PPL enters uncertain world of ratemaking in the United Kingdom
Anthony SalamoneContact ReporterOf The Morning Call
At next monthâs PPL Corp. shareholder meeting, attendees will undoubtedly hear plenty of talk about the energy companyâs business an ocean away.
Shareholders and Lehigh Valley PPL customers are used to hearing terms such as PUC, or the Pennsylvania Public Utility Commission, but they had better brace themselves for a new acronym: Ofgem, or the Office of Gas and Electricity Markets.
The rates that are set in United Kingdom, which comprises a substantial amount of the Allentown utilityâs business, could affect its bottom line and s hareholder returns.
Last month, Ofgem, the regulatory agency in the United Kingdom, said it is beginning the process by which it plans to enact tougher price controls. Those price controls determine the maximum amount utilities such as PPL can earn, said agency spokesman Chris Lock. Much like in Pennsylvania, PPL â" as a regulated monopoly in the distribution of electricity â" earns its money through rates charged to customers, according to Lock.
The framework for those new price controls in the U.K. wonât become effective for another five years, so itâs unclear yet how PPL will be affected. But the issue has already signaled concern from PPL headquarters regarding its stock and earnings, since the company has a sizable chunk of its business invested in its Western Power Distribution subsidiary.
PPL addressed this in its proxy statement sent out recently to shareholders ahead of the May 16 meeting.
âWhile the company delivered strong oper ational performance in 2017, political and regulatory uncertainty in the U.K. affected our stock price in the second half of the year,â PPL said.
The stock tumbled from about $38 per share in July to around $31 per share by Dec. 31. It has continued to fall to as low as around $27 per share.
PPL CEO William Spence said in a recent news release to shareholders that the new ratemaking framework outlined thus far âis in line with what we expected, and we look forward to engaging with Ofgem as we work to achieve the best possible outcomes for our (WPD) customers and shareowners.â
Financial analyst Christopher Muir, who follows PPL, said while itâs too soon to predict the outcome of Ofgemâs actions, he believes the PPL subsidiary is poised to succeed, and that should reflect favorably on PPLâs earnings and dividends.
He bases that in part on WPDâs performance on electric reliability and customer service. He said that as long as PPLâs utilities in the U.K. and U.S. continue to achieve high performance, âthey should be in a good situation,â said Muir, an equity analyst at CFRA Research in New York.
Other financial analysts have raised concerns in recent research reports. Goldman Sachs cited the potential for lower allowable returns on equity when new price controls take effect during the early 2020s.
âWhile we do not see significant risk to 2019 [earnings per share] â¦ this year we note longer term EPS risk exists due to lower costs of capital allowed potentially for U.K. utilities, including PPL,â according to a Goldman Sachs research report. The report went on to say share prices could rise if Ofgem allows PPL in part to maintain its return on equity, which measures a companyâs profitability based on shareholdersâ investment.
For now, Spence has sought to assure shareholders. He said during a February earnings call with analysts that PPL remains confident its U.K. business will be âvery well positioned to succeedâ under Ofgemâs future ratemaking decisions.
At the shareholder meeting, which will be held at the PPL Center, shareholders will vote on:
- Electing its 10-member board of directors.
- Ratifying Deloitte & Touche LLP as the companyâs accountants.
- Approving compensation of Spence and other ânamed executive officersâ listed in the proxy. That vote is merely advisory.
Spence, 61, who is also PPL chairman and president, earned $13.5 million in total compensation for 2017, down from $15.5 million the previous year. His base salary last year of nearly $1.9 million was higher than 2016âs salary of $1.5 million, but his stock awards rose by about $2 million, to about $8.5 million, despite the share decline.
Allentownâs PPL, which also sells electricity in Kentucky and small portions of Virginia and Tennessee, earned a profit of $1.2 billion in 2017 off revenue of $7.5 billion. The comp any has more than 12,500 employees worldwide, including about 1,300 in the Lehigh Valley. Its PPL Electric Utilities PPL subsidiary distributes electricity in 29 Pennsylvania counties.
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