PPL Corporation (PPL) Earnings Call Transcript & Summary

Good morning, and welcome to the PPL Corporation Investor Update Conference Call. [Operator Instructions] 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. Good morning, everyone, and welcome to the PPL Corporation conference call. We have provided slides for this presentation on the Investors section of our website. We'll begin today's call with updates from Vince Sorgi, PPL President and CEO; and Joe Bergstein, Chief Financial Officer. And we'll conclude with a Q&A session following our prepared remarks. Before we get started, I'll draw your attention to Slide 2 and a brief cautionary statement. Our presentation today contains forward-looking statements about future operating results or other future events. Actual results may differ materially from these forward-looking statements. Please refer to the appendix of this presentation and PPL's SEC filings for a discussion of some of the factors that could cause actual results to differ from the forward-looking statements. We will also refer to non-GAAP measures on this call. For reconciliations to the comparable GAAP measure, please refer to the appendix. I'll now turn the call over to Vince.

Thank you, Andy, and good morning, everyone. I'm thrilled to be sharing our progress with you today as we continue to execute on our vision for the new PPL. We recognize that this update is a bit off cycle from our usual cadence. And while none of these updates should be a surprise to the market given the significance of them, we wanted to show our progress now instead of waiting for the year-end call. Turning to Slide 4. There are several key updates that we want you to take away from today's call. Updates that further enhance PPL's premium investment proposition. First and foremost, we are increasingly confident in our long-term plan to deliver 6% to 8% earnings and dividend growth per year as we laid out for you in June of last year. Illustrating this, we are extending our 6% to 8% projected growth rate another year through 2026 based off the $1.58 per share midpoint of our 2023 earnings forecast range, which we announced this morning. The $1.58 per share also represents a 7% increase from our 2022 pro forma forecast of $1.48 per share, which reflects a full year of Rhode Island Energy. We are also expecting to increase our next quarterly dividend to $0.24 per share, subject to Board approval. This also represents a 7% increase, which is consistent with our targeted dividend growth rate. The second key takeaway is that we've made exceptional progress on our capital plan and have added about $2.5 billion to the plan through 2026. This includes the proposal that we filed with the Kentucky Commission last month for replacement generation in Kentucky as we retire 1,500 megawatts of coal generation that is reaching end of life. We've also added nearly $1 billion of FERC transmission investments at our Pennsylvania and Rhode Island utilities. These key investments result in a substantial increase to our rate base growth, which we now project to average 5.6% annually through 2026. The third takeaway is that we continue to identify additional opportunities for operating efficiencies in support of customer affordability. We've identified an incremental $25 million of O&M savings in 2026. This brings our total annual O&M savings to about $175 million compared to our 2021 actuals. The fourth takeaway is that our updated plan maintains one of the strongest balance sheets in our sector. We continue to project FFO to debt metrics in the 16% to 18% range through at least 2026 without the need for equity issuances over this period. The fifth key takeaway is that our plan advances our clean energy transition strategy. This plan delivers significant carbon emission reductions that are projected to be 67% lower than our 2010 baseline. This fully aligns with our net 0 by 2050 commitment and these carbon reductions also support our interim targets of 70% by 2035 and 80% by 2040. And finally, we are building on our best-in-class governance structure and are pleased to announce the addition of another excellent utility veteran to our Board of Directors in Linda Sullivan. Linda is a collaborative leader with deep utility and financial expertise. She spent nearly 3 decades in the utility industry, including 5 years as the Executive Vice President and Chief Financial Officer of American Water Works, where she helped to deliver total shareholder return of over 150% during her tenure. Linda also spent more than 20 years in a variety of leadership roles at Edison International. In addition, Linda has experience serving on utility industry boards, including both NorthWestern Energy and AltaGas. We are delighted to have Linda join our Board and look forward to our keen insights as we deliver our plan as a premier U.S. utility company. Turning to Slide 5. We are extending our annual 6% to 8% earnings and dividend growth targets by an additional year through 2026. Our projected earnings growth is based off the midpoint of our newly established 2023 forecast range or $1.58 per share, which is a 7% improvement over our 2022 pro forma forecast of $1.48 per share. We extended our growth projection based on our confidence in several upside opportunities we previously discussed, including incremental CapEx, additional cost efficiencies and load growth. Each of those items are showing value in our updated plan while providing offsets to the macroeconomic headwinds of higher inflation and higher interest rates. And as we continue to execute our plans and deploy our strategic vision, we are more confident than ever in our ability to deliver predictable, linear, and competitive annual EPS and dividend growth of 6% to 8% through at least 2026. Turning to Slide 6. One of the most important underlying factors of this plan update is the substantial capital investment opportunities at our utility. We plan to replace an aging generation fleet in Kentucky and further upgrade our transmission assets in Pennsylvania and Rhode Island. The additional $2.5 billion of planned capital investment increases our total CapEx to more than $14 billion over this 5-year period. As you can see in the chart, most of these incremental investments are planned for the back half of our plan, given the timing of the generation retirements and needed investments for replacement generation. Importantly, the timing of these investments enables us to continue to stay out of rate cases in Pennsylvania and Kentucky to at least 2026, which will help reduce near-term rate pressure for our customers. This timing also supports longer-term growth as we move through the rest of the decade. Turning to Slide 7. These additional capital investments will lead to projected rate base growth of over 5.5% from 2022 to 2026. We now project rate base to top $30 billion by the end of 2026. We project about a 4% average annual rate base CAGR in the front half of the plan, increasing to more than 7% in 2025 and 2026. And again, this trajectory aligns with our rate case strategy that we believe maximizes value for both customers and shareowners. Our earnings growth continues to be driven by the combination of rate base growth and operating efficiencies, while we stay out of rate cases in Kentucky and Pennsylvania. The only base rate case we are assuming in the plan is in Rhode Island, to be effective in mid-2026. But to be clear, our earnings growth is not dependent on base rate cases. This significantly derisks our plan over the next few years while continuing to support affordability for our customers. Turning to Slide 8. We've summarized our Kentucky CPCN filing, which supports an economic plan to replace a significant portion of the coal fleet in Kentucky, which is approaching end of life. In total, we expect to retire about 1,500 megawatts of our coal generation by 2028, reflected by the gray bars in the chart. Included in the 1,500 megawatts is the 485-megawatt Gen Unit 2, which is the primary plant that would be impacted by the EPA's proposed Good Neighbor rule. Focusing on the replacement generation, we've developed a comprehensive plan that will deliver a balanced portfolio that keeps reliability and affordability for our customers front and center and aligns with our clean energy goals. Our proposal includes adding 2 new combined cycle natural gas plants, which would come online in mid-2027 and mid-2028. Each combined cycle plant would be built at one of our existing sites. This provides for a just transition of our coal fleet and supports our current and future workforce as well as tax revenues and economic activity for our local communities. We also proposed adding nearly 1,000 megawatts of solar generation through a combination of PPAs and company-owned assets. The 640 megawatts of solar PPAs would be expected to come online in 2026. The 240 megawatts of company-owned solar would come online in 2026 and 2027. Finally, we are proposing a 4-hour 125-megawatt battery storage facility to be online by 2026. The total capital investment associated with this plan is approximately $2.1 billion from 2023 to 2028. We expect a decision from the Kentucky Commission in the fourth quarter of this year. Turning to Slide 9. The result of our plan would be a generation portfolio that can reliably serve our customers' energy needs at the lowest reasonable cost while at the same time, significantly reducing our emissions. This plan puts into action tangible progress towards achieving our net 0 goals in a responsible and economic manner. Looking at the chart on the left. By the time this plan is in full effect, we expect our carbon emissions to be 1/3 of what they were in 2010. Further, as shown on the chart on the upper right, our carbon intensity is projected to improve by over 25% and will be more in line with our peers. Our generation mix shifts from about 80% coal today to a mix that is less than 50% from coal, about 40% from gas and approximately 10% from renewables, primarily solar. And we continue to invest in industry-leading R&D to economically reach net 0 by 2050. This includes our leading initiatives in carbon capture technology with the Department of Energy and University of Kentucky, utility-scale energy storage technology, solar powered electric vehicle charging and renewable hydrogen blending in our gas operations. Turning to Slide 10. We remain laser-focused on executing our business transformation plan and are confident in increasing our targeted annual O&M savings by $25 million in 2026. In total, we now have a clear line of sight on at least $175 million of annual savings by 2026. The source of these incremental savings is primarily driven by implementing common systems across the company, within our T&D operations as we continue to execute our Utility of the Future playbook. Our Utility of the Future playbook is about building self-healing grids with automation, technology and data science. We are now leveraging the vast amount of data we obtained from thousands of smart sensors on our grid to minimize labor-intensive work, automate our customer service functions, including the use of self-service technologies and monitor our assets to predict failures before they occur and cause outages. We have made substantial progress in testing and piloting the technologies needed to achieve these results. We are now implementing these technologies across our entire portfolio of utilities, which will take several years to complete. And what excites me most is that we'll continue to see additional opportunities to drive efficiencies throughout our business for years to come as we realize the benefits of our actions and scale these best practices across our utilities. I'll now turn the call over to Joe to review in more detail the financial aspects of our updated plan. Joe?

Thank you, Vince, and good morning, everyone. I'll share Vince's enthusiasm on our updated plan and the progress we've made to date and look forward to sharing some of the key financial highlights with you. Turning to Slide 12. We've made some important updates that further strengthen and lengthen PPL's financial outlook. First, we expect the incremental capital that Vince outlined will experience minimal regulatory lag as most of these investments are subject to existing regulatory mechanisms. This includes key additions to transmission investments under FERC formula rates and the investments in our new generation facilities in Kentucky as we've requested to record them as construction work in progress and accrue AFUDC on those investments. Importantly, AFUDC treatment would enable us to defer our next rate case in Kentucky to beyond 2026, which is positive for our customers. Looking across the 5-year plan, we now project over 60% of our total capital investments will be recovered by or subject to existing regulatory mechanisms. Our CapEx plan continues to reflect only identified projects and does not include placeholders. In our second key update, we've increased our load assumptions in both Pennsylvania and Kentucky, due to the strong trends and economic development we continue to experience in our service territories. We are now incorporating about 0.5% of base customer load growth in both Pennsylvania and Kentucky. We have also added the expected load increases from the Ford battery plants in Kentucky, and we continue to expect further development with the build-out of ancillary load from these facilities and the record economic development in the state which would be upside to our plan. The third key update is that we've reflected current macroeconomic assumptions in this plan and remain extremely confident in delivering on our stated growth targets. This includes incorporating the impacts from higher interest rates and inflation. Our teams have done a phenomenal job in managing these risks, including achieving constructive outcomes with our labor contracts diversifying our suppliers and managing our pension plans with our liability-driven strategy, which minimizes pension expense volatility. All of these factors and more have positioned the company well to successfully navigate macroeconomic risks and deliver our long-term plan. The fourth key consideration is that we continue to expect minimal rate case activity within the planning period. As Vince mentioned, we are only expecting to have a base rate case in Rhode Island following the stay out period agreed to in the acquisition filing with rates effective mid-2026. Our efficiency model and capital trackers support earning our allowed returns without rate cases in Pennsylvania or Kentucky through at least 2026. This is important as we consider the impacts of rising commodity prices on our customers and strive to deliver premier service in the most affordable manner. Finally, we continue to see value in maintaining a strong balance sheet to fund our organic growth and expect to deliver our targeted 16% to 18% FFO to debt metrics throughout the plan period. And we can achieve this without the need to issue equity at least through our planning horizon. We also expect our holding company debt to total debt ratio to remain below 25% throughout the plan period. While we have made several enhancements to this plan, we continue to see several upside opportunities that further enhance our growth predictability, providing potential offsets if we experience prolonged inflation impacts and may even support stronger growth. These include the load growth upside previously noted, additional opportunities for further cost efficiencies as we execute our playbook and drive towards top quartile performance and continued progress on identifying CapEx opportunities in areas with tracking mechanisms. We have an ample backlog of longer-dated CapEx opportunities, including implementing the Utility of the Future playbook in Kentucky and Rhode Island, continuous evaluation of the most cost-effective generation resources for our customers, offshore transmission spending in New England and resiliency and grid hardening across our jurisdictions. All told, we are in excellent shape from a financial perspective and are excited to execute on this enhanced plan for our customers and shareowners. Turning to Slide 13. We are initiating a 2023 EPS forecast of $1.50 to $1.65 per share with a midpoint of $1.58 per share. This represents a 13% increase from the midpoint of our 2022 EPS forecast of $1.40 per share, which we remain very confident in achieving this year. As Vince noted, this is a 7% increase from the midpoint of the 2022 pro forma forecast of $1.48 per share, which is in line with our targeted EPS growth rate. We will provide additional details on our fourth quarter call once we have finalized the 2022 results. Turning to Slide 14. The dividend is a core component of PPL's investment proposition. Today, we've announced an expected increase subject to Board approval of our next quarterly dividend to $0.24 per share from $0.225 per share. This represents about a 7% increase from our January 3rd dividend, which is also in line with our stated growth targets. And as we have previously discussed, we are committed to growing the dividend in line with earnings growth placing us among the leaders in our sector in dividend growth. Combining our targeted EPS growth, with our dividend yield, provides investors with a compelling total return proposition in the range of 9% to 11% per year. Turning to Slide 15. Our planned update reflects meaningful capital additions across our utilities that will deliver real value for both customers and shareowners. The largest increase was in Kentucky due to the addition of $1.6 billion of the $2.1 billion total capital for new generation facilities through 2026. About $1.1 billion of that investment will be in the 2 combined cycle gas units, $240 million is planned for the construction of the 120-megawatt solar installation, and about $270 million of the investment is expected in the battery storage facility. The $500 million balance of the generation replacement investment will support growth beyond the planning period in 2027 and 2028. This includes an additional $300 million required for the combined cycle gas units and $200 million related to the purchase of the third-party solar facility. We have also increased our capital plan by about $1 billion to further expand our industry-leading transmission solutions, primarily in the 2024 to 2026 time frame. This includes more than $700 million in Pennsylvania and $300 million in Rhode Island of FERC transmission capital under formula rates to further asset resiliency and advanced smart grid technology. Our planned update also reflects our recently filed grid modernization, ISR and advanced metering plans in Rhode Island, which are subject to regulatory approval. These plans provide a blueprint for many of the necessary investments that will enable the grid of the future, which is critical to the state's clean energy goals. Our update this morning builds on our already robust base capital plan that includes critical investments needed for enhanced network resiliency, reliability and safety. And we're excited to deliver this plan for our customers as we deliver the clean energy future and provide an exceptional customer experience at an affordable price. Turning to Slide 16. I previously noted that our updated plan continues to support our strong FFO to debt target of 16% to 18% without the need for equity issuances. As demonstrated on this chart, we plan to leverage our strong operating cash flows and debt financing to fund our capital investments. Most of these debt issuances are expected to be at the utility companies. And while we also expect some holding company issuances to fund our CapEx plan, we project our holding company debt to total debt ratio to remain below 25% over the planning horizon. This is an important metric as it helps to reduce the risk profile assigned by the credit rating agencies. Turning to Slide 17. We've worked very hard to create one of the sector's best credit profiles which we believe positions PPL to achieve a higher relative valuation. Our strong balance sheet will continue to support growth capital investment opportunities like those that we've outlined today. And as you can see by the chart on the right of the slide, strong credit metrics have translated into value for shareowners. We believe the combination of our strong credit, robust rate base growth, continued line of sight to O&M savings and strong regulatory jurisdictions that yield PPL's predictable, linear and sustainable EPS growth provide a very attractive investment proposition for utility investors. We've already seen a 1.5 turn improvement in our relative valuation to peers since the Investor Day and believe that continued execution of our strategy supports a premium valuation over time. That concludes my prepared remarks. I'll turn the call back over to Vince.

Thank you, Joe. In closing, I want to briefly recap today's updates and reiterate my excitement for all that we have accomplished and our position to deliver on. We initiated the midpoint of our 2023 forecast of $1.58 per share, in line with our 6% to 8% annual growth target off the 2022 pro forma forecast of $1.48 per share. We've extended our 6% to 8% earnings and dividend growth targets to 2026. We've added key investments to our capital plans and are now projecting rate base growth of over 5.5% per year, including over 7% rate base growth in the back half of the plan. We've increased our targeted annual O&M savings by more than 15% to at least $175 million by 2026. We are economically advancing our clean energy strategy through a plan that would provide safe, reliable and affordable energy for our customers and reduce our coal generation by about 1/3, significantly reducing our carbon footprint. We developed this plan without the need for equity issuances given the strength of our balance sheet. Finally, we continue to enhance the already strong governance structure at PPL with the addition of Linda Sullivan to our Board of Directors. When I became PPL's CEO, improving our relative TSR performance was a priority for me as we pursued our strategy to provide safe, reliable, affordable and sustainable energy for our customers. And I strongly believe that we are on track to do just that. I'm very proud of the team we've assembled here at PPL and what we've already accomplished in a relatively short period of time from selling our U.K. assets at a record valuation and acquiring a phenomenal asset in Rhode Island Energy to more recently delivering on and exceeding the goals set at our Investor Day last June, despite rising interest rates and inflation. The actions we have taken have resulted in a significant relative improvement in our share price performance, and this is reflected in PPL's improved relative valuation versus peers. Our focus moving forward is to continue this momentum as we work to attain a premium valuation in our sector. It is a fantastic time to be a part of this company, and we remain as excited as ever about PPL's bright future. With that, operator, let's open it up for questions.

[Operator Instructions] And our first question will come from Shar Pourreza of Guggenheim Partners. Please go ahead.

Hey, guys, Vince, the latest update points towards strong rate base growth in the back half of the plan, how should we, I guess, think about the runway of 6% to 8% as you flip from O&M savings to Kentucky spend and then beyond. So I guess put differently, at a high level, I guess, where do you see the next incremental opportunities as we look at '27 and beyond as you kind of continue to close the gap between rate base growth and EPS growth?

Yes. Sure, Shar. So the update that we provided today was obviously a comprehensive update through '26. But as we look beyond '26, we are seeing significant capital opportunities as we think longer term, right? When we're looking at grid mod, grid resiliency, digital transformation. We're looking at transmission upgrades across all 3 of the jurisdictions, replacing the aging infrastructure in Kentucky, including the assets that we talked about at length today. Some of that spend moves into the '27, '28 time frame. So we're seeing plenty of opportunity for earnings growth through the end of the decade, Shar. And that really will be driven by a continued combination of both rate base growth and the continuation of our O&M efficiency strategy. So while we're not providing guidance today beyond 2026, clearly, our focus is to maintain that growth rate.

Okay. Perfect. That's what I was trying to allude to. And then I know substantial update on the Rhode Island CapEx plan and it's kind of the segments within, what's driving the CapEx above the top end of your prior guide in '25 as we're focusing there from the $750 million range to the $875 million? And how should we sort of think about the run rates there going forward, especially on the gas side?

Yes. Well, the plans that we put in place, right, we just filed the ISR, the grid mod and the AMI plans. So those were all comprehensively put together to determine what we feel is required to meet the state's 100% renewable energy requirements by 2033 and support much-needed system upgrades to support resiliency and reliability of the grid. A lot of this, Shar, is really just as we've taken ownership of the asset. We're taking physical stock, the condition of the assets and fine-tuning our plans to really meet the legislative requirements that have been set. Also includes a lot of grid enhancement to connect a lot more DER penetration. We've talked in the past about the backlog that we're seeing there. We expect that to continue as well. Grid mod on the cost side, right, we are expecting grid-mod will help to reduce cost for our customers longer term as we deploy those capital investments. Again, we keep rates front and center as we're thinking about our capital plans. And so our capital strategy should continue to result in O&M efficiencies as we move through the plan.

Terrific. And then just real quick, lastly. Just the Pennsylvania distribution CapEx. It declined a bit between '23 and '25 from the prior guide. Anything we should be reading into there?

No. I would just say, fine-tuning where we're deploying the CapEx. We'll continue to look at opportunities in distribution longer term. But for this 5-year cycle, I think the priority is on getting some of those transmission investments in and then the generation replacement.

Terrific. Congrats, Vince, on a fantastic update and big congrats on Linda, that's a huge win for you guys. Appreciate it.

Next question comes from Nick Campanella of Credit Suisse.

Appreciate it. Just on the EPS CAGR, I appreciate the comments you kind of high-graded the forecast for inflation, interest rates, the higher load, et cetera. Just given the fact that you're executing on these O&M savings, you're not in rate cases. Do you still expect to kind of grow linearly through this forecast period through '26? Or how would you kind of frame where you are in this CAGR, '24, '25, '26?

Yes. We expect our growth to be linear. If you look at '23 off of our '22 pro forma, it's right solidly in that 6% to 8% range. So, yes, Nick, we expect a linear growth rate throughout the time period.

And then just I assume on the CapEx increase, you're largely funding it with parent debt. I hear you on the comments 16% to 18% range. Where do you stand in that range?

Yes. Nick, it's Joe. So we'll fund that through a combination of operating company debt and holding company debt. Maintaining that 16% to 18% credit and holdco debt to total debt below the 25% mark from the rating agencies, we would expect to be right around the midpoint of that range, so right around 17% through the period.

Got it. Appreciate that. And then just one last one, if I can. Just on the inflation topic. And understanding the gas business is a little smaller than -- is much smaller than the electric business, but the strips come in a lot here over the near term? And can you just help us understand if that's translating to lower bills for customers. Does it inform your hedging strategy at all for '23 and '24 to the extent that you have one, that would be helpful?

Yes, sure. So Nick, again, it's Joe. It should certainly be beneficial to customers as we move forward. For the winter, we're hedged pretty much. So not -- I wouldn't see a major impact on a customer bill perspective with the strips coming in, as you indicated. But on a longer-term basis, it would be certainly offset to some of the bill increases that we've recently seen, if it sticks.

The next question comes from David Arcaro of Morgan Stanley.

Great update. Let's see, do you think you could give your latest thinking on the load growth outlook here with the increase up to the 0.5%? And which customer classes are you seeing that come from, whether it's resi versus commercial here?

Yes. Sure, Dave. It's Joe. So look, as we said, we're updating our load forecast here will be to 0.5%. What we've been seeing in Pennsylvania and Kentucky is about 0.5% to 1% load growth. So we're incorporating the lower end of that range, which obviously then provides some potential upside to the plan or offsets if we see higher interest rates or inflation over the period. Where we're seeing that is in both jurisdictions is predominantly in the C&I space. And just as a reminder, Rhode Island's decoupled. So there's no -- that's why we're not factoring any load in there.

Yes. Got it. That makes sense. And then could you touch on the cost cut outlook here in the near term? What's your confidence level in the 2023 targets? Are '23 and '24 targets still on track? And I was curious what quartile this plan would bring you to by the end of it for the different subsidiaries?

Sure. So we -- as you know, we're targeting longer term first quartile operating efficiency performance across the utilities. We -- in terms of the near-term targets, Dave, we're feeling very confident in our ability to achieve actually all of the savings that we've provided through 2026. We have plans in place to achieve those. We're well underway in our execution of those. We've already completed the centralization of shared services activities. We talked about that a little bit on the third quarter call. We were ahead of schedule on that. The other areas around system implementations and deploying our smart grid across the portfolio, we're right on schedule with all of that. So feeling very confident in our ability to achieve that. We do have -- in terms of quartiles, EU will be moving into first quartile, the others will still be in the second quartile. We are -- if -- we did include Slide 25 in the appendix, which just shows the benchmarking when we look at our O&M per customer for the various utilities. And if you just look at the T&D component of the -- electric T&D component of that alone, it's about a $200 million opportunity. And as we've updated here on the call, we've only included about $105 million of that through 2026 in the $175 million target. So there's quite a bit of runway for us to continue with our efficiency strategy beyond 2026, and that doesn't include the other parts of the business.

The next question comes from Paul Zimbardo of Bank of America.

A couple of cleanup ones and thank you for the updated plan. On the 50 basis points customer load growth, you just talked about, could you quantify how much the EPS contribution in that and is it fair to think about -- it's more later in the plan when some of those discrete load comes online? Or is it more ratable?

Yes, Paul, you're not coming through very clear. I think you asked what was the quantification of the load growth, 0.5%. 0.5% is about $0.01 to $0.02 per year.