PPL Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2010, compared with the corresponding 2009 periods. PPL operates competitive generation and energy marketing businesses, regulated electric delivery businesses in Pennsylvania and the U.K., and filed alongside its subsidiaries PPL Energy Supply and PPL Electric.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $2.179 billion | $1.782 billion | $6.658 billion | $5.739 billion |
| Operating income | $522 million | $171 million | $1.224 billion | $648 million |
| Net income attributable to PPL | $248 million | $20 million | $583 million | $254 million |
| Diluted EPS | $0.51 | $0.05 | $1.40 | $0.67 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $1.696 billion | $1.247 billion |
- Q3 income from continuing operations attributable to PPL was $301 million, or $0.62 per diluted share, versus $45 million, or $0.12, in 2009. Q3 net income included a $53 million after-tax discontinued-operations loss.
- Management’s non-GAAP domestic gross energy margin was $679 million in Q3 and $2.043 billion for the nine months, up from $476 million and $1.260 billion, respectively. Domestic gross delivery margin was $217 million in Q3 and $637 million year to date, versus $207 million and $629 million.
- Cash and cash equivalents were $4.853 billion at September 30, versus $801 million at year-end 2009; management said much of the cash was for the pending E.ON U.S. acquisition. Short-term debt was $181 million and long-term debt $8.839 billion, compared with $639 million and $7.143 billion at year-end.
- Nine-month capital expenditures were $980 million. PPL paid $397 million in common dividends; the declared quarterly dividend was $0.35 per share.
Material changes and notable items
- Results benefited from the January 2010 end of Pennsylvania’s capped generation rates. Higher Eastern U.S. baseload pricing drove the increase in energy margins; lower demand reduced margins on full-requirement sales contracts. Pennsylvania delivery revenue declined as customers selected alternative suppliers, while approved recovery mechanisms largely offset supply-cost effects.
- PPL issued 103.5 million common shares and 23 million Equity Units in June, raising approximately $3.5 billion net. The increased share count affects EPS comparisons.
- In July, PPL Energy Supply monetized full-requirement sales contracts for $249 million of cash proceeds. The associated accounting and hedge reclassifications created material earnings volatility; management identified a $102 million after-tax loss for the nine-month period as a special item.
- Agreements to sell non-core generation assets for approximately $381 million prompted a $96 million pretax impairment and a $5 million goodwill write-off in Q3. The sale was expected to close in Q4, subject to approvals and consents.
- Tax benefits included a favorable Tax Court ruling on crediting the U.K. Windfall Profits Tax, which generated a $42 million benefit in Q3, and a separate $7 million benefit for PPL Electric. The U.K. tax-rate change also produced a $19 million benefit.
Outlook, risks and contingencies
- PPL expected to close its E.ON U.S. acquisition around November 1, 2010. Estimated aggregate consideration was $7.6 billion, including surviving debt. All requisite regulatory approvals were reported received. If specified conditions are met and PPL fails to close when required, a $450 million termination fee may apply.
- Management projected regulated businesses would contribute 25% of PPL earnings in 2010 and 55%–60% in 2011 following the acquisition. Excluding special items, it expected higher 2010 Supply earnings, but lower earnings from International Delivery and Pennsylvania Delivery. The filing does not provide a consolidated EPS guidance range.
- The proposed sale of three remaining Maine hydroelectric facilities was expected to generate an after-tax gain of $14 million–$18 million if completed by November 1, 2013; the expected gain would be lower if completed later.
- Key risks include power and fuel prices, generation availability, weather, customer demand, counterparty defaults, foreign exchange, financing and credit ratings, and changing regulation. Environmental rules covering emissions, coal-combustion waste and water may require significant but currently unquantifiable spending.
- PPL Montana had accrued $71 million for hydroelectric streambed compensation litigation and sought U.S. Supreme Court review; the outcome remained uncertain. Dodd-Frank implementation could also increase collateral needs. A below-investment-grade downgrade could trigger additional collateral requirements; PPL estimated $494 million across specified derivative and non-derivative contracts at quarter-end.
- For PPL Electric, an administrative law judge recommended a $77.5 million distribution-rate increase, subject to a final PUC order. The Susquehanna–Roseland transmission project’s estimated PPL Electric share was about $500 million, with approval delays potentially postponing service to 2014 or later.
Investor verification priorities
- Confirm the acquisition’s closing, final funding mix, debt issued or assumed, and post-close leverage and credit ratings.
- Separate recurring operating performance from derivative and hedge accounting effects, contract monetization, tax benefits, and discontinued-operations impairments.
- Track actual proceeds and approval status for the non-core generation and Maine hydroelectric sales.
- Review the final Pennsylvania rate-case order and the timing, cost, and approvals for major transmission and environmental projects.
- Assess cash availability after acquisition funding, collateral exposure from market or credit changes, and the resolution of Montana litigation.