01—Abstract
Summary
Summary of the 10-K filed February 26, 2013. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) filed its 2012 Form 10-K on February 26, 2013, as a public utility holding company serving over five million retail customers across eleven states, with roughly 37,600 MW of generating capacity, about 40,000 miles of transmission lines, and 221,000 miles of distribution lines.
Consolidated 2012 total revenues were $14.9 billiona, operating income $2.66 billion, and net income attributable to AEP shareholders $1.26 billion, or $2.60 per diluted share, down from $4.02 in 2011, which included a $373 million extraordinary gain tied to Texas restructuring. The decline was driven by the loss of Ohio retail customers to competitive providers (about $235 million of gross margin lost), a $287 million pretax impairment of older OPCo coal units, mild weather, and costs of early debt retirement. The company maintained its quarterly dividend at $0.47 per share, with 2012 dividends declared at $1.88 per share, a payout ratio of about 72%.
The filing highlights a strategic pivot away from coal toward natural gas, transmission investment, and environmental compliance. Management projects construction expenditures of roughly $3.6 billionb in 2013 and $3.8 billion annually in 2014 and 2015, funded largely by operating cash flow and financing, and estimates $4 to $5 billion of environmental investment through 2020 to meet pending EPA rules. Key regulatory risks include the Ohio ESP and the planned corporate separation of OPCo's generation (targeted for January 2014), the pending FERC decision on terminating the Interconnection Agreement (expected mid-2013), and several rate cases in Texas, Louisiana, and Oklahoma tied to the Turk Plant and environmental projects.
Transmission is positioned as a growth driver through AEPTCo and joint ventures, though the company notes the strategy depends on continued FERC policy support. For investors, the key trade-off is earnings pressure in the near term from Ohio competition, plant retirements, and regulatory uncertainty, against a multi-year capital program intended to shift earnings toward regulated transmission and rate-base growth. Liquidity appears adequate with about $3.1 billionc of net available credit, though debt-to-capital is around 55%, and a 2013 Ohio debt maturity of $2.2 billion is being refinanced.
02—Key points
Key Highlights
- Diluted EPS fell to $2.60 in 2012 from $4.02 in 2011, which included a $373 million extraordinary gain; income before extraordinary items fell about 20% to $1.26 billion.
- OPCo recorded a $287 million pretax impairment on Beckjord, Conesville, Kammer, Muskingum River, Sporn, and Picway generating units after proposing the Interconnection Agreement termination.
- About 51% of Ohio load had switched to competitive CRES providers by year-end 2012, costing roughly $235 million of gross margin in 2012.
- Quarterly dividend held at $0.47 per share; 2012 dividends declared were $1.88 per share, representing a 72% payout ratio.
- Capital plan of about $3.6 billion in 2013 rising to $3.8 billion in 2014 and 2015, with environmental compliance and transmission as the main drivers.
- Estimated $4 to $5 billion of environmental investment between 2012 and 2020 tied to CSAPR, MACT, and CO2 rules, with 1,555 MW of coal capacity potentially converted to gas.
- Liquidity of about $3.1 billion net available; in February 2013 credit facilities were upsized to $3.75 billion and a $1 billion interim facility was added to fund OPCo's 2013 maturities.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 26, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $14.95B$15.12B | −1.1% |
| Operating Expenses | $12.29B$12.33B | −0.4% |
| Operating Income | $2.66B$2.78B | −4.5% |
| Interest Expense | $988.00M$933.00M | +5.9% |
| Net Income | $1.26B$1.94B | −35.1% |
| EPS (Basic) | $2.60$4.02 | −35.3% |
| EPS (Diluted) | $2.60$4.02 | −35.3% |
| Shares Outstanding (Basic) | 484.68M482.17M | +0.5% |
| Shares Outstanding (Diluted) | 485.08M482.46M | +0.5% |
05—Questions
Frequently Asked Questions
Why did AEP's earnings per share drop so sharply in 2012?
The 2011 results included a $373 million extraordinary gain from the Texas true-up settlement, which did not recur. Underlying results were also pressured by Ohio customers switching to competitive suppliers, a $287 million impairment on older OPCo coal units, mild winter weather, and expenses from early retirement of parent debt and the sustainable cost reduction program.
How safe is the dividend given the 72% payout ratio?
The dividend was held flat at $0.47 per quarter and management notes that future dividends depend on profit levels, operating cash flow, and capital requirements. The 2012 payout was elevated because of the lower earnings base; the 2011 payout ratio was about 46%, so the dividend depends on earnings recovery and the outcome of pending regulatory decisions.
What are the biggest regulatory risks to watch in 2013?
Key items include the FERC decision on terminating the Interconnection Agreement and approving OPCo's generation transfers (expected mid-2013), Ohio ESP rehearing and Supreme Court of Ohio appeals on deferred fuel and capacity costs (potentially reducing OPCo's deferred balances of $519 million for fuel), the Texas PUCT decision on SWEPCo's Turk Plant rate request (expected Q2 2013), and the Oklahoma environmental compliance plan hearing.
How is AEP shifting its business away from coal?
Coal and lignite supplied 71% of AEP's fuel in 2012, down from 82% in 2010, while natural gas rose to 17% due to combined-cycle additions and low gas prices. AEP has announced retirements of roughly 4,441 MW by 2016 and expects CO2 emissions to decline as older units are retired, with investment directed to natural gas, renewables (1,994 MW of contracted wind and solar), and transmission.
Where does future earnings growth come from?
Management expects a growing share of earnings from transmission through AEPTCo's seven transmission companies and joint ventures such as ETT, which had about $378 million in service at year-end 2012 with nearly $1.9 billion more planned through 2015. Rate base growth from environmental and distribution investment, along with successful rate cases, is also cited, though management acknowledges timing risk and regulatory lag.
06—Continue