PPL Corp

PPL reported second-quarter operating earnings per share of $0.33, up from $0.32 in the same-year-ago quarter.

Why it matters: Earnings benefited from recovery of capital investments, partially offset by higher costs and unfavorable weather. Management reaffirmed its 2026 EPS guidance of $1.90-$1.98, in line with our estimate.

The bottom line: We are maintaining our $36 fair value estimate and narrow moat rating for PPL. Management reaffirmed its 6%-8% annual earnings growth rate through 2029, with expectations to be in the upper half of the range. We think this is achievable.

Long view: The company's 2026-29 $23 billion capital investment program supports our growth outlook. PPL is on track to invest $5.1 billion in 2026. Large-load customer growth continues in PPL's service territories. In Pennsylvania, the backlog of data centers with signed energy service agreements or letters of authorization increased 12% to 31.8 gigawatts with 6.5 GW under construction. We consider PPL's rate case outcome in Pennsylvania as constructive given challenging stakeholder relations in the state due to significant pushback against rising rates due to market dynamics that are out of management's control. PPL secured a 4% rate increase and support for capital investments. Management should be commended for working with all stakeholders to achieve the outcome.

Coming up: Invitium Energy, the company's development joint venture with Blackstone, is making meaningful progress. Invitium Energy has identified sites supporting up to 14 GW of new load. Over 5 GW of generation have been accepted into the PJM Interconnection queue. The projects would represent $12.5 billion-$15 billion of capital investment, of which PPL would be responsible for 51%. This represents meaningful upside to PPL's current plan. Most of Invitium's earnings contribution would be beyond 2030. Given the uncertainty in PJM, we currently exclude the upside in our forecast.

Our fair value estimate is $36 after incorporating year-to-date financial results and regulatory outcomes.

We expect PPL's consolidated annual earnings growth at the top half of management's 6%-8% guidance range. We assume consistent regulatory treatment across the company's subsidiaries. We estimate that PPL will invest $30 billion in its utilities through 2030.

We incorporate the most recent allowed rate increases and allowed returns on equity for each subsidiary. We estimate that PPL will receive constructive regulatory outcomes across its regulated operations, supporting the company's investment plan.

We use a 7% cost of equity and a 5.9% weighted average cost of capital in our discounted cash flow valuation.

We assign PPL a narrow moat rating. The company's regulated utilities are in jurisdictions where numerous ratemaking mechanisms reduce regulatory lag to six months or less on approximately two-thirds of the company's capital expenditure.

Service territory monopolies and efficient scale advantages are the primary sources of economic moats for regulated utilities such as PPL's subsidiaries. State and federal regulators typically grant regulated utilities exclusive rights to charge customers rates that allow the utilities to earn a fair return on and return of the capital they invest to build, operate, and maintain their distribution networks. In exchange for regulated utilities’ service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

This implicit contract between regulators and capital providers should, on balance, allow regulated utilities to achieve at least their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing.

Intuitively, utilities should have an economic moat based on efficient scale, but in some cases, regulation offsets this advantage, preventing excess returns on capital. The risk of adverse regulatory decisions precludes regulated utilities from earning wide economic moats. However, the threat of material value destruction is low, and normalized returns exceed costs of capital in most cases, leaving us comfortable assigning narrow moats to many regulated utilities.

PPL's US regulated earnings mix provides a stable base for earnings growth.

Management's decision to focus on organic growth opportunities has been a positive for shareholders.

We expect PPL to invest $30 billion of capital through 2030, supporting earnings growth in the upper half of management's 6%-8% guidance range.

PPL's large capital investment plan increases regulatory risk.

To support its investment plans, PPL will have to request frequent rate increases with the potential for unfavorable rulings from regulators.

As with all regulated utilities, rising interest rates will raise financing costs and could make the dividend less attractive for income investors.