01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported 2010 results in its combined Form 10-K filed February 25, 2011, covering AEP and six operating subsidiaries (APCo, CSPCo, I&M, OPCo, PSO, SWEPCo).
Total 2010 revenues were $14.4 billiona, up from $13.5 billion in 2009, while income before discontinued operations and extraordinary items declined to $1.218 billion from $1.370 billion, primarily due to $185 million (after tax) of cost reduction charges. Earnings per share were $2.53 versus $2.96 in 2009, with the decline partly reflecting a larger share count after the April 2009 issuance of 69 million shares. AEP reduced its workforce by about 2,461 positions and recorded $293 million of pretax charges tied to those initiatives, which management expects to offset future inflationary pressure.
The filing highlights a heavy capital program, with roughly $2.5 billionb of 2011 construction expenditures forecast and $2.6 billion to $3.1 billion annually projected for 2012 through 2014, driven largely by environmental compliance (scrubbers and other controls) and transmission. Key regulatory and legal risks include the Turk Plant litigation in Arkansas, Ohio electric security plan appeals and refund exposure, Cook Plant Unit 1 recovery issues, a proposed termination of the AEP Power Pool effective 2014, and open CO2-related nuisance lawsuits.
Dividends were $1.71c per share for 2010, and the company paid a $425 million settlement to Bank of America in February 2011 related to the Enron-era Houston Pipeline litigation, with no 2010 income statement impact. Overall, the 10-K shows a regulated utility holding company with a sizable investment program, rising environmental and regulatory exposure, and near-term earnings pressure from restructuring costs and regulatory uncertainty, offset by favorable 2010 weather and rate relief.
02—Key points
Key Highlights
- 2010 total revenues of $14.4 billion, up about 7% from $13.5 billion in 2009.
- Net income before discontinued operations fell to $1.218 billion from $1.370 billion, largely due to $185 million (after tax) of cost reduction charges.
- Diluted EPS of $2.53 in 2010 versus $2.96 in 2009; dividends paid were $1.71 per share.
- Capital spending of about $2.5 billion budgeted for 2011, rising to $2.6-3.1 billion annually through 2014, mainly for environmental compliance and transmission.
- Cost reduction program eliminated 2,461 positions (about 11.5% of workforce) with $293 million of pretax expense recorded in 2010.
- Notice given in December 2010 by all AEP Power Pool members to terminate the Interconnection Agreement effective January 2014, creating uncertainty over pooled generation economics.
- Settled Enron-related Bank of America litigation for $425 million in February 2011, a payment previously fully reserved with no 2010 earnings impact.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $14.43B$13.49B | +7.0% |
| Operating Expenses | $11.76B$10.72B | +9.8% |
| Operating Income | $2.66B$2.77B | −3.9% |
| Interest Expense | $999.00M$973.00M | +2.7% |
| Net Income | $1.21B$1.36B | −10.8% |
| EPS (Basic) | $2.53$2.96 | −14.5% |
| EPS (Diluted) | $2.53$2.96 | −14.5% |
| Shares Outstanding (Basic) | 479.37M458.68M | +4.5% |
| Shares Outstanding (Diluted) | 479.60M458.98M | +4.5% |
05—Questions
Frequently Asked Questions
Why did AEP's 2010 net income decline despite higher revenues?
Revenues rose on higher retail margins from rate relief and favorable weather, but net income before discontinued operations fell from $1.370 billion to $1.218 billion mainly because of $185 million (after tax) of charges related to the 2010 cost reduction initiatives, along with higher depreciation, interest expense, and income tax expense. Gross margin rose to $8.8 billion from $8.4 billion in the utility segment.
How large is AEP's planned capital spending and what drives it?
AEP forecast about $2.5 billion of construction expenditures in 2011 and $2.6 billion in 2012, with annual spending averaging $2.6 billion to $3.1 billion for 2012 through 2014. The increase is primarily driven by required environmental investments to comply with Federal EPA rules, including additional scrubbers, plus additional transmission spending. Recovery depends on regulators approving rate treatment.
What are the biggest regulatory and legal risks to AEP's earnings?
Key risks include the Turk Plant (73% owned by SWEPCo) facing multiple permit and construction challenges, Ohio ESP appeals and a $43 million CSPCo refund ordered under the significantly excessive earnings test, possible refunds of SECA transmission revenues, uncertainty around recovery of the Cook Plant Unit 1 outage costs, and pending CO2 public nuisance lawsuits. Adverse outcomes could reduce net income and cash flows.
What does the proposed termination of the AEP Power Pool mean for investors?
All AEP East Power Pool members gave notice in December 2010 to terminate the Interconnection Agreement effective January 1, 2014, subject to FERC approval. The pool currently allocates generation costs and off-system sales margins based on member load ratios. Management has not decided what will replace it, so members could face revenue declines or cost increases if they cannot recover changes through rates or sales.
06—Continue