01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported 2009 total revenues of $13.5 billiona and net income of $1.365 billion (earnings attributable to common shareholders of $1.357 billion, or $2.96 basic EPS), down modestly from $14.4 billion revenue and $1.388 billion net income in 2008.
Income before discontinued operations was essentially flat at $1.370 billionb versus $1.376 billion, as higher Utility Operations segment earnings ($1.329 billion vs. $1.123 billion), driven by rate increases in Indiana, Ohio, Oklahoma and Virginia, were offset by the absence of the 2008 $164 million after-tax TEM litigation settlement gain and weaker off-system sales margins as volumes fell about 50% amid an industrial KWH sales decline of 16%. The balance sheet strengthened materially: AEP issued 69 million common shares in April 2009 for net proceeds of $1.64 billion, which were used to repay $2 billion of credit facility borrowings. The debt-to-capitalization ratio improved from 62.5% to 57.2%.
Total assets grew to $48.3 billionc, with construction expenditures of roughly $2.8 billion and a 2010 construction budget of about $2.2 billion. Liquidity was approximately $3.4 billion, and AEP expects to refinance about $1.2 billion of the $1.6 billion of long-term debt maturing in 2010. The principal risks are regulatory and environmental.
Several pending rate cases (Kentucky, Texas, Virginia, Michigan) seek roughly $124 milliond, $75 million, $154 million and $63 million in annual increases, respectively. Major contingencies include the Ohio ESP appeals and SEET review, the Turk coal plant's pending court appeals, the $441 million Bank of America liability tied to the Enron-related cushion gas litigation, the Cook Plant Unit 1 repair estimated at up to $395 million, and the EPA's pending CAIR, CAMR and CO2 regulatory actions. Credit ratings are investment grade but several subsidiaries carry negative outlooks at Moody's or Fitch.
02—Key points
Key Highlights
- Net income of $1.365 billion in 2009 vs. $1.388 billion in 2008; EPS of $2.96 basic, impacted by a 14% increase in average shares following the April 2009 equity issuance.
- Utility Operations segment income rose to $1.329 billion from $1.123 billion on base rate increases in Indiana, Ohio, Oklahoma and Virginia, partially offset by lower industrial sales and off-system sales.
- Non-recurring 2008 gain of $164 million after tax from the TEM litigation settlement, which made the comparable 2009 earnings look flat despite stronger operations.
- Debt-to-capitalization ratio improved to 57.2% from 62.5% after the $1.64 billion common equity raise; long-term debt of $17.5 billion, with about $1.6 billion maturing in 2010.
- Pending rate requests total roughly $420 million in annual revenue increases across Kentucky, Texas, Virginia and Michigan, creating meaningful regulatory outcome risk.
- Major legal and environmental exposures include the $441 million Bank of America liability, Cook Plant Unit 1 repair costs up to $395 million, and CO2 regulation and nuisance litigation.
- Credit ratings remain investment grade (Baa2/BBB/BBB at AEP), though Moody's placed AEP on negative outlook and Fitch placed TCC and SWEPCo on negative outlook in 2009.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $13.49B$14.44B | −6.6% |
| Operating Expenses | $10.72B$11.65B | −8.0% |
| Operating Income | $2.77B$2.79B | −0.6% |
| Interest Expense | $973.00M$957.00M | +1.7% |
| Net Income | $1.36B$1.38B | −1.9% |
| EPS (Basic) | $2.96$3.43 | −13.7% |
| EPS (Diluted) | $2.96$3.42 | −13.5% |
| Shares Outstanding (Basic) | 458.68M402.08M | +14.1% |
| Shares Outstanding (Diluted) | 458.98M403.64M | +13.7% |
05—Questions
Frequently Asked Questions
Why did AEP's net income decline in 2009 even though its core utility segment grew?
AEP's 2008 results included a one-time $164 million after-tax gain from settling the TEM purchase power litigation. Excluding that gain, underlying earnings rose, because Utility Operations income increased about $206 million on rate relief. The overall decline is therefore largely attributable to the non-recurring 2008 item, offset by weaker off-system sales margins and lower industrial demand.
How did the 2009 equity issuance affect AEP's financial position?
AEP issued 69 million common shares at $24.50 in April 2009, raising $1.64 billion net. The proceeds repaid $2 billion of borrowings under its credit facilities and reduced debt. This lifted AEP common equity to $13.1 billion from $10.7 billion and improved the debt-to-capitalization ratio to 57.2% from 62.5%, while increasing average shares outstanding to 459 million from 402 million, which dilutes per-share comparisons.
What are the largest near-term regulatory risks to AEP's earnings?
The most significant items are pending base rate requests in Kentucky ($124 million), Texas ($75 million), Virginia ($154 million, with intervenors estimating $63 to $94 million) and Michigan ($63 million). Outcomes will depend on regulatory approval of the requested returns on equity, which range from 10.2% to 13.35%. Additional risks include the Ohio ESP appeals and the possible SEET refund, and the Turk plant appeals in Arkansas and Texas that could affect construction recovery.
What is the financial exposure from the Bank of America and Cook Plant matters?
AEP recorded a $441 million liability, including interest, related to the Bank of America litigation over the Enron-linked cushion gas arrangements, after a $346 million judgment and a $20 million attorneys' fee award. For the Cook Plant Unit 1 turbine failure, repair and replacement costs could reach about $395 million. Management expects a significant portion to be recovered through the turbine warranty, insurance and rate proceedings, but insurance and regulatory outcomes are not assured.
How exposed is AEP to carbon regulation?
AEP is heavily coal-dependent, with approximately 85-88% of its fuel from coal and lignite, and emits about 140 million metric tons of CO2 in 2009. Pending federal legislation (ACES, which passed the House in June 2009) and EPA endangerment-based regulation could require significant capital and operating spending, potentially accelerating retirement of older coal units. Management believes compliance costs should be recoverable from customers in regulated jurisdictions, but has not quantified the potential total impact.
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