01—Abstract
Summary
Summary of the 10-K filed February 25, 2014. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) filed its combined 2013 Form 10-K on February 25, 2014, covering the parent holding company and five operating subsidiaries (APCo, I&M, OPCo, PSO, SWEPCo).
AEP reported 2013 net income attributable to common shareholders of $1,480 milliona ($3.04 diluted EPS), up from $1,259 million ($2.60) in 2012, with total revenues of $15.4 billion. The increase was driven mainly by successful rate proceedings across jurisdictions, the absence of 2012 Ohio generation impairments, and a favorable U.K. Windfall Tax ruling, partially offset by 2013 impairments and regulatory disallowances (Muskingum River Unit 5, Amos Unit 3, Big Sandy scrubber costs, and Turk Plant-related items) and continued customer switching to alternative suppliers in Ohio.
The filing marks a major structural shift: on December 31, 2013, OPCo transferred its generation fleet at net book value to a new nonregulated affiliate, AEP Generation Resources (AGR), completing corporate separation in Ohio, and the Interconnection Agreement among the AEP East companies terminated effective January 1, 2014. Ohio's regulatory outcome remains a key uncertainty, with the 2012-2015 ESP, deferred fuel and capacity balances (OPCo net deferred fuel of $445 millionb and deferred capacity costs of $288 million), and a proposed 2015-2018 ESP all subject to pending appeals and PUCO decisions.
Management projects approximately $3.8 billionc of construction spending annually in 2014-2016 and environmental compliance investments of roughly $3-3.5 billion over 2013-2020, with a substantial portion of coal fleet exposure to EPA rules. Liquidity appears adequate, with about $3.4 billion of net available liquidity, a debt-to-capital ratio of 54.3% (down from 55.2%), and a quarterly dividend of $0.50 per share declared for January 2014 (annual dividend of $1.95 in 2013).
02—Key points
Key Highlights
- 2013 net income attributable to AEP common shareholders rose to $1,480 million ($3.04 per diluted share) from $1,259 million ($2.60) in 2012, on total revenues of $15,357 million.
- Completed Ohio corporate separation on December 31, 2013: OPCo transferred its generation assets at net book value (about 9,200 MW) to AGR, and the Interconnection Agreement terminated January 1, 2014.
- 2013 included several charges: a $154 million pretax impairment of Muskingum River Unit 5, a $39 million Amos Unit 3 disallowance in Virginia, and a $33 million Big Sandy scrubber disallowance in Kentucky.
- Ohio regulatory risk remains significant: pending Supreme Court of Ohio appeals on the 2012-2015 ESP, OPCo's $445 million net deferred fuel balance, $288 million deferred capacity costs, and a proposed 2015-2018 ESP filed December 2013.
- Capital spending plan of about $3.8 billion per year for 2014-2016; environmental investment estimates of $588 million in 2014 rising to $644 million in 2015.
- Liquidity of about $3.4 billion of net available liquidity at year-end; debt-to-total-capital improved to 54.3% from 55.2%; operating cash flow of $4.1 billion.
- Quarterly dividend of $0.50 per share declared for January 2014, with 2013 dividends declared at $1.95 per share (64% payout ratio).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 25, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $14.81B$14.95B | −0.9% |
| Operating Expenses | $11.99B$12.29B | −2.4% |
| Operating Income | $2.82B$2.66B | +6.3% |
| Interest Expense | $890.00M$988.00M | −9.9% |
| Net Income | $1.48B$1.26B | +17.6% |
| EPS (Basic) | $3.04$2.60 | +16.9% |
| EPS (Diluted) | $3.04$2.60 | +16.9% |
| Shares Outstanding (Basic) | 486.62M484.68M | +0.4% |
| Shares Outstanding (Diluted) | 487.04M485.08M | +0.4% |
05—Questions
Frequently Asked Questions
Why did AEP's earnings rise in 2013?
Earnings rose to $1,480 million from $1,259 million, primarily due to successful rate proceedings in several jurisdictions, the absence of the 2012 impairments of certain Ohio generation plants (a $287 million charge), and a favorable U.S. Supreme Court decision on the U.K. Windfall Tax that produced an $80 million tax benefit plus $43 million of interest income. These gains were partly offset by 2013 impairments and disallowances and the loss of Ohio retail customers to alternative suppliers.
What did the Ohio corporate separation mean for AEP?
On December 31, 2013, OPCo transferred its generation assets and related liabilities at net book value to AGR, a nonregulated subsidiary, and OPCo now purchases power to serve remaining generation customers. OPCo remains responsible for supplying customers who have not switched providers. Under a Power Supply Agreement, AGR supplies capacity to OPCo at $188.88/MW-day through May 2015, which limits OPCo's near-term generation exposure but shifts merchant price risk to AGR after that period.
What are the main financial risks investors should monitor?
Key risks include the outcome of Ohio appeals on deferred fuel (about $445 million) and deferred capacity costs (about $288 million), the PUCO's decisions on the 2015-2018 ESP, the Indiana Court of Appeals review of the 2013 rate order, and the Michigan appeal of the Cook Plant life-extension certificate. Environmental compliance costs for the coal fleet, potentially $3-3.5 billion through 2020, and volatility in PJM capacity auction prices and natural gas prices also affect earnings. Several items, including the Rockport Unit 2 lease dispute and PATH abandonment recovery, remain unresolved.
How strong is AEP's balance sheet and liquidity?
AEP had approximately $3.4 billion of net available liquidity supported by $3.5 billion of revolving credit facilities. Its debt-to-total-capital ratio improved to 54.3% at year-end 2013 from 55.2%, and operating cash flow was $4.1 billion. The parent's ability to pay dividends depends on subsidiary distributions, and the credit agreements include a 67.5% maximum debt-to-capitalization covenant, which AEP reported was 50.4% on the contractually defined basis at year-end.
What is AEP's capital spending outlook?
Management forecasts about $3.8 billion of construction expenditures each year in 2014, 2015 and 2016, excluding equity AFUDC, mainly for transmission, distribution and environmental compliance. Major projects include the Cook Plant Life Cycle Management project ($1.2 billion through 2018), the Rockport dry sorbent injection retrofit (about $258 million), and Welsh Plant environmental controls (about $600 million through 2020). These are subject to regulatory approval and may change with market and regulatory developments.
06—Continue