Moody's Upgrades PPL Corp. (PPL) to 'Baa2' Amid Upcoming Spin of PPL Energy Supply

Moody's Investors Service today upgraded the senior unsecured ratings of PPL Corp. (NYSE: PPL) to Baa2 from Baa3 and its LG&E and KU Energy LLC (LKE) subsidiary to Baa1 from Baa2. At the same time, we have revised PPL Corp and LKE's outlook to stable from positive and revised its PPL Electric Utilities (PPLEU Baa1) subsidiary outlook to positive from stable. The rating actions on PPL and LKE are taken in anticipation that PPL's unregulated subsidiary PPL Energy Supply (Supply; Ba2 stable) will be spun off from PPL on June 1, 2015.

Post spinoff, PPL will have lower business risk because all of its material subsidiaries will be regulated utility companies, leading to an improved credit risk profile. The positive outlook on PPLEU's reflects the continued improvement in Pennsylvania's cost recovery mechanisms as well as the growing share of the transmission operations within PPLEU, which have highly favorable credit characteristics.

Upgrades:

..Issuer: LG&E and KU Energy LLC

.... Issuer Rating, Upgraded to Baa1 from Baa2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

..Issuer: PPL Capital Funding, Inc.

....Junior Subordinated Regular Bond/Debenture, Upgraded to Baa3 from Ba1

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

..Issuer: PPL Corporation

.... Issuer Rating, Upgraded to Baa2 from Baa3

Affirmations:

..Issuer: PPL Electric Utilities Corporation

.... Issuer Rating, Affirmed Baa1

....Senior Secured First Mortgage Bonds, Affirmed A2

....Senior Secured Regular Bond/Debenture, Affirmed A2

....Senior Unsecured Bank Credit Facility, Affirmed Baa1

....Senior Unsecured Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: LG&E and KU Energy LLC

....Outlook, Changed To Stable From Positive

..Issuer: PPL Capital Funding, Inc.

....Outlook, Changed To Stable From Positive

..Issuer: PPL Corporation

....Outlook, Changed To Stable From Positive

..Issuer: PPL Electric Utilities Corporation

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

PPL's Baa2 rating reflects the low business risk of its US and UK regulated utilities, offset by substantial debt leverage at the parent holding company. The regulated business is characterized by credit supportive regulatory environments and a currently large capital expenditure program across all major subsidiaries, resulting in substantial negative free cash flow and depressed key credit metrics. As a fully regulated business after the spinoff, PPL will have 70% of its earnings and cash flows coming from a networks or transmission and distribution (T&D) platform and 30% from integrated utilities buisness, all of which provide good visibility from a recovery, earnings and cash flow perspective.

PPL's consolidated CFO Pre-WC to debt has ranged in the 15% to 16% for the past three years and is expected to decline to the 13% to 14% range going forward after the spin. PPL's retained cash flow (RCF) to debt has been in the 11% to 12% range for the past three years and is expected to fall to about 9% to 10% going forward. These credit metrics position the company reasonably well relative to the range of 11% to 19% for CFO Pre-WC/Debt and 7% to 15% for RCF/debt for the Baa rating category as a lower risk concern under our Regulated Electric and Gas Utility methodology. We consider National Grid Plc (Baa1 stable) as the closest peer comparison to PPL.

Liquidity

PPL's liquidity is marginally adequate, but not a significant concern given its low business risk profile after the spin. Due to a high level of capital expenditure, we expect PPL to have more than $1.5 billion of negative free cash flow after dividends each year, plus about $1.8 billion of debt refinancing needs over the next eighteen months. While PPL has significant amount of cash on hand ($1.3 billion at the end of the first quarter of 2015), we expect most of this cash to be used to fund upcoming negative free cash flow. After the spin, the primary source of liquidity will be mainly comprised of $4 billion of bilateral and syndicated credit facilities issued by various entities throughout the PPL family. As of the end of first quarter 2015, there was about $2.7 billion of availability remaining out of the $4 billion total.

Outlook

PPL's stable outlook is supported by its strong regulated business operations in the US and UK and our expectation that management will maintain its capital structure with equity issuance as needed in the face of large capital expenditures and pressure to increase dividends.

What Could Change the Rating -- Up

The potential for a rating upgrade is low due to the large upcoming capital expenditure program and high level of holding company debt. However, upward pressure could result should its consolidated CFO Pre-WC/debt rise to the high teens and its RCF/debt rises to the mid-teens.

What Could Change the Rating - Down

The potential for a rating downgrade could occur should the company increase its debt level, especially at the holding company level. A downgrade could also result should its consolidated CFO-Pre WC/debt falls to the low-teens range or its RCF/debt falls to mid-single digits.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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