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Analyst sees strategic benefits for PPL and Avangrid in potential merger

A potential combination of Avangrid Inc. and PPL Corp. offers strong financial and strategic benefits for both U.S. utilities with foreign exposure, according to at least one Wall Street analyst.

The Financial Times reported Oct. 12 that Orange, Conn.-based Avangrid and Allentown, Penn.-headquartered PPL are considering a potential tie-up. A full merger, which could create a company worth more than $67 billion, would be the biggest deal in the utility space this year.

The companies are still exploring options to structure the transaction and there is no certainty that they would reach a deal, according to the report.

"Is there validity to it? Likely," Guggenheim Securities LLC analyst Shahriar Pourreza said in an Oct. 16 phone interview. "Whether something transpires, I don't know."

The analyst added that PPL has been trading at a discount and is looking to add value. The company's foreign exposure has made investors a little uneasy.

"Investors are very U.S.-centric in general," Pourreza said. "There was always this discount assigned to having a business outside the U.S."

PPL subsidiary Western Power Distribution PLC, or WPD, operates an electricity distribution network in the U.K., which accounted for about 29% of PPL's revenues in 2018.

PPL has been looking at strategic options for its U.K. business, especially with the controversy surrounding Brexit, Pourreza noted.

The analyst said simply spinning off WPD, reportedly an option that PPL is considering, "would be highly dilutive."

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Avangrid is majority-owned by Spanish utility Iberdrola SA, which would essentially be "doubling down in the U.K.," through any PPL tie-up, Pourreza said.

However, a potential merger with PPL could be beneficial to Avangrid, especially from an investor standpoint.

"Avangrid is not known from an investor's standpoint to have the strongest management team," Pourreza said, adding the company has also had some offshore wind issues. "PPL could dilute Avangrid's hiccups in the U.S."

Avangrid has $33 billion in assets and operations in 24 different U.S. states, including wind, solar and thermal power plants and transmission infrastructure. One of the largest wind operators in the U.S., Avangrid has more than 7,000 MW of installed generation capacity, most of it wind. The company has 15,900 MW of solar, onshore wind and offshore wind in its project pipeline, according to a September investor presentation.

Its two primary lines of business are Avangrid Networks Inc. and Avangrid Renewables LLC.

PPL serves more than 10 million customers in the U.S. and U.K.

The company operates in the U.S. through subsidiaries LG&E and KU Energy LLC, the direct parent of Kentucky Utilities Co. and Louisville Gas and Electric Co., and PPL Electric Utilities Corp. in Pennsylvania.

PPL, on its website, touts plans to invest more than $15 billion through 2022 in new infrastructure and technology.

In June 2014, PPL agreed to spin off its merchant generation business in a deal with private equity firm Riverstone Holdings LLC, which later took full control of the newly created independent power producer.

PPL's stock closed at $32.09 on Oct. 17, up slightly from $31.43 at market close on Oct. 11, the day before reports of the potential merger surfaced.

Avangrid's shares closed at $49.94 on Oct. 17 after closing at $49.87 on Oct. 11.