Coal is an abundant, indigenous resource used to produce roughly half of the nation’s electricity supply. It has been our most cost-effective fuel for more than a century, enabling us to provide a source of reliable, affordable electricity to our customers. Coal will play an important role in our energy future, but natural gas looks increasingly attractive given the promise of continued relatively low natural gas prices due to the development of shale gas and the high cost of environmental controls associated with coal-fired generation.

In 2010, AEP consumed 67 million tons of coal, which accounted for 80 percent of the energy we produced. As we retire some of our coal units and adjust the operation of other units during the next decade, we expect that our generation from coal will gradually decline. We will continue to be a major consumer of coal, but we are aware of the increasing difficulty of negotiating long-term fuel contracts with the current heightened regulatory and market uncertainty.

Maintaining an adequate fuel supply is a key part of ensuring the operational reliability of our system. Conversely, excessive stockpiles increase financial and regulatory risk. AEP generally targets coal inventory levels at about 40 days of supply. But the 2008-2009 recession caused energy demand to drop precipitously, which resulted in a corresponding increase in AEP’s coal inventories. The combined average inventory level grew to a peak of 64 days before declining to 50 days by the end of 2010. To help address this, we renegotiated contracts with a number of our suppliers. We expect to return to near target levels by the end of 2011.

Natural gas generation creates about half the carbon emissions of coal per kilowatt-hour of energy produced. Largely because of this advantage, natural gas is widely viewed as the “bridge” fuel to a future when new technologies and renewable energy become widely available and cost-competitive. We have increased our natural gas generating capacity during the past five years and will continue to do so as long as it remains a cost-effective fuel option. We have added 4,181megawatts (MW) of nominal natural gas capacity to our system since 2005.

Our natural gas generating units consumed nearly 134 billion cubic feet of natural gas in 2010, a 40 percent increase over 2009. We expect our natural gas-fueled generation will further increase from approximately 8 percent of our fuel portfolio today to 15 percent during the next decade.

In 2010, we completed construction of the 508-MW J. Lamar Stall unit in Shreveport, La., to serve Southwestern Electric Power Co. (SWEPCO) customers. This combined cycle gas plant is co-located with SWEPCO’s Arsenal Hill Plant to take advantage of existing natural gas pipelines and electric transmission lines. During the peak construction period, the Stall Unit provided 700 jobs and now employs 10 permanent workers.

We plan to complete the 580-MW Dresden combined-cycle gas plant in Ohio and have it operational in the first quarter of 2012, creating approximately 25 permanent jobs.

One of the factors driving our transition to natural gas is the growing supply of shale gas. The Marcellus, Utica, Haynesville, Fayetteville, Eagle Ford and Woodford shale formations are located within or close to AEP’s service territory. The U.S. Energy Information Administration (EIA) Annual Energy Outlook 2011 estimates that the United States has 827 trillion cubic feet (Tcf) of natural gas shale resources. If the predictions are accurate, that is 480 Tcf more than was estimated in the EIA’s Annual Energy Outlook 2010 and represents a long-term source of supply that should lead to stable prices.

As the shale gas market develops, we are talking to pipeline companies and gas producers about building infrastructure capable of delivering the gas to our power plants. As these new markets take shape, it will refine our decisions about choosing the optimal sites to build new gas plants to serve our customers.

Energy Security

A secure energy future will be based primarily on secure fuel resources, secure energy delivery systems and greater energy efficiency. The lack of a comprehensive federal energy policy creates uncertainty and makes it more difficult for AEP and the industry to provide energy security solutions. Nonetheless, we are working with our regulators, legislators and other stakeholders to create solutions that benefit our customers and the nation as a whole.

Workers assemble some of the massive pipes that will be part of the 580-MW Dresden Plant combined-cycle natural gas-fired power plant in Dresden, Ohio.