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Cold winter boosts AEP earnings in 1Q

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For The State Journal

A cold winter led to stronger earnings for American Electric Power in the first quarter.

The company announced first-quarter earnings of $560 million, up from $363 million a year ago.

In a conference call following the earnings announcement, AEP executives said they plan to ask the West Virginia Public Service Commission for a rate increase later this year, as the Appalachian Power Co. unit is not earning a sufficient return on equity.

“We have a current ROE range of 10 percent to 10.9 percent in West Virginia, but we’re certainly underperforming there from an ROE perspective,” said Nick Akins, chairman, president and CEO of Appalachian Power. “So we will file a rate case there.”

In other comments during the conference call, Brian X. Tierney, executive vice president and chief financial officer, said AEP is seeing industrial sales growth in shale gas areas.

“We have already seen significant industrial sales growth around the Eagle Ford area in Texas and the Marcellus Shale in West Virginia dating back to 2012,” Tierney said. “We are projecting additional new loads to be added in all five of the listed shale regions over the next several years.”

AEP service territory in the Marcellus Shale area of West Virginia would be in the Northern Panhandle, which is served by Wheeling Power.

The future of coal was broached in several comments and in answers to questions from investment analysts. The Environmental Protection Agency is expected to announce rules on carbon dioxide emissions from existing fossil fuel power plants soon. Tierney said EPA Administrator Gina McCarthy has said the agency does not expect the rules to reduce the reliability of the grid.

“She has reinforced the point that they are not trying to take coal away,” Tierney said. “They are concerned about the reliability of the grid and won’t do anything to impair that.

“So there is somewhat of an expectation that they may go outside the fence and focus on energy efficiency on those types of things with the states, and … they said they would give the state a lot of opportunity to be able to come up with their mechanisms to adjust to the new targets.”

Still, the winter weather showed that the scheduled retirement of older, smaller coal-burning units next year in response to EPA regulations could affect delivery of electricity in severe weather, Akins said.

“I had previously reported 89 percent of coal units slated for retirement in mid 2015 ran during the polar vortex,” he said. “That is also true for the quarter. But another interesting tidbit is that these units ran at substantial 46 percent capacity factor during the quarter.

“So the need for this coal capacity was not just an aberration, but an integral part of the maintaining comfort for our customers during the extreme cold weather.”

AEP plans to retire about 6,600 megawatts of coal-fueled generating capacity before the end of 2016 due to environmental regulations and market conditions, and it plans to increase its use of natural gas, renewables and energy-efficiency resources.

At the annual stockholder meeting in April, company officials said between 2005 and 2013, AEP reduced its carbon dioxide emissions between 2005 and 2013 by 21 percent, exceeding President Barack Obama’s Climate Action Plan target of achieving a 17 percent reduction by 2020. In addition, AEP’s emissions of sulfur dioxide and nitrogen oxide each have been reduced by more than 80 percent since 1990, and mercury emissions have declined by nearly 60 percent since 2001, company officials said.

As utilities responded to demand during the cold winter, they drew down on stockpiles of coal that had become larger than normal during a year or two of mild weather and competition from gas-fired plants. That has reduced demand for coal. But throughout various industries, executives are saying stockpiles at power plants are getting smaller now.

“We’re at about 25 days on average on the system,” Akins said. “We were 35 days going into the winter.”

Tierney added, “We’ve heard of some people doing things like burning more gas to build up their coal inventories. We went into the winter fairly healthy and we haven’t had to change or dispatch our commitment at all in response to our coal levels.”

American Electric Power is one of two major investor-owned electric utilities operating in West Virginia. Its Appalachian Power subsidiary provides power to the southern part of the state, while Wheeling Power operates in the Northern Panhandle.