Why did AEP's reported net income jump so sharply in 2004?

Most of the swing comes from 2003 charges that did not recur. 2003 included roughly $960 million of after-tax impairments and discontinued-operations losses, mainly on U.K. generation, gas assets and Texas plants. In 2004 AEP recorded income from discontinued operations of $83 million, largely from the U.K. sale. Income from continuing operations improved by about $605 million, but the 2004 results also carry a $121 million extraordinary loss on Texas stranded costs, so the underlying improvement is smaller than the headline figures suggest.

How significant is the Texas true-up risk for investors?

It is the largest identified contingency. TCC has recorded a net true-up regulatory asset of about $1.6 billion, of which roughly $1.4 billion is designated for securitization. The PUCT's CenterPoint order led TCC to write down $238 million of stranded generation costs and to record carrying costs of $302 million, but TCC's own true-up filing has not yet been made and management acknowledges the proceeding will be contentious and could produce material disallowances. Any shortfall would affect earnings, cash flow and possibly financial condition.

Is AEP's dividend likely to rise soon?

Not in the near term. The quarterly dividend remains $0.35 per share. Management has said it hopes to recommend gradual, sustainable increases only after its remaining asset divestitures are completed and the Texas true-up proceedings are finalized, and it is also directing substantial cash toward pension funding and a large capital program.

What are the main near-term rate and regulatory events?

Several rate cases are pending in 2005: TCC's Texas wires rate case (a reduction of $48-75 million is possible), PSO's Oklahoma general rate review (revenue deficiency of $28 million, with intervenors recommending cuts of $15-36 million), and SWEPCo's Louisiana base rate filing (a possible $15 million reduction). Ohio rate stabilization plans were approved in January 2005 with fixed annual generation increases of 3% for CSPCo and 7% for OPCo through 2008, subject to pending rehearing applications.

How large are the financing and capital requirements?

AEP forecasts $2.7 billion of construction expenditures for 2005, including substantial environmental investments. Debt reduction has been significant, but AEP also faces roughly $1.3 billion of long-term debt maturing in 2005 and $100 million per quarter of pension contributions. Management intends to fund the environmental program primarily from free cash flow and rate recovery, and it expects to replace its $1 billion credit facility expiring in May 2005 with a $1.5 billion five-year facility.

AEP 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2005. Cited figures are marked; the original filing is the authoritative source.

American Electric Power's 2004 Form 10-K (combined filing for AEP and its ten public utility subsidiaries) reports consolidated net income of $1,089 million^a, or $2.75 per share, up from $110 million ($0.29 per share) in 2003, and total revenues of $14.06 billion.

The improvement is driven largely by non-recurring items: income from discontinued operations of $83 million^b (mainly a gain on the U.K. generation sale), a $121 million after-tax extraordinary loss tied to Texas stranded cost adjustments, and the absence of roughly $960 million of 2003 impairments. Income before discontinued operations and extraordinary items rose to $1,127 million ($2.85/share) from $522 million ($1.35/share), with Utility Operations earning $1,171 million, down $48 million year over year due to the loss of Texas capacity auction true-up revenues and divested Texas generation. Balance sheet deleveraging was the central 2004 story.

AEP sold roughly $1.4 billion^c of assets (U.K. generation, Texas plants, gas storage, several IPPs), cut long-term debt by about $1.8 billion and short-term debt by $303 million, and reduced the debt-to-total-capital ratio from 64.6% to 59.1%. Moody's moved AEP's outlook to positive in August 2004. Liquidity was approximately $3.3 billion at year-end.

Common dividends were held at $0.35^d per quarter ($1.40 annually), with management signaling possible increases only after remaining divestitures and Texas true-up proceedings conclude. Key risks for investors include TCC's roughly $1.6 billion net true-up regulatory asset, which remains subject to contentious PUCT review and possible disallowance; pending rate reductions at TCC and PSO; pension underfunding of about $450 million requiring $100 million per quarter of 2005 contributions; substantial environmental capital needs (about $1.8 billion through 2010 under proposed rules, plus NSR litigation with the EPA); and a PUHCA challenge to the CSW merger. The company also settled CFTC, DOJ and FERC gas-reporting investigations for $81 million in January 2005.

02—Key points

Key Highlights

Net income of $1,089 million ($2.75/share) versus $110 million ($0.29/share) in 2003, but this includes $83 million from discontinued operations and a $121 million after-tax extraordinary loss; income from continuing operations before these items was $1,127 million ($2.85/share)
Debt-to-total-capital ratio improved to 59.1% from 64.6%, with long-term debt reduced by $1.8 billion and about $1.4 billion of asset sale proceeds in 2004
TCC carries a $1.6 billion recorded net true-up regulatory asset in Texas; a $185 million pretax write-down (extraordinary loss of $121 million after tax) was taken in Q4 2004 following the PUCT CenterPoint order, and further disallowances remain possible
Pension plans underfunded by about $450 million on an accumulated benefit obligation basis; $200 million discretionary contribution made in Q4 2004 with $100 million per quarter planned for 2005 to fully fund qualified plans by year-end 2005
Environmental capital plan of approximately $3.7 billion for 2004-2010 (about $5 billion through 2020), with $1.2 billion for SO2 scrubbers and $600 million for NOx compliance, plus ongoing NSR litigation with the Federal EPA
Dividend held at $0.35 per quarter ($1.40 annual); management hopes to recommend gradual increases after remaining divestitures and Texas true-up proceedings are complete
Moody's placed AEP on positive outlook in August 2004; liquidity of approximately $3.3 billion at year-end 2004 and a $500 million share repurchase authorization for 2005-2006

03—Questions

Frequently Asked Questions

Why did AEP's reported net income jump so sharply in 2004?
Most of the swing comes from 2003 charges that did not recur. 2003 included roughly $960 million of after-tax impairments and discontinued-operations losses, mainly on U.K. generation, gas assets and Texas plants. In 2004 AEP recorded income from discontinued operations of $83 million, largely from the U.K. sale. Income from continuing operations improved by about $605 million, but the 2004 results also carry a $121 million extraordinary loss on Texas stranded costs, so the underlying improvement is smaller than the headline figures suggest.
How significant is the Texas true-up risk for investors?
It is the largest identified contingency. TCC has recorded a net true-up regulatory asset of about $1.6 billion, of which roughly $1.4 billion is designated for securitization. The PUCT's CenterPoint order led TCC to write down $238 million of stranded generation costs and to record carrying costs of $302 million, but TCC's own true-up filing has not yet been made and management acknowledges the proceeding will be contentious and could produce material disallowances. Any shortfall would affect earnings, cash flow and possibly financial condition.
Is AEP's dividend likely to rise soon?
Not in the near term. The quarterly dividend remains $0.35 per share. Management has said it hopes to recommend gradual, sustainable increases only after its remaining asset divestitures are completed and the Texas true-up proceedings are finalized, and it is also directing substantial cash toward pension funding and a large capital program.
What are the main near-term rate and regulatory events?
Several rate cases are pending in 2005: TCC's Texas wires rate case (a reduction of $48-75 million is possible), PSO's Oklahoma general rate review (revenue deficiency of $28 million, with intervenors recommending cuts of $15-36 million), and SWEPCo's Louisiana base rate filing (a possible $15 million reduction). Ohio rate stabilization plans were approved in January 2005 with fixed annual generation increases of 3% for CSPCo and 7% for OPCo through 2008, subject to pending rehearing applications.
How large are the financing and capital requirements?
AEP forecasts $2.7 billion of construction expenditures for 2005, including substantial environmental investments. Debt reduction has been significant, but AEP also faces roughly $1.3 billion of long-term debt maturing in 2005 and $100 million per quarter of pension contributions. Management intends to fund the environmental program primarily from free cash flow and rate recovery, and it expects to replace its $1 billion credit facility expiring in May 2005 with a $1.5 billion five-year facility.

04—Continue

← View all 10-K filings