American Electric Power Company, Inc. — Q2 2010 Form 10-Q
Business and period. AEP is an integrated electric utility with generation, transmission and distribution operations, alongside river transportation and generation/marketing businesses. This unaudited quarterly filing covers the three and six months ended June 30, 2010, compared with the same 2009 periods. It is a combined filing that also reports six AEP utility subsidiaries.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $3.360bn | $3.202bn | $6.929bn | $6.660bn |
| Net income attributable to AEP shareholders | $136m | $316m | $481m | $677m |
| Basic EPS | $0.28 | $0.67 | $1.00 | $1.54 |
| Operating income | $394m | $682m | $1.152bn | $1.432bn |
| Utility Operations gross margin | $2.101bn | $2.060bn | $4.280bn | $4.131bn |
| Cash from operating activities | — | $582m | $857m |
Revenue rose 5% in Q2 and 4% for the first half, while shareholder net income fell 57% and 29%, respectively. Results included $293m of Q2 expense for cost-reduction initiatives, equivalent to $185m after tax. Higher retail margins, driven by rates, weather and demand, were partly offset by higher operating expenses and the end of Cook Plant Unit 1 outage-insurance revenue. Industrial sales for the AEP System increased 9% in Q2 and 4% in the first half versus recessionary 2009 levels.
First-half investing cash outflow was $992m, versus $1.478bn in 2009; financing cash inflow was $758m, versus $568m. Construction expenditures were $1.104bn. The operating cash-flow comparison was affected by a $656m increase in securitized receivables recorded under new accounting guidance, which also brought related receivables and debt onto the balance sheet.
Debt, liquidity and other key metrics
- At June 30, 2010, total debt was $18.821bn: $17.348bn long-term debt, including amounts due within one year, and $1.473bn short-term debt. Debt was 58.5% of total capitalization, up from 57.2% at year-end 2009.
- Cash and cash equivalents were $838m, compared with $490m at December 31, 2009. Total assets were $49.937bn and AEP common equity was $13.269bn.
- Available liquidity was approximately $2.857bn, including credit facilities and cash, net of commercial paper and letters of credit. AEP reported compliance with its credit covenants; the contractually calculated debt-to-capital ratio was 54.8%, below the 67.5% limit.
- The Board declared a quarterly dividend of $0.42 per share in July 2010. Cash dividends paid in the first half were $399m.
Material developments, outlook and risks
- Cost reductions: AEP eliminated approximately 2,450 positions, with most affected employees leaving by May 31. The filing describes the initiatives as intended to produce sustainable savings but does not quantify expected future savings.
- Rates: Kentucky regulators approved a $64m annual base-rate increase effective July 2010. SWEPCo received approval for an approximately $15m annual increase effective May, plus a one-year $10m vegetation-management rider. I&M requested $63m annually and planned a $44m interim increase subject to refund. PSO filed for an $82m annual increase in July. APCo and WPCo sought a combined $156m annual increase in West Virginia. Outcomes of pending filings remain uncertain.
- Unusual charge: A Virginia rate order denied recovery of APCo’s share of the Mountaineer Carbon Capture and Storage Project. AEP recorded a $54m pretax write-off in Q2; APCo sought reconsideration. A remaining $58m regulatory asset was recorded at June 30.
- Turk Plant: SWEPCo’s 73%-owned, 600 MW coal plant was expected online in 2012. SWEPCo’s estimated share was $1.3bn, excluding AFUDC, plus $131m for transmission. Appeals and permitting litigation continued; management expected completion, but warned that non-completion or inability to recover investment could materially harm earnings, cash flows and financial condition.
- Environmental and legal exposure: Proposed federal rules on sulfur and nitrogen emissions and coal-combustion residuals could require significant investment, affect plant operations and potentially accelerate retirements. The filing also describes pending rate, fuel-cost, Cook Plant insurance/recovery, environmental and climate litigation and contingencies. Some potential losses cannot be reasonably estimated.
- Guidance: The filing provides no clear consolidated full-year earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
Investor facts to verify
- Whether cost-reduction charges produce the expected recurring savings, and how much of the $289m unpaid balance at quarter-end was subsequently settled.
- Whether AEP can sustain operating cash flow and liquidity as capital spending continues, particularly given the receivables-accounting change and increased short-term debt.
- Regulatory outcomes and recoverability of deferred fuel costs, rate-case requests and the Mountaineer project asset.
- Turk Plant permitting, litigation, cost estimates, construction commitments and eventual cost recovery.
- Potential effects of environmental rules, Cook Plant Unit 1 claims, and other legal or regulatory proceedings on earnings and financing needs.