Morningstar | Elements of Regulatory Framework Support Our U.K. View; PPL Reports 2Q Earnings
We are reaffirming our $35 per share fair value estimate and narrow economic moat rating after PPL reported second-quarter operating earnings per share of $0.55 compared with $0.52 in the year-ago period.Management slightly increased 2018 operating earnings guidance to $2.25-$2.40 per share, up from $2.20-$2.40. We expect to increase our earnings estimate, but near-term changes do not have a material impact on our long-term outlook. PPL's 5%-6% earnings growth targets through 2020 and 4% dividend growth over the same period were also reaffirmed. Management's expectations are consistent with our forecasts.
PPL's U.K. segment remains at the top of investors' minds. During the quarter, elements of the next regulatory framework, RIIO-2, were put in place. Overall, the initial framework supports our long-term expectation that the U.K. will remain a constructive regulatory environment. 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.
We consider the proposed cut in the price control period to five years from eight years less constructive. U.K. regulators also proposed enhanced competition for large-scale transmission projects, but PPL doesn't have any exposure to U.K. transmission.
We continue to expect that returns will be lower under RIIO-2 but believe the market is pricing in an unlikely scenario of a significant degradation of the U.K. regulatory environment for distribution utilities. The uncertainty of the U.K. regulatory environment has been a concern for investors and a significant driver of PPL's underperformance against its peers.
The company's U.S. utilities are on track to meet our expectation for 5.5% rate base growth. PPL also completed its $1.7 billion equity forward program during the quarter.
PPL is a utility holding company. Through its regulated utility subsidiaries, the company delivers electricity to customers in United Kingdom, Pennsylvania, Kentucky, and Virginia; delivers natural gas to customers in Kentucky; and generates electricity from power plants in Kentucky. The company's segments are: United Kingdom Regulated, which has regulated electricity distribution operations in United Kingdom; Kentucky Regulated, which is engaged in the regulated generation, transmission, distribution and sale of electricity in Kentucky and Virginia, and the distribution and sale of natural gas in Kentucky; and Pennsylvania Regulated, which delivers electricity in eastern and central Pennsylvania.
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