PPL Corporation: Q3 2013 Form 10-Q Summary
Business context and reporting period
PPL is an energy holding company with regulated electricity distribution businesses in the U.K., Pennsylvania and Kentucky, alongside competitive generation and energy marketing operations. This combined, unaudited Form 10-Q covers the three and nine months ended September 30, 2013; comparisons are to the corresponding 2012 periods unless noted. Dollar amounts are in millions except per-share data.
Financial and operating metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $3,105 | $2,403 | $9,012 | $9,064 |
| Operating income | $857 | $664 | $2,308 | $2,287 |
| Net income attributable to PPL shareowners | $410 | $355 | $1,228 | $1,167 |
| Diluted EPS | $0.62 | $0.61 | $1.90 | $2.00 |
| Dividends declared per share | $0.3675 | $0.36 | $1.1025 | $1.08 |
Operating margin, calculated as operating income divided by reported revenue, was approximately 27.6% in Q3 2013 and 25.6% for the first nine months of 2013; the comparison is affected by volatile derivative accounting in reported revenue and expenses.
- Cash flow: Nine-month operating cash flow was $2,223, versus $2,094. Capital expenditures were $2,768, up from $2,078, leaving operating cash flow less capital expenditures of negative $545. Cash and cash equivalents were $1,291 at September 30, compared with $901 at year-end 2012.
- Debt and liquidity: At September 30, short-term debt was $499, current maturities of long-term debt were $751, and long-term debt was $19,092—about $20.3 billion combined. Current assets of $4,971 and current liabilities of $4,948 imply a current ratio of approximately 1.0. Credit facilities were maintained to support liquidity and commercial paper programs.
- Segments: Nine-month earnings rose in U.K. Regulated ($741 versus $563), Kentucky Regulated ($227 versus $148) and Pennsylvania Regulated ($160 versus $95). Supply earnings fell to $122 from $361. In Q3, Supply earnings rose to $91 from $48, while U.K. Regulated earnings fell to $183 from $202.
Material changes versus prior comparable periods
- Q3 revenue increased substantially, while nine-month revenue was nearly flat. The Q3 comparison is strongly affected by unrealized energy derivative activity: unrealized wholesale energy revenue was negative $49 versus negative $716 in Q3 2012, with corresponding unrealized energy purchase expense of negative $37 versus negative $569.
- Q3 shareowner net income increased 15% and diluted EPS rose slightly. Nine-month shareowner net income increased 5%, but diluted EPS declined from $2.00 to $1.90, principally reflecting more weighted-average diluted shares, including the 2010 Equity Unit settlement.
- Regulated earnings benefited from rate increases effective January 1, 2013: Pennsylvania distribution rates increased about $71 annually; Kentucky base electricity rates increased $34 at LG&E and $51 at KU, with LG&E gas rates up $15 annually. Kentucky results also benefited from returns on environmental capital investment.
- Supply results remained pressured by lower baseload energy prices. Nine-month Supply earnings were also affected by higher fuel costs, depreciation and taxes, despite stronger capacity prices and intermediate/peaking margins.
Outlook, commentary, risks and unusual items
- Management expected higher 2013 earnings excluding special items versus 2012, but projected lower diluted EPS because of higher average shares outstanding. It expected higher earnings from the regulated businesses and lower earnings from Supply, citing low energy prices, higher fuel costs, depreciation, taxes and financing costs.
- Tax items materially affected comparisons: PPL recorded a $93 million third-quarter deferred tax benefit from U.K. tax-rate reductions, a $44 million nine-month benefit following the U.S. Supreme Court’s Windfall Profits Tax decision, and a $38 million increase in state tax expense related primarily to a valuation allowance on Pennsylvania net operating losses.
- PPL agreed to sell 633 MW of Montana hydroelectric facilities for $900 million, subject to adjustments and approvals; closing was not expected before the second half of 2014. In a related transaction, it agreed to pay $271 million to terminate a Colstrip sale-leaseback. The expected after-tax loss was $310 million to $430 million, subject to asset valuation and regulatory approval.
- A generator-damage outage at Colstrip Unit 4 was expected to take at least six months to repair, at an estimated cost of $30 million to $40 million; PPL Montana estimated its pre-tax earnings impact at $5 million to $10 million. A Unit 2 turbine-blade inspection outage at Susquehanna was described as not material.
- Key uncertainties include wholesale power and fuel prices, plant availability, weather, counterparty credit, regulatory and rate-case outcomes, environmental compliance costs, foreign exchange and pension funding. Potential environmental requirements for coal ash, wastewater discharges, cooling-water intakes, air emissions and greenhouse gases could entail significant costs. The Colstrip Clean Air Act litigation and other legal and regulatory proceedings remain unresolved.
- WPD’s estimated exposure for the U.K. line-loss incentive/penalty matter was $93 million to $226 million; a $93 million liability was recorded at September 30. PPL stated that the ultimate outcome was uncertain.
Important facts for investors to verify
- How much of reported revenue and earnings reflects derivative fair-value movements, tax benefits and other special items, rather than recurring operating performance.
- Whether management’s full-year outlook excluding special items was achieved, and how share issuance affected diluted EPS and per-share cash generation.
- Progress, final cost and recovery of regulated capital programs, including Pennsylvania transmission projects and Kentucky environmental investments.
- Regulatory approvals and closing terms for the Montana hydro sale and Colstrip lease termination, including the final after-tax loss.
- Developments in major environmental exposures, Colstrip litigation, the WPD line-loss review and other rate or transmission proceedings.
- Cash-flow capacity to fund capital expenditures, dividends and debt maturities, alongside borrowing availability and credit-rating developments.