- PPL Corp. on Monday unveiled a plan to sell its U.K.-based utility business, Western Power Distribution (WPD), and to instead concentrate on becoming a U.S.-only utility holding company. Company officials say the simplified corporate structure and investment in clean energy will help to improve share value.
- A buyer for WPD is expected to be identified in the first half of 2021. The transaction could be an all-cash sale or include a combination of cash and U.S. utility assets.
- Lower sales due to the COVID-19 pandemic and global economic slowdown reduced PPL's earnings in the first half of the year by about $0.06/share compared to the first half of 2019, officials said during the second quarter earnings call on Monday, with most of that impact coming from the U.K. business. Weather-normalized second-quarter electricity sales at its Pennsylvania and Kentucky utilities declined 4.3% and 7.7%, respectively, compared to the year-ago quarter.
Impacts of the novel coronavirus will be "manageable," said PPL officials on Monday's call, and the company has left its full-year earnings guidance largely intact. Significantly lower commercial and industrial (C&I) electricity sales have been offset by higher residential usage, they said.
PPL reaffirmed its 2020 earnings guidance range of $2.40 to $2.60/share, but said it now expects results "to track toward the lower end" due to COVID-19 and unfavorable weather impacts in the first half of the year. The company reported second-quarter earnings of $0.45/share and earnings from ongoing operations of $0.55/share.
"We've been very effective in minimizing the impact of COVID-19 on our workforce, we maintain access to the materials and equipment we need, and our capital plans remain on track as we've experienced minimal delays apart from the early lockdown phase in the U.K.," PPL President and CEO Vince Sorgi told analysts and reporters.
In Kentucky, where PPL owns Louisville Gas and Electric and Kentucky Utilities Co., Q2 earnings decreased by $0.03/share compared to last year's quarter. Due to COVID-19, the company saw a 14.4% decline in weather-normalized C&I electricity sales in the state, but this was offset by a 5.7% increase in residential sales.
In Pennsylvania, where the company owns PPL Electric Utilities, C&I sales were down 10.5% but residential sales rose 7.3%, and earnings rose slightly on higher returns on additional capital investments in transmission, among other factors.
Company officials also touted their storm recovery performance in Pennsylvania following Tropical Storm Isaias earlier this month. The utility restored power to 70,000 customers within 48 hours, "despite widespread damage and flooding, underscoring our ability to perform well even in the worst of conditions," Sorgi said.
But the headline from PPL's earnings announcement was the decision to exit U.K. operations. The sale is expected to move quickly, due to a more streamlined regulatory process in Europe, company officials said. Analysts on the call questioned the possibility of an asset swap as opposed to an all-cash deal, and the potential tax implications.
Sorgi said the decision creates a path to improve shareholder returns "by simplifying the business mix, reducing our leverage, improving our earnings growth rate, and enhancing our ability to invest in sustainable energy solutions. Another key area of focus will be to reduce the carbon footprint of the company."
PPL shares traded around $36/share in January and February, but have more recently settled around $26/share. The market responded favorably to Monday's announcement, however, and shares rose 5.5% to close at $28.65/share.
Steven Fleishman, an analyst with Wolfe Research, questioned on the earnings call whether an asset swap for WPD could "potentially be like a like-kind exchange treatment for that portion, where you could defer tax?"
"Not likely," Sorgi said, but he added that the company is focused on avoiding the potential for "tax leakage" on the deal.
"We're going to look at various different structures and look at maximizing shareowner return," Sorgi said. "And whether that's all cash or a combination of cash and assets, [it is] way too early to tell, but at the end of the day ... the goal here is to maximize shareowner value. But it's also to set the company up for long-term growth and value for investors as well."
Andrew Bischof, a senior equity analyst at Morningstar, reaffirmed a $27/share estimate after PPL's announcement.
"The management's plan to seek strategic alternatives for the U.K. business is not surprising, as the unit has been a key concern," Bischof wrote in a note to subscribers. "We think management's decision is the right one. The U.K. regulatory environment has continued to deteriorate, with the U.K. regulator recently proposing sharply lower rates of return for the next regulatory period."
There were reports last year that Avangrid and PPL were discussing a potential merger of their utility businesses. But according to Bischof, Avangrid owner Iberdrola has "recently expressed significant displeasure with U.K. regulators, suggesting Iberdrola's interest in the U.K. is waning."