Based on improved performance across all business segments, PPL Corporation (NYSE: PPL) today reported a solid increase in first-quarter earnings for 2006 compared with a year ago and announced an increase in its 2006 earnings forecast.
The company's reported earnings in the first quarter of 2006 were $0.73 per share compared with $0.44 per share for the same period of 2005. Reported earnings in the first quarter of 2006 included an unusual credit of $0.03 per share, while the first quarter of 2005 reflected $0.10 per share in unusual charges. Excluding these unusual items, PPL's earnings from ongoing operations for the first quarter of 2006 were $0.70 per share, a 30 percent increase from the $0.54 per share in earnings from ongoing operations in the same period a year ago.
"This exceptional first-quarter performance, one of PPL's best quarters ever, results from our ability to capture increasing margins in the improving wholesale energy markets," said William F. Hecht, PPL's chairman and chief executive officer.
"Although each of our businesses contributed to our success in the quarter, we continue to see the supply business as the engine of our growth over the remainder of the decade," said Hecht. He said the first-quarter 2006 per share earnings from ongoing operations of the supply business segment, which includes energy generation and marketing, increased by 31 percent over the first quarter of last year.
Per share earnings from ongoing operations of the company's international delivery business and its Pennsylvania delivery business also increased significantly in the first quarter of 2006, by 31 percent and 25 percent, respectively, compared with a year ago.
Reflecting its strong first-quarter results, PPL has increased its 2006 forecast of earnings from ongoing operations to $2.20 to $2.30 per share from $2.15 to $2.25 per share. The $2.25 per share midpoint of the revised forecast represents an 8.2 percent increase over PPL's 2005 earnings from ongoing operations of $2.08 per share. The company's 2006 forecast of reported earnings per share is $2.23 to $2.33 per share, reflecting unusual items recorded through March 31, 2006.
Hecht said PPL has increased its 2006 forecast despite an expected $0.12 per share reduction in synfuel earnings compared with 2005, as well as potentially higher fuel replacement costs for purchases of synfuel from third-party producers for the company's coal-fired power plant operations.
PPL also reiterated its target of 11 percent compound annual growth in earnings per share through 2010, based on 2005 earnings from ongoing operations of $2.08 per share. This long-term target would result in 2010 earnings of about $3.50 per share.
Although the company is not issuing a revised 2007 forecast at this time, Hecht said the company expects earnings per share growth in 2007 despite a conservative assumption that PPL will realize no synfuel benefits in that year due to high crude oil prices.
In the event that PPL is able to realize any benefits from synfuel tax credits above the amounts now included in its 2006 and 2007 forecasts, it would be upside to the company's earnings.
First-quarter 2006 Earnings Results
Reported earnings are calculated in accordance with generally accepted accounting principles (GAAP). Earnings from ongoing operations is a non-GAAP financial measure that excludes unusual items. The reconciliation tables at the end of this news release provide a detailed description of all unusual items, including a $0.03 per share credit in the first quarter of 2006 related to an increase in the expected recovery of PPL's claims in the Enron bankruptcy and a total of $0.10 per share in charges in the first quarter of 2005.
First-quarter Earnings by Business Segment
The following chart shows earnings contributions from PPL's business segments for the first quarter of 2006 compared with the first quarter of 2005.
First-quarter 2006 Key Earnings Factors by Business Segment
Supply Segment
PPL's supply business segment primarily consists of the domestic energy marketing and generation operations of PPL Energy Supply.
Per share earnings from ongoing operations for PPL's supply business segment in the first quarter of 2006 increased by approximately 31 percent compared with the same period in 2005. This increase was primarily due to higher wholesale energy margins in both the eastern and western United States. PPL's supply business segment also benefited in the first quarter of 2006 from unrealized gains on options purchased to economically hedge a portion of the risk associated with synfuel tax credits.
The improved wholesale energy margins in the eastern U.S. resulted from a contract price increase for customers who chose not to shop in the competitive electricity market, increased average sale prices for electricity, and unrealized gains from new forward contracts for wholesale energy and related services. The improved wholesale energy margins in the western U.S. resulted from increased average sale prices for electricity and higher output from PPL's hydroelectric power plants.
Partially offsetting the positive earnings drivers for this business segment in the first quarter of 2006 were higher fuel and fuel transportation costs and increased operation and maintenance costs, primarily due to higher costs from both planned and unplanned power plant outages.
Pennsylvania Delivery Segment
PPL's Pennsylvania delivery business segment includes the regulated electric and gas delivery operations of PPL Electric Utilities and PPL Gas Utilities.
Per share earnings from ongoing operations for PPL's Pennsylvania delivery business segment in the first quarter of 2006 increased by 25 percent compared with the same period of 2005. The key positive earnings driver for this business segment in the first quarter of 2006 was lower operation and maintenance costs compared with the same period a year ago, when PPL Electric Utilities incurred expenses to restore electric service to customers following ice storms in northeastern Pennsylvania. A portion of these costs was deferred in the third quarter of 2005 following the receipt of an accounting order from the Pennsylvania Public Utility Commission (PUC). Partially offsetting the positive earnings driver for this business segment in the first quarter of 2006 were lower residential and commercial electricity sales, primarily due to a milder winter in 2006 than in 2005.
International Delivery Segment
PPL's international delivery business segment includes regulated electric distribution companies in the United Kingdom and Latin America.
Per share earnings from ongoing operations for PPL's international delivery business segment in the first quarter of 2006 increased by approximately 31 percent compared with the same period of 2005. The key positive earnings drivers for this business segment for the first quarter of 2006 were higher electricity delivery margins in the U.K., primarily due to increased sales; a significant increase in the amount of electricity sold by PPL's affiliates in Latin America; and the realization of certain tax benefits in the U.K.
Partially offsetting the key positive earnings drivers for this business segment in the first quarter of 2006 were higher U.S. income taxes and a negative effect from the foreign currency exchange rate in the U.K.
2006 Earnings Forecast
The company's 2006 forecast of reported earnings per share is $2.23 to $2.33 per share, reflecting unusual items through March 31, 2006. PPL's new 2006 forecast of earnings from ongoing operations of $2.20 to $2.30 per share excludes the impact of the first-quarter unusual credit of $0.03 per share and any other unusual items that may occur this year. The 2006 forecast includes specific key factors for each of PPL's three business segments.
PPL expects its supply business segment to provide about 60 percent of the company's 2006 per share earnings from ongoing operations, with the balance almost evenly distributed between its Pennsylvania delivery and international delivery segments.
Supply Segment
PPL's energy supply margins are expected to benefit from the 8.4 percent increase in the generation prices under the PUC-approved contract between PPL Electric Utilities and PPL EnergyPlus for customers who choose not to shop for an energy supplier; higher prices for wholesale electricity sales; and higher generation output for the remainder of 2006 compared with the same period of 2005. These benefits are expected to be partially offset by increased fuel and fuel transportation expenses. The 2006 supply business segment earnings also are expected to be affected by higher operation and maintenance expenses. In addition, PPL is forecasting 2006 synfuel earnings of $0.05 per share, which is $0.12 per share less than the company realized in 2005.
The earnings of PPL's supply business segment have historically benefited from synfuel operations in two ways. The primary earnings benefit is derived from the production of synfuel at the company's two synfuel production facilities. In 2005, the supply business segment earned $0.17 per share from the production of synfuel, including a benefit from unrealized gains on options purchased by PPL to economically hedge a portion of the risk associated with the 2006 and 2007 synfuel tax credits. PPL originally planned 2006 synfuel earnings of $0.10 per share. Due to the rising level of oil prices year-to-date in 2006, as well as elevated current forward prices for oil, this business segment now expects to realize about $0.05 per share from synfuel operations for 2006 due to the phase-out of synfuel tax credits and reduced synfuel production.
The second way in which PPL's supply business segment benefits from synfuel is through the purchase of synfuel from third parties as a fuel source for PPL's eastern coal generation facilities. Should these third-party synfuel suppliers stop production due to the phase-out of tax credits, this business segment would incur approximately $0.02 per share in fuel replacement costs in 2006. The reduced earnings from both synfuel production and fuel supply are reflected in PPL's revised earnings forecast for 2006.
Pennsylvania Delivery Segment
PPL projects that the Pennsylvania delivery business segment will have slightly lower delivery earnings in 2006, from an expectation of flat revenues in 2006 compared with 2005, due to favorable weather impacts in 2005, and an increase in operation and maintenance expenses compared with 2005.
International Delivery Segment
PPL projects that the international delivery business segment will have somewhat lower delivery earnings in 2006 compared with 2005, due to increased operation and maintenance expenses, primarily resulting from higher pension costs at PPL's electricity distribution companies in the United Kingdom; higher U.S. income taxes; and unfavorable currency effects in 2006.
2007 Earnings Forecast
Although the company is not issuing a revised 2007 forecast at this time, it expects earnings per share growth in 2007 over 2006 despite an assumption that PPL will realize no synfuel tax credit benefits in 2007 due to high crude oil prices. PPL's expected 2007 earnings per share growth is driven primarily by the replacement of expiring fixed-price supply obligations with higher-margin wholesale energy contracts; an increase in generation prices under the PUC-approved contract between PPL Electric Utilities and PPL EnergyPlus for customers who choose not to shop for an energy supplier; and higher generation output in the western U.S. Partially offsetting these drivers are projected increases in operation and maintenance expenses and projected increases in fuel-related expenses, including higher fuel costs for replacing synfuels currently being purchased from third parties.
Credit Profile and Liquidity Position
PPL's equity to total capitalization ratio as of March 31, 2006, was 40 percent, up from 36 percent a year ago, using debt and equity as presented on PPL's balance sheet. PPL's adjusted equity to total capitalization ratio as of March 31, 2006, was 54 percent, up from 50 percent a year ago. The adjusted ratio for March 31, 2006, excludes $816 million of transition bonds and $2.1 billion of debt of international affiliates, which are non-recourse to PPL.
PPL expects its equity to total capitalization ratio to grow to about 43 percent by the end of 2006, again using debt and equity as presented on PPL's balance sheet. This reflects a $97 million net reduction of debt, the sale of $250 million of preference stock in April 2006 and an approximate $310 million increase in common equity, primarily through growth in retained earnings. PPL's adjusted equity to total capitalization ratio for the same period is forecast to increase to about 56 percent. The adjusted ratio excludes $605 million of non-recourse transition bonds and $2.1 billion of non-recourse debt of international affiliates.
At March 31, 2006, PPL had $3.0 billion of available capacity under its $3.6 billion of bank credit facilities. The following table reflects PPL's projected free cash flow before dividends for 2006 and actual cash flows for 2005.
The forecasted change in cash from operations between periods is primarily due to a projection of higher net income in 2006. PPL's projection of increased capital expenditures in 2006 is primarily driven by the construction of pollution-control equipment at the Montour and Brunner Island power plants.
As previously announced, PPL plans to spend about $1.5 billion for the installation of pollution-control equipment at coal-fired power plants in Pennsylvania. This plan includes the installation of sulfur dioxide scrubbers at both units of PPL's Montour power plant and at Unit 3 of its Brunner Island power plant, with the equipment expected to be in service during 2008. The company also plans to install a scrubber at Units 1 and 2 of the Brunner Island plant, with the equipment expected to be in service in 2009. In late 2005, PPL received its air permit and started construction of the Montour scrubbers. PPL recently received air permits for the Brunner Island scrubbers, with construction scheduled to start in the near future.
During the first quarter of 2006, PPL also announced plans to install cooling towers at its Brunner Island coal-fired power plant. PPL expects construction of the cooling towers to begin by 2008 and for the towers to be in service in the spring of 2010. The cost of this project is expected to be about $125 million, with the majority of this expenditure to be incurred in 2009 and early 2010.
PPL plans to finance this $1.6 billion of pollution-control equipment as part of its overall capital expenditure program with cash from operations and, when necessary, the issuance of debt and preferred securities. The company has no plans to issue any common stock during this period to fund its current capital expenditure program. PPL expects to be in a position to repurchase a portion of its common stock beginning in 2009.
Future Outlook
PPL's ability to grow its energy supply margins through the end of 2009 is limited to some degree because a substantial portion of its generation in the eastern U.S. is being sold through Dec. 31, 2009, under the PUC-approved contract between PPL EnergyPlus and PPL Electric Utilities for customers who choose not to shop for an energy supplier. Sales of energy for delivery after the expiration of that contract are expected to be made at the forward market prices in effect for the specified delivery period at the time those sales commitments are made.
"PPL's forecast of an 11 percent compound annual growth rate in earnings per share through 2010 reflects our year-end 2005 view of 2010 forward energy prices, fuel and emission allowance prices, fuel transportation costs and other costs associated with operating the business," Hecht said.
Hecht stated that underlying forces -- such as rising fuel costs, and, especially, declining generation reserve margins in the PJM Interconnection, combined with anticipated costs for new base load generation -- suggest that 2010 energy prices will be substantially higher than the prices now being received by PPL EnergyPlus under its long-term contract with PPL Electric Utilities. PPL EnergyPlus has started to layer in 2010 sales contracts at the current forward prices, along with longer-term fuel supply arrangements.
Hecht said PPL expects that the growth rate of its common stock dividends over the next few years will continue to exceed the growth rate in the company's earnings per share and, therefore, result in a dividend payout ratio above 50 percent after 2006. All future dividend decisions, Hecht noted, are subject to the board of directors' quarterly dividend declarations based on the company's financial position and other relevant considerations at the time.
PPL increased the annualized dividend rate on its common stock twice during 2005 and once in 2006, bringing it to $1.10 per share and bringing the payout ratio to 50 percent of the $2.20 per share low end of the company's revised 2006 forecast. The annualized dividend rate has been increased by more than 30 percent since the start of 2005 and by 108 percent over the past five years.
Hecht identified the following visible growth elements through 2010:
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Annual increases in the supply prices under the PUC-approved contract, expiring at the end of 2009, between PPL Electric Utilities and PPL EnergyPlus for PPL Electric Utilities customers who choose not to shop for an energy supplier. |
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The opportunity to improve margins from wholesale electricity sales as certain long-term contracts expire over the next several years. |
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Incremental capacity increases of about 270 megawatts at several existing generating facilities. |
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The benefits from the installation of scrubbers at the Montour and Brunner Island coal-fired power plants. |