netrashetty
Netra Shetty
American Electric Power (NYSE: AEP) is a major investor-owner electric utility in various parts of the United States. AEP ranks among the nation's largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the U.S. AEP also owns the nation's largest electricity transmission system, a nearly 39,000-mile (63,000 km) network that includes 765 kilovolt ultra-high voltage transmission lines; more than all other U.S. transmission systems combined. AEP's transmission system directly or indirectly serves about 10 percent of the electricity demand in the Eastern Interconnection, the interconnected transmission system that covers 38 eastern and central U.S. states and eastern Canada, and approximately 11 percent of the electricity demand in ERCOT, the transmission system that covers much of Texas. AEP's utility units operate as AEP Ohio, AEP Texas, Appalachian Power (in Virginia, West Virginia, and Tennessee), Indiana Michigan Power, Kentucky Power, Public Service Company of Oklahoma, and Southwestern Electric Power Company (in Arkansas, Louisiana and east Texas). AEP's headquarters are in Columbus, Ohio.
American Electric Power was the first utility to utilize 345KV transmission lines which took place in 1953.
Dine Equity Inc. (NYSE Euronext (NYX)
IN) operates Applebee's and the International House of Pancakes (IHOP), well-known chains of casual dining restaurants. Applebee's offers a variety of signature American foods like burgers and southwestern cuisine, and IHOP specializes in breakfast (although its menu includes lunch and dinner foods as well), serving over 700 million pancakes annually.[1] The company owns 1,976 Applebee's establishments and 1,344 IHOP restaurants across the globe.[2]
Franchise royalties are the company's primary revenue source, accounting for approximately 42.5% of the company's revenue.[3] In 2003, DIN began a refranchising initiative - meaning, transitioning company-owned restaurants to franshisees - for its IHOP restaurants, and in 2008 launched a similar effort for its Applebee's restaurants. This decision was driven by the large spread between the profitability of franchises vs. company-owned restaurants for DineEquity - DIN earned a 52.7% profit margin from franchisee-owned restaurants in 2007, while company-owned restaurants operated at a 6.7% profit margin.[4] The refranchising efforts contributed to IHOP's 3.6% increase in operating margin and 21% increase in net income from 2003 to 2006 [4] and helped boost Applebee's operating margin by 1.2% in Q2 2008.[5]
In 2007, DIN earned approximately $484.5 million in revenue, a 40% increase from 2006 which was mainly due to DIN's acquisition of the Applebee's restaurant chain during 2007. However, net income declined from $44.5 million in 2006 to a loss of $480,000 because of costs associated with the acquisition.[4
American Electric Power (NYSE: AEP) is one of the largest electric utility companies in the United States, delivering electricity to 5 million customers in 11 states.[1] About 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] AEP’s transmission system directly or indirectly serves about 10 percent of the electricity demand in the Eastern Interconnection, the interconnected transmission system that covers 38 eastern and central U.S. states and eastern Canada, and approximately 11 percent of the electricity demand in Texas.[5]
Prices for fossil fuels, the key energy input for AEP’s electrical generation plants, have been volatile over the past couple years. When the demand for coal dropped in the second half of 2008 and caused massive surpluses, the resulting decline in coal prices lowered operating expenses for AEP and increased the company's profit margin. However, the global economic slowdown lowered industrial electricity usage by an average of 15 percent in the first quarter of 2009, leading to lower revenues for AEP than in the previous year.[5]
Weather can also have a material impact on AEP's business. Generally, extremes of temperature benefit utility companies because they force customers to run either heaters or air conditioners. Unseasonably mild weather on the other hand, results in fewer heating and cooling days, leading to lower electrical demand and lower revenue for AEP.
Electric utilities are heavily regulated by the federal and state governments in the United States. Federal agencies supervise utility companies and ensure that electricity is affordable and that it provides a "fair" return for the utility company without causing them to earn excess profits. As such, AEP must have all electricity rate hikes approved by various government agencies.
AEP generates nearly 66% of its energy using coal power, making it particularly vulnerable to "green" legislation like the Renewable Portfolio Standards enacted in 26 states and the Advanced Energy Portfolio Standard being enacted in Ohio. Electric utility companies are under increasing legislative pressure to adopt cleaner electricity generation methods while maintaining competitive prices. AEP produces over two-thirds of its energy from burning coal, but has begun to diversify its electricity generation base by getting into wind, hydroelectric, solar, biomass, and biodiesel energy. AEP owns over 300+ MW of wind generating capacity within Texas and 800 MW of hydroelectric power from its 17 hydroelectric facilities.
Company Overview
American Electric Power is a utility holding company that generates, transmits, and distributes electric power to retail customers, other electric utility companies, and municipalities. The subsidiaries of AEP include Appalachian Power Company (APCo), Columbus Southern Power Company (CSPCo), Indiana Michigan Power Company (I&M), Ohio Power Company (OPCo), Public Service Company of Oklahoma (PSO), and Southwestern Electric Power Company (SWEPCo).[6]
Business and Financial Metrics
Q4 2010 Summary[7]
American Electric Power's earnings fell 26% to $176 million, or 37 cents a share, from $238 million, or 50 cents a share, in the year-earlier period. Revenue rose to $3.4 billion from $3.3 billion. The fall in earnings was largely attributed to the fact that AEP was ordered to pay $43 million in refunds to Ohio customers. The Public Utilities Commission of Ohio ruled recently that an AEP unit serving parts of Ohio had "significantly excessive earnings" in 2009 and would have to reimburse consumers, in accordance with a state law.
For the 2010 fiscal year, AEP's earnings fell 11 percent. The company had net income of $1.21 billion, or $2.53 per share, in 2010, down from $1.36 billion, or $2.96 per share, in 2009. AEP said the annual results reflect various one-time items, like a $293 million second-quarter restructuring charge from cutting 2,500 jobs, about 11.5 percent of the utility's work force.
Q3 2010 Summary[8]
American Electric Power reported earnings for the third quarter of $555 million or $1.16 per share, compared with $443 million or $0.93 per share for third-quarter 2009. This represents an increase in earnings of 25.3%. The increase in earnings was caused by abnormally warm weather, offset by the slow economic recovery. AEP's industrial electricity sales increased 6% compared to the same period one year ago. Though the industrial sector has increased its demand for electricity, other sectors, such as retail power, have remained flat.
Q2 2010 Summary[9]
AEP reported 2010 second-quarter earnings of $136 million or $0.28 per share, compared with $316 million or $0.67 per share for second-quarter 2009. Revenue for the quarter was $3.4 billion, compared to $3.2 in the second quarter of 2009. During the quarter, industrial sales recovered 9.4% from same period last year.
GAAP earnings for the quarter were $219 million lower than ongoing earnings primarily because of charges incurred related to the cost reduction and restructuring program implemented in May 2010 and the disallowance by the Virginia State Corporation Commission of the recovery of $54 million related to the Mountaineer Plant carbon capture and storage project ($34 million net of tax). As a result of the cost reduction and restructuring program, AEP eliminated 2,461 positions, or 11.5 percent of the previous workforce, and recorded a one-time charge of $293 million ($185 million net of tax) for severance and other restructuring-related costs.
Q1 2010 Summary
American Electric Power reported earnings of $344 million, down from $360 million in the first quarter of 2009.[10] AEP's revenues were up $0.1 million from the year-ago quarter to $3.6 billion. Favorable weather, successful rate proceedings, and rising off-system sales contributed to AEP's recovery from its net income of $238 million in the fourth quarter of 2009.[10] There have been some signs of economic improvement in the key states that AEP serves, but AEP is still waiting for a broad increase in electricity demand. Residential electricity sales have improved from 2009, but industiral sales are still down for the year.[10]
Q4 2009 Summary
AEP reported 2009 earnings of $1.357 billion, down 1.7% from earnings of $1.380 billion in 2008.[11] Revenue for the fourth quarter totaled $238 million, up 56.6% from earnings of $152 million in the year-ago quarter.[11] AEP kept its maintenance and operations costs flat despite costly recovery efforts following winter storms in the eastern U.S. Industrial electricity sales were steady from the third quarter to the fourth quarter, while residential and commercial electricity sales stalled.
Q3 2009 Summary
AEP reported revenues of $3.5 billion, down nearly 17% from the third quarter of 2008. AEP reported GAAP earnings of $443 million, up more than 18% from the third quarter of 2008.[12] The summer of 2009 was the coolest summer since the 1970s for the Eastern states and the fourth coolest summer in 30 years for Oklahoma, Arkansas, Louisiana, and northeast Texas.[12] Cooler weather reduces retail and wholesale sales because fewer people use air conditioning, reducing the demand for electricity. Additionally, weakness in the industrial sectors of the economy led to weak electricity demand from industrial plants. Sales to industrial customers in the third quarter of 2009 were down 17% from 2008, compared to a decline in industrial sales of 20% in the second quarter of 2009.[12] The continued weakness in demand for electricity contributed to AEP's lower revenue in the third quarter, but its aggressive cost-cutting measures increased its profits in the third quarter.
2008 earnings totaled $1.357 billion[13]
Favorable weather, primarily in AEP’s eastern service areas, improved margins in the quarter. Heating degree-days in second-quarter 2009 were 9 percent below normal but 15 percent above the total for the same period in 2008.[14] Cooling degree-days in second-quarter 2009 were 5 percent above normal and 8 percent above the prior period.[14] In AEP’s western service areas, cooling-degree days for second-quarter 2009 were 2 percent above normal but 1 percent below the prior period.[14]
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.
AEP's energy production breakdown by source[15]
Trends and Forces
AEP is expanding its portfolio to include renewable energy
Improvements in technology continue to make renewable energy more competitive with existing fossil-fuel based sources of energy. AEP has recognized this trend by embracing new technologies such as wind energy, hydroelectric energy, solar energy, and biomass.
Wind
A study released by the National Renewable Energy Laboratory concluded that 20% of the electricity on the East Coast of the U.S. could come from wind power by 2024 if there is significant infrastructure expansion in the next decade.[16] AEP has recognized the potential of wind power and now owns 310.5 megawatts of wind generation capacity in Texas.[17] AEP also has agreements to purchase 742 megawatts from several wind power facilities in Illinois, Indiana, Oklahoma and Texas.[17]
AEP continues to increase its wind portfolio throughout the U.S. For example, AEP Ohio has entered into a long-term contract to purchase wind power from Paulding Wind Farm, a subsidiary of Horizon Wind Energy. AEP Ohio will purchase all the power produced from the 99 megawatt (MW) facility from Paulding Wind farm starting in 2011.[18]
Hydroelectric
AEP’s 17 hydroelectric facilities in Virginia, West Virginia, Ohio, Indiana and Michigan generate more than 800 megawatts of electricity.[17] Smith Mountain Hydro Project, on the Roanoke River southeast of Roanoke, Virginia, was the nation’s first major development combining run-of-the-river hydro with pumped storage generation.[17]
Solar
AEP has also expanded its renewable portfolio to include solar energy. On June 15, 2009, AEP's Ohio unit signed a long-term power purchase agreement for a 10 megawatt solar energy plant to be built in Ohio.[19] The deal is AEP's first commercial solar energy agreement in its renewable portfolio. Under the agreement, AEP Ohio will purchase all of the output and renewable energy credits from a Wyandot Solar plant to be built in Salem Township, Ohio. Construction is expected to begin in November, and commercial operation is expected by mid-summer 2010.
Biomass
Biomass represents a potentially carbon-neutral energy source, in that the carbon released during the conversion of plants and trees into electricity is the same carbon that is taken out of the atmosphere during photosynthesis. AEP has conducted biomass co-firing tests at several of its power plants in the U.S.[17] AEP continues to investigate biomass fuels and views biomass co-firing as an effective means of meeting possible renewable energy requirements in the future.[17]
Biodiesel
AEP is conducting an investigation to determined if it can use biodiesel fuel in one or more of its generating stations in Ohio. AEP issued a request for quotes in August 2010 for biodiesel blended with No. 2 fuel oil for its Picway, Muskingum River and Conesville plants in Ohio. AEP reported that it will be evaluating the use of renewable fuel sources for start-up and flame stabilization in the plants.[20]
Reducing carbon emissions
In December 2009, AEP announced that it was selected by the U.S. Department of Energy to receive funding to cover some costs of installing a commercial-scale carbon dioxide capture and storage system in West Virginia. The system will capture an estimated 1.5 million metric tons of captured carbon dioxide per year, which will be treated and compressed, then injected into geological formations about 1.5 miles underground for permanent storage.[21] AEP expects the system to begin commercial operation in 2015.
AEP has also launched gridSMART, a plan to provide customers with greater control over their energy consumption through the use of a "smart" electricity meter. The program will also deploy advanced technologies to identify potential problems with AEP's electricity delivery system, preventing disruptions and increasing the reliability and efficiency of electricity transmission.
Falling coal prices lower AEP's input costs
Prices for fossil fuels, the key energy input for AEP’s electrical generation plants, have been volatile over the past couple years. Higher coal spot prices lead to increased operating costs for AEP. When the demand for coal dropped in the second half of 2008 due to the global economic slowdown, coal miners had huge surpluses of coal already out of the ground.[22] While electric utilities and the steel industry bought less and less coal in the second half of 2008, coal miners began to lower the prices of both thermal and coking coal in order to sell their huge surpluses, which were expensive to store.[23] The decline in coal prices lowered operating expenses for AEP and increased the company's profit margin.
Internationally, coal consumption will depend primarily on the economic conditions in China, India, and Europe. Led by strong economic growth and rising need for cheap energy in China and India, coal consumption is projected to double 2005 consumption levels by 2030.[24] However, the largest increases in consumption are from coal produced and consumed in China, meaning that exports to China have declined dramatically.[25] However, growth in Asia and production problems in China, South Africa, and Australia were the primary reasons U.S. coal exports increased 40% in 2008.[26] Although economic growth in China is expected to slow, its infrastructure-focused $586 billion stimulus package should increase the need for coal as a cheap power source.[27]
Coal prices are fairly stable but are slowly rising. AEP's profit margin is largely determined by coal prices, which are driven by the economics of supply and demand.
US Coal Prices as of December 2010[28]
Regulations to disproportionately affect coal dependent power generators
Utilities face growing pressure from government regulatory bodies to curb their emissions of greenhouse gases. 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.
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[29], 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 July 2010, the Obama administration proposed deadlines to curb pollution. The proposed rules would limit trading of pollution allowances while slashing sulfur dioxide, which produces acid rain, and nitrogen oxide, the cause of smog. The proposed rules would cut sulfur dioxide by 71 percent by 2014 from 2005 levels and nitrogen oxide by 52 percent over the same period. American Electric Power made a public statement that utilities do not have enough time to permit, construct and install control equipment to limit emissions or replace polluting plants with new capacity.[30] AEP is constantly threatened by increasing regulation of greenhouse gas emissions and must incur large costs in order to comply with new rules.
Supreme Court Pollution Case
The U.S. Supreme Court will hear an appeal by four power companies including American Electric Power. The Court will decide whether they must face a suit by states seeking a reduction in carbon dioxide emissions.
The eight states, including New York and California, claim that plants operated by AEP, Xcel Energy (XEL), Duke Energy Corporation (DUK), Southern Company (SO) and the Tennessee Valley Authority (TVE) contribute to global warming by adding 650 million tons of carbon dioxide into the atmosphere annually. The suit seeks to force cuts in emissions from the plants.[31]
The states contend that the carbon dioxide emissions are a “public nuisance." In considering the case, the New York 2nd U.S. Circuit Court of Appeals overturned a trial judge who had concluded that the dispute belonged in the political arena, rather than the courts.
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 they force customers to run either heaters or air conditioners. Unseasonably mild weather on the other hand, can lead to fewer heating and cooling days, in the winter and spring respectively.
Over 14% of the electricity used by household powered central air-conditioning systems and refrigerators in United States.[32] With close to 60% of U.S. households equipped with central air conditioning systems, the number of hot days and cold days impacts the amount of electricity used in homes and the amount of coal needed to supply that electricity.[33] In order to account for weather-related electricity usage, the National Oceanic and Atmospheric Administration (NOAA) records the number of heating degree days and cooling degree days, which reflect the need for air conditioning during cooler days and warmer days.[34] Although the data collected by the NOAA can help explain past and current electricity consumption and, therefore, coal consumption, future weather patterns are hard to predict. Additionally, during drought seasons, the amount of hydroelectric electricity generated drops, and coal power electricity is used as an alternative. In 2007, hydroelectric energy accounted for 6% of electrical power generated in the United States.[35] That same year, hydroelectric power dropped 14.6% due to drought. On the other hand, coal consumption grew 1.9% partly because of the fall in electricity produced by hydroelectric plants.[36] In general, AEP benefits when the demand for electricity rises and the load on its electrical grid increases, whether caused by drought, unseasonably warm or cold weather, or other factors.
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 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. Defining "fair" returns on investment and excessive profits has been the subject of much controversy. Each of AEP's utility businesses faces a variety of challenges and potential benefits that may arise from changes in legislation and regulatory schemes. Recently, AEP and the Ohio Consumers Counsel proposed a two-year increase in electricity rates which would add $2.24 to the bills of residential customers who use 1,000 kilowatt hours of power each month.[37] This rate increase is part of an energy efficiency initiative that incentivizes people to conserve energy. Also, in March 2010, two of AEP's subsidiaries, Appalachian Power and Wheeling Power, applied to raise electric rates by 8.2 percent in West Virginia in order to recoup losses from purchasing coal and installing scrubbers for coal power plants. AEP filed the request with the West Virginia Public Service Commission, and plans to raise rates a total of four times in 2010.[38]
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.
Comparison to Competitors
AYE AEP DUK Entergy Exelon PG&E
Revenue (FY 2006, USD Billions) 3.1[39] 12.1[40] 15.2[41] 10.9 15.6 12.1
Generation Capacity (Megawatts) 9,670[42] 38,000[43] 40,000 (include int'l)[44] 30,000 33,000 17,000
Customers (Millions) 1.5[45] 5[46] 3.9[47] 2.4 6.1 21
% Nuclear Power N/A 6.1[48] 35[49] 31 66 23
After Tax Profit Margins (%) 10.2[50] 7.9[51] 12.2[52] 8.4 14.1 9
Electrical Generation Fleet Mix
AYE[53] EIX [54] AEP[55] DUK[56] Entergy [57] Exelon[58] PEG [59]
% Coal Power 80 7.4 73 43 10.1 5.7 28
% Natural Gas & Oil 9 10.5 16 27 66 21.7 49
% Nuclear Power 0 24.8 8 13 23 66 23
% Renewable Power 11 57.3 3 17 .3 6.3 N/A
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.
American Electric Power was the first utility to utilize 345KV transmission lines which took place in 1953.
Dine Equity Inc. (NYSE Euronext (NYX)
IN) operates Applebee's and the International House of Pancakes (IHOP), well-known chains of casual dining restaurants. Applebee's offers a variety of signature American foods like burgers and southwestern cuisine, and IHOP specializes in breakfast (although its menu includes lunch and dinner foods as well), serving over 700 million pancakes annually.[1] The company owns 1,976 Applebee's establishments and 1,344 IHOP restaurants across the globe.[2]Franchise royalties are the company's primary revenue source, accounting for approximately 42.5% of the company's revenue.[3] In 2003, DIN began a refranchising initiative - meaning, transitioning company-owned restaurants to franshisees - for its IHOP restaurants, and in 2008 launched a similar effort for its Applebee's restaurants. This decision was driven by the large spread between the profitability of franchises vs. company-owned restaurants for DineEquity - DIN earned a 52.7% profit margin from franchisee-owned restaurants in 2007, while company-owned restaurants operated at a 6.7% profit margin.[4] The refranchising efforts contributed to IHOP's 3.6% increase in operating margin and 21% increase in net income from 2003 to 2006 [4] and helped boost Applebee's operating margin by 1.2% in Q2 2008.[5]
In 2007, DIN earned approximately $484.5 million in revenue, a 40% increase from 2006 which was mainly due to DIN's acquisition of the Applebee's restaurant chain during 2007. However, net income declined from $44.5 million in 2006 to a loss of $480,000 because of costs associated with the acquisition.[4
American Electric Power (NYSE: AEP) is one of the largest electric utility companies in the United States, delivering electricity to 5 million customers in 11 states.[1] About 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] AEP’s transmission system directly or indirectly serves about 10 percent of the electricity demand in the Eastern Interconnection, the interconnected transmission system that covers 38 eastern and central U.S. states and eastern Canada, and approximately 11 percent of the electricity demand in Texas.[5]
Prices for fossil fuels, the key energy input for AEP’s electrical generation plants, have been volatile over the past couple years. When the demand for coal dropped in the second half of 2008 and caused massive surpluses, the resulting decline in coal prices lowered operating expenses for AEP and increased the company's profit margin. However, the global economic slowdown lowered industrial electricity usage by an average of 15 percent in the first quarter of 2009, leading to lower revenues for AEP than in the previous year.[5]
Weather can also have a material impact on AEP's business. Generally, extremes of temperature benefit utility companies because they force customers to run either heaters or air conditioners. Unseasonably mild weather on the other hand, results in fewer heating and cooling days, leading to lower electrical demand and lower revenue for AEP.
Electric utilities are heavily regulated by the federal and state governments in the United States. Federal agencies supervise utility companies and ensure that electricity is affordable and that it provides a "fair" return for the utility company without causing them to earn excess profits. As such, AEP must have all electricity rate hikes approved by various government agencies.
AEP generates nearly 66% of its energy using coal power, making it particularly vulnerable to "green" legislation like the Renewable Portfolio Standards enacted in 26 states and the Advanced Energy Portfolio Standard being enacted in Ohio. Electric utility companies are under increasing legislative pressure to adopt cleaner electricity generation methods while maintaining competitive prices. AEP produces over two-thirds of its energy from burning coal, but has begun to diversify its electricity generation base by getting into wind, hydroelectric, solar, biomass, and biodiesel energy. AEP owns over 300+ MW of wind generating capacity within Texas and 800 MW of hydroelectric power from its 17 hydroelectric facilities.
Company Overview
American Electric Power is a utility holding company that generates, transmits, and distributes electric power to retail customers, other electric utility companies, and municipalities. The subsidiaries of AEP include Appalachian Power Company (APCo), Columbus Southern Power Company (CSPCo), Indiana Michigan Power Company (I&M), Ohio Power Company (OPCo), Public Service Company of Oklahoma (PSO), and Southwestern Electric Power Company (SWEPCo).[6]
Business and Financial Metrics
Q4 2010 Summary[7]
American Electric Power's earnings fell 26% to $176 million, or 37 cents a share, from $238 million, or 50 cents a share, in the year-earlier period. Revenue rose to $3.4 billion from $3.3 billion. The fall in earnings was largely attributed to the fact that AEP was ordered to pay $43 million in refunds to Ohio customers. The Public Utilities Commission of Ohio ruled recently that an AEP unit serving parts of Ohio had "significantly excessive earnings" in 2009 and would have to reimburse consumers, in accordance with a state law.
For the 2010 fiscal year, AEP's earnings fell 11 percent. The company had net income of $1.21 billion, or $2.53 per share, in 2010, down from $1.36 billion, or $2.96 per share, in 2009. AEP said the annual results reflect various one-time items, like a $293 million second-quarter restructuring charge from cutting 2,500 jobs, about 11.5 percent of the utility's work force.
Q3 2010 Summary[8]
American Electric Power reported earnings for the third quarter of $555 million or $1.16 per share, compared with $443 million or $0.93 per share for third-quarter 2009. This represents an increase in earnings of 25.3%. The increase in earnings was caused by abnormally warm weather, offset by the slow economic recovery. AEP's industrial electricity sales increased 6% compared to the same period one year ago. Though the industrial sector has increased its demand for electricity, other sectors, such as retail power, have remained flat.
Q2 2010 Summary[9]
AEP reported 2010 second-quarter earnings of $136 million or $0.28 per share, compared with $316 million or $0.67 per share for second-quarter 2009. Revenue for the quarter was $3.4 billion, compared to $3.2 in the second quarter of 2009. During the quarter, industrial sales recovered 9.4% from same period last year.
GAAP earnings for the quarter were $219 million lower than ongoing earnings primarily because of charges incurred related to the cost reduction and restructuring program implemented in May 2010 and the disallowance by the Virginia State Corporation Commission of the recovery of $54 million related to the Mountaineer Plant carbon capture and storage project ($34 million net of tax). As a result of the cost reduction and restructuring program, AEP eliminated 2,461 positions, or 11.5 percent of the previous workforce, and recorded a one-time charge of $293 million ($185 million net of tax) for severance and other restructuring-related costs.
Q1 2010 Summary
American Electric Power reported earnings of $344 million, down from $360 million in the first quarter of 2009.[10] AEP's revenues were up $0.1 million from the year-ago quarter to $3.6 billion. Favorable weather, successful rate proceedings, and rising off-system sales contributed to AEP's recovery from its net income of $238 million in the fourth quarter of 2009.[10] There have been some signs of economic improvement in the key states that AEP serves, but AEP is still waiting for a broad increase in electricity demand. Residential electricity sales have improved from 2009, but industiral sales are still down for the year.[10]
Q4 2009 Summary
AEP reported 2009 earnings of $1.357 billion, down 1.7% from earnings of $1.380 billion in 2008.[11] Revenue for the fourth quarter totaled $238 million, up 56.6% from earnings of $152 million in the year-ago quarter.[11] AEP kept its maintenance and operations costs flat despite costly recovery efforts following winter storms in the eastern U.S. Industrial electricity sales were steady from the third quarter to the fourth quarter, while residential and commercial electricity sales stalled.
Q3 2009 Summary
AEP reported revenues of $3.5 billion, down nearly 17% from the third quarter of 2008. AEP reported GAAP earnings of $443 million, up more than 18% from the third quarter of 2008.[12] The summer of 2009 was the coolest summer since the 1970s for the Eastern states and the fourth coolest summer in 30 years for Oklahoma, Arkansas, Louisiana, and northeast Texas.[12] Cooler weather reduces retail and wholesale sales because fewer people use air conditioning, reducing the demand for electricity. Additionally, weakness in the industrial sectors of the economy led to weak electricity demand from industrial plants. Sales to industrial customers in the third quarter of 2009 were down 17% from 2008, compared to a decline in industrial sales of 20% in the second quarter of 2009.[12] The continued weakness in demand for electricity contributed to AEP's lower revenue in the third quarter, but its aggressive cost-cutting measures increased its profits in the third quarter.
2008 earnings totaled $1.357 billion[13]
Favorable weather, primarily in AEP’s eastern service areas, improved margins in the quarter. Heating degree-days in second-quarter 2009 were 9 percent below normal but 15 percent above the total for the same period in 2008.[14] Cooling degree-days in second-quarter 2009 were 5 percent above normal and 8 percent above the prior period.[14] In AEP’s western service areas, cooling-degree days for second-quarter 2009 were 2 percent above normal but 1 percent below the prior period.[14]
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.
AEP's energy production breakdown by source[15]
Trends and Forces
AEP is expanding its portfolio to include renewable energy
Improvements in technology continue to make renewable energy more competitive with existing fossil-fuel based sources of energy. AEP has recognized this trend by embracing new technologies such as wind energy, hydroelectric energy, solar energy, and biomass.
Wind
A study released by the National Renewable Energy Laboratory concluded that 20% of the electricity on the East Coast of the U.S. could come from wind power by 2024 if there is significant infrastructure expansion in the next decade.[16] AEP has recognized the potential of wind power and now owns 310.5 megawatts of wind generation capacity in Texas.[17] AEP also has agreements to purchase 742 megawatts from several wind power facilities in Illinois, Indiana, Oklahoma and Texas.[17]
AEP continues to increase its wind portfolio throughout the U.S. For example, AEP Ohio has entered into a long-term contract to purchase wind power from Paulding Wind Farm, a subsidiary of Horizon Wind Energy. AEP Ohio will purchase all the power produced from the 99 megawatt (MW) facility from Paulding Wind farm starting in 2011.[18]
Hydroelectric
AEP’s 17 hydroelectric facilities in Virginia, West Virginia, Ohio, Indiana and Michigan generate more than 800 megawatts of electricity.[17] Smith Mountain Hydro Project, on the Roanoke River southeast of Roanoke, Virginia, was the nation’s first major development combining run-of-the-river hydro with pumped storage generation.[17]
Solar
AEP has also expanded its renewable portfolio to include solar energy. On June 15, 2009, AEP's Ohio unit signed a long-term power purchase agreement for a 10 megawatt solar energy plant to be built in Ohio.[19] The deal is AEP's first commercial solar energy agreement in its renewable portfolio. Under the agreement, AEP Ohio will purchase all of the output and renewable energy credits from a Wyandot Solar plant to be built in Salem Township, Ohio. Construction is expected to begin in November, and commercial operation is expected by mid-summer 2010.
Biomass
Biomass represents a potentially carbon-neutral energy source, in that the carbon released during the conversion of plants and trees into electricity is the same carbon that is taken out of the atmosphere during photosynthesis. AEP has conducted biomass co-firing tests at several of its power plants in the U.S.[17] AEP continues to investigate biomass fuels and views biomass co-firing as an effective means of meeting possible renewable energy requirements in the future.[17]
Biodiesel
AEP is conducting an investigation to determined if it can use biodiesel fuel in one or more of its generating stations in Ohio. AEP issued a request for quotes in August 2010 for biodiesel blended with No. 2 fuel oil for its Picway, Muskingum River and Conesville plants in Ohio. AEP reported that it will be evaluating the use of renewable fuel sources for start-up and flame stabilization in the plants.[20]
Reducing carbon emissions
In December 2009, AEP announced that it was selected by the U.S. Department of Energy to receive funding to cover some costs of installing a commercial-scale carbon dioxide capture and storage system in West Virginia. The system will capture an estimated 1.5 million metric tons of captured carbon dioxide per year, which will be treated and compressed, then injected into geological formations about 1.5 miles underground for permanent storage.[21] AEP expects the system to begin commercial operation in 2015.
AEP has also launched gridSMART, a plan to provide customers with greater control over their energy consumption through the use of a "smart" electricity meter. The program will also deploy advanced technologies to identify potential problems with AEP's electricity delivery system, preventing disruptions and increasing the reliability and efficiency of electricity transmission.
Falling coal prices lower AEP's input costs
Prices for fossil fuels, the key energy input for AEP’s electrical generation plants, have been volatile over the past couple years. Higher coal spot prices lead to increased operating costs for AEP. When the demand for coal dropped in the second half of 2008 due to the global economic slowdown, coal miners had huge surpluses of coal already out of the ground.[22] While electric utilities and the steel industry bought less and less coal in the second half of 2008, coal miners began to lower the prices of both thermal and coking coal in order to sell their huge surpluses, which were expensive to store.[23] The decline in coal prices lowered operating expenses for AEP and increased the company's profit margin.
Internationally, coal consumption will depend primarily on the economic conditions in China, India, and Europe. Led by strong economic growth and rising need for cheap energy in China and India, coal consumption is projected to double 2005 consumption levels by 2030.[24] However, the largest increases in consumption are from coal produced and consumed in China, meaning that exports to China have declined dramatically.[25] However, growth in Asia and production problems in China, South Africa, and Australia were the primary reasons U.S. coal exports increased 40% in 2008.[26] Although economic growth in China is expected to slow, its infrastructure-focused $586 billion stimulus package should increase the need for coal as a cheap power source.[27]
Coal prices are fairly stable but are slowly rising. AEP's profit margin is largely determined by coal prices, which are driven by the economics of supply and demand.
US Coal Prices as of December 2010[28]
Regulations to disproportionately affect coal dependent power generators
Utilities face growing pressure from government regulatory bodies to curb their emissions of greenhouse gases. 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.
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[29], 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 July 2010, the Obama administration proposed deadlines to curb pollution. The proposed rules would limit trading of pollution allowances while slashing sulfur dioxide, which produces acid rain, and nitrogen oxide, the cause of smog. The proposed rules would cut sulfur dioxide by 71 percent by 2014 from 2005 levels and nitrogen oxide by 52 percent over the same period. American Electric Power made a public statement that utilities do not have enough time to permit, construct and install control equipment to limit emissions or replace polluting plants with new capacity.[30] AEP is constantly threatened by increasing regulation of greenhouse gas emissions and must incur large costs in order to comply with new rules.
Supreme Court Pollution Case
The U.S. Supreme Court will hear an appeal by four power companies including American Electric Power. The Court will decide whether they must face a suit by states seeking a reduction in carbon dioxide emissions.
The eight states, including New York and California, claim that plants operated by AEP, Xcel Energy (XEL), Duke Energy Corporation (DUK), Southern Company (SO) and the Tennessee Valley Authority (TVE) contribute to global warming by adding 650 million tons of carbon dioxide into the atmosphere annually. The suit seeks to force cuts in emissions from the plants.[31]
The states contend that the carbon dioxide emissions are a “public nuisance." In considering the case, the New York 2nd U.S. Circuit Court of Appeals overturned a trial judge who had concluded that the dispute belonged in the political arena, rather than the courts.
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 they force customers to run either heaters or air conditioners. Unseasonably mild weather on the other hand, can lead to fewer heating and cooling days, in the winter and spring respectively.
Over 14% of the electricity used by household powered central air-conditioning systems and refrigerators in United States.[32] With close to 60% of U.S. households equipped with central air conditioning systems, the number of hot days and cold days impacts the amount of electricity used in homes and the amount of coal needed to supply that electricity.[33] In order to account for weather-related electricity usage, the National Oceanic and Atmospheric Administration (NOAA) records the number of heating degree days and cooling degree days, which reflect the need for air conditioning during cooler days and warmer days.[34] Although the data collected by the NOAA can help explain past and current electricity consumption and, therefore, coal consumption, future weather patterns are hard to predict. Additionally, during drought seasons, the amount of hydroelectric electricity generated drops, and coal power electricity is used as an alternative. In 2007, hydroelectric energy accounted for 6% of electrical power generated in the United States.[35] That same year, hydroelectric power dropped 14.6% due to drought. On the other hand, coal consumption grew 1.9% partly because of the fall in electricity produced by hydroelectric plants.[36] In general, AEP benefits when the demand for electricity rises and the load on its electrical grid increases, whether caused by drought, unseasonably warm or cold weather, or other factors.
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 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. Defining "fair" returns on investment and excessive profits has been the subject of much controversy. Each of AEP's utility businesses faces a variety of challenges and potential benefits that may arise from changes in legislation and regulatory schemes. Recently, AEP and the Ohio Consumers Counsel proposed a two-year increase in electricity rates which would add $2.24 to the bills of residential customers who use 1,000 kilowatt hours of power each month.[37] This rate increase is part of an energy efficiency initiative that incentivizes people to conserve energy. Also, in March 2010, two of AEP's subsidiaries, Appalachian Power and Wheeling Power, applied to raise electric rates by 8.2 percent in West Virginia in order to recoup losses from purchasing coal and installing scrubbers for coal power plants. AEP filed the request with the West Virginia Public Service Commission, and plans to raise rates a total of four times in 2010.[38]
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.
Comparison to Competitors
AYE AEP DUK Entergy Exelon PG&E
Revenue (FY 2006, USD Billions) 3.1[39] 12.1[40] 15.2[41] 10.9 15.6 12.1
Generation Capacity (Megawatts) 9,670[42] 38,000[43] 40,000 (include int'l)[44] 30,000 33,000 17,000
Customers (Millions) 1.5[45] 5[46] 3.9[47] 2.4 6.1 21
% Nuclear Power N/A 6.1[48] 35[49] 31 66 23
After Tax Profit Margins (%) 10.2[50] 7.9[51] 12.2[52] 8.4 14.1 9
Electrical Generation Fleet Mix
AYE[53] EIX [54] AEP[55] DUK[56] Entergy [57] Exelon[58] PEG [59]
% Coal Power 80 7.4 73 43 10.1 5.7 28
% Natural Gas & Oil 9 10.5 16 27 66 21.7 49
% Nuclear Power 0 24.8 8 13 23 66 23
% Renewable Power 11 57.3 3 17 .3 6.3 N/A
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.
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