When PPL Corp., an Allentown, Pa.-based utility with $7.6 billion in 2009 revenue, decided to ratchet down commodity risk by acquiring more rate-regulated utilities, it had to finance two major purchases within 12 months. PPL bought E.on US and its units, Kentucky Utilities Co. and Louisville Gas and Electric, for $7.6 billion in 2010 and purchased the Central Networks electric utilities in the U.K. for $5.7 billion earlier this year. The deals entailed $31 billion in temporary, permanent and liquidity financing.
“I believe we set some land speed records in getting these financings done and behind us, while almost doubling the size of our balance sheet and retaining our credit quality,” says James Abel, PPL’s senior vice president of finance and treasurer.
PPL’s revenue, once evenly split between rate-regulated and unregulated generation, had shifted so that 80% was coming from unregulated generation, exposing the company to more commodity risk. In the wake of the acquisitions, 80% of PPL’s revenue comes from rate-regulated sources, Abel says.
PPL financed the E.on US purchase with $2.4 billion of common stock and $1.1 billion of equity units, plus $875 million of investment-grade debt issued by the Kentucky and Louisville utilities after the deal closed. The utilities also sold $2 billion of debt backed by a first mortgage on their assets, which had not previously been used as collateral. For the U.K. purchase, PPL sold $2.3 billion of common stock and $978 million of equity units after the deal closed.
When PPL’s management met with institutional shareholders, “one of the messages we got back was, ‘We’d like to see the financing risk taken off the table. Get the common stock issuance behind you,’” Abel says.
The strategy worked. “Our stock price actually reacted positively by getting the common stock overhang behind us,” which set PPL up to tap the debt market, Abel says.