PPL Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The combined filing covers PPL Corporation and five subsidiaries; figures below focus on PPL consolidated unless noted. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context and reporting period
PPL operates regulated electricity delivery and generation businesses in the U.S. and U.K., alongside competitive energy supply and marketing. After acquiring LG&E and KU in November 2010 and WPD Midlands in April 2011, management said about 70% of PPL’s assets were in regulated businesses. Comparisons with 2010 are not fully like-for-like: LKE was not consolidated in the prior-year periods, WPD Midlands contributed only from its acquisition date, and PPL Energy Supply distributed PPL Global to its parent in January 2011.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $3,120 | $2,179 | $8,519 | $6,658 |
| Operating income | $767 | $522 | $2,167 | $1,224 |
| Net income attributable to PPL | $444 | $248 | $1,041 | $583 |
| Diluted EPS | $0.76 | $0.51 | $1.91 | $1.40 |
| Dividends declared per share | $0.35 | $0.35 | $1.05 | $1.05 |
For the nine months, operating cash flow was $1,846 versus $1,696; capital expenditures were $1,685. Cash and cash equivalents at September 30 were $1,511, up from $925 at year-end 2010. Total assets were $40,956 and total equity $11,116, compared with $32,837 and $8,478, respectively, at year-end.
At September 30, debt comprised $17,675 of long-term debt, $502 of current long-term debt and $428 of short-term debt. Long-term debt had been $12,161 at December 31, 2010. PPL reported $3,879 of unused capacity under domestic credit facilities and approximately $1.3 billion of unused WPD facilities. Current assets were $5,412 and current liabilities $4,540.
Material changes versus the prior comparable period
- Revenue and earnings rose substantially, reflecting the acquisitions and changes in business mix as well as operating results. PPL reported 79% higher net income attributable to PPL for both the quarter and nine-month period.
- Supply economics weakened: unregulated gross energy margins fell $64 in Q3 and $264 for the nine months, primarily due to lower Eastern U.S. energy and capacity prices, generation-volume changes, higher coal costs and the sale of non-core facilities. PPL Energy Supply’s own net income was $169 for Q3 versus $265 and $472 for nine months versus $551.
- PPL’s cash flow from operations increased $150 year over year for the nine months, but included cash contributions from the acquired regulated businesses. Lower gross energy margins, reduced counterparty collateral receipts and $249 of prior-year proceeds from monetizing energy contracts partly offset operating cash flow.
- Long-term debt increased following the WPD Midlands acquisition and its financing. PPL issued $2,328 of common stock and raised $5,245 from long-term debt issuance during the nine months.
Outlook, management commentary, risks and unusual items
- Outlook: The filing text provided does not state a quantified consolidated PPL earnings or EPS forecast. Segment commentary anticipated higher 2011 earnings for the regulated businesses, excluding special items and acquisition effects, but lower Supply earnings, principally due to weaker energy margins, higher average fuel costs, nuclear outages, taxes and operating costs.
- WPD Midlands: The acquisition’s enterprise consideration was $6.6 billion, including $5.8 billion cash consideration and approximately $800 million of debt assumed. Preliminary goodwill was $2.4 billion. PPL had recorded $84 million of expected separation benefits, within a total estimated $102 million; the purchase price allocation remained preliminary.
- Unusual earnings items: PPL recognized a $69 million deferred tax benefit from U.K. tax-rate reductions in Q3. The Susquehanna Unit 1 and 2 turbine blade inspections and replacements extended outages; the after-tax earnings impact was $63 million for the nine months. A DOE settlement produced $50 million pre-tax for spent-fuel storage costs, with $56 million credited to fuel expense in the nine-month period.
- Environmental investment and regulation: LG&E and KU sought approval to recover $2.5 billion of proposed environmental upgrades. They also sought approval for a 640 MW gas-fired plant and the purchase of up to 495 MW of gas turbines, with combined anticipated capital costs of up to $800 million. Planned retirements of 797 MW of coal capacity were tied to replacement generation and environmental requirements. Outcomes and cost recovery remained subject to regulatory approval.
- Other risks and contingencies: PPL Electric reported $59 million of storm restoration costs for the nine months, net of insurance recoveries in reported expenses; a request to defer $15–20 million for future recovery was filed after quarter-end. A severe late-October snowstorm caused additional damage whose costs were still being assessed. PPL also disclosed environmental compliance uncertainty, pending litigation including Montana hydroelectric compensation before the U.S. Supreme Court, and potential collateral calls if credit ratings fall below investment grade.
- Counterparty exposure: PPL’s net energy-trading credit exposure after netting and collateral was $766 million at September 30. The largest counterparty subsequently filed for Chapter 11 bankruptcy; its receivable, net of collateral, was not significant at quarter-end, but exposure under long-term contracts remained a risk.
Most important facts for investors to verify
- How much of reported earnings growth reflects acquired businesses, recurring operations, tax benefits, settlements and other special items.
- The final WPD Midlands purchase price allocation, goodwill, integration costs and realization of expected savings.
- Actual capital spending and regulatory recovery for the proposed Kentucky environmental upgrades and replacement generation.
- The financial effect of the Susquehanna turbine outages, subsequent storm restoration costs and any approved regulatory deferrals.
- Developments in the largest trading counterparty’s bankruptcy, PPL’s net exposure and collateral requirements.
- Debt maturities, refinancing plans, credit-rating developments and the continued availability of committed facilities.