1 of 19

1

American Electric Power

By: Israel, Caitlyn, Jinxian

Wake Investment Club

2 of 19

Executive summary

Overview

Transmission Line Industry Overview 

Thesis

Financial Metrics & Valuation

​

​

​

​

​

2

3 of 19

Company Profile

3

Financials Summary

 

2018 A

2019 A

2020 A

2021 A

2022 A

Total Revenue

16,195.70

15,561.40

14,918.50

16,792.00

19,639.50

Growth Rate %

5.0%

-3.9%

-4.1%

12.6%

17.0%

​

​

​

​

​

​

EBITDA

5,178.90

5,819.70

6,016.30

6,525.00

7,430.90

Margin %

32.0%

37.4%

40.3%

38.9%

37.8%

​

​

​

​

​

​

EBIT

2,670.00

2,647.00

2,998.90

3,518.20

3,919.90

Margin %

16.5%

17.0%

20.1%

21.0%

20.0%

​

​

​

​

​

​

Net Income

1,923.80

1,921.10

2,200.10

2,488.10

2,307.20

Margin %

11.9%

12.3%

14.7%

14.8%

11.7%

​

​

​

​

​

​

Diluted EPS Excl. Extra Items

3.94

4.23

4.37

4.75

5.15

Operating Segments 

  • With over 40,000 miles of transmission lines, American Electric Power (AEP) is one of America's largest electric energy companies 
  • The company formed in 1906 and now serves 5.6 million customers and employs 17,000 individuals 
  • AEP is committed to making smart infrastructure investments that provide clean and affordable energies to American communities 

​

4 of 19

Transmission Lines Overview

Transmission lines carry electricity from one point to another, from powering residential homes to manufacturing sites.  

​

​

​

​

​

4

Strengths: 

  • Global energy demand continues to rise, making transmission lines more critical than ever before. 
  • High levels of government investment 
  • In 2021, the industry was valued at USD 27.23 billion and is expected to reach 66.80 billion by 2032 – a CAGR of 8.5% from 2022-2032
  • Quickly adopt new technology
  • More renewable energy projects being completed --> more need for transmission lines

​

Weaknesses: 

  • Strong competition, so profitability is limited
  • Low barriers to entry
  • Regulatory hurdles

​

​

How it works

5 of 19

Upstream and Downstream Structure

5

Construction Contractors

Infrastructure Services

Energy Providers

6 of 19

Industry Opportunities: Decarbonization

6

To meet increasing energy demand sustainably, producing green energy has become a priority for governments and businesses across the world.  Transmission lines are a crucial asset for the expansion of renewable energy sources and are therefore essential for achieving net-zero targets by 2035. This gives this industry immense potential for growth.

​

Incredible Potential for Growth

​

7 of 19

Industry Opportunities: Upgrading + Interconnection�

7

Transmission Paradigms

AC Transmission

    • Used for the bulk of transmission
    • Simpler to shift up and down in voltage levels – beneficial for distribution
    • Most efficient for intra-regional transmission

LCC-HVDC

    • Beneficial when transmitting over 1000 kilometers
    • Lower losses of power while transmitting long distances
    • Lower maintenance costs than VSC
    • Use thyristor valves to convert AC power to DC power

VSC-HVDC

    • Uses semiconductor devices to to convert AC power to DC power
    • Faster conversions than LCC and allows for more control over power flow
    • Less efficient over long distances
    • More sophisticated system than LCC, requires more maintenance

8 of 19

Commitment to ESG

8

​

  • Accelerated CO2 emission goals: 80% reduction from 2005 (previously 2000) level by 2030 and net-zero goal by 2045 (previously 2005)
  • 47% reduction in coal capacity as percentage of total capacity by 2032
  • Increase renewable generation portfolio to 50% of total portfolio by 2030
  • $8.6 billion investment in renewables through 2027

​

​

​

​

​

9 of 19

Why AEP

  • American Electric Power currently plans to invest $40 billion over the 2023-2027 period in its core regulated operations, contracted renewables and wires. Such planned investments should enable AEP to achieve its long-term earnings growth target of 6-7% (https://www.nasdaq.com/articles/reasons-to-add-american-electric-power-aep-to-your-portfolio-0)
  • In the past year, the stock has gained 14.3% compared with the industry’s 0.9% increase.
  • Market cap of 47 billion 
  • 40k transmission miles - nations largest electric line system
  • Goal of net zero by 2045 - Capital forecast includes $9B of regulated renewable investment 
  • Capital forecast of $40B includes $15B of transmission investment and $11B of distribution investment

​

​

9

10 of 19

Key Ratios

10

11 of 19

Thesis�

​

AEP, with its strong presence in the Midwest, Plains, and Texas its 100+ years of experience in the industry is well-positioned for growth in the next decade. Additionally, AEP's 40 billion-dollar investment in transmission, distribution, and renewable energy gives it a competitive advantage in meeting the rising demand for energy.

​

​

11

12 of 19

Stock movements

12

-Consistent EPS Growth

-Matched movement with the industry

-History of beating EPS estimates

​

13 of 19

Revenue Forecast�

13

Revenues

 

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Vertically Integrated Utilities

​

9,645.5

9,367.1

8,879.4

9,998.5

11,477.5

12,625.25

13,509.02

14,049.38

14,189.87

14,615.57

15,054.04

15,505.66

15,970.83

16,449.95

16,943.45

​

​

​

-3%

-5%

13%

15%

10%

7.0%

4.0%

1.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

Transmission and Distribution Utilities

4,653.1

4,482.5

4,345.9

4,492.9

5,512.0

6,228.56

6,913.70

7,535.93

8,063.45

8,466.62

8,720.62

8,982.24

9,251.71

9,529.26

9,815.14

​

​

​

-4%

-3%

3%

23%

13%

11%

9.00%

7.00%

5.00%

3.00%

3%

3%

3%

3%

AEP Transmission Holdco

​

804.1

1,073.2

1,198.8

1,526.2

1,677.0

1,794.39

1,884.11

1,940.63

1,998.85

2,058.82

2,120.58

2,184.20

2,249.73

2,317.22

2,386.73

​

​

​

33%

12%

27%

10%

7%

5%

3%

3%

3%

3%

3%

3%

3%

3%

Generation & Marketing

​

1,940.3

1,857.6

1,725.6

2,163.7

2,466.9

2,639.58

2,771.56

2,854.71

2,911.80

2,970.04

3,029.44

3,090.03

3,151.83

3,214.87

3,279.16

​

​

​

-4%

-7%

25%

14%

7%

5%

3%

2%

2%

2%

2%

2%

2%

2%

Corporate and Other

​

95.1

95.8

96.8

72.2

109.9

111.00

112.11

113.23

114.36

115.51

116.66

117.83

119.01

120.20

121.40

​

​

​

1%

1%

-25%

52%

1%

1%

1%

1%

1%

1%

1%

1%

1%

1%

Reconciling Adjustments

​

(942.4)

(1,314.8)

(1,328.0)

(1,461.5)

(1,603.8)

​

​

​

​

​

​

​

​

​

​

​

​

​

40%

1%

10%

10%

​

​

​

​

​

​

​

​

​

​

Total Revenues

​

16,195.7

15,561.4

14,918.5

16,792.0

19,639.5

23,399.2

25,190.8

26,494.1

27,278.5

28,226.7

29,041.5

29,880.1

30,743.2

31,631.6

32,546.0

14 of 19

DCF Valuation

14

WACC

​

​

Debt to Equity Ratio

82.6%

Tax rate

4.3%

Risk free Rate

3.57%

Cost of Debt

4.90%

Weight of Debt

46%

​

​

Equity beta

0.84

Market Return

5.57%

Cost of Equity

8.25%

Weight of Equity

54%

​

​

WACC

6.62%

Valuation

PV of 2023 Free Cash Flow

1,184

PV of 2024-2032 Free Cash Flows

12283.06

PV of Terminal Value

82,933.99

Enterprise Value

$ 96,401.18

Less:

​

​

​

Net Debt

39,928.80

​

Preferred Share

229

Plus:

​

​

​

Cash and Equivalents

556.50

Equity Value

​

$ 56,799.88

​

​

​

Shares Outstanding

513.9

Implied Value Per Share

$ 110.53

15 of 19

DCF�

15

 

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

EBIT

4,512

4,857

5,108

5,260

5,442

5,600

5,761

5,928

6,099

6,275

-Texas

195

210

221

227

235

242

249

256

263

271

=NOPAT

4,317

4,647

4,888

5,032

5,207

5,358

5,512

5,672

5,836

6,004

D&A

3,885

4,183

4,399

4,529

4,687

4,822

4,961

5,105

5,252

5,404

CAPX

6,893

7,421

7,805

8,036

8,316

8,556

8,803

9,057

9,319

9,588

Change in NWC

125

(385)

(280)

(168)

(204)

(175)

(180)

(185)

(191)

(196)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

WACC

6.62%

​

​

​

​

​

​

​

​

​

TV

143,954.28

FCF

1,184

1,794

1,762

1,694

1,782

1,799

1,851

1,905

1,960

2,017

Terminal Value

2032 EBITDA

13160.05

Terminal Value EBITDA multiple

12.33 X

Undiscounted Terminal Value

$ 162,204.59

16 of 19

Comparable Valuation

16

Company

Market Capitalization

Debt Outstanding

Enterprise Value

Revenue/Sales

EBITDA

EBITDA Margin

Revenue Multiple

EBITDA Multiple

P/B

P/E

 

​

​

​

​

​

​

 

 

​

​

AEP

$ 48,313.00

39225.4

$87,538.40

$19,639.50

$7,102.20

36.16%

4.46 X

12.33 X

2.02 X

18.25 X

 

​

​

​

​

​

​

 

 

​

​

Vertically Integrated Utilities

​

​

​

​

​

​

 

 

​

​

FirstEnergy

$ 23,263.00

21488

$44,751.00

12,459.00

3,769.00

30.25%

3.59 X

11.87 X

2.29 X

34.42 X

Exelon

$ 42,974.00

39643

$82,617.00

19078

7383

38.70%

4.33 X

11.19 X

1.71 X

21.40 X

PG&E

$ 38,483.00

51331

$89,814.00

21680

6249

28.82%

4.14 X

14.37 X

1.47 X

14.43 X

Entergy

$ 23,042.00

23536

$46,578.00

13764.237

4236.349

30.78%

3.38 X

10.99 X

1.77 X

34.27 X

​

​

​

​

​

​

​

 

 

​

​

Generation and Distribution

​

​

​

​

​

​

 

 

​

​

Dominion Energy

$ 48,202.00

45525

$93,727.00

17174

7198

41.91%

5.46 X

13.02 X

1.85 X

13.55 X

Southern Company

$ 80,346.00

55633

$135,979.00

29279

10309

35.21%

4.64 X

13.19 X

2.66 X

20.48 X

Duke Energy

$ 75,801.00

74758

$150,559.00

28768

12360

42.96%

5.23 X

12.18 X

1.60 X

17.88 X

Edison International

$ 28,005.00

30740

$58,745.00

17220

4464

25.92%

3.41 X

13.16 X

2.04 X

17.85 X

​

​

​

​

​

​

​

 

 

​

​

​

​

​

​

​

​

​

 

 

​

​

​

​

​

​

​

Average

​

4.27 X

12.50 X

1.92 X

21.78 X

17 of 19

Valuation

17

18 of 19

Sensitivity

18

Base

$ 106.11

Bull

$ 174.17

Bear

$ 43.88

Current Price

$ 94.01

​

​

Upside

1.60 X

​

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Revenue (Bull)

24,016.60

26,627.83

28,935.94

30,837.30

32,242.67

33,177.54

34,109.26

35,068.32

36,055.50

37,071.65

%Growth

22.3%

10.9%

8.7%

6.6%

4.6%

2.9%

2.8%

2.8%

2.8%

2.8%

Revenue (Base)

23,399.16

25,190.79

26,494.08

27,278.48

28,226.69

29,041.46

29,880.07

30,743.21

31,631.61

32,546.00

%Growth

19.1%

7.7%

5.2%

3.0%

3.5%

2.9%

2.9%

2.9%

2.9%

2.9%

Revenue (Bear)

22,220.58

22,842.16

23,481.60

24,139.33

24,815.88

25,511.80

26,227.65

26,964.00

27,721.46

28,500.64

%Growth

13.1%

2.8%

2.8%

2.8%

2.8%

2.8%

2.8%

2.8%

2.8%

2.8%

EBITDA (Bull)

9,606.64

10,651.13

11,574.38

12,334.92

12,897.07

13,271.02

13,643.71

14,027.33

14,422.20

14,828.66

Margin

0.4

0.4

0.4

0.4

0.4

0.4

0.4

0.4

0.4

0.4

EBITDA (Base)

8,396.95

9,039.89

9,507.58

9,789.07

10,129.34

10,421.73

10,722.67

11,032.41

11,351.22

11,679.36

Margin

35.9%

35.9%

35.9%

35.9%

35.9%

35.9%

35.9%

35.9%

35.9%

35.9%

EBITDA (Bear)

6,888.38

7,081.07

7,279.30

7,483.19

7,692.92

7,908.66

8,130.57

8,358.84

8,593.65

8,835.20

Margin

31.0%

31.0%

31.0%

31.0%

31.0%

31.0%

31.0%

31.0%

31.0%

31.0%

WACC (Bull)

6.31%

6.31%

6.31%

6.31%

6.31%

6.31%

6.31%

6.31%

6.31%

6.31%

WACC (Base)

6.62%

6.62%

6.62%

6.62%

6.62%

6.62%

6.62%

6.62%

6.62%

6.62%

WACC (Bear)

7.13%

7.13%

7.13%

7.13%

7.13%

7.13%

7.13%

7.13%

7.13%

7.13%

19 of 19

Thank You

Jinxian Zhao (zhaoj20@wfu.edu)

Israel Alonge (alonib22@wfu.edu)

Caitlyn Weil (weilce21@wfu.edu)

​

19