PPL Corporation — Form 10-Q Summary
Business context and reporting period. This joint filing covers PPL Corporation, PPL Energy Supply, LLC and PPL Electric Utilities Corporation for the quarter and nine months ended September 30, 2009. PPL generates and markets electricity in the U.S. and delivers electricity in Pennsylvania and the U.K. Results are unaudited and interim-period results may not indicate full-year performance.
Key financial metrics
Amounts are in millions of dollars except per-share data. PPL consolidated results:
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Operating revenue | $1,805 | $2,971 | $5,829 | $5,501 |
| Operating income | $181 | $384 | $697 | $1,242 |
| Net income attributable to PPL | $20 | $203 | $254 | $653 |
| Diluted EPS | $0.05 | $0.54 | $0.67 | $1.73 |
| Domestic gross energy margins (non-GAAP) | $476 | $344 | $1,260 | $1,192 |
Cash flow and liquidity. Nine-month operating cash flow was $1,247, compared with $1,161 in 2008. Investing activities used $591, while financing activities used $1,060. Cash and cash equivalents were $696 at September 30, down from $1,100 at year-end 2008. Current assets were $4,299 and current liabilities $3,793. PPL reported $3,486 of unused domestic committed credit capacity, plus unused WPD facilities.
Debt and shareholder distributions. At September 30, PPL reported $620 of short-term debt, $696 of current long-term debt and $7,250 of long-term debt. The quarterly dividend was $0.345 per share, increased from $0.335 a year earlier; dividends paid in the first nine months totaled $386.
Changes versus comparable periods
- Q3 revenue declined about 39% and net income attributable to PPL fell to $20 from $203. Nine-month revenue rose about 6%, but net income declined to $254 from $653.
- The large year-over-year swings in reported revenue and earnings reflect volatile unrealized commodity-derivative results: Q3 2009 included a $307 unrealized loss in wholesale energy marketing versus a $1,157 unrealized gain in Q3 2008. Management’s domestic gross energy margins, a non-GAAP measure, increased in both the quarter and nine-month period.
- Q3 segment net income attributable to PPL was Supply loss of $31, International Delivery income of $24 and Pennsylvania Delivery income of $27. Supply’s reported performance was particularly affected by special items and market-value accounting; U.K. earnings were also pressured by sterling weakness.
Outlook, commentary and risks
- Management projected lower 2009 earnings, excluding special items, for Supply, International Delivery and Pennsylvania Delivery compared with 2008. Supply’s expected higher energy margins were expected to be partly offset by higher operating costs, depreciation and taxes; U.K. results faced less favorable exchange rates; Pennsylvania Delivery faced higher financing costs and weaker delivery revenues.
- PPL expected an after-tax gain of $20–$25 from the planned sale of most of its Maine hydroelectric business, expected to close in November 2009. A further $7–$9 after-tax contingent gain depended on a separate potential sale and might not be realized. The Long Island generation business was under agreement to be sold for approximately $135 in cash, subject to adjustments and approvals, with closing expected in late 2009 or early 2010.
- PPL projected capital expenditures of $9.2 billion for 2009–2013. Major projects include transmission investment and generation upgrades; project timing, approvals and funding remain relevant uncertainties.
- PPL and PPL Electric warned that legislation extending or restricting recovery of generation costs after Pennsylvania rate caps expired could materially harm cash flows, credit quality and financial viability. PPL Electric’s existing PLR supply contract with PPL EnergyPlus runs through year-end 2009; replacement supply procurement plans for 2010–May 2013 had PUC approval.
- Credit outlooks were negative at S&P for PPL, PPL Energy Supply and PPL Electric, and at Moody’s for PPL and PPL Electric. PPL Energy Supply had $3.151 billion of unused domestic facility capacity; ratings downgrades could raise collateral and borrowing needs. The filing estimates that below-investment-grade ratings could trigger $313 million of additional collateral for commodity-related and other contracts.
- Material uncertainties include commodity-price and derivative valuation volatility, counterparty defaults, plant availability, environmental compliance costs and litigation. Potential environmental spending could be significant but was not fully estimable; the filing also describes pending Montana streambed and environmental matters. Management stated that no material changes had been made to the risk factors disclosed in the 2008 Form 10-K.
- Unusual items included a $30 impairment charge on sulfur dioxide allowances, Long Island held-for-sale impairments, workforce-reduction charges, a $24 tax expense related to previously sold Latin American businesses, and gains from debt extinguishment. The filing also reports substantial income-tax reserve and return adjustments.
Investor verification priorities
- Reconcile reported earnings with unrealized derivative gains and losses, special items, and management’s non-GAAP gross energy margins.
- Track cash generation, debt maturities, credit-facility availability, ratings outlooks and potential collateral calls.
- Verify completion, proceeds and accounting effects of the Maine and Long Island asset sales.
- Monitor Pennsylvania rate-cap transition, PLR procurement and cost-recovery decisions, including potential legislative changes.
- Assess exposure to environmental regulation, litigation, tax contingencies and the company’s assumptions underlying derivative fair values.