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PPL’s spin-off of generation business tied to price of natural gas

These days, PPL Corp. derives 85 percent of its earnings from its regulated utilities. The rest comes from its electric generation and other businesses.

But just five years ago, that statistic was flipped, when electric generation provided the bulk of the company’s earnings, said George Lewis, PPL’s corporate communications director.

“That’s driven by the differences in the two businesses,” he said. “Low natural-gas prices have been driving down wholesale power prices.”

Couple that with conservation efforts and environmental regulations, and you can see why PPL announced earlier this month it was spinning off its electric supply business and merging it with Riverstone Holdings LLC to create Talen Energy Corp.

It’s a growing trend. Bloomberg recently reported that Duke Energy Corp., the largest U.S. utility owner, said it plans to sell its interest in 13 Midwestern power units. Also, American Electric Power Co. is looking at whether it will sell plants later this year or early next year.

Strategic move

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For PPL, the move is strategic, said Daniel White, a director at Berkeley Research Group LLC, an expert services and consulting firm.

Regulated utilities are usually pretty solid performers in terms of stock price. The return is small, maybe 10 percent. But it is reliable.

That’s not the case with competitive energy generation.

“Utility stockholders are seeking stable returns that come from operating within a regulated environment, while energy commodity markets can be highly volatile and, as to U.S. gas and power markets, are currently perceived as a tough market for suppliers,” White said. “Companies in that environment need to be nimble and drive to be the lowest cost producer, which are not utility strengths.”

In an analysis from November, M. Tyson Brown, an analyst with the federal Energy Information Administration, noted that more reliance on natural gas to generate electricity caused the price of power to fall from 2008 to 2013.

Joseph Deinlein

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