Appalachian’s Rate Hike Approved – Analyst Blog

Appalachian Power, a public utility subsidiary of American Electric Power Co. (AEP) received an approval for $61.5 million increase in base rates from the State Corporation Commission of Virginia. The hike was, however, below Appalachian Power’s desired amount of $154.0 million, demanded on grounds of higher service costs to 500,000 Virginia customers.

 

The Virginia regulators justified the approved increase as fair and reasonable for Appalachian Power. Average residential customers’ monthly bill will decrease roughly by $2.50 to $101, effective August 1, as higher base rates are offset by lower fuel costs that can be charged by Appalachian Power. The regulators also ordered Appalachian Power to refund amounts charged as higher interim rates for more than 10 weeks.

 

Over a period from 2007 to 2009, electricity rates in Virginia soared 35%, according to the data from the General Assembly’s Commission on Electric Utility Regulation. Also, Appalachian Power witnessed an increase of 50% attributable to roughly $2 billion in environmental compliance costs.

 

Appalachian Power Company is primarily engaged in the generation, transmission and distribution of electric power in the southwestern portion of Virginia and southern West Virginia to approximately 1 million customers.

 

Headquartered in Columbus, Ohio, American Electric Power Company Inc. is one of the largest investor-owned utility holding companies in the country operating through its directly and indirectly-owned subsidiaries. The company serves more than five million customers in US with more than 39,000 MW of primarily coal-fired generating capacity and nearly 39,000 mile electricity transmission system network.

 

We believe that going forward, the company offers investors stable core utility earnings through consistent performance in the residential and wholesale segments, higher rates (in Indiana, Oklahoma, and Virginia) and recovery of coal cost in Ohio.

 

However, reduced expansion plans due to tight credit markets, high debt, lower wholesale and industrial sales, and uncertainty surrounding pending regulatory cases continue to weigh on the stock. Prime competitors of the company include CenterPoint Energy Inc. (CNP), Duke Energy Corporation (DUK) and Entergy Corporation (ETR).

 

In the last 30 days, EPS estimates for American Electric Power were roughly stable for 2010 and 2011, implying that the analysts do not see any meaningful catalyst for the time being. The current Zacks Consensus Estimate is $3.02 for 2010, reflecting a year-over-year growth of 1.76% and $3.23 for 2011, reflecting a year-over-year growth of 6.76%.

 

We maintain our Neutral recommendation on the stock, supported by Zacks #3 (Hold) Rank.