PP&L's Rtgs Affmd Re: Restructuring Settlement.NEW YORK--(BUSINESS WIRE)-- Standard & Poor's CreditWire 8/14/98 - Standard & Poor's today affirmed its triple-'B'-plus/'A-2' corporate credit ratings of PP&L Resources Inc. and the single-'A'-minus long-term corporate credit and senior secured debt, triple-'B'-plus preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. , and 'A-2' short-term corporate credit and commercial paper ratings of PP&L Inc. (formerly Pennsylvania Power & Light Co.) following a restructuring settlement with all major parties. A final Pennsylvania Public Utilities Commission (PPUC) vote is expected Aug. 27, 1998. The agreement not only allows PP&L to recover $2.97 billion in stranded costs over 11 years, but eliminates a significant degree of uncertainty, potentially prolonged litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. , and provides for a balanced transition to a competitive marketplace. PP&L had originally requested recovery of $4 billion, but the PPUC's June 4, 1998 order authorized only $2.6 billion over eight and one-half years. PP&L will withdraw from litigation it has filed in federal and state courts upon receipt of the PPUC's order. The settlement allows PP&L to securitize Securitize The practice of a company selling accounts receivables or other debts owed to it. The third party that buys the debt assumes ownership of it and the responsibility for collecting the debts, and keeps the repayments when made. essentially all of its recoverable transition costs if the company chooses to do so. Although 75% of the associated financing cost savings Financing Cost Savings A source of competitive advantage that depends on access to low cost sources of capital. are to be flowed through to ratepayers, proceeds would be used to shrink capitalization, including paying down debt. The pact also increased the shopping credit to 3.81 cents per kWh from 2.72 cents per kWh, caps delivery service rates through 2004, permits two-thirds of PP&L's customers to shop for electricity supply on Jan. 2, 1999, and requires a 4% rate decrease in 1999. As a result of the settlement, PP&L Resources has taken a one-time $948 million after-tax, noncash charge Noncash charge A cost, such as depreciation, depletion, and amortization, that does not involve any cash outflow. That is, this is treated as an accounting expense -- not a real expense that demands cash. to second-quarter 1998 earnings. The write-down comes as no surprise and, given a relatively healthy equity cushion, harms-but does not decimate-the utility's capital structure. Total debt to capital at PP&L will rise to about 55% from 47%, while common equity will drop to about 32% from 42%. Of greater importance to credit considerations is PP&L Resources' decision to slash the common stock dividend by 40%. This will save about $113 million annually and, over time, will boost already strong free cash flow measures. Given PP&L Resources' healthy financial profile, it can withstand the planned self-tender for up to 17 million shares of common stock through a Dutch Auction Dutch Auction An auction where the price on an item is lowered until it gets its first bid, and then the item is sold at that price. Notes: The U.S. Treasury (and other countries) uses a Dutch auction when it sells securities. process. The potential $449 million transaction initially will be financed with commercial paper. Despite sharply higher consolidated debt leverage at the parent (roughly 63%), the dividend cut will free up a considerable amount of cash, partially offsetting the increase in interest expense. Moreover, the lower payout ratio Payout Ratio The percentage of earnings paid out in dividends. It is calculated by dividing dividends per share by earnings per share. Notes: The payout ratio indicates how well earnings support the dividend payments: the lower the ratio, the more secure the dividend. (45% to 50%) will enhance financial flexibility going forward, which will help the company to compete in an increasingly open market. Within four to five years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time transaction debt will likely be repaid and balance in PP&L Resources' capital structure restored to about 45% debt. OUTLOOK: STABLE PP&L Resources' stable outlook mirrors that of the utility, which accounts for the bulk of consolidated operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. . Prospective ratings stability reflects expectations for consistent nuclear operating performance, limited competitive pressures due to relatively low production costs, and substantial recovery of stranded costs. While PP&L has the option of securitizing its stranded costs, it has indicated no intention of doing so for several years. Upside Upside The potential dollar amount by which the market or a stock could rise. Notes: This is basically an educated guess on how high a stock could go in the near future. See also: Bull, Downside rating potential will be restrained by the need to sell capacity and energy that is returning over the next few years as sales contracts Sales Contract Contract between a seller and buyer for the sale of goods, services, or both. expire. In light of an increasingly free market, any new sales are likely to be at lower prices. In addition, any growth in PP&L Resources' nonregulated activities, if not conservatively financed, could eventually pressure credit quality, Standard & Poor's said. --CreditWire
CONTACT: Barbara A Eiseman, New York (1) 212-208-1656
Copyright 1998, Standard & Poor's Rating Services
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