PPL Corporation Beats Estimates

Zacks

PPL Corporation (PPL) reported second-quarter 2012 pro forma earnings per share of 51 cents, beating the Zacks Consensus Estimate of 40 cents and the year-ago earnings of 45 cents per share.

GAAP earnings during the quarter were 46 cents versus 35 cents in the year-ago quarter. The difference of 5 cents between GAAP and pro forma earnings was due to a charge of 5 cents for energy-related economic activities, 1 cent charge for acquisition related adjustments, 1 cent charge related to discontinued operations, and coal contract modification related charge of 1 cent.

This was partially offset by a gain of 2 cents associated with foreign currency-based economic hedges and 1 cent gain for acquisition-related adjustments. 

Revenue

In the reported quarter, the company’s total revenue was $2,549 million compared with $2,489 million in the prior-year quarter. The growth in revenue was driven by higher utility, realized wholesale energy marketing and energy-related businesses revenues, partially offset by lower unregulated retail electric and gas revenue.

The quarterly revenue surpassed the Zacks Consensus Estimate of $2,094 million.

Segment Results

Kentucky Regulated Segment: In second-quarter 2012, earnings from this segment came in at 7 cents compared with 6 cents in the year-ago quarter. This year-over-year increase was driven by warmer weather and retail volume growth due to production-level increase by few of the company’s larger industrial clients.

U.K. Regulated Segment: In the reported quarter, earnings from this segment were 31 cents compared with 21 cents in the year-ago quarter. This year-over-year rise was primarily driven by decline in financing costs and income taxes, additional operating performance from the Western Power Distribution (“WPD”) Midlands businesses, and increase in delivery revenues at WPD Southwest and South Wales.

These positives were partially offset by higher operation and maintenance expenses, rise in U.S. income taxes, unfavorable currency exchange rate and dilution of a penny per share. 

Pennsylvania Regulated Segment: In second-quarter 2012, earnings from this segment were 5 cents compared with 6 cents in the year-ago quarter. This year-over-year decline was due to rise in operation and maintenance expenses.

Supply Segment: In the reported quarter, earnings from this segment were 8 cents compared with 12 cents in the year-ago quarter. The year-over-year decline was due to higher depreciation charges, lower Eastern and Western energy margins, higher operation and maintenance expense mainly at the Susquehanna nuclear power plant, and dilution of 4 cents per share.

Operational Update

Total operating expenses in the reported quarter were $2 billion versus $1.9 billion in the year-ago quarter.

In second-quarter 2012, the company’s operating income was $572 million compared with $595 million in the prior-year quarter.

Interest expenses were $236 million in second-quarter 2012 versus $264 million in the year-ago quarter.

Financial Update

Cash and cash equivalents as of June 30, 2012 were $981 million compared with $1,202 million as of December 31, 2011.

As of June 30, 2012, long-term debt was $18.7 billion versus $18 billion as of December 31, 2011.

In six months, the company generated cash from operating activities of $947 million compared with $814 million in the prior-year quarter.

Full-Year 2012 Guidance

For full-year 2012, PPL Corporation reiterated its pro forma earnings guidance in the range of $2.15-$2.45 per share and GAAP earnings guidance in the band of $2.33 -$2.63 per share.

PPL expects full-year 2012 earnings will lower than 2011 earnings due to decline in energy margins in supply segment, partially offset by full-year earnings from the Midlands operations in the UK.

The company reported its mid-point pro forma earnings in full-year 2012 from different segments. Kentucky Regulated, U.K. Regulated, Pennsylvania Regulated and Supply segments are expected to generate pro forma earnings of 33 cents, $1.07, 20 cents and 70 cents, respectively, compared with 40 cents, 87 cents, 31 cents and $1.15, respectively.

In 2012, PPL’s earnings from Kentucky Regulated, Pennsylvania Regulated and Supply segments are expected to decline due to higher operation and maintenance expenses, an increase in depreciation charges, lower capacity prices and energy margins, and a rise in fuel charges. These were partially offset by improve in U.K. Regulated segment earnings due to rise in electricity delivery revenue and four extra months of earnings from the Midlands operations.

At the Peer

The AES Corporation (AES), which competes with PPL Corporation, announced its second-quarter 2012 adjusted earnings of 18 cents per share versus 29 cents per share in the year-ago quarter. This decline was primarily due to higher effective tax rate, lower plant availability in Chile, unfavorable movements in foreign exchange rates and the final impact of July 2011 tariff reset at Eletropaulo in Brazil.

These negatives were partially offset by the contributions of new businesses in the U.S., Bulgaria, and Latin America. Quarterly earnings missed the Zacks Consensus Estimate of 26 cents.

In the reported quarter, AES Corporation’s revenue decreased $243 million year over year to $4,192 million. Top line also fell short of the Zacks Consensus Estimate by $500 million.

Our View

PPL Corporation’s results in second-quarter 2012 surpassed our expectations on the back of strong contribution from its utility, realized wholesale energy marketing and energy-related operations.

PPL Corporation has diverse asset portfolio, which are adaptable to a wide range of market scenarios. In addition, PPL continues to follow steady acquisitions program. We believe the company’s inorganic growth strategy along with development of existing assets will strengthen PPL’s overall portfolio. These initiatives will subsequently improve the company’s financial position by increasing proportionate size of its regulated business.

However, we are skeptical about the company’s performance in Kentucky Regulated, Pennsylvania Regulated and Supply segments in 2012. These segments are continually dragging down the company’s overall result. In addition, unpredictable weather patterns and strict federal regulations are also matters of concern. 

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

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