AEP Retires Fewer Coal Plants - Analyst Blog

Zacks Investment Research
Posted: Mar 23, 2012 2:15 PM
AEP Retires Fewer Coal Plants  - Analyst Blog

American Electric Power Company Inc. (AEP), a public utility holding company, recently made official notifications to regional reliability organizations PJM Interconnection and Southwest Power Pool (‘SPP’) of the company's plan to retire more than 4,600 megawatts (‘MW’) of coal-fueled power generation. However, this is far below the 6,000 MW retirement target announced by the company in fiscal 2011.

American Electric was forced to downsize its plant retirement target keeping in mind the potential impact these plant retirements will have on the reliability of the electricity grid. The units retired by the company were required to run to meet peak demand last summer, and little new generation is scheduled to come on line prior to the retirement dates to replace this lost generating capacity.

The announcement aims to comply with a series of U.S. Environmental Protection Agency (‘EPA’) regulations. American Electric was required to file its plan for plant retirements prior to PJM's auction in May 2012 that will set electric generation capacity prices for June 2015 through May 2016. In addition to the generation retirements, the company plans to install or upgrade emission control systems on more than 13,000 MW of capacity In keeping with EPA regulations, other utilities like Duke Energy Corporation (DUK) also announced retirement of a section of their coal based generation units.

Columbus, Ohio-based American Electric Power is a public utility holding company which, through directly and indirectly owned subsidiaries, generates, transmits, and distributes electricity, natural gas, and other commodities. The company derives revenues mainly from power-generating activities.

American Electric Power is one of the largest electric utilities in the U.S., delivering electricity to more than 5 million customers in 11 states. The company ranks among the nation's largest generators of electricity, owning nearly 39,000 megawatts of generating capacity in the U.S.

American Electric Power also owns the nation's largest electricity transmission system, a nearly 39,000-mile network that includes additional 765-kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined. The company's utility units operate as AEP Ohio, AEP Texas, Appalachian Power (in Virginia and West Virginia), AEP Appalachian Power (in Tennessee), Indiana Michigan Power, Kentucky Power, Public Service Company of Oklahoma, and Southwestern Electric Power Company (in Arkansas, Louisiana and east Texas).

In recent times, American Electric Power is experiencing growth in industrial volume. In fiscal 2011, the company saw a 4% jump in industrial volume owing to increased production. We view the growth in industrial demand as a significant indicator of a reviving economy, a fact that will surely benefit the company going forward.

We appreciate the decision taken by the company to focus on shareholder value through payment of incremental dividends. The company currently dishes out an annualized dividend of $1.88 with a yield of 4.5%. American Electric Power also received a favorable ruling as recent as January 12, 2012, from the Public Utilities Commission of Texas to securitize funds. The company expects to receive proceeds of approximately $800 million from the securitization later in the first quarter of 2012. The company plans to utilize these cash proceeds to reduce liabilities and strengthen the balance sheet.

American Electric Power presently retains a short-term Zacks #3 Rank, which translates into a short-term Hold rating. We have a long-term Neutral recommendation on the stock.

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