PPL Corporation (NYSE:PPL) Q2 2023 Earnings Call Transcript

PPL Corporation (NYSE:PPL) Q2 2023 Earnings Call Transcript August 4, 2023

PPL Corporation misses on earnings expectations. Reported EPS is $0.29 EPS, expectations were $0.32.

Operator: Good day, and welcome to the PPL Corporation Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Note that this event is being recorded. I would now like to turn the conference over to Andy Ludwig, Vice President, Investor Relations. Please go ahead.

Andy Ludwig: Good morning, everyone, and thank you for joining the PPL Corporation conference call on second quarter 2023 financial results. 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 in 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.

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We will also refer to non-GAAP measures including earnings from ongoing operations on this call. For reconciliation to the comparable GAAP measures, please refer to the appendix. I’ll now turn the call over to Vince.

Vince Sorgi: Thank you, Andy, and good morning, everyone. Welcome to our second quarter investor update. Let’s start with our financial results and a few highlights from the quarter on Slide 4. Today, we announced second quarter reported earnings of $0.15 per share. Adjusting for special items, second quarter earnings from ongoing operations were $0.29 per share compared with $0.30 per share a year ago. Overall, second quarter results were in line with our expectations apart from the continued mild weather and storm activity in Kentucky and Pennsylvania, as this has been one of the most active storm years we’ve ever experienced. Between the mild weather and storm O&M, our year-to-date results were negatively impacted by about $0.09 per share compared to our original plan.

But despite these impacts, we remain confident in our ability to deliver on our 2023 ongoing earnings forecast of $1.50 to $1.65 per share with a midpoint of $1.58 per share. We have identified several areas in which we can offset the headwinds from weather and storms, and Joe will cover that in detail in his financial review. As you know, one area we remain extremely focused on is O&M, and we are on track to achieve the $50 million to $60 million targeted reductions this year. And despite the incremental storm expenses, we are tracking slightly ahead of our O&M forecast through June. We expect that trend to continue and improve through the second half of the year. In addition, today, we reaffirmed our projected earnings per share and dividend growth rate of 6% to 8% through at least 2026, as we remain confident in our low-risk business plan.

This will be supported by our $12 billion capital investment plan and targeted O&M savings of at least $175 million by 2026 to advance a reliable, resilient, affordable and clean energy future. Turning to a few second quarter operational highlights. We continue to deliver excellent reliability for our customers across our jurisdiction, again, despite the increased storm activity in both Kentucky and Pennsylvania. This is a direct result of our ongoing investments, not only in system hardening that prevents outages, but also smart grid technology and automation that enables us to respond more quickly when outages do occur. On the integration of Rhode Island Energy, we remain well positioned to complete our transition services with National Grid next year.

We also continue to make progress on an important filing before the Rhode Island Public Utilities Commission, as we seek to deploy advanced metering functionality across our service territory and build a smarter grid that supports the state’s leading climate goals. Hearings before the Rhode Island PUC were held in late July to review our business case and cost recovery proposals. We expect a decision on our AMF filing later this fall. We also remain on track with the Kentucky CPCN process, which I’ll cover in more detail on the next slide. Finally, we continue to receive awards for our industry-leading approach in grid innovation as both the Edison Electric Institute and the Southeastern Electric Exchange recognized PPL Electric Utilities for its groundbreaking use of dynamic line rating technology.

PPL Electric is the first utility in the nation to integrate this technology with its transmission management system. DLR sensors provide real-time information that enables us to better utilize our existing transmission line capacity and reduce gestion on the grid. FERC has also recognized the value that this technology can bring to the industry and better managing congestion on the transmission network. Turning to Slide 5 and an update on the CPCN process in Kentucky. We remain focused on advancing our generation investment plan as we seek to replace 1,500 megawatt of aging coal generation with an affordable, reliable and cleaner energy mix by 2028. We remain confident our plan represents the best path forward for our Kentucky customers. As proposed, it would replace several 1970s era coal units with over 1,200 megawatts of new combined cycle natural gas generation, nearly 1,000 megawatts of solar generation and 125 megawatts of battery storage.

In addition, it would establish more than a dozen new energy efficiency programs. In May, the Kentucky Public Service Commission approved our request to consolidate the CPCN filing and our generation retirement request as required by Senate Bill 4. The commission approved the consolidation while keeping the CPCN procedural schedule largely unchanged. For the schedule, intervenor testimony was filed July 14 with no real surprises. Next up is our rebuttal testimony due August 9, followed by an info conference scheduled for August 15 to explore a potential settlement. Public hearings are then set to begin August 22 and could last several days. Again, we are very confident that the plan we’ve proposed is in our customers and the state’s best interest but we are also open to settlement discussions with the parties to the case.

Ultimately, with or without a settlement, we anticipate a decision on our filings from the commission by November 6. That concludes my strategic and operational update. I’ll now turn the call over to Joe for the financial update.

Joe Bergstein: Thank you, Vince, and good morning, everyone. Let’s turn to Slide 7. As Vince mentioned, second quarter earnings from ongoing operations were $0.29 per share compared to $0.30 per share in Q2 2022. The Primary drivers of $0.01 per share decline from last year were lower sales volumes in both Kentucky and Pennsylvania driven by mild weather and as expected in our plan higher interest expense due to increased borrowings at higher interest rates to fund our growth. Those factors were partially offset by lower O&M expense, driven by our continued focus on operating efficiency and improved earnings at the Rhode Island segment from 2 additional months of results in Q2 2023 compared to the prior year. Overall, our teams performed well for the quarter and results were slightly ahead of expectations, apart from the mild weather, which impacted results by $0.03 per share compared to our forecast.

Degree days were lower by more than 20% in our Kentucky service territory and by over 35% in Pennsylvania. This resulted in lower actual electricity sales volumes of 4% in Kentucky and 8% Pennsylvania compared to normal. Turning to the ongoing segment drivers for the quarter on Slide 8. Our Pennsylvania Regulated segment results decreased by $0.01 year-over-year. Results were primarily driven by lower sales volumes and higher interest expense partially offset by higher transmission revenue and higher distribution rider recovery. Our Kentucky segment results decreased by $0.03 per share year-over-year. Results were impacted primarily by the lower sales volumes and higher interest expense, partially offset by lower O&M expense. Our Rhode Island segment results increased by $0.02 per share year-over-year, reflecting the additional 2 months of earnings this quarter.

Finally, results at Corporate & Other increased $0.01 per share compared to the prior year, primarily due to lower O&M expense and other factors that were not individually significant partially offset by higher interest expense. Moving to Slide 9. Our Q2 performance puts PPL’s GAAP earnings at $0.54 per share year-to-date through June 30. Adjusting for special items recorded through the second quarter, earnings from ongoing operations totaled $0.77 per share for the first half of 2023. Mild weather has unfavorably impacted our year-to-date results by a total of about $0.08 per share compared to our plan due to lower sales volumes. In addition, we have experienced higher storm-related costs of about $0.01 per share compared to our plan so far this year due to the significant storm activity.

Importantly, we’ve been able to more than offset these increased storm costs and we are tracking favorably to plan on O&M through the second quarter, and we remain confident in achieving our 2023 earnings forecast as we expect to offset the unfavorable weather and storm impacts due to the projected outperformance in several areas. First, the disc mechanism in Pennsylvania is projected to offset the lower sales volumes and higher O&M experience in that segment. Second, we are tracking favorably on our integration of Rhode Island Energy, which we expect to provide upside compared to our plan. Third, the convertible debt financing that we executed in the first quarter will reduce our annual interest expense relative to our plan. And finally, we continue to optimize our discretionary O&M.

This includes contractor and consultant spend, and the timing of filling open positions and other discretionary O&M spend. In total, these identified offsets present a clear path to achieving the midpoint of our 2023 earnings forecast of $1.58 per share. We have an excellent track record of achieving our financial targets, which we expect to continue in 2023. Looking ahead and our plans to achieve at least $175 million of O&M efficiencies by 2026, we established a Transformation Management Office or TMO, to ensure we achieve our long-term efficiency objectives. The TMO, which I chair, with support from our Chief Operating Officer and our Chief Information Officer, and with the engagement from our employees across the entire company is responsible for tracking our progress on savings initiatives as well as identifying and verifying additional areas of possible savings.

To date, we have identified over 100 initiatives with savings potential significantly above our $175 million target. This structure and rigorous process gives us even more confidence that we will achieve the targeted savings assumed in our long-term forecast and it will help us deliver a more affordable clean energy transition for our customers. That concludes my prepared remarks. I’ll turn the call back over to Vince.

Vince Sorgi: Thank you, Joe. In closing, we remain confident in achieving our goals for 2023. While mild weather and storms have created some headwinds, we have plans in place to overcome those challenges and deliver on our commitments to share owners. We’re also on target to complete more than $2.5 billion in infrastructure improvements to provide safe, reliable and affordable energy for our customers. Our integration of Rhode Island Energy continues to go smoothly. We continue to progress our regulatory filings in both Kentucky and Rhode Island. And last but not least, we’re solidly on track to deliver our targeted O&M savings as we execute our Utility of the Future playbook, incorporate more technology and automation and centralized various functions across PPL to deliver better value for customers and share owners alike. With that, operator, let’s open it up for questions.

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Q&A Session

Operator: [Operator Instructions] The first question today comes from Durgesh Chopra with Evercore ISI. Please go ahead.

Durgesh Chopra: Hey, good morning, guys. Pretty straightforward quarter here. I had two housekeeping questions. First, can you quantify what’s the AMI ask in Rhode Island? How much investment that is?

Vince Sorgi: We’re in the $200 million range Durgesh?

Durgesh Chopra: Got it. And over what time frame?

Vince Sorgi: $250 million somewhere around there. Sorry, say that again?

Durgesh Chopra: Sorry. Thank you. Over what time frame is that $200 million to $250 million?

Vince Sorgi: Well, we need to get that approved, right? So we just went through the hearings late last month. We expect to have a decision by the commission up there in the fall of this year. And then that will kind of dictate the time frame over which we deploy that capital.

Durgesh Chopra: Would that be incremental to your current CapEx plan wins? Or do you have some…

Vince Sorgi: No, that’s in the current plan.

Durgesh Chopra: Got it. Okay. And then just in terms of the offsetting the year-date headwinds and weather and storm, I think you mentioned in your prepared remarks, you mentioned like integration savings. Can you elaborate on that? How brings that pie obviously, it sounds like a lot of opportunities in excess of $175 million. But maybe just like what’s the upside on the integration and Rhode Island and what might be the other opportunities?

Joe Bergstein: Yes. So the integration in Rhode Island Durgesh is going very well. Really, what we’re – have been able to do is exit TSAs quicker than we had expected and at a lower cost which is driving a lot of the outperformance we’re seeing there. We’re also mindful of the pace at which we’re hiring some of the open positions we have there. So we’re fully staffing up that operations and looking to take over completely from grid. And so those are the areas that are driving the Rhode Island integration. We would expect that to be about $0.01 to $0.02 for the year. As far as the progress on the $175 million and the establishment of the TMO, that’s going extremely well. As I noted, we have over 100 initiatives totaling more than $175 million.

Really, it’s driven by significant employee engagement as we’re developing tends to implement and achieve the $175 million, the TMO also provides a forum for employees to share their ideas, areas that we could save on O&M and be more efficient across the company. So I don’t want to give a dollar amount on that yet at this point as to where we are. We – part of the process of that brings a lot of rigor to the savings, we got to vet them all to complete business cases where needed. What I can tell you is that we are confident in achieving the $175 million and potentially more than that and the development of the TMO really is even enhanced that confidence as we’re working through this.

Durgesh Chopra: Got it. Thanks for the time.

Vince Sorgi: Thanks, Durgesh.

Operator: The next question comes from Paul Zimbardo with Bank of America. Please go ahead.

Paul Zimbardo: Hi, good morning, team. Thanks. Just to follow-up on that last question of Durgesh quickly. Is the TMO and those savings more about derisking and extending the outlook? Or is that something that could be incremental in the planning period?

Joe Bergstein: Yes. So we will have to go through all of those items. I mean, it certainly de-risk and give us confidence in the $175 million through the planning period, whether those items that are in excess of the $175 million we will have to see whether they come into this period for execution, whether they are longer-dated items. And look, there is headwinds that we have to offset as well. We still see inflation and interest rates. So we have a bank of ideas and opportunities to execute on should we see those headwinds persist or increase, and then it just gives us confidence in the near-term to achieve the $175 and the 6% to 8% earnings growth, and it gives us confidence in the longer-term to continue to execute on the strategy.

Vince Sorgi: Yes. I would reiterate that, Paul. I think it gives us both, right? Certainly, shores up the confidence in the $175 million, but likely gives us upside potential looking beyond that.

Paul Zimbardo: Okay. Great. Thank you. Very clear. And then switching topics. I noticed the weather-normalized sales volumes were decently down in the quarter and now trailing 12 months, both Pennsylvania, Kentucky. Just could you give any color on what you’re seeing on the ground and just expectations for the second half of the year?

Joe Bergstein: Yes, sure. So well, from a second half of the year, we would expect we have in our forecast normal weather. From our longer-term forecast, we continue 50 basis points of sale of the growth in our plans in total and we continue to be – believe that, that’s an achievable growth forecast. Some of the near-term impact that we’re seeing, particularly on the residential side has been due to energy conservation with the rising commodity prices. I would expect that to be a shorter-term anomaly given that we’ve seen a significant decline in commodity prices already this year and we would expect longer-term to see growth in residential usage as electric vehicles and electrification becomes more prevalent. Lower industrial sales in Kentucky have not really impacted our margins.