Fitch Rates PPL Capital Funding's Senior Notes 'BBB'

NEW YORK--()--Fitch Ratings has assigned a 'BBB' rating to PPL Capital Funding Inc.'s (PPL Capital Funding) proposed issue of $350 million 3.95% senior notes due 2024 and $400 million 5.00% senior notes due 2044 (together, the senior notes).

These senior notes are issued in exchange for the junior subordinated notes due 2017 and junior subordinated notes due 2019 (together, the junior notes) that were remarketed in accordance with the terms of PPL's 2011 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. In 2013, regulated operations provided nearly 80% of consolidated EBITDA. By comparison regulated operations accounted for approximately 30% of EBITDA prior to two utility acquisitions. The proposed ratings also reflect credit metrics that are generally consistent with the rating.

Rising capital expenditures in PPL's regulated segment pose a potential credit risk. The credit risk 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. PPL expects to grow the regulated rate base by approximately 6.7% 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.

In PPL's merchant power generation segment, a weak power price environment is the primary challenge in the next two to three years. However, Fitch believes that the weak performance in this business segment is currently manageable as the segment becomes less critical to PPL's consolidated financial strength going forward.

Over the next two to three years, Fitch expects PPL's credit measures to weaken slightly primarily due to declining performance of the merchant business and the sizeable capital spending program but remain supportive of the current ratings. Fitch estimates funds from operations (FFO)-to-debt will, on average, be in the mid-teens and FFO interest coverage approximately 4x. Over the prior three years, FFO-to-debt averaged 18% and FFO interest coverage 4.2x.

Rating Sensitivities

Negative:

--PPL's ratings could be downgraded if capital resources are allocated disproportionally to the unregulated business during the period of heavy utility investment. FFO-to-debt consistently below 16% and debt-to-EBITDA above 4.0x beyond the utility investment period could trigger a downgrade.

-- Any material adverse development in the regulatory framework in U.S. or in U.K. that PPL's regulated utilities operate in, such as changes in commodity cost and environmental cost recovery.

Positive:

--Unlikely given the large capital spending program and struggling merchant segment.

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, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822652

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Contacts

Fitch Ratings
Primary Analyst:
Julie Jiang, +1-212-908-0708
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Robert Hornick, +1-212-908-0523
Senior Director
or
Committee Chairperson:
Glen Grabelsky, +1-212-908-0977
Managing Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Julie Jiang, +1-212-908-0708
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Robert Hornick, +1-212-908-0523
Senior Director
or
Committee Chairperson:
Glen Grabelsky, +1-212-908-0977
Managing Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com