(AEP) American Electric Power Company to Buy Assets

American Electric Power Co. Inc.’s (AEP) subsidiary Southwestern Electric Power Co. signed a letter of intent to buy transmission and distribution assets worth $94 million from the Valley Electric Membership Corp. Southwestern Electric’s acquisition of the cooperative will double its presence in Louisiana.
 
Valley Electric Membership Corp. is a Louisiana cooperative with more than 7,000 miles of distribution lines, 90 miles of transmission lines and 29 substations. Southwestern Electric expects to shell out $124 million overall for the deal. Although this is over the value of the assets, the company would be adding 30,000 customers of the cooperative.
 
A deal is expected to be formalized by the end of fiscal 2009, with a formal vote on the dissolution of the cooperative expected by February 2010. However, a number of regulatory approvals are required, as well as approval from the board of American Electric Power.
 
Southwestern Electric currently serves more than 473,500 customers in three states, including 180,000 in Northwest Louisiana, 113,500 in western Arkansas, and 180,000 in East and North Texas. The subsidiary is based in Shreveport, Louisiana.
 
The parent company, American Electric, is one of the largest public utility holding companies catering to approximately 5.2 million customers spread over 11 states. Increasing the headcount of customers will boost the dwindling fortunes of the utility.
 
In the recently reported quarter of fiscal 2009, American Electric’s revenues fell 17% to $3.5 billion from $4.2 billion in the year-ago quarter. A tepid economy, coupled with a summer cooler than average, affected electricity demand. The downturn affected demand for industrial customers most. Industrial retail sales fell 16.9% year-over-year. Commercial retail sales also fell 1.2%. However, residential retail sales remain stagnant.

We maintain our cautious Neutral recommendation on the stock.

Today’s tickers: CVS, LIZ, ITMN, MA, V, RF, KG, HW, WSM, AEP & NTAP

CVS - CVS Caremark Corp. – Shares of the pharmacy retail chain are up 1.5% to $31.11 perhaps due, in part, to the ‘buy’ rating it received at UBS today. Optimistic options activity took place in the December contract as one investor initiated a bullish risk reversal. It appears the trader sold 4,400 puts at the December 31 strike for an average premium of 94 cents apiece in order to finance the purchase of the same number of calls at the higher December 32 strike for 63 cents each. The investor pockets a 31 cent credit on the trade, which he retains in full as long as shares remain above $31.00 through expiration. Additional profits accumulate if CVS’s shares rally above $32.00.

LIZ - Liz Claiborne, Inc. – A 15,000-lot covered call in the January 2011 contract on Liz Claiborne today suggests shares are likely to recover, albeit at a glacial pace. Shares of the apparel and accessories retailer suffered a 5% decline to $4.55 during the trading session. One investor effectively purchased shares of the underlying stock for $3.30 apiece by selling 15,000 calls at the January 2011 5.0 strike for a premium of 1.25 each. Thus, the trader stands ready to accrue gains of 51% if shares of LIZ appreciate to $5.00 by expiration. The long-term positioning of the covered call play provides several advantages to the investor. One advantage is that the call options do not expire for another 13 months, which leaves ample time for LIZ’s shares to appreciate up to the strike price of $5.00. The 15,000-lot call transaction represents nearly 50% of the total existing open interest on LIZ of 31,502 contracts. Note that shares last traded above $5.00 yesterday at approximately 10:35 am (EDT).

ITMN - InterMune, Inc. – A bull call spread on the biotechnology company today suggests shares could rally significantly by expiration in April 2010. Bullish options activity on the stock belies the more than 3% decline in ITMN’s shares during the session to $10.94. The call spread involved the purchase of 3,750 calls at the April 15 strike for an average premium of 2.25 each, marked against the sale of the same number of calls at the higher April 25 strike for 75 cents apiece. The net cost of the transaction amounts to 1.50 per contract. The optimistic investor is positioned…