01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported 2007 results in its February 28, 2008 Form 10-K.
Consolidated revenues rose to $13.38 billiona from $12.62 billion, operating income increased to $2.32 billion from $1.97 billion, and net income reached $1.089 billion, or $2.72 diluted EPS, versus $1.002 billion in 2006. Income from continuing operations before discontinued operations and extraordinary items was $1.144 billion, boosted by the absence of a $136 million after-tax 2006 impairment on the Plaquemine cogeneration sale, retail rate increases, and favorable weather, partly offset by higher interest expense, storm restoration costs in Oklahoma, and NSR settlement charges. The company faces a heavy capital program: about $3.8 billion of construction spending is forecast for 2008, roughly $11.2 billion over 2008-2010, driven by environmental retrofits, roughly 1,800 MW of new generation, and IGCC plants in Ohio and West Virginia.
Debt rose to 60.7% of total capitalization, the senior unsecured ratings are Baa2/BBB/BBB, and Moody's placed several subsidiaries on negative outlook. Key uncertainties include Ohio's post-2008 generation pricing legislation, the Indiana base rate case, FERC SECA refund proceedings, the Bank of America/HPL litigation (about $427 millionb accrued including the deferred gain), and the Texas stranded cost appeals. For investors, AEP's dividend is $1.58 per share (up from $1.50), its earnings are supported by a large regulated asset base and a $2.5 billion liquidity position, but returns depend on timely rate recovery of a multi-billion-dollar investment program that is increasingly funded by debt.
02—Key points
Key Highlights
- Revenues of $13.38 billion (up from $12.62 billion) and operating income of $2.32 billion (up from $1.97 billion) in 2007.
- Net income of $1.089 billion, or $2.72 diluted EPS, versus $1.002 billion ($2.53) in 2006; 2006 included a $136 million after-tax Plaquemine impairment.
- Construction expenditures forecast at about $3.83 billion for 2008 and $11.2 billion over 2008-2010, including environmental controls and roughly 1,800 MW of new generation.
- Long-term debt rose to $14.99 billion; debt-to-total-capital increased to 60.7% from 59.1%, with about $2.5 billion of net available liquidity.
- Senior unsecured credit ratings of Baa2 (Moody's), BBB (S&P) and BBB (Fitch); Moody's placed APCo, OPCo, SWEPCo and TCC on negative outlook in January 2008 and Fitch downgraded PSO.
- Dividend increased to $0.41 quarterly ($1.58 annual cash paid in 2007, versus $1.50 in 2006), with 2007 total shareholder return of 13.1%.
- Pending risks include Ohio legislation affecting market-based generation rates after the RSP expires in 2008, the I&M Indiana rate case (about $82 million requested), and a potential $427 million Bank of America judgment tied to the HPL sale.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 28, 2008Financial Statements
| Revenue | $13.38B |
| Operating Expenses | $11.06B |
| Operating Income | $2.32B |
| Interest Expense | $838.00M |
| Net Income | $1.09B |
| EPS (Basic) | $2.73 |
| EPS (Diluted) | $2.72 |
| Shares Outstanding (Basic) | 398.78M |
| Shares Outstanding (Diluted) | 400.20M |
05—Questions
Frequently Asked Questions
How did AEP's 2007 earnings compare with 2006?
Net income rose to $1.089 billion ($2.72 diluted EPS) from $1.002 billion ($2.53). The improvement mainly reflects the absence of a $136 million after-tax 2006 impairment tied to the Plaquemine cogeneration facility sale, partly offset by higher interest expense and storm and NSR-related costs.
What are AEP's major capital spending plans?
AEP forecasts construction expenditures of about $3.83 billion in 2008, $3.75 billion in 2009 and $3.60 billion in 2010, about $11.2 billion in total. Spending focuses on environmental upgrades (scrubbers and SCR), new gas-fired units in Ohio, Arkansas, Louisiana and Oklahoma, and proposed IGCC plants whose timing depends on regulatory approval.
What is the outlook for Ohio generation rates?
CSPCo and OPCo's rate stabilization plans expire December 31, 2008, after which market-based rates were scheduled to take effect. Ohio legislation introduced in August 2007 would significantly reduce the likelihood of market-based pricing; the Ohio Senate passed it and the House was still considering it. Management cannot predict the outcome, and a return to cost-based regulation could force re-establishment of regulatory liabilities.
What are the main litigation and contingent risks?
Key exposures include the Bank of America cushion gas lawsuit, where a federal court awarded damages of about $347 million (about $427 million with interest), which AEP accrued against a deferred HPL sale gain and indemnification; the Texas stranded cost true-up appeals for TCC; FERC proceedings on SECA refunds (about $115 million unsettled); and the NSR consent decree, which required a $15 million penalty and about $60 million in environmental mitigation.
Is AEP's dividend and liquidity position sound?
The quarterly dividend was raised to $0.41 in October 2007 and has been paid for 391 consecutive quarters. Liquidity was about $2.5 billion at year-end 2007 under $3 billion of revolving credit facilities. However, debt rose to 60.7% of capitalization, and management expects to increase net borrowings by about $1.8 billion in 2008, so future dividend growth depends on continued rate recovery and access to capital markets.
06—Continue