PPL Corporation 10-Q Summary — Quarter Ended June 30, 2011
Reporting context: Unaudited results cover the three and six months ended June 30, 2011. PPL is an energy and utility holding company with regulated electricity and gas operations in the U.S. and U.K., as well as competitive generation and energy marketing. Comparisons with 2010 are materially affected by PPL’s November 2010 acquisition of LG&E and KU (LKE) and its April 1, 2011 acquisition of WPD Midlands. PPL included two months of WPD Midlands’ results in the quarter; LKE and WPD Midlands have no comparable 2010 results in PPL’s reported figures. LKE’s successor-period accounting also differs from predecessor accounting.
Key Financial Results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $2.489 billion | $1.473 billion | $5.399 billion | $4.479 billion |
| Operating income | $595 million | $226 million | $1.400 billion | $702 million |
| Net income attributable to PPL | $196 million | $85 million | $597 million | $335 million |
| EPS, diluted | $0.35 | $0.22 | $1.14 | $0.88 |
| Interest expense | $264 million | $131 million | $438 million | $242 million |
For the six months, cash provided by operating activities was $814 million, versus $572 million a year earlier. Investing activities used $6.299 billion, primarily reflecting the $5.763 billion cash acquisition of WPD Midlands and $1.003 billion of property, plant and equipment expenditures. Financing activities provided $5.847 billion, including $4.350 billion from long-term debt issuance and $2.266 billion from common stock issuance. Cash and cash equivalents ended the period at $1.269 billion, compared with $925 million at December 31, 2010.
At June 30, PPL reported $17.532 billion of long-term debt, $502 million of current maturities of long-term debt and $431 million of short-term debt. Total debt on that basis was approximately $18.5 billion, versus approximately $13.4 billion at year-end 2010. Current assets were $5.364 billion and current liabilities $4.593 billion. PPL also reported $163 million of short-term investments. Domestic credit facilities had $3.910 billion of unused capacity; WPD’s facilities had approximately $1.3 billion of unused capacity.
PPL declared a quarterly dividend of $0.35 per share, unchanged from the 2010 comparable quarter. In April, PPL issued 92 million common shares and 19.55 million equity units to help finance the WPD Midlands acquisition. Common shares outstanding were approximately 577.7 million at July 29, 2011.
Performance Changes and Business Developments
- Reported Q2 and first-half revenue and earnings increased substantially, but the acquisitions make reported growth an imperfect measure of underlying performance. The company said approximately 70% of its assets were in regulated businesses after the LKE and WPD Midlands acquisitions.
- Reported Q2 net income attributable to PPL rose 131% and first-half net income rose 78%. Management identified acquisition-related contributions, unrealized energy-market gains, the prior-year comparison and a spent-nuclear-fuel settlement among the factors affecting the change.
- Supply-segment earnings were $91 million in Q2 and $310 million for the first half, compared with $30 million and $167 million, respectively. PPL cited special items and the prior-year monetization of full-requirement sales contracts; underlying U.S. non-trading margins were lower.
- PPL Electric’s net income available to PPL increased to $36 million for Q2 and $88 million for the first half, from $16 million and $53 million. The January 2011 distribution-rate increase contributed to higher margins.
- LKE reported net income of $41 million for Q2 and $128 million for the first half. Management cautions that its successor and predecessor accounting bases are not directly comparable.
- WPD Midlands was acquired for $6.6 billion of enterprise consideration, including $5.8 billion cash consideration and approximately $800 million of assumed long-term debt. The preliminary allocation included $2.3 billion of goodwill; the purchase-price allocation remained subject to revision.
Outlook, Commentary, Risks and Unusual Items
Outlook: The filing provides segment-level expectations, not a consolidated EPS or revenue forecast. Excluding special items, management expected 2011 Kentucky Regulated earnings to be higher, including the benefit of rate increases; International Regulated earnings to be higher excluding acquired-business effects, supported by delivery revenue and currency, partly offset by taxes, depreciation and financing costs; and Pennsylvania Regulated earnings to be higher due to the January 2011 rate increase. Supply earnings were expected to be lower than in 2010, reflecting lower Eastern energy and capacity prices, higher average fuel costs, Susquehanna outages, higher taxes and operating costs.
Acquisition and integration: PPL incurred approximately $130 million of pre-tax WPD Midlands acquisition-related costs through June 30. A planned reorganization is expected to result in 600–800 employee departures; total separation costs could not yet be reasonably estimated but were not expected to exceed $140 million, primarily in the third and fourth quarters of 2011. PPL expected a $65–$75 million deferred tax benefit in Q3 2011 following U.K. tax-rate reductions enacted in July.
Generation and other unusual items: Cracked turbine blades led to extended outages at both Susquehanna nuclear units. PPL estimated a $60–$65 million after-tax 2011 earnings impact, including lost sales margins and repair costs. A settlement of spent-nuclear-fuel litigation generated approximately $50 million pre-tax in cash for costs through September 2009; PPL said it could also submit eligible annual claims through 2013. The Montana hydroelectric riverbed compensation case remained before the U.S. Supreme Court; PPL had an $81 million accrued loss at June 30 and did not expect material losses beyond amounts recorded.
Regulatory and environmental risks: LG&E and KU sought approval to spend and recover approximately $2.5 billion for coal-plant environmental upgrades. The filing described possible additional operating changes, unit retirements or replacement generation depending on EPA requirements, and noted that actual compliance costs could differ significantly from estimates. PPL’s projected capital expenditures totaled approximately $18.6 billion for 2011–2015. Other risks include uncertain rate-case outcomes, fuel and power prices, weather, plant availability, counterparty defaults, foreign-exchange movements, credit-market access and environmental rules. The Susquehanna-Roseland transmission project could be delayed to 2014 or later.
Liquidity and financing risks: A downgrade below investment grade could trigger collateral requirements. PPL estimated a maximum $490 million of additional collateral under relevant derivative and non-derivative contracts; PPL Energy Supply’s separate estimate was $359 million. PPL’s acquisition financing materially increased debt and included substantial equity issuance. The filing also notes that results for interim periods are subject to seasonality and are not necessarily indicative of full-year results.
Most Important Facts for Investors to Verify
- How much of reported earnings growth reflects acquired businesses, one-time items and mark-to-market effects versus recurring operating performance.
- The final WPD Midlands purchase-price allocation, realized integration benefits and actual restructuring costs compared with the stated $140 million ceiling.
- Susquehanna unit availability, repair costs and the realized earnings impact of the turbine-blade outages.
- Whether regulators approve timely recovery of the requested Kentucky environmental investments and how final EPA requirements affect capital spending, rates and possible plant retirements.
- Debt, interest costs, credit ratings, available facilities and potential collateral needs, including the effect of equity issuance on per-share results.
- Developments in the Montana hydroelectric litigation, the spent-fuel settlement claims and significant environmental or regulatory proceedings.