AMERICAN ELECTRIC POWER CO INC quarterly report, Q1 FY2013

Business context and reporting period

American Electric Power Company, Inc. (AEP) filed this combined, unaudited Form 10-Q for the three months ended March 31, 2013. AEP is an electric utility holding company whose principal business is generation, transmission and distribution; the filing also includes separate reports for five utility subsidiaries.

Key financial metrics

• Utility Operations gross margin rose to $2.240 billion from $2.116 billion; operating income was $746 million versus $738 million, while segment net income declined to $349 million from $384 million.
• Consolidated operating margin was approximately 19.7% versus 20.8%; net margin was approximately 9.5% versus 10.8%.
• Investing cash outflow was $772 million, including $843 million of construction expenditures; financing cash outflow was $84 million, including $230 million of common dividends paid.
• Total debt was $18.880 billion, comprising $17.573 billion of long-term debt (including current maturities) and $1.307 billion of short-term debt. Debt-to-total capitalization was 55.0%, down from 55.2% at year-end 2012.
• AEP reported $3.703 billion of net available liquidity, including credit facilities and cash. The revolving credit covenant ceiling for debt-to-capitalization was 67.5%; AEP reported a covenant-calculated ratio of 51.4% and compliance with covenants.

Material changes versus the prior comparable period

• Revenue increased about 5.5%, but net income fell about 6.7% and diluted EPS declined from $0.80 to $0.75.
• Higher weather-related usage and rate increases supported utility gross margin. These benefits were partly offset by Ohio customer switching, lower capacity revenues and off-system sales, and higher operating and maintenance costs.
• Other operation and maintenance expense increased $124 million in Utility Operations. Drivers included a $30 million write-off of previously deferred Virginia storm costs, higher plant-outage costs, and the absence of a favorable $35 million prior-year reversal of an Ohio-related obligation.
• Operating cash flow declined $120 million year over year. Construction expenditures increased to $843 million from $741 million.
• Segment results varied: Transmission Operations net income rose to $13 million from $9 million; AEP River Operations moved to a $2 million loss from $9 million income, attributed to continuing effects of the 2012 drought; Generation and Marketing improved to $7 million income from a $1 million loss.

Outlook, management commentary, risks and unusual items

• Management anticipated slight retail-sales increases across AEP territories in 2013, principally from oil- and gas-related activity, including shale gas, while expecting continued weakness in eastern industrial demand related to Ormet. System weather-normalized retail sales were down 1.5% year over year; Ormet was in bankruptcy proceedings.
• No consolidated earnings-per-share or other quantified financial guidance is provided in the supplied filing text. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
• Regulatory decisions remain material: AEP sought FERC approval for Ohio generation separation and related plant transfers, with a decision expected in Q2 2013. If approved as filed, Ohio generation results would be more exposed to market conditions beginning in 2014.
• OPCo had a $501 million deferred-fuel balance and $116 million of deferred capacity costs at March 31, 2013; recovery and related appeals remain subject to regulatory or court outcomes. Ohio approved securitization of a separate $277 million DARR balance, with bond issuance expected mid-2013.
• SWEPCo’s Turk Plant entered service in December 2012; approximately $1.7 billion of costs had been capitalized, excluding joint-owner costs and a $62 million Texas capital-cost-cap provision. Recovery of portions of the investment remains uncertain. A Texas rate decision was expected in Q2 2013; Louisiana rates include Turk recovery subject to review and possible refund.
• AEP estimated system environmental-compliance investments of approximately $4 billion to $5 billion through 2020, including conversion of 1,570 MW of coal capacity to natural gas. The company had notified RTOs of planned retirements totaling 4,441 MW before or during 2016. Rules, litigation, permits, recovery in rates and market conditions could change costs or asset values.
• Other material exposures include pending rate proceedings, litigation, environmental requirements, coal-plant impairment or retirement risk, fuel and power-market volatility, counterparty credit risk, and potential collateral demands after a credit downgrade. AEP said it had not experienced a downgrade below investment grade.
• AEP’s Board declared a $0.49-per-share quarterly dividend in April 2013; the income statement reports $0.47 per share declared for Q1.

Important facts for investors to verify

1. Whether regulators and courts permit recovery of deferred Ohio fuel and capacity costs, storm costs, and other regulatory assets.
2. Progress and final terms of the Ohio generation separation, plant transfers and proposed replacement power-coordination arrangement.
3. Final Texas and Louisiana treatment of Turk Plant costs, and the impact of any prudence review or refund requirement.
4. Updated environmental compliance spending, planned generation retirements, and recoverability of affected coal-plant assets.
5. Whether cash generation, capital spending, short-term borrowing and available liquidity remain consistent with AEP’s stated financing needs.