AMERICAN ELECTRIC POWER CO INC annual report, FY2010

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Business context and reporting period

American Electric Power Company, Inc. (AEP) filed a combined Form 10-K with six utility subsidiaries for the fiscal year ended December 31, 2010. AEP is a holding company; its main business is regulated electricity generation, transmission and distribution across parts of 11 states, alongside river transportation and competitive generation and marketing. The system had approximately 37,235 MW of generating capacity, of which 64.2% was coal-fired. The filing incorporates most consolidated financial statements and MD&A by reference to the 2010 Annual Reports; the supplied text does not include the full consolidated statements.

Financial and operating metrics

  • AEP parent net income: $1.211 billion in 2010, versus $1.357 billion in 2009 and $1.380 billion in 2008. Basic and diluted EPS were $2.53 in 2010, versus $2.96 and $3.43/$3.42, respectively, in 2009 and 2008.
  • Revenue: The utility class-of-service table reports $14.427 billion in AEP System total revenue for 2010, including $13.687 billion in utility operating revenue. This table is not a substitute for the consolidated income statement; full consolidated revenue is not clearly provided in the supplied text.
  • Cash flow and parent liquidity: Parent-only operating cash flow was $772 million, compared with $526 million in 2009. Parent cash and cash equivalents were $231 million at year-end 2010. These are holding-company figures, not consolidated AEP liquidity.
  • Parent debt: At year-end, AEP parent reported $650 million of commercial paper and $552 million of long-term debt; it was in compliance with debt covenants. Consolidated debt, liquidity and leverage figures are not clearly provided in the supplied text.
  • Margins: Consolidated operating margin and other profitability measures are not clearly provided in the supplied text.
  • Capital spending: AEP System construction expenditures were $2.345 billion in 2010, down from $2.792 billion in 2009. The 2011 estimate was approximately $2.506 billion. Environmental investment was $303.8 million in 2010, with estimates of $223.1 million in 2011, $340.3 million in 2012 and $678.5 million in 2013.
  • Fuel and operations: Coal and lignite supplied 82% of system fuel in 2010, compared with 88% in 2009; gas supplied 8% and nuclear 9%. Coal deliveries fell to 64.6 million tons from 75.9 million in 2009, while average purchased-coal cost declined to $44.82 per ton from $49.54.

Material changes versus prior comparable period

  • Parent net income declined about 11% year over year; diluted EPS fell from $2.96 to $2.53. Weighted-average diluted shares rose to about 479.6 million from 459.0 million, contributing to the per-share decline.
  • System construction spending decreased about 16% in 2010 from 2009, with a modest increase budgeted for 2011.
  • Coal and lignite’s share of fuel fell six percentage points year over year, while natural gas and nuclear shares increased.
  • CSPCo lost about 3% of its total load to customer switching in Ohio during 2010; OPCo’s customer losses were described as insignificant.
  • Cook Nuclear Plant Unit 1, which had returned to service in December 2009 after a turbine failure, recorded an 82.2% 2010 capacity factor; the replacement turbine was projected for late 2011.

Outlook, commentary, risks and unusual items

  • AEP forecast approximately $2.5 billion of 2011 construction expenditures. It was building SWEPCo’s 600 MW Turk coal plant, expected online in 2012, and AEGCo’s 580 MW Dresden gas unit, also expected online in 2012; Dresden work resumed in early 2011.
  • In December 2010, AEP East Power Pool members gave notice to terminate their Interconnection Agreement effective January 1, 2014, subject to FERC approval and further evaluation. The outcome could include a modified pool, bilateral agreements or asset sales.
  • Major exposures include environmental regulation and potentially substantial compliance investment; recovery of those costs through rates is not assured. EPA rules on emissions, coal ash and water standards were pending or developing.
  • Turk Plant construction and cost recovery faced multiple legal and permitting challenges. Other regulatory uncertainties included Ohio rate/refund proceedings and a West Virginia rate request. In January 2011, the PUCO ruled that CSPCo had approximately $43 million of significantly excessive 2009 earnings, subject to rehearing or appeal.
  • Cook Unit 1 turbine repairs and replacement could cost up to approximately $395 million; AEP expected significant recovery through warranty, insurance and regulation, but the ultimate recovery remained uncertain.
  • Other material risks include fuel and power price volatility, weather and demand, capital-market access, pension funding, counterparty and trading exposures, nuclear waste and decommissioning costs, and potential unrecovered investment in generating assets. The filing identifies forward-looking statements as subject to these and other uncertainties.
  • Management reported effective disclosure controls and internal control over financial reporting, with no material weaknesses. The auditor issued an unqualified opinion on AEP’s consolidated financial statements, with an explanatory paragraph regarding adoption of a new accounting pronouncement in 2010.

Important facts for investors to verify

  1. Review the incorporated 2010 Annual Report for consolidated revenue, earnings, margins, cash flows, balance sheet, debt maturities, liquidity and market-risk detail; the supplied filing text does not provide these clearly.
  2. Assess the drivers of the 2010 net-income and EPS declines, including operating results, share-count changes and any unusual or nonrecurring items.
  3. Track regulatory decisions on Ohio and West Virginia rates, potential refunds, and recovery of environmental and construction costs.
  4. Verify Turk and Dresden schedules, final costs, permits, financing and expected customer recovery.
  5. Monitor Cook Unit 1 warranty and insurance recoveries, replacement-turbine completion, and nuclear decommissioning and waste obligations.
  6. Follow FERC and state developments concerning the proposed 2014 Power Pool termination and the resulting allocation of generation and transmission costs.