PPL Corporation — Q1 2013 Form 10-Q
Business context and period. The combined, unaudited filing covers PPL Corporation and five subsidiaries for the three months ended March 31, 2013; comparisons are with Q1 2012. PPL combines regulated electricity and gas delivery in the U.K., Pennsylvania and Kentucky with competitive generation and energy marketing. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Operating revenue | $2,457 | $4,112 | Down 40% |
| Operating income | $693 | $1,051 | Down 34% |
| Net income attributable to PPL shareowners | $413 | $541 | Down 24% |
| Basic / diluted EPS | $0.70 / $0.65 | $0.93 / $0.93 | Diluted EPS reflects the new If-Converted treatment of Equity Units |
| Operating cash flow | $244 | $728 | Down $484 |
| Capital expenditures | $828 | $682 | Up $146 |
| Cash and cash equivalents, March 31 | $853 | $901 at Dec. 31, 2012 | Quarter-end cash decreased $48 |
| Total debt, including current maturities | $20,693 | $20,128 at Dec. 31, 2012 | Short-term debt rose to $1,061 from $652 |
Cash flow after capital expenditures was negative $584. PPL reported $3,425 of unused domestic credit-facility capacity at quarter-end, in addition to substantial unused U.K. facilities. Current assets were $4,989 versus current liabilities of $5,650.
Reported revenue and earnings were heavily affected by volatile unrealized energy-derivative marks: unrealized wholesale energy revenue was negative $822 versus positive $852 in Q1 2012, while unrealized energy-purchase expense was negative $634 versus positive $591. PPL also recorded $119 of gains on economic foreign-currency contracts in other income, compared with $18 of losses a year earlier. These items make reported revenue comparisons and conventional revenue-based margin comparisons less representative of underlying performance.
Material changes and management commentary
- Regulated businesses improved. PPL’s Kentucky, U.K. and Pennsylvania segment earnings were $85, $313 and $64, respectively, versus $42, $165 and $33. Kentucky and Pennsylvania benefited from rate increases effective January 1, 2013; colder weather also lifted Kentucky volumes. U.K. earnings included significant foreign-currency hedge gains.
- Competitive Supply weakened. The segment recorded a $46 loss versus $301 of income. Its non-GAAP Unregulated Gross Energy Margins were $477 versus $584, with lower wholesale prices the principal pressure. This measure is not GAAP operating income.
- Operating cash flow fell amid higher working-capital use and $429 of defined-benefit plan funding, versus $208 in Q1 2012. Higher capital spending included transmission, environmental and generation projects.
- In March, PPL Capital Funding issued $450 of 5.90% junior subordinated notes due 2073, receiving $436 net of fees. The quarterly dividend declared was $0.3675 per share.
Outlook, risks and contingencies
Management expected higher 2013 earnings in the Kentucky, U.K. and Pennsylvania regulated segments, excluding special items, but lower Supply earnings, chiefly due to low energy prices and higher fuel, operating, depreciation and financing costs. The filing gives no clear consolidated earnings or EPS guidance. PPL cautioned that interim results are seasonal and not necessarily indicative of full-year results.
- Susquehanna turbine-blade modifications were planned during 2013 outages. Corette was expected to enter long-term reserve status in April 2015; its $65 carrying value could face future impairment.
- PPL Electric’s pending FERC waiver/audit matter could affect transmission revenue requirements by an estimated $0–$40 pre-tax. Pennsylvania storm-rider and distribution-system improvement-charge filings were also pending.
- Potential environmental compliance costs could be significant, including proposed wastewater and cooling-water rules, coal-ash requirements, and regional-haze controls. Outcomes and costs were not reliably estimable.
- Other material uncertainties include the Colstrip Clean Air Act litigation, ongoing regulatory proceedings, wholesale-market prices, plant availability, weather, fuel costs, counterparties and foreign-exchange movements. PPL stated that no material risk-factor changes had occurred since its 2012 Form 10-K.
- After quarter-end, PPL settled most forward sale agreements, receiving $205 net proceeds and issuing 8.4 million shares; settlement of agreements covering a further 591,000 shares was due by July 2013.
Important facts for investors to verify
- How much of the year-over-year earnings decline reflects derivative marks and special items versus realized Supply economics?
- Whether cash generation, pension funding and planned capital spending remain consistent with liquidity and debt plans.
- Progress and financial outcomes in the FERC proceedings, Pennsylvania recovery filings and environmental matters.
- Supply-segment outlook under continued low wholesale prices, including Corette’s planned status change and Susquehanna outage effects.
- Effects of the Equity Unit conversion and forward-sale settlements on diluted shares, EPS and future financing needs.