Morningstar

American Electric Power Earnings: Additional Strategic Announcements After Kentucky Termination

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Securities In This Article
American Electric Power Co Inc
(AEP)

We are reaffirming our $97 per share fair value estimate after American Electric Power AEP, or AEP, reported first-quarter operating earnings of $1.11 per share, compared with $1.22 in the same year-ago period.

Similar to AEP’s peers that have reported earnings so far, the switch from a colder-than-normal winter in 2022 to a substantially warmer-than-normal winter this year resulted in a $0.17 per-share negative year-over-year impact. AEP has usage-based rates across its service territories that do not protect it from underlying demand changes. Near-term changes in electricity demand driven by weather volatility have no impact on our fair value estimate. Weather-normalized demand remained strong, with strength in commercial and industrial sales partially offset by lower residential demand.

AEP will have to make up the weather impact with cost savings during the rest of the year to achieve management’s $5.19 to $5.39 EPS guidance range. AEP has a strong track record of overcoming the impact of electricity demand headwinds through cost savings, most recently offsetting pandemic-related electricity demand weakness during 2020.

We think investors should have been disappointed last month when AEP announced that it had terminated its planned sale of its Kentucky operations to Liberty due to ongoing regulatory hurdles. AEP will now focus on improving returns in Kentucky. We think this could be challenging given AEP has struggled to earn its allowed returns and currently is earning just 2.9%.

AEP also announced it plans to sell its retail and distributed resources business and joint venture solar portfolio. We don’t expect the sales to have a material impact on our fair value estimate given the small contribution to earnings, but we think the company’s continued strategic pivot to regulated businesses is positive for investors. The company also announced a strategic review of its small noncore transmission joint venture businesses, which we expect AEP to ultimately to sell.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Andrew Bischof, CFA

Strategist
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Andrew Bischof, CFA, CPA, is a strategist, AM Resources, for Morningstar*. He covers electric, gas and water utilities. He conducts comprehensive research and analysis on his covered companies to provide insights into investment opportunities. He assesses financial statements, competitive advantages, and economic indicators to determine a stock’s intrinsic value. He is a five-time Morningstar Outstanding Research Achievement award winner, which recognizes thought leadership and equity research quality as voted on by senior management.

Before joining Morningstar in 2011, Bischof worked in treasury for Mead Johnson Nutrition. Previously, He was a group audit officer for Bank of America in Chicago, and before that, an auditor for Ernst & Young.

Bischof holds a bachelor’s degree in business administration and accounting and a master’s degree in accounting from the University of Wisconsin. He also holds a master’s degree in business administration, with a concentration in finance, from Indiana University’s Kelley School of Business. Additionally, he holds the Chartered Financial Analyst® and Certified Public Accountant designations.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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