01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported 2011 net income of $1.95 billiona ($4.02 basic EPS), up sharply from $1.22 billion ($2.53) in 2010, though much of the improvement reflects a one-time $373 million after-tax extraordinary gain tied to the Texas capacity auction true-up and a favorable Texas restructuring resolution.
Income before extraordinary items rose to $1.58 billionb from $1.22 billion, aided by $393 million in carrying costs income, lower 2010 cost-reduction charges, and successful rate cases, partly offset by the loss of Ohio retail customers to competitive suppliers, Turk Plant and Ohio-related write-offs, and plant impairments. Total revenues grew to $15.1 billion, and operating cash flow reached $3.8 billion. The filing's most important investor message is regulatory and competitive uncertainty concentrated in Ohio.
The PUCO's February 2012 rehearing order rejected the proposed 2012-2016 Electric Security Plan, reinstated 2011 rates, revoked approval of OPCo's corporate separation plan, and terminated Distribution Investment Rider collections. AEP also disclosed plans to terminate the Interconnection Agreement and break up the AEP Power Pool effective 2014, with unresolved outcomes for generation asset transfers and cost recovery. Management estimates that every 10% decline in Ohio retail customers could cost roughly $75 millionc of generation gross margin, and about 10% of Ohio load was lost to switching in 2011.
Longer term, AEP faces substantial environmental capital needs, with estimated investment of roughly $6d-7 billion for 2012-2020 to comply with emerging EPA rules, and total 2012 construction expenditures forecast at about $3.1 billion, rising to $3.4-3.5 billion annually in 2013-2014. Key risks include potential coal unit retirements (about 4,600 MW before 2015), CO2 regulation, the Cook Plant Unit 1 outage cost recovery, and CSAPR and Utility MACT compliance timing. The company's balance sheet carries about $16.5 billion of long-term debt and a debt-to-capital ratio of roughly 55%, with $2.4 billion of net available liquidity at year-end.
02—Key points
Key Highlights
- Net income of $1.95 billion ($4.02 per basic share) versus $1.22 billion ($2.53) in 2010; income before extraordinary items of $1.58 billion, up about 29%
- Extraordinary gain of $373 million after tax from the Texas TCC capacity auction true-up resolution, plus $393 million of carrying costs income, which together inflated reported 2011 earnings
- Total revenues of $15.1 billion (up 5%) and operating cash flow of $3.8 billion; dividend declared at $1.85 per share, a 46% payout of reported EPS
- Ohio regulatory risk: PUCO rehearing order rejected the new ESP, reinstated 2011 rates, revoked corporate separation approval, and ended DIR collections; about 10% of Ohio load lost to competitive switching in 2011
- AEP Power Pool termination effective January 2014 and transfer of OPCo generation assets remain pending FERC/PUCO approval, creating uncertainty over future sharing of costs and revenues
- 2012 construction expenditures forecast at $3.1 billion, rising to $3.4-3.5 billion annually in 2013-2014, driven by environmental compliance and transmission investment
- Approximately $6-7 billion in estimated environmental investment for 2012-2020 under proposed EPA rules; about 4,600 MW of coal-fired capacity may be retired before 2015
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $15.12B$14.43B | +4.8% |
| Operating Expenses | $12.33B$11.76B | +4.8% |
| Operating Income | $2.78B$2.66B | +4.5% |
| Interest Expense | $933.00M$999.00M | −6.6% |
| Net Income | $1.94B$1.21B | +60.3% |
| EPS (Basic) | $4.02$2.53 | +58.9% |
| EPS (Diluted) | $4.02$2.53 | +58.9% |
| Shares Outstanding (Basic) | 482.17M479.37M | +0.6% |
| Shares Outstanding (Diluted) | 482.46M479.60M | +0.6% |
05—Questions
Frequently Asked Questions
Why did AEP's reported 2011 earnings jump so much, and how much of that is recurring?
Reported net income rose to $1.95 billion from $1.22 billion largely due to a $373 million after-tax extraordinary gain from the Texas TCC capacity auction true-up and $393 million of carrying costs income, both largely non-recurring. Income before extraordinary items improved to $1.58 billion, but still benefited from the absence of 2010 cost-reduction charges and rate increases. Investors should look at underlying operating trends and the non-recurring components separately.
What is the biggest near-term risk to AEP's Ohio business?
The PUCO's February 2012 rehearing order rejected OPCo's proposed 2012-2016 ESP, reinstated 2011 rates, and revoked approval of the corporate separation plan. Management is evaluating options, including whether to withdraw its distribution rate stipulation. Continued customer switching could reduce generation margins; management estimates each 10% decline in Ohio retail customers could cost about $75 million of generation gross margin.
How will the termination of the AEP Power Pool affect the company?
The East operating companies gave notice in December 2010 to terminate the Interconnection Agreement effective January 2014, subject to FERC approval. Surplus members may lose the ability to sell automatically to deficit members, and deficit members may face higher purchase costs. Management has not finalized replacement arrangements, so the financial impact could reduce future net income and cash flows.
What are AEP's major capital spending and environmental obligations?
AEP forecasts about $3.1 billion of 2012 construction expenditures, increasing to roughly $3.4-3.5 billion per year in 2013-2014. Estimated environmental investment is about $6-7 billion for 2012-2020 under proposed EPA rules, and management may retire roughly 4,600 MW of coal capacity before 2015. Recovery through regulated rates is expected but not assured, particularly in Ohio.
How leveraged is AEP and how does it fund its plans?
At December 31, 2011, long-term debt was about $16.5 billion and total debt-to-total-capitalization was 55.3%, down from 57%. The company had $2.4 billion of net available liquidity under $3.25 billion of credit facilities, supporting a $967 million commercial paper balance. Management plans to refinance a portion of about $1.4 billion of debt maturing in 2012 and anticipates TCC securitization of $800 million in March 2012.
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