Good morning, and welcome to the PPL Corporation's First Quarter Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I would now like to turn the conference over to Andy Ludwig, Director of Investor Relations. Please go ahead

Thank you, Robert. Good morning, everyone, and thank you for joining the PPL conference call on first quarter 2019 financial results. We have provided slides for this presentation in our earnings release issued this morning on the Investors section of our website. Our presentation on earnings release, which we'll discuss during today's call, 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 factors that could cause actual results to differ from the forward-looking statements. We will also refer to earnings from ongoing operations or ongoing earnings, a non-GAAP measure on this call. For reconciliations to the GAAP measure, you should refer to the appendix of this presentation and our earnings release. I'll now turn the call over to Bill Spence, PPL Chairman, President and CEO

Thank you, Andy, and good morning, everyone. We're pleased that you've joined us for our first quarter earnings call. With me today are Vince Sorgi, PPL's Chief Financial Officer; Greg Dudkin; and Paul Thompson, the Heads of our U.S. Utility businesses; and Phil Swift, Head of our Western Power Distribution business in the U.K. Moving to Slide 3. Our agenda this morning begins with highlights of our 2019 first quarter results, and a brief review of our operational and regulatory developments. Vince will then provide a more detailed review of first quarter earnings as well as an update on our foreign currency hedging status. As always, we'll leave ample time to answer your questions. Turning to Slide 4. Today, we announced first quarter reported earnings of $0.64 per share, in line with earnings from the same period a year ago. Adjusting for special items, the first quarter earnings from ongoing operations were $0.70 per share compared with $0.74 per share a year ago. The decrease in ongoing earnings was driven primarily by share dilution and weather with lower earnings at PPL's U.S. segments, partially offset by higher earnings in the U.K. Vince will provide a more detailed overview in his remarks. PPL's performance in the first quarter keeps us solidly on-track to deliver on our 2019 earnings forecast of $2.30 per share to $2.50 per share. In addition, we remain on track to invest $3.3 billion in infrastructure improvements in 2019, as we work to make the grid smarter, more reliable and more resilient. We remain confident in our ability to execute our business plans moving forward. As a result, today, we reaffirmed our projection of 5% to 6% compound annual growth per share through 2020 measured against the midpoint of our regional 2018 earnings forecast. In addition, we reaffirmed…

Thank you, Bill, and good morning, everyone. Let's move to Slide 6 for an overview of first quarter segment results. As Bill mentioned, PPL delivered first quarter 2019 earnings from ongoing operations of $0.70 per share, which was in line with expectations and positions us well to achieve our earnings forecast for the year. Looking at the year-over-year walk, PPL's first quarter earnings from ongoing operations decreased by $0.04 per share from Q1 2018 primarily driven by $0.03 of share dilution and less favorable weather this quarter compared to last year. Weather was about $0.02 negative compared to Q1 2018, and about a $0.01 negative to budget for the quarter. Excluding dilution in weather, higher earnings at our U.K. segment were partially offset by lower earnings at our domestic businesses. Our U.K. Regulated segment earned $0.42 per share in the first quarter of 2019, an $0.08 increase compared to the same period a year ago, excluding the impacts of dilution in weather. The increase in U.K. earnings was primarily due to higher adjusted gross margins from higher prices as a result of the April 1, 2018, increase partially offset by lower sales volumes. Higher -- other income, due to higher pension income and higher realized foreign currency exchange rates compared to 2018 with Q1 2019 average rates of $1.34 per pound compared to $1.26 per pound in Q1 2018. Moving to the Pennsylvania segment. Our Pennsylvania Regulated segment earned $0.17 per share in the first quarter of 2019, a $0.03 decrease compared to the first quarter of 2018, excluding dilution. This decrease was primarily due to lower adjusted gross margins, primarily due to reduced income taxes recovered in rates as a result of U.S. tax reform. This was $0.04, $0.02 in transmission, $0.02 in distribution, which was partially offset by…

Thanks, Vince. As I mentioned PPL's solid performance during the first quarter keeps us on track to deliver on our 2019 earnings guidance. We continue to invest in infrastructure that both benefits customers as well as shareowners. And we remain well positioned to deliver on our future growth projections. And with that, operator, let's open the call up for questions, please.

[Operator Instructions]. The first question comes from Ali Agha of SunTrust.

First question. As I recall, this month in the U.K., Ofgem is supposed to be firming up its cost of equity expectations for the gas and electric transmission companies. Obviously, not for you guys, but it's an early read on their thinking. Just wondering, based on your own conversations, et cetera, what are you expecting there? I think the thought from their last communication was that it may come down to as much as 4% starting point. So just curious what you're hearing? And what we should be expecting when that comes out?

Sure. So as you indicated that the midpoint of the initial range that they had discussed was 3% to 5%, so 4%, and they have been seeking input on that number and the overall framework for the cost of capital. We had provided comments as well as many others. We've actually had several of our investors make lodge their own comments, particularly around the financial parameters and specifically around the ROE and the 4% being too low relative to the risk that we see on a go-forward basis within the U.K. Given that, I think that they have yet to -- they have not yet published their final ROE numbers. We would expect that to be -- at the end of this month is there target. So I don't know, Phil Swift, if there's anything else that you wanted to comment on? Phil's been very involved with this process as well as his team.

No. There's no additional information Bill. The target for the consultation response was the end of the month. In fact, Ofgem were expected to publish all the responses and I don't know if they don't that of yet.

Okay. Very good.

I mean just from conversations you've had, do the comment that you and others have put in, are you getting a sense if that's making a difference? I mean any feedback from them on those conversations?

Yes. Good question. I would say, no. I'll turn it over to Phil. That we had a more positive read across from the conversations we've had to them and recognition that to meet the U.K.'s goals on carbonizations were going to require a lot more investment in the electricity networks, very different perhaps from the gas networks. Phil, did you want to...

Yes. The conversions we've had are very much around, we shouldn't read across directly, and that the -- there's recognition on the decarbonization objectives as alluded to there. And in terms of incentive income, very much. It's an open door at the moment to put forward potentially incentive-based ratings to get that return. But back into the area that it is currently. I am actually meeting with Ofgem's Director next Thursday. We were actually talking about those issues.

I see. Separate question. When I look at your CapEx forecast and the corresponding rate base growth, there is a pretty big tapering off in the outer years. And I know in the past, you guys have talked about customer rate impacts is one of the impediments as you're thinking about planning out CapEx spend. Just wondering, are there ways for you to create headroom that could increase the spending in the outer years? And just potentially what is the pool of capital potentially that you could spend for improving the system, et cetera, that may not be currently reflected in these $15 billion five year forecast you've given us?

Sure. Well, on the headroom question, obviously, part of that could be driven by the overall price of power, so to the extent that the commodity prices at the wholesale lever -- level drops, and we have seen natural gas prices fall, which in turn has driven power prices further down. And when that happens, that creates potential headroom for us. The other area is to the extent that we find cost savings on the operating and maintenance run. That can create some headroom that will allow us to put in more CapEx without potentially a significant increase in rates. Having said that, with our capital plan that exist today, it only reflects the projects that we've identified to date, and there are certainly opportunities that we could act on in the future. And some of those that aren't in the 5-year plan, for example, we see -- or could be further enhanced are some great resiliency efforts both in Pennsylvania and Kentucky. We have the automated meter project in Kentucky, potential renewables expansion, I would say, just in general. There is other generation power-plant modifications in Kentucky that are required by new environmental regulations. And for 2023 and beyond, we already talked about some of the electrification initiatives in the U.K. And as you know, our capital plans are essentially set already in the U.K. until the end of RIIO-ED2. So those are identified and known and not really subject to change per se.

Yes. Bill, lastly, is there a way to just quantify this pool of capital? I know that not all of it will be spent, maybe none of it, but just to give us a sense of opportunity there.

Sure, Vince, do you want to comment?

Yes, I mean, Ali, it's hard to say how much, in total. I mean the AMS project alone is $350 million to $400 million. The ELG regulations coming out. We have a couple of hundred million in the plan, I think that could potentially require some additional funding there. Bill talked about just headroom in PA, or -- sorry around wholesale power prices that really effects PA more so than it does Kentucky. And as you know, in Pennsylvania, we're really -- the strategy there is to stay out of rate cases, certainly through the guidance period that we've provided, so there's already significant O&M. Management going on in PA to enable that strategy there. So it -- I think it's tough to read and put an overall number over the 5-year period, but there is some big chunks of numbers that we could see coming back in.

Okay. The next question comes from Greg Orrill of UBS.

What are you thinking about in terms of distributions from the U.K. in guidance?

Sure, Vince. Do you want to -- distributions from the U.K.

We provided the range of $300 million to $500 million coming back from the U.K. over time, really no change at this point to that guidance.

The next question comes from Paul Patterson of Glenrock Associates.

I know this isn't directly impacting you guys, but it does impact your customers, I guess. And I think you guys made some comments on the nuclear legislation -- the proposed nuclear legislation in Pennsylvania. And I was wondering if you could elaborate a little bit further about what you see happening there potentially? And your thoughts about it at this point.

Sure, Paul. Just -- I'll make a couple of comments, and then I'll ask Greg Dudkin, President of our Electric Utilities here in Pennsylvania to provide a little perspective as well. We are certainly supportive of efforts to reduce carbon and maintain and grow jobs within the Commonwealth of Pennsylvania. We really have a question whether these subsidies to the entire nuclear sector in PA are the right answer. As proposed, our customers would see a significant rate increase. Greg has recently provided comments, both publicly in some op-eds as well as direct input to some of our legislators on a couple of other aspects of this. And Greg, maybe you want to highlight some of those key points.

Yes. Thanks, Bill. Yes, so from real high level, I guess, just as Bill mentioned, we firmly believe that nuclear to play a role in Pennsylvania's future. The last 20 years, the state is really -- the state's customers have really benefited from a very robust competitive market. And our concern, as Bill mentioned, is that the current proposals that are out there both in the House and the Senate would basically provide -- in our case, it would create a $140 million impact to our customers through subsidies of plants that need, but also a lot of other plants that don't necessarily need it. So our comments were that, hey, this is a very complicated issue, it really requires a lot of thinking. We suggested hearings. And those hearings are ongoing. There are hearings going on in the House and the Senate, which we really appreciate. So I think we're in the midst of deliberative process, and looking forward to a more holistic, I guess, solution to this.

That, we'll see.

Time will tell, but that's the current setup.

So do you guys think that if the -- if legislations have come to transit, it's more likely to be sort of mean steps that I think is determined, they're using there in Harrisburg with respect to nuclear subsidies being awarded?

We certainly heard a lot of other comments aside from our own that speak to requiring each of the plants to demonstrate the financial need for customer funded financial assistance. So I think that's likely to be somehow factored in, if not included directly in whatever legislative solution comes out, if one does come out. So it's talked a lot about. I don't -- we, obviously, are still somewhat early in the process. But I think there will be a lot more discussions to be held in the couple of weeks and perhaps months.

The next question once again comes from Abe Azar of Deutsche Bank.

With the performance period now locked, what do you expect for pension revenue in the U.K. in 2021? And can you remind us what is embedded in the low end and the high end of the guidance range, please?

Okay, sure. Overall, the impact that we expect is about $0.05 a share. Within that, I don't recall the exact range that we gave or is embedded. I don't know that we had it specifically identified in the low and the high end of arrangements.

Sure. So Abe, in 2020, we have about $0.20 -- $0.23 of pension deficit earnings and so that $0.05 would be about $0.18 in 2021. Our '21 guidance for all true-up mechanisms including pension deficit, interest under recovery, et cetera, was in that $0.05 to $0.10 range and that kind of balance the high and the low that we talked about.

Got it. And then on the RIIO-2 sector-specific methodology, what would be a good outcome in the decision when it comes in the coming weeks? And what would be incrementally negative from your perspective?

Well, I would say, a good outcome would be something that's fairly balanced, meaning that the financial parameters are improved from where they are today, which we think is not balanced. And that the overall incentive scheme is maintained with, I would say, incremental improvements, meaning, I don't think there is an attempt or should not probably be an outcome where Ofgem, kind of, blows up the incentive scheme per se, but hopefully improves upon it in a way that allows companies with the incentive mechanisms to achieve something we think is much more reasonable in line with what we've been earning, which is in the 9% to 10% ROE type range. So I don't know, on the downside, incrementally negative side, if you can think of anything, in particular. I think it be probably on the financial front or the ROE front, if they maintain, kind of, where they are, that would be, kind of, incrementally negative from our view.

Yes. I think the key for us, if the incentive income, which, obviously, gives us an opportunity to outperform in the sector. We have far more activity in distribution then they had in transmission and gas. So it isn't a direct read across, certainly maintaining a sensible package of incentives as what we'll be looking.

[Operator Instructions]. The next question comes from Shahriar Pourreza of Guggenheim Partners.

Paul has actually touched on the question that I had around Pennsylvania legislation, but is there any other options outside of a means test that would sort of satisfy what you're looking for? Or is it, sort of, more focused around the means test, which I guess, would just impact TMI?

I think it's mostly focused around some kind of justification and some ongoing look. Should markets improve, we want to make sure that this -- whatever the subsidy, if there is one, that it is adjusted fairly on a go-forward basis. But I don't know, Greg, if you have any other thoughts on that?

No. I think that's good. So energy policy, as everybody knows, is very completed and, kind of, a way that's happening is sort of ad hoc. And I think everybody would agree it'll be better to have a comprehensive energy policy that would include factors of nuclear and renewables. So whether it's mean testing, whether it's other market mechanisms, I think that will be a better approach for all involved.

Have you done -- just a follow-up, have you done any, sort of, studies or sensitivities around like, for instance, the TMI closing to rates?

You mean, if it was just TMI...

Right.

The subsidy, what will the impact be to our customers.

So we have, of course, I don't -- yes, we have done that. I just don't remember what the number is.

Okay. But was it a material impact or not?

Well, it's much less. It's all relativeness of your customer.

Okay. With that, we appreciate everyone joining us on today's call. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.