Business context and reporting period
American Electric Power Company, Inc. (AEP) filed this unaudited combined Form 10-Q for the three months ended March 31, 2014. The filing also includes separate reports for five utility subsidiaries. AEP generates, transmits and distributes electricity and operates transmission, generation-and-marketing and river-transportation businesses. AEP’s segment presentation was changed in late 2013, and comparative segment results were recast; OPCo’s generation assets and related liabilities transferred to affiliate AGR on December 31, 2013.
Key financial metrics
Unless noted, AEP consolidated amounts are in millions of dollars. Year-over-year comparisons are for the three months ended March 31.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $4,648 | $3,826 |
| Operating income | $1,041 | $755 |
| Net income | $561 | $364 |
| Earnings attributable to AEP common shareholders | $560 | $363 |
| Diluted EPS | $1.15 | $0.75 |
| Operating margin (operating income / revenue) | 22.4% | 19.7% |
| Cash from operating activities | $1,133 | $756 |
| Cash used for investing activities | $(981) | $(772) |
| Cash from (used for) financing activities | $22 | $(84) |
| Cash and cash equivalents, March 31 / period end | $292 | $179 |
At March 31, 2014, total debt was $19.419 billion, including $18.087 billion of long-term debt (including amounts due within one year) and $1.332 billion of short-term debt. Debt was 54.2% of total capitalization, versus 54.3% at December 31, 2013. Net available liquidity was approximately $3.03 billion, including credit facilities and cash. AEP reported $3.5 billion in revolving credit commitments and compliance with its credit covenants. The board declared a quarterly dividend of $0.50 per share in April 2014.
Operating cash flow included $137 million of fuel-cost deferrals and $56 million of Ohio capacity-cost deferrals. Construction expenditures were $907 million in the quarter. In April, AEP raised its 2014 construction-expenditure forecast by $250 million to approximately $4.1 billion.
Material changes versus the prior comparable period
- Revenue increased about 21% and net income about 54%; diluted EPS rose from $0.75 to $1.15. Management cited successful rate proceedings, higher weather-related usage, higher wholesale market prices and increased sales volumes.
- Segment net income rose at Vertically Integrated Utilities ($279 million versus $181 million), Transmission and Distribution Utilities ($97 million versus $87 million), AEP Transmission Holdco ($24 million versus $12 million), and Generation & Marketing ($163 million versus $85 million). River Operations moved to $3 million of income from a $2 million loss.
- Cold weather boosted demand: weather-normalized retail sales volumes increased 1.5%; weather-adjusted residential and commercial sales rose 4.4% and 2.9%, respectively. Industrial sales declined 2.9%, mainly because Ormet closed; excluding Ormet, industrial sales increased 2.2%.
- Operating cash flow improved, while investing outflows increased, principally reflecting construction spending. Short-term debt rose to $1.332 billion from $757 million at year-end.
- OPCo’s generation-business separation and the termination of the Interconnection Agreement changed the business and comparison base. Some wholesale-sales comparisons are identified by the filing as not meaningful.
Outlook, commentary, risks and unusual items
- Ohio regulatory recovery: At March 31, OPCo reported a $426 million net deferred fuel balance and $348 million of deferred capacity costs, including debt carrying costs. Appeals and fuel-clause audits could reduce recoveries. OPCo’s proposed 2015–2018 ESP estimated an average 9% rate decrease over the plan term for customers receiving auction-based generation; this was a proposal, not an approved outcome. A hearing was scheduled for June 2014.
- Other rate proceedings: PSO requested a $38 million annual base-rate increase in Oklahoma; staff and intervenors recommended outcomes ranging from a $16 million increase to a $22 million decrease. SWEPCo proposed Louisiana rate increases totaling $20 million annually, subject to review. APCo’s Virginia filing requested no base-rate increase but sought depreciation-rate changes and recovery of certain deferred costs.
- Environmental investment and generation changes: AEP estimated $3–$3.5 billion of system-wide environmental investments through 2020 and identified 6,533 MW of plants or units for retirement before or during 2016. For APCo, I&M, PSO and SWEPCo, estimated environmental investments through 2020 ranged from $1.91 billion to $2.21 billion in aggregate. Recovery, final rules, gas prices and regulatory requirements could alter costs and asset values. SWEPCo estimated about $600 million of Welsh Units 1 and 3 environmental work through 2020, excluding AFUDC.
- Regulatory and litigation exposure: Potential adverse outcomes include disputes over Ohio fuel and capacity deferrals, Ormet-related recovery, Turk Plant cost recovery and environmental compliance. A court conditionally certified a wage-and-hours case against PSO as a class action; management could not estimate a reasonably possible loss range. Rockport Unit 2 lease litigation also remained pending, with no reasonably possible loss range identified.
- Market and funding risks: AEP cited exposure to commodity prices, weather, load, fuel availability, interest rates, counterparty credit, regulatory decisions and access to capital. A credit-rating decline could trigger collateral requirements; AEP reported that it had not experienced a downgrade triggering additional collateral. The $385 million portion of the receivables-securitization commitment was due to expire in June 2014, and AEP intended to extend or replace it.
- Unusual accounting/reporting matters: AEP discontinued cash-flow-hedge accounting for heating-oil and gasoline derivatives effective March 31, 2014. AEP planned to adopt ASU 2014-08 on discontinued-operations presentation beginning January 1, 2015; the filing said it would affect presentation, not net income or EPS.
Most important facts for investors to verify
- Progress and final outcomes in OPCo’s ESP, fuel-clause audits, deferred fuel recovery and $348 million capacity deferral.
- Whether the 2014 construction forecast of approximately $4.1 billion and environmental investment estimates change, and whether regulators permit cost recovery.
- Final terms and timing of the PSO, SWEPCo and APCo rate proceedings, including intervenor recommendations and potential refunds or disallowances.
- Liquidity and refinancing developments, especially the June 2014 receivables-securitization commitment expiration, short-term borrowings and debt maturities.
- Updates to the Ormet recovery, PSO wage-and-hours litigation, Rockport Unit 2 litigation and planned generation retirements.