Morningstar | American Electric Power Reports Strong 2Q Earnings; Wind Catcher Remains Uncertain
We are reaffirming our $68 fair value estimate and narrow moat and stable moat trend ratings after American Electric Power reported second-quarter operating earnings of $1.01 per share, up sharply from $0.75 per share in the same year-ago period. Management reaffirmed its 2018 earnings guidance of $3.75-$3.95 per share, in line with our expectations.We remain cautiously optimistic for a positive outcome for AEP's proposed 2,000-megawatt Wind Catcher Energy Connection project. The company has received orders supporting the project in Arkansas and Louisiana and is awaiting approval in Texas and Oklahoma. Approval of the $4.5 billion project would add approximately $1-$2 per share to our fair value estimate. We currently exclude the project from our forecast, given the considerable regulatory uncertainty in Oklahoma and Texas. Management said a decision needs to be made by late August.
While AEP has reached a settlement with numerous intervenors in Oklahoma, that state remains the largest wild card for the project's future, in our opinion. Management has worked hard with key parties there, but the state's regulatory environment remains difficult. The most recent rate case outcome supports our view that Oklahoma remains one of the most challenging operating environments for independently owned utilities.
In the second quarter, earnings were boosted by warmer-than-normal weather and additional revenue from rate increases in Indiana, Michigan, Kentucky, and Texas. The rate outcomes and weather boosted consolidated rolling 12-month regulated returns to 10%, a marked improvement from last quarter's 9.5%. Current consolidated returns are in line with our long-term forecasts.
Management released a 2021 capital expenditure outlook of $6.3 billion, which supports our five-year 5.5% earnings growth estimate and our opinion that AEP has a long pipeline of growth opportunities to continue to drive long-term growth beyond Wind Catcher.
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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