Diversified energy utility, DPL Inc. (DPL) reported first quarter 2011 financial results. Earnings for the quarter were 56 cents per share, below the Zacks Consensus Estimate of 67 cents per share and year-ago earnings of 61 cents per share.
After adjusting for the debt purchase premium and write-off charges of 9 cents per share, tax adjustments of 5 cents per share and storm costs of 4 cents per share, the company reported GAAP earnings of 38 cents per share versus 61 cents per share in the first quarter of 2010.
Operational Update
In the reported quarter, total revenue of $494.7 million exceeded the Zacks Consensus Estimate of $478 million and the year-ago revenue of $451.2 million. The results reflect higher average retail rates, higher retail sales volumes, and higher RTO capacity revenue, partially offset by lower wholesale sales volume.
Retail revenues increased $28.9 million year over year to $383.5 million driven by the continued recovery of fuel, energy efficiency, transmission and capacity costs, as well as a 0.8% increase in retail sales volume. The increase in retail sales volume reflects higher commercial and industrial sales. However, this was partially offset by warmer weather as heating degree days were 3.0% lower year over year.
Wholesale revenues decreased $8.5 million to $31.7 million due to a 20% decline in wholesale sales volume and a 1% decline in average wholesale prices. RTO, RTO capacity and other revenues increased $23.1 million primarily due to an increase in Pennsylvania – New Jersey – Maryland regional transmission organization capacity revenue.
Fuel costs in the quarter under review decreased 2% to $99.8 million primarily due to an increase in gains realized from coal sales and reduction in generation volume partially offset by increase in average fuel prices.
Total Purchased power costs were $120.8 million, up 66% due to increase in RTO capacity and other RTO charges. It also reflects increase in purchased power volume, partially offset by a decrease in average purchased power prices.
In February 2011, DPL had purchased $122.0 million principal amount of DPL Capital Trust II 8.125% capital securities in a privately negotiated transaction. As part of this transaction, DPL paid a $12.2 million, or 10%, premium and incurred $3.1 million of unamortized discount and issuance costs.
Financial Update
In the reported quarter, DPL's cash and cash equivalents totaled $70.5 million compared with $88.9 million in the year-ago period. Long-term debt was $923.2 million as against $1,223.6 million in the first quarter of 2010. Net cash provided by operating activities was $92 million compared with $122.6 million in the year-ago period.
Capital expenditures in the quarter were $43 million, up from $39.8 million in the year-earlier period. Construction additions went up to $34.4 million during the quarter versus $30.2 million in the first quarter of 2010.
Merger Agreement
On April 20, 2011, DPL and The AES Corporation (AES) have entered into a merger agreement whereby AES will acquire DPL for $30 per share. The cash transaction is valued at approximately $3.5 billion plus the assumption of $1.2 billion of debt and preferred stock. On completion, DPL will become a wholly owned subsidiary of AES Corp.
Share Repurchase Plan Update
DPL Inc. had announced a share repurchase plan in October 2010. However, as a result of the merger plans, the company is suspending the share repurchase program. No shares were repurchased during the first quarter 2011.
Guidance
DPL Inc. expects pro forma EPS in the range of $2.30–$2.55 and GAAP EPS in the range of $2.01–$2.26 for 2011. It expects to spend $770 million on capital projects for the period 2011 through 2013.
Our Take
DPL Inc. has performed consistently across its solid base of stable utility operations. We also like its strong balance sheet, higher rates, and regulatory approval for recovery of fuel cost.
However, the near-term upside is constrained by regulatory risks, tepid growth in the economy, the high unemployment level in Ohio and lofty purchase power costs. Thus, in the absence of any positive near-term triggers, DPL presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.
Dayton, Ohio-based DPL Inc. is a diversified energy company that sells electricity through its subsidiaries – Dayton Power and Light Company (DP&L), DPL Energy Resources, Inc. (DPLER) and DPL Energy, LLC (DPLE).
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