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Could AEP’s Sales Mix Grow Healthier If Its Merchant Arm Goes?

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AEP’s sales mix

American Electric Power’s (AEP) healthy combination of operations at each level of the energy value chain is likely to be affected by a divestment of its merchant generation segment. Though the segment accounts for a small portion of the total revenue, it generates significant revenues during periods of high energy demand. The 55% contribution from integrated utilities (XLU) is expected to grow in the near future.

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Segment and customer class contribution

AEP’s generation and marketing segment operates in wholesale energy markets. Merchant generation, which is up for a possible divestment, is a part of this segment. Management is looking to divest a total of 7,900 megawatts of merchant generation capacity, of which 4,900 megawatts is expected to be sold this year.

Considering the composition of AEP’s customer class, 15% of revenue is contributed by wholesale customers while the majority of revenue contribution, more than 42%, comes from residential customers. In the last few quarters, AEP’s sales in the industrial customer category increased due to higher sales, particularly to oil and gas (UNG) related sectors.

AEP’s fuel mix

Like many other utilities, AEP is paying keen attention to Clean Power Plan developments, as more than 60% of AEP-generated power comes from coal. It is expected to be a very capital-intensive task for coal-heavy power generators to switch to low-emitting energy sources. Interestingly, in ten years, coal will still be AEP’s primary energy source. According to a company presentation, 48% of AEP’s power is likely to come from coal in 2026. Like AEP, Duke Energy (DUK), FirstEnergy (FE), Southern Company (SO), and DTE Energy (DTE) rely on coal (KOL) for most of their power generation.

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