Business Context and Reporting Period
American Electric Power Company, Inc. (AEP) filed this unaudited combined Form 10-Q for the quarter and nine months ended September 30, 2019. AEP is an electric utility holding company with regulated generation, transmission and distribution businesses, alongside competitive generation, marketing and contracted renewables. The filing also covers seven separately reporting utility subsidiaries.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $4.315 billion | $4.333 billion | $11.945 billion | $12.395 billion |
| Operating income | $958 million | $669 million | $2.298 billion | $2.132 billion |
| Net income | $734 million | $580 million | $1.767 billion | $1.567 billion |
| Earnings attributable to AEP common shareholders | $734 million | $578 million | $1.768 billion | $1.560 billion |
| Diluted EPS | $1.48 | $1.17 | $3.57 | $3.16 |
Operating income margin, calculated as operating income divided by revenue, was approximately 22.2% in Q3 2019 versus 15.4% in Q3 2018, and 19.2% for the first nine months of 2019 versus 17.2% in 2018. Revenue declined modestly in the quarter and more substantially year to date, while earnings and EPS increased.
- Management attributed higher consolidated earnings mainly to favorable rate proceedings, transmission investment and, in Q3, higher weather-related usage. Nine-month results also reflected lower weather-related usage.
- Segment earnings for the first nine months were $918 million in Vertically Integrated Utilities (up from $852 million), $422 million in Transmission and Distribution Utilities (up from $385 million), $405 million in AEP Transmission Holdco (up from $278 million), and $140 million in Generation & Marketing (up from $62 million). Corporate and Other recorded a $116 million loss versus a $17 million loss.
- Weather-normalized retail sales were flat year over year in Q3 and down 0.6% for the nine-month period. Industrial sales declined 1.1% in Q3 and 1.4% year to date.
Cash Flow, Debt and Liquidity
- Nine-month operating cash flow was $3.350 billion, down from $3.933 billion. The filing cites working-capital movements, including higher fuel and materials purchases, lower accrued taxes and tax-related refunds.
- Investing cash outflow was $5.358 billion, including $4.336 billion of construction expenditures and $921 million of net cash used for the Sempra Renewables and Santa Rita East acquisitions. Construction expenditures were below the prior-year $4.688 billion.
- Financing cash inflow was $2.053 billion, compared with $1.281 billion. AEP paid $1.002 billion in common dividends during the nine months.
- At September 30, total debt was $28.391 billion, comprising $25.881 billion of long-term debt (including amounts due within one year) and $2.510 billion of short-term debt. Debt-to-total capitalization increased to 58.7% from 57.0% at year-end 2018.
- Net available liquidity was approximately $2.589 billion, after $1.760 billion of commercial paper outstanding, supported by a $4 billion revolving credit facility and $349 million of cash and cash equivalents. AEP reported covenant-defined debt to capitalization of 55.3%, below its 67.5% limit.
- AEP forecast approximately $32.9 billion of capital expenditures for 2019–2023; this excludes the proposed North Central Wind project. Management expects to fund investment through operating cash flow and financing.
Material Changes Versus the Prior Comparable Period
- Q3 earnings increased by about $156 million, while nine-month earnings increased by about $207 million. Higher regulated margins and transmission-related earnings were important contributors.
- Generation & Marketing earnings improved substantially, in part because the prior-year period included a $35 million Racine impairment and 2019 results benefited from renewable acquisitions and tax credits. Nine-month generation margins nevertheless declined, reflecting lower capacity revenue and plant retirements.
- Q3 consolidated revenue was lower by $18 million; nine-month revenue was lower by $449 million. AEP’s 2019 results include acquisition-related renewable revenue, while operating-company revenue also reflected customer refunds, rate changes and recovery mechanisms.
- Operating cash flow fell by $583 million year over year despite higher net income. Debt and debt-to-capitalization rose as AEP funded distribution, transmission and renewable investments.
- AEP adopted the new lease standard on January 1, 2019. It materially increased balance-sheet lease assets and liabilities but did not materially affect earnings or cash flow.
Outlook, Management Commentary and Key Risks
- The filing provides no specific consolidated earnings or EPS guidance. Management’s stated capital plan is approximately $32.9 billion for 2019–2023, excluding North Central Wind. The company’s emissions goals are a 70% reduction from 2000 generation emissions by 2030 and more than an 80% reduction by 2050; zero emissions by 2050 is described as aspirational and dependent on technology and other factors.
- AEP acquired Sempra Renewables LLC in April for wind and battery assets valued at approximately $1.1 billion, and acquired a 75% interest in the 302.4 MW Santa Rita East wind project in July for approximately $356 million. The proposed North Central Wind project comprises 1,485 MW and is estimated to cost about $2 billion, subject to regulatory approval.
- Several rate cases are material. AEP Texas sought a $56 million annual increase, while staff and intervenors recommended reductions; proposed disallowances could result in write-offs exceeding $450 million. I&M sought a $172 million annual Indiana increase, with intervenors identifying potential write-offs of $52 million. Orders in both cases were expected by the first quarter of 2020.
- SWEPCo’s Texas recovery of its approximately 33% jurisdictional share of the Turk Plant investment remains under appeal. The plant’s net book value was $1.5 billion at September 30, 2019. AEP Texas securitized $235 million of Hurricane Harvey restoration costs in September; recovery of an additional estimated $95 million of transmission-related costs remained subject to the rate case or interim rates.
- Other exposures include regulatory recovery and refund uncertainty, environmental compliance and coal-ash remediation costs, fuel and power-market volatility, weather and storm costs, interest rates, and litigation. A July 2019 patent complaint alleges mercury-control patent infringement; management could not estimate a reasonably possible loss. The filing reports no material change to previously disclosed risk factors.
- Operating conditions include the seasonal operation of Dolet Hills beginning in Q2 2019 and expected completion of the Racine dam reconstruction in the first half of 2020. Further Racine cost increases or delays could cause additional losses.
Most Important Facts for Investors to Verify
- Track outcomes of the AEP Texas and I&M rate cases, including proposed disallowances, refunds and approved returns.
- Review cash generation against the investment plan, debt growth, liquidity and dividend commitments; assess the effect of working-capital volatility.
- Confirm regulatory approvals, project costs, contracted economics and financing for North Central Wind and other renewable investments.
- Monitor the Turk Plant appeal, remaining Hurricane Harvey cost recovery, environmental liabilities and potential Racine completion costs.
- Separate recurring operating performance from tax-related Excess ADIT adjustments, prior-year impairments and acquisition-related effects when evaluating earnings growth.