Sale, acquisition give PPL new look
Company would be smaller, more simplified
Get ready to meet the new PPL Corp., a highgrowth, low-risk energy company focused on the U.S. market with a strong balance sheet and the flexibility to pay down debt, reinvest in operations and pursue, maybe, future acquisitions.
That’s the plan anyway after the Allentown Fortune 500 firm on Thursday announced two transactions that shot the company’s stock up 6%: the long-awaited sale of its United Kingdom business, Western Power Distribution, to National Grid plc for $10.9 billion, and the acquisition of National Grid’s Rhode Island utility business, The Narragansett Electric Co., for $3.8 billion.
The WPD sale is expected to close within four months, while the Narragansett acquisition could take up to a year to gain approval. PPL President and CEO Vincent Sorgi called the transactions “transformative,” helping to reposition the company for long-term growth.
“They will refocus our business mix squarely on strong, rate-regulated U.S. utilities; strengthen our credit metrics; enhance long-term earnings growth and predictability; and provide us with greater financial flexibility to invest in sustainable energy solutions for those we serve,” Sorgi said.
While the transactions will simplify its business, diversify its U.S. regulated operations and eliminate the foreign exchange risk that came with the U.K. operations, PPL also will be a smaller company when both deals are done a year from now.
Even as a smaller, more simplified company, two analysts who follow PPL told The Morning Call they don’t view the utility as a future takeover target. If anything, they noted, the deals announced Thursday should bolster PPL’s finances and set it up as a potential acquirer of assets down the road.
PPL spokesperson Ryan Hill said the WPD sale “will not have a significant impact on jobs in Allentown.” PPL is headquartered at the PPL Tower building at Ninth and Hamilton streets and employs about 1,300 people in the Lehigh
Valley, serving as a longtime employment hub and a mainstay in an otherwise rapidly changing downtown.
“We expect today’s announcement would have a positive impact on jobs in both Rhode Island and elsewhere across our operations as some support services currently provided by National Grid at the corporate level are transitioned to Narragansett Electric and others are provided by PPL’s existing operations,” Hill said. “It’s too soon to say precisely what those impacts may be. We intend to determine long-term staffing plans as we work through the transition with National Grid.”
Smaller, but stronger
Today, PPL employs about 12,200 people worldwide, which includes 6,500 in the U.K., and recently reported 2020 revenue of $7.6 billion. The company has more than 10 million customers, all told.
While it’s too early to project many numbers for the post-transaction PPL, National Grid has about 950 employees in Rhode Island and Narragansett reported revenue of $1.56 billion for its year ended March 31, 2020.
That means, once the two deals close, PPL could have about 6,650 employees, all in the U.S., along with annual revenue in the ballpark of $7 billion, which would drop it around 30 spots to somewhere around No. 435 on the Fortune 500 list. With the addition of 780,000 customers from Narragansett’s electric and gas business in Rhode Island, PPL would have about 3.5 million U.S. customers.
State Rep. Peter Schweyer, D-Lehigh, whose district includes PPL’s headquarters, said he thinks the moves are positive for the company and region.
“On the surface, it appears to put the company in a strong position to do very well, maintain their employment and stay in downtown Allentown, which is vital for our region and commonwealth,” said Schwyer, Democratic chairman on the House of Representatives’ consumer affairs’ utilities subcommittee. “The company seems like it’s in a stronger position than it was yesterday.”
Rumors and speculation have swirled about a potential PPL merger for several years. Most recently, in fall 2019, the Financial Times reported PPL was in talks with Avangrid for a potential blockbuster merger valued at $67 billion that would have formed one of the largest publicly traded utilities in the U.S. Nothing came of it, however.
In August, PPL disclosed its plan to sell its business in the United Kingdom and focus solely on its U.S. operations, which include Pennsylvania and Kentucky.
Analysts viewed the deals announced Thursday as positives, moves that get PPL out of a difficult U.K. regulatory environment that presented uncertainty while strengthening the company’s balance sheet.
In fact, PPL said it expects the WPD sale to result in net cash proceeds of about $10.2 billion, and the company plans to use a portion of that to finance the acquisition of Narragansett. The Narragansett purchase also will reduce PPL’s earnings related to coal-fired generation as the company lessens its reliance on coal. Narragansett doesn’t own any generation assets but is the largest electricity transmission and distribution service provider to Rhode Island, as well as a natural gas distributor in the state.
On news of the deals, Moody’s Investors Service revised the rating outlook of PPL to positive, up from stable.
“The divestiture of its U.K. assets provides an opportunity for PPL to improve its credit profile as it becomes a U.S.-only utility holding company with operations in three supportive regulatory jurisdictions, namely Kentucky, Pennsylvania and now Rhode Island,” said Jairo Chung, a senior analyst with Moody’s. “In addition, the positive outlook reflects our expectation that PPL will use proceeds from the sale to meaningfully reduce parent level debt.”
What’s next?
PPL expects to have residual net cash proceeds of $6.4 billion, and executives laid out a host of possible uses for that money during a call with analysts Thursday. That includes investments in its utilities, share repurchases, potential acquisitions or renewable energy investments. On the call, Sorgi told analysts PPL spends about $100 million annually on renewables, so there’s opportunity to increase that moving forward.
By acquiring Narragansett —
PPL also will assume $1.5 billion of Narragansett debt in the deal — Sorgi said PPL expects to play a major role in advancing Rhode Island’s decarbonization goals, namely the state’s target of hitting 100% renewable energy by 2030.
“You do have the $6 billion-plus in proceeds, and I think there’s a question of what they’re going to use that for,” said Andrew Bischof, a senior analyst for Morningstar who covers PPL. “They pushed out a lot of different options.”
While questions remain on that front, Bischof said PPL received an attractive price for the U.K. assets, partially offset by what Morningstar views as a “rich price” for Narragansett. That utility, however, does operate in a constructive regulatory environment in Rhode Island with strong rate-base growth, Bischof said.
And while PPL is cleaner without the U.K. business, Bischof said he doesn’t view the company as a future acquisition target. He noted that PPL will have operations across three U.S. states, and thus three state regulatory commissions, which would come with regulatory risk of its own in a potential deal. In addition, PPL has a market capitalization of about $23 billion, which would be a relatively large transaction for most utilities, Bischof said.
“I don’t view them as an acquisition target,” he said. “With their proceeds, they might be looking for additional acquisitions.”
Paul Patterson, an analyst at Glenrock Associates LLC, said it’s too soon to consider whether PPL would be a takeover target, and much depends on how things play out as the transactions move toward completion.
“It’s a consolidating industry in the U.S., and there are more buyers than sellers,” Patterson said. “But it depends on where things stand after the transaction. What happens depends on their strategy and ultimately what opportunities they have, but I wouldn’t say this puts them in a situation where they are volatile to a takeover.”
PPL’s stock closed at $29.69 on Thursday, up $1.67, or about 6%, from the closing price Wednesday.