PPL Corporation (PPL) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the PPL Corporation Third Quarter Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to your Vice President and Director of Relations, Mr. Joe Bergstein.

Thank you. Good morning, everybody, and thank you for joining the PPL conference call on third quarter results and our general business outlook. We are providing slides of this presentation on our website at www.pplweb.com. Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the appendix to this presentation and in the company's SEC filings. At this time, I'd like to turn the call over to Bill Spence, PPL Chairman, President and CEO.

Thanks, Joe, and good morning, everyone. And thanks for dialing in. Joining me on the call today are Paul Farr, PPL's Executive VP and Chief Financial Officer, as well as the presidents of our 4 business segments, who will participate in the Q&A session today. To get started, I'll provide an overview of our third quarter results and a few operational highlights. Then Paul will provide more details on our segment performance for the quarter. We will try to keep this call brief and focus primarily on the events of the quarter, as I know your day is full of earnings calls and we'll see many of you next week at EEI. But before turning to earnings, I'll update you on the impact of Hurricane Sandy. The hurricane caused considerable damage in parts of Eastern Pennsylvania served by our PPL Electric Utilities affiliate. This was the largest storm to hit PPL Electric Utilities-serviced territory, causing outages to over 500,000 customers. PPL Electric Utilities assembled the largest workforce in its history, more than 5,000 people, to undo Sandy's damage. By Sunday night, power had been restored to 99% of the affected customers, the remaining work wrapped up on Tuesday. Some of our neighboring utilities closer to the coast fared significantly worse. We have sent contractor crews that have completed work for PPL Electric Utilities to New Jersey and New York utilities to assist in the rebuilding of their devastated communities. I know this was a very trying time for our customers, and I'd really like to thank them for their understanding and patience as we work diligently to restore their power. The PA Governor's Office and PUC showed strong leadership in working with the utility industry to ensure we had solid communications and very well coordinated assistance, especially through FEMA and…

Thanks, Bill, and good morning, everyone. Let's move the Slide 8 to review our third quarter financial results. PPL's third quarter earnings from ongoing operations were lower than last year, primarily driven by lower earnings at the supply segment as a result of lower energy margins, higher O&M and higher depreciation, which were partially offset by higher earnings in the U.K., primarily driven by higher delivery revenue. We've outlined on Slide 9 the Kentucky regulated segment earnings drivers. Our Kentucky regulated segment earned $0.12 per share in the third quarter, a $0.01 decrease compared to last year. This decrease was primarily driven by lower retail margins as a result of lower residential consumption, partially offset by higher industrial load compared to a year ago. Moving now to Slide 10. Our U.K. regulated segment earned $0.28 per share in the third quarter, a $0.06 increase over last year. This increase was due to higher earnings at WPD Midlands and higher delivery revenue at WPD South West and South Wales, primarily driven by higher prices. These positive earnings drivers were partially offset by higher pension expense at the 2 legacy companies and less favorable currency exchange rates. Turning to our Pennsylvania regulated segment on Slide 11. This segment earned $0.06 per share in the quarter, a $0.01 increase compared to last year. This increase was primarily due to higher transmission and distribution margins and lower financing costs, partially offset by higher O&M. Moving to Slide 12. Our supply segment earned $0.26 per share in the third quarter, a decrease of $0.10 compared to last year. This decrease was driven by lower Eastern energy margins, primarily due to lower hedged energy prices; lower Western energy margins, primarily due to lower volumes; higher O&M; higher depreciation; and higher financing costs. Turning to Slide 13.…

Thank you, Paul. And operator, we're now ready for questions.

[Operator Instructions] Your first question will come from Paul Patterson.

On the nuclear cost side there, you mentioned some -- could you just give us a little bit more of a flavor? I mean, you said $25 million to $30 million for the inspection. But what kind of costs are we talking about with respect to the actual repair of the blade cracks and any of the sort of Fukushima -- or any other basic costs that you're seeing? The other sort of question related to that is that Exxon mentioned on their call that they were looking at annual refueling cycle potentially to at least some of their plants, I think, help out with their fuel expense. I was just wondering what your thoughts are about that with respect to Susquehanna.

Sure. I don't think we would change our refueling outages at this point or the timing of them. Related to cost for Fukushima, we're still in the process of determining that. But as we've mentioned on previous calls, we think the capital costs will be very manageable and the real question or open question at the moment is whether the industry would be required to install filtered nets on the units, and that would be a little bit more costly. But again, I don't think in the overall context of PPL that those costs of capital would be unmanageable. As for your first part of your question on the costs to replace the blades and the ultimate fix, on the replacement side, the costs for the O&M associated with the outage, as well as the replacement costs, those have been already factored into the numbers that we have provided today, that $25 million to $35 million after-tax. In terms of the fix, we're still determining exactly what those costs would be. But again, I don't think that they're going to be unmanageable for us.

Okay. And then with respect to the filtered venting issue, what kind of -- I mean you mentioned it's manageable for you guys. Is there any sort of sense as to roughly speaking what the impact could be there?

I'll ask Dave DeCampli to comment on that.

Yes. First of all, we believe the commission, NRC, will be wrestling with this issue shortly, probably by the end of the month, as to whether that filtered vent will be included in the package of improvements or changes we'll have to make at the unit. Filtered vent, though we do not have a solid enough estimate on it at this point in time, we do have an estimate for the balance of the other changes we believe will be necessary, and that's somewhere between $60 million and $85 million.

Yes.

Of capital.

But that doesn't include the vents. Is that right?

That's correct. That's right. And I think...

Well, my understanding was that the staff was going to be maybe issuing a recommendation for these filtered vents. And I'm just sort of trying to get a sense as to what the impact of those would be.

Sure. Yes, I think we'll know more obviously by the end of the month, once we find out exactly what they're looking for and the time frame they're looking for.

Okay. And these are sort of capital expenses. Is O&M considerably more or less or a big factor in all of this?

Yes. It really wouldn't factor in any meaningful way. It would be capital.

Okay. And then just on industrial sales in Kentucky. It looked like they've been very strong. What's going on there?

Sure. I'll ask Vic Staffieri to comment.

Our capital -- our sales on industrials are up 9% quarter-over-quarter and about 6% for the year. And that's just -- we've just had some good, robust industrial sales in the automotive sector and in the North American stainless and the return to service of a facility that was out of service last year. So we've had good, steady industrial sales growth in Kentucky this year, 6% over last year.

And just in terms of trading, just to revisit on that, how is the outlook for trading in your forecast now looking with your current experience and just what you're seeing out there?

We're right on plan. I don't think there's any change.

Okay. And then just finally the Kentucky case. It looks like you guys are going to be having settlement discussions pretty soon. Any sense as to how those are shaping up or the outlook for those?

The settlement, the hearings are scheduled to begin next week, and it will be too early for me to speculate. We haven't had a chance to sit down with interveners yet. The big issues, as you might imagine, are return on equity and there's some depreciation, a little bit of skirmishing around O&M expenses. But it's really the return on equity.

The question will come from Kit Konolige.

So a couple of questions. Paul, I think in the past, you've talked about your belief that earnings from the supply business would not drop below 0 at the bottom of the cycle. Is that still the case as you start to hedge out into '14 now?

Yes. As I think about the hedges that we've layered in and I think about the balance of the business plan, which again is getting close to final, we continue to believe that we can keep the supply earnings at that neutral to positive for the tougher years of the cycle that you're referencing.

Okay. Excellent. And on WPD then, you said that $1 million [ph] in performance bonuses. This is the relative to the -- I think, in the past, you've talked about $60 million or better that you expected here. That's the kind of data point that we're following here?

Yes, that's correct.

Your next question will come from Justin McCann. Justin C. McCann - S&P Equity Research: A question for Paul. What is your current projection of average outstanding shares for '13 and '14 and also your expected effective tax rate both for the U.K. and on a consolidated basis for those years?

Yes. On a consolidated basis on the ETR for '12 and '13, we are around 28% to 30% for '12 and '13 and that goes blending [ph] across all of -- actually, a little lower than that, closer to 25% for '12, 28% to 30% for 2013. And let me pull the share amounts for it. 2012 weighted average around 586 million. We'll get back to you on the '13 number.

Your next question will come from Julien Dumoulin.

So congratulations again on the U.K. here. It just seems like it never stops. I'd be curious to what extent are the year-to-date benefits or above plan that you recognized in your guidance? Are those going to go forward? Or is this really driven by kind of a one-time tax benefit this year? If you could kind of parse that apart, I'd appreciate it.

Sure. I would say it's really a combination of great operational performance, good customer service, and reliability that's going to drive some of the performance on a go-forward basis, and then there are some tax benefits. But I think basically, it's small and it's really driven by the fundamentals of the business, not any one-time items.

Great. And then secondly on supply, kind of going back to the first question there on the nuclear costs, if you could just -- in aggregate, what kind of cost increases are we talking about? And then secondly, just flagging I suppose to the extent to which on a go-forward basis '12, '13, '14, what kind of costs are we talking about? At what point will we recognize this O&M benefit?

Sure. Well, on the cost for Fukushima-related, as we mentioned, the first part of it is pretty well known. And that's making changes to everything but the filtered vents, the items that the NRC and the industry is on the same page with, which will allow us to respond a bit better in an unlikely event of a challenge to off-site power in particular, as well as maintaining proper levels and understanding where the water levels are and the spent fuel pools, as well as the temperature. So those instrumentation changes are relatively small and low capital cost items. So all of that, as Dave mentioned, I think in the $50 million to $60 million kind of range. The bigger unknown is around the filtered vents, which as I commented earlier, we don't have a good estimate yet because we're not exactly sure what the NRC maybe looking for. When it comes to the turbine blades, the majority of our expense to do the permanent fix will probably come next year. That will come with some unscheduled outages, so we're going to have on the units, it's not in the refueling, we'll have a special outage to put in the permanent fix. And then the scheduled outage may -- hopefully wouldn't take much longer, but it could be a little bit longer. So O&M for 2013 will be a bit higher now. As I mentioned on the last call, we have a number of initiatives underway to trim our O&M and capital expenses, particularly in the supply segment. And there, we would expect some of the O&M savings for 2013 would be offset by the increased outage that we have to take next year. So that's kind of a rundown of where we see the supply business from an O&M and capital perspective.

Excellent. And perhaps a last quick one here, more strategic. On the supply business overall, how are you thinking about it from an ownership perspective, particularly given some of the comments from some of your peers of late?

Sure. We still like the business mix that we have. We have no plans to make a strategic change with the supply business. And we're happy with its performance through the good part of the cycle, and we'll manage it well through the down cycle.

Your next question will come from Jonathan Arnold.

Just on the additional CapEx cuts, I think, Paul, you mentioned in your speech $200 million to $300 million of additional CapEx you might take out over the next several years. Are you saying that you're planning to go through with these? Or that's something you have sort of obviously to manage through prolonged down cycle? Or is that something we're going to actually see you do?

Yes. I would say that as we look at the -- responding to the lower commodity environment, that those are actions that make economic sense to take. We would try to take those in the final business plan that our board will approve later this year. So I don't think [indiscernible] the margin.

So that's something that's going to be in the plan, but just wasn't on the slide?

Correct. We typically only update the chart in full of CapEx on an annual basis, and then provide you -- throughout the years as we make changes, we provide you the deltas. We'll reassess whether or not we actually go ahead and update that going forward just so you have it all in one spot.

Okay. And then you talked about -- I think it was about $500 million of lower spending on environmental CapEx and because you've moved early on getting this stuff moving. To what extent was it a function of the final rules being less severe than maybe the initial proposal? Was that a piece of it or not?

No, that was a very small piece. It was $30 million to $40 million of the total spending to optimize around gas. But it was heavily driven by the mercury rules, so not driven by that at all.

So you're just being more conservative about what you assume it would cost?

I'm sorry, this is Vic Staffieri. I would say it's not a question of conservatism. We had a plan that we laid out with the regulatory commission in Kentucky. We applied pursuant to our environmental cost recovery mechanisms. We had projections of what we thought the compliance costs were. And we were just very fortunate that with the commission's support, we were able to get out early, get our estimates in, get it all bid, everything was bid here, including all the commodities. And all of these bids have come back very favorable, and that's really the genesis of the $500 million in savings.

Your next question will come from Anthony Crowdell. Anthony C. Crowdell - Jefferies & Company, Inc., Research Division: Just a quick question on you had, I guess, there's additional dividends being repatriated from the U.K. properties. I mean, is that additional -- is that going to be absorbed by the higher expenses that you have at the other business units?

No. I would say that, that's a straight increment in terms of additional cash flow that we've got in the U.S. that we're then able to deploy to the regulated utilities, primarily here that have the equity needs as they're growing rate base so strongly. So yes, we don't have a forecast out for '13. So I don't want to talk about things on a net basis per se that, that's not being absorbed and is incremental to the cash we have to invest in the domestic rate-regulated. Anthony C. Crowdell - Jefferies & Company, Inc., Research Division: All right. And lastly, it looks like you have the potential to wrap up the cases early -- late December, early next year both in Kentucky and in Pennsylvania. I mean does the company think they could earn your allowed return in these 2 jurisdictions once these rate proceedings are finished? Or there'll still be lag where you'll still underearn?

Well, since we're still in a pretty heavily capital-intensive building program infrastructure and replacements, there's going to be immediately some type of lag. But we can manage some of that hopefully through O&M and other levers that we have to try to keep it close to or near the ROE. But I think as we've said in the past, with the type of the spending we need to do on a traditional general rate case basis that we'd be probably looking at needing to file every few years. Now I would probably just remind you that a lot of the spending that we are planning to do has real-time or near-real-time recovery, particularly in Kentucky with the environmental spend. Of course in the U.K., it's all returned off and on immediately as we spend it. And then in Pennsylvania, we have a new law that was passed early this year that will allow us to file for some of the capital, about 1/3 or more of the capital, that had we planned to spend under a new ratemaking mechanism, which will allow more timely recovery. So I think overall, we feel good about our ability to keep the returns close to the authorized level because of the ratemaking constructive arrangements that we have in both Pennsylvania and Kentucky.

The other thing I'd chime in with is -- the other thing that's a driver that's a bit going against us is Pennsylvania, we're dealing with still with Act 129, and that's corrupting the kilowatt hour sales growth that would more organically be there. We talked about strength of industrial in Kentucky, but we've seen some soft residential. So a lot of our ability to stay out for longer periods will be dictated by how strongly the economy recovers and getting back to more normal load growth profiles as well.

Your next question will come from Paul Ridzon.

Do you have any recourse to the vendor on the turbine blades? Are they going to share some of this cost? Or is it all going to be expensed by you?

At this point, we have not made that determination. I think we are both focused on ensuring that we know the root cause and putting in a permanent fix. And in terms of the commercial sharing of the cost, that will come at a later date. But I think we're very focused on just making sure that we get the permanent fix into the unit as quickly as possible.

Your next question will come from Michael Lapides.

Just wanted to make sure one thing. Am I following -- are you expecting multiple years of higher nuclear O&M and capital cost of suppliers? Or is this more of a one-time thing related to Fukushima, meaning a 1 year where you'll see higher expense, and then things kind of normalize beyond that?

We would be looking at this as a one-time expense. We're hopeful that for the Susquehanna turbine outage blade-cracking issue, we can accomplish much of what we need to do in 2013. We'll know better by the end of the year. But yes, we would look at these as one-time events.

Okay. And just want to make sure I follow, the potential CapEx reductions at supply are not on the slide deck that you put out. That's not on the slide deck you put out today, but maybe something you put out when you give guidance for '13, as well as any potential O&M reductions you do at supply.

Exactly right, yes.

Your next question will come from Steve Fleishman.

Just a couple of questions. First on the hedging strategy, you guys ramped up a lot of hedging for '14 the last 2 quarters. Are you kind of planning to do more ratably hedged from here on because you left open it for a while, ramp it up? Is it kind of back to more ratable hedging from here?

I think probably because we're getting closer to the period in which we'd want to have 2014 more highly hedged, it will probably tend to be more ratable, Steve. But just as we've done in this last rally, we're going to look to pick our spots as to when we hedge. So I would say we're kind of leaning in that direction to be more ratable, but we're going to certainly take advantage of any market opportunities as we see them. I'd also say that we just completed our own internal fundamental analysis. And I would say the team is more bullish on '14 and '15 than they've been for a while now. So that would tend to have us leave it open a little bit more than we otherwise would. But again, as we drive closer and closer to '14, we'll want to have a pretty heavily hedged book by then.

Okay. One other question on Susquehanna. Is the outage cost expected to be similar to this year? Or is it just kind of uncertain?

Go ahead, Dave. Why don't you answer that?

Yes. The cost this year included -- will include 3 additional outages, really. We had a refueling outage. But in addition to that, we had an inspection outage for the other unit in the spring plus the outage we just accomplished plus a short upcoming outage to the other unit soon to start. So this year, we experienced 3 what we'll call maintenance or inspection outages to deal with the turbine [ph] rate issue. We expect just 1 of those next year in addition to the refueling outage. So next year's O&M cost would be about 1/3 of what they would have been this year.

Your next question will come from Brian Chin. [Operator Instructions] Our next question will come from Raymond Leung.

Just Paul, can you just give us an update on the latest thoughts on the equity proceeds from the equity units? I think you talked about down streaming again down to supply in terms of reducing that there. Any updates on thoughts, given that you've been able to sort of maybe potentially reduce some cost and CapEx. Does that change your view there?

Yes. It really doesn't change the view there, per se. It lightens up -- in '13 and '14, the equity needs a little bit in Kentucky, but we have around 700 -- north of a $700 million refinancing that was otherwise due at supply next year. So we'll downstream cash for that. We will equitize appropriately Kentucky and PPL Electric Utilities to help finance those rate base growth plans. So I wouldn't say really anything has changed with respect to that. To the -- sorry to hijack the question. But the individual that asked about the 2013, the weighted average share count of 614 million shares for that year. But Ray, I wouldn't expect that we'd be changing the plan materially. And again, those cuts are coming across a 4- to 5-year window so in any given year, they're not all that significant.

Okay. And just a sidebar question. Can you talk a little bit about PPL Montana and what's going on down there? I think one of the agencies changed the outlook the other day. Is it just all margin pressure and lack of contracts?

Yes. If you read the S&P report, it's reduced levels of contracting as we go out over the next couple of years. So very heavily hedged this year and next year, less hedged in '14 and '15. And those are the years like we see with respect to the entire supply business, where we do see some pressure on it. And given the project finance nature of that sale-leaseback, they've put a negative outlook on the BBB-.

[Operator Instructions] Your next question will come from Ashar Khan.

I just wanted to -- I guess, Bill, you mentioned in the beginning of your comments that there might be some more additional CapEx at Kentucky in '16 and '17. Could you just tell us the amount and when will that be firmed up? I guess it's not in your projections right now.

It is not in the projections right now, Ashar, and we don't have a preliminary number yet. But maybe Vic can talk to what we're thinking about it in terms of projects.

We're in the process now of an RFP. We just got the offers in last week to meet [indiscernible]. We have some capacity requirements in '17 and '18. We've had the Bluegrass turbines originally we were going to use to meet that. We haven't done that. Those capital savings were reflected in 2012. And until we evaluate the bids that we just received and we will also take into account any self-build options for '17 and '18, still early for us to make an estimate on what those capital requirements might be.

Okay. But when will you get to know? Is it like a year down the road? Or when should we expect you having a clearer idea of those?

Well, I think we could handle it by the first quarter of next year when we're done with the evaluation of the RFPs.

Okay. Operator, if there are no more questions in the queue -- apparently not. Okay. Well thanks, everyone, for joining us today. And we'll see many of you at EEI. And safe travels.

This concludes today's conference call. You may now disconnect.