PPL Corporation — Q2 2013 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The combined filing covers PPL Corporation and five subsidiaries; interim financial statements are unaudited. Unless otherwise noted, amounts are in millions of dollars.
Business context
PPL is an energy and utility holding company with regulated electricity and gas delivery businesses in the U.S. and U.K., alongside competitive generation and energy marketing. Its reported segments are Kentucky Regulated, U.K. Regulated, Pennsylvania Regulated, Supply, and Corporate and Other.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $3,450 | $2,549 | $5,907 | $6,661 |
| Operating income | $758 | $572 | $1,451 | $1,623 |
| Net income attributable to PPL shareowners | $405 | $271 | $818 | $812 |
| Basic / diluted EPS | $0.68 / $0.63 | $0.46 / $0.46 | $1.39 / $1.28 | $1.39 / $1.39 |
| Operating cash flow | Not separately presented for the quarter | $947 | $947 |
- Q2 revenue rose 35% and net income rose 49% year over year; first-half revenue fell about 11%, while net income was nearly unchanged. First-half operating income declined about 11%.
- Q2 reported results included large fair-value movements in commodity derivatives: unrealized energy revenue activity was a $590 gain versus a $458 loss a year earlier, while related unrealized energy-purchase expense was $479 versus a $442 benefit. These non-cash movements make reported quarterly comparisons volatile.
- First-half capital expenditures were $1,797, up from $1,309. Cash and equivalents were $711 at June 30, down from $901 at year-end 2012. Operating cash flow was unchanged year over year at $947.
- At June 30, short-term debt was $1,206, current maturities of long-term debt $751, and long-term debt $18,875. Combined debt on these balance-sheet lines was approximately $20.8 billion, compared with $20.1 billion at year-end 2012. Total equity was $10,954.
- Liquidity included $3,327 of unused domestic committed credit capacity and approximately $1.3 billion equivalent of unused WPD committed capacity, as reported in MD&A.
- Quarterly dividend declared was $0.3675 per share; the six-month declared amount was $0.735 per share.
Material changes and segment performance
- Regulated businesses improved: first-half net income attributable to PPL was $134 in Kentucky Regulated versus $76 in 2012, $558 in U.K. Regulated versus $361, and $109 in Pennsylvania Regulated versus $62.
- Supply weakened for the first half: segment net income was $31 versus $313. Unregulated Gross Energy Margins declined $195 to $882, chiefly because of lower baseload wholesale prices; management cited lower energy prices as a continuing pressure. Q2 Supply segment earnings were $77 versus $12, a result affected by derivative fair-value swings.
- New Pennsylvania and Kentucky base rates took effect January 1, 2013. The Kentucky settlement authorized annual base-rate increases of $34 for LG&E electricity, $51 for KU electricity and $15 for LG&E gas; Pennsylvania approved about $71 of annual distribution revenue increases.
- First-half capital spending increased mainly for the Susquehanna-Roseland transmission line, distribution reliability work, Kentucky environmental projects and construction of Cane Run Unit 7.
Outlook, unusual items and risks
- Management gave directional, not consolidated numerical, 2013 outlook in the supplied filing text: earnings were projected higher for the regulated segments and lower for Supply versus 2012, excluding special items. Supply faced lower energy prices, higher fuel costs, depreciation and financing costs.
- The U.S. Supreme Court’s May 2013 ruling that the U.K. Windfall Profits Tax was creditable produced a $44 income tax benefit in the first half, including $19 of interest. A July 2013 U.K. tax-rate reduction was expected to generate a further $90–$100 deferred tax benefit in Q3.
- A $10 loss on extinguishment of debt was recorded in Q2 following the remarketing and exchange of PPL Capital Funding junior subordinated notes. In July, PPL issued 40 million shares to settle 2010 Purchase Contracts, receiving net proceeds of $1.15 billion for debt repayment and general corporate purposes; this subsequent issuance was not included in June 30 balances.
- WPD’s potential exposure on the U.K. line-loss incentive/penalty matter was estimated at $97–$251; PPL recorded a $97 liability at June 30 and increased it by $24 during the quarter and first half.
- A pending FERC accounting-waiver/audit matter for PPL Electric could affect its formula-rate revenue requirement by $0–$40 pre-tax; the outcome was not known. Its proposed storm damage rider also remained pending, and the approved DSIC rate effective July 1 was subject to refund after hearings.
- Environmental rules and proceedings pose potentially significant, unquantified costs, including coal-combustion residuals, wastewater discharge limits, cooling-water intake requirements, greenhouse-gas standards and air-quality compliance. LKE projected $2.1 billion of environmental-related capital investment over five years and planned retirement of five coal units totaling 726 MW by 2015.
- PPL Energy Supply planned to place the Corette plant in long-term reserve beginning April 2015; its carrying amount was $68, with future impairment considered reasonably possible. Separately, a July 2013 Colstrip Unit 4 generator outage was estimated to cost $30–$40 to repair and to reduce PPL Montana earnings by $5–$10 pre-tax.
- Other material uncertainties include environmental litigation, the Susquehanna turbine-blade work and generation availability, commodity prices, weather, counterparty performance, foreign exchange and pension funding. Management stated interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- How much of quarterly Supply earnings came from non-cash derivative valuation changes versus realized operating margins, and whether those gains reverse.
- Execution of regulated capital programs, recovery through rates, and the outcomes of the FERC formula-rate matter, Pennsylvania DSIC hearings and storm-cost recovery proceedings.
- Updates to the $97–$251 WPD line-loss exposure and potential environmental compliance, remediation and litigation costs.
- Cash flow, capital spending, debt and available credit capacity after the July $1.15 billion equity issuance and subsequent financing actions.
- Whether lower wholesale prices, plant availability and environmental requirements alter Supply’s outlook, Corette plans or the projected retirements and investments in Kentucky.
- The Q3 recognition and amount of the expected $90–$100 U.K. deferred tax benefit, and the effect of the 2010 Purchase Contract share issuance on dilution.