American Electric Power Company, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
This combined, unaudited Form 10-Q covers the three months ended March 31, 2016, and includes AEP and five registered utility subsidiaries. AEP generates, transmits and distributes electricity through regulated utilities, transmission businesses and competitive generation and marketing operations. Results are compared with Q1 2015.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $4.045 billion | $4.580 billion |
| Operating income | $892.9 million | $1.103 billion |
| Income from continuing operations | $503.1 million | $620.2 million |
| Earnings attributable to AEP common shareholders | $501.2 million | $629.2 million |
| Diluted EPS | $1.02 | $1.29 |
| Net cash from continuing operations | $799.9 million | $1.258 billion |
- Revenue declined 11.7% and common earnings fell 20.3% year over year. Operating income was down about 19%.
- Cash used in continuing investing activities was $1.138 billion, including $1.204 billion of construction expenditures, mainly for environmental, distribution and transmission investment. Financing activities provided $352.4 million; cash and cash equivalents ended at $190.4 million.
- At March 31, total debt was $21.004 billion, including $19.783 billion of long-term debt and $1.221 billion of short-term debt. Debt was 53.7% of total capitalization, versus 53.2% at year-end 2015.
- AEP reported $3.187 billion of net available liquidity, including committed revolving credit facilities; management said liquidity was adequate. The credit agreement debt-to-capitalization covenant ceiling was 67.5%, and AEP reported a contractually calculated ratio of 51% and compliance with covenants.
- The board declared a quarterly dividend of $0.56 per share in April, up from $0.53 per share in Q1 2015.
Material changes versus the prior comparable period
- AEP attributed lower earnings mainly to weaker generation capacity revenue and wholesale power prices, reduced trading and marketing activity, lower off-system sales margins, and milder weather. Weather-normalized retail sales decreased 0.1%; residential sales declined 1.6%, commercial sales rose 0.7%, and industrial sales rose 0.9%.
- Generation & Marketing earnings fell to $70.7 million from $187.4 million, primarily reflecting lower capacity revenue and wholesale energy prices and less favorable trading results. Vertically Integrated Utilities earnings declined to $277.6 million from $299.3 million.
- Transmission and Distribution Utilities earnings increased to $108.0 million from $97.2 million, and AEP Transmission Holdco earnings increased to $43.9 million from $35.8 million, supported by transmission investment and projects entering service.
- Operating cash flow decreased by $457.8 million. The filing cites working-capital and other timing changes, including accrued taxes and current liabilities, as important factors.
- AEPRO was sold in November 2015. Its Q1 2015 results included $10.5 million of after-tax discontinued-operations income; there was no comparable 2016 contribution.
Outlook, management commentary, risks and contingencies
- The filing provides no specific consolidated full-year 2016 earnings guidance. Management cautions that Q1 results are not necessarily indicative of full-year results.
- In March 2016, the PUCO modified and approved an Ohio PPA rider arrangement running April 2016 through May 2024, with quarterly cost reconciliations and customer protections. In April, FERC rescinded waivers for the affiliate PPA between OPCo and AEP Generation Resources and required FERC review; that affiliate agreement is not effective pending approval. Potential customer credits of up to $100 million in the final four rider years could affect future earnings and cash flow. A separate proposed PJM tariff change could also affect bidding by the PPA units.
- Ohio capacity-cost proceedings remain unresolved. OPCo had $320 million of net deferred capacity costs at March 31, 2016; an Ohio Supreme Court remand requires PUCO reconsideration of related capacity and rider issues. Management expects the issues to largely offset, but outcomes remain uncertain. Other Ohio rate and fuel-cost reviews may result in adjustments or refunds.
- Environmental compliance is a major investment and recovery risk. AEP estimated $3.2 billion to $3.8 billion of investment through 2025 to meet proposed requirements. SWEPCo estimated approximately $900 million for Welsh Plant compliance through 2025; cost recovery and plant-retirement matters remain subject to regulatory review. The Clean Power Plan was stayed by the U.S. Supreme Court in February 2016, while other air, water and coal-ash rules and challenges remain relevant.
- Other material exposures include pending state rate cases and riders, the prudence review of SWEPCo’s Turk Plant investment, potential recovery of retired-unit costs, and ordinary-course litigation. Management generally records liabilities when loss is probable and estimable; for certain proceedings it cannot estimate a reasonably possible loss range.
- Management is evaluating strategic alternatives for its PJM merchant generation fleet; alternatives could result in a loss. The filing reports no material changes to previously disclosed risk factors and states that disclosure controls were effective.
Important facts for investors to verify
- Subsequent FERC review and approval of the OPCo–AGR affiliate PPA, and the practical effects of the PUCO rider limits and possible customer credits.
- PUCO outcomes on OPCo’s deferred capacity costs, fuel-cost audits and any potential customer refunds.
- Whether rate regulators approve recovery of environmental investments, retired-plant balances and other deferred costs, including the PSO and SWEPCo cases.
- Whether operating cash flow sustains capital expenditures and dividends, and how short-term borrowing and available liquidity change.
- The outlook for merchant generation earnings given capacity-market prices, wholesale power prices and potential strategic actions.