PPL Corporation — Q3 2017 Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2017; filed November 1, 2017. PPL is a regulated utility holding company with electricity distribution operations in the U.K. and Pennsylvania, and regulated electric and gas operations in Kentucky. This combined filing also reports separately for PPL Electric, LG&E and KU. Amounts below are in millions of dollars unless stated otherwise; interim results are unaudited.
Financial performance
| PPL consolidated | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $1,845 | $1,889 | $5,521 | $5,685 |
| Operating income | $777 | $786 | $2,275 | $2,334 |
| Net income | $355 | $473 | $1,050 | $1,437 |
| Diluted EPS | $0.51 | $0.69 | $1.53 | $2.11 |
| Dividends declared per share | $0.395 | $0.38 | $1.185 | $1.14 |
- Management’s non-GAAP earnings from ongoing operations were $388 million in Q3 and $1,169 million for nine months, versus $427 million and $1,265 million, respectively, in 2016. These exclude special items, including unrealized foreign-currency hedge gains and losses; they are not a substitute for GAAP net income.
- Cash from operations was $1,754 million for nine months, down from $2,230 million. Capital expenditures for property, plant and equipment were $2,152 million, up from $2,073 million; investing cash outflow was $2,164 million. Financing provided $738 million, compared with a $558 million outflow in 2016.
- At September 30, cash was $676 million, versus $341 million at year-end 2016. Short-term debt was $1,211 million and long-term debt, including current maturities, was $19,558 million. Combined reported borrowings were approximately $20,769 million, versus $19,249 million at year-end.
- PPL reported $2,531 million of unused U.S. committed credit capacity and about $1.0 billion of unused U.K. facility capacity. PPL Capital Funding had $285 million of commercial paper outstanding; total commercial paper issuances across the listed U.S. programs were $475 million.
- Q3 GAAP results were weighed down by “Other Income (Expense) - net” of negative $76 million, versus positive $49 million a year earlier. For nine months the line was negative $235 million versus positive $284 million, primarily reflecting changes in gains and losses on foreign-currency contracts hedging U.K. earnings.
Material changes and operating drivers
- For nine months, U.K. Regulated segment net income was $560 million versus $915 million; earnings from ongoing operations were $682 million versus $741 million. The reported decline included foreign-currency hedge effects and prior-year special items. PPL’s U.K. operations represented 53% of nine-month net income and 39% of assets.
- Kentucky Regulated net income was $125 million in Q3 versus $126 million and $299 million for nine months versus $314 million. Pennsylvania Regulated net income was $95 million versus $91 million in Q3 and $251 million versus $263 million year to date.
- Across Kentucky, milder weather reduced sales volumes; this offset part of the benefit from new base rates effective July 1. Higher depreciation also reduced earnings. Pennsylvania transmission margins benefited from returns on additional transmission investment, while milder weather reduced distribution sales.
- New Kentucky rates approved by the KPSC increased annual revenue requirements by $52 million for KU electricity, $57 million for LG&E electricity and $7 million for LG&E gas. The approved authorized return on equity was 9.7%; rates took effect July 1, 2017.
- U.K. currency translation contributed a $194 million gain to nine-month other comprehensive income in 2017, compared with an $840 million loss in 2016. The 2017 translation effect was recorded in accumulated other comprehensive income, not net income.
Outlook, risks and unusual items
- The filing gives qualitative, not numerical, 2017 outlook: lower U.K. earnings were expected, mainly from the assumed weaker pound, lower true-ups and incentives, and higher interest and depreciation, partly offset by lower operating and pension costs and higher base revenue. Kentucky earnings were expected to decline, with weather and depreciation headwinds partly offset by rate increases. Pennsylvania earnings were expected to be relatively flat; corporate and other costs were also expected to be relatively flat.
- PPL declared a quarterly dividend of $0.395 per share, equivalent to $1.58 annually. Future dividends remain subject to Board discretion and earnings, cash flows, legal and financial requirements, and other factors.
- PPL issued $500 million of 4.00% senior notes due 2047; PPL Electric issued $475 million of 3.95% first mortgage bonds due 2047. PPL also sold 5.526 million shares under its ATM program in the first nine months, raising net proceeds of $211 million.
- PPL contributed $558 million to defined-benefit plans during the first nine months, including $485 million contributed by WPD to U.K. plans. WPD said these contributions funded all of 2017 and part of 2018, with no further 2017 contribution expected.
- Revisions to CCR closure plans reduced reported asset retirement obligations by $70 million at PPL and $63 million at LKE during the nine months. Further revisions to estimated closure costs and timing may be required.
- Principal uncertainties include U.K. withdrawal from the EU and pound volatility; future rate-case and regulatory outcomes; environmental compliance costs and recovery; weather-driven demand; pension asset values and funding; interest rates, credit access and counterparty risk; and litigation. Environmental matters include a new citizen suit concerning E.W. Brown, a state-law Cane Run claims action, and an EPA notice concerning sulfuric-acid-mist emissions at Mill Creek. The filing says outcomes and potential costs for several matters cannot be predicted or fully estimated.
- KU filed in Virginia for a $7 million annual base-rate increase, or 10.4%, with requested rates effective July 1, 2018, subject to approval. LG&E’s gas-franchise fee dispute remained before the KPSC; a final order was expected in 2017.
Most important facts for investors to verify
- Reconcile GAAP net income and EPS with ongoing-operations earnings, especially the foreign-currency hedge impacts and special-item treatment.
- Track U.K. pound exposure and the maturity, coverage and effectiveness of PPL’s economic hedges; management reported budgeted earnings hedged 100% for the remainder of 2017 and 99% for 2018 as of October 18, 2017.
- Assess debt growth, financing costs, and continued access to committed facilities and commercial-paper markets against the capital expenditure program.
- Monitor whether Kentucky rate increases offset weather-related volume weakness and higher depreciation, and follow KU’s pending Virginia rate request.
- Review environmental compliance, CCR closure estimates, associated litigation and the extent and timing of regulatory cost recovery.