PPL Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Figures are in millions of dollars unless noted. This combined filing also reports PPL Electric, LG&E and KU; PPL’s consolidated results include Rhode Island Energy (RIE), acquired in May 2022.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $2,043 | $2,134 | $6,281 | $5,612 |
| Operating income | $437 | $341 | $1,240 | $1,038 |
| Operating margin | 21.4% | 16.0% | 19.7% | 18.5% |
| Net income | $230 | $174 | $627 | $566 |
| Diluted EPS | $0.31 | $0.24 | $0.85 | $0.77 |
| Earnings from Ongoing Operations (non-GAAP) | $317 | $305 | $884 | $832 |
Q3 operating income and net income improved year over year despite lower revenue. The nine-month revenue increase primarily reflects a full nine months of RIE results in 2023 versus partial-period inclusion in 2022. Q3 revenue fell $91 million; nine-month revenue rose $669 million. Lower fuel costs supported results, while higher interest expense partly offset gains. Operating margin is calculated as operating income divided by operating revenue.
Cash flow, debt and liquidity
- Operating cash flow: $1,648 for the first nine months, versus $1,511 in 2022.
- Capital spending: $1,741 for property, plant and equipment; operating cash flow less this spending was approximately negative $93 million, before other investing activity.
- Debt and cash: At September 30, cash was $353; short-term debt was $287, current maturities of long-term debt were $91, and long-term debt was $14,484. The comparable balance-sheet debt components totaled $14,228 at year-end 2022, versus $14,862 at September 2023.
- Credit availability: The filing reports $2.9 billion of external committed credit-facility capacity, with $2.612 billion unused after letters of credit and commercial paper. Commercial paper outstanding totaled $287 million.
- Financing: PPL issued $1.0 billion of 2.875% exchangeable senior notes due 2028. PPL Electric, LG&E and KU also issued new long-term debt during the period, generally at rates above 5%, and used proceeds in part to repay maturing or term debt.
Business developments and outlook
- PPL reported three regulated geographic segments: Kentucky, Pennsylvania and Rhode Island. Nine-month segment net income was $432 million, $384 million and $70 million, respectively; Corporate and Other recorded a $259 million loss.
- Management’s stated strategy emphasizes reliable and affordable service, clean-energy transition, financial strength and timely recovery of regulated capital investment. The filing does not provide a clear numerical full-year earnings or EPS guidance figure.
- LG&E and KU sought regulatory approval for two 621 MW natural-gas combined-cycle facilities, two 120 MWac solar facilities, a 125 MW battery project, solar power-purchase agreements and DSM programs. The proceedings also cover proposed coal-unit retirements. Approval and cost recovery remained uncertain in this filing.
- RIE received approval to deploy advanced electric meters. It may seek recovery through the infrastructure, safety and reliability process subject to an approximately $153 million multi-year recovery cap and other conditions; the utility must continue spending to deliver specified functionality.
- The company targets net-zero carbon emissions by 2050. Management says its proposed Kentucky generation plan could support interim emissions-reduction targets, subject to regulatory decisions and execution.
Material risks, contingencies and unusual items
- RIE acquisition/integration: RIE incurred $193 million of transition costs for the first nine months, which PPL committed not to seek to recover in rates. TSA costs were $179 million. Acquisition-related items are excluded from management’s non-GAAP ongoing-earnings measure.
- Talen litigation: A bankruptcy adversary proceeding seeks recovery of approximately $900 million tied to a 2014 asset-sale proceeds distribution. PPL says it has meritorious defenses but cannot estimate possible losses; they could be material. Trial was scheduled for February 2024.
- Regulatory matters: FERC ordered LG&E and KU to refund certain transmission credits; the companies recorded regulatory liabilities of $3 million and $9 million, respectively, and were challenging the order. PPL Electric was also subject to a Pennsylvania investigation into estimated billing, customer-service and website issues and recorded related expenses.
- Weather and operating exposure: Kentucky’s March 2023 windstorm caused $75 million of costs through September 30. The KPSC approved regulatory-asset accounting for the extraordinary O&M portion, but recovery was to be determined in future rate cases.
- Environmental and legal exposure: Proposed or evolving rules on greenhouse gases, wastewater and coal ash could require added controls, operating changes or accelerated retirements; costs and rate recovery are uncertain. RIE’s environmental remediation liability was $100 million, expected to be incurred over approximately 30 years and generally subject to rate recovery.
- Other risks identified include weather-driven demand, interest rates and financing costs, inflation and supply-chain constraints, regulatory outcomes, cybersecurity, labor negotiations and litigation. Management stated that interim results may not indicate full-year performance.
Investor verification priorities
- Check subsequent regulatory decisions on the Kentucky generation and retirement applications, RIE meter investment recovery and the FERC refund dispute.
- Monitor the Talen litigation, including any updated estimate or disclosure of potential exposure.
- Assess whether RIE integration and transition spending declines, and how much remains unrecoverable in rates.
- Track debt issuance, interest costs, capital spending and operating cash flow against the company’s ongoing investment needs.
- Review the resolution and financial consequences, if any, of the Pennsylvania billing investigation and environmental rulemaking.