American Electric to Buy Assets

American Electric Power Co. Inc.’s (AEP - Analyst Report) subsidiary Southwestern Electric Power Co. signed a letter of intent to buy transmission and distribution assets worth $94 million from the Valley Electric Membership Corp. Southwestern Electric’s acquisition of the cooperative will double its presence in Louisiana.
 
Valley Electric Membership Corp. is a Louisiana cooperative with more than 7,000 miles of distribution lines, 90 miles of transmission lines and 29 substations. Southwestern Electric expects to shell out $124 million overall for the deal. Although this is over the value of the assets, the company would be adding 30,000 customers of the cooperative.
 
A deal is expected to be formalized by the end of fiscal 2009, with a formal vote on the dissolution of the cooperative expected by February 2010. However, a number of regulatory approvals are required, as well as approval from the board of American Electric Power.
 
Southwestern Electric currently serves more than 473,500 customers in three states, including 180,000 in Northwest Louisiana, 113,500 in western Arkansas, and 180,000 in East and North Texas. The subsidiary is based in Shreveport, Louisiana.
 
The parent company, American Electric, is one of the largest public utility holding companies catering to approximately 5.2 million customers spread over 11 states. Increasing the headcount of customers will boost the dwindling fortunes of the utility.
 
In the recently reported quarter of fiscal 2009, American Electric’s revenues fell 17% to $3.5 billion from $4.2 billion in the year-ago quarter. A tepid economy, coupled with a summer cooler than average, affected electricity demand. The downturn affected demand for industrial customers most. Industrial retail sales fell 16.9% year-over-year. Commercial retail sales also fell 1.2%. However, residential retail sales remain stagnant.

We maintain our cautious Neutral recommendation on the stock.

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