PPL’s Purchase of U.K. Power Grid Marks Move Away From Volatile Earnings
PPL Corp. (PPL)’s $5.6 billion purchase of E.ON AG (EOAN)’s U.K. power grid will move the Pennsylvania power producer away from riskier wholesale electricity markets and toward more predictable revenue.
PPL’s shares rose the most in almost two years after it announced on March 1 an agreement to buy the U.K. grid. PPL’s so-called merchant plants sell power on wholesale markets without the income assurance utilities with regulated electricity rates get. The owners of U.K. power grids get guaranteed rates of return from regulators.
Those stable returns are now more attractive to companies burned by depressed power demand and low prices, said Paul Patterson, a New York-based analyst at Glenrock Associates LLC who doesn’t rate the shares and doesn’t own them.
“There is no question that several managements in the electric-power sector have been looking to reevaluate their exposure to the competitive marketplace given the painful contraction in merchant generation margins,” Patterson said in a telephone interview yesterday. “The generation business has gotten a lot less sexy.”
PPL rose 84 cents, or 3.4 percent, to $25.74 at 4:01 p.m. yesterday in New York Stock Exchange Composite trading, the biggest increase since June 1, 2009. Before yesterday, the company had been the worst performer among the 13 members of the Standard & Poor’s electric utilities index.
Second Big Deal
E.ON, based in Dusseldorf, fell 11 cents to 23.29 euros in Frankfurt trading at 5:35 p.m. local time yesterday.
The purchase from E.ON is the second transaction exceeding $5 billion in less than a year for Allentown, Pennsylvania-based PPL. Before last year, PPL had never bid more than $1 billion to acquire a company, according to Bloomberg data.
The acquisition of the U.K.’s second-largest distribution network will add as much as 15 cents a share to earnings this year and 27 cents in 2012, PPL Chief Executive Officer James Miller said on an investor conference call yesterday. The company will assume $800 million in debt.
PPL, which owns power plants that can generate about 19,000 megawatts of electricity, said last month it expects reduced profit at its unregulated unit this year as slack demand and low natural gas prices squeeze power margins.
About 75 percent of PPL’s earnings before interest, taxes, depreciation and amortization will come from its regulated businesses in 2013, Miller said. That compares with 25 percent for 2010, George Biechler, a company spokesman, said in an e- mail.
PPL plans to issue as much as $3.25 billion of unsecured debt to finance the purchase with as much as $1.9 billion of common stock and $950 million of convertible equity units. PPL has about $14.8 billion of debt, according to Bloomberg data.
The expected earnings accretion this year “strongly suggests there is no burden on the cash flow of PPL’s U.S. businesses, so there should not be much of a concern for existing PPL debt,” Phil Adams, a Chicago-based analyst for Gimme Credit LLC, said in an e-mail.
PPL agreed last April to buy two U.S. utilities from E.ON for $6.7 billion as part of an earlier asset sale plan by the German energy company.
Moody’s Investors Service yesterday affirmed its Baa3 rating on PPL and its subsidiaries, one level above junk. Buying the U.K. distribution network reduces PPL’s business risk “making the company’s earnings, cash flow and dividends less reliant on the company’s commodity business,” A.J. Sabatelle, senior vice president of Moody’s, wrote in yesterday’s research note.
Standard & Poor’s yesterday cut its rating on PPL and certain affiliates to BBB from BBB+, two notches above junk. Standard & Poor’s said it could further lower the rating based on PPL’s ability to complete its financing plan, which includes a substantial issuance of stock.
Fitch Ratings yesterday affirmed its BBB rating on PPL, citing the company’s transition from relying on a “commodity sensitive-business to one that is highly regulated.”
PPL owns a U.K. grid unit with 83,000 kilometers (50,000 miles) of power lines that serve 2.6 million customers in south Wales and southwest England, according to its website. E.ON’s U.K. grid has 133,000 kilometers of power lines that serve more than 5 million customers in central England.
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