PPL Corporation (PPL) — Q3 2019 Form 10-Q
Business context and period. This unaudited combined quarterly filing covers the three and nine months ended September 30, 2019, with comparisons to 2018. PPL is a regulated utility holding company with operations in the U.K., Pennsylvania and Kentucky; the filing also presents separate financial statements for PPL Electric, LKE, LG&E and KU. Amounts below are U.S. dollars unless noted.
Key financial metrics
| PPL consolidated | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $1.933 billion | $1.872 billion | $5.815 billion | $5.846 billion |
| Operating income | $726 million | $686 million | $2.147 billion | $2.195 billion |
| Net income | $475 million | $445 million | $1.382 billion | $1.412 billion |
| Diluted EPS | $0.65 | $0.62 | $1.89 | $2.01 |
| Operating cash flow | — | — | $1.888 billion | $2.210 billion |
| Capital expenditures | — | — | $2.197 billion | $2.344 billion |
Operating margin, calculated as operating income divided by revenue, was approximately 37.6% in Q3 2019 versus 36.6% in Q3 2018, and 36.9% for the first nine months of 2019 versus 37.5% in 2018. Nine-month operating cash flow less capital expenditures was negative $309 million. PPL paid $893 million in common dividends during the nine months.
At September 30, PPL reported $670 million of cash and $21.547 billion of long-term debt, plus $1.387 billion of short-term debt; total reported debt was approximately $22.934 billion. Cash was $621 million and total debt approximately $22.029 billion at December 31, 2018. PPL reported $2.002 billion of unused U.S. committed credit capacity and approximately $1 billion of unused U.K. capacity, in addition to cash.
Material changes and operating trends
- Q3 revenue and net income increased year over year, while nine-month revenue and net income declined. Q3 earnings benefited from stronger Kentucky and Pennsylvania results; nine-month results were weighed by lower U.K. segment earnings reported in U.S. dollars.
- Nine-month segment net income: U.K. Regulated $784 million, down $52 million; Kentucky Regulated $364 million, up $32 million; Pennsylvania Regulated $333 million, down $2 million. Management’s non-GAAP Earnings from Ongoing Operations were $445 million for Q3 versus $422 million and $1.375 billion for nine months versus $1.323 billion.
- Kentucky results benefited from higher rates effective May 1, 2019, including termination of the TCJA bill-credit mechanism. The KPSC orders provide an estimated $187 million annual revenue increase across KU and LG&E. This was partly offset by weather-related lower year-to-date volumes and termination of eight municipal supply contracts.
- Pennsylvania revenue increased, supported by distribution and transmission investment recovery. Nine-month PPL Electric net income was $333 million versus $334 million; higher depreciation and interest expense offset investment returns.
- U.K. Adjusted Gross Margins, a non-GAAP measure, were down $86 million year to date as reported, including a $93 million adverse foreign-exchange effect; excluding currency, they increased $7 million. PPL recorded a $369 million nine-month foreign-currency translation loss in other comprehensive income.
Outlook, risks and unusual items
- The filing provides no clear numerical full-year 2019 earnings or revenue guidance. Management describes a strategy focused on regulated utility investment, reliability, cost recovery and maintaining investment-grade credit ratings.
- PPL’s U.K. earnings remain exposed to Brexit-related sterling movements. As of September 30, 2019, budgeted U.K. earnings exposure was 100% hedged for the remainder of 2019 at an average $1.45/GBP and 70% hedged for 2020 at $1.46/GBP.
- KU requested a Virginia base-rate increase of approximately $13 million, or 18.2%, with proposed rates effective April 2020, subject to regulatory approval. PPL Electric also petitioned to return $43 million of TCJA tax savings to customers over 2020; PUC approval is pending.
- Environmental compliance, particularly coal-combustion-residual (CCR) impoundment closure and wastewater requirements, could require significant spending. The companies expect certain costs to be recoverable through rates, but estimates and timing remain uncertain.
- PPL faces Talen-related litigation alleging an improper 2014 distribution of $733 million. The claims seek unspecified damages, potentially material; PPL says it has meritorious defenses and cannot estimate possible losses. A Delaware court sustained most of PPL’s claims in its separate action on October 23, 2019.
- Other uncertainties include the E.W. Brown environmental suit and potential remediation, pending regulatory proceedings, weather and demand, interest and currency movements, pension funding, and a possible significant limitation on tax interest deductions if proposed IRS rules are finalized in their current form.
- A Kentucky recycling tax credit generated a deferred tax benefit in 2019; LKE filed its application and expected a state ruling in Q4 2019. The amount and ultimate realization are subject to tax-authority review and taxable-income limitations.
Important facts for investors to verify
- Reconcile GAAP net income and EPS with management’s non-GAAP Earnings from Ongoing Operations, especially the treatment of foreign-currency hedge gains and losses.
- Track PPL’s debt growth, cash generation relative to capital spending and dividends, and availability of committed credit facilities.
- Confirm outcomes of the pending PUC rate/refund matters, KU’s Virginia rate request and the FERC transition-mechanism rehearing.
- Monitor Brexit and sterling impacts against the disclosed hedge coverage, including exposures beyond 2020.
- Assess potential CCR, wastewater and litigation costs, rate-recovery prospects, and any resulting changes to asset-retirement obligations.