EEI 52nd Financial Conference

Nov 6, 2017

Slides

I'm Bill Spence, PPL's Chairman, President and CEO. And I have up on the stage with me this morning, Vince Dorgey. Vince is our Chief Financial Officer. I also have Phil Swift. Phil is our Chief Operating Officer for our U. K. Business called Western Power Distribution. Happy to have you here this morning. I wanted to first start before I get into my slides and my other remarks, I really want to briefly comment on our recent stock performance for those of you that follow closely and some concerns that we've heard over our U. K. Regulation and our business in The U. K. First and foremost, we're certainly not pleased with the stock performance relative to the broader utility index. The valuation that is being ascribed currently is quite frankly inconsistent with our view of the company, which we believe continues to have a collection of premium regulated utilities with an above average earnings growth and a dividend that's growing 4% annually through the end of this decade. So when you compare us to others in the sector, I think we will compare very, very favorably. Speaking specifically to our U. K. Regulated business where much of the concern recently has been pointed, therefore, we have just as a reminder, the top four performing utilities in The U. K. The regulation of The U. K, as I've described it in the past, is we believe far superior to that in The U. S. For a variety of reasons. I won't get into all of those. But certainly, number one is the high degree of certainty that we have over rate periods and the incentive nature of the regulation. And just as a reminder, we still have six years to go under the current regulatory construct, which we call RIIO ED1. That means that for the next six years, we have a clear runway. Our rates will not get reset until 2023. And we have ample time to consult with Ofgem to balance the needs of our stakeholders in The U. K. And our shareowners as we look to RIIO-two. Ultimately, we're going to develop a plan to improve and modernize the grid and maximize returns for our shareowners as we always have quite frankly. There have been concerns raised over also the possibility of a mid period review for RIIO ED1. That's the period we're in right now. As we've said, if Ofgem concludes that they're going to conduct such a midyear review, which we don't know at this point if they will, we don't see any material changes from the well justified plans that we've established in collaboration with Ofgem and our stakeholders at the outset of the three point zero ED1 process. I'll remind you that this review is very limited in scope and firmly excludes financial related items. Per Ofgem, and I'll quote them here, this review is restricted to material changes to outputs that can be justified by clear changes in government policy and the introduction of new outputs that are needed to meet the needs of consumers and other network users. I'll note that we were the only electric distribution company to be fast tracked under this RIIO ED1 regulatory process, which means that our plans were ones in which Ofgem had full confidence that we could deliver on. And Ofgem concluded that our customers were getting real value and the money for the money that we're spending. And that's exactly what we're doing today, delivering on our commitments to customers that were born from significant share engagement throughout the entire process. There have been reports and commentary regarding companies earning higher ROEs than were anticipated, and this has sparked some responses from regulators for potential of lower equity returns in the future as we look into RIIO ED2. Again, we're talking about something that's not going to happen until 2023. Quite simply, in terms of these higher ROEs, that is not our company's. Our current equity returns at the operating level are about 9% and are projected to be just under 10% throughout the entire RIIO ED1 period through 2023 as we execute on those plans and deliver the outputs that we're promising. So, in a nutshell, we are not earning much higher than the average of the utility group, yet we have the best performance in the entire group and are earning significant incentive revenues. The reason that we're at the level that we are is because we're exactly on plan, if not ahead of plan in many cases. So we're actually deploying a lot more capital quicker than the other companies and meeting all of our outputs as expected. So, we again, we are not the target of these concerns or these issues. Just a couple of other comments. We would expect Ofgem to address this over earning potential for those poor performers, in the next three point zero ED2 process, and we're just on the front end of that beginning in that process. Overall, actually, we've been very encouraged by what we're hearing from the initial Of Chem workshops. These workshops are part of a very lengthy process that we're starting again for the period that begins in 2023. So, workshops are intended to engage many of the stakeholders in the process, the utility companies, of course, others that would be interested in this. So, that could be renewable energy players, it could be customer groups, consumer groups, etcetera. Stakeholders, what we've seen is have actually shown very broad support for the current RIIO process. They like the process. They believe it's delivering real value. And that's a good thing. And one of the things that we've heard consistently throughout this process, particularly as it relates to the topic of fair returns is that customers and other stakeholders are not interested in adding more complexity and mechanisms to address the topic of fair returns to the utility companies. The main message is look have Ofgem, the regulator, look to use the tools that they already have in place for the RIIO ED1 process and keep those as simple and straightforward as possible. Ofgem has also reaffirmed that double digit and this is very important, that double digit ROEs are acceptable for top performing companies and we believe Ofgem will try to differentiate the distribution network operators a lot more under RIIO ED2, which we actually think would be good for our companies, our WPD companies. We expect all of our companies to remain top performers as we continue to invest in The U. K. Energy networks. We expect significant investment to continue in the foreseeable future as we're only replacing about 2% to 3% of the network annually. Finally, I'd like to address the question that has been raised regarding a potential for renationalizing The U. K. Networks. The bottom line here is that while we can't predict the outcome, we see this as an extremely low probability event. We believe a change of this magnitude would be extremely difficult due to the sheer economic impact it would have alone and that it would be an expensive alternative that's not in the best interest of U. K. Citizens or their economy. Regulation and privatization has provided significant benefits to customers and reliability, innovation and costs since the networks have been privatized. Just as an example, WPD's customers have experienced a 60% improvement in reliability since the 1992, 1993 period when we began this process. Consequently, we've seen an improvement in overall customer satisfaction ratings. And over that time period and where we are today, where we stand is, we're getting from our customers an 8.8 rating on a scale of 10. So clearly, the customers believe that we're doing a good job in delivering reliable, affordable and very good customer service. These strong ratings are also as a result, I should say, of stakeholders being very involved from the very beginning of this price control period as we developed very efficient and innovative plans that reward companies for achieving their outputs. This has enabled significant deployment of renewable distributed energy resources in The UK, while reducing costs to customers by more than 40% since privatization. I think it's an extremely strong track record and one that not only we're proud of, but I think Ofgem is also proud of. I can assure you that we're going to continue to be diligent in our efforts to create value for customers and our shareowners. And so now I'm just going to I'm going to turn our attention over to the formal presentation on why we believe PPL continues to be a very compelling investment opportunity for utility investors. Let me just start with our cautionary statements and factors that may affect future results. So I'll draw your attention to the slide in front of me. Next slide, Slide three here, PPL's investment proposition. Just a couple of things I want to highlight. We are a pure play regulated business. I'm going to talk later about the transformation that's happened with PPL over the last six to seven years. We have seven high performing utilities in diverse and we believe very constructive regulatory jurisdictions. We have a solid investment grade credit rating and we're going to continue to focus our efforts on maintaining the existing credit rating. As you can see at the bottom of the slide here, we are projecting an EPS compound annual growth rate of 5% to 6% and a dividend increase annually of about 4%, putting us at an annual targeted total return in the range of 9% to 10%. I'd also point out that we're one of the few utilities that has guidance, or at least a projection of EPS and dividend growth that goes out through 2020. Turning to the next slide. This is Slide four. This is just a very quick snapshot of the three major business units of PPL, our Pennsylvania, Kentucky and U. K. Business segments. I'll just point out on the far right hand side, the total rate base among the group is $23,500,000,000 in rate base, and we're serving just over 10,000,000 customers. Moving to the next slide, five. I really this is where I wanted to talk about the transition of PPL. And this is really if you take a look at 2010 when we were a hybrid utility, you can see that 73% of our earnings were coming from our competitive generation fleet and all of our competitive operations, 27% coming from our regulated utility operations. That changed significantly in 2012 and 2013 when we engaged in two major strategic initiatives to acquire in the first case, Kentucky assets, Louisville Gas and Electric and Kentucky Utilities. And we followed that the next year with the acquisition of two distribution network operations in The U. K. That more than doubled our footprint in The U. K. At that point in 2013, that took us to an 84% regulated footprint and a 14 rather 16% competitive energy footprint. By 2015, we spun off our competitive generation, placing us at 100% pure regulated utility company. So the transformation, while it took a little bit of time, I think has created tremendous shareowner value over that period of time, nearly doubling our market cap from about $13,000,000,000 to just over $25 where we sit today. As far as our strategy going forward, this next slide six really points out some of the key elements of our strategy. I'm not going to go through all these. I'll just point out a couple. On the second bullet here, providing leading industry customer service and reliability, what I would say here is that our domestic utilities are all in the top quartile when it comes to all the key customer and reliability metrics. In The U. K, we're actually top decile. We hold all the top four spots in terms of overall customer reliability and satisfaction. Earning ROEs near authorized levels and recovering investments in a timely manner. I'm going to talk a little bit later about the fact that I think we're a little bit unique in the industry, again, because about 80% of the capital we're spending is recovered in one year's time or less. I'll talk more about that in a moment. Maintaining the strong financial metrics, we're targeting to be in the FFO to debt range of 13% to 15% through the entire plan period. And we're delivering best in class returns for our shareowners, that 9% to 10% total shareowner return that I mentioned earlier puts us in the top quartile of our peers. Moving to Slide seven. This is just another kind of quick snapshot of the three business units. I'll just point out a couple of things here that are relatively new. The first in Pennsylvania on the left hand side here is our smart meter rider. We recently gained approval to have a tracking device that will allow us to recover on a very timely basis the investments we're making in automated metering infrastructure. That project is about a 500,000,000 project over essentially three years. Something that's the same in both Pennsylvania and Kentucky is the forward looking test years that we've been using. We're not planning to be in a rate case in Pennsylvania in the foreseeable future. In Kentucky, we just completed a rate case as noted here at the top of the Kentucky portion here with rates effective July 1 and an authorized return on equity of 9.7%. Switching over to The U. K. On the far right hand side, as I already talked about with the RIIO ED1 process, we have a rate set for eight years, that runs through 2023. So we've just recently entered into the third year, so we have still six years to run. Real time recovery of CapEx, we are getting immediate recovery of the capital as we're spending it. That's what makes The U. K. Regulatory construct so interesting and we think productive for us. We also have the ability to gain incentive revenues. In fact, we're targeting about and expecting about $100,000,000 worth of annual revenues from the incentives. In the case of our central networks operations, we're actually maxed out on the revenues at the current time, due to our strong performance. So, we continue to see very good performance from Phil and his team in The U. K. Moving on to Slide eight. I would just say that PPL has an excellent track record of delivering results for not only shareowners but customers alike. As far as our operating excellence, we have executed extremely well on very large projects down to the smallest of projects. And whether that's a large project like our Susquehanna Roseland line, 150 mile project passed not only through Pennsylvania into New Jersey, but one that took a very significant effort on our part to complete. That came in basically on target and on budget. A couple of other things I wanted to mention here. Long history of achieving fair regulatory outcomes, whether that's in The U. K, Pennsylvania or Kentucky, I think we've shown an ability to whether it's using forward test years or other mechanisms with trackers to really think about how do we deliver value knowing to customers or bring that value back as quickly as we possibly can to shareowners. I would note here that in terms of our performance on the customer facing side, we have 45 JD Power Awards combined between the domestic utilities. That puts us in rare territory. I think we're the only utility that can that has that amount of JD Power Awards. On the capital deployment side, we've made substantial improvements in network reliability as well as some of the things we're doing for the environment. Just for example, in Pennsylvania, our reliability has improved by about 30% over the past five to six years as we've deployed a lot more capital. We're one of the only companies in fact, think the first company to have deployed smart grid technology on every distribution circuit that we operate in the state of Pennsylvania. Other things that we're focused on and are proud of being the first company in Kentucky to put in a utility scale solar project. We also have the authority now to offer our customers, whether they be industrial, commercial or residential, solar opportunities. And those opportunities are available to them, we can build our rate base as a result of that as well. On the financial stability side, we've got a growing dividend, as I've already mentioned. We've increased that dividend 15 out of the last sixteen years. We've consistently been able to achieve or exceed our earnings expectations. If you were able to listen in on last week's earnings call, you'll note that we raised the midpoint of our guidance on the call last week, driven by the first three quarters of very strong performance overall for the company. And then on the strategic execution side, I've already talked about the three major strategic moves we've made over the last six years that I think has positioned PPL very well for the future. Moving to Slide nine. This just shows where we're spending the capital and how much we're spending. In a nutshell here, we're spending about $3,000,000,000 a year over the next five years. You can see how that breaks down among the three business units. The areas of investment are shown on the left of this slide. I think even spending this amount of money, we're only increasing our equity need or only planning to issue about $350,000,000 of equity each year. The rest of it is going to be covered with cash flow and some new debt issuances. So, we can deliver on this plan with very minimal capital needs from an equity perspective. Moving to Slide 10. This really shows the as I mentioned earlier, the timely recovery that's driving the growth opportunity for PPL. You can see on the left hand side the strong rate base growth in the 5.5% to 5.6% CAGR range. You can see in the center here, this is the 80% that I mentioned roughly of CapEx recovery that's coming to us in one year. You'll note here that 70% of that is actually in zero to six months. I already previously mentioned that 100% of the capital in The U. K. Is being delivered on a real time basis. That all supports our 5% to 6% EPS CAGR, as you see there on the right hand side. Slide 11, just a couple of comments about our managing our foreign currency risk. I think many of you know that since Brexit happened, we spent a considerable amount of time focused on how do we manage this currency risk and still maintain our earnings guidance and be confident that we're going to be able to deliver on this result. And I am extremely confident. And you can see on the left hand side why I've got such confidence. We've already hedged fully 2018 and 2019. We've already begun hedging in 2020. And what you can see there, the hedged rates are well above our business plan target of $1.3 or pound to the U. S. Dollar. And on the right hand side here, what you can see and this also gives me confidence in our forecast, What the range of forecasts are by many companies, I forget how many companies we have in the deck here, but these are forecasts by banks and others that are forecasting where the pound should be over this time period through 2021. What you can see in the gray shaded area, that represents the lowest to the highest points. And then in the middle of the slide here, can see in the darker blue line, the forecast median of where the pound should be. So, you can see in every case, that median is well above our 1.3 in fact, well above by 2020, where you're seeing the median of the forecast being 1.5 Again, our plan is based on 1.3 dollars That difference of $0.2 is actually $0.20 in earnings as well. So none of which is baked into our current forecast. So, even at the current forwards where we see them today, that would put us if they stay, that would put us at the high end of our range of 5% to 6% EPS growth and potentially above that. Let me just now turn and offer a couple of comments on our dividend. So, you can see here on Slide 12, I already mentioned an established and growing dividend as part of our value proposition. On the left hand side here, you see that our dividend yield is well above the average peer group comparable at 4.2%. On the right hand side, as I mentioned, we're targeting a 4% annual growth through 2020. So, I suspect we're going to continue to maintain an above average dividend yield compared to our average peers. Finally, just here's just a recap of the investment proposition. I won't go back over this. I think I've touched on each and every one of these items through my presentation. So let me just stop there and open it up for questions, please. Any questions? We're bringing the mic to you. Just one second. Bill Kemp from Innovation Partners. Could you comment on how exposed, if at all, you are to volumetric how exposed your earnings are to changes in volumes, say, if there's an economic downturn in The U. K, for example, or we get a recession in The U. S? Sure. Yes, we have zero exposure to volumes in The U. K, whether it be because of the economy or weather. So they're trued up. It's on a lagging basis that it's trued up, but we are made whole on volumes. We're also made whole on inflation. So to the extent inflation is much higher than projected, we are trued up for that as well. So when we look at the eight year timeframe, the timely recovery, the certainty of the cash flow, no volume no inflation risk, it really is an amazing jurisdiction in which to do business as a utility. Thanks for the question. Other questions? Yes. You painted a pretty good picture about what you are doing with The U. K. Regulatory business. However, there are a lot of anxiety and concern about these changes, which may take place with three zero two review or whatever else. And as much as you can assure, people are going to wait until something comes out. And then you have also somewhat currency exposure, which we have seen and you are managing as well. But market may or may not give you full value for U. K. Regulation. And you have shown ability to divest when you chose the generation business. So maybe someday you may consider separating The U. K. Business from The U. S. To get a better valuation for the two companies? So, we're always open to ways that we can create more shareowner value. When you look at the alternatives for The U. K. Business specifically, whether that's a sale partial or full sale, it's value destructive to the shareowner because there's significant tax leakage. If you think about splitting it and maybe listing The U. K. Operation, let's say, for example, on the London Exchange, we've studied that. That looks like it's not value accretive either to the shareowner. So, I think that over a period of time, we've had a great track record of dealing with different regulatory things that have been thrown at us, whether it's in The U. S. Or in The U. K. And we've been very good at being able to mitigate those. So just by way of example, when we transitioned from DPCR5, which was the previous regulatory five year period into this new eight year period, RIIO ED1, there was a $0.14 drop off or would have been a $0.14 drop off in revenues based on the way the revenues were being profiled in this period, this eight year period compared to the previous five year period. We were able to mitigate almost all of that zero one four dollars Just to kind of put a point on how this could play out and a lot of the concern has been around what's the return on equity going to drop to potentially as part of this process. Just as a point of reference, 100 basis points reduction in our ROE in The U. K, which would be very significant, is really less than $05 a share to PPL. So it's not I won't say it's immaterial, but it's not either it's not dramatic either. So I think as we think long term, we've seen these ebbs and flows with political challenges, regulatory challenges, they come and go, politicians come and go. We're in this business for the long haul, so we're not going to take dramatic action in the short term based on what A, B or C politician says today. The way we're we look at our businesses overall is we're going to be strategic. We've shown as we have a great track record of purchasing utilities at what today seems like a bargain. In the case of our Kentucky assets, we purchased those at a 13 times multiple. You see transactions at 23 to 30 times multiples right now. So, obviously, that was a good acquisition for us. Same in The U. K. Essentially purchased the assets at a little over 1.3 times RAB. The most recent sale in The U. K. By National Grid was 1.6 So, we've not only purchased assets at a reasonable value, the value of those assets is tremendously higher today than it was previously. And part of that, I think, is driven by the fact that we're operating these assets very, very well. So over the period of time, we continue to look at things. We're open to things that can create more shareowner value. The opportunities to change the business mix at the current time don't seem to add to shareowner value and would be a very destructive fact to shareowner value. Yes, question up here in the front. I'm Michael Wieczewski from Atlas. On slide number four of your presentation, you're showing the breakdown of the rate base and earnings by location. Now I can see that The U. K. Constitutes around 36% of the overall rate base, but the earnings contribution is around 57%. So just wanted to understand how you kind of bridge that difference between the rate base and earnings given that the allowed ROEs are not that materially kind of different on the base level I presume. Sure. Since I have part of my team up here, I'll ask Vince to comment on that one. Sure. Can you hear me? So the yes, so one of the there are a number of qualities about The U. K. Regulation that Bill talked about that we think makes it such a premium jurisdiction to The U. S. And what you're seeing is a level of earnings production off of The U. K. RAV that's much more efficient than The U. S. Rate base. And what you're seeing, one of the major factors in addition to just the return on the RAV that we earned is the accelerated depreciation that we earned in The U. K. And so for U. S. GAAP purposes, we're depreciating the assets over, say, seventy years, but we're collecting depreciation over, on average thirty, thirty five years. And so that generates about $500.600000000 dollars of earnings that as long as we continue to invest in the network, which we show certainly through the end of RIIO-one, would also expect to continue into RIIO-two. In fact, CapEx may go up in RIIO-two as we look at electrification initiatives in The U. K. That benefit in earnings doesn't dissipate over time. And so again, it's one of those premium aspects of The U. K. Regulatory model, and it actually generates quite a bit of U. S. GAAP earnings for us. And I presume that you have some incentive capture above the base level of the ROE in The U. K? You do. So the base ROE is 6%. It's the incentives and other efficiency mechanisms that gets it up to the 9% that Bill was talking about. And our U. S. Returns are in the 9% to 10% range as well. So I would say the incentives kind of get you up to the level of returns that we're experiencing in The U. S. It's some of the other regulatory mechanisms that improve the ROE efficiency. All right. Thank you. Thank you. Other questions? Okay. Hearing no other questions, thank you very much for your attendance. Oh, we do have one more. Sorry. Okay. There we go. Larry, if you could just give me an outline for the tax reform. I know it's in early days and they're still yet to be done. But given that a good portion of your income is coming from overseas, what type of tax implications do you see? Sure. I'll just make one brief comment and I'll turn it over to Vince again. I'd point out that since as you've rightly pointed out, half of our business is in The U. K. So it's totally unaffected more or less by U. S. Tax reform. So that places us in a unique position as well and gives us some options and levers that perhaps others don't have. So for just by way of example, should we be unable to deduct interest at the HoldCo level for PPL in The U. S, we could raise capital going forward in The U. K. And then bring that money back to fund some of our investments here domestically. So we have an internal mitigant, if you will, that we could use should we so choose. Vince, you want to talk about the details? Sure. So we've been working very closely with the Ways and Measures Committee getting some carve out language in tax reform for regulated utilities to preserve interest deductibility, not only at the OpCo level, but also at the HoldCo level. And in exchange for that, we would not be permitted to do the 100% expensing for the five years. So basically, we would be exempted from those two provisions. I will say that the language that came out in the initial bill, it wasn't quite drafted exactly as we had expected. And so we've gone back to Kevin Brady and the Ways and Means Committee to work with them to try to modify that language. They've expressed support for that. I think it was more of a drafting issue than an intent issue. And so we're still pretty optimistic that we'll be able to get that carve out language. If not, the 30% limitation on tax EBITDA, most domestic utilities fit within that. So I think if we had to fall back on that, we would be okay. We don't see at least in our case, we don't see that we would have any interest disallowed under that in the event that we can't get there on the carve out language. And as Bill said, it doesn't affect the earnings of The U. K. From a repatriation perspective, there is, I call it, a tolling charge to move to a territorial tax regime. It's 12% on accumulated earnings and profits that have not been repatriated. It's 12% on cash and it's 5% on non cash. We've been reinvesting our profits back into The U. K. As we're spending over $1,000,000,000 a year in The U. K. And so ours would fit into that 5% non cash category. It's not a significant amount and it's payable over eight years, which makes it significantly immaterial in any one year. So overall, I think tax reform, it looks like it's headed in the right direction. We have a little bit of cleanup we need to do with Congress. Ultimately, if that doesn't pay off, I think the status quo with the 30% limitation is we can work within that. Great. Other questions?