AEP to spin its Ohio Power coal capacity into new entity

American Electric Power (NYSE: AEP) said in a Feb. 10 update to investors on its 2012-2014 plans that it is planning a number of changes, including coal retirements, as it positions itself for future energy markets and compliance with new U.S. Environmental Protection Agency emissions rules.

The  company said its 2012 capital budget is $3.1bn, with capital expenditures for 2013 and 2014 estimated at $3.5bn to $3.7bn per year.

“We expect earnings growth between 4 and 6 percent over the next few years as we continue to invest in our regulated operations, refocus our transmission business and put capital to work on our regulated generating fleet to comply with new regulations from the U.S. Environmental Protection Agency,” said Nicholas Akins, AEP’s President and CEO, in a prepared statement about the Feb. 10 update. “We’ve proven that we can execute very successfully within the regulated utility space, which generates a significant portion of our earnings and supports our dividend.”

Akins added: “At the same time, we are creating two sustainable businesses out of our Ohio assets: a competitive generation company and a regulated wires company. The competitive generation company will be able to begin accessing the potential value of its assets in 2013 and will have an opportunity to realize the full value of those assets after mid-2015 through various hedging strategies, including retail and wholesale marketing activities.”

AEP wants approval from FERC to separate its Ohio businesses and to terminate and replace the Interconnection Agreement for its eastern generating assets with a new power cost-sharing arrangement. The company received approval Jan. 23 from the Public Utilities Commission of Ohio to move forward with corporate separation of its Ohio generation assets. AEP expects to receive decisions from the FERC enabling implementation of corporate separation and the termination and replacement of the Interconnection Agreement in the first quarter of 2013.

The regulated companies for AEP are Appalachian Power, Kentucky Power, Indiana Michigan Power, Public Service Co. of Oklahoma, Southwestern Electric Power and AEP Generating Co. The competitive power companies are AEP Generation Resources, AEP Energy Partners and AEP Retail Energy.

Expected 2012-2020 regulated environmental capital spending is forecast at $5bn to $6bn. About 2,538 MW of capacity will be retired in the regulated segment. The AEP Generation Resources capacity position of 8,900 MW as of 2015 consists primarily of competitive, controlled coal and natural gas-fired resources.

The 2,538 MW targeted for retirement, all of it coal-fired, is broken down as all or the AEP-controlled parts of these plants and units: Kammer 1-3, 630 MW; Muskingum River 1-4, 840 MW; Sporn 2, 4 and 5, 750 MW; Picway, 100 MW; Conesville 3, 165 MW; and Beckjord, 53 MW.

On the coal side, AEP Generation Resources will be left with, after the transfer of Amos 3 and Mitchell 1-2 and the planned retirements: Gavin 1-2, 2,640 MW; Cardinal 1, 595 MW; Conesville 4; 340 MW; Conesville 5-6, 800 MW; Zimmer, 330 MW; Stuart 1-4, 600 MW; and AEP portions of two Ohio Valley Electric coal plants (Kyger Creek and Clifty Creek), 434 MW.

Before all of this reorganization, the controlled capacity figures break down as: Ohio Power, 12,132 MW; Appalachian Power, 6,806 MW; Kentucky Power, 1,078 MW; and Indiana Michigan Power, 5,381 MW. After the reorganization, the breakdowns are: AEP Generation, 9,708 MW; Ohio Power, zero; Appalachian Power, 8,918 MW; Kentucky Power, 1,390 MW; and Indiana Michigan Power, 5,381 MW.

Amos Unit 3 and Mitchell get shifted

APCo is seeking FERC approval to obtain an undivided two-thirds interest in Unit 3 of the Amos plant (APCo already owns the remaining undivided one-third interest in this unit) and an 80% undivided interest in the Mitchell plant, which will add 2,112 MW to APCo’s owned generating capacity but will add no generation to the AEP corporate family, since APCo will acquire these interests from another wholly-owned subsidiary of AEP.

AEP is also asking FERC for authorization for an internal corporate reorganization that will result in the separation of Ohio Power’s generation and power marketing businesses from its transmission and distribution businesses, consistent with an Ohio restructuring law and Ohio Power’s structural corporate separation plan approved by the Public Utilities Commission of Ohio (PUCO). Under this transaction, Ohio Power will transfer certain jurisdictional facilities to AEP Generation Resources.

Ohio Power has an ownership interest in some or all of the units in 15 generating stations, totaling about 12,000 MW, with these interests to be transferred to AEP Generation Resources. Among other things, in conjunction with the separation, AEP Generation Resources will have an interim full requirements wholesale power sales agreement (called the SSO Contract) with Ohio Power to allow Ohio Power to serve, through May 31, 2015, its retail customers that are not served by alternative retail suppliers.

Operating agreements related to the Mitchell and Sporn plants will also be filed with FERC. Under those agreements, APCo will operate both the Mitchell plant, which it will own jointly with Kentucky Power, and the Sporn plant, of which APCo owns Units 1 and 3, and AEP Generation Resources will own Units 2, 4 and 5.

AEP Generation Resources is an indirect, wholly-owned subsidiary of AEP. It was formed in December 2011 as a direct subsidiary of Ohio Power for the purposes of owning and operating the generating assets of Ohio Power (which is itself a direct, wholly-owned subsidiary of AEP). Under the transaction, AEP Generation Resources will acquire the generation units and associated interconnection facilities, as well as other generation-related assets, currently owned by Ohio Power.

Upon closing of the proposed transaction, and after a series of steps , AEP Generation Resources will still be an indirect, wholly-owned subsidiary of AEP, but it will no longer be in the chain of ownership of Ohio Power. Thus, the transaction will achieve structural corporate separation of Ohio Power’s generation and marketing businesses from its transmission and distribution businesses. AEP anticipates that at the time of the transaction, AEP Generation Resources will be a public utility and will have authority from FERC to make wholesale power sales at market-based rates. Notable is that AEP merged Columbus Southern Power into Ohio Power at the end of 2011.

Under the transaction as currently contemplated, the coal-fired Muskingum River Unit 5 (MR 5) will be one of the generating units transferred to AEP Generation Resources, the company said in a Feb. 10 FERC filing. AEP wants FERC to approve two possible, non-material variations to the transaction, under which MR 5 would be: retained by Ohio Power and not transferred to AEP Generation Resources; or transferred from Ohio Power to AEP Generation Resources and then transferred back to Ohio Power. Subject to the outcome of a future PUCO proceeding, MR 5 might be retired and a new natural gas-fired generating unit, MR 6, might be constructed using shale gas. These changes would take place only if the unit were owned by Ohio Power. Therefore, if the PUCO approves the regulatory treatment that would allow the MR 6 shale gas project to go forward, Ohio Power would either retain ownership of MR 5 (if the transaction had not yet closed) or ownership would be transferred from AEP Generation Resources back to Ohio Power at net book value (if the transaction had already closed).

Also to be transferred to AEP Generation Resources will be Ohio Power’s 100% ownership of Conesville Coal Preparation Co., which has a coal cleaning facility at the Conesville power plant, and Ohio Power’s 50% stake in Central Coal Co.

AEP readies for new EPA air restrictions

AEP expects EPA to publish the Mercury and Air Toxics Standards (MATS) rule, also known as the Hazardous Air Pollutants Maximum Achievable Control Technology (HAPs MACT) rule, in mid-February, with the rule probably effective in mid-April, Akins noted during the live portion of the Feb. 10 update session. Related filings with the RTOs show that the those organizations need to look at in terms of retirements of generation to ensure transmission system reliability and get AEP’s needed “hall pass” to get one- or two-year extensions on the three-year MATS deadline, which EPA is allowing if utilities can prove they can’t get emissions controls in place in time and the shutdown of the subject plant would harm grid reliability, Akins noted.

“We’re probably one of the first out with our plans,” Akins added. “Our plans have been consistent during this entire period and we have been very aggressive about ensuring that there is RTO review of these plans. And then, we’ll take them to the EPA and have those discussions as well.”

Repositioning of the generation resource portfolio is key for AEP because it has to start thinking about resources in a broader sense, Akins said. “And as we look toward making sure that we not only deal with the issues associated with HAPs MACT and EPA and all the other rules that are coming down the pipe but also what the market is doing,” he said. “And as you know, we just brought on Dresden generation by 550 MW in natural gas capacity. We’ll continue to move in that direction as we retire these subcritical 200-MW [coal] units. So as we go through that process, it will be a repositioning of that business, going forward.”

AEP has already filed for pre-approvals at the relevant state commissions for emissions control projects for Big Sandy Unit 2 in Kentucky, Rockport in Indiana and Flint Creek in Arkansas. AEP wants to have as much interaction as it possibly can with the various commissions so that there’s a full understanding of the options available. “Whether it’s natural gas or coal or nothing, we need to know that,” Akins said. “And there’ve been credible discussions already with the commissions before we file these particular plans. And then, the dialogue can begin and we can assure cost recovery associated with these investments.”

One analyst asked that out of the 2,538 MW that AEP is talking about retiring, would the company consider retiring those early, in advance of 2015, due to low dark spreads. AEP Executive Vice President and CFO Brian Tierney said those targeted units don’t run that often. “Actually, they do run considerably during the summer peak periods,” he added. “So I would say that we will probably continue operating those units as long as we see off-system sales margins that support running that generation.”

Akins addressed a question about rampant coal-to-gas switching right now in power markets as generators take advantage of historically low natural gas prices. “[O]ur gas capacity factors are in excess of 80%, which actually surprised us,” he said. “And so we do have reductions in capacity factors on the coal units as a result, but we should expect that in this market. And I think it will have an impact on how we secure fuel supplies in the future. I mean for our gas supply, we’re now doing firm transportation contracts in the East, where we’ve never had done that before. And also, from a coal contracting perspective, we’re going to have to be very mindful as we make this transition that we do have the flexibility to respond to that kind of market response, if necessary. So coal capacity factors, U.S. market is coming down, gas capacity factors are up.”

Tierney added that natural gas went, as a percentage of AEP’s total generation, from 6% in 2009 to 11% in 2011, and is estimated to be 14% in 2012. Coal and lignite was 88% of generation in 2009, 78% in 2011 and 74% in 2012, so the higher gas burn is coming directly from that coal and lignite component.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.