PPL Electric's redemption of 6.25% preference shares raises concerns

By Stephanie N. Rotondo

Portland, Ore., April 23 - PPL Electric Utilities Corp.'s recently announced redemption of its $250 million of 6.25% preference shares has raised some eyebrows in the preferred stock market.

A market source said he thought it was "rather unusual" that the company was not paying accrued dividends on the non-cumulative piece of paper, though the terms of the security allow such a thing happen.

PPL is only required to pay dividends on the preference shares if they have been declared. Since the company has not declared these dividends, it has no obligation to pay them.

"It seems silly to do," the source said, noting that the Lehigh, Pa.-based power company has a nearly $16 billion market capitalization while dividends on the preference shares would have totaled less than $3 million.

He also remarked that, while legally allowable, not paying the two months of accrued dividends was "not right," especially for retail investors.

"The banks that did this should be standing up for their retail guys," he said.

Other sources, however, say this type of call is not unusual.

"It is not unheard of," said one source. "To the traditional fixed income investors it seems like a bad move. To the traditional preferred guy, not as big an issue. We did a double check ourselves, just to make sure. This is not the first time this has happened this year."

George Biechler, a spokesperson for PPL, noted that the redemption is "considered an optional redemption."

The company elected to make the call this way in an effort to "refinance less expensively," he said in an interview with Prospect News.

In an 8-K filed with the Securities and Exchange Commission on Thursday, the company said it was redeeming all 2.5 million of the shares - and subsequently the 10 million underlying depositary shares - at $100 per share on June 18, sans any accrued and unpaid dividends.

The $250 million issue was originally issued on April 6, 2006. Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Wachovia Securities LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., Lehman Brothers, Morgan Stanley & Co. Inc., Janney Montgomery Scott LLC and LaSalle Capital Markets were the bookrunners.

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