filings.toolsItem 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations
(All Registrants)
This "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL, PPL Electric, LKE, LG&E and KU. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant. The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures. Within combined disclosures, amounts are disclosed for individual Registrants when significant.
The following should be read in conjunction with the Registrants' Consolidated Financial Statements and the accompanying Notes. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted.
"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:
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"Overview" provides a description of each Registrant's business strategy and a discussion of important financial and operational developments.
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"Results of Operations" for all Registrants includes a "Statement of Income Analysis," which discusses significant changes in principal line items on the Statements of Income, comparing 2020 with 2019. For PPL, "Results of Operations" also includes "Segment Earnings" and "Adjusted Gross Margins," which provide a detailed analysis of earnings by reportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "Adjusted Gross Margins" and provide explanations of the non-GAAP financial measures and a reconciliation of the non-GAAP financial measures to the most comparable GAAP measure.
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"Financial Condition - Liquidity and Capital Resources" provides an analysis of the Registrants' liquidity positions and credit profiles. This section also includes a discussion of forecasted sources and uses of cash and rating agency actions.
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"Financial Condition - Risk Management" provides an explanation of the Registrants' risk management programs relating to market and credit risk.
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"Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of the Registrants and that require their management to make significant estimates, assumptions and other judgments of inherently uncertain matters.
For comparison of the Registrants’ results of operations and cash flows for the years ended December 31, 2019 to December 31, 2018, refer to “Item 7. Combined Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2019 Form 10-K, filed with the SEC on February 14, 2020.
Overview
For a description of the Registrants and their businesses, see "Item 1. Business."
Business Strategy
(All Registrants)
PPL operates seven fully regulated high-performing utilities. These utilities are located in the U.K., Pennsylvania and Kentucky, constructive regulatory jurisdictions with distinct regulatory structures and customer classes.
PPL's strategy, and that of the other Registrants, is to deliver best-in-sector operational performance, invest in a sustainable energy future, provide superior customer service, maintain a strong financial foundation, and engage and develop its people. PPL's business plan is designed to achieve growth by providing efficient, reliable and safe operations and strong customer service, maintaining constructive regulatory relationships and achieving timely recovery of costs. These businesses are expected to achieve long-term growth in rate base in the U.S. and RAV in the U.K. Rate base growth is being driven by planned significant capital expenditures to maintain existing assets and improve system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to coal-fired electricity generation facilities.
For the U.S. businesses, central to PPL's strategy is recovering capital project costs efficiently through various rate-making mechanisms, including periodic base rate case proceedings using forward test years, annual FERC formula rate mechanisms and other regulatory agency-approved recovery mechanisms designed to limit regulatory lag. In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause and gas supply clause) and recovery on construction work-in-progress that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. In addition, the KPSC requires a utility to obtain a CPCN prior to constructing a facility, unless the construction is an ordinary extension of existing facilities in the usual course of business or does not involve sufficient capital expenditures to materially affect the utility's financial condition. Although such KPSC proceedings do not directly address cost recovery issues, the KPSC, in awarding a CPCN, concludes that the public convenience and necessity require the construction of the facility on the basis that the facility is the lowest reasonable cost alternative to address the need. In Pennsylvania, the FERC transmission formula rate, DSIC mechanism, Smart Meter Rider and other recovery mechanisms operate to reduce regulatory lag and provide for timely recovery of and a return on, as appropriate, prudently incurred costs.
To manage financing costs and access to credit markets, and to fund capital expenditures, a key objective of the Registrants is to maintain their investment grade credit ratings and adequate liquidity positions. In addition, the Registrants have financial and operational risk management programs that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility, as applicable, related to changes in interest rates, foreign currency exchange rates and counterparty credit quality. To manage these risks, PPL generally uses contracts such as forwards, options and swaps. See "Financial Condition - Risk Management" below for further information.
Earnings generated by PPL's U.K. subsidiaries are subject to foreign currency translation risk. Because WPD's earnings represent such a significant portion of PPL's consolidated earnings, PPL enters into foreign currency contracts to economically hedge the value of the GBP versus the U.S. dollar. These hedges do not receive hedge accounting treatment under GAAP.
The U.K. subsidiaries also have currency exposure to the U.S. dollar to the extent of their U.S. dollar denominated debt. To manage these risks, PPL generally uses contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts.
As discussed above, a key component of this strategy is to maintain constructive relationships with regulators in all jurisdictions in which the Registrants operate (U.K., U.S. federal and state). This is supported by a strong culture of integrity and delivering on commitments to customers, regulators and shareowners, and a commitment to continue to improve customer service, reliability and operational efficiency.
Financial and Operational Developments
Initiation of Formal Process to Sell U.K. Utility Business (PPL)
On August 10, 2020, PPL announced that it initiated a formal process to sell its U.K. utility business. There can be no assurance of any specific outcome, including whether the sale process will result in the completion of any potential transaction, the timing or terms thereof, the value or benefits that may be realized or the effect that any potential transaction will have on future financial results.
As a result of the potential sale, PPL assessed the recoverability of the assets of its U.K. utility business. PPL prepared probability-weighted undiscounted cash flow estimates as of December 31, 2020 and September 30, 2020 that considered the likelihood of the possible outcomes of the sale process, including the possibility of not selling the U.K. utility business. The resulting cash flow analyses exceeded the carrying value of the assets of the U.K. utility business. A change in the possible outcomes of the sale process could result in the carrying value of the assets of the U.K. utility business not being recoverable, which could result in an impairment in future periods. The U.K. utility business will continue to be classified as held and used until it meets the criteria to be classified as held for sale, which includes management obtaining a commitment to a plan to sell from its Board of Directors.
Should the U.K. utility business meet the criteria to be classified as held for sale in a future period, PPL will be required at that time to compare the estimated fair value of its investment in the U.K. utility business, less costs to sell, to its carrying value, including accumulated other comprehensive losses related to the U.K. utility business, for impairment purposes. The resulting measurement may result in a loss. In addition, PPL will reassess its assertion of the indefinite reinvestment of the unremitted earnings of the U.K. utility business. See Note 21 to the Financial Statements for additional information on accumulated other comprehensive income and losses. See Note 6 to the Financial Statements for additional information on income taxes.
Outbreak of COVID-19 (All Registrants)
The continued spread of COVID-19 has disrupted the U. S. and global economies and continues to present extraordinary challenges to businesses, communities, workforces and markets. The Registrants have taken significant steps to mitigate the potential spread of COVID-19 to our customers, suppliers and employees. PPL has successfully implemented its company-wide pandemic plan, which guides the emergency response. Business continuity and other precautionary measures have been taken to ensure we can continue to safely provide reliable electricity and gas service to our customers. The Registrants have implemented social distancing measures for all employees including work from home arrangements where possible and continue to implement strong physical and cyber security measures to ensure that systems function effectively to serve operational and remote workforce needs. The Registrants continue to monitor developments affecting their workforces and customers and will take additional actions as appropriate to respond to changing conditions and mitigate the impacts.
This rapidly evolving situation could lead to continued disruption of economic activity in the Registrants’ markets for an undetermined period of time. Lock-down or closure of non-essential businesses has occurred in each of the Registrants’ service territories, which has resulted in reductions in commercial and industrial demand and an increase in residential demand for electricity service. The impact of this net reduction in load has not been material to the Registrants' 2020 financial condition. The impact on future periods will depend upon various factors, including the pace and extent to which the Registrants' jurisdictions reopen their economies and community response to the reopening of businesses as well as the extent that businesses continue work from home protocols. We cannot predict these factors and therefore cannot quantify the overall impact COVID-19 will have on our future results of operations.
The Registrants are committed to supporting their customers and communities and have followed federal and state mandates related to suspending disconnections for non-payment and new late fees, reconnecting service for customers who had previously been disconnected and developing late payment plans with customers, where appropriate. The Registrants have experienced an increase in aged accounts receivable, resulting in an increase in expected credit losses. See "Current Expected Credit Losses" in Note 1 to the Financial Statements for additional information. The Registrants will continue to monitor cash receipts and accounts receivable aging to determine if further increases in their allowance for uncollectible accounts are required.
At December 31, 2020, the Registrants had approximately $3.2 billion of combined unused credit facility capacity. In addition, PPL Capital Funding, PPL Electric, LG&E and KU may, subject to certain conditions, increase their syndicated credit facilities in an aggregate amount of up to $1 billion. In April 2020, PPL Capital Funding issued $1 billion of 4.125% Senior Notes due 2030. In June 2020, KU issued $500 million of First Mortgage Bonds due 2050. In October 2020, PPL Electric issued $250 million of First Mortgage Bonds, Floating Rate Series due 2023. In October 2020, WPD (South Wales) issued £250 million of 1.625% Senior Notes due 2035. Based on available liquidity and access to capital markets, the Registrants do not anticipate a significant impact on their financial condition or liquidity, and do not foresee difficulties in accessing the capital markets in the near-term. See Note 8 to the Financial Statements for additional information.
The Registrants have assessed the fair value of their assets and liabilities and no impairment charges were required. See “Goodwill Assessment” below for additional information on the interim goodwill impairment test performed for the U.K. Regulated segment reporting unit in the first quarter of 2020 and the annual goodwill impairment tests performed in the fourth quarter of 2020 for all of PPL's reporting units.
PPL’s pension plans continue to be well-funded as its liability-driven investment strategy and active management function to mitigate investment losses resulting from market volatility.
In response to COVID-19, various forms of aid and relief were enacted in 2020, including the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The provisions of the CARES Act and other forms of aid and relief did not have a material impact on the Registrants' financial statements.
For the year ended December 31, 2020 the following estimated changes in revenue and incremental costs incurred resulted from the impact of COVID-19.
| Reduction in Revenue | Incremental Costs | ||||||||||||||||||||||||||||||||||
| PPL | $ | (114) | $ | 28 | |||||||||||||||||||||||||||||||
| WPD | (82) | 19 | |||||||||||||||||||||||||||||||||
| LKE | (32) | 7 | |||||||||||||||||||||||||||||||||
| LG&E | (18) | 3 | |||||||||||||||||||||||||||||||||
| KU | (14) | 4 | |||||||||||||||||||||||||||||||||
WPD tariffs are set to recover allowed revenues. Any under-recoveries, including the estimated amounts shown above, will be added to revenue, with interest, in future years through K-factor. See discussion of K-factor in “Item 1. Business.” The impact on revenue and incremental COVID-19 related costs were not significant at PPL Electric.
To date, there has been no material impact on the Registrants’ operations, financial condition, liquidity or on their supply chain as a result of COVID-19. The ultimate severity or duration of the outbreak or its effects on the global economy, the capital markets, or the Registrants’ workforce, contractors, customers and suppliers is uncertain. The Registrants cannot predict the ultimate impact COVID-19 will have on their financial position, results of operations, cash flows or liquidity.
Goodwill Assessment (PPL, LKE, LG&E and KU)
During the three months ended March 31, 2020, PPL, LKE, LG&E and KU considered whether the impact of COVID-19 described above, resulting volatility and decrease in PPL's shares would more likely than not reduce the fair value of the Registrants’ reporting units below their carrying amounts. Based on our assessment, a quantitative impairment test was not required for the LKE, LG&E and KU reporting units, but was required for the U.K. Regulated segment reporting unit, the allocated goodwill of which was $2.5 billion at March 31, 2020. The test did not indicate impairment of the reporting unit.
No impairments were recognized in conjunction with the annual goodwill impairment tests performed in the fourth quarter of 2020. See "Long-Lived and Intangible Assets - Asset Impairment (Excluding Investments)" in Note 1 to the Financial Statements for additional information. An impairment charge could occur in future periods if PPL’s share price or any of the assumptions used in determining fair value of the reporting units are negatively impacted.
U.K. Corporation Tax Rate Change (PPL)
The U.K. corporation tax rate was scheduled to be reduced from 19% to 17%, effective April 1, 2020. On March 11, 2020, the U.K. Finance Act 2020 included a cancellation of the tax rate reduction to 17%, thereby maintaining the corporation tax rate at 19%. The Finance Act 2020 was formally enacted on July 22, 2020. The primary impact of the cancellation of the corporation tax rate reduction was an increase in deferred tax liabilities and a corresponding deferred tax expense of $106 million.
U.S. Tax Reform (All Registrants)
In July 2020, the IRS issued final and new proposed regulations relating to the limitation on interest deductibility. The final regulations do not apply to the Registrants until the 2021 tax year. The new proposed regulations were finalized on January 5, 2021 and will apply to the Registrants in the 2022 tax year. The Registrants are evaluating the final regulations issued in 2021, but do not expect these regulations or the 2020 final regulations to have a material impact on the Registrants’ financial condition or results of operations.
U.K. Withdrawal from European Union (PPL)
In March 2017, the U.K. Government invoked Article 50 (Article 50) of the Lisbon Treaty, formally beginning the two-year period for the U.K. to negotiate an agreement specifying the terms of its withdrawal from the European Union (EU), popularly referred to as Brexit. After repeated extensions, in October 2019, the EU agreed to extend the Article 50 process until January 31, 2020. Following an early general election in December 2019, which resulted in a substantial Conservative Party Parliamentary majority, the U.K. and EU Parliaments voted to approve the EU withdrawal agreement negotiated by Prime Minister Boris Johnson.
The U.K. formally left the EU on January 31, 2020 and entered into a transition period that ended on December 31, 2020 through which the U.K. sought to negotiate a free trade arrangement with the EU and new trade terms with countries outside of the EU. Successively, the EU-UK Trade and Cooperation Agreement was agreed on December 24, 2020 and ratified by the
U.K. Parliament on December 30, 2020 and was provisionally applied by the EU beginning December 31, 2020. While significant progress has been made, uncertainty continues to surround the economic impact of Brexit. PPL believes that its greatest risks relate to any extended period of depressed value of the GBP or the potential further decline in the value of the GBP compared to the U.S. dollar.
PPL cannot predict the impact, in either the short-term or long-term, on foreign exchange rates or PPL's financial condition that may be experienced as a result of the actions taken by the U.K. government to withdraw from the EU, although such impacts could be material.
PPL does not expect the financial condition and results of operations of WPD, itself, to change significantly as a result of Brexit. The regulatory environment and operation of WPD's businesses are not expected to change. RIIO-ED1, the current price control, with allowed revenues agreed with Ofgem runs through March 2023. The impact of a slower economy or recession on WPD would be mitigated in part because U.K. regulation provides that any reduction in the volume of electricity delivered will be recovered in allowed revenues in future periods through the K-factor adjustment. See "Item 1. Business - Segment Information - U.K. Regulated Segment" for additional information on the current price control and K-factor adjustment. In addition, an increase in inflation would have a positive effect on revenues and RAV as annual inflation adjustments are applied to both revenues and RAV (and real returns are earned on inflated RAV). This impact, however, would be partially offset by higher operation and maintenance expenses and interest expense on index-linked debt. With respect to access to financing, WPD has substantial borrowing capacity under existing credit facilities and expects to continue to have access to all major financial markets. With respect to access to and cost of equipment and other materials, WPD management continues to review U.K. government issued advice on preparations for Brexit and has taken actions to mitigate potential increasing costs and disruption to its critical sources of supply. Additionally, less than 1% of WPD's employees are non-U.K. EU nationals and no change in their domicile is expected.
Regulatory Requirements
*(*All Registrants)
The Registrants cannot predict the impact that future regulatory requirements may have on their financial condition or results of operations.
(PPL, LKE, LG&E and KU)
The businesses of LKE, LG&E and KU are subject to extensive federal, state and local environmental laws, rules and regulations, including those pertaining to CCRs, GHG, and ELGs. See "Item 1. Business" and Notes 7, 14 and 20 to the Financial Statements for a discussion of these significant environmental matters. These and other environmental requirements led PPL, LKE, LG&E and KU to retire approximately 1,200 MW of coal-fired generating plants in Kentucky since 2010.
RIIO-2 Framework (PPL)
In 2018, Ofgem issued its consultation document on the RIIO-2 framework, covering all U.K. gas and electricity transmission and distribution price controls. The current electricity distribution price control, RIIO-ED1, continues through March 31, 2023 and will not be impacted by the RIIO-2 consultation process. Later in 2018, Ofgem published its decision following its RIIO-2 framework consultation after consideration of comments received including those from WPD and PPL.
In August 2019, Ofgem published an open letter seeking views on its proposed sector specific approach on the RIIO-ED2 framework. WPD and PPL provided responses to this open letter. In December 2019, Ofgem published its decision on the RIIO-ED2 framework, thus confirming the following points in its RIIO-2 and RIIO-ED2 framework decision documents:
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RIIO-ED2 will be a five-year price control period, compared to eight years in the current RIIO-ED1 price control.
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CPI or CPIH will be used for inflation measurement in calculating both RAV and allowed returns rather than RPI.
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The baseline allowed return on equity will be set using the same methodology in all RIIO-2 sectors. The new methodology includes; (a) an equity indexation, whereby the allowed return on equity is updated to reflect changes in the risk-free rate, and (b) potentially setting the allowed return 0.5% below the expected return.
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Full debt indexation will be retained.
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The early settlement process (fast tracking) will be removed and replaced with an alternative mechanism to incentivize high-quality, rigorous and ambitious business plans.
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The Totex incentive rate will be based on a confidence level for setting baseline cost allowances.
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A new enhanced engagement model will be introduced requiring distribution companies to set up a customer engagement group to provide Ofgem with a public report of local stakeholders’ views on the companies’ business plans. Ofgem will also establish an independent RIIO-2 challenge group comprised of consumer experts to provide Ofgem with a public report on companies’ business plans.
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There will be no change to the existing depreciation policy of using economic asset lives as the basis for depreciating RAV as part of base revenue calculations. WPD is currently transitioning to 45-year asset lives for new additions in RIIO-ED1 based on Ofgem’s extensive review of asset lives in RIIO-ED1.
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A focus of RIIO-2 will be on whole-system outcomes. Ofgem intends network companies and system operators working together to ensure the energy system as a whole is efficient and delivers the best value to consumers. Ofgem is undertaking further work to clarify the definition of whole-system and the appropriate roles of the network companies in supporting this objective. Ofgem is still undecided on how DSO functions are to be treated. Ofgem will include a DSO reopener to reassess progress made in the establishment of DSO activities.
On July 30, 2020, Ofgem published its consultation on the RIIO-ED2 price control methodology which Ofgem will use to apply its framework decisions listed above. Some of the key aspects in Ofgem’s consultation include:
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Proposing a suite of Net-Zero related investment and innovation mechanisms, including a Net Zero re-opener, to ensure that RIIO-ED2 is adaptable and can keep pace with changes in the wider policy and technological environment.
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Consulting on four different models for managing strategic investment to enable more flexibility within the price control and allow DNOs to adapt their investment plans to keep pace with Net Zero.
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Consulting on debt allowance proposals including the debt allowance calibration, the index used, and a possible additional cost of borrowing allowance.
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Consulting on whether the three-stage equity indexation methodology for baseline allowance returns proposed in the Gas Distribution and Transmission Draft Determination should equally apply to the ED sector and if the estimation approach for systematic risk should differ for ED2.
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Proposing to introduce a suite of reforms to define and regulate the distribution system operation. In the first instance, those reforms will apply to DNOs.
WPD and PPL continue to be fully engaged in the RIIO-ED2 process. The comment period on the July 30, 2020 consultation closed on October 1, 2020, which WPD provided a response to, and a decision on the RIIO-ED2 Sector Specific Methodology was made in December 2020 with the Regulatory finance decisions to be confirmed in the first quarter of 2021. Final Determinations for RIIO-ED2 will be made in December 2022. The RIIO-ED2 price control will come into effect on April 1, 2023. PPL cannot predict the outcome of this process or the long-term impact the final RIIO-ED2 price control will have on its financial condition or results of operations.
Challenge to PPL Electric Transmission Formula Rate Return on Equity
*(*PPL and PPL Electric)
On May 21, 2020, PP&L Industrial Customer Alliance (PPLICA) filed a complaint with the FERC alleging that PPL Electric's base return on equity (ROE) of 11.18% used to determine PPL Electric's formula transmission rate is unjust and unreasonable, and proposing an alternative ROE of 8.00% based on its interpretation of FERC Opinion No. 569. However, also on May 21, 2020, the FERC issued Opinion No. 569-A in response to numerous requests for rehearing of Opinion No. 569, which revised the method for analyzing base ROE. On June 10, 2020, PPLICA filed a Motion to Supplement the May 21, 2020 complaint in which PPLICA continued to allege that PPL Electric’s base ROE is unjust and unreasonable, but revised its analysis of PPL Electric's base ROE to reflect the guidance provided in Opinion No. 569-A. The amended complaint proposed an updated alternative ROE of 8.50% and also requested that the FERC preserve the original refund effective date as established by the filing of the original complaint on May 21, 2020. Several parties have filed motions to intervene, including one party who filed Comments in Support of the original complaint.
On July 10, 2020, PPL Electric filed its Answer and supporting Testimony to the PPLICA filings arguing that the FERC should deny the original and amended complaints as they are without merit and fail to demonstrate the existing base ROE is unjust and
unreasonable. In addition, PPL Electric contended any refund effective date should be set for no earlier than June 10, 2020 and PPLICA's proposed replacement ROE should be rejected.
On October 15, 2020, the FERC issued an order on the PPLICA complaints which established hearing and settlement procedures, set a refund effective date of May 21, 2020 and granted the motions to intervene. On November 16, 2020, PPL Electric filed a request for rehearing of the portion of the October 15, 2020 Order that set the May 21, 2020 refund effective date. On December 17, 2020, the FERC issued a Notice of Denial of Rehearing by Operation of Law and Providing for Further Consideration. On February 16, 2021, PPL Electric filed a Petition for Review with the United States Court of Appeals for the District of Columbia Circuit of the portion of the October 15, 2020 Order that set the May 21, 2020 refund effective date.
PPL Electric continues to believe its ROE is just and reasonable and that it has meritorious defenses against the original and amended complaints. At this time, PPL Electric cannot predict the outcome of this matter or the range of possible losses, if any, that may be incurred. However, revenue earned from May 21, 2020 through the settlement of this matter may be subject to refund. A change of 50 basis points to the base ROE would impact PPL Electric's net income by approximately $12 million on an annual basis.
FERC Transmission Rate Filing
(PPL, LKE, LG&E and KU)
In 2018, LG&E and KU applied to the FERC requesting elimination of certain on-going credits to a sub-set of transmission customers relating to the 1998 merger of LG&E's and KU's parent entities and the 2006 withdrawal of LG&E and KU from the Midcontinent Independent System Operator, Inc. (MISO), a regional transmission operator and energy market. The application sought termination of LG&E's and KU's commitment to provide certain Kentucky municipalities mitigation for certain horizontal market power concerns arising out of the 1998 LG&E and KU merger and 2006 MISO withdrawal. The amounts at issue are generally waivers or credits granted to a limited number of Kentucky municipalities for either certain LG&E and KU or MISO transmission charges incurred for transmission service received. Due to the development of robust, accessible energy markets over time, LG&E and KU believe the mitigation commitments are no longer relevant or appropriate. In March 2019, the FERC granted LG&E's and KU's request to remove the ongoing credits, conditioned upon the implementation by LG&E and KU of a transition mechanism for certain existing power supply arrangements, subject to FERC review and approval. In July 2019, LG&E and KU proposed their transition mechanism to the FERC and in September 2019, the FERC rejected the proposed transition mechanism and issued a separate order providing clarifications of certain aspects of the March order. In October 2019, LG&E and KU filed requests for rehearing and clarification on the two September orders. In September 2020, the FERC issued its orders in the rehearing process that modified the discussion in, and set aside portions of, the September 2019 orders including adjusting factors impacting the proposed transition mechanism. In October 2020, both LG&E and KU and other parties filed separate motions for rehearing and clarification regarding FERC’s September 2020 orders. In November 2020, the FERC denied the parties’ rehearing requests. In November 2020 and January 2021, LG&E and KU and other parties filed for appeal of the September 2020 and November 2020 orders with the D.C. Circuit Court of Appeals, where certain additional prior petitions for review relating to the proceedings are also pending. On January 15, 2021, LG&E and KU made a filing seeking FERC acceptance of a new proposal for a transition mechanism. LG&E and KU cannot predict the outcome of these proceedings. LG&E and KU currently receive recovery of the waivers and credits provided through other rate mechanisms.
Rate Case Proceedings
*(*PPL, LKE, LG&E and KU)
On November 25, 2020, LG&E and KU filed requests with the KPSC for an increase in annual electricity and gas revenues of approximately $331 million ($131 million and $170 million in electricity revenues at LG&E and KU and $30 million in gas revenues at LG&E). The revenue increases would be an increase of 11.6% and 10.4% in electricity revenues at LG&E and KU, and an increase of 8.3% in gas revenues at LG&E. LG&E and KU are also requesting approval of a one-year billing credit which will credit customers approximately $53 million ($41 million at LG&E and $12 million at KU). The billing credit represents the return to customers of certain regulatory liabilities on LG&E’s and KU’s balance sheets and serves to partially mitigate the rate increases during the first year in which the new rates are in effect.
LG&E’s and KU’s applications also include a request for a CPCN to deploy Advanced Metering Infrastructure across LG&E’s and KU’s service territories in Kentucky.
The applications are based on a forecasted test year of July 1, 2021 through June 30, 2022 and request an authorized return on equity of 10.0%. Subject to KPSC approval, the requested rates, decreased by the amount of the billing credit, are expected to become effective July 1, 2021. Certain counterparties have intervened in the proceedings. Data discovery and the filing of written testimony will continue through April 2021 and a hearing is expected to occur during the second quarter of 2021. PPL, LKE, LG&E and KU cannot predict the outcome of these proceedings.
(LKE and KU)
In July 2019, KU filed a request with the VSCC for an increase in annual Virginia base electricity revenues of approximately $13 million, representing an increase of 18.2%. In January 2020, KU reached a partial settlement agreement including an increase in annual Virginia base electricity revenues of $9 million effective May 1, 2020, representing an increase of 12.9%. A hearing on the settlement and certain tariff provisions was held in January 2020. On April 6, 2020, the VSCC issued an order approving the settlement and Hearing Examiner tariff provision recommendations. KU implemented the new rates on May 1, 2020.
Results of Operations
(PPL)
The "Statement of Income Analysis" discussion below describes significant changes in principal line items on PPL's Statements of Income, comparing 2020 with 2019. The "Segment Earnings" and "Adjusted Gross Margins" discussions for PPL provide a review of results by reportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "Adjusted Gross Margins," and provide explanations of the non-GAAP financial measures and a reconciliation of those measures to the most comparable GAAP measure.
Tables analyzing changes in amounts between periods within "Statement of Income Analysis," "Segment Earnings" and "Adjusted Gross Margins" are presented on a constant GBP to U.S. dollar exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained. Results computed on a constant GBP to U.S. dollar exchange rate basis are calculated by translating current year results at the prior year weighted-average GBP to U.S. dollar exchange rate.
(PPL Electric, LKE, LG&E and KU)
A "Statement of Income Analysis" is presented separately for PPL Electric, LKE, LG&E and KU. The "Statement of Income Analysis" discussion below describes significant changes in principal line items on the Statements of Income, comparing 2020 with 2019. The results of operations section for PPL Electric, LKE, LG&E and KU is presented in a reduced disclosure format in accordance with General Instructions (I)(2)(a) of Form 10-K.
PPL: Statement of Income Analysis, Segment Earnings and Adjusted Gross Margins
Statement of Income Analysis
Net income for the years ended December 31 includes the following results:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| Operating Revenues | $ | 7,607 | $ | 7,769 | $ | (162) | |||||||||||
| Operating Expenses | |||||||||||||||||
| Operation | |||||||||||||||||
| Fuel | 632 | 709 | (77) | ||||||||||||||
| Energy purchases | 634 | 723 | (89) | ||||||||||||||
| Other operation and maintenance | 1,944 | 1,985 | (41) | ||||||||||||||
| Depreciation | 1,287 | 1,199 | 88 | ||||||||||||||
| Taxes, other than income | 307 | 313 | (6) | ||||||||||||||
| Total Operating Expenses | 4,804 | 4,929 | (125) | ||||||||||||||
| Other Income (Expense) - net | 169 | 309 | (140) | ||||||||||||||
| Interest Expense | 1,001 | 994 | 7 | ||||||||||||||
| Income Taxes | 502 | 409 | 93 | ||||||||||||||
| Net Income | $ | 1,469 | $ | 1,746 | $ | (277) |
Operating Revenues
The increase (decrease) in operating revenues was due to:
| 2020 vs. 2019 | |||||
| Domestic: | |||||
| PPL Electric Distribution price (a) | $ | (27) | |||
| PPL Electric Distribution volume (b) | (16) | ||||
| PPL Electric PLR (c) | (57) | ||||
| PPL Electric Transmission Formula Rate (d) | 82 | ||||
| LKE Volumes (b) | (95) | ||||
| LKE Demand (e) | (42) | ||||
| LKE Fuel and other energy prices (f) | (37) | ||||
| LKE Municipal supply (g) | (28) | ||||
| LKE Retail rates (h) | 64 | ||||
| LKE ECR (i) | 29 | ||||
| Other | (1) | ||||
| Total Domestic | (128) | ||||
| U.K.: | |||||
| Price | 13 | ||||
| Volumes (e) | (67) | ||||
| Foreign currency exchange rates | 14 | ||||
| Engineering recharge income | 7 | ||||
| Other | (1) | ||||
| Total U.K. | (34) | ||||
| Total | $ | (162) |
(a) Distribution price variance was primarily due to reconcilable cost recovery mechanisms approved by the PUC.
(b) The decrease was primarily due to unfavorable weather.
(c) The decrease was primarily the result of lower energy prices, unfavorable weather and lower usage, partially offset by higher volumes of non-shopping customers.
(d) The increase was primarily due to returns on additional capital investments.
(e) The decrease was primarily due to COVID-19.
(f) The decrease was primarily due to lower recoveries of fuel and energy purchases due to lower commodity costs.
(g) The decrease was primarily due to the termination of eight supply contracts with Kentucky municipalities on April 30, 2019.
(h) The increase was primarily due to higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(i) The increase was primarily due to higher recoverable depreciation expense as a result of higher depreciation rates effective May 1, 2019.
Fuel
Fuel decreased $77 million in 2020 compared with 2019 at LKE, primarily due to a $46 million decrease in volumes driven by weather, a $27 million decrease in commodity costs and a $9 million decrease in volumes driven by the termination of eight supply contracts with Kentucky municipalities on April 30, 2019.
Energy Purchases
Energy purchases decreased $89 million in 2020 compared with 2019, primarily due to a $58 million decrease at PPL Electric due to lower PLR prices of $70 million, partially offset by higher transmission enhancement expenses of $13 million and a $31 million decrease at LKE primarily due to a $24 million decrease in commodity costs.
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance was due to:
| 2020 vs. 2019 | |||||
| Domestic: | |||||
| PPL Electric Act 129 | $ | (17) | |||
| PPL Electric storm costs | (11) | ||||
| PPL Electric universal service programs | (10) | ||||
| PPL Electric vegetation management | (8) | ||||
| PPL Electric canceled projects | 7 | ||||
| LKE administrative and general | (12) | ||||
| LKE plant operations and maintenance | (11) | ||||
| LKE distribution operations and maintenance | (9) | ||||
| LKE COVID-19 | 7 | ||||
| Stock compensation expense | (7) | ||||
| Other | (13) | ||||
| U.K.: | |||||
| Pension | 6 | ||||
| Third-party engineering | 9 | ||||
| Engineering management | 5 | ||||
| COVID-19 impact | 19 | ||||
| Other | 4 | ||||
| Total | $ | (41) |
Depreciation
The increase (decrease) in depreciation was due to:
| 2020 vs. 2019 | |||||
| Additions to PP&E, net | $ | 55 | |||
| Depreciation rates (a) | 26 | ||||
| Other | 7 | ||||
| Total | $ | 88 |
(a)Higher depreciation rates were effective May 1, 2019 at LG&E and KU.
Other Income (Expense) - net
The increase (decrease) in other income (expense) - net was due to:
| 2020 vs. 2019 | |||||
| Economic foreign currency exchange contracts (Note 18) | $ | (84) | |||
| Defined benefit plans - non-service credits (Note 12) | (54) | ||||
| Charitable contributions | 14 | ||||
| Other | (16) | ||||
| Total | $ | (140) |
Interest Expense
The increase (decrease) in interest expense was due to:
| 2020 vs. 2019 | |||||
| Long-term debt interest | $ | 23 | |||
| Short-term debt interest | (18) | ||||
| Other | 2 | ||||
| Total | $ | 7 |
Income Taxes
The increase (decrease) in income taxes was due to:
| 2020 vs. 2019 | |||||
| Change in pre-tax income | $ | (37) | |||
| Federal and state income tax return adjustments | (10) | ||||
| U.S. income tax on foreign earnings net of foreign tax credit | 9 | ||||
| Impact of the U.K. Finance Acts on deferred tax balances (a) | 115 | ||||
| Kentucky recycling credit, net of federal income tax expense (b) | 18 | ||||
| Other | (2) | ||||
| Total | $ | 93 |
(a)The U.K. corporation tax rate was scheduled to be reduced from 19% to 17%, effective April 1, 2020. On March 11, 2020, the U.K. Finance Act 2020 included a cancellation of the tax rate reduction to 17%, thereby maintaining the corporation tax rate at 19% for financial years 2020 and 2021. The Finance Act 2020 was formally enacted on July 22, 2020. The impact of the cancellation of the corporation tax rate reduction resulted in an increase in deferred tax liabilities and a corresponding deferred tax cost of $106 million.
(b)In 2019, LKE recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky.
See Note 6 to the Financial Statements for additional information on income taxes.
Segment Earnings
PPL's net income by reportable segments were as follows:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| U.K. Regulated | $ | 686 | $ | 977 | $ | (291) | |||||||||||
| Kentucky Regulated | 418 | 436 | (18) | ||||||||||||||
| Pennsylvania Regulated | 497 | 458 | 39 | ||||||||||||||
| Corporate and Other (a) | (132) | (125) | (7) | ||||||||||||||
| Net Income | $ | 1,469 | $ | 1,746 | $ | (277) |
(a)Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results.
Earnings from Ongoing Operations
Management utilizes "Earnings from Ongoing Operations" as a non-GAAP financial measure that should not be considered as an alternative to net income, an indicator of operating performance determined in accordance with GAAP. PPL believes that Earnings from Ongoing Operations is useful and meaningful to investors because it provides management's view of PPL's earnings performance as another criterion in making investment decisions. In addition, PPL's management uses Earnings from Ongoing Operations in measuring achievement of certain corporate performance goals, including targets for certain executive incentive compensation. Other companies may use different measures to present financial performance.
Earnings from Ongoing Operations is adjusted for the impact of special items. Special items are presented in the financial tables on an after-tax basis with the related income taxes on special items separately disclosed. Income taxes on special items, when applicable, are calculated based on the statutory tax rate of the entity where the activity is recorded. Special items may include items such as:
-
Unrealized gains or losses on foreign currency economic hedges (as discussed below).
-
Gains and losses on sales of assets not in the ordinary course of business.
-
Impairment charges.
-
Significant workforce reduction and other restructuring effects.
-
Acquisition and divestiture-related adjustments.
-
Other charges or credits that are, in management's view, non-recurring or otherwise not reflective of the company's ongoing operations.
Unrealized gains or losses on foreign currency economic hedges include the changes in fair value of foreign currency contracts used to hedge GBP-denominated anticipated earnings and anticipated proceeds from the potential sale of PPL's U.K. utility business. The changes in fair value of these contracts are recognized immediately within GAAP earnings. Management believes that excluding these amounts from Earnings from Ongoing Operations until settlement of the contracts provides a better matching of the financial impacts of those contracts with the economic value of PPL's underlying hedged earnings. See Note 18 to the Financial Statements and "Risk Management" below for additional information on foreign currency economic activity.
PPL's Earnings from Ongoing Operations by reportable segment were as follows:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| U.K. Regulated | $ | 1,027 | $ | 1,032 | $ | (5) | |||||||||||
| Kentucky Regulated | 423 | 436 | (13) | ||||||||||||||
| Pennsylvania Regulated | 498 | 458 | 40 | ||||||||||||||
| Corporate and Other | (101) | (120) | 19 | ||||||||||||||
| Earnings from Ongoing Operations | $ | 1,847 | $ | 1,806 | $ | 41 |
See "Reconciliation of Earnings from Ongoing Operations" below for a reconciliation of this non-GAAP financial measure to Net Income.
U.K. Regulated Segment
The U.K. Regulated segment consists of PPL Global, which primarily includes WPD's regulated electricity distribution operations, the results of hedging the translation of WPD's earnings from GBP into U.S. dollars, and certain costs, such as U.S. income taxes, administrative costs, and certain acquisition-related financing costs. The U.K. Regulated segment represents 47% of PPL's Net Income for 2020 and 40% of PPL's assets at December 31, 2020.
Net Income and Earnings from Ongoing Operations include the following results:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| Operating revenues | $ | 2,133 | $ | 2,167 | $ | (34) | |||||||||||
| Other operation and maintenance | 549 | 510 | 39 | ||||||||||||||
| Depreciation | 265 | 250 | 15 | ||||||||||||||
| Taxes, other than income | 127 | 127 | — | ||||||||||||||
| Total operating expenses | 941 | 887 | 54 | ||||||||||||||
| Other Income (Expense) - net | 166 | 294 | (128) | ||||||||||||||
| Interest Expense | 400 | 405 | (5) | ||||||||||||||
| Income Taxes | 272 | 192 | 80 | ||||||||||||||
| Net Income | 686 | 977 | (291) | ||||||||||||||
| Less: Special Items | (341) | (55) | (286) | ||||||||||||||
| Earnings from Ongoing Operations | $ | 1,027 | $ | 1,032 | $ | (5) |
The following after-tax gains (losses), which management considers special items, impacted the U.K. Regulated segment's results and are excluded from Earnings from Ongoing Operations:
| Income Statement Line Item | 2020 | 2019 | |||||||||||||||
| Foreign currency economic hedges, net of tax of $57, $13 (a) | Other Income (Expense) - net | $ | (216) | $ | (51) | ||||||||||||
| COVID-19 impact, net of tax of $4, $0 (b) | Other operation and maintenance | (15) | — | ||||||||||||||
| U.K. tax rate change (c) | Income Taxes | (102) | — | ||||||||||||||
| Strategic corporate initiatives (d) | Income Taxes | (8) | — | ||||||||||||||
| Other, net of tax of $0, $1 (e) | Other operation and maintenance | — | (4) | ||||||||||||||
| Total | $ | (341) | $ | (55) |
(a)Unrealized gains (losses) on contracts that economically hedge anticipated GBP-denominated earnings and anticipated proceeds from the potential sale of the U.K. utility business.
(b)Incremental costs for labor not chargeable to capital projects due to U.K. government lockdown restrictions, purchases of personal protective equipment and other safety related actions associated with the COVID-19 pandemic.
(c)The U.K. Finance Act 2020, formally enacted on July 22, 2020, cancelled the reduction of the corporation tax rate from 19% to 17%. See Note 6 to the Financial Statements for additional information.
(d)U.S. tax on distribution of intercompany note receivable from the U.K. utility business related to the potential sale.
(e)Settlement of a contractual dispute.
The changes in the components of the U.K. Regulated segment's results between these periods were due to the factors set forth below, which reflect amounts classified as U.K. Adjusted Gross Margins, the items that management considers special and the effects of movements in foreign currency exchange, including the effects of foreign currency hedge contracts, on separate lines and not in their respective Statement of Income line items.
| 2020 vs. 2019 | |||||
| U.K. | |||||
| U.K. Adjusted Gross Margins | $ | (57) | |||
| Other operation and maintenance | (15) | ||||
| Depreciation | (14) | ||||
| Other Income (Expense) - net | (45) | ||||
| Interest expense | 8 | ||||
| Income taxes | 16 | ||||
| U.S. | |||||
| Income taxes | (6) | ||||
| Operation and maintenance | 2 | ||||
| Foreign currency exchange, after-tax | 106 | ||||
| Earnings from Ongoing Operations | (5) | ||||
| Special items, after-tax | (286) | ||||
| Net Income | $ | (291) |
-
See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of U.K. Adjusted Gross Margins.
-
Higher U.K. operation and maintenance expense in 2020 compared with 2019 primarily due to increases in various costs that were not individually significant in comparison to the prior year.
-
Higher depreciation expense in 2020 compared with 2019 primarily due to additions to PP&E, net of retirements.
-
Lower other income (expense) - net in 2020 compared with 2019 primarily due to lower pension income.
Kentucky Regulated Segment
The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations conducted by LG&E and KU, as well as LG&E's regulated distribution and sale of natural gas. In addition, certain acquisition-related financing costs are allocated to the Kentucky Regulated segment. The Kentucky Regulated segment represents 28% of PPL's Net Income for 2020 and 33% of PPL's assets at December 31, 2020.
Net Income and Earnings from Ongoing Operations include the following results:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| Operating revenues | $ | 3,106 | $ | 3,206 | $ | (100) | |||||||||||
| Fuel | 632 | 709 | (77) | ||||||||||||||
| Energy purchases | 143 | 174 | (31) | ||||||||||||||
| Other operation and maintenance | 834 | 861 | (27) | ||||||||||||||
| Depreciation | 606 | 547 | 59 | ||||||||||||||
| Taxes, other than income | 77 | 74 | 3 | ||||||||||||||
| Total operating expenses | 2,292 | 2,365 | (73) | ||||||||||||||
| Other Income (Expense) - net | 2 | (13) | 15 | ||||||||||||||
| Interest Expense | 300 | 298 | 2 | ||||||||||||||
| Income Taxes | 98 | 94 | 4 | ||||||||||||||
| Net Income | 418 | 436 | (18) | ||||||||||||||
| Less: Special Items | (5) | — | (5) | ||||||||||||||
| Earnings from Ongoing Operations | $ | 423 | $ | 436 | $ | (13) |
The following after-tax gains (losses), which management considers special items, impacted the Kentucky Regulated segment's results and are excluded from Earnings from Ongoing Operations:
| Income Statement Line Item | 2020 | 2019 | |||||||||||||||
| COVID-19 impact, net of tax of $2, $0 (a) | Other operation and maintenance | $ | (5) | $ | — | ||||||||||||
| Total | $ | (5) | $ | — |
(a)Incremental costs for outside services, customer payment processing, personal protective equipment and other safety related actions associated with the COVID-19 pandemic.
The changes in the components of the Kentucky Regulated segment's results between these periods were due to the factors set forth below, which reflect amounts classified as Kentucky Adjusted Gross Margins and the items that management considers special on separate lines and not in their respective Statement of Income line item.
| 2020 vs. 2019 | |||||
| Kentucky Adjusted Gross Margins | $ | (30) | |||
| Other operation and maintenance | 33 | ||||
| Depreciation | (21) | ||||
| Taxes, other than income | (2) | ||||
| Other Income (Expense) - net | 15 | ||||
| Interest Expense | (2) | ||||
| Income Taxes | (6) | ||||
| Earnings from Ongoing Operations | (13) | ||||
| Special Items, after-tax | (5) | ||||
| Net Income | $ | (18) |
-
See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of Kentucky Adjusted Gross Margins.
-
Lower other operation and maintenance expense in 2020 compared with 2019 primarily due to a $12 million decrease in administrative and general expenses, a $9 million decrease in plant operations and maintenance and a $9 million decrease in distribution maintenance.
-
Higher depreciation expense in 2020 compared with 2019 primarily due to a $14 million increase related to additional assets placed into service, net of retirements, and a $7 million increase related to higher depreciation rates effective May 1, 2019.
-
Higher income taxes in 2020 compared with 2019, primarily due to a deferred income tax benefit recorded in 2019 related to a Kentucky recycling credit of $17 million, partially offset by higher amortization of excess deferred federal and state income taxes of $5 million and an increase in income tax credits of $5 million.
Pennsylvania Regulated Segment
The Pennsylvania Regulated segment includes the regulated electricity transmission and distribution operations of PPL Electric. In addition, certain costs are allocated to the Pennsylvania Regulated segment. The Pennsylvania Regulated segment represents 34% of PPL's Net Income for 2020 and 26% of PPL's assets at December 31, 2020.
Net Income and Earnings from Ongoing Operations include the following results:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| Operating revenues | $ | 2,330 | $ | 2,358 | $ | (28) | |||||||||||
| Energy purchases | 491 | 549 | (58) | ||||||||||||||
| Other operation and maintenance | 513 | 566 | (53) | ||||||||||||||
| Depreciation | 403 | 386 | 17 | ||||||||||||||
| Taxes, other than income | 107 | 112 | (5) | ||||||||||||||
| Total operating expenses | 1,514 | 1,613 | (99) | ||||||||||||||
| Other Income (Expense) - net | 20 | 31 | (11) | ||||||||||||||
| Interest Expense | 172 | 169 | 3 | ||||||||||||||
| Income Taxes | 167 | 149 | 18 | ||||||||||||||
| Net Income | 497 | 458 | 39 | ||||||||||||||
| Less: Special Items | (1) | — | (1) | ||||||||||||||
| Earnings from Ongoing Operations | $ | 498 | $ | 458 | $ | 40 |
The following after-tax gains (losses), which management considers special items, impacted the Pennsylvania Regulated segment's results and are excluded from Earnings from Ongoing Operations:
| Income Statement Line Item | 2020 | 2019 | |||||||||||||||
| COVID-19 impact, net of tax of $0, $0 (a) | Other operation and maintenance | $ | (1) | $ | — | ||||||||||||
| Total | $ | (1) | $ | — |
(a)Incremental costs for outside services, personal protective equipment and other safety related actions associated with the COVID-19 pandemic.
The changes in the components of the Pennsylvania Regulated segment's results between these periods were due to the factors set forth below, which reflect amounts classified as Pennsylvania Adjusted Gross Margins and the items that management considers special on separate lines and not in their respective Statement of Income line items.
| 2020 vs. 2019 | |||||
| Pennsylvania Adjusted Gross Margins | $ | 62 | |||
| Other operation and maintenance | 19 | ||||
| Depreciation | (14) | ||||
| Taxes, other than income | 5 | ||||
| Other Income (Expense) - net | (11) | ||||
| Interest Expense | (3) | ||||
| Income Taxes | (18) | ||||
| Earnings from Ongoing Operations | 40 | ||||
| Special Items, after-tax | (1) | ||||
| Net Income | $ | 39 |
- See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of Pennsylvania Adjusted Gross Margins.
Reconciliation of Earnings from Ongoing Operations
The following tables contain after-tax gains (losses), in total, which management considers special items, that are excluded from Earnings from Ongoing Operations, and a reconciliation to PPL's "Net Income" for the years ended December 31:
| 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.K. Regulated | KY Regulated | PA Regulated | Corporate and Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income | $ | 686 | $ | 418 | $ | 497 | $ | (132) | $ | 1,469 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Less: Special Items (expense) benefit: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency economic hedges, net of tax of $57 | (216) | — | — | — | (216) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Talen litigation costs, net of tax of $3 (a) | — | — | — | (13) | (13) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| COVID-19 impact, net of tax of $4, $2, $0, $0 | (15) | (5) | (1) | (1) | (22) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.K. tax rate change | (102) | — | — | — | (102) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Strategic corporate initiatives, net of tax of $0, $0, $0, $3 (b) | (8) | — | — | (11) | (19) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Executive retirement benefits, net of tax of $2 (c) | — | — | — | (6) | (6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Special Items | (341) | (5) | (1) | (31) | (378) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings from Ongoing Operations | $ | 1,027 | $ | 423 | $ | 498 | $ | (101) | $ | 1,847 |
| 2019 | |||||||||||||||||||||||||||||||||||
| U.K. Regulated | KY Regulated | PA Regulated | Corporate and Other | Total | |||||||||||||||||||||||||||||||
| Net Income | $ | 977 | $ | 436 | $ | 458 | $ | (125) | $ | 1,746 | |||||||||||||||||||||||||
| Less: Special Items (expense) benefit: | |||||||||||||||||||||||||||||||||||
| Foreign currency economic hedges, net of tax of $13 | (51) | — | — | — | (51) | ||||||||||||||||||||||||||||||
| Talen litigation costs, net of tax of $1 (a) | — | — | — | (5) | (5) | ||||||||||||||||||||||||||||||
| Other, net of tax of $1 | (4) | — | — | — | (4) | ||||||||||||||||||||||||||||||
| Total Special Items | (55) | — | — | (5) | (60) | ||||||||||||||||||||||||||||||
| Earnings from Ongoing Operations | $ | 1,032 | $ | 436 | $ | 458 | $ | (120) | $ | 1,806 |
(a)Legal expenses related to litigation with a former affiliate, Talen Montana. See Note 14 to the Financial Statements for additional information.
(b)Costs related to the process to sell the U.K. utility business, announced on August 10, 2020. Similar costs of $4 million, after-tax, were incurred in 2019, but not treated as a special item.
(c)Settlement charge from the remeasurement of the projected benefit obligation for the PPL Supplemental Executive Retirement Plan related to a lump-sum payment made to a former PPL executive.
Adjusted Gross Margins
Management also utilizes the following non-GAAP financial measures as indicators of performance for its businesses.
- "U.K. Adjusted Gross Margins" is a single financial performance measure of the electricity distribution operations of the U.K. Regulated segment. In calculating this measure, direct costs such as connection charges from National Grid, which owns and manages the electricity transmission network in England and Wales, and Ofgem license fees (recorded in "Other operation and maintenance" on the Statements of Income) are deducted from operating revenues, as they are costs passed
through to customers. As a result, this measure represents the net revenues from the delivery of electricity across WPD's distribution network in the U.K. and directly related activities.
-
"Kentucky Adjusted Gross Margins" is a single financial performance measure of the electricity generation, transmission and distribution operations of the Kentucky Regulated segment, as well as the Kentucky Regulated segment's distribution and sale of natural gas. In calculating this measure, fuel, energy purchases and certain variable costs of production (recorded in "Other operation and maintenance" on the Statements of Income) are deducted from operating revenues. In addition, certain other expenses, recorded in "Other operation and maintenance", "Depreciation" and "Taxes, other than income" on the Statements of Income, associated with approved cost recovery mechanisms are offset against the recovery of those expenses, which are included in revenues. These mechanisms allow for direct recovery of these expenses and, in some cases, returns on capital investments and performance incentives. As a result, this measure represents the net revenues from electricity and gas operations.
-
"Pennsylvania Adjusted Gross Margins" is a single financial performance measure of the electricity transmission and distribution operations of the Pennsylvania Regulated segment. In calculating this measure, utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, are offset with minimal impact on earnings. Costs associated with these mechanisms are recorded in "Energy purchases," "Other operation and maintenance," (which are primarily Act 129, Storm Damage and Universal Service program costs), "Depreciation" (which is primarily related to the Act 129 Smart Meter program) and "Taxes, other than income," (which is primarily gross receipts tax) on the Statements of Income. This measure represents the net revenues from the Pennsylvania Regulated segment's electricity delivery operations.
These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and report their results of operations. Management believes these measures provide additional useful criteria to make investment decisions. These performance measures are used, in conjunction with other information, by senior management and PPL's Board of Directors to manage operations and analyze actual results compared with budget.
Changes in Adjusted Gross Margins
The following table shows Adjusted Gross Margins by PPL's reportable segment and by component, as applicable, for the year ended December 31 as well as the changes between periods. The factors that gave rise to the changes are described following the table.
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| U.K. Regulated | |||||||||||||||||
| U.K. Adjusted Gross Margins | $ | 1,954 | $ | 1,998 | $ | (44) | |||||||||||
| Impact of changes in foreign currency exchange rates | 13 | ||||||||||||||||
| U.K. Adjusted Gross Margins excluding impact of foreign currency exchange rates | $ | (57) | |||||||||||||||
| Kentucky Regulated | |||||||||||||||||
| Kentucky Adjusted Gross Margins | $ | 2,081 | $ | 2,111 | $ | (30) | |||||||||||
| Pennsylvania Regulated | |||||||||||||||||
| Pennsylvania Adjusted Gross Margins | |||||||||||||||||
| Distribution | $ | 907 | $ | 927 | $ | (20) | |||||||||||
| Transmission | 682 | 600 | 82 | ||||||||||||||
| Total Pennsylvania Adjusted Gross Margins | $ | 1,589 | $ | 1,527 | $ | 62 |
U.K. Adjusted Gross Margins
U.K. Adjusted Gross Margins, excluding the impact of changes in foreign currency exchange rates, decreased in 2020 compared with 2019 primarily due to $67 million of lower volumes, of which $82 million was due to the COVID-19 lockdown restrictions that were effective beginning the latter half of March 2020 and $11 million from the April 1, 2020 price decrease,
driven by lower true-up mechanisms mainly offset by higher base demand revenue, partially offset by $24 million from the April 1, 2019 price increase.
Kentucky Adjusted Gross Margins
Kentucky Adjusted Gross Margins decreased in 2020 compared with 2019 due to $42 million of lower commercial and industrial demand revenue primarily due to impacts of COVID-19, $39 million of decreased sales volumes primarily due to weather, and a $17 million decrease due to the termination of eight supply contracts with Kentucky municipalities on April 30, 2019, partially offset by $64 million due to higher retail rates approved by the KPSC effective May 1, 2019, inclusive of the termination of the TCJA bill credit mechanism.
Pennsylvania Adjusted Gross Margins
Distribution
Distribution Adjusted Gross Margins decreased in 2020 compared with 2019. No items were individually significant in comparison to the prior year.
Transmission
Transmission Adjusted Gross Margins increased in 2020 compared with 2019 primarily due to returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability.
Reconciliation of Adjusted Gross Margins
The following tables contain the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the years ended December 31:
| 2020 | |||||||||||||||||||||||||||||
| U.K. Adjusted Gross Margins | Kentucky Adjusted Gross Margins | Pennsylvania Adjusted Gross Margins | Other (a) | Operating Income (b) | |||||||||||||||||||||||||
| Operating Revenues | $ | 2,095 | (c) | $ | 3,106 | $ | 2,331 | $ | 75 | $ | 7,607 | ||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||
| Fuel | — | 632 | — | — | 632 | ||||||||||||||||||||||||
| Energy purchases | — | 143 | 491 | — | 634 | ||||||||||||||||||||||||
| Other operation and maintenance | 141 | 91 | 91 | 1,621 | 1,944 | ||||||||||||||||||||||||
| Depreciation | — | 154 | 53 | 1,080 | 1,287 | ||||||||||||||||||||||||
| Taxes, other than income | — | 5 | 107 | 195 | 307 | ||||||||||||||||||||||||
| Total Operating Expenses | 141 | 1,025 | 742 | 2,896 | 4,804 | ||||||||||||||||||||||||
| Total | $ | 1,954 | $ | 2,081 | $ | 1,589 | $ | (2,821) | $ | 2,803 |
| 2019 | |||||||||||||||||||||||||||||
| U.K. Adjusted Gross Margins | Kentucky Adjusted Gross Margins | Pennsylvania Adjusted Gross Margins | Other (a) | Operating Income (b) | |||||||||||||||||||||||||
| Operating Revenues | $ | 2,129 | (c) | $ | 3,206 | $ | 2,358 | $ | 76 | $ | 7,769 | ||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||
| Fuel | — | 709 | — | — | 709 | ||||||||||||||||||||||||
| Energy purchases | — | 174 | 549 | — | 723 | ||||||||||||||||||||||||
| Other operation and maintenance | 131 | 92 | 125 | 1,637 | 1,985 | ||||||||||||||||||||||||
| Depreciation | — | 116 | 50 | 1,033 | 1,199 | ||||||||||||||||||||||||
| Taxes, other than income | — | 4 | 107 | 202 | 313 | ||||||||||||||||||||||||
| Total Operating Expenses | 131 | 1,095 | 831 | 2,872 | 4,929 | ||||||||||||||||||||||||
| Total | $ | 1,998 | $ | 2,111 | $ | 1,527 | $ | (2,796) | $ | 2,840 |
(a)Represents amounts excluded from Adjusted Gross Margins.
(b)As reported on the Statements of Income.
(c)2020 and 2019 exclude $38 million of ancillary revenues.
2021 Outlook
(All Registrants)
As a result of the initiation of PPL's formal process to sell its U.K. utility business, PPL is not providing future earnings guidance at this time.
Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7, and Notes 1, 7 and 14 to the Financial Statements (as applicable) for a discussion of the risks, uncertainties and factors that may impact future earnings.
PPL Electric: Statement of Income Analysis
Net income for the years ended December 31 includes the following results:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| Operating Revenues | $ | 2,331 | $ | 2,358 | $ | (27) | |||||||||||
| Operating Expenses | |||||||||||||||||
| Operation | |||||||||||||||||
| Energy purchases | 491 | 549 | (58) | ||||||||||||||
| Other operation and maintenance | 513 | 566 | (53) | ||||||||||||||
| Depreciation | 403 | 386 | 17 | ||||||||||||||
| Taxes, other than income | 107 | 112 | (5) | ||||||||||||||
| Total Operating Expenses | 1,514 | 1,613 | (99) | ||||||||||||||
| Other Income (Expense) - net | 18 | 25 | (7) | ||||||||||||||
| Interest Income from Affiliate | 2 | 6 | (4) | ||||||||||||||
| Interest Expense | 173 | 170 | 3 | ||||||||||||||
| Income Taxes | 167 | 149 | 18 | ||||||||||||||
| Net Income | $ | 497 | $ | 457 | $ | 40 |
Operating Revenues
The increase (decrease) in operating revenues was due to:
| 2020 vs. 2019 | |||||
| Distribution price (a) | $ | (27) | |||
| Distribution volume (b) | (16) | ||||
| PLR (c) | (57) | ||||
| Transmission Formula Rate (d) | 82 | ||||
| Other | (9) | ||||
| Total | $ | (27) |
(a) Distribution price variance was primarily due to reconcilable cost recovery mechanisms approved by the PUC.
(b) The decrease was primarily due to unfavorable weather.
(c) The decrease was primarily the result of lower energy prices, unfavorable weather and lower usage, partially offset by higher volumes of non-shopping customers.
(d) The increase was primarily due to returns on additional capital investments.
Energy Purchases
Energy purchases decreased $58 million in 2020 compared with 2019. This decrease was primarily due to lower PLR prices of $70 million, partially offset by higher transmission enhancement expenses of $13 million.
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance was due to:
| 2020 vs. 2019 | |||||
| Act 129 | $ | (17) | |||
| Storm costs | (11) | ||||
| Universal service programs | (10) | ||||
| Vegetation management | (8) | ||||
| Bad debts | (4) | ||||
| Contractor-related expenses | (4) | ||||
| Canceled projects | 7 | ||||
| Other | (6) | ||||
| Total | $ | (53) |
LKE: Statement of Income Analysis
Net income for the years ended December 31 includes the following results:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| Operating Revenues | $ | 3,106 | $ | 3,206 | $ | (100) | |||||||||||
| Operating Expenses | |||||||||||||||||
| Operation | |||||||||||||||||
| Fuel | 632 | 709 | (77) | ||||||||||||||
| Energy purchases | 143 | 174 | (31) | ||||||||||||||
| Other operation and maintenance | 834 | 861 | (27) | ||||||||||||||
| Depreciation | 606 | 547 | 59 | ||||||||||||||
| Taxes, other than income | 77 | 74 | 3 | ||||||||||||||
| Total Operating Expenses | 2,292 | 2,365 | (73) | ||||||||||||||
| Other Income (Expense) - net | 2 | (13) | 15 | ||||||||||||||
| Interest Expense | 223 | 226 | (3) | ||||||||||||||
| Interest Expense with Affiliate | 37 | 31 | 6 | ||||||||||||||
| Income Taxes | 106 | 103 | 3 | ||||||||||||||
| Net Income | $ | 450 | $ | 468 | $ | (18) |
Operating Revenues
The increase (decrease) in operating revenues was due to:
| 2020 vs. 2019 | |||||
| Volumes (a) | $ | (95) | |||
| Demand (b) | (42) | ||||
| Fuel and other energy prices (c) | (37) | ||||
| Municipal supply (d) | (28) | ||||
| Retail rates (e) | 64 | ||||
| ECR (f) | 29 | ||||
| Other | 9 | ||||
| Total | $ | (100) |
(a)The decrease was primarily due to unfavorable weather.
(b)The decrease was primarily due to COVID-19.
(c)The decrease was primarily due to lower recoveries of fuel and energy purchases due to lower commodity costs.
(d)The decrease was primarily due to the termination of eight supply contracts with Kentucky municipalities on April 30, 2019.
(e)The increase was primarily due to higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(f)The increase was primarily due to higher recoverable depreciation expense as a result of higher depreciation rates effective May 1, 2019.
Fuel
Fuel decreased $77 million in 2020 compared with 2019 at LKE, primarily due to a $46 million decrease in volumes driven by weather, a $27 million decrease in commodity costs and a $9 million decrease in volumes driven by the termination of eight supply contracts with Kentucky municipalities on April 30, 2019.
Energy Purchases
Energy purchases decreased $31 million in 2020 compared with 2019, primarily due to lower commodity costs.
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance was due to:
| 2020 vs. 2019 | |||||
| Administrative and general | $ | (12) | |||
| Plant operations and maintenance | (11) | ||||
| Distribution operations and maintenance | (9) | ||||
| COVID-19 | 7 | ||||
| Other | (2) | ||||
| Total | $ | (27) |
Depreciation
Depreciation increased $59 million in 2020 compared with 2019, primarily due to a $30 million increase related to additional assets placed into service, net of retirements and a $26 million increase related to higher depreciation rates effective May 1, 2019.
LG&E: Statement of Income Analysis
Net income for the years ended December 31 includes the following results:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| Operating Revenues | |||||||||||||||||
| Retail and wholesale | $ | 1,435 | $ | 1,473 | $ | (38) | |||||||||||
| Electric revenue from affiliate | 21 | 27 | (6) | ||||||||||||||
| Total Operating Revenues | 1,456 | 1,500 | (44) | ||||||||||||||
| Operating Expenses | |||||||||||||||||
| Operation | |||||||||||||||||
| Fuel | 246 | 289 | (43) | ||||||||||||||
| Energy purchases | 125 | 154 | (29) | ||||||||||||||
| Energy purchases from affiliates | 19 | 7 | 12 | ||||||||||||||
| Other operation and maintenance | 373 | 387 | (14) | ||||||||||||||
| Depreciation | 259 | 231 | 28 | ||||||||||||||
| Taxes, other than income | 40 | 39 | 1 | ||||||||||||||
| Total Operating Expenses | 1,062 | 1,107 | (45) | ||||||||||||||
| Other Income (Expense) - net | (1) | (11) | 10 | ||||||||||||||
| Interest Expense | 87 | 87 | — | ||||||||||||||
| Income Taxes | 62 | 63 | (1) | ||||||||||||||
| Net Income | $ | 244 | $ | 232 | $ | 12 |
Operating Revenues
The increase (decrease) in operating revenues was due to:
| 2020 vs. 2019 | |||||
| Volumes (a) | $ | (52) | |||
| Fuel and other energy prices (b) | (22) | ||||
| Demand (c) | (18) | ||||
| Retail rates (d) | 27 | ||||
| ECR (e) | 13 | ||||
| Other | 8 | ||||
| Total | $ | (44) |
(a)The decrease was primarily due to unfavorable weather.
(b)The decrease was primarily due to lower recoveries of fuel and energy purchases due to lower commodity costs.
(c)The decrease was primarily due to COVID-19.
(d)The increase was primarily due to higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(e)The increase was primarily due to higher recoverable depreciation expense as a result of higher depreciation rates effective May 1, 2019.
Fuel
Fuel decreased $43 million in 2020 compared with 2019, primarily due to a $38 million decrease in volumes driven by weather and a $7 million decrease in commodity costs.
Energy Purchases
Energy purchases decreased $29 million in 2020 compared with 2019, primarily due to lower commodity costs.
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance was due to:
| 2020 vs. 2019 | |||||
| Plant operations and maintenance | $ | (6) | |||
| Distribution operations and maintenance | (5) | ||||
| Administrative and general | (4) | ||||
| COVID-19 | 3 | ||||
| Other | (2) | ||||
| Total | $ | (14) |
Depreciation
Depreciation increased $28 million in 2020 compared with 2019, due to a $15 million increase related to additional assets placed into service, net of retirements and a $13 million increase related to higher depreciation rates effective May 1, 2019.
KU: Statement of Income Analysis
Net income for the years ended December 31 includes the following results:
| Change | |||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||
| Operating Revenues | |||||||||||||||||
| Retail and wholesale | $ | 1,671 | $ | 1,733 | $ | (62) | |||||||||||
| Electric revenue from affiliate | 19 | 7 | 12 | ||||||||||||||
| Total Operating Revenues | 1,690 | 1,740 | (50) | ||||||||||||||
| Operating Expenses | |||||||||||||||||
| Operation | |||||||||||||||||
| Fuel | 386 | 420 | (34) | ||||||||||||||
| Energy purchases | 18 | 20 | (2) | ||||||||||||||
| Energy purchases from affiliates | 21 | 27 | (6) | ||||||||||||||
| Other operation and maintenance | 429 | 438 | (9) | ||||||||||||||
| Depreciation | 346 | 315 | 31 | ||||||||||||||
| Taxes, other than income | 37 | 35 | 2 | ||||||||||||||
| Total Operating Expenses | 1,237 | 1,255 | (18) | ||||||||||||||
| Other Income (Expense) - net | 3 | (4) | 7 | ||||||||||||||
| Interest Expense | 113 | 109 | 4 | ||||||||||||||
| Income Taxes | 63 | 79 | (16) | ||||||||||||||
| Net Income | $ | 280 | $ | 293 | $ | (13) |
Operating Revenue
The increase (decrease) in operating revenue was due to:
| 2020 vs. 2019 | |||||
| Volumes (a) | $ | (35) | |||
| Municipal supply (b) | (28) | ||||
| Demand (c) | (24) | ||||
| Fuel and other energy prices (d) | (15) | ||||
| Retail rates (e) | 37 | ||||
| ECR (f) | 16 | ||||
| Other | (1) | ||||
| Total | $ | (50) |
(a)The decrease was primarily due to unfavorable weather.
(b)The decrease was primarily due to the termination of eight supply contracts with Kentucky municipalities on April 30, 2019.
(c)The decrease was primarily due to COVID-19.
(d)The decrease was primarily due to lower recoveries of fuel due to lower commodity costs.
(e)The increase was primarily due to higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(f)The increase was primarily due to higher recoverable depreciation expense as a result of higher depreciation rates effective May 1, 2019.
Fuel
Fuel decreased $34 million in 2020 compared with 2019, primarily due to a $20 million decrease in commodity costs, a $9 million decrease in volumes driven by the termination of eight supply contracts with Kentucky municipalities on April 30, 2019 and an $8 million decrease in volumes driven by weather.
Depreciation
Depreciation increased $31 million in 2020 compared with 2019, primarily due to a $15 million increase related to additional assets placed into service, net of retirements and a $13 million increase related to higher depreciation rates effective May 1, 2019.
Income Taxes
Income taxes decreased $16 million in 2020 compared to 2019, primarily due to a $7 million decrease due to lower pre-tax income, $4 million due to increased amortization of excess deferred federal and state income taxes and $4 million due to an increase in income tax credits in 2020. See Note 6 to the Financial Statements for additional information on income taxes.
Financial Condition
The remainder of this Item 7 in this Form 10-K is presented on a combined basis, providing information, as applicable, for all Registrants.
Liquidity and Capital Resources
(All Registrants)
The Registrants' cash flows from operations and access to cost effective bank and capital markets are subject to risks and uncertainties. See "Item 1A. Risk Factors" for a discussion of risks and uncertainties that could affect the Registrants' cash flows.
The Registrants had the following at:
| PPL (a) | PPL Electric | LKE | LG&E | KU | |||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 708 | $ | 40 | $ | 29 | $ | 7 | $ | 22 | |||||||||||||||||||
| Short-term debt | 1,662 | — | 465 | 262 | 203 | ||||||||||||||||||||||||
| Long-term debt due within one year | 1,574 | 400 | 674 | 292 | 132 | ||||||||||||||||||||||||
| Notes payable with affiliates | — | 251 | — | — | |||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 815 | $ | 262 | $ | 27 | $ | 15 | $ | 12 | |||||||||||||||||||
| Short-term debt | 1,151 | — | 388 | 238 | 150 | ||||||||||||||||||||||||
| Long-term debt due within one year | 1,172 | — | 975 | — | 500 | ||||||||||||||||||||||||
| Notes payable with affiliates | — | 150 | — | — |
(a)At December 31, 2020, $261 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL would not anticipate an incremental U.S. tax cost. See Note 6 to the Financial Statements for additional information on undistributed earnings of WPD.
(All Registrants)
Net cash provided by (used in) operating, investing and financing activities for the years ended December 31 and the changes between periods were as follows:
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||
| Operating activities | $ | 2,746 | $ | 884 | $ | 1,003 | $ | 483 | $ | 543 | |||||||||||||||||||
| Investing activities | (3,258) | (1,151) | (963) | (456) | (507) | ||||||||||||||||||||||||
| Financing activities | 386 | 43 | (38) | (35) | (26) | ||||||||||||||||||||||||
| 2019 | |||||||||||||||||||||||||||||
| Operating activities | $ | 2,427 | $ | 913 | $ | 938 | $ | 492 | $ | 553 | |||||||||||||||||||
| Investing activities | (3,080) | (1,117) | (1,094) | (482) | (610) | ||||||||||||||||||||||||
| Financing activities | 836 | 199 | 159 | (5) | 55 | ||||||||||||||||||||||||
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||||||||||||||||
| 2020 vs. 2019 Change | |||||||||||||||||||||||||||||
| Operating activities | $ | 319 | $ | (29) | $ | 65 | $ | (9) | $ | (10) | |||||||||||||||||||
| Investing activities | (178) | (34) | 131 | 26 | 103 | ||||||||||||||||||||||||
| Financing activities | (450) | (156) | (197) | (30) | (81) |
Operating Activities
The components of the change in cash provided by (used in) operating activities were as follows:
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||||||||||||||||
| 2020 vs. 2019 | |||||||||||||||||||||||||||||
| Change - Cash Provided (Used): | |||||||||||||||||||||||||||||
| Net income | $ | (277) | $ | 40 | $ | (18) | $ | 12 | $ | (13) | |||||||||||||||||||
| Non-cash components | 444 | 25 | 38 | (31) | 13 | ||||||||||||||||||||||||
| Working capital | 132 | (50) | 42 | (6) | (1) | ||||||||||||||||||||||||
| Defined benefit plan funding | (40) | — | (20) | (5) | — | ||||||||||||||||||||||||
| Other operating activities | 60 | (44) | 23 | 21 | (9) | ||||||||||||||||||||||||
| Total | $ | 319 | $ | (29) | $ | 65 | $ | (9) | $ | (10) |
(PPL)
PPL cash provided by operating activities in 2020 decreased $319 million compared with 2019.
-
Net income decreased $277 million between periods and included an increase in net non-cash charges of $444 million. The increase in net non-cash charges was primarily due to an increase in depreciation expense (primarily due to additional assets placed into service, net of retirements, increased cost of removal and salvage amortization and higher depreciation rates), an increase in deferred income taxes (due to the cancellation of the U.K. corporation tax rate reduction, book versus tax plant timing differences and Federal net operating losses) and an increase in unrealized gains on derivatives, and other hedging activities, partially offset by a decrease in amortization expense.
-
The $132 million increase in cash from changes in working capital was primarily due to an increase in accounts payable (primarily due to timing of disbursement of payments) and a decrease in regulatory assets and liabilities, net primarily due to the timing of rate recovery mechanisms), partially offset by an increase in accounts receivable (primarily due to timing of receipts).
-
The $60 million increase in cash provided by other operating activities was driven by an increase in other non-current assets (primarily related to non-current regulatory assets) and an increase in other non-current liabilities (primarily related to an increase in non-current regulatory liabilities partially offset by a decrease in accrued retirement obligations).
(PPL Electric)
PPL Electric's cash provided by operating activities in 2020 decreased $29 million compared with 2019.
-
Net income increased $40 million between the periods and included an increase in non-cash components of $25 million. The increase in non-cash components was primarily due to an increase in depreciation expense (primarily due to additional assets placed in service, net of retirements and increased cost of removal and salvage amortization) and an increase in other expenses (primarily due to an increase in canceled projects).
-
The $50 million decrease in cash from changes in working capital was primarily due to an increase in accounts receivable (primarily due to timing of receipts), partially offset by a decrease in unbilled revenues (primarily due to reduced prices and volume).
-
The $44 million decrease in cash provided by other operating activities was driven primarily by an increase in non-current assets (primarily related to prepayments).
(LKE)
LKE's cash provided by operating activities in 2020 increased $65 million compared with 2019.
-
Net income decreased $18 million between the periods and included an increase in non-cash components of $38 million. The increase in non-cash components was primarily driven by an increase in depreciation expense (primarily due to additional assets placed into service, net of retirements and higher depreciation rates), partially offset by a decrease in deferred income tax expense (primarily due to book versus tax plant timing differences, partially offset by increased benefit from net operating losses).
-
The increase in cash from changes in working capital was primarily driven by a decrease in net regulatory assets (primarily due to the timing of rate recovery mechanisms), an increase in taxes payable (primarily due to timing of payments) and an increase in accounts payable (primarily due to timing of payments), partially offset by an increase in unbilled revenue (primarily due to weather).
(LG&E)
LG&E's cash provided by operating activities in 2020 decreased $9 million compared with 2019.
-
Net income increased $12 million between the periods and included a decrease in non-cash components of $31 million. The decrease in non-cash components was primarily driven by a decrease in deferred income tax expense (primarily due to book versus tax plant timing differences), partially offset by an increase in depreciation expense (primarily due to additional assets placed into service, net of retirements and higher depreciation rates).
-
Cash from changes in working capital was consistent primarily due to a decrease in accounts payable (primarily due to timing of payments) and a decrease in taxes payable (primarily due to timing of payments), partially offset by a decrease in net regulatory assets (primarily due to the timing of rate recovery mechanisms).
-
The increase in cash provided by other operating activities was driven primarily by an increase in other liabilities (primarily related to noncurrent regulatory liabilities) and a decrease in ARO expenditures.
(KU)
KU's cash provided by operating activities in 2020 decreased $10 million compared with 2019.
-
Net income decreased $13 million between the periods and included an increase in non-cash components of $13 million. The increase in non-cash components was driven by an increase in depreciation expense (primarily due to additional assets placed into service, net of retirements and higher depreciation rates), partially offset by a decrease in deferred income tax expense (primarily due to book versus tax plant timing differences).
-
Cash from changes in working capital was consistent primarily due to an increase in unbilled revenue (primarily due to weather), offset by an increase in accounts payable (primarily due to timing of payments).
Investing Activities
(All Registrants)
The components of the change in cash provided by (used in) investing activities were as follows:
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||||||||||||||||
| 2020 vs. 2019 | |||||||||||||||||||||||||||||
| Change - Cash Provided (Used): | |||||||||||||||||||||||||||||
| Expenditures for PP&E | $ | (166) | $ | (31) | $ | 128 | $ | 26 | $ | 100 | |||||||||||||||||||
| Purchase of investments | 55 | — | — | — | — | ||||||||||||||||||||||||
| Proceeds from sale of investments | (60) | — | — | — | — | ||||||||||||||||||||||||
| Other investing activities | (7) | (3) | 3 | — | 3 | ||||||||||||||||||||||||
| Total | $ | (178) | $ | (34) | $ | 131 | $ | 26 | $ | 103 |
For PPL, in 2020 compared with 2019, the increase in expenditures was due to higher project expenditures at WPD and PPL Electric, partially offset by lower project expenditures at LKE, LG&E and KU. The increase in expenditures at WPD was primarily due to an increase in expenditures to enhance system reliability. The increase in expenditures for PPL Electric was
primarily due to timing differences on capital spending projects related to ongoing efforts to improve reliability and replace aging infrastructure. The decrease in expenditures at LKE was primarily due to decreased spending for environmental water projects at LG&E and KU's Trimble County plant, LG&E's Mill Creek plant and KU's Ghent plant, and decreased spending at LG&E and KU's Trimble County landfill, partially offset by spending on gas transmission projects at LG&E and spending on various other projects at LG&E and KU that are not individually significant.
See "Forecasted Uses of Cash" for detail regarding projected capital expenditures for the years 2021 through 2025.
Financing Activities
(All Registrants)
The components of the change in cash provided by (used in) financing activities were as follows:
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||||||||||||||||
| 2020 vs. 2019 | |||||||||||||||||||||||||||||
| Change - Cash Provided (Used): | |||||||||||||||||||||||||||||
| Debt issuance/retirement, net | $ | (170) | $ | (43) | $ | (982) | $ | (199) | $ | (308) | |||||||||||||||||||
| Debt issuance/retirement, affiliate | — | 550 | — | — | |||||||||||||||||||||||||
| Proceeds from project financing | 173 | — | — | — | — | ||||||||||||||||||||||||
| Stock issuances/redemptions, net | (1,133) | — | — | — | — | ||||||||||||||||||||||||
| Dividends | (83) | 86 | — | 21 | 29 | ||||||||||||||||||||||||
| Capital contributions/distributions, net | — | (205) | (38) | 78 | 60 | ||||||||||||||||||||||||
| Issuance of term loan | 300 | — | — | — | — | ||||||||||||||||||||||||
| Issuance of commercial paper | 73 | — | 73 | 41 | 32 | ||||||||||||||||||||||||
| Changes in net short-term debt | 405 | — | 130 | 24 | 106 | ||||||||||||||||||||||||
| Note payable with affiliate | — | 64 | — | — | |||||||||||||||||||||||||
| Other financing activities | (15) | 6 | 6 | 5 | — | ||||||||||||||||||||||||
| Total | $ | (450) | $ | (156) | $ | (197) | $ | (30) | $ | (81) |
(All Registrants)
In 2020 compared with 2019, cash provided by financing activities decreased primarily as a result of a decrease in cash required to fund capital and general expenditures.
See "Long-term Debt and Equity Securities" below for additional information on current year activity. See "Forecasted Sources of Cash" for a discussion of the Registrants' plans to issue debt and equity securities, as well as a discussion of credit facility capacity available to the Registrants. Also see "Forecasted Uses of Cash" for a discussion of PPL's plans to pay dividends on common securities in the future, as well as the Registrants' maturities of long-term debt.
Long-term Debt and Equity Securities
Long-term debt and equity securities activity for 2020 included:
| Debt | Net Stock | ||||||||||||||||
| Issuances (a) | Retirements | Issuances | |||||||||||||||
| Cash Flow Impact: | |||||||||||||||||
| PPL | $ | 2,167 | $ | 1,172 | $ | 34 | |||||||||||
| PPL Electric | 250 | — | |||||||||||||||
| LKE | 1,048 | 975 | |||||||||||||||
| LG&E | — | — | |||||||||||||||
| KU | 498 | 500 |
(a)Issuances are net of pricing discounts, where applicable, and exclude the impact of debt issuance costs. Includes debt issuances with affiliates.
See Note 8 to the Financial Statements for additional long-term debt information.
(PPL)
Equity Securities Activities
See Note 8 to the Financial Statements for additional information.
ATM Program
In February 2018, PPL entered into an equity distribution agreement, pursuant to which PPL may sell, from time to time, up to an aggregate of $1.0 billion of its common stock through an at-the-market offering program, including a forward sales component. The compensation paid to the selling agents by PPL may be up to 2% of the gross offering proceeds of the shares. There were no issuances under the ATM program for the twelve months ended December 31, 2020 and 2019. PPL issued 42 million shares of common stock and received proceeds of $119 million for the year ended December 31, 2018. The ATM program expires in February 2021.
Forecasted Sources of Cash
(All Registrants)
The Registrants expect to continue to have adequate liquidity available from operating cash flows, cash and cash equivalents, credit facilities and commercial paper issuances. Additionally, subject to market conditions, the Registrants and their subsidiaries may access the capital markets, and PPL Electric, LG&E and KU anticipate receiving equity contributions from their parent or member in 2021.
Credit Facilities
The Registrants maintain credit facilities to enhance liquidity, provide credit support and provide a backstop to commercial paper programs. Amounts borrowed under these credit facilities are reflected in "Short-term debt" on the Balance Sheets except for borrowings of $100 million under PPL Capital Funding's term loan agreement due in March 2022, which are reflected in "Long-term Debt" on the Balance Sheets. At December 31, 2020, the total committed borrowing capacity under credit facilities and the borrowings under these facilities were:
External
| Committed Capacity | Borrowed | Letters of Credit and Commercial Paper Issued | Unused Capacity | ||||||||||||||||||||
| PPL Capital Funding Credit Facilities | $ | 1,900 | $ | 400 | $ | 402 | $ | 1,098 | |||||||||||||||
| PPL Electric Credit Facility | 650 | — | 1 | 649 | |||||||||||||||||||
| LG&E Credit Facilities | 500 | — | 262 | 238 | |||||||||||||||||||
| KU Credit Facilities | 400 | — | 203 | 197 | |||||||||||||||||||
| Total LKE | 900 | — | 465 | 435 | |||||||||||||||||||
| Total U.S. Credit Facilities (a) (b) | $ | 3,450 | $ | 400 | $ | 868 | $ | 2,182 | |||||||||||||||
| Total U.K. Credit Facilities (b) (c) | £ | 1,055 | £ | 311 | £ | — | £ | 744 |
(a)The syndicated credit facilities and PPL Capital Funding's bilateral facility, each contain a financial covenant requiring debt to total capitalization not to exceed 70% for PPL Capital Funding, PPL Electric, LKE, LG&E and KU, as calculated in accordance with the facility, and other customary covenants.
The commitments under the domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than the following percentages of the total committed capacity: PPL - 12%, PPL Electric - 6%, LKE - 7%, LG&E - 7% and KU - 7%.
(b)Each company pays customary fees under its respective syndicated credit facility. Borrowings generally bear interest at LIBOR-based rates plus an applicable margin.
(c)The facilities contain financial covenants to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and total net debt not in excess of 85% of its RAV, calculated in accordance with the credit facility.
The amounts borrowed at December 31, 2020, include USD-denominated borrowings of $249 million and GBP-denominated borrowings of £124 million, which equated to $165 million. At December 31, 2020, the USD equivalent of unused capacity under the U.K. committed credit facilities was approximately $991 million.
The commitments under the U.K.'s credit facilities are provided by a diverse bank group with no one bank providing more than 14% of the total committed capacity.
In addition to the financial covenants noted in the table above, the credit agreements governing the above credit facilities contain various other covenants. Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements. The Registrants monitor compliance with the covenants on a regular basis. At December 31, 2020, the Registrants were in compliance with these covenants. At this time, the Registrants believe that these covenants and other borrowing conditions will not limit access to these funding sources.
See Note 8 to the Financial Statements for further discussion of the Registrants' credit facilities.
Intercompany (LKE, LG&E and KU)
| Committed Capacity | Borrowed | Non-affiliate Used Capacity | Unused Capacity | ||||||||||||||||||||
| LKE Credit Facility | $ | 375 | $ | 251 | $ | — | $ | 124 | |||||||||||||||
| LG&E Money Pool (a) | 750 | — | 262 | 488 | |||||||||||||||||||
| KU Money Pool (a) | 650 | — | 203 | 447 |
(a)LG&E and KU participate in an intercompany agreement whereby LKE and/or KU make available to LG&E funds up to $750 million and LKE and/or LG&E make available to KU funds up to $650 million, at an interest rate based on a market index of commercial paper issues. However, the FERC has authorized a maximum aggregate short-term debt limit for each utility at $750 million for LG&E and $650 million for KU from all covered sources.
See Note 15 to the Financial Statements for further discussion of intercompany credit facilities.
Commercial Paper (All Registrants)
PPL, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as necessary. Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's credit facilities. The following commercial paper programs were in place at:
| December 31, 2020 | |||||||||||||||||
| Capacity | Commercial Paper Issuances | Unused Capacity | |||||||||||||||
| PPL Capital Funding | $ | 1,500 | $ | 402 | $ | 1,098 | |||||||||||
| PPL Electric | 650 | — | 650 | ||||||||||||||
| LG&E | 350 | 262 | 88 | ||||||||||||||
| KU | 350 | 203 | 147 | ||||||||||||||
| Total LKE | 700 | 465 | 235 | ||||||||||||||
| Total PPL | $ | 2,850 | $ | 867 | $ | 1,983 |
Long-term Debt and Equity Securities
(PPL)
PPL and its subsidiaries are authorized to issue, at the discretion of management and subject to market conditions, up to $4.0 billion of long-term debt and equity securities, the proceeds of which would be used to fund capital expenditures and for general corporate purposes.
(PPL Electric)
PPL Electric is authorized to issue, at the discretion of management and subject to market conditions and regulatory approvals, up to $650 million of long-term debt securities, the proceeds of which would be used to fund capital expenditures and for general corporate purposes.
(LKE, LG&E and KU)
LG&E is authorized to issue, at the discretion of management and subject to market conditions and regulatory approvals, up to $400 million of long-term debt securities, the proceeds of which would be used to repay short-term debt incurred to fund capital expenditures and for general corporate purposes.
KU is authorized to issue, at the discretion of management and subject to market conditions and regulatory approvals, up to $300 million of long-term debt securities, the proceeds of which would be used to repay short-term debt incurred to fund capital expenditures and for general corporate purposes.
Contributions from Parent/Member (PPL Electric, LKE, LG&E and KU)
From time to time, LKE's member or the parents of PPL Electric, LG&E and KU make capital contributions to subsidiaries. The proceeds from these contributions are used to fund capital expenditures and for other general corporate purposes and, in the case of LKE, to make contributions to its subsidiaries.
Forecasted Uses of Cash
(All Registrants)
In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, the Registrants currently expect to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common stock, distributions by LKE to its member, and possibly the purchase or redemption of a portion of debt securities.
Capital Expenditures
The table below shows the Registrants' current capital expenditure projections for the years 2021 through 2025. Expenditures for the domestic regulated utilities are expected to be recovered through rates, pending regulatory approval.
| Projected | |||||||||||||||||||||||||||||||||||
| Total | 2021 (b) | 2022 | 2023 | 2024 | 2025 | ||||||||||||||||||||||||||||||
| PPL | |||||||||||||||||||||||||||||||||||
| Construction expenditures (a) | |||||||||||||||||||||||||||||||||||
| Generating facilities | $ | 811 | $ | 239 | $ | 104 | $ | 119 | $ | 171 | $ | 178 | |||||||||||||||||||||||
| Distribution facilities | 9,629 | 2,030 | 1,823 | 1,826 | 1,984 | 1,966 | |||||||||||||||||||||||||||||
| Transmission facilities | 2,408 | 648 | 523 | 403 | 420 | 414 | |||||||||||||||||||||||||||||
| Environmental | 567 | 201 | 154 | 130 | 63 | 19 | |||||||||||||||||||||||||||||
| Other | 1,276 | 235 | 262 | 288 | 251 | 240 | |||||||||||||||||||||||||||||
| Total Capital Expenditures | $ | 14,691 | $ | 3,353 | $ | 2,866 | $ | 2,766 | $ | 2,889 | $ | 2,817 | |||||||||||||||||||||||
| PPL Electric (a) | |||||||||||||||||||||||||||||||||||
| Distribution facilities | $ | 1,802 | $ | 437 | $ | 409 | $ | 315 | $ | 327 | $ | 314 | |||||||||||||||||||||||
| Transmission facilities | 1,738 | 419 | 407 | 292 | 312 | 308 | |||||||||||||||||||||||||||||
| Total Capital Expenditures | $ | 3,540 | $ | 856 | $ | 816 | $ | 607 | $ | 639 | $ | 622 | |||||||||||||||||||||||
| LKE (a) | |||||||||||||||||||||||||||||||||||
| Generating facilities | $ | 811 | $ | 239 | $ | 104 | $ | 119 | $ | 171 | $ | 178 | |||||||||||||||||||||||
| Electricity Distribution facilities | 1,145 | 266 | 224 | 223 | 218 | 214 | |||||||||||||||||||||||||||||
| Natural Gas Distribution facilities | 379 | 143 | 52 | 42 | 101 | 41 | |||||||||||||||||||||||||||||
| Transmission facilities | 670 | 229 | 116 | 111 | 108 | 106 | |||||||||||||||||||||||||||||
| Environmental | 567 | 201 | 154 | 130 | 63 | 19 | |||||||||||||||||||||||||||||
| Other | 687 | 125 | 122 | 155 | 148 | 137 | |||||||||||||||||||||||||||||
| Total Capital Expenditures | $ | 4,259 | $ | 1,203 | $ | 772 | $ | 780 | $ | 809 | $ | 695 | |||||||||||||||||||||||
| Projected | |||||||||||||||||||||||||||||||||||
| Total | 2021 (b) | 2022 | 2023 | 2024 | 2025 | ||||||||||||||||||||||||||||||
| LG&E (a) | |||||||||||||||||||||||||||||||||||
| Generating facilities | $ | 348 | $ | 115 | $ | 51 | $ | 51 | $ | 60 | $ | 71 | |||||||||||||||||||||||
| Electricity Distribution facilities | 532 | 127 | 97 | 102 | 104 | 102 | |||||||||||||||||||||||||||||
| Natural Gas Distribution facilities | 379 | 143 | 52 | 42 | 101 | 41 | |||||||||||||||||||||||||||||
| Transmission facilities | 103 | 44 | 11 | 16 | 12 | 20 | |||||||||||||||||||||||||||||
| Environmental | 193 | 60 | 48 | 47 | 28 | 10 | |||||||||||||||||||||||||||||
| Other | 320 | 51 | 57 | 77 | 71 | 64 | |||||||||||||||||||||||||||||
| Total Capital Expenditures | $ | 1,875 | $ | 540 | $ | 316 | $ | 335 | $ | 376 | $ | 308 | |||||||||||||||||||||||
| KU (a) | |||||||||||||||||||||||||||||||||||
| Generating facilities | $ | 463 | $ | 124 | $ | 53 | $ | 68 | $ | 111 | $ | 107 | |||||||||||||||||||||||
| Electricity Distribution facilities | 613 | 139 | 127 | 121 | 114 | 112 | |||||||||||||||||||||||||||||
| Transmission facilities | 567 | 185 | 105 | 95 | 96 | 86 | |||||||||||||||||||||||||||||
| Environmental | 374 | 141 | 106 | 83 | 35 | 9 | |||||||||||||||||||||||||||||
| Other | 357 | 73 | 64 | 76 | 74 | 70 | |||||||||||||||||||||||||||||
| Total Capital Expenditures | $ | 2,374 | $ | 662 | $ | 455 | $ | 443 | $ | 430 | $ | 384 |
(a)Construction expenditures include capitalized interest and AFUDC, which are expected to total approximately $138 million for PPL, $92 million for PPL Electric, $35 million for LKE, $19 million for LG&E and $16 million for KU over the five-year period.
(b)The 2021 total excludes amounts included in accounts payable as of December 31, 2020.
Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions. For the years presented, this table includes PPL Electric's asset optimization program to replace aging transmission and distribution assets.
Contractual Obligations
The Registrants have assumed various financial obligations and commitments in the ordinary course of conducting business. At December 31, 2020, estimated contractual cash obligations were as follows:
| Total | 2021 | 2022-2023 | 2024-2025 | After 2026 | |||||||||||||||||||||||||
| PPL | |||||||||||||||||||||||||||||
| Long-term Debt (a) | $ | 23,249 | $ | 1,574 | $ | 3,926 | $ | 1,833 | $ | 15,916 | |||||||||||||||||||
| Interest on Long-term Debt (b) | 15,016 | 914 | 1,689 | 1,441 | 10,972 | ||||||||||||||||||||||||
| Operating Leases (c) | 110 | 27 | 40 | 23 | 20 | ||||||||||||||||||||||||
| Purchase Obligations (d) | 2,437 | 940 | 877 | 251 | 369 | ||||||||||||||||||||||||
| Pension Benefit Plan Funding Obligations (e) | 452 | 153 | 152 | 147 | — | ||||||||||||||||||||||||
| Total Contractual Cash Obligations | $ | 41,264 | $ | 3,608 | $ | 6,684 | $ | 3,695 | $ | 27,277 | |||||||||||||||||||
| PPL Electric | |||||||||||||||||||||||||||||
| Long-term Debt (a) | $ | 4,289 | $ | 400 | $ | 814 | $ | — | $ | 3,075 | |||||||||||||||||||
| Interest on Long-term Debt (b) | 3,269 | 162 | 291 | 278 | 2,538 | ||||||||||||||||||||||||
| Unconditional Power Purchase Obligations | 9 | 9 | — | — | — | ||||||||||||||||||||||||
| Total Contractual Cash Obligations | $ | 7,567 | $ | 571 | $ | 1,105 | $ | 278 | $ | 5,613 | |||||||||||||||||||
| LKE | |||||||||||||||||||||||||||||
| Long-term Debt (a) | $ | 6,116 | $ | 674 | $ | 13 | $ | 550 | $ | 4,879 | |||||||||||||||||||
| Interest on Long-term Debt (b) | 4,006 | 235 | 440 | 439 | 2,892 | ||||||||||||||||||||||||
| Operating Leases (c) | 57 | 17 | 23 | 14 | 3 | ||||||||||||||||||||||||
| Coal and Natural Gas Purchase Obligations (f) | 1,471 | 526 | 757 | 178 | 10 | ||||||||||||||||||||||||
| Unconditional Power Purchase Obligations (g) | 525 | 34 | 68 | 64 | 359 | ||||||||||||||||||||||||
| Construction Obligations (h) | 169 | 145 | 23 | 1 | — | ||||||||||||||||||||||||
| Other Obligations | 184 | 147 | 29 | 8 | — | ||||||||||||||||||||||||
| Total Contractual Cash Obligations | $ | 12,528 | $ | 1,778 | $ | 1,353 | $ | 1,254 | $ | 8,143 |
| Total | 2021 | 2022-2023 | 2024-2025 | After 2026 | |||||||||||||||||||||||||
| LG&E | |||||||||||||||||||||||||||||
| Long-term Debt (a) | $ | 2,024 | $ | 292 | $ | — | $ | 300 | $ | 1,432 | |||||||||||||||||||
| Interest on Long-term Debt (b) | 1,439 | 74 | 142 | 142 | 1,081 | ||||||||||||||||||||||||
| Operating Leases (c) | 22 | 6 | 9 | 6 | 1 | ||||||||||||||||||||||||
| Coal and Natural Gas Purchase Obligations (f) | 842 | 271 | 466 | 98 | 7 | ||||||||||||||||||||||||
| Unconditional Power Purchase Obligations (g) | 364 | 23 | 47 | 44 | 250 | ||||||||||||||||||||||||
| Construction Obligations (h) | 55 | 50 | 5 | — | — | ||||||||||||||||||||||||
| Other Obligations | 42 | 42 | — | — | — | ||||||||||||||||||||||||
| Total Contractual Cash Obligations | $ | 4,788 | $ | 758 | $ | 669 | $ | 590 | $ | 2,771 | |||||||||||||||||||
| KU | |||||||||||||||||||||||||||||
| Long-term Debt (a) | $ | 2,642 | $ | 132 | $ | 13 | $ | 250 | $ | 2,247 | |||||||||||||||||||
| Interest on Long-term Debt (b) | 2,189 | 103 | 205 | 204 | 1,677 | ||||||||||||||||||||||||
| Operating Leases (c) | 33 | 10 | 14 | 7 | 2 | ||||||||||||||||||||||||
| Coal and Natural Gas Purchase Obligations (f) | 629 | 255 | 291 | 80 | 3 | ||||||||||||||||||||||||
| Unconditional Power Purchase Obligations (g) | 161 | 11 | 21 | 20 | 109 | ||||||||||||||||||||||||
| Construction Obligations (h) | 74 | 66 | 8 | — | — | ||||||||||||||||||||||||
| Other Obligations | 79 | 59 | 13 | 7 | — | ||||||||||||||||||||||||
| Total Contractual Cash Obligations | $ | 5,807 | $ | 636 | $ | 565 | $ | 568 | $ | 4,038 |
(a)Reflects principal maturities based on stated maturity or earlier put dates. See Note 8 to the Financial Statements for a discussion of variable-rate remarketable bonds issued on behalf of PPL Electric, LG&E and KU. The Registrants do not have any significant finance lease obligations.
(b)Assumes interest payments through stated maturity or earlier put dates. The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated and for PPL, payments denominated in British pounds sterling have been translated to U.S. dollars at a current foreign currency exchange rate.
(c)See Note 10 to the Financial Statements for additional information.
(d)The amounts include agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Primarily includes, as applicable, the purchase obligations of electricity, coal, natural gas and limestone, as well as certain construction expenditures, which are also included in the Capital Expenditures table presented above.
(e)The amounts for PPL include WPD's contractual deficit pension funding requirements arising from actuarial valuations performed in March 2019. The U.K. electricity regulator currently allows a recovery of a substantial portion of the contributions relating to the plan deficit. The amounts also include contributions made or committed to be made in 2021 for PPL's U.S. pension plans. Based on the current funded status of these plans, except for WPD's plans, no cash contributions are required. See Note 12 to the Financial Statements for a discussion of expected contributions.
(f)Represents contracts to purchase coal, natural gas and natural gas transportation. See Note 14 to the Financial Statements for additional information.
(g)Represents future minimum payments under OVEC power purchase agreements through June 2040. See Note 14 to the Financial Statements for additional information.
(h)Represents construction commitments, which are also reflected in the Capital Expenditures table presented above.
Dividends/Distributions
(PPL)
PPL views dividends as an integral component of shareowner return and expects to continue to pay dividends in amounts intended to maintain a capitalization structure that supports investment grade credit ratings. In November 2020, PPL declared its quarterly common stock dividend, payable January 4, 2021, at 41.50 cents per share (equivalent to $1.66 per annum). Future dividends, declared at the discretion of the Board of Directors, will depend upon future earnings, cash flows, financial and legal requirements and other factors.
Subject to certain exceptions, PPL may not declare or pay any cash dividend or distribution on its capital stock during any period in which PPL Capital Funding defers interest payments on its 2007 Series A Junior Subordinated Notes due 2067 or 2013 Series B Junior Subordinated Notes due 2073. At December 31, 2020, no interest payments were deferred.
(PPL Electric, LKE, LG&E and KU)
From time to time, as determined by their respective Board of Directors, the Registrants pay dividends, distributions or return capital, as applicable, to their respective shareholders or members. Certain of the credit facilities of PPL Electric, LKE, LG&E and KU include minimum debt covenant ratios that could effectively restrict the payment of dividends or distributions.
(All Registrants)
See Note 8 to the Financial Statements for these and other restrictions related to distributions on capital interests for the Registrants and their subsidiaries.
Purchase or Redemption of Debt Securities
The Registrants will continue to evaluate outstanding debt securities and may decide to purchase or redeem these securities in open market or privately negotiated transactions, in exchange transactions or otherwise, depending upon prevailing market conditions, available cash and other factors, and may be commenced or suspended at any time. The amounts involved may be material.
Rating Agency Actions
Moody's and S&P periodically review the credit ratings of the debt of the Registrants and their subsidiaries. Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.
A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues. The credit ratings of the Registrants and their subsidiaries are based on information provided by the Registrants and other sources. The ratings of Moody's and S&P are not a recommendation to buy, sell or hold any securities of the Registrants or their subsidiaries. Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.
The credit ratings of the Registrants and their subsidiaries affect their liquidity, access to capital markets and cost of borrowing under their credit facilities. A downgrade in the Registrants' or their subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets. The Registrants and their subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.
The following table sets forth the Registrants' and their subsidiaries' credit ratings for outstanding debt securities or commercial paper programs as of December 31, 2020.
| Senior Unsecured | Senior Secured | Commercial Paper | ||||||||||||||||||||||||||||||||||||
| Issuer | Moody's | S&P | Moody's | S&P | Moody's | S&P | ||||||||||||||||||||||||||||||||
| PPL | ||||||||||||||||||||||||||||||||||||||
| PPL Capital Funding | Baa2 | BBB+ | P-2 | A-2 | ||||||||||||||||||||||||||||||||||
| WPD plc | Baa3 | BBB+ | ||||||||||||||||||||||||||||||||||||
| WPD (East Midlands) | Baa1 | A- | ||||||||||||||||||||||||||||||||||||
| WPD (West Midlands) | Baa1 | A- | ||||||||||||||||||||||||||||||||||||
| WPD (South Wales) | Baa1 | A- | ||||||||||||||||||||||||||||||||||||
| WPD (South West) | Baa1 | A- | ||||||||||||||||||||||||||||||||||||
| PPL and PPL Electric | ||||||||||||||||||||||||||||||||||||||
| PPL Electric | A1 | A | P-2 | A-2 | ||||||||||||||||||||||||||||||||||
| PPL and LKE | ||||||||||||||||||||||||||||||||||||||
| LKE | Baa1 | BBB+ | ||||||||||||||||||||||||||||||||||||
| LG&E | A1 | A | P-2 | A-2 | ||||||||||||||||||||||||||||||||||
| KU | A1 | A | P-2 | A-2 |
The rating agencies have taken the following actions related to the Registrants and their subsidiaries.
(PPL)
In April 2020, Moody’s and S&P assigned ratings of Baa2 and BBB+ to PPL Capital Funding’s $1 billion 4.125% Senior Notes due 2030. The notes were issued April 1, 2020.
(PPL and PPL Electric)
In September 2020, Moody's and S&P assigned ratings of A1 and A to PPL Electric's $250 million First Mortgage Bonds, Floating Rate Series, due 2023. The bonds were issued October 1, 2020.
In September 2020, Moody's and S&P assigned ratings of A1 and A to PEDFA's $90 million Pollution Control Revenue Refunding Bonds, Series 2008, due 2023, previously issued on behalf of PPL Electric. The bonds were remarketed October 1, 2020.
(PPL, LKE and LG&E)
In August 2020, Moody's and S&P assigned ratings of A1 and A to the Louisville/Jefferson County Metro Government, Kentucky's $23 million 0.90% Pollution Control Revenue Bonds, 2001 Series A, due 2026, previously issued on behalf of LG&E. The bonds were remarketed September 3, 2020.
In August 2020, Moody's and S&P assigned ratings of A1 and A/A-2 to the County of Trimble, Kentucky's $125 million 1.30% Pollution Control Revenue Refunding Bonds, 2016 Series A, due 2044, previously issued on behalf of LG&E. The bonds were remarketed September 3, 2020.
(PPL, LKE and KU)
In May 2020, Moody's and S&P assigned ratings of A1 and A to KU's $500 million 3.30% First Mortgage Bonds due 2050. The bonds were issued June 3, 2020.
Ratings Triggers
(PPL)
As discussed in Note 8 to the Financial Statements, certain of WPD's senior unsecured notes may be put by the holders to the issuer for redemption if the long-term credit ratings assigned to the notes are withdrawn by any of the rating agencies (Moody's or S&P) or reduced to a non-investment grade rating of Ba1 or BB+ or lower in connection with a restructuring event. A restructuring event includes the loss of, or a material adverse change to, the distribution licenses under which WPD (East Midlands), WPD (South West), WPD (South Wales) and WPD (West Midlands) operate and would be a trigger event for each company. These notes totaled £5.8 billion (approximately $7.7 billion) nominal value at December 31, 2020.
(PPL, LKE, LG&E and KU)
Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, interest rate and foreign currency instruments (for PPL), contain provisions that require the posting of additional collateral, or permit the counterparty to terminate the contract, if PPL's, LKE's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade. See Note 18 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral requirements for PPL, LKE and LG&E for derivative contracts in a net liability position at December 31, 2020.
Guarantees for Subsidiaries (PPL)
PPL guarantees certain consolidated affiliate financing arrangements. Some of the guarantees contain financial and other covenants that, if not met, would limit or restrict the consolidated affiliates' access to funds under these financing arrangements, accelerate maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions. At this time, PPL believes that these covenants will not limit access to relevant funding sources. See Note 14 to the Financial Statements for additional information about guarantees.
Off-Balance Sheet Arrangements (All Registrants)
The Registrants have entered into certain agreements that may contingently require payment to a guaranteed or indemnified party. See Note 14 to the Financial Statements for a discussion of these agreements.
Risk Management
Market Risk
(All Registrants)
See Notes 1, 17 and 18 to the Financial Statements for information about the Registrants' risk management objectives, valuation techniques and accounting designations.
The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions. Actual future results may differ materially from those presented. These are not precise indicators of expected future losses, but are rather only indicators of possible losses under normal market conditions at a given confidence level.
Interest Rate Risk
The Registrants and their subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. The Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of their debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolios due to changes in the absolute level of interest rates. In addition, the interest rate risk of certain subsidiaries is potentially mitigated as a result of the existing regulatory framework or the timing of rate cases.
The following interest rate hedges were outstanding at December 31:
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Exposure Hedged | Fair Value, Net - Asset (Liability) (a) | Effect of a 10% Adverse Movement in Rates (b) | Maturities Ranging Through | Exposure Hedged | Fair Value, Net - Asset (Liability) (a) | Effect of a 10% Adverse Movement in Rates (b) | |||||||||||||||||||||||||||||||||||
| PPL | |||||||||||||||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||||||||||||||
| Cross-currency swaps (c) | $ | 702 | $ | 148 | $ | (69) | 2028 | $ | 702 | $ | 156 | $ | (71) | ||||||||||||||||||||||||||||
| Economic hedges | |||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps (d) | 64 | (24) | — | 2033 | 147 | (22) | (1) | ||||||||||||||||||||||||||||||||||
| LKE | |||||||||||||||||||||||||||||||||||||||||
| Economic hedges | |||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps (d) | 64 | (24) | — | 2033 | 147 | (22) | (1) | ||||||||||||||||||||||||||||||||||
| LG&E | |||||||||||||||||||||||||||||||||||||||||
| Economic hedges | |||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps (d) | 64 | (24) | — | 2033 | 147 | (22) | (1) | ||||||||||||||||||||||||||||||||||
(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes a 10% adverse movement in foreign currency exchange rates.
(c)Changes in the fair value of these instruments are recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.
(d)Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in the fair value of these derivatives are included in regulatory assets or regulatory liabilities.
The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios. The estimated impact of a 10% adverse movement in interest rates on interest expense at December 31, 2020 and 2019 was insignificant for PPL, PPL Electric, LKE, LG&E and KU. The estimated impact of a 10% adverse movement in interest rates on the fair value of debt at December 31 is shown below.
| 10% Adverse Movement in Rates | |||||||||||
| 2020 | 2019 | ||||||||||
| PPL | $ | 582 | $ | 655 | |||||||
| PPL Electric | 175 | 197 | |||||||||
| LKE | 199 | 198 | |||||||||
| LG&E | 74 | 84 | |||||||||
| KU | 118 | 104 |
Foreign Currency Risk (PPL)
PPL is exposed to foreign currency risk primarily through investments in and earnings of U.K. affiliates. Under its risk management program, PPL may enter into financial instruments to hedge certain foreign currency exposures, including translation risk of expected earnings, firm commitments, recognized assets or liabilities, anticipated transactions, including the previously announced potential sale of its U.K. utility business, and net investments.
The following foreign currency hedges were outstanding at December 31:
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Exposure Hedged | Fair Value, Net - Asset (Liability) | Effect of a 10% Adverse Movement in Foreign Currency Exchange Rates (a) | Maturities Ranging Through | Exposure Hedged | Fair Value, Net - Asset (Liability) | Effect of a 10% Adverse Movement in Foreign Currency Exchange Rates (a) | |||||||||||||||||||||||||||||||||||
| Economic hedges (b) | £ | 3,880 | $ | (137) | $ | (326) | 2021 | £ | 859 | $ | 137 | $ | (89) |
(a)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(b)To economically hedge the translation of expected earnings and anticipated transactions, including the previously announced potential sale of the U.K. utility business, denominated in GBP.
(All Registrants)
Commodity Price Risk
PPL is exposed to commodity price risk through its domestic subsidiaries as described below.
-
PPL Electric is required to purchase electricity to fulfill its obligation as a PLR. Potential commodity price risk is insignificant and mitigated through its PUC-approved cost recovery mechanism and full-requirement supply agreements to serve its PLR customers which transfer the risk to energy suppliers.
-
LG&E's and KU's rates include certain mechanisms for fuel, fuel-related expenses and energy purchases. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.
Volumetric Risk
Volumetric risk is the risk related to the changes in volume of retail sales due to weather, economic conditions or other factors. PPL is exposed to volumetric risk through its subsidiaries as described below.
-
WPD is exposed to volumetric risk which is significantly mitigated as a result of the method of regulation in the U.K. Under the RIIO-ED1 price control regulations, recovery of such exposure occurs on a two year lag. See Note 1 to the Financial Statements for additional information on revenue recognition under RIIO-ED1.
-
PPL Electric, LG&E and KU are exposed to volumetric risk on retail sales, mainly due to weather and other economic conditions for which there is limited mitigation between rate cases.
Defined Benefit Plans - Equity Securities Price Risk
See "Application of Critical Accounting Policies - Defined Benefits" for additional information regarding the effect of equity securities price risk on plan assets.
Credit Risk
(All Registrants)
Credit risk is the risk that the Registrants would incur a loss as a result of nonperformance by counterparties of their contractual obligations. The Registrants maintain credit policies and procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit ratings) and require other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk. However, the Registrants, as applicable, have concentrations of suppliers and customers among electric utilities, financial institutions and energy marketing and trading companies. These concentrations may impact the Registrants' overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.
(PPL and PPL Electric)
In January 2017, the PUC issued a Final Order approving PPL Electric’s default service plan for the period June 2017 through May 2021, which included a total of eight semi-annual solicitations for electricity supply. Additionally, on December 17, 2020, the PUC approved PPL Electric’s next default service plan for the period of June 2021 through May 2025, which includes a total of eight solicitations for electricity supply held semiannually in April and October. The new plan also includes eight solicitations for alternative energy credits held semiannually in January and July with the first solicitation being in July 2021 and the final solicitation being in January 2025.
Under the standard Supply Master Agreement (the Agreement) for the competitive solicitation process, PPL Electric requires all suppliers to post collateral if their credit exposure exceeds an established credit limit. In the event a supplier defaults on its obligation, PPL Electric would be required to seek replacement power in the market. All incremental costs incurred by PPL Electric would be recoverable from customers in future rates. At December 31, 2020, most of the successful bidders under all of the solicitations had an investment grade credit rating from S&P and were not required to post collateral under the Agreement. A small portion of bidders were required to post an insignificant amount of collateral under the Agreement. There is no instance under the Agreement in which PPL Electric is required to post collateral to its suppliers.
See Note 18 to the Financial Statements for additional information on credit risk.
Foreign Currency Translation (PPL)
The value of the British pound sterling fluctuates in relation to the U.S. dollar. In 2020, changes in this exchange rate resulted in a foreign currency translation gain of $267 million, which reflected a $433 million increase to PP&E and a $76 million increase to goodwill partially offset by a $214 million increase to long-term debt and a $28 million increase to other net liabilities. In 2019, changes in this exchange rate resulted in a foreign currency translation gain of $106 million, which reflected a $181 million increase to PP&E, $34 million increase to goodwill and $12 million decrease to other net liabilities partially offset by a $121 million increase to long-term debt. In 2018, changes in this exchange rate resulted in a foreign currency translation loss of $453 million, which reflected a $754 million decrease to PP&E and $150 million decrease to goodwill partially offset by a $445 million decrease to long-term debt and a decrease of $6 million to other net liabilities.
(All Registrants)
Related Party Transactions
The Registrants are not aware of any material ownership interests or operating responsibility by senior management in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with the Registrants. See Note 15 to the Financial Statements for additional information on related party transactions for PPL Electric, LKE, LG&E and KU.
Acquisitions, Development and Divestitures
The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with, modify or terminate the projects. Any resulting transactions may impact future financial results.
(PPL)
On August 10, 2020, PPL announced that it initiated a formal process to sell its U.K. utility business. There can be no assurance of any specific outcome, including whether the sale process will result in the completion of any potential transaction, the timing or terms thereof, the value or benefits that may be realized or the effect that any potential transaction will have on future financial results. See Note 9 to the Financial Statements for additional information on the potential sale of the U.K. utility business.
(All Registrants)
Environmental Matters
Extensive federal, state and local environmental laws and regulations are applicable to PPL's, PPL Electric's, LKE's, LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of the Registrants' businesses. The costs of compliance or alleged non-compliance cannot be predicted with certainty but could be significant. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed. Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs for their products or their demand for the Registrants' services. Increased capital and operating costs are subject to rate recovery. PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.
See "Legal Matters" in Note 14 to the Financial Statements for a discussion of the more significant environmental claims. See "Financial Condition - Liquidity and Capital Resources - Forecasted Uses of Cash - Capital Expenditures" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on projected environmental capital expenditures for 2021 through 2025. See Note 20 to the Financial Statements for information related to the impacts of CCRs on AROs. See "Item 1. Business - Environmental Matters" for additional information regarding climate change, NAAQS and other environmental matters.
Sustainability
Increasing attention has been focused on a broad range of corporate activities under the heading of “sustainability”, which has resulted in a significant increase in the number of requests from interested parties for information on sustainability topics. These parties range from investor groups focused on environmental, social, governance and other matters to non-investors concerned with a variety of public policy matters. Often the scope of the information sought is very broad and not necessarily relevant to an issuer’s business or industry. As a result, a number of private groups have proposed to standardize the subject matter constituting sustainability, either generally or by industry. Those efforts remain ongoing. In addition, certain of these private groups have advocated that the SEC promulgate regulations requiring specific sustainability reporting under the Securities Exchange Act of 1934, as amended (the “’34 Act”), or that issuers voluntarily include certain sustainability disclosure in their ’34 Act reports. To date, no new reporting requirements have been adopted or proposed by the SEC.
As has been PPL’s practice, to the extent sustainability issues have or may have a material impact on the Registrants’ financial condition or results of operation, PPL discloses such matters in accordance with applicable securities law and SEC regulations. With respect to other sustainability topics that PPL deems relevant to investors but that are not required to be reported under applicable securities law and SEC regulation, PPL will continue each spring to publish its annual sustainability report including tracking reductions related to the company's goal to reduce carbon emissions and post that report on its corporate website at www.pplweb.com and on www.pplsustainability.com. Neither the information in such annual sustainability report nor the information at such websites is incorporated in this Form 10-K by reference, and it should not be considered a part of this Form 10-K. In preparing its sustainability report, PPL is guided by the framework established by the Global Reporting Initiative, which identifies environmental, social, governance and other subject matter categories. PPL also participates in efforts by the Edison Electric Institute to provide the appropriate subset of sustainability information that can be applied consistently across
the electric utility industry. Additionally, PPL publicly discloses its corporate political contributions and responds to the CDP climate survey.
Cybersecurity
See “Cybersecurity Management” in “Item 1. Business” and “Item 1A. Risk factors” for a discussion of cybersecurity risks affecting the Registrants and the related strategies for managing these risks.
Competition
See "Competition" under each of PPL's reportable segments in "Item 1. Business - General - Segment Information" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting the Registrants.
New Accounting Guidance
See Note 1 to the Financial Statements for a discussion of new accounting guidance adopted.
Application of Critical Accounting Policies
Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to an understanding of the reported financial condition or results of operations and require management to make estimates or other judgments of matters that are inherently uncertain. Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements). Senior management has reviewed with PPL's Audit Committee these critical accounting policies, the following disclosures regarding their application, and the estimates and assumptions regarding them.
Defined Benefits
(All Registrants)
Certain of the Registrants and/or their subsidiaries sponsor or participate in certain qualified funded and non-qualified unfunded defined benefit pension plans and both funded and unfunded other postretirement benefit plans. See Notes 1, 7 and 12 to the Financial Statements for additional information about the plans and the accounting for defined benefits.
A summary of plan sponsors by Registrant and whether a Registrant or its subsidiaries sponsor (S) or participate in and receives allocations (P) from those plans is shown in the table below.
| Plan Sponsor | PPL | PPL Electric | LKE | LG&E | KU | |||||||||||||||||||||||||||
| PPL Services | S | P | ||||||||||||||||||||||||||||||
| WPD (a) | S | |||||||||||||||||||||||||||||||
| LKE | S | P | P |
(a)Does not sponsor or participate in other postretirement benefits plans.
Management makes certain assumptions regarding the valuation of benefit obligations and the performance of plan assets. As such, annual net periodic defined benefit costs are recorded in current earnings or regulatory assets and liabilities based on estimated results. Any differences between actual and estimated results are recorded in AOCI or, in the case of PPL Electric, LG&E and KU, regulatory assets and liabilities for amounts that are expected to be recovered through regulated customer rates. These amounts in AOCI or regulatory assets and liabilities are amortized to income over future periods. The significant assumptions are:
- Discount Rate - In selecting the discount rates for U.S. defined benefit plans, the plan sponsors start with a cash flow analysis of the expected benefit payment stream for their plans. The plan-specific cash flows are matched against the coupons and expected maturity values of Aa-rated non-callable (or callable with make-whole provisions) bonds that could be purchased for a hypothetical settlement portfolio. The plan sponsors then use the single discount rate derived from matching the discounted benefit payment stream to the market value of the selected bond portfolio.
In selecting the discount rate for its U.K. pension plans, WPD starts with a cash flow analysis of the expected benefit payment stream for its plans. These plan-specific cash flows are matched against a spot-rate yield curve to determine the assumed discount rate. The spot-rate yield curve uses an iBoxx British pounds sterling denominated corporate bond index as its base. From this base, those bonds with the lowest and highest yields are eliminated to develop an appropriate subset of bonds. WPD uses the single weighted-average discount rate derived from the spot rates to discount the benefit obligation. In addition, the spot rates that match the cash flows associated with the service cost and interest cost are used to discount those components of net periodic defined benefit cost.
-
Expected Return on Plan Assets - The expected long-term rates of return for pension and other postretirement benefits are based on management's projections using a best-estimate of expected returns, volatilities and correlations for each asset class. Each plan's specific current and expected asset allocations are also considered in developing a reasonable return assumption.
-
Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement. In selecting a rate of compensation increase, plan sponsors consider past experience, the potential impact of movements in inflation rates and expectations of ongoing compensation practices.
See Note 12 to the Financial Statements for details of the assumptions selected for pension and other postretirement benefits. A variance in the assumptions could significantly impact accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and AOCI or regulatory assets and liabilities.
The following tables reflect changes in certain assumptions based on the Registrants' primary defined benefit plans. The inverse of this change would have the opposite impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and AOCI or regulatory assets and liabilities. The sensitivities below reflect an evaluation of the change based solely on a change in that assumption.
| Increase (Decrease) | |||||
| Actuarial assumption | |||||
| Discount Rate | (0.25 | %) | |||
| Expected Return on Plan Assets | (0.25 | %) | |||
| Rate of Compensation Increase | 0.25 | % |
| Increase (Decrease) | Increase (Decrease) | (Increase) Decrease | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||
| Actuarial assumption | Defined Benefit Asset | Defined Benefit Liabilities | AOCI (pre-tax) | Net Regulatory Assets | Defined Benefit Costs | ||||||||||||||||||||||||
| PPL | |||||||||||||||||||||||||||||
| Discount rates | $ | (424) | $ | 155 | $ | 480 | $ | 99 | $ | 47 | |||||||||||||||||||
| Expected return on plan assets | n/a | n/a | n/a | n/a | 32 | ||||||||||||||||||||||||
| Rate of compensation increase | (62) | 14 | 68 | 8 | 13 | ||||||||||||||||||||||||
| PPL Electric | |||||||||||||||||||||||||||||
| Discount rates | 61 | — | 61 | 6 | |||||||||||||||||||||||||
| Expected return on plan assets | n/a | — | n/a | 4 | |||||||||||||||||||||||||
| Rate of compensation increase | 4 | — | 4 | 1 | |||||||||||||||||||||||||
| LKE | |||||||||||||||||||||||||||||
| Discount rates | — | 68 | 30 | 38 | 9 | ||||||||||||||||||||||||
| Expected return on plan assets | n/a | n/a | n/a | n/a | 3 | ||||||||||||||||||||||||
| Rate of compensation increase | n/a | 8 | 4 | 4 | 2 | ||||||||||||||||||||||||
| LG&E | |||||||||||||||||||||||||||||
| Discount rates | (18) | 2 | n/a | 20 | 3 | ||||||||||||||||||||||||
| Expected return on plan assets | n/a | n/a | n/a | n/a | 1 | ||||||||||||||||||||||||
| Rate of compensation increase | (2) | — | n/a | 2 | — | ||||||||||||||||||||||||
| Increase (Decrease) | Increase (Decrease) | (Increase) Decrease | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||
| Actuarial assumption | Defined Benefit Asset | Defined Benefit Liabilities | AOCI (pre-tax) | Net Regulatory Assets | Defined Benefit Costs | ||||||||||||||||||||||||
| KU | |||||||||||||||||||||||||||||
| Discount rates | (16) | 2 | n/a | 18 | 3 | ||||||||||||||||||||||||
| Expected return on plan assets | n/a | n/a | n/a | n/a | 1 | ||||||||||||||||||||||||
| Rate of compensation increase | (2) | — | n/a | 2 | — |
Income Taxes (All Registrants)
Significant management judgment is required in developing the Registrants' provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken on tax returns, valuation allowances on deferred tax assets, as well as whether the undistributed earnings of WPD are considered indefinitely reinvested.
Additionally, significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position. On a quarterly basis, uncertain tax positions are reassessed by considering information known as of the reporting date. Based on management's assessment of new information, a tax benefit may subsequently be recognized for a previously unrecognized tax position, a previously recognized tax position may be derecognized, or the benefit of a previously recognized tax position may be remeasured. The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements in the future.
The need for valuation allowances to reduce deferred tax assets also requires significant management judgment. Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset. Management considers several factors in assessing the expected realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies. Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized to account for an uncertain tax position. When evaluating the need for valuation allowances, the uncertainty posed by political risk on such factors is also considered by management. The amount of deferred tax assets ultimately realized may differ materially from the estimates utilized in the computation of valuation allowances and may materially impact the financial statements in the future.
See Note 6 to the Financial Statements for income tax disclosures, including the impact of the TCJA and management's conclusion that the undistributed earnings of WPD are considered indefinitely reinvested. Based on the conclusion of indefinite reinvestment, PPL Global has not recorded deferred U.S. federal income taxes associated with the outside book-tax basis difference on its investment in WPD.
Regulatory Assets and Liabilities
(All Registrants)
PPL Electric, LG&E and KU are subject to cost-based rate regulation. As a result, the effects of regulatory actions are required to be reflected in the financial statements. Assets and liabilities are recorded that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates. Regulatory liabilities are recognized for amounts expected to be returned through future regulated customer rates. In certain cases, regulatory liabilities are recorded based on an understanding or agreement with the regulator that rates have been set to recover costs that are expected to be incurred in the future, and the regulated entity is accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose.
Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to the Registrants and other regulated entities, and the status of any pending or potential deregulation legislation. Based on this continual assessment, management believes the existing regulatory assets are probable of recovery. This assessment reflects the current political and regulatory climate at the state and federal levels and is subject to change in the future. If future recovery of costs ceases to be probable, the regulatory asset would be written-off. Additionally, the regulatory agencies can provide flexibility in the manner and timing of recovery of regulatory assets.
See Note 7 to the Financial Statements for regulatory assets and regulatory liabilities recorded at December 31, 2020 and 2019, as well as additional information on those regulatory assets and liabilities. All regulatory assets are either currently being
recovered under specific rate orders, represent amounts that are expected to be recovered in future rates or benefit future periods based upon established regulatory practices.
(PPL)
WPD's operations are regulated by Ofgem. Ofgem has adopted a price control regulatory framework focused on outputs and performance in contrast to traditional U.S. utility ratemaking that operates under a cost recovery model. Because the regulatory model is incentive-based, WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP for entities subject to cost-based rate regulation and does not record regulatory assets and liabilities. See "General - Regulation" in Note 1 to the Financial Statements for additional information.
Price Risk Management (PPL)
See "Financial Condition - Risk Management" above.
Asset Impairment (Excluding Investments)
Goodwill Impairment (PPL, LKE, LG&E and KU)
Goodwill is tested for impairment at the reporting unit level. PPL has determined its reporting units to be primarily at the same level as its reportable segments. LKE, LG&E and KU are individually single operating and reportable segments. A goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that the carrying amount of the reporting unit may be greater than the reporting unit's fair value. Additionally, goodwill is tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.
Effective January 1, 2020, the Registrants adopted accounting guidance that simplifies the test for goodwill impairment by eliminating the second step of the quantitative test. Under the new guidance, the fair value of a reporting unit will be compared with the carrying value and an impairment charge will be recognized if the carrying amount exceeds the fair value of the reporting unit.
PPL, LKE, LG&E and KU may elect either to initially make a qualitative evaluation about the likelihood of an impairment of goodwill or to bypass the qualitative evaluation and test goodwill for impairment using a quantitative test. See "Long-Lived and Intangible Assets - Asset Impairment (Excluding Investments)" in Note 1 to the Financial Statements for further discussion of goodwill impairment tests. See Note 19 to the Financial Statements for information on goodwill balances at December 31, 2020.
During the three months ended March 31, 2020, PPL, LKE, LG&E and KU considered whether the economic events associated with COVID-19, which resulted in PPL's shares experiencing volatility and a decrease in market value, would more likely than not reduce the fair value of the Registrants’ reporting units below their carrying amounts. Based on our assessment, a quantitative impairment test was not required for the LKE, LG&E and KU reporting units, but was required for the U.K. Regulated segment reporting unit, the allocated goodwill of which was $2.5 billion at March 31, 2020. The test did not indicate impairment of the reporting unit.
Management used both discounted cash flows and market multiples, including implied RAV premiums, which required significant assumptions, to estimate the fair value of the reporting units. Significant assumptions used in the discounted cash flows include discount and growth rates, the finalization of RIIO-ED2, and projected operating and capital cash flows. Projected operating and capital cash flows are based on internal business plans, which assume the occurrence of certain future events. Significant assumptions used in the market multiples include sector market performance and comparable transactions.
A high degree of judgment is required to develop estimates related to fair value conclusions. A decrease in the forecasted cash flows of 10%, an increase in the discount rate of 10%, or a 10% decrease in the market multiples would not have resulted in an impairment of goodwill for the U.K. Regulated segment reporting unit as of March 31, 2020.
In the fourth quarter of 2020, PPL, for its U.K. Regulated and Kentucky Regulated segments, and individually for LKE, LG&E and KU, elected to perform qualitative step zero evaluations for their annual goodwill impairment tests as of October 1, 2020. PPL further updated the qualitative step zero evaluation for the U.K. Regulated segment as of December 31, 2020. Based on these evaluations, management concluded it was not more likely than not that the fair value of these reporting units was less than their carrying values. As such, quantitative impairment tests were not performed.
Impairment of Long-lived Assets (PPL, LKE, LG&E and KU)
Impairment analyses are performed for long-lived assets that are subject to depreciation or amortization whenever events or changes in circumstances indicate that a long-lived asset's carrying amount may not be recoverable. For these long-lived assets classified as held and used, such events or changes in circumstances are:
-
a significant decrease in the market price of an asset;
-
a significant adverse change in the extent or manner in which an asset is being used or in its physical condition;
-
a significant adverse change in legal factors or in the business climate;
-
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
-
a current period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
-
a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
For a long-lived asset classified as held and used, an impairment is recognized when the carrying amount of the asset is not recoverable and exceeds its fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying amount to its estimated fair value. Management must make significant judgments to estimate future cash flows, including the useful lives of the assets, the amount of revenue, the amount of capital and operations and maintenance spending and management's intended use of the assets. Alternate courses of action are considered to recover the carrying amount of a long-lived asset, and estimated cash flows from the "most likely" alternative are used to assess impairment whenever one alternative is clearly the most likely outcome. If no alternative is clearly the most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternatives. For assets tested for impairment as of the balance sheet date, the estimates of future cash flows used in that test consider the likelihood of possible outcomes that existed at the balance sheet date, including an assessment of the likelihood of a future sale of the assets. That assessment is not revised based on events that occur after the balance sheet date. Changes in assumptions and estimates could result in materially different results than those identified and recorded in the financial statements.
Initiation of Formal Process to Sell U.K. Utility Business (PPL)
As discussed in Note 9 to the Financial Statements, on August 10, 2020, PPL announced that it initiated a formal process to sell its U.K. utility business. As a result of the potential sale, PPL assessed the recoverability of the assets of its U.K. utility business. PPL prepared probability-weighted undiscounted cash flow estimates as of December 31, 2020 and September 30, 2020 that considered the likelihood of the possible outcomes of the sale process, including the possibility of not selling the U.K. utility business. The resulting cash flow analyses exceeded the carrying value of the assets of the U.K. utility business. A change in the possible outcomes of the sale process could result in the carrying value of the assets of the U.K. utility business not being recoverable, which could result in an impairment in future periods. The recoverability test was performed assuming estimates of selling price, expected forecasted cash flows from the operations of the U.K. utility business (which included significant assumptions made by management to estimate projected operating and capital cash flows, RAV and the finalization of RIIO-ED2) and weighted average probability of sale. A decrease in the expected selling price of 10%, a decrease in the forecasted cash flows from the operations of the U.K. utility business of 10%, or a change in the probability of a sale occurring of 10% would not have resulted in the carrying value of the assets of the U.K. utility business not being recoverable.
Asset Retirement Obligations (PPL, LKE, LG&E and KU)
ARO liabilities are required to be recognized for legal obligations associated with the retirement of long-lived assets. Initial obligations are measured at estimated fair value. An ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated. An equivalent amount is recorded as an increase in the value of the capitalized asset and amortized to expense over the asset's useful life.
In determining AROs, management must make significant judgments and estimates to calculate fair value. Fair value is developed using an expected present value technique based on assumptions of market participants that consider estimated retirement costs in current period dollars, inflated to the anticipated retirement date and discounted back to the date the ARO was incurred. Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements. Estimated ARO costs and settlement dates, which affect the carrying value of the ARO and the related capitalized asset, are reviewed periodically to ensure that any
material changes are incorporated into the ARO estimate. Any change to the capitalized asset is generally amortized over the remaining life of the associated long-lived asset.
See “Long-Lived and Intangible Assets - Asset Retirement Obligations” in Note 1, Note 7 and Note 20 to the Financial Statements for additional information on AROs.
At December 31, 2020, the total recorded balances and information on the most significant recorded AROs were as follows.
| Most Significant AROs | |||||||||||||||||||||||
| Total ARO Recorded | Amount Recorded | % of Total | Description | ||||||||||||||||||||
| PPL | $ | 250 | $ | 147 | 59 | Ponds, landfills and natural gas mains | |||||||||||||||||
| LKE | 182 | 147 | 81 | Ponds, landfills and natural gas mains | |||||||||||||||||||
| LG&E | 67 | 49 | 73 | Ponds, landfills and natural gas mains | |||||||||||||||||||
| KU | 115 | 98 | 85 | Ponds and landfills |
The most significant assumptions surrounding AROs are the forecasted retirement costs (including settlement dates and the timing of cash flows), discount and inflation rates. At December 31, 2020, a 10% increase to retirement cost would increase these ARO liabilities by $32 million. A 0.25% decrease in the discount rate would increase these ARO liabilities by $3 million and a 0.25% increase in the inflation rate would increase these ARO liabilities by $3 million. There would be no significant change to the annual depreciation expense of the ARO asset or the annual accretion expense of the ARO liability as a result of these changes in assumptions.
Revenue Recognition - Unbilled Revenues (LKE, LG&E and KU)
Revenues related to the sale of energy are recorded when service is rendered or when energy is delivered to customers. Because customers are billed on cycles which vary based on the timing of actual meter reads taken throughout the month, estimates are recorded for unbilled revenues at the end of each reporting period. For LG&E and KU, such unbilled revenue amounts reflect estimates of deliveries to customers since the date of the last reading of their meters. The unbilled revenue estimates reflect consideration of factors including daily load models, estimated usage for each customer class, the effect of current and different rate schedules, the meter read schedule, the billing schedule, actual weather data, and, where applicable, the impact of weather normalization or other regulatory provisions of rate structures. See "Unbilled revenues" on the Registrants' Balance Sheets for balances at December 31, 2020 and 2019.
Other Information (All Registrants)
PPL's Audit Committee has approved the independent auditor to provide audit and audit-related services, tax services and other services permitted by Sarbanes-Oxley and SEC rules. The audit and audit-related services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews.
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