AEP Announces Commercial Renewable Energy Sale

We are reaffirming our $94 fair value estimate for American Electric Power AEP after the company reported full-year operating earnings per share of $5.09 compared with $4.74 in 2021. Management reaffirmed its 2023 operating EPS guidance of $5.19-$5.39.

The company’s long-term 6%-7% growth target, which we expect AEP to achieve, is supported by a $40 billion capital investment plan for 2023-27. AEP trades at slight discount to our fair value estimate. Its 3.7% dividend yield is 20 basis points higher than the median for regulated utilities.

AEP announced that it has agreed to sell its 1,365-megawatt commercial renewable energy portfolio for $1.5 billion to IRG Acquisition Holdings. We view the outcome as reasonable, particularly given lower valuations for renewable energy portfolios recently.

AEP continues to work on closing the sale of its Kentucky operations. It resubmitted a FERC 203 application earlier this month after the Federal Energy Regulatory Commission initially rejected the proposed sale. Management remains confident it can close the transaction by the end of the closing period, April 26. The company continues its strategic review of its retail business, which we expect it to divest.

We like that management is recycling capital. We expect AEP will reinvest the $2.4 billion of net proceeds from the renewable energy portfolio sale and the Kentucky sale at its regulated utilities.

The company’s 9.1% 12-month trailing return on equity remains low. Rate activity systemwide should help AEP earn closer to its 9.4% year-end target. The company must also work with regulators to ensure timely recovery of deferred fuel balances.

Earnings in 2022 benefited from rate changes, favorable weather, and higher demand, partially offset by higher expenses and interest. Weather-normalized electricity sales remained strong, increasing 2.8% across its customer classes. AEP foresees greater commercial and industrial sales, partially offset by weaker retail demand.