PPL Corporation (PPL) is targeting 6.3% annual earnings growth in 2016, which is on the high side of the industry average. This earnings growth will be mainly driven by higher earnings expectations from Pennsylvania transmission. Earnings from the company’s UK operations are expected to grow by 1%–3% for the next few years, but this is likely to be on the low side, given the UK’s eight-year formula.
PPL has historically earned low ROE (returns on equity) from Kentucky and Pennsylvania—about 9.5% and 10.5%, respectively. (The earned ROE is higher in Pennsylvania because it consists of both state and federally regulated rate bases.)
Capital spending plan and earnings
PPL’s rate cases increased rates in Kentucky in mid-2015 and in Pennsylvania early in 2016. This is expected to have a positive impact on earnings for the next few quarters. PPL’s earnings are also expected to have a substantial influence on its $15 billion capital spending plan in the next few years.
We should note that incremental spending can improve a utility’s regulated rate base, which can have a positive impact on its earnings. The business model of a utility generally obliges the company to spend more in operational territories to earn more.
Thriving UK operations
In 2015 and 2016, PPL’s UK segment, Western Power Distribution, improved its service performance by 8% over the prior year. This was measured in customer minutes lost and customer interruptions, and the improved performance resulted in earnings of 77% of its maximum potential payout. As a result, $107 million of total revenues will be collected in 2017 and 2018 as incentives, which will ultimately uplift earnings.
Notably, PPL’s peers with an international presence include Duke Energy (DUK) and AES Corporation (AES), whose international segments are struggling from the past few quarters due to the stronger dollar.
Now let’s take a close look at PPL’s debt.