PPL Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unless noted, financial amounts are in millions of dollars. The filing also reports separately for PPL Electric Utilities, Louisville Gas and Electric (LG&E), and Kentucky Utilities (KU).
Business context
PPL is a U.S. regulated utility holding company, with Pennsylvania electric transmission and distribution and Kentucky electric and gas operations. The U.K. utility sale closed in June 2021; its results appear as discontinued operations in the 2021 comparison, making reported net income comparisons materially affected by that transaction.
Key financial results
| PPL consolidated | Q1 2022 | Q1 2021 |
|---|---|---|
| Operating revenue | $1,782 | $1,498 |
| Operating income | $454 | $415 |
| Operating margin | 25.5% | 27.7% |
| Continuing-operations net income | $273 | $203 |
| GAAP net income (loss) | $273 | $(1,840) |
| EPS from continuing operations | $0.37 | $0.26 |
| Management-defined earnings from ongoing operations (non-GAAP) | $305 | $219 |
| Cash from operating activities | $502 | $396 |
| Capital expenditures for property, plant and equipment | $427 | $471 |
At March 31, 2022, PPL reported cash and cash equivalents of $4,249, short-term debt of $985, and long-term debt of $11,142, including $474 due within one year. Total unused external credit-facility capacity was $1,914; commercial paper outstanding was $985. The quarter’s $678 increase in cash included financing inflows, notably a $916 net increase in short-term debt.
Operating revenue increased $284 year over year, while operating expenses rose $245. Higher customer supply costs and commodity-related recoveries contributed to revenue growth; higher energy purchases and fuel costs also raised expenses. Operating margin declined to 25.5% from 27.7%. PPL paid common dividends of $306 in cash; the declared quarterly dividend was $0.20 per share.
Regulated subsidiary net income rose year over year: PPL Electric $143 versus $113; LG&E $93 versus $75; and KU $107 versus $86. These are subsidiary results and are not additive to PPL consolidated net income without eliminations and corporate items.
Material changes and unusual items
- PPL’s 2021 GAAP net loss included a $2,043 after-tax loss from discontinued operations, principally related to the U.K. utility sale. The sale generated $10.7 billion in cash proceeds and $10.4 billion net proceeds after taxes and fees in June 2021.
- Interest expense fell $46 year over year, primarily because PPL Capital Funding debt was redeemed in June and July 2021.
- 2022 earnings from ongoing operations of $305 exclude $32 after-tax of special items, including $21 after-tax of Narragansett acquisition integration costs and $4 after-tax of Talen litigation costs. Management said the acquisition integration costs are not expected to be recovered.
- Kentucky regulated adjusted gross margins increased $89, mainly from new base rates and environmental and gas cost recoveries transferred into base rates. Pennsylvania adjusted gross margins increased $45, including higher transmission billing factors and returns on additional transmission investment.
- PPL Electric refunded $44 of customer revenue during the quarter under the settled transmission formula-rate return-on-equity matter; the remaining balance was expected to be refunded through May 31, 2022.
Outlook, risks and contingencies
- The filing provides no specific consolidated earnings or revenue guidance for 2022. Management cautions that interim results may not indicate full-year results and that seasonality can affect quarterly performance.
- The proposed approximately $3.8 billion acquisition of Narragansett Electric remained pending. Rhode Island Superior Court stayed the state utility regulator’s approval pending an appeal; the filing described favorable resolution of that process as the final pending approval needed to close. The transaction has no financing condition and is expected to be funded with U.K. sale proceeds.
- Management cited inflation and supply-chain disruption as risks to fuel, construction, regulatory-compliance and other costs. Rate mechanisms mitigate some cost and commodity exposure, but retail sales remain exposed to weather and economic conditions.
- Environmental compliance is a continuing exposure, particularly coal-combustion residuals (CCR), wastewater rules and potential emissions requirements. Future regulatory determinations could require changes to closure plans, additional monitoring or remediation, potentially at substantial cost; recovery is generally expected through rates but is not assured.
- Other notable contingencies include Talen-related litigation, for which PPL could not estimate possible losses, and regulatory appeals involving LG&E and KU transmission credits. The filing also identifies cybersecurity, counterparty, interest-rate, climate-policy, and acquisition-approval risks.
- LG&E and KU expect to retire Mill Creek Unit 1 in 2024, Mill Creek Unit 2 in 2028, and KU’s E.W. Brown Unit 3 in 2028; the companies anticipate recovery of and return on remaining net book value through a retired-asset recovery rider.
Important facts for investors to verify
- Track Rhode Island court proceedings and any resulting change to the timing, approvals, or economics of the Narragansett acquisition.
- Reconcile GAAP earnings with management’s non-GAAP ongoing-earnings measure, including acquisition, litigation, and other special items.
- Monitor short-term borrowing, liquidity, and use of U.K. sale proceeds alongside capital spending, dividends, and the authorized share-repurchase program; no shares were repurchased in Q1 2022.
- Assess whether environmental compliance costs, inflation, and supply-chain disruptions remain recoverable through rates and whether coal-closure plans or estimates change.
- Review outcomes of the Talen litigation and relevant regulatory proceedings; PPL said it could not predict certain outcomes or estimate potential losses.