PPL Corporation — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2021. PPL is a regulated utility holding company with operations in Pennsylvania and Kentucky. The combined filing also reports PPL Electric, Louisville Gas and Electric (LG&E), and Kentucky Utilities (KU). PPL completed the sale of its U.K. utility business on June 14, 2021; its results are reported as discontinued operations, so comparisons with 2020 are not fully comparable.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $1,288 million | $1,263 million | $2,786 million | $2,703 million |
| Operating income | $270 million | $347 million | $685 million | $771 million |
| Continuing-operations income (loss), after tax | $(536) million | $153 million | $(333) million | $357 million |
| Discontinued-operations income (loss), after tax | $555 million | $191 million | $(1,488) million | $541 million |
| Net income (loss) | $19 million | $344 million | $(1,821) million | $898 million |
| EPS | $0.03 | $0.45 | $(2.37) | $1.17 |
Q2 operating income was about 21% of revenue, compared with about 27% a year earlier; the filing does not present a single consolidated margin measure. PPL’s non-GAAP earnings from ongoing operations were $147 million in Q2 versus $159 million, and $366 million for the first half versus $365 million.
Cash flow and liquidity. For the first half, cash from continuing operating activities was $795 million, down from $866 million; capital expenditures were $969 million. The U.K. sale generated $10.56 billion of net investing cash proceeds (reported sale proceeds were $10.7 billion before taxes and fees; net proceeds after taxes and fees were $10.4 billion). At June 30, cash and cash equivalents were $7.629 billion, versus $442 million at year-end 2020. PPL had $11.095 billion of long-term debt and $2.2 billion due within one year; reported debt carrying value including current maturities was $13.295 billion. Available capacity under the listed external credit facilities was $3.084 billion.
Operating subsidiaries. First-half net income was $209 million at PPL Electric (versus $236 million), $120 million at LG&E (unchanged), and $142 million at KU (versus $133 million). PPL Electric’s revenue and earnings were affected by a reserve related to a challenge to its transmission return on equity. Kentucky utilities benefited from higher volumes, primarily associated with weather, while fuel and energy costs also increased.
Material changes and unusual items
- The U.K. utility sale produced a first-half pre-tax loss on sale of $1.609 billion. The sale also triggered a $647 million federal tax expense related to realization of the investment’s outside book-tax basis difference.
- PPL recorded a $322 million pre-tax loss in Q2 on extinguishment of debt, primarily tender premiums and related costs. The debt transaction materially increased reported interest expense. A further $58 million loss was recorded in Q3 following July redemptions.
- A $383 million deferred tax expense in continuing operations reflected the U.K. corporation tax rate increase from 19% to 25%, effective April 2023, even though the U.K. business was sold.
- Safari Energy recorded a $37 million pre-tax impairment of solar panel inventory ($28 million after tax), citing lower module values, tax-credit changes, and higher project input costs.
- Other comprehensive income included substantial reclassifications associated with the U.K. sale, including a $3.578 billion after-tax transfer from accumulated other comprehensive loss.
Outlook, commentary, risks, and contingencies
- PPL expects to use sale proceeds to acquire Narragansett Electric for approximately $3.8 billion, with closing then expected by March 2022, subject to remaining regulatory approvals and customary conditions. The transaction is not subject to a financing condition.
- PPL said it planned to reduce outstanding debt by approximately $3 billion to $3.5 billion and continued to evaluate use of remaining proceeds. In July, the board authorized up to $3 billion of share repurchases; PPL expected to repurchase $500 million by year-end 2021, subject to market conditions and competing capital needs. The company was also reevaluating its capital expenditure plan.
- Kentucky regulators approved annual revenue increases of $199 million for LG&E and KU, with a 9.425% authorized ROE, and approved advanced metering deployment and a retired-asset recovery rider. Net-metering issues remained unresolved, and the utilities filed motions for rehearing and clarification.
- PPL Electric recorded a $51 million regulatory liability for potential refunds relating to a FERC challenge to its transmission formula-rate ROE; the proceeding and related appeals remained unresolved.
- Material risks include regulatory and rate-case outcomes, environmental compliance and remediation costs, severe weather and changing demand, cyber and pipeline security requirements, interest rates and credit access, and litigation. PPL said COVID-19 had not materially affected operations, liquidity, or supply chains to date, but its duration and effects remained uncertain.
- PPL disclosed Talen-related litigation for which it could not estimate possible losses; a Delaware trial was scheduled for February 2022. Other environmental matters and regulatory proceedings also remain pending. The filing provides no formal full-year earnings guidance.
Most important facts for investors to verify
- Reconcile reported GAAP results with ongoing-operations earnings, especially the sale-related loss and tax effects, debt-extinguishment loss, and solar inventory impairment.
- Track Narragansett acquisition approvals, expected funding, closing timing, and the final allocation of U.K. sale proceeds among debt reduction, investment, and repurchases.
- Monitor the FERC transmission ROE challenge and potential customer refunds, as well as the outcome of Kentucky rate-case rehearing and net-metering proceedings.
- Assess debt maturities, post-quarter debt redemptions, liquidity, and whether planned capital spending or repurchases change as PPL completes its strategic repositioning.
- Review environmental obligations, pending litigation, and the potential cost and rate-recovery implications of evolving emissions, CCR, and cybersecurity requirements.