Morningstar | AEP Positioned Well for Long Term Growth Despite Windcatcher Setback
AEP is wrapping up a critical stretch in its regulatory calendar, helping boost 12-month regulated returns across its jurisdictions to 10.0%. The company has received constructive regulatory outcomes in Indiana, Michigan, Kentucky, and Texas with allowed returns on equity ranging between 9.6% and 9.95%, which is consistent with average regulated allowed return on equity in the industry. Oklahoma remains AEP's most difficult regulatory environment, with an upcoming rate case an important benchmark for future investment and allowed returns in the region. Almost all of the company’s $17.8 billion capital spending plan for 2018-20 focuses on regulated investments, supporting 8% annual rate-base growth. Transmission investment is AEP's most attractive long-term growth opportunity, given federal incentives to improve the efficiency of the U.S. power grid. We forecast wide-moat transmission investments will account for more than half of AEP's three-year capital plan, totaling $3 billion annually. We believe AEP is the best-positioned transmission developer in the U.S., given the firm's large transmission footprint and history of execution. We think environmental regulations, aging infrastructure, and renewable energy growth support a long runway of transmission growth. Management is quickly putting the disappointing outcome of the 2,000 MW Wind Catcher Energy Connection Project behind them after an unfavorable regulatory ruling caused AEP to abandon the project. AEP put investor anxiety at ease over its long-term growth prospects earlier this year by releasing its 2021 capital expenditure outlook of $6.3 billion for 2021 and reaffirming its 5% to 7% earnings growth.AEP's board recently increased its dividend 8.1%, a strong vote of confidence for AEP's long-term earnings prospects. It puts the dividend at the middle of management's 60%-70% target payout ratio. The increase was above our expectations, and we forecast future dividend increases will be in line with earnings growth.American Electric Power Company is a public utility holding company. The public utility subsidiaries of the company provide electric service, consisting of generation, transmission and distribution, on an integrated basis to their retail customers. The service areas of the company's public utility subsidiaries cover portions of the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. Transmission networks are interconnected with distribution facilities in the territories served. The company's service company subsidiary provides accounting, administrative, information systems, engineering, financial, legal, maintenance and other services.
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