Morningstar | Oklahoma Rate Decision Move in the Right Direction for American Electric Power
American Electric Power wrapped up a critical stretch in its regulatory calendar, helping boost 12-month regulated returns across its jurisdictions.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 was AEP's most difficult operating subsidiary, but the recent Oklahoma rate decision was a move in the right direction. The 9.4% allowed return is below the national average, but it is a significant boost from where current returns are in the state, currently 8% on a 12-month rolling average. Transmission and distribution riders also allow AEP quicker recovery of investments.Almost all of the company’s $33 billion capital spending plan for 2019-23 focuses on regulated investments, supporting 8% annual rate-base growth. Roughly 70% of this investment will be recovered through mechanisms with little regulatory lag.Transmission investment is one of 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 five-year capital plan, totaling roughly $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. This year will be instrumental in the execution of AEP's aggressive renewable energy investment plan, with AEP aiming to install 2.2 GW by the end of 2021. Long term, AEP has plans to install 3.9 GW of solar and 4.4 GW from 2021 to 2030. While management was unsuccessful in the 2,000 MW Wind Catcher Connection Project, we view these smaller state-specific requests as much more attainable. These projects are instrumental in AEP's ability to meet the higher end of its 5% to 7% earnings target, a goal we think this seasoned executive team will meet.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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