SEC Company Response from AMERICAN ELECTRIC POWER CO INC (AEP) (CIK 0000004904) (AEP) — Jul 16, 2010
AMERICAN ELECTRIC POWER CO INC (AEP) (CIK 0000004904)
Date: July 16, 2010 · CIK: 0000004904 · Accession: 0000004904-10-000100
AI Filing Summary & Sentiment
File numbers found in text: 001-03457, 001-03525, 001-06543
Referenced dates: June 24, 2010
Letter
RE: American Electric Power Company, Inc.
commentletter07162010.htm
Securities and Exchange Commission
Division of Corporate Finance
100 F. Street NE
Washington, D. C. 20549
July 16, 2010
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
Definitive Proxy Statement on Schedule 14A
Filed March 15, 2010
File No. 001-03525
Appalachian Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
Definitive Information Statement on Schedule 14A
Filed March 19, 2010
File No. 001-03457
Ohio Power Company
Form 10-K for the Fiscal year Ended December 31, 2009
Filed February 26, 2010
Definitive Information Statement on Schedule 14A
Filed March 19, 2010
File No. 001-06543
Columbus Southern Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
File No. 001-06543
Indiana Michigan Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
File No. 001-06543
Public Service Company of Oklahoma
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
File No. 001-06543
Southwestern Electric Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
File No. 001-06543
Responses to the comment letter dated June 24, 2010 from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) regarding the above-captioned Reports are provided herewith, including the text of the Staff’s comments.
General
1. Please include page numbers in all of your filings.
Response:
In future filings, we will include page numbers in our HTML documents. We will also submit a PDF document as we have in past filings. Our HTML conversion software can cause page numbers to differ from the page numbers in our PDF documents. We are currently working with our HTML software vendor to resolve this inconsistency.
American Electric Power Company, Inc.
Appalachian Power Company
Ohio Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Item 7. Management’s Financial Discussion and Analysis of Results of Operations
Budgeted Construction Expenditures
2. We note your statement that American Electric Power “forecast[s] approximately $2.2 billion of construction expenditures for 2010,” as well your disclosure that Appalachian Power Company and Ohio Power Company have budgeted construction expenditures of $381 million and $302 million, respectively, for 2010. Please expand your disclosure to describe your material commitments for capital expenditures as of the end of the latest fiscal period, indicate the general purpose of such commitments, and describe any known material trends in your capital resources. Refer to Item 303(a)(2) of Regulation S-K.
Response:
Material contractual commitments for capital expenditures as of December 31, 2009 are disclosed in the table on page A-20 labeled “Payments Due by Period”. Footnote (h) to the line item “Construction Contracts for Capital Assets” explains that these are the amounts we are contractually obligated to pay as of December 31, 2009. These amounts are included in the $2.2 billion of forecasted capital expenditures on page A-19. Similar tables and disclosures for Appalachian Power Company (APCo) and Ohio Power Company (OPCo) are included on pages B-9 and E-9, respectively.
The $381 million and $302 million disclosure on page I-2 of budgeted construction expenditures for 2010 for APCo and OPCo, respectively, are included in the $2.2 billion AEP consolidated total on page A-19. As shown on pages B-9 and E-9, APCo and OPCo have 2010 construction commitments of $76 million and $53 million, respectively, which are included in their 2010 budgeted construction expenditures of $381 million and $302 million, respectively.
In “BUDGETED CONSTRUCTION EXPENDITURES” on page A-19, we state that construction expenditures will be funded through cash flows from operations and financing activities. In the “LIQUIDITY” section on pages A-14, we discuss our sources of short-term and long-term funding. In the “SIGNIFICANT FACTORS” section on pages A-23 through A-27, we describe the potential significant regulatory and environmental factors impacting our future capital expenditures.
The general purpose of such construction contracts is to arrange for the timely, fixed price construction of capital assets such as generation stations, transmission lines and environmental controls. In future Form 10-K filings, we will expand our disclosure to provide in more detail, the nature and general purpose of such major construction commitments.
Exhibit 13. 2009 Annual Reports
American Electric Power Company, Inc. and Subsidiary Companies
Consolidated Financial Statements, page A-40
Notes to Consolidated Financial Statements, page A-46
Note 1. Organization and Summary of Significant Accounting Policies, page A-46
Summary of Significant Accounting Policies, page A-46
Revenue Recognition, page A-54
Traditional Electricity Supply and Delivery Activities, page A-54
3. We note that you and AEP East companies generally report power sales and purchases in the PJM region on a net basis as revenues, except in circumstances where purchases are made to serve retail load which are recorded on a gross basis as purchased electricity for resale. Please tell us how you apply these accounting policies and determine when to report transactions on a net or gross basis, including whether purchases and sales are netted on an hourly, daily, monthly or other basis. Please contrast your policy to predominate practice of load serving entities in the PJM region. In addition, it seems as though a clarification of your disclosure and the disclosure in the notes to financial statements of registrant subsidiaries regarding these accounting policies may be appropriate to facilitate an understanding of the policies followed in recognizing transactions in the PJM region. Please advise.
Response:
As excerpted from our footnote,
Most of the power produced at the generation plants of the AEP East companies is sold to PJM, the RTO operating in the east service territory. We purchase power from PJM to supply our customers. Generally, these power sales and purchases are reported on a net basis as revenues … However in 2009, there were times when we were a purchaser of power from PJM to serve retail load. These purchases were recorded gross as Purchased Electricity for Resale…
The purchases of power in excess of sales to PJM were reported as Purchased Electricity for Resale in our Consolidated Statements of Income for hourly net purchases.
In future Form 10-K filings, AEP and its registrant subsidiaries will add this disclosure.
We reviewed Form 10-K disclosures for six utilities which have load serving entities within PJM. Two of these utilities appeared to have similar operating structures as AEP. Both Allegheny Energy, Inc. and PPL Corporation stated that transactions were reported on a net basis. Based on our limited review of this publicly available information, we were unable to determine the accounting methods used by other utilities.
Earnings per Share (EPS), page A-60
4. Please tell us how you apply the treasury stock method in light of your disclosure that outstanding stock options were not included in the computation of diluted earnings per share because option exercise prices were greater than the year-end market price of your common shares and why your accounting policy complies with ASC 260-10-45-23.
Response:
AEP applies the treasury stock method specified in ASC 260-10-45-23 on an award-by-award basis. ASC 260-10-45-25 states, in part: “Options and warrants will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants (they are in the money).” In accordance with this guidance, AEP applies the treasury stock method using an average market price during the period. For AEP’s 2009 EPS calculation, AEP’s average stock price was $32.34 per share and its exercise prices for non-dilutive stock options outstanding ranged from $35.63 to $49.00 per share. In our 2009 Report on Form 10-K, we disclosed the following:
Options to purchase 452,216, 470,016 and 83,150 shares of common stock were outstanding at December 31, 2009, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share attributable to AEP common shareholders. Since the options’ exercise prices were greater than the year-end market price of the common shares, the effect would be antidilutive.
In future filings, we will revise our disclosure to state that stock options are not included in the computation of diluted earnings per share when the exercise price is greater than the average market price during the period.
Note 6. Commitments, Guarantees and Contingencies, page A-77
5. Please tell us your estimate of the possible loss or range of loss, and what amounts, if any, you and the registrant subsidiaries accrued with respect to each of the environmental and operating contingencies that had not been settled as of December 31, 2009. Please also tell us why disclosure of estimates of possible losses or range of losses or stating that such estimates cannot be made is not provided. Please refer to ASC 450-20-50-4.
Response:
At December 31, 2009, the following matters discussed in Note 6 were not settled and we cannot predict the ultimate outcome of such litigation against AEP. We are also unable to estimate a range of loss.
§
Federal EPA Complaint and Notice of Violation
§
SWEPCo Notice of Enforcement and Notice of Citizen Suit
§
Carbon Dioxide Public Nuisance Claims
§
Alaskan Villages’ Claims
§
Coal Transportation Rate Dispute – affecting PSO
At December 31, 2009, AEP had total reserves of $493 million recorded related to litigation and contingencies as follows:
(in millions)
Enron Bankruptcy related to Bank of America
$
CERCLA Superfund related to MDEQ claim
Other
Balance as of December 31, 2009
$
Other consists primarily of recorded liabilities related to uncertainties associated with the Fort Wayne Lease, the Natural Gas Markets Lawsuits, the FERC Long-term Contracts and accruals for various other miscellaneous matters. None of the reserves for contingencies contained in Other are material in total or individually to AEP or any of its subsidiary registrants.
In future filings, we will state that we are unable to estimate a loss or range of losses for each applicable matter.
Note 14. Financing Activities, page A-116
Dividend Restrictions, page A -119
6. Please tell us what consideration you and the registrant subsidiaries gave to describing the most significant restrictions on the payment of dividends contained in financing arrangements, charter provisions and/or federal and state regulatory actions and their pertinent provisions rather than the brief disclosures presently provided. Refer to paragraph (e)(1) of Rule 4-08 of Regulation S-X. In addition please tell us how you determine the restricted net assets of consolidated subsidiaries in assessing whether the disclosures required by paragraphs (e)(3)(i) and (ii) of Rule 4-08 of Regulation S-X and Schedule I required by Rule 5-04 of Regulation S-X should be provided. In doing so, please discuss in detail the restrictions imposed by the Federal Power Act and state public utility regulators, the leverage restrictions contained in subsidiary credit agreements and any restrictions related to the spent nuclear fuel and decommissioning trust assets.
Response:
We typically consider the following sources of restrictions on dividends in formulating our disclosure: state corporate codes, provisions in the articles of incorporation, by-laws or other similar organizational documents, leverage ratio covenants contained in debt agreements or similar instruments, and, for our electric utility subsidiaries, the Federal Power Act and rules relating to state utility commissions.
In considering paragraphs (e)(3)(i) and (ii) of Rule 4-08 of Regulation S-X and Schedule I required by Rule 5-04 of Regulation S-X, our restricted net assets include the par value of common stock, preferred stock and restricted retained earnings per our debt agreements. AEP’s restricted net assets were 14.4%, which was below the 25% threshold. Therefore, AEP did not need to file Schedule I. None of the registrant subsidiaries’ restricted net assets exceeded 25%.
We also considered the following restrictions:
AEP Dividend Restrictions
The holders of our common stock are entitled to receive the dividends declared by our board of directors provided funds are legally available for such dividends.
New York law provides that dividends may be declared or paid either out of surplus, so that the net assets of the corporation remaining after such declaration, payment or distribution shall at least equal the amount of its stated capital, or, in case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
AEP issued $315 million aggregate principal amount of junior subordinated debentures (the “Junior Subordinated Debentures”). We have the option to defer interest payments on our Junior Subordinated Debentures for one or more periods of up to 10 consecutive years per period. During any period in which we defer interest payments, we may not declare or pay any dividends or distributions on, or redeem, repurchase or acquire, our common stock. We do not anticipate any deferral of those interest payments in the foreseeable future.
Our ability to pay dividends could also be limited by the leverage restrictions in our credit agreements which have substantially identical terms. The credit agreements contain certain covenants and require us to maintain our percentage of consolidated debt to total capitalization at a level that does not exceed 67.5%. The payment of cash dividends generally results in an increase in the percentage of debt to total capitalization of the company distributing the dividend. The method for calculating outstanding debt and other capital is contractually defined in the credit agreements. As of December 31, 2009, none of our retained earnings were restricted by these leverage restrictions for the purpose of the payment of dividends.
Dividend Restrictions on Utility Subsidiaries
Federal Power Act
Section 305 of the Federal Power Act prohibits each of our utility subsidiaries from participating "in the making or paying of any dividends of such public utility from any funds properly included in capital account." The term “capital account” is not defined in the Federal Power Act or its regulations. We understand “capital account” to mean the par value of the common stock multiplied by the number of shares outstanding. Dividends paid solely out of retained earnings do not violate Section 305 of the Federal Power Act. Additionally, Sections 202-204 of the Federal Power Act create a reserve on earnings attributable to hydro-electric generating plants. Because of its ownership of such plants, this reserve applies to Appalachian Power Company (APCo) , Indiana Michigan Company (I&M) and Ohio Power Company (OPCo) in immaterial amounts.
As discussed below, APCo’s dividends are subject to restriction by the Virginia State Corporate Commission (the “VSCC”). None of our other utility subsidiaries are restricted by their respective state commissions.
APCo
The Articles of Incorporation of APCo restrict its ability to declare dividends or distributions on the common stock if the ratio of common stock equity to total capitalization is, or after such dividend would be, below 25%. Virginia corporation law prohibits a corporation from payi
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CORRESP
1
filename1.htm
commentletter07162010.htm
Securities and Exchange Commission
Division of Corporate Finance
100 F. Street NE
Washington, D. C. 20549
July 16, 2010
RE: American Electric Power Company, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
Definitive Proxy Statement on Schedule 14A
Filed March 15, 2010
File No. 001-03525
Appalachian Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
Definitive Information Statement on Schedule 14A
Filed March 19, 2010
File No. 001-03457
Ohio Power Company
Form 10-K for the Fiscal year Ended December 31, 2009
Filed February 26, 2010
Definitive Information Statement on Schedule 14A
Filed March 19, 2010
File No. 001-06543
Columbus Southern Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
File No. 001-06543
Indiana Michigan Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
File No. 001-06543
Public Service Company of Oklahoma
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
File No. 001-06543
Southwestern Electric Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed February 26, 2010
File No. 001-06543
Responses to the comment letter dated June 24, 2010 from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) regarding the above-captioned Reports are provided herewith, including the text of the Staff’s comments.
General
1. Please include page numbers in all of your filings.
Response:
In future filings, we will include page numbers in our HTML documents. We will also submit a PDF document as we have in past filings. Our HTML conversion software can cause page numbers to differ from the page numbers in our PDF documents. We are currently working with our HTML software vendor to resolve this inconsistency.
American Electric Power Company, Inc.
Appalachian Power Company
Ohio Power Company
Form 10-K for the Fiscal Year Ended December 31, 2009
Item 7. Management’s Financial Discussion and Analysis of Results of Operations
Budgeted Construction Expenditures
2. We note your statement that American Electric Power “forecast[s] approximately $2.2 billion of construction expenditures for 2010,” as well your disclosure that Appalachian Power Company and Ohio Power Company have budgeted construction expenditures of $381 million and $302 million, respectively, for 2010. Please expand your disclosure to describe your material commitments for capital expenditures as of the end of the latest fiscal period, indicate the general purpose of such commitments, and describe any known material trends in your capital resources. Refer to Item 303(a)(2) of Regulation S-K.
Response:
Material contractual commitments for capital expenditures as of December 31, 2009 are disclosed in the table on page A-20 labeled “Payments Due by Period”. Footnote (h) to the line item “Construction Contracts for Capital Assets” explains that these are the amounts we are contractually obligated to pay as of December 31, 2009. These amounts are included in the $2.2 billion of forecasted capital expenditures on page A-19. Similar tables and disclosures for Appalachian Power Company (APCo) and Ohio Power Company (OPCo) are included on pages B-9 and E-9, respectively.
The $381 million and $302 million disclosure on page I-2 of budgeted construction expenditures for 2010 for APCo and OPCo, respectively, are included in the $2.2 billion AEP consolidated total on page A-19. As shown on pages B-9 and E-9, APCo and OPCo have 2010 construction commitments of $76 million and $53 million, respectively, which are included in their 2010 budgeted construction expenditures of $381 million and $302 million, respectively.
In “BUDGETED CONSTRUCTION EXPENDITURES” on page A-19, we state that construction expenditures will be funded through cash flows from operations and financing activities. In the “LIQUIDITY” section on pages A-14, we discuss our sources of short-term and long-term funding. In the “SIGNIFICANT FACTORS” section on pages A-23 through A-27, we describe the potential significant regulatory and environmental factors impacting our future capital expenditures.
The general purpose of such construction contracts is to arrange for the timely, fixed price construction of capital assets such as generation stations, transmission lines and environmental controls. In future Form 10-K filings, we will expand our disclosure to provide in more detail, the nature and general purpose of such major construction commitments.
Exhibit 13. 2009 Annual Reports
American Electric Power Company, Inc. and Subsidiary Companies
Consolidated Financial Statements, page A-40
Notes to Consolidated Financial Statements, page A-46
Note 1. Organization and Summary of Significant Accounting Policies, page A-46
Summary of Significant Accounting Policies, page A-46
Revenue Recognition, page A-54
Traditional Electricity Supply and Delivery Activities, page A-54
3. We note that you and AEP East companies generally report power sales and purchases in the PJM region on a net basis as revenues, except in circumstances where purchases are made to serve retail load which are recorded on a gross basis as purchased electricity for resale. Please tell us how you apply these accounting policies and determine when to report transactions on a net or gross basis, including whether purchases and sales are netted on an hourly, daily, monthly or other basis. Please contrast your policy to predominate practice of load serving entities in the PJM region. In addition, it seems as though a clarification of your disclosure and the disclosure in the notes to financial statements of registrant subsidiaries regarding these accounting policies may be appropriate to facilitate an understanding of the policies followed in recognizing transactions in the PJM region. Please advise.
Response:
As excerpted from our footnote,
Most of the power produced at the generation plants of the AEP East companies is sold to PJM, the RTO operating in the east service territory. We purchase power from PJM to supply our customers. Generally, these power sales and purchases are reported on a net basis as revenues … However in 2009, there were times when we were a purchaser of power from PJM to serve retail load. These purchases were recorded gross as Purchased Electricity for Resale…
The purchases of power in excess of sales to PJM were reported as Purchased Electricity for Resale in our Consolidated Statements of Income for hourly net purchases.
In future Form 10-K filings, AEP and its registrant subsidiaries will add this disclosure.
We reviewed Form 10-K disclosures for six utilities which have load serving entities within PJM. Two of these utilities appeared to have similar operating structures as AEP. Both Allegheny Energy, Inc. and PPL Corporation stated that transactions were reported on a net basis. Based on our limited review of this publicly available information, we were unable to determine the accounting methods used by other utilities.
Earnings per Share (EPS), page A-60
4. Please tell us how you apply the treasury stock method in light of your disclosure that outstanding stock options were not included in the computation of diluted earnings per share because option exercise prices were greater than the year-end market price of your common shares and why your accounting policy complies with ASC 260-10-45-23.
Response:
AEP applies the treasury stock method specified in ASC 260-10-45-23 on an award-by-award basis. ASC 260-10-45-25 states, in part: “Options and warrants will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants (they are in the money).” In accordance with this guidance, AEP applies the treasury stock method using an average market price during the period. For AEP’s 2009 EPS calculation, AEP’s average stock price was $32.34 per share and its exercise prices for non-dilutive stock options outstanding ranged from $35.63 to $49.00 per share. In our 2009 Report on Form 10-K, we disclosed the following:
Options to purchase 452,216, 470,016 and 83,150 shares of common stock were outstanding at December 31, 2009, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share attributable to AEP common shareholders. Since the options’ exercise prices were greater than the year-end market price of the common shares, the effect would be antidilutive.
In future filings, we will revise our disclosure to state that stock options are not included in the computation of diluted earnings per share when the exercise price is greater than the average market price during the period.
Note 6. Commitments, Guarantees and Contingencies, page A-77
5. Please tell us your estimate of the possible loss or range of loss, and what amounts, if any, you and the registrant subsidiaries accrued with respect to each of the environmental and operating contingencies that had not been settled as of December 31, 2009. Please also tell us why disclosure of estimates of possible losses or range of losses or stating that such estimates cannot be made is not provided. Please refer to ASC 450-20-50-4.
Response:
At December 31, 2009, the following matters discussed in Note 6 were not settled and we cannot predict the ultimate outcome of such litigation against AEP. We are also unable to estimate a range of loss.
§
Federal EPA Complaint and Notice of Violation
§
SWEPCo Notice of Enforcement and Notice of Citizen Suit
§
Carbon Dioxide Public Nuisance Claims
§
Alaskan Villages’ Claims
§
Coal Transportation Rate Dispute – affecting PSO
At December 31, 2009, AEP had total reserves of $493 million recorded related to litigation and contingencies as follows:
(in millions)
Enron Bankruptcy related to Bank of America
$
441
CERCLA Superfund related to MDEQ claim
10
Other
42
Balance as of December 31, 2009
$
493
Other consists primarily of recorded liabilities related to uncertainties associated with the Fort Wayne Lease, the Natural Gas Markets Lawsuits, the FERC Long-term Contracts and accruals for various other miscellaneous matters. None of the reserves for contingencies contained in Other are material in total or individually to AEP or any of its subsidiary registrants.
In future filings, we will state that we are unable to estimate a loss or range of losses for each applicable matter.
Note 14. Financing Activities, page A-116
Dividend Restrictions, page A -119
6. Please tell us what consideration you and the registrant subsidiaries gave to describing the most significant restrictions on the payment of dividends contained in financing arrangements, charter provisions and/or federal and state regulatory actions and their pertinent provisions rather than the brief disclosures presently provided. Refer to paragraph (e)(1) of Rule 4-08 of Regulation S-X. In addition please tell us how you determine the restricted net assets of consolidated subsidiaries in assessing whether the disclosures required by paragraphs (e)(3)(i) and (ii) of Rule 4-08 of Regulation S-X and Schedule I required by Rule 5-04 of Regulation S-X should be provided. In doing so, please discuss in detail the restrictions imposed by the Federal Power Act and state public utility regulators, the leverage restrictions contained in subsidiary credit agreements and any restrictions related to the spent nuclear fuel and decommissioning trust assets.
Response:
We typically consider the following sources of restrictions on dividends in formulating our disclosure: state corporate codes, provisions in the articles of incorporation, by-laws or other similar organizational documents, leverage ratio covenants contained in debt agreements or similar instruments, and, for our electric utility subsidiaries, the Federal Power Act and rules relating to state utility commissions.
In considering paragraphs (e)(3)(i) and (ii) of Rule 4-08 of Regulation S-X and Schedule I required by Rule 5-04 of Regulation S-X, our restricted net assets include the par value of common stock, preferred stock and restricted retained earnings per our debt agreements. AEP’s restricted net assets were 14.4%, which was below the 25% threshold. Therefore, AEP did not need to file Schedule I. None of the registrant subsidiaries’ restricted net assets exceeded 25%.
We also considered the following restrictions:
AEP Dividend Restrictions
The holders of our common stock are entitled to receive the dividends declared by our board of directors provided funds are legally available for such dividends.
New York law provides that dividends may be declared or paid either out of surplus, so that the net assets of the corporation remaining after such declaration, payment or distribution shall at least equal the amount of its stated capital, or, in case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
AEP issued $315 million aggregate principal amount of junior subordinated debentures (the “Junior Subordinated Debentures”). We have the option to defer interest payments on our Junior Subordinated Debentures for one or more periods of up to 10 consecutive years per period. During any period in which we defer interest payments, we may not declare or pay any dividends or distributions on, or redeem, repurchase or acquire, our common stock. We do not anticipate any deferral of those interest payments in the foreseeable future.
Our ability to pay dividends could also be limited by the leverage restrictions in our credit agreements which have substantially identical terms. The credit agreements contain certain covenants and require us to maintain our percentage of consolidated debt to total capitalization at a level that does not exceed 67.5%. The payment of cash dividends generally results in an increase in the percentage of debt to total capitalization of the company distributing the dividend. The method for calculating outstanding debt and other capital is contractually defined in the credit agreements. As of December 31, 2009, none of our retained earnings were restricted by these leverage restrictions for the purpose of the payment of dividends.
Dividend Restrictions on Utility Subsidiaries
Federal Power Act
Section 305 of the Federal Power Act prohibits each of our utility subsidiaries from participating "in the making or paying of any dividends of such public utility from any funds properly included in capital account." The term “capital account” is not defined in the Federal Power Act or its regulations. We understand “capital account” to mean the par value of the common stock multiplied by the number of shares outstanding. Dividends paid solely out of retained earnings do not violate Section 305 of the Federal Power Act. Additionally, Sections 202-204 of the Federal Power Act create a reserve on earnings attributable to hydro-electric generating plants. Because of its ownership of such plants, this reserve applies to Appalachian Power Company (APCo) , Indiana Michigan Company (I&M) and Ohio Power Company (OPCo) in immaterial amounts.
As discussed below, APCo’s dividends are subject to restriction by the Virginia State Corporate Commission (the “VSCC”). None of our other utility subsidiaries are restricted by their respective state commissions.
APCo
The Articles of Incorporation of APCo restrict its ability to declare dividends or distributions on the common stock if the ratio of common stock equity to total capitalization is, or after such dividend would be, below 25%. Virginia corporation law prohibits a corporation from payi