PPL Corporation — Q2 2017 Form 10-Q
Business context and period. This combined filing covers PPL Corporation and its regulated utility subsidiaries for the quarter and six months ended June 30, 2017, compared with the same 2016 periods. PPL operates regulated electricity distribution and delivery businesses in the U.K., Pennsylvania and Kentucky; its Kentucky utilities also generate electricity, and LG&E distributes natural gas.
Key financial results
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $1.725 billion | $3.676 billion | $1.785 billion; $3.796 billion |
| Operating income | $702 million | $1.498 billion | $725 million; $1.548 billion |
| Net income | $292 million | $695 million | $483 million; $964 million |
| Diluted EPS | $0.43 | $1.01 | $0.71; $1.41 |
| Cash from operations | Not presented for the quarter | $790 million | $1.170 billion |
| Capital expenditures for PP&E | Not presented for the quarter | $1.373 billion | $1.346 billion |
Earnings quality and drivers. PPL’s non-GAAP earnings from ongoing operations were $356 million for Q2 and $781 million for the first half, versus $380 million and $838 million, respectively. Reported results were substantially affected by foreign-currency economic hedges: other income (expense), net, was a $112 million expense in Q2 2017 versus $174 million income in Q2 2016, and a $159 million expense for H1 2017 versus $235 million income in H1 2016. Lower U.K. earnings translated into dollars also weighed on revenue. These hedge-related differences explain much of the gap between GAAP and ongoing earnings.
Operating expenses declined, including lower other operation and maintenance costs, but depreciation increased as assets entered service. Kentucky earnings benefited in Q2 from lower maintenance costs, while milder weather reduced electricity sales volumes and weighed on H1 Kentucky results. Pennsylvania’s H1 earnings declined, primarily reflecting higher depreciation and corporate service costs, partly offset by transmission investment returns.
Financial position and liquidity
- At June 30, PPL reported $467 million of cash, total assets of $39.964 billion, and total equity of $10.490 billion.
- Debt comprised $1.497 billion of short-term debt, $671 million due within one year, and $18.397 billion of long-term debt. These components total approximately $20.565 billion, up from approximately $19.249 billion at December 31, 2016.
- H1 operating cash flow fell to $790 million from $1.170 billion. The filing attributes much of the decline to $552 million of defined-benefit plan funding, including WPD’s $485 million accelerated U.K. pension contribution; WPD said it did not expect further 2017 contributions.
- PPL spent $1.373 billion on PP&E in H1. Cash dividends paid were $529 million. PPL issued $132 million of shares under its at-the-market program during H1.
- The filing reported $2.325 billion of unused U.S. committed credit-facility capacity and approximately $910 million of unused U.K. committed capacity at June 30. PPL’s commercial paper program had $576 million of unused capacity.
Material changes, outlook and risks
- Kentucky rates: KPSC orders approved annual revenue-requirement increases of $52 million for KU electricity, $57 million for LG&E electricity, and $7 million for LG&E gas. New rates took effect July 1, 2017. The orders authorized a 9.7% return on equity and approved Distribution Automation, but the utilities withdrew their Advanced Metering System CPCN request. Higher depreciation rates are expected to add about $15 million in 2017, excluding net PP&E additions.
- Management outlook: PPL projected lower 2017 U.K. segment net income than in 2016, citing the assumed GBP exchange rate, lower true-ups and incentive revenue, and higher interest and depreciation, partly offset by lower operating costs and higher base revenue. Kentucky net income was projected lower, mainly due to weather-related volumes and depreciation, partly offset by rate increases. Pennsylvania net income was expected to be relatively flat. The supplied filing text does not provide a clear consolidated full-year EPS guidance value.
- Currency and regulatory uncertainty: Brexit-related uncertainty could affect the GBP and PPL’s U.K. results. As of August 2, the company said its budgeted U.K. earnings exposure was 98% hedged for the remainder of 2017 and 99% hedged for 2018 and 2019. U.S. tax reform was also uncertain. Ofgem began a review of the future RIIO-2 regulatory framework; current RIIO-ED1 runs through March 2023.
- Environmental and legal matters: Coal-combustion-residual closure, wastewater discharge rules, potential climate regulation and related plant requirements could require significant spending, which management generally believes is recoverable through rates. The filing notes that costs and outcomes cannot always be estimated. A new citizen suit concerning alleged Clean Water Act and RCRA issues at KU’s E.W. Brown plant was filed in July 2017; plaintiffs seek injunctive relief and penalties. The Cane Run state-law claims also remain pending. The filing says it cannot predict these matters’ outcomes.
- Other notable items: PPL’s ARO balance declined from $488 million at year-end to $416 million, principally following revised CCR closure cost and timing estimates. Management said further revisions may be needed. PPL reported no material change in risk factors from its 2016 Form 10-K.
Most important facts for investors to verify
- Separate recurring operating performance from volatile GBP hedge gains and losses; reconcile GAAP net income with ongoing-operations earnings.
- Track U.K. exchange rates, WPD performance and future regulatory decisions, including the RIIO-2 process.
- Assess whether operating cash flow can support capital spending, pension funding, dividends and debt service.
- Monitor debt levels, short-term borrowing and available credit capacity, alongside credit ratings and financing costs.
- Confirm the realized earnings and cost-recovery effects of Kentucky’s July 2017 rate changes and higher depreciation.
- Follow environmental compliance costs, CCR closure estimates, and the E.W. Brown and Cane Run proceedings.