PPL Corporation — 2013 Form 10-K Summary
Business context and reporting period. This combined Form 10-K reports the fiscal year ended December 31, 2013; it is an annual filing, not a standalone fourth-quarter report. PPL operates regulated electricity distribution and utility businesses in the U.K., Pennsylvania and Kentucky, alongside competitive U.S. power generation and energy marketing. Nearly all projected 2014 earnings were expected to come from regulated businesses.
Key financial results
Amounts are U.S. dollars unless noted. PPL’s consolidated results include several separately reporting subsidiaries.
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $11.860 billion | $12.286 billion | Down 3% |
| Operating income | $2.339 billion | $3.109 billion | Down 25% |
| Net income attributable to PPL shareowners | $1.130 billion | $1.526 billion | Down 26% |
| Diluted EPS | $1.76 | $2.60 | Down 32% |
| Cash from operating activities | $2.857 billion | $2.764 billion | Up $93 million |
| Cash used in investing activities | $4.295 billion | $3.123 billion | Use increased $1.172 billion |
| Cash and cash equivalents at year-end | $1.102 billion | $901 million | Up $201 million |
| Short-term debt | $701 million | $652 million | Up $49 million |
| Long-term debt, including current portion | $20.907 billion | $19.476 billion | Up $1.431 billion |
The operating margin, calculated as operating income divided by revenue, was approximately 19.7%, versus 25.3% in 2012. At year-end, current assets were $5.153 billion and current liabilities $4.912 billion. PPL reported $4.022 billion of unused domestic credit-facility capacity and approximately $1.6 billion of unused U.K. facility capacity. The filing states that PPL was in compliance with credit-facility covenants.
Material changes and drivers
- Regulated earnings improved: U.K. Regulated net income was $922 million, up 15%; Kentucky Regulated was $307 million, up 73%; and Pennsylvania Regulated was $209 million, up 58% (rounded).
- The Supply segment swung to a $272 million loss from $414 million income. Lower baseload energy prices, higher depreciation and taxes weighed on results; higher capacity prices and nuclear generation partially offset the decline.
- U.K. and domestic utility rate increases supported regulated results. Kentucky rate increases took effect January 1, 2013; PPL Electric’s approximately $71 million distribution revenue increase also took effect that date.
- Utility and U.K. revenue growth was more than offset by lower competitive energy revenue. PPL’s regulated revenues also reflect the WPD Midlands acquisition, completed in 2011; 2013 and 2012 each included a full year of its results.
Outlook, unusual items and risks
- 2014 outlook: Management expected lower earnings than in 2013, excluding special items. U.K. Regulated earnings were projected to be comparable; Kentucky and Supply lower; Pennsylvania higher. The filing text provided here does not give a clear numerical consolidated EPS forecast.
- Major unusual item: PPL recorded a $697 million pre-tax charge ($413 million after tax) for terminating the Colstrip operating lease and acquiring the previously leased interests. The charge contributed to a fourth-quarter loss attributable to PPL shareowners of $98 million. PPL also recorded a $65 million pre-tax ($39 million after-tax) impairment of the Corette plant and related emission allowances.
- Strategic and capital plans: PPL agreed to sell 633 MW of Montana hydroelectric facilities to NorthWestern for $900 million, subject to adjustments, approvals and other closing conditions; closing was not expected before the second half of 2014. Forecast capital expenditures for 2014–2018 totaled $19.148 billion, including $2.433 billion classified as environmental.
- Environmental exposure: Environmental compliance spending and requirements remain uncertain. PPL projected $2.4 billion of environmental capital expenditures over five years, including $2.2 billion for LKE. EPA rules concerning coal ash, wastewater, cooling-water intakes, air emissions and greenhouse gases could raise costs, require plant modifications or contribute to retirements. Most Kentucky utility environmental compliance costs are eligible for recovery through regulatory mechanisms.
- Other key risks and contingencies: Competitive power-price declines, fuel availability and cost, plant outages, weather, regulatory cost recovery, U.K. pound exchange rates, pension funding, counterparty credit, collateral calls, cyber and physical security, litigation, and access to capital. WPD’s unresolved line-loss calculation exposure was estimated at $74 million to $213 million; the outcome remained uncertain.
- Audit and controls: Ernst & Young issued an unqualified opinion on PPL’s consolidated financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Reconcile reported earnings and EPS to special items, especially the Colstrip lease-termination charge, Corette impairment, tax benefits and the effect of the 2010 Equity Unit settlement on diluted shares.
- Check the status, final sale proceeds and regulatory approvals for the Montana hydroelectric divestiture, and how management used or planned to use the proceeds.
- Track competitive energy prices and Supply-segment margins, including the impairment sensitivity of the $2.7 billion Brunner Island and Montour asset group.
- Assess funding and regulatory recovery for the $19.148 billion five-year capital program, particularly Kentucky environmental projects and Pennsylvania transmission investment.
- Review debt maturities, refinancing and collateral requirements; PPL estimated that a downgrade below investment grade combined with a 10% adverse energy-price move could require about $406 million of additional collateral.
- Monitor the 2014 earnings outlook against actual segment results, WPD regulatory decisions and the unresolved legal, environmental and line-loss matters.