PPL Corporation — Q3 2015 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2015; financial statements are unaudited. 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, substantially its former competitive Supply segment, to form Talen Energy. Unless otherwise noted, amounts below are for PPL consolidated and in millions of dollars.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,878 | $1,879 | $5,889 | $5,906 |
| Operating income | $686 | $688 | $2,214 | $2,167 |
| Continuing-operations income after tax | $396 | $410 | $1,198 | $1,029 |
| Net income (loss) | $393 | $497 | $283 | $1,042 |
| Continuing-operations diluted EPS | $0.59 | $0.61 | $1.78 | $1.55 |
| Net-income diluted EPS | $0.58 | $0.74 | $0.42 | $1.57 |
| Dividends declared per share | $0.3775 | $0.3725 | $1.1225 | $1.1175 |
- Operating margin, calculated as operating income divided by revenue, was approximately 36.5% in Q3 2015 versus 36.6% in Q3 2014, and 37.6% versus 36.7% for the nine-month periods.
- Continuing-operations cash from operating activities was $1,688 for the first nine months, down from $2,163. Capital expenditures were $2,560; continuing-operations operating cash flow less PP&E spending was therefore approximately negative $872.
- At September 30, cash was $981, versus $1,399 at year-end 2014. Debt comprised $17,745 long-term debt, $1,460 due within one year and $557 short-term debt. The filing reports $19,205 carrying value of long-term debt, excluding short-term debt.
- PPL reported $39,246 total assets and $10,222 equity, compared with $48,864 and $13,628, respectively, at December 31, 2014; the change reflects, in large part, the spinoff and removal of Supply-segment assets and liabilities.
- At September 30, the filing lists $1,861 of unused U.S. credit-facility capacity across the registrants and approximately $1.2 billion equivalent of unused U.K. capacity. These facilities support liquidity and commercial-paper programs.
Material changes versus prior comparable periods
- Nine-month continuing income rose $169, primarily reflecting stronger Kentucky regulated earnings, lower U.K. depreciation and lower income taxes. Q3 continuing income declined $14 year over year.
- Nine-month net income fell $759, chiefly because discontinued operations recorded a $915 loss, including an $879 nondeductible loss on the Supply spinoff. The nine-month 2015 continuing result should be distinguished from this one-time transaction impact.
- U.K. regulated earnings were $814 for the first nine months, up from $688, but fell to $249 in Q3 from $295. The segment experienced lower revenue under the RIIO-ED1 price control; an asset-life extension reduced nine-month depreciation by $64 ($50 after tax, or $0.08 per share).
- Kentucky regulated earnings increased to $267 from $247 for nine months; PPL Electric earnings were $191 versus $194. Kentucky gains reflected higher base rates and returns on environmental investment, while Pennsylvania delivery margins improved but higher operating costs and depreciation weighed on earnings.
- PPL completed $1.05 billion of LG&E and KU bond issuances in September. The utilities used proceeds in part to repay short-term debt and planned to repay bonds maturing in November. PPL also issued $28 million net proceeds under its at-the-market equity program during the first nine months.
Outlook, management commentary and risks
- Management expected 2015 earnings, excluding special items, to exceed 2014 after adjusting for corporate dissynergies from the spin-off. No specific consolidated EPS target is provided in the supplied filing text.
- Management projected higher 2015 earnings at the U.K. and Kentucky regulated segments, and lower Pennsylvania regulated earnings, excluding special items. It expected U.K. segment EPS to remain relatively flat from 2015 to 2018 despite revenue and incentive pressure under RIIO-ED1.
- PPL Electric’s proposed rate-case settlement would increase annual distribution rates by $124 million from January 1, 2016, subject to a final PUC order then expected in December 2015. Kentucky’s approved settlement increased KU annual base-electricity revenue requirements by $125 million and LG&E base-gas requirements by $7 million, effective July 1, 2015.
- LKE projected $2.2 billion of environmental capital investment over five years, split between LG&E and KU. CCR rules increased recorded asset-retirement obligations by $219 million over nine months; further estimates or obligations may change. The companies believe relevant costs are recoverable through rates, but recovery and timing remain regulatory matters.
- Key uncertainties include environmental compliance and related litigation, the pending KPSC landfill proceedings, regulatory rate outcomes, weather, generation availability and outages, pension funding, interest rates, sterling exchange rates, credit markets, and cost recovery. PPL said it expected adequate liquidity from operating cash flow, cash, credit facilities and commercial paper.
Important facts for investors to verify
- Separate continuing operations from discontinued operations when assessing earnings and EPS; review the $879 million spinoff loss and its valuation assumptions.
- Confirm final regulatory outcomes and timing for PPL Electric’s rate settlement and Kentucky landfill proceedings, and monitor the related environmental cost-recovery assumptions.
- Assess cash generation against planned capital spending, debt maturities and pension funding; note that continuing operating cash flow was below PP&E expenditures for the nine-month period.
- Track U.K. RIIO-ED1 revenue and incentive performance, and the ongoing effect of the longer asset-life assumption on depreciation and earnings.
- Review the full filing’s debt, credit-facility, guarantee and contingency disclosures; this summary does not quantify every exposure or the full range of possible losses.