PPL Corp. Surpasses Estimates

Zacks

PPL Corporation (PPL) reported first quarter 2012 pro forma earnings of 70 cents per share compared with the year-ago earnings of 84 cents. The year-over-year decline in earnings was due to issue of common stock in April 2011 related to acquisitions in the United Kingdom and decreased electricity sales as a result of a mild winter in eastern U.S. The quarterly earnings beat the Zacks Consensus Estimate by 2 cents.

GAAP earnings during the quarter were 93 cents versus 82 cents in the year-ago quarter. The difference between GAAP and pro forma earnings of 23 cents was due to a gain of 26 cents for energy-related economic activities; a charge of 2 cents associated with foreign currency-based economic hedges, a 1 cent charge for acquisition related adjustments, a 1 cent gain related to tax adjustments, and counterparty bankruptcy related charge of 1 cent.  

Revenue

In the reported quarter, company’s total revenue was $4.1 billion compared with $2.9 billion in the prior-year quarter. The growth in revenue was driven by higher utility, unregulated retail electric and gas, and wholesale energy marketing revenues, partially offset by lower revenue from energy-related businesses. The quarterly revenue surpassed the Zacks Consensus Estimate of $3.3 billion.

Segment Results

Kentucky Regulated Segment: In the first quarter 2012, earnings from this segment were 6 cents compared with 15 cents in the year-ago quarter. This year-over-year decline was due to higher depreciation costs, a diluted impact of 1 cent per share, a mild winter and increased operation and maintenance expenses.

U.K. Regulated Segment: In the reported quarter, earnings from this segment were 31 cents compared with 16 cents in the year-ago quarter. This year-over-year increase was primarily driven by better operating performance from the Western Power Distribution (“WPD”) Midlands businesses, partially offset by a diluted impact of 6 cents per share, and higher U.S. income taxes and pension expenses.  

Pennsylvania Regulated Segment: In the first quarter 2012, earnings from this segment were 6 cents compared with 11 cents in the year-ago quarter. The year-over-year decline was due to higher depreciation costs, diluted impact of 1 cent per share, a mild winter and increased operation and maintenance expenses.

Supply Segment: In the reported quarter, earnings from this segment were 27 cents compared with 42 cents in the year-ago quarter. A 15-cent year-over-year decline in earnings was due to decreased Eastern energy margins related to lower energy and capacity prices, partially offset by an increase in nuclear generation.

Operational Update

Total operating expenses in the reported quarter were $3.1 billion versus $2.1 billion in the year-ago quarter.

In first quarter 2012, company’s operating income was $1.1 billion compared with $0.8 billion in the prior-year quarter.

Interest expenses were $0.23 billion in first quarter 2012 versus $0.17 billion in the year-ago quarter.

Financial Update

Cash and cash equivalents as of March 31, 2012 were $1.1 billion compared with $1.2 billion as of December 31, 2011.

As of March 31, 2012, long-term debt was $18.1 billion versus $18 billion as of December 31, 2011.

In the first quarter of 2012, the company generated cash from operating activities of $0.7 billion compared with $0.2 billion in the prior-year quarter.

Fiscal 2012 Outlook

For fiscal 2012, PPL Corporation reiterated its pro forma earnings guidance in the range of $2.15 to $2.45 per share and GAAP earnings guidance in the range of $2.38 - $2.68 per share.

The company expects Kentucky Regulated, U.K. Regulated, Pennsylvania Regulated and Supply segments to contribute 33 cents, $1.07, 20 cents and 70 cents, respectively, to pro forma earnings.

At the Peer

The AES Corporation (AES), which competes with PPL Corporation, announced adjusted earnings for the first quarter 2012 of 37 cents per share versus 24 cents per share in the year-ago quarter. Earnings missed the Zacks Consensus Estimate of 28 cents.

In the reported quarter, company’s revenue was $4.7 billion, higher than the year-ago revenue by $584 million. The quarterly revenue fell short of the Zacks Consensus Estimate by $60 million.

Our View

PPL Corporation’s results in the first quarter surpassed our expectations on the back of strong contribution from its higher utility, unregulated retail electric and gas, and wholesale energy marketing operations.

But we are concerned about the performance of the company’s Kentucky Regulated, Pennsylvania Regulated and Supply segments in fiscal 2012. These segments are continually dragging down the company’s overall result. 

However, we view PPL Corporation as a well positioned organization with a strong growth potential associated with higher contribution from Midlands businesses and frequent acquisitions. We expect that the acquisition of units of AES Corporation will act as a positive catalyst as PPL presently intends to use oil and natural gas as raw materials for electricity generation.

As PPL is the raw material supplier of the AES units, we believe it will likely benefit from the overall operational synergies post acquisition. This acquisition will help the company to strengthen its Pennsylvania segment’s natural gas portfolio with higher revenue generation.

PPL Corporation currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Allentown, Pennsylvania-based PPL Corporation is an energy and utility holding company. Through its subsidiaries, PPL generates electricity from power plants in  Northeastern, Northwestern and Southeastern U.S., markets wholesale or retail energy primarily in northeastern and northwestern portions of the United States, delivers electricity to customers in Pennsylvania, Kentucky, Virginia, Tennessee and the U.K. and delivers natural gas in Kentucky.

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