Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, for PPL Corporation (PPL), PPL Energy Supply, LLC, and PPL Electric Utilities Corporation. PPL is an energy and utility holding company engaged in electricity generation, marketing, and delivery in the northeastern and western U.S., as well as regulated distribution in the U.K. The filing includes unaudited condensed consolidated financial statements for the three and six months ended June 30, 2008, compared to the same periods in 2007.
Key Financial Metrics (PPL Corporation)
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Operating Revenues | $2,550 million | $3,119 million |
| Operating Income | $873 million | $767 million |
| Net Income | $450 million | $548 million |
| Diluted EPS (Net Income) | $1.19 | $1.41 |
| Cash Provided by Operating Activities | $933 million | $619 million |
| Total Assets | $23,901 million | $19,972 million |
| Total Debt (Short-term + Long-term) | $7,690 million | $7,560 million |
| Cash and Cash Equivalents | $466 million | $567 million |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by $569 million (18%) compared to the prior year, primarily due to a significant decrease in wholesale energy marketing revenues driven by unrealized economic activity losses of $796 million in 2008 versus $99 million in 2007.
- Net Income Decrease: Net income fell by $98 million (18%). This was largely driven by a $68 million decrease in income from discontinued operations (Latin American businesses sold in 2007) and higher income tax expenses due to changes in tax reserves and the expiration of synthetic fuel tax credits.
- Balance Sheet Expansion: Total assets increased by $3.9 billion, primarily due to a $2.1 billion increase in "Price risk management assets" and a $1.2 billion increase in "Price risk management liabilities," reflecting mark-to-market adjustments on energy derivatives.
- Discontinued Operations: Results for the natural gas distribution and propane businesses are classified as discontinued operations following a definitive agreement to sell these assets in March 2008.
Guidance, Outlook, and Risks
- Supply Segment Outlook: PPL projects lower earnings for the Supply segment in 2008 compared to 2007, excluding special items, due to the loss of synthetic fuel tax credits and higher operating expenses for pollution control equipment (scrubbers). Energy margins are expected to be flat in 2008.
- International Delivery Outlook: Earnings are projected to decline in 2008 compared to 2007 due to the 2007 sale of Latin American businesses and higher U.S. income taxes, partially offset by lower U.K. pension expenses.
- Regulatory Risks (CAIR): A July 2008 court decision invalidated the EPA's Clean Air Interstate Rule (CAIR). PPL anticipates potential impairment of emission allowances with a combined book value of approximately $100 million and is reviewing its pollution control equipment installation plans.
- Montana Hydroelectric Litigation: A Montana court awarded approximately $34 million for prior years (2000-2006) and $6 million for 2007 regarding streambed use. PPL Montana intends to appeal the decision for prior years but has accrued the low end of the estimated range for 2007 and future years.
- PLR Contract Expiration: PPL Electric's fixed-price Provider of Last Resort (PLR) contract expires in 2009. Future earnings are constrained by the inability to fully recover rising fuel costs under the current contract structure.
Investor Verification Checklist
- Emission Allowance Impairment: Verify the timing and magnitude of potential impairment charges related to the CAIR court decision, which could impact Q3 2008 earnings.
- Discontinued Operations Closure: Confirm the closing date and final proceeds of the natural gas and propane business sale, expected before the end of 2008.
- Montana Litigation Appeal: Monitor the status of the appeal regarding the $34 million award for 2000-2006 streambed use, as PPL has not accrued a loss for this portion.
- 2010 Supply Procurement: Review the results of the remaining competitive solicitations for 2010 electricity supply, which will determine future customer rate increases.
- Auction Rate Securities: Assess the liquidity risk and fair value of auction rate securities ($21 million for PPL), which have failed to remarket and are classified as Level 3 assets.