Financial Analysis Report

Topics: Financial ratios, Electricity generation, Asset Pages: 12 (3722 words) Published: August 3, 2013
| American Electric Power Co.|
Financial Analysis Report


Industry Outlook
The energy industry in its entirety involves the production and sale of energy, fuel extraction, manufacturing, refining and distribution. As our society consumes enormous amounts of fuel, the energy industry becomes more of a necessity to the infrastructure and maintenance of civilization worldwide. Indeed energy use is considered to be one of the most significant factors to the expansion of the human society in almost all countries as it is the aid to the control and adaptation to the environment. Managing the use of energy is definitely unavoidable as development of its resources is crucial to various industries such as agriculture, transportation, communication, and etc. The increasing demand for utility services, particularly for electricity, is leading to the installation of large generation units. The power generators, in the wake of more stringent environmental regulations and restrictions, are gradually shifting their focus to renewable sources and natural gas to produce power. This is a welcome sign for the industry and a positive step towards reducing the emission of greenhouse gases. Despite the assured demand for services, the utilities have to constantly meet the high expectations of its wide customer base, adapt to a changing global economic scenario, and upgrade technologies to meet stringent environmental norms.

The majority of new electricity in the next two decades in the U.S. will be generated from natural gas and renewable sources. Besides the abundance of natural gas, as many as 30 U.S. states and the District of Columbia have enforceable renewable portfolio standards or other renewable generation policies. We expect this count to go up, compelling producers to generate more green power to meet the renewable standards fixed by the states.

Since the utilities operate in a regulated environment, they charge a fixed rate for power supply as approved by the different commissions. We hardly find utilities posting eye-catching numbers, but these companies are generally stable due to the regulated nature of operations, and they are loyal to shareholders. Investment in the utility sector is more suited for income-oriented, long-term investors looking for a modest but stable return.

Company Background
American Electric Power (AEP) is one of the largest power generators and distributors and also the top wholesale energy company in the US. The main energy market of American Electric Power Company is eastern US, central US and eastern Canada, where it has about 5.3 million customers in 11 states. (Hoovers Online Company Index, 2012) In addition, AEP owns the nation’s largest electricity transmission systems and has large coal-fired generating capacity. Since the power demand directly related with economic condition, global and national economic situations can both significantly impact AEP’s business operations, the recovering industrial demand and wholesale power use will give a significant rise in AEP’s net income. (Hoovers Online Company Index, 2012) After cutting short its unregulated operations and selling its independent power production operations and trading operations, AEP now focuses on regulated businesses and wholesale energy transactions. At the same time, AEP plan to grow its retail business in the US to compensate for the potential output decrease of soon-to-be unregulated power generation in some states. At the same time, (AEP) initiated its international expansion plan and opened its subsidiary in England. In the following years, the company further expands to Far East (Philippine), Europe (France, Germany), Latin America (Venezuela), Japan and China.

An important change to the (AEP)’s corporate performance was made by its current Chief Executive Officer (CEO) who restated the company’s purpose and values and concentrated attention on the few main goals of the business...
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