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2001 BW 50



Q&A with AEP's E. Linn Draper Jr.
The chairman is quick to distance his energy-trading company from Enron: "We have been conservative"

American Electric Power (AEP ) trailed only Enron in the volume of electricity and natural gas traded in 2001, and its rival's thunderous collapse shook AEP, too. The Columbus (Ohio) company said its earnings were clipped by $50 million in the fourth quarter because Enron no longer could make good on its energy trades or indemnify a Houston gas pipeline AEP bought from Enron last spring. Moreover, Enron's bankruptcy has forced AEP management to mount a nonstop road show to reassure investors that its bookkeeping is credible and its balance sheet sound.

Industry analysts say investors needn't fret about AEP, No. 35 on this year's BusinessWeek 50 list of top-performing companies. For one thing, it's big enough to handle a $50 million write-off and not suffer. After all, AEP boasted net income of $971 million in 2001 on revenue of $61.3 billion. Its debt still carries investment-grade ratings. Also, with Enron gone, AEP should be able to claim an even larger share of the wholesale energy market.

AEP is much more than a trading house. It's the largest producer of electricity in the U.S., with 38,000 megawatts of capacity. Its regulated utilities serve customers in 11 states, from Michigan to Virginia to Texas. AEP also has interests in coal mines, pipelines, and, thanks to another 2001 acquisition, the fourth-biggest fleet of river barges in the nation.

The company is now international, having picked up 4,000 megawatts of generating capacity in Britain in one of those 2001 deals. "We clearly are an entity that believes in the value of assets," Chairman and CEO E. Linn Draper Jr. recently said in an interview with BusinessWeek Chicago Correspondent Michael Arndt. Edited excerpts from their conversation follow:

Q: You had a great 2001, with sales almost doubling and net income more than tripling. How did you do it?
A: We did it through a variety of things. We have had, over the past five years, a pretty steady program to increase the wholesale part of our business -- the part outside our regulated business. In 2001 in particular we made several significant acquisitions. Our trading activities in both electricity and gas also increased substantially. Today, we're right at the top of the heap.

Third, one of the things that made 2001 such a good year for us was that 2000 was a bad year. We had a nuclear plant that was down the whole year, and it came back into service in 2001. That was very helpful.

Q: You did close on a number of acquisitions the past year. Should we assume you'll be out on the acquisition hunt again in 2002?
A: You should assume we'll be out on the hunt. Whether we succeed will depend on the price people will seek for their assets. I think a lot of things will come on the market as people try to strengthen their balance sheets. But we have not gotten into the frenzy to acquire assets that occurred three or four years ago. There were a lot of power plants sold in the U.S. then. We looked at every one of them, and we never could get ourselves around the price being asked.

That was similar to our experience in Europe until last year, when we bought the British plants. Those plants, for example, were bought a few years ago at $500 per kilowatt. We bought them the second time around for $200 per kilowatt. If the price is too high, we're willing to pass and just wait awhile.

Q: You have grown into a huge energy trader. Has the collapse of Enron helped or hurt you?
A: I don't think it has had too much impact, to tell you the truth. We have seen a very dramatic increase in a trading platform that we own a 5% piece of, called the Intercontinental Exchange. Much of the business that had been done at Enron Online, which went out of business, is now done on the Intercontinental Exchange. There's a lot more action there, and we feel good about that. But I'm not sure that the number of trades done by our people has gone up much.

Q: But investors seem much more skittish in this post-Enron era about corporate finances, especially if the companies are in the same business as Enron was. Have you had to go out into the marketplace to assure investors that you're not another Enron?
A: I think every company in the energy business is spending more time with investors and analysts than we did a year ago. People want assurance that there is a differentiation that's real. People are worried about what your exposure is to the trading business. We clearly are an entity that believes in the value of assets. We think that gives stability. Enron was not in favor of owning assets.

We do believe we are sufficiently different. We have been conservative with our finances and accounting, and we think that's going to pay off.

Q: Only a year ago, energy prices were shooting through the roof, and we were all reading and writing about blackouts in California. Today, prices have come back to earth. What do you foresee in the energy markets in 2002?
A: A lot of new generating capacity was installed in the last year that is now available in a relatively soft economy. So we're not in the situation we were in a few years ago, when we were pushing up against capacity limits. But almost all of that new electric capacity is gas-fired. And I think electricity prices will be heavily influenced by gas availability.

Today, that's no problem. We have a lot of gas because of a soft economy and mild weather. We will have to work off the gas that is now in storage. And that will take a combination of a pretty hot summer, a growing economy, and maybe a cold winter next year. So we're certainly not days from spiky prices, but we may not be many years from it.

Q: What do you see in the economy? Any signs of strengthening these days?
A: I wouldn't say we see anything dramatic. We don't see anything from our retail business that tells us it's worsening. But I don't see anything now very different from what we saw a couple of months ago.

Q: Concerning the structure of the company, half of it is a traditional utility business, which is stable but slow-growing. The other half is in wholesale trading and other unregulated businesses that are more volatile but high-growth. Does it make sense to keep both businesses under the same tent?
A: If you'd have asked me a year ago, I would have come down pretty strong on the side of splitting it up. There was a big premium for unregulated power generation and trading-type businesses. But those things certainly have fallen out of favor. And the stability that is provided by the earnings stream from the regulated business looks pretty good right now.

Also, even the unregulated piece of our company is not pure trading. A lot of the output of our unregulated power plants is sold under reasonably long-term contracts to entities at predictable prices. It's really only that piece that comes from pure trading that is problematic.

MARCH 3, 2002

Edited by Beth Belton

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