Business Performance

2013 Performance

Contributing to AEP’s financial success in 2013 were a number of factors: approvals for and completion of $647 million in securitizations in West Virginia and Ohio; inclusion, starting in February 2013, of the John W. Turk, Jr., Power Plant and other assets in rates in Texas; regulatory support in Michigan and Indiana for the Donald C. Cook Nuclear Power Plant’s life cycle management plan; and sustainable savings and enhanced revenue sources identified through employee-led continuous improvement efforts.

AEP’s earnings for 2013, based on Generally Accepted Accounting Principles (GAAP), totaled $1.48 billion or $3.04 per share, compared with $1.3 billion or $2.60 per share for 2012. AEP’s operating earnings in 2013, or GAAP earnings excluding special items, totaled $1.57 billion or $3.23 per share, compared with $1.49 billion or $3.09 per share in 2012. AEP Transmission Holding Company (AEPTHCo) contributed $0.16 per share in 2013 – $0.02 higher than originally forecasted – reflecting its accelerated growth. We expect AEPTHCo to contribute $0.29 per share to operating earnings in 2014. Overall, AEP delivered operating earnings per share at the high end of our earnings guidance. We reaffirmed our earnings growth range between 4 percent and 6 percent.

2013 operating earnings were higher than GAAP earnings due to the exclusion of charges related to plant impairments and regulatory disallowances, reversal of deferred storm costs, and a charge related to our cost restructuring efforts, somewhat offset by a favorable court decision associated with U.K. windfall taxes.

Weather-adjusted sales of electricity fell 1.6 percent in 2013 compared with 0.7 percent in 2012. The closure of Ormet Corp., an aluminum smelter in Ohio and AEP’s largest customer, was a significant factor in this decline. Excluding Ormet, weather-normalized sales were down 0.6 percent in 2013 and are expected to grow by 1.2 percent in 2014. We expect an additional 270 megawatts of new industrial load to come on line in 2014. Residential and commercial sales were flat in 2013 and are projected to remain that way in 2014. Among residential customers, the use of home-energy efficiency programs is reducing the average usage per customer. In total, we anticipate total normalized gigawatt-hour sales to be down 1.1 percent over 2013 levels but essentially flat, excluding Ormet.

A somewhat sluggish economy, along with our customers becoming increasingly efficient users of electricity, is limiting load growth below historical rates of 1 percent to 2 percent per year.

Fiscal discipline is central to our business strategy, and we work hard to be efficient and thoughtful about how we spend our resources. We strive to manage those resources in ways that consider the customer impact in essentially every decision we make and with every dollar we spend. On a total system basis, excluding items with earnings offsets and River Operations, operations and maintenance (O&M) spending for 2013 was $2.8 billion, which was flat with 2012.

At AEP, we are working to align our investments with what our customers value and in ways that reward our shareholders. That’s the philosophy driving our capital investment strategy. Customers want safe, reliable and affordable electricity. They also want efficient, effective communication with us. About 95 percent of our capital funds are forecasted to be invested in our regulated operations. In 2013, we invested $3.7 billion in our regulated businesses. In 2014, we expect to invest approximately $2.8 billion (excluding AFUDC debt and equity) in our transmission and distribution units. We will invest approximately $875 million this year in our regulated generation business, mostly for environmental compliance and life cycle management at the Cook Nuclear station. As our environmental investments continue to wind down, we are redeploying that capital to transmission and distribution.

In 2013, we improved our total debt-to-capitalization ratio, a common indicator of a company’s financial health, to 54.3 percent – the lowest percentage in more than a decade. This compares with a debt-to-capitalization ratio of 55.2 percent at the end of 2012 and 57.2 percent in 2009. This is an important metric because it shows AEP’s leverage ratio in the market when it seeks capital for infrastructure development; the lower the percentage, the more financial flexibility a company has. AEP’s ratio positions us well in the capital markets.

In 2013, AEP maintained its liquidity position – the ability to gain access to cash when it’s needed. AEP’s liquidity position of approximately $3.4 billion primarily consists of our two revolving credit lines. Our debt-to-capitalization and liquidity ratios reflect a strong balance sheet, solid credit metrics and adequate liquidity to support our growth strategy.

We maintain a qualified, defined benefit pension plan that, at the end of 2013, was 99 percent funded. Our strategy has been to aggressively fund the plan to the benefit of our employees, retirees, customers and investors. We are working hard to match the duration of the plan’s assets to its liabilities to reduce risk as the plan approaches full funding. In 2013, the qualified plan paid $324 million in benefits to plan participants.

AEP’s other postemployment benefit plan is now more than fully funded at 117 percent. This is due, in part, to changes we made in 2012 to medical plans for future retirees. Starting in December 2012, we capped our contribution to retiree medical costs to reduce future exposure to medical cost inflation. Employees hired after December 2013 are not eligible for retiree medical coverage.

One of the most significant milestones in 2013 was the completion of corporate separation – separating our generating assets from transmission and distribution assets in Ohio. This division of assets supports the state’s competitive electricity market. The process included transferring some assets to other AEP operating companies. We received approvals from the Federal Energy Regulatory Commission, the Public Utilities Commission of Ohio, and utility commissions in Virginia, West Virginia and Kentucky, and worked with many other stakeholders to accomplish this effort. We created a competitive generation business for our Ohio assets, AEP Generation Resources.

We are well positioned to hedge the generation from our competitive fleet through our retail provider, AEP Energy. Because the ability to maintain relatively low-cost, efficient and reliable operations is a significant factor in determining competitiveness, we continue to carefully analyze the cost structure of that business. The challenges are compounded by a dysfunctional capacity auction process in PJM Interconnection that undervalues generation capacity. The value of these newly deregulated plants is at stake, and we are reforming the way we operate them to function as a competitive generation business.

Our Commitment to Zero Harm

At AEP, our focus on zero harm - zero injuries, illnesses or fatalities - means compliance with regulations is just a starting point. We are committed to continuous safety and health improvement.

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