PPL Corporation 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report. Dollar amounts are in millions unless noted. The combined filing also covers PPL Energy Supply, LLC and PPL Electric Utilities Corporation; figures below focus on PPL Corporation unless identified otherwise.
Business context and reporting period
PPL operates regulated electric and gas utilities in Kentucky, Pennsylvania and the U.K., alongside competitive generation and energy marketing businesses. On November 1, 2010, PPL acquired E.ON U.S. LLC, renamed LG&E and KU Energy LLC (LKE), for approximately $7.6 billion including assumed debt. LKE contributed two months of results to 2010, so year-over-year comparisons are not like-for-like. The acquisition expanded PPL’s regulated business mix; management projected that regulated businesses would provide about half of 2011 net income.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $8,521 | $7,449 |
| Operating income | $1,866 | $896 |
| Net income attributable to PPL | $938 | $407 |
| Diluted EPS | $2.17 | $1.08 |
| Cash from operating activities | $2,033 | $1,852 |
| Cash used in investing activities | $(8,229) | $(880) |
| Cash from (used in) financing activities | $6,307 | $(1,271) |
| Cash and cash equivalents at year-end | $925 | $801 |
| Short-term debt | $694 | $639 |
| Long-term debt, including current portion | $12,663 | $7,143 |
Operating margin was approximately 21.9% in 2010, versus 12.0% in 2009, calculated as operating income divided by operating revenue. PPL’s non-GAAP unregulated gross energy margin rose to $2,770 from $1,731; management attributed much of the increase to the expiration of the PPL Electric–PPL EnergyPlus capped-price supply contract at year-end 2009 and higher realized eastern U.S. prices.
PPL’s 2010 capital expenditures were $1,644. Cash used in investing activities was dominated by the LKE acquisition, including $6,812 net of cash acquired. PPL reported $1,088 of cash and short-term investments and $3,741 of unused domestic credit capacity at year-end. The filing reports total committed domestic credit facilities of $4,650; PPL also reported approximately $381 of unused WPD credit capacity.
PPL declared dividends of $1.40 per common share in 2010, up from $1.38 in 2009. Its year-end debt and equity balances changed substantially with the acquisition financing and issuance of 103.5 million common shares and 23 million Equity Units.
Material changes versus the prior comparable period
- Reported revenue increased 14%, while operating income more than doubled and net income attributable to PPL rose to $938 from $407. The acquisition added $493 of revenue and $26 of net income for its two-month reporting period; acquisition-related financing and transaction costs also affected results.
- Supply segment net income attributable to PPL increased to $612 from $40, primarily reflecting higher eastern U.S. margins after the capped-price supply contract expired. Pennsylvania Regulated segment net income declined to $115 from $124; International Regulated increased to $261 from $243. Kentucky Regulated contributed $26 for the two months included in 2010.
- Operating cash flow increased 10%. Investing outflow rose sharply because of the acquisition; financing cash flow turned positive, supported by $4.7 billion of net debt issuance and $2.4 billion of net common-stock proceeds.
- Year-end total assets rose to $32,837 from $22,165 and long-term debt, including current maturities, rose to $12,663 from $7,143. These changes principally reflect LKE and acquisition financing.
Guidance, management commentary, risks and unusual items
- 2011 outlook: Management expected Kentucky Regulated to contribute about 20% of PPL’s earnings, with the broader regulated businesses expected to contribute approximately 50% of net income. International Regulated earnings were projected to be comparable with 2010, excluding special items; Pennsylvania Regulated earnings were projected to increase on the January 2011 rate increase. Supply earnings were projected to decline because of lower eastern energy and capacity prices, higher fuel costs and higher operating expense. The filing does not provide a clear consolidated 2011 earnings or EPS target.
- Capital needs: PPL projected approximately $15.1 billion of capital expenditures for 2011–2015. Its environmental capital expenditure forecast included $2.1 billion for LG&E and KU and $400 million for PPL Energy Supply over five years; actual amounts depend on final regulatory requirements.
- Acquisition and integration: The LKE acquisition added $996 of goodwill. PPL excluded LKE from its formal internal-control effectiveness evaluation due to the acquisition’s size, complexity and timing; management was evaluating integration of processes and systems.
- Unusual items: PPL recorded $74 after tax of acquisition-related costs, including $22 of third-party costs and $52 of Bridge Facility costs. Supply results also included a $125 after-tax loss related to monetized full-requirement contracts and other special items. A $72 tax valuation allowance release benefited 2010 earnings. Management reported no goodwill impairment in 2010.
- Contingencies and operational matters: PPL Montana recorded a $75 million accrual at year-end for Montana hydroelectric streambed litigation; the outcome remained uncertain. LKE said it could not estimate the ultimate outcome of remaining Trimble County Unit 2 construction and modification matters. The company also disclosed environmental, regulatory, tax and other litigation exposures, including evolving air, water and waste rules.
- Liquidity and market risks: A below-investment-grade downgrade combined with a 10% adverse energy-price movement could have required approximately $455 million of additional collateral for PPL’s commodity and related contracts, based on year-end positions. The filing identifies commodity prices, plant availability, fuel supply, weather, counterparties, interest rates, environmental compliance, rate recovery and access to capital as material risks.
- Audit: The independent auditor issued an unqualified opinion on PPL’s consolidated financial statements and internal control over financial reporting; the internal-control audit did not include LKE.
Most important facts an investor should verify
- Separate the two months of LKE results from PPL’s legacy business when assessing growth, margins and cash generation; review acquisition pro forma information and subsequent full-year results.
- Assess the sustainability of Supply’s 2010 margin improvement after the contract expiration, including commodity-price exposure, hedging and the scheduled realization of monetized contract effects through May 2013.
- Reconcile acquisition funding, debt maturities, credit-facility availability and expected 2011 borrowing against the $15.1 billion five-year capital plan and dividend commitments.
- Track final environmental rules and associated capital costs, Kentucky rate-recovery arrangements, and the status and potential cost of Montana streambed litigation and Trimble County Unit 2 matters.
- Review the integration of LKE’s controls and systems, and confirm that subsequent reporting includes LKE in internal-control assessments.