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PPL Utilities to buy power via open-market contracts
It will sell $900 million in bonds to cover the cost of getting energy from generators. Shareholders still must approve the plan.

05/27/01

By CHRISTIAN BERG
Of The Morning Call

Californians brace for a summer of soaring power prices amid a botched attempt to deregulate the state's electric industry, PPL Corp. officials are touting Pennsylvania's successful deregulation effort as a national model.

Last month, PPL executives credited deregulation for helping them develop a first-of-its-kind plan they believe will help PPL Electric Utilities guarantee stable power rates through 2009. The plan will also free up an extra 6,000 megawatts of PPL generating capacity for sale on the lucrative wholesale market.

PPL officials hope the move will boost already record-breaking profits and provide additional cash to fuel the company's rapid expansion.

"This unique plan…is one more example of the innovation that Pennsylvania's deregulation success has spawned," said William F. Hecht, PPL's chairman, president and chief executive officer. "Clearly, the results show that Pennsylvania's approach to deregulation should serve as an example for the nation."

The plan must be approved by the state Public Utility Commission and PPL Utilities shareholders before the company can proceed. The commission is expected to rule on PPL's request sometime in June, and a special shareholders meeting has been scheduled for July 17.

PPL's proposal involves a process called securitization, through which PPL will issue about $900 million in bonds. The bonds will be backed by the assets of PPL Utilities, which provides electricity to about 1.3 million customers in central and eastern Pennsylvania.

PPL Utilities will use about $200 million of the bond money to pay off existing debt with higher interest than the bonds. The bonds are expected to carry an interest rate around 7 percent.

Savings on interest payments alone are expected to increase PPL's earnings by about 2 cents a share this year and 10 cents a share in 2002, said John R. Biggar, executive vice president and chief financial officer.

PPL Utilities will use the remaining $700 million to purchase electricity for its Pennsylvania customers. Some of the money will also pay for maintenance and upgrades to its power lines, service trucks and other equipment used to deliver electricity to consumers.

Buying electricity on the wholesale market will be a major change for PPL Utilities, which currently gets all the power its customers need from PPL EnergyPlus, another PPL division that has dedicated 6,000 megawatts of generation to PPL Utilities.

PPL Utilities has an agreement with PPL EnergyPlus to provide power through the end of the year. Starting next year, PPL Utilities will purchase electricity for its customers through long-term contracts awarded on a competitive basis.

PPL Utilities is now soliciting bids from energy suppliers to meet its 6,000-megawatt generation requirement from 2002 through 2009. The company may purchase power from a single supplier or a combination of suppliers to meet customer demand, Biggar said.

PPL EnergyPlus will bid on the contract, but could be outbid by other suppliers. If PPL EnergyPlus does not win any portion of the PPL Utilities contract, it will have 6,000 more megawatts of generation to sell on the wholesale market, Biggar said.

That would more than double the current amount of wholesale electricity PPL can sell, and bring its total wholesale generation to almost 10,000 megawatts. PPL is rapidly building new power plants around the country and has a goal of owning 20,000 megawatts of generation by 2005.

"What this concept does…is provide additional earnings opportunities in the wholesale business and grow profits for the corporation," Biggar said. "It's a transaction that makes economic sense and good business sense."

David M. Schanzer, a power industry analyst with Janney Montgomery Scott, said PPL's experience with securitization will be closely watched by competitors.

"I think every utility company in the United States is going to be looking at this template and trying to figure out whether it works for them," Schanzer said. "I think it's a wonderful idea. It shows tremendous financial acumen and creativity."

On the downside, Biggar acknowledges that PPL Utilities will probably have to buy power on the wholesale market for more than it charges its customers.

PPL Utilities is obligated to provide electricity at capped rates through 2009 to customers in its service territory who do not choose another supplier. That's according to an agreement PPL reached with the state utility commission as part of Pennsylvania's electric industry deregulation.

For residential customers, the capped rate is an average of 4.6 cents per kilowatt hour.

If the bids PPL receives for its power needs come in higher than the capped rates, PPL Utilities will have to use a portion of its bond proceeds to make up the difference. Despite that, Biggar said PPL has no plans to ask the PUC to raise electric rates prior to 2009.

"The rate caps are in effect, and it's our intention to stay within the rate caps," Biggar said.

That's good news for Pennsylvania consumers, said state consumer advocate Sonny Popowsky, a government official who represents the interests of utility customers before the PUC.

Popowsky said he hasn't yet taken a position on PPL's securitization plan, but added that he won't oppose it as long as the rate caps are preserved.

"I wish them well," Popowsky said of PPL's desire to sell additional power on the wholesale market. "I just don't want their good fortune to come at the expense of their consumers."

Popowsky said he is also concerned about the amount of debt the securitization plan would place on PPL's utilities business. Once the bonds are issued, PPL Utilities will have about $3.4 billion in outstanding debt -- more than half of the company's $6 billion in total assets.

But Biggar said the hefty debt load won't negatively impact the company's credit ratings, because PPL is taking a number of steps to ensure the long-term stability of its finances.

PPL Utilities will be structurally separated from other PPL divisions, with an independent advisor appointed to oversee the finances of the utility business.

PPL also will change the charter of PPL Utilities to add a stipulation that PPL Utilities will only be involved in delivering electricity. Biggar said that precludes the company from participating in the more risky aspects of the electricity business.

Finally, PPL will place limits on how much money PPL Utilities can contribute to the overall profits of PPL Corp. Biggar said certain financial performance standards will have to be met before PPL Utilities can send cash to other parts of the corporation.

Because of these steps, Biggar said both Moody's and Standard & Poor's have indicated the bond issue will have no impact on PPL's strong credit rating. Moody's and Standard & Poor's are the nation's two largest credit rating agencies.

That "should provide assurance that we haven't done anything to weaken the organization," Biggar said.

Although PPL Utilities will likely lose money on the wholesale power it buys, Biggar said the money raised with the pending bond issue will more than cover it. Biggar said customers will benefit because the company is contracting for its power supply seven years in advance, and can plan ahead for its expenses.

He also said securitization will reduce the potential for an increase in electric delivery rates when a cap on those charges expires in 2005. With the bonds, PPL will have money to make needed repairs and upgrades to its power lines and other equipment. Without that, the company might have to borrow money using other credit methods that have higher interest rates.

"We have provided some assurance that customers otherwise did not have," Biggar said. "Their price and supply are assured for the rest of the transition period. That's more than you can say for some of the states in the West."

It's more than you can say for some parts of Pennsylvania, too. GPU Energy, which serves customers in Easton, Stroudsburg and other areas throughout the state, recently asked the PUC to raise its rate cap to help recoup the money it was losing on energy transactions.

Unlike PPL, GPU, of Morristown, N.J., owns no generation assets and must purchase all its electricity at wholesale market prices. The company has been losing money on power for more than a year, because it's buying electricity at high wholesale levels and reselling it to consumers at the state-imposed rate cap. GPU told the Public Utility Commission its losses on electric purchases could top $145 million this year.

The commission will decide on GPU's request for rate relief at its July 13 meeting in Harrisburg.

Despite the likelihood of losing money on its retail electric sales, Biggar said the securitization plan is a benefit for PPL Corp. as a whole. The company expects that increased profits from selling additional power on the wholesale market will more than make up for what is lost on the utility side.

Schanzer, the industry analyst, said if PPL's securitization plan is approved, he expects the company's profits to increase by at least 10 percent.

"While the customers of PPL don't lose, and it's possible for them to even benefit, it is a painless way to reward PPL shareholders," Schanzer said. "It allows them to have a better opportunity for the reward that's equated with the risk that comes with being in this new energy environment. It may prove to be a winner for them."

Popowsky, the consumer advocate, isn't so certain.

"We're going to be reviewing it very carefully, because it's a complex proposal," Popowsky said. "The money they can make in the unregulated market, I have no problem with that. My concern is that the rate cap be met and in a way that doesn't harm customers."



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