PPL Corporation — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; filed February 17, 2017. This combined filing covers PPL Corporation and four regulated subsidiaries. Figures below are primarily for consolidated PPL unless identified otherwise; amounts are in U.S. dollars.
Business context
PPL operates regulated electricity distribution businesses in the U.K. and Pennsylvania, and regulated electric and natural gas utilities in Kentucky. Following the June 2015 spinoff of its competitive generation business, PPL reported three segments: U.K. Regulated, Kentucky Regulated and Pennsylvania Regulated.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $7.517 billion | $7.669 billion |
| Operating income | $3.048 billion | $2.831 billion |
| Net income attributable to PPL shareowners | $1.902 billion | $682 million |
| Diluted EPS | $2.79 | $1.01 |
| Management’s non-GAAP earnings from ongoing operations | $1.674 billion | $1.489 billion |
| Cash from continuing operating activities | $2.890 billion | $2.272 billion |
| Capital expenditures for property, plant and equipment | $2.920 billion | $3.533 billion |
Operating expenses were $4.469 billion, down from $4.838 billion, primarily reflecting lower fuel, purchased-energy and maintenance costs. Interest expense was $888 million. PPL’s 2016 operating margin was approximately 40.6% (operating income divided by revenue).
At year-end, PPL had $38.315 billion in assets, $9.899 billion in equity, $923 million in short-term debt and $18.326 billion in long-term debt including its current portion. Cash and cash equivalents were $341 million, down from $836 million. Unused committed credit capacity was approximately $2.507 billion for U.S. facilities and $969 million for U.K. facilities.
Segment net income was $1.246 billion for U.K. Regulated, $398 million for Kentucky Regulated and $338 million for Pennsylvania Regulated; corporate and other costs were $80 million. PPL declared dividends of $1.52 per share for 2016 and announced an increase to an annualized $1.58 in February 2017.
Material changes versus 2015
- Revenue declined $152 million, or about 2%, including a $255 million adverse foreign-exchange effect on U.K. revenue. Lower energy prices reduced reported pass-through revenue, while domestic rate increases supported results.
- Net income rose $1.220 billion, but the comparison is distorted by 2015’s $879 million loss on the Supply business spinoff and discontinued operations. Ongoing-operations earnings increased $185 million, or about 12%.
- Operating cash flow increased $618 million. Cash used in investing activities was $2.918 billion; financing activities used $439 million.
- Foreign currency translation reduced other comprehensive income by $1.107 billion, largely from translating U.K. assets and liabilities into U.S. dollars. This was recorded in accumulated other comprehensive loss, not as an equivalent operating cash outflow.
Outlook, commentary and risks
- Management expected lower 2017 net income than 2016, mainly due to a lower assumed pound-to-dollar exchange rate and 2016 tax benefits not expected to recur. It projected slightly higher Kentucky earnings and relatively flat Pennsylvania earnings; no consolidated 2017 EPS target is stated in the supplied filing text.
- Management’s strategy centers on regulated rate-base and U.K. regulatory asset growth, reliability investments, cost recovery and maintaining investment-grade credit ratings. Planned 2017–2021 capital expenditures total $15.887 billion, including $1.435 billion for environmental projects.
- In November 2016, LG&E and KU sought KPSC base-rate increases totaling approximately $211 million across their electric and gas businesses, with rates proposed for July 2017; the outcome was uncertain. The filings also requested approval for advanced metering and distribution automation.
- U.K. earnings and reported assets are exposed to sterling movements, inflation-linked regulation and uncertainty following the Brexit referendum. As of January 31, 2017, budgeted U.K. earnings were 92% hedged for 2017, 87% for 2018 and 50% for 2019.
- Key risks include rate-case outcomes and regulatory cost recovery; environmental compliance and coal-ash closure requirements; pension assumptions and funding; weather, demand and operational interruptions; cyber and physical security; financing costs and credit ratings; and litigation or contingent obligations. The filing discusses unresolved environmental claims and an uncertain legacy WKE-related indemnification matter.
- Unusual 2016 items included $310 million cash received from settling U.K. earnings hedges (with no material settlement effect on net income because prior fair-value changes had been recognized), a $42 million U.K. tax-rate benefit, approximately $35 million from a foreign-tax-credit decision, and a $34 million after-tax pension-cost benefit from a methodology change.
Important facts for investors to verify
- Reconcile GAAP net income and EPS with management’s non-GAAP ongoing-earnings measure, particularly the effects of hedge marks, tax benefits and the 2015 spinoff comparison.
- Track the GBP/USD rate, hedge coverage and the earnings sensitivity of the U.K. segment.
- Review final outcomes and timing of the Kentucky rate cases, including authorized returns and recovery for proposed programs and environmental spending.
- Assess projected capital spending, funding needs, debt maturities, credit capacity and dividend sustainability against operating cash flow.
- Monitor Clean Power Plan and other environmental rule developments, CCR closure estimates, related ARO revisions and any resulting rate recovery.
- Follow the WKE indemnification litigation and environmental proceedings for changes in exposure; the filing does not provide a clear estimate of potential loss for certain matters.
Audit and controls: Deloitte & Touche issued an unqualified opinion on PPL’s 2016 consolidated financial statements and concluded PPL’s internal control over financial reporting was effective. Management reported effective disclosure controls for the registrants.