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Why AEP Plans to Sell Merchant Capacity to Blackstone, ArcLight

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AEP to sell competitive power plants

Leading utility holding company American Electric Power (AEP) has advanced one step further to become a pure-play regulated utility. On Wednesday, September 14, 2016, it agreed to sell its four competitive power plants with a total capacity of 5.2 GW (gigawatts). AEP had been considering various options for these power plants since early in 2016.

AEP’s four power plants located in Ohio and Indiana will be sold to a newly formed joint venture of Blackstone and ArcLight Capital Partners for $2.2 billion.

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Will AEP join the regulated utility club?

The sale is expected to complete in the first quarter of 2017 and is subject to regulatory approvals. The reduced exposure to competitive generation is likely to stabilize AEP’s earnings in coming years.

AEP expects after-tax gains of nearly $140 million from the sale. After the sale, it will still own approximately 2.7 GW of competitive generation capacity, which is being evaluated for separation.

Competitive generation has been a thorn in AEP’s performance side lately. Weakness in wholesale power prices has marred its earnings over the past few quarters, and exiting competitive generation will lead American Electric Power to become an almost entirely regulated utility, which is likely to reduce earnings volatility in the next few years.

Notably, $31-billion AEP has corrected more than 10% since July 2016, but this correction was sector-wide as investors dumped overvalued utilities (XLU) (IDU) after rate hike winds started blowing strongly in the past couple of months.

Continue the next part of this series for a look at AEP’s short interest.

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