Good day, and welcome to the PPL Corporation Third Quarter Earnings Conference Call. [Operator instructions] Please note, today's 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 third quarter 2020 financial results. We have provided slides for this presentation and our earnings release issued this morning on the investors section of our website. Our presentation and earnings release, which we will discuss during today's call, contain forward-looking statements about future operating results or other future events. Actual results may differ materially from these forward-looking statements. Please refer to the appendix of this presentation and PPL's SEC filings for a discussion of factors that could cause actual results to differ from the forward-looking statements. We will also refer to non-GAAP measures including earnings from ongoing operations and adjusted gross margins on this call. For reconciliation to the comparable GAAP measures, you should refer to the appendix of this presentation. I'll now turn the call over to Vince Sorgi, PPL's President and CEO.

Thank you, Andy, and good morning, everyone. We appreciate you joining us for our third quarter earnings call. 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, the Head of our U.K. Electric Distribution Business. Moving to Slide 3. I'll begin this morning with brief highlights on third quarter earnings results and our continued strong performance during the COVID-19 pandemic. I'll share a few updates on regulatory and ESG related matters. And Joe will then provide a more detailed overview of the third-quarter financial results. And as always, we'll leave ample time for your questions. Turning to Slide 4. Today, we announced third quarter reported earnings of $0.37 per share. Adjusting for special items, primarily a deferred tax adjustment in the U.K. based on the 2020 Finance Act and unrealized losses on foreign currency economic hedges. Third quarter earnings from ongoing operations were $0.58 per share compared with $0.61 per share a year ago. At a high level, results for the quarter were in line with our expectations. I'll note that the lower earnings compared to last year include $0.02 of lower volumes in the U.K., which will recover in future periods, and $0.01 due to the timing of our estimated federal income tax computation, which will reverse in Q4. Joe will cover the financial results in more detail in his section. Regarding a COVID update, throughout the quarter we continued to deliver strong operational performance, providing outstanding customer service and reliability. At the same time, we've remained focused on innovation and building for the future. In September, we launched the new digitalization strategy in the U.K. The strategy focuses on transforming the way we develop and operate…

Thank you, Vince, and good morning, everyone. I'll cover our third quarter segment results on Slide 6. First, I would like to highlight that the estimated impact of COVID on our third quarter results was about $0.04 per share, which was primarily due to lower sales volumes in the U.K. and lower demand revenue in Kentucky. This is less than the $0.06 impact we experienced during the second quarter, primarily due to the improving electricity demand that Vince mentioned earlier in his remarks. As a reminder, the majority of this impact is recoverable via the U.K. decoupling mechanism, which adjusts revenues on a two-year lag. Turning to the quarterly walk, starting with the Q3 2019 ongoing results on the left, we first separate the impact of weather and dilution for comparability purposes of the underlying businesses. During the third quarter, we experienced a $0.02 unfavorable variance due to weather compared to the third quarter of 2019, primarily in Kentucky. We experienced substantially higher degree days in Kentucky during the third quarter of 2019 that led to a favorable variance last year. Weather in the third quarter of 2020 was about $0.01 favorable overall compared to plan, primarily due to stronger load in Pennsylvania versus normal due to the warmer conditions in July. In terms of dilution, during the third quarter, we continued to recognize the impact of the November 2019 draw on our equity forward contracts, which resulted in dilution of about $0.03 per share for the quarter. Moving to the segment drivers. Excluding these items, our U.K.-regulated segment earnings increased by $0.01 per share compared to a year ago. Factors driving the U.K. earnings results include higher foreign currency exchange rates, compared to the prior period, with Q3 2020 average rates of $1.54 per pound, compared to $1.26 per…

Thanks, Joe. In closing, I remain very proud of how our teams across PPL have risen to the challenge of COVID-19. We continue to deliver electricity and gas safely and reliably to our customers. At the same time, we remain as focused as ever on innovation and continuous improvement as we position the company for future success. With that, operator, let's open the call for Q&A.

Thank you. [Operator instructions] Today's first question comes from Ryan Greenwald at BofA. Please go ahead.

Good morning. I appreciate the time.

Good morning.

Can you guys just talk about your confidence and conviction levels and how that kind of evolved over the last few months around being able to reach constructive deal terms between the CMA findings and what you're seeing internally? And how are you thinking about additional upcoming Ofgem data points in terms of ability to really further improve sentiment and drive renewed interest?

Sure. So as you can appreciate, we are in the middle of a competitive process. So I don't think it's appropriate to get into too much detail in terms of the process that we are currently – is currently under way. But to your point, I think the CMA decision for the water company, that provisional decision was certainly positive as we think about overall returns in the U.K.-regulated utility sector. I think it should play well into what we would expect for gas and transmission coming here in about a month or so, that should be coming out early December. We also have the government's white paper on decarbonization. That should be coming out. They said autumn, so that could be this month or early December as well. And then, the CMA final decision. So I think to your point, things seem to be progressing in a positive light in the U.K. regulatory construct. And I would expect that to translate positively in our process, but I don't want to get into a lot of detail in terms of where we are with potential bidders.

Got it. Fair enough. And how are you guys thinking about your hedging strategy ahead of any transaction, corresponding cash proceeds, just given the latest backdrop? I'm curious if you can kind of frame your thoughts around any internal forecast you guys have on the currency over the next several months?

Sure. Joe, you want to talk about that a little bit?

Yeah. Well, as far as hedging the proceeds of the transaction that is something that we're considering at this time. Nothing really to update at this point, but if and when appropriate, we'll provide an update then. I think how the pound moves here could depend on – would depend, we think, on our U.S. collection results and which way that goes. So certainly watching the pound closely and giving consideration to hedging.

Got it. Appreciate the time.

Thanks, Ryan.

And our next question today comes from Durgesh Chopra with Evercore ISI. Please go ahead.

Hi, team. Good morning. Who do you think is going to win the election? I'm just kidding. Maybe just can you talk about – you mentioned asset swaps or asset exchange events in the past and Joe – so maybe just talk about where that stands? And then, in light of that, I do have a follow-up question, but maybe just address that and then I have a follow-up as it relates to sort of possible future M&A.

Yes, Durgesh, I don't think it's appropriate to get into. We're kind of getting into the process now with potential buyers. So just not appropriate to get into any kind of detail around the process.

Okay. That's fair, Vince. Totally understandable. And then, maybe can you talk about just maybe there's – the reason why I ask is there's, obviously, Center Point earlier today talked about putting one to two gas LDCs in their infrastructure – in their asset base on market next year. NiSource is another – one of your peers, has made that commentary. Maybe can you talk about the M&A growth opportunities in the U.S. outside of this whole deal with the U.K.? Just how do you think about potential consolidation opportunities, your views on electric versus gas and geographies that you might be interested in, anything that you can sort of speak to that?

Sure. So overall, I would say we are interested in acquiring regulated utilities. We do have a preference toward electric, but electric and gas utilities are also attractive to us. In terms of geography, I'm not sure that that contiguous service territories or anything like that is necessarily something that we put a high emphasis on. So at this point, I would say, we are pretty open to opportunities that may come-up in the market. Again, where – our base case is fix the balance sheet, not really fix the balance sheet, but improve the balance sheet from where we are to kind of the mid-teens and then share buybacks, right? It would be the kind of the base case as that we would look at M&A as potential to improving value above that. Renewables is also another area that I think we're seriously considering. We did acquire Safari Energy back in 2018, hasn't been a significant component of the PPL earnings profile to date. However, when we come out of the WPD sale we could possibly be a cash taxpayer at that time, which, obviously, would put us in a good position around the renewables business. So I think we have opportunity to organically grow that business given kind of how we've positioned the DER business that we acquired a couple of years ago, but also there could be possibility or potential to do some M&A there as well.

Great. Super helpful, Vince. So I'll let others to ask. Thank you.

Thanks, Durgesh.

[Operator instructions] Today's next question comes from Paul Patterson of Glenrock Associates. Please go ahead.

Hi, good morning.

Good morning, Paul.

Good morning.

I appreciate you guys are in the middle of the process. And obviously, if – you can share only what you can share. But can you give us any flavor, I mean, as to sort of the level of interest? I mean, in other words, have there been a lot of people who have been showing interest in the property? And are you – I mean, you mentioned these regulatory events in the U.K. Are these things that people are looking to see, I guess, before they do – before they show interest? Or can you give us any flavor as to – or at least how optimistic you feel about what you've encountered so far?

Yes. I would – so Paul, I would say that the process and the level of interest is progressing as we would have expected. I did talk about in August when we made the announcement that I did expect there to be quite a bit of interest in WPD, given the quality of the assets, the quality of the management team. And again, we think electric distribution is the premier sector in the utility industry in the U.K. given its role in where it's going to play in the decarbonization efforts to get to net zero in the U.K. So at this point, I would say, nothing that I'm seeing would kind of alter that view. And things are progressing as we had expected.

Awesome. Thanks so much.

And our next question today comes from Ryan Levine of Citi. Please go ahead.

Hi, good morning. So as the sale process continues to move forward, is there any more color you're able to share around the tax attributes of the portfolio for sale?

Yes. No update at this point. But Joe, I don't know if you want to mention anything on – thoughts on tax strategy.

No. Nothing. Nothing to update at this time or any additional details at this time, Ryan. We'll give an update on that when appropriate, but I don't think it's appropriate to do so now given where we are in the process.

Okay. And then, to follow-up on the comments about being open to gas utility deals, curious about your long-term ESG strategy and your views on decarbonization?

Sure. So our stated goals are try to reduce our carbon emissions by 80% by 2050, 70% – at least 70% by 2040. As of 12/31/2019, so as of the end of last year, we've already delivered about a 56% reduction, compared to 2010, and that compares to about a 45% reduction for the sector. So we're feeling very, very good about our transition strategy and the glide path that we're on to achieve that at least 70% by 2040 and at least 80% by 2050. Our reduction targets are, we think they're comparable to our industry peers, even some of those peers that have indicated a net-zero target by 2050, they've indicated that they see a pretty clear path to 80% reduction, but would require incremental technological improvements to get the remaining 20%. And that's very consistent with how we are seeing things as well. It's one of the reasons why we joined the EPRI, GTI, LCRI R&D project over the next five years to really try to identify that technology to actually get to net zero by 2050. Again, as we're thinking about the declining costs of renewable energy, we think there'll be continued opportunity to accelerate decarbonization, even in Kentucky, even without retiring coal plants to the extent that the LCOE of solar continues to come down, it could end up being cheaper than the variable cost of generating in Kentucky. But again, a long-term carbon reduction goals for us is around the retirement of the coal fleet. But we will continue to do that in a very balanced way. We're focused on working with the commission making sure that the power that we continue to generate in the state is affordable and reliable for our customers that is critical. Relatively cheap electric in the State of…

But just a follow-up, I mean, how does adding or potentially adding a gas utility to your portfolio fit within that framework?

Well, I don't want to specifically indicate whether or not we would be interested in just a gas LDC on its own. My preference would be in electric and gas utility. Again, I think over time, gas will be deemphasized as we think about a longer-term carbon transition strategy for the U.S. And so that's why I like electric and gas a little better because you can build in that direct edge for electrification there. But I wouldn't say today that we wouldn't take a look at that.

Appreciate it. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for the final remarks.

Great. I just want to thank everybody for joining us on the call today, and we'll see you all at EEI virtually next week. Thanks, everyone.

And thank you. This concludes today's conference call. Well, thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.