Retiring CEO Michael Morris has helped AEP become a rising star in the Central Ohio Community. Now, execs want to impress investors, too.
On any given afternoon this summer in downtown Columbus, groups of children could be found playing among the fountains, their cries of delight providing a soundtrack for office workers enjoying an outdoor lunch break along the Scioto River. It's the culmination of the Scioto Mile project, and it could not have happened without American Electric Power or its leader, Michael Morris, says Columbus Mayor Michael Coleman.
Coleman developed a vision to build a park along the east riverbank shortly after he was elected in 1999. There was just one problem: the price tag. Early in 2007, he approached Morris for help. Quickly, Morris, whose office at 1 Riverside Plaza overlooks the river, "got it. We looked out the window, and he got it," Coleman says.
The city and AEP each kicked in $10 million and approached government entities and private funders to pick up the remainder of the $44 million cost. Morris "made it happen on the corporate side, and without that, it would not have been done," Coleman says.
For Morris, the Scioto Mile was a chance to make a meaningful contribution to Downtown. "We are one of the few businesses, really when you think about it, that really sit on the riverfront. Even though we're across the street, it really does meander right beyond our building. ... We wanted a significant project that folks would look at and say, ‘That's AEP's work.' "
Scioto Mile "probably more so publicly and outwardly expresses and personifies the leadership of both Mike and AEP, but from my perspective, it's often the quieter and unnoticed engagements that a CEO can have that have even a greater impact," says Alex Fischer, president and CEO of the Columbus Partnership. Last year, AEP and the AEP Foundation, its charitable arm, gave more than $9.3 million in Central Ohio. But the company doesn't just write checks, says Fischer: "With AEP, with the check comes an active, engaged member of their team, putting muscle behind the financial resources."
For many Central Ohioans, AEP is more familiar as an electric utility provider than a civic giant. At the time of its incorporation in December 1906, the American Gas and Electric Company was nothing more than "a collection of small, struggling utilities" stretching from the East Coast to the Midwest, according to a company history.
Today, AEP delivers power to more than 5 million customers spread across 11 states. With almost 38,000 megawatts of generating capacity, it is one of the nation's largest electricity generators. Its nearly 39,000-mile transmission system is the nation's largest, boasting more 765-kilovolt extra-high-voltage lines than all other U.S. systems combined.
AEP settled in the capital city in 1980, the same year it purchased the Columbus and Southern Ohio Electric Company; it moved into its current headquarters in 1983.
The company is a "tremendous corporate citizen and economic engine to Columbus and Central Ohio," says Michael Dalby, president and CEO of the Columbus Chamber. "They're a company that's a part of our innovation landscape as well," he says. "They've been a tremendous chamber member, a great supporter for economic development. We count them as one of our prime assets."
"AEP, ever since it's been in Columbus, has been one of the biggest employers in our city, has had a huge economic impact to our community and is a valued member of the community," says Coleman. "It's always been an important company, but it's far more than that now, with Mike's leadership." It's not often, Coleman says, that a corporation's leaders truly affect the city in which they're doing business. "That, I think, has been part of his mission: not just to lead a great company, but for that great company to transform a great city into a greater city."
Soon, however, Morris will retire as chairman and CEO-a job he's held since 2004. President Nick Akins will step up to take the reins of AEP's corporate and civic endeavors.
AEP, ranked No. 169 on the Fortune 500 and the region's ninth-largest private-sector employer, has more than 3,500 workers in Central Ohio and nearly 19,000 nationwide. Last year, AEP posted $14.4 billion in revenue--up from $13.5 billion the year prior--and $1.2 billion in net income. Diluted earnings per share were $2.53, down from $2.96 in 2009; the current price-to-earnings ratio is 12.43.
Two-thirds of AEP's power is generated by coal, the remainder from natural gas and oil, nuclear and other sources, according to investment firm Hilliard Lyons. Its utility units include AEP Ohio and operations in other states, as well as inland barge line AEP River Operations.
"AEP has a history, which Mike has definitely advanced, to be one of the top technology companies within the industry," says Tom Kuhn, president of Edison Electric Institute (EEI), whose membership collectively generates and distributes about 75 percent of the country's electricity. AEP has "been a driver of providing low-cost service in every one of the states they operate in," Kuhn says.
AEP "is one of the larger operating electric utilities in the U.S. It's perceived as being a leader on that front," says Neil Kalton, a senior equity analyst who covers utilities for Wells Fargo Securities. Over the last several years, however, the company hasn't met Wall Street expectations. "It hasn't necessarily achieved the financial results that investors would like," Kalton says. "They've had some issues in some of their jurisdictions from a regulatory standpoint."
Shares of AEP (NYSE: AEP), whose market cap is $17.76 billion, were trading at $38.24 on Sept. 7, compared to $30.76 when Morris took the helm. Historic prices have been fairly steady, hovering around $30 as far back as January 1970. Recent high and low prices dipped to the low $20s in early 2003 and up just over $50 in May 2007.
Kalton says AEP has been trading at roughly a 15 percent discount relative to its peers for reasons including uncertainties about Ohio rates and the impact of EPA regulations, as well as how it has historically allocated capital.
Analyst David Burks of Hilliard Lyons opined in an August report that AEP is a "well managed utility with an attractive fundamental outlook."
"It still has one of the more attractive valuations in the group in our perspective, and in addition, it has nearly a 5 percent dividend yield," Burks says in a phone interview. "There can be reasonable outcomes attained and perhaps that valuation gap narrows over time."
Last year, in an effort to trim costs, AEP offered buyouts to all of its employees--then numbering 21,700. Twelve percent accepted. Akins says the job reductions reflected the national economy. "We have to be responsive to what's around us, and customers were challenged paying their bills, and we have to respond," he says. "Many [employees] left with a smile on their face. The people who weren't smiling were the ones left, but we have figured out how to continue to do business, and the business continues to operate in a very good fashion; it was just one of those times where we have to be able to adjust."
The relationship between AEP and environmentalists has long been an uneasy one, and in 2010, the Political Economy Research Institute ranked it 40th among 100 U.S. corporations for the amount of air pollution released. But the company--no doubt nudged by state and federal regulators--is trying to green up its act.
Ohio Senate Bill 221, passed in 2008, mandates that by 2024, utilities must generate 12.5 percent of their power from renewable sources and another 12.5 from advanced sources. AEP Ohio has signed alternative power purchasing agreements, including one with a 49.9 megawatt facility in southeastern Ohio--the largest commercial solar development east of the Rockies. But Morris says SB221 has changed AEP's role in Ohio. "The utility can no longer be in the generation business," he says. In September, AEP Ohio announced it would split generation and transmission into two separate businesses.
SB221 also led to the creation of AEP Ohio's gridSMART, a $150 million pilot program intended to meet the legislation's requirement that investor-owned utilities create programs to reduce peak power demand and increase energy efficiency. AEP customers, the U.S. Department of Energy, and AEP's shareholders and suppliers share the cost of gridSMART.
In 2004, AEP announced plans to construct a large-scale Integrated Gasification Combined Cycle (IGCC) coal-fired power plant. The so-called clean coal technology removes impurities before combustion, reducing air pollution. However, the company has since put proposed IGCC plants in Ohio and West Virginia on hold, citing lack of support from state regulators.
Earlier this year, AEP tabled a $668 million carbon-capture and storage plant despite a successful two-year pilot program at the Mountaineer Plant in New Haven, W. Va. "We demonstrated it worked," Morris says. However, West Virginia and Virginia utility commissions didn't want customers to pay for the development in the absence of federal legislation, he says.
AEP has had a contentious relationship with the U.S. Environmental Protection Agency (EPA). In 1999, AEP and six other companies were sued by the U.S. Justice Department for violating the Clean Air Act. In 2007, the company agreed to install $4.6 billion in emissions-reducing equipment at coal-fired power plants in Ohio, West Virginia, Virginia, Indiana and Kentucky and pay $15 million in fines. The agreement was the largest environmental settlement in Justice Department history. The controls were expected to cut 813,000 tons of air pollutants annually.
More recently, AEP has protested a new round of EPA regulations regarding coal-fueled power plants. In a June news release, the company estimated the cost of compliance at $6 billion to $8 billion by the end of the decade. In the release, Morris called the proposed EPA timelines "unrealistic" and said they would force AEP to prematurely shut down nearly a quarter of its coal-fueled generating capacity and cut hundreds of jobs.
AEP points out it has spent more than $7.2 billion since 1990 to reduce emissions at its coal-fueled plants, cutting annual emissions of nitrogen oxides by 80 percent and sulfur dioxide by 73 percent. AEP plans to drop its proportion of coal-fueled generation from 65 percent of total capacity to 57 percent by the end of the decade.
Morris calls this "the most aggressive Environmental Protection Agency that we've had since Bill Ruckelshaus was the administrator of the EPA at its creation. It's clear to me that they're endeavoring to take fossil fuels off of the table, which is not good for Ohio, not good for coal-centric America, and not good for coal-centric utilities like American Electric Power."
The Rate Debate
Closely tied to the conversation about AEP's capital investments has been a continuing tug-of-war over what it can charge Ohio customers. AEP Ohio had several cases pending before the Public Utilities Commission of Ohio (PUCO), which approves all rate increases, including a proposed electric security plan setting rates from January 2012 through May 2014. In early September, AEP Ohio came to an agreement with most stakeholders on the rate plan and two other issues, but has other outstanding cases before the PUCO.
The settlement, which was signed by more than 20 organizations representing customers, suppliers, environmental groups and local governments, gave AEP Ohio the authority to merge its two operating companies--Columbus Southern Power (CSP) and Ohio Power--as well as to separate its Ohio generation assets from its regulated energy delivery system by mid-2015. Rate-wise, AEP says starting Jan. 1, a typical CSP customer using 1,000 kilowatt hours per month will pay $117.96, down $4.54. A typical Ohio Power customer using the same amount of electricity would pay $115.65, a $4.41 increase.
AEP Ohio also agreed to create the AEP Ohio Growth Fund to support economic development efforts, and will contribute $5 million annually through May 2016. The company's Partnership with Ohio Fund, its shareholder-funded initiative to benefit low-income customers, will continue with $3 million in annual funding.
Prior to the settlement, Morris cast the rate increase as a necessary one: "Over the last eight years, we've spent somewhere between $10 billion and $20 billion on our energy generation and delivery systems, and the way utility rates are structured, our customers pay for those capital investments. So I understand that the upward rate pressure, on occasion, is somewhat disruptive to customers. I'm fully aware of that, and yet we remain the lowest-cost energy supplier in every jurisdiction in which we do business."
Ohio accounts for roughly half of AEP's business earnings; the unresolved rate issue led to investor unhappiness. "Equity investors detest uncertainty," Kalton says. AEP Executive Vice President and Chief Financial Officer Brian Tierney addressed the issue in a Sept. 7 settlement conference call with investors and analysts: "If that's one of the reasons for the discount of our stock, we certainly hope to see that discount shrink."
Hilliard Lyons' Burks calls the agreement "certainly a positive, in the sense that it eliminates regulatory uncertainty for the next several years, and that's clearly an issue that has hung over the company for some time and has been a source of investor concern."
But, he cautions, by moving toward a hybrid operation, AEP raises its risk profile. Long-term, nonregulated transmission would make up 25 percent to 30 percent of AEP's business, with regulated delivery the remainder. "With a larger component of earnings coming from an unregulated source, that has the potential for making earnings more volatile, longer-term. That can be a positive, that can be a negative. ... It will change the way we look at and perhaps value AEP going forward," Burks says.
While Burks maintained a "buy" rating, at least one other firm, Bank of America Merrill Lynch, initially downgraded AEP from "buy" to "neutral" as a result of the settlement.
The Ohio Consumers' Counsel and retail energy provider FirstEnergy Solutions also balked and didn't sign the agreement. "The settlement filed today is no better for customers than AEP's initial plan which was overwhelmingly opposed by consumer and business groups," FirstEnergy President Donald R. Schneider said in a statement. "With this settlement, customers will be denied the benefits of low prices from the competitive market and be illegally burdened with high electric prices for years to come-all to benefit AEP shareholders at the expense of customers."
The settlement still needs to be approved by PUCO following testimony and a hearing, hopefully before Jan. 1, says spokesman Matt Butler.
Meet the New Boss
For nearly eight years, AEP has been steered by Morris, a power industry veteran. He's past chairman of EEI, which in September gave him the Distinguished Leadership Award, as well as of the Institute of Nuclear Power Operations. Morris serves on the U.S. Department of Energy Electricity Advisory Board and also has been engaged in the Columbus community, serving as chairman of the Columbus Downtown Development Corp. (CDDC) and Capitol South Community Urban Redevelopment Corp. and as a member of Battelle's board of directors.
A member of the Columbus Partnership and its executive committee, Morris "represents the gold standard" for CEO and company engagement, says Fischer: "Maybe if you're in my shoes it's dangerous to say, but there's probably no other CEO in Columbus that is more active day-to-day in the broad civic agenda of our community than Mike Morris."
When Morris arrived from Northeast Utilities System, "AEP had diversified itself into a very large energy trading organization. It held assets throughout the world," he says. "I came in here a year after Enron fell apart, and we immediately began to downsize the energy-trading shop and move it into a much more conventional, off-system sales of electricity that our retail customers did not need."
The company had already started selling its international assets, but became more aggressive under Morris's leadership, even though it meant taking some financial losses. "We refocused American Electric Power on its core competencies, and that was generating electricity, transmitting electricity and distributing electricity to our customers, focusing on capital investments at our utility properties in all 11 states, obviously with a concentration here in Ohio," Morris says.
Upon his arrival, Morris "immediately started changing our culture and immediately started changing the way that management related to employees," says longtime AEP board of directors member Les Hudson. He "really set the example for integrity, for honesty, for trustworthiness, and has built his leadership on those kinds of foundations."
Now more change is coming. On Nov. 11, Morris will celebrate his 65th birthday and with it, his retirement from AEP, though he will remain nonexecutive chairman through 2013. Last year, Morris's base salary was more than $1.2 million, with total compensation topping $9 million. Day-to-day operations will be handed over to Akins, 51, who has worked his way up through the company since his original employer, Central and South West Corp., merged with AEP in 1998.
Akins was chosen by the board of directors because "they thought Nick had the perfect blend of engineering background, of state experience, federal experience; Nick had been in a number of different places inside the company and probably was one of the most productive operating company presidents we ever had as he managed our Southwestern Electric Power Company," Morris says.
An electrical engineer by training, Akins is chairman of the Coal Utilization Research Council and a member of the boards of the Electric Power Research Institute and several AEP subsidiaries. In Central Ohio, Akins sits on the boards of the Mid-Ohio Foodbank and the Greater Columbus Arts Council.
"Nick is going to bring his own leadership style," says Fischer. Akins "knows Columbus well; he is no stranger to both AEP's history and legacy of community engagement; and Nick in his own right has been very active."
Akins says he sees AEP's future as one where natural gas becomes an increased part of the utility's portfolio and where technology will lead to "less but more efficient, cleaner coal" and the use of more nuclear and renewable power. "Invariably, when AEP is invited to be in a panel discussion at a conference, we're there as a representative of coal-which is fine, and I certainly want coal to be a large part of our mix in the future. But what I want AEP to be seen as is a balanced-energy portfolio company that is very credible and is moving toward a clean-energy economy."
Now is a time of major transformation, he says. "In my 29 years [in the industry], I have never seen this much change, because you not only have things changing on the resource side, you have things changing on the financial side as well. With regulators, they're having to change based on the times, and then the customers themselves, the customer usage is changing. And so it really is a new day, and it's one where I think we have to carry the baggage that we have of the past and transform it into a workable solution for the future."
Jennifer Wray is a staff writer for Columbus C.E.O.
Reprinted from the October 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.