American Electric Power: Termination of Kentucky Power Sale Leaves Our Fair Value Unchanged

We are reaffirming our $97 per share fair value estimate after American Electric Power AEP announced that it had mutually agreed to terminate the planned sale of its Kentucky Power operations to Liberty. Our narrow moat and stable moat trend remain unchanged.

AEP remains one of the cheapest utilities in our coverage universe, albeit trading at only a 5% discount to our fair value estimate in a sector we view as fairly valued.

The sale of Kentucky Power to Liberty was originally announced in late 2021, valuing the unit at $2.6 billion. The transaction had met numerous regulatory hurdles. Most recently, the Federal Energy Regulatory Commission denied the parties’ 2023 application.

We had originally believed management would ultimately close the transaction, which we viewed as value neutral. However, we liked the strategic rationale for divesting a utility that had struggled to earn its allowed returns on equity in one of AEP’s more challenging regulatory jurisdictions, and reallocating the capital to more attractive internal growth opportunities.

AEP reaffirmed its current financing plan, which we expect will include a modest equity issuance in the back half of the capital investment plan. In the near term, AEP will receive $1.2 billion in proceeds from its commercial renewable energy portfolio sale. Additionally, we expect the company to announce plans to divest its retail energy unit later this year.

AEP will now focus on improving returns in Kentucky. Management plans to file a rate case in June, identify opportunities to invest in the region, and securitize retired coal assets, which we think could be challenging given AEP has had problems in this region in the past.

The company reaffirmed its long-term 6%-7% annual growth target, which we expect AEP to achieve. The company’s $40 billion regulated capital plan in 2023-27 and its full-year earnings range of $5.19-$5.39 per share supports this.