American Electric Power Company, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. AEP is an electric utility holding company with regulated generation, transmission and distribution operations, alongside competitive generation and marketing and river transportation businesses. This unaudited report covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Some comparisons reflect the December 2013 transfer of Ohio Power’s generation assets to AEP Generation Resources and the January 2014 end of the Interconnection Agreement.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $4.044 billion | $3.582 billion | $8.692 billion | $7.408 billion |
| Operating income | $767 million | $547 million | $1.808 billion | $1.302 billion |
| Operating margin | 19.0% | 15.3% | 20.8% | 17.6% |
| Net income | $391 million | $339 million | $952 million | $703 million |
| Earnings attributable to AEP common shareholders | $390 million | $338 million | $950 million | $701 million |
| Diluted EPS | $0.80 | $0.69 | $1.95 | $1.44 |
Operating margins are calculated from reported revenue and operating income. AEP declared dividends of $0.50 per share in Q2, compared with $0.49 a year earlier; the board declared a $0.50 quarterly dividend in July 2014.
- Cash flow: First-half operating cash flow was $2.197 billion, versus $1.516 billion in 2013. Investing used $2.068 billion, including $1.883 billion of construction expenditures; financing used $57 million. Cash increased from $118 million to $190 million.
- Debt and capitalization: At June 30, total debt was $19.607 billion, comprising $18.125 billion of long-term debt (including current maturities) and $1.482 billion of short-term debt. Debt was 54.2% of total capitalization, versus 54.3% at year-end 2013.
- Liquidity: AEP reported $2.909 billion of net available liquidity, including cash and committed revolving facilities. It had $3.5 billion of revolving credit commitments and a $750 million receivables securitization commitment.
- Construction program: AEP raised its 2014 construction expenditure forecast by $350 million to approximately $4.2 billion, primarily for transmission investment.
Material changes versus the prior period
- First-half net income rose $249 million. Management attributed the increase mainly to successful rate proceedings, greater transmission investment, higher market prices and sales, increased weather-related usage, and the absence of the $154 million Muskingum River Plant Unit 5 impairment recorded in Q2 2013. The prior-year comparison also included a favorable U.K. Windfall Tax decision.
- Q2 net income increased $52 million year over year. The same operating factors and absence of the prior-year impairment were partly offset by the prior-year tax benefit.
- Weather-normalized retail sales volumes increased 0.6% for the first half but declined 0.5% in Q2. Industrial sales fell 1.6% for the first half, largely because Ormet closed; excluding Ormet, industrial sales rose 3.4%.
- Ohio Power’s generation separation changed its revenue and expense profile and makes some segment and subsidiary comparisons less directly comparable. Its first-half net income fell to $117 million from $151 million, while AEP’s consolidated results increased.
Outlook, commentary, risks and unusual items
- Ohio regulatory recovery: Ohio Power reported $411 million of deferred fuel costs and $396 million of deferred capacity costs at June 30. Appeals and fuel-cost audits remained pending; adverse decisions or limits on collection could reduce future earnings and cash flows. A proposed 2015–2018 Ohio plan estimated an average 9% rate decrease for certain customers, but was not approved.
- Other rate matters: Pending proceedings included an APCo West Virginia base-rate request and vegetation-management rider, PSO’s Oklahoma rate settlement, and SWEPCo rate filings in Louisiana and Texas. SWEPCo’s approximately $52 million annual Texas base-rate increase tied to the Turk Plant was subject to appeals.
- Generation capacity: Management expected a significant decline in Generation & Marketing capacity revenues after the OPCo power-supply agreement ends in May 2015, and lower PJM auction prices for June 2016–May 2017.
- Environmental exposure and asset plans: AEP estimated $3–$3.5 billion of system environmental investment through 2020, subject to regulatory outcomes and project assumptions. It intended to retire listed units totaling 6,533 MW before or during 2016; regulated plants in that group had $985 million of net book value, before cost of removal. SWEPCo estimated about $600 million of Welsh Units 1 and 3 environmental work through 2020, excluding AFUDC, and planned to seek recovery from customers.
- Contingencies: Litigation and regulatory proceedings include the Rockport Unit 2 lease dispute, environmental and rate matters, and an overtime class action against PSO. AEP said it could not estimate reasonably possible losses for certain cases. Recovery of regulatory assets, plant investments and environmental costs is not assured.
- Accounting: AEP planned to adopt the new revenue-recognition standard in 2017 and had not estimated its effect on revenue or net income. Management stated the interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Developments in Ohio appeals and audits, and actual recovery of the $411 million deferred fuel balance and $396 million deferred capacity balance.
- Regulatory decisions on APCo, PSO and SWEPCo rate requests, Turk Plant recovery, and environmental-cost recovery.
- Progress, cost and timing of the $4.2 billion 2014 construction program and environmental projects, including planned unit retirements.
- Whether forecast declines in competitive-generation capacity revenues after May 2015 are offset by other market or operating results.
- Cash generation, short-term borrowing and liquidity as investment spending and debt maturities progress.