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Global Credit Research - 02 Mar 2011
Approximately $ 16.0 Billion of Debt Securities and Credit Facilities Affected.
New York, March 02, 2011 -- Moody's Investors Service affirmed the ratings of PPL Corporation (PPL:
Baa3 Issuer Rating) and its subsidiaries following yesterday's announcement
that it had reached a definitive agreement to acquire the Central Networks
electric distribution business from E.ON UK plc for 4.0
billion pounds Sterling ($6.4 billion), which includes
the assumption of 500 million pounds ($800 million) of existing
public debt. The rating outlook for PPL and its subsidiaries is
"The rating affirmation recognizes that the planned acquisition
of Central Networks further de-risks PPL's overall business
platform as more than 70% of consolidated results will be provided
by predictable, rate regulated businesses from three different jurisdictions,
making the company's earnings, cash flow, and dividends
less reliant on the company's commodity business", said
A.J. Sabatelle, Senior Vice President of Moody's.
The rating action considers the pro-forma consolidated credit profile
of PPL, and factors in the increasing proportion of regulated activities,
the geographic diversity across these businesses, and the declining
exposure to the commodities business as a source of cash flow and earnings.
To that end, the rating affirmation acknowledges that the combination
of the Central Networks transaction coupled with last year's acquisition
of LG&E and KU Energy LLC (LKE: Baa2 Senior Unsecured Debt)
and its subsidiaries have transitioned the company from a smaller,
more regional commodity sensitive concern to a larger, more geographically
diverse company with a more sustainable business model.
The rating affirmation considers the relatively conservative manner in
which PPL intends to permanently finance the acquisition, including
the issuance of $1.7 -- $1.9 billion
of PPL common stock and $750 -- $950 million of convertible
equity units, which helps to maintain balance sheet strength,
and more strongly positions PPL in its current investment grade rating
category. We understand that the company intends to permanently
finance the remainder of the transaction with debt issued at both the
Central Networks operating and holding company levels in a manner which
targets a low Baa rating for the consolidated regulated networks business.
While this degree of leverage in the capital structure at Central Networks
does slightly weaken PPL's consolidated credit metrics, the
degree of dependable cash flow expected to be derived from this transaction
and from the earlier LKE acquisition makes the organization's overall
credit quality more resilient to any potential negative credit events
within the family.
Moody's also recognizes the track record that PPL has demonstrated
in the UK in operating its existing Western Power Distribution (WPD) business
where WPD ranks in the top tier in several different efficiency and performance
standards and where those network's tariffs were recently reset
for a five-year period. However, our rating affirmation
balances this expected performance and the opportunities for potential
synergies against the challenges that we believe management may face in
successfully integrating two large acquisitions in a fairly compressed
timeframe -- the LKE acquisition which closed about four
months ago and the Central Networks acquisition which is expected to close
next month. This somewhat guarded view considers the substantially
larger size of the Central Networks operations relative to WPD and the
fact that all UK electric distribution networks have gone through various
rounds of cost saving initiatives over the last decade.
With respect to the PPL subsidiaries' ratings, Moody's views
the acquisition as being a credit supportive development for these ratings
as no incremental debt is being added at any of the affiliates while the
transaction provides another source of reliable earnings, cash flow,
and dividends to the overall enterprise. In particular, Moody's
believes that PPL Energy Supply, LLC (PPL Supply), the company's
unregulated power subsidiary, indirectly benefits from the Central
Networks and LKE transactions as they should reduce the company's
reliance on this commodity driven subsidiary for earnings and dividends,
enabling this unregulated operation to potentially utilize any free cash
flow for future debt reduction. That being said, PPL Supply
remains weakly positioned at its current Baa2 senior unsecured rating
and while recently reported 2010 results were strong, future financial
performance is expected to weaken particularly in 2012 due to the various
challenges affecting all unregulated power companies. As such,
while the benefits of the Central Networks and LKE acquisitions help mitigate
near-term downward rating pressure at PPL Supply, negative
rating pressure remains at this subsidiary.
Importantly, to the extent that a negative rating action is taken
at PPL Supply, the probability of a similar rating action occurring
at PPL or its subsidiaries has been greatly reduced, given the business
and risk profile transformation that will occur from the completion of
the Central Networks and LKE transactions.
The stable outlook for PPL reflects our view that the planned acquisition
of Central Networks will be financed in a balanced manner and that upon
completion, PPL's credit quality will have been fortified
through the reduction in overall business risk at the company.
While we view the Central Networks and LKE acquisitions as transforming
events which could form the basis for positive rating momentum at PPL,
prospects for the company to be upgraded in the near --term are limited
in light of the execution risks in integrating these two large acquisitions
at the same time coupled with some of the market-based issues currently
facing the company's unregulated business. However,
to the extent that the integration process at both Central Networks and
LKE meets the company's expectation and PPL continues to take actions
that lower overall enterprise risk and leverage over time, PPL's
rating could be upgraded. Conversely, the prospects for downward
rating action are limited in the intermediate term, as Moody's
views PPL as being strongly positioned at the current rating category
and fairly resilient to withstand downward pressure in the family given
the diversified set of rate regulated operations at the company and the
reduced exposure to the commodity business.
The principal methodology used in rating PPL was Rating Methodology:
Regulated Electric and Gas Utilities, published August 2009 and
available on www.moodys.com in the Rating Methodologies
sub-directory under the Research and Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating these issuers can also be found in the Rating Methodologies
sub-directory 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,
Senior Vice President
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's ratings following acqusition announcement; outlook stable
250 Greenwich Street
New York, NY 10007
No Related Data.
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