PPL Corp 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, 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. and the U.K. The reporting period reflects the impact of the global financial crisis, volatile energy markets, and significant strategic divestitures.
Key Financial Metrics (PPL Corporation Consolidated)
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|---|
| Total Operating Revenues | $1,673 million | $4,024 million | $2,530 million |
| Net Income (Loss) Attributable to PPL | $(7) million | $234 million | $450 million |
| Diluted EPS | $(0.02) | $0.62 | $1.19 |
| Operating Cash Flow | N/A | $568 million | $933 million |
| Cash and Cash Equivalents | $973 million | $973 million | $466 million |
| Total Debt (Short-term + Long-term) | $7,710 million | $7,710 million | $7,838 million |
Material Changes vs. Prior Period
- Revenue Surge: Total operating revenues increased significantly year-over-year (6 months: $4.02B vs $2.53B) primarily due to unrealized gains from economic activity in wholesale energy marketing ($240 million gain in 2009 vs $796 million loss in 2008) and higher realized wholesale energy marketing revenues.
- Earnings Decline: Despite higher revenues, net income attributable to PPL dropped 48% for the six-month period ($234M vs $450M). This was driven by a $32 million loss from discontinued operations (Long Island and Maine hydro sales) and special items totaling $96 million in after-tax charges.
- Discontinued Operations: PPL reclassified the Long Island generation business and the majority of the Maine hydroelectric generation business as discontinued operations. A $52 million pre-tax impairment charge was recorded for the Long Island assets held for sale.
- Workforce Reduction: A one-time charge of $22 million ($13 million after-tax) was recorded in Q1 2009 for the elimination of approximately 200 management and staff positions.
Guidance, Outlook, and Risks
- Supply Segment Outlook: Excluding special items, PPL projects higher earnings for the Supply segment in 2009 compared to 2008, driven by higher expected baseload generation and marketing margins, despite higher coal costs.
- International Delivery Outlook: Earnings are projected to be lower in 2009 due to unfavorable foreign currency exchange rates (GBP/USD averaged $1.46 in 2009 vs $1.98 in 2008).
- Pennsylvania Delivery Outlook: Earnings are projected to be lower due to higher financing costs, lower delivery revenues, and the divestiture of gas/propane businesses.
- Divestitures: PPL expects to close the sale of the Long Island generation business and the majority of the Maine hydroelectric business in 2009. The Maine sale is expected to result in an after-tax gain of $26 million to $35 million.
- Key Risks:
- Regulatory: Uncertainty regarding Pennsylvania rate caps expiring in 2009 and potential legislative extensions; FERC transmission rate proceedings.
- Environmental: Potential costs associated with new EPA regulations on mercury, carbon dioxide, and regional haze; ongoing litigation regarding Montana hydroelectric streambed leases.
- Market: Volatility in wholesale energy prices and credit risk exposure to counterparties.
Investor Verification Checklist
- Discontinued Operations: Verify the final sale price and closing dates for the Long Island and Maine hydroelectric assets to confirm the realized gain/loss versus the current impairment charges.
- Unrealized Gains: Scrutinize the $240 million unrealized gain from economic activity in wholesale energy marketing; assess the likelihood of these gains being realized given market volatility.
- Regulatory Rate Caps: Monitor Pennsylvania legislative developments regarding the extension of generation rate caps beyond December 31, 2009, which could materially impact PPL Electric's revenue recovery.
- Environmental Liabilities: Review the status of the Montana hydroelectric litigation and the potential capital expenditures required for new EPA mercury and carbon regulations.
- Debt Refinancing: Confirm the successful refinancing of the $486 million Senior Secured Bonds due August 2009, partially funded by the May 2009 issuance of $300 million in new bonds.