Diversified energy utility, DPL Inc. (DPL) reported third quarter 2011 financial results. Earnings for the quarter were 70 cents per share, below the Zacks Consensus Estimate of 76 cents per share and year-ago earnings of 74 cents per share. This was primarily the result of lower sales volumes.
On a reported basis the company clocked earnings per share of 58 cents versus 74 cents in the year-ago quarter. The variance of 12 cents between adjusted and reported earnings in the reported quarter emanated from 6 cents from mark to market losses, 5 cents from its ongoing merger proceeding costs with The AES Corporation (AES), and a penny from storm costs.
Earlier, in April 2011, DPL had agreed to merge with AES Corp. 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.
Operational Update
In the reported quarter, DPL’s total revenue of $511.8 million came below the Zacks Consensus Estimate of $533 million and the year-ago revenue of $516.9 million. The results reflect lower retail and a decrease in RTO capacity revenues. This was partially offset by higher retail rates, an increase in wholesale sales volumes, and higher average wholesale prices.
Retail revenues increased $7.7 million to $410.3 million resulting primarily from a 3% increase in average retail rates. This was partially offset by increased customer shopping and a decrease especially in residential retail sales volume.
Wholesale revenues increased $9.5 million to $40.7 million primarily as a result of a 16% increase in average wholesale prices and a 12% increase in wholesale sales volumes. All other revenues, including mark to market losses, decreased $22.3 million primarily due to a decrease in Pennsylvania – New Jersey – Maryland (‘PJM’) regional transmission organization capacity revenue.
Fuel costs in the quarter under review increased 24% to $129.0 million primarily due to a 20% increase in average fuel prices and a $10.4 million increase related to unrealized mark-to-market fuel losses. These increases were partially offset by a 3% reduction in generation volume and a $2.7 million net increase in gains realized from emission allowance and coal sales.
Total Purchased power costs were $108.3 million, down 9% due to the decrease in RTO capacity charges and reduction in average purchase power prices. This was partially offset by an increase in purchased power volumes.
Gross margin decreased $19.1 million, or 7%, to $274.5 million for the third quarter 2011 compared with $293.6 million for the same period in 2010. Overall, DPL reported net income of $67.7 million compared with $86.4 million in the year-ago quarter.
Financial Update
DPL’s cash and cash equivalents totaled $67.6 million as on September 30, 2011 compared with $124.0 million as on December 31, 2010. The decrease in cash and cash equivalents was primarily attributable to capital expenditures, purchase of capital securities, and dividend.
Long-term debt was $1.2 billion as against approximately $1 billion at fiscal-end 2010. Net cash provided by operating activities in the first nine months of 2011 was $264.8 million compared with $331.6 million in the year-ago period.
Guidance
DPL Inc. now expects adjusted earnings from continuing operations for 2011 to be at the lower end of its previously announced guidance range of $2.30-$2.55 per share.
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 #4 Rank (Sell). Over the longer run we maintain our long-term Neutral recommendation on the stock.
