賓州電力 (PPL) 2020 Q2 法說會逐字稿

Good day and welcome to the PPL Corporation second quarter earnings conference call and webcast. (Operator Instructions) 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 Investors 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 U.K. 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 Sorgi, 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 U.K.

Moving to Slide 3. I'll begin this morning's call with comments on today's announcement to initiate a process to sell our operations in the U.K. 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 RIIO-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 4. 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 U.K. business, WPD. We've engaged JPMorgan 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 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 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 U.S. 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 shareowners.

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 shareowners. 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 subsector in the U.K., i.e., electric distribution. We are more confident than ever that the road to net-zero carbon emissions in the U.K. will flow through electric distribution.

And significant investment will be required in that sector, if the U.K. 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 RIIO-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 2 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 and 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 U.K. 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 as 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 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. 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 5. Today, we announced second quarter reported earnings of $0.45 per share. Adjusting for special items, second quarter earnings from ongoing operations were $0.55 per share compared with $0.58 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 company. 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, has 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 U.K.

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 U.K. regulatory update. We've seen some recent developments pertaining to the next price control period, RIIO-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 3 things in their RIIO-2 messaging. They are going to incentivize investment that supports the U.K.'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 deemphasize 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 RIIO-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 U.K. 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 RIIO-1 in terms of stakeholder engagement, and we'll 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.

In 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 C&I is still below plan in all 3 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 U.K. 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?

Thank you, Vince, and good morning, everyone. I'll cover our second quarter segment results on Slide 6. First, I'd like to highlight that the estimated impact from COVID on our second quarter results was about $0.06 per share, which was primarily due to lower sales volumes in the U.K. and lower demand revenue in Kentucky. As we outlined in our projections on the first quarter call, about 2/3 of the impact or $0.04 per share is recoverable through the U.K. decoupling mechanism on a 2-year lag. I'll discuss further the impacts of COVID on the 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, we first reflect adjustments for weather and dilution for comparability purposes of the underlying businesses. During the second quarter, we experienced a $0.01 favorable variance due to weather compared to the second quarter of 2019, primarily in Pennsylvania. Compared to our forecast, weather in the second quarter was about $0.01 unfavorable variance with stronger load in Pennsylvania being offset by more mild weather in the U.K. and Kentucky versus normal conditions. In terms of dilution, we saw a $0.03 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 U.K. regulated segment earned $0.33 per share in the second quarter 2020. This represents a $0.01 decrease compared to a year ago. The decline was primarily due to lower sales volumes, primarily due to the impact of COVID-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, with Q2 2020 average rates of $1.63 per pound compared to $1.36 per pound in Q2 2019. 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, we earned $0.15 per share, which was $0.02 higher than our comparable results in Q2 2019. The increase was primarily driven by higher adjusted gross margins, primarily resulting from returns on additional capital investments in 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 COVID-19, as our positive impact from our significant residential base in Pennsylvania and fixed charges more than offset lower demand in the C&I sectors.

Turning to our Kentucky regulated segment. We earned $0.10 per share a $0.03 decrease from our results 1 year ago. The decline was primarily due to lower commercial and industrial demand due to the impact of COVID-19 and higher income taxes due to a tax credit recognized in the second quarter of 2019. These decreases were partially offset by higher retail rates that were effective May 1, 2019. Results at Corporate and Other were $0.01 higher compared with a year ago, driven by several factors, none of which were individually significant.

Turning to Slide 7. We outline the changes in weather-normalized sales for each segment by customer class. As expected and reflected in the financial results, we saw lower demand in the C&I 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 and Pennsylvania, we went from 15% to 20% C&I load declines at the peak of the lockdowns in April to more modest declines of 8% and 2%, respectively, for the month of June.

In the U.K., we saw some positive momentum as the U.K. government downgraded its alert level midmonth, 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 U.K. aligns with our financial statement presentation on a 1-month lag and shows the period-over-period variances from March, April and May. Looking forward, we are 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 that we provided last quarter, will remain as good guide as we move through the balance of the year. That concludes my prepared remarks.

And I'll turn the call back over to Vince.

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 PPL's 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 of delivering safe and reliable service at an affordable price. This has been and will continue to be a priority for the company as it has led to continuous innovation and 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 shareowners. Another one of my goals is to improve our overall TSR performance and the strategic repositioning announced this morning as one step in that direction.

I'm sure our decision to launch a sale process for WPD doesn't become as a surprise to investors, given PPL's 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 enhancing our ability to invest in sustainable energy solutions.

Another key area of focus will be to reduce the carbon footprint of the company. We've already communicated our targets of reducing CO2 emissions by at least 70% by 2040, and at least 80% by 2050. With the declining cost of renewable energy, we believe there will be a real opportunity to accelerate decarbonization of our Kentucky fleet under regulatory oversight and with economic benefit for our customers.

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, let's open the call for questions.

(Operator Instructions) The first question today will come from Shar Pourreza with Guggenheim Partners.

It's actually James for Shar. I guess just sort of following on your comments there, Vince, if we could start at a high level on the sale process. I mean what gave you and the Board the sense that this is really the time to do this, kind of why now? Is it the internal management? Is it external factors like post-Brexit, pre-RIIO-ED2? Kind of what were the factors that went into the decision?

Sure. So I think there's been quite a bit of change, actually, right? We've been very transparent with the market and our investors that while we constantly review strategic options to maximize value, that we would not engage in M&A unless we thought, right, that it would create value for our shareowners. And as I said in my prepared remarks, at this point, we believe that the market has shifted and that executing a sale of WPD will, in fact, create not only immediate value for shareowners, but will set the company up going forward for longer-term growth with a stronger balance sheet.

In terms of the market backdrop, right, last year, we had the general election in the U.K. Corbyn election they had failed. Re-nationalization risk is in the rearview mirror. We believe there's been additional clarity around the RIIO-2 process, primarily for electric distribution, which supports what we've been saying from the beginning in terms of supporting electric distribution and the road to 0 kind of flowing through that subsector. So we've gotten some 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. And in fact, the discount 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 has been a number of comps that we saw starting with gas distribution in the U.K., electric distribution in the U.K. and then some other electric assets in broader Europe that have yielded some very strong results. So we think given the quality of the U.K. business and the management team and again, the subsector that we're dealing with, we firmly believe that the process will be successful, and will garner a greater value for WPD and a sale process then will be recognized in the share price.

Got you. And then, I guess, could you give us a sense on whether there are any market power concerns in the U.K.? Would that preclude some of your neighbors from eventually acquiring the systems? And then are you open to selling the WPD region's piecemeal? Or is it really just a single sale?

Yes, I don't want to get into necessarily specifics 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 part of buyers, whether it's cash, a combination of cash and perhaps assets in the U.S., that certainly we will entertain as those start coming in, and we will work with JPMorgan on all of that stuff. So at this point, I don't know that market power would be a top concern. But certainly, we'll deal with that if appropriate.

Got you. And then just one quick one, states side. Can you give us any updates on Project Compass? Is there any movement there?

No. That's -- we pretty much stopped working actively on Compass.

Great. Congrats on the announcement.

Thank you.

And the next question will come from Julien Dumoulin-Smith with Bank of America.

Congrats on the potential transactions that you said. I wanted to follow up here with a couple of considerations here. Just wanted to elaborate on your commentary on the script, around dividends and just reaffirmation therein? I know, today, you guys obviously are about just considerations. And then secondly, you have some very interesting wording around cash and/or assets, and U.S. utility assets of that, the extent to which you are not necessarily successful in gaining an asset swap or what have you, how do you see this leading potentially to a second stage U.S. utility combination as well, just 1 step versus 2 steps? I'd love to hear your expanded thoughts.

Sure. So on the generic use of proceeds, Julien, maybe let me just talk about how we're kind of thinking about that. I kind of put it into 4 main buckets, right? The first will be to strengthen the balance sheet, better position us moving forward. And again, I think, targeting a mid-teens FFO to debt based on our discussions with the agencies, we think that maintain solid investment-grade credit ratings, where we are currently coming out of this with a lot more flexibility and levers to pull as we think about future growth of the company moving forward. So that would kind of the bucket #1.

The second, which is kind of to your point, looking at future long-term earnings growth with investments in regulated utility assets. As we think about the operating model that we've deployed at PPL and the efficiency of that model. We think we can acquire some U.S. utility assets, whether it's part of the consideration coming from the deal or to your point, a potential follow-on and create significant shareholder and customer value. I'll just use PPL Electric Utilities here in Pennsylvania as an example of what we've been able to accomplish.

Since 2011, we've grown our rate base CAGR in PA by about 12% at the same time, our O&M 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've improved our customer satisfaction score from J.D. Power by about 20%. And of course, improved reliability at the same time by about 30%. So the kind of the strategy that underpinned that was a clear focus on hardening our system as we were making these investments, including advanced market technology and grid automation, of course, looking at a better integration of distributed energy resources, including distributed energy resource management system. So the software side of that as well.

And then moving to digital technologies on the IT front has done a lot to actually reduce the O&M and drive that less than 1% CAGR that I talked about. And so all of that kind of results in our ability to become more efficient, deploy that capital into the network and bring the 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 could replicate that. And so again, if we're able to acquire an asset in the U.S., either through the consideration or a follow-on, we think that would be another opportunity to create long-term value, again, both for shareholders and customers.

Kind of the third bucket...

Let me...

Yes? Go ahead.

No. No. No. Go. Go.

The third bucket, just given the strengthening of the balance sheet, we could think about renewables a bit differently than we do today, which would have a 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 a lever that we've been able to pull in any significant way.

And then return of capital to shareholders would be kind of that fourth bucket. Although I would say our strong preference is to redeploy the proceeds into U.S. growth assets as opposed to return of capital.

If I can clarify your U.S. utility as you frame an acquisition, I mean could this be a sale and/or merger of equals? I just want to understand a little bit of your philosophy. And maybe at the end of the day, what's your philosophy in terms of EPS accretion of any deal? Just to give you guys the opportunity to clarify.

Yes. Look, I don't think it's appropriate to speculate on the buy side M&A at this point since we're just launching the process on the sell-side for WPD. And maybe I'll just comment, Julien, and take a big step back and make a couple of comments that I recognize that announcing the launch of the process today as opposed to making this announcement when we have a deal, we recognize that we're not going to have all the answers to your questions, right? And a lot of your questions may depend on what the actual transaction is, the proceeds and then the use of those proceeds. But given the amount of questions that we've gotten from investors and from sell-side over the years, specifically regarding strategic alternatives for WPD. We just wanted to be transparent with the market and announced the process. It also has benefits in terms of the process itself. It is common in Europe to announce these types of sale processes at the time you launch it as opposed to waiting. And so we believe the buyer universe will be those that -- or will include those that have played in that European market. So having a process that's more into what they're accustomed to, we think, will help with the process itself. So we think we've just maximized the flexibility. We think there'll be a lot of interest and just improves the probability that we'll be able to execute it. So I just wanted to just make a general comment on that. But recognizing that we really don't have specifics on a transaction or the proceeds or the use of those proceeds. I think it's a bit premature to speculate on the buy side uses of that -- to your question.

Congrats again. Absolutely look forward to it.

Thanks, Julien.

And the next question will come from Steve Fleishman with Wolfe Research.

Yes. Vince, so just I guess in the event that you're able to find a transaction that includes U.S. assets, utility assets from a buyer, could that potentially be like a like-kind exchange treatment for that portion where you could defer tax or not clear?

Not likely that we would get like-kind exchange treatment, Steve, but we -- one of the issues we've discussed in the past was just tax leakage on a transaction. And maybe I'll let Joe talk a little bit about kind of our views on that. So we do think we've identified with ways to minimize that burden, but I don't think like-kind exchange would be the way to do it. But go ahead, Joe.

Sure. Thanks. So tax has been one of the limiting factors for us previously. And as we've said many times, this is an area that we would continue to focus on. So as a result of some changes that came about from the TCJA, we believe that there's some transaction structures that will allow us to offset a significant portion of the tax burden. So those changes, along with our NOL balance, we believe we're in a much better position today than we were previously.

Oh, that's good. Okay. Okay. So to a degree, assets might be involved, it would just be because you like the value of that, it wouldn't have any other real rationale versus cash, I guess? And I guess it's a direct reinvestment, too, so when it's dilution risk?

Yes. I mean, look, we're going to look at right various different structures and look at maximizing shareowner return whether that's all cash or a combination of cash and assets -- way too early to tell. But look, at the end of the day, we are -- the goal here 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 we'll factor all that in. I think if you look at our track record of M&A, whether it was acquiring Kentucky in 2010 and the Midlands acquisition in 2011 and then spinning off the Genco in 2015, right, all of those created significant shareholder value at the time we're done. So we'll deal with this in a very thoughtful way with the Board and our advisers, and ultimately pick the best structure that optimizes long-term growth and value.

Okay. And then just 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'll 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?

Yes. Look, I just think it's too early, Steve, to get into any specifics on it if there would be an adjustment, if any, to the dividend. To your point, we'll take a look at all of this at the time we announced the transaction and then the Board will assess the dividend at that time. But as a result of the announcement today, we're not adjusting the dividend at all. And that will continue to remain an important part of our overall TSR, which has always been the case for PPL and will continue. I just think it's too early to get into really any specific scenarios around the dividend.

The next question will come from Durgesh Chopra with Evercore ISI.

Maybe just, Joe, can you go back to the tax basis issue? Sort of if I remember this sort of being a hurdle to get the deal done. So what exactly -- so with TCJA, you're actually in a much favorable position? And then I heard you say NOLs, perhaps, were bigger than they were when you evaluated this perhaps maybe 12, 16, 24 months ago. But just can you elaborate any more color on what changed with TCJA?

Yes. Sure. So first of all, the NOL balance really hasn't changed. It's just I think we would, in all likelihood, be utilizing that NOL balance in the transaction, but we'll have to see ultimately what the transaction is. As far as the TCJA changes go, as you could -- I'm sure you can appreciate, as with most things tax-related, it's complicated. It's also very technical, and the reality is it's transaction specific. So given the flexibility that we're creating and talking about today around the potential transactions, we're not going to get into specifics on any of the details at this time. I would just say, though, that these are very low-risk strategies that we found, and so we feel comfortable with our ability to utilize them.

Understood. But...

Durgesh, this is Vince. I would just say that the tax component of this that Joe 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 and even in the U.K., we just think the after-tax proceeds that we would expect today are quite a bit higher than we would have 18 to 24 months ago when re-nationalization risk was in the middle of all the discussion, and Corbyn was in the middle of it all. So I think that while the tax component is certainly helping, it's the total net after-tax proceeds that we just think is much stronger now than it was.

Understood. But just to be clear, you still expect a tax leakage. You just think from a tax, specifically, tax perspective, you're better now versus, let's say, 24 months ago. And you also think the U.K. assets would fetch you better value here than perhaps 24 -- 16, 24 months ago?

Correct on both points.

Okay. And then maybe just one last follow-up, Vince. The timing first half of '21, is there -- did you just officially kickstart the process? Or have you been actively talking to parties? It just seems like you're pretty confident in that the first half of '21 schedule. Am I reading too much into it?

Well, the regulatory process in the U.K. is much shorter than in the U.S. So getting from announcement to a deal to close could take as little as 30 to 68, as opposed to what we're accustomed to here in the U.S. So all we're doing with that kind of first half of '21 commentary is providing enough time. So we are launching the process today. So we need to do all of the activities that go into actually launching the process and then likely a couple of rounds of bids and then a couple of months of allotment for approval time should -- we should be able to get that done through -- between now and the middle of next year.

Okay. That's great, Vince. And congratulations on your first earnings call as CEO, and good luck.

Thanks so much.

And the next question will come from Paul Patterson with Glenrock.

Just -- so just to sort of clarify the tax situation. For the most part, it sounds like you plan on offsetting through a variety of work in terms of structuring the transaction and NOLs that there really won't be any significant tax leakage. Is that right?

Joe you want to take that?

Yes. Certainly, through the transaction structuring on the NOL, we think we can offset a significant portion, ultimately, what the resulting tax will be. I think we'll just have to wait and see what the transaction is and what -- given that we're open to a variety of transaction structures that we'll obviously, where we end up at the end of the day.

Okay. And then just you're launching the formal process. Was there an informal process? Have you put any feelers out? Or anything else that sort of -- or is this pretty much just you're really just starting the process in general here, there's no -- you haven't had any preliminary discussions or anything?

No, just between us and our advisers, no outreach to do.

Okay. And then finally, the credit rating for the new entity, assuming the transaction happens and everything and the -- how should we think about how you guys want to be -- if there's any particularly change in credit rating metric or credit rating itself, goals or anything, has that changed?

Yes, go ahead, Joe.

Yes. 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 to total debt percentage as part of that. So maintaining our current credit ratings and improving the credit metrics is one of the objectives.

The next question will come from Michael Lapides with Goldman Sachs.

Just curious, can you remind us what's the size of the NOL currently? I'm just trying to think about the ramifications of an all-cash deal.

Sure. It's -- at the end of 2019, it was about USD 1.5 billion.

And would you think about it, are there just the time line of that, how do you think about from the time you make a deal announcement to the time of an actual close? Like what have you seen in the U.K. in terms of just process-wise from announced deals or closing one?

Yes. So when we announced the acquisition of Midlands, Michael, it was 38.

Okay. So you expect a relatively quick close for a buyer. So a potential buyer doesn't have to go 6 to 9 months or so, like you often see in the U.S., if not longer, before being able to close and therefore, have a role in the RIIO process?

Yes. I think that depends on who the buyer is. But either way, I don't think you're looking at the length of the process that we're seeing in the U.S.

Got it. Okay. And then last on Kentucky. I've asked on this a bit in prior earnings calls. How do you look at your Kentucky fleet right now? How much of the coal-generating capacity there? What percent roughly? Do you think comprised -- is made up of smaller, less kind of uneconomic units that lack economy really lack economy of scale of the coal fleet.

Yes. So I mean, Paul, I think you're on -- I don't know if you have specifics on some of the smaller parts of the fleet. I mean, I think, for the most part, with the 1,200 megawatts that we've retired, Michael, those are pretty well out of the fleet. But Paul, any thoughts on that?

Right. I would say, Michael, that the fleet that we have today is larger, more economic, by and large, as Vince just indicated. Over the last few years, we have retired smaller, older units. And so what we have today on the margin is very efficient and effective, all in compliance, but obviously, there is a progression of smaller units existing to larger. And as some of the regulations and economic may change, we'll continue to look at retiring those at the appropriate time and with the appropriate approvals. 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 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 wind.

Yes. I mean economics are going to drive that. We -- again, we've done 1,200 megawatts over the last 5 years, and have had no issues dealing with the commission and the state on that, but economics is what drove that. So as we think about -- and this is kind of a follow-on to Paul's comment as we look at renewables or if there are -- if Biden wins the election and the Senate flips to Democrats. Biden's plan is calling for net carbon neutral from the power sector by 2035. So that would likely require a more aggressive coal retirement strategy than what we're currently working under current regulation and legislation. So I think a lot of things could factor into that, Michael. But for the most part, the commission has been, again, if there's a regulatory requirement to do it, then we have to do it. Absent that, it's economics. So Paul, I don't know if you have any additional thoughts on that.

No. I would just reiterate what you're saying. We've had a good process on everything that we've done heretofore. And so I would expect that to continue as the conditions change for whatever reasons.

The next question will come from Paul Fremont with Mizuho.

And congratulations on the announcement. I was hoping you could maybe a little bit more specific on the FFO to debt. We have you, I think, 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 by how much?

Yes, Joe, let's take that.

Yes, Paul, I think it's too early to say. I think the point that we want to make today is that we would target FFO to debt metric in the mid-teens and we look to maintain our current credit ratings. Our ratings have been and will continue to be important to us, and we've taken the necessary steps to maintain those ratings and this transaction would be no different. So I think our current credit ratings, we're happy with where they are, and we'd be willing to maintain them, and that may include improving our current metric of it to do so. But we'll have to see what the transaction looks like at the end before we can get into more details.

And is that because one of the rating agencies, at least, looks at the U.K. business as having lower business risk than the U.S. utilities?

Both of the agencies view the U.K. favorably in our credit rating. So selling the U.K., how they view the stand-alone business, I think we have to have discussions with them about that. And then, of course, what assets could potentially 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 the specific credit metric other than to say that we want to maintain our current credit ratings.

And then can you provide what would you consider to be sort of comps? You mentioned sort of generically what some of the recent comps look like, but can you -- what transactions would you consider to be similar to yours?

Well, like I said, you have the gas distribution networks that National Grid sold a couple of years ago, E&W sold within the last couple of years. There's been some other electric distribution networks that have sold in other parts of Europe, actually more recently than that. So those are kind of the assets that we're talking about and the businesses, the comps that we're talking about.

And then last question for me. I guess what would you consider to be an appropriate payout on sort of a U.S.-regulated electric?

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, some are 65% to 70%, some are 60% to 65%, but kind of in that -- in the 60s range is kind of the right average for our sector.

The next question will come from Ryan Levine with Citi.

To the extent you're looking to return capital to shareholders as a result of this transaction. Can you comment on preliminary thoughts around efficient ways to return capital to shareholders, buybacks or special dividends given where the assets are held?

Yes. Joe, do you want to take that?

Yes, sure. Ryan, I think, again, it's too early to say how that would play out, although I think today, I'd say the preference would be buybacks rather than a special dividend, but we'll have to, again, see what it looks like when we get there.

And then what is the regulatory process differences that there would be if the U.K. business was transacted in pieces versus a whole? And is there anything that would prevent PPL from keeping a smaller part of the U.K. business longer term?

I mean I would just say that our intention in launching the process is a full exit of the business, so I don't know that there's anything that would preclude us from owning a part of WPD going forward other than our intention. We think the -- again, we think 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 in demand. And we do recognize this will be a large equity check, given the size of the WPD business, but that's where potentially, including U.S. asset as consideration improves the probability of getting it done because it reduces the amount of cash that's required. So again, we think just maximum flexibility in kicking this process off just improves the probability of getting to the end result that we're shooting for, which is a full exit of the business.

Appreciate that. And just one to follow up. To the extent that your intent to sell the entire business, are there any tax advantages if you were to sell a part as opposed to the whole, given the NOLs and your legacy assets?

Not really. I mean there could be tax advantage or cash tax advantage if you don't sell the whole thing. But from a taxable perspective, it's whether you sell 1 or 4, just pro rata.

This will conclude today's question-and-answer session. I would now like to turn it over to management for any closing remarks.

Great. Thanks. Just want to close out the call, thanking everybody for your time and joining us today. I just want to reiterate that today's announcement was 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 in the near-term for our shareowners, but sets the company up for the long term as well with stronger balance sheet, better earnings growth and more opportunity to deploy capital, whether that's in the clean energy sector or within our utility. So really looking forward to getting -- going on this process and providing more details if and when appropriate. I'm just really excited about the future of the company.

So appreciate everybody's time. And thank you, operator. We can close out the call.

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