American Electric Power Company, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The combined filing covers AEP and six registered subsidiaries; figures below focus on AEP consolidated unless noted. Financial statements are unaudited.
Business context and operating performance
AEP generates, transmits and distributes electricity, with regulated utility and transmission businesses alongside competitive generation, marketing and renewable investments. Weather-normalized retail sales rose 0.7% in Q2 year over year, including industrial sales growth of 3.3%; first-half weather-normalized retail sales declined 0.2%. AEP attributed softer results in part to mild weather and the sale of merchant generation assets.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $3.577 billion | $3.893 billion | $7.510 billion | $7.938 billion |
| Operating income | $744.7 million | $866.2 million | $1.842 billion | $1.759 billion |
| Net income | $376.2 million | $503.9 million | $970.4 million | $1.007 billion |
| Earnings attributable to AEP common shareholders | $375.0 million | $502.1 million | $967.2 million | $1.003 billion |
| Diluted EPS | $0.76 | $1.02 | $1.96 | $2.04 |
| Cash from continuing operations | Not separately provided for the quarter | Not separately provided for the quarter | $1.717 billion | $1.726 billion |
Q2 revenue fell about 8% and earnings attributable to common shareholders fell about 25% year over year. First-half revenue declined about 5% and common earnings about 4%. Q2 operating income decreased, while first-half operating income increased, partly reflecting the $226.4 million pretax gain on the sale of merchant generation assets. The filing does not provide a single consolidated gross-margin figure in the presented results; segment gross margin is a non-GAAP measure.
- Segment earnings, Q2 / first half 2017: Vertically Integrated Utilities $120.8 million / $340.3 million; Transmission and Distribution Utilities $111.2 million / $230.3 million; AEP Transmission Holdco $128.4 million / $200.2 million; Generation & Marketing $26.4 million / $212.6 million. Corporate and Other recorded losses of $11.8 million / $16.2 million.
- Cash and investment: Operating cash flow was $1.717 billion for the first half. Construction expenditures were $2.510 billion; net cash used for continuing investing activities was $375.7 million after $2.160 billion of merchant-asset sale proceeds. Financing activities used $1.379 billion, including $584.9 million of common dividends.
- Debt and liquidity at June 30: Total debt was $21.404 billion, down from $22.104 billion at year-end 2016; debt-to-total capitalization was 54.5%, versus 55.9%. Cash and cash equivalents were $172.4 million. Net available liquidity was $1.848 billion, including a $3.0 billion revolving facility and $1.324 billion of commercial paper outstanding. The credit-agreement debt-to-capitalization measure was 52.5%, below the 67.5% covenant ceiling.
- Margins and dividend: Q2 declared dividends were $0.59 per share, up from $0.56 a year earlier; the board declared $0.59 per share in July 2017.
Material changes and unusual items
- AEP completed the January 2017 sale of the Darby, Gavin, Lawrenceburg and Waterford plants, totaling 5,329 MW, for approximately $2.2 billion. Net cash proceeds after taxes, associated debt repayment and other costs were about $1.2 billion. The sale produced a $226.4 million pretax gain; proceeds were used mainly to reduce debt and support regulated and contracted renewable investments.
- Merchant generation revenue and earnings fell following the asset sale. AEP continued evaluating strategic alternatives for remaining merchant generation assets; management gave no decision timetable and cautioned that alternatives could cause further losses.
- Transmission investment supported higher transmission revenues and earnings, especially at AEP Transmission Holdco. Its Q2 earnings attributable to AEP rose to $128.4 million from $94.6 million, while transmission property, net, increased to $5.875 billion from $4.454 billion a year earlier.
- The prior-year second quarter included a $56 million reversal of an unrealized capital-loss tax valuation allowance following resolution of an IRS audit issue, contributing to the year-over-year earnings and tax-rate comparison.
- AEP recorded $13.1 million of first-half asset impairment charges and an $88.1 million provision for customer refunds under the Ohio Global Settlement.
Outlook, risks and contingencies
- No consolidated earnings guidance is stated in the provided filing text. Management says results for the first half are not necessarily indicative of full-year results.
- Renewables: AEP reported about 120 MW of contracted renewable generation in operation and 56 MW under construction, with an estimated commitment of $317 million; $221 million had been incurred by June 30. PSO and SWEPCo proposed the approximately 2,000 MW Wind Catcher project and a 350-mile interconnection line, estimated at $4.5 billion, subject to regulatory approvals and targeted for service by the end of 2020.
- Rate recovery remains significant: I&M filed for a $263 million annual Indiana rate increase and a $52 million Michigan increase; PSO sought a $156 million annual Oklahoma increase; KPCo requested a $66 million Kentucky increase. These requests were pending and are not guaranteed to be approved or collected.
- Regulatory exposure includes Ohio’s proposed extension of OPCo’s electric security plan through May 2024, a $58 million 2016 significantly excessive earnings provision, pending challenges to transmission returns in PJM and SPP, and possible refunds or disallowances in other rate proceedings. Several interim or formula rates remain subject to review or refund.
- Environmental compliance investment was estimated at $2.2–$2.8 billion from 2017 through 2025. Recovery, project costs and operating requirements depend on regulatory decisions and evolving environmental rules. SWEPCo estimated Welsh Plant environmental investment through 2025 at about $850 million, excluding AFUDC; $398 million had been incurred through June 30.
- Rockport Unit 2 litigation continued after a Sixth Circuit amended opinion revived certain lease claims and remanded the matter. Management could not estimate a reasonably possible loss range. The $274 million SCR project for Rockport Unit 2 remained subject to regulatory approval; I&M sought a delay to its installation deadline.
- Westinghouse’s Chapter 11 reorganization creates potential risk to Cook Plant fuel fabrication and other contracts. A disruption could affect operations and potentially require a temporary shutdown while alternative vendors are found.
- Other risks include weather and demand, fuel and wholesale-market prices, construction and financing costs, credit ratings and counterparties, nuclear operations, and recovery of retired-plant and environmental costs. The filing reports no material change to previously disclosed risk factors, while supplementing the nuclear-generation risk discussion.
Important facts for investors to verify
- Whether pending state and FERC rate cases are approved as requested, and the ultimate amounts of any refunds or disallowances.
- Progress, final economics and remaining impairment exposure for merchant-generation exits, including the Zimmer and Conesville transactions and remaining assets.
- Regulatory approvals, financing, cost estimates and schedule for Wind Catcher and other renewable projects.
- Updates on Rockport Unit 2 litigation and SCR requirements, Turk Plant cost recovery, and Welsh environmental investment recovery.
- Whether Westinghouse’s reorganization affects Cook Plant fuel supply or service continuity.
- Ongoing liquidity, capital spending and debt levels, particularly as construction expenditures exceed operating cash flow and AEP relies on commercial paper and revolving credit capacity.