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PPL to issue additional equity, maintain EPS growth on heels of tax reform

PPL Corp. will issue $650 million in additional equity but remains confident in its 5% to 6% earnings growth rate through 2020 following federal tax reform enacted in the U.S.

The Tax Cuts and Jobs Act of 2017 lowers the corporate income tax rate to 21% from 35% beginning in the 2018 tax year.

"The net result in our credit metrics was a reduction in our FFO-to-debt metrics into the low 12% range over the planning period, which pressures our current credit rating," PPL Senior Vice President and CFO Vincent Sorgi said Feb. 22 on the company's fourth-quarter 2017 earnings call. "Therefore, in response, we expect to settle the foreign currency hedges over the next few years to help mitigate near-term earnings and cash flow impact, and we now plan to increase our equity issuances in 2018."

PPL announced it will issue $1 billion in equity in 2018, up from prior guidance of $350 million, to support its credit ratings with S&P Global Ratings and Moody's.

PPL is targeting a return to an FFO-to-debt ratio of 13% by the end of 2019 and signaled the likelihood of additional equity needs through 2020.

"Our additional equity needs beyond 2018 will be dependent upon the performance of our businesses, foreign currency and regulatory outcomes," PPL Chairman, President and CEO William Spence said. "Currently, we expect to issue between $500 million and $1 billion of equity in 2019 and 2020 with very minimal equity needs beyond 2020. We will work to minimize the amount of additional equity needed in 2019 and 2020."

PPL management said it is essentially "pulling forward" the $350 million in annual equity planned through 2022.

While PPL was not among the two dozen regulated utilities and holding companies put on negative outlook by Moody's, the company said the rating agency signaled a threshold of 12% to 15% FFO to debt.

"With tax reform, we would be skating at the bottom of that range," Spence said. "And we felt that [was] probably not the best place to be, and in conversations with the rating agencies, we felt that it was probably most prudent to add some more equity into the plan."

PPL acknowledged that the new tax law included many provisions electric utilities favored, including the preservation of interest deductibility.

"However, tax reform does negatively impact earnings and credit due to the lower tax shield on holding company interest expense and reduced cash flows at our domestic utilities, as we pass through to customers the lower cost of federal income taxes. And since PPL is not a current federal taxpayer, we will see no immediate corporate cash benefit from the reduced tax rate," Sorgi said.

Despite the negative impacts of U.S. tax reform, PPL still plans to achieve its EPS growth rate through 2020 off a new 2018 earnings midpoint of $2.30 per share.

"Even at the high end of the equity range, we are confident in our ability to achieve the midpoint of our 5% to 6% earnings growth through 2020. And at the low end of the range, we would actually exceed our EPS growth of 5% to 6% guidance through 2020," Spence said.

The lower corporate income taxes will be beneficial to PPL's customers, with the company's Kentucky subsidiaries Kentucky Utilities Co. and Louisville Gas and Electric Co. recently reaching an agreement to return up to $177 million to ratepayers.

In addition, PPL increased its projected amount of cash for repatriation from its U.K. regulated business segment through 2020 to "pre-Brexit levels of between $300 million and $500 million per year compared to our prior plan of $100 million to $200 million a year," Sorgi said.

"While there is now greater long-term flexibility with regards to repatriation, this decision was primarily driven by the change in the U.S. tax rate and the strengthening of the pound," the CFO added.

M&A

PPL, which splits its business between the U.S. and U.K., said it does not see the lower tax rate and higher interest rates driving a push into M&A activity.

"On the M&A front, I don't really think that tax reform overall is going to have a significant effect within our sector whether that's in the EU or here in the U.S.," Spence said in response to an analyst's question on potential industry consolidation.

"What we've said in the past is we can be successful with the organic growth plan that we have. We don't need M&A to be successful," Spence added. "I'd also mention that currently, we think our stock is undervalued and we believe that transaction multiples ... continue to be pretty excessive and would not allow us to achieve our objectives in any M&A kind of scenario."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.