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Ppl Financing Arrangements Essay

2290 words - 10 pages

PPL Growth Strategy and Financing Policies
Pennsylvania Power and Light Company (PPL) was originally incorporated in 1920 as holding company. 1920-1994 PPL operated as a vertically integrated utility. In 1994 the company’s management recognizing and anticipating changes to the electric utility industry chose to changes it strategy by creating a subsidiary PPL Global “to pursue business opportunities in the unregulated electricity marketplace” (Esty, Ferman3). Senior management recognizing the need to create a more competitive environment within the company began a restructuring process from 1994-2000. In 1999 the company announced it intended to double its generation capacity by 2005 ...view middle of the document...

Lease vs. Corporate Debt at PPL
PPL Global went through an evaluation period of the finance structures to that would be appropriate to raise the billions of needed capital to fund the company’s generation expansion from “10,000 MW to 20,000 MW” (Esty, Ferman 4). As stated above the Finance team quickly ascertained that Corporate Finance would be an inappropriate method of raising the needed funds due to the ‘burden this would place on the corporation balance sheet and credit rating’ (Esty,Ferman 5). Because the finance team eliminated the corporate balance sheet for financing it was forced to explore “off-balance sheet financing tools” (Esty, Ferman 5). This resulted in the evaluation of Project Finance and Lease options. The team recognized that these options were not necessarily the most “optimal way” (Esty, Ferman 5) to raise the needed capital but were the only way. Project Finance would allow PPL global to raise nonrecourse debt to fund the generation portfolio expansion, however the assets would be on the balance sheet and interest rates/transactions costs were high. Because the assets would be on the balance sheet the depreciation of the assets would result in a decrease in earnings per share (Esty, Ferman 5). The finance team also evaluated the various lease options. What they found here was that leasing the assets would cause them to be treated off the corporate balance sheet which eliminated depreciation costs improving the earnings per share on the corporate balance sheet. Additionally depending on the structure of the lease they could get some off credit treatment as well as a deduction on taxes for interest paid (for synthetic leases) this in effective boosts earnings. As stated on page 6 of Esty & Ferman:
“Companies that are intent on surviving the competition in the merchant power environment through a strategy of consolidation and growth are starved for capital and earnings. EPS growth is necessary to support the stock price and issue additional equity, thereby increasing debt capacity and the ability to fund more assets acquisitions and construction. Leasing enhances earnings growth and augments the capital raising process.”
This is precisely the situation PPL Global found themselves in. Thus, by using a leasing structure they could boost earnings per share to support the stock price enabling them to issue more equity if need be in order to be able to issue more debt. Additionally use of the lease increase earnings due to net effective of reducing the cost of raising capital through tax deductions on interest paid for certain types of lease structures.
Recommended Lease Option for PPL
Jim Abel explained that in the early years of venturing into the unregulated markets that it was key for PPL to show that the company could manage this new business and show earnings (Esty, Ferman 5). This would enable access to raising capital in the future to fund further expansion. The finance team evaluated and surmised...

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