PPL Corp annual report, FY2015

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PPL Corporation 2015 Form 10-K Summary

Business context and reporting period

This combined Form 10-K covers the fiscal year ended December 31, 2015, and includes PPL Corporation and its regulated utility subsidiaries. PPL’s businesses were organized into U.K., Kentucky and Pennsylvania regulated segments. On June 1, 2015, PPL spun off its competitive generation business, PPL Energy Supply, which combined with Riverstone’s generation business to form Talen Energy. PPL retained no ownership or control of Talen after the transaction.

Financial performance and position

  • Revenue and operating income: Revenue was $7.669 billion, down from $7.852 billion in 2014. Operating income was $2.831 billion versus $2.867 billion.
  • Profit and EPS: Income from continuing operations attributable to PPL shareowners was $1.603 billion, up from $1.437 billion. Net income attributable to shareowners was $682 million, down from $1.737 billion; the 2015 result includes a $921 million loss from discontinued operations, including an $879 million loss on the spinoff. Diluted EPS was $2.37 from continuing operations and $1.01 on a net-income basis.
  • Ongoing earnings: Management’s non-GAAP earnings from ongoing operations were $1.489 billion, compared with $1.349 billion in 2014. This measure excludes special items and is not a substitute for GAAP net income.
  • Segment earnings from ongoing operations: U.K. Regulated $968 million (up from $907 million); Kentucky Regulated $343 million (up from $312 million); Pennsylvania Regulated $252 million (down from $265 million); Corporate and Other was a $74 million loss, compared with a $135 million loss.
  • Operating margins: Management-reported non-GAAP gross margins were $2.243 billion for the U.K., $1.926 billion for Kentucky, and $1.237 billion for Pennsylvania. U.K. margins were affected by the start of the RIIO-ED1 price control and currency translation; Kentucky benefited from rate increases and environmental-capital returns; Pennsylvania transmission margins rose with investment, while higher operating costs weighed on earnings.
  • Cash flow and investment: Cash from continuing operating activities was $2.272 billion, down from $2.941 billion. Continuing investing cash outflow was $3.439 billion, including $3.533 billion of PP&E expenditures. Total cash from operations, including discontinued operations, was $2.615 billion. Year-end cash was $836 million, versus $1.399 billion.
  • Debt and liquidity: At year-end, PPL reported $916 million of short-term debt and $19.048 billion of long-term debt, including current maturities. Unused committed borrowing capacity was $1.288 billion in U.S. facilities and approximately $1.4 billion in U.K. facilities. PPL reported compliance with credit-facility covenants.
  • Dividends: PPL declared $1.50 per share for 2015. In February 2016, it announced a quarterly dividend increase to $0.38 per share, or $1.52 annualized.

Material changes versus the prior comparable period

  • The Talen spinoff substantially changed PPL’s business mix and makes reported net income and revenue less directly comparable with 2014, when the competitive Supply segment was included for the full year. The spinoff also reduced reported assets from $48.606 billion to $39.301 billion.
  • Continuing-operations income and management’s ongoing earnings increased, despite lower revenue and operating income. Segment results diverged: U.K. and Kentucky ongoing earnings rose, while Pennsylvania earnings declined.
  • Cash from continuing operations fell by $669 million, with working-capital movements, lower U.K. margins and interest-rate-swap settlement payments among the cited factors.
  • At WPD, a change in estimated network-asset useful lives reduced 2015 depreciation by $84 million pretax, or $66 million after tax ($0.10 per share). A U.K. tax-rate reduction generated a $90 million deferred tax benefit.
  • LG&E and KU recorded a $228 million increase to asset-retirement obligations related to the final coal-combustion-residuals rule. PPL’s total reported ARO increased to $586 million.

Guidance, commentary, risks and unusual items

  • 2016 outlook: Excluding special items, PPL expected higher earnings in 2016 than in 2015, primarily from Kentucky and Pennsylvania. U.K. earnings were expected to be relatively flat; Corporate and Other costs were expected to be relatively flat. No consolidated 2016 EPS target is stated in the provided filing text.
  • Regulatory outlook: WPD began its eight-year RIIO-ED1 price-control period in April 2015. Management expected U.K. earnings to be relatively flat through 2017 during the transition, with more stringent incentive targets expected to reduce incentive revenue from 2017. PPL Electric’s $124 million annual distribution-rate increase took effect January 1, 2016; Kentucky rate increases took effect July 1, 2015.
  • Capital program: PPL projected $16.417 billion of capital expenditures for 2016–2020, including $1.947 billion for environmental projects. These projections exclude the proposed Project Compass transmission line. The company noted actual environmental costs could differ substantially and recovery remains subject to regulatory processes.
  • Environmental and legal risks: Significant uncertainties include the Clean Power Plan, CCR closure and monitoring requirements, wastewater-discharge rules, other air and water regulation, and related recovery in rates. The Clean Power Plan was stayed by the U.S. Supreme Court in February 2016 pending judicial review. Environmental claims involving the Cane Run, Mill Creek and E.W. Brown facilities, and other proceedings, remain unresolved. PPL Electric accrued $10 million for remediation at additional sites; reasonably possible costs could be as much as $29 million.
  • Other contingencies: LKE’s indemnities related to the former Western Kentucky Energy lease remain uncertain; a related complaint was filed in February 2016. WPD debt includes approximately £4.4 billion of notes with a potential put following specified ratings or restructuring events. A downgrade below investment grade could also trigger collateral or termination provisions in certain contracts.
  • Other items to note: The $879 million spinoff loss was nondeductible for tax purposes. PPL recorded no goodwill impairment in its 2015 review. The independent auditor issued an unqualified opinion on PPL’s financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Reconcile the $682 million GAAP net income and $1.01 diluted EPS to continuing-operations results and management’s $1.489 billion ongoing-earnings measure, including the spinoff loss and other special items.
  • Assess the sustainability of 2015 continuing earnings, including the $90 million U.K. deferred-tax benefit and the $84 million depreciation benefit from extended asset lives.
  • Review the drivers of the $669 million decline in continuing operating cash flow and the funding plan for the projected capital program and debt maturities.
  • Track regulatory decisions and cost recovery for U.K. RIIO-ED1, Pennsylvania rates and transmission investment, Kentucky environmental spending, and coal-ash and wastewater compliance.
  • Review the status and potential exposure of environmental litigation, remediation, the WKE indemnities, pension funding, and debt or derivative rating triggers.