American Electric Power Company, Inc. (AEP) — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009; unaudited. The combined filing also covers six regulated utility subsidiaries. Figures below primarily reflect AEP consolidated results and are in U.S. dollars.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $3.202 billion | $3.546 billion | $6.660 billion | $7.013 billion |
| Operating income | $682 million | $586 million | $1.432 billion | $1.629 billion |
| Net income attributable to AEP common shareholders | $316 million | $281 million | $676 million | $854 million |
| Basic EPS | $0.67 | $0.70 | $1.54 | $2.13 |
| Utility Operations gross margin | $2.060 billion | $1.939 billion | $4.131 billion | $4.020 billion |
| Cash from operating activities | Not separately stated for quarter | Not separately stated for quarter | $857 million | $1.201 billion |
In Q2, the $63 million increase in Utility Operations earnings reflected rate increases, partly offset by weaker off-system sales margins. Utility Operations gross margin rose $121 million, including $226 million of higher retail margins, while off-system sales margins fell $155 million. AEP’s consolidated Q2 revenue declined 10% year over year; common earnings increased, but EPS fell as average basic shares rose to 472 million from 402 million following the April equity issuance.
For the first half, common earnings declined $178 million and EPS fell 28%. The principal comparison item was a $164 million after-tax TEM litigation settlement recognized in 2008. Utility Operations earnings were down $4 million: higher rates were largely offset by lower off-system sales margins. Operating income also fell, while consolidated revenue declined about 5%.
Six-month cash used for investing was $1.478 billion, chiefly construction expenditures of $1.547 billion; financing provided $568 million. Cash and cash equivalents ended June at $358 million, versus $411 million at year-end 2008. Management attributed lower operating cash flow mainly to lower net income and higher fuel inventory, including increased coal stocks amid reduced demand.
Balance sheet and liquidity
- At June 30, AEP reported total debt of $17.258 billion, including $16.696 billion of long-term debt (including current maturities) and $562 million of short-term debt. Debt-to-total capitalization was 57.3%, down from 62.5% at year-end, primarily after issuing 69 million shares and using proceeds to reduce debt.
- Net available liquidity was approximately $2.919 billion, including $3.581 billion of credit commitments and $358 million of cash, less facility drawings, commercial paper and letters of credit. The credit agreements cap contractually calculated debt to capitalization at 67.5%; AEP reported 53.3% under that definition and compliance with covenants.
- AEP issued $1.64 billion net from common stock in April and issued $1.1 billion of long-term debt in the first half. Approximately $1.7 billion of long-term debt matures in 2010, excluding securitization bonds. Management intended to refinance or repay maturities.
- Common dividends were $0.41 per share in Q2; the board declared another $0.41 quarterly dividend in July.
Outlook, management commentary and key risks
- Demand and sales: Residential and commercial sales were described as relatively stable, but industrial electricity sales fell 21% in Q2 and 18% in the first half. AEP forecast 2009 off-system sales volumes about 34% below 2008, citing weak demand and prices. Ormet, a major industrial customer operating at reduced load, announced substantial curtailments beginning September 2009.
- Capital spending: AEP forecast approximately $2.6 billion of 2009 construction expenditures, excluding allowance for funds used during construction. Its 2010 capital budget was reduced from $3.4 billion to approximately $1.846 billion amid capital-market volatility and the economic slowdown. No consolidated EPS guidance is provided in the supplied filing text.
- Regulatory recovery: Ohio regulators approved three-year electric security plans for CSPCo and OPCo, with capped rate increases and deferred fuel costs recoverable by surcharge during 2012–2018. The plans remain subject to true-ups, reviews and an excessive-earnings test. APCo’s West Virginia fuel-cost case and Virginia base-rate and fuel proceedings remained material uncertainties; the Virginia SCC subsequently authorized a $130 million fuel-revenue increase, effective August 10, 2009.
- Major construction exposure: SWEPCo’s approximately 600 MW Turk coal plant faced an adverse Arkansas Court of Appeals ruling on its certification, pending Supreme Court review, and a separate air-permit appeal with a decision not expected until 2010. Construction continued. SWEPCo disclosed approximately $570 million of capitalized expenditures, $582 million of further contractual commitments and $136 million of cancellation fees if cancelled. Management expected completion, but adverse outcomes could delay, increase costs or threaten recovery. The 500 MW Stall gas plant was estimated at $432 million and had a $445 million cost cap.
- Cook Plant Unit 1: I&M was repairing the unit after a 2008 turbine-related fire and shutdown. Return to service was targeted as early as October 2009 at reduced power; unsuccessful repairs could extend the outage into 2011. Repair costs could reach $330 million. AEP recorded $99 million of 2009 accidental-outage insurance revenue and $54 million of current assets as recoverable property-insurance amounts; ultimate recovery and regulatory treatment remained uncertain.
- Other exposures: AEP disclosed net counterparty credit exposure of approximately $997 million, about 90% to investment-grade counterparties, and said typical near-term commodity price moves were not expected to materially affect results. Other material risks include environmental and potential greenhouse-gas regulation, litigation and regulatory proceedings, pension asset performance, and access to capital. Management estimated minimum pension contributions of $453 million in 2010 and $292 million in 2011. Bonus depreciation was expected to provide about $300 million of favorable 2009 cash flow.
- Unusual item: SWEPCo’s return to cost-based regulation in its Texas SPP area resulted in a $5 million after-tax extraordinary loss for AEP in Q2. AEP also recorded a $9 million impairment charge before tax on protected-cell equity investments.
Most important facts for investors to verify
- Whether industrial demand, Ormet’s curtailment and lower off-system sales further pressure utility margins and operating cash flow.
- Final outcomes and timing of Ohio, Virginia, West Virginia and other rate proceedings, including the collectability of deferred fuel and other regulatory assets.
- Turk Plant permit and certification appeals, cost and cancellation exposure, and whether the project remains recoverable through rates.
- Cook Unit 1’s repair progress, return-to-service timing, insurance and vendor recoveries, and regulatory treatment of outage costs and proceeds.
- Refinancing plans for 2010 maturities and auction-rate debt, continued access to liquidity, and the effect of ratings outlooks or downgrades.
- Whether reported earnings and EPS trends are comparable after the 2008 TEM settlement and AEP’s 2009 share issuance.