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WIKI ANALYSIS
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]
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. [4] 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. [5] Pennsylvania has adopted Renewable Portfolio Standards (RPS) requiring utilities to generate atleast 18% of their energy from renewable energy sources, effective in 2020. [6] 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. [7]
Business Overview
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.
Business & Financial Metrics[8]
In 2009, PPL generated a net income of $407 million on revenues of $7.56 billion. This represents a 56.2% decrease in net income on a 5.6% decrease in total revenues from 2008, when the company earned $907 million on revenue of $8.01 billion.
Business Segments[8]
- Supply (47.9% of total revenues): 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. [9] The majority (9,076MW) is generated in Pennsylvania and sold to PPL EnergyPlus. [9] PPL EnergyPlus markets the electricity, natural gas, and oil produced by PPL Generation on the wholesale market and on deregulated retail markets.
- Pennsylvania Delivery (42.6% of total revenues): 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. [10] As a regulated public utility, PPL Electric purchases electricity from PPL EnergyPlus and delivers it to customers at predetermined rates. [10] 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.
- International Delivery (9.5% of total revenues): Western Power Distribution (WPD) comprises PPL’s international delivery segment, which supplies electricity to 2.6 million customers in the U.K. [4]
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]In 2010, the state plans to remove its price caps. [11] 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. [12] In order to ease the transition to market prices, PPL Electric has proposed a plan, pending approval by the Pennsylvania Public Utilities Commission.
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 the U.K., retail electric rates are set every five years and automatically adjusted to inflation, helping PPL recover rising fuel costs. [2]
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. [13]
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. [14]). 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. [4]
PPL's competitors include:
- TECO Energy (TE)
- National Grid Transco (NGG)
- Great Plains Energy (GXP)
- Edison International (EIX)
- American Electric Power Company (AEP)
- Duke Energy Corporation (DUK)
- Exelon Energy Corp (EXC)
References
- ↑ 1.0 1.1 Yahoo Finance, “PPL”
- ↑ 2.0 2.1 2.2 2.3 2.4 Morningstar Analyst Report, “PPL Corporation”
- ↑ 3.0 3.1 PPL 2007 10-K, Item 1 "Business," page 15
- ↑ 4.0 4.1 4.2
- ↑ Yahoo Finance, “PPL may write down value of emissions allowances”
- ↑ US Department of Energy, Energy Efficiency and Renewable Energy State Activities and Partnerships
- ↑ Pennsylvania Incentives for Renewable Energy
- ↑ 8.0 8.1 PPL 2009 10-K
- ↑ 9.0 9.1
- ↑ 10.0 10.1 PPL 2007 10-K, Item 1 "Business," page 13
- ↑ PPL 2007 10-K, Item 7 "Management’s Discussion," page 43
- ↑
- ↑ Standard and Poor’s Stock Report, “PPL,” 27 Sept 2008
- ↑ PPL 2007 10-K, Item 1A "Risk Factors," page 22
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