Q2 2020 PPL Corp Earnings Call
[music].
Good day and welcome to the PPL Corporation second quarter earnings Conference call.
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Today's presentation therell be opportunity.
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Please note this event is being recorded.
Now, let's 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 you provided slides for this presentation in our earnings release issued earlier today on the Investor section of our web site remarks. This morning may contain forward looking statements about future operating results or other future events include.
During today's announcement to launch a process to sell Ppls UK business.
Actual results may differ materially from these forward looking statement. Please refer to the appendix of our presentation and PPL that de filings or discussion of factors that could cause actual results to differ some forward looking statements. During the call. You also referred to earnings from ongoing operations and non-GAAP measure.
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 Sorgi, PPL, President and CEO.
Thank you Andy and good morning, everyone.
I'm excited to be leading my first earnings call as CEO since we certainly have a lot to talk about this morning.
With me today, our Joe Bergstein, our Chief Financial Officer.
Greg Dudkin, the head of our Pennsylvania utility business.
Paul Thompson, the head of IR, Kentucky utility business.
And fill Swift, who leads W.P.D.R. 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.
And I'll discuss some quarterly highlights and operational updates.
Including our continued strong performance during cobot 19 pandemic.
Some thoughts around off Jens latest publications on the Rio to process.
Joe will then provide a more detailed review with a second quarter financial update.
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're going to initiate a process to sell our UK business W.P.D.
We've engaged JP Morgan to lead that process for us.
The sale, which strategically repositioned P.P.L.S.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. Saks asset acquisitions, and returning capital to shareowners.
We believe there are multiple ways in which this transaction will create shareowner value.
First.
We strongly believe the sale price net of any tax will be higher than the some of the parts value currently embedded in PPL stock price.
Second.
We believe we'll have a much stronger balance sheet post sale targeting mid teens f., how did that metric.
Third we believe we can target and EPS growth rate more in line with our U.S. utility peers.
Finally, assuming we acquired 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 shareowners.
We've been very transparent with investors that why 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 W.P.D. at this time will unlock value for our shareholders.
As we've been saying for a number of years, we believe W.P.D. represents the premier asset group with an extremely high performing management team and the best energy sub sector in the UK I.E. electric distribution.
We're more confident than ever that the ROE to net zero carbon emissions in the UK will flow through electric distribution.
A significant investment will be required in that sector UK is going to achieve its net zero goals, which off gem reaffirmed over a week ago in the electric distribution Subsector consultation.
I expect that W.P.D. will have the opportunity to on reasonable returns and invest significant amounts of capital during REO EDI too well beyond that.
As such the decision to sell W.P.D. is in no way a negative reflection on our W.P.D. team.
For the W.P.D. business in fact, it's quite the opposite.
We are extremely proud of the financial and operational results that W.P.D. has achieved over the past two decades, we are confident they will continue to deliver in the future.
And while we believe the public market continues to discount the value of W.P.D. in our share price.
We firmly expect that a wide range of strategic and financial buyers will demonstrate significant interest in this highly attractive assets.
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 W.P.D. business, we would expect W.P.D. to attract a premium valuation.
We expect to evaluate a variety of offers for the purchase of W.P.D., 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 saddened by saying the plan to sell W.P.D. as part of a broader strategic repositioning of the company, which we believe will result in a new PPL with a stronger balance sheet I'm more focused growth strategy in the U.S. 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 shareowner return for PPL investors.
There's no change in the dividend as a result of the announcement this morning.
Board will assess the dividend at the appropriate time in connection with the resulting transaction.
Now, let me make some high level comments on a quarterly results before turning it over to Joe, but a 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 were 55 cents per share compared with 58 cents per share a year ago.
Turning to a brief update on the impacts of Cobot Nike.
I'm pleased to report that we continued 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, Paul we acted swiftly and aggressively to implement social dispensing and minimize the spread of the virus within our company.
This included shifting about 35% to 40% of our workforce or more than 4500 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 asked restrictions have begun to ease in the regions in which we operate.
And while we continue to plan for what re entry 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 at the measures we've taken we've been very effective in minimizing the impact of covert 19 on our workforce and our operations.
While the most recent tropical storm Isa east impacted about 70000 of our customers and 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 cobot 19 on our ability to serve our customers even in the worst if 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 locked down 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 real chip.
First.
We were not surprised at all by the recent outcomes of the draft determination for gas and transmission published in early July.
Bob Jim has been very clear about three things in their Rio two messaging.
They are going to incentivize investment that supports the UK net zero carbon ambitions.
They will ensure customer bills remain affordable.
And there will be significant investment required and electric distribution over at least the next decade.
We've said all along that off Jim was going to deemphasize, the gas and transmission sectors in favor of electric distribution not because they are picking winners and losers, but because they fundamentally no. 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 off Jim has been so critical of the investment plans a bulk the gas and transmission subsectors.
On average ofgem cut the gas investment plans by about 20% and cut the transmission plans by about 45%.
Well off Jim 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 often is going to make it easy on these sectors.
W.P.D. is in the fortunate position, however to be able to follow the gas and transmission process through the end prior to us having to submit our business plans mid next year.
Therefore, we are expecting that the Rio 82 process for W.P.D. 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.
Jim made it clear that the Dnos, we're going to be critical to supporting the de carbonization 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 its process W.P.D. is very focused and engaged with our stakeholders and off Jan to ensure we deliver a plan that will achieve these calls.
We've led the way in real one in terms of stakeholder engagement.
Well continue to lead in this area as we began 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 off Jim We expect the incentive scheme for 82 to continue to play a significant rolled and the overall returns for the electric distribution sector much more significant compare to gas and transmission.
In addition to the reliability and customer incentives were accustomed to.
I would expect to see significant output measures for low carbon initiatives promoting flexibility got a network and other net zero related to help us.
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 82.
And finally regarding our 2020 earnings forecast.
Well covered 19 has had an impact on our year to date financial results and we expect it to negatively impact the remainder of the here as well we continue to believe full year impact will be manageable.
Therefore, we reiterated our earnings guidance range up for 2000, 20-F, $2 and $42.60 per share.
With results expected to track towards the lower end of our forecast range given cove it an unfavorable weather in the first half in here.
In a positive sign we began to see a gradual easing of restrictions later in the quarter that dampen some of the impact we were seeing an april from strict locked down measures.
Residential load continues to be stronger than plan as a result at the continued work from home measures and well see an ice still below plan and all three business units is not as bad as we originally expecting it to big.
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 update at 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 uptick jump.
Thank you Vince and good morning, everyone.
I'll cover our second quarter segment results on slide six first I'd like to highlight that the estimated impact from cobot on our second quarter results was about six cents per share.
Which was primarily due to lower sales volumes in the UK and lower demand revenue in Kentucky.
As we outlined in our projections on the first quarter call about two thirds of the impact or four cents per share is recoverable through the UK decoupling mechanism on a two year lag.
I'll discuss further the impacts of covert on a quarterly sales volumes in more detail in a few moments.
Turning to the quarterly walk and starting with Q2 2019 ongoing results on the left.
The first reflect adjustments for weather and dilution for comparability purposes of the underlying businesses.
During the second quarter, we experienced a one cents favorable variance due to weather compared to the second quarter of 2019, primarily in Pennsylvania.
Compared to our forecast whether in the second quarter was about a one cents on favorable variance was stronger load in Pennsylvania, being offset by more mild weather in the UK and Kentucky versus normal conditions.
In terms of dilution, we saw a three cents impact in the quarter, primarily driven by the November 2019 draw on our equity forward contracts.
Moving to the segment drivers excluding these items.
Our UK regulated segment earned 33 cents per share.
Second quarter 2020.
This represents a one cents decrease compared to a year ago.
The decline was primarily due to lower sales volumes, primarily due to the impact of covert 19.
And lower other income due to lower pension income.
These decreases were partially offset by higher realized foreign currency exchange rates compared to the prior period.
Q2, 2020 average rates of $1.63 per pound compared to a dollar 636 per pound in Q2 29 team.
I'll note that we layered on additional hedges since our last quarterly call and are now hedged at 95% for the balance of 2020 at an average hedge rate of $1.47 per pound.
And in light of today's announcement, we do not plan to add additional earnings hedges to 2021.
Moving to Pennsylvania, Weird 15 cents per share, which was two cents higher than our comparable results in Q2 29 team.
The increase was primarily driven by higher adjusted gross margins.
Primarily resulting from returns on additional capital investments and transmission.
This increase was partially offset by higher operation and maintenance expense.
I'll note that our customer mix mitigated the impact on sales from Cobot 19, as our positive impact from our significant residential base in Pennsylvania, and fixed charges more than offset lower demand in the see nice sectors.
Turning to our Kentucky regulated segment.
We are in 10 cents per share.
The recent decreased from our results one year ago.
The decline was primarily due to lower commercial industrial demand due to the impact of covert 19, and higher income taxes due to a tax credit recognized in the second quarter of 2090.
These decreases were partially offset by higher retail rates or effective may 129 team.
Results a corporate another one cents higher compared with a year ago, driven by several factors, none of which were individually significant.
Turning to slide seven we outlined the changes in weather normalized sales for each segment by customer class.
As expected and reflected in the financial results, we saw lower demand and the see a nice sectors, partially offset by higher demand in the residential space in each of our service territories.
In addition, as Vince pointed out the Reopenings that we observed primarily in June substantially reduced the impact on load.
For example in Kentucky in Pennsylvania, We went from 15% to 20% see an eye low declines at the peak of the Lockdowns in April more modest declines of eight and 2% respectively for the month of June.
In the UK, we saw some positive <unk> momentum as the UK government downgraded its alert level mid month.
Although the recovery was more modest with June demand down about 11% versus the prior year.
I'll note for this slide the quarterly information presented for the UK aligns with our financial statement presentation on a one month lag and shows the period over period variances from March April and May.
Looking forward, we're encouraged by the recovery we've seen in June which gives us more comfort in reaffirming the 2020 forecast today, albeit at the lower end of the range.
We expect the annualized load sensitivities by segment and we provided last quarter will remain as good guides as we move through the balance of the year.
Concludes my prepared remarks, and I'll turn the call back over to that's.
Thanks, Joe.
Let me conclude today's remarks with an outline of some of my key areas of focus for the company and my excitement for Ppls bright future.
As I've mentioned to many of you over the past few months I'm extremely proud of our operational excellence at PPL, which is core to our mission up delivering safe and reliable service at an affordable price.
This has been and we'll continue to be a priority for the company has it has led to continuous innovation in operational improvements that are driving our premier customer service and satisfaction levels.
One of my goals is to take this culture of operational excellence and find ways to leverage it to drive additional value for our customers and shareholders.
Another one of my goals is to improve our overall TSR performance and the strategic repositioning announced this morning is one step in that direction.
I'm sure our decision to launch a sale process for W.P.D. doesn't come as a surprise to investors given PPL stock performance over the past few years. We believe today's announcement creates the best path forward to improve our TSR by simplifying the business mix, reducing our leverage improving our earnings growth rate and then how.
Dancing, our ability to invest in sustainable energy solutions.
Another key area of focus will be to reduce the carbon footprint at the company.
We've already communicated our targets of reducing C. O two emissions by at least 70% by 2040 and at least 80% by 2050 with the declining costs of renewable energy. We believe there will be a real opportunity to accelerate de carbonization of our Kentucky fleet under regulatory oversight and with economic benefit.
Yes.
In closing I'm very excited for the future of PPL I firmly believe that the company's organic growth opportunities and strengthened financial flexibility expected from today's announced strategic repositioning best position PPL to deliver long term value to both our shareowners and our customers.
We look forward to providing further updates at the conclusion of the process or as appropriate with that operator lets open the call for questions.
Thank you we will now begin my question answer session you would like to ask your question. Please press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset nucor pressing lucky if at any time. Your question has been addressed and you would like to withdraw your question. Please press star.
Then too.
The first question today will come from Shire part is with Guggenheim Partners. Please go ahead.
Hey, guys, if they're going to complete chance for shark. Good morning, Thanks for taking my question.
Yeah.
Oh, I guess just sort of falling on your comments are best <unk> started at a high level of a sale process I mean, what do you view and the board the sense that this is really the time to do this kind of you know why now is that the internal management is it external factors like.
Post Brexit pre RIIO edone to kind of you know what were the factors or whatever decision.
Sure. So I think I think theres been quite a bit of change actually right we've been very.
Very transparent with the market our investors that while we have sent me reviews strategic options to maximize value.
We will not engage in M&A, unless we thought right anyway, it would create value for our shareholders.
And as I said in my prepared remarks at this point, we believe the market has shifted and that executing a salad WV will create not only at value for shareowners.
Well the company out going forward or large and growing stronger balance sheet.
In terms of the market backdrop right last year, we had a general election in UK Corbin election day sale.
Renationalization risk is in the rear view mirror.
We believe theres been additional clarity around the Rio to process.
Primarily for our electric distribution, which supports what we've been saying from the beginning in terms of supporting electric distribution and the Roche is zero kind of flowing through that sector. So we got clarity on all that.
Unfortunately that additional clarity really has not improved our stock price performance.
Certainly not to the level, we would have expected in fact, it has count has widened compared to our peers. So.
Again the market also on the buy side for these types of assets is pretty strong right now in Europe.
There's been a number of comps that we saw I'm, starting with gas distribution in the UK metric distributions UK than some other.
Electric assets in the in prior year ahead.
In some very strong results. So we think given.
The quality of the UK business and the management team and again sub sector that we're dealing with.
We firmly believe that that process will be successful and will garner a greater value for Devon. He has sale process that will be recognized share right.
Got it thanks, and then I guess could you give us a sense on whether there are any market power concerns in the UK would that precluded somebody your neighbors from a potentially acquiring the systems.
And then are you opened to selling the W.P.D. regions piecemeal or that really just a single cell.
Yeah, I don't want to get into necessarily specifics on on who the names that might be interested or the structures I think what we've done.
Today with the announcement has created maximum flexibility around that so I think you're going to see some.
Creativity on the on the part of buyers whether its.
Cash accommodation of a passion, perhaps assets in the U.S.
That the you know certainly we will entertain as they start coming in and we work with JP Morgan all of that so.
At this point I don't know that that market power would be a top concern but.
Certainly well deal with that is.
Okay.
Gotcha. Thanks, I'm just one quick one state side can you give us any updates on project Compass is there any movement there.
No that Oh, we pretty much.
Stopped working actively on campus.
Cool, that's what they're great. Thanks, guys. Congrats the announcement and thanks for taking my questions.
Thank you.
In the next question will come from the Julien Dumoulin Smith with Bank of America. Please go ahead.
Hey, good morning, Jim Congrats on the.
On the.
Touching transactions or was that I wanted to follow the couple of considerations. There just wanted to elaborate on your commentary was true on the script around dividends and just a reaffirmation there and I know today you guys, obviously, our but just considerations and then secondly.
You have some very interesting wording around you know cash indoor assets and U.S. utility assets or that the extensive which you are not necessarily successful gaining a asset swap or what have you. How do you see that we do potentially to it its second stage U.S. utility combination as well just.
You know one step versus two steps love to hear your expanded thought.
Sure. So you know on that on the generic use of proceeds.
Julien let you know maybe let me just talk about how what kind of thinking about that I kind of putting into into four main buckets right. The cars will be to strengthen the balance sheet.
Better position us.
Our and again I think targeting mid teens.
Based on our discussions with agencies, we think that.
Yeah maintained solid investment grade credit ratings, where we are currently coming out of this.
A lot more flexibility.
And levers to pull as we think about future growth.
Alan.
Happy but number one.
The second which is tied to your point I'm looking at future long term earnings growth with investments in regulated utility assets.
You know as we think about the operating model that be deployed PPL and and the efficiency of that model.
We think we can acquire.
You asked utility assets, whether as part of the consideration coming from video or to your point potential follow on and create significant shareholder and customer value. Yeah. I'll just use PPL electric utilities here in Pennsylvania, as an example of what we've been able to accomplish.
Since 2011, Weve grown our rate base cater.
In P.I. about 12% at the same high our I went and has grown less than 1%.
And our average PPL electric utility rate is about 25% less than the average in the mid Atlantic region.
We improved our customer satisfaction score from JD power by about 20% and of course improved reliability at the same time by about 30%. So.
You know the could the kind of strategy that that underpin that was a clear focus on.
Hardening our system as we were making these investments and including advanced marketing technology and grid automation.
Of course looking at a better integration has distributed energy resources, including.
Distributed energy resource management systems.
Where side of that as well and then moving to digital technologies on the IP, Brian has done a lot to actually reduce the out and drives that less than 1% behavior that I talked about.
So all of that kinda results in our ability to become more efficient deploy that capital into the network and brain frankly network into a state that's more flexible more automated and more friendly to distributed energy resources and.
Green sources of power. So we think at this point that we've gotten that model that to a point, where we got we can replicate that and so again if were able to acquire assets in the U.S. either through that.
The consideration or or a follow on we think that would be another opportunity to create long term value.
Shareholders customers.
And the third bucket, let me finish.
Okay.
No no go.
The third bucket just given the strengthening of the balance sheet. We could think about renewables have been differently than we do today, which we have direct impact on reducing our carbon footprint and.
Enhancing the growth profile quite frankly, just given the credit metrics that we have today that hasn't really been elaborate that we've been able to call in any significant way.
And then a return of capital to shareholders would be kind of that fourth bucket. Although you know I would say our strong preference is to redeploy the proceeds into.
Okay.
If I can clarify your U.S. utility or have you from an acquisition. We could this be sale indoor MARD merger of equals I just want to understand a little bit your philosophy and maybe at the at the end of the like what's your philosophy in terms of EPS accretion of any deal.
Just to give you got the opportunity to clarify.
Yeah look I don't think it's appropriate to speculate on on the buy side M&A at this point since we're just launching to process on the sell side for does PD.
And it you know maybe I'll just comment Julian ticket take a big step back and you make a couple of comments that that I recognize that.
Announcing the launch of the process today as opposed to make Miss announcement, when we have a deal we recognize that we're not going to have all the answers to your questions right now a lot of.
Your questions may depend on.
What the actual transaction is rosy and then it used to those proceeds but given the amount of questions that we've gotten from investors and sell side over the over the years.
Specifically regarding strategic alternatives for MPT, we just wanted to be transparent with with the market.
And announced the process. It also has benefits.
Terms the process itself is common in Europe to announce these types of sale process either at the time.
The launch it as opposed to waiting so.
We believe the buyer universe will be.
Those that are will include those that have.
I played in that European market, so having a process that more akin to what they're accustomed to we think will help.
Process itself. So we think we've just maximize the flexibility we think will be a lot of interesting I was just increase the profitability that we'll be able to execute.
So just wanted to just make a general general comment on that but recognizing that we really don't have.
Typically on a transaction with the proceeds.
So those proceeds.
It's a bit premature to speculate on the buy side.
You start to.
To your question.
Congrats again, absolutely look forward to it thank you.
Thanks.
The next question will come from Steve Fleishman with Wolfe Research. Please go ahead.
Yeah, Hey, good morning.
Sorry.
Hey, Vince so so just Uh huh.
I guess any event that you're able to find a transaction that includes.
You S. assets utility assets from an from a buyer.
Would that potentially be like a like kind exchange.
Treatment for that portion, where you could deferred tax or not clear.
[noise] not likely that we would get like kind exchange treatment scene, but we.
You know one of the issues we discussed in the past was just tax leakage on transaction and maybe I'll, let Joe talked little bit about kind of our views on that.
So we do think we identified ways to minimize that burn, but I don't think like kind exchange would be the way hedge.
Sure. Thanks, Morry, Steve So yes tax has been one of those limiting factors force previously and as we've said many times. This is an area that we would continue to focus on as a result.
Some changes to came about from the TJ, we believe that Theres. Some transaction structures that will allow us to offset a significant portion of the tax burden. So those changes along with our at a well balanced we believe we're much better position today than we were previously.
Oh, that's good okay.
Okay. So it so to degree assets might be involved they would just be because you like to value or that it wouldn't have any other real.
Rationale purses cash I guess.
And I guess it the directory investment too so limits.
Pollution risk.
Yeah, I mean look we're gonna we're going to look at the.
Great various different structures and.
Look at maximizing shareowner return.
And whether that's all cash or combination of cash assets.
Way too early to tell but at the end of the day we are.
Yes. The goal here is to is to maximize shareholder value.
But it's also to set the company up for long term.
Growth and value for investors as well so.
Yeah, we'll factor all that and I think if you look at our track record of M&A, whether it was you know acquiring Kentucky and 20 had.
The commitments acquisition in 2011, Instating off the Genco in 2015, right all of those created significant shareholder value we downside.
Yeah, well well deal with this a in a very thoughtful way with the board and our advisors.
And ultimately pick the pick the best structure that that Optimizes Congress.
And value.
Okay.
And then just a on the on the dividend could you just be maybe.
A little more clear on the dividend post this whole transaction kind of how you're thinking about that is it just something where you will assess all the pieces at the time.
And determine what to do with it.
Or just is there any more color you could just give on that to fill out the picture.
Yeah, I I, just think it's too early seemed to get into any specifics on if there would be an adjustment if any to the dividend to your point.
Well well take a look at all of this time, we announced transaction and then aboard we'll assess the dividend at that time.
But as a result of the announcement today were not adjusting the do it at all.
And that'll continue to remain.
You know.
Important part of our overall TSR, which is always in the case.
Well continue.
Just think it's too early to good feeling any specifics areas.
Okay. Thank you.
Thank you.
The next question will come from Durgesh Chopra with Evercore ISI. Please go ahead.
Hey, good morning, Vincent Joe Good morning, where that.
Or maybe just Joe can you go back to the tax bases issue I sort of if I remember this sort of being a hurdle to get the deal done so what exactly so would you see it you're actually in a much favorable position and then I heard you say I don't wells.
Perhaps for bigger than the water. When you you evaluated this perhaps maybe 12 16 24 months ago, but just can you elaborate and anymore color on what change would D.C.G.A.
Yeah sure. So first of all the animal health really hasn't changed it's just I think we would.
Utilizing that at all about the transaction will have to see.
Ultimately what the transaction is as far as the T.C.J. changes goes as you can trigger appreciate as with most things tax related.
It's complicated it's also very technical.
The reality is its transaction specific so given the flexibility that we're creating and talking about today around the potential transaction Oh, we're going to get into specifics on any of the details at this time I would just say, though that these.
These are very low risk strategies that we found so we feel comfortable with with our ability to utilize.
Understood, but they're gosh.
This is Vince I would just saying that the task.
Component of this that you have talked about is just one component I think at the end of the day when we think about the current market for these types of assets in Europe.
Unum UK.
We just think that the after tax proceeds that we would expect.
Today are quite a bit higher than we would huh.
18, 24 months ago when.
Nationalisation raise was in the middle of all the discussion. According was in the middle of it all so I think back while the tax component is certainly helping it. It's the total net after tax proceeds thing is much stronger now.
Understood, but just to be clear you still expect the tax leakage. We just thing from a tax just specifically tax perspective, you're better now works is that say 24 months ago and he also think the UK assets that you would expect you better value. Here. Then you know, perhaps 24 16 24 months ago.
Correct.
Yes.
Okay, and then maybe just one last follow up and the timing first half of 21.
You know is there or you do you just officially kick started the process.
Or have you been actively talking or two parties. It just seems like.
You're pretty confident in that had four staff of 21 schedule or am I reading too much into it.
Well the regulatory process in the UK is much shorter than in the U.S. So.
I'm getting from announce into a deal to close.
Could take as little as 30 to 68.
What we're accustomed to here in the U.S. So all we're doing with that kind of first half of 21 commentaries providing enough time. So we are launching the process today, so we too.
Yes, do all of the activities that go.
Into actually launching a process and then likely a couple of rounds of bids and couple of months.
A lot for approval times should we should be able to get that Don.
Between now and the no next year.
Okay. That's great went and congratulations on your first earnings call the CEO and good luck.
Thanks, so much.
The next question will come from Paul Patterson with Glenrock. Please go ahead.
Good morning.
Good morning, Paul I'm just so.
This is sort of clarify the tax situation.
For the most part it sounds like you plan on offsetting.
Through <unk> terms of structuring the transaction and other wells that they're really won't be any significant tax leakage is that right.
[noise] James Yeah, certainly through through the transaction structure.
We think we could offset a significant portion ultimately what the resulting tax will be.
I have to wait and see what transaction is and what.
Given that we're open to a variety of transaction structures as well.
The agenda today, Okay, and then just you launching the formal.
Process was there an informal process. If you put in if you lose out or anything else it sort of or is it is pretty much just really just starting the process in general here or there was no you haven't had any preliminary discussions or anything.
No just between us and our advisors no no no outreach.
Okay, and then finally be Clint reading.
For the for the new entity I'm, assuming the transaction happens and everything in the well how should we think about how you guys want to be.
If there's any particularly changing credit rating metric.
<unk> credit rating itself goals or anything has that changed.
Yes, good yeah, no no changes to those objectives, Paul we would as Vince mentioned in his remarks, we would expect to target.
FFO to debt in the mid teens, and certainly lowering our holdco debt told that percentage as part of that so you know maintaining our for credit ratings and improving the credit metrics is one of the objectives.
Okay, great. Thanks, a lot.
Sure.
And the next question or will come from Michael outfitted with Goldman Sachs. Please go ahead.
Hey, guys. Just curious can you remind us what besides of the you know well currently I'm just trying to think about the ramifications of an all cash steel.
Sure. It's a a data 2019 of about $1.5 billion.
Yes.
And in would you think about eight or their air just the timeline at that.
How do you think about from the tiny make a deal announcement to the time up an actual close like what have you seen in the UK in terms of just process wise from announced deals so closing Todd.
Yeah. So when we when we announced acquisition of Midland Michael It was 30.
Okay. So you expect a relatively quick close for a buyer. So a potential buyer you know good NAFTA doesn't have to go six to nine bumps are so like you often see in the U.S., if not longer well for being able to close and therefore have a role in the real process.
Yeah, I think that that depends on who the buyer it but.
Either way I don't think you're looking at the length of the process that we're seeing.
Got it Okay, and then why don't Kentucky, I I've asked on this a bit in prior earnings calls.
How do you look at your Kentucky, we right now how much of the coal generating capacity there what percent roughly do you think comprise is made up smaller less kind of an economic unit that whack economy.
Really lack economy of scale.
Oh, the coal fleet.
[noise], yeah, so [noise].
I mean.
Paul I think you're on yeah, I don't know if you have specifics on some of the.
The smaller parts of the fleet I mean, I think for the most part with the 1200 megawatts that weve.
Retired Michael those are those are pretty well out of the fleet the Paul any thoughts on that.
Right I would say Michael that the fleet that we have today is larger and more economic.
By and large.
Vince just indicated.
Last few years, we have.
Retire smaller older units.
And so what we have today.
The margin is very efficient and effective all in compliance.
But obviously, there's a progression of smaller units existing to larger and that some of the.
Regulations and economics May change, we'll continue to look at retiring those at the appropriate time in with the appropriate approval, but I guess I would leave you with the thought that today. The fossil fleet is a pretty efficient one.
Okay, and how about the the the regulatory politics of retiring existing coal units and what is still somewhat of a coal state like Kentucky, and replacing them with either gas or wins.
Yeah, I mean economics are going to drive that.
No. We again, we we've done 1200 megawatts over the last five years and.
I have no have had no issues dealing with the commission in the state on that.
But you know economics is what drove that so as we think about a in any of this is kind of follow on to Paul's comment as we look at renewables or if there are.
You know it by design wins the election.
The Senate switched to the damage to Democrats.
The plan is calling for you know that carbon neutral from the power sector by 23 high so that would likely.
Require more aggressive or coal retirement strategy than what we're currently working undercurrent regulation and legislation.
So I think a lot of things kick factor into that Michael but yeah for the most part that the commission has been.
Again, if theres a regulatory requirement to do it and then we have to do it absent that it's a it's economics. So Paul I don't have any additional thoughts on that.
No I would just reiterate what you're saying we've had a good process.
And everything that we've done heretofore and so I would expect that to continue as conditions change for whatever reasons.
Got it thank you guys much appreciated.
Thanks, Mike.
The next question will come from all pretty much with me do though we get ahead.
Hi, Thank you very much and congratulations on the announcement.
I was hoping you could be a maybe a little bit more specific on the FFO to debt. We have you I think a in the 14% to 15% range.
Are you looking when you say mid teens are you looking to maintain that or are you looking for that to go up and if it's going up by roughly you know.
Hi, how much.
Yeah, John let's take that.
Yeah Paul.
It's it's too early to say I think the point that we want to make today that we would target.
Got it up metric in the mid teen and we look to maintain our credit ratings or <unk> or ratings have been and we'll continue to be important to us and we're taking the necessary steps to maintain those ratings and this transaction would be no different. So I think our current credit ratings are we're happy with where they are and we'd be willing to us.
We maintain them and that may include improving our metrics do so but love to see what the transaction looks like at the end before you get into more detail.
And is that because one of the rating agencies at least looks at the UK businesses, having lower business risk on the U.S. utilities.
Most of the agencies view the UK favorably on our credit rating. So you know.
So in the UK.
You know how they view.
Business I think.
That discussions with them about that of course, what assets could actually come along with the transaction would be another factor there. So I just I think.
At this point, it's really too early to get into details around a specific credit metric.
Other than to say that we want to maintain or credit ratings.
And then can you provide what would you consider to be sort of comps you mentioned sort of generically Oh lets you know on what some of the recent comps look like but can you what what transactions you know what would you consider to be similar to yours.
Well like I said.
No you have to have the gas distribution.
Networks that national grid sold a couple of years ago.
BMW soul.
Within the last couple of years Theres been some other.
Electric distribution.
Networks that is sold in other parts of Europe.
Actually more recently.
Those are kept those are kind of that.
The.
The assets that we're talking about it the businesses the comps that we're talking about.
And then last question for me I guess, what would you consider to be inappropriate payout on sort of a U.S. regulated electric.
Oh, I'm, sorry are you referring to a dividend payout yes.
I mean, I think where you see the sector right is kind of in that 60% to 70% range somewhere 65 to 70. Some are 60 65.
Kind of in that in the sixties range is kind of.
Average for our sector.
Right.
Thank you very much.
Thank you.
The next question will come from Ryan Levine with Citi. Please.
Please go ahead.
Good morning, and things that you're looking to return capital to shareholders. As result of this transaction can you comment on commentary thoughts around efficient ways to return capital to shareholders buyback special dividends, given where the assets or help.
Yeah Michael.
Yeah sure I think again.
It's too early to say how that would play out although I think.
Today I'd say the.
Difference would be a buyback from a special dividend.
I guess you were what it looks like when we get there.
Okay. Thanks, and then what's the regulatory process differences that there would be it the UK businesses transacted in pieces first as a whole and is there anything that would prevent P.P.L. from keeping a smaller part of the UK business longer term.
I mean, I'd, just say that our intention in launching the process if they fall exit.
Yes so.
I don't know.
You know that there theres anything that would preclude us from.
Owning a part of them going forward on today that our attention.
We think the again, we think that.
The interest level in this business will be high.
The market is hot right now for infrastructure assets. So we think these assets will be.
End demand and that we do recognize this will be a large equity Jack given.
The size of the W.P. did the WP business, but that's where.
Potentially including a U.S. asset as consideration.
Who's the probability of getting it done because it reduces the amount of cash that's required. So again, we think are just maximum flexibility in taking this process off.
Just improves the probability of getting to the end result that we're shooting for which is.
Oh legs.
Appreciate that and just want to follow up to the extent that you're you're intends to.
Throughout the entire business are there any tax advantage is if you were to south part as opposed to the whole I'm, giving the anywhere else and in your legacy assets.
Not really I mean, a there there could be there could be tax advantage or cash tax advantage.
So the whole thing but from a.
Yeah taxable perspective is whether you sell Warner for it.
As pro rata.
I appreciate it thank you.
This concludes today's question and answer session I would now like to turned over to management for any closing remarks.
Great. Thanks, just want to close out or the call with thanking everybody for your time and joining us today.
You know just want to reiterate that today's announcement.
Was that part of a broader strategic repositioning for the company. Following strategic review that we conducted with the board and.
Again, reinforcing that we believe this will create shareholder value not only a in the near term for our shareowners.
The company out for the long term as well with stronger balance sheet, better earnings growth and and more opportunity to.
Deploy capital.
Whether that's on the clean energy sector, where within our utility so.
Really looking forward to two or getting going on this process and providing more details if and when appropriate I'm just really excited about the future. The company. So appreciate everybodys time, and thank you operator, we can close optical.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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