EUR 850.00 For Business Accounts Only

Morningstar | U.K. Headwinds Offset U.S. Growth

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 regulated 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 operates four electricity distribution networks in the United Kingdom, making it the largest distribution utility in the U.K. by regulated asset value. However, the unit also enhances shareholder risk compared with PPL's regulated domestic peers. U.K. politicians are pressuring regulators to reduce the region's high power prices.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. We think this is a strong read-through for electricity distribution rates. PPL has achieved constructive rate outcomes in the past in Pennsylvania and Kentucky, and we think this will continue. Returns at PPL's Pennsylvania distribution and transmission segment have improved with recent rate increases. In Kentucky, the constructive regulatory environment allows for minimal lag on capital expenditures. PPL's pending rate case should support earned returns at LG&E and KU. The rate increase is based on a forward April 2020 test year, with new rates to be effective in May 2019.