01—Abstract
Summary
Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.
PPL Corporation, headquartered in Allentown, PA, is an energy and utility holding company whose 2006 Form 10-K reports consolidated net income of $865 milliona, or $2.24 diluted EPS, up from $678 million in 2005, on operating revenues of $6.90 billion.
Its three reportable segments are Supply (domestic generation and marketing, with 11,556 MW of generating capacity), International Delivery (electricity distribution in the U.K., Chile, El Salvador and Bolivia), and Pennsylvania Delivery (regulated delivery by PPL Electric and gas utility PPL Gas Utilities). Supply segment net income rose to $416 million, International Delivery to $268 millionb and Pennsylvania Delivery to $181 million. The filing highlights a large capital program: total capital expenditures are projected at about $6.8 billion for 2007 through 2011, with environmental spending (mainly sulfur dioxide scrubbers) of $612 million planned for 2007 alone.
Management expects significantly higher Supply segment earnings in 2007 from replacing expiring fixed-price PLR supply obligations with higher-margin contracts, while International Delivery earnings are projected to decline and Pennsylvania Delivery earnings are expected to be flat. PPL also plans to file a distribution rate request in March 2007 and says customer rates for PLR supply could rise about 20%c in 2010 at current forward prices.
Key risks include the expiration of PPL Electric's capped PLR contracts after 2009, pending Pennsylvania PUC rules and proposed legislation, commodity price and counterparty exposure, environmental and nuclear regulation, and the phase-out of synthetic fuel tax credits. Liquidity appears adequate, with $3.4 billiond of committed credit facilities and $1.15 billion of cash and short-term investments at year-end 2006, while PPL plans to issue up to $1.1 billion of long-term debt in 2007 and expects to begin repurchasing common stock in 2009.
02—Key points
Key Highlights
- Net income rose to $865 million ($2.24 diluted EPS) in 2006 from $678 million ($1.77 diluted EPS) in 2005; operating revenues were $6.90 billion, up from $6.18 billion.
- Supply segment net income was $416 million in 2006, up from $311 million, and management projects significantly higher Supply earnings in 2007 as fixed-price PLR obligations roll off.
- Capital expenditures are projected at roughly $6.8 billion for 2007-2011, with environmental projects (scrubbers and pollution control) accounting for $612 million in 2007 alone.
- PPL Electric's PLR contracts with PPL EnergyPlus cap supply rates through 2009; PPL estimates customer rates could rise about 20% in 2010 at current forward prices.
- Credit facilities total $3.4 billion, and the company expects to increase them to more than $4.0 billion in 2007; senior credit ratings are at the Baa2/BBB investment-grade level.
- Dividends per share rose to $1.10 in 2006 from $0.96, and the company announced a further increase to a $1.22 annual rate for 2007, with a stock repurchase program expected to begin in 2009.
- Sale of the 50% Griffith plant interest produced a $23 million after-tax loss, and synthetic fuel assets were fully impaired in 2006, reflecting the phase-out of federal synfuel tax credits.
03—Questions
Frequently Asked Questions
How did PPL's earnings change in 2006 and what drove the increase?
Net income was $865 million in 2006, compared with $678 million in 2005. Supply segment net income rose to $416 million from $311 million, helped by higher eastern non-trading margins and higher PLR sales prices, which were 8.4% higher in 2006 under the PUC Final Order. International Delivery net income rose to $268 million from $215 million, and Pennsylvania Delivery rose to $181 million from $152 million, partly due to unusual items.
What is the outlook for 2007?
PPL projects significantly higher earnings for the Supply segment, driven by higher-margin wholesale contracts replacing expiring fixed-price obligations. It expects International Delivery earnings to decline, mainly due to a higher U.K. effective tax rate and lower gains from asset sales, and expects Pennsylvania Delivery earnings to be flat, with modest load growth offset by higher operation and maintenance expense. PPL Electric also expects to file a distribution rate request in late March 2007 seeking increases effective January 2008.
What regulatory uncertainty affects PPL Electric after 2009?
PPL Electric's PLR contracts with PPL EnergyPlus, which supply electricity at capped rates, expire at the end of 2009. The PUC has yet to finalize rules governing PLR obligations after 2009; in February 2007 it issued proposed regulations, and an administrative law judge recommended approval of PPL Electric's supply plan with minor changes. The filing also notes a Pennsylvania governor's Energy Independence Strategy that would phase in rate increases and may change PLR procurement, but PPL says it cannot predict the final outcome.
How much capital does PPL plan to spend and how will it be funded?
PPL's projected capital expenditures total about $6.8 billion for 2007 through 2011, with 2007 spending of $1.73 billion including $612 million for environmental projects. PPL plans to fund 2007 capital expenditures with cash on hand, operating cash flow and debt issuance, and it plans to issue up to $1.1 billion of long-term debt in 2007. It does not currently plan to issue significant common stock in 2007.
What are the main risks highlighted in the filing?
The risk factors include volatility in wholesale electricity and fuel prices, reliance on long-term power sales contracts, counterparty credit risk, intense competition in deregulated markets, extensive environmental and nuclear regulation, possible credit rating downgrades that would raise collateral requirements, rising health care and pension costs, and the outcome of legal proceedings and investigations. The filing also notes a $2.2 billion market-over-contract exposure under the PLR contracts, of which PPL EnergyPlus must post $300 million in performance assurance.
04—Continue