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Business Acquisitions
 12 Months Ended
Dec. 31, 2013
Business Acquisition [Line Items]  
Business Acquisitions

10. Business Acquisitions

 

Ironwood Acquisition (PPL and PPL Energy Supply)

 

On April 13, 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of all of the equity interests of two subsidiaries of The AES Corporation, AES Ironwood, L.L.C. (subsequently renamed PPL Ironwood, LLC) and AES Prescott, L.L.C. (subsequently renamed PPL Prescott, LLC), which together own and operate, the Ironwood Facility. The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has supplied natural gas for the facility and received the facility's full electricity output and capacity value pursuant to a tolling agreement that expires in 2021. The acquisition provides PPL Energy Supply, through its subsidiaries, operational control of additional combined-cycle gas generation in PJM.

 

The fair value of the consideration paid for this acquisition was as follows.

Aggregate enterprise consideration $326
Less: Fair value of long-term debt outstanding assumed through consolidation (a)  258
Plus: Restricted cash debt service reserves  17
Cash consideration paid for equity interests (including working capital adjustments) $85

(a)       The long-term debt assumed through consolidation consisted of $226 million aggregate principal amount of 8.857% senior secured bonds to be fully repaid by December 31, 2025, plus $8 million of debt service reserve loans, and a $24 million fair value adjustment. See Note 7 for information on the February 2013 exchange of a portion of long-term debt assumed through consolidation.

 

Purchase Price Allocation

 

The following table summarizes the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed through consolidation, and the effective settlement of the tolling agreement through consolidation.

PP&E $ 505
Long-term debt (current and noncurrent) (a)   (258)
Tolling agreement (b)   (170)
Other net assets (a)   8
Net identifiable assets acquired  $ 85

(a)       Represents non-cash activity excluded from the 2012 Statement of Cash Flows.

(b)       Prior to the acquisition, PPL EnergyPlus had recorded primarily an intangible asset, which represented its rights to and the related accounting for the tolling agreement with PPL Ironwood, LLC. On the acquisition date, PPL Ironwood, LLC recorded a liability, recognized at fair value, for its obligation to PPL EnergyPlus. The tolling agreement assets of PPL EnergyPlus and the tolling agreement liability of PPL Ironwood, LLC eliminate in consolidation for PPL and PPL Energy Supply as a result of the acquisition, and therefore the agreement is considered effectively settled. The difference between the tolling agreement assets and liability resulted in an insignificant loss on the effective settlement of the agreement.

Acquisition of WPD Midlands (PPL)

 

On April 1, 2011, PPL, through its indirect, wholly owned subsidiary PPL WEM, completed its acquisition of all of the outstanding ordinary share capital of Central Networks East plc and Central Networks Limited, the sole owner of Central Networks West plc, together with certain other related assets and liabilities (collectively referred to as Central Networks and subsequently renamed WPD Midlands), from subsidiaries of E.ON AG. The consideration for the acquisition consisted of cash of $5.8 billion, including the repayment of $1.7 billion of affiliate indebtedness owed to subsidiaries of E.ON AG, and approximately $800 million of long-term debt assumed through consolidation. WPD Midlands operates two regulated distribution networks that serve 5 million end-users in the Midlands area of England. The acquisition increased the regulated portion of PPL's business and enhances rate-regulated growth opportunities as the regulated businesses make investments to improve infrastructure and customer reliability. Further, since the service territories of WPD (South Wales), WPD (South West) and WPD Midlands are contiguous, cost savings, efficiencies and other benefits have been achieved from the combined operations of these entities.

 

The fair value of the consideration paid for this acquisition was as follows (in billions).

Aggregate enterprise consideration $ 6.6
Less: Fair value of long-term debt outstanding assumed through consolidation   0.8
Total cash consideration paid   5.8
Less: Funds used to repay pre-acquisition affiliate indebtedness   1.7
Cash consideration paid for Central Networks' outstanding ordinary share capital  $ 4.1

The total cash consideration paid was primarily funded by borrowings under the 2011 Bridge Facility on the date of acquisition. Subsequently, PPL repaid those borrowings in 2011 using proceeds from the permanent financing, including issuances of common stock and 2011 Equity Units, as well as proceeds from the issuance of debt by PPL WEM, WPD (East Midlands) and WPD (West Midlands). See Note 7 for additional information.

 

Purchase Price Allocation

 

The following table summarizes (in billions) the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed.

Current assets (a) $ 0.2
PP&E   4.9
Intangible assets   0.1
Other noncurrent assets   0.1
Current liabilities (b)   (0.4)
PPL WEM affiliate indebtedness    (1.7)
Long-term debt (current and noncurrent) (b)   (0.8)
Other noncurrent liabilities (b)   (0.7)
Net identifiable assets acquired   1.7
Goodwill   2.4
Net assets acquired $ 4.1

(a)       Includes gross contractual amount of the accounts receivable acquired of $122 million, which approximates fair value.

(b)       Represents non-cash activity excluded from the 2011 Statement of Cash Flows.

 

The purchase price allocation resulted in goodwill of $2.4 billion that was assigned to the U.K. Regulated segment. The goodwill is attributable to the expected continued growth of a rate-regulated business with a defined service area operating under a constructive regulatory framework, expected cost savings, efficiencies and other benefits resulting from a contiguous service area with WPD (South West) and WPD (South Wales), as well as the ability to leverage WPD (South West)'s and WPD (South Wales)'s existing management team's high level of performance in capital cost efficiency, system reliability and customer service. The goodwill is not deductible for U.K. income tax purposes.

Separation Benefits - U.K. Regulated Segment

 

In connection with the 2011 acquisition, PPL completed a reorganization designed to transition WPD Midlands from a functional operating structure to a regional operating structure requiring a smaller combined support structure, reducing duplication and implementing more efficient procedures. As a result of the reorganization, 729 employees of WPD Midlands were terminated.

 

The separation benefits, before income taxes, associated with the reorganization were as follows.

Severance compensation $61
Early retirement deficiency costs (ERDC) under applicable pension plans  46
Outplacement services   1
Total separation benefits $108

In connection with the reorganization, WPD Midlands recorded $93 million of the total expected separation benefits in 2011, of which $48 million related to severance compensation and $45 million related to ERDC. WPD Midlands recorded an additional $15 million of total separation benefits in 2012, of which $13 million related to severance compensation and $2 million related to ERDC. The accrued severance compensation is reflected in "Other current liabilities" and the ERDC reduced "Other noncurrent assets" on the Balance Sheets. All separation benefits are included in "Other operation and maintenance" on the Statements of Income.

 

The changes in the carrying amounts of accrued severance were as follows.

   2012  2011
Accrued severance at beginning of period $ 21   
Severance compensation    13 $ 48
Severance paid   (34)   (27)
Accrued severance at end of period $  $ 21

In addition to the reorganization costs noted above, an additional $9 million was recorded in 2011 for ERDC payable under applicable pension plans and severance compensation for certain employees who separated from the WPD Midlands companies, but were not part of the reorganization. These separation benefits are also included in "Other operation and maintenance" on the Statement of Income.

Other

 

WPD Midlands 2011 financial results included in PPL's Statement of Income and included in the U.K. Regulated segment were as follows.

Operating Revenues    $ 790
Net Income Attributable to PPL Shareowners      137

Pro forma Information

 

The pro forma financial information, which includes WPD Midlands as if the acquisition had occurred January 1, 2010, is as follows.

        2011
            
Operating Revenues - PPL consolidated pro forma (unaudited)         $ 13,140
Net Income Attributable to PPL Shareowners - PPL consolidated pro forma (unaudited)           1,800

The pro forma financial information presented above has been derived from the historical combined financial statements of WPD Midlands, which was acquired on April 1, 2011. Income (loss) from discontinued operations (net of income taxes), which was not significant for 2011, was excluded from the pro forma amounts above.

 

The pro forma financial information presented above includes adjustments to depreciation, net periodic pension costs, interest expense and the related income tax effects to reflect the impact of the acquisition. The pre-tax nonrecurring credits (expenses) presented in the following table were directly attributable to the acquisition and adjustments were included in the calculation of pro forma operating revenue and net income to remove the effect of these nonrecurring items and the related income tax effects.

   Income Statement    
   Line Item        2011
                
WPD Midlands acquisition             
 2011 Bridge Facility costs (a)Interest Expense          $ (44)
 Foreign currency loss on 2011 Bridge Facility (b)Other Income (Expense) - net            (57)
 Net hedge gains associated with the 2011 Bridge Facility (c)Other Income (Expense) - net            55
 Hedge ineffectiveness (d)Interest Expense            (12)
 U.K. stamp duty tax (e)Other Income (Expense) - net            (21)
 Separation benefits (f)Other operation and maintenance            (102)
 Other acquisition-related adjustments (g)            (77)

(a)       The 2011 Bridge Facility costs, primarily commitment and structuring fees, were incurred to establish a bridge facility for purposes of funding the WPD Midlands acquisition purchase price.

(b)       The 2011 Bridge Facility was denominated in GBP. The amount includes a $42 million foreign currency loss on PPL Capital Funding's repayment of its 2011 Bridge Facility borrowing and a $15 million foreign currency loss associated with proceeds received on the U.S. dollar-denominated senior notes issued by PPL WEM in April 2011 that were used to repay a portion of PPL WEM's borrowing under the 2011 Bridge Facility.

(c)       The repayment of borrowings on the 2011 Bridge Facility was economically hedged to mitigate the effects of changes in foreign currency exchange rates with forward contracts to purchase GBP, which resulted in net hedge gains.

(d)       The hedge ineffectiveness includes a combination of ineffectiveness associated with closed out interest rate swaps and a charge recorded as a result of certain interest rate swaps failing hedge effectiveness testing, both associated with the acquisition financing.

(e)       The U.K. stamp duty tax represents a tax on the transfer of ownership of property in the U.K. incurred in connection with the acquisition.

(f)       See "Separation Benefits - U.K. Regulated Segment" above.

(g)       Primarily includes acquisition-related advisory, accounting and legal fees recorded in "Other Income (Expense) - net" and contract termination costs, rebranding costs and relocation costs recorded in "Other operation and maintenance."

PPL Energy Supply LLC [Member]
  
Business Acquisition [Line Items]  
Business Acquisitions

10. Business Acquisitions

 

Ironwood Acquisition (PPL and PPL Energy Supply)

 

On April 13, 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of all of the equity interests of two subsidiaries of The AES Corporation, AES Ironwood, L.L.C. (subsequently renamed PPL Ironwood, LLC) and AES Prescott, L.L.C. (subsequently renamed PPL Prescott, LLC), which together own and operate, the Ironwood Facility. The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has supplied natural gas for the facility and received the facility's full electricity output and capacity value pursuant to a tolling agreement that expires in 2021. The acquisition provides PPL Energy Supply, through its subsidiaries, operational control of additional combined-cycle gas generation in PJM.

 

The fair value of the consideration paid for this acquisition was as follows.

Aggregate enterprise consideration $326
Less: Fair value of long-term debt outstanding assumed through consolidation (a)  258
Plus: Restricted cash debt service reserves  17
Cash consideration paid for equity interests (including working capital adjustments) $85

(a)       The long-term debt assumed through consolidation consisted of $226 million aggregate principal amount of 8.857% senior secured bonds to be fully repaid by December 31, 2025, plus $8 million of debt service reserve loans, and a $24 million fair value adjustment. See Note 7 for information on the February 2013 exchange of a portion of long-term debt assumed through consolidation.

 

Purchase Price Allocation

 

The following table summarizes the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed through consolidation, and the effective settlement of the tolling agreement through consolidation.

PP&E $ 505
Long-term debt (current and noncurrent) (a)   (258)
Tolling agreement (b)   (170)
Other net assets (a)   8
Net identifiable assets acquired  $ 85

(a)       Represents non-cash activity excluded from the 2012 Statement of Cash Flows.

(b)       Prior to the acquisition, PPL EnergyPlus had recorded primarily an intangible asset, which represented its rights to and the related accounting for the tolling agreement with PPL Ironwood, LLC. On the acquisition date, PPL Ironwood, LLC recorded a liability, recognized at fair value, for its obligation to PPL EnergyPlus. The tolling agreement assets of PPL EnergyPlus and the tolling agreement liability of PPL Ironwood, LLC eliminate in consolidation for PPL and PPL Energy Supply as a result of the acquisition, and therefore the agreement is considered effectively settled. The difference between the tolling agreement assets and liability resulted in an insignificant loss on the effective settlement of the agreement.

Acquisition of WPD Midlands (PPL)

 

On April 1, 2011, PPL, through its indirect, wholly owned subsidiary PPL WEM, completed its acquisition of all of the outstanding ordinary share capital of Central Networks East plc and Central Networks Limited, the sole owner of Central Networks West plc, together with certain other related assets and liabilities (collectively referred to as Central Networks and subsequently renamed WPD Midlands), from subsidiaries of E.ON AG. The consideration for the acquisition consisted of cash of $5.8 billion, including the repayment of $1.7 billion of affiliate indebtedness owed to subsidiaries of E.ON AG, and approximately $800 million of long-term debt assumed through consolidation. WPD Midlands operates two regulated distribution networks that serve 5 million end-users in the Midlands area of England. The acquisition increased the regulated portion of PPL's business and enhances rate-regulated growth opportunities as the regulated businesses make investments to improve infrastructure and customer reliability. Further, since the service territories of WPD (South Wales), WPD (South West) and WPD Midlands are contiguous, cost savings, efficiencies and other benefits have been achieved from the combined operations of these entities.

 

The fair value of the consideration paid for this acquisition was as follows (in billions).

Aggregate enterprise consideration $ 6.6
Less: Fair value of long-term debt outstanding assumed through consolidation   0.8
Total cash consideration paid   5.8
Less: Funds used to repay pre-acquisition affiliate indebtedness   1.7
Cash consideration paid for Central Networks' outstanding ordinary share capital  $ 4.1

The total cash consideration paid was primarily funded by borrowings under the 2011 Bridge Facility on the date of acquisition. Subsequently, PPL repaid those borrowings in 2011 using proceeds from the permanent financing, including issuances of common stock and 2011 Equity Units, as well as proceeds from the issuance of debt by PPL WEM, WPD (East Midlands) and WPD (West Midlands). See Note 7 for additional information.

 

Purchase Price Allocation

 

The following table summarizes (in billions) the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed.

Current assets (a) $ 0.2
PP&E   4.9
Intangible assets   0.1
Other noncurrent assets   0.1
Current liabilities (b)   (0.4)
PPL WEM affiliate indebtedness    (1.7)
Long-term debt (current and noncurrent) (b)   (0.8)
Other noncurrent liabilities (b)   (0.7)
Net identifiable assets acquired   1.7
Goodwill   2.4
Net assets acquired $ 4.1

(a)       Includes gross contractual amount of the accounts receivable acquired of $122 million, which approximates fair value.

(b)       Represents non-cash activity excluded from the 2011 Statement of Cash Flows.

 

The purchase price allocation resulted in goodwill of $2.4 billion that was assigned to the U.K. Regulated segment. The goodwill is attributable to the expected continued growth of a rate-regulated business with a defined service area operating under a constructive regulatory framework, expected cost savings, efficiencies and other benefits resulting from a contiguous service area with WPD (South West) and WPD (South Wales), as well as the ability to leverage WPD (South West)'s and WPD (South Wales)'s existing management team's high level of performance in capital cost efficiency, system reliability and customer service. The goodwill is not deductible for U.K. income tax purposes.

Separation Benefits - U.K. Regulated Segment

 

In connection with the 2011 acquisition, PPL completed a reorganization designed to transition WPD Midlands from a functional operating structure to a regional operating structure requiring a smaller combined support structure, reducing duplication and implementing more efficient procedures. As a result of the reorganization, 729 employees of WPD Midlands were terminated.

 

The separation benefits, before income taxes, associated with the reorganization were as follows.

Severance compensation $61
Early retirement deficiency costs (ERDC) under applicable pension plans  46
Outplacement services   1
Total separation benefits $108

In connection with the reorganization, WPD Midlands recorded $93 million of the total expected separation benefits in 2011, of which $48 million related to severance compensation and $45 million related to ERDC. WPD Midlands recorded an additional $15 million of total separation benefits in 2012, of which $13 million related to severance compensation and $2 million related to ERDC. The accrued severance compensation is reflected in "Other current liabilities" and the ERDC reduced "Other noncurrent assets" on the Balance Sheets. All separation benefits are included in "Other operation and maintenance" on the Statements of Income.

 

The changes in the carrying amounts of accrued severance were as follows.

   2012  2011
Accrued severance at beginning of period $ 21   
Severance compensation    13 $ 48
Severance paid   (34)   (27)
Accrued severance at end of period $  $ 21

In addition to the reorganization costs noted above, an additional $9 million was recorded in 2011 for ERDC payable under applicable pension plans and severance compensation for certain employees who separated from the WPD Midlands companies, but were not part of the reorganization. These separation benefits are also included in "Other operation and maintenance" on the Statement of Income.

Other

 

WPD Midlands 2011 financial results included in PPL's Statement of Income and included in the U.K. Regulated segment were as follows.

Operating Revenues    $ 790
Net Income Attributable to PPL Shareowners      137

Pro forma Information

 

The pro forma financial information, which includes WPD Midlands as if the acquisition had occurred January 1, 2010, is as follows.

        2011
            
Operating Revenues - PPL consolidated pro forma (unaudited)         $ 13,140
Net Income Attributable to PPL Shareowners - PPL consolidated pro forma (unaudited)           1,800

The pro forma financial information presented above has been derived from the historical combined financial statements of WPD Midlands, which was acquired on April 1, 2011. Income (loss) from discontinued operations (net of income taxes), which was not significant for 2011, was excluded from the pro forma amounts above.

 

The pro forma financial information presented above includes adjustments to depreciation, net periodic pension costs, interest expense and the related income tax effects to reflect the impact of the acquisition. The pre-tax nonrecurring credits (expenses) presented in the following table were directly attributable to the acquisition and adjustments were included in the calculation of pro forma operating revenue and net income to remove the effect of these nonrecurring items and the related income tax effects.

   Income Statement    
   Line Item        2011
                
WPD Midlands acquisition             
 2011 Bridge Facility costs (a)Interest Expense          $ (44)
 Foreign currency loss on 2011 Bridge Facility (b)Other Income (Expense) - net            (57)
 Net hedge gains associated with the 2011 Bridge Facility (c)Other Income (Expense) - net            55
 Hedge ineffectiveness (d)Interest Expense            (12)
 U.K. stamp duty tax (e)Other Income (Expense) - net            (21)
 Separation benefits (f)Other operation and maintenance            (102)
 Other acquisition-related adjustments (g)            (77)

(a)       The 2011 Bridge Facility costs, primarily commitment and structuring fees, were incurred to establish a bridge facility for purposes of funding the WPD Midlands acquisition purchase price.

(b)       The 2011 Bridge Facility was denominated in GBP. The amount includes a $42 million foreign currency loss on PPL Capital Funding's repayment of its 2011 Bridge Facility borrowing and a $15 million foreign currency loss associated with proceeds received on the U.S. dollar-denominated senior notes issued by PPL WEM in April 2011 that were used to repay a portion of PPL WEM's borrowing under the 2011 Bridge Facility.

(c)       The repayment of borrowings on the 2011 Bridge Facility was economically hedged to mitigate the effects of changes in foreign currency exchange rates with forward contracts to purchase GBP, which resulted in net hedge gains.

(d)       The hedge ineffectiveness includes a combination of ineffectiveness associated with closed out interest rate swaps and a charge recorded as a result of certain interest rate swaps failing hedge effectiveness testing, both associated with the acquisition financing.

(e)       The U.K. stamp duty tax represents a tax on the transfer of ownership of property in the U.K. incurred in connection with the acquisition.

(f)       See "Separation Benefits - U.K. Regulated Segment" above.

(g)       Primarily includes acquisition-related advisory, accounting and legal fees recorded in "Other Income (Expense) - net" and contract termination costs, rebranding costs and relocation costs recorded in "Other operation and maintenance."