We reiterate our Neutral recommendation on PPL Corporation (PPL). In second-quarter 2012, the company’s earnings per share and revenue surpassed the Zacks Consensus Estimates owing to higher utility, realized wholesale energy marketing and energy-related businesses revenues. However, the year-over-year results were slightly impacted by dilutive impact of shares issued in April 2011 to finance PPL's UK operations expansion. In addition, the company’s Pennsylvania Regulated segments and Supply segments are continually dragging down its overall result.
We know that the performance of the utility providers strongly depend on weather patterns and related impacts of its operating regions. Moderate temperatures during the winter and summer season adversely impacted the usage of energy, resulting in the company’s revenue decline. PPL Corp.’s performance can also be affected by extreme weather conditions, such as hurricanes and storms in its service territories and other parts of the U.S.
In addition, a major challenge that PPL faces in its electricity delivery businesses is to maintain a high quality customer service and reliability in a cost-effective manner. The company’s electricity delivery businesses are rate-regulated. Thus, these businesses are subject to regulatory risks with respect to costs that may be recovered and investment returns that may be collected through customer rates.
As far as positive factors are concerned, PPL has an excellent well diversified asset portfolio and business model, which is adaptable to a wide range of market scenarios. This diverse generation mix positions the company to benefit from proposed Environmental Protection Agency (“EPA”) regulations. PPL also looks to achieve stable, long-term growth from its regulated electricity delivery businesses through efficient operations, and strong customer and regulatory relations.
However, we are skeptical about impacts of strict federal regulations and higher operating expenses, which might negatively impact PPL’s near-term results.
PPL Corporation currently retains a short-term Zacks #2 Rank (Buy Rating).
Allentown, Pennsylvania-based PPL Corporation generates and delivers electricity and natural gas to more than 10 million customers in the U.S. and UK. PPL Corporation competes with The AES Corporation (AES).
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