PPL Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited combined filing also reports separately for PPL Electric, LKE, LG&E and KU. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenues | $1,872 | $1,845 | $5,846 | $5,521 |
| Operating income | $686 | $736 | $2,195 | $2,152 |
| Net income | $445 | $355 | $1,412 | $1,050 |
| Diluted EPS | $0.62 | $0.51 | $2.01 | $1.53 |
| Cash from operations | — | — | $2,210 | $1,754 |
| Capital expenditures | — | — | $2,344 | $2,152 |
- Q3 revenue rose modestly, while operating income declined. Net income growth was significantly affected by higher other income: $106 versus an expense of $35 in Q3 2017, largely reflecting foreign-currency hedge gains and pension non-service credits.
- Nine-month adjusted gross margins, a company-defined non-GAAP measure, increased in the U.K. ($1,578 versus $1,446) and Pennsylvania ($1,106 versus $1,067); Kentucky was $1,544 versus $1,520. Management’s non-GAAP earnings from ongoing operations were $422 for Q3 and $1,323 for nine months, compared with $388 and $1,169, respectively.
- At September 30, cash and cash equivalents were $842; including restricted cash, cash totaled $864. Balance-sheet debt comprised $1,549 short-term debt, $330 due within one year and $19,924 long-term debt—$21,803 in total on this basis. Total assets were $43,042 and equity was $11,783.
- Nine-month dividends paid were $846. PPL declared a quarterly dividend of $0.41 per share, or $1.64 annualized. The company issued 20 million shares to settle part of its forward-sale agreements, generating $520 net proceeds; it also raised $119 gross proceeds through its at-the-market program.
Material changes and operating drivers
- Nine-month revenue increased $325, with growth in the U.K. ($169), Pennsylvania ($84) and Kentucky ($67). Favorable weather supported domestic sales volumes; U.K. revenue also benefited from price increases and exchange rates.
- Operating expenses increased $282 for nine months, including higher maintenance, depreciation, fuel and purchased energy. Depreciation rose $72, reflecting assets placed in service, infrastructure investment and higher depreciation rates.
- The U.K. segment generated $836 of nine-month net income versus $560; $103 of 2018 and a $122 loss in 2017 related to unrealized foreign-currency economic hedge results excluded from ongoing earnings. A $330 nine-month foreign-currency translation loss was recorded in other comprehensive income.
- U.S. federal tax reform reduced the statutory corporate rate to 21%. Customer refunds and rate reductions lowered revenue, including an estimated $72 full-year 2018 revenue impact at PPL Electric. PPL completed measurement of several provisional TCJA tax items during the quarter; executive-compensation deductibility remained under review.
- Capital spending increased at the Kentucky utilities, particularly for environmental water projects, while PPL Electric spending decreased versus the prior-year period. PPL’s nine-month operating cash flow increased, but capital expenditures exceeded operating cash flow.
Outlook, regulatory matters and risks
- Management projected higher 2018 net income in each regulated segment than in 2017, citing U.K. pension income and assumed exchange rates, favorable weather and prior rate increases in Kentucky, and higher Pennsylvania transmission earnings. The supplied filing text provides no specific consolidated EPS guidance.
- LG&E and KU filed Kentucky rate cases on September 28, requesting annual base-rate increases of approximately $112 at KU and $35 for LG&E electricity plus $25 for LG&E gas. They requested a 10.42% return on equity; new rates were expected May 1, 2019. Outcomes are uncertain.
- The KPSC denied full deployment of LG&E and KU’s proposed advanced-metering systems in August; the utilities said the decision was not expected to significantly affect results. PPL Electric’s Pennsylvania tax-related negative surcharge began July 1, 2018.
- Environmental compliance, particularly coal-ash (CCR) closure and wastewater requirements, may require significant future spending. Estimates and timing remain uncertain; the companies state that eligible costs are subject to rate recovery. KU’s E.W. Brown RCRA claims returned to district court after an appellate ruling; possible additional remediation is not yet known.
- PPL faces two Montana lawsuits alleging improper distribution of $733 in proceeds from a 2014 asset sale. PPL disputes the claims; it cannot estimate potential losses, which could be material.
- LG&E and KU’s OVEC power-purchase exposure is uncertain after a sponsor filed for bankruptcy and obtained an order rejecting its contract. Their estimated share of OVEC outstanding debt was $114. A separate FERC proceeding concerns transmission credits estimated at about $22 annually; the outcome is uncertain.
- Other key exposures include Brexit and GBP exchange-rate volatility, rate-case outcomes, interest rates, weather, counterparty credit, environmental rules, and litigation. PPL reported unused capacity of $1,959 under U.S. credit facilities and approximately $1.0 billion under U.K. facilities at September 30.
Investor verification priorities
- Assess how much reported earnings growth depends on volatile hedge gains and pension credits versus ongoing operating performance.
- Review the requested Kentucky rate increases, expected effective date, and the impact of TCJA customer refunds on revenue and margins.
- Track CCR and wastewater compliance plans, potential ARO revisions, and the recoverability and timing of related costs.
- Monitor the Montana claims, E.W. Brown RCRA litigation, OVEC bankruptcy developments and the FERC transmission-credit proceeding.
- Evaluate funding needs against capital spending, debt maturities, short-term borrowings, share issuance and dividend commitments.