ALLENTOWN, Pa., Jan. 22, 2003 — PPL Corp. on Wednesday reported 2002 earnings per share of $1.36, compared to $1.22 per share in 2001. Both periods reflect unusual items.
The company also reported 2002 earnings from core operations of $3.54 per share, compared to $4.22 a year ago. These core earnings, which exclude unusual items, exceed the consensus earnings estimate by Thomson Financial’s FirstCall of $3.42 per share from the company’s core operations.
Looking to the future, PPL has announced its 2003 forecast for reported earnings of $3.75 to $4.05 per share and earnings from core operations of $3.45 to $3.75 per share compared to the $3.60 to $3.80 per share from core operations that it had previously forecast. The forecast revision reflects the planned issuance of additional common stock in 2003 and lower pension income.
William F. Hecht, PPL’s chairman, president and chief executive officer, also reaffirmed the company’s longer-term forecast of a 5 to 8 percent compound annual growth rate based on 2002 earnings from core operations.
“Despite a year that brought extreme pressure to the energy sector from low wholesale energy prices, PPL’s stock price outperformed both the Dow Jones Utility Average and the Standard & Poor’s 500.” said Hecht. “We believe this performance reflects investor confidence both in our sound, risk-mitigating strategy and in our ability to quickly respond to changing business conditions.
“Our business strategy, coupled with our cost-reduction programs, has produced solid core earnings and an improving balance sheet,” Hecht said.
Hecht also said the company is taking steps to further strengthen its balance sheet in 2003. Subject to market conditions, the company plans to issue about $300 million in common stock during 2003. Approximately $50 million of this amount already has been issued through the company’s structured equity shelf program, and about $35 million is expected to be issued under PPL’s dividend reinvestment plan. This is in addition to the $41 million of common stock that the company issued under its structured equity shelf program in the fourth quarter of 2002. Hecht said the company currently anticipates raising the balance of its common stock equity needs throughout the course of 2003 using its structured equity shelf program.
“We have a clear strategy to grow earnings while also maintaining a strong balance sheet,” said Hecht. “Our strong cash flows from operations and our strengthening balance sheet make PPL a highly regarded competitor in the U.S. electricity business.”
Year-end and fourth-quarter earnings results
PPL’s reported earnings per share were $0.71 for the fourth quarter of 2002, compared to a loss of $2.12 a year ago. Earnings per share from core operations in the fourth quarter of 2002 were $0.82, exceeding the consensus earnings estimate of $0.70 per share from core operations by Thomson Financial’s FirstCall. PPL’s earnings from core operations in the fourth quarter of 2001 were $0.87 per share.
PPL’s 2002 earnings benefited from: improved results from the company’s international operations, excluding its Brazilian affiliate; increased electricity delivered to residential and commercial customers; and increased electricity supplied to wholesale customers, offset by lower margins realized on wholesale sales not under long-term contract. Negatively affecting PPL’s reported earnings in 2002 were the dilutive effects of the company’s $500 million common stock offering, higher financing costs, additional operating costs associated with new generating facilities, and lower pension income.
PPL’s 2002 and fourth-quarter reported earnings were favorably affected by an unusual item: a $0.06 per share credit due to a tax benefit accruing from the impaired Teesside power plant investment in the United Kingdom that PPL wrote down to zero during 2001.
PPL’s reported earnings for 2002 were adversely affected by several unusual charges: $0.99 per share due to a change in accounting rules for goodwill related to its Latin American investments; $0.64 per share due to the writedown to zero of its Brazilian investment; $0.15 per share due to additional operating losses at its Brazilian affiliate; $0.29 per share due to a workforce reduction program; and $0.17 per share in the fourth quarter due to a writedown to fair value of the generation equipment that had been planned for deployment at the Kings Park project on Long Island.
The company has decided to seek a buyer and not proceed with development of the 300-megawatt Kings Park project because of low energy prices and the unavailability of a power contract. Hecht said the decision involving Kings Park will reduce PPL’s planned capital expenditures for generation by a total of $165 million in 2003 and 2004.
Fourth-quarter earnings in 2002 benefited from improved results from the company’s international operations, excluding its Brazilian affiliate; increased electricity delivered to residential, commercial and industrial customers; and increased electricity supplied to wholesale customers, offset by lower margins realized on wholesale sales not under long-term contract. Negatively affecting fourth-quarter earnings were the dilutive effects of the company’s $500 million common stock offering, higher financing costs and lower pension income.
Focus on long-term energy contracts
Hecht said PPL’s earnings have benefited from the company’s strategy to effectively manage risk in the wholesale energy business.
“PPL is focused on profitable contracts in the wholesale market, especially longer-term contracts where available,” Hecht said. Over 85 percent of PPL’s projected energy margins in 2003 and about 70 percent of margins through 2007 are expected to come from these long-term contracts, according to Hecht.
“Our corporate strategy takes advantage of our strong generating capacity and well-run power plants in the U.S. Northeast and West, and these strengths are carefully balanced with contracted electricity load,” Hecht said.
“In fact, we currently anticipate annual earnings growth from core operations in the 5 to 8 percent range and improving equity ratios,” Hecht said. “This growth will be driven, in part, through increased revenues from long-term energy contracts already in place and through generation capacity that is not already under contract from our existing fleet of well-run power plants.”
“We believe that certain regions of the United States could be short of energy and generating capacity over the next several years,” Hecht said. “However, both the cost and risk currently associated with undertaking new development projects outweigh potential returns.”
PPL is developing the 600-megawatt Lower Mount Bethel plant, which is located next to the company’s existing Martins Creek generating facility in Pennsylvania.
Adjustments to international business plans
In September 2002, PPL gained full operational control of Western Power Distribution (WPD) in the United Kingdom when it purchased the remaining ownership interest from Mirant (NYSE: MIR – News). PPL previously owned a 51 percent interest in WPD, which serves about 2.5 million electricity distribution customers in Southwest England and Southern Wales.
Late in 2002, PPL sold its minority interests in small generating facilities in Bolivia and Portugal to concentrate on its majority-owned electricity distribution companies in Chile, Bolivia, El Salvador and the United Kingdom.
PPL’s strong liquidity and credit positions
PPL’s liquidity position is strong, with all necessary funding currently in place for the company to complete the construction of the remaining planned generation capacity of 690 megawatts by early 2004, after which time PPL anticipates having positive free cash flow.
Cash flow from operations in 2003 is expected to be about $1 billion, and PPL has access to bank-borrowing capacity of $1.5 billion in the United States and $400 million in the United Kingdom for WPD.
All three major credit-rating agencies reaffirmed their investment-grade credit ratings for PPL’s rated companies following PPL Corporation’s successful $500 million common stock offering in September 2002. Since that time, PPL has continued to strengthen its credit profile through the issuance of $41 million of common stock under its structured equity shelf program in the fourth quarter of 2002 and an additional $50 million in January 2003 under the same program.
PPL’s 2003 earnings forecast reflects the effect of the common stock the company expects to issue in 2003. In addition, there are two unusual items currently expected to affect earnings in 2003.
PPL’s 2003 forecast excludes any positive or negative impact of exiting its Brazilian investment and is based on the following assumptions: a continuation of current wholesale electricity prices; common stock issuances of $300 million; the addition to the company’s balance sheet, in the third quarter, of the variable interest entities related to the Sundance (Arizona), University Park (Illinois), and Lower Mount Bethel (Pennsylvania) power plants, which currently are reflected as operating leases; and, effective January 2003, the adoption of a new accounting rule addressing asset retirement obligations.
PPL Corporation, headquartered in Allentown, Pa., controls nearly 11,500 megawatts of generating capacity in the United States, sells energy in key U.S. markets and delivers electricity to customers in Pennsylvania, the United Kingdom and Latin America.