01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported 2008 results in its FY2008 Form 10-K, filed February 27, 2009.
Consolidated revenues rose to $14.44 billiona (from $13.38 billion) and net income reached $1.38 billion ($3.43 basic EPS, versus $2.73 in 2007). Income before discontinued operations rose to $1.368 billion, helped by a one-time $255 million pretax (about $164 million after-tax) settlement with TEM over the Plaquemine purchase power agreement, which flatters the comparison and is non-recurring. Operating income was $2.79 billion.
The filing is dominated by balance-sheet and regulatory pressure. Total debt reached about $18.0 billionb (62.6% of capitalization, up from 60.7%), short-term borrowings rose to $1.98 billion as AEP drew $2 billion on credit facilities during the credit crisis, and cash rose to $411 million. AEP reduced its 2009 construction budget by $750 million to $2.58 billion and expects to need capital-market access to fund the rest.
Pending items that could affect future earnings include the Ohio electric security plan decision, Cook Plant Unit 1 repair (up to $330 millionc, with the unit possibly down until September 2009 or later), SECA and off-system sales margin refunds (a $97 million net-income hit in December 2008), and the Turk and Stall gas and coal plant builds, which carry cost-cap and permitting risk. Credit ratings are an area of watch: Moody's placed AEP on negative outlook and put several subsidiaries on review for possible downgrade in early 2009.
Pension asset values fell roughly 29%, creating future minimum contributions of $365 milliond in 2010 and $258 million in 2011. The filing also details a large Ohio fuel-recovery issue and growing exposure to carbon-regulation risk.
02—Key points
Key Highlights
- Revenue grew to $14.44B in 2008 (up about 8%); diluted EPS of $3.42 vs. $2.72 in 2007, though 2008 includes a non-recurring ~$164M after-tax TEM settlement gain.
- Total debt rose to ~$18.0B (62.6% of capitalization vs. 60.7%); short-term debt jumped to $1.98B after $2B of credit-facility draws during the 2008 credit squeeze.
- 2009 construction capex cut by $750M to $2.58B; management says it will still need capital-market access to fund the program.
- Cook Plant Unit 1 has been offline since September 2008 after a turbine failure; repairs could cost up to ~$330M, mostly expected to be recovered via warranty, insurance and rates.
- Ohio ESP filings request rate increases up to ~15% per year for 2009–2011 with a fuel recovery mechanism; PUCO decision expected Q1 2009 and remains a key earnings swing factor.
- Credit ratings under pressure: Moody's placed AEP on negative outlook and put OPCo, SWEPCo, TCC and TNC on review for possible downgrade in early 2009 (AEP senior unsecured at Baa2/BBB/BBB).
- Pension plan assets fell to $3.2B from $4.5B, with minimum required contributions of $365M in 2010 and $258M in 2011; FERC off-system sales margin refund cost AEP roughly $97M of net income in December 2008.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $14.44B$13.38B | +7.9% |
| Operating Expenses | $11.65B$11.06B | +5.4% |
| Operating Income | $2.79B$2.32B | +20.2% |
| Interest Expense | $957.00M$838.00M | +14.2% |
| Net Income | $1.38B$1.09B | +26.6% |
| EPS (Basic) | $3.43$2.73 | +25.6% |
| EPS (Diluted) | $3.42$2.72 | +25.7% |
| Shares Outstanding (Basic) | 402.08M398.78M | +0.8% |
| Shares Outstanding (Diluted) | 403.64M400.20M | +0.9% |
05—Questions
Frequently Asked Questions
How much of AEP's 2008 earnings growth came from one-time items?
The TEM settlement contributed a pretax gain of $255 million (about $164 million after-tax), which equals roughly $0.41 of basic EPS. Excluding it, 2008 earnings would have been meaningfully lower than the reported $3.43, partly offset by a $97 million net-income charge for the FERC off-system sales margin refund in December 2008. Investors should treat 2008 as a flattered base year.
Is AEP's balance sheet under strain, and how is it funded?
Debt increased to about $18.0 billion, lifting debt-to-capitalization to 62.6%. Short-term debt rose to $1.98 billion after AEP borrowed $2 billion on its credit facilities as a precaution against capital-market disruption. Management plans to refinance about $300 million of 2009 maturities and cut 2009 capex by $750 million. It says current liquidity, including about $1.9 billion of net available credit, is adequate through 2009, but it could not predict how long credit markets would stay constrained.
What are the biggest near-term regulatory and legal risks?
Key items include the Ohio ESP rate decision for CSPCo and OPCo (requested increases of up to about 15% per year), the Cook Plant Unit 1 outage and cost recovery, the FERC order requiring refunds of off-system sales margins (about $250 million was refunded in January 2009), SECA transmission revenue refunds with a $34 million reserve against about $108 million of contested revenue, and the CO2 public nuisance lawsuits. Several of these could move earnings materially.
What does the credit rating outlook mean for borrowing costs?
Moody's placed AEP on negative outlook and put several operating subsidiaries on review for possible downgrade in early 2009. A downgrade below investment grade would raise borrowing costs, reduce the investor base, and require posting cash or letters of credit for the power trading business. Management says it considers a below-investment-grade downgrade unlikely, but it is a real risk given the leverage increase and pending rate cases.
Are the new generation projects likely to add value for shareholders?
Major projects include the Turk coal plant (SWEPCo 73% share about $1.2 billion, expected 2012–2013), the Stall combined-cycle unit (about $384 million, expected mid-2010), and the Dresden plant. The Turk plant faces appeals, a Texas cost cap of $1.522 billion, and possible carbon-cost limits, and the IGCC plants remain pending regulatory approval with cancellation risk. Returns depend on achieving full cost recovery through rates, which the filing repeatedly flags as uncertain.
06—Continue