Outlook for Utilities Stocks

Our Outlook for Utilities Stocks

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GEN.TO	0.17	0.00

Travis Miller, On Wednesday March 30, 2011, 7:00 am EDT

Increased scrutiny that nuclear operators could face worldwide following the disaster in Japan should not have a long-run impact on valuations.
Washington continues its push to reduce environmental impacts from power plants, creating industry winners and losers.
Even with dividend yields near decade highs, the last six months have been a tough period for regulated utilities as investors rotate back into riskier holdings.

Before disaster hit Japan, all eyes in the utility sector were on Washington, waiting for the Environmental Protection Agency's landmark power plant environmental regulations. But when the earthquake and tsunami disabled two of Japan's nuclear plants, focus immediately turned to the costs and benefits of nuclear power. Once considered big winners as environmental standards tightened worldwide, nuclear operators now could face higher operating costs, capital investment requirements, or plant shutdowns.

So instead of a clearer long-term outlook for the sector following the EPA's mid-March proposal limiting hazardous air pollutants, we now see even more uncertainty ahead. We think the market generally has overreacted to nuclear fears while underestimating the EPA's impact. Thus, we continue to believe merchant nuclear operators such as Exelon , NRG Energy , and FirstEnergy present compelling risk-return profiles at current prices. They stand to benefit the most from tightening EPA standards targeting coal plants. Entergy , the second-largest U.S. nuclear operator also stands to benefit from higher power prices and coal plant closures, but we think its heightened nuclear re-licensing risk should give investors caution.

The utility sector as a whole has produced virtually no net returns for investors since September 2010. With the threat of rising interest rates and inflation, we continue to believe investors must choose carefully within the sector to realize attractive returns.

Industry-Level Insights
Power prices remain stagnant across the U.S., hurting the near-term outlook for independent power producers such as GenOn Energy (Toronto:GEN.TO - News) and NRG Energy, and diversifieds such as Exelon, FirstEnergy and Entergy. Natural gas prices, which drive power prices in most regions, are at the same level as they were in early 2009. The EPA proposals in March did nothing to move power prices, and forward curves continue pricing in virtually no change in power supply or demand.

We think the disconnect is widening between pricing signals and recent developments in the market. First, demand appears to be on the rebound. During the first quarter, seasonally adjusted generation output for the trailing 12 months was at its highest level in two years and was up 3% from its low in late 2009. Industrial demand is leading the way, up 5% from its lows in late 2009. Coal prices are up almost 70% from their lows in early 2009, raising costs in coal-heavy regions such as the Midwest and Mid-Atlantic regions and favoring low-cost generators. Gas oversupply concerns are beginning to subside as rig counts fall and drilling activity slows.

In addition, the EPA estimated its hazardous air pollutant proposal could shut down 10 gigawatts of coal plants, 3% of the fleet, as soon as 2014. We think this underestimates the actual impact, which could be closer to 50 GW. Political pressure to limit job losses in coal-heavy regions likely contributed to the EPA's low-ball estimate. All of these supply-demand drivers eventually should boost power prices and margins for low-cost operators like Exelon, NRG Energy, and GenOn Energy.

Among regulated utilities, the consolidation wave continued in the first quarter. Duke Energy made the biggest move yet when it proposed acquiring Progress Energy in a $25.7 billion deal that would make it the largest U.S. utility. PPL closed its $7.6 billion acquisition of E.ON's Kentucky utilities and made a $6.4 billion bid for E.ON's U.K. Central Networks regulated distribution utility. Northeast Utilities and NSTAR cleared several hurdles toward their marriage and AGL Resources is waiting on Illinois regulators to affirm its Nicor purchase. We think capital-hungry utilities such as Westar Energy and Portland General could be attractive targets for capital-rich acquirers.

Deal valuations support our view that regulated utilities are about 10% overvalued on average. Since we began calling regulated utilities overvalued in October 2010, the group has produced just 3% total returns with dividends offsetting negative price performance. Regulated utilities still yield 4.4% on average. But with rising Treasury yields since mid-2010, utility yields look much less attractive. We think rising Treasury yields will pressure regulated utility stock prices the rest of the year.

Our Top Utilities Picks
We remain bullish on utilities with exposure to a rebound in wholesale power markets, such as 5-star picks Exelon, NRG Energy, and GenOn Energy. All three own low-cost generation fleets in high-demand regions that can benefit from a cyclical rebound in natural gas and power prices. All three also have environmental profiles that could make them net beneficiaries from the proposed non-carbon EPA regulations. GenOn has no nuclear risk.

Among regulated utilities, we see buying opportunities in utilities yielding more than 5% with regulation that allows them to pass along higher costs on a timely basis. This combination of higher-than-average yield and timely rate recovery offers protection from higher interest rates and inflation, the key threats we see on the horizon. The only undervalued regulated utilities in our coverage universe as of late March are American Electric Power , National Grid , Westar Energy, and PG&E .

On a market-capitalization-weighted basis, the average sector price/fair value ratio is 0.94, up from 0.91 last quarter. Several large undervalued diversified utilities skew this average lower. The median price/fair value ratio for the sector is 1.06, the same level it was in October 2010. This reflects our view that the smaller, fully regulated utilities could underperform their larger, diversified peers. The median price/fair value ratio for independent power producers in our coverage universe is 0.72.

The utilities we highlight below feature high-quality assets, strong management teams, and good earnings-growth prospects. The 4- and 5-star names look attractive at today's market prices, while the 3-star pick reflects a name we think investors should keep high on their watchlists.

Top Utilities Sector Picks

NRG Energy
Star Rating: 5
Fair Value Estimate: $39.00
Economic Moat: None
Fair Value Uncertainty: High
Dividend Yield %: NA

GenOn Energy
Star Rating: 5
Fair Value Estimate: $7.00
Economic Moat: None
Fair Value Uncertainty: High
Dividend Yield %: NA

Exelon 
Star Rating: 5
Fair Value Estimate: $67.00
Economic Moat: Wide
Fair Value Uncertainty: Medium
Dividend Yield: 5.3%

American Electric Power
Star Rating: 4
Fair Value Estimate: $40.00
Economic Moat: Narrow
Fair Value Uncertainty: Low
Dividend Yield: 5.2%

National Grid
Star Rating: 3
Fair Value Estimate: $51.00
Economic Moat: Narrow
Fair Value Uncertainty: Medium
Dividend Yield: 6.0%

Data as of 3-21-11.

NRG Energy We think NRG is an excellent pick for investors looking for an independent power producer with a high-quality management team and asset profile that will benefit from an improving U.S. economy and rising power demand. Its low-cost legacy power plants in Texas, California, and the Northeast still represent the bulk of its long-term value. But after nearly $3 billion of acquisitions during the past year, management has diversified its earnings profile with more natural gas generation, renewable energy, and countercyclical retail businesses. We think these moves preserve the firm's option-like upside in more favorable commodity cycles while reducing its exposure to tighter environmental regulations. Its $3 billion of cash at year-end 2010 enhances its financial flexibility.

GenOn Energy 
GenOn's creation from the December 2010 merger of Mirant and RRI Energy gives investors a diversified portfolio of power plants and upside from management's projected merger synergies. We estimate the $150 million of annual projected synergies are worth nearly $2 per share if they are fully realized. Synergies notwithstanding, GenOn's prospects remain closely tied to power markets in the Mid-Atlantic region. Current forward power markets are pricing in no demand recovery and no change in supply, but we believe coal plant closures and a return of economically sensitive demand growth should drive up power and capacity prices. Its most valuable coal plants have state-of-the-art environmental controls, protecting it from EPA regulations. GenOn's current hedges lock in what we estimate will be trough EBITDA in 2012, unless power markets deteriorate materially. Our net asset value calculation suggests the company is worth $8 per share with synergies.

Exelon 
Operating leverage from the largest nuclear fleet in the U.S. is key for our only wide-moat utility. Despite today's weak power prices and prospects for a 20% earnings drop by 2012, we believe Exelon's long-term value remains intact, and its 8 times EV/EBITDA market valuation ignores this upside. We are most focused on the company's ability to hedge in favorable economics for 2013 and beyond. A rebound in Midwest industrial power demand, higher gas prices, and strict environmental regulations would help. We estimate a 10% move in 2013 power prices from today's levels translates into $500 million of incremental EBITDA. Proposed non-carbon emissions regulations could add $600 million of incremental pre-tax margin ($0.60 per share aftertax) by 2014, and carbon caps could add another $900 million of pre-tax margin ($0.83 per share aftertax). Our primary concern is M&A risk and increased nuclear oversight.

American Electric Power 
After a period of slow earnings and dividend growth, we think American Electric Power has the potential to grow faster than most other regulated utilities during the next several years. With significant investments in new generation, transmission, distribution, and environmental upgrades, we expect regulators to grant rate increases that will support 5%-7% ongoing earnings growth between 2010 and 2014, and likely faster growth thereafter given favorable regulation for its transmission investments. AEP is one of the few utilities in our coverage universe that is free cash flow positive, and we expect it to remain so throughout our forecast period. In addition, AEP's 5.4% dividend yield is quite attractive, and we expect dividends to grow at a pace in line with earnings growth.

National Grid 
This U.K.-based regulated utility should benefit substantially from a shift away from fossil fuels and toward renewables in the U.K. and U.S. Northeast. Building high-return transmission grids on both sides of the Atlantic should drive strong earnings growth while favorable regulated rate structures protect those earnings from inflation through automatic adjustments. With a dividend yield near 6% and management's 8% dividend-growth target through 2012, we think National Grid offers one of the most attractive total-return packages among regulated utilities. We expect the annual fiscal 2011 dividend to climb to GBX 36.37 per share ($2.87 per ADR share), a 6.0% yield as of mid-March.

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Fuel Fix » Power market provides cheapest energy, PJM tells NJ

Fuel Fix » Power market provides cheapest energy, PJM tells NJ

U.S. Supreme Court Reverses AEP v. Connecticut: EPA, Not Judges and Juries, Will Decide Climate Change Policy

U.S. Supreme Court Reverses AEP v. Connecticut: EPA, Not Judges and Juries, Will Decide Climate Change Policy


by Renewable Energy Insights
Yesterday, the Supreme Court spoke for the second time on climate change. Observing that the Supreme Court “endorses no particular view of the complicated issues related to carbon-dioxide emissions and climate change,” a unanimous Court, in a decision written by Justice Ruth Ginsburg, held that Congress, through the U.S. Environmental Protection Agency – and not a group of states and cities using federal common law – should decide national policy on climate change. The case is a welcome relief for the utility industry but not the last word on whether greenhouse gas emitters can be sued in tort.

Background
Unlike the complex facts related to global warming, the facts in this case are relatively straightforward. In July 2004, two groups of plaintiffs filed separate complaints against four major electric power companies and the TVA. The first group included eight states and New York City, and the second joined three nonprofit land trusts. According to the complaints, the defendants were the five largest emitters of carbon dioxide in the United States. By contributing to global warming, the plaintiffs asserted, the defendants’ emissions created a “substantial and unreasonable interference with public rights” in violation of the federal common law of interstate nuisance, or, in the alternative, state tort law. The states alleged the public lands, infrastructure, and health were at risk from climate change. The trusts urged that climate change would destroy habitats for animals and rare species of trees and plants. All of the plaintiffs sought injunctive relief requiring each defendant to “cap its carbon dioxide emissions and then reduce them by a specified percentage each year or at least a decade.” The lawsuits, in other words, attempted to cap carbon emissions from electric utilities.



The District Court dismissed both suits as presenting non-justiciable political questions, but the Second Circuit reversed. On the fundamental issues, the Second Circuit held not only that the suits were not barred by the political question doctrine, but the plaintiffs had adequately alleged Article III standing. Specifically, the Second Circuit held the Clean Air Act did not “displace” the federal common law of public nuisance. At the time of the Second Circuit’s decision, EPA had not yet promulgated any rule regulating greenhouse gases, a fact the court thought dispositive.
The Supreme Court’s Decision


The Court decided the case based on the doctrine of legislative displacement. According to the Court, when Congress enacted the Clean Air Act, Congress spoke on who should regulate carbon dioxide and climate change. And in its Massachusetts v. EPA decision in 2007, the Supreme Court made it clear that EPA was required to regulate carbon dioxide emissions under certain provisions of the Clean Air Act. In direct response to that decision, the Court noted, in December 2009 EPA released its draft endangerment finding proposal, has committed to issuing a proposed greenhouse gas New Source Performance Standards (NSPS) for electric utilities by July 2011, and expects to promulgate a final rule by May 2012.
The Court found it particularly important that Section 111(d) authorizes EPA to establish greenhouse gas NSPS for existing sources. On the other hand, EPA found that federal common law tort actions were displaced even if EPA decided against issuing GHG NSPS at all. According to the court, “[t]he critical point is that Congress delegated to EPA the decision whether and how to regulate carbon-dioxide emissions from power plants; the delegation is what displaces federal common law. Indeed, were EPA to decline to regulate carbon-dioxide emissions altogether at the conclusion of its ongoing §7411 rulemaking, the federal courts would have no warrant to employ the federal common law of nuisance to upset the agency’s expert determination.”
The Court also noted that the Clean Air Act provides multiple avenues for enforcement. EPA may commence civil and criminal enforcement actions, and the Act provides for private enforcement through citizen suits. If EPA does not set emissions limits for a particular pollutant or source of pollution, the Court held, states and private parties may petition for a rulemaking on the matter, and EPA’s response will be reviewable in federal court. Accordingly, the Act itself provides a means to seek limits on emissions of carbon dioxide from domestic power plants – the same relief the plaintiffs seek by invoking federal common law. In its opinion, the Supreme Court saw no room for a parallel enforcement track.
In addition, for the Court, it made more sense for EPA to tackle the problem of climate change first. Indeed, the Court held, this prescribed order of decision making – the first decider under the Act is the expert administrative agency, the second, federal judges – is a key reason to resist setting emission standards by judicial decree under federal tort law. The Clean Air Act entrusts the complex balancing of issues to EPA in the first instance, in combination with state regulators.
In addressing concern for trial courts, the Court found that it is “fitting that Congress designated an expert agency, here, EPA, as best suited to serve as primary regulator of greenhouse gas emissions.” For the Court, EPA is “surely better equipped to do the job than individual district judges issuing ad hoc, case-by-case injunction.” Judges may not commission scientific studies or convene groups of experts for advice, or issue rules under notice-and-comment procedures inviting input by any interested person, or seek the counsel of regulators in the states where defendants are located.
What The Decision Did Not Decide

Several key issues on climate change tort lawsuits remain open.

First, at the end of its decision, the Court noted that its decision did not address whether state tort actions were pre-empted. The plaintiffs had brought state law tort claims, but the appellate court did not reach those issues and so neither did the Supreme Court. There were also state law claims brought in the ongoing Kivalina lawsuit now in the 9th Circuit and in the Comer lawsuit dismissed and now refilled in Mississippi. Noting that none of the parties briefed preemption or otherwise addressed the availability of a claim under state nuisance law, the Court left that matter open for consideration on remand. The unanswered question is whether displacement equates to pre-emption under the Clean Air Act when the topic is climate change.

Second, the Court did not reach the issue of whether, regardless of displacement, there is a cause of action under federal tort law for greenhouse gas emissions. This could be an important issue given efforts in Congress to repeal EPA’s authority to regulate greenhouse gases. Depending on the nature of such legislation, repealing EPA’s authority to regulate greenhouse gas emissions could mean that the displacement doctrine would not prevent federal common law tort claims. But the Court left open the issue of whether such claims might be dismissed anyway for failing to state a cause of action.



Finally, the Court split 4-4 on standing and so declined to disturb the appellate court decision finding that the case should not be dismissed on that basis. But as in Massachusetts v. EPA, which also refused to find that the case should be dismissed for lack of standing, the plaintiffs in AEP v. Connecticut were states rather than individuals or organizations. Given that the standing issue in Massachusetts v. EPA was decided in part because of the “special solicitude” that Courts accord states in having access to the federal courts in cases involving impacts originating from other states, it is possible that standing may still prevent non-state parties from pursuing climate change nuisance causes of action.



Implications



As decided, this case is less about the importance of global warming and more about which branch should decide energy and environmental policy appropriate to address climate change. The decision is not pro-business or anti-environment; the decision says nothing about what measures should be taken to address climate change, if any. Rather, the take-away is that Congress – for good or bad – should decide how the United States will respond to climate change in the United States, not Courts and not states or cities. Still, given the fact that the Court did not resolve the state law issues, it can be expected that climate change nuisance actions will continue, including on remand of AEP v. Connecticut, until that issue is resolved.

Toshiba cautious on nuclear sales, eyes renewables

A view shows Toshiba Corp's logo at the fourth International Photovoltaic Power Generation (PV) Expo in Tokyo March 2, 2011.

Credit: Reuters/Yuriko Nakao

By Isabel Reynolds

Tokyo | Tue May 24, 2011 7:07am EDT

Tokyo (Reuters) - Toshiba Corp said it may not reach its target of 39 orders for nuclear reactors until 2-3 years later than expected, and that it would increase focus on renewables and smart grids as the crisis rumbles on at the Fukushima Daiichi nuclear plant. Despite the setback to its nuclear business, Toshiba said it aims to more than double its operating profit to 500 billion yen by the year to March 2014.
Engineers are battling to bring the Fukushima nuclear plant northeast of Tokyo under control more than two months after a 9.0 magnitude earthquake and tsunami devastated a swathe of Japan's coastline.
The incident has fueled public opposition to nuclear power in some countries and will likely lead to a tightening of safety regulations. Germany has already moved to close older reactors, while other governments have launched safety reviews.
"If everyone around the world is against nuclear power, there is no point in us saying it is a pillar of our strategy," Toshiba President Norio Sasaki told reporters. "But it is going to take some time to work out exactly what the environment is."
Orders for four AP1000 reactors in China are on target, but approval delays in the United States and other countries could delay by 2-3 years the firm's goal to expand nuclear sales to 1 trillion yen ($12.2 billion) and 39 reactor orders by March 2016, Sasaki said.
He added that the company's direct checks with customers had not yet found any planning to change their orders.
Toshiba, which has set up a 1,900-person team to help operator Tokyo Electric bring the plant under control, also said it will tap 700 billion yen of its funds to build new revenue streams and invest in its flash memory chips, batteries, smart grids and production in emerging markets.
Toshiba has been trying to lower its dependence on nuclear power for growth by investing in solar and other renewable energy sources, next-generation batteries and smart grids.
It now targets sales of 350 billion yen in solar, hydroelectric, geothermal and wind power technologies, 900 billion yen in smart grid products and 800 billion yen in low-power consumption motors, inverters and batteries.
The industrial conglomerate's strategy will expand the company's 2011-2013 capital and research-and-development budget to 1.45 trillion yen, up from 1.3 trillion yen in 2010-2012.
MORE THAN DOUBLE
Toshiba said it was aiming for 500 billion yen in operating profit in the year to March 2014 on forecast sales of 8.5 trillion yen, compared with operating income of 240.3 billion yen in the year that ended in March 2011.
The announcement pushed its shares up 2.1 percent, compared with a 0.2 percent rise in the benchmark Nikkei average.
"The figures are pretty ambitious," said analyst Shuichi Ide of Mizuho Securities. "But I do wonder whether sales will rise that far. Will they be able to sell as many televisions and computers as they forecast?"
The company, whose products run the gamut from rice cookers to gas turbines, last week announced it would buy unlisted Swiss smart-meter manufacturer Landis+Gyr for around $2.3 billion.
Smart meters are an essential element of smart grids, which are being eyed by utilities and governments around the world as a means of saving energy and cutting carbon emissions.
They are designed to accommodate a range of generation options, including renewables, and to provide customers and utilities with more real time information, enabling them to manage usage and supply more efficiently.
Sasaki said the company still needed to beef up its cloud computing capabilities in order to compete in smart grids.
On Monday, Toshiba announced an alliance with South Korean wind power firm Unison Co. The Japanese firm will buy some 3 billion yen in Unison convertible bonds as the first step of the deal and the Nikkei newspaper reported it would raise its stake to about 30 percent in about a year.
Toshiba also said it plans to boost output at a lithium ion battery plant in Kashiwazaki, Niigata Prefecture, in anticipation of higher demand for use in smart-grid systems. ($1 = 81.955 Japanese Yen)
(Additional reporting by Mayumi Negishi in Tokyo and Arpita Mukherjee in Bangalore; Editing by Chris Gallagher and Joseph Radford)

Google makes $280-million residential solar investment – Daily Commercial News

Google makes $280-million residential solar investment – Daily Commercial News

Blackouts Pushed Electricity Prices to the Limit

By Matt Largey

Enlarge image

Photo by Nasha Lee/KUT.

It's been reported that last week's rolling blackouts that left parts of the state in the dark for 15 minutes or more--in some cases, a lot more)--made for sky-high wholesale electric prices.

The only thing that stopped them from rising higher was the Electric Reliability Council of Texas' (ERCOT) "system-wide offer cap," that is, the top rate a power generator can charge for electricity.  The cap on the day of the blackouts was $3,000.  It had been raised from $2,250 just the day before.  Two weeks earlier, it was only $180.

That's led some to question the timing and the extent of rolling outages last week.

The state's Public Utility Commission has ordered an investigation into the outages.

RELATED POSTS: 

AEP Joins With TVA to Develop Regional Transmission Projects

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COLUMBUS, Ohio, June 2, 2011 /PRNewswire/ -- American Electric Power (NYSE: AEP) has signed a memorandum of understanding (MOU) with Tennessee Valley Authority (TVA) to pursue extra-high voltage transmission projects designed to strengthen the transmission system in Tennessee, Virginia and Kentucky.

Through the non-binding MOU, AEP and TVA will collaboratively identify beneficial transmission enhancements along the interface of the PJM Interconnection (PJM) and TVA transmission systems. Joint development agreements would be negotiated for any potential future projects.

"This region's transmission system, which was home to some of the very first extra-high voltage transmission projects built inthe United States, has not seen significant transmission investment for nearly three decades. It is time to build additional transmission in these states to maintain a strong regional grid," said Susan Tomasky, president, AEP Transmission.

"A reliable supply of electricity is critical for economic growth. Partnering with TVA will leverage our vast transmission expertise and resources to ensure that both systems have the transmission capacity necessary to power this region's economic future," Tomasky said.

Through its Pioneer Transmission LLC joint venture with Duke Energy, AEP also signed a second MOU with TVA to develop a transmission project in Indiana and Kentucky. The companies propose to build 55 miles of 765-kilovolt (kV) extra-high voltage transmission connecting AEP's Rockport Station, located east of Evansville, Ind., with TVA's Paradise Fossil Plant inDrakesboro, Ky. The project also would include construction of a new 765-kV substation at Paradise Fossil Plant. The project would cost approximately $275 million, depending on approved routing, with a projected completion date to be determined by the PJM and TVA.

AEP, Duke and TVA will submit the Rockport-Paradise proposal to the PJM for consideration in their regional planning process. Additionally, the project will require siting approval from the Kentucky Public Service Commission. Ownership shares of the final project will be determined by TVA and the PJM approval processes.

The Rockport – Paradise project complements the Greentown – Rockport transmission line that AEP and Duke proposed inAugust 2008. Greentown – Rockport received a final order Jan. 21, 2010 from the Federal Energy Regulatory Commission granting the project a formula rate and project incentives. AEP and Duke are working with PJM and MISO to move the project through the respective approval processes. Pioneer Transmission LLC expects to file for utility status in Indiana later this year.

American Electric Power is one of the largest electric utilities in the United States, delivering electricity to more than 5 million customers in 11 states. AEP ranks among the nation's largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the U.S. AEP also owns the nation's largest electricity transmission system, a nearly 39,000-mile network that includes more 765-kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined. AEP's transmission system directly or indirectly serves about 10 percent of the electricity demand in the Eastern Interconnection, the interconnected transmission system that covers 38 eastern and central U.S. states and eastern Canada, and approximately 11 percent of the electricity demand in ERCOT, the transmission system that covers much of Texas. AEP's utility units operate as AEP Ohio, AEP Texas, Appalachian Power (in Virginia and West Virginia), AEP Appalachian Power (inTennessee), Indiana Michigan Power, Kentucky Power, Public Service Company of Oklahoma, and Southwestern Electric Power Company (in Arkansas, Louisiana and east Texas). AEP's headquarters are in Columbus, Ohio. Visit AEP on the web atwww.aep.com.

This report made by American Electric Power and its Registrant Subsidiaries contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although AEP and each of its Registrant Subsidiaries believe that their expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Among the factors that could cause actual results to differ materially from those in the forward-looking statements are: the economic climate and growth in, or contraction within, AEP's service territory and changes in market demand and demographic patterns; inflationary or deflationary interest rate trends; volatility in the financial markets, particularly developments affecting the availability of capital on reasonable terms and developments impairing AEP's ability to finance new capital projects and refinance existing debt at attractive rates; the availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material; electric load and customer growth; weather conditions, including storms, and AEP's ability to recover significant storm restoration costs through applicable rate mechanisms; available sources and costs of, and transportation for, fuels and the creditworthiness and performance of fuel suppliers and transporters; availability of necessary generating capacity and the performance of AEP's generating plants; AEP's ability to recover Indiana Michigan Power's Donald C. Cook Nuclear Plant Unit 1 restoration costs through warranty, insurance and the regulatory process; AEP's ability to recover regulatory assets and stranded costs in connection with deregulation; AEP's ability to recover increases in fuel and other energy costs through regulated or competitive electric rates; AEP's ability to build or acquire generating capacity, including the Turk Plant, and transmission line facilities (including the ability to obtain any necessary regulatory approvals and permits) when needed at acceptable prices and terms and to recover those costs (including the costs of projects that are cancelled) through applicable rate cases or competitive rates; new legislation, litigation and government regulation, including requirements for reduced emissions of sulfur, nitrogen, mercury, carbon, soot or particulate matter and other substances or additional regulation of flyash and similar combustion products that could impact the continued operation and cost recovery of AEP's plants; timing and resolution of pending and future rate cases, negotiations and other regulatory decisions (including rate or other recovery of new investments in generation, distribution and transmission service and environmental compliance); resolution of litigation (including AEP's dispute with Bank of America); AEP's ability to constrain operation and maintenance costs; AEP's ability to develop and execute a strategy based on a view regarding prices of electricity, natural gas and other energy-related commodities; changes in the creditworthiness of the counterparties with whom AEP has contractual arrangements, including participants in the energy trading market; actions of rating agencies, including changes in the ratings of debt; volatility and changes in markets for electricity, natural gas, coal, nuclear fuel and other energy-related commodities; changes in utility regulation, including the implementation of electric security plans and related regulation in Ohio and the allocation of costs within regional transmission organizations, including PJM and SPP; accounting pronouncements periodically issued by accounting standard-setting bodies; the impact of volatility in the capital markets on the value of the investments held by AEP's pension, other postretirement benefit plans and nuclear decommissioning trust and the impact on future funding requirements; prices and demand for power that AEP generates and sells at wholesale; changes in technology, particularly with respect to new, developing or alternative sources of generation; and other risks and unforeseen events, including wars, the effects of terrorism (including increased security costs), embargoes and other catastrophic events.

SOURCE American Electric Power