Bucking the recent fuel switching trend, American Electric Power (AEP) in the first three months of 2013 became more dependent on coal and used significantly less natural gas to generate electricity, said CFO Brian Tierney.
“In gross terms, AEP generated 34% less electricity from natural gas and 9% more from coal-fired generation,” Tierney said in a conference call with analysts. “These results were related to two factors. First, the price of natural gas increased significantly. And second, our coal-fired generation fleet is very competitive, even at gas prices below $4.
“Henry Hub natural gas prices increased 41% quarter-over-quarter, and AEP’s delivered natural gas costs increased 35%. By contrast, AEP’s cost of delivered coal only increased 7%. This is against the backdrop where AEP generation Hub peak pricing increased 15% and around-the-clock pricing increased 14%.”
The Columbus, OH-based company has changed its contracting methodologies, making it “flexible enough to adjust our generation either way — and it’s worked out positively for us,” said CEO Nicholas Akins. AEP enjoys a lower break point on the price of Central Appalachian coal thanks in part to its ability to avoid rail deliveries, instead bringing in coal via less expensive river barges.
“We have a distinct advantage from the river operations standpoint, and then also, the mine-mouth aspects of it as well. So a lot less rail delivery,” Akins said.
But AEP’s turnabout on fuel switching isn’t a cure-all for the giant utility company’s coal woes. Earlier this year, as part of a precedent-setting settlement with citizen groups, eight states, and the U.S. Environmental Protection Agency, AEP agreed to close or refuel units at three Midwest coal-fired electric generation plants (see Daily GPI, Feb. 26). Under the agreement, AEP plans to stop burning coal at plants in Indiana, Ohio and Kentucky. The deal also includes investments AEP will make to curb its emissions at other plants in its sprawling generation plant fleet.
A flurry of recent analyst reports have pointed towards natural gas prices creeping higher through 2015 (see Daily GPI, April 11; April 10, April 9; April 8; April 5; April 4). The reasons given include the cold end to the 2012-2013 winter and EIA Form 914 data indicating declining production. Tudor, Pickering, Holt & Co. analysts said recently that at $4 gas prices, “coal and gas are competing for a large piece of the power generation pie, and small differences in gas price, regional supply/demand dynamics and generator behavior drive big changes in relative gas/coal demand.
“At $4.50/MMBtu natural gas, we continue to see coal as the clear favorite, and below $3.50, gas is generally the power generation fuel of choice.”
AEP reported 1Q2013 earnings of $363 million (75 cents/share), down from $389 million (80 cents) in 1Q2012, and reaffirmed its previously announced earnings guidance of $3.05-$3.25/share.
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