New PPL Will Look to Rhode Island for Growth

Business Strategy & Outlook:

PPL is expected to spend nearly $12 billion at its U.S. utilities through 2026, including its recent acquisition of Narragansett Electric. These regulated utility growth opportunities support the expectations for 6% annual earnings growth, the low end of management’s 6% to 8% earnings growth target through 2025. PPL exited its U.K. business for $10.4 billion in net cash proceeds. This was an attractive price, representing a 50% premium to standalone value for the unit. Amid regulatory and political uncertainty, management’s decision to exit the business was the right one. As part of the WPD transaction, PPL agreed to pay $3.8 billion for National Grid’s U.S. utility, Narragansett Electric. Management allocated the remaining proceeds to $2 billion of additional regulated investment opportunities, $3.9 billion to strengthen the company’s balance sheet bringing leverage more in line with its peers, $1 billion of common stock repurchases, and $400 million in additional dividends.

Overall, these capital allocation decisions were in the best interest of shareholders. Narragansett Electric provides the most growth opportunities among PPL’s portfolio of companies. The forecasted 11% annual rate base growth supported by a constructive regulatory environment. Growth in the region should accelerate in 2024 and beyond, coinciding with the company’s agreement not to seek a rate base increase until then. The company’s legacy Pennsylvania and Kentucky utilities also operate in supportive regulatory environments but offer less growth than Narragansett. In Kentucky, rate base growth will be less than 2% annually as the company slowly winds down its coal generation. Importantly, regulators will allow PPL to recover through rates a return of and on the net book value of assets it plans to retire in the coming years. Coal rate base in the state is $5 billion, declining to $4 billion by 2026, but will still represent one third of rate base in 2026, among the highest of its utility peers. Rate base in Pennsylvania should grow near 4% annually.

Financial Strengths:

PPL will invest nearly $12 billion at its utilities through 2026, including the recent Narragansett acquisition. This will require PPL to issue debt to maintain its current capital structure. Company didn’t expect any equity issuances in five-year forecast. Total debt/capital improved significantly as management used $3.9 billion in proceeds from its U.K. utility sale to reduce leverage. Estimate leverage will normalize around 50%, down from prior year-end 65% debt to capital. Total debt/EBITDA to stay below 5 times. The earnings stability of the regulated utilities coupled with modest near-term maturities makes the debt load manageable. The company approved a $0.20 per share dividend for the first quarter of 2022, a more than 50% cut from the quarterly payments in 2021 after the company completed the sale of its U.K. business. After closing the Narragansett acquisition, the company increased its quarterly distribution to $0.225, or $0.90 annualized. The company plans to maintain a 60%-65% payout target, and the company will grow the dividend in line with 6% earnings growth estimate.

Bulls Say:

PPL’s domestic regulated earnings mix provides a stable base for earnings growth.
Management’s decision to sell its U.K. assets will allow investors to focus on the company’s U.S. utilities.
PPL is expected to spend nearly $12 billion in capital investment, including the recently acquired Narragansett, supports near-term earnings growth.

Company Description:

PPL is a holding company of regulated utilities in Pennsylvania, Kentucky, and Rhode Island. The Pennsylvania regulated delivery and transmission segment distributes electricity to customers in central and eastern Pennsylvania. LG&E and KU are involved in regulated electricity generation, transmission, and distribution in Kentucky. The Kentucky utilities also serve gas customers. Narragansett operates electric and gas utilities in Rhode Island.

(Source: Morningstar)

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