American Electric Power Company (AEP)

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American Electric Power is one of the largest electric utility companies in the United States, delivering electricity to 5 million customers in 11 states.^[1] 56% of its revenue comes from three key states: Ohio (32% of revenue), Oklahoma (14%) and Indiana (10%)^[2]. The company can generate over 38,000 megawatts (MW), enough to power nearly 30 million homes, and has an extensive 39,000 mile transmission network.^[3][4]

Electric utility companies are under increasing legislative pressure to adopt cleaner electricity generation methods while maintaining competitive prices. AEP, produces over 2/3 of its energy from burning coal, but has begun to diversify its electricity generation base by getting into hydroelectric, nuclear, wind and solar power projects. AEP owns over 300+MW of wind generating capacity within Texas and 800MW of hydroelectric power from its 17 hydroelectric facilities.

[edit] Business Financials

AEP's revenue and net income have grown steadily over the past three years. From 2004 to 2005, an increasing number of customers resulted in higher electric usage. In 2006, AEP benefited most ($244MM) from new rate increases in their Ohio operating region. However, these net increases were partially offset by drops in electricity usage relating to mild weather. There were significant (21% and 15% declines, respectively, in heating degree days) in the amount of cold days requiring heating while the eastern's cooler weather throughout the warmer months also decreased electrical demand (20% decrease in cooling degree days).^[5]

In the second quarter of 2008, AEP saw revenues of $3.5 billion, up $400 million year-on-year.^[6] GAAP Earnings increased from $180 million to $281 million, thanks to rate increases in Ohio, Virginia, West Virginia, Oklahoma, and Texas, as well as higher power prices and higher power volumes.<re name=2q08/>

2004 Net Income is abnormally high, compared to 2005 and 2006, due to the sale of equity investments.^[7]

^[8]

AEP's is highly dependent on coal. With the government pushing for a reduction in greenhouse gas emissions, AEP will have to retrofit existing coal-fired power plants to reduce emissions while shifting towards cleaner, more sustainable generation solutions.

^[9]

[edit] Key Trends/Forces

[edit] Rising Fossil Fuel Prices

Prices for fossil fuels, the key energy input for AEP’s electrical generation plants, have been volatile over the past couple years. During 2006, AEP experienced an eight percent increase in coal costs ^[10] due to expiring lower priced contracts being replaced with new higher priced contracts. The company could not recoup the increased fuel costs through rate hikes in Ohio, their primary revenue generating state.

[edit] Regulations to disproportionately affect coal dependent power generators

Utilities face growing pressure from government regulatory bodies to curb their emissions of greenhouse gases. In 2008 three major investment banks, predicted that the U.S. government would cap CO2 emissions in the next three years. AEP generates nearly 66% of its energy using coal power, making it particularly vulnerable to "green" legislation like the Renewable Portfolio Standards being enacted in 26 states and the Advanced Energy Portfolio Standard being enacted in Ohio. The company has already experienced troubles related to its emissions. In October of 2007, AEP reached a settlement agreement with the U.S. Environmental Protection Agency, eight states and 14 environmental organizations requiring AEP to limit emissions for its 16 coal power plays and install additional emissions control equipment in two plants. AEP will also pay a civil penalty of $15 million. ^[11] The company's CEO believes that fossil fuels will remain the dominant form of energy production in the 21st century, and emissions will be mitigated through the implementation of new technologies^[12], and as a result has taken few steps to increase the company's nuclear portfolio. It has, however, started to increase its investment in renewable energy sources. In 2007, the company announced a voluntary plan to increase its renewable generating capacity by 1000 MW by 2011, and on April first its subsidiary, Appalachian Power, issued a request for electric utilities to propose long-term purchases of up to 100 MW of electricity coming from proven renewable sources.

[edit] Mild weather dampens AEP's revenue

Weather can have a material impact on AEP's business. Generally, extremes of temperature are good for utility companies because the force customers to run either heaters or air conditioners. Unseasonbly mild weather on the other hand, can lead to fewer heating and cooling days, in the winter and spring respectively. In 2006, the company's eastern and western regions had 21% and 15% fewer heating degree days while the eastern regions experienced a 20% decrease in cooling degree days, which reduced gross margin by $95 million.

[edit] Governments must approve AEP rate hikes

The U.S. and state governments play critical roles in the financial performance of the highly regulated energy sector since the government sets the price of electricity. Electricity is considered as a necessary service, and with regulation in place, the government can guarantee that adequate service at an affordable price will be rendered to all who apply for it. Federal agencies that supervise the utilities ensure that it is affordable and that it provides utilities a "fair" return on their investment without earning excessive profits. How "fair" returns on investment and excessive profits are determined has been subject of much controversy. Each of AEP's utility businesses face a variety of challenges and potential benefits that may arise from changes in legislation and regulatory schemes. In recent years, the company has had relatively successful attempts at lobbying for rate hikes; $481 million of the $518 million in rate increases that the company applied for in the first quarter of 2008 were approved.^[13] In Ohio, however, new utilities legislation that is being debated could have an "excessive earnings" clause that would compare the returns of utilities to private-sector companies with similar risk, in order to determine if the utilities are abusing their monopoly powers. If the bill passes, AEP will find it more difficult to obtain rate hikes.

[edit] Competition

Utility companies, historically speaking, have faced little competition due to the regulated nature of the industry. Since utility companies are massive operations requiring immense amounts of capital to build power plants, transmission services, and connections into homes, their services only become economical as they add users as they realize economies of scale and diffuse costs over a larger customer base. In this industry, a monopolistic utility guarantees it can provide vital electricity service at an affordable cost, especially to lower socio-economic classes. The government acts as a watch-guard, ensuring that consumers are not overcharged for electricity while granting these utility immunity from anti-trust/monopoly laws.

As a result, AEP faces mild competition from other electric utilities, even in areas that are moving towards de-regulation and an open/free market.

 American Electric Power Company

	Select All  |  Select None Metrics Electricity Sales to Wholesale Electricity Delivered to Residential Customers in Watt Hours Electricity Delivered to Industrial Customers in Watt Hours Electricity Delivered to Commercial Customers in Watt Hours Electricity Delivered to Other Electric Utilities in Watt Hours Total Customers Generation Capacity in Watts Nuclear Generation Capacity in Watts Fossil Fuel Generation Capacity in Watts Leased Generation Capacity in Watts Net Income Retail Sales Total Electricity Sales Electricity Sales to Residential Customers Electricity Sales to Industrial Customers Electricity Sales to Commercial Customers Electricity Sales to Other Electric Utilities HydroElectric/Wind Generation Capacity in Watts Owned Generation Capacity in Watts Cancel

	Select All  |  Select None Companies Active Power (ACPW) American Electric Power Company (AEP) AMEN Properties (AMEN) Beacon Power (BCON) Black Hills (BKH) Constellation Energy Group (CEG) Dominion Resources (D) DTE Energy Company (DTE) Empire District Electric Company (EDE) El Paso Electric Company (EE) EVERGREEN ENERGY (EEE) Edison International (EIX) Companhia Paranaense de Energia (COPEL) (ELP) Environmental Power (EPG) Entergy (ETR) Great Plains Energy (GXP) Hawaiian Electric Industries (HE) IDACORP (IDA) ITC Holdings (ITC) Maine & Maritimes (MAM) NRG Energy (NRG) NSTAR (NST) OGE Energy (OGE) Ocean Power Technologies (OPTT) Ormat Technologies (ORA) Otter Tail (OTTR) Pinnacle West Capital (PNW) Pepco Holdings (POM) Portland General Electric Co (POR) PPL (PPL) Southern Company (SO) TransAlta (TAC) TECO Energy (TE) UIL Holdings (UIL) UniSource Energy (UNS) Dynegy (DYN) FirstEnergy (FE) Allegheny Energy (AYE) Xcel Energy (XEL) Central Vermont Pub Svc (CV) ADDvantage Technologies Group (AEY) Duke Energy Corporation (DUK) Puget Sound Energy (PSD) The AES Corporation (AES) Reliant Energy (RRI) SPX Corporation (SPW) Progress Energy (PGN) FPL Group (FPL) Cleco Power (CNL) Cancel

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Company	Data From	Total Electricity Sales	Retail Sales	Electricity Sales to Residential Customers	Electricity Sales to Industrial Customers	Electricity Sales to Commercial Customers	Electricity Sales to Other Electric Utilities	HydroElectric/Wind Generation Capacity in Watts	Owned Generation Capacity in Watts
American Electric Power Company (AEP)	2007	$12.1B[35]	Add	$3.99B[35]	$2.67B[35]	$2.91B[35]	$192M[35]	722M[36]	37B[37]
Duke Energy Corporation (DUK)	2006	$5.12B[38]	Add	$2.01B[38]	$1.09B[38]	$1.64B[38]	$354M[38]	3.21B[39]	Add
Edison International (EIX)	2006	$9.9B[40]	Add	$3.86B[41]	$750M[41]	$4.23B[41]	$3.7M[41]	1.15B[42]	5.11B[42]
Entergy (ETR)	2006	$9.06B[43]	Add	$3.19B[43]	$2.63B[43]	$2.32B[43]	$612M[43]	70M[44]	Add

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[edit] Electrical Generation Fleet Mix

The above table encapsulates the utilities' current electrical generation fleet broken down by power source (e.g. coal, natural gas, oil etc.). It is worth noting that these percentages do not necessarily reflect the actual source percentages for electricity generated as power-plants are used at various capacities depending on the market demand and price of electricity.

[edit] References

1. ↑ AEP's Investor Page
2. ↑ AEP's 2006 Annual Report (Utility Operations)
3. ↑ AEP's Investor Page)
4. ↑ Power of Electricity
5. ↑ AEP's 2006 10-k (Pg A-9)
6. ↑ AEP: "AEP Reports 2008 Second-Quarter Earnings"
7. ↑ AEP's 2006 10-k (Pg A-45)
8. ↑ AEP's 2006 10-k (Pg A-45)
9. ↑ AEP's 2006 Annual Report (Item 2)
10. ↑ AEP's 2006 10-k (Pg A-3)
11. ↑ AEP reaches settlement agreement in NSR case
12. ↑ Future power: American electric power's Mike Morris
13. ↑ AEP 1Q08 Earnings Call, Page 1
14. ↑ AYE's 2006 10-k (Pg 52)
15. ↑ AEP's 2006 10-k (Pg A-45)
16. ↑ DUK's 2006 10-k (Pg 40)
17. ↑ AYE - About Us
18. ↑ AEP's Investor Page)
19. ↑ DUK's Energy Business Segments
20. ↑ AYE's About Us
21. ↑ AEP's Investor Page)
22. ↑ DUK's Energy Business Segments
23. ↑ AEP's 2006 Annual Report (Item 2)
24. ↑ DUK's 2006 10-k (Pg 11)
25. ↑ AYE's 2006 10-k (Pg 52)
26. ↑ AEP's 2006 10-k (Pg A-45)
27. ↑ DUK's 2006 10-k (Pg 40)
28. ↑ AYE's Generation Facilities
29. ↑ EIX's 2006 Annual Report (Pg 19)
30. ↑ AEP's Power Plants and other assets
31. ↑ DUK's 2006 10-k (Pg 34)
32. ↑ Entergy's 2006 10-k (Pg 173)
33. ↑ Exelon's 2006 10-k - Properties
34. ↑ PSEG's 2006 10-k (Pg 41)
35. ↑ ^{35.0 35.1 35.2 35.3 35.4} AEP,2007,10-K, Pg-na ,item 1
36. ↑ AEP,2007,10-K, Pg-na ,item 2
37. ↑ AEP, 2007 10-K Report, Item2: Properties
38. ↑ ^{38.0 38.1 38.2 38.3 38.4} DUK,2006,statistical record 2006,page-7,PDF
39. ↑ DUK,2006,10-K,page-10,item 1
40. ↑ EIX,2006,AR-2005,pg-18
41. ↑ ^{41.0 41.1 41.2 41.3} EIX,2006,AR-2005,pg-17
42. ↑ ^{42.0 42.1} EIX,2006,AR-2006,pg-19
43. ↑ ^{43.0 43.1 43.2 43.3 43.4} ETR,2006,10-K,page-47,item na
44. ↑ ETR,2006,10-K,page-173,item na