PPL Corporation: Q3 2022 Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2022; figures are unaudited. PPL is a regulated utility holding company operating in Pennsylvania, Kentucky and Rhode Island. Results include Narragansett Electric, now Rhode Island Energy (RIE), from its May 25, 2022 acquisition. The U.K. utility business was sold in June 2021, so comparisons with 2021 are affected by discontinued operations and a different business mix.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $2.134 billion | $1.512 billion | $5.612 billion | $4.298 billion |
| Operating income | $341 million | $431 million | $1.038 billion | $1.116 billion |
| Income from continuing operations | $174 million | $209 million | $566 million | $(124) million |
| Net income (loss) | $174 million | $207 million | $566 million | $(1.614) billion |
| Diluted EPS | $0.24 | $0.27 | $0.77 | $(2.10) |
| Earnings from ongoing operations (non-GAAP) | $305 million | $277 million | $832 million | $643 million |
- Q3 operating margin was approximately 16.0%, versus 28.5% a year earlier; nine-month operating margin was approximately 18.5%, versus 26.0%. Higher operating costs—including energy purchases, RIE operations and integration, and the Safari impairment—outpaced revenue growth.
- Q3 operating revenue increased $622 million; nine-month revenue increased $1.314 billion. Growth reflected RIE, higher Pennsylvania default-supply prices and volumes, and higher fuel and energy-cost recoveries. Much of the commodity-related revenue and expense is subject to regulated recovery mechanisms.
- Operating cash flow from continuing operations was $1.511 billion for the nine months, compared with $1.252 billion in 2021. PP&E expenditures were $1.515 billion, leaving approximately break-even operating cash flow after capital expenditures, before acquisitions and financing.
- Cash and cash equivalents were $303 million at September 30, versus $3.571 billion at December 31, 2021. Cash-flow-statement cash, including restricted cash, was $304 million. The decline chiefly reflects the RIE acquisition and related cash movements.
- At September 30, short-term debt was $510 million, current long-term debt $264 million, and long-term debt $12.977 billion—approximately $13.751 billion combined. This compares with approximately $11.209 billion at year-end 2021. PPL reported $2.389 billion of unused capacity under external credit facilities.
- Q3 adjusted gross margins (non-GAAP) were $639 million for Kentucky, $417 million for Pennsylvania, and $184 million for Rhode Island. Nine-month amounts were $1.865 billion, $1.261 billion, and $254 million, respectively.
Material changes versus the prior comparable period
- Q3 GAAP net income fell $33 million year over year, while nine-month GAAP net income improved by $2.180 billion. The large year-to-date comparison is primarily explained by the 2021 U.K. sale loss and discontinued-operation loss, not solely by underlying operating improvement.
- Non-GAAP earnings from ongoing operations increased 10% in Q3 and 29% year to date. The nine-month improvement included higher Pennsylvania and Kentucky earnings and RIE’s contribution, partly offset by corporate and acquisition-related costs.
- Q3 operating expenses rose $712 million year over year, including increases of $269 million in energy purchases and $285 million in other O&M. Nine-month operating expenses rose $1.392 billion.
- PPL acquired RIE for approximately $3.8 billion cash and assumed approximately $1.5 billion of debt. RIE contributed $512 million of revenue and a $55 million net loss from acquisition through September 30; its reported results include significant acquisition commitments and integration costs.
- On September 30, PPL recorded a $67 million pretax impairment ($50 million after tax) on Safari Holdings, classified as held for sale. The sale closed November 1, 2022.
Outlook, commentary, risks and unusual items
- No full-year EPS or earnings guidance is provided in the supplied filing text. PPL anticipated RIE capital expenditures of $450 million in 2022, including approximately $275 million under PPL ownership, and up to approximately $1.3 billion for 2023–2024.
- RIE’s acquisition commitments include a $50 million customer bill credit, forgiveness of certain customer arrears, no base-rate increase case sooner than three years after closing, and foregoing recovery of estimated transition costs of approximately $408 million through June 2024. Transition costs incurred through September were $142 million for the nine months.
- Pennsylvania tax reform led to a $274 million increase in regulatory liabilities for remeasurement of regulated deferred taxes and deferred tax benefits of $5 million at PPL and $9 million at PPL Electric. PPL said estimates will be updated; it was still assessing the Inflation Reduction Act’s effects and did not anticipate a material near-term cash-tax impact.
- Major uncertainties include the integration and realization of benefits from RIE; rate and cost-recovery proceedings; inflation, supply-chain constraints and interest rates; weather and demand; cyber and operational risks; and environmental rules affecting coal generation. The filing describes planned coal-unit retirements: Mill Creek Unit 1 in 2024, and Mill Creek Unit 2 and E.W. Brown Unit 3 in 2028.
- PPL is defending Talen-related litigation transferred to and consolidated in the Texas Bankruptcy Court. PPL says it believes it has meritorious defenses but cannot predict the outcome or estimate possible losses, which could be material.
- Other matters include pending regulatory proceedings in Rhode Island and environmental remediation obligations. RIE estimated remaining remediation costs of $102 million, expected over approximately 30 years; actual costs could be higher.
- PPL disclosed that RIE’s acquisition materially affected internal controls. RIE was excluded from PPL’s 2022 Section 404 internal-control assessment because of integration timing and its systems’ prior integration with National Grid.
Most important facts for investors to verify
- Reconcile GAAP results with ongoing-operations earnings, including the treatment of acquisition costs, customer commitments and the Safari impairment.
- Track RIE integration costs, operating performance, capital spending, rate proceedings and the execution of customer commitments.
- Assess PPL’s debt and liquidity after the acquisition, including borrowing costs, maturities, unused facility capacity and dividend coverage by recurring cash flow.
- Monitor regulatory recovery of fuel, energy, environmental and infrastructure costs, and the outcomes of the RIE and FERC proceedings.
- Review developments in Talen litigation and environmental remediation, including whether any exposure becomes estimable or material.