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PPL AT A GLANCE

P/E ► 21.2 AVG EV/EBITDA ► 11.4 HIGH ROA ► 3.9% AVG ROE ► 8.4% AVG Debt to Equity ► 2.91 AVG Current Ratio ► 1.13 AVG Interest Coverage Ratio ► 1.99 AVG

 

 

 

 

 

 

PPL Corporation is an electric utility that both generates electricity and delivers it to consumers in the northeastern and western United States and the United Kingdom.^[1] Because the company both generates and transmits electricity - known as vertical integration - it earns higher returns than traditional utilities (which only transmit electricity - they buy power from third party sources) and more stable earnings than electric suppliers (which aren't regulated by the government and therefore aren't guaranteed a profit). ^[2] On the unregulated supply side, PPL’s power plants in the United States have a total generating capacity of 11,418MW, 61% of which comes from fossil fuels. ^[3] On the regulated distribution side, the company serves approximately 4 million customers in Pennsylvania and the United Kingdom. ^[1]

PPL Generation has suffered from statutory price caps in Pennsylvania. Estimates suggest the company lost $7 billion in potential revenue from the price caps between 2005 and 2007. ^[2] However, the price caps are set to expire in 2010. PPL estimates retail rates will rise 36.1% and is providing its customers an option to phase in the price increase. ^[4]

Steps towards deregulation of the electric industry at the state and federal levels in the United States have resulted in increased competition in the wholesale electric market. In 1996, Pennsylvania enacted the Customer Choice Act to restructure the state’s electric utility industry to create a competitive market for electricity generation. ^[5] However, on the utility side, PPL Electric maintains a regulated distribution monopoly in its service areas under authorization from the Pennsylvania Public Utility Commission.^[3]

Although PPL has a diversified portfolio of power sources, 61% of its power is still generated from fossil fuels, making the company vulnerable to increases in fuel costs and carbon emissions legislation. In July 2008, a US Appeals Court struck down an EPA emissions cap-and-trade rule, making $100 million in emissions allowances that PPL had purchased worthless. ^[6] Pennsylvania has adopted Renewable Portfolio Standards (RPS) requiring utilities to generate atleast 18% of their energy from renewable energy sources, effective in 2020. ^[7] Because Pennsylvania counts PPL's 17% hydroelectric power as renewable under the RPS, PPL has almost satisfied all of the state's mandated renewable energy requirements. ^[8]

Business Overview

PPL Organization Chart ^[11]

PPL Corporation is one of the oldest regional power companies in the United States, with vertically integrated operations from Montana to the U.K. ^[2] The company’s diversified operations results in higher returns than regulated utilities and more stable earnings than electric suppliers. On the supply side, PPL has produced an average of 20% annual shareholder returns since 2001, benefiting from the spread between fuel costs ($16 MWh) and prices ($60-$100 Mwh).^[2] On the regulated side, PPL has consistently reported 8-10% returns for the past few years. ^[2]

Business Segments

• Supply (36.1% of revenue ^[12]:, 44.1% of net income ^[12]): PPL Generation and PPL EnergyPlus comprise the supply segment, which owns and operates power plants in the United States and markets the electricity produced. The supply segment has been exposed to increasingly higher levels of competition. PPL Generation has a generating capacity of 11,418 MW and operates plants in Pennsylvania, Montana, Illinois, Connecticut, New York, and Maine. ^[11] The majority (9,076MW) is generated in Pennsylvania and sold to PPL EnergyPlus. ^[11] PPL EnergyPlus markets the electricity, natural gas, and oil produced by PPL Generation on the wholesale market and on deregulated retail markets.

Contents 1 Business Overview 1.1 Business Segments 2 Trends and Forces 2.1 Pennsylvania to remove price caps on retail electricity in 2010 2.2 Natural Monopoly Over Retail Electricity Promotes Stable Revenue Outlook 2.3 Rising Cost of Coal Increases Costs for PPL 2.4 Global Climate Change 3 Competition 4 References

PPL Generation 2007 Power Sources ^[3]

• International Delivery (13.9% of revenue ^[12], 47.4% of net income ^[12]): Western Power Distribution (WPD) comprises PPL’s international delivery segment, which supplies electricity to 2.6 million customers in the U.K. ^[5]In the second half of 2007, PPL sold its electric utilities in Chile, El Salvador, and Bolivia for a total of $877 million. ^[13] Although PPL lost 1.1 million customers as a result of the sales, the company expects the divestments to bring more stability to the company’s operating outlook. ^[5]
• Pennsylvania Delivery (50.0% of revenue ^[12], 8.5% of net income ^[12]: PPL Pennsylvania Delivery encompasses the electric and gas delivery services of PPL Electric and PPL Gas Utilities. PPL Electric delivers power to 1.4 million customers in 29 counties throughout eastern and central Pennsylvania. ^[14] As a regulated public utility, PPL Electric purchases electricity from PPL EnergyPlus and delivers it to customers at predetermined rates. ^[14] Residential and commercial customers make up the majority of PPL Electric’s revenue. PPL Gas Utilities distributes natural gas and propane in Pennsylvania, Maryland, and Delaware to approximately 110,000 customers. While the natural gas service is regulated by the Pennsylvania Public Utilities Commission, the propane delivery service is not. On October 1, 2008, PPL Gas Utilities was sold to UGI Corp for $268 million and renamed UGI Central Penn Gas. ^[15]

PPL Electric 2007 Revenue Sources by Customer Type ^[14]

Trends and Forces

Pennsylvania to remove price caps on retail electricity in 2010

Pennsylvania regulations require PPL to sell two-thirds of its power to Pennsylvania residents at capped prices.^[2] Estimates suggest the mandated price caps resulted in nearly $7 billion of lost revenue between 2005 and 2007. ^[2] However, in 2010 the state plans to remove its price caps. ^[16] The company estimates rates will rise by 36.1% if future power costs match the existing trend, though the Pennsylvania Consumer Advocate expects an even higher price. ^[4] In order to ease the transition to market prices, PPL Electric has proposed a plan, pending approval by the Pennsylvania Public Utilities Commission, under which customers have the option of paying additional amounts on their bills beginning in mid-2008. ^[16] This would permit PPL to begin realizing additional revenue as early as 2009.

Some state legislators have introduced legislation to extend the price caps beyond their expiration on December 31, 2009. If such legislation is enacted, PPL Electric would experience cash flow shortfalls and risk losing its high credit rating. ^[16] The company's business strategy relies on the removal of the price caps to recover increases in fuel costs and capital expenditures.

Natural Monopoly Over Retail Electricity Promotes Stable Revenue Outlook

PPL has a monopoly over retail electricity in its areas of service in Pennsylvania because of the barriers to entry to the industry due to the high cost of building infrastructure. This brings stability to the company’s operating outlook by guaranteeing a customer base. As a legally regulated utility, PPL Electric is permitted to generate a return on equity of 10.7%. ^[2] If returns exceed this level, the extra revenue must be passed back to ratepayers in the form of savings.

On the other hand, PPL’s regulated status also makes it more difficult for the company to adjust retail prices based on swings in the cost of fuel since regulators must approve changes in electricity rates. If costs increase faster than regulators authorize retail rate increases, the company’s bottom line is negatively affected. In 2007, rising fuel costs and capital expenditures pulled returns below the allowed 10.7%. In 2008, The Pennsylvania Public Utilities Commission approved a 1.7% rate increase, the first rate increase since 1995. ^[2] The rate increase should boost returns through 2009. ^[2] In the U.K., retail electric rates are set every five years and automatically adjusted to inflation, helping PPL recover rising fuel costs. ^[2]

Rising Cost of Coal Increases Costs for PPL

PPL generates 56% of its electricity from coal power. ^[3] JP Morgan forecasts the price of coal will increase over 60% in 2008 due to surging demand from developing nations. ^[17] In particular, continued strong demand for coal in China and India, bottlenecks in ports in Australia, and the temporary closures of several large coal mines worldwide caused coal prices to increase. ^[18] Spot prices for domestic steam coal have increased 48% from October 2007 to February 2008. ^[18] In 2008, PPL projects lower earnings for its supply segment due to higher operating costs and capital expenses. ^[19] PPL does not completely hedge against increases in fuel prices. A 10% rise in fossil fuel prices would decrease 2008 gross margins by $20 million. ^[20]

Global Climate Change

PPL generates 61% of its electricity from coal, natural gas, and oil^[3], making the company vulnerable to carbon emissions regulation. As of 2008, twenty-six states had adopted binding Renewable Portfolio Standards, policies that require electricity providers to obtain a minimum percentage of their power from renewable energy sources. Pennsylvania has adopted an RPS requiring utilities to generate at least 18% of their energy from renewable energy sources (including hydroelectric), effective in 2020. ^[21] By 2010, PPL Electric will be required to supply 9% of its electricity from alternative energy sources. ^[14] Since PPL generated 8% of its electricity from hydroelectric power in 2007, in the short term the company only needs to marginally increase its use of alternative energy. ^[3]

Competition

PPL has a natural monopoly over distribution of retail electricity in its areas of operation in Pennsylvania and the U.K. since the high cost of infrastructure acts as a barrier to entry for other firms. PPL Electric does not face competition in its distribution business, and PPL’s UK subsidiary faces little or no competition in the residential power market. However, customers have the ability to employ self-generating sources of energy, such as installing their own solar panels. ^[22]

Unlike its regulated electric distribution business, PPL’s energy supply business is not guaranteed a legal rate of return and its revenue is entirely dependent on the company’s ability to compete with other wholesale electricity providers. ^[23]). Competitors include regulated utilities, industrial companies, and non-utility electricity generators. The wholesale electric industry has undergone deregulation at both the federal and state levels. In 1996, Pennsylvania enacted the Customer Choice Act to restructure the state’s electric utility industry to create a competitive market for electricity generation. ^[5]

References

1. ↑ ^{1.0 1.1} Yahoo Finance, “PPL”
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10} Morningstar Analyst Report, “PPL Corporation”
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5} PPL 2007 10-K, Item 1 "Business," page 15
4. ↑ ^{4.0 4.1} Wilkes-Barre News, “Electric rates to rise when caps expire”
5. ↑ ^{5.0 5.1 5.2 5.3} PPL 2007 10-K, Item 1 "Business," page 14
6. ↑ Yahoo Finance, “PPL may write down value of emissions allowances”
7. ↑ US Department of Energy, Energy Efficiency and Renewable Energy State Activities and Partnerships
8. ↑ Pennsylvania Incentives for Renewable Energy
9. ↑ PPL 2007 10-K, Item 8 "Financial Statements," page 118
10. ↑ PPL 2005 10-K, Item 8 "Financial Statements," page 136
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} PPL 2007 10-K, Item 1 "Business," page 11
12. ↑ ^{12.0 12.1 12.2 12.3 12.4 12.5} PPL 2007 10-K, Item 8 "Financial Statement," page 153
13. ↑ PPL 2007 10-K, Item 8 "Financial Statement," page 171
14. ↑ ^{14.0 14.1 14.2 14.3} PPL 2007 10-K, Item 1 "Business," page 13
15. ↑ Philadelphia Business Journal, “UGI buys PPL Gas Utilities”
16. ↑ ^{16.0 16.1 16.2 16.3} PPL 2007 10-K, Item 7 "Management’s Discussion," page 43
17. ↑ Reuters, "JP Morgan raises 2008 coal price forecast"
18. ↑ ^{18.0 18.1} TE 2007 10-K, Item 7 "Management’s Discussion," page 61
19. ↑ PPL 2007 10-K, Item 7 “Management’s Discussion and Analysis of Financial Conditions” page 40
20. ↑ PPL 2007 10-K, Item 7 “Management’s Discussion and Analysis of Financial Conditions” page 58
21. ↑ US Department of Energy, Energy Efficiency and Renewable Energy State Activities and Partnerships
22. ↑ Standard and Poor’s Stock Report, “PPL,” 27 Sept 2008
23. ↑ PPL 2007 10-K, Item 1A "Risk Factors," page 22
24. ↑ ^{24.0 24.1} Google Finance PPL
25. ↑ TE 2007 10-K, Item 1 "Business," page 4
26. ↑ NGG 2007 20-F
27. ↑ GXP 2007 10-K, Item 8 "Consolidated Financial Statement," page 59
28. ↑ EIX's 2007 Annual Report , page 104
29. ↑ AEP 2007 10-K, Item 1 “Business,” page 2
30. ↑ DUK 2007 10-K, Item 8 “Financial Statement,” page 40
31. ↑ Google Finance ETR
32. ↑ Google Finance EXC
33. ↑ Google Finance PSEG
34. ↑ TE 2007 10-K, Item 2 “Properties," page 33
35. ↑ TE 2007 10-K, Item 2 “Properties," page 33
36. ↑ National Grid 2005 Seven Year Statement
37. ↑ EIX's 2006 Annual Report (Pg 18 & 29)
38. ↑ AEP's Investor Page)
39. ↑ DUK's Energy Business Segments
40. ↑ National Grid awarded contracts to provide British Gas metering services
41. ↑ GXP 2007 10-K, Item 1 “Business," page 12
42. ↑ EIX's 2006 Annual Report (Pg 17)
43. ↑ AEP's Investor Page)
44. ↑ DUK's Energy Business Segments
45. ↑ PPL 2007 10-K, Item 1 "Business," page 25
46. ↑ TE 2007 10-K, Item 1 "Business," page 7
47. ↑ GXP 2007 10-K, Item 1 “Business," page 9
48. ↑ EIX's 2006 Annual Report (Pg 19)
49. ↑ AEP's 2006 Annual Report (Item 2)
50. ↑ DUK's 2006 10-k (Pg 11)
51. ↑ Google Finance TE
52. ↑ Google Finance NGG
53. ↑ Google Finance GXP
54. ↑ Google Finance EIX
55. ↑ Google Finance AEP
56. ↑ Google Finance DUK
57. ↑ Google Finance ETR
58. ↑ Google Finance EXC
59. ↑ Google Finance PSEG