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PPL Corp. to Spin off Units, Form New Co. with Riverstone

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Utility firm PPL Corporation (PPL - Free Report) announced that it will spin-off its competitive energy business to create an independent entity, Talen Energy Corporation (“Talen Energy”), in collaboration with an energy and power investment firm Riverstone Holdings LLC. (“Riverstone Holdings”). Subject to different regulatory approval, the deal is expected to be completed within 9 to 12 months.

Talen Energy – A New Power Producer    

Per the contract, PPL Corp. will spin-off its unit PPL Energy Supply, LLC and merge its merchant power generation business with Riverstone Holdings’ operations. Post transaction, the merged entity will work as a stand alone Independent Power Producer (IPP), trading on the New York Stock Exchange.

The shareholders of PPL Corp. will obtain 65% ownership in Talen Energy while Riverstone Holdings will hold the rest. But, PPL Corp will not have continuing ownership interest in Talen Energy.

Post transaction, Pennsylvania-based Talen Energy will own and operate 15,320 megawatts (MW) of power generating capacity and will be third-largest investor-owned IPP in the U.S. Talen Energy will have diversified fuel-fired generation assets, including coal, natural gas and nuclear.

Talen Energy can capitalize its locational advantage as 83% of its generating assets are located in the Pennsylvania-New Jersey-Maryland (PJM) region, where demand for wholesale electricity is high. Talen Energy can tap the increasing demand for the vital U.S. competitive energy markets while strengthening its presence in the growing Electric Reliability Council of Texas (ERCOT) market.

In addition, Talen Energy is expected to obtain annual synergy benefits of around $0.12 billion in 2015. The transaction is expected to generate adjusted earnings before interest, taxes, depreciation, and amortization of roughly $1.07 billion in 2015.

PPL Corp. - Post Spin-off

The spin-off is expected to benefit PPL Corp. as performance from its Supply segment was lower than expectation in the past few quarters. In this scenario, we consider the spin-off as a positive move for PPL Corp.’s future growth.

The separation of the competitive energy operations will enable PPL Corp. to manage its regulated operations in the United Kingdom, Kentucky and Pennsylvania more efficiently and control the scale of operations.

Currently, PPL Corp. is retaining its ongoing earnings expectation for 2014 in the range of $2.15 to $2.30 per share. The company also provided its 2015 earnings guidance in the band of $2.05 to $2.25 per share, excluding Supply segment. The company also maintains its existing annual dividend rate at $1.49 per share. In the long run, PPL Corp. is aiming at least 4% compound annual growth from its earnings per share based on 2014 projection.

The transaction is expected to enable both companies to proficiently implement their long-term growth plans and concentrate on their strategic objectives, while improving shareholders’ value.

Zacks Rank

PPL Corp. currently has a Zacks Rank #3 (Hold). However, some better-ranked stocks in the sector include Dynegy Inc. , Entergy Corporation (ETR - Free Report) and NRG Energy, Inc. (NRG - Free Report) . All the stocks carry a Zacks Rank #1 (Strong Buy).

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