American Electric Power Co. Inc. plans a massive buildout of its regulated renewables platform by the end of the decade as the company continues its pivot to clean energy while reducing market exposure.

As part of this transition, American Electric Power, or AEP, launched a process Feb. 24 to sell all or a portion of subsidiary AEP Renewables' 1,600-MW competitive contracted renewables portfolio.

The portfolio consists of 1,435 MW of installed wind capacity and 165 MW of installed solar capacity in 11 states as of Dec. 31, 2021, according to a Form 10-K filing.

"Our transformation strategy is working, and the investments we are making will continue to support our solid earnings growth and results," AEP Chairman, President and CEO Nicholas Akins said on the company's fourth-quarter 2021 earnings call.

The CEO said some of the asset sales will occur this year with more in 2023.

In addition to funding regulated investments, AEP Executive Vice President and CFO Julie Sloat said that ideally, the company will be able to remove equity needs from its growth plan through sale proceeds.

"There will be a bias toward trying to alleviate that pressure that you might otherwise perceive around equity issuances," Sloat said.

In connection with the move, AEP plans to shift $1.5 billion in its five-year, $38 billion capital plan to transmission and eliminate growth capital in its unregulated contracted renewables business. This increases planned transmission investments to $14.4 billion and significantly reduces the $1.7 billion previously earmarked for contracted renewable projects.

"We don't expect AEP will struggle to sell the portfolio at an attractive price, and see infrastructure or private equity funds as the most likely potential buyers," Scotia Capital (USA) Inc. analyst Andrew Weisel wrote in a Feb. 24 research report. The analyst said a strategic buyer, such as NextEra Energy Inc., also is possible, "though we question the degree to which a publicly traded utility could make EPS accretion attractive enough."

CreditSights estimated AEP could raise about $2.1 billion from the sale of the entire contracted renewables portfolio to help fund its renewables and transmission growth.

Regulated renewables

AEP is targeting 8,600 MW of wind generation and 6,600 MW of solar additions in its regulated resources base from 2022 through 2030 as part of plans to move its fleet to about 50% renewable over the same time frame. The company has allocated $8.2 billion for about 5,800 MW of regulated renewables in its 2022-2026 capital plan.

The 999-MW Traverse Wind Energy Center in Oklahoma is expected to come online in the second quarter. The third of the three North Central Wind facilities will be acquired from developer Invenergy LLC by AEP subsidiaries Public Service Co. of Oklahoma and Southwestern Electric Power Co. upon project completion.

Opportunities in renewables and transmission are AEP's "two pinnacles of growth," Akins said.

"We will not give up our position as being the largest transmission provider in this country by far," Akins said. "And then on the renewable side, we're at the leading front edge of a major transformation that's going to benefit our ability to not only help in terms of customer rates ... but also to be able deploy the capital necessary to make that happen."

The CEO added that right now, the company's renewables investments are focused on capacity replacement.

More sales?

The planned sale of the competitive renewables portfolio comes as AEP works to "simplify and de-risk" the business.

"The process is not over," Akins said. "We are continuing the process of really fine-tuning the optimization around all of our assets."

On Oct. 26, 2021, AEP announced an agreement to sell its Kentucky operations to Liberty Utilities Co., an indirect subsidiary of Canada's Algonquin Power & Utilities Corp., in a deal with a $2.85 billion enterprise value and $1.5 billion equity value.

Akins said the transaction is on track to close in the second quarter despite some regulatory concerns about the transfer in ownership of the 1,560-MW Mitchell coal-fired power plant in West Virginia.

AEP announced a strategic review of its Kentucky assets in April 2021 as the company looked to finance renewable energy additions across its footprint.

Akins said the company will continue "looking beyond the traditional forms of equity to fund the growth going forward."

AEP plans to hold an analyst day soon after the sale of the Kentucky assets is completed.

Results

On Feb. 24, AEP raised its 2022 operating earnings guidance range to $4.87 to $5.07 per share from $4.85 to $5.05. The company tightened its long-term EPS growth rate to 6% to 7% from 5% to 7% and increased its targeted funds from operations-to-debt ratio to a range of 14% to 15% from 13.5% to 15%.

The company reported fourth-quarter 2021 operating earnings of $496 million, or 98 cents per share, compared with operating earnings of $433 million, or 87 cents per share, in the fourth quarter of 2020. The S&P Capital IQ normalized consensus EPS estimate for the quarter was 92 cents.

Year-end 2021 operating earnings were $2.4 billion, or $4.74 per share, compared with full-year 2020 operating earnings of $2.2 billion, or $4.44 per share. The S&P Capital IQ normalized consensus EPS estimate for 2021 was $4.69.