American Electric Power Co Earnings Call Nuggets: Gas-to-Coal Switching and Economic Generation
Greg Gordon – ISI Group: So two questions. One, when I’m looking at the slide where you talk about gas-to-coal switching, can you talk a little bit about the types of coal that you’re burning and what the sort of the breakeven cost is between gas and coal and the types of coal you’re burning, that whether it’s CAP, NAP, Illinois Basin, PRB, that’s allowed you to switch back?
Nick Akins – President and CEO: Yeah, typically it’s CAP coal, and when you look at the price breakpoint on a delivery cost basis, when you’re in that 3.25 to 3.50 range on natural gas, you’ll start to see the switching occur. Based on natural gas prices today, obviously, we’ve seen it just go – just basically 180 degrees the other direction, but that’s a good thing, and I think the real issue is that we’ve been able to change our contracting methodologies, particularly on the coal side and the natural gas side to be flexible enough to adjust our generation either way and it’s worked out positively for us.
Greg Gordon – ISI Group: That’s a lot lower break point than on cap coal than we’ve heard from other companies. Is that because of your delivery cost advantage being either mine mouth or on the river?
Nick Akins – President and CEO: Yeah, that’s right. We have distinct advantage from the river operations standpoint, and then also the mine mouth aspects of it as well. So, a lot less rail delivery.
Brian X. Tierney – EVP & CFO: Greg, when you look at Slide 9 in our presentation and see how our supply stack lines up and you compare those prices to what natural gas prices were, our delivered natural gas was only $3.78 this year, and look at how much more of our capacity goes in the money even at that low natural gas price. So it’s a very competitive fleet that we have. And I think we demonstrated that quarter-on-quarter difference this year to last even at pretty low natural gas prices…
Nick Akins – President and CEO: And we’ve also been able to take the Northern App coal because all of our units are fully controlled.
Greg Gordon – ISI Group: Next and last question. Page 18, you go through a line-by-line comparison of what you did in your off-system sales business. It’s clear that you, obviously, you sold a lot more power and made more money. Can you take us through the big deltas in the other areas and what drove those?
Brian X. Tierney – EVP & CFO: Yeah, so capacity payments were comprised of two items. One is the difference in the CRES price that we’re getting in Ohio. So, considerably less pricing there. The other was capacity that we were getting from the RPM market. So in the first quarter of 2012, the RPM volume that we sold was 1,300 megawatts at the RPM price of $110 a megawatt day for about $16 million, and in 2013, the volume was about 640 megawatts that we cleared at a price of about $16 a megawatt day for $1.8 million. So those items comprised the capacity difference. The marketing and trading was just lower realized volumes from that and you see that the sharing stayed about the same year-on-year and that resulted in the difference in total off-system sales.
Nick Akins – President and CEO: Really, the deviations will be because of the capacity payment difference.
Brian X. Tierney – EVP & CFO: That’s right.
Daniel Eggers – Credit Suisse: Just following-up on Greg’s question on the coal-to-gas switching or gas-to-coal switching, I guess, we’re calling it now, if you look at the curve having moved up even further of the 3,800 megawatts of additional economic generation in the first quarter, how many more megawatts are now economic as the curve has moved that much higher?
Brian X. Tierney – EVP & CFO: You mean for the balance of the year?
Daniel Eggers – Credit Suisse: Yeah.
Brian X. Tierney – EVP & CFO: It’s considerable, Dan. It’s probably another 3,000 megawatts.
Nick Akins – President and CEO: Yeah, and keep in mind too, the part that kicks up on that curve are primarily peaker units that we don’t expect to run much anyway. So you’re getting much deeper into the base load capability of the system now and also keep in mind, this is the entire fleet perspective, not just the part that’s going to be unregulated in the future.
Brian X. Tierney – EVP & CFO: You could even do it yourself on this slide. You could draw in the balance of the year prices for either AD Hub or AEP Gen Hub, whichever you like and see where that crosses the line.
Daniel Eggers – Credit Suisse: When you guys talk about the coal inventory situation and you have the normalization, are you guys assuming to get the days cover using historic burn rate or are you using some sort of modified lower burn rate to figure out the number of days in inventory?
Brian X. Tierney – EVP & CFO: It’s a full load burn rate. So, it’s the units that we have at full load burn for those number of days, and that’s the sort of historical measure that we’ve used.
Nick Akins – President and CEO: We’ve done pretty well in managing our inventories during this process, and that goes to the flexibility issue. We’re still at 43, 44 days of inventory. So we’re going into the summer peak period in a pretty good fashion.
Daniel Eggers – Credit Suisse: Just on load growth, you gave a lot of detail, but against the plan for this year relative to a pretty slow start in the first quarter even with your normal – a little better-than-normal weather, what gives you guys confidence that you’re going to make catch-up over the remainder of the year to get to that positive demand growth, and are you hearing comments from your industrial customers who are out of more clarification on when they’re going to be back on?
Brian X. Tierney – EVP & CFO: I mean, I think the story that you see on those slides kind of nails it. The residential and commercial are up, and we’re seeing the difficulty in industrial. We may not make the five-tenth of load growth that we forecasted for the year, but your earlier question highlights an offset to that, and that if off-system sales are up a bit, because prices are up even from when we came out February 15, that puts more of the fleet in the money, and that should help offset some of the load challenges that we might have through the balance of the year.
Nick Akins – President and CEO: Also, you have to look at the mix. You have to look at the mix of the customers, too. If you have residential and commercial improving, the margins associated with those customers are higher than the industrial customers. So it’s not a one-for-one type of deal that you’re looking at. That’s why it’s held up now. We need the industrials and manufacturing to continue to improve, and hopefully, that will occur and a lot of times we’re saying third quarter of the year, but it’s a matter of making sure it’s sustainable so that the commercial and residential can continue to thrive. In the past, our residential and commercial have been really, really struggling in sales and now we’re seeing uptick there and that’s what’s making the difference. Also, I think the weather was better than last year, but the weather was still normal.
Daniel Eggers – Credit Suisse: Weather-normalized is always complicated when you have your big deltas from one period to another. When you look at residential, given the big move after having not trended well for so long, are there underlying commentary you’re seeing that gives you confidence that, that holds rather than just being kind of a fluctuation to what happened in weather for the period?
Nick Akins – President and CEO: Yeah, I think customer accounts – I always joke that maybe the 25-year-olds are finally moving out of the house, but we’re seeing customer accounts go up. We’re seeing construction improve, but it’s that underlying industrial primary metal side, but that’s all tied to the world market. So, we’re watching it very closely. Brian?
Brian X. Tierney – EVP & CFO: We get worried about that when you have large weather effects in the period, and relative to normal, we were about $10 million positive to normal weather. So, we forecasted normal for the quarter. We had normal weather, significant compared to last year, but compared to normal, it’s right on top of it. So we’re not concerned that weather is impacting those numbers in any significant way.
A Closer Look: American Electric Power Co. Earnings Cheat Sheet>>