(The following statement was released by the rating agency)
NEW YORK, May 22 (Fitch) Fitch Ratings has assigned a 'BBB' rating to PPL
Capital Funding Inc.'s (PPL Capital Funding) proposed issue of $250 million
1.90% senior notes due 2018, $600 million 3.40% senior notes due 2023 and $300
million 4.70% senior notes due 2043 (together, the senior notes). These senior
notes are issued in exchange for the $300 million 2.04% junior subordinated
notes due 2016 and $850 million 2.77% junior subordinated notes due 2018
(together, the junior notes) that were remarketed in accordance with the terms
of PPL's 2010 equity units. The senior notes will receive no equity credit. PPL
Capital Funding's ratings are based on an unconditional guarantee by its parent
PPL Corporation (PPL). The Rating Outlook is Stable.
Key Rating Drivers:
PPL's ratings and Outlook reflect its transformation from a company heavily
reliant on commodity sensitive businesses to one that is highly regulated with
substantially less business risk. Driven by the acquisitions of Central Networks
in April 2011 and LG&E and KU Energy, LLC (LKE) in November 2010, regulated
operations are expected by Fitch to provide approximately 75% of consolidated
EBITDA by 2013. By comparison regulated operations accounted for approximately
30% of EBITDA prior to the two acquisitions. The proposed ratings also reflect
credit metrics that are generally consistent with the rating and lower risk
Rising capital expenditures in PPL's regulated segment pose a potential credit
risk. PPL is investing heavily in its regulated businesses and expects to grow
the regulated rate base by approximately 7.6% annually over the next five years.
The investments will require on-going rate increases in both Kentucky and
Pennsylvania and equity support from PPL. Expenditures in Kentucky are primarily
to install environmental upgrades to comply with new Environmental Protection
Agency (EPA) standards. In Pennsylvania the new investments are largely to
replace aging infrastructure and for transmission upgrades. The risk associated
with the magnitude of the capital expenditure program is mitigated by regulatory
provisions that provide near real-time cost recovery of invested capital for
about two-thirds of projected expenditures, including FERC jurisdictional
transmission in Pennsylvania, environmental compliance in Kentucky and all
capital investments in the U.K.
In PPL's merchant power generation segment, a weak power price environment is
the primary challenge in the next two to three years. Additionally, several
unplanned plant outages due to hardware failure adds more downward pressure and
raise concern with regard to the chronic nature of these incidents. However,
Fitch believes that the weak performance in this business segment is currently
manageable for PPL as the segment becomes less critical to PPL's consolidated
financial strength going forward.
Historically, PPL's credit metrics were consistent with the rating category.
Over the last three years, on average, it produced funds from operations
(FFO)-to-debt of 19.8% and FFO interest coverage of 4.6x. In the next two to
three years, Fitch expects these metrics to weaken with average FFO-to-debt in
mid-to high-teens and FFO interest coverage of approximately 4x, primarily due
to the expected weakening of the merchant business and the sizeable capital
--PPL's ratings could be downgraded if capital resources are allocated
disproportionally to the unregulated business in this period of heavy utility
investment. Leverage and consolidated FFO-to-debt consistently below 17% and
debt-to-EBITDA above 4.0x could trigger a downgrade.
--Any material adverse development in the regulatory framework such as change
in commodity cost recovery provisions in Pennsylvania.
--Unlikely given the large capital spending program.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research:
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
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