PPL Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period. PPL is a regulated utility holding company with electricity distribution operations in the U.K. and regulated utility businesses in Pennsylvania and Kentucky; LG&E also distributes natural gas. This combined, unaudited Form 10-Q covers the three months ended March 31, 2019, and separately reports PPL and certain utility subsidiaries. Unless otherwise noted, amounts below are in millions of dollars.
Key financial metrics
| PPL consolidated | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $2,079 | $2,126 |
| Operating income | $781 | $851 |
| Net income | $466 | $452 |
| Diluted EPS | $0.64 | $0.65 |
| Operating cash flow | $474 | $566 |
| Capital expenditures for PP&E | $729 | $750 |
- Operating margin was approximately 37.6%, versus 40.0% a year earlier; net margin was approximately 22.4%, versus 21.3%.
- Operating cash flow less PP&E expenditures was negative $255 million, compared with negative $184 million in Q1 2018.
- At March 31, cash and cash equivalents were $518 million; total current assets were $2.429 billion and current liabilities were $4.061 billion. Short-term debt was $1.428 billion, current maturities of long-term debt $202 million, and long-term debt $21.114 billion. These debt categories total approximately $22.744 billion.
- PPL paid $296 million in common dividends during the quarter; the declared quarterly dividend was $0.4125 per share, or $1.65 annualized.
Material changes versus the prior comparable period
- Revenue fell $47 million, while operating income declined $70 million. Net income increased $14 million, reflecting a $95 million improvement in other income (expense), chiefly smaller losses on foreign-currency economic hedges.
- Management’s non-GAAP Earnings from Ongoing Operations decreased to $508 million from $517 million. The measure excludes special items, including a $40 million after-tax unrealized foreign-currency hedge loss in 2019 and a $65 million loss in 2018. Do not equate this measure with GAAP net income.
- Segment net income: U.K. Regulated increased to $264 million from $197 million; Kentucky Regulated declined to $117 million from $133 million; Pennsylvania Regulated declined to $121 million from $148 million. The U.K. segment’s reported result includes foreign-currency hedge effects.
- Management attributed lower U.S. utility sales principally to weather. In Pennsylvania, tax-reform-related customer refunds reduced distribution revenue; transmission returns on additional capital investment partly offset this effect. In Kentucky, lower volumes also weighed on results.
- Weighted-average basic shares rose to 721.0 million from 694.5 million. Basic EPS remained $0.65, while diluted EPS was $0.64 versus $0.65.
Outlook, developments, risks and unusual items
- Rates: On April 30, 2019, after quarter-end, the Kentucky Public Service Commission approved rate-case orders effective May 1. Together with ending the TCJA bill-credit mechanism, the orders were expected to increase annual revenues by $114 million at KU and $73 million at LG&E. The orders use a 9.725% return on equity. These are annual revenue-requirement changes, not Q1 results.
- Financing after quarter-end: In April, LG&E issued $400 million of 4.25% first mortgage bonds due 2049; KU issued an additional $300 million of 4.375% bonds due 2045. Proceeds were used to repay commercial paper and, for LG&E, its term loan, with KU also citing general corporate purposes.
- Brexit and currency: PPL said its principal Brexit financial exposure was a decline in sterling, which would reduce the translated value of U.K. earnings. As of April 29, PPL reported hedging 100% of budgeted 2019 U.K. earnings at an average $1.41 per pound and 55% of 2020 earnings at $1.47. Outcomes and currency effects remained uncertain.
- Environmental obligations: CCR closure and wastewater compliance could require significant spending. Estimates, timing and potential additional ARO costs remain uncertain; the companies state that relevant costs are subject to rate recovery. KU retired two E.W. Brown coal units totaling 272 MW in February 2019 and said LG&E and KU retained sufficient generation capacity.
- Contingencies: PPL is defending Montana litigation brought by Talen-related plaintiffs concerning a 2014 distribution of $733 million in proceeds. PPL believes it has meritorious defenses but said it could not estimate possible losses, which could be material. Environmental claims involving Cane Run and E.W. Brown also remain unresolved; losses could not be estimated in the filing.
- Other uncertainty: Proposed federal tax rules on interest deductibility could significantly limit deductions if finalized in their proposed form. The filing identifies weather, regulatory outcomes, environmental requirements, financing markets, cyber incidents, currency and pension funding among broader risks. It provides no clear full-year earnings guidance in the supplied text.
Important facts for investors to verify
- Whether reported earnings trends persist after separating the U.K. currency-hedge effects; compare GAAP net income with management’s non-GAAP ongoing-earnings measure.
- How the May 2019 Kentucky rate changes affect realized revenues, customer bills and earnings, and whether approved amounts differ from the company’s original requests.
- Debt and liquidity after the April bond issuances and commercial-paper repayments, including refinancing needs and borrowing costs.
- Updated CCR, wastewater and other environmental compliance plans, cost estimates, regulatory recovery and any changes to ARO liabilities.
- Developments, potential exposure and any loss estimates in the Talen litigation and other disclosed legal or environmental proceedings.