PPL Corporation — Q2 2018 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers PPL Corporation and four subsidiaries for the quarter and six months ended June 30, 2018, with comparisons to 2017. PPL operates regulated electricity businesses in the U.K., Pennsylvania and Kentucky, and regulated natural gas operations in Kentucky. Dollar amounts below are in millions except per-share data.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $1,848 | $1,725 | $3,974 | $3,676 |
| Operating income | $658 | $658 | $1,509 | $1,416 |
| Net income | $515 | $292 | $967 | $695 |
| Diluted EPS | $0.73 | $0.43 | $1.38 | $1.01 |
| Operating cash flow | Not separately presented for the quarter | $1,325 | $790 |
- Q2 revenue rose $123, while operating income was unchanged as operating expenses also increased. First-half revenue rose $298 and operating income rose $93.
- GAAP net income and EPS benefited significantly from foreign-currency hedge results: other income, net, was $234 in Q2 versus an expense of $68 a year earlier. The filing attributes $164 of Q2 other income to economic foreign-currency contracts; the after-tax special-item gain from unrealized foreign-currency hedges was $140. For the first half, the corresponding after-tax special-item gain was $75, compared with a loss of $85 in 2017.
- Management’s non-GAAP earnings from ongoing operations were $384 for Q2 versus $356, and $901 for the first half versus $781. First-half segment results included ongoing earnings of $516 in the U.K. (down $3), $219 in Kentucky (up $44) and $223 in Pennsylvania (up $67).
- First-half operating cash flow of $1,325 was below capital expenditures of $1,527, implying approximately $202 of negative operating-cash-flow-after-capex. Cash dividends paid were $558. Operating cash flow increased $535 year over year, helped by lower pension contributions following accelerated U.K. pension funding in 2017.
- At June 30, cash and cash equivalents were $852. Short-term debt was $1,864, current maturities of long-term debt $203, and long-term debt $20,217. Total reported debt was approximately $22,284, up from about $21,275 at year-end 2017. The filing reports $331 of unused PPL Capital Funding credit-facility capacity and $1 of unused capacity under its $1,000 commercial-paper program; separate U.K. facilities had $1.2 billion equivalent of unused capacity.
- PPL declared a quarterly dividend of $0.41 per share, equivalent to $1.64 annualized. Six-month dividends declared per share were $0.82, versus $0.79 in 2017.
Material changes and unusual items
- The U.S. federal corporate tax rate reduction to 21% lowered income taxes, while tax savings are being returned to customers through rate adjustments and regulatory liabilities. PPL Electric recorded a $37 liability for January–June tax savings; its estimated full-year 2018 revenue reduction was $72.
- Kentucky state tax legislation reduced the corporate rate from 6% to 5%. LKE recorded a $9 deferred-tax charge, while LG&E and KU recorded regulatory liabilities of $16 and $19, respectively, related to regulated deferred-tax remeasurement.
- PPL completed a public offering of 55 million shares plus 8.25 million over-allotment shares and entered forward-sale agreements covering 63.25 million shares. Settlement is due no later than November 2019; PPL receives proceeds and issues shares upon settlement. Its at-the-market program generated $119 gross proceeds for the first half.
- Capital expenditures rose year over year at LKE, LG&E and KU, particularly for environmental water projects; spending declined at PPL Electric and WPD.
- PPL acquired Safari Energy, a U.S. commercial solar solutions provider, in Q2. The acquisition was described as not material.
Outlook, risks and contingencies
- Management projected higher 2018 net income versus 2017 for the U.K., Kentucky and Pennsylvania segments. Excluding prior-year tax-reform and hedge special items, U.K. earnings were expected to benefit from assumed higher sterling exchange rates and pension income; Kentucky earnings were expected to be relatively flat, and Pennsylvania earnings higher, primarily from transmission. The filing provides no numerical consolidated earnings or EPS guidance in the text supplied.
- Management cited favorable weather and higher base rates as earnings supports, offset by higher operating and maintenance costs, depreciation and interest expense. Interim results may be affected by seasonality and are not necessarily indicative of full-year results.
- Kentucky regulators’ treatment of tax savings remained under review after LG&E and KU challenged modifications to a settlement; a decision was pending. The utilities intended to file Kentucky base-rate applications during 2018 for rates expected in spring 2019. PPL Electric’s approved negative surcharge began July 1, 2018.
- Environmental exposures include coal-combustion-residual closures, wastewater discharge rules, possible air-emissions controls and groundwater matters. Compliance costs could be significant, though the utilities generally expect eligible costs to be recoverable through rates. The filing says losses cannot currently be estimated for certain seepage and environmental claims. Cane Run litigation and an appeal in the E.W. Brown environmental case remained unresolved.
- Other risks include U.K. withdrawal from the EU and sterling volatility, future U.K. RIIO-2 price controls, weather-driven volumes, fuel and supplier risks, interest rates, credit markets and regulatory proceedings. PPL’s budgeted U.K. earnings exposure was fully hedged for the remainder of 2018 and 2019, and 50% hedged for 2020, as of July 31.
- LG&E and KU’s obligations related to OVEC warrant attention: a sponsor with a 4.85% share filed for bankruptcy and sought to reject its power-purchase contract. The effect on other sponsors’ obligations and possible credit-support needs was uncertain.
- Management reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during Q2. The filing reported no material change to the risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Separate recurring performance from volatile foreign-currency hedge gains when assessing reported earnings; review the reconciliation of GAAP net income to ongoing earnings.
- Track short-term borrowing and commercial-paper utilization, refinancing needs, and the timing and dilution effects of the 63.25 million-share forward contracts.
- Confirm the final regulatory disposition and customer-refund timing for federal and Kentucky tax savings, and monitor proposed Kentucky base-rate cases.
- Assess actual capital spending, environmental compliance costs and rate recovery, including developments in CCR, wastewater and groundwater matters.
- Follow the OVEC sponsor bankruptcy, potential credit-support requirements, and the unresolved environmental litigation and regulatory proceedings.