EUR 850.00 For Business Accounts Only

Morningstar | Rejection of AEP's Wind Catcher project has no impact on our fair value estimate.

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. 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. We were hopeful AEP would receive regulatory approval for the proposed 2,000 MW Wind Catcher Energy Connection project. After receiving support for the project in Arkansas and Louisiana, Texas regulators denied the project, citing insufficient consumer benefits. While we think shareholders should be disappointed the project wasn't approved, we like that management wasn't willing to make concessions that might have lowered returns or put shareholders at risk for cost overages. Approval of the $4.5 billion project would have added approximately $1-$2 per share of value; however, we excluded the project from our fair value estimate because of regulatory uncertainty. Management recently 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 Wind Catcher project.