PPL Corporation 2012 Form 10-K Summary
Business context and reporting period
This is PPL Corporation’s annual report for the fiscal year ended December 31, 2012, not a standalone quarterly filing. PPL is a diversified utility and energy holding company with regulated electricity and gas operations in the U.S. and U.K., alongside competitive U.S. generation and energy marketing. Its four segments are Kentucky Regulated, U.K. Regulated, Pennsylvania Regulated and Supply. About 71% of assets and 73% of net income attributable to shareowners came from regulated businesses in 2012.
Comparisons reflect recent acquisitions: 2012 includes a full year of WPD Midlands, acquired in April 2011; 2011 includes eight months. LKE, acquired in November 2010, is included for a full year in both 2012 and 2011. These acquisition effects limit comparability with earlier periods.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenues | $12.286 billion | $12.737 billion | Down 3.5% |
| Operating income | $3.109 billion | $3.101 billion | Up 0.3% |
| Net income attributable to PPL shareowners | $1.526 billion | $1.495 billion | Up 2.1% |
| Diluted EPS | $2.60 | $2.70 | Down 3.7% |
| Operating cash flow | $2.764 billion | $2.507 billion | Up 10% |
| Cash and cash equivalents at year-end | $901 million | $1.202 billion | Down $301 million |
| Short-term debt | $652 million | $578 million | Up $74 million |
| Long-term debt | $19.476 billion | $17.993 billion | Up $1.483 billion |
| Total assets | $43.634 billion | $42.648 billion | Up $986 million |
PPL used $3.105 billion for property, plant and equipment expenditures in 2012, versus $2.487 billion in 2011. Operating cash flow less PP&E expenditures was negative $341 million; this simple measure excludes other investing activity. Year-end current assets were $5.068 billion and current liabilities $5.625 billion. Management said liquidity was adequate, citing operating cash flow, cash, credit facilities and commercial paper access. Domestic committed credit facilities totaled $4.698 billion, with $3.743 billion unused; WPD had approximately $1.4 billion of unused capacity.
Fourth-quarter 2012 operating revenues were $3.222 billion and net income attributable to PPL shareowners was $359 million; diluted EPS was $0.60. The filing reports quarterly results as unaudited and cautions that seasonality and weather can affect comparisons.
Material changes versus the prior comparable period
- Supply segment earnings fell 47%, to $414 million from $776 million. Unregulated Gross Energy Margins declined $197 million as weak power prices and lower capacity prices pressured margins; the western U.S. also faced lower volumes, including the effect of SMGT’s bankruptcy.
- Kentucky Regulated earnings declined 20%, to $177 million, with lower margins, higher operating costs and losses related to EEI contributing. Pennsylvania Regulated earnings decreased 24%, to $132 million, despite higher transmission margins; mild weather and higher operating costs weighed on results.
- U.K. Regulated earnings rose to $803 million from $325 million, reflecting a full year of WPD Midlands in 2012 versus eight months in 2011, along with tax and other special items. The comparison is not like-for-like.
- Operating cash flow increased by $257 million, partly reflecting the additional four months of WPD Midlands activity. Investing cash outflow fell substantially from 2011, when PPL spent $5.8 billion to acquire WPD Midlands.
Outlook, commentary, risks and unusual items
- 2013 outlook: Management expected higher earnings, excluding special items, in Kentucky, U.K. and Pennsylvania regulated segments, mainly from rate increases and transmission or environmental investment returns. It projected lower Supply segment earnings, citing lower energy prices, higher fuel and operating costs, depreciation and financing costs; higher capacity prices and nuclear output were expected to partly offset these pressures. The filing does not provide a clear consolidated 2013 earnings or EPS guidance figure.
- Investment and financing: PPL projected approximately $18.5 billion of capital expenditures for 2013–2017, including substantial distribution, transmission and environmental spending. It planned approximately $2.0 billion of long-term debt issuance in 2013, subject to market conditions. The 2010 equity purchase contracts were expected to produce $1.15 billion through common-stock issuance in 2013. PPL declared $1.44 per share in dividends for 2012 and announced a 2013 annualized rate of $1.47; future dividends remain at the board’s discretion.
- Operating and environmental risks: Persistently low wholesale prices shifted competitive generation from coal to gas, raising the risk of excess coal inventory. PPL recorded $29 million of pretax charges to reduce contracted coal deliveries. Kentucky utilities forecast about $2.3 billion of environmental investment over five years and anticipated retiring 726 MW of coal capacity by 2015; KU also retired a 71 MW unit in February 2013. PPL planned to place its Corette plant in long-term reserve beginning in April 2015. Environmental rules, regulatory recovery, outages, severe weather, fuel costs, market prices, pension funding, credit access and foreign exchange were identified as material risks.
- Notable items and contingencies: KU recorded a $25 million pretax impairment of its EEI investment ($15 million after tax), reducing its carrying value to zero. A $75 million deferred tax benefit was recognized from U.K. tax-rate changes. PPL Electric incurred $81 million of 2012 storm restoration costs, including $66 million from Hurricane Sandy; it recorded a $28 million regulatory asset and sought recovery subject to regulatory approval. PPL EnergyPlus’s SMGT bankruptcy claim was approximately $375 million, including a $21 million receivable that was fully reserved; no recovery was recorded.
- Legal and credit exposure: PPL’s U.K. Windfall Profits Tax case was before the U.S. Supreme Court, with an outcome not predictable. A downgrade below investment grade could trigger additional collateral requirements; PPL estimated $501 million of potential additional collateral on covered contracts at year-end. The Susquehanna nuclear plant’s turbine-blade issues affected after-tax earnings by approximately $53 million in 2012, and further outages were anticipated in 2013.
- The independent auditor issued an unqualified opinion on PPL’s consolidated financial statements and internal controls. Management reported effective disclosure controls and financial-reporting controls at year-end.
Important facts for investors to verify
- Reconcile reported earnings with segment special items, particularly U.K. tax benefits and line-loss adjustments, and assess how much of the 2012 result is recurring.
- Check whether regulated rate increases and proposed Pennsylvania cost-recovery mechanisms were implemented as expected, and whether storm costs were ultimately recovered.
- Monitor wholesale power prices, Supply margins, coal contract obligations and the earnings impact of Susquehanna outages and the Corette reserve plan.
- Track the timing, cost and regulatory recovery of the $18.5 billion capital program, including environmental and major transmission projects, and the resulting debt and equity financing needs.
- Follow the SMGT bankruptcy recovery, the Windfall Profits Tax litigation, the WKE indemnification matter and other environmental or regulatory proceedings.
- Review debt maturities, credit ratings and collateral triggers, as well as pension assumptions and funding needs; compare actual liquidity and dividends with management’s stated plans.