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Text: During the call, we will also refer to earnings from ongoing operations, a non-GAAP measure.
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 JP Morgan to lead that process for us.
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.
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.
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 return 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 two decades and we are confident they will continue to deliver in the future.
And while we believe the public market continues to discount the value of WPD 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.
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.
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 department.
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 operation.
While the most recent tropical storm Isaias, impacted about 70,000 of our customers in Pennsylvania, we were able to restore power to most of them within 24 hours and all of them within 48 hours, reinforcing again, little to no impact from COVID-19 on our ability to serve our customers even in the worst of conditions.
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 three 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 toward 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 toward 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 three business units, it is not as bad as we were originally expecting it to be.
Regarding 2021, we are withdrawing our prior 2021 forecast as a result of today's announcement regarding the potential sale of the 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 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 two-thirds of the impact or $0.04 per share is recoverable through the U.K. decoupling mechanism on a two-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 one 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.
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.
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.
I'm sure our decision to launch a sale process for WPD doesn't come 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.

user
reaffirms fy 2020 earnings per share view $2.40 to $2.60 from continuing operations.
reaffirms 2020 earnings from ongoing operations forecast range of $2.40 to $2.60 per share.
withdraws guidance for 2021.
qtrly gaap earnings per share $0.45.
qtrly non-gaap earnings per share $0.55.
expects full-year impacts of pandemic to be manageable.

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