PPL Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited. The combined filing also reports separately on PPL Electric Utilities, Louisville Gas and Electric (LG&E), and Kentucky Utilities (KU).
Business context and material developments
PPL operates regulated electric utilities in Pennsylvania and Kentucky and a regulated gas utility in Kentucky. The major portfolio change was the June 14, 2021 sale of its U.K. utility business to National Grid. PPL received $10.7 billion in proceeds, or $10.4 billion net of taxes and fees, and recorded a $1.609 billion pretax loss on sale. The U.K. business is reported as discontinued operations.
PPL agreed to acquire Narragansett Electric for approximately $3.8 billion in cash, expected to close by March 2022, subject to remaining approvals. Management described the transactions as repositioning PPL as a U.S.-focused utility and intended to strengthen its balance sheet and support growth.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $1.512B | $1.400B | $4.298B | $4.103B |
| Operating income | $431M | $437M | $1.116B | $1.208B |
| Continuing-operations income (loss), after tax | $209M | $117M | ($124M) | $474M |
| Discontinued-operations income (loss), after tax | ($2M) | $164M | ($1.490B) | $705M |
| Net income (loss) | $207M | $281M | ($1.614B) | $1.179B |
| EPS | $0.27 | $0.37 | ($2.10) | $1.53 |
Underlying earnings: Management’s non-GAAP Earnings from Ongoing Operations were $277M in Q3, up from $228M, and $643M for the first nine months, up from $593M. This measure excludes special items and is not GAAP net income.
Cash flow: Nine-month cash from operating activities was $1.978B, including $1.252B from continuing operations and $726M from discontinued operations, versus $2.247B total in 2020. Capital expenditures were $1.460B. Investing cash flow included $10.560B of net proceeds from the U.K. sale, producing $8.471B net investing cash flow.
Debt and liquidity: At September 30, cash and cash equivalents were $4.767B, versus $442M at year-end 2020. Debt carrying amount was $11.139B, including $474M due within one year, versus $14.689B at year-end. PPL’s credit facilities had $3.084B of unused capacity; no commercial paper was outstanding. PPL repurchased $282M of shares through September 30.
Margins and operating trends: Revenue rose, but operating income declined as operating expenses increased. Kentucky Regulated earnings were $159M for Q3 and $389M year to date, compared with $129M and $330M. Pennsylvania Regulated earnings were $126M and $335M, compared with $135M and $371M. Kentucky results benefited from new rates effective July 1, 2021, favorable weather and volumes; Pennsylvania results faced higher costs and a transmission return-on-equity reserve.
Key changes, outlook, and risks
- Nine-month reported results were heavily affected by the U.K. sale loss, $395M of debt-extinguishment expense, and a $383M deferred tax expense related to the U.K. tax-rate change. Higher interest expense and taxes contributed to the continuing-operations loss.
- PPL repaid or retired $3.484B of debt principal for $3.876B in cash during June and July, recognizing $395M of extinguishment losses year to date. The board authorized up to $3B of share repurchases; management expected approximately $1B of repurchases by year-end. An additional $269M was repurchased in October.
- Management was evaluating at least $1B of incremental regulated-utility capital spending through 2025; plans remained subject to board review. The declared quarterly dividend was $0.415 per share, or $1.66 annualized; future dividends are subject to board discretion.
- Kentucky regulators approved approximately $199M of annual revenue increases for LG&E and KU, effective July 1, 2021, and approved advanced metering deployment and a retired-asset recovery rider. The utilities accepted a four-year base-rate stay-out, subject to exceptions. Certain rehearing matters remained unresolved.
- A PPL Electric transmission-rate settlement would reduce its base ROE in stages to 10.00% beginning June 2023, subject to FERC review. The filing estimates a $25M–$30M annual net-income reduction once fully effective; refund reserves were recorded.
- Risks include regulatory and rate-case outcomes, the Narragansett acquisition and required approvals, environmental compliance and costs, weather and demand, fuel and commodity supply, cyber threats, litigation, and uncertainty from COVID-19. PPL said the pandemic had not materially affected operations or liquidity to date. The Talen-related litigation could involve material losses, but PPL could not estimate a range.
Investor facts to verify
- Track final Rhode Island approval and timing, conditions, and funding for the Narragansett acquisition.
- Confirm FERC action on the PPL Electric settlement, associated customer refunds, and the expected earnings impact.
- Assess how PPL allocates sale proceeds among debt reduction, repurchases, dividends, and incremental utility investment.
- Monitor continuing-operations earnings and cash flow separately from the discontinued U.K. business and transaction-related items.
- Review environmental obligations, unresolved regulatory matters, and Talen litigation developments for changes in estimated exposure.