PPL Corporation 2009 Form 10-K Summary
Business context and reporting period. This combined Form 10-K covers the fiscal year ended December 31, 2009, and reports PPL Corporation, PPL Energy Supply, LLC and PPL Electric Utilities Corporation. PPL generates and markets electricity in U.S. wholesale and retail markets and delivers electricity in Pennsylvania and the U.K. Its segments are Supply, Pennsylvania Delivery and International Delivery. This is an annual filing, not a standalone fourth-quarter report.
Key financial results
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Operating revenue | $7.556 billion | $8.007 billion | Down 5.6% |
| Operating income | $961 million | $1.793 billion | Down 46.4% |
| Net income attributable to PPL | $407 million | $930 million | Down 56.2% |
| Diluted EPS | $1.08 | $2.47 | Down 56.3% |
| Operating margin | 12.7% | 22.4% | Down 9.7 percentage points |
| Operating cash flow | $1.852 billion | $1.589 billion | Up 16.5% |
| Capital expenditures, including nuclear fuel | $1.265 billion | — | — |
Operating margin is calculated as operating income divided by operating revenue. 2008 comparative capital-expenditure value is not separately stated in the selected data presented here.
- Segment earnings attributable to PPL: Supply $40 million (2008: $479 million); International Delivery $243 million (2008: $290 million); Pennsylvania Delivery $124 million (2008: $161 million).
- Domestic gross energy margins, a non-GAAP measure: $1.731 billion, up from $1.564 billion. Net energy trading margins improved by $138 million, while Eastern U.S. non-trading margins were nearly flat and Western U.S. non-trading margins rose $34 million.
- Cash and debt at year-end: cash and cash equivalents were $801 million, versus $1.100 billion in 2008. Short-term debt was $639 million and long-term debt was $7.143 billion, for total reported debt of approximately $7.782 billion. Total assets were $22.165 billion and common equity was $5.496 billion.
- Cash flow and financing: investing activities used $880 million; financing activities used $1.271 billion. Net cash declined $299 million. PPL paid $517 million in common dividends and retired $770 million of debt on a net basis.
- Liquidity: domestic credit facilities had $3.512 billion of unused capacity at year-end, after borrowings and letters of credit. PPL also reported approximately $276 million of unused WPD credit capacity. Management said it expected adequate liquidity from operating cash flows, cash and credit facilities.
Material changes versus prior year
- Net income attributable to PPL fell $523 million. A major factor was a $476 million after-tax year-over-year swing in energy-related economic activity, primarily from cash-flow hedges that failed effectiveness testing in certain quarters. PPL recorded after-tax losses of $215 million on this activity in 2009, compared with a $298 million gain in 2008.
- Lower wholesale energy prices and market liquidity pressures affected results, particularly in the second half of 2008 and first half of 2009. Trading margins improved in 2009 versus 2008, but included substantial unrealized changes.
- Supply segment earnings also reflected impairments and divestitures: after-tax special items totaled a net $293 million charge in 2009, compared with a net $176 million gain in 2008. The 2009 items included the Long Island generation business impairment and emission-allowance charges.
- PPL Electric’s 2009 revenue and earnings weakened amid economic softness, lower industrial demand and unfavorable weather. Its operating cash flow also fell, largely because it repaid $300 million of collateral to PPL Energy Supply as the affiliate supply agreements expired.
- The U.K. pound’s weaker average exchange rate reduced reported U.K. earnings and revenue. PPL’s reported U.K. utility revenue also reflects currency translation.
Outlook, risks and unusual items
- 2010 outlook: Management projected higher Supply segment earnings, excluding special items, due to growth in energy margins based on hedged power and fuel prices and established PJM capacity prices. It projected lower International Delivery earnings, mainly from higher taxes, operating costs and financing costs, partly offset by higher delivery margins and a more favorable currency rate. It projected lower Pennsylvania Delivery earnings, with weak demand and higher operating costs partly offset by lower financing costs. No numerical consolidated earnings guidance is provided in the supplied filing text.
- Pennsylvania rate transition: Generation rate caps expired for PPL Electric on January 1, 2010. Competitive procurement prices were expected to raise the average residential customer’s delivered-electricity rates by approximately 30% versus prior capped rates. PPL Electric passes PLR supply costs through to customers without markup and remains the regulated delivery provider. Management expected no significant 2010 impact to PPL Electric’s financial condition, results or cash flows from the transition, but legislative and regulatory outcomes remained uncertain.
- Investment plans: PPL projected approximately $5.8 billion of capital expenditures for 2010–2012, including transmission and distribution upgrades, environmental work and generation projects. It planned to issue up to $300 million and £400 million in long-term debt in 2010, subject to market conditions. These are plans, not guarantees of execution or funding.
- Asset sales and projects: PPL expected to close the Long Island generation sale around February 26, 2010, for approximately $125 million before working-capital adjustments. It completed the sale of most of its Maine hydroelectric business for $81 million in 2009. Key projects include the Holtwood expansion, Susquehanna nuclear uprates and the Susquehanna–Roseland transmission line; timing, approvals and costs remain subject to contingencies.
- Contingencies and risks: The Montana hydroelectric streambed litigation remains on appeal. PPL accrued $9 million for 2007–2009, while exposure for earlier years was assessed as reasonably possible but not probable. Environmental compliance, greenhouse-gas regulation, ash and wastewater management, plant outages, fuel and power-price volatility, counterparty defaults, weather, pension assumptions and regulatory rate recovery could materially affect results or cash flows.
- Credit and accounting matters: PPL’s Moody’s and S&P outlooks were negative at year-end; Fitch’s outlook was stable. PPL reported $4.1 billion of liquidity facilities for potential collateral needs and $242 million of collateral posted under power contracts. Ernst & Young issued unqualified opinions on the financial statements and PPL’s internal control over financial reporting.
Investor verification priorities
- Reconcile the $523 million decline in attributable net income, separating recurring operating performance from hedge accounting effects, impairments, asset-sale results and discontinued operations.
- Review Supply segment earnings and hedge positions after the December 31, 2009 expiration of PPL EnergyPlus’s long-term PLR contracts with PPL Electric; confirm realized versus unrealized margin contributions.
- Verify 2010 Pennsylvania customer-rate effects, procurement costs, customer shopping trends and any further legislation or PUC action affecting cost recovery.
- Assess the assumptions, availability and covenant conditions behind the stated liquidity, collateral capacity, planned debt issuance and $5.8 billion capital program.
- Track the Long Island sale closing and proceeds, major construction budgets and schedules, and the status of required regulatory approvals, including for the Susquehanna–Roseland line.
- Monitor the Montana litigation, environmental obligations and evolving greenhouse-gas rules, and test the sensitivity of pension, nuclear decommissioning and other long-term liabilities to assumptions.