Duke Energy’s Younger Brother: Out Performance In The Age Of Disruptive Technology
American Electric Power (NYSE:AEP) is diversified across the generation, transmission and distribution of electricity, providing its services to customers throughout the Southwest with a strong presence in Texas, Ohio, Kentucky, and Oklahoma. The company is currently focused on a series of divestitures and capital expenditures to reposition itself for future growth based on technological innovation and macroeconomic conditions.
Nicholas Akins, President and CEO, and Lisa Barton EVP of Transmission, are forward looking executives that understand the importance of decreasing the company’s reliance on coal. With coal use decreasing across the industry, American Electric Power is positioning itself for the increase in renewable resources through $13 billion capital expenditures to modernize and strengthen their transmission infrastructure. With strong transmission infrastructure, AEP will be prepared to transmit the new era of electricity, created through wind, solar and nuclear generation.
Utility company’s take pride in their dividends. With the success of these expenditures, American Electric Power will be able to continue earning 4%-6% operating earnings growth rates while paying shareholders a constant dividend. Dividend growth over the trailing 10 year period is a relatively constant 4.1%. American Electric Power has paid 422 consecutive quarterly dividends since the company’s inception in 1906.
When presenting an investment proposal, I believe that understanding the risks inherent in the proposed company is vital. It is easy to create a great story, but it takes in-depth analysis of market and intrinsic risk to understand the environment the management team is confronting.
Oversupply in the Electricity Market
Macroeconomic factors are the largest risk that American Electric Power faces. The utilities industry is seeing an oversupply of electricity. While typical theories of supply and demand would dictate that producers would cut back on the level of output in order to bring prices to within a profitable level the opposite is holding true. Rather than close power plants, companies are weighing the downside of transferring the financial burden onto the consumer. Although the electricity industry is highly regulated and large price differentiation is not possible, this production decision may negatively impact long term relationships with the company’s consumers.
Alternative Energy Sources
With 60% of American Electric Power’s power generated through coal-fueled power plants the company is highly exposed to the decrease is coal consumption. Coal is becoming unfavorable in comparison to the ever increasing cost effectiveness of natural gas and renewable energy sources. Although natural gas represents 23% of the power generating capacity of AEP, the company has pledged to increase this amount to 33% of output, while decreasing its dependency on coal-fueled capacity down to 45% of total production.