PPL Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Unless otherwise noted, financial amounts are in millions of dollars. This combined filing also reports PPL subsidiaries; figures below focus on PPL Corporation consolidated results.
Business context and reporting period
PPL operates regulated electricity delivery businesses in the U.K., Pennsylvania and Kentucky, alongside competitive generation and energy marketing in the U.S. Management’s strategy emphasizes growth in regulated utilities while managing commodity and earnings volatility in the Supply business. Regulated businesses represented approximately 70% of assets and 69% of PPL shareowner net income for the first nine months of 2012.
Comparisons are affected by acquisitions: PPL’s 2012 results include nine months of WPD Midlands, acquired in April 2011, versus five months in the year-earlier nine-month period. The filing states that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenues | $2,403 | $3,120 | $9,064 | $8,519 |
| Operating income | $664 | $767 | $2,287 | $2,167 |
| Net income attributable to PPL shareowners | $355 | $444 | $1,167 | $1,041 |
| Diluted EPS | $0.61 | $0.76 | $2.00 | $1.91 |
| Dividends declared per share | $0.36 | $0.35 | $1.08 | $1.05 |
Nine-month operating cash flow was $2,094, up from $1,846. Capital expenditures were $2,078; cash dividends paid were $623. Cash and cash equivalents were $946 at September 30, down from $1,202 at December 31, 2011. Current assets were $5,227 and current liabilities $4,887.
At September 30, short-term debt was $526, long-term debt was $18,711, and long-term debt due within one year was $313. Total debt on these reported balance-sheet lines was therefore $19,550. PPL reported $3,805 of unused capacity under domestic credit facilities; WPD also had substantial unused credit capacity.
Material changes versus the prior comparable periods
- Q3 revenue fell 23%, while nine-month revenue rose 6%. The quarter’s revenue comparison was heavily affected by unrealized energy-market activity: wholesale energy marketing included a $716 loss versus a $216 gain a year earlier, partly offset by unrealized credits in energy-purchase expense.
- Shareowner net income declined 20% in Q3 but increased 12% for the first nine months. Q3 income taxes were $17 versus $110 a year earlier; results included a $74 deferred tax benefit from U.K. statutory tax-rate reductions.
- Supply segment shareowner income fell to $48 from $200 in Q3 and to $361 from $510 for nine months. Management cited lower energy and capacity prices, lower generation volumes and other operating costs; mark-to-market activity made reported results volatile.
- U.K. Regulated segment income rose to $202 from $138 in Q3 and $563 from $231 for nine months. The year-to-date comparison reflects additional WPD Midlands contribution in 2012, U.K. price increases and the tax benefit; the periods are not directly comparable.
- Kentucky Regulated segment income declined to $72 from $78 in Q3 and $148 from $184 for nine months. Pennsylvania Regulated income rose to $33 from $28 in Q3 but fell to $95 from $116 for nine months.
Outlook, management commentary and key risks
- Management projected lower 2012 earnings, excluding special items, in the Kentucky, Pennsylvania and Supply segments; it projected higher U.K. Regulated earnings, largely reflecting WPD Midlands and higher delivery revenue. These are segment-level outlook statements; a clear consolidated EPS guidance value is not provided in the filing text.
- LG&E and KU began preliminary work on a KPSC-approved 640 MW natural-gas combined-cycle plant at Cane Run, estimated to cost approximately $600 million and expected to be completed by May 2015. The companies anticipate retiring six coal units totaling 797 MW by 2015. A separate proposed purchase of the Bluegrass combustion turbines was terminated after the parties found required market-power mitigation commercially unjustifiable.
- PPL announced that the Corette plant, with a $67 carrying value, is expected to enter long-term reserve status in April 2015 due to market conditions and environmental compliance costs. Although no impairment was recorded at quarter-end, a future impairment was considered reasonably possible.
- In late October, Hurricane Sandy caused extensive damage to PPL Electric’s network; restoration costs were estimated to exceed $60. Insurance may cover part of the amount, and certain costs may be eligible for future recovery. These events occurred after September 30.
- PPL estimated a $43–$58 pre-tax ($26–$35 after-tax) earnings impact from Susquehanna turbine-blade inspections, including reduced sales margins and possible repairs; the ultimate impact depends partly on the duration of the Unit 2 outage.
- SMGT’s power contract was terminated effective April 1. PPL EnergyPlus fully reserved a $21 receivable and filed an approximately $375 predominantly unsecured bankruptcy claim; recovery is uncertain.
- Key exposures include environmental compliance and potential capital costs, wholesale energy-price and generation risks, counterparty defaults, foreign-exchange movements, regulatory rate proceedings and legal matters. If PPL’s and subsidiaries’ credit ratings fell below investment grade, the filing estimates up to $486 of additional collateral or prepayments could be required. PPL states there were no material changes to the risk factors in its 2011 Form 10-K.
Most important facts for investors to verify
- Whether Supply earnings and cash generation hold up as power prices, generation volumes and derivative positions settle; distinguish cash economics from unrealized fair-value swings.
- Final outcomes and timing of the Pennsylvania and Kentucky rate cases, including the allowed increases and returns, and the recovery of storm and infrastructure costs.
- Updated costs, schedules and regulatory recovery for major projects and environmental compliance, including the Cane Run plant, coal-unit retirements and transmission investments.
- Subsequent developments affecting Sandy restoration costs, Susquehanna inspections, the SMGT bankruptcy claim, Corette impairment risk and the U.K. tax litigation.