PPL Corporation — Q3 2014 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. PPL combines regulated electricity and gas utilities in the U.K., Pennsylvania and Kentucky with competitive generation and energy marketing. The filing is a combined report for PPL and five subsidiary registrants; figures below refer to consolidated PPL unless otherwise stated. Dollar amounts are in millions, except per-share data.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenues | $3,449 | $3,074 | $7,476 | $8,902 |
| Operating income | $869 | $846 | $2,289 | $2,257 |
| Net income attributable to PPL shareowners | $497 | $410 | $1,042 | $1,228 |
| Diluted EPS | $0.74 | $0.62 | $1.57 | $1.90 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $2,628 | $2,223 |
Operating margin, calculated as operating income divided by revenue, was approximately 25.2% for Q3 2014 versus 27.5% in Q3 2013, and 30.6% for the nine-month period versus 25.4% in 2013. These simple calculations reflect reported revenue volatility, including commodity-related derivative effects; they are not management’s non-GAAP margin measures.
At September 30, 2014, PPL reported cash and cash equivalents of $1,188, restricted cash of $274, total assets of $48,189 and total equity of $13,974. Debt included $1,099 of short-term debt, $235 due within one year and $20,522 of long-term debt. Cash from operating activities of $2,628 was below property, plant and equipment expenditures of $2,878. PPL paid $718 in common dividends during the nine months and declared a Q3 dividend of $0.3725 per share.
Material changes versus prior period
- Q3 revenue rose 12%, while nine-month revenue fell 16%. The nine-month comparison was heavily affected by competitive-energy and derivative accounting: PPL reported large cold-weather-related losses on energy sales derivatives and offsetting gains on energy purchase derivatives. Revenue movements should not be read as a direct measure of underlying demand or profitability.
- Q3 net income attributable to shareowners increased 21%; nine-month net income declined 15%. Q3 benefited from the swing in other income/expense, including economic foreign-currency contracts, which improved by $251 year over year. Nine-month results also reflected higher taxes, including a $49 deferred tax charge associated with the proposed Supply business separation, versus favorable tax items in 2013.
- Operating income increased modestly in both comparisons. Reported results varied by business: nine-month regulated-segment earnings were mixed, while Supply earnings fell sharply, from $122 to $16, reflecting weaker energy margins and special items.
- Operating cash flow increased $405 year over year, while investing outflows increased $186, primarily reflecting capital spending and restricted cash. Financing cash inflow decreased $547, in part because 2014 had lower net equity issuance and different debt and distribution activity.
Outlook, management commentary and significant items
- 2014 outlook: Management expected lower full-year earnings excluding special items versus 2013, primarily because of lower energy margins in Supply. It projected higher earnings for the U.K. and Pennsylvania regulated businesses, and lower earnings for Kentucky regulated operations and Supply. A specific consolidated EPS outlook is not clear in the provided filing text.
- Talen Energy transaction: PPL and Riverstone affiliates agreed to combine competitive generation businesses into Talen Energy. At completion, PPL shareowners were expected to own 65% and Riverstone affiliates 35%; PPL expected no continuing ownership or control. Closing was targeted for Q1 or Q2 2015, subject to regulatory and other conditions. PPL targeted $185 million in annual corporate support-cost reductions after any transition period. The transaction could incur further costs and a possible impairment at closing.
- Hydro sale: PPL Montana’s 633 MW hydroelectric facilities were classified as held for sale following regulatory approval. The $900 million sale price was subject to adjustments; net proceeds were estimated at $880 million, with closing expected in Q4 2014. The facilities contributed $10 million of PPL discontinued-operations income for the first nine months, versus $30 million in 2013. A separate $18 million pre-tax Kerr Dam impairment was recorded in Q1.
- Other unusual items: PPL recorded employee separation charges tied to the planned spin-off and restructuring; further $30–$40 million of award-related costs were estimated at transaction closing. Total third-party transaction costs were estimated at $60–$70 million. WPD recorded a $65 million increase to its line-loss refund liability; the total liability was $105 million at quarter-end, with refunds expected from 2015 to 2019. Q3 and nine-month Supply revenues also included $14 million and $17 million, respectively, of prior-period revenue-recognition adjustments that management said were not material.
- Regulatory and rate developments: LG&E and KU announced plans to seek base-rate increases in Kentucky, expected to be filed in November 2014 and, if approved, effective July 2015. PPL Electric’s proposed smart-meter replacement program was estimated at approximately $450 million, with deployment targeted by 2019, subject to regulatory approval.
- Risks and contingencies: Key exposures include commodity prices and hedging volatility, counterparty performance, credit-rating-related collateral demands, foreign exchange, generation outages, weather, rate recovery and substantial environmental rulemaking. Potentially significant or uncertain environmental matters include coal ash, wastewater discharge limits, greenhouse-gas rules, regional haze and litigation involving Colstrip and other plants. The filing states that outcomes and potential losses cannot be predicted or estimated in several matters.
Important facts for investors to verify
- Whether the Talen transaction received required approvals, met its financing conditions and closed on schedule; confirm final separation costs, tax treatment and any impairment.
- How much reported earnings and revenue volatility came from derivative fair-value movements, unusually cold weather and other nonrecurring items, versus recurring operating performance.
- Whether Supply’s lower energy and capacity margins, and PPL Energy Supply’s below-investment-grade credit ratings, affected liquidity, collateral needs or transaction financing.
- Progress and outcomes in Kentucky rate cases, PPL Electric’s smart-meter and storm-cost recovery proceedings, and KU’s municipal wholesale contracts and FERC proceedings.
- Final requirements and likely compliance costs for coal ash, wastewater, air-quality and greenhouse-gas regulations, as well as material environmental litigation and remediation.
- Whether cash generation continues to fund capital investment and dividends, given nine-month capital expenditures above operating cash flow and consolidated debt of about $21.9 billion at quarter-end.