Zacks_Analysts' Blog : AEP's Priority High on Transmission - Analyst Blog

American Electric Power (AEP) has signed a memorandum of understanding (MOU) with Tennessee Valley Authority (“TVA”) to pursue extra-high voltage transmission projects. The projects are designed to strengthen the transmission system in Tennessee, Virginia and Kentucky.

American Electric and TVA will collaborate to identify beneficial transmission improvements along the interface of the PJM Interconnection (“PJM“) and TVA transmission systems. Going forward, joint development agreements would be negotiated for potential future projects.

American Electric has also signed a second MOU with TVA through its Pioneer Transmission LLC joint venture with Duke Energy Corporation (DUK) to develop a transmission project in Kentucky and Indiana. The companies plan to build 55 miles of 765-kilovolt (kV) extra-high voltage transmission that will connect American Electric’s Rockport Station, located east of Evansville, Indiana, with TVA's Paradise Fossil Plant in Drakesboro, Kentucky. The project would also include construction of a new 765-kV substation at Paradise Fossil Plant.

The project would cost approximately $275 million, depending on the completion date that would be determined by the PJM and TVA. Duke Energy, American Electric and TVA will submit the Rockport-Paradise proposal to the PJM for consideration in their regional planning process. Additionally, the project will require approval from the Kentucky Public Service Commission. Ownership shares of the final project will be determined by TVA and the PJM approval processes.

In August 2008, Duke Energy had announced the formation of a 50-50 joint venture with American Electric Power Company, Inc., called Pioneer Transmission LLC (Pioneer Transmission) to build extra-high-voltage 765 KV transmission lines and related facilities in Indiana. The Rockport – Paradise project will be a complement to this initial project with a $1 billion transmission line that runs 240 miles from Duke’s Greentown Station near Kokomo, Indiana, to the Rockport station. The project is expected to be completed in 2015.

Duke sees a commercial opportunity in transmission due to the need to upgrade the transmission grid as well as rising demand for the use of solar and wind power to produce electricity.

American Electric Power Company Inc. is one of the largest investor-owned utility holding companies in the country, catering to over 5 million customers spread over 11 states. Going forward, the company offers stable earnings through consistent performance in core regulated operations, and growth through transmission network expansion.

However, tepid economies in a number of its service states restrict opportunities for growth. Also, uncertainty surrounding pending regulatory cases, its predominantly fossil-fuel based generation assets and lower wholesale sales continue to weigh on the valuation of the stock. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.