PPL Corporation — Q3 2020 Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2020; filing dated November 5, 2020. PPL is a regulated utility holding company operating in the U.K., Pennsylvania and Kentucky. This combined filing also reports PPL Electric, LG&E and KU. Financial amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,885 | $1,933 | $5,678 | $5,815 |
| Operating income | $687 | $726 | $2,099 | $2,147 |
| Net income | $281 | $475 | $1,179 | $1,382 |
| Diluted EPS | $0.37 | $0.65 | $1.53 | $1.89 |
| Earnings from ongoing operations (non-GAAP) | $450 | $445 | $1,391 | $1,375 |
- Q3 GAAP net income fell $194 million year over year, while ongoing earnings increased $5 million. Nine-month GAAP net income declined $203 million; ongoing earnings rose $16 million.
- Q3 PPL Electric net income increased to $134 million from $118 million; LKE net income decreased to $137 million from $158 million. Nine-month results were $370 million versus $333 million for PPL Electric and $355 million versus $388 million for LKE.
- Cash from operations for the first nine months was $2,247 million, versus $1,888 million. Capital expenditures were $2,348 million, versus $2,197 million; operating cash flow less these expenditures was negative $101 million. Dividends paid were $956 million.
- At September 30, cash and cash equivalents were $746 million ($769 million including restricted cash). Short-term debt was $1,368 million, current maturities of long-term debt $1,525 million, and long-term debt $21,243 million. Combined unused credit facility capacity was approximately $3.6 billion.
- Total assets were $47,924 million and equity was $13,686 million, compared with $45,680 million and $12,991 million, respectively, at December 31, 2019.
Material changes and unusual items
- GAAP results included a $106 million deferred tax expense from the U.K. decision to retain a 19% corporation tax rate rather than reduce it to 17%. Q3 results also reflected an after-tax $53 million loss on foreign-currency economic hedges, compared with a $31 million gain in Q3 2019. PPL excludes these hedge movements and other designated items from its non-GAAP ongoing earnings measure.
- Revenue decreased by $48 million in Q3 and $137 million year to date. Management cited lower Kentucky sales volumes and commercial/industrial demand, weather, lower energy prices, and COVID-related demand effects; higher Pennsylvania transmission revenue from additional capital investment partly offset declines.
- PPL issued $1 billion of 4.125% senior notes due 2030. KU issued $500 million of 3.30% bonds due 2050 and redeemed $500 million of bonds due 2020. LKE redeemed $475 million of notes due 2020. PPL declared a quarterly dividend of $0.415 per share.
Outlook, commentary, risks and contingencies
- PPL began a formal process in August to sell its U.K. utility business. No transaction is assured; the business remained classified as held and used. Management’s impairment assessment found no impairment, but a change in sale outcomes or assumptions could lead to a future impairment. A qualifying sale could also result in realization of accumulated other comprehensive losses.
- Management said COVID-19 had not materially affected overall financial condition, liquidity or operations through the period, but reported estimated nine-month revenue reduction of $94 million and incremental costs of $26 million for PPL. Aged receivables and credit losses increased; duration and ultimate impacts remain uncertain.
- FERC established hearing and settlement procedures for a complaint challenging PPL Electric’s 11.18% transmission base return on equity and set a May 21, 2020 refund-effective date. Revenue from that date may be subject to refund; a 50-basis-point ROE change would affect annual net income by approximately $12 million. The outcome and potential loss are not estimable.
- LG&E and KU gave notice of intent to seek general electric and gas rate changes and approvals for advanced metering infrastructure. Separately, Kentucky regulators approved approximately $405 million of planned environmental projects for recovery through ECR mechanisms, with a 9.2% authorized return.
- Environmental and litigation exposures include coal-combustion-residual closure and remediation requirements, the E.W. Brown and Cane Run claims, and a federal complaint alleging sulfuric-acid-mist violations at LG&E’s Mill Creek plant. The filing says outcomes or possible losses cannot be estimated for several matters; related costs may depend on regulatory recovery.
- Other risks highlighted include weather and demand, foreign-exchange and interest-rate movements, U.K. RIIO-ED2 regulatory outcomes, credit and funding access, environmental rules, and legal proceedings. Management reported effective disclosure controls and no material third-quarter change in internal controls over financial reporting.
Investor facts to verify
- Track the U.K. sale process, valuation, potential impairment exposure and any impact from realizing accumulated translation and pension losses.
- Monitor the PPL Electric FERC ROE case, potential refunds and final transmission rates.
- Assess cash generation against capital spending, dividends, debt maturities and available committed liquidity.
- Review COVID-related receivable aging, credit-loss reserves, demand effects and whether customer protections affect collections.
- Follow Kentucky rate filings and environmental compliance costs, including the timing and extent of customer cost recovery.
- Reconcile GAAP earnings with management’s non-GAAP ongoing earnings, particularly the U.K. tax-rate charge and volatile currency-hedge results.