PPL Corporation — Q2 2020 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. The combined filing also reports for PPL Electric, LG&E and KU Energy, Louisville Gas and Electric, and Kentucky Utilities. Unless noted, amounts below are PPL consolidated and in millions of dollars.
Business context and financial performance
PPL is a utility holding company with regulated electricity businesses in the U.K., Pennsylvania, and Kentucky, and natural-gas operations in Kentucky. Its strategy emphasizes reliable service, regulated capital investment, timely cost recovery, and maintaining investment-grade credit ratings.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,739 | $1,803 | $3,793 | $3,882 |
| Operating income | $595 | $640 | $1,412 | $1,421 |
| Net income | $344 | $441 | $898 | $907 |
| Diluted EPS | $0.45 | $0.60 | $1.17 | $1.24 |
| Operating cash flow | Not separately stated for the quarter | $1,299 | $1,070 |
Q2 operating margin was approximately 34.2%, compared with 35.5% a year earlier; first-half margin was approximately 37.2%, versus 36.6%. These percentages are calculated from reported operating income and revenue.
Management’s non-GAAP Earnings from Ongoing Operations were $427 million in Q2 versus $422 million, and $941 million for the first half versus $930 million. This measure excludes special items and should not be treated as a substitute for GAAP net income.
Cash flow, debt, and liquidity
- First-half operating cash flow was $1.299 billion; capital expenditures were $1.576 billion, leaving cash flow after capital expenditures of approximately negative $277 million by simple subtraction.
- Cash and cash equivalents were $1.278 billion at June 30, 2020, up from $815 million at year-end 2019. Cash, cash equivalents, and restricted cash totaled $1.301 billion.
- Long-term debt, including amounts due within one year, was $23.156 billion; short-term debt was $828 million. The filing reports approximately $4.0 billion of combined unused credit-facility capacity for the registrants.
- PPL Capital Funding issued $1.0 billion of 4.125% senior notes due 2030. PPL declared a quarterly dividend of $0.415 per share, equivalent to $1.66 annualized; future dividends remain at the board’s discretion.
Material changes and management commentary
- Q2 revenue fell $64 million and net income fell $97 million year over year. The U.K. segment’s net income declined $105 million to $179 million, including a $65 million after-tax loss on foreign-currency economic hedges; PPL’s adjusted ongoing-earnings measure excludes that hedge item.
- For the first half, revenue declined $89 million while net income decreased $9 million. Pennsylvania regulated net income rose $21 million to $236 million, while Kentucky regulated net income declined $13 million to $201 million and U.K. regulated net income declined $29 million to $519 million.
- Management attributed revenue pressure to COVID-19-related lower demand, weather and lower commodity prices, partly offset by higher regulated rates and returns on transmission investment. First-half COVID-19 estimates included $61 million of revenue reductions and $20 million of incremental costs at PPL; management said the net impact had not materially affected results to date.
- PPL reported no goodwill impairment in the first half. Its Q1 U.K. regulated goodwill test found no impairment, including under the sensitivity cases described in the filing.
- On August 10, 2020, after quarter-end, PPL announced a formal process to sell its U.K. utility business. The company cautioned that there is no assurance a transaction will occur or what its terms, timing, or benefits might be.
- U.K. legislation maintaining the corporate tax rate at 19% is expected to increase deferred tax liabilities and produce a $100–$110 million deferred tax expense in Q3 2020.
Outlook, risks, and contingencies
- The filing does not provide a clear full-year earnings or EPS guidance figure. Management said COVID-19’s eventual effect on 2020 results cannot be quantified and depends on economic reopening, demand, customer payments, and other uncertain developments.
- Key risks include pandemic-related demand and collection impacts, GBP/USD movements, U.K. regulatory outcomes including RIIO-ED2, U.S. rate proceedings, financing and interest-rate conditions, and environmental compliance costs.
- A complaint before FERC challenges PPL Electric’s 11.18% transmission return on equity and proposes 8.5%. Revenue earned from May 21, 2020 until resolution may be subject to refund; a 50-basis-point ROE change would affect PPL Electric net income by about $12 million annually. The outcome and possible losses are not estimable in the filing.
- Environmental and legal contingencies include coal-ash and wastewater compliance, the E.W. Brown claims, and a newly filed federal complaint concerning sulfuric acid mist emissions at LG&E’s Mill Creek plant. Potential losses for several matters cannot be estimated.
- The U.K. rate change is a quantified subsequent-period item; the U.K. sale process, litigation outcomes, regulatory decisions, and environmental compliance costs remain uncertain.
Important facts for investors to verify
- Reconcile GAAP net income and EPS to management’s non-GAAP ongoing-earnings measure, particularly the foreign-exchange hedge effects and COVID-19 costs.
- Track the U.K. sale process, including any announced terms, expected proceeds, tax effects, and intended use of proceeds.
- Monitor the FERC ROE complaint, potential refunds, and related rate developments.
- Assess the impact of the expected $100–$110 million Q3 U.K. deferred-tax expense and subsequent tax guidance.
- Review COVID-19 effects on demand, receivables, cash collections, and the adequacy of credit-loss allowances, alongside capital spending, debt maturities, and available liquidity.