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Global Credit Research - 27 Oct 2010
Approximately $1.7 billion of securities affected
New York, October 27, 2010 -- Moody's Investors Service affirmed the ratings of PPL Corporation
(PPL: Baa3 Issuer Rating) and its subsidiary, PPL Capital
Funding (PPL Funding: Baa3 senior unsecured (debt guaranteed by
PPL)). The outlook for PPL and PPL Funding is stable.
The rating affirmations follow PPL's receipt of Federal Energy Regulatory
Commission (FERC) approval of its pending acquisition of E.ON U.S.
LLC (Baa2 Issuer Rating) and its subsidiaries, Kentucky Utilities
(KU: Baa1 Issuer Rating) and Louisville Electric & Gas (LGE:
Baa1 Issuer Rating). PPL also received approval from the Kentucky
Public Service Commission, the State Corporation Commission of Virginia
and the Tennessee Regulatory Authority. With the receipt of this
last regulatory approval from the FERC, we believe there is a very
high probability the transaction will close imminently.
The affirmation of PPL's Baa3 Issuer Rating considers the additional
regulatory scale, diversity and cash flow stability that will result
from its acquisition of E.ON US (to be renamed LG&E and KU
Energy LLC (LKE)). Going forward, we anticipate that over
50% of PPL's assets and cash flows will be associated with
regulated operations, with about half of those coming from the LKE
subsidiaries. The rating considers the challenges the company continues
to face as it manages the transition to a fully competitive market in
its Pennsylvania service territory while its wholesale generation business
continues to operate within weakened commodities markets; however,
the rating recognizes the overall risk reduction and stability that comes
as a result of its increased regulatory exposure. The Baa3 rating
reflects the supportive regulatory relationships that exist at the LKE
entities, and assumes these relationships will be maintained under
PPL's Baa3 Issuer Rating is driven by consolidated credit metrics
that are expected to remain within the Baa ranges identified in Moody's
August 2009 Rating Methodology for Regulated Electric and Gas Utilities,
for example, the consolidated ratio of cash flow excluding changes
in working capital (CFO pre-WC) to debt, calculated in accordance
with Moody's standard analytical adjustments, is expected
to remain in the mid-teens. The ratings for the debt instruments
of PPL Funding are based on the guarantees provided by PPL. The
Baa3 Issuer/senior unsecured ratings for PPL and PPL Funding also consider
their structurally subordinate position relative to the Baa2 or better
senior unsecured debt rating assigned to several of PPL's primary
The rating affirmations consider PPL's balanced plan for financing
the approximately $6.8 billion necessary to complete the
acquisition of LKE. In June 2010, PPL completed the sale
of 103.5 million shares of common stock and issued approximately
$1.15 billion of hybrid -- equity linked - securities,
generating total proceeds of approximately $3.5 billion
in permanent capital. Also in June PPL obtained a $6.5
billion bridge loan that could be drawn, if necessary, to
complete the transaction. We understand PPL now intends to draw
temporarily on PPL Energy Supply's new $4 billion revolving
credit facility to obtain approximately $3 billion of additional
external financing to close the transaction. It is our understanding
that shortly after the purchase is complete, PPL will issue a similar
amount of permanent debt financing at a combination of KU, LGE and
LKE, proceeds of which will be used to repay the PPL Energy Supply
The rating outlook for PPL and PPL Funding is stable, an indication
that ratings are not likely to be revised in the near term. Longer
term, ratings could be revised upward if there were to be a sustained
improvement in financial metrics; as demonstrated, for example,
by a consolidated ratio of CFO pre-WC to debt, calculated
in accordance with Moody's standard analytical adjustments, in the
range of 20%.
The ratings of PPL or PPL Funding could be adjusted downward if there
is a meaningful increase in business risk, if there is a significant
prolonged deterioration of plant availability, if the company is
unsuccessful in managing the full transition to a competitive market,
if its planned capital expenditures are funded in a manner inconsistent
with maintaining credit metrics that are appropriate for its current rating
levels in light of current market conditions, or if there were to
be adverse regulatory rulings such that financial metrics deteriorate;
as demonstrated, for example, by a PPL consolidated ratio
of CFO pre-WC to debt, calculated in accordance with Moody's
standard analytical adjustments, in the low teens. In the
event PPL is unable to obtain the remaining permanent financing for the
transaction, there could be downward pressure on the ratings.
The principal methodology used in rating PPL and PPL Funding was Regulated
Electric and Gas Utilities rating methodology published in August 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
PPL is a diversified energy holding company headquartered in Allentown,
Pennsylvania. PPL's Pennsylvania regulated transmission and
distribution operations are conducted through its subsidiary, PPL
Electric Utilities; PPL Energy Supply is a holding company engaged
primarily in non-regulated generation and marketing of power in
the U.S. and the regulated delivery of electricity in the
U.K.; PPL funding is a financing subsidiary of PPL
- its debt is guaranteed by PPL.
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms PPL ratings
250 Greenwich Street
New York, NY 10007
No Related Data.
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