PPL Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Unaudited results are for PPL Corporation and subsidiaries; the filing also presents separate financial statements for PPL Energy Supply and PPL Electric. Dollar amounts below are in millions unless otherwise stated.
Financial results and position
| Metric | Q1 2010 | Q1 2009 / prior date |
|---|---|---|
| Operating revenue | $3,033 | $2,344 |
| Operating income | $492 | $412 |
| Net income attributable to PPL | $250 | $241 |
| Diluted EPS | $0.66 | $0.64 |
| Dividends declared per share | $0.350 | $0.345 |
| Cash from operating activities | $798 | $310 |
| Capital expenditures for property, plant and equipment | $283 | $270 |
| Cash and cash equivalents at March 31 | $1,724 | $801 at Dec. 31, 2009 |
| Short-term debt at March 31 | $589 | $639 at Dec. 31, 2009 |
| Long-term debt at March 31 | $7,652 | $7,143 at Dec. 31, 2009 |
Operating margin was approximately 16.2%, versus 17.6% in Q1 2009. Operating cash flow increased substantially, with a $351 million benefit from counterparty collateral movements among the reported cash-flow changes. Cash generation also reflected working-capital movements and should not be viewed as recurring earnings.
Business changes and comparison with prior period
- Total revenue rose about 29%, while net income attributable to PPL increased about 4%. Revenue growth reflected a changed mix of wholesale and retail energy sales, including the end of capped-rate supply arrangements in Pennsylvania at year-end 2009.
- Management said expiration of the Pennsylvania generation rate caps had a significant positive effect on PPL and PPL Energy Supply results, and expected the effect to continue during 2010. PPL Energy Supply sold more generation under wholesale and retail contracts at prevailing market prices; sales to PPL Electric under the prior affiliate arrangements declined.
- Domestic gross energy margins, a company-defined non-GAAP measure, increased to $743 million from $395 million. Eastern U.S. non-trading margins rose $326 million, primarily from higher realized prices compared with the expired PPL Electric supply contract. Economic activity was a significant offset to reported results.
- PPL Electric revenue declined to $813 million from $910 million and net income available to PPL fell to $37 million from $49 million. Lower revenue reflected transition-cost billing ending, customer migration to alternative suppliers, and lower demand; generation supply costs and recovery mechanisms also changed. Domestic gross delivery margins, a non-GAAP measure, decreased to $221 million from $237 million.
- International Delivery net income declined to $76 million from $87 million, despite higher U.K. utility revenue. Higher pension and other operating costs, interest expense and taxes weighed on earnings; a stronger pound supported reported results.
Outlook, material events and risks
- Outlook: Excluding special items, management projected higher 2010 Supply earnings, citing expected energy-margin growth based on hedged power and fuel prices and established PJM capacity prices. Higher depreciation, financing and operating costs were expected to offset part of the benefit. Management projected lower 2010 earnings for International Delivery and Pennsylvania Delivery. The filing provides no consolidated EPS guidance.
- Acquisition announced after quarter-end: On April 28, PPL agreed to acquire E.ON U.S. for about $2.1 billion cash, assume about $925 million of pollution-control bonds, and repay affiliate debt then estimated at $4.6 billion—approximately $7.6 billion total consideration, subject to adjustment. Closing was expected by year-end 2010, pending approvals. PPL secured a commitment for up to $6.5 billion of 364-day bridge financing as a backstop. A conditional $450 million termination fee may apply if the deal fails to close in specified circumstances.
- Unusual charge: Following a Montana Supreme Court decision, PPL recorded a $56 million pretax charge ($34 million after tax, or $0.09 per share) for hydroelectric streambed compensation related to current and prior years. PPL Montana’s total loss accrual was $65 million at quarter-end; future amounts may differ from estimates.
- Debt and liquidity: PPL’s cash balance increased by $923 million during the quarter. Cash sources included $798 million of operating cash flow, $597 million of long-term debt issuance and $124 million from the Long Island generation business sale. WPD subsidiaries issued £400 million of 5.75% notes due 2040, with approximately $593 million net proceeds. PPL reported $3.414 billion of unused domestic committed credit capacity, excluding WPD facilities.
- Other significant developments: PPL completed the Long Island generation business sale for approximately $124 million in February. PPL Electric filed for a distribution-rate increase of approximately $115 million, proposed effective January 1, 2011; the outcome remained uncertain. PPL Electric’s $51 million par-value preferred stock was redeemed in April for $54 million plus accumulated dividends.
- Key risks and contingencies: PPL cited wholesale energy prices, fuel supply and costs, weather, plant availability, customer demand, counterparty performance, foreign exchange, pension funding, credit ratings and regulatory changes. Environmental compliance costs could be significant and are not always estimable. The filing also discusses the Montana streambed litigation, a $130 million MISO claim in a PJM billing dispute (with outcome and allocation uncertain), and other legal and regulatory matters. PPL noted that a credit downgrade below investment grade could trigger additional collateral requirements; estimated additional collateral for specified contracts was $291 million.
- Ratings: In April, Moody’s downgraded PPL’s issuer rating to Baa3 from Baa2 and PPL Electric’s issuer rating to Baa2 from Baa1, while revising their outlooks to stable. Agencies also took other actions described in the filing; verify current ratings and outlooks independently.
Investor verification points
- Separate recurring operating performance from derivative fair-value movements and other special items; verify the nature and timing of economic-activity gains and losses.
- Assess whether Q1 operating cash flow is repeatable, particularly the effects of collateral and working-capital changes.
- Track financing, regulatory approvals, final consideration, integration plans and any rating effects related to the E.ON U.S. acquisition; confirm whether bridge financing is drawn or replaced.
- Follow the Montana hydroelectric litigation accrual and the PJM/MISO dispute, along with environmental obligations and potential compliance costs.
- Monitor Pennsylvania customer switching, demand, the proposed rate case and the effects of competitive supply procurement on PPL Electric.
- Review debt maturities, credit-facility availability, collateral triggers and planned capital expenditures; PPL projected total capital expenditures of $5.6 billion for 2010–2012.