Oct. 30, 2009 (Business Wire) -- Fitch Ratings has lowered the senior unsecured debt ratings of PPL Energy Supply, LLC (PPLES) to 'BBB' from 'BBB+'. All other ratings of PPL Corp. (PPL) and its domestic subsidiaries PPLES and PPL Electric Utilities Corp. (PPLEU) are affirmed as shown in the ratings list at the end of this release. The Ratings Outlook for each entity remains Stable.
The downgrade of PPLES' senior unsecured debt ratings to 'BBB' from 'BBB+' aligns the senior unsecured debt ratings with the 'BBB' Issuer Default Rating (IDR) in a manner that is consistent with the approach Fitch applies to other competitive generators and also recognizes a lower valuation of PPLES' power assets based on current and forward wholesale power prices. The ratings also reflect Fitch's expectation of lower than previously expected earnings and cash flow improvement in 2010 and 2011. Based on recent hedge transactions entered into by PPLES for the years 2010 and 2011, Fitch no longer expects leverage and cash flow measures, which weakened in 2008 and through the first half of 2009, to reach the levels required to support the former rating. The financial improvement expected to begin in 2010 is driven by the expiration of a below market power supply contract with affiliate PPLEU. The company has entered into replacement hedges that are approximately 33% above the price in the expiring contract, but below Fitch's previous forecast. The ratings also consider $250 million of debt reductions accomplished in 2009 that will reduce interest expense by approximately $15 million and cost savings from work force reductions. PPLES has sufficient liquidity to manage its collateral and working capital needs.
The ratings of PPL are supported by the cash flow and earnings of its two core subsidiaries PPLES and PPLEU, sufficient liquidity and the expected improvement in PPLES' earnings and cash flow. The ratings also reflect the beneficial impact of approximately $451 million of debt retirements in 2009 (interest savings of $24 million), including a tender offer for $250 million of PPLES debt and the retirement of $201 million of PPL Capital Funding debt with cash, and work force reductions that are projected to save $25 million annually. PPLES also reached two separate agreements to sell assets in Maine and Long Island with expected net proceeds of approximately $230 million. The asset sales are expected to close before year-end.
The primary credit concerns are the future level of electricity demand and power prices in the wholesale energy markets in which PPLES operates and the uncertain cost and impact on gross margins of meeting potential environmental regulations addressing greenhouse gas (GHG) emissions. While power market prices and demand are expected to improve over time, the extent and timing of the improvement is uncertain.
