(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 , 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' Condensed Consolidated Financial Statements and the accompanying Notes and with the Registrants' 2020 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 months endedMarch 31, 2021 with the same period in 2020. 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.
•"Application of Critical Accounting Policies" provides an update to PPL's critical accounting policy related to "Income Taxes."
Overview Introduction (PPL) PPL, headquartered inAllentown, Pennsylvania , is a utility holding company. PPL, through its regulated utility subsidiaries, delivers electricity to customers in theU.K. ,Pennsylvania ,Kentucky andVirginia ; delivers natural gas to customers inKentucky ; and generates electricity from power plants inKentucky . OnMarch 17, 2021 ,PPL WPD Limited entered into a share purchase agreement to sell PPL'sU.K. utility business, which substantially represents PPL'sU.K. Regulated segment. As a result of this strategic shift in the operations of the business, PPL will no longer provide segment information for theU.K. Regulated segment. See "Financial and Operational Developments - "Share Purchase Agreement to SellU.K. Utility Business" below for additional information.
PPL's principal subsidiaries are shown below (* denotes a Registrant).
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Table of Contents PPL Corporation* PPL Electric* PPL Capital Funding Engages in the regulated transmission and LKE* Provides financing for the distribution of electricity in operations of PPL and certain Pennsylvania subsidiaries LG&E* KU* Engages in the regulated generation, Engages in the regulated transmission, distribution and sale generation, transmission, of electricity and regulated distribution and sale of distribution and sale of natural gas electricity, primarily in Kentucky in Kentucky Pennsylvania Kentucky Regulated Segment Regulated Segment PPL's reportable segments' results primarily represent the results ofLKE and PPL Electric , except that in 2020 the reportable segments were also allocated certain corporate level financing and other costs that were not included in the results ofLKE and PPL Electric . In 2021, corporate level financing costs are no longer being allocated to the reportable segments.
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 PUC, 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.
(LKE)
LKE, headquartered inLouisville, Kentucky , is a wholly owned subsidiary of PPL and a holding company that owns regulated utility operations through its subsidiaries, LG&E and KU, which constitute substantially all of LKE's assets. LG&E and KU are engaged in the generation, transmission, distribution and sale of electricity. LG&E also engages in the transmission, distribution and sale of natural gas inKentucky . LG&E and KU maintain separate corporate identities and serve customers inKentucky under their respective names. KU also serves customers inVirginia under theOld Dominion Power name.
(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 72 -------------------------------------------------------------------------------- Table of Contents of theFERC under the Federal Power Act. KU serves itsKentucky customers under the KU name and itsVirginia customers under theOld Dominion Power name.
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 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 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. InMarch 2021 , PPL entered into definitive agreements that strategically reposition the company as aU.S. -based energy company focused on building the utilities of the future.PPL WPD Limited entered into a share purchase agreement to sell PPL'sU.K. utility business to a subsidiary of National Grid plc. PPL and its subsidiary,PPL Energy Holdings also entered into a separate share purchase agreement to acquire The Narragansett Electric Company from a different subsidiary of National Grid plc, to be financed with a portion of the proceeds from the sale of theU.K. utility business. OnMay 3, 2021 , an Assignment and Assumption Agreement was entered into by PPL,PPL Energy Holdings ,PPL Rhode Island Holdings and National GridU.S. whereby certain interests ofPPL Energy Holdings in the Narragansett SPA were assigned to and assumed byPPL Rhode Island Holdings . The announced transactions are intended to strengthen PPL's credit metrics, enhance long-term earnings growth and predictability, and provide the company with greater financial flexibility to invest in sustainable energy solutions. See Note 9 to the Financial Statements, and the discussions in "Financial and Operating Developments" below, for additional information on these transactions.
Financial and Operational Developments
(PPL)
Share Purchase Agreement to Sell
OnMarch 17, 2021 ,PPL WPD Limited (WPD Limited ) entered into a share purchase agreement (WPD SPA) to sell PPL'sU.K. utility business toNational Grid Holdings One plc (National GridU.K. ), a subsidiary of National Grid plc. Pursuant to the WPD SPA, National GridU.K. will acquire 100% of the issued share capital ofPPL WPD Investments Limited (WPD Investments) for £7.8 billion in cash.WPD Limited will also receive an additional amount of £548,000 for each day during the period fromJanuary 1, 2021 to the closing date if the dividends usually declared by WPD Investments toWPD Limited are not paid for that period. The completion of the transaction, which is currently expected to occur by the end ofJuly 2021 , is subject to approval by National Grid plc's shareholders and receipt of regulatory approvals from theFinancial Conduct Authority (theFCA ), theGuernsey Financial Services Commission and, if applicable at the time of closing, from theU.K. Secretary of State in connection with the National Security and Investment Bill 2020. OnApril 22, 2021 , National Grid plc's shareholders approved the transaction pursuant to the listing rules of theFCA . OnMay 4, 2021 , theGuernsey Financial Services Commission approved the transaction. The approval of theFCA is the sole remaining approval before the transaction can be consummated. The consummation of the transaction is not subject to a financing condition. In connection with entering into the WPD SPA, theU.K. utility business has met the accounting criteria to be classified as assets and liabilities held for sale and discontinued operations beginning with the first quarter of 2021. Accordingly, PPL's investment in theU.K. utility business has been reported at its estimated fair value, less costs to sell, resulting in an estimated pre-tax loss on sale of$1.6 billion as ofMarch 31, 2021 . 73 -------------------------------------------------------------------------------- Table of Contents See Note 9 to the Financial Statements for additional information on the WPD SPA.
Share Purchase Agreement to Acquire The Narragansett Electric Company
OnMarch 17, 2021 , PPL and its subsidiary,PPL Energy Holdings , entered into a share purchase agreement (Narragansett SPA) withNational Grid USA (National GridU.S. ), a subsidiary of National Grid plc to acquire 100% of the outstanding shares of common stock of The Narragansett Electric Company (Narragansett Electric) for approximately$3.8 billion in cash. OnMay 3, 2021 , an Assignment and Assumption Agreement was entered into by PPL,PPL Energy Holdings ,PPL Rhode Island Holdings and National GridU.S. whereby certain interests ofPPL Energy Holdings in the Narragansett SPA were assigned to and assumed byPPL Rhode Island Holdings . Pursuant to that Assignment and Assumption Agreement,PPL Rhode Island Holdings became the purchasing entity under the Narragansett SPA. The acquisition is expected to be funded with proceeds from the sale of theU.K. utility business. PPL has agreed to guarantee all obligations ofPPL Energy Holdings andPPL Rhode Island Holdings under the Narragansett SPA and the related Assignment and Assumption Agreement. The closing of the acquisition, which is currently expected to occur byMarch 2022 , is subject to the prior closing of the sale of WPD Investments to National GridU.K. and is also subject to the receipt of certainU.S. regulatory approvals, as well as other customary conditions to closing. The consummation of the transaction is not subject to a financing condition.
See Note 9 to the Financial Statements for additional information on the Narragansett SPA.
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 Notes 7, 11 and 16 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 inKentucky since 2010.
Challenge to PPL Electric Transmission Formula Rate Return on Equity (
OnMay 21, 2020 ,PP&L Industrial Customer Alliance (PPLICA) filed a complaint with theFERC alleging thatPPL Electric's base return on equity (ROE) of 11.18% used to determinePPL Electric's formula transmission rate is unjust and unreasonable, and proposing an alternative ROE of 8.0% based on its interpretation of FERC Opinion No. 569. However, also onMay 21, 2020 , theFERC issued Opinion No. 569-A in response to numerous requests for rehearing of Opinion No. 569, which revised the method for analyzing base ROE. OnJune 10, 2020 , PPLICA filed a Motion to Supplement theMay 21, 2020 complaint in which PPLICA continued to allege thatPPL Electric's base ROE is unjust and unreasonable, but revised its analysis ofPPL Electric's base ROE to reflect the guidance provided in Opinion No. 569-A. The amended complaint proposed an updated alternative ROE of 8.5% and also requested that theFERC preserve the original refund effective date as established by the filing of the original complaint onMay 21, 2020 . Several parties have filed motions to intervene, including one party who filed Comments in Support of the original complaint. OnJuly 10, 2020 ,PPL Electric filed its Answer and supporting Testimony to the PPLICA filings arguing that theFERC 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 thanJune 10, 2020 and PPLICA's proposed replacement ROE should be rejected. OnOctober 15, 2020 , theFERC issued an order on the PPLICA complaints which established hearing and settlement procedures, set a refund effective date ofMay 21, 2020 and granted the motions to intervene. OnNovember 16, 2020 ,PPL Electric filed a request for rehearing of the portion of theOctober 15, 2020 Order that set theMay 21, 2020 refund effective date. OnDecember 17, 2020 , theFERC issued a Notice of Denial of Rehearing by Operation of Law and Providing for Further Consideration. OnFebruary 16 andApril 19, 2021 ,PPL Electric filed Petitions for Review withthe United States Court of 74 -------------------------------------------------------------------------------- Table of Contents Appeals for theDistrict of Columbia Circuit of the portion of theOctober 15, 2020 Order that set theMay 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. Settlement negotiations are currently proceeding, but there can be no assurance that they will result in a final settlement. AlthoughPPL Electric cannot predict the outcome of this matter, in the first quarter of 2021,PPL Electric recorded a revenue reserve of$19 million after-tax. Of this amount,$13 million relates to the period fromMay 21, 2020 toDecember 31, 2020 . Additional revenue earned fromMay 21, 2020 through the ultimate resolution of this matter may be subject to refund. A change of 50 basis points to the base ROE would impactPPL 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 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. 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. InMarch 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, subject toFERC review and approval. InJuly 2019 , LG&E and KU proposed their transition mechanism to theFERC and inSeptember 2019 , theFERC rejected the proposed transition mechanism. InSeptember 2020 , theFERC issued orders in the rehearing process that modified various aspects of theSeptember 2019 orders which had approved future termination of the credits, including adjusting which customer arrangements are covered by the transition mechanism and respective future periods or dates for termination of credits. InNovember 2020 , theFERC denied the parties' rehearing requests. InNovember 2020 andJanuary 2021 , LG&E and KU and other parties appealed theSeptember 2020 andNovember 2020 orders at theD.C. Circuit Court of Appeals . The appellate proceedings are continuing, and also include certain additional prior pending petitions for review relating to the matter. OnJanuary 15, 2021 , LG&E and KU made a filing seekingFERC acceptance of a new proposal for a transition mechanism. OnMarch 16, 2021 , theFERC accepted the filed transition mechanism agreements effective onMarch 17, 2021 but subject to refund, and established hearing and settlement procedures. LG&E and KU are also required to make certain compliance filings consistent with theMarch 16, 2021 order. 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 consistent with potential changes or terminations of the waivers and credits, as such become effective.
Rate Case Proceedings (PPL, LKE, LG&E and KU)
OnNovember 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. In recognition of the economic impact of COVID-19, LG&E and KU requested 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 included a request for a CPCN to deploy Advanced Metering Infrastructure across LG&E's and KU's service territories inKentucky . The applications were based on a forecasted test year ofJuly 1, 2021 throughJune 30, 2022 and requested an authorized return on equity of 10.0%. OnApril 19, 2021 , LG&E and KU entered into an agreement with all intervening parties to the proceedings resolving all matters in their applications, with the explicit exception of LG&E's and KU's net metering proposals. The agreement proposes increases in annual revenues of$217 million ($77 million and$116 million in electricity revenues at LG&E and KU and$24 million in gas revenues at LG&E) based on an authorized return on equity of 9.55%. The proposal includes an authorized 75 -------------------------------------------------------------------------------- Table of Contents 9.35% return on equity for the ECR and GLT mechanisms. The agreement does not modify the requested one-year billing credit. The agreement proposes that the KPSC should grant LG&E's and KU's request for a CPCN to deploy Advanced Metering Infrastructure and proposes the establishment of a Retired Asset Recovery rider (RAR) to provide recovery of and return on the remaining investment in certain electric generating units upon their retirement over a ten-year period following retirement. In respect of the RAR rider, the agreement proposes that LG&E and KU will continue to use currently approved depreciation rates forMill Creek units 1 and 2 and Brown Unit 3. The agreement also proposes a four-year "stay-out" commitment from LG&E and KU to refrain from effective base rate increases beforeJuly 1, 2025 , subject to certain exceptions. A hearing on the agreement, and the underlying proceedings, was completed onApril 28, 2021 . Subject to KPSC approval, the rates, decreased by the amount of the billing credit, are expected to become effectiveJuly 1, 2021 . An Order on the net metering issues is expected by the end ofSeptember 2021 . PPL, LKE, LG&E and KU cannot predict the outcome of these proceedings. 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 months endedMarch 31, 2021 with the same period in 2020. 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 for
(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. 76
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Table of Contents
PPL: Statement of Income Analysis, Segment Earnings and Adjusted Gross Margins
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