PPL plans to target balance sheet, growth through National Grid asset swap

PPL Corp. will strengthen its debt-laden balance sheet and could deploy capital into strategic growth at its utilities or clean energy investments following the long-awaited sale of its U.K. business, executives said.

The company on March 18 announced an asset swap agreement with British utility National Grid PLC.

In the first part of the deal, PPL will sell its U.K. electricity distribution business Western Power Distribution PLC to National Grid for £7.8 billion in cash, plus the assumption of approximately £6.6 billion of debt. The transaction is expected to result in net cash proceeds of about $10.2 billion for PPL, inclusive of taxes and fees and based on a foreign-currency exchange rate of $1.35 to the pound.

A portion of the proceeds will be used to finance a separate transaction through which PPL will acquire National Grid's Rhode Island utility, Narragansett Electric Co., for $3.8 billion, plus the assumption of approximately $1.5 billion of debt.

"The combination of these two transactions are really transforming PPL, and we are totally repositioning the company for the future," PPL President and CEO Vincent Sorgi said on a March 18 conference call with analysts and investors.

Following its purchase of Narragansett Electric, PPL expects to have about $6.4 billion in cash proceeds to address its balance sheet, potential growth opportunities at its utilities or investments in renewable projects and share repurchases.

"You know, credit matters in our industry, and for us to go through this transformation, we wanted to make sure that we were set up the best way possible for future growth and flexibility in terms of embarking on a growth strategy," Sorgi said. "We feel very comfortable with our strong earnings growth trajectory ... solidly in that 4[%] to 8% range. But we also want to make sure that we are absolutely positioned well to execute on additional growth opportunities, whatever they may be."

PPL management said they plan to funnel about $3 billion to $3.5 billion toward debt reduction with the company now targeting a cash from operations-to-total debt ratio of 16% to 18% following the transactions. The company has about $6 billion of domestic holding company debt, executives said.

Following the transactions, PPL expects its holding company debt-to-total debt ratio to decrease below 25%, down from about 35% at the end of 2020.

Moody's revised the rating outlook on PPL and PPL Capital Funding Inc. to positive from stable March 18. The rating agency affirmed PPL's Baa2 issue rating and the Baa2 senior unsecured and Prime-2 short-term ratings of PPL Capital Funding.

PPL executives said the company is "uniquely positioned" to support Rhode Island's clean energy goals but stopped short of indicating whether PPL will invest in offshore wind development in the state.

Management also said they are focused on closing the transactions before deciding on the best use of proceeds.

"We could certainly invest further in Pennsylvania and Kentucky as we continue to execute our plans there," Sorgi said, adding that the company expects its "tax position to shift" following the U.K. utility sale.

"That makes our competitiveness in the renewables business shift as well, post-closing of these transactions," the CEO said. "So certainly, we could deploy additional capital in the renewables business. ... We've only been spending about $100 million a year over the last couple years in our renewables business, so there are opportunities to deploy more there."

While Narragansett Electric is expected to add $2.8 billion to PPL's $19.1 billion rate base, management did not indicate whether the company would pursue more growth opportunities in the region.

"On the inorganic side around the strategic front, really nothing specific to talk about there," Sorgi said. "Certainly, we will continue to look at strategic opportunities as one of the potentials for deploying that excess capital."

The sale of Western Power Distribution is expected to close within four months, with the acquisition of Narragansett Electric set to close within a year, subject to customary approvals in the U.S. and the U.K. as well as National Grid shareholder approval for the Western Power Distribution deal.

National Grid beat out several major utilities and investors in North America and Europe that were reportedly bidding for the business or expressed interest in it.

At the closing of the deals, PPL will serve approximately 3.5 million electricity and gas customers in the U.S., including approximately 780,000 customers from Narragansett Electric's electricity transmission and distribution and gas distribution businesses in Rhode Island.

PPL's stock was up more than 5% in early morning trading March 18.

CreditSights said the deal "came in well above expectations" and is "incredibly positive for PPL credit quality."

"We have not dug into the Narragansett deal in full detail yet, but on the surface, the transaction appears to make sense, and acquiring the utility's fully regulated electric and gas [transmission and distribution] asset base is a positive on the [environmental, social and governance] front which is much needed for PPL who has a heavy coal exposure (57% of its net generation in 2019)," CreditSights analyst Nick Moglia wrote in a March 18 research report. "This deal will at least lower PPL's overall rate base exposure to coal."

PPL executives said they will provide earnings guidance after the Narragansett Electric transaction closes, with approval from the Rhode Island Division of Public Utilities and Carriers expected to take 12 months.