• Quarterly reported earnings per share up 87 percent primarily on successful sale of El Salvadoran business
• Quarterly ongoing earnings per share up 19 percent on international segment tax benefit, higher energy supply margins and improved energy marketing results
PPL Corporation (NYSE: PPL) on Thursday (8/2) reported second-quarter earnings of $0.88 per share, 87 percent higher than the $0.47 per share earned in the second quarter a year ago.
Driving this strong performance was a gain on the successful sale of PPL’s El Salvadoran business, a U.S. income tax benefit associated with PPL’s international delivery business segment, higher realized wholesale energy margins in PPL’s supply business and increased profitability in the company’s energy marketing operations.
Excluding special items, PPL’s earnings per share from ongoing operations for the second quarter increased by 19 percent to $0.63 per share compared with $0.53 per share in the same period of 2006.
For the first six months of 2007, PPL’s reported earnings increased by 18 percent per share compared with a year ago. Earnings from ongoing operations for the first six months of 2007 increased by 6 percent per share compared with a year ago.
“We are pleased with PPL’s solid results so far this year, which have benefited from higher wholesale energy prices, improving operational performance at our power plants, and our expanding energy marketing operations,” said James H. Miller, PPL’s chairman, president and chief executive officer. “We are growing shareowner value by further improving our outstanding generation, marketing and delivery assets as we pursue growth opportunities.”
Miller said the company is continuing to sharpen the focus on its core businesses by selling non-strategic assets. In late July, PPL announced that it is pursuing the sale of its natural gas and propane delivery operations. Earlier this year, the company completed the sales of its electricity delivery businesses in El Salvador and Bolivia and reached a definitive agreement to sell its telecommunications operations. PPL expects to complete the sale of its telecommunications operations and Chilean electricity delivery business in 2007 and its natural gas and propane delivery operations in 2008.
Miller said PPL is raising its existing 2007 forecast of earnings from ongoing operations from $2.30 to $2.40 per share to $2.40 to $2.50 per share, driven in part by a U.S. income tax benefit of $0.08 per share associated with the company’s international delivery business segment. Besides this tax benefit, which will not likely recur at similar levels in future periods, he said PPL looks to strong earnings growth in the second half of 2007 from the replacement of expiring supply obligations with higher-margin wholesale energy contracts and increased energy marketing profitability that includes new full-requirements contracts in the mid-Atlantic region.
Miller said PPL’s 2007 forecast of earnings from ongoing operations includes the operating results of PPL’s Latin American businesses but excludes special items related to the divestiture process. The company also has increased its 2007 forecast of reported earnings from $2.43 to $2.53 per share to $2.53 to $2.63 per share, which reflects special items recorded through June 30, 2007.
PPL’s revised 2007 earnings forecast excludes an estimated $0.13 to $0.15 per share U.K. income tax benefit expected to be recorded in the third quarter of 2007. This benefit results from a recent decrease in the U.K. statutory income tax rate from 30 percent to 28 percent, effective for fiscal tax years beginning on April 1, 2008, which will reduce PPL’s deferred tax liabilities.
Second-Quarter Reported and Ongoing Earnings Details
PPL’s reported earnings in the most recent quarter included special item credits of $0.25 per share, consisting of $0.21 per share primarily from the sale of PPL’s El Salvadoran electricity delivery business and unrealized gains of $0.04 per share related to the mark-to-market impact of energy-related, non-trading economic hedges. The second quarter of 2006 reflected special items of $0.06 per share in net charges.
Excluding these special items, PPL’s earnings from ongoing operations for the second quarter of 2007 were $0.63 per share, a 19 percent increase compared with $0.53 per share in earnings from ongoing operations a year ago. This increase was primarily due to an $0.08 per share U.S. income tax benefit associated with PPL’s international delivery business segment and higher wholesale energy margins driven by higher wholesale prices compared with a year ago, as well as increased margins from new full-requirements contracts.
Reported earnings are calculated in accordance with generally accepted accounting principles (GAAP). Earnings from ongoing operations is a non-GAAP financial measure that excludes special items. Special items include charges or credits that are unusual or non-recurring as well as the mark-to-market impact of energy-related, non-trading economic hedges.
First-Half Reported and Ongoing Earnings Details
For the first six months of 2007, PPL’s reported earnings were $1.41 per share, an 18 percent increase from $1.19 per share in the same period of 2006. These reported earnings included special items of $0.13 per share in net credits, consisting of an $0.11 net credit from the sale of PPL’s Latin American assets; unrealized gains of $0.07 related to the mark-to-market impact of energy-related, non-trading economic hedges; and a charge of $0.05 for the previously announced sale of the company’s telecommunication operations. The same period of 2006 reflected special items of $0.02 per share in net charges.
Excluding special items, PPL’s earnings from ongoing operations for the first six months of 2007 were $1.28 per share, a 6 percent increase from $1.21 a year ago. This increase was primarily due to an $0.08 per share U.S. income tax benefit associated with PPL’s international delivery business segment.
Key Earnings Factors by Business Segment
Supply Segment
PPL’s supply business segment primarily consists of the domestic energy generation and marketing operations of PPL Energy Supply.
Per share earnings from ongoing operations for PPL’s supply business segment in the second quarter of 2007 increased by 20 percent compared with a year ago. This increase primarily resulted from higher wholesale energy margins due to higher wholesale prices, increased energy marketing profitability and higher total margins from new and existing full-requirements supply contracts. Partially offsetting these higher margins were increased operation and maintenance costs related to planned nuclear and coal-fired power plant outages in the Eastern U.S.
Per share earnings from ongoing operations for PPL’s supply business segment during the first six months of 2007 increased by about 7 percent compared with a year ago. This increase was primarily due to the same factors as in the second quarter of 2007 as well as higher synfuel income. Partially offsetting these increases were higher operation and maintenance costs related to planned nuclear and coal-fired power plant outages in the Eastern U.S.
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 second quarter of 2007 declined by about 13 percent compared with a year ago. Increased sales to residential and commercial electricity customers were more than offset by higher operation and maintenance costs and higher depreciation compared with a year ago.
Per share earnings from ongoing operations for PPL’s Pennsylvania delivery business segment during the first six months of 2007 increased by about 5 percent compared with a year ago. This increase was primarily due to increased sales to residential and commercial electricity customers, partially offset by higher operation and maintenance costs and higher depreciation compared with a year ago.
International Delivery Segment
The quarterly and six-month results for PPL’s international delivery business segment include 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 second quarter of 2007 increased by 30 percent compared with a year ago. This increase was primarily due to a U.S. income tax benefit of $0.08 per share, which will not likely recur at similar levels in future periods. Other positive earnings factors were a favorable currency exchange rate in the U.K. and higher earnings in the electricity delivery businesses in Chile compared with a year ago. These favorable results were partially offset by higher operation and maintenance expenses in the U.K. In addition, last year’s second-quarter results benefited from higher income recognized from the ongoing liquidation of certain non-core businesses in the U.K.
Per share earnings from ongoing operations for PPL’s international delivery business segment during the first six months of 2007 increased by about 5 percent compared with a year ago. This increase was primarily due to the same factors as in the second quarter of 2007, partially offset by lower electricity sales and higher local taxes in the U.K.
Long-Term Outlook
Because the provider-of-last-resort (POLR) contract between PPL EnergyPlus and PPL Electric Utilities expires at the end of 2009, PPL Electric Utilities will be required to purchase energy supply in 2010 for default supply for those residential and small commercial and industrial customers who do not shop in the competitive market. Those purchases will be made through six competitive solicitations during 2007 to 2009 in accordance with a plan approved by the PUC in May 2007.
In late July 2007, the PUC approved PPL Electric Utilities’ purchase of one-sixth of the electricity it expects to need in 2010 for default supply customers. The next competitive solicitation is scheduled to begin Aug. 27, with bids due Oct. 1 and PUC approval Oct. 4.
Miller said that the company expects to provide definitive guidance for 2008 and to revise its current 2010 earnings forecast of $3.50 per share later in 2007. The 2010 revised forecast will incorporate the positive drivers of increases in market prices for energy and capacity since that forecast was developed in late 2005. He also said the company will be evaluating the market information provided by the capacity auctions of the PJM Interconnection, specifically the one scheduled for October, which will establish a value for capacity within PJM for a portion of 2010. This market information, as well as other factors, will assist PPL in developing an updated long-term earnings forecast.
Credit and Cash Flow Profiles
Miller said that the company’s improving credit profile, coupled with the sale of its Latin American assets and of its telecommunication operations, positions PPL to follow through on its previously announced program to repurchase up to $750 million of common stock. He said that as of July 31, 2007, about 3.6 million shares of PPL’s common stock already had been repurchased. He also said the company’s current business plan reflects additional common stock repurchases beginning in 2009, assuming the absence of other opportunities to enhance shareowner value at that time through business growth investments. “PPL’s improving credit and cash flow profiles provide a strong base for future investment,” Miller said.
Dividend Growth Rate
Miller said PPL expects that the growth rate of its common stock dividend in 2008 and 2009 will continue to exceed the growth rate in the company’s per share earnings from ongoing operations. The company increased the annualized dividend rate on its common stock from $1.10 to $1.22 per share, effective with the April 1, 2007 dividend payment. The current annual dividend rate equates to a 50 percent payout ratio based on the midpoint of the company’s revised 2007 forecast of earnings from ongoing operations. PPL expects its dividend payout ratio will be above 50 percent in 2008 and 2009.
PPL Corporation, headquartered in Allentown, Pa., controls more than 11,000 megawatts of generating capacity in the United States, sells energy in key U.S. markets and delivers electricity to more than 4 million customers in Pennsylvania, the United Kingdom and Chile. More information is available at www.pplweb.com.
(Note: All references to earnings per share in the text and tables of this news release are stated in terms of diluted earnings per share.)
Conference Call and Webcast
PPL invites interested parties to listen to the live Webcast of management’s teleconference with financial analysts about second-quarter 2007 financial results at 9 a.m. EDT Thursday, Aug. 2. The meeting is available online live, in audio format, along with slides of the presentation, on PPL’s Web site: www.pplweb.com. The Webcast will be available for replay on the PPL Web site for 30 days. Interested individuals also can access the live conference call via telephone at 719-457-2681.
Condensed Consolidated Financial Information (unaudited)
“Earnings from ongoing operations” excludes the impact of special items. Special items include charges, credits or gains that are unusual or non-recurring and the mark-to-market impact of energy-related, non-trading economic hedges. The mark-to-market impact of these hedges is economically neutral to the company in that offsetting gains or losses on underlying accrual positions will be recognized as energy is delivered over the terms of the contracts. Earnings from ongoing operations should not be considered as an alternative to reported earnings, or net income, which is an indicator of operating performance determined in accordance with generally accepted accounting principles (GAAP). PPL believes that earnings from ongoing operations, although a non-GAAP measure, is also useful and meaningful to investors because it provides them with PPL’s underlying earnings performance as another criterion in making their investment decisions. PPL’s management also uses earnings from ongoing operations in measuring certain corporate performance goals. Other companies may use different measures to present financial performance. Statements contained in this news release, including statements with respect to future earnings, energy prices, margins, sales and supply, marketing performance, growth, revenues, expenses, rates, cash flows, credit profile, financing, dividends, business disposition, corporate strategy, and generating capacity and performance, are “forward-looking statements” within the meaning of the federal securities laws. Although PPL Corporation believes that the expectations and assumptions reflected in these forward-looking statements are reasonable, these statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in the statements. The following are among the important factors that could cause actual results to differ materially from the forward-looking statements: market demand and prices for energy, capacity and fuel; market prices for crude oil and the potential impact on the phaseout of synthetic fuel tax credits and synthetic fuel operations; weather conditions affecting generation production, customer energy usage and operating costs; competition in retail and wholesale power markets; liquidity of wholesale power markets; the effect of any business or industry restructuring; the profitability and liquidity, including access to capital markets and credit facilities of PPL Corporation and its subsidiaries; new accounting requirements or new interpretations or applications of existing requirements; operation and availability of existing generation facilities and operating costs; transmission and distribution system conditions and operating costs; current and future environmental conditions and requirements and the related costs of compliance, including environmental capital expenditures and emission allowance and other expenses; significant delays in the planned installation of pollution control equipment at certain coal-fired generating units in Pennsylvania due to weather conditions, contractor performance or other reasons; development of new projects, markets and technologies; performance of new ventures; asset acquisitions and dispositions; political, regulatory or economic conditions in states, regions or countries where PPL Corporation or its subsidiaries conduct business; any impact of hurricanes or other severe weather on PPL and its subsidiaries, including any impact on fuel prices; receipt of necessary governmental permits, approvals and rate relief; new state, federal or foreign legislation, including new tax legislation; state, federal and foreign regulatory developments; any impact of state, federal or foreign investigations applicable to PPL Corporation and its subsidiaries and the energy industry; capital markets conditions, including changes in interest rates, and decisions regarding capital structure; stock price performance of PPL Corporation; the market prices of equity securities and the impact on pension costs and resultant cash funding requirements for defined benefit pension plans; securities and credit ratings; disposition proceeds; foreign currency exchange rates; the outcome of litigation against PPL Corporation and its subsidiaries; potential effects of threatened or actual terrorism or war or other hostilities; and the commitments and liabilities of PPL Corporation and its subsidiaries. Any such forward-looking statements should be considered in light of such important factors and in conjunction with PPL Corporation’s Form 10-K and other reports on file with the Securities and Exchange Commission.