Is PPL Ignoring the Clean Power Plan?



Capital spending plan

PPL Corporation (PPL) has an ambitious capital spending plan of over $15 billion through 2020. Management forecasts that its regulated asset base will increase from $25 billion in 2015 to $32 billion in 2020. The planned spending may result in regulatory pushback, considering the slowing demand growth.

Is PPL Ignoring the Clean Power Plan?

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Focus on transmission

PPL’s Kentucky and Pennsylvania subsidiaries are expecting higher earnings growth of 10%–12% annually, whereas peers are targeting 4%–6% growth. PPL’s superior target still seems achievable, however, considering its investment in Pennsylvania transmission. Management intends to double the transmission rate base in Pennsylvania by 2019.

PPL’s management is also focusing on expanding the company’s transmission rate base due to higher authorized return on equity. The FERC’s (US Federal Energy Regulatory Commission) authorized return on equity in transmission falls in the range 11.7%–13% in Pennsylvania. Similar to PPL, Xcel Energy (XEL) and Public Service Enterprise Group (PEG) are also motivated to invest more in transmission, driven by higher authorized ROE.

The implementation of Clean Power Plan

PPL’s planned capital spending of ~$3.3 billion annually also focuses on its UK subsidiary, Western Power Distribution. Earnings from this segment are forecasted to grow in the range 1%–3% for the next couple of years.

But interestingly, the spending plan of PPL does not take into account any impact from the US Clean Power Plan. PPL’s fuel mix has coal exposure that needs to be changed to gas or other lower-emitting sources when the plan is implemented. Without a doubt, switching from coal to other primary sources is going to be a very capital-intensive task for coal-heavy generators.

In the next part, we’ll discuss valuations.


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