American Electric Power's Sensible Sale
The planned sale of four merchant coal and gas power plants will allow this narrow-moat utility to pay down debt and fund its pipeline of infrastructure investments.
We are reaffirming our $61 per share fair value estimate, along with our narrow economic moat and stable moat trend ratings, after American Electric Power (AEP) announced plans to sell four merchant coal and gas power plants totaling 5.2 gigawatts for $2.17 billion to a joint venture between Blackstone and ArcLight Capital Partners.
In our fair value estimate, we had estimated the value of the plants at $2.0 billion. The difference between the sale price and our estimate had an immaterial impact on our fair value estimate. Our valuation and the sale price imply approximately $600/kilowatt valuation for the gas plants (Lawrenceburg, Waterford, and Darby) and $175/kw for the Gavin coal plant.
We expect AEP to use the aftertax proceeds to pay down about $900 million of debt and fund its strong pipeline of regulated infrastructure investments that support our 7% annual rate-base growth forecast. Management also highlighted possible share buybacks, which we think would be mostly value-neutral for shareholders, as the stock is trading within 5% of our fair value estimate as of mid-September.
We also expect AEP to monetize its remaining nonregulated generation, or power purchase agreement assets. We value those plants at $800 million, given the large share of inefficient coal plants in the portfolio. We think an outright sale of these assets in 2017 is the most likely outcome. In our view, the less likely scenario is state legislation that would allow transition and investment in the assets and address the Federal Energy Regulatory Commission's denial of AEP's affiliate sales waiver. We think management will also use any proceeds to fund its regulated investment plans.
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Andrew Bischof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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