Overview: Millennium Management's 1Q14 positions (Part 4 of 7)
Millennium Management and PPL Corporation
Millennium Management has top new positions in Rice Energy Inc. (RICE) and Anixter International Inc. (AXE). Positions were increased in PPL Corp. (PPL), Devon Energy (DVN), Teva Pharmaceuticals (TEVA), and Edison International (EIX).
Millennium Management upped its position in PPL Corp. (PPL) to 13,053,035 shares, which now accounts for 1.25% of the fund’s portfolio. Millennium earlier owned 9,119,479 shares in PPL that accounted for 0.87% of the portfolio in 4Q13.
PPL, headquartered in Allentown, Pennsylvania, is an energy and utility holding company. With 2013 revenues of $12 billion, PPL is one of the largest companies in the U.S. utility sector. The PPL family of companies delivers electricity and natural gas to about ten million customers in the United States and the United Kingdom. Through its subsidiaries, PPL delivers electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia, and Tennessee; delivers natural gas to customers in Kentucky; generates electricity from power plants in the northeastern, northwestern, and southeastern U.S.; and markets wholesale or retail energy primarily in the northeastern and northwestern portions of the U.S. Its subsidiaries are PPL Energy Supply, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company, and Kentucky Utilities Company.
PPL to spin-off merchant generation business
PPL Corp. and Riverstone Holdings LLC, an energy and power investment firm, recently announced plans to combine their merchant power generation businesses into a new stand-alone, publicly traded Independent Power Producer (or IPP). Under the agreement, PPL Corp. will spin-off PPL Energy Supply LLC, the parent company of PPL Generation LLC, and PPL EnergyPlus LLC, to shareholders of PPL. Then it will immediately combine that business with Riverstone’s generation business to form Talen Energy Corporation—an independent publicly traded company expected to be listed on the New York Stock Exchange. PPL Energy Supply had total debt of $2.7 billion and cash of $520 million as of May 31, 2014.
News reports noted that utilities such as PPL and Duke Energy have been shedding assets as profits have been impacted by a decline in electricity prices driven by lower natural gas prices and increased operating costs for power plants. PPL’s annual report said that the “supply business continues to face significant challenges on various fronts, including low wholesale energy and capacity prices, little to no demand growth and more stringent environmental regulations.” According to PPL chief executive officer (or CEO) William H. Spence, “Given the challenges, uncertainties and opportunities in the wholesale power markets, maintaining the status quo was not a viable option.” He was cited as saying that, “As PPL has grown its rate-regulated business portfolio significantly over the past several years, PPL’s Energy Supply business has not—in our view—achieved appropriate equity valuation.” Its Supply unit’s biggest asset is the Susquehanna nuclear power plant.
Talen Energy, which will be ranked as the third-largest independent power producer (or IPP) after NRG Energy (NRG) and Calpine (CPN), will own and operate a diverse mix of 15,320 megawatts of generating capacity in key U.S. competitive energy markets. It will combine 5,325 megawatts of capacity owned and operated by Riverstone at 15 sites in Maryland, New Jersey, Texas, and Massachusetts with 9,995 megawatts of capacity owned and operated by PPL Generation at 12 sites in Pennsylvania and Montana. About 83% of the generating capacity to be owned by Talen Energy is located in the region served by the Pennsylvania-New Jersey-Maryland Interconnection—the world’s largest wholesale electricity marketplace, a statement from PPL noted.
A release said that following the spin-off, PPL will focus on the high-performing regulated utilities it owns and operates in the United Kingdom, Kentucky and Pennsylvania, serving more than ten million customers. These regulated businesses, which had 2013 revenues of $7.2 billion, provided more than 85% of PPL’s 2013 earnings from ongoing operations. PPL Corporation’s shareholders will own 65% of Talen Energy and Riverstone will own 35%. PPL Corporation will have no continuing ownership interest in Talen Energy.
PPL’s rate-regulated utility businesses drive growth, but supply segment flat
In May, PPL saw 1Q14 reported earnings of $316 million, or $0.49 per share—a decrease from $413 million, or $0.65 per share in the 1Q13. Total operating revenues of $1,223 million in 1Q14, down from $2,457 million in the year ago quarter. PPL said, “All three regulated businesses outperformed 2013 results, as our capital investments in regulated infrastructure continue to provide benefits to customers and shareowners. The unusually cold winter weather resulted in increased sales to customers in Pennsylvania and Kentucky, and our competitive generating plants in the PJM Interconnection operated well during the periods of high electricity demand. In the U.K., we benefited from higher rates and bonus revenues that we earned through best-in-class performance.”
In terms of segments, PPL’s supply segment earnings from ongoing operations in the 1Q14 was flat year-over-year (or YoY). This was primarily due to higher capacity prices, net benefits from unusually cold weather, and lower interest expense offset by lower baseload energy prices and the timing of a planned outage at the Susquehanna nuclear power plant. It projected lower segment earnings in 2014 compared with 2013, driven primarily by lower energy and capacity prices.
PPL maintains dividend rate, earnings outlook
PPL has increased its common stock dividend 12 times in the last 13 years. It said it will maintain the current dividend rate of $1.49 per share on an annualized basis until the close of the spin-off transaction and intends to grow the dividend under the fully regulated business model. It also maintained its current 2014 forecast of ongoing earnings of $2.15–$2.30 per share. CEO Spence said, “We also are providing 2015 earnings guidance, excluding the Supply segment, of $2.05 to $2.25 per share. And, going forward, we are targeting a minimum of 4% compound annual growth in PPL’s earnings per share, based on the $2.05 per share midpoint of our projected 2014 ongoing earnings, excluding Supply.”
Browse this series on Market Realist:
- Part 1 - Must-know: Millennium Management discloses 1Q14 positions
- Part 2 - Why Millennium Management starts new position in Rice Energy
- Part 3 - Millennium Management adds new position in Anixter International
- Utility Industry
- PPL Corporation
- Devon Energy