Business context and reporting period
American Electric Power Company, Inc. (AEP) filed this unaudited Form 10-Q for the quarter ended March 31, 2010. The combined filing also covers six utility subsidiaries. AEP operates regulated electric generation, transmission and distribution businesses, alongside river transportation and generation/marketing activities.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Total revenue | $3.569 billion | $3.458 billion; up 3.2% |
| Net income attributable to AEP common shareholders | $344 million | $360 million; down 4.4% |
| Basic and diluted EPS | $0.72 | $0.89 |
| Utility Operations gross margin | $2.179 billion | $2.071 billion; up $108 million |
| Net cash from operating activities | $2 million | $317 million |
| Construction expenditures | $609 million | $897 million |
| Cash and cash equivalents, March 31 | $818 million | $490 million at Dec. 31, 2009 |
| Total debt | $18.597 billion | $17.624 billion at Dec. 31, 2009 |
| Debt / total capitalization | 58.1% | 57.2% at Dec. 31, 2009 |
| Net available liquidity | $3.348 billion | At March 31, 2010 |
Utility Operations earned $344 million, versus $346 million a year earlier. AEP River Operations earned $3 million versus $11 million; Generation and Marketing earned $10 million versus $24 million. The filing does not provide a single consolidated operating-margin percentage as a key measure.
Material changes and drivers
- Utility gross margin improved mainly from rate increases, higher residential use in favorable weather, and higher off-system sales. These gains were partly offset by weaker commercial and industrial usage amid continued economic weakness.
- Net income declined chiefly because of a $21 million after-tax charge related to the healthcare legislation’s future tax treatment of Medicare Part D retiree prescription-drug subsidies. AEP’s weighted-average basic shares rose to about 478 million from 407 million, largely reflecting the April 2009 share issuance; this contributed to the larger EPS decline.
- Operating cash flow fell to $2 million, primarily reflecting a $656 million increase in securitized receivables recorded on balance sheet following adoption of new transfer-and-servicing accounting guidance. The filing says the change was accounting-related, not a comparable deterioration in underlying earnings.
- Total debt rose, with short-term debt increasing to $1.063 billion from $126 million at year-end. AEP attributed much of the reported increase to the receivables-accounting change and higher commercial paper. First-quarter long-term debt issuance was $658 million.
Outlook, commentary and risks
- Management said projected operating cash flows should support ongoing operations and described liquidity as adequate. AEP had $3.6 billion of credit facility commitments and reported compliance with its 67.5% credit-agreement debt-to-capital covenant; its contractually calculated ratio was 54.5%.
- AEP planned broad labor and non-labor cost reductions. It expected more than 2,000 employees to accept voluntary severance, with a related expense charge expected in Q2 2010; the financial impact was not yet estimable. Further involuntary separations were possible.
- Rate proceedings could affect future earnings and cash recovery: APCo’s Virginia base-rate case remained pending; I&M sought a $63 million annual Michigan increase; KPCo sought $124 million in Kentucky; and SWEPCo’s Texas settlement approved in April provided about $15 million in annual base-rate increases effective May, plus a one-year $10 million vegetation-management surcharge.
- SWEPCo’s 600-MW Turk coal plant was estimated to cost $1.7 billion, with its share $1.3 billion, excluding AFUDC; permits and approvals faced appeals and litigation. A separate Cook Plant Unit 1 turbine incident could cost up to about $395 million. I&M had recorded $143 million of recoverable property-insurance amounts at quarter-end and received a further $45 million in April; final warranty, insurance and regulatory recovery remained uncertain.
- Other material exposures include the $443 million recorded liability for Bank of America litigation, contested Ohio rate and fuel-cost recovery, Texas restructuring appeals, environmental compliance and potential CO₂ regulation, and pending environmental and nuisance litigation. Management cautioned that interim results are not necessarily indicative of full-year results. No specific consolidated earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether the low reported operating cash flow persists after separating the receivables-accounting presentation change from working-capital movements.
- Progress on debt maturities and refinancing: about $1.1 billion of long-term debt was due in the remaining three quarters of 2010; OPCo’s $400 million maturity was paid in April, and AEP expected to refinance a further $700 million.
- Final regulatory rulings and potential refunds, especially Virginia rates, Ohio ESP/FAC and excessive-earnings proceedings, and recovery of deferred costs.
- Turk Plant permitting, construction cost and cancellation exposure; Cook Unit 1 insurance, warranty and regulatory recoveries; and environmental compliance costs.
- The amount and timing of restructuring charges and realized savings from the workforce and expense-reduction program.