Financing PPL Growth
Case 5: Financing PPL Corp.’s Growth Strategy
Study Questions
1. Evaluate PPL’s growth strategy and financing policies. Why is it important for PPL to seek out alternative financing strategies instead of using its own corporate balance sheet?
In the early 1990’s, the anticipation of deregulation in the electricity marketplace led PPL to change its business strategy. It was essential for them to enter the market as soon as possible or they may have faced barriers to entry. In 1994, PPL established a new subsidiary now known as PPL Global. PPL Global pursued opportunities in the deregulated electricity market and was employed its growth strategy for the future. They specifically explored opportunities in power generation, marketing, and trading. The management had a belief that their vertical integration was a good thing as they had prior experience in the segments and this would enable them to balance out the unstable earnings from the deregulated, and the more stable earnings from the regulated transmission and distribution businesses.
In 1998 PPL reduced dividends, increased their target payout ratio from 45% to 55%, and bought back 17 million shares of common stock. These actions by the company were made to try and fund growth within the company by increasing cash flows. In 2001, PPL was successful in securitizing its electric delivery business. The electricity industry, being a capital intensive industry required them to have access to low cost capital. Their need to generate and raise large amounts of cash drives their decisions towards their financial policies. This allowed them to increase their financial leverage in its transmission and distribution operations without harming PPL’s Electric Utilities credit.
Management firmly believed that the market was undervaluing the company’s potential and was therefore not interested in issuing new equity. Corporate Finance would be a big burden for the company as this, being an industry that required investment up
Study Questions
1. Evaluate PPL’s growth strategy and financing policies. Why is it important for PPL to seek out alternative financing strategies instead of using its own corporate balance sheet?
In the early 1990’s, the anticipation of deregulation in the electricity marketplace led PPL to change its business strategy. It was essential for them to enter the market as soon as possible or they may have faced barriers to entry. In 1994, PPL established a new subsidiary now known as PPL Global. PPL Global pursued opportunities in the deregulated electricity market and was employed its growth strategy for the future. They specifically explored opportunities in power generation, marketing, and trading. The management had a belief that their vertical integration was a good thing as they had prior experience in the segments and this would enable them to balance out the unstable earnings from the deregulated, and the more stable earnings from the regulated transmission and distribution businesses.
In 1998 PPL reduced dividends, increased their target payout ratio from 45% to 55%, and bought back 17 million shares of common stock. These actions by the company were made to try and fund growth within the company by increasing cash flows. In 2001, PPL was successful in securitizing its electric delivery business. The electricity industry, being a capital intensive industry required them to have access to low cost capital. Their need to generate and raise large amounts of cash drives their decisions towards their financial policies. This allowed them to increase their financial leverage in its transmission and distribution operations without harming PPL’s Electric Utilities credit.
Management firmly believed that the market was undervaluing the company’s potential and was therefore not interested in issuing new equity. Corporate Finance would be a big burden for the company as this, being an industry that required investment up