PPL Corporation — 2011 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2011. This combined filing covers PPL Corporation and five subsidiaries. PPL operates regulated electric and gas utilities in the U.S. and U.K., alongside competitive U.S. generation and energy marketing. The filing includes fourth-quarter data, but is an annual report rather than a standalone quarterly filing.
PPL completed its acquisition of U.K. distributor WPD Midlands on April 1, 2011, for $5.8 billion in cash and assumed $800 million of long-term debt. LKE, the parent of Kentucky utilities LG&E and KU, was acquired in November 2010; consequently, 2011 includes a full year of LKE results versus two months in 2010. PPL says these acquisition effects make year-to-year comparisons less comparable.
Key financial results
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Operating revenue | $12.737 billion | $8.521 billion | Up 49%, substantially reflecting acquisitions |
| Operating income | $3.101 billion | $1.866 billion | Up 66% |
| Net income attributable to PPL | $1.495 billion | $938 million | Up 59% |
| Diluted EPS | $2.70 | $2.17 | Up 24%; includes special items |
| Net cash from operating activities | $2.507 billion | $2.033 billion | Up $474 million |
| Net cash used in investing activities | $7.952 billion | $8.229 billion | Includes WPD Midlands acquisition spending |
| Net cash from financing activities | $5.767 billion | $6.307 billion | Included debt and equity financing |
| Cash and cash equivalents | $1.202 billion | $925 million | Year-end balances |
| Short-term debt | $578 million | $694 million | Year-end balance |
| Long-term debt | $17.993 billion | $12.663 billion | As presented in selected financial data |
Year-end total assets were $42.648 billion, versus $32.837 billion in 2010; common equity was $10.828 billion, versus $8.210 billion. PPL reported $1.218 billion in cash and short-term investments combined. It had $3.719 billion of unused domestic credit-facility capacity and approximately $1.1 billion of unused WPD capacity. Management expected adequate liquidity from operating cash flow, cash and credit facilities.
Fourth-quarter 2011 revenue was $4.218 billion, operating income $934 million, net income attributable to PPL $454 million and diluted EPS $0.78. Fourth-quarter 2010 net income attributable to PPL was $355 million and diluted EPS was $0.73; revenue comparisons are affected by the acquisitions.
Material changes versus comparable periods
- PPL’s regulated operations grew as a share of the business following the LKE and WPD Midlands acquisitions; management said approximately 70% of assets were regulated after the acquisitions.
- International Regulated segment earnings were $325 million in 2011, including WPD Midlands. Its contribution included $281 million of WPD Midlands earnings and $192 million of after-tax acquisition-related costs.
- Kentucky Regulated segment earnings were $221 million, compared with $26 million in 2010, which included only two months of LKE results.
- Supply segment earnings were $776 million, up from $612 million, but unregulated gross energy margins fell $405 million to $2.365 billion. Lower baseload prices, reduced generation volumes and outages weighed on margins; special items materially affected reported results.
- PPL Electric earnings attributable to PPL increased to $173 million from $115 million, supported in part by a distribution rate increase effective January 2011. Its reported revenue declined as customers increasingly selected alternative electricity suppliers; supply costs are generally passed through to customers.
- Operating cash flow rose despite lower competitive energy margins, reflecting acquired businesses and working-capital changes. Investing cash outflows included the $5.8 billion WPD Midlands acquisition and increased capital expenditures.
Outlook, management commentary, risks and unusual items
For 2012, management projected lower earnings in Kentucky Regulated, Pennsylvania Regulated and Supply, excluding special items. International Regulated earnings were projected higher, primarily from a full year of WPD Midlands and higher delivery revenue, partly offset by higher costs, taxes, financing costs and less favorable currency exchange rates. These are qualitative outlook statements; the filing text does not provide a clear company-wide numerical earnings guidance range.
- PPL declared a $1.40 annualized common dividend for 2011; in February 2012 it raised the annualized rate to $1.44. Future dividends remain subject to Board discretion and financial, legal and cash-flow conditions.
- Management projected approximately $18.7 billion of capital expenditures for 2012–2016. The plan includes infrastructure, generation and environmental work. Kentucky regulators approved approximately $2.3 billion of LG&E and KU environmental upgrades for 2012–2016, with recovery through the environmental cost recovery mechanism; some replacement-generation costs are expected to require future rate recovery.
- In April and May, turbine-blade inspections and replacements extended outages at both Susquehanna nuclear units by about six weeks each; the reported after-tax earnings impact was $63 million.
- A 2011 settlement with the U.S. Government provided PPL Susquehanna $50 million pre-tax for spent-fuel storage costs through September 2009, recorded as a fuel-expense credit. Annual claims may be submitted for certain later costs through December 2013; PPL waived related claims through that date.
- WPD Midlands acquisition-related costs were $258 million pre-tax in 2011, including separation benefits. PPL recorded $2.4 billion of goodwill from the acquisition.
- SMGT, a Montana wholesale customer, filed for Chapter 11 protection. PPL reserved its approximately $11 million contract-damage claim in full; collection and the future of the supply contract were uncertain.
- Environmental regulation remains a major risk. CSAPR implementation was stayed pending litigation, with CAIR remaining in effect; the outcome and compliance timing could change costs. PPL also faces MATS and other evolving air, water and waste rules. Management’s environmental cost estimates may change with final requirements.
- Ofgem was reviewing the methodology behind WPD’s $170 million liability for prior-period line losses; potential methodology changes could reduce the liability, but the outcome was uncertain.
- In February 2012, the U.S. Supreme Court overturned a Montana hydroelectric riverbed ruling and remanded the case. PPL Montana reversed an $89 million accrual; it said a loss remained reasonably possible but could not estimate a range and did not expect any loss to be material.
- Other key exposures include commodity price and counterparty risk, weather and outages, pension and health costs, foreign-currency movements, regulatory cost recovery, nuclear safety and spent-fuel storage, litigation, credit ratings and access to financing. A below-investment-grade downgrade combined with adverse energy-price movements could trigger substantial collateral requirements.
The independent auditor gave an unqualified opinion on PPL’s consolidated financial statements and internal control over financial reporting. Management excluded WPD Midlands from its internal-control evaluation because of acquisition integration; a December 2011 systems migration is expected to affect primarily 2012 reporting.
Important facts for investors to verify
- How much 2011 earnings growth reflects acquisitions and special items versus recurring operating performance; review segment results and the company’s non-GAAP margin reconciliations.
- Whether WPD Midlands integration delivers the expected efficiencies, and how its $2.4 billion of goodwill and $170 million line-loss liability develop.
- Whether competitive power prices, generation volumes and fuel costs support the Supply segment’s earnings and cash flow outlook.
- Progress, final costs and rate recovery for the $2.3 billion approved Kentucky environmental program, proposed generation projects and the broader capital plan.
- Debt maturities, refinancing needs, credit-facility availability and potential collateral calls; reconcile reported debt classifications with the balance sheet and debt notes.
- Outcomes of CSAPR and other environmental rulemakings, the SMGT bankruptcy and contract, the Montana litigation remand, and other material proceedings.
- Whether the WPD Midlands control-system integration and related controls remain effective as the company completes its 2012 transition.