01—Abstract
Summary
Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported 2006 results that improved on 2005 but were pressured by a non-cash charge and mild weather.
Consolidated net income rose to $1.002 billiona (EPS $2.54 basic) from $814 million, though income before discontinued operations, extraordinary items and accounting changes fell $37 million to $992 million, mainly because of a $136 million after-tax impairment on the sale of the Plaquemine Cogeneration Facility to Dow. Utility Operations earnings rose $10 million to $1.028 billion, helped by new retail rates in Ohio and other states and offset by mild weather, lost SECA transmission revenues and higher operating costs. MEMCO barging earnings jumped to $80 million on strong freight demand.
The balance sheet and capital plan dominate the investment case. Total assets reached $37.99 billion, long-term debt rose to $13.7 billionb, and the debt-to-capital ratio climbed to 59.1% from 57.2%, driven by $1.74 billion of Texas securitization bonds. Management forecasts roughly $3.5 billion of 2007 construction spending and about $9.9 billion over 2007–2009, largely for environmental retrofits, new gas-fired and coal-related generation, and a proposed $3 billion 765kV transmission line (AEP Interstate Project).
Credit ratings were stable (Moody's Baa2, S&P BBB, Fitch BBB), and the quarterly dividend was raised 5.4% to $0.39c. Key risks include pending rate cases in Virginia, Texas and Oklahoma, a possible $126 million SECA refund, the Texas true-up appeal (where an adverse ruling could exceed TCC's common equity), an ongoing Clean Air Act NSR enforcement case, the Enron/BOA cushion-gas litigation, and rising coal costs. The filing is a combined report covering AEP and ten operating subsidiaries.
02—Key points
Key Highlights
- Consolidated net income of $1.002 billion ($2.54 basic EPS), up from $814 million ($2.09) in 2005, though pre-extraordinary earnings fell 3.6% to $992 million due to a $136M after-tax Plaquemine impairment.
- Utility Operations earnings rose to $1.028 billion, driven by new Ohio RSP rates (a $244M retail margin increase), partly offset by mild weather and lost SECA transmission revenue.
- MEMCO barging earnings more than tripled to $80 million on tight barge supply and higher freight rates.
- Debt-to-capital rose to 59.1% from 57.2% after $3.4B of new long-term debt, including $1.74B of Texas securitization bonds; total assets reached $37.99B.
- Capital program of about $9.9B over 2007–2009 (≈$3.5B in 2007), including environmental retrofits, new gas-fired units and the $3B AEP Interstate 765kV line.
- Quarterly dividend increased 5.4% to $0.39 per share; total shareholder return of 18.8% in 2006.
- Material legal and regulatory exposures: a potential $126M SECA refund, Texas stranded-cost appeal (adverse outcome could exceed TCC equity), NSR Clean Air Act litigation, and Enron/BOA cushion-gas dispute.
03—Questions
Frequently Asked Questions
Why did AEP's pre-extraordinary earnings decline in 2006 even though Utility Operations improved?
Income before discontinued operations, extraordinary items and accounting changes fell $37 million to $992 million, primarily because of a $136 million after-tax impairment recorded in Q3 2006 on the sale of the Plaquemine Cogeneration Facility to Dow. This was partly offset by a $59 million increase in MEMCO barging earnings and a $10 million increase in Utility Operations earnings.
How much is AEP planning to spend on capital projects, and how will it be funded?
AEP projects about $9.9 billion of capital expenditures for 2007–2009, with roughly $3.5 billion of construction spending in 2007 plus $427 million for purchased gas-fired units. Management says the program will require additional capital markets funding, and the debt-to-capital ratio already rose to 59.1%, so credit-rating stability is a key consideration.
What are the biggest pending regulatory or legal risks for investors?
Key items include pending base rate cases in Virginia (APCo, $198M requested), Texas (TCC/TNC transmission and distribution rates) and Oklahoma (PSO, $50M); a FERC decision that could require up to $126M of SECA refunds; the Texas true-up appeal, where an adverse ruling could substantially reduce TCC's stranded cost recovery; and the Clean Air Act NSR case, whose outcome and penalties cannot yet be estimated.
Did AEP's credit ratings or dividend change in 2006?
Credit ratings were stable: Moody's Baa2 senior unsecured, S&P BBB (business risk profile improved from six to five), and Fitch BBB, with TNC placed on negative outlook by Fitch. The quarterly common dividend was raised 5.4% to $0.39 per share in October 2006, extending the company's long dividend history.
What drove the growth in MEMCO and the Texas transmission businesses?
MEMCO's barging segment earned $80 million in 2006 versus $21 million in 2005, reflecting strong demand and tight barge supply that raised freight rates and utilization. In Texas, AEP announced a 50/50 transmission joint venture with MidAmerican (Electric Transmission Texas LLC) expected to invest over $1 billion in ERCOT projects, starting operations in the second half of 2007 pending PUCT and FERC approval.
04—Continue