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American Electric Power Industrial Sales Down On Restrained Shale Development

Low oil and natural gas prices that have reduced development activity from the Northeast to the Southwest cut into American Electric Power Co.'s (AEP) power sales to industrials in the second quarter.

In recent years, the company's industrial sales growth has largely been tied to oil and gas activity in some of the nation's major shale plays. Despite the prolonged commodities downturn, sales to the industry had remained resilient up until the second quarter, according to AEP management,

"We experienced growth in sales to our commercial customers in the second quarter and normalized residential sales rebounded after declines in the first three months of the year," said AEP CEO Nicholas Akins. "Industrial sales declined in the second quarter reflecting lower energy prices, weak global demand and the strong dollar. However, these declines were offset by the growth in residential and commercial customer sales, which provide higher margins."

AEP is one of the nation's largest electric utilities, with nearly 5.4 million customers in 11 states from Virginia to Texas. It owns 31,000 MW of generating capacity and supplies 3,200 MW of renewable energy to its customers. The company said that while economies in its eastern territory are growing faster than the country overall and helping the bottom line, growth in its western territory is more exposed to lower oil and gas prices.

"Depressed energy prices have created a noticeable slowing in our western footprint," CFO Brian Tierney said. AEP's industrial sales in its shale counties in Ohio, Texas and Oklahoma declined by 0.3% during the second quarter. Specifically, power sales to the upstream sector declined by 6%.

While the shale industry accounted for 19% of the companies industrial sales between 2Q2015 and 2Q2016, industrial sales outside those counties were also down by 3.3%

In April, FERC blocked controversial power purchase agreements approved by Ohio regulators that would have guaranteed cost recovery for AEP and FirstEnergy Corp. power produced at  uneconomic coal and nuclear generating units in the state (see Daily GPIApril 28). Akins said the vast majority of electricity produced during peak cycles is produced by coal and nuclear fueled generators in the region.

He added that fundamental changes need to occur in the market to resolve that issue. The company is trying to advance legislation in Ohio that would make it easier for companies to invest in new generation.

"The proposed legislation strikes a balance between our ability to invest and maintain generation in the state, and the customers' ability to choose generation supplies," he said. "This overall process would allow AEP Ohio to move forward with the transition of generation resources in a responsible way that would benefit the state of Ohio, AEP and its customers. The legislation would address any potential [Federal Energy Regulatory Commission] jurisdictional matters while allowing the state to take control of its own resources as well as any transition envisioned under initiatives such as the Clean Power Plan."

Akins said the company would not be investing in new generation in the state until the power market is restructured.

"There is a capacity deficiency in Ohio. If Ohio wants to take advantage of additional natural gas buildout...pipeline infrastructure, electric transmission infrastructure and the economic development follow-on of all of that, there is no reason for Ohio to give that up," Akins said. "There has to be a mechanism to do all that, and that's what we're after."

AEP said it continues to evaluate new natural gas and renewable energy generation in its portfolio outside of Ohio.

The growth in commercial and residential sales, along with more than $840 million in new plant investments since June 2015, helped drive a second quarter profit for the company. Revenue was up slightly to $3.9 billion, compared to $3.8 billion in 2Q2015. AEP reported $502.1 million in earnings ($1.02/share), compared to earnings of $430 million (88 cents) in the year-ago period.

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