PPL Corporation 10-Q Summary — Quarter Ended June 30, 2015
Business context and reporting period
This unaudited combined Form 10-Q covers PPL Corporation and four separately reporting subsidiaries for the three and six months ended June 30, 2015, compared with the same 2014 periods. PPL is now focused on regulated electricity and gas utilities in the U.K., Pennsylvania and Kentucky. On June 1, 2015, it spun off PPL Energy Supply, which combined with Riverstone’s competitive generation businesses to form Talen Energy. PPL shareowners received approximately 0.1249 Talen shares per PPL share; they owned 65% of Talen after the transaction. PPL says it has no continuing ownership, control or affiliation with Talen.
Financial and operating metrics
Dollar amounts below are in millions except per-share data. PPL results include discontinued operations unless identified as continuing operations.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,781 | $1,849 | $4,011 | $4,027 |
| Operating income | $638 | $678 | $1,528 | $1,479 |
| Income from continuing operations after tax | $250 | $230 | $802 | $619 |
| Net income (loss) | $(757) | $229 | $(110) | $545 |
| Continuing-operations diluted EPS | $0.37 | $0.34 | $1.19 | $0.94 |
| Net diluted EPS | $(1.13) | $0.34 | $(0.17) | $0.83 |
| Declared dividend per share | $0.3725 | $0.3725 | $0.7450 | $0.7450 |
- Cash flow: First-half operating cash flow from continuing operations was $970, down from $1,293; total operating cash flow, including discontinued operations, was $1,313 versus $1,583. Continuing-operations capital expenditures were $1,679, about level with 2014. Ending cash was $846, down from $1,399 at year-end 2014.
- Debt and liquidity: At June 30, PPL reported $17,103 of long-term debt and $1,000 due within one year, plus $1,100 of short-term debt. Cash was $846. The filing states that liquidity is expected to remain adequate through operating cash flow, cash, credit facilities and commercial paper; it reported $1,275 of unused U.S. credit-facility capacity and approximately $1.2 billion of unused U.K. capacity.
- Margins and segments: Management’s non-GAAP Kentucky Gross Margins were $438 in Q2 and $959 for the first half, versus $428 and $936, respectively, in 2014. Pennsylvania Gross Delivery Margins were $283 and $618, versus $270 and $592. First-half segment net income was $565 for U.K. Regulated (up from $393), $156 for Kentucky Regulated (down from $165), and $136 for Pennsylvania Regulated (down from $137).
- Subsidiary results: First-half net income was $136 for PPL Electric (versus $137), $177 for LG&E and KU Energy (versus $180), $88 for LG&E (versus $87), and $117 for KU (unchanged). These subsidiary figures are not additive to PPL consolidated results.
Material changes versus the prior comparable period
- Consolidated revenue declined 4% in Q2 and was nearly flat for the first half. Q2 operating income fell $40, while first-half operating income rose $49.
- Continuing-operations earnings improved, but consolidated net income turned to a loss because of the Talen transaction. PPL recorded an $879 nondeductible loss on the spinoff; discontinued operations reported a net loss of $1,007 in Q2 and $912 for the first half.
- The Supply segment’s assets and liabilities were removed from PPL’s balance sheet at the spinoff. PPL distributed $3.2 billion of net assets to shareowners. Total assets fell to $38,244 from $48,864 at year-end 2014; equity fell to $9,941 from $13,628.
- WPD extended the weighted-average useful lives of U.K. distribution assets from 55 to 69 years. This reduced depreciation by $42 before tax ($33 after tax, or $0.05 per share) in the first half; management estimated an approximately $86 annual pretax reduction for 2015.
- Cash from continuing operations was lower, primarily due to working-capital movements, higher tax payments and $103 more in defined-benefit plan funding. The U.K. pound’s translation effect contributed a $149 first-half loss in other comprehensive income, versus a $128 gain in 2014.
Outlook, management commentary, risks and unusual items
- Outlook: PPL expected 2015 earnings, excluding special items, to be higher than 2014 after adjusting the prior year for certain spin-related dissynergies. The filing gives no clear numeric full-year EPS guidance. Management cited U.K. and Kentucky regulated earnings growth and lower corporate costs, partly offset by lower expected Pennsylvania earnings. U.K. earnings exposure to foreign currency was described as fully hedged for the remainder of 2015.
- Rates and investment: Kentucky regulators approved a settlement effective July 1, 2015, providing annual revenue-requirement increases of $125 for KU electric rates and $7 for LG&E gas rates; LG&E electric base revenue requirements were unchanged. PPL Electric sought an approximately $167.5 annual distribution-revenue increase, proposed for January 2016, and a higher distribution-system-improvement-charge cap; both requests remained pending. KU also filed for a $7.2 annual Virginia rate increase. PPL forecast $2.2 billion of LKE environmental capital investment over five years.
- Environmental and regulatory exposure: New coal-combustion-residual rules led LG&E and KU to increase asset-retirement obligations by $162 in Q2. Future estimates may change; the companies believe related costs are recoverable through rates. Potential costs from wastewater rules and other environmental requirements could be significant, but the filing says a reasonable range cannot currently be estimated.
- Contingencies: The KPSC consolidated proceedings concerning the Trimble County and Ghent coal-ash landfills; the utilities could not predict the outcome or impact. Other disclosed matters include environmental claims involving Cane Run and Mill Creek, pending reliability-standard matters, and guarantees and indemnifications. PPL said it could not predict certain outcomes or estimate possible losses for some matters.
- Other unusual items: PPL recorded a $23 tax benefit from settlement of IRS audits for 1998–2011, including an estimated interest component; final interest determination remained pending. Separately, the CCR rule increased AROs, while Cane Run retirements generated $11 of inventory write-down and separation costs. PPL raised its quarterly dividend to $0.3775 per share, payable October 1, 2015, as announced August 3.
- Principal risks: Results remain exposed to weather and customer usage, generation availability and outages, fuel and commodity costs, rate-case and cost-recovery outcomes, environmental compliance, interest and foreign-exchange movements, pension funding, capital-market access, litigation, and credit-rating or counterparty events. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the $879 spinoff loss was valued: the estimated Supply-segment fair value was $3.2 billion versus a $4.1 billion carrying value, using weighted market and discounted-cash-flow approaches and a 25% control premium.
- Whether continuing-operations earnings and cash generation support the stated 2015 outlook and increased dividend after the competitive generation business has been removed.
- Progress and final outcomes of PPL Electric’s Pennsylvania rate case and DSIC petition, Kentucky rate settlement implementation, and KU’s Virginia rate request.
- Final cost, timing, and rate recovery for coal-ash, wastewater and other environmental compliance obligations, including possible changes to the $162 ARO increase.
- Cash availability and debt refinancing needs: PPL had $846 of cash, $1,100 of short-term debt and $1,000 of long-term debt due within one year at quarter-end.
- Resolution of the landfill proceedings, environmental litigation and other contingencies, and the final IRS refund-interest determination.