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AEP plans restructuring to focus on generation, wholesale markets

SAN FRANCISCO, Calif., Oct. 30, 2000—American Electric Power (NYSE: AEP) is sharpening its focus on power generation and related wholesale markets.

“Our focus for growth moving forward, plain and simple, will be the wholesale business – generation and related energy assets, wholesale marketing and trading,” said E. Linn Draper Jr., AEP’s chairman, president and chief executive officer. “With our large generating fleet and very successful trading organization, we are already in an excellent position as our markets move toward deregulation and competition. We are following a plan to strengthen our position.”

Draper and other top AEP officials discussed the company’s direction with financial analysts today during luncheon presentations at Edison Electric Institute’s annual financial conference.

During his presentation, Draper announced that AEP will file documents with the Securities and Exchange Commission this week outlining a restructuring plan that will group the company’s growth businesses and provide options for unlocking shareholder value. The SEC filing is required before companies regulated under the Public Utility Holding Company Act (PUHCA) of 1935 can make organizational changes.

AEP’s SEC filing will seek authorization to form two wholly owned corporations.

One corporation will hold AEP’s utility and non-utility subsidiaries whose revenues derive from competitive, usually market-based, activities.

The second will hold AEP’s utility subsidiaries that are subject to regulation by at least one state utility commission or foreign utility subsidiaries subject to rates or tariffs regulations.

“We are restructuring the company to provide us maximum flexibility to achieve value from our wires business when restructuring is complete,” Draper said. “In the short term, we will aggressively manage our costs.”

Draper added that the company plans no expansion in the distribution business in the U.S. and internationally.

Draper also told the analysts that AEP had decided not to pursue the combination of Yorkshire and SEEBOARD, two companies in the United Kingdom. AEP owns 100 percent of SEEBOARD and shares ownership of Yorkshire on an equal basis with Xcel Energy.

“Given the way the retail market has evolved in the UK, we’ve concluded that there are better opportunities for enhancing the value of our UK investments,” Draper said.

Earlier this year, AEP filed business separation plans in Ohio and Texas, as required by restructuring legislation in those states. Among other things, the plans separate all or most of the company’s generation assets in Texas and Ohio from its transmission and distribution assets in those states.

AEP’s plan, which will be filed with the SEC, extends the concepts included in the state business separation plans to the entire corporation, providing the company greater flexibility to make business decisions in the increasingly competitive energy marketplace.

“Corporate separation is our highest priority and we plan to restructure by the end of 2001,” Draper said.

That puts AEP’s restructuring plan on the same timeline as state deregulation plans that will affect the majority of the company’s power generation capacity.

“We own more than 38,000 megawatts of low-cost, very efficient generation,” Draper said. “Approximately 25,000 megawatts of our generation will be deregulated by the end of 2001.”

AEP’s wholesale and trading group, ranked second among U.S. power marketers in electricity volume, will market the output of the plants.

“Our wholesale and trading organization is the best in the business, in my opinion,” Draper said. “We’ve grown from start-up to a leading player in about three years. This marketing and trading mentality has changed how we operate our plants, making us much more efficient and more profitable.”

John Norris, AEP’s senior vice president – operations and technical services, said AEP has “a unique set of assets in its power plants, support services and people.” The challenge, he said, is getting more value out of the assets.

“We’ve implemented what has been a very successful incentive program for our generation group,” Norris said. “The employees understand the wholesale markets, forward price curves and what they can do to increase company profits which, in turn, increases their individual compensation. They’ve been aggressively – and enthusiastically – looking for ways to make a difference.

“We’ve already seen the results of this,” Norris said. “Our plant availability in our eastern region is up almost 4 percent over last year. We’ve also reduced our operations and maintenance expenses by almost 13 percent since 1998 while simultaneously improving our safety record.”

AEP views individual plants as profit units that work together for total team results. The company has extended that thinking to include service groups.

“AEP Pro Serv is a good example,” Norris said. “It was formed by combining a variety of AEP’s internal engineering and technical support services groups into a for-profit company. AEP Pro Serv is building three power plants for other companies and is successfully marketing a variety of engineering, environmental and maintenance services to other companies.”

While AEP’s generation employees were learning the wholesale markets, the company’s traders and marketers were learning key elements of plant operations.

“To be successful, our traders had to integrate the plant information with other market information,” said Eric van der Walde, AEP’s senior vice president – energy trading. “An added benefit is that our three years of experience with our own plants helped us learn how to work with plant operations. This enabled us to efficiently integrate the new megawatts that came with the recently completed merger with Central and South West.”

But van der Walde notes that AEP’s wholesale marketing and trading operation goes far beyond the megawatts supplied by the company’s plants.

“We have continued to broaden our base,” van der Walde said. “Our marketing and trading organization is number two in the U.S. in electricity volume, so it’s obvious we do more than just move AEP’s megawatts.

“But we are more than just electricity. We currently trade electricity, natural gas, sulfur dioxide allowances and coal. We are rapidly growing our gas capabilities, and our European trading is also rapidly growing.”

AEP’s natural gas volumes averaged approximately 4 billion cubic feet per day in the third quarter, up from approximately 2.5 billion cubic feet per day in the third quarter last year. The company’s European traders completed as many as 600 transactions a week in September, up from less than 50 a week as recently as June.

And AEP is heavily involved with leading electronic exchanges as a partner in IntercontinentalExchange and an equity investor in Altra.

“Our wholesale marketing and trading business is growing rapidly, efficiently and profitably,” van der Walde said.

American Electric Power is a multinational energy company based in Columbus, Ohio. AEP owns and operates more than 38,000 megawatts of generating capacity, making it one of America’s largest generators of electricity. The company is also a wholesale energy marketer and trader, ranking second in the U.S. in electricity volume. AEP provides retail electricity to more than 9 million customers worldwide and has more than $35 billion in assets, primarily in the U.S. with holdings in select international markets. Wholly owned subsidiaries are involved in power engineering and construction services, energy management and telecommunications.