We recently moved to a Neutral rating for PPL Corporation (PPL), following the recent receipt of regulatory approvals for the much-talked about E.ON acquisition.
PPL Corp. is steadfastly clearing all the hurdles for its proposed acquisition of E.ON U.S. LLC, the parent company of Louisville Gas and Electric Company and Kentucky Utilities Company. The company recently received the approvals from Kentucky Public Service Commission (PSC) and successfully settled the allegations of the two parties who prevented the Federal Energy Regulatory Commission’s (FERC) approval.
In August 2010, PPL also received antitrust clearance for the acquisition from the Federal Trade Commission and the U.S. Department of Justice.
PPL now remains on track to soon get a nod from the FERC. Other parties required to approve the acquisition include the Virginia State Corporation Commission and the Tennessee Regulatory Authority. If the FERC and other required approvals are received by mid-October, the company expects to complete the transaction by October 31, 2010.
The acquisition is expected to transform PPL into a more geographically diverse utility holding company. Following the acquisition, the company estimates annual revenues of $10 billion, serving nearly 5 million electricity customers in the United States and the United Kingdom, and owning about 20,000 megawatts of U.S. electricity generating capacity.
We expect the acquisition to lower the company’s risk profile, improve revenues, diversify its earnings stream and reduce commodity sensitivity.
Additionally, we like PPL Corp. for its attractively located and diverse generation fleet, robust regulated business, strong hedge positions and improved credit and cash flow profile, as well as projected dividend hikes. Looking ahead, we expect PPL to continue maintaining stable cash flows as a result of its power sales commitments to wholesale and retail customers, as well as its long-term fuel purchase contracts and contracts to procure electricity in 2010.
However, we remain apprehensive about the company given management’s lowered 2010 earnings guidance of $2.70-$3.05 per share (previously $3.10 to $3.50 per share). Additionally, expectations for continued pressure on PPL’s hedges and projections for higher coal transportation costs could weigh on future earnings, in our view.
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