We have retained our Neutral recommendation on PPL Corporation (PPL) based on favorable earnings results, completion of the E.ON acquisition and strong management guidance.
Additionally, we believe PPL’s strategically located and diverse generation fleet, robust regulated business and improved credit and cash flow profile, as well as projected dividend hikes, bode well for the company. We believe the company is positioned to benefit from future Environmental Protection Agency (EPA) regulations, given its voluntary environmental control efforts.
However, we remain apprehensive about the company given the premonition of continued pressure on PPL’s hedges, projections for higher coal transportation costs and higher environment-related expenditures.
Allentown, Pennsylvania-based PPL Corporation primarily generates electricity from power plants in the northeastern, northwestern and southeastern U.S., markets wholesale or retail energy, chiefly in northeastern and northwestern portions of the U.S.; delivers electricity to customers in Pennsylvania, Kentucky, Virginia, Tennessee and the U.K. and supplies natural gas in Kentucky. As of December 31, 2010, PPL served approximately 5.3 million utility customers.
PPL Corporation’s excellent asset portfolio and business model is adaptable to a wide range of market scenarios. The company owns 12,000 MWs of nuclear, coal, gas and hydro generation assets in Pennsylvania and Montana. This diverse generation mix positions the company to benefit from the proposed EPA regulations.
The company aims at achieving disciplined growth in energy supply margins while reducing the volatility in both cash flows and earnings. PPL Corp.’s strategy involves both divestitures and acquisitions. Of late, the company has been involved in divesting its non-core generation assets due to the challenges faced in competitive power generation.
Apart from divestitures the company has balanced its portfolio by successfully acquiring rate-regulated businesses, the most recent being the acquisition of E.ON U.S. LLC, which now forms the company’s fourth business segment Kentucky Regulated (LG&E and KU Energy LLC).
More recently, the company agreed to acquire E. ON’s U.K. distribution business (Central Networks) with a goal to expand its regulated electricity operations in the U.K. On completion of the acquisition, PPL is expected to own the largest distribution network in the U.K. in terms of regulated asset value ($7.8 billion), serving about 7.6 million customers in England and Wales.
These strategic actions have strengthened the company’s financial position by increasing the proportionate size of its regulated business and lowering the exposure to commodity market volatility.
Going forward, we believe PPL’s regulated business will benefit from distribution and transmission rate-base growth opportunities. However, risks remain associated with regulatory uncertainty, increasing operating and maintenance expenses, growth constraints within PJM and higher environment-related capital expenditures.
PPL presently maintains a short term Zacks #3 Rank (Hold). The company is at par with its closest peers Exelon Corp. (EXC) and FirstEnergy Corp. (FE), based on the short term Zacks Rank.
EXELON CORP (EXC): Free Stock Analysis Report
FIRSTENERGY CP (FE): Free Stock Analysis Report
PPL CORP (PPL): Free Stock Analysis Report
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