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American Electric Power Co., Inc.’s (AEP - Analyst Report) unit AEP Ohio has filed a request with the Public Utilities Commission of Ohio (PUCO) to expand its successful gridSMART program. The company intends to facilitate the communities throughout its Ohio service territory with this program.

The customers in the gridSMART Demonstration Project get more accurate information of their energy consumption, improved billing accuracy and enhanced reliability. Moreover, the company believes that modernization of the distribution grid would help in locating damage more accurately and support faster restoration times during storms like derecho and Sandy that occurred in 2012.

The gridSMART plan includes installing advanced metering infrastructure (“AMI”) benefiting approximately 900,000 customers, distribution of automation circuit reconfiguration (“DACR”) to improve the reliability of 250 distribution circuits to serve more than 330,000 customers and volt var optimization (“VVO”) to control the voltage of 80 distribution circuits aiding 119,000 customers.

AMIs, also known as smart meters, are scheduled to be installed in more than 31 communities throughout the service territory. These smart meters provide customers with the requisite information of how to use electricity more efficiently. With the help of two-way communication capabilities, this technology provides near real-time meter readings. These AMIs also provide environmental benefit as the company does not have to send meter readers out to a customer's home or business. The company expects this to eliminate 187,000 metric tons of carbon dioxide by reducing 440,000 miles driven on an annual basis.

Additionally, the company intends to install DACR devices. With the help of remote monitoring, coordination and operation these devices improve reliability of the distribution system. Installation of VVO will help in achieving energy efficiency by better controlling and monitoring the voltage levels on a distribution circuit.

These installations if approved would require huge capital expenditures. Therefore, the company plans to recover the costs through a rider to customers' bills. With this increase, the company expects that costs for an average residential customer will be approximately $2.00 per month for the first five years.

American Electric Power’s stable earnings base provides stability to the revenue stream and insulates the company from adverse regulatory decisions and the detrimental effects of lower sales in a particular service area.  Going forward, focus on transmission expansion will allow the company to attain its 4%–6% long-term EPS growth target along with an attractive dividend yield.

However, tepid economies in a number of its service states and its predominantly fossil fuel based generation assets may restrict opportunities for future performance. Also, we are concerned about the soft second quarter results that missed the Zacks Consensus Estimate primarily due to declines in residential, commercial and industrial sales. The company presently retains a short-term Zacks Rank #3 (Hold).

Stocks that are worth considering in the space are Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report), Integrys Energy Group, Inc. (TEG - Analyst Report) and IdaCorp, Inc. (IDA - Snapshot Report), all with a short-term Zacks Rank #2 (Buy).

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