PPL CORPORATION (All Registrants)
This "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL,PPL Electric , 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' Condensed Consolidated Financial Statements and the accompanying Notes and with the Registrants' 2021 Form 10-K. 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:
•"Overview" provides a description of each Registrant's business strategy and a discussion of important financial and operational developments.
•"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 the three and six months endedJune 30, 2022 with the same period in 2021. The 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.
•"Financial Condition - Liquidity and Capital Resources" provides an analysis of the Registrants' liquidity positions and credit profiles. This section also includes a discussion of rating agency actions.
•"Financial Condition - Risk Management" provides an explanation of the Registrants' risk management programs relating to market and credit risk.
Overview
Introduction
(PPL)
PPL, headquartered in Allentown, Pennsylvania , is a utility holding company.
PPL, through its regulated utility subsidiaries, delivers electricity to
customers in Pennsylvania , Kentucky , Virginia , and Rhode Island ; delivers
natural gas to customers in Kentucky and Rhode Island ; and generates electricity
from power plants in Kentucky .
PPL's principal subsidiaries are shown below (* denotes a Registrant).
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PPL Corporation*
PPL Capital Funding
Provides financing for the operations of PPL
and certain subsidiaries
LKE RIE
PPL Electric* A holding company that owns Engages in the regulated
Engages in the regulated transmission and regulated utility operations transmission, distribution and sale
distribution of electricity in through its subsidiaries, LG&E of electricity and regulated
Pennsylvania and KU distribution and sale of natural gas
in Rhode Island
LG&E*
Engages in the regulated generation, KU*
transmission, distribution and sale Engages in the regulated generation,
of electricity and regulated transmission, distribution and sale of
distribution and sale of natural gas electricity, primarily in Kentucky
in Kentucky
Pennsylvania Kentucky Rhode Island
Regulated Segment Regulated Segment Regulated Segment
In addition to PPL, the other Registrants included in this filing are as follows.
(
PPL Electric , headquartered inAllentown, Pennsylvania , is a wholly-owned subsidiary of PPL and a regulated public utility that is an electricity transmission and distribution service provider in eastern and centralPennsylvania .PPL Electric is subject to regulation as a public utility by the PAPUC, and certain of its transmission activities are subject to the jurisdiction of theFERC under the Federal Power Act.PPL Electric delivers electricity in itsPennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.PPL Electric was organized in 1920 asPennsylvania Power & Light Company .
(LG&E)
LG&E, headquartered inLouisville, Kentucky , is a wholly-owned subsidiary of LKE and a regulated utility engaged in the generation, transmission, distribution and sale of electricity and distribution and sale of natural gas inKentucky . LG&E is subject to regulation as a public utility by the KPSC, and certain of its transmission activities are subject to the jurisdiction of theFERC under the Federal Power Act. (KU)KU , headquartered inLexington, Kentucky , is a wholly-owned subsidiary of LKE and a regulated utility engaged in the generation, transmission, distribution and sale of electricity inKentucky andVirginia . KU is subject to regulation as a public utility by the KPSC and the VSCC, and certain of its transmission and wholesale power activities are subject to the jurisdiction of theFERC under the Federal Power Act. KU serves itsKentucky customers under the KU name and itsVirginia customers under theOld Dominion Power name.
Segment Information (PPL)
The following segment information represents an update to "Item 1. Business" in PPL's 2021 Form 10-K and should be read in conjunction with those disclosures.
PPL is organized into three reportable segments as depicted in the chart above: Kentucky Regulated, which primarily represents the results of LG&E and KU, Pennsylvania Regulated, which primarily represents the results ofPPL Electric andRhode Island 70 -------------------------------------------------------------------------------- Table of Contents Regulated, which primarily represents the results of RIE. "Corporate and Other" primarily includes financing costs incurred at the corporate level that have not been allocated or assigned to the segments. Rhode Island Regulated Segment
The Rhode Island Regulated segment consists primarily of the regulated electricity transmission and distribution operations and regulated distribution and sale of natural gas conducted by RIE.
RIE is engaged in the regulated transmission, distribution and sale of electricity and regulated distribution and sale of natural gas inRhode Island . RIE provides electricity service to approximately 510,000 customers and natural gas service to approximately 270,000 customers inRhode Island . RIE's service area covers substantially all ofRhode Island . See Note 3 to the Financial Statements for revenue information.
Franchises and Licenses
RIE provides electricity delivery service and natural gas distribution service in its service territory pursuant to certain franchises, licenses, statutory service areas, easements and other rights or permissions granted by state legislatures, cities or municipalities or other entities.
Competition
There are currently no other electric or gas public utilities operating within the service area of RIE.
Rates and Regulation RIE is subject to the jurisdiction of theFERC , the RIPUC and theRhode Island Division of Public Utilities and Carriers . RIE operates under aFERC -approved open access transmission tariff.
Distribution
RIE owns and maintains electric and natural gas distribution networks inRhode Island . Distribution revenues are primarily from the sale of electricity, natural gas, and related services to retail customers. Distribution sales are regulated by the RIPUC, which is responsible for approving the rates and other terms of services as part of the rate making process. Natural gas and electric distribution revenues are derived from the regulated sale and distribution of electricity and natural gas to residential, commercial, and industrial customers within RIE's service territory under the tariff rates. The tariff rates approved by the regulator are designed to recover the costs incurred by the RIE for products and services provided and along with a return on investment.
Transmission
RIE owns an electric transmission system inRhode Island . RIE's transmission services are regulated by theFERC and coordinated withIndependent System Operator (ISO) - New England . Additionally, RIE makes available its transmission facilities to NEP, for operation and control pursuant to an integrated facilities agreement, Service Agreement No. 23 (Integrated Facilities Agreement orIFA ). These revenues arise under tariff/rate agreements.
Deferral Mechanisms
RIE records revenues in accordance with accounting principles for rate-regulated
operations for arrangements between the RIE and the regulator. These include
various deferral mechanisms such as capital trackers, energy efficiency
programs, and other programs that also qualify as Alternative Revenue Programs
(ARPs). ARPs enable the RIE to adjust rates in the future, in response to past
activities or completed events. RIE's electric and gas distribution rates both
have a revenue decoupling mechanism, which allows for annual adjustments to the
RIE's delivery rates, as a result of the reconciliation between allowed revenue
and billed revenue. RIE also has other ARPs related to the achievement of
certain objectives, demand side management initiatives, and certain other rate
making mechanisms. RIE recognizes ARPs with a corresponding offset to a
regulatory asset or
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liability account when the regulatory specified events or conditions have been
met, when the amounts are determinable, and are probable of recovery (or
payment) through future rate adjustments.
At
Last Resort Service
RIE is required by the RIPUC and by statute to provide Last Resort Service. Last Resort Service is available to all customers (including new customers) who have not elected to take their electric supply from a non-regulated power producer or any customer who, for any reason, has stopped receiving generation service from a non-regulated power producer. The charge for Last Resort Service is the sum of the applicableLast Resort Service charges in addition to all appropriate Retail Delivery charges as stated in the applicable tariff. The monthly charge for Last Resort Service also includes the costs incurred by RIE to comply with the Renewable Energy Standard, established in R.I.G.L. Section 39-26-1 and the costs to comply with the RIPUC's Rules Governing Energy Source Disclosure. The charge for Last Resort Service includes the administrative costs associated with the procurement ofLast Resort Service, including an adjustment for uncollectible accounts as approved by the RIPUC.
Numerous alternative suppliers have offered to provide generation supply in RIE's service area. As the cost of generation supply is a pass-through cost for RIE, its financial results are not impacted if its customers purchase electricity supply from these alternative suppliers.
See Note 6 to the Financial Statements for additional information on rate mechanisms and regulatory matters.
Natural Gas Distribution Supply
To meet the projected annual gas supply requirements of approximately 37 Bcf, RIE has a portfolio of gas supply arrangements of varying contractual terms and durations to provide reliable and cost-effective service to its customers. These natural gas supply arrangements include contracts with natural gas producers and marketers that reflect market price signals. RIE also has firm pipeline and underground storage capacity contracts to support the delivery of natural gas supplies to its customers. Also, to manage the winter peak requirements for RIE customers, RIE contracts for liquified natural gas (LNG) service and owns and operates certain LNG storage facilities. The RIE gas supply portfolio includes contracts for firm transportation service with eleven interstate pipeline companies and natural gas storage operators. These contracts have various termination dates with certain contracts being subject to evergreen renewal provisions affording RIE with flexibility in managing its upstream resource portfolio. RIE expects to purchase natural gas supplies for its gas distribution operations from onshore producing regions accessed by its pipeline capacity portfolio inSouth Texas ,East Texas , andLouisiana , as well as gas originating in the Marcellus andUtica production areas. RIE expects to purchase certain natural gas supplies that originate inCanada and from regional LNG importation terminals. Business Strategy (All Registrants) PPL's strategy, which is supported by the other Registrants, is to achieve industry-leading performance in safety, reliability, customer satisfaction and operational efficiency; to advance a clean energy transition while maintaining affordability and reliability; to maintain a strong financial foundation and create long-term value for our shareowners; to foster a diverse and exceptional workplace; and to build strong communities in areas that we serve. Central to PPL's and the other Registrants' strategy is recovering capital project costs efficiently through various rate-making mechanisms, including periodic base rate case proceedings using forward test years, annualFERC formula rate mechanisms and other regulatory agency-approved recovery mechanisms designed to limit regulatory lag. InKentucky , the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, and gas supply clause) and recovery on 72 -------------------------------------------------------------------------------- Table of Contents construction work-in-progress that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. InPennsylvania , theFERC 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. InRhode Island , the gas cost adjustment, net metering, infrastructure, safety and reliability (ISR) and revenue decoupling mechanisms and other rate adjustment mechanisms operate to reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs.
Financial and Operational Developments
Acquisition of Narragansett Electric (PPL)
OnMay 25, 2022 ,PPL Rhode Island Holdings acquired 100% of the outstanding shares of common stock of Narragansett Electric from National GridU.S. The consideration for the Acquisition consisted of approximately$3.8 billion in cash and approximately$1.5 billion of long-term debt assumed through the transaction. The$3.8 billion total cash consideration paid was funded with proceeds from PPL's 2021 sale of itsU.K. utility business. The Acquisition resulted in$1.6 billion of goodwill. The results of RIE are reported in PPL's Rhode Island Regulated segment. The acquisition of Narragansett Electric was deemed an asset acquisition for federal and state income tax purposes, as a result of PPL and National Grid making a tax election under Internal Revenue Code (IRC) §338(h)(10). Accordingly, the tax basis of substantially all of the assets acquired were increased to fair market value, which equaled net book value, thereby eliminating the related deferred tax assets and liabilities. The tax goodwill will be amortized for tax purposes over 15 years.
See Note 8 to the Financial Statements for additional information.
Pennsylvania State Tax Reform (
OnJuly 8, 2022 , the Governor ofPennsylvania signed into lawPennsylvania House Bill 1342 (H.B. 1342). Among other changes to the state tax code, the bill will reduce the corporate net income tax rate from 9.99% to 8.99% beginningJanuary 1, 2023 , and reduces annually by half a percentage point until the rate reaches 4.99% in 2031. GAAP requires that deferred tax assets and liabilities be measured at the enacted tax rate expected to apply when temporary book-to-tax differences are expected to be realized or settled. Accordingly, in the third quarter of 2022, PPL expects to record the impact of the reduced tax rate as a reduction in the accumulated deferred income taxes related to regulated operations in an amount between$200 million and$300 million , with a corresponding increase in regulatory liabilities. In addition, PPL expects to recognize a deferred tax benefit of between$3 million and$7 million primarily associated with the remeasurement of accumulated deferred income tax balances related to non-regulated operations.
The foregoing numbers are estimates that will be updated quarterly to reflect revised forecast, actual activity, and orders from regulatory authorities.
Regulatory Requirements
(All Registrants)
The Registrants cannot predict the impact that future regulatory requirements may have on their financial condition or results of operations.
Environmental Considerations for Coal-Fired Generation (PPL, LG&E and KU)
The businesses of 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 Notes 6, 10 and 15 to the Financial Statements for a discussion of these significant environmental matters. These and other environmental requirements led PPL, LG&E and KU to retire approximately 1,200 MW of coal-fired generating plants inKentucky since 2010. As part of the long-term generation planning process, LG&E and KU evaluate a range of factors including the impact of potential stricter environmental regulations, fuel price scenarios, the cost of replacement generation, continued operations and major maintenance costs and the risk of major equipment failures in determining when to retire generation assets. As a result of environmental requirements and aging infrastructure, LG&E anticipates retiring two older coal-fired units at the Mill Creek Plant and KU anticipates retiring one coal-fired unit at the E.W. Brown plant. Mill Creek Unit 1 has 300 MW of capacity and is expected to be retired in 2024.Mill Creek 73 -------------------------------------------------------------------------------- Table of Contents Unit 2 and E.W. Brown Unit 3 have capacities of 297 MW and 412 MW and are expected to be retired in 2028. LG&E and KU anticipate earning recovery of and return on any remaining net book value of these assets through the Retired Asset Recovery (RAR) rider. See Note 7 to the Financial Statements in the Registrants' 2021 Form 10-K for additional information related to the RAR rider.
FERC Transmission Rate Filing (PPL, LG&E and KU)
In 2018, LG&E and KU applied to theFERC 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 theMidcontinent 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 certainKentucky 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 ofKentucky municipalities for either certain LG&E and KU or MISO transmission charges incurred for transmission service received. In 2019, theFERC 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, which was subsequently filed, modified, and approved by theFERC in 2020 and 2021. In 2020, LG&E and KU and other parties filed appeals with theD.C. Circuit Court of Appeals regardingFERC's orders on the elimination of the mitigation and required transition mechanism. Oral arguments in the appellate proceeding occurred onFebruary 14, 2022 . LG&E and KU cannot predict the outcome of the respective appellate andFERC proceedings. LG&E and KU currently receive recovery of the waivers and credits provided through other rate mechanisms and such rate recovery would be anticipated to be adjusted in future rate proceedings consistent with potential changes or terminations of the waivers and credits, as such become effective.
Rate Case Proceedings (KU)
OnAugust 31, 2021 , KU filed a request with the VSCC for an annual increase inVirginia base electricity rates of approximately$12 million , based on an authorized 10.4% return on equity. OnMarch 11, 2022 , KU, certain intervenors and the VSCC staff reached a partial stipulation and recommendation agreement providing KU with an increase in base electricity rates of approximately$7 million based on an authorized 9.4% return on equity. A hearing on open issues occurred onMarch 17, 2022 . OnMay 25, 2022 , the VSCC issued an order approving the proposed agreement. New rates became effectiveJune 1, 2022 .
Labor Union Agreement (
InMarch 2022 , members of theIBEW Local 1600 ratified a new five-year labor agreement withPPL and PPL Electric . The contract covers over 1,000 employees and was effectiveMay 16, 2022 . The terms of the new labor agreement are not expected to have a significant impact on the financial results of PPL orPPL Electric . Results of Operations (PPL) The "Statement of Income Analysis" discussion below describes significant changes in principal line items on the Statements of Income, comparing the three and six months endedJune 30, 2022 with the same periods in 2021. The "Segment Earnings" and "Adjusted Gross Margins" discussions 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.
(
A "Statement of Income Analysis" is presented separately forPPL Electric , LG&E and KU. The "Statement of Income Analysis" discussion below describes significant changes in principal line items on the Statements of Income, comparing the three and six months endedJune 30, 2022 with the same periods in 2021. 74 -------------------------------------------------------------------------------- Table of Contents (All Registrants) The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations. As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.
PPL: Statement of Income Analysis, Segment Earnings and Adjusted Gross Margins
Statement of Income Analysis
Net income for the periods ended
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