American Electric Looks Good, Steps Up Transmission Capex - Analyst Blog

By Zacks Equity Research,

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On Jul 2, we issued an updated research report on American Electric Power Co. Inc. ( AEP ) based on its regulated business mix, increasing focus on transmission as a growth driver and planned capital spending program.

This public utility holding company has been able to exceed both top- and bottom-line expectations for the first quarter 2014 driven by strong performances across the board. Earnings in the quarter beat the Zacks Consensus Estimate by 26.4% and improved 43.8% year over year supported by favorable weather and high power prices.

The company's increased focus on enlarging its stable earnings base as well as its geographically diversified nature allows it to avail transmission opportunities with better returns, compared to its single-state utility peers. Focus on transmission expansion, repositioning of assets, curtailment of unregulated generation costs and efficient capital allocation will allow the company to attain its 4%-6% long-term EPS growth target.

In fact, the major part of the planned capital investment of $4 billion per year is directed towards the development of its Transmission segment in the period 2014 through 2016. The company will continue to invest more than $1.5 billion annually in transmission infrastructure projects. The solid first quarter results encouraged AEP to increase its transmission investment by $200 million. We believe this will boost earnings in the future. The company also raised its 2014 earnings guidance to $3.35-$3.55 per share from $3.20-$3.40 per share.

The U.S. Environmental Protection Agency (EPA) has been proactive in issuing regulations aimed at reducing emissions from fossil fuel-fired generating units. These rules are forcing the electric utilities, including AEP, to retire, refuel and retrofit many existing coal plants.

While the company's environmental efforts center on regulatory compliance, it is also committed to delivering affordable, reliable electricity to its customers. Though overall generation from natural gas decreased by 28% and from coal declined by 15.0% in 2013, the company stated that existing regulations and market conditions will help it to cut coal fired generation to 49% in 2026 from 61% in 2014. The share of natural gas in the fuel mix will however rise to 28% in 2026 from 23% in 2014.

Between 2005 and 2013, AEP reduced its carbon footprint by 21%, exceeding President Obama's climate action plan of achieving a 17% reduction by 2020. The company's use of renewables and energy efficiency resources will continue to increase over this period.

American Electric Power currently retains a Zacks Rank #2 (Buy). Other better-ranked players in the utility industry comprise Alliant Energy Corporation ( LNT ), Black Hills Corporation ( BKH ) and Dynegy Inc. ( DYN ), all with a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: AEP , DYN , BKH , LNT

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