Reasons to Invest in American Electric Power

American Electric Power (AEP) is in the largest electricity generators in the United States. AEP is a holding company. Its subsidiaries own and operate 38,000 megawatts of generating capacity and owns and operates the country’s largest electricity line transmission system covering 39,000 miles. The company provides power to the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia, West Virginia through  a diversified portfolio of nuclear, coal and green energy installations: the fuel mix in 2012 being 79% coal and lignite, 11% natural gas, 10 nuclear, 1% other.   The company also provides power through the transmission system, supplying about 10-percent of th electricity demand in the Eastern Interconnection covering 38 eastern and central U.S. states and eastern Canada and much of Texas through the ERCOT  network. The company is engaged in joint ventures with Midamerican Energy Holdings Company, Duke Energy, FirstEnergy Corp and Great Plains Energy to develop new transmission networks in Texas, the East Coast and Omaha respectively. The company operates its own inland barge line, AEP River Operations and has extensive land holdings.

American Electric Power is an instinctive defensive stock. The dividend yield at 4.87% is attractive. It is a large company with assets of US$ 50.5 billion which supplies an essential product. In 2011 American Electric Power generated an income of US$ 15.1 billion with contributions of 35%, 20% and 20% from residential, commercial and industrial sales respectively. The company is committed to sustainable dividend growth. According to a financial news release dated April 2012 American Electric Power is stepping up its investment in new plant and transmission lines with capital expenditure rising from US$ 2.7 billion in 2011 to US$ 3.1 billion in 2012. The company has a strong technical reputation and apart from transmission line developments intends to bring a  600 megawatt state of the art coal fired power station into operation in late 2012. A 580 megawatt Ohio natural gas plant came into service during February 2012.

On the downside, American Electric Power has a weak environmental record. In 1999 American Electric Power In 1999 the United States Justice Department filed a lawsuit against AEP and six other companies for violating the Clean Air Act. On October 8, 2007, AEP agreed to install US$4.6 billion in equipment to reduce emission, as well as pay a US$15 million civil fine. It is currently investing in environmentally improved technologies. The Environmental Protection agency has also named American Electric a potentially responsible party at the Green River Disposal Inc. Superfund toxic waste site. This may incur substantial liabilities against the company.

There are some uncertainties overhanging the AEP group which should be resolved through the competence of their management. The group has traditionally operated in an integrated environment in which it controls distribution and generation throughout a territory. In Ohio, following regulatory pressure, this model is being broken down  with marketing and generating activities being separated into different companies as a prelude to competition being introduced in 2015. The long established pooling agreements between AEP affiliates using the transmission system is also due to be restructured to encourage competition. Currently these uncertainties overhang the stock price. Handled well, these opportunities could turn out to play out in AEPs favour.

There as some indications that American Electric Power may be a recovery play. According to the presentation of first quarter earnings given in conference call ( on April 23 2012 the company first quarter earnings were US$ 389 million despite the adverse influence of mild winter weather. Industrial power consumption which experienced a sharp fall in demand in spring 2009 due to the recession has demonstrated continued growth since summer 2009. Retail consumption  has fallen compared to the prior year. The company does not operate oil fired plant and is making substantial progress in switching from coal to gas fired plant. Coal is supplied through long term contracts to mitigate the effects of fluctuations in the spot price.  Increasing industrial sales coupled with cost management through the switch to gas are an attractive combination.