PPL Corporation
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Good day, and welcome to the PPL Corporation First quarter Earnings Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to Andy Ludwig, Vice President of Investor Relations. Please go ahead.

[Andrew Ludwig:]

Thank you. Good morning, everyone, and thank you for joining the PPL conference call on First Quarter 2021 financial results. We have provided slides for this presentation and our earnings release issued this morning on the Investors section of our website. Before we get started, I'll draw your attention to Slide 2 and a brief cautionary statement. Our presentation and earnings release, which we'll discuss during today's call, contain forward-looking statements about future operating results or other future events.

[Vincent Sorgi:]

Thank you, Andy, and good morning, everyone. We appreciate you joining us for our first quarter earnings call. Moving to the agenda for today's call on Slide 3. I'll begin this morning with a brief overview of first quarter financial performance. I'll share a few operational highlights as well as an update on the 2 strategic transactions we announced in March. Joe will provide a more detailed overview of first quarter financial results. And as always, we'll leave ample time for your questions. Turning to Slide 4. Today, we announced the first quarter reported net loss of $2.39 per share. This reflects special item net losses of $2.67 per share, primarily related to reporting WPD's discontinued operations this quarter. Adjusting for special items, first quarter earnings from ongoing operations were $0.28 per share compared with $0.27 per share a year ago. These results were in line with our expectations for the quarter. Compared to last year, improved margins were the most significant driver of the increase, primarily due to more favorable weather compared to the mild winter we experienced in 2020. Shifting to a few operational highlights. Now over a year into the pandemic, I'm pleased to report that operationally, all 7 of our utilities continue to perform extremely well with no operational issues to report. We continue to operate in a very similar manner to last year with many of our team members continuing to work from home. We continue to stress the importance of social distancing and mask wearing within our facilities and at our work site. With vaccinations in full swing, we are beginning to turn our attention to return to office planning and protocols. However, we are not expecting to deviate from our current mode of operations for at least a few more months and perhaps until end of summer for some of our locations.

[Joseph Bergstein:]

Thank you, Vince, and good morning, everyone. I'll cover our first quarter segment results on Slide 6. And with the U.K. now reflected as discontinued operations, we removed the U.K. Regulated segment from our quarterly earnings walk. In connection with this change, we have also updated our ongoing segment presentation for certain items. First, we have adjusted the 2020 corporate and other amount to reflect certain costs previously reflected in the U.K. Regulated segment, which was primarily interest expense. The total amount of these costs was about $0.01 per share for the quarter. In addition, beginning with our 2021 results, corporate level financing costs will no longer be allocated for segment reporting purposes. Those costs were primarily related to the acquisition financing of the Kentucky Regulated segment and will also be reflected in corporate and other moving forward. Now turning to the domestic segment drivers. Our Pennsylvania Regulated segment results were flat compared to a year ago. During the first quarter, we experienced higher distribution adjusted gross margins resulting primarily from higher sales volumes due to favorable weather compared to the prior year, a year in which we experienced a mild winter. Weather in Pennsylvania was essentially flat to our forecast for Q1 2021, with quarterly heating degree days slightly below normal conditions. Adjusted gross margins related to transmission were slightly lower for the first quarter. Returns on additional capital investments were offset by lower peak transmission demand and a reserve recorded as a result of a challenge to the transmission formula rate return on equity. Settlement negotiations related to the challenge are currently proceeding, but there can be no assurance that they will result in a final settlement. Finally, we experienced lower O&M expense of about $0.01 per share in Pennsylvania during the first quarter compared to 2020. Turning to our Kentucky Regulated segment. Results were $0.02 per share higher than our comparable results in Q1 2020.

[Vincent Sorgi:]

Thank you, Joe. In summary, we continue to deliver electricity and natural gas safely and reliably for our customers during the pandemic. We're on pace to close our strategic transactions within the expected time frames while making good progress on the integration and transition planning for Narragansett Electric. And we remain very excited about the opportunity we have in front of us to reposition PPL for future growth and success. With that, operator, let's open the call for Q&A.

[Operator:]

. Today's first question comes from Julien Dumoulin-Smith with Bank of America.

[Julien Dumoulin-Smith:]

And congrats on continued progress on the transaction. So first off, if you can, can you talk a little bit more as to how you think about the trajectory of Rhode Island here? I mean, obviously, you've got a clean energy mandate in that state. I know we're still early. I know you filed related documents here recently. But can you speak at least a little bit more to how you're initially thinking about this clean energy mandate? I know last time we spoke about this initially, any updated thoughts? And that reconciles against the, shall we say, historical rate base ?

[Vincent Sorgi:]

Yes. You cut out a little bit throughout that, but I think your question was how are we thinking about Rhode Island trajectory given the clean energy mandate there. So yes, the state has enacted a net zero by 2050 goal through Executive Board or with the prior governor had aspirations for a 100% renewable generation by 2030. That's the executive order, not legislation. However, we feel very positive and very comfortable about the opportunity in front of us to partner with the state to really help them reposition that great to be ready for those ambitious goals. And we -- in our conversations, we've had many conversations with public officials up there around what our value proposition is to the state and why we think we're uniquely positioned to own these assets at this point in time. And to your point, Julien, I think what we've been able to create in Pennsylvania with -- we use the term grid of the future, utility of the future, with the automation and really having that grid setup for distributed energy resources and being able to not only be able to connect significantly more renewable energy behind-the-meter renewable energy, but to also to be able to have the insight and the ability to control those resources to ensure we can maintain power quality and stability of the grid. And so as we've been talking with the constituents in Rhode Island, we've been stressing that we've already built a lot of what they are going to need to achieve those objectives. And obviously, doing it the second time is easier and faster than doing it the first time. And so we think there's an incredible opportunity not only to support their 2050 ambitions, but their 2030 ambitions, I think, are potentially achievable as well given what to do in Pennsylvania and our confidence in our ability to replicate that and . So to your earlier point, and you mentioned a little bit here, your question, we need to -- obviously, we talked about that in our petition. And we've been very open in our discussions with the commission and the division as well as just some of the public officials. But to your point, we need to close on the transaction and then really work on the capital investment plans with both the division and the commission up there, demonstrate what we've done. We'll be doing that through the petition process, I'm sure, through and testimonies. And so we look forward to engaging with the constituents in Rhode Island to demonstrate our ability there. But to your point, we absolutely see that as an opportunity for us. But as importantly for the state of Rhode Island.

[Julien Dumoulin-Smith:]

Indeed. And if I can follow-up on a question on acquisitions here in brief. Obviously, we've seen a number of transactions across the space, probably higher valuations than perhaps one would have expected a few months ago. Does that put pause at all with respect to your strategy, especially as you think about competing against infrastructure funds, et cetera, here? Just any open commentary you might provide to differentiate your strategy might be helpful, I think.

[Vincent Sorgi:]

Yes. I don't think we have much in terms of further details to talk about versus what we talked about in March when we announced the transactions, we do continue to explore various options for the best use of the remaining proceeds we will certainly update the market at the appropriate time when we make a decision on that. In terms of M&A, that's one of the options that we will look at. We continuously look at M&A opportunities, as you know. I think our track record has demonstrated a disciplined approach there. Including the 2 transactions that we did with National Grid, both on the valuation we got for WPD, but the valuation that we paid for arrogance and both of those demonstrate a lot more discipline. And so we will continue that disciplined approach as we look at potential strategic acquisitions with the remaining use of proceeds. But there's also opportunities that we're looking at for, potentially, further investments in the utility. We talked about the opportunity in Rhode Island, but we'll also continue to look at those opportunities in Pennsylvania and Kentucky additional investments in renewables. We talked about that in March as well. I think when you look at the Biden's plans, both infrastructure plan and the clean energy plan, that will certainly continue to be a tailwind for renewable investment, and we think we're poised very well to take advantage of that with our distributed energy resource group. And then potentially share buybacks could be, again, the use of those proceeds, but we'll -- again, that kind of creates the base case that will look at these other opportunities. And I'll just stress, Julien that we'll continue to be disciplined in that analysis and work with the Board on those various options. And then, of course, we'll update the market when we make but I think the key for us is maintaining that level of discipline, which I think we've demonstrated a track record.

[Operator:]

Our next question today comes from Paul Patterson with Glenrock Associates.

[Paul Patterson:]

Just to sort of follow-up on Julien's question with respect to Narragansett, is it the case that you guys feel that, I guess, rate base growth will pretty much be on the same trajectory that it has been historically there? Or do you think it might increase or change?

[Vincent Sorgi:]

Well, again, Paul, I think -- we certainly don't want to get ahead of ourselves in terms of putting those investment plans together after we make the acquisition, we do certainly think there's potential opportunity to deploy more capital than what was being spent previously, especially if the state launched to meet some of those more aggressive targets in that '20, '30, '35 time frame. And then the challenge for us, which, again, we think we're up to the challenge, but what we'll have to do is work with the Division and the Commission to show a path to make that investment in a way that remains affordability for the state, and that would likely come from being more efficient on the O&M side that would enable that investment without necessarily driving up customer rates significantly. So that's the opportunity, Paul, to be honest. And we just need to work through the details with both the Division and the Commission in the state once we pose the deal.

[Paul Patterson:]

I got you. Okay. That makes a lot of sense. Okay. So just moving up to the -- just on transmission and the comments that Joe made. Just could you elaborate a little bit further on this lower peak transmission demand? And how much -- can you just sort of give us a sense as to how much that was versus the reserve that you that you're booking as a result of the challenge on the ROE? And then just in association with that challenge or the negotiations associated with it, is -- has there been a discernible impact associated with the FERC's NOPR on the RTO ladder? I'm just wondering if that's had any impact on -- if that caused any uncertainty or issues with expected negotiations, if you follow me?

[Vincent Sorgi:]

Yes. Maybe I'll answer the last part, and then I'll ask Joe just to cover the details on the P&L variance between the 2 components for transmission. But on the on the negotiations, Paul, I don't think there's anything discernible regarding the NOPR. We and the intervenors or the counterparties, we've been negotiating in good faith all the way through. I think it's been fairly constructive. And so that continues. And again, as Joe said, that there can be no assurance that these negotiations will result in a settlement, but -- but both parties are -- I feel very comfortable that we are both negotiating in good faith. And I don't necessarily see that the NOPR has really impacted those negotiations at this point. But Joe, do you want to cover the breakup -- the breakdown of the transmission ?

[Joseph Bergstein:]

Sure. So the lower peak transmission demand was about $0.02 per share for the quarter. And then for the reserve that we recorded, it was in total about $19 million after tax. $5 million of that was related to this year and $14 million of that was related to 2020. So it's about $0.01 -- that $5 million is about $0.01 for the quarter.

[Operator:]

. Today's next question comes from Steven Fleishman with Wolfe Research.

[Steven Fleishman:]

I guess, one, given that you still have a lot of potential money to be put to work, one strategic question. How willing are you to add more coal to your mix as part of any strategic option as you look out there?

[Vincent Sorgi:]

Yes. Our willingness to add more coal to the portfolio, we really, I think, depend on the specific asset, Steve, and whether or not there's a clear transition plan for those coal assets. We are very mindful of our ESG profile. So that would certainly be something that we would take into consideration, both from management and the Board as we evaluate any particular M&A transaction, it would be our ESG profile. So but I would say that's probably very asset specific, whether or not we would be willing to take on more coal.

[Operator:]

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

[Vincent Sorgi:]

Great. Thanks again for joining us on our first quarter call, and everybody, have a great day. Thanks so much.

[Operator:]

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