American Electric Power Company, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. AEP is an electric utility holding company with regulated generation, transmission and distribution businesses, plus competitive energy and contracted renewable operations. This combined filing covers the quarter and six months ended June 30, 2019; financial amounts below are consolidated AEP figures unless noted.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $3.574bn | $4.013bn | $7.630bn | $8.062bn |
| Operating income | $551.0m | $757.0m | $1.339bn | $1.463bn |
| Net income | $459.1m | $530.1m | $1.033bn | $986.8m |
| Earnings attributable to AEP common shareholders | $461.3m | $528.4m | $1.034bn | $982.8m |
| Diluted EPS | $0.93 | $1.07 | $2.09 | $1.99 |
| Operating margin (operating income / revenue) | 15.4% | 18.9% | 17.5% | 18.1% |
- Second-quarter earnings attributable to common shareholders fell 13% year over year; first-half earnings rose 5%. Q2 net income was below common earnings because of a net loss attributable to noncontrolling interests.
- Six-month operating cash flow was $1.801bn, down from $2.007bn. Investing cash outflow was $3.595bn, including $2.987bn of construction expenditures and $581m paid for the Sempra Renewables acquisition, net of cash acquired. Financing provided $1.740bn.
- At June 30, total debt was $27.709bn, versus $25.257bn at year-end 2018; debt was 58.8% of total capitalization, up from 57.0%. Cash and cash equivalents were $210.5m. Net available liquidity was approximately $2.626bn, including a $4bn revolving facility and cash, less commercial paper outstanding.
- AEP reported a $4bn revolving credit facility through June 2022 and a $750m receivables securitization commitment. Its defined debt-to-capitalization covenant measure was 55.4%, below the 67.5% maximum.
- The Board declared a quarterly dividend of $0.67 per share in July 2019. First-half common dividends paid were $668m.
Material changes and drivers
- Management attributed the Q2 earnings decline primarily to lower weather-related usage. Weather-normalized retail sales volumes fell 1.8% in Q2 and 1.0% for the first half; Q2 industrial sales were down 2.7%.
- Transmission investment and favorable rate outcomes supported results, but did not fully offset weaker demand. AEP Transmission Holdco common earnings rose to $154.5m in Q2 from $101.1m, and to $278.7m for the first half from $205.1m.
- Vertically Integrated Utilities earnings fell to $177.7m in Q2 from $276.8m and to $480.1m for the first half from $508.0m. Generation & Marketing earnings declined to $9.4m in Q2 from $38.8m.
- Income tax benefits materially supported earnings: AEP cited increased amortization of excess accumulated deferred income taxes (Excess ADIT) and renewable tax credits. The filing reports a consolidated effective tax rate of negative 13.5% for Q2 and negative 1.0% for the first half.
- AEP acquired Sempra Renewables LLC in April for approximately $1.1bn of transaction value, including $583m cash paid and about $364m of existing project debt assumed in nonconsolidated joint ventures. The acquired portfolio includes 724 MW of wind generation and battery assets, backed by long-term power purchase agreements.
Outlook, risks and unusual items
- Management forecast approximately $32.9bn of capital expenditures for 2019–2023; the estimate excludes the proposed North Central Wind Energy Facilities. Funding is expected from operating cash flow and financing.
- AEP Texas received a June PUCT financing order approving securitization of approximately $229m of distribution-related storm restoration costs; bonds were expected in Q3 2019, subject to market conditions. An estimated $95m of transmission-related storm costs remained subject to rate-case or interim-rate recovery.
- Material regulatory uncertainty includes the Turk Plant prudence dispute in Texas. Its net book value was $1.5bn at June 30, and SWEPCo’s Texas jurisdictional share was about 33%; adverse resolution could impair cost recovery. Other proceedings include pending base-rate cases and APCo’s Virginia earnings review, where over-earning was considered reasonably possible but not probable and management could not estimate a range.
- Environmental compliance investment was estimated at $550m–$1.1bn through 2026. Potential additional costs, asset impairments, or regulatory disallowances could affect earnings and cash flow if not recovered from customers.
- The Rockport consent decree was modified in July 2019, requiring enhanced controls and emission limits; I&M also agreed to provide $7.5m for environmental mitigation. A July 2019 patent-infringement complaint concerning mercury-control processes seeks injunctive relief and damages; management could not estimate potential losses.
- In July 2019, AEP acquired a 75% interest in the 227-MW Santa Rita East wind project for approximately $356m. PSO and SWEPCo also filed for approval to acquire up to 1,485 MW of North Central wind facilities at an estimated cost of approximately $2bn.
- AEP disclosed no material change to previously reported risk factors. Risks include weather and demand variability, rate-case outcomes, cost recovery, environmental rules, commodity and interest-rate exposures, financing access, and litigation. Management stated disclosure controls were effective; certain accounting and tax transaction processing activities were outsourced during the quarter and remain subject to management review controls.
Important facts for investors to verify
- Whether the decline in retail demand and Q2 operating margin persists, and how much earnings depend on favorable weather, rate changes and Excess ADIT amortization.
- Progress and final outcomes in the Turk Plant, Virginia earnings-review, pending rate-case and storm-cost recovery proceedings.
- Actual capital spending and financing needs compared with the five-year plan, including the cost and approvals for proposed wind investments.
- Integration, performance and financing of the Sempra portfolio, including guarantees and noncontrolling tax-equity interests.
- Updates on environmental compliance obligations, Rockport requirements, and the mercury-control patent litigation.