Morningstar | PPL's Near-Term Operating Success in U.K. Overshadowed by Long-Term Risks
We are reaffirming our $31 fair value estimate and narrow economic moat rating for PPL after the company reported first-quarter operating earnings per share of $0.70, compared with $0.74 in the year-ago period. Management reaffirmed 2019 EPS guidance of $2.30-$2.50, in line with our estimate. PPL's 5%-6% annual earnings growth target through 2020 is consistent with our forecast.Operating success at PPL's U.K. regulated subsidiary remains overshadowed by long-term concerns about the direction of U.K.'s regulatory construct. For 2018-19, PPL's subsidiary earned $112 million in incentive revenue, above our estimates. The increase doesn't have a material effect on our fair value estimate.
Our concern remains the long-term health of U.K. regulation. If electricity distribution rates of return are subject to similar treatment as recently suggested for U.K. gas and transmission utilities, 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's KU and LG&E Kentucky subsidiaries received a final rate order allowing $187 million of rate increases, which includes $110 million of bill credits associated with tax reform, with an allowed return on equity of 9.725%. The agreement was in line with our expectations.
Earnings in the first quarter were negatively affected by weather and share dilution, partially offset by higher earnings at the U.K. segment.
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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