PPL Unit to Swap Debts

PPL Corporation’s (PPL - Analyst Report) unit PPL Energy Supply, LLC intends to issue new 4.60% senior notes due in 2021. PPL Energy Supply exercises this transaction on behalf of its subsidiary PPL Ironwood, LLC. This offering will expire on February 8, 2013. This transaction is subject to several approvals.

PPL Corporation will utilize new notes to swap majority of its existing 8.857% senior secured bonds due in 2025.

Per the offering, the bondholders, who have agreed to offer and surrender old notes before the date of expiration, will get $1,270 in the form of new senior notes against each $1,000 principal amount.

On February 28, 2013, PPL Ironwood will pay the principal and interest amounts to the outstanding bondholders as of February 1, 2013.

It is a common practice among the utility companies to exercise new issuances to redeem its old debts while minimizing both interest costs as well as the repayment tenure.

In the last couple of months, few utility providers implemented this strategy. In August last year, Ameren Corporation’s (AEE - Analyst Report) subsidiary Ameren Illinois Company issued $400 million of 2.70% senior secured notes due in 2022. The company utilized the net proceeds of this offering along with other surplus cash primarily to redeem its outstanding 9.75% and 6.25% senior secured notes worth $450 million due in 2018.

In the third quarter of 2012, PPL Corporation’s interest expenses were $248 million compared with $240 million. With this new issuance having lower interest rate, the company’s interest expenses are expected to fall in the forthcoming quarters.

Long-term-debt to capital ratio of PPL Corporation as of January 13, 2012 was 62.1%, much higher than its peer group ratio of 46.7%. The higher debt level is somewhat justified, as the return on equity of 13.8% as of January 13, 2012, is more than double with the peer group average.

We believe PPL Corporation’s inorganic growth strategy and strong credit profile are key positives for its near-term growth. In addition, the company’s strong liquidity position and well-equipped back-up plans will enable it to handle the after effects of the Hurricane Sandy.

However, we are skeptical about the impacts of stringent regulations, and risks associated with delay and cancellation of its several important projects, which may challenge the company’s future financial performance. PPL Corporation currently has a short-term Zacks Rank #3 (Hold).

Allentown, Pennsylvania-based PPL Corporation generates and delivers electricity and natural gas to more than 10 million customers in the U.S. and UK.