AMERICAN ELECTRIC POWER CO INC annual report, FY2018

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Business context and reporting period

American Electric Power Company, Inc. (AEP) filed this combined Form 10-K for the fiscal year ended December 31, 2018. AEP is a regulated electric utility holding company operating through subsidiaries across 11 states. Its reportable segments are Vertically Integrated Utilities, Transmission and Distribution Utilities, AEP Transmission Holdco, and Generation & Marketing.

The filing incorporates AEP’s and subsidiaries’ full financial statements and management discussion by reference to their 2018 Annual Reports. Those consolidated statements are not included in the supplied text; figures below are limited to information presented here, including Parent-only financial data.

Financial performance and key metrics

  • Segment revenues: Vertically Integrated Utilities reported $9.65 billion in 2018 versus $9.19 billion in 2017; Transmission and Distribution Utilities, $4.65 billion versus $4.42 billion; AEP Transmission Holdco, $804.1 million versus $766.7 million; and Generation & Marketing, $1.94 billion versus $1.88 billion. These segment figures include affiliate sales and should not be treated as consolidated revenue.
  • Parent-only earnings: AEP Parent reported net income of $1.924 billion in 2018 versus $1.913 billion in 2017, and basic and diluted EPS of $3.90 versus $3.89. Parent income is substantially derived from equity earnings of subsidiaries ($2.012 billion); it is not AEP’s consolidated net income.
  • Parent-only cash flow: Operating cash flow was $817.0 million, down from $1.015 billion in 2017. Cash dividends received from subsidiaries were $855.6 million. Investing activities used $766.7 million; common dividends paid were $1.251 billion.
  • Parent-only liquidity and debt: Cash was $99.3 million at year-end, compared with $132.1 million a year earlier. Commercial paper outstanding was $1.160 billion at a 2.96% weighted-average rate, versus $898.6 million at 1.85%. Long-term debt was $2.266 billion versus $1.282 billion. AEP stated it was in compliance with debt covenants.
  • Margins and consolidated financial measures: The supplied filing text does not provide a clear consolidated value for revenue, net income, operating cash flow, margins, total debt or liquidity. Consult the incorporated consolidated statements and MD&A for these metrics.

Material changes versus the prior comparable period

  • Reported segment revenues increased year over year in each of the four segments. Vertically Integrated Utilities revenue included a $210.1 million rate-refund provision in 2018, compared with $46.4 million in 2017; Transmission and Distribution Utilities included a $69.2 million provision versus $11.4 million.
  • Parent-only net income and EPS were broadly stable, while Parent operating cash flow declined. Parent short-term and long-term debt were higher at year-end.
  • Vertically Integrated Utilities’ 2018 generation mix shifted toward natural gas: coal and lignite represented 58% of net generation versus 61% in 2017; natural gas was 14% versus 11%. Gas consumption rose 29% year over year.
  • In 2018, AEP identified transmission assets that it believed had been improperly included in AEPTCo SPP formula rates and AFUDC revenue recorded improperly in prior periods. AEPTCo revised its 2017 Parent financial statements, reducing net income by $15 million; the filing says the effects were not material to 2017 or earlier periods.

Outlook, management commentary, risks and unusual items

  • Investment outlook: AEP forecast approximately $7.8 billion of 2019 construction expenditures. State Transcos had $6.7 billion of transmission assets in service and planned about $4.5 billion of additional transmission investment through 2021. Estimated major environmental investments for 2019–2025 ranged from $650 million to $1.5 billion for AEP, subject to regulatory and other changes.
  • Generation transition: AEP set goals to reduce generating-facility CO2 emissions 60% from 2000 levels by 2030 and 80% by 2050. Estimated 2018 emissions were approximately 69 million metric tons, 59% below 2000. AEP also reported 2,750 MW of contracted wind and 10 MW of contracted solar serving regulated customers.
  • Retirements and acquisition: AEP planned to close Conesville units in May 2019 and May 2020 and Oklaunion by October 2020; other unit retirements were also disclosed. In February 2019, AEP agreed to acquire Sempra Renewables’ 724 MW wind and battery portfolio for approximately $1.1 billion, including $551 million cash, assumption of $343 million of project debt, and recognition of $162 million of noncontrolling tax equity interests. Closing was expected in mid-2019, subject to approvals.
  • Regulatory and environmental exposure: Rate recovery, rate-refund proceedings and challenges to transmission formula rates and allowed returns could affect earnings and cash flows. Environmental compliance costs may be material; recovery from customers is not assured. The filing also identifies risks from changing carbon rules, coal ash and water requirements, and potential early plant retirements.
  • OVEC contingency: FirstEnergy Solutions filed bankruptcy and obtained court approval to reject its OVEC power agreement; an appeal was pending. APCo, I&M and OPCo have a combined 43.47% power participation ratio. The filing states they were collectively responsible for $604 million of OVEC’s approximately $1.4 billion outstanding debt through the agreement and could face additional payments if OVEC cannot meet obligations or its debt is accelerated.
  • Other principal risks: The filing highlights capital-market access and interest-rate exposure, weather and demand variability, fuel and commodity prices, cyber and physical security, counterparty defaults, nuclear plant operations and decommissioning, and the ability to recover substantial capital and operating costs through regulated rates. Cook Plant decommissioning and low-level waste disposal costs remain uncertain; its trust fund held approximately $2.2 billion at year-end.

Important facts for investors to verify

  1. Review the incorporated consolidated statements and MD&A for AEP’s actual consolidated revenue, net income, EPS reconciliation, cash flows, debt, liquidity and segment earnings; the figures supplied here do not establish those consolidated totals.
  2. Assess the scale, timing and regulatory recovery of planned capital spending, environmental investments and rate-refund provisions.
  3. Track FERC and state proceedings on transmission returns and formula rates, including potential refunds or rate reductions.
  4. Monitor the OVEC appeal and any resulting payment, financing or credit implications for AEP and its utility subsidiaries.
  5. Confirm the closing, financing and regulatory approvals for the Sempra Renewables acquisition and progress on announced plant closures.