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Macquarie downgrades PPL, upgrades National Grid

Macquarie Capital (USA) Inc. on Dec. 18 downgraded PPL Corp. to "Underperform" from "Neutral" and upgraded National Grid plc to "Outperform" from "Neutral."

In its note, Macquarie analysts cited the expectation of a reduction in allowed returns and leverage at PPL's U.K. subsidiaries in the next regulatory review, which will put pressure on the company's dividend.

By 2020, PPL should be paying out nearly $1.3 billion annually in dividends, according to Macquarie, and at that time the company will be experiencing weakened cash flows at U.S. utilities due to the latest corporate tax reform, and a step down in net cash generation at its U.K. utilities, all of which is likely to renew a debate over whether the current dividend level can be continued.

PPL and National Grid have approximately 60% of their earnings coming from the U.K., but Macquarie upgraded the latter company on the expectation of "outperformance in current years," though that "manifests itself in reduced earnings in future years."