01—Abstract
Summary
Summary of the 10-K filed February 14, 2020. Cited figures are marked; the original filing is the authoritative source.
PPL Corporation, a utility holding company headquartered in Allentown, Pennsylvania, reports 2019 net income attributable to PPL shareowners of $1,746 milliona, down from $1,827 million in 2018, and diluted EPS of $2.37 versus $2.58.
Earnings from Ongoing Operations, a non-GAAP measure, rose to $1,806 millionb from $1,705 million. The company operates three regulated segments: U.K. Regulated (WPD, which generated $977 million of net income), Kentucky Regulated ($436 million) and Pennsylvania Regulated ($458 million).
The filing states that approximately 56% of PPL's 2019 net income came from its U.K. businesses, so currency and Ofgem regulatory outcomes are central to the investment case. Operating revenues were $7,769 millionc in 2019 versus $7,785 million in 2018. Operating income was $2,840 million, and the company reported $1.1 billion of net proceeds from settling the remaining forward sale agreements in November 2019.
Management projects higher net income in 2020, driven by higher base demand revenues and higher assumed GBP exchange rates in the U.K. and higher retail rates in Kentucky, partly offset by lower true-up mechanisms, lower pension income and higher interest expense. On February 14, 2020, PPL announced a quarterly dividend increase to 41.5 cents per share ($1.66d annualized).
Key risks flagged in the filing include Brexit-related exposure to GBP weakness (90% of 2020 budgeted U.K. earnings hedged at $1.48 per GBP), uncertainty over RIIO-ED2 price control terms beginning April 2023, the Talen litigation over the 2014 distribution of PPL Montana proceeds, and environmental compliance costs for coal-fired generation in Kentucky. Capital expenditures are projected at $14.3 billion for 2020 through 2024.
02—Key points
Key Highlights
- Net income attributable to PPL shareowners was $1,746 million in 2019, compared with $1,827 million in 2018; diluted EPS was $2.37 versus $2.58.
- Earnings from Ongoing Operations (non-GAAP) rose to $1,806 million from $1,705 million, with the U.K. Regulated segment contributing $1,032 million.
- The U.K. Regulated segment represents 56% of PPL's 2019 net income, making WPD's performance and the GBP exchange rate the dominant earnings drivers.
- Operating revenues were $7,769 million in 2019, essentially flat versus $7,785 million, as U.K. foreign currency effects offset higher Kentucky and Pennsylvania revenues.
- Kentucky base rate increases approved by the KPSC effective May 1, 2019 provide annual revenue increases of $187 million, including the elimination of the TCJA bill credit.
- Projected capital expenditures total $14,267 million for PPL over 2020 through 2024, with $9,299 million for distribution facilities.
- The quarterly dividend was increased to 41.5 cents per share on February 14, 2020, equivalent to $1.66 per year.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 14, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $5.60B$7.79B | −28.0% |
| Operating Income | $1.53B$2.85B | −46.5% |
| Interest Expense | $621.00M$963.00M | −35.5% |
| Net Income | $1.75B$1.83B | −4.4% |
| EPS (Basic) | $2.39$2.59 | −7.7% |
| EPS (Diluted) | $2.37$2.58 | −8.1% |
| Shares Outstanding (Basic) | 728.51M704.44M | +3.4% |
| Shares Outstanding (Diluted) | 736.75M708.62M | +4.0% |
05—Questions
Frequently Asked Questions
How much of PPL's earnings come from the U.K. business?
The filing states that the U.K. Regulated segment represents 56% of PPL's 2019 net income and 39% of its assets at December 31, 2019. The segment reported net income of $977 million in 2019 and Earnings from Ongoing Operations of $1,032 million.
What is PPL doing to protect against a weaker British pound?
PPL uses foreign currency economic hedges. As of January 31, 2020, its foreign exchange exposure related to budgeted earnings was 90% hedged for 2020 at an average rate of $1.48 per GBP and 5% hedged for 2021 at $1.33 per GBP. The filing notes that a further GBP decline would reduce the U.S. dollar value of WPD's earnings.
What drove the decline in reported net income in 2019?
Net income fell $81 million to $1,746 million. The largest factor was a $201 million swing in special items in the U.K. Regulated segment, mainly unrealized losses of $51 million on foreign currency economic hedges in 2019 compared with a gain of $148 million in 2018. Excluding special items, Earnings from Ongoing Operations increased $101 million.
What does the filing say about future U.K. regulation?
WPD operates under RIIO-ED1, which runs through March 31, 2023. Ofgem confirmed in December 2019 that RIIO-ED2 will be a five-year price control, will use CPI or CPIH rather than RPI, and will remove the fast-track early settlement process. PPL states it cannot predict the final RIIO-ED2 outcome, which will not be finalized until November 2022.
What litigation is pending that could affect investors?
The Talen Montana litigation concerns the November 2014 distribution of $733 million of proceeds from the sale of PPL Montana's hydroelectric facilities. The Talen Direct Action was dismissed on December 26, 2019, but the Talen Putative Class Action remains in state court, and PPL's Delaware action against Riverstone and Talen Energy has a tentative trial date of June 2021. PPL states it cannot predict the outcomes or estimate possible losses, which could be material.
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