PPL Corporation — Form 10-Q summary
Business context and reporting period
Quarter ended September 30, 2016; filed November 1, 2016. PPL is a regulated utility holding company with U.K., Pennsylvania and Kentucky operations. The comparison with 2015 is affected by the June 2015 spinoff of competitive generation business PPL Energy Supply; PPL has no continuing ownership interest in that business.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $1.889bn | $1.878bn | $5.685bn | $5.889bn |
| Operating income | $786m | $686m | $2.334bn | $2.214bn |
| Income from continuing operations after tax | $473m | $396m | $1.437bn | $1.198bn |
| Net income | $473m | $393m | $1.437bn | $283m |
| Diluted EPS from continuing operations | $0.69 | $0.59 | $2.11 | $1.78 |
- Management’s non-GAAP earnings from ongoing operations were $427m for Q3, up from $347m, and $1.265bn for the first nine months, up from $1.195bn. The nine-month GAAP net-income comparison is not like-for-like: 2015 included a $915m loss from discontinued operations, including the spinoff loss.
- Operating cash flow was $2.230bn for the first nine months, versus $1.688bn in 2015. Capital expenditures for property, plant and equipment were $2.073bn, versus $2.560bn. Dividends paid were $772m. Cash at quarter-end was $416m, down from $836m at year-end 2015.
- At September 30, short-term debt was $636m, current maturities of long-term debt $443m, and long-term debt $18.069bn. Combined debt on those balance-sheet lines was $19.148bn, compared with $19.964bn at year-end 2015. PPL reported substantial unused committed capacity, including $2.242bn under U.S. facilities and about $1bn under U.K. facilities.
- Revenue was nearly flat in Q3 and down 3% for the nine-month period. Lower U.K. revenues in U.S.-dollar terms and lower fuel and energy-cost recoveries weighed on the nine-month total. Operating income improved as operating expenses declined; lower commodity costs and reduced operating and maintenance expense contributed.
Changes, outlook, commentary and risks
- Segment net income for the first nine months increased in the U.K. regulated business to $915m from $814m, Kentucky to $314m from $267m, and Pennsylvania to $263m from $191m. U.K. results were affected by currency and hedge movements; PPL’s reported foreign-currency translation loss was $840m, recorded in accumulated other comprehensive loss rather than net income.
- PPL expected higher 2016 GAAP net income than 2015, primarily because 2015 included the Supply spinoff. It expected higher ongoing earnings, chiefly from Pennsylvania and Kentucky. U.K. segment net income was expected to be relatively flat; management expected lower U.K. ongoing earnings, partly because of exchange rates. The filing provides no numerical consolidated EPS guidance.
- In Q3, PPL received approximately $310m cash by settling U.K. earnings hedges and entered replacement hedges. Management said the settlement had no significant net-income effect because hedge values had already been marked to fair value. As of October 31, budgeted U.K. earnings were reported 91% hedged for the rest of 2016, 94% for 2017 and 93% for 2018.
- The U.K. Finance Act reduced the statutory tax rate effective 2020; PPL recognized a $42m deferred tax benefit in Q3, of which $37m related to prior-year deferred taxes and was treated as a special item. A revised U.K. pension discount-rate method reduced nine-month pension cost by $31m pretax, or $25m after tax.
- Brexit-related uncertainty and sterling weakness could materially affect PPL’s U.K. earnings and financial condition. Other material risks include environmental compliance costs and litigation, regulatory cost recovery, weather and customer demand, generation availability, fuel costs, interest rates, pension funding, and counterparty and credit risks. The Clean Power Plan was stayed pending litigation; the ultimate compliance requirements and costs remained uncertain.
- LG&E and KU announced plans to seek KPSC rate increases, anticipated for filing in November 2016, with proposed annual increases of $103m for KU and $94m for LG&E electricity plus $14m for LG&E gas. The requested rates were proposed to take effect in July 2017; approval and final amounts were uncertain.
- LG&E and KU reduced recorded asset-retirement obligations by a combined $118m after revising estimated coal-ash impoundment closure costs and timing. The filing notes that further changes may be needed as plans and estimates develop.
Most important facts for investors to verify
- Compare ongoing earnings and segment trends separately from GAAP net income, particularly given the 2015 spinoff-related loss and 2016 hedge and tax items.
- Review U.K. sterling exposure, hedge coverage and the sensitivity of earnings and balance-sheet values to exchange rates and Brexit developments.
- Track the outcome of the proposed Kentucky rate cases, including requested returns, capital programs and effective dates.
- Assess the funding of capital spending and dividends against operating cash flow, debt maturities, available credit and environmental obligations.
- Monitor environmental litigation, coal-ash closure estimates and the potential timing and cost of future compliance requirements.