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Millennium Management's largest positions in 3Q 2013

Part 3
Millennium Management's largest positions in 3Q 2013 (Part 3 of 7)

Millennium Management buys PPL, BHI, AEP, CMS, and SRE and sells DRYS and NYCB—13F Flash C

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Millennium Management is a global investment management firm with approximately $20.1 billion in assets under management and offices in the United States, Europe, and Asia. Founded in 1989 by Israel Englander, it employs a global multi-strategy investment approach, opportunistically engaging in a broad array of trading and investing strategies. It’s structured to allocate capital globally across a diverse set of strategies involving a variety of predominantly liquid asset classes. It focuses on generating uncorrelated returns by engaging and overseeing over 140 specialized trading teams, each of which pursues specific strategies.

In this seven-part series, we’ll go through some of the main positions Millennium Management traded this past quarter.

Its largest buys in 3Q 2013 were PPL Corp. (PPL), American Electric Power (AEP), CMS Energy (CMS), Baker Hughes Inc. (BHI), and Sempra Energy (SRE). It sold Dryships Inc. (DRYS) and New York Community Bancorp Inc. (NYCB).

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Why buy American Electric Power (AEP)?

The company reported operating earnings of $1.10 per share in 3Q 2013, above analyst estimates. It said it achieved positive results primarily from the investments made in its regulated operations. The contribution of weather to earnings in 3Q was slightly below normal and much lower than the favorable weather experienced last year. Energy efficiency continued to impact residential load growth, but there was an uptick in commercial demand during 3Q. AEP added that industrial sales remain challenged but provide a smaller margin contribution than residential and commercial load. Its quarterly revenue was flat year-over-year, at $4.2 billion.

AEP has increased the midpoint of its 2013 operating earnings guidance on the back of the strong results. The 2013 operating earnings guidance range narrowed from between $3.05 and $3.25 per share to between $3.15 and $3.25 per share. The board also voted on an increase in its quarterly dividend by $0.01 to $0.50 per share, providing a dividend increase this year of nearly 4% for its shareholders. The company said investment in its regulated utilities will focus on infrastructure that enhances reliability and improves customer experience. It will continue to allocate additional capital to its transmission business, and it expects earnings contribution of AEP Transmission Holding Co. to nearly double in 2014.

AEP plans to invest nearly $5 billion in transmission between 2014 and 2016 in AEP Transmission Holding Co. and through its regulated utility operating companies. It expects to complete separation of its Ohio generation assets from its Ohio wires business at the end of 2013 and begin operating its Ohio generation as a competitive business in 2014.

Utility stocks, including Southern Company (SO), American Electric Power (AEP), and Consolidated Edison (ED), have been pressured in the recent past by rumors of rising interest rates ahead of the Fed tapering its bond buying program. Higher interest rates affect utilities because these companies tend to be capital-intensive and depend on debt for financing their operations. Also, higher interest rates make bonds more attractive to investors compared to riskier yield options in the market. The sector is also prone to regulatory uncertainties. AEP has a robust balance sheet and a stable credit outlook. Strong dividend yields, a focus on cost reduction, and an expansion of its transmission business are expected to benefit AEP in the long term.

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Millennium emphasizes diversity in asset classes, industry sectors, and geographic boundaries and it invests in a variety of domestic and foreign equity and debt securities, asset-backed securities, currencies, futures and forward contracts, options, and other financial instruments. Its approach is to prioritize capital preservation. It aims to achieve absolute returns, rather than outperforming a given benchmark or asset class. It capitalizes on opportunities in a diversified portfolio while minimizing risk. An important feature of Millennium’s approach is that it doesn’t make firm-wide, concentrated investments. Each of its trading teams focuses on the specific opportunities and strategies it specializes in, subject to the company’s overall risk management and hedging of aggregate exposures where appropriate.

Millennium founder Israel Englander has over 35 years of experience in securities and derivatives across a broad range of instruments and strategies. A Brooklyn native, Englander earned a B.S. in finance at NYU before dropping out of the university’s MBA program to work full-time on Wall Street as a trader and floor broker at the American Stock Exchange.

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