PPL Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. The filing also includes separate financial statements for PPL Energy Supply, LLC and PPL Electric Utilities Corporation. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Business context
PPL operates regulated electric and gas utilities, U.K. electricity distribution networks, and competitive generation and energy marketing businesses. Results include a full quarter of LG&E and KU (LKE), acquired in November 2010, with no comparable 2010 contribution. On April 1, 2011, after quarter-end, PPL completed the Central Networks acquisition, adding regulated U.K. distribution operations serving about five million end users.
Key financial results
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| PPL operating revenue | $2,910 | $3,006 |
| Operating income | $805 | $476 |
| Income from continuing operations after tax | $402 | $247 |
| Net income attributable to PPL | $401 | $250 |
| Diluted EPS | $0.82 | $0.66 |
| Operating cash flow | $196 | $798 |
| Capital expenditures | $428 | $283 |
- Revenue declined about 3%, while operating income rose about 69%. Net income increased despite lower total revenue; results reflect the LKE acquisition, changes in derivative-related unrealized activity, and other special items.
- Cash from operations fell $602 million, principally due to higher defined-benefit plan funding and working-capital movements, including counterparty collateral. The quarter included $438 million of defined-benefit plan funding versus $142 million a year earlier.
- PPL declared dividends of $0.35 per common share, unchanged year over year; cash dividends paid were $170 million.
- At March 31, PPL reported cash of $1,245 million, short-term investments of $163 million, short-term debt of $881 million, current long-term debt of $502 million, and long-term debt of $12,247 million. Reported short- and long-term debt therefore totaled approximately $13.6 billion.
- PPL had $3.2 billion of unused domestic committed credit capacity and approximately $500 million of unused WPD facility capacity, subject to facility terms and availability. Liquidity is also affected by collateral requirements and the acquisition financing.
- Management’s non-GAAP margins: Pennsylvania gross delivery margins rose to $250 million from $221 million; unregulated gross energy margins fell to $671 million from $743 million. The latter decline was primarily driven by lower Eastern U.S. prices and higher generation supply costs.
Subsidiary results and material changes
- Kentucky Regulated: contributed $75 million of PPL-attributable net income; no comparable 2010 segment amount because LKE was acquired in November 2010. Management expected higher utility revenues, in part from rate increases effective in 2010.
- International Regulated: PPL-attributable net income was $55 million versus $76 million. Higher revenue was more than offset by acquisition-related costs, increased interest expense, taxes, and other items.
- Pennsylvania Regulated: PPL-attributable net income was $52 million versus $37 million, supported by higher distribution margins following a rate increase effective January 1, 2011 and favorable weather. PPL Electric’s revenue was $558 million versus $813 million, while net income was $56 million versus $42 million.
- Supply: PPL-attributable net income was $219 million versus $137 million. PPL Energy Supply reported revenue of $1,369 million versus $2,094 million and net income of $214 million versus $200 million. Comparability is affected by PPL Global’s January 2011 distribution to its parent and its presentation as discontinued operations in 2010; 2010 discontinued operations also included $68 million from PPL Global.
- PPL Energy Supply sold certain non-core generation facilities in March for $381 million, with an insignificant after-tax loss. PPL Energy Supply’s operating cash flow was $202 million versus $961 million, and its cash balance was $583 million at quarter-end.
Outlook, financing, and risks
- Central Networks acquisition: PPL paid $5.7 billion in cash and assumed approximately $800 million of long-term debt, for aggregate enterprise consideration of about $6.5 billion. The preliminary purchase-price allocation included $2.6 billion of goodwill and is subject to change. PPL cited regulated earnings stability and expected operating synergies, but cautioned that benefits and integration outcomes are uncertain.
- Acquisition financing included April 2011 net proceeds of approximately $2.3 billion from common stock, $948 million from equity units, and $953 million from PPL WEM senior notes. As of May 6, £1.2 billion remained outstanding under the bridge facility. A pro forma presentation giving effect to the acquisition and related financing estimated debt of $18.3 billion and equity of $10.9 billion; these are not March 31 reported balances.
- For 2011, management expected lower Supply energy margins, citing lower Eastern energy and capacity prices, higher average fuel costs, nuclear outages, higher taxes, and higher operating and maintenance costs. It expected higher revenues in regulated businesses, including from rate increases. The filing does not provide a consolidated earnings or EPS guidance target.
- Susquehanna Unit 2’s outage was expected to extend approximately four to six weeks for turbine-blade replacement. PPL might also take Unit 1 offline for inspection. Management estimated an after-tax impact of $20 million to $30 million, with possible additional repairs or delays.
- PPL projected approximately $18.4 billion of capital expenditures for 2011–2015, including the newly acquired U.K. business. The filing identifies substantial uncertainty around environmental compliance costs; projected air-compliance capital expenditures over the next five years were $2.3 billion for LKE and $400 million for PPL Energy Supply.
- Risks include commodity prices and fuel availability, plant outages and reliability, weather, counterparty defaults and collateral calls, foreign exchange and refinancing costs, regulatory and rate-case outcomes, and environmental rules. PPL disclosed an $78 million accrual for Montana hydroelectric litigation and noted several ongoing legal, regulatory, and environmental matters whose outcomes or costs could not be predicted.
- Standard & Poor’s lowered certain PPL and subsidiary ratings after the acquisition announcement; following closing, it affirmed long-term ratings and revised outlooks. The filing warns that downgrades could increase borrowing costs or collateral needs. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Most important facts for investors to verify
- Final Central Networks purchase accounting, integration costs and synergies, and repayment or refinancing of remaining bridge borrowings.
- Actual duration and financial effect of the Susquehanna outages, including any Unit 1 inspection findings.
- Underlying Supply margins apart from derivative fair-value movements, special items, and discontinued-operation effects.
- Operating cash flow, pension funding needs, available credit capacity, and potential collateral requirements following any credit-rating change.
- Environmental compliance spending and rate recovery, along with outcomes of material litigation and regulatory proceedings.