PPL Corporation — Q2 2019 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2019, compared with the same 2018 periods. PPL is a regulated utility holding company with U.K., Pennsylvania and Kentucky operations; the combined filing also reports separately for PPL Electric, LKE, LG&E and KU.
Key financial results
| Metric (PPL consolidated, $ millions except per-share data) | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | 1,803 | 1,848 | 3,882 | 3,974 |
| Operating income | 640 | 658 | 1,421 | 1,509 |
| Net income | 441 | 515 | 907 | 967 |
| Diluted EPS | $0.60 | $0.73 | $1.24 | $1.38 |
| Operating margin | 35.5% | 35.6% | 36.6% | 38.0% |
| Net margin | 24.5% | 27.9% | 23.4% | 24.3% |
- Cash flow: First-half operating cash flow was $1.070 billion, down from $1.325 billion. Capital expenditures were $1.474 billion versus $1.527 billion, leaving operating cash flow less capital expenditures at negative $404 million (prior-year negative $202 million). Dividends paid were $594 million. Cash, cash equivalents and restricted cash ended at $428 million, down from $643 million at year-end 2018.
- Debt and liquidity: At June 30, short-term debt was $1.636 billion and long-term debt, including amounts due within one year, was $21.101 billion; combined debt was approximately $22.737 billion, versus approximately $22.029 billion at December 31, 2018. Cash was $406 million on the balance sheet. PPL Capital Funding commercial paper outstanding was $1.014 billion, with $486 million unused capacity; total U.S. credit-facility unused capacity was $1.789 billion. These liquidity amounts are not interchangeable with consolidated cash.
- Segment results: First-half net income was $548 million in U.K. Regulated (down $43 million), $214 million in Kentucky Regulated (up $4 million), and $215 million in Pennsylvania Regulated (down $8 million); corporate and other was a $70 million loss. Management’s non-GAAP Earnings from Ongoing Operations were $422 million for Q2 (up from $384 million) and $930 million for the first half (up from $901 million).
Material changes and management commentary
- Revenue fell $45 million in Q2 and $92 million in the first half. In Kentucky, increased rates were offset by lower weather-driven sales and the departure of eight municipal customers effective April 30. U.K. revenue was also reduced by lower volumes and sterling translation.
- Lower Q2 and first-half GAAP earnings chiefly reflect reduced gains on foreign-currency economic hedges versus 2018, alongside lower revenue and higher depreciation and interest costs. Q2 other income included $45 million of gains on these contracts, versus $164 million a year earlier. PPL excludes unrealized hedge effects from its non-GAAP ongoing earnings measure.
- Depreciation increased $42 million in the first half, primarily from additions to utility assets and higher Kentucky depreciation rates effective May 1. First-half interest expense rose $13 million.
- Kentucky regulators approved new LG&E and KU rates effective May 1, 2019. Including termination of the TCJA bill-credit mechanism, the orders represent stated annual revenue increases of $187 million ($114 million KU; $73 million LG&E). KU separately requested a $13 million Virginia rate increase in July; regulatory approval remained pending.
Outlook, risks and contingencies
- The filing provides no specific consolidated earnings guidance. Management describes a strategy focused on regulated utility investment, reliability, timely cost recovery and maintaining investment-grade credit ratings. Interim results may be affected by seasonality and are not necessarily indicative of full-year results.
- Key uncertainties include Brexit and sterling exposure, U.S. and U.K. regulatory outcomes, interest rates, weather and demand, and environmental compliance. PPL reported U.K. earnings exposure 100% hedged for the remainder of 2019 and 63% hedged for 2020 as of July 31, 2019; sterling weakness could still affect reported results and asset values.
- Coal-ash closure and wastewater rules may require significant capital and operating spending. Compliance estimates and timing remain uncertain; related costs are generally subject to rate recovery, but recovery is not assured. Potential additional asset-retirement costs could be material.
- PPL faces Talen-related Montana and Delaware litigation concerning a 2014 proceeds distribution. PPL says it has meritorious defenses, but could not estimate possible losses, which could be material. Environmental claims involving Cane Run and E.W. Brown also remain unresolved; losses could not be estimated for these matters.
- A Kentucky recycling tax credit produced a deferred tax benefit in Q2, partly offset by valuation allowances. Separately, proposed federal interest-deduction regulations could significantly limit tax deductions if finalized in their proposed form; the impact was not yet determinable.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS with management’s non-GAAP ongoing earnings, particularly the effect and timing of foreign-currency hedge gains and losses.
- Check whether operating cash flow, capital spending, dividends and debt levels remain consistent with liquidity and investment-grade objectives.
- Monitor implementation and realized revenue effects of the Kentucky rate orders, and the pending KU Virginia rate request.
- Follow Brexit-related sterling exposure and hedge coverage, plus the developing RIIO-ED2 U.K. price-control process.
- Track coal-ash and wastewater compliance estimates, regulatory cost recovery, and the outcomes or changing loss estimates for Talen and environmental litigation.