PPL Corporation — Q2 2012 Form 10-Q
Business context and reporting period. This unaudited combined filing covers PPL Corporation and five separately reporting subsidiaries for the quarter and six months ended June 30, 2012. PPL combines regulated electric and gas utilities in the U.S. and U.K. with competitive generation and energy marketing. Comparisons are affected by the April 2011 WPD Midlands acquisition: 2012 includes three and six months of its results, versus two months in the comparable 2011 periods.
Key financial results
Amounts are in millions of dollars except per-share data. PPL’s consolidated results:
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $2,549 | $2,489 | $6,661 | $5,399 |
| Operating income | $572 | $595 | $1,623 | $1,400 |
| Net income attributable to PPL | $271 | $196 | $812 | $597 |
| Basic and diluted EPS | $0.46 | $0.35 | $1.39 | $1.14 |
| Declared dividends per common share | $0.36 | $0.35 | $0.72 | $0.70 |
- Q2 revenue rose about 2%, while operating income fell about 4%; attributable net income increased about 38%. First-half revenue, operating income and attributable net income rose about 23%, 16% and 36%, respectively.
- Operating cash flow for the first half was $947 million, versus $814 million. Capital expenditures were $1.309 billion; operating cash flow less capital expenditures was negative $362 million before other investing items.
- Cash and cash equivalents were $981 million at June 30, down $221 million from year-end. Short-term debt was $889 million and long-term debt was $18.698 billion, plus $12 million due within one year. PPL reported $3.464 billion of unused domestic credit-facility capacity; WPD had approximately $1.4 billion equivalent of unused committed capacity.
- Interest expense was $236 million in Q2 and $466 million in the first half. The filing reports long-term debt carrying value of $18.710 billion and estimated fair value of $20.402 billion at June 30.
Material changes and business drivers
- U.K. regulated: Segment net income attributable to PPL was $196 million in Q2 and $361 million in the first half, versus $38 million and $93 million, respectively, in 2011. Additional months of WPD Midlands results materially affect comparability; U.K. price increases also supported revenue.
- Supply: Segment net income attributable to PPL was $12 million in Q2 versus $91 million; first-half results were $313 million versus $310 million. Q2 results reflected lower energy margins and a substantial adverse mark-to-market swing in economic activity. Unrealized wholesale energy marketing activity was negative $458 million in Q2 2012 versus negative $44 million in Q2 2011; related unrealized energy-purchase activity was negative $442 million versus negative $109 million. These amounts are volatile and should not be read as realized operating performance.
- Kentucky regulated: Segment net income was $34 million in Q2 versus $31 million, but $76 million for the first half versus $106 million. Mild weather depressed first-half retail volumes; Q2 was helped by warmer weather and increased industrial customer production.
- Pennsylvania regulated: Segment net income was $29 million in Q2 versus $36 million and $62 million for the first half versus $88 million. Lower distribution revenue and higher operating and depreciation costs weighed on results; transmission margins benefited from investment and formula-rate recovery.
Outlook, management commentary, and notable items
- PPL did not provide a consolidated EPS or earnings target in the provided filing text. Management projected lower 2012 earnings, excluding special items, for Kentucky regulated, Pennsylvania regulated and Supply; it projected higher U.K. regulated earnings, primarily due to additional WPD Midlands contribution and higher delivery revenue.
- PPL reduced projected 2012 capital spending by approximately $325 million from the previously disclosed $3.8 billion, mainly following termination of the Bluegrass combustion-turbine purchase and changes in environmental project status.
- LG&E and KU received approval to build a 640 MW natural-gas combined-cycle plant at Cane Run, estimated at about $600 million, with construction expected to start in 2012 and finish in 2015, subject to contracts and permits. Six coal units totaling 797 MW are expected to retire in connection with environmental requirements. Their requests for 2013 base-rate increases total approximately $161 million for electric rates and $17 million for LG&E gas rates; outcomes are uncertain.
- PPL Electric sought a roughly $105 million distribution-rate increase, proposed effective January 2013. Its Susquehanna-Roseland transmission project was delayed, with an expected in-service date of 2015; estimated PPL Electric cost rose to $560 million from about $500 million.
- In April, PPL Energy Supply acquired the Ironwood facility for approximately $85 million cash consideration and assumed debt through consolidation. The purchase-price allocation remained preliminary. PPL also issued $400 million of 4.20% senior notes in June and entered forward-sale agreements covering approximately 10.5 million shares; proceeds and shares are not due until settlement in 2013.
- PPL Electric redeemed its $250 million of 6.25% preference stock in June. In July, PPL expected a $65–$75 million deferred tax benefit in Q3 following U.K. tax-rate reductions. The filing also reports a $13 million Q2 reduction in income-tax expense from an annual effective-tax-rate estimate change.
- SMGT’s power contract ended April 1 following its bankruptcy. A $22 million receivable was fully reserved; PPL EnergyPlus filed a roughly $375 million claim, predominantly unsecured, and recovery is uncertain.
- Key risks include energy and fuel prices, plant availability and outages, weather, counterparty defaults, regulatory and rate-case outcomes, environmental compliance costs, foreign exchange, credit-market conditions, and litigation. A downgrade below investment grade could require up to $531 million of additional collateral at PPL. Environmental liabilities and potential compliance costs are in several instances not reasonably estimable.
Important facts for investors to verify
- How much of first-half earnings growth reflects WPD Midlands acquisition timing, tax items, and other special or non-recurring items rather than recurring operations.
- The sensitivity of Supply earnings and cash flow to depressed power and capacity prices, coal-contract adjustments, hedge accounting, and derivative mark-to-market volatility.
- Progress and final cost recovery for the Cane Run gas plant, planned coal-unit retirements, Pennsylvania rate cases, and the delayed Susquehanna-Roseland line.
- Liquidity, debt maturities, short-term borrowing, and the potential collateral impact of ratings changes; confirm available facilities and borrowing-base limits.
- Potential outcomes and recoveries for the SMGT bankruptcy claim, environmental proceedings, regulatory matters, and other contingencies, including whether estimated reserves remain adequate.