PPL Corporation 2018 Form 10-K Summary
Business context and reporting period. This combined Form 10-K covers PPL Corporation and four utility subsidiaries for the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. PPL operates regulated electricity distribution, transmission and generation businesses in the U.K., Pennsylvania and Kentucky, as well as natural gas distribution in Kentucky. Figures below are in U.S. dollars unless noted.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $7.785 billion | $7.447 billion | Up 4.5% |
| Operating income | $2.852 billion | $2.901 billion | Down 1.7% |
| Net income | $1.827 billion | $1.128 billion | Up 61.9% |
| Diluted EPS | $2.58 | $1.64 | Up 57.3% |
| Earnings from Ongoing Operations (non-GAAP) | $1.705 billion | $1.553 billion | Up 9.8% |
| Cash from operating activities | $2.821 billion | $2.461 billion | Up $360 million |
Operating margin was approximately 36.6%, compared with 39.0% in 2017. The rise in GAAP net income substantially exceeded growth in ongoing earnings: 2018 included $148 million after tax of favorable unrealized foreign-currency hedge gains among special items. Management’s non-GAAP ongoing measure excludes special items and should not be treated as a substitute for GAAP results.
- Segments: 2018 net income was $1.114 billion for U.K. Regulated, $411 million for Kentucky Regulated, $431 million for Pennsylvania Regulated and negative $129 million for Corporate and Other. U.K. Regulated contributed about 61% of PPL net income.
- Investment and cash flow: Property, plant and equipment expenditures were $3.238 billion, exceeding operating cash flow by approximately $417 million. The cash-flow statement reports $3.361 billion of net cash used in investing activities, including other investing items.
- Debt and liquidity: At year-end, PPL reported $1.430 billion of short-term debt and $20.599 billion of long-term debt, including the current portion. Cash and cash equivalents were $621 million. The filing reports $1.401 billion of unused U.S. credit-facility capacity and approximately $1.1 billion of unused U.K. capacity in U.S.-dollar equivalent. PPL was in compliance with credit-facility covenants.
- Capital and shareholder returns: Common equity was $11.657 billion. Dividends declared were $1.64 per share, versus $1.58 in 2017. PPL settled part of its 2018 forward share sale agreements by issuing 20 million shares for $520 million net proceeds; additional agreements covering 43.25 million shares remained unsettled at year-end.
Material changes versus 2017
- Revenue rose, helped by favorable weather in the U.S., U.K. price changes, increased transmission investment returns and foreign-exchange translation. U.S. tax savings returned to customers partly offset revenue growth, including $143 million of Kentucky reductions and $79 million at PPL Electric.
- Operating income declined despite higher revenue, as operating expenses increased $387 million, including higher maintenance, depreciation, fuel and energy purchases.
- Other income and expense improved markedly, largely due to a $411 million year-over-year improvement in changes in the fair value of foreign-currency economic hedges. Income-tax expense fell $326 million, reflecting the federal tax-rate reduction and other tax effects.
- Operating cash flow increased, but results differed by subsidiary: PPL Electric cash from operations rose to $978 million, while LKE’s declined to $915 million from $1.099 billion, partly due to higher pension funding.
- Foreign-currency translation produced a $453 million loss in 2018, compared with a $537 million gain in 2017, primarily affecting the translated value of U.K. assets and debt.
Outlook, risks and unusual items
- 2019 outlook: Management expected lower GAAP net income than in 2018, principally because of the favorable 2018 unrealized hedge gains. Excluding 2018 special items, management projected higher U.K. earnings and lower Corporate and Other costs, with comparable net income in the Kentucky and Pennsylvania segments. The filing provides no numerical consolidated earnings guidance in the supplied text.
- Regulation and rates: LG&E and KU requested annual base-rate increases totaling approximately $172 million, with rates expected May 1, 2019; outcomes were uncertain. PPL’s domestic utilities depend on regulatory recovery of costs and returns on substantial planned capital investment.
- U.K. regulation and currency: The U.K. price-control framework permits revenue adjustments but leaves uncertainty around future RIIO-ED2 terms. PPL estimated WPD could under-recover about £175 million of cost-of-debt allowances over RIIO-ED1; recovery after 2023 was uncertain. Brexit-related uncertainty could materially affect sterling and translated PPL earnings. PPL reported its budgeted U.K. earnings exposure was 100% hedged for the remainder of 2019 and 49% hedged for 2020 as of February 6, 2019.
- Tax and customer refunds: The effects of the U.S. Tax Cuts and Jobs Act were finalized for 2017 accounting in 2018. Reduced tax costs are being passed through to customers; proposed IRS rules on interest deductions could materially limit tax deductions if finalized in their proposed form.
- Environmental and operational exposure: PPL projected $682 million of Kentucky environmental capital investment over five years. CCR rule changes, litigation and remediation could require additional costs; management said amounts and timing were uncertain, though costs are generally expected to be recoverable through rates. KU planned to retire two older coal units totaling 272 MW in 2019.
- Contingencies and unusual matters: Talen-related litigation sought unspecified, potentially material damages; PPL said it could not estimate possible losses. A coal-plant environmental suit against KU included remanded RCRA claims, and additional remediation at E.W. Brown could not yet be determined. A bankruptcy and contract rejection involving an OVEC co-sponsor could affect credit support and costs under LG&E’s and KU’s long-term power-purchase obligations.
- Other risks: Management identified weather, interest rates, access to capital, pension funding, cyberattacks, fuel supply, environmental rules, litigation and changes in regulation as material risks. PPL’s 2018 acquisition of Safari Energy was described as not material.
Most important facts for investors to verify
- Reconcile GAAP net income and EPS to ongoing earnings, focusing on foreign-currency hedge gains and other special items.
- Review the company’s debt maturities, planned financing, credit-facility availability and funding for capital expenditures and dividends.
- Track outcomes of the Kentucky rate cases and the amount and timing of tax savings returned to customers.
- Monitor Brexit and sterling exposure, WPD’s cost-of-debt under-recovery, pension funding reviews and RIIO-ED2 proposals.
- Assess potential exposure from CCR compliance, E.W. Brown remediation, Talen litigation and OVEC’s financial and contractual developments.
- Confirm that weather-driven earnings and cash flow, and management’s 2019 outlook, remain consistent with subsequent filings and results.
Audit note: Deloitte issued an unqualified opinion on PPL’s 2018 consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2018.