PPL Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2020; results are unaudited and compare with Q1 2019. PPL is a regulated utility holding company with electricity distribution operations in the U.K. and Pennsylvania, and regulated electricity and gas operations in Kentucky. The combined filing also reports on PPL Electric, LG&E and KU Energy, LG&E, and KU.
Key financial metrics
| PPL consolidated | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $2.054 billion | $2.079 billion |
| Operating income | $817 million | $781 million |
| Net income | $554 million | $466 million |
| Diluted EPS | $0.72 | $0.64 |
| Cash from operating activities | $692 million | $474 million |
| Capital expenditures for property, plant and equipment | $826 million | $729 million |
- Operating revenue declined about 1%; operating income increased about 5%, and net income increased about 19% year over year. Approximate operating margin rose to 39.8% from 37.6%; approximate net margin rose to 27.0% from 22.4%.
- Net cash used in investing activities was $833 million. Operating cash flow less PP&E expenditures was negative $134 million, versus negative $255 million in Q1 2019.
- At March 31, cash and cash equivalents were $915 million. Debt comprised $1.696 billion of short-term debt, $1.170 billion due within one year, and $20.670 billion of long-term debt. Short-term debt was up from $1.151 billion at year-end 2019.
- The company reported approximately $3.1 billion of combined unused credit-facility capacity across the Registrants. PPL reported $46.328 billion in total assets and $13.241 billion in equity.
- PPL declared a quarterly dividend of $0.415 per share, equivalent to $1.66 annualized; the dividend was payable April 1, 2020.
Material changes versus Q1 2019
- Lower revenue reflected warmer weather and lower volumes in Pennsylvania and Kentucky, lower Kentucky municipal supply revenues after contracts ended, and lower commodity-related recoveries. U.K. revenue increased, including from pricing and currency translation.
- Lower fuel and energy-purchase costs and reduced operating and maintenance expense helped lift operating income despite lower revenue. Depreciation increased $33 million, primarily from higher depreciation rates and assets placed in service.
- Other income, net, increased to $125 million from $52 million, principally reflecting a $62 million gain on foreign-currency economic contracts versus a $33 million loss in Q1 2019, alongside defined-benefit non-service credits.
- Management’s non-GAAP Earnings from Ongoing Operations increased to $514 million from $508 million. The U.K. segment’s ongoing earnings fell to $298 million from $304 million, while reported U.K. net income rose to $340 million from $264 million, substantially affected by the swing in unrealized foreign-currency hedge results.
- Segment net income was $340 million in U.K. Regulated, $127 million in Kentucky Regulated, $118 million in Pennsylvania Regulated, and negative $31 million in Corporate and Other.
Outlook, commentary, risks and unusual items
- Management said COVID-19 had not materially affected first-quarter results, liquidity, operations, or supply chains. Commercial and industrial demand declined while residential demand rose; the net first-quarter load impact was not material. The effect on later periods could not be quantified and depends on economic reopening, customer demand, collections, and other developments. Disconnection suspensions and late-fee restrictions were in effect; the company had not materially reduced cash receipts or increased its bad-debt allowance as of the filing.
- Management reported no goodwill impairment from its first-quarter assessment of the U.K. Regulated reporting unit, which had $2.5 billion of allocated goodwill. Future impairment remains possible if share value or valuation assumptions worsen.
- PPL’s budgeted U.K. earnings exposure was about 86% hedged for 2020 at an average $1.55 per pound and about 8% hedged for 2021 at $1.32 per pound. Foreign exchange movements and Brexit-related uncertainty could affect reported results.
- The U.K. decision to retain a 19% corporation tax rate rather than reduce it to 17% was expected, if enacted as proposed, to increase deferred tax liabilities and deferred tax expense by approximately $100–$110 million.
- LG&E and KU applied for ECR rate treatment for environmental construction projects estimated at $405 million through 2024; decisions were expected in September 2020. The filing says environmental compliance costs may be significant, with recovery subject to regulatory processes.
- Significant proceedings and contingencies include Talen-related litigation, environmental claims and remediation, and proceedings concerning OVEC obligations and FERC transmission credits. PPL could not estimate possible losses for certain matters; some outcomes could be material.
- After quarter-end, PPL Capital Funding borrowed $200 million under a term loan and issued $1 billion of 4.125% senior notes due 2030 on April 1, 2020; proceeds were intended for short-term debt repayment and general corporate purposes. Management said it did not anticipate a significant liquidity impact from COVID-19 and expected near-term capital-market access.
- The filing provides no clear quantified full-year 2020 earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether COVID-19-related load reductions, customer payment delays, or bad debts materially affect subsequent quarters and liquidity.
- How much of reported earnings growth reflects recurring operations versus unrealized foreign-currency hedge gains; review the non-GAAP reconciliation alongside GAAP net income.
- Debt maturities, short-term borrowing needs, and remaining credit capacity after the post-quarter financing transactions.
- The regulatory outcome and recoverability of the proposed $405 million Kentucky environmental projects, and the eventual compliance costs for environmental rules.
- Developments in material litigation and contingencies, including Talen, environmental matters, and OVEC-related proceedings.
- Whether the U.K. tax-rate change is enacted and its deferred-tax impact, as well as foreign-exchange exposure and RIIO-ED2 regulatory decisions.