AMERICAN ELECTRIC POWER CO INC annual report, FY2012

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Business context and reporting period

American Electric Power Company, Inc. (AEP) filed this combined Form 10-K for the fiscal year ended December 31, 2012, covering AEP and five named utility subsidiaries. AEP is a holding company; its regulated electric utilities provide most of the system’s operations across 11 states. The filing describes annual results, not standalone fourth-quarter results.

AEP System utility operating revenues were $13.677 billion in 2012; total revenues, including other businesses, were $14.945 billion. The filing says financial statements and management’s discussion are incorporated from the 2012 Annual Reports. The supplied filing text does not provide clear consolidated AEP revenue, profit, cash-flow, margin, or liquidity figures.

Financial metrics

  • Parent-company earnings: AEP parent-only net income was $1.259 billion in 2012, down from $1.941 billion in 2011; basic and diluted EPS were both $2.60 versus $4.02. These figures are not consolidated AEP results and largely reflect equity earnings from subsidiaries.
  • Parent-company cash flow: Operating cash flow was $1.258 billion, compared with $1.062 billion in 2011. Investing cash outflow was $26 million (versus $385 million); financing cash outflow was $1.193 billion (versus $781 million). Year-end cash was $166 million, up from $127 million.
  • Parent-company debt and liquidity: At year-end, parent long-term debt was $852 million and commercial paper was $321 million, down from $554 million and $967 million, respectively, in 2011. Parent current assets were $930 million and current liabilities $836 million. These are parent-only balances, not consolidated measures. AEP stated it was in compliance with debt covenants.
  • Capital spending: AEP System construction expenditures were $3.025 billion in 2012, up from $2.669 billion in 2011. The 2013 estimate was $3.578 billion. Environmental investments were estimated at $544 million for 2013, $760 million for 2014, and $850 million for 2015.
  • Fuel and generation: Coal and lignite supplied 71% of system fuel in 2012, down from 78%; natural gas rose to 17% from 11%. Natural-gas use increased 32% year over year, while delivered gas prices fell to $3.01/MMBtu from $4.48. Coal deliveries fell to 60.1 million tons from 63.0 million, while delivered coal cost rose to $49.22/ton from $46.76.

Material changes versus prior period

  • Parent-only net income and EPS declined substantially from 2011, while parent operating cash flow increased.
  • Ohio customers’ migration to competitive suppliers accelerated: approximately 51% of OPCo’s Ohio load had switched by year-end 2012, versus approximately 10% in 2011.
  • AEP’s CO2 emissions declined to approximately 122 million metric tons in 2012 from 136 million in 2011, excluding AEP’s ownership in two specified plants.
  • The Turk coal plant entered commercial operation in December 2012. SWEPCo’s 73% ownership share was reported at 440 MW at year-end; a portion of output was not then subject to cost-based recovery and was sold into the SPP market.
  • AEP completed the merger of Columbus Southern Power into Ohio Power effective December 31, 2011; 2012 comparisons may reflect the changed entity structure.

Outlook, commentary, risks and unusual items

  • Management forecast approximately $3.6 billion of 2013 construction spending, excluding specified financing and lease items, and expects substantial further environmental investment. Recovery of these costs through regulated rates or market prices is not assured.
  • AEP expected emissions to remain broadly stable in the near term, then trend lower over much of the decade as older coal units retire and natural-gas generation increases. It reported long-term contracts for 1,994 MW of wind and solar power for regulated customers.
  • AEP sought FERC approval to terminate the East Companies’ Interconnection Agreement and restructure generation ownership, including transferring OPCo generation assets. A FERC decision was expected in mid-2013; adverse terms or a mismatch in approvals could affect earnings and costs.
  • Ohio rate recovery remained exposed to appeals and regulatory proceedings, including recovery of deferred capacity and fuel costs. SWEPCo’s recovery of Turk Plant investment was also uncertain. I&M’s Cook Plant life-cycle project was estimated at $1.2 billion through 2018; $176 million had been incurred by year-end 2012.
  • Environmental rules and litigation involving air and water emissions, coal ash, and CO2 could require material spending, accelerate plant retirements, or limit recovery. AEP operated 37 ash ponds. Future costs and regulatory outcomes were not fully predictable.
  • Other prominent risks include weather and demand variability, fuel and power-price volatility, access to capital and credit ratings, counterparty and trading exposure, cyber threats, nuclear operations and decommissioning, and low or high river levels affecting AEP River Operations.
  • The filing reports effective disclosure controls and internal control over financial reporting, with no material weaknesses identified. Deloitte audited the financial statements and internal controls; the statements themselves are incorporated by reference rather than reproduced in the supplied text.

Important facts for investors to verify

  1. Review the incorporated 2012 Annual Report for consolidated AEP revenue, net income, EPS, cash flows, margins, debt, liquidity, and segment results; the parent-only data above should not be treated as consolidated results.
  2. Check the status and final terms of Ohio rate orders, deferred-cost recovery, customer switching, and the proposed generation separation.
  3. Track regulatory recovery and market exposure for the Turk Plant, Cook Plant investments, and planned environmental and transmission capital spending.
  4. Assess the scale, timing, financing, and rate recovery of forecast construction and environmental expenditures, along with potential plant retirements.
  5. Review the full financial-statement notes for litigation, contingencies, guarantees, debt maturities, and exposure to environmental, nuclear, commodity, and counterparty risks.