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PPL Corporation (PPL - Analyst Report) reported third-quarter 2012 pro forma earnings per share of 72 cents, beating the Zacks Consensus Estimate of 68 cents. However, quarterly earnings per share were lower than the year-ago figure of 76 cents due to lower earnings from the Kentucky Regulated and the Supply segments; partially offset by an increase in the U.K. Regulated and the Pennsylvania Regulated segments’ earnings.  

GAAP earnings during the quarter were 61 cents compared with 76 cents in the year-ago quarter. The difference between GAAP and pro forma earnings was due to a charge of 16 cents for energy-related economic activities, 6 cents cost related to foreign currency-based economic hedges and coal contract modification related charge of 2 cents; partially offset by a 13 cents gain associated with changes in U.K. tax rate.

Revenue

In the quarter under review, the company’s total revenue was $2.4 billion, declining from $3.1 billion in the prior-year quarter. The downfall in revenue was due to a negative impact of $716.0 million associated with the unrealized economic activities; partially offset by an increase in utility, unregulated retail electric and gas, realized wholesale energy marketing and energy-related businesses revenues. The quarterly revenue lagged the Zacks Consensus Estimate of $3.0 billion.

Operational Update

Total operating expenses in the reported quarter were $1.7 billion, down from $2.4 billion in the year-ago quarter due to lower fuel operations expenses, and other operation and maintenance costs.

In third-quarter 2012, the company’s operating income was $664.0 million compared with $767.0 million in the prior-year quarter.

Interest expenses were $248.0 million in third-quarter 2012, up from the year-ago figure of $240.0 million due to an increase in total debt level.

Financial Update

Cash and cash equivalents as of September 30, 2012 were $0.9 billion lower from $1.2 billion as of December 31, 2011.

As of September 30, 2012, long-term debt was $18.7 billion, increasing from $18.0 billion as of December 31, 2011.

In the first nine months of 2012, the company generated cash from operating activities of $2.1 billion, improving from $1.8 billion in the prior-year comparable period.

Full-Year 2012 Guidance

For full-year 2012, PPL Corporation revised its pro forma earnings guidance in the range of $2.30 - $2.40 per share from its earlier projection of $2.15 - $2.45 per share. GAAP earnings guidance for full-year 2012 was revised to $2.37 to $2.47 per share from its previous estimate of $2.33 - $2.63 per share.

PPL Corporation guided the mid-point of its full-year 2012 earnings per share expectation to $2.35, lower than the year-ago earnings of $2.73 per share primarily due to a substantial decline in energy margins at the supply segment. This was partially offset by strong performance from the WPD Midlands utilities.

The mid-point of full-year 2012 earnings guidance for Kentucky Regulated, U.K. Regulated, Pennsylvania Regulated and Supply segments are 32 cents, $1.15, 21 cents and 67 cents, respectively, compared with the year-ago segment-wise earnings of 40 cents, 87 cents, 31 cents and $1.15, respectively.

At the Peer

The AES Corporation (AES - Analyst Report), a Virginia-based utility company, reported third-quarter 2012 adjusted earnings per share of 36 cents, beating the Zacks Consensus Estimate of 35 cents and the year-ago figure of 17 cents.

In the reported quarter, the company’s consolidated revenue increased $280.0 million year over year to approximately $4.6 billion. The reported figure also beats the Zacks Consensus Estimate of $4.5 billion. The upside came from contributions of the company’s new businesses, and recovery of pass through costs of energy in Brazil. These increases were partially offset by the unfavorable impact of foreign currency.

Our View

We view PPL Corporation as an organization with well diversified asset portfolio following strong business models, which are adaptable to a wide range of market coverage. The company’s diverse generation mix positions it to benefit from proposed Environmental Protection Agency regulations.

In addition, PPL Corporation expects to achieve stable, long-term growth from its regulated electricity delivery businesses through efficient operations, and strong customer-base and regulatory relations.

Like most of the utility providers of the Southeast and Mid-Atlantic states, and New England of the U.S., PPL Corporation’s assets are also affected due to Hurricane Sandy. The company’s electric subsidiary, PPL Electric Utilities has restored nearly 99.0% of power services out of the total customer-consumption. We believe the company’s strong liquidity position along with its well-equipped back-up plans enable it to handle this crisis in an efficient manner.

However, we are skeptical about stringent regulations, risks associated with delay and cancellation of several important projects.

PPL Corporation currently has Zacks #2 Rank (short term Buy rating).

Allentown, Pennsylvania-based PPL Corporation generates and delivers electricity and natural gas to more than 10 million customers in the U.S. and UK. With a market capitalization of $16.43 billion, the company has 17,722 full-time employees.

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