PPL Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Figures are in millions of dollars except per-share amounts. The combined filing also reports PPL Electric, LG&E and KU separately.
Business context and reporting period
PPL operates regulated electric and gas utilities in Pennsylvania, Kentucky and, following its May 25, 2022 acquisition of Narragansett Electric, Rhode Island Energy (RIE). The 2021 comparison includes the U.K. utility business, sold June 14, 2021, as discontinued operations; reported year-over-year comparisons are therefore not fully comparable.
PPL paid approximately $3.8 billion cash and assumed approximately $1.5 billion of debt for RIE. The cash consideration was funded with proceeds from the 2021 U.K. business sale. RIE’s results are included from the acquisition date.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,696 | $1,288 | $3,478 | $2,786 |
| Operating income | $243 | $270 | $697 | $685 |
| Continuing-operations income (loss), after tax | $119 | $(536) | $392 | $(333) |
| Net income (loss) | $119 | $19 | $392 | $(1,821) |
| Diluted EPS | $0.16 | $(0.69) | $0.53 | $(0.44) |
| Operating cash flow | — | — | $979 | $795 |
| Capital expenditures | — | — | $1,009 | $969 |
Reported operating margin was approximately 14.3% in Q2 and 20.0% for the first half, versus 21.0% and 24.6%, respectively, in 2021; acquisition and business-mix effects limit comparability. Management’s non-GAAP Earnings from Ongoing Operations were $222 million ($0.30 per share) for Q2 and $527 million ($0.72 per share) for the first half, versus $147 million ($0.19 per share) and $366 million ($0.48 per share) in 2021.
Higher revenue reflected the RIE acquisition, higher Pennsylvania default-supply energy prices and volumes, Kentucky rate increases, and increased recovery of fuel and other energy costs. Much of the higher commodity-related revenue was accompanied by higher energy-purchase and fuel expense. Kentucky and Pennsylvania regulated net income increased in both comparison periods. RIE contributed $128 million of revenue and a $29 million net loss from acquisition through June 30; its ongoing-operations contribution, excluding special items, was $9 million.
Cash, debt and liquidity
At June 30, PPL had $336 million of cash, $988 million of short-term debt, $501 million of long-term debt due within one year, and $12.153 billion of noncurrent long-term debt. Total balance-sheet debt was approximately $13.642 billion, compared with approximately $11.209 billion at December 31, 2021. Debt increased in part because PPL assumed RIE debt and increased short-term borrowing.
First-half operating cash flow was $979 million; property, plant and equipment expenditures were $1.009 billion, implying approximately $30 million of operating cash flow less capital expenditures. The $3.674 billion acquisition cash outflow contributed to total investing cash outflow of $4.683 billion and the decline in cash from $3.571 billion at year-end to $336 million. PPL reported $1.911 billion of unused capacity under external credit facilities at quarter-end. The quarterly dividend declared was $0.225 per share, or $0.90 annualized.
Changes, outlook and material items
- Q2 and first-half 2022 GAAP earnings improved against 2021, but prior-year results included U.K. discontinued-operation amounts, a $322 million debt-extinguishment loss, a $383 million U.K. tax charge, and other sale-related items. The 2021 U.K. sale also generated substantial discontinued-operation results and cash proceeds.
- PPL expects RIE capital expenditures of approximately $450 million in 2022 and up to approximately $1.3 billion in 2023–2024. The filing does not provide a consolidated earnings or EPS guidance range.
- RIE acquisition commitments include $50 million of customer bill credits, approximately $44 million of arrearage forgiveness (recorded as a $23 million net expense), and transition costs estimated at approximately $408 million through June 30, 2024 that are not recoverable from customers. RIE recorded $74 million of transition costs in Q2 and $101 million in the first half. It also expensed $20 million of certain regulatory assets and recorded acquisition-related transaction costs.
- Pennsylvania enacted a phased corporate tax-rate reduction after quarter-end. PPL estimated a third-quarter reduction of $200–$300 million in regulated deferred tax balances, with a corresponding increase in regulatory liabilities, and a $3–$7 million deferred tax benefit primarily for nonregulated operations.
- Management cited inflation, supply-chain disruption, interest-rate and market volatility, weather, fuel availability, rate-case outcomes, cyber risks, environmental regulation and acquisition integration as risks. PPL said it cannot predict the outcome or estimate possible losses from the Talen-related fraudulent-transfer litigation; potential losses could be material.
- RIE’s next base-rate case is not expected sooner than three years after acquisition. Certain Rhode Island rate and infrastructure matters remain pending. The RIE purchase-price allocation is preliminary and could change materially during the measurement period. PPL also stated that RIE would be excluded from PPL’s 2022 internal-control assessment under Sarbanes-Oxley Section 404 due to integration timing.
Most important facts for investors to verify
- How much of ongoing earnings growth is attributable to underlying regulated performance versus acquisition effects, rate changes and recoverable commodity costs.
- RIE integration spending, delivery of expected benefits, final purchase-price allocation and execution of customer-credit commitments.
- Debt, interest expense, credit-facility availability and financing plans as capital spending proceeds.
- Regulatory recovery and timing for fuel, environmental, storm, transition and infrastructure costs, including pending Rhode Island and federal proceedings.
- Potential exposure and developments in the Talen litigation, and the adequacy of environmental remediation and coal-ash cost estimates.
- Progress on RIE’s financial reporting controls and the scope and timing of its inclusion in PPL’s internal-control assessment.