Morningstar | PPL Reports Full-Year Earnings; U.K. Main Concern for Investors
We are reaffirming our $31 fair value estimate and narrow economic moat rating after PPL reported full-year operating earnings per share of $2.40 compared with $2.25 in the year-ago period. Management's 2019 EPS guidance of $2.30-$2.50 is in line with our $2.43 estimate. PPL's targets for 5%-6% earnings growth through 2020 and 4% dividend growth over the same period were reaffirmed and are consistent with our forecasts.The biggest headwind for PPL remains the United Kingdom. Recently, U.K. regulators suggested moving toward a 3% real allowed return on equity in rates for gas and transmission utilities starting in 2021. The decision doesn't directly affect PPL's U.K. electricity distribution rates, but we think it is a strong read-through for what regulators will propose for electricity distribution rates next year. The consultation proposed returns on current market conditions, where current negative real risk-free rates are near historic lows. Incentives under the consultation will provide for opportunities for the best performers.
The recent tough stance that regulators have taken on gas and electric transmission rates of return has raised our uncertainty about the constructiveness of the U.K. regulatory environment. 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 the lower returns. PPL has consistently earned material incentive revenue, which could offset some of the lower allowed returns. We previously lowered our fair value estimate by $4 per share as a result of the announcement.
PPL's U.S. utilities continued to perform well. We expect a constructive outcome from the rate review in Kentucky at the company's KU and LG&E subsidiaries. The units requested $172 million of rate increases and a 10.42% return on equity. We forecast a 9.7% return on equity, consistent with the prior rate case outcome.
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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