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Stocks P / PP&L Resources Inc.


Subject:  Questions & Answers Date:  6/9/2001  4:45 PM
Author:  minesweep Number:  58 of 117

Here are few questions & answers from the May edition of “PPL Dimensions” (an employee & retiree magazine). The answers were provided by Bill Hecht & John Biggar.

Q. With the price of PPL common shares trading as high as they are, why doesn't the company consider a stock split?

A. PPL is pursuing a strategic direction of becoming one of the most successful “growth-oriented” energy companies in the U.S. This strategy emphasizes reinvesting profits back into the deregulated businesses of the corporation, instead of increasing cash dividends to shareowners who might be primarily interested in current income. Through a growth-oriented strategy, PPL seeks to grow earnings over time. Increased earnings typically lead to higher stock prices, attracting investors who have a higher tolerance for risk in the pursuit of higher rewards over time. The result is that PPL is no longer the highly conservative “yield-oriented” or “income-oriented” investment that it once was as a regulated electric utility.
During its corporate history PPL has implemented two 2-for-1 stock splits, one in 1959 and one in 1992. In a 2-for-1 stock split, an investor ends up with twice as many shares, but the market price of each share is cut in half. Individual investors, who generally prefer to achieve lower per-share stock brokerage commissions, find the lower stock price attractive because it reduces the amount of funds needed to purchase what is known as a “round lot” of 100 shares.
As part of its transformation to a growth-oriented energy company, PPL has focused significant efforts on attracting growth-oriented institutional investors to its stock, with less intense effort devoted to individual investors. Institutional investors are pension funds, insurance companies and banks, which often buy and sell large quantities of stock in a single transaction. Keen interest by institutional investors in PPL stock has been reflected in the rising price performance of the stock over the past year. A stock split, on the other hand, could be perceived as a movement of PPL away from its strategy to attract a strong institutional investor base that is focused on growth.

Q. Why does PPL's P/E ratio lag behind the P/E ratios of the unregulated, independent generating companies like Dynegy, Enron and Reliant?

A. PPL Chairman Bill Hecht said recently that perceived growth of an energy company by investors is crucial to its future success. “As well as we've been telling our own success story to the financial community lately, we have more to do in that regard, “Hecht said. Some of the unregulated, independent companies currently trade at P/E ratios of between 20 and 30 (compared to 13 or 14 for PPL), even though they have an earnings growth story that is no better than PPL's. As a result they have an earnings growth story that is no better than PPL's. As a result of the current strategic initiative, Hecht hopes that PPL's successful unregulated energy marketing and supply businesses will earn PPL a profile –and a P/E ratio—that is consistent, in the critical view of the financial community, with that of a fully unregulated, independent generating company.

Q. Does this strategic initiative make PPL more attractive to bigger energy companies, like Exelon, who say they are now on the prowl for acquisition candidates?

A. The strategic initiative has no direct impact relating to PPL's vulnerability to an unsolicited acquisition attempt. Running our company better than our competitors run their companies leads to a higher stock price, which is the best defense against an unwanted takeover attempt.

Q. Why didn't PPL consider an IPO to fully separate its generation and delivery businesses?

A. The current transaction is superior to an IPO. It provides all of the benefits associated with an IPO, in which the wires company would have been separated from the generation company, and both would have had their own stock. However, the current transaction enables PPL to retain the benefits of having an electricity transmission and delivery business. At the same time, PPL's common stock benefits from the financial community's reception of the strategic initiative as giving PPL an earnings profile that is consistent with that of a fully unregulated, independent generating company. The current transaction also provides PPL with the greatest flexibility for the future. The current transaction would not preclude a properly designed full separation some time in the future.

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