American Electric Power Company, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results cover AEP and its consolidated subsidiaries; this combined filing also includes separate reports for five registered utility subsidiaries.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3.942 billion | $4.044 billion | $8.650 billion | $8.692 billion |
| Operating income | $809 million | $767 million | $1.933 billion | $1.808 billion |
| Net income | $431 million | $391 million | $1.062 billion | $952 million |
| Earnings attributable to AEP common shareholders | $430 million | $390 million | $1.059 billion | $950 million |
| Diluted EPS | $0.88 | $0.80 | $2.16 | $1.95 |
- Operating margin was approximately 20.5% for Q2 versus 19.0% a year earlier, and 22.3% for the first half versus 20.8%.
- Operating cash flow was $2.203 billion for the first half, nearly unchanged from $2.197 billion. Investing cash outflow was $2.190 billion, including $2.182 billion of construction expenditures; financing cash flow was $19 million. Ending cash was $195 million.
- At June 30, total debt was $20.683 billion, comprising $19.578 billion of long-term debt, including amounts due within one year, and $1.105 billion of short-term debt. Debt-to-total capitalization was 54.3%, unchanged from year-end 2014. AEP reported $3.237 billion of net available liquidity under its credit facilities and cash position.
- Total assets were $60.938 billion and AEP common equity was $17.434 billion. The board declared a quarterly dividend of $0.53 per share in July 2015.
Changes versus the comparable period
- Q2 earnings attributable to common shareholders rose $40 million; first-half earnings rose $109 million. Management cited rate proceedings, formula-rate adjustments, transmission investment, lower employee-related expenses, and favorable retail, trading and marketing activity.
- Revenue declined in both periods. Lower fuel costs helped vertically integrated utility gross margin, but lower wholesale market prices and sales volumes reduced off-system sales margins. Retail demand, weather-normalized, increased 0.9% in Q2 but decreased 0.3% for the first half year over year.
- Transmission and Distribution Utilities earnings fell to $78 million in Q2 from $90 million and to $175 million for the first half from $187 million. Generation & Marketing earnings fell to $82 million in Q2 from $98 million, while first-half earnings increased to $269 million from $261 million. Lower merchant capacity revenue, including the end of the AGR-OPCo power supply agreement, pressured generation results.
- Cash used for investing increased to $2.190 billion from $2.068 billion, largely reflecting higher construction spending. AEP increased its 2015 construction expenditure forecast by $200 million to approximately $4.6 billion, primarily for transmission investment.
Outlook, regulatory matters and risks
- No consolidated earnings guidance is stated in the provided filing text. AEP is evaluating alternatives for its merchant generation fleet and nonregulated river operations; it has made no decision or set a decision timetable. Management expects AGR capacity revenues to decline after the OPCo supply agreement ended, with a further decline indicated for June 2016–May 2017 under PJM auction results.
- Environmental compliance is a major investment and recovery risk. AEP estimated $2.8–$3.3 billion of system investment through 2020; the registered utility subsidiaries’ estimate was $1.83–$2.05 billion. Recovery depends on regulatory approvals. The final coal combustion residuals rule led to a $95 million increase in AEP asset retirement obligations in Q2.
- In May 2015, AEP retired plants or units totaling 5,535 MW across its system. Management intends to retire another 998 MW in 2016, subject to ongoing evaluation. Some retired-plant balances remain subject to regulatory recovery; $144 million of the listed regulated-plant book value was pending approval.
- OPCo’s deferred capacity-cost balance was $432 million at June 30. Recovery through the Ohio rider is subject to rehearing and audit proceedings. An auditor recommended a methodology for potential refunds of fixed fuel costs; the retail share of those costs is about $90 million annually. Management disputes the audit findings and says it believes there has been no over-recovery.
- Other material regulatory exposures include challenges to SWEPCo’s Turk Plant cost recovery and potential prudence-related refunds; APCo’s Virginia rate freeze through its 2020 review and obligation to absorb certain incremental costs; and I&M’s appeal after Indiana regulators denied its proposed $787 million transmission, distribution and storage improvement plan.
- Environmental rules and litigation remain uncertain. The Supreme Court remanded the Mercury and Air Toxics Standards rule for EPA to reconsider costs; the rule remained in effect at the reporting date. AEP also noted pending carbon-rule, water-rule and coal-ash implementation issues, any of which could increase costs, accelerate retirements, or impair assets if costs cannot be recovered.
- Management identified ordinary-course litigation and contingencies, including Rockport Plant lease litigation, a PSO wage-and-hours class action, and Gavin landfill claims. The filing says it cannot estimate reasonably possible losses for several of these matters. Management reported disclosure controls were effective and no material change in internal control over financial reporting during Q2.
Key facts for investors to verify
- Whether regulated rate recovery keeps pace with the $4.6 billion 2015 construction program and longer-term environmental investment requirements.
- Final outcomes of Ohio capacity and fuel-cost proceedings, including any audit-related refunds or changes to recovery of the $432 million deferred capacity balance.
- Merchant generation performance and the financial effect of lower capacity revenues or any strategic alternative involving the fleet.
- Progress and regulatory recovery for Turk Plant, Welsh Plant and other environmental projects, and the effect of planned and completed plant retirements.
- Debt maturities, credit access, and cash generation relative to capital spending and dividends; AEP reported $20.683 billion of debt and $3.237 billion of net available liquidity at June 30.