PPL Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The filing also reports separately for PPL Energy Supply, PPL Electric, LG&E and KU. Amounts below are in U.S. dollars unless stated otherwise.
Business context and financial results
PPL combines regulated electricity and gas utilities in the U.K., Pennsylvania and Kentucky with competitive generation and energy marketing businesses. The quarter’s results were affected by unusually cold weather, volatile commodity prices and hedge accounting/mark-to-market movements.
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Operating revenues | $1.223 billion | $2.457 billion | Down 50%; materially distorted by derivative-related presentation and losses in unregulated wholesale energy. |
| Operating income | $715 million | $693 million | Up 3%; energy purchases included large offsetting derivative gains. |
| Income before taxes | $428 million | $564 million | Down 24%. |
| Net income attributable to PPL shareowners | $316 million | $413 million | Down 23%. |
| Basic / diluted EPS | $0.50 / $0.49 | $0.70 / $0.65 | Down 29% / 25%; share count and equity-unit dilution affect comparability. |
| Dividend declared per share | $0.3725 | $0.3675 | Quarterly dividend increased. |
| Cash from operating activities | $931 million | $244 million | Improved, with substantial contributions from working capital and lower pension funding. |
| Capital expenditures | $892 million | $828 million | Investing cash outflow was $1.183 billion, including a large increase in restricted cash. |
Segments and material comparisons
- U.K. Regulated: Segment net income fell to $206 million from $313 million. A $65 million increase in the WPD line-loss liability reduced utility revenue; management reported special items of negative $58 million after tax, versus positive $75 million a year earlier. Underlying results benefited from a 2013 rate increase and lower pension expense, partly offset by weather-related lower volumes and higher depreciation.
- Kentucky Regulated: Net income rose to $107 million from $85 million, primarily from higher volumes during unusually cold weather and returns on environmental investment.
- Pennsylvania Regulated: Net income increased to $85 million from $64 million. Higher transmission investment, cold-weather distribution margins and a regulatory-liability estimate change contributed.
- Supply: Segment net loss widened to $75 million from $46 million. Excluding special items, management described earnings as relatively flat: higher capacity prices and net cold-weather benefits were offset by lower baseload energy prices and Susquehanna outage timing. Special items were negative $149 million after tax, including a $10 million after-tax Kerr Dam impairment and adjusted energy-related economic losses.
Consolidated revenue and expense lines are unusually volatile because commodity derivatives are recorded gross and mark-to-market changes may affect earnings before the related physical delivery. The filing attributes significant realized and unrealized sales-contract losses and purchase-contract gains to the unusually cold winter; therefore, headline revenue and operating expenses should not be read as straightforward changes in underlying sales volumes or margins.
Liquidity, debt and capital
- At March 31, PPL reported $1.256 billion of cash and cash equivalents and $416 million of restricted cash. Current liabilities were $6.376 billion.
- Short-term debt was $1.579 billion, up from $701 million at year-end 2013; long-term debt was $20.514 billion, with $304 million due within one year. Total reported debt including short-term and current maturities was approximately $22.4 billion.
- PPL Energy Supply held $970 million of short-term debt and $412 million of restricted cash. Management linked much of the restricted-cash increase to collateral requirements for commodity hedges and said short-term borrowing helped fund them.
- In March, PPL Capital Funding completed a remarketing/exchange of notes associated with the 2011 Equity Units. On May 1, 2014, PPL issued 31.7 million shares at $30.86 per share, receiving $978 million net, intended primarily to repay short-term debt and for general corporate purposes.
- Credit access remained supported by committed facilities and commercial-paper programs. Moody’s upgraded PPL Electric and the Kentucky utilities in January; Fitch maintained a negative outlook for PPL Energy Supply in April.
Outlook, developments and risks
- 2014 outlook: PPL expected lower full-year earnings than 2013 excluding special items; the filing provides no clear numerical earnings guidance. Management projected higher U.K. and Pennsylvania regulated earnings, but lower Kentucky regulated and Supply earnings. Supply was expected to face lower energy and capacity prices, partly offset by benefits from the unusually cold winter.
- U.K. regulation: Ofgem’s final line-loss decision raised WPD’s liability to $115 million at quarter-end; nearly all is expected to be refunded to customers from 2015 through 2019. WPD’s RIIO-ED1 plans were fast-tracked, with an estimated additional revenue benefit of about $35 million annually during the eight-year period beginning April 2015.
- Asset sale and investment: PPL Montana agreed to sell 633 MW of Montana hydroelectric facilities for $900 million, subject to approvals and other closing conditions; closing was not expected before the second half of 2014. The Susquehanna nuclear unit completed a planned turbine inspection in March, and Unit 1 entered a planned outage in April.
- Market and impairment risks: Low PJM energy and capacity prices challenge recoverability of Pennsylvania coal assets. Management said further price declines or higher environmental costs could prompt future impairment testing; the $2.6 billion carrying value of Brunner Island and Montour was sensitive to assumptions.
- Regulatory and environmental exposure: Material uncertainties include coal ash rules, wastewater discharge requirements, cooling-water rules, air-emission standards and potential greenhouse-gas regulation. Compliance costs could be significant or material, and some loss ranges cannot be estimated.
- Legal and operational contingencies: Matters include Clean Air Act litigation concerning Colstrip, environmental claims involving Cane Run and Mill Creek, and unresolved FERC rate disputes. Nine KU municipal customers gave notices to terminate wholesale power contracts effective principally in 2019; the outcome and effect on future capacity needs were uncertain. A labor agreement covering substantial portions of certain workforces was due to expire May 11, 2014, with negotiations ongoing.
- Derivative credit provisions could require additional collateral or termination payments after credit downgrades. Energy counterparty exposure after netting, reserves and collateral was reported at $372 million for PPL; the filing also identifies foreign-exchange, interest-rate, weather, outage and fuel-supply risks.
Important facts for investors to verify
- Review the reconciliation of reported revenue and operating income to commodity derivative gains/losses and the company’s non-GAAP margin measures; assess the effect of unusual winter weather and hedge positioning.
- Track whether the $978 million equity proceeds reduce short-term borrowings as planned, and monitor restricted-cash collateral needs and available liquidity.
- Check the status, approvals, proceeds adjustments and closing timing of the Montana hydro sale, and any subsequent changes in the carrying values of competitive generation assets.
- Monitor the U.K. line-loss refund schedule, KU municipal contract terminations, and rate-case or formula-rate outcomes.
- Assess environmental rulemaking, litigation and potential compliance costs, particularly coal ash, effluent limits and Colstrip-related matters; the filing says several exposures cannot be reliably estimated.