Fitch Downgrades PPL Supply; Outlook Negative; Affirms Other U.S. Subsidiaries

  Fitch Downgrades PPL Supply; Outlook Negative; Affirms Other U.S.
  Subsidiaries

Business Wire

NEW YORK -- December 5, 2013

Fitch Ratings has downgraded the long-term Issuer Default Ratings (IDR) of PPL
Energy Supply (Supply) to 'BBB-' from 'BBB' and the short-term IDR to 'F3'
from 'F2'. The Rating Outlook remains Negative. Simultaneously, Fitch has
affirmed the long-term and short-term IDRs and Stable Outlook of PPL Corp.
(PPL), PPL Capital Funding (PPL Funding) and each of its domestic regulated
subsidiaries. Approximately $19 billion of debt is affected by these actions.
A full list of rating actions appears at the end of this release.

KEY RATING DRIVERS:

PPL and PPL Funding

PPL's ratings and Stable Outlook reflect its rapid transformation from a
company heavily reliant on commodity sensitive businesses to one that is
highly regulated with substantially less business risk. Driven by the
acquisitions of Central Networks in April 2011 and LG&E and KU Energy, LLC
(LKE) in November 2010, regulated operations are expected to provide 78% of
consolidated EBITDA in 2013. By comparison regulated operations accounted for
approximately 30% of EBITDA prior to the two acquisitions. The ratings also
reflect credit metrics that are consistent with Fitch's target ratios for the
rating category and low risk profile despite the challenging operating
environment in its merchant power business.

Rising capital expenditures in the regulated segment pose a potential credit
risk. The concern is mitigated by regulatory provisions that provide near real
time cost recovery of invested capital for about two-thirds of projected
expenditures, including FERC jurisdictional transmission in Pennsylvania,
environmental compliance in Kentucky and all capital investments in the U.K.
For the merchant business, a weak power price environment remains the primary
challenge in the next two years. However, Fitch believes that the operating
risks at the merchant segment should not affect PPL's ratings currently due to
Supply's decreasing importance to the consolidated entity.

PPL Energy Supply

The downgrade of PPL Energy Supply, LLC (Supply) reflects Fitch's expectations
of a continued weak credit profile over the next two years due to the
depressed market conditions despite the deleveraging effort and modest capital
requirements. The recent announcement of the hydro asset sale is credit
positive to Supply. However, it is not sufficient to offset the decline in
metrics and justify the existing ratings in the foreseeable future. Currently,
Fitch expects Supply to produce, over the next two years, an average funds
from operations (FFO)/debt of approximately 20%.

Supply's Negative Outlook reflects Fitch's concern over the timing of market
price recovery. Fitch considers PPL's ownership and on-going support crucial
to maintaining Supply's investment grade rating, given the company's limited
options to strengthen its currently weak credit metrics. Since 2010, Supply
has reduced capital spending by over $1 billion. To maintain operational
performance, further material capex reduction is unlikely.

PPL Electric Utilities

PPL Electric Utilities' (PPLEU) ratings are supported by leverage, interest
coverage and cash flow measures that are strong within the 'BBB' rating
category and comparable to its peer group of electric distribution utilities
with low operating risk and no commodity exposure. Going forward, Fitch
expects the credit metrics to decline modestly due to the large capex program
but remain in line with current rating. The ratings also consider the
supportive regulatory recovery mechanism employed by FERC and the Pennsylvania
utility commission. Out of $3.9 billion of planned capital expenditure in the
next five years, $2.3 billion will be spent in FERC regulated transmission
projects, substantially all of which enjoy near-real time recovery and
favorable returns. Fitch believes that the regulatory framework in
Pennsylvania is improving. The most recent distribution rate case order
outcome was reasonable. The Pennsylvania commission approved 70% of the rate
increase request based on a 10.4% return on equity (ROE). Additionally, the
new HB1294 should minimize regulatory lag associated with a $700 million
distribution infrastructure replacement program (approved in January 2013) in
the next several years.

Kentucky Utilities Company, Louisville Gas and Electric Company and LG&E and
KU Energy LLC

The ratings and Stable Outlook at the Kentucky Utilities Company (KU) and
Louisville Gas and Electric Company (LG&E) reflect the strong credit metrics
and constructive regulatory policies that limit cash flow volatility and
business risk. The two utilities benefit from the Kentucky Public Service
Commission's (KPSC) track record for timely rate increases and constructive
regulatory policies, including a monthly fuel adjustment clause (FAC) and an
environmental cost recovery mechanism. Regulatory statutes also permit the
inclusion of construction work in progress (CWIP) in rate base. The ECR
mechanism is particularly important given the two utilities reliance on
coal-fired electric generation and the substantial investment that will be
required to meet the Environmental Protection Agency's (EPA) newest
regulations. The ECR provides for recovery of and a return on environment
investments required as a result of coal combustion emissions. The ECR permits
the approved environmental costs to be reflected in rates two months after
incurred. $2.3 billion of the ECR plan has been approved, which represents 38%
of the total capex spending from 2013 to 2017. The ratings of LG&E and KU
Energy LLC's (LKE), an intermediate holding company and parent of KU and LG&E
reflect the predictable cash flow and strong credit profile of its two
regulated utility subsidiaries.

RATING SENSITIVITIES:

PPL

Positive:

--Unlikely given the large capital spending program and struggling merchant
business.

Negative:

--PPL's ratings could be downgraded if capital resources are allocated
disproportionally to the merchant segment, resulting in increasing leverage
and FFO to debt falling below 16% and debt to EBITDA above 4x beyond the heavy
utility spending period.

--Any material adverse development in the regulatory framework in U.S. or in
U.K. that PPL's regulated utilities operate in, such as changes in commodity
cost and environmental cost recovery.

PPL Supply

Positive:

--The outlook could be stabilized if the market power prices improve such that
Supply could produce FFO to debt of over 23.5% on a sustainable basis.

Negative:

--Weaker market environment and/or poor plant performance that cause FFO to
debt to fall below 21%.

--A legal separation from its parent or diminishing parent support resulting
in heightened leverage.

PPLEU

Positive:

--Unlikely given the large capital spending program.

Negative:

--Any material adverse development in the regulatory framework in Pennsylvania
such as change in commodity cost recovery provisions or return of rate freeze
(though unlike in currently low power price environment) could pressure the
ratings.

--Rating could be pressured if the utility upstreams disproportionately large
dividend relative to its earnings, or provides other forms of financial
support indirectly to Supply through PPL.

KU and LG&E

Positive:

--Unlikely given the large capital spending program.

Negative:

--Material adverse development in the regulatory recovery mechanism in
Kentucky especially the ECR.

--Rating could be pressured if the Kentucky utilities upstream
disproportionately large dividend relative to their earnings, or provides
other forms of financial support indirectly to Supply through PPL.

Fitch affirms the following ratings with a Stable Outlook:

PPL Corp

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2'.

PPL Capital Funding Inc.

--Long-term IDR at 'BBB';

--Senior unsecured debt at 'BBB';

--Junior subordinated notes at 'BB+';

--Short-term IDR at 'F2'.

PPL Electric Utilities Corp.

--Long-term IDR at 'BBB';

--Secured debt at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

LG&E and KU Energy LLC

--Long-term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'F2'.

Kentucky Utilities Company

--Long-term IDR at 'A-';

--Secured debt at 'A+';

--Secured pollution control bonds at 'A+/F2';

--Senior unsecured debt at 'A';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Louisville Gas and Electric Company

--Long-term IDR at 'A-';

--Secured debt 'A+';

--Secured pollution control bonds at 'A+/F2';

--Senior unsecured debt at 'A';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Fitch downgrades the following ratings with a Negative Outlook:

PPL Energy Supply, LLC.

--Long-term IDR to 'BBB-' from 'BBB';

--Senior unsecured debt to 'BBB-' from 'BBB';

--Short-term IDR to 'F3' from 'F2';

--Commercial paper to 'F3' from 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Rating North American Utilities, Gas and Water Companies' (May 16, 2012);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities
within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810780

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.

Contact:

Fitch Ratings
Primary Analyst
Julie Jiang
Director
+1-212-908-0708
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Robert Hornick
Senior Director
+1-212-908-0523
or
Committee Chairperson
Glen Grabelsky
Managing Director
+1-212-908-0977
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
 
Press spacebar to pause and continue. Press esc to stop.