On American Electric Power Co Inc (NYSE: AEP) is BUY. Third-quarter results came in better than expected, with strong normalized residential energy consumption helping to offset declines in commercial and industrial sales. The company has a growing pipeline of renewables projects that are either under construction or in the planning stage. The company is well positioned to drive future earnings growth through investments in its regulated businesses, with planned transmission investments funded through equity and debt offerings. We also believe that AEP’s earnings and stock price are levered to the industrial sector of the U.S. economy and should benefit as the economy recovers from the pandemic. In addition, AEP is benefiting from recently implemented cost-reduction programs, which, along with favorable rate case decisions, should contribute to stable earnings growth over the next few years.
American Electric Power recently reported results that narrowly topped consensus estimates. The company reported third-quarter GAAP earnings of $749 million. Operating EPS totaled $1.47, up slightly from $1.46 in the prior-year period and above the consensus of $1.45. Third-quarter revenue declined 6% to $4.1 billion, below the consensus forecast of $4.4 billion.
On May 27, AEP received regulatory approval for a major 1.5 GW wind project in Oklahoma. The project will serve customers in two of AEP’s regulated subsidiaries: Southwestern Electric Power Company (SWEPCO) and Public Service Company of Oklahoma (PSO). On the 3Q conference call, management said that it would use equity to finance two-thirds of this $2 billion project.
It also reaffirmed its long-term EPS growth forecast of 5%-7% from a 2019 base.
EARNINGS & GROWTH ANALYSIS
In the Vertically Integrated Utilities segment, third-quarter revenue fell 8% year-over-year to $2.4 billion due to lower fuel/energy prices and unfavorable weather. Operating earnings fell 4% to $423 million, or $0.85 per share, driven by unfavorable weather, lower wholesale load, and higher depreciation and taxes.
Operating EPS rose to $0.31 from $0.27 in 3Q19. Positive drivers included favorable rate changes in Texas and Ohio, combined with lower O&M expense. Unfavorable weather and higher depreciation partially offset these positives.
Third quarter earnings in the AEP Transmission Holdco segment rose to $0.28 per share.
As the company scales back its nonregulated business, earnings and dividend growth should become more predictable. The company will also be able to use proceeds from the sale of nonregulated assets to strengthen its regulated business and expand its generation of renewable energy.
Management has projected capital spending of $35.0 billion through 2024, including $2 billion for the wind project in Oklahoma, and with roughly 45% allocated to the Transmission businesses.
FINANCIAL STRENGTH & DIVIDEND
Moody’s and S&P rate the company’s debt at Baa2 and BBB+, respectively.
MANAGEMENT & RISKS
Nicholas Akins is the chairman, president and CEO of American Electric Power. He is the sixth CEO in the company’s 114-year history. He joined AEP in 2000 after his former company, Central and South West Corp., was acquired by AEP. Brian X. Tierney is the CFO.
American Electric Power is a major U.S. electric utility, delivering electricity to more than 5.5 million customers. It owns 26,000 megawatts of generating capacity, with an estimated 44% of generating capacity from coal; 29% from natural gas; 17% from wind, hydro, pumped storage and other; 7% from nuclear; and 3% from energy efficient sources. The company is expanding its use of renewable energy. AEP also owns the nation’s largest electricity transmission system, a network of over 40,000 miles. The transmission system serves about 10% of electricity demand in the interconnected system covering 38 eastern and central U.S. states and eastern Canada, and approximately 11% of electricity demand in the system covering much of Texas.
Our target price is $102, raised from $95.