PPL Corporation (PPL) moved a step closer to completing the proposed E.ON U.S. LLC acquisition. Yesterday, PPL Corp. and E.ON U.S. LLC announced that they have successfully settled the allegations of the two parties who prevented the Federal Energy Regulatory Commission's (FERC) approval of PPL's acquisition of E.ON U.S.
The settlement resolved the concerns raised by the two parties – American Municipal Power and Kentucky Municipals. Both have subsequently withdrawn their protests.
American Municipal Power supplies wholesale power to municipal electric systems. Kentucky Municipals is a coalition of several municipal electric providers in the state, including the Frankfort Electric and Water Plant Board, and the cities of Barbourville, Bardstown, Bardwell, Benham, Berea, Corbin, Falmouth, Madisonville, Nicholasville, Paris and Providence.
Following the settlement, PPL and E.ON U.S. filed with the FERC to approve the acquisition by October 15, 2010. If the FERC and other required approvals are received by mid-October, the companies expect to complete the transaction by October 31, 2010. Other parties required to approve the acquisition include the Kentucky Public Service Commission (PSC), the Virginia State Corporation Commission and the Tennessee Regulatory Authority.
PPL Corp. expects to receive the final decision from the Kentucky PSC by September 30, 2010. The company had filed for PSC approval in early September after reaching a settlement with all the intervening parties in its Kentucky PSC application.
During the second quarter of 2010, the company had cleared the financial hurdle of closing the acquisition by raising roughly $3.5 billion through the sale of common stock and equity units to fund a major part of the acquisition.
The origin of the purchase agreement between PPL Corp. and E.ON A.G. to acquire E.ON U.S. LLC dates back to April 28, 2010. E.ON U.S. LLC is the parent company of Kentucky's two major utilities, Louisville Gas and Electric Company and Kentucky Utilities Company. The companies serve about 1.2 million customers and generate about 7,600 megawatts of electricity.
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. However, we are presently apprehensive about the company's performance given management's lowered 2010 earnings guidance, expectations of continued pressure on PPL's hedges and projections for higher coal transportation costs, which could weigh on the company's earnings.
We currently have a short-term Zacks #5 Rank (Strong Sell) on PPL Corp. Our long-term recommendation on the stock is also Underperform.
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