With its primarily coal-fired fleet of power plants, American Electric Power (AEP) stands to gain from the recent surge in natural gas prices, a top executive with the Ohio-based electric power company told an audience of investment professionals on Wednesday.

“As gas prices go up, the fundamental picture is that AEP’s generation is more and more in the money since we’re primarily a coal-fired entity,” said Linn Draper, president of the Ohio-based electric utility, in an appearance before Morgan Stanley’s 10th annual global electricity and energy conference in New York.

“The amount that we’re more in the money depends on how much of that coal-fired generation we have pre-sold,” he noted. “We recognize that we’re in a position where the generation output for our own facilities is more than our own customers require, so we will sell some of that in longer dated contracts to near neighbors, other utilities and so forth.”

“So there’s not a one-to-one correlation between the movement of gas price and the value of our…generation given the fact that some of it’s pre-sold, but the fundamental answer is that as gas prices rise that helps AEP.”

Reliant Resources earlier this month said that it has decided to leave the financial gas trading business after it incurred an estimated $80 million pre-tax loss when it closed trading positions that were battered by high prices in late February (see Daily GPI, March 10).

An analyst asked Draper whether the recent volatility in gas prices has made the unwinding of the company’s trading book any more difficult or costly.

AEP announced last fall that it would exit the trading business “in those parts of the country where we did not have physical assets,” Draper noted. “That means, the West, the Northeast, et cetera. What we have done in those regions of the country over the last six months or so is substantially flatten the book,” Draper said.

“We have some longer dated positions in those regions of the country, but we’ve tried to match them so that as prices move, we don’t experience ups and downs in the mark to market book. In the areas of the country where we do have physical assets — that would be the Midwest, Texas, et cetera — we have continued to hedge our position, both our generating fleet and the output from our storage facilities, particularly at the Bammel storage facility near Houston,” Draper said.

“So as prices move, we will see value created around those, if we are on the right side of those hedging activities, and I think it’s safe to say that we are.”

Another analyst grilled Draper on AEP’s recently announced plans to sell generation assets located in Texas. “I think we all understand what the long-term reasons [are] for selling the Texas generation, but why would you focus on selling such a big book of assets, potentially at a price below book, at a time like this?” the analyst asked.

AEP’s Central Power & Light (CP&L) last December filed a plan of divestiture with the Public Utility Commission of Texas proposing to sell all of its power generation assets, which have a nameplate generation capacity of 4,241 MW and a net book value of just under $1.9 billion (see Power Market Today, Dec. 18, 2002).

CP&L is selling these assets to accurately determine its level of stranded costs — the amount that the book value exceeds the market value of the assets. The state’s electric restructuring law, created through Senate Bill 7, provides for recovery of stranded costs as part of the transition to a competitive market in Texas. The state opened the majority of its power markets to retail competition at the start of the year.

Draper noted that the properties that are the “heart of the assets for sale” are coal and nuclear assets. “We have a mix of gas-fired, coal and nuclear assets in Texas and the practical fact is there has been so much construction of combined cycle gas generation in Texas that older steam gas plants are out of the money. Those have been mothballed,” he said.

“And so they are part of the package, but we don’t expect it to have big, economic value because the fact is — except for a few that are in unusual locations and are must run units — those plants are not dispatched. So what we are offering for sale, with real economic value, are the coal assets and our share of the South Texas nuclear plant.”

Draper noted that AEP “can’t predict whether those will sell above or below book. But one way to establish the stranded cost in Texas is to have an actual sale. If you don’t have an actual sale, then you use models that we think are very disadvantageous to our recovering the full value of those assets.”

If the assets wind up being sold below book value, then AEP can pursue a “true up proceeding and we would expect to securitize that amount of difference and collect it over time from the wires customers.”

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