q3 2011 aep earnings presentation
DESCRIPTION
AEP reports strong 2011 third-quarter earnings, tightens full-year ongoing earnings guidance range.TRANSCRIPT
1
3Q11 Earnings Release Presentation
October 26, 2011
2
This presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although AEP and each of its Registrant Subsidiaries believe that their expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Among the factors that could cause actual results to differ materially from those in the forward-looking statements are: the economic climate and growth in, or contraction within, our service territory and changes in market demand and demographic patterns, inflationary or deflationary interest rate trends, volatility in the financial markets, particularly developments affecting the availability of capital on reasonable terms and developments impairing our ability to finance new capital projects and refinance existing debt at attractive rates, the availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material, electric load, customer growth and the impact of retail competition, particularly in Ohio, weather conditions, including storms, and our ability to recover significant storm restoration costs through applicable rate mechanisms, available sources and costs of, and transportation for, fuels and the creditworthiness and performance of fuel suppliers and transporters, availability of necessary generating capacity and the performance of our generating plants, our ability to resolve I&M’s Donald C. Cook Nuclear Plant Unit 1 restoration and outage-related issues through warranty, insurance and the regulatory process, our ability to recover regulatory assets and stranded costs in connection with deregulation, our ability to recover increases in fuel and other energy costs through regulated or competitive electric rates, our ability to build or acquire generating capacity, including the Turk Plant, and transmission line facilities (including our ability to obtain any necessary regulatory approvals and permits) when needed at acceptable prices and terms and to recover those costs (including the costs of projects that are cancelled) through applicable rate cases or competitive rates, new legislation, litigation and government regulation including oversight of energy commodity trading and new or heightened requirements for reduced emissions of sulfur, nitrogen, mercury, carbon, soot or particulate matter and other substances or additional regulation of fly ash and similar combustion products that could impact the continued operation and cost recovery of our plants, timing and resolution of pending and future rate cases, negotiations and other regulatory decisions including rate or other recovery of new investments in generation, distribution and transmission service and environmental compliance, resolution of litigation, our ability to constrain operation and maintenance costs, our ability to develop and execute a strategy based on a view regarding prices of electricity, natural gas and other energy-related commodities, changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading market, actions of rating agencies, including changes in the ratings of debt, volatility and changes in markets for electricity, natural gas, coal, nuclear fuel and other energy-related commodities, changes in utility regulation, including the implementation of ESPs and the expected legal separation and transition to market for generation in Ohio and the allocation of costs within regional transmission organizations, including PJM and SPP, accounting pronouncements periodically issued by accounting standard-setting bodies, the impact of volatility in the capital markets on the value of the investments held by our pension, other postretirement benefit plans, captive insurance entity and nuclear decommissioning trust and the impact on future funding requirements, prices and demand for power that we generate and sell at wholesale, changes in technology, particularly with respect to new, developing or alternative sources of generation, our ability to recover through rates or prices any remaining unrecovered investment in generating units that may be retired before the end of their previously projected useful lives, evolving public perception of the risks associated with fuels used before, during and after the generation of electricity, including nuclear fuel and other risks and unforeseen events, including wars, the effects of terrorism (including increased security costs), embargoes, cyber security threats and other catastrophic events.
Investor Relations Contacts
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
Chuck ZebulaTreasurer
SVP Investor Relations614-716-2800
Bette Jo RozsaManaging DirectorInvestor Relations
Julie SherwoodDirector
Investor Relations614-716-2663
Sara MaciochAnalyst
Investor Relations614-716-2835
3
Third Quarter 2011 Highlights
Financial Performance
Delivered GAAP earnings of $1.93 and on-going earnings of $1.17 per share
Tightening 2011 earnings guidance to $3.07 to $3.17 per share, from $3.00 to $3.20 per share
Announcements
Nick Akins elected CEO effective November 12, 2011
Board declared $0.47/share quarterly dividend; an increase of $0.01/share, or 2.2%
Redemption of all preferred shares at AEP Subsidiaries
1.40 1.42
1.50
1.581.64 1.64
1.71
1.85
$1.20
$1.30
$1.40
$1.50
$1.60
$1.70
$1.80
$1.90
$2.00
2004 2005 2006 2007 2008 2009 2010 2011
$/sh
are
Dividend history since 2004
4.1% average annual growth
Dividend remains in-line with payout ratio target and earnings growth
4
Update on Key Areas of Interest
Hearing on Ohio Stipulation Underway
Transition to Market for Ohio
Corporate Separation
Environmental Rules
CSAPR Allocations
MACT Rules
Transmission
RITELine - FERC Approval in October
ETT
Transco Update
TCC Supreme Court Remand
PUCO decision expected later this year
Timing for compliance periods – impact on
reliability
Gaining traction in regulated business
growth
Regulatory certainty provides clarity to AEP’s business plan
Keeps credit and balance sheet strong
5
3Q11 Performance DriversThird Quarter Reconciliation
3Q11 Performance
Refund of POLR charges from Ohio ESP Remand ruling $43M
Gross Customer Switching up $33M
O&M expense net of offsets increased $19M primarily due to higher storm expenses and higher generation maintenance
Retail Margins down $12M
Weather was favorable by $14M vs. prior year, favorable $79M vs. normal
Income from carrying costs related to TCC True-up Remand $28M
Rate Changes net of offsets of $53M from multiple operating jurisdictions
Delivered solid quarter within Company’s expectations
OngoingEarnings
EPS ($ in millions)3Q10 1.15$ $552POLR Remand (0.06)$ Customer Switching (0.04)$ Operations & Maintenance (0.03)$ Retail Margin (0.02)$ Off-System Sales -$ Weather 0.02$ Other 0.04$ TCC True-Up Remand 0.04$ Rate Changes 0.07$ 3Q11 1.17$ $566EPS Based on 482MM shares in Q311
6
YTD 2011 Performance DriversSeptember YTD 2011 Reconciliation
September YTD 2011 Performance
Refund of POLR charges from Ohio ESP Remand ruling $43M
Gross Customer Switching up $76M
O&M expense net of offsets increased $48M primarily due to higher storm expenses
Retail Margins down $12M
Off-System Sales, net of sharing, were favorable by $49M due to higher volumes and higher prices
Weather was unfavorable by $1M vs. prior year, favorable $147M vs. normal
Income from carrying costs related to TCC True-up Remand $28M
Rate Changes net of offsets of $163M from multiple operating jurisdictions
YTD results give Company confidence to raise mid-point of guidance range
Ongoing Earnings
EPS ($ in millions)2010 2.65$ $1,272POLR Remand (0.06)$ Customer Switching (0.10)$ Operations & Maintenance (0.06)$ Retail Margin (0.02)$ Off-System Sales 0.07$ Weather -$ Other (0.02)$ TCC True-Up Remand 0.04$ Rate Changes 0.22$ 2011 2.72$ $1,310EPS Based on 482MM shares in YTD11
7Industrial sales leads load growth
1.3%
-1.2% -1.7%
4.4%
-0.1% 0.5%
-5%
0%
5%
10%
15%
3Q10 4Q10 1Q11 2Q11 3Q11 2011YTD
Normalized Load Trends
-1.6%-0.3%
1.2% 0.5%0.0%
-1.5%-5%
0%
5%
10%
15%
3Q10 4Q10 1Q11 2Q11 3Q11 2011YTD
6.0% 7.0% 7.1%
3.3%5.2% 5.1%
-5%
0%
5%
10%
15%
3Q10 4Q10 1Q11 2Q11 3Q11 2011YTD
0.8%2.2% 2.5% 1.9% 1.9%
2.1%
-5%
0%
5%
10%
15%
3Q10 4Q10 1Q11 2Q11 3Q11 2011YTD
AEP Residential Normalized GWh Sales%Change vs. Prior Year
AEP Commercial Normalized GWh Sales%Change vs. Prior Year
AEP Industrial Normalized GWh Sales%Change vs. Prior Year
AEP Total Normalized GWh Sales*%Change vs. Prior Year
*includes firm wholesale loadNote: Chart represents connected load
8
$83,015
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11
% k
Wh
Lost
$-
$15,000
$30,000
$45,000
$60,000
$75,000
$90,000
$105,000
$120,000
$135,000
$150,000
Lost Gross M
argin ($000s)
Actual Cumulative % Lost LoadActual Cumulative Lost Gross Margin
Customer Switching
AEP-OH Customers Choosing Other Energy Providers
3Q11 Gross Margin
Lost
YTD Gross Margin
Lost
YTD % Lost Load
CSP 32.0$ 74.7$ 16.5%
OPCo 5.4$ 8.3$ 1.6%Total 37.4$ 83.0$ 8.3%
($ in millions)
Customer switching impacts offset by off-system sales and capacity revenues
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59.1%
57.2%
59.1%
60.7%
62.5%
57.2%
54.6%
64.5%
57.0%
40%
45%
50%
55%
60%
65%
70%
2003
A20
04A
2005
A20
06A
2007
A20
08A
2009
A20
10A
3Q201
1
Capitalization & Liquidity
Total Debt / Total Capitalization
Note: Total Debt is calculated according to GAAP and includes securitized debt
Liquidity Summary (09/30/2011)Liquidity Summary(unaudited) Actual($ in millions) Amount MaturityRevolving Credit Facility 1,750$ Jul-16Revolving Credit Facility 1,500 Jun-15Total Credit Facilities 3,250
PlusCash & Cash Equivalents 546
LessCommercial Paper Outstanding (529) Letters of credit issued (103)
Net available Liquidity 3,164$
Debt to Cap ratio lowest in 8 years Liquidity profile renewed this year
Credit Statistics
Note: Credit statistics represent the trailing 12 month as of 09/30/2011
Actual TargetFFO Interest Coverage 4.9 >3.6xFFO To Total Debt 21.5% 15%- 20%
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Summary
Management committed to earnings and dividend growth
Solid performance for 2011
Continued focus on capital and O&M discipline, as well as cash proceeds from securitization bonds in TX, will keep our credit statistics and balance sheet strong
Certainty from “overhangs” on the company will be resolved soon
Operating company performance remains a priority
11
Questions
12
3Q11 Earnings
3rd Qtr 3rd Qtr 3rd Qtr 3rd Qtr2010 2011 Change 2010 2011 Change
Utility Operations 530$ 542$ 12$ 1.11$ 1.12$ 0.01$
Transmission Operations 4 9 5 0.01 0.02 0.01
Non-Utility Operations 15 25 10 0.03 0.05 0.02
Parent & Other 3 (10) (13) - (0.02) (0.02)
AEP On-Going Earnings 552 566 14 1.15 1.17 0.02Cost Reduction Initiative 3 - (3) 0.01 - (0.01)Carbon Capture and Storage - Ohio - (5) (5) - (0.01) (0.01)Sporn Unit 5 Retirement - (31) (31) - (0.06) (0.06)MR5 - Suspended Scrubber - (27) (27) - (0.05) (0.05)Texas Capacity Auction True-Up - 425 425 - 0.88 0.88Special Items Total 3 362 359 0.01 0.76 0.75
Reported Earnings (GAAP) 555$ 928$ 373$ 1.16$ 1.93$ 0.77$
$ millions Earnings Per Share
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Quarterly Performance Comparison
Performance Driver ($ millions) EPS Performance Driver ($ millions) EPS
UTILITY OPERATIONS:Gross Margin:
1 East Regulated Integrated Utilities 17,326 GWh @ 42.5$ /MWhr = 737 17,136 GWh @ 42.4$ /MWhr = 727 2 Ohio Companies 12,788 GWh @ 60.8$ /MWhr = 777 13,089 GWh @ 55.5$ /MWhr = 727 3 West Regulated Integrated Utilities 12,657 GWh @ 34.3$ /MWhr = 435 13,377 GWh @ 34.4$ /MWhr = 460 4 Texas Wires 8,141 GWh @ 21.0$ /MWhr = 171 8,917 GWh @ 21.2$ /MWhr = 189 5 Off-System Sales 7,314 GWh @ 15.3$ /MWhr = 112 9,616 GWh @ 11.6$ /MWhr = 111 6 Transmission Revenue - 3rd Party 95 109 7 Other Operating Revenue 151 142
8 Utility Gross Margin 2,478 2,465
9 Operations & Maintenance (853) (876) 10 Depreciation & Amortization (413) (435) 11 Taxes Other than Income Taxes (210) (210) 12 Interest Exp & Preferred Dividend (239) (223) 13 Other Income & Deductions 35 99 14 Income Taxes (268) (278) 15 Utility Operations On-Going Earnings 530 1.11 542 1.12
16 Transmission Operations On-Going Earnings 4 0.01 9 0.02
NON-UTILITY OPERATIONS:17 AEP River Operations 15 0.03 17 0.03 18 Generation & Marketing - - 8 0.02
PARENT & OTHER:
19 Parent Company On-Going Earnings (14) (13)
20 Other Investments 17 3
21 Parent & Other On-Going Earnings 3 - (10) (0.02)
22 ON-GOING EARNINGS 552 1.15 566 1.17
Note: For analysis purposes, certain financial statement amounts have been reclassified for this effect on earnings presentation.
2011 Actual2010 Actual
American Electric PowerFinancial Results for 3rd Quarter 2011 Actual vs 3rd Quarter 2010 Actual
14
Sept YTD Sept YTD Sept YTD Sept YTD2010 2011 Change 2010 2011 Change
Utility Operations 1,239$ 1,280$ 41$ 2.59$ 2.66$ 0.07$
Transmission Operations 5 19 14 0.01 0.04 0.03
Non-Utility Operations 36 43 7 0.07 0.09 0.02
Parent & Other (8) (32) (24) (0.02) (0.07) (0.05)
AEP On-Going Earnings 1,272 1,310 38 2.65 2.72 0.07 Medicare D Subsidy (21) - 21 (0.04) - 0.04 Cost Reduction Initiative (182) 9 191 (0.38) 0.02 0.40 Litigation Settlement Enron Bankruptcy - (22) (22) - (0.05) (0.05) Carbon Capture and Storage - Ohio - (5) (5) - (0.01) (0.01) Carbon Capture -- APCo WV - (26) (26) - (0.06) (0.06) Carbon Capture -- APCo VA (34) - 34 (0.07) - 0.07 Sporn Unit 5 Retirement - (31) (31) - (0.06) (0.06) MR5 - Suspended Scrubber - (27) (27) - (0.05) (0.05) Texas Capacity Auction True-Up - 425 425 - 0.88 0.88 Special Items Total (237) 323 560 (0.49) 0.67 1.16
Reported Earnings (GAAP) 1,035$ 1,633$ 598$ 2.16$ 3.39$ 1.23$
$ millions Earnings Per Share
September YTD Earnings
15
YTD 2011 Performance Comparison
Performance Driver ($ millions) EPS Performance Driver ($ millions) EPS
UTILITY OPERATIONS:Gross Margin:
1 East Regulated Integrated Utilities 51,425 GWh @ 42.0$ /MWhr = 2,160 50,623 GWh @ 42.1$ /MWhr = 2,132 2 Ohio Companies 36,733 GWh @ 58.6$ /MWhr = 2,153 38,225 GWh @ 54.9$ /MWhr = 2,099 3 West Regulated Integrated Utilities 32,722 GWh @ 32.0$ /MWhr = 1,050 33,910 GWh @ 32.7$ /MWhr = 1,111 4 Texas Wires 21,324 GWh @ 22.1$ /MWhr = 472 22,983 GWh @ 21.8$ /MWhr = 502 5 Off-System Sales 16,038 GWh @ 15.2$ /MWhr = 244 22,232 GWh @ 13.2$ /MWhr = 293 6 Transmission Revenue - 3rd Party 277 311 7 Other Operating Revenue 402 402
8 Utility Gross Margin 6,758 6,850
9 Operations & Maintenance (2,467) (2,564) 10 Depreciation & Amortization (1,205) (1,226) 11 Taxes Other than Income Taxes (603) (618) 12 Interest Exp & Preferred Dividend (712) (683) 13 Other Income & Deductions 114 188 14 Income Taxes (646) (667) 15 Utility Operations On-Going Earnings 1,239 2.59 1,280 2.66
16 Transmission Operations On-Going Earnings 5 0.01 19 0.04
NON-UTILITY OPERATIONS:17 AEP River Operations 19 0.04 23 0.05 18 Generation & Marketing 17 0.03 20 0.04
PARENT & OTHER:
19 Parent Company On-Going Earnings (40) (41)
20 Other Investments 32 9
21 Parent & Other On-Going Earnings (8) (0.02) (32) (0.07)
22 ON-GOING EARNINGS 1,272 2.65 1,310 2.72
Note: For analysis purposes, certain financial statement amounts have been reclassified for this effect on earnings presentation.
2011 Actual2010 Actual
American Electric PowerFinancial Results for YTD September 2011 Actual vs YTD September 2010 Actual
16
Detailed Ongoing Earnings Guidance
2010A: $3.03 2011E: $3.07 - $3.17
2011 Guidance
Performance Driver ($ millions) Performance Driver ($ millions)UTILITY OPERATIONS:
Gross Margin:1 East Regulated Integrated Utilities 68,761 GWh @ 41.9$ /MWhr = 2,882 67,739 GWh @ 43.4$ /MWhr = 2,940 2 Ohio Companies 49,465 GWh @ 56.6$ /MWhr = 2,800 49,747 GWh @ 56.1$ /MWhr = 2,793 3 West Regulated Integrated Utilities 42,131 GWh @ 31.4$ /MWhr = 1,322 41,536 GWh @ 32.8$ /MWhr = 1,361 4 Texas Wires 27,348 GWh @ 22.3$ /MWhr = 611 27,870 GWh @ 22.0$ /MWhr = 614 5 Off-System Sales 19,172 GWh @ 15.6$ /MWhr = 299 21,786 GWh @ 12.0$ /MWhr = 262 6 Transmission Revenue - 3rd Party 369 429 7 Other Operating Revenue 511 481
8 Utility Gross Margin 8,794 8,880
9 Operations & Maintenance (3,427) (3,529) 10 Depreciation & Amortization (1,598) (1,553) 11 Taxes Other than Income Taxes (801) (818) 12 Interest Exp & Preferred Dividend (945) (921) 13 Other Income & Deductions 154 211 14 Income Taxes (758) (787) 15 Utility Operations On-Going Earnings 1,419 1,483
16 Transmission Operations On-Going Earnings 10 17
NON-UTILITY OPERATIONS:17 AEP River Operations 40 51 18 Generation & Marketing 25 6
19 Parent & Other On-Going Earnings (43) (61)
20 ON-GOING EARNINGS 1,451 1,496
2010 Actual
American Electric PowerFinancial Results for 2011 Guidance vs 2010 Actual
17
Retail Rate Performance
$0Texas Wires$0Texas Wires
Rate Changes, net of trackers (in millions)
Rate Changes, net of trackers (in millions)
3Q11 vs. 3Q10 YTD11 vs. YTD10
East Regulated Integrated Utilities $34
East Regulated Integrated Utilities
$106
Ohio Companies $15 Ohio Companies $36
West Regulated Integrated Utilities $4
West Regulated Integrated Utilities
$22
AEP System Total $53 AEP System Total $163
Impact on EPS Impact on EPS $0.22$0.07
18
3Q11 Retail Performance
Retail Load(weather normalized)
Weather Impact(in millions)
3Q11 vs. 3Q10 3Q11 vs. 3Q10
East Regulated Integrated Utilities (0.8%)
East Regulated Integrated Utilities
($3)
Ohio Companies 3.0% Ohio Companies ($3)
West Regulated Integrated Utilities 2.4%
West Regulated Integrated Utilities
$14
Texas Wires 4.9% Texas Wires $5
Impact on EPS Impact on EPS $0.02$0.02
19
YTD 2011 Retail Performance
Retail Load(weather normalized)
Weather Impact(in millions)
YTD11 vs. YTD10 YTD11 vs. YTD10
East Regulated Integrated Utilities (0.6%)
East Regulated Integrated Utilities
($24)
Ohio Companies 4.5% Ohio Companies ($8)
West Regulated Integrated Utilities 2.7%
West Regulated Integrated Utilities
$15
Texas Wires 3.5% Texas Wires $16
Impact on EPS Impact on EPS$0.00$0.02
20
AEP Industrial GWh by Sector
-
400
800
1,200
1,600
2,000
2,400
Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
GWh
Primary Metal ManufacturingChemical ManufacturingPetroleum and Coal Products ManufacturingMining (except Oil & Gas)Paper Manufacturing
These 5 sectors account for approximately 60% of AEP's total Industrial Sales.
Industrial Sales Volumes
Industry 3Q11 vs PY YTD vs PYPrimary Metals 14.1% 14.7%Chemical Mfg 4.0% 3.3%Petroleum & Coal Products 7.5% 5.3%Mining (except Oil & Gas) 4.2% 4.0% Paper Mfg -4.8% -0.4%
21
Off System Sales Gross Margin Detail
Physical off-system sales margins exceeded last year by $14M
Volumes up 31% versus last year
Improved AEP/Dayton Hub pricing: 3% increase in liquidation prices
Lower Trading & Marketing results by $13M
Physical off-system sales margins exceeded last year by $94M
Volumes up 39% versus last year
Improved AEP/Dayton Hub pricing: 4% increase in liquidation prices
Lower Trading & Marketing results by $16M
3Q11
YTD11
3Q10 3Q11GWh Realization ($millions) GWh Realization ($millions)
OSS Physical Sales 7,314 18.02$ 132$ 9,616 15.18$ 146$ Marketing/Trading - 36$ - 23$ Pre-Sharing Gross Margin 7,314 168$ 9,616 169$ Margin Shared (56)$ (58)$ Net OSS 112$ 111$
YTD10 YTD11GWh Realization ($millions) GWh Realization ($millions)
OSS Physical Sales 16,038 14.86$ 238$ 22,232 14.93$ 332$ Marketing/Trading - 105$ - 89$ Pre-Sharing Gross Margin 16,038 344$ 22,232 421$ Margin Shared (100)$ (128)$ Net OSS 244$ 293$
22
Off-System Sales
3Q11 vs. 3Q10 YTD11 vs. YTD10
Power forwards and NG futures as of October 11, 2011
Hub 2010 2011 $ Change % ChangeAEP Dayton 38.36 40.07 1.71 4%PJM West 47.61 46.18 (1.43) -3%NiHub 35.06 35.37 0.31 1%CinHub 35.74 36.27 0.53 1%SPP 33.88 30.74 (3.14) -9%Natural Gas ($/mmBtu) 4.58 4.21 (0.37) -8%
YTD 2011 Liquidations vs. YTD 2010 Liquidations ($/MWh)
Hub 2010 2011 $ Change % ChangeAEP Dayton 35.29 35.30 0.01 0%PJM West 43.56 40.69 (2.87) -7%NiHub 27.41 28.44 1.03 4%CinHub 32.04 30.82 (1.22) -4%SPP 28.22 28.56 0.34 1%Natural Gas ($/mmBtu) 3.78 3.74 (0.04) -1%
Balance of 2011 Forwards vs. Balance of Year 2010 Liquidations ($/MWh)
Hub 2010 2011 $ Change % ChangeAEP Dayton 40.60 41.80 1.20 3%PJM West 51.34 46.38 (4.96) -10%NiHub 37.48 37.43 (0.05) 0%CinHub 37.60 37.55 (0.05) 0%SPP 31.67 34.00 2.33 7%Natural Gas ($/mmBtu) 4.29 4.13 (0.16) -4%
Q3 2011 Liquidations vs. Q3 2010 Liquidations ($/MWh)