Business context and reporting period
American Electric Power Company, Inc. (AEP) is an investor-owned electric utility holding company whose businesses include regulated generation, transmission and distribution, as well as competitive generation, marketing and contracted renewables. This combined Form 10-Q covers the quarter ended March 31, 2019; comparisons are with the first quarter of 2018 unless noted. Financial figures below are for consolidated AEP.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $4.057 billion | $4.048 billion | Up 0.2% |
| Operating income | $788.4 million | $706.0 million | Up 11.7% |
| Net income | $574.1 million | $456.7 million | Up 25.7% |
| Earnings attributable to AEP common shareholders | $572.8 million | $454.4 million | Up 26.1% |
| Diluted EPS | $1.16 | $0.92 | Up 26.1% |
| Operating margin | 19.4% | 17.4% | Higher |
| Cash from operating activities | $808.3 million | $802.2 million | Up $6.1 million |
| Construction expenditures | $1.565 billion | $1.906 billion | Down $340.4 million |
| Total debt at March 31 | $26.285 billion | $25.257 billion at Dec. 31, 2018 | Up $1.028 billion |
| Debt to total capitalization | 57.8% | 57.0% at Dec. 31, 2018 | Higher |
Cash, cash equivalents and restricted cash totaled $363.1 million at quarter-end, including $227.7 million of cash and equivalents. AEP reported net available liquidity of approximately $3.12 billion, including its $4 billion revolving credit facility, after commercial paper outstanding. The filing reports adequate liquidity under existing facilities. Current assets were $3.915 billion and current liabilities $7.991 billion.
Material changes versus the prior comparable period
- Shareholder earnings rose chiefly on higher transmission investment and revenues, favorable rate outcomes, lower operation and maintenance costs, and lower income-tax expense. Consolidated income-tax expense fell to $44.5 million from $102.0 million, primarily reflecting amortization of excess accumulated deferred income taxes (Excess ADIT) and projected renewable tax credits.
- Transmission and Distribution Utilities earnings increased to $156.5 million from $125.4 million, and AEP Transmission Holdco earnings increased to $124.2 million from $104.0 million; transmission growth reflected continued investment in the network.
- Vertically Integrated Utilities earnings increased to $302.4 million from $231.2 million. Lower maintenance costs and lower tax expense more than offset higher depreciation and weaker weather-related usage.
- Generation & Marketing earnings increased to $40.1 million from $18.2 million. Improved retail, trading and marketing margins and lower operating costs offset weaker generation margins.
- Corporate and Other recorded a $50.4 million loss versus a $24.4 million loss, due mainly to higher tax and interest expense and a $5 million investment impairment.
- Weather-normalized retail sales volumes declined 0.3%; industrial volumes fell 0.4%, residential sales rose 0.9% and commercial sales fell 1.7%.
Outlook, management commentary, risks and unusual items
- Capital program: Management forecasts approximately $32.9 billion in capital expenditures for 2019–2023, principally for transmission, generation, distribution, renewables and environmental compliance. Funding is expected from operating cash flows and financing activities. The filing provides no specific full-year earnings or EPS guidance.
- Renewables: In April 2019, after quarter-end, AEP acquired Sempra Renewables LLC and 724 MW of wind and battery assets for approximately $1.1 billion, including $584 million cash consideration and assumption of approximately $358 million in project debt. The acquired wind farms have long-term power purchase agreements. AEP also expected a separate 302 MW West Texas wind acquisition to enter service in mid-2019.
- Financing: In March, AEP issued 16.1 million Equity Units with an $805 million stated amount and approximately $785 million net proceeds. The units include 3.40% junior subordinated notes due 2024 and a forward equity purchase contract settling in 2022. The Board declared a $0.67-per-share quarterly dividend in April.
- Rate and regulatory matters: AEP Texas sought PUCT approval to securitize approximately $230 million of estimated distribution-related storm restoration costs; a decision was expected in Q2 2019. A further estimated $95 million of transmission-related restoration costs is expected to be pursued through transmission filings or a base-rate case. PSO received approval for a $46 million annual rate increase, effective April 2019; APCo and WPCo received a combined $44 million annual West Virginia increase, effective March 2019.
- Unusual benefit: OPCo reversed a $58 million provision after the PUCO concluded it had not earned significantly excessive 2016 returns. This contributed to improved first-quarter results and should be distinguished from recurring operating performance.
- Pending exposures: APCo could owe customer refunds if it exceeds the Virginia earnings threshold for 2017–2019; management said over-earnings were reasonably possible but could not estimate a range. A Virginia staff depreciation recommendation could add $21 million of annual pretax depreciation without a corresponding base-rate increase. SWEPCo’s appeal concerning the Turk Plant remains pending; its net book value was $1.5 billion, and an adverse outcome could impair cost recovery. FERC decisions on PJM and SPP transmission return-on-equity settlements also remain pending.
- Environmental and operating risks: AEP estimates $650 million to $1.5 billion of investment through 2025 to address existing and proposed environmental requirements; estimates depend on rulemaking, technology, plant-retirement decisions and cost recovery. Management says unrecovered compliance costs could reduce earnings and cash flows. Racine dam reconstruction is expected to finish in Q4 2019, but further cost increases could cause losses. Dolet Hills shifted to seasonal operation.
- Accounting and controls: AEP adopted the new lease standard on January 1, 2019. It materially increased balance-sheet assets and liabilities but did not materially affect earnings or cash flows. AEPTCo revised comparative financial statements for previously identified immaterial errors involving transmission formula-rate assets and AFUDC; management concluded the prior-period errors were not material. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Most important facts an investor should verify
- How much of the earnings increase—especially the $58 million OPCo provision reversal and lower tax expense—is recurring, and how results compare after adjusting for these items.
- Whether AEP sustains operating cash generation against its $32.9 billion five-year capital plan, rising debt and dividend commitments.
- Final regulatory decisions and recoveries for Texas storm costs, Virginia earnings/depreciation matters, Turk Plant prudence and the PJM/SPP transmission settlements.
- The Sempra acquisition’s final purchase-price allocation, financing, integration and realized contribution, as well as progress on other contracted renewable projects.
- Environmental compliance costs, plant-retirement and remediation exposures, and the adequacy of recovery through regulated rates.