2018 through 2020 to mitigate the near-term tax impact to earnings and cash flow by letting our current hedges settle in their respective years. We feel comfortable with this revised strategy given the strength of where the pound is trading against the dollar today. Secondly, we plan to issue about $1 billion of equity in 2018 compared to our prior guidance for equity issuances of $350 million per year. Our additional equity needs beyond 2018 will be dependent upon the performance of our businesses, foreign currency, and regulatory outcomes. Currently, we expect to issue between $500 million and $1 billion of equity in 2019 and 2020, with very minimal equity needs beyond 2020. We will work to minimize the amount of additional equity needed in 2019 and 2020.
Even at the high end of the equity range, we are confident in our ability to achieve the midpoint of our 5% to 6% earnings growth through 2020. At the low end of the range, we would actually exceed our EPS growth of 5% to 6% guidance through 2020. Turning to the dividend, I want to reiterate that our dividend is secure and we remain committed to dividend growth. In every quarter since 1946, we have paid a dividend to our shareowners, and PPL's dividend continues to be an important piece of our overall shareowner return. This year is no exception. We announced a 4% dividend increase for 2018 with an annualized rate of $1.64 per share. I should point out that given our yield is significantly above our peer average, we will continue to monitor this as we consider the growth rate moving forward.
We believe the disconnect between our yield and that of our peers is temporary, driven by the current political and regulatory uncertainty that exists in the U.K. I want to reiterate our position on the U.K. regulatory model in that it remains a premium jurisdiction. Vince and I, along with Robert Symons, recently had a very constructive meeting with the most senior members of Ofgem, the regulator in the U.K. Following that meeting, we feel even more confident that WPD is well-positioned for long-term success under the RIIO regulatory framework, and that the mid-period review will not be a material event for WPD or for PPL. I'll talk more about my thoughts on the U.K. in a few minutes. Let's turn to slide six, where we outline some of our significant accomplishments in 2017.
In addition to our strong financial results, from an operations standpoint, we continue to invest in the future, successfully executing on $3.5 billion worth of infrastructure improvements. These investments continue to make our U.S. and U.K. networks smarter, more reliable, more sustainable, and more resilient. In Pennsylvania, we installed about 600,000 advanced meters, completed significant transmission projects, including the first phase of our $160 million Greater Scranton Transmission Reliability Project, and added hundreds of additional smart grid devices to enhance distribution automation and strengthen grid resilience and reliability. In Kentucky, we completed a 20-year, 540-mile gas main replacement project in the Louisville area and made significant progress on more than $800 million in environmental upgrades as part of a 10-year project to cap and close ash ponds at our coal-fired power plants.
In the U.K., we continue to make progress on our asset replacement and fault management plans, as well as advancing nearly two dozen low-carbon network projects to enable increased adoption of renewable energy resources. As we executed these investment plans, we remained focused on continuous improvement and value for our customers. In Pennsylvania, PPL Electric Utilities recorded its best year ever for safety, reliability, and customer satisfaction. PPL Electric Utilities also achieved the lowest OSHA recordable injury rate as well as the highest customer satisfaction rate in our company's history. The company finished the year near the top decile of public utilities nationwide in limiting the average number of outages per customer. In 2017, our Pennsylvania customers experienced 550,000 fewer power outages than they did just 10 years ago.
In Kentucky, LG&E and KU achieved the company's lowest OSHA recordable injury rate in their history, finishing among the best in a group of comparable utilities nationwide, while also improving reliability for our customers. In 2017, LG&E and KU also had their best performance for customer reliability in more than a decade. Since 2010, our Kentucky utilities have reduced both the frequency and duration of customer outages by 35% and 34% respectively. On the generation side of the business, the utilities achieved their lowest combined annual forced outage rate since 2004, once again, putting us in the top quartile of our peers' forced outage metric for the year. In the U.K., WPD remains on track to achieve its 2017-2018 performance incentive targets, which include reliability and customer satisfaction metrics with its four distribution network operators maintaining the top four spots for customer satisfaction among all the U.K. DNOs.
This is a testament that the capital dollars we are spending across all three of our business lines are providing real value for customers. Also in 2017, LG&E and KU received Kentucky Public Service Commission approval for a combined rate increase of $116 million with new rates taking effect July 1st of last year. As we executed on our business plans in 2017, we also remained committed to transparency and sustainability. In November, PPL released a detailed scenario-based climate assessment report examining the potential impact of climate policies on PPL, consistent with a shareowner request for increased disclosure. In December, we issued our completed Edison Electric Institute environmental, social, and governance reporting template. PPL was one of a number of EEI member companies that helped to develop the template to provide investors a condensed, consistent look at sustainability metrics across our sector.
In January of this year, we announced a new goal to cut the company's carbon dioxide emissions 70% from 2010 levels by the year 2050. We expect to achieve these reductions by economically replacing Kentucky coal-fired generation over time with a mix of renewables and natural gas, improving our energy efficiency, reducing substation greenhouse gas emissions, and cutting vehicle fleet emissions. We also announced our intent to respond to CDP's annual climate survey. In summary, once again in 2017, we demonstrated strong execution across our U.S. and U.K. businesses as we position the company for continued growth and success. Turning to slide seven, I want to spend a bit of time on the U.K. regulatory update as political and regulatory uncertainty in the U.K. affected our stock price performance during the second half of 2017.
We continue to believe, based on Ofgem's public comments and our meeting with them earlier this month, that we will have the opportunity to earn double-digit real returns in RIIO-2 as the top performer among electric DNOs in the U.K. Our meeting with Ofgem was very constructive, and I think both parties really listened to what the others had to say. Ofgem communicated to us that while they are pleased with the outputs being generated by regulated networks under RIIO-1, they believe customers are paying too much for those outputs. This was especially evident in the transmission and gas distribution businesses, where the cost of equity was set much higher than for the electric DNOs, and overall returns on regulated equity in those sectors are higher than our sector. However, even for the electric DNOs, they were expecting a much wider distribution of returns among the companies.
As a result, we believe Ofgem's goal for RIIO-2 will be to bring the overall regulatory returns down for transmission and gas distribution and force much more differentiation for electric distribution while preserving the ability for the top performers to still earn a double-digit real return on regulated equity. Therefore, as we've been saying, while we agree the sector in general will likely see lower returns, it is far too early to say that WPD will experience lower returns as the top-performing DNO. From our side, we communicated to Ofgem the concerns we have been hearing directly from our investors about the uncertainty of the U.K. regulation and the impact it's having on investor confidence. We are also aware that some of our investors are actively engaging with Ofgem and expressing their views and concerns to them directly.
I would encourage you to continue that direct engagement and to respond to the formal consultation processes as we have done for the mid-period review and plan to do on the RIIO-2 consultation. As many of you know, the consultation process is underway to determine if a mid-period review for ED1 is required, with a decision expected in the spring of 2018. Ofgem notes that the MPR mechanism was intended to be very limited in scope, and that they have not identified any issues that meet the original scope definition. Given that fact, we firmly believe that an MPR with an extension of scope would ultimately lead to increased costs for customers as regulatory uncertainty will likely drive higher equity risk premiums and higher financing costs.
We have made that clear to Ofgem on behalf of our share owners and other stakeholders in our formal consultation response, and they acknowledge that they have heard the same message from many others as well. Based on everything we are aware of to date, we do not expect the MPR to have a material impact on our future results. Regarding RIIO-ED2, we believe it is far too early to predict any outcomes as the rules have not yet been developed by Ofgem. However, with Ofgem's statements that the best-performing companies should still be able to earn double-digit returns and that they want to drive more differentiation between the best and worst-performing DNOs, we believe WPD is very well-positioned to succeed in that type of regulatory construct in RIIO-ED2. Ofgem expects to consult with stakeholders in early 2018 on the proposed structure for the broader RIIO2 framework.
WPD and PPL will have an opportunity to share our views with Ofgem during this phase, similar to prior price control reviews. Finally, I would like to add that we still have five years before the next rate period takes effect, which begins in April of 2023. We have been very successful in the past at navigating through new price controls and mitigating earnings impacts. As we move forward, we will work constructively with Ofgem to continue to deliver positive outcomes for customers and fair returns for our share owners. In addition, we will keep investors informed of the ongoing regulatory processes and provide greater visibility into U.K. regulation and financial results. In fact, we are providing expanded disclosures on the U.K. regulated segment in the business section of our 10-K that will be filed later today. Moving to slide eight.
We have updated this slide to reflect our rate base and earnings growth post-tax reform. We expect U.S. rate base to be higher relative to our prior plan due to the lower tax rates and the elimination of bonus depreciation for regulated utilities. We now project our combined regulated rate base to grow by 6.4% through 2020, increasing to $31 billion. We continue to expect to receive near real-time recovery for about 80% of the $10 billion in infrastructure investment we plan to make during that period, which supports our 5%-6% EPS growth. Now I will turn it over to Vince for a more detailed financial overview. Vince?
Thank you, Bill, and good morning, everyone. Let's move to slide 10 for a review of our financial results. Today, we announced fourth quarter 2017 reported earnings of $0.11 per share compared with $0.68 per share a year ago. Full year 2017 reported earnings were $1.64 per share compared to $2.79 per share a year ago. Lower reported earnings for the quarter and the year reflect a current year non-cash loss of $321 million, or $0.47 per share, due to the impact of U.S. tax reform legislation enacted in December of 2017. This loss was driven by a reduction to deferred tax assets related to net operating loss carryforward of about $120 million and pension and other compensation-related liabilities of about $90 million to reflect the decrease in the U.S. corporate income tax rate from 35% to 21%.
In addition, we established a valuation allowance of about $100 million related to foreign tax credits associated with the transition from a worldwide to a territorial approach to taxing foreign earnings. Adjusting for special items, including the effect of tax reform, fourth quarter 2017 earnings from ongoing operations were $0.55 per share compared with $0.60 per share a year ago. The $0.05 per share decrease was driven by lower earnings from the U.K. regulated segment of $0.11, primarily due to higher income taxes due to a benefit recorded in the fourth quarter of 2016 for the utilization of foreign tax credits and lower foreign currency exchange rates in 2017. The lower U.K. results were partially offset by higher domestic gross margins in both Pennsylvania and Kentucky and lower operation and maintenance expense in Pennsylvania. Moving to the bottom table.
Full-year earnings from ongoing operations were $2.25 per share, placing us at the top of our 2017 ongoing earnings guidance range compared with $2.45 per share for 2016. I'll cover the year-over-year segment earnings drivers in more detail in a moment, first let me just highlight the impact of weather for the quarter and the year. For the quarter, we experienced $0.01 of favorable domestic weather compared to the prior year and compared to budget, mostly from Kentucky. For the year, domestic weather negatively impacted our results by $0.04 compared to the prior year and $0.03 compared to budget. In the U.K. for the year, weather was flat compared to 2016 and favorable by $0.02 compared to budget. Let's move to a more detailed review of the full-year segment earnings drivers, starting with the Pennsylvania results on slide 11.
Our Pennsylvania regulated segment earned $0.51 per share in 2017, a $0.01 increase over 2016 results. This year-over-year increase was primarily due to higher gross margins, primarily resulting from additional transmission capital investments and lower operation and maintenance expense. This was partially offset by higher depreciation due to asset additions, higher financing costs, and higher income taxes and other. Moving to slide 12. Our Kentucky regulated segment earned $0.57 per share in 2017, a $0.01 decrease from 2016. This year-over-year decline was primarily driven by higher gross margins from higher base electricity and gas rates effective July 1st, 2017 of about $0.05, partially offset by lower sales volumes due to unfavorable weather of negative $0.03, and higher depreciation expense due to asset additions. Turning to slide 13.
Our U.K.-regulated segment earned $1.28 per share in 2017, a $0.21 decrease compared to the same period a year ago. The lower year-over-year results were primarily due to lower foreign currency exchange rates in 2017 compared to 2016 of $0.27, which we were expecting. Increased depreciation expense from asset additions and higher financing costs due to higher interest expense on index-linked debt. This was partially offset by higher gross margins driven by the April 1st, 2016 price increase, partially offset by lower sales volumes. Lower operation and maintenance expense, primarily from higher pension income and lower income taxes, primarily due to lower U.K. income taxes and a 2017 U.S. tax benefit from accelerated pension contributions, partially offset by a U.S. tax benefit recorded in 2016 for the utilization of foreign tax credits. Moving to slide 15 and a more detailed review of the impacts of U.S. tax reform.
As Bill mentioned, U.S. tax reform will be beneficial to our domestic customers as lower corporate income taxes will be reflected in rates. The final legislation included many of the provisions we and other electric utilities advocated for, including the preservation of interest deductibility for utilities paid for by foregoing bonus depreciation. However, tax reform does negatively impact earnings and credit through the lower tax shield on holding company interest expense and reduced cash flows at our domestic utilities as we pass through to customers the lower cost of federal income taxes. Since PPL is not a current federal taxpayer, we will see no immediate corporate cash benefit from the reduced tax rate. The net result in our credit metrics was a reduction in our FFO to debt metrics into the low 12% range over the planning period, which pressures our current credit rating.
Therefore, in response, we expect to settle the foreign currency hedges over the next few years to help mitigate near-term earnings and cash flow impacts. We now plan to increase our equity issuances in 2018. In terms of the U.K. segment, tax reform shift to a territorial tax system for foreign entities is not expected to have a material impact on PPL. We were able to successfully mitigate the legislation's one-time incremental tax on accumulated foreign earnings with existing net operating losses and foreign tax credits. In addition, the fact that U.S. parent corporations will generally no longer be subject to an incremental U.S. tax on cash repatriation, this provides us with greater flexibility long term to repatriate cash from the U.K.
As referred to in earlier remarks, we've increased the projected amount of cash repatriation from the U.K. to pre-Brexit levels of between $300 million and $500 million per year compared to our prior plan of $100 million to $200 million a year, which also results in a corresponding shift in borrowing from the U.S. to the U.K. segment. While there is now greater long-term flexibility with regards to repatriation, this decision was primarily driven by the change in the U.S. tax rate and the strengthening of the pound. Overall, the impact of U.S. tax reform was a net benefit to our federal cash taxpaying status, as we don't expect to be a federal cash taxpayer now until 2022 or 2023. Lastly, on the regulatory front, on January 29th, LG&E and KU reached a settlement agreement, subject to approval by the KPSC, to commence returning savings related to tax reform to their customers.
In Pennsylvania, the PUC requested comments regarding the impact of tax reform on customer rates last week. We are preparing our responses to this request and will wait for formal guidance from the commission. At this point, we have not received formal guidance from FERC. We will continue to work closely with the applicable regulatory bodies to appropriately reflect and incorporate the impact of federal tax reform in our rates. Turning to a discussion of our updated plan. On slide 16, we show a walk from our 2017 actual ongoing earnings of $2.25 per share to the midpoint of our 2018 forecast prior to tax reform of $2.33 per share. We then continue the walk reflecting the impacts of tax reform and end at our current 2018 ongoing earnings forecast midpoint of $2.30 per share.
In summary, our 2018 midpoint is still $0.05 per share higher than our strong 2017 result, despite the effects of tax reform. Looking at the detailed operational drivers on the left-hand side of the slide, our U.K. segment is expected to deliver higher earnings of $0.08 compared to 2017, primarily resulting from a higher foreign currency exchange rate and higher pension income, primarily due to continued pension funding required by our pension trustees. Partially offset by higher taxes, primarily the result of $0.11 of tax benefit recorded in 2017 that are not expected to repeat in 2018. In Pennsylvania, we are projecting higher transmission margins, partially offset by higher depreciation due to continued capital investment. In Kentucky, we're projecting higher margins of $0.12, partially offset by higher operation and maintenance expense, higher depreciation, and higher financing costs.
In terms of our Kentucky margins, the positive projection includes a full year's worth of rate case benefit, along with the assumption back to normal weather. Our pre-tax reform plan included equity issuances of $350 million per year, which results in about $0.05 of dilution for 2018 compared to 2017. Moving to the effects of tax reform on the right-hand side of the slide. As expected, earnings were impacted by about $0.06 from the lower tax shield on holding company interest expense. However, this was more than offset by higher earnings on higher domestic rate base, higher foreign currency rates as we shifted our hedge strategy to let the excess hedge values flow through each year, effectively eliminating the restrike strategy that we were deploying prior to tax reform and other factors.
Finally, we see about $0.05 of incremental dilution from the additional $650 million of equity relative to our prior assumption, net of the benefits from lower debt financing. Moving to slide 17. Our planned capital expenditures for 2018 through 2022 are detailed on this slide, with infrastructure investment totaling $15 billion over the period. Our revised capital plan increased by about $180 million compared to the prior plan, primarily driven by an increase in Pennsylvania distribution spending to maximize reliability. This incremental distribution capital should be subject to recovery under the DSIC mechanism and is consistent with our most recently approved LTIP filing. We also slightly increased our reliability-based capital spending in 2018 through 2021 in Kentucky while shifting some of our environmental spending out to later years.
We currently project our capital investments to be slightly lower in the back end of the plan compared to current levels due to the completion of advanced metering projects in both Pennsylvania and Kentucky, which is consistent with prior capital plans. We also reflect lower transmission spend in Pennsylvania in 2021 and 2022, as we only include identified projects in our capital plan. There could be further capital spending opportunities as we often identify projects during the execution of our plan. I'll also point out that this five-year capital plan does not include Project Compass. Finally, moving to slide 18 for a foreign currency update. Post-tax reform, we have updated our hedge portfolio to incorporate the lower tax rate of 21% down from 35%.
We are now 100% hedged for the remainder of 2018 at an average of $1.34 per pound, 100% hedged for 2019 at an average rate of $1.39. Since the third quarter call, we've continued to layer on additional hedges for 2020 and are now 35% hedged at an average rate of $1.46. To help offset the earnings and credit impacts from tax reform, we expect to let our current hedges settle in their respective years without significant additional restrikes going forward. The restrike strategy served its purpose to provide some stability and flexibility as the pound was under a lot of pressure immediately following the Brexit vote in 2016. Looking forward and given the strength of the pound, we would expect to hedge more in line with the ranges established by our risk management framework on a rolling 36-month basis.
As a reminder, we target 70%-100% hedged in year one, 30%-70% hedged in year two, and 0%-30% hedged in year three. As I mentioned, we've increased our budgeted rate on 2020 open positions to be more reflective of current market rates. However, this remains a conservative assumption as the current average forward rate for 2020 is well above $1.40. That concludes my prepared remarks. I'll turn the call back over to Bill for the question and answer period. Bill?
Thanks, Vince. Before turning to your questions, I want to reiterate a couple of things. First, we believe that we have a solid, low-risk organic growth plan that we can deliver on. Delivering on this plan, in fact, has been our strategic focus since the spin-off of our competitive generation business, that focus has not changed. Our attention is squarely on delivering long-term earnings growth, on strengthening our balance sheet, on reaching a positive resolution on the mid-period review in the U.K., all of which we are making progress towards. We believe PPL continues to be a very compelling investment opportunity within our sector. The underlying fundamentals of our business are strong. Nothing we see on the horizon changes that view. We continue to project competitive earnings growth and a secure and growing dividend even post-tax reform.
We continue to demonstrate an ability to mitigate challenges that affect our business as we did with Brexit last year and now again with U.S. tax reform. Our utilities remains among the very best in the regions they serve, we're continuing to invest responsibly to make the grid smarter, more reliable, more resilient, and to advance a cleaner energy future. The bottom line is we will continue to deliver on our commitments to customers and shareowners, we will continue to deliver long-term value to those who invest in PPL. With that, operator, let's open the call up for some questions.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, we ask you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster From Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead.
Hey, good morning.
Good morning, Julien.
Hey. Perhaps let me just start off on the obvious questions around tax reform and FFO to debt. Can you elaborate a little bit more about the longer term here? Obviously you're targeting 13% here in the kind of the medium term. How do you think about that in a longer term sense? Is this kind of still the right range for you to think about? And then in tandem with that, can you comment a little bit about equity needs beyond just this next few years here?
Sure. I do think that getting back to about 13% by next year is very important to maintain the current ratings that we have, which we think is important for the overall strength of the business. We do believe that credit FFO to debt metrics in particular will continue to improve even beyond 2019. As far as equity needs post 2020, we think they're going to be very minimal, probably just the DRIP, $100 million or less per year. In effect, we've accelerated a lot of the $350 million a year that we would have had otherwise in 2021 and 2022.
That's been kind of pulled forward and as we indicated, we think, well, we don't think, we're very confident that even at the high end of the equity range that we gave for 2019 and 2020, that we can still achieve the midpoint of our 5%-6% earnings per share growth.
13% is still, you kind of allude to some improvement beyond the end of 2019. How much better do you think you're getting as you look at your plan over the forecasted period?
I'd say it'd probably be another 100 basis points by the end of the period as we get out in time.
Got it. That's a more sustainable level in your mind over the long term?
I think certainly north of 13 would be a sustainable level that we're targeting.
Got it. Then just to follow up.
Julien, it's Vince. Just as Bill said, the credit metric will continue to improve once we get to 13% in 2019 and 2020. We think it's important to continue to show strength in the FFO to debt as we move towards that taxpaying status of 2022, 2023. We don't want to drop below 13% at that time and have to issue additional equity. I think building up a little strength as we go through the next five years will certainly serve us well longer term.
Right. Excellent. Just perhaps following from there real quickly, as you think about sort of the near years, you've got a 5%-6% through 2020, but you've got a rate base CAGR that goes through the 2022 period. What are the kind of puts and takes if you're not ready to kind of roll forward your EPS CAGR in those next couple of years? Obviously, you've got the dynamics in the U.K., but can you talk about maybe the FX and any other kind of puts and takes there?
Sure. FX is probably
Why not go forward?
Sure. FX is probably one of the key ones, and the forward curve currently for 2021 is $1.49. Clearly that's $0.09 above where we're currently projecting 2020 earnings or based our earnings on 2020 at $1.40. There's clearly a significant upside should the forward curve continue to show that kind of strength. In terms of other puts and takes, you mentioned the rate-based growth that will continue. I believe over the entire period it's just above 6%. That in the 5%-6% range will continue beyond 2020. That's going to be a key driver of earnings. As well as just overall cost management, cost containment, which we've done a really good job of managing over time. I think those are a couple of the key factors.
Great. Excellent. I'll leave it there. Best of luck.
Thanks.
Thank you, Julien.
Ladies and gentlemen, our next question today comes from Ali Agha of SunTrust. Please go ahead.
Thank you. Good morning.
Good morning.
First question. The extra $650 million of equity that you're planning for this year, will that be covered from internal programs like DRIP, ATM, or would that require some kind of block issuance? What's the thought there?
Our thought is that DRIP and ATM would be probably the most efficient and we think that given it's the incremental $650 is not that significant overall. We could issue probably much more than $1 billion overall for the year under the ATM and DRIP program. We think it's very doable, and as always, we'll look at other means and use the most efficient means, but ATM is the most likely mechanism.
I see. Bill, you made this point in your slide. This is the eighth consecutive year where you've actually exceeded the midpoint of your guidance. Should we assume, given that track record and trend, that there is a healthy dose of conservatism built into your 2018 guidance?
I think certainly we have had a track record that's been very positive of delivering above our midpoint of our earnings guidance. We put together what we believe are very solid business plans. They have proven to be conservative, I guess, in the past, if you look back at the track record. One of the reasons we gave you a range for the equity issuance is for 2019 and 2020. $500 million to $1 billion was the fact that we have delivered in excess of the midpoint. Taking that into account, as well as some of the other moving parts, for example, we don't have the regulatory outcomes yet in Pennsylvania nor at FERC.
We think that there is some upside there, not only just in delivering but that $500 million is probably achievable in terms of the equity in 2019 and 2020 if things fall in places as they could. Again, kind of being conservative, we wanted to point out that even at the very high end, the $1 billion of equity in each of the three years, we can still meet the midpoint of the 5%-6%. If we can lower the equity raise, we're going to be above that range.
Okay. Lastly, just clarifying your comments, just making sure I got them right. You laid out your 2022 CapEx plan, which equates to a 5.4% CAGR on rate base per your math. As you point out, the forward exchange rates are much higher today than the $1.40 that you're budgeting. Given conditions as they are today, is it fair to say that that 5%-6% should be sustainable through 2022, given what we know today?
Given what we know today and the forward curve at $1.49, we could maintain the 5%-6%, yes. We're not issuing formal guidance right now. With those assumptions that you outlined rather, that would be achievable, correct.
Okay. Thank you.
You're welcome.
Our next question today comes from Jonathan Arnold of Deutsche Bank. Please go ahead.
Good morning, guys.
Good morning, Jonathan.
Just one question. Can you give us a little sense of what your sort of most likely option for executing on the equity is?
Sure. I think it would be the combination of ATM and DRIP. We think that that's very doable in the current environment. Particularly as we get beyond the mid-period review and some of the initial RIIO-2 framework, we think we'll see some strength in the stock and some of the uncertainty removed. I think ATM for now is our assumption and probably a pretty good one from our perspective.
Okay. The DRIP, I think you said it's about $100.
That's correct.
Okay. I had a question on the walk from 2017 to 2018 that was on slide 16.
Yeah.
I'm sure this is obvious, apologize for the question if so, why is it that the impact of tax reform on Kentucky is negative, on Pennsylvania it's positive?
Vince, you want to
Sure.
Yeah.
Jonathan, Kentucky has holding company debt as well, where PA has none. They, in addition to Cap Funding, are losing the tax shield on going from 35% to 21% on their holding company debt primarily.
That's encompassed within the number you've given for sort of overall holding company debt impact, but it's just in that segment. Is that correct?
It's in the $0.06 that I talked about on that first bucket.
Yeah.
The lower tax shield on holdco-interest, it's in that $0.06. That's Cap Funding and LK.
Okay. It's in a segment allocation thing. Okay. We just have one other question on the 13% you're talking about around FFO to debt. Is that the threshold that you currently have, or is that where you feel you need to be to be comfortable? I'd sort of be clear whether because I guess we didn't see you guys put on negative outlook, so we don't have as clear a sense of exactly where your threshold might be.
Yeah. The threshold, previously as indicated by Moody's, was 12%-15% FFO to debt. With tax reform, we would be skating at the bottom of that range, and we felt that probably not the best place to be. In conversations with the rating agencies, we felt that it was probably most prudent to add some more equity into the plan. Given we had the hedge value that we could utilize to maintain our EPS growth rates, we felt that that was the best way to do it.
Perfect.
Jonathan, that is one of the open items as we think about the $500 million to $1 billion for 2019 and 2020. We've had initial discussions with the agencies, but I would not say we've had fulsome discussions in detail with either of them. We need to do that. Ultimately, we'll flesh out where that ultimately needs to be to maintain our credit ratings with both agencies. At this point, we're assuming 13% will be a comfortable area.
Great. Thank you. Just to be sure I've fully understood you on equity, we're saying in 2019 and 2020, it's at least $500 million each year, but it could be up to $1 billion each year.
That's correct.
It is. If we're at the 500, that will simply be pulling forward 2021 and 2022 because we're going from 350 to basically less than 100 in those years.
Okay, perfect. Thank you very much.
You're welcome.
ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then one on your touch-tone phone. Once again, that's star then one if you have a question. Today's next question comes from Michael Lapides of Goldman Sachs. Please go ahead.
Hey guys, just kind of a bigger picture question. Given a few factors, meaning tax reform in the U.S., higher interest rates overall, how do you think those two things change your competitive positioning relative to other U.S. and European utilities? How does that trickle into your view of whether further consolidation on either continent is both value added and worthwhile?
Well, let me take the last part of your question first, Michael. On the M&A front, I don't really think that tax reform overall is going to have a significant effect within our sector, whether that's in the EU or here in the U.S. I think the one effect it could have is it does remove the uncertainty about what tax reform might have been. From that perspective, it might create some more opportunity for some. I don't think the fundamentals of the business overall have changed much because everyone's pretty much on the same level playing field. Now, having said that for PPL specifically, because 50% of our business is in the U.K. and 50% is here, as interest rates rise in the U.S., we've got somewhat of a hedge against rising interest rates here vis-a-vis the U.K.
To the extent that the U.K. interest rates remain much lower than they are here in the U.S., that could be a positive to the stock. I think overall, we don't see a whole lot of change from the PPL perspective in our view of M&A. What we've said in the past is that we can be successful with the organic growth plan that we have. We don't need M&A to be successful. I think we've been pretty transparent that as we think about M&A, our objective has been to strengthen our EPS growth rate and credit metrics if we were to engage in M&A. Said another way, I'm unaware of any transaction that would meet these objectives today. Our focus is clearly on delivering long-term earnings growth, which we can do organically.
I'd also mention that currently we think our stock is undervalued, and we believe that transaction multiples currently continue to be pretty excessive and would not allow us to achieve our objectives in any M&A kind of scenario.
Got it. Thank you, guys. Thank you, Bill. Much appreciated for that.
You're welcome, Michael.
Okay.
I was going to say this concludes the question and answer session. Please go ahead, sir.
Okay. I was just going to say, seeing no other names in the queue, we'll just say thanks to everyone for joining us today. We'll catch up with you on the next earnings call, if not before. Thank you.
Thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines. Have a wonderful day.