PPL Corporation

Good day, and welcome to the PPL Corporation's second quarter earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. 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.

Good morning, everyone, and thank you for joining the PPL conference call on second quarter 2020 financial results. We have provided slides for this presentation and our earnings release issued earlier today on the investor section of our website. Our remarks this morning may contain forward-looking statements about future operating results or other future events. including today's announcement to launch a process to sell PPL's UK business. Actual results may differ materially from these forward-looking statements. Please refer to the appendix of our presentation and PPL's SEC filings for our discussion of factors that could cause actual results to differ from forward-looking statements. During the call, we will also refer to earnings from ongoing operations, a non-GAAP measure. For reconciliations to the appropriate GAAP measure, please refer to the appendix of this presentation and our earnings release. I'll now turn the call over to Vince Sorge, PPL president and CEO.

Thank you, Andy, and good morning, everyone. I'm excited to be leading my first earnings call as CEO, as we certainly have a lot to talk about this morning. With me today are Joe Bergstein, our chief financial officer, Greg Dudkin, the head of our Pennsylvania utility business, Paul Thompson, the head of our Kentucky utility business, and Phil Swift, who leads WPD, our electric distribution business in the UK. Moving to slide three, I'll begin this morning's call with comments on today's announcement to initiate a process to sell our operations in the UK. Then I'll discuss some quarterly highlights and operational updates, including our continued strong performance during COVID-19 pandemic and some thoughts around Ofgem's latest publications on the Rio 2 process. Joe will then provide a more detailed review of the second quarter financial update. And as always, we'll leave ample time to answer your questions. So turning to slide four, today we announced after completing a comprehensive strategic review with our board of directors that we are going to initiate a process to sell our UK business WPD. We've engaged J.P. Morgan to lead that process for us. The sale would strategically reposition PPL as a purely U.S. utility holding company, sharpening our focus on rate-regulated assets in the U.S. and improving our ability to invest in sustainable energy solutions. We expect the proceeds from the sale would be used to strengthen our balance sheet and enhance our long-term earnings growth, which could include supporting U.S. asset acquisitions and returning capital to share owners. We believe there are multiple ways in which this transaction will create share owner value. First, we strongly believe the sale price net of any tax will be higher than the sum of the parts value currently embedded in PPL stock price. Second, we believe we will have a much stronger balance sheet post-sale targeting mid-teens FFO to debt metric. Third, we believe we can target an EPS growth rate more in line with our US utility peers. And finally, Assuming we acquire another U.S. utility, we believe we can leverage our operational excellence and efficient business model to create even more value for both customers and shareholders. We've been very transparent with investors that while we constantly analyze strategic alternatives, we would not engage in M&A unless we could do it in a way that would create shareholder value. We firmly believe that the sale of WPD at this time will unlock value for our shareholders. As we've been saying for a number of years, we believe WPD represents the premier asset group with an extremely high performing management team in the best energy sub sector in the UK, i.e. electric distribution. We are more confident than ever that the road to net zero carbon emissions in the UK will flow through electric distribution. And significant investment will be required in that sector if the UK is going to achieve its net zero goals. which Ofgem reaffirmed over a week ago in the electric distribution subsector consultation. I expect that WPD will have the opportunity to earn reasonable returns and invest significant amounts of capital during Rio ED2 and well beyond that. As such, the decision to sell WPD is in no way a negative reflection on our WPD team or the WPD business. In fact, it's quite the opposite. We are extremely proud of the financial and operational results that WPD has achieved over the past two decades, and we are confident they will continue to deliver in the future. And while we believe the public market continues to discount the value of WPD in our share price, we firmly expect that a wide range of strategic and financial buyers will demonstrate significant interest in this highly attractive asset. There are several recent precedent transactions of regulated networks in the UK and across broader Europe that support our position. Given the relative attractiveness of electric distribution and the superior quality of the WPD business, we would expect WPD to attract a premium valuation. We expect to evaluate a variety of offers for the purchase of WPD, including all cash or a combination of cash and U.S. utility assets. Regarding timing, we would intend to announce a transaction within the first half of next year. Let me just end by saying the plan to sell WPD is part of a broader strategic repositioning of the company, which we believe will result in a new PPL with a stronger balance sheet, a more focused growth strategy in the US, and an improved position to reduce its carbon footprint. We believe this will lead to a stronger outlook for the company with a competitive TSR and compelling growth prospects. The dividend has been and will remain an important part of total share owner return for PPL investors. There's no change in the dividend as a result of the announcement this morning. The Board will assess the dividend at the appropriate time in connection with the resulting transaction. Now let me make some high-level comments on the quarterly results before turning it over to Joe for the more detailed quarterly review. Turning to slide five, today we announced second quarter reported earnings of 45 cents per share. Adjusting for special items, second quarter earnings from ongoing operations We're 55 cents per share compared with 58 cents per share a year ago. Turning to a brief update on the impacts of COVID-19, I'm pleased to report that we continue to deliver electricity and natural gas safely and reliably as our customers navigate the challenges of this pandemic. As we highlighted on our first quarter call, we acted swiftly and aggressively to implement social distancing and minimize the spread of the virus within our companies. This included shifting about 35 to 40% of our workforce or more than 4,500 employees to work from home and creating additional separation for those who must still report to a PPL facility due to the nature of their jobs. With health and safety our top priority, these steps remain in place today, even as restrictions have begun to ease in the regions in which we operate. And while we continue to plan for what reentry to the workplace will look like for those now at home, We plan to move very cautiously and continue to follow guidance from the CDC and state and local health departments. As a result of the measures we've taken, we've been very effective in minimizing the impact of COVID-19 on our workforce and our operations. While the most recent tropical storm, Isaias, impacted about 70,000 of our customers in Pennsylvania, we were able to restore power to most of them within 24 hours and all of them within 48 hours. reinforcing again little to no impact from COVID-19 on our ability to serve our customers even in the worst of conditions. Further, we remain well positioned from a supply chain perspective and our capital plans remain on track if we've experienced minimal delays apart from the early lockdown phase in the UK. Finally, from a financial perspective, we've maintained a strong liquidity position of over $4 billion. Our cash receipts have remained steady and minimal impact on our allowance for bad debt. Turning to a UK regulatory update, we've seen some recent developments pertaining to the next price control period, Rio 2. First, we were not surprised at all by the recent outcomes of the draft determinations for gas and transmission published in early July. Ofgem has been very clear about three things in their Rio 2 messaging. They are going to incentivize investment that supports the UK's net zero carbon ambitions. They will ensure customer bills remain affordable, and there will be significant investment required in electric distribution over at least the next decade. We've said all along that Ofgem was going to de-emphasize the gas and transmission sectors in favor of electric distribution, not because they are picking winners and losers, but because they fundamentally know the electric distribution networks will require significant investment going forward. In order for customers to afford that level of investment, they need to build headroom into customer bills with lower returns and lower investment levels in gas and transmission. We believe that is why Ofgem has been so critical of the investment plans of both the gas and transmission subsectors. On average, Ofgem cut the gas investment plans by about 20%, and cut the transmission plans by about 45%. While Ofgem indicated there would be potential opportunity for some of that investment to be approved in the final determinations, which will come out later this year, I don't believe Ofgem is going to make it easy on these sectors. WPD is in the fortunate position, however, to be able to follow the gas and transmission process through to the end, prior to us having to submit our business plans mid-next year. Therefore, we are expecting that the Rio ED2 process for WPD will be much smoother and more successful. The sector-specific methodology consultation on electric distribution that was released just over a week ago was also largely in line with our expectations. Ofgem made it clear that the DNOs were going to be critical to supporting the decarbonization efforts in the UK to deliver a net zero economy. And we continue to agree that we are best positioned to deliver on those objectives. While we are still in the early stages of this process, WPD is very focused and engaged with our stakeholders and Ofgem to ensure we deliver a plan that will achieve these goals. We've led the way in Rio 1 in terms of stakeholder engagement and will continue to lead in this area as we begin our business planning process towards the end of this year. While many of the parameters are still being developed, let me talk a little bit about our expectations for the electric distribution incentive package. Based on our recent discussions with Ofgem, we expect the incentive scheme for ED2 to continue to play a significant role in the overall returns for the electric distribution sector, much more significant compared to gas and transmission. In addition to the reliability and customer incentives we're accustomed to, I would expect to see significant output measures for low carbon initiatives, promoting flexibility of the network, and other net zero related outputs. So while incentives are not a significant component of the gas and transmission subsector reviews, we absolutely continue to expect it to be meaningful for ED2. And finally, regarding our 2020 earnings forecast, while COVID-19 has had an impact on our year-to-date financial results, and we expect it to negatively impact the remainder of the year as well, we continue to believe the full year impact will be manageable. Therefore, we reiterated our earnings guidance range for 2020 of $2.40 to $2.60 per share, with results expected to track towards the lower end of our forecast range given COVID and unfavorable weather in the first half of the year. And a positive sign, we began to see a gradual easing of restrictions later in the quarter that dampened some of the impact we were seeing in April from strict lockdown measures. Residential load continues to be stronger than planned as a result of the continued work from home measures And while CNI is still below plan in all three business units, it is not as bad as we were originally expecting it to be. Regarding 2021, we are withdrawing our prior 2021 forecast as a result of today's announcement regarding the potential sale of the UK business, and we will provide an updated 2021 forecast at the conclusion of the process, which we expect to occur in the first half of 2021. I'll now turn the call over to Joe for a more detailed financial update. Joe?