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American Electric Power Co., Inc. (AEP - Analyst Report) has decided to retire unit 5 of its coal-fueled Muskingum River Plant in 2015. Located in Beverly, Ohio, the coal plant has an electric generation capacity of 585 megawatt (MW).
The company arrived at this decision as it was unwilling to spend additional capital on refueling the plant. In February this year, the company had modified the 2007 New Source Review Consent Decree that gave the company an option to either retire Muskingum River Unit 5 or refuel it with natural gas.
The company expects to incur a non-operating, pre-tax impairment charge for the unit in the range of $150 million to $170 million in the second quarter of 2013. However, this will not impact the company’s full year earnings guidance range of $3.05 to $3.25 and long-term earnings growth rate in the range of 4% to 6%.
Earlier, the company had announced that it will shut down Muskingum’s four other units. The closure of these units would affect approximately 95 employees. The company will either move these employees to other units or compensate them with severance benefits.
Taking into account the closure of the 5th unit, AEP Ohio's total generation capacity will come to 10,725 MW comprising mainly of fully controlled coal-fueled plants, natural gas-fueled combined cycle and combustion turbines, and a small hydro plant.
With the rising demand for power and the phasing out of coal-fired units, the company would have to shift its focus on other fuel sources. Indeed, American Electric Power is busy increasing its wind power deliveries in regions of Indiana, Michigan and Oklahoma to meet the surging demand for renewable energy. Recently, Indiana Michigan Power Company, a fully owned subsidiary of American Electric Power, signed a 20-year power purchase agreement with EDP Renewables North America LLC to buy renewable energy from the 200 MW Headwaters wind farm.
Other energy companies are also shutting down their coal-based units. In Feb 2013, Duke Energy Corp. (DUK - Analyst Report) had announced the retirement of its Buck and Riverbend steam stations, coal-fired power plants in the Charlotte area, two years earlier than schedule. Earlier, both stations had been slated for retirement in Apr 2015 in apprehension of upcoming federal environmental regulations.
Recently President Obama unveiled a fresh climate change strategy that will likely limit pollution from existing coal-fired power plants. He issued directives asking environmental regulators to set up carbon pollution standards for active plants.
This decision is likely to boost American Electric’s share price. However, tepid economies in a number of its service states, pending regulatory cases, and lower wholesale sales keep us concerned. The company presently retains a short-term Zacks Rank #3 (Hold).
However, stocks to look out for in the energy space are The AES Corp. (AES - Analyst Report) and Black Hills Corp. (BKH - Snapshot Report), both with a Zacks Rank #2 (Buy).