PPL Corporation (NYSE:PPL) reported its 2013 earnings. The company did perform well, as earnings from ongoing operations came out at $2.45 per share which was higher than the anticipated forecast range of 2013. The higher bottom line led the company to increase its annualized dividend to $1.49 per share, marking the 12th increase in the last 13 years.
Source: Company's earnings news
The company improved its earnings from ongoing operations in nearly all of its operating segments, and this can be seen in the chart above. However, after adjusting for a loss of $0.69 per share caused by the supply business, the total earnings for 2013 comes at $1.13 billion or $1.76 per share which is 32 percent lower compared to $1.53 billion or $2.60 per share in 2012.
Source: Company's earnings news
Going forward, the company announced its 2014 earnings forecast in the range of $2.05 to $2.25 per share with a midpoint of $2.15 per share. During the rest of the article, I will be discussing the outlook of each business segment and infer whether the current operations of the company allow it to achieve the forecasted target or not.
The higher rate base that became effective Jan 1st led the company to increase the earnings in the fourth quarter by $0.04 per share and by $0.15 per share compared to a year ago. With the Kentucky Environmental Cost Recovery [ECR] mechanism, PPL will be able to recover over $2 billion in system capital expenditure. In addition to the returns on environmental capital investment, the company expects to benefit from the modest retail load growth.
During 2013, the U.K. segment's earnings increased by $0.13 per share compared to 2012, which is primarily due to higher electricity delivery revenues. In addition, lower taxes in the U.K. also contributed to the increase in earnings. Going forward, the company's Western Production Division was awarded fast track status, so the division can quickly earn 2.5% of expenditures in revenue. The process is set to commence in 2015 and will be translated into over $30 million per year.
Higher distribution sales volume due to weather coupled with lower operation and maintenance expenditures caused the earnings from this segment to increase by $0.09 per share. Going forward, I believe that the higher transmission margins will contribute to an increase in the earnings from this segment.
Moreover, with the Distribution System Improvement Charge [DSIC], PPL is able to collect a 5% surcharge on customer bills for critical infrastructure improvements.
The segment consists of the competitive electricity generation. Its earnings decreased by $0.29 per share primarily due to lower base load energy prices. For 2014, the company projects lower segmental earnings due to lower energy and capacity prices.
During 2013, the company reported nearly 86 percent of earnings from ongoing operations coming out of the regulated operations. However, for 2014, it projects that all of the earnings will be derived from regulated operations. The most important earnings growth driver for PPL is the continuous shift towards regulated business as it provides stability of earnings and dividends in weak economic and market environments.
Similarly, the company has been able to earn revenues through the two part tariffs that were negotiated with the regulatory authority. One part ensures timely recovery of capital expenditures while the other part tracks electric and gas usage.
This bodes well for the company, as the regulated operations are likely to provide 5 percent long term earnings growth coupled with the sustainability and reliability. The regulated revenues will ensure sustainability in the top line which will serve to strengthen bottom line growth.
Stable income stream
Currently, PPL is offering a dividend yield of 4.66% that is fully backed by the earnings from the regulated operations. Moreover, its payout ratio is 45.60% of its earnings as dividends whereas the average payout ratio of industry stands at more than 70%. On a standalone basis, if the company raised its payout ratio closer to the industrial average, the dividend yield will jump to more than 5%. So, even if the current dividend yield is higher, there is still ample upside potential to further increase its dividends.
Despite flat customer growth, PPL will be able to grow its rate base. The improved services coupled with innovative rate cases in multiple regional franchises will help the company to reduce the risks embedded in capital expenditures. In addition, with the reduction in regulatory lag between capital and operational expenditure and recovery in rates the company can deliver timely returns to shareholders.