AEP to Shut Down 3 Coal Power Units

American Electric Power Company Inc. (AEP - Analyst Report) announced its plan to shut down three coal-fired power stations by 2016 in order to comply with the rules of Environmental Protection Agency (“EPA”), as reported by the media.

This is not the first time that the company is taking such an initiative. In June 2011, the company had made a compliance plan as per which it would retire approximately 6,000 megawatts (“MW”) of coal-fueled power generation, upgrade or install new advanced emissions reduction equipment on another 10,100 MW, refuel 1,070 MW of coal generation and build 1,220 MW of natural gas-fueled generation. Further, the compliance plan included permanently retiring the 630 MW Kammer Plant, 400 MW Kanawha River Plant, and 1,050 MW Philip Sporn Power Plant. These plants did not comply with environmental regulations.

The company is focusing on making substantial capital investment and incurring additional operational costs to comply with new environmental control requirements. At the same time, it is not willing to spend billions for the modernization or modification of these plants.

As of June 30, 2012, AEP System had a total generating capacity of 37,035 MW, of which 23,900 MW are coal fired. The company expects investment in the range of $6 billion to $7 billion between 2012 and 2020 to meet the proposed environmental requirements. This includes investments to convert 1,055 MW of coal generation to natural gas capacity.

Columbus, Ohio-based American Electric Power is a public utility holding company, which through directly and indirectly-owned subsidiaries generates, transmits, and distributes electricity, natural gas, and other commodities. The company is one of the largest integrated utilities in the U.S. with coal-fired generating capacity of more than 39,000 MW and nearly 39,000 mile of electricity transmission system network. The company derives revenue mainly from power-generating activities.

Nearly 66% of the company’s power is generated from coal, 22% from natural gas and oil, 6% from nuclear energy, and the remaining 6% from wind, water, pumped storage, and other sources. The predominantly fossil-fuel based generation assets and the lowest natural gas prices in a decade are coming in the way of the company's growth. Per the U.S. Energy Department, natural gas-produced electricity is expected to grow 23% in 2012 as coal-fired electricity drops by 12%.

However, being one of the largest investor-owned utility holding companies in the country, with a major presence in Ohio, the company offers stable earnings through consistent performance in core regulated operations, growth through transmission network expansion and an above-average dividend yield. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Some of the company’s main competitors include NextEra Energy, Inc. (NEE - Analyst Report) and Duke Energy Corporation (DUK - Analyst Report).