Diversified energy utility, DPL Inc. (DPL) reported second quarter 2011 financial results. Earnings for the quarter were 33 cents per share, below the Zacks Consensus Estimate of 52 cents per share and year-ago earnings of 53 cents per share. Lower electricity sales volume impacted earnings.
DPL in April 2011 had agreed to merge with The AES Corporation (AES). Per the agreement AES will acquire DPL in a transaction valued at $4.7 billion. On completion, DPL will become a wholly owned subsidiary of AES Corp.
After adjusting for merger related costs of 5 cents per share, the company reported GAAP earnings of 28 cents per share versus 53 cents per share in the year-ago quarter.
Operational Update
In the reported quarter, total revenue of $444.9 million came below the Zacks Consensus Estimate of $459 million and the year-ago revenue of $445.5 million. The results reflect lower retail and wholesale sales volumes. This was partially offset by higher average retail rates, higher average wholesale prices, and an increase in RTO capacity revenues.
Retail revenues increased $5.4 million to $348.1 million resulting primarily from the continued recovery of fuel, energy efficiency, transmission and capacity costs. This was partially offset by a slight reduction in retail sales volumes as cooling degree days were 15% lower than in the second quarter of 2010.
Wholesale revenues decreased $10.4 million to $28.7 million primarily as a result of a 34% decrease in wholesale sales volume. This was partially offset by an 11% increase in average wholesale prices. All other revenues increased $4.4 million primarily due to an increase in Pennsylvania – New Jersey – Maryland (‘PJM’) regional transmission organization capacity revenue.
Fuel costs in the quarter under review increased 1% to $92.1 million primarily due to a 13% increase in average fuel prices and a $0.3 million net reduction in gains realized from emission allowance and coal sales. Partially offsetting these increases was a 17% reduction in generation volume.
Total Purchased power costs were $113.6 million, up 25% due to the increase in purchased power volumes and increase in RTO capacity and other RTO charges. This was partially offset by decrease in average purchased power prices.
Gross margindecreased $24.5 million, or 9%, to $239.2 million for the second quarter 2011 compared to $263.7 million for the second quarter of 2010. Operation and maintenance expense increased $19.3 million, or 22%, for the second quarter 2011 compared to the same period in 2010.
The increase was primarily attributable to an $8.7 million increase in costs at DPL's generating facilities due largely to the timing of planned generation plant outages, $5.8 million of merger related costs, a $3.5 million increase in costs which are funded through rate riders, and a $2.2 million increase in storm and line clearance costs.
Overall DPL reported net income of $31.7 million compared to $61.4 million in the -ago quarter.
Financial Update
In the reported quarter, DPL's cash and cash equivalents totaled $72.8 million compared with $124.0 million at fiscal-end 2010. The decrease in cash and cash equivalents was primarily attributable to purchase of capital securities, capital expenditures, and dividend disbursed.
Long-term debt was $923.6 million as against approximately $1 billion at fiscal-end 2010. Net cash provided by operating activities in the first half of 2011 was $185.1 million compared with $204.9 million in the year-ago period.
Guidance
DPL Inc. reaffirmed its pro forma EPS in the range of $2.30–$2.55 for 2011.
Our Take
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).
DPL 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.
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