PPL Corporation — Q1 2012 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2012; filed May 7, 2012. This combined, unaudited filing covers PPL Corporation and five subsidiaries. PPL operates regulated electricity delivery and generation businesses in the U.S. and U.K., alongside competitive energy generation and marketing. Results are compared with Q1 2011; the acquisition of WPD Midlands closed April 1, 2011, so Q1 2012 includes its results while the comparable quarter does not.
Key financial metrics
| PPL consolidated, $ millions except per-share data | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | 4,112 | 2,910 |
| Operating income | 1,051 | 805 |
| Net income attributable to PPL | 541 | 401 |
| Diluted EPS | $0.93 | $0.82 |
| Operating cash flow | 728 | 196 |
| Capital expenditures | 682 | 428 |
At March 31, PPL reported cash and cash equivalents of $1.103 billion, short-term debt of $674 million and long-term debt of $18.076 billion. Cash declined $99 million from year-end 2011. Operating cash flow benefited from working-capital movements, lower pension contributions and WPD Midlands cash flow; capital spending and common dividends of $203 million were significant uses of cash.
Reported revenue and earnings included substantial derivative fair-value effects: unrealized economic activity contributed $852 million of revenue and $591 million of energy-purchase expense. Management’s adjusted, after-tax energy-related economic activity was a $150 million gain, versus $17 million in Q1 2011. PPL’s net economic positions were an $816 million asset at quarter-end, compared with a $63 million liability at December 31, 2011.
Material changes versus the prior period
- PPL net income attributable to the company increased 35%, and diluted EPS rose from $0.82 to $0.93. Management attributed the increase in part to favorable economic-hedge mark-to-market results and the addition of WPD Midlands.
- WPD Midlands contributed $324 million of external revenue in the quarter; its operations had no comparable Q1 2011 contribution. PPL’s U.K. Regulated segment reported $165 million of attributable net income versus $55 million.
- Underlying competitive energy margins weakened: PPL’s non-GAAP Unregulated Gross Energy Margins fell $87 million to $584 million, mainly from lower Eastern U.S. energy and capacity prices. Regulated Kentucky and Pennsylvania margins also declined, with mild weather reducing demand.
- Cash from operations rose $532 million year over year, reflecting, among other items, $223 million less in defined-benefit plan contributions and favorable working-capital changes. The filing cautions that interim results may not indicate full-year performance.
Outlook, management commentary and key risks
- PPL did not provide a numeric consolidated full-year EPS forecast in the supplied filing text. Excluding special items, management expected 2012 earnings to be lower in the Kentucky Regulated, Pennsylvania Regulated and Supply segments, and higher in the U.K. Regulated segment, principally because of WPD Midlands and higher delivery revenue.
- PPL Electric sought an approximately $105 million distribution-rate increase, proposed to take effect January 1, 2013; the outcome remained uncertain. Pennsylvania Act 11, effective April 14, 2012, authorizes projected test years and, subject to conditions, a distribution system improvement charge.
- After quarter-end, Kentucky regulators approved a proposed 640 MW gas-fired Cane Run plant and the purchase of up to 495 MW of Bluegrass combustion turbines. FERC’s Bluegrass approval was conditional on acceptable market-power mitigation. The combined projects could require up to $800 million, with cost recovery expected in future rate proceedings.
- Environmental compliance is a major capital and operating risk. The filing estimates five-year environmental capital expenditures of $3.1 billion for LG&E and KU, subject to regulatory requirements and market conditions. Pending air, water and coal-ash rules could add costs; actual impacts were not clear.
- Other notable items: PPL completed the Ironwood acquisition in April 2012 for approximately $302 million enterprise consideration, including $217 million of debt assumed through consolidation; a $22 million SMGT receivable was fully reserved after contract termination effective April 1; and PPL Electric planned to redeem $250 million of preference stock in June 2012.
- Key exposures include energy-price and counterparty risk, environmental regulation, rate-case and project approvals, foreign-exchange movements, litigation, and financing access. A downgrade below investment grade could have required PPL to post or prepay an additional $527 million of collateral under relevant contracts.
- PPL disclosed that the Third Circuit had rejected its position that the U.K. Windfall Profits Tax qualified for U.S. foreign tax credit treatment; PPL was considering a Supreme Court petition. The filing reported no material change in risk factors from the 2011 Form 10-K.
Important facts for investors to verify
- Separate the $150 million after-tax adjusted economic-activity gain from recurring operating performance; assess the sensitivity and timing of derivative gains and losses.
- Review segment earnings and the year-over-year comparison excluding WPD Midlands, acquisition effects and other special items.
- Track liquidity and refinancing needs, including PPL Energy Supply’s $500 million commercial paper balance, the planned equity forward settlements, and subsidiary-level credit availability.
- Confirm final approvals, mitigation conditions, capital costs and future rate recovery for the Kentucky generation projects; monitor the delayed Susquehanna-Roseland transmission line, then expected in service in 2015.
- Monitor environmental compliance spending, the SMGT receivable recovery and resale economics, and the resolution of the U.K. tax-credit litigation.