PPL Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. The combined filing also reports separately for PPL Electric Utilities, Louisville Gas and Electric (LG&E), and Kentucky Utilities (KU). PPL is a regulated utility holding company serving customers in Pennsylvania, Kentucky, Rhode Island, and Virginia. Year-over-year results include Rhode Island Energy (RIE), acquired May 25, 2022, so comparisons are affected by the acquisition.
Key financial results
| PPL consolidated, millions except per-share data | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $2,415 | $1,782 | +$633 |
| Operating income | $498 | $454 | +$44 |
| Net income | $285 | $273 | +$12 |
| GAAP diluted EPS | $0.39 | $0.37 | +$0.02 |
| Management’s non-GAAP earnings from ongoing operations | $352 | $305 | +$47 |
| Cash from operating activities | $430 | $502 | −$72 |
| Capital expenditures for property, plant and equipment | $499 | $427 | +$72 |
Revenue growth primarily reflected $565 million from RIE, higher PPL Electric provider-of-last-resort (PLR) revenue associated with higher supply prices, and distribution-rate and transmission revenue increases. Higher energy purchases, including RIE’s costs and higher PLR prices, offset much of the revenue growth. PPL reported $30 million of other income versus zero in the prior-year quarter, while interest expense rose $57 million to $164 million, principally reflecting increased borrowings, higher rates, and RIE.
Operating cash flow declined despite higher net income, primarily due to working-capital changes and other operating outflows. Cash and cash equivalents were $460 million at March 31, 2023, versus $356 million at year-end 2022. Long-term debt carrying amount, including current maturities, was $14.585 billion, versus $13.243 billion at year-end; short-term debt was zero, down from $985 million. PPL had $2.9 billion of external credit-facility capacity, with $2.899 billion unused. Current assets were $3.038 billion and current liabilities $2.480 billion.
Operating segments and material comparisons
- Kentucky Regulated: Net income was $166 million, down $23 million; ongoing earnings were $167 million, down $26 million. Adjusted gross margin declined $26 million to $633 million, mainly due to weather-related lower sales volumes.
- Pennsylvania Regulated: Net income was $138 million, down $5 million; ongoing earnings were $137 million, down $6 million. Adjusted gross margin increased $4 million to $452 million; distribution weakness from weather was partly offset by transmission results.
- Rhode Island Regulated: Net income was $54 million and ongoing earnings were $71 million. The segment contributed $565 million of revenue; there is no comparable Q1 2022 segment result because RIE was acquired in May 2022. Acquisition integration costs were among the special items excluded from ongoing earnings.
Management’s non-GAAP ongoing earnings exceed GAAP net income by $67 million in Q1 2023, largely reflecting excluded acquisition-integration costs, including costs at RIE and corporate level, as well as other items. The filing also records a $4 million after-tax loss from final Safari Holdings sale adjustments. Segment reporting changed effective January 1, 2023: LKE financing activity moved from Kentucky Regulated to Corporate and Other, and prior periods were adjusted.
Debt, investment, outlook, and risks
- Financing: PPL Capital Funding issued $1.0 billion of 2.875% exchangeable senior notes due 2028. PPL Electric issued $1.35 billion of first mortgage bonds due 2033 and 2053; LG&E and KU each issued $400 million of 5.45% bonds due 2033. Proceeds were used partly to repay debt. PPL declared a quarterly dividend of $0.24 per share, equivalent to $0.96 annually; future dividends remain subject to board discretion and financial conditions.
- Generation plans: LG&E and KU have a pending Kentucky Public Service Commission application for two 621-MW natural-gas combined-cycle units, solar facilities, a 125-MW battery project, demand-side programs, and related power-purchase arrangements. The commission indicated an intended decision by November 6, 2023. Proposed coal-unit retirements include Mill Creek 1 in 2024, Mill Creek 2 in 2027, and E.W. Brown 3 and Ghent 2 in 2028. Kentucky legislation enacted in March 2023 requires commission approval before fossil-fuel unit retirements; the companies said they did not then expect a material effect on plans or financial condition.
- Storm and regulatory matters: March windstorms caused $72 million of costs at LG&E and KU through quarter-end. The regulator approved regulatory-asset accounting for extraordinary O&M costs, but recovery is to be determined in future rate cases. Separately, the Pennsylvania regulator is investigating billing and customer-service issues, including estimated bills issued during a technical problem; PPL Electric cannot predict the outcome.
- Litigation and environmental exposure: Talen-related litigation seeks recovery of approximately $900 million of proceeds from a 2014 asset sale. PPL says it has meritorious defenses but cannot estimate possible losses; they could be material. Environmental rules concerning coal ash, wastewater, and air emissions may require additional controls, operational changes, or costs; ultimate costs and rate recovery are uncertain. PPL recorded a $100 million liability for RIE environmental remediation, expected to be incurred over approximately 30 years and generally subject to rate recovery.
- Management commentary and uncertainties: PPL’s strategy emphasizes reliability, affordability, regulated investment recovery, and a clean-energy transition, with a stated goal of net-zero carbon emissions by 2050. Key risks include regulatory outcomes and cost recovery, weather and demand, interest rates, inflation and supply-chain disruption, environmental requirements, cybersecurity, and access to capital. No specific consolidated earnings guidance for 2023 is provided in the supplied filing text. Management stated credit agencies took no rating actions in Q1 2023.
Investor verification priorities
- Assess how much of revenue and earnings growth reflects the RIE acquisition versus ongoing performance, and review the $67 million reconciliation from GAAP net income to non-GAAP ongoing earnings.
- Verify debt maturity, interest-cost, and refinancing implications of the new notes and bonds, alongside planned capital spending and available credit capacity.
- Track the Kentucky generation and retirement proceedings, including the effect of the new retirement-approval law and expected customer cost recovery.
- Monitor whether storm restoration costs are ultimately recoverable and the outcomes of the Pennsylvania billing investigation and Talen litigation.
- Review environmental compliance estimates and regulatory recovery assumptions, as well as RIE’s rate plans and proposed infrastructure investment approvals.