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Morningstar | Decision on AEP's Wind Catcher Project Expected By End of August

AEP finished a critical stretch in its regulatory calendar, helping boost 12-month regulated returns across its jurisdictions to 9.5%. 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 a recent ruling allowing just a 9.3% allowed return on equity.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. 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.Management released its 2021 capital expenditure outlook of $6.3 billion, which supports our 6.4% earnings growth estimate in 2018-22. We continue to believe that AEP has a long pipeline of growth opportunities to continue to drive long-term growth beyond the potential Wind Catcher opportunity.We remain cautiously optimistic that AEP will receive approval for its proposed 2,000 MW Wind Catcher Energy Connection project. The company has received orders supporting the project in Arkansas and Louisiana, and it is awaiting approval in Texas and Oklahoma. Approval of the $4.5 billion project would add approximately $1 to $2 per share to our fair value estimate. However, we exclude the project from our fair value estimate given the considerable regulatory uncertainty in Oklahoma and Texas. A decision is expected by late August.AEP has reached a settlement with numerous intervenors in Oklahoma, but we believe Oklahoma regulators remain the key wildcard for the project's future. Management has worked hard with key parties in Oklahoma, 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 regulatory environments for U.S. utilities.