Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, 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., as well as regulated distribution in the U.K. The reporting period was significantly impacted by the global financial crisis, volatility in wholesale energy markets, and the completion of the sale of PPL's natural gas distribution and propane businesses in October 2008 (classified as discontinued operations).
Key Financial Metrics (PPL Corporation Consolidated)
| Metric | Three Months Ended Sept 30, 2008 | Three Months Ended Sept 30, 2007 | Nine Months Ended Sept 30, 2008 | Nine Months Ended Sept 30, 2007 |
|---|---|---|---|---|
| Total Operating Revenues | $2,981 million | $1,774 million | $5,531 million | $4,893 million |
| Operating Income | $391 million | $521 million | $1,264 million | $1,288 million |
| Net Income | $203 million | $322 million | $653 million | $870 million |
| Diluted EPS | $0.54 | $0.84 | $1.73 | $2.25 |
| Cash from Operating Activities (9mo) | $1,161 million (2008) vs $1,252 million (2007) | |||
| Cash and Cash Equivalents | $349 million (Sept 30, 2008) vs $430 million (Dec 31, 2007) | |||
| Total Debt (Short + Long Term) | $7,989 million (Sept 30, 2008) vs $7,660 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Revenue Increase: Total revenues increased significantly due to higher wholesale energy marketing volumes and unrealized economic activity gains driven by mark-to-market adjustments on energy derivatives. However, this was partially offset by lower net energy trading margins.
- Earnings Decline: Net income decreased by 37% for the quarter and 25% for the nine-month period compared to 2007. The decline was primarily driven by lower earnings from the Supply segment due to decreased wholesale energy prices, higher fuel costs, and the expiration of synthetic fuel tax credits.
- Discontinued Operations: Results for the natural gas distribution and propane businesses are classified as discontinued operations. The sale was completed in October 2008 for approximately $303 million (adjusted for working capital).
- Impairment Charges: PPL recorded a $33 million pre-tax impairment charge for nitrogen oxide allowances and a $12 million charge for put options related to these allowances following a court decision invalidating the Clean Air Interstate Rule (CAIR).
- Dividend Increase: The quarterly common stock dividend was increased to $0.335 per share, effective April 1, 2008.
Guidance, Outlook, and Risks
- Supply Segment Outlook: PPL projects lower earnings for the Supply segment in 2008 compared to 2007 due to the loss of synthetic fuel tax benefits, higher coal costs, and lower trading margins. For 2009, earnings are expected to be lower than 2008 due to higher operating and financing costs, though partially offset by higher energy margins.
- International Delivery Outlook: 2008 earnings are projected to approximate 2007 results. 2009 earnings are expected to be lower due to the loss of certain U.K. tax benefits and unfavorable foreign currency exchange rates.
- Pennsylvania Delivery Outlook: 2008 earnings are projected to be higher due to a rate increase effective January 1, 2008. 2009 earnings are expected to be comparable to 2008.
- Key Risks:
- Market Volatility: Significant exposure to wholesale energy price volatility and liquidity in power markets.
- Regulatory Uncertainty: Pending Pennsylvania legislation (Act 129) and potential extension of generation rate caps could impact cost recovery and financial viability.
- Environmental Compliance: Significant capital expenditures required for pollution control equipment (scrubbers, SCR) to meet EPA and state regulations, with costs potentially increasing if new rules are enacted.
- Legal Proceedings: Ongoing litigation regarding Montana hydroelectric streambed compensation (approx. $34 million awarded for prior years, subject to appeal) and California ISO refund liabilities.
- Credit Risk: Lehman Brothers Bank, a participant in PPL's credit facilities, became a defaulting lender, reducing available capacity by approximately $185 million.
Investor Verification Checklist
- Energy Trading Margins: Verify the sustainability of earnings given the significant impact of unrealized mark-to-market gains and losses on the income statement.
- Environmental Capital Expenditures: Confirm the timeline and cost estimates for pollution control equipment installation at Brunner Island and Montour plants, and potential costs associated with new mercury or carbon regulations.
- Regulatory Rate Recovery: Monitor the outcome of Pennsylvania Act 129 implementation and any legislative attempts to extend generation rate caps beyond 2009.
- Liquidity Position: Assess the impact of the Lehman Brothers default on credit facility availability and the company's ability to refinance debt maturing in 2009 without accessing capital markets.
- Montana Litigation: Track the status of the appeal regarding the Montana hydroelectric streambed compensation award and potential future annual payments.