Business context and reporting period
American Electric Power Company, Inc. (AEP) filed this combined Form 10-K for the fiscal year ended December 31, 2009. AEP is a holding company whose regulated electric utilities serve parts of 11 states; the system also includes river transportation and competitive generation and energy marketing businesses. The filing’s financial statements and detailed MD&A are incorporated by reference to the registrants’ 2009 annual reports and are not reproduced in the supplied text.
Key financial and operating metrics
| Metric | Reported information |
|---|---|
| Revenue | AEP System total revenue was $13.489 billion for 2009, including $12.733 billion of utility operating revenue, as shown in the filing’s business section. |
| Profit and margins | The supplied filing text does not provide a clear value for net income, earnings per share, or profit margins. |
| Cash flow, debt and liquidity | The supplied text does not provide clear year-end cash, cash flow, total debt, or liquidity balances. AEP reported compliance with debt covenants at year-end and used cash, revolving credit facilities and commercial paper for short-term funding. |
| Capital spending | 2009 construction expenditures were $2.496 billion, excluding AFUDC and certain other items, versus $3.981 billion in 2008. The 2010 estimate was approximately $2.181 billion; a separate construction-program estimate described approximately $2.2 billion. |
| Generation and fuel | System generation capacity was 36,685 MW. Fuel mix was 88% coal and lignite, 6% natural gas, 5% nuclear, and 1% hydroelectric and other. Average delivered purchased-coal price increased to $49.54 per ton from $47.14 in 2008. |
Material changes versus the prior comparable period
- Construction expenditures fell to $2.496 billion from $3.981 billion in 2008.
- Management cited recession-related demand weakness: off-system sales volumes decreased 50% and industrial kilowatt-hour sales declined 16% in 2009.
- Estimated CO2 emissions declined to approximately 140 million metric tons from approximately 155 million in 2008.
- Nuclear’s share of fuel mix fell to 5% from 8%; the filing attributes nuclear generation variation partly to the Cook Plant Unit 1 outage and maintenance and refueling outages.
- Purchased-coal prices rose despite lower demand and lower market fuel prices, primarily because replacement term contracts were at higher prices.
Outlook, commentary, risks and unusual items
- Outlook and investment: AEP estimated 2010 construction spending of about $2.2 billion. The Turk coal plant was under construction with projected total cost of approximately $1.6 billion and expected in-service timing in 2012; construction and permits faced appeals. AEP also projected $120 million of transmission investments in 2010.
- Demand and emissions: Management expected emissions to rise in 2010–2012 as sales and generation recover from recession lows, with relatively flat emissions growth later in the decade. AEP targeted 2,000 MW of additional renewable power by 2011, subject to regulatory approval, and had secured 1,013.5 MW by year-end 2009.
- Environmental exposure: AEP expected material future compliance costs. System environmental investments were estimated at $321.7 million in 2010, $233.9 million in 2011 and $405.6 million in 2012. Potential regulation of carbon emissions, coal ash, mercury, air pollutants and water discharges could increase costs or affect plant operations; recovery from customers is not assured.
- Regulatory and legal risks: Ohio electric security plans and rate recovery were under appeal. Rate cases were pending in Texas, Virginia and Kentucky; I&M filed a Michigan rate case in January 2010. Other contingencies include a disputed $42 million PSO fuel-cost recovery and the Fort Wayne, Indiana lease dispute involving I&M.
- Cook Plant Unit 1: The unit returned to service at reduced power in December 2009 after a 2008 turbine-related outage. Repair and replacement costs were estimated at approximately $395 million; management expected significant recovery through warranty, insurance and regulation but could not assure the outcome. A full-capacity turbine replacement was projected for late 2011.
- Credit and financing: Moody’s placed AEP’s parent ratings on negative outlook in 2009; Fitch placed TCC and SWEPCo on negative outlook. AEP identified capital-market access, refinancing costs, pension funding and counterparty credit as risks.
- Operational and market risks: Risks include weather and economic conditions, fuel and power price volatility, generation and transmission outages, trading exposures, and ability to recover fuel and capital costs in rates. AEP reported approximately $203 million posted by its public utility subsidiaries to counterparties and exchanges at year-end, compared with approximately $52 million posted by counterparties for AEP’s benefit.
Important facts for investors to verify
- Review the incorporated annual reports for AEP’s actual 2009 net income, EPS, cash flows, balance sheet, debt, liquidity, and year-over-year comparisons; those figures are not clear in the supplied filing text.
- Track outcomes of major rate cases and appeals, including Ohio ESP recovery, and the status of pending Texas, Virginia, Kentucky and Michigan proceedings.
- Verify the cost, schedule, permitting and eventual rate recovery for the Turk plant and other major construction and environmental projects.
- Monitor Cook Unit 1’s restoration costs, insurance and warranty recovery, regulatory treatment, and return to full capacity.
- Assess environmental rulemaking and litigation exposure, including potential carbon, coal-ash, mercury and water-discharge requirements, alongside AEP’s ability to recover associated costs.
- Review credit-rating developments, pension funding needs, capital-market access and commodity-trading collateral requirements.