PPL Corporation — Q1 2016 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2016; results are unaudited. PPL is a regulated utility holding company operating in the U.K., Pennsylvania and Kentucky. The filing is a combined report for PPL and four subsidiary registrants. Comparisons are with Q1 2015, when PPL’s former competitive Supply segment was still included in results and was later spun off in June 2015.
Key financial metrics
| PPL consolidated | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenues | $2.011 billion | $2.230 billion | Down $219 million, or 9.8% |
| Operating income | $823 million | $890 million | Down $67 million |
| Income from continuing operations | $481 million | $552 million | Down $71 million |
| Net income | $481 million | $647 million | Down $166 million |
| Diluted EPS | $0.71 | $0.82 continuing operations; $0.96 total | Prior-year total included discontinued operations |
| Operating cash flow | $557 million | $452 million continuing operations | Up $105 million |
| Capital expenditures for property, plant and equipment | $656 million | $833 million | Down $177 million |
| Cash and cash equivalents | $814 million | $836 million at Dec. 31, 2015 | Down $22 million |
| Debt, including short-term and current maturities | $19.824 billion | $19.964 billion at Dec. 31, 2015 | Down $140 million |
Operating margin was approximately 40.9%, versus 39.9% a year earlier. Operating cash flow less PP&E expenditures was negative $99 million, compared with negative $381 million in Q1 2015. The current ratio was approximately 0.67 at March 31. PPL reported $1.493 billion of unused U.S. credit-facility capacity and approximately $1.2 billion of unused U.K. capacity; these facilities support liquidity and commercial paper programs.
Segment net income: U.K. Regulated $289 million (versus $375 million); Kentucky Regulated $112 million (versus $109 million); Pennsylvania Regulated $94 million (versus $87 million); Corporate and Other $(14) million (versus $(19) million). PPL’s non-GAAP earnings from ongoing operations were $458 million, compared with $519 million. PPL declared a quarterly dividend of $0.38 per share.
Material changes versus the prior comparable period
- Revenue declined mainly with lower U.K. regulated margins, milder weather and foreign-exchange effects; lower fuel and energy-purchase costs partly offset the revenue decline.
- U.K. gross margins fell $100 million, including $31 million from currency translation and $69 million from lower margins excluding currency effects, chiefly following the April 2015 RIIO-ED1 price decrease and lower weather-related volumes.
- Kentucky gross margins increased $3 million: higher base rates were largely offset by lower sales volumes from milder weather. Pennsylvania gross delivery margins rose $30 million, reflecting higher distribution rates and transmission returns, partly offset by milder weather.
- Net income comparisons are affected by the Supply segment spinoff: Q1 2015 included $95 million of discontinued-operations income. Q1 2016 continuing-operations income was $481 million.
- Foreign-currency translation reduced other comprehensive income by $464 million in Q1 2016, versus $66 million in Q1 2015; PPL’s total comprehensive income was $50 million versus $610 million.
Outlook, commentary, risks and unusual items
- Management expected 2016 earnings from ongoing operations to exceed 2015, primarily because of higher Kentucky and Pennsylvania regulated earnings. The filing text does not provide a clear numerical full-year EPS guidance value.
- Management projected relatively flat U.K. segment earnings in 2016 excluding special items, and relatively flat earnings from 2015 through 2017 during the RIIO-ED1 transition. The U.K. segment’s 2016 results were expected to benefit from recovery of prior distribution-revenue reductions.
- WPD changed its U.K. pension-cost discount-rate method, reducing Q1 2016 expense by $11 million pre-tax ($9 million after tax, or $0.01 per share). PPL estimated a $36 million after-tax 2016 benefit from the change.
- Q1 2016 PPL earnings included $24 million after-tax of gains on foreign-currency economic hedges, classified by management as a special item and excluded from ongoing earnings. A new stock-compensation accounting rule produced an $8 million PPL tax benefit; PPL Electric recorded a $5 million benefit.
- Major environmental investment and recovery matters include pending Kentucky approvals for coal-combustion-residual compliance projects estimated at $316 million for LG&E and $678 million for KU. Separate proposed environmental construction plans were estimated at $311 million for LG&E and $661 million for KU. Costs are subject to regulatory recovery, but outcomes and timing are uncertain.
- Environmental litigation and regulatory uncertainty include Clean Water Act claims involving Mill Creek and E.W. Brown, Cane Run claims, and a pending Kentucky Supreme Court review concerning the Trimble County water-discharge permit. The filing says outcomes and potential impacts cannot be predicted.
- PPL cited U.K. currency, inflation and interest-rate uncertainty around the June 2016 EU-membership referendum; its 2016 budgeted U.K. earnings currency exposure was 93% hedged at an average $1.54 per pound. Other risks include weather and demand, fuel and generation costs, regulatory decisions, environmental compliance, financing conditions, pension funding and litigation.
Important facts for investors to verify
- Reconcile reported GAAP earnings with management’s non-GAAP ongoing-earnings measure and the prior-year discontinued-operations comparison.
- Track U.K. segment performance, RIIO-ED1 revenue and incentive effects, GBP exchange rates, and the referendum-related exposure.
- Confirm whether Kentucky environmental approvals and cost-recovery mechanisms are granted, and assess resulting capital spending and customer-rate effects.
- Monitor cash generation against planned capital investment, short-term borrowing, debt maturities and available committed liquidity.
- Review outcomes and potential financial effects of the environmental and other legal proceedings; the filing does not establish a clear quantified loss range for several matters.