EUR 850.00 For Business Accounts Only

Morningstar | Despite Strong Near-Term Results for U.K. Unit, Long Term Remains a Significant Concern

PPL has attractive regulated growth opportunities that could produce 5.5% annual rate base growth through 2021, supported by PPL's regulated operations.During the next five years, PPL plans to spend $14.3 billion at its domestic and international utilities. This supports our projected 5% annual earnings growth from 2019 through 2021. However, we think it will be difficult to offset declining returns in the U.K and expect lower consolidated earnings in 2022 and 2023. PPL's international delivery segment is the largest distribution utility in the U.K., however, the unit also adds shareholder risk as the U.K. regulatory environment comes under political and regulatory pressure. Recently, U.K. regulators put in place elements of the next regulatory framework, RIIO-2. Positives of the framework include a calculation of regulated asset value and returns that remains economically similar to the current structure; no change in the economic asset life for depreciation; and an option for fast-track eligibility, for which PPL qualified under the last framework. However, returns are likely to be much lower. U.K. regulators recently suggested just 4% rates of return for gas distribution, gas transmission, and electricity transmission. If electricity distribution rates of return are subject to similar treatment, we think it will be difficult for PPL to invest significant growth capital to help offset what we expect will be materially lower returns. PPL has consistently done an excellent job earning material incentive revenue, but we don't think this will be enough to offset the lower allowed returns. Beyond 2021, we forecast lower consolidated earnings and minimal dividend growth due to the U.K. headwinds.PPL has achieved constructive rate outcomes in the past in Pennsylvania and Kentucky. Recently, the Kentucky commission allowed its KU and LG&E subsidiaries a total of $187 million in rate increases as part of its review, including $110 million of bill credits associated with tax reform, with an allowed return on equity of 9.725%.