PPL Corporation — Q2 2014 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2014; financial statements are unaudited. PPL combined results include regulated utilities in the U.K., Pennsylvania and Kentucky, as well as competitive generation and energy marketing through PPL Energy Supply. Comparisons below are with the second quarter or first half of 2013, as indicated.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $2.874bn | $3.450bn | $4.097bn | $5.907bn |
| Operating income | $718m | $758m | $1.433bn | $1.451bn |
| Net income attributable to PPL shareowners | $229m | $405m | $545m | $818m |
| Diluted EPS | $0.34 | $0.63 | $0.83 | $1.28 |
| Operating cash flow | Not presented separately for Q2 | $1.583bn | $947m |
Six-month capital spending on property, plant and equipment was $1.854bn, exceeding operating cash flow by $271m before other investing activity. Cash and cash equivalents were $1.269bn at June 30, up from $1.102bn at year-end 2013. Short-term debt was $808m, current maturities of long-term debt $304m, and long-term debt $20.819bn—approximately $21.931bn in total debt. Current assets were $5.537bn and current liabilities $5.156bn. Quarterly dividends declared were $0.3725 per share.
Management’s non-GAAP gross-margin measures rose year over year: Kentucky gross margins were $428m for Q2 and $936m for six months; Pennsylvania gross delivery margins were $270m and $592m; unregulated gross energy margins were $452m and $936m, respectively. These measures are not GAAP operating income.
Material changes versus comparable periods
- Consolidated revenue fell 17% in Q2 and 31% in the first half; net income declined 43% and 33%, respectively. Diluted EPS fell 46% and 35%.
- Competitive Supply segment earnings were $5m in Q2 versus $77m, and a $70m first-half loss versus $31m of earnings. The six-month period included unusually large offsetting unrealized commodity-sale losses and purchase gains associated with extreme first-quarter cold-weather markets.
- Regulated segment earnings were stronger: Kentucky reported $58m in Q2 and $165m for six months, versus $49m and $134m; Pennsylvania reported $52m and $137m, versus $45m and $109m. U.K. regulated earnings declined to $187m and $393m, versus $245m and $558m.
- Cash from operations increased $636m year over year in the first half. Management attributed the change in part to lower defined-benefit plan funding (cash outflow of $218m versus $468m) and working-capital movements; it should not be read as solely an improvement in recurring earnings.
Outlook, commentary, risks and unusual items
- 2014 outlook: PPL expected lower full-year earnings excluding special items versus 2013, principally because of lower energy margins in Supply. Management expected higher U.K. and Pennsylvania regulated earnings, but lower Kentucky regulated earnings, excluding special items. No specific consolidated EPS guidance value is provided in the supplied filing text.
- Planned Talen Energy transaction: PPL planned to spin off PPL Energy Supply and combine it with Riverstone-affiliated generation assets. PPL shareowners were to own 65% of the new company and Riverstone affiliates 35%; closing was expected in Q1 or Q2 2015, subject to approvals and other conditions. PPL targeted $185m in annual corporate support-cost reductions after transition, including $75m of savings from workforce and other cost reductions. Separation costs could be material and were not estimable; at least $26m of additional transaction costs were expected at closing.
- The transaction announcement led to $46m of deferred tax expense and $16m of third-party transaction costs in the first half. PPL said an impairment at the spin-off date remained possible but could not be predicted.
- PPL Energy Supply’s credit ratings were downgraded below investment grade during Q2. The downgrade resulted in $176m of additional collateral posted by June 30; the filing reported adequate facility capacity and access to capital markets at that date.
- Other notable items included an $18m pretax ($10m after-tax) Kerr Dam impairment and a $65m increase in WPD’s line-loss accrual, bringing the customer-refund liability to $106m. PPL Electric also issued $300m of 4.125% first-mortgage bonds; PPL issued 31.7m shares to settle purchase contracts and received $978m net proceeds.
- Risks include volatile commodity prices and hedging results, generation outages and counterparties, weather, credit and collateral requirements, regulatory proceedings, and significant environmental compliance uncertainty. The filing says potential costs from coal-combustion residual and wastewater rules could be significant or material; several environmental claims and rate matters remained unresolved.
Important facts for investors to verify
- Whether the Talen Energy transaction received required regulatory approvals, met its financing and other closing conditions, and closed on the expected timeline; also verify ultimate separation costs and realized savings.
- How much of the first-half Supply loss reflects timing-sensitive, unrealized commodity marks versus realized operating performance, and how the hedge position and collateral needs evolve.
- Whether PPL Energy Supply’s below-investment-grade ratings or further market movements trigger additional collateral, liquidity pressure or financing costs.
- Progress and potential financial exposure from environmental proceedings, the WPD line-loss appeal, utility rate cases, and KU municipal contract terminations.
- How capital spending, debt issuance, pension funding and dividends affect free cash flow and leverage; first-half operating cash flow less PP&E spending was negative $271m.