AEP takes steps to strengthen balance sheet

COLUMBUS, Ohio, Jan. 24, 2003 — Citing continued difficult wholesale market conditions that have depressed corporate earnings, American Electric Power (AEP) is implementing a plan designed to strengthen the company and improve short-term and long-term performance.

“We are committed to strengthening our balance sheet and have developed a three-part plan for doing so,” said E. Linn Draper Jr., AEP´s chairman, president, and chief executive officer. “First, we will reduce operations and maintenance costs and capital expenditures, and we have already made substantial progress in that area. Second, we will revise our dividend policy and have discussed that with our board of directors this week. Third, we plan to systematically dispose of non-core assets. In addition, we will continue to evaluate the potential for issuing additional equity.

“The decisions we’re making are designed to strengthen the company and improve short-term and long-term performance,” Draper said. “The last year has been a tough and turbulent one for AEP and others in our industry because of a series of negative events in the energy sector. The once flourishing wholesale market is no longer the promising business we contemplated three years ago. We will therefore return to the more traditional model of a regulated utility with a small commercial cell that ensures maximum value for the output of our generation assets.

“We are not out of the woods yet, but AEP is still a strong company,” Draper said.

Details of the plan include:

* O&M, capital expenditures – The continued effort to reduce costs follows AEP’s completion of a cost-cutting program that should result in operations and maintenance net savings of more than $200 million when compared to 2002. As part of that program, AEP reduced its workforce by approximately 5 percent, or 1,300 positions, and has made comparable reductions in outside services and other business expenses. In addition, AEP reduced its capital forecast for 2003 to approximately $1.5 billion, a reduction of approximately $200 million from previous levels.

* Dividend – During Wednesday’s board of directors meeting, the AEP board declared the regular quarterly dividend of $0.60 per share for the first quarter. “Management expects to recommend a 40 percent reduction in the dividend beginning in the second quarter to a quarterly rate of $0.35 per share,” Draper said. “This will result in annual cash savings of $340 million and will immediately improve retained earnings as well as create free cash flow that can be used to pay down debt. The decision to reduce the dividend was made after very careful evaluation, since we recognize the importance of the dividend to our shareholders. We believe that we have retained significant value in the dividend we preserved and it still has an attractive yield.”

* Non-core assets – AEP will conduct an orderly disposition of non-core assets. “This will be accomplished over time and will not be a fire sale,” Draper said. “We will take action when we determine that a divestiture brings shareholder value.” Proceeds from sales will be used to reduce debt.

“We also recognize the need to evaluate the issuance of equity,” Draper said. “While we do not like the dilutive impact on earnings and the additional cash it requires for dividends, incremental equity may be necessary to further strengthen our balance sheet and maintain credit quality. We plan to continue active dialogue with the rating agencies on this matter. I believe that, ultimately, a strong BBB credit for the company is in the best interest of all investors.”

American Electric Power owns and operates more than 42,000 megawatts of generating capacity in the United States and select international markets and is the largest electricity generator in the U.S. AEP is also one of the largest electric utilities in the United States, with almost 5 million customers linked to AEP’s 11-state electricity transmission and distribution grid. The company is based in Columbus, Ohio.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at

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