PPL Corp Acquires AES Corp Units

PPL Corporation ( PPL - Analyst Report ) has completed its earlier announced acquisition of AES Ironwood, L.L.C. and AES Prescott, L.L.C., subsidiaries of The AES Corporation ( AES - Analyst Report ) . Post acquisition, the entities will be known as PPL Ironwood.

PPL and AES have a longstanding relationship going back to 2008. PPL has been providing natural gas for the operation of the AES Ironwood plant through its subsidiary PPL EnergyPlus, LLC. In return, AES secured PPL’s overall production under a tolling agreement till 2021.

In February 2012, PPL announced its intention of acquiring the two AES units. The company has a strong cash balance of $1.2 billion million as of December 31, 2011.

The company utilized its own cash for this acquisition with a consideration of $302 million. The consideration has two parts, comprising a cash purchase price of $85 million, which includes $3 million in working capital and a net project indebtedness of AES Ironwood, L.L.C worth $217 million.

The recent acquisition will enable PPL to control a 705-megawatt (“MW”) AES Ironwood combined-cycle natural gas-fired power plant in Lebanon, Pennsylvania, earlier owned and operated jointly by AES Ironwood, L.L.C. and AES Prescott, L.L.C.

PPL’s frequent acquisition programs indicate that the company strongly roots for inorganic growth. In April 2011, the company acquired the Central Networks East plc and Central Networks Limited from Central Networks West Plc. for a transaction value of approximately $6.5 billion.

We know that The AES unit acquisition will not likely add to PPL's future earnings and financing strategies. But we view this acquisition as a positive catalyst for the company’s future growth. At present, PPL intends to use oil and natural gas as raw materials for electricity generation. As PPL is the raw material supplier of The AES units, we believe that PPL will likely benefit from the overall operational synergies out of this acquisition. This acquisition will help the company to strengthen its Pennsylvania segment’s natural gas portfolio with higher revenue generation. In fiscal year 2011, PPL reported total operating revenue of $12.7 billion versus $8.5 billion in fiscal 2010.

But, at the same time, we are skeptical about the company’s higher depreciation and interest expenses, and increase in operation and maintenance expenses related to the addition of new assets.

We currently retain a Zacks #4 Rank on PPL Corporation, which translates into a short-term Sell recommendation.

Allentown, Pennsylvania-based PPL Corporation is an energy and utility holding company. Through its subsidiaries, PPL generates electricity from power plants in northeastern, northwestern and southeastern U.S.; markets wholesale or retail energy primarily in northeastern and northwestern portions of the United States, delivers electricity to customers in Pennsylvania, Kentucky, Virginia, Tennessee and the U.K. and delivers natural gas in Kentucky.