Business context and reporting period
American Electric Power Company, Inc. (AEP) filed this unaudited combined Form 10-Q for the three months ended March 31, 2011, with separate financial information for six registered utility subsidiaries. AEP’s principal business is regulated electric generation, transmission and distribution; other segments include river transportation and generation and marketing. Comparisons are with the first quarter of 2010 unless noted.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $3.730 billion | $3.569 billion |
| Operating income | $832 million | $758 million |
| Net income | $355 million | $346 million |
| Earnings attributable to AEP common shareholders | $353 million; $0.73 per diluted share | $344 million; $0.72 per diluted share |
| Operating cash flow | $830 million | $2 million |
| Cash and cash equivalents at March 31 | $625 million | $818 million |
- Utility Operations net income rose to $378 million from $344 million. Its gross margin increased $48 million to $2.227 billion, supported by rate proceedings, industrial usage and higher PJM capacity revenues.
- System retail electricity sales were 43.647 billion kWh, up from 43.343 billion kWh; industrial sales increased 7%. Less favorable weather reduced residential usage and partially offset gains.
- Income tax expense increased to $278 million from $207 million, including tax effects related to the BOA/Enron settlement and the associated deferred tax valuation allowance.
- At March 31, total debt was $18.485 billion, including $17.052 billion of long-term debt and $1.433 billion of short-term debt. Debt was 57.2% of total capitalization, versus 57.0% at year-end 2010. AEP reported $13.779 billion of common equity.
- Net available liquidity was approximately $2.642 billion, including committed credit facilities and cash, net of commercial paper and letters of credit. AEP stated that existing liquidity was adequate; it also had a $750 million receivables-securitization commitment, with $375 million expiring in July 2011.
Operating cash flow increased sharply from the prior-year quarter, when cash flow was affected by a $656 million increase in securitized receivables under new accounting guidance. In Q1 2011, working-capital movements included lower fuel inventory and receivables, partly offset by lower accounts payable. Investing cash outflow was $613 million, including $540 million of construction expenditures and $214 million paid for cushion gas. Financing cash inflow was $114 million; AEP paid $223 million in common dividends. The board declared a quarterly dividend of $0.46 per share in April 2011.
Material changes versus the prior comparable period
- AEP net income improved by $9 million, while operating income rose $74 million. Rate increases and higher industrial use were important contributors; lower weather-related demand, customer switching in Ohio, and unusual charges partly offset them.
- AEP reported a $41 million pretax write-off ($26 million after tax) related to APCo’s Mountaineer carbon-capture validation facility after West Virginia regulators denied rate-base treatment. The remaining recorded regulatory asset was $19 million.
- A February 2011 settlement with Bank of America and Enron involved a $425 million cash payment. AEP acquired cushion gas valued at $214 million and recognized a $51 million pretax gain, but the transaction produced a $22 million after-tax net loss, principally due to a $56 million unrealized capital-loss valuation allowance.
- Segment results diverged: AEP River Operations net income rose to $7 million from $3 million; Generation and Marketing fell to $1 million from $10 million; All Other’s loss widened to $31 million from $11 million, primarily due to the BOA/Enron settlement.
- APCo’s Q1 net income fell to $39 million from $70 million, mainly as retail margins declined with lower residential and commercial usage and reduced rate-related margins. CSPCo’s net income rose to $66 million from $52 million; OPCo’s rose to $100 million from $92 million; I&M was broadly flat at $45 million; PSO rose to $15 million from $4 million; SWEPCo declined to $30 million from $31 million.
Outlook, commentary, risks and unusual items
- Rates and regulation: Ohio utilities sought new generation and distribution rate plans. The proposed 2012–2014 Ohio ESP projected average base-generation increases of 1.4% in 2012 and 2.7% in 2013, subject to regulatory approval and possible effects from an Ohio Supreme Court decision. APCo requested a Virginia annual base-rate increase of $126 million, or $75 million net of proposed mitigation, and West Virginia regulators approved approximately $51 million of annual increases for APCo and WPCo.
- Turk Plant: SWEPCo’s 600 MW coal project was expected to enter service in 2012. SWEPCo’s estimated share was $1.3 billion, plus $125 million for transmission, excluding AFUDC. Legal and permitting challenges included an injunction stopping certain unfinished wetlands, stream and river work. Management expected completion, but warned that inability to complete the plant or recover costs could materially harm earnings, cash flows and financial condition.
- Environmental capital needs: AEP estimated $5.1–$11.2 billion of system coal-fleet environmental investment for 2012–2020, including replacement of some older coal generation. Proposed coal-combustion-residual rules could cost up to $3.9 billion under the solid-waste alternative; hazardous-waste treatment could cost more. Final rules and actual compliance costs were uncertain, and recovery through rates or market prices was not assured.
- Other significant exposures: I&M’s Cook Unit 1 turbine damage and repairs could cost up to approximately $395 million; $203 million of insurance payments had been received, with further warranty, insurance and regulatory recovery unresolved. The filing also describes pending rate proceedings, Ohio customer-choice margin losses, environmental and climate litigation, and potential additional nuclear safety requirements following events in Japan.
- Management outlook: The filing provides no company-wide earnings guidance. It notes that first-quarter results are not necessarily indicative of full-year results. Management expected to extend or replace the receivables commitment maturing in July 2011 and planned to evaluate the Mountaineer commercial-scale carbon-capture project after a design study expected in Q3 2011. AEP also gave forward-looking estimates for rates, construction and environmental costs, subject to regulatory, legal and market uncertainty.
Important facts for investors to verify
- Whether Ohio and other state regulators approve requested rate recovery, and the ultimate outcomes of the Ohio ESP remand and distribution-rate cases.
- Turk Plant construction status, permit and litigation outcomes, total cost, and recoverability of SWEPCo’s investment.
- Final environmental rules, the resulting capital and operating costs, and the extent and timing of customer recovery.
- Resolution of Cook Unit 1 insurance, warranty and rate proceedings, including any further replacement-power or repair costs.
- Ongoing liquidity and refinancing access, particularly the July 2011 receivables commitment renewal and debt maturities.
- The effects of Ohio customer switching and the sustainability of rate, industrial-load and weather-related margin trends.