American Electric Power Company, Inc. — Q3 2018 Form 10-Q
Business context and period. AEP is an electric utility holding company with regulated generation, transmission and distribution businesses, alongside competitive generation and marketing. This combined, unaudited filing covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $4.333 billion | $4.105 billion | $12.395 billion | $11.615 billion |
| Operating income | $668.6 million | $975.1 million | $2.132 billion | $2.794 billion |
| Net income | $579.7 million | $556.7 million | $1.567 billion | $1.527 billion |
| Earnings attributable to AEP common shareholders | $577.6 million | $544.7 million | $1.560 billion | $1.512 billion |
| Diluted EPS | $1.17 | $1.10 | $3.16 | $3.07 |
- Revenue increased 5.6% in Q3 and 6.7% year to date. Common earnings increased 6.0% in Q3 and 3.2% year to date.
- Operating income fell about 31% in Q3 and 24% year to date, despite higher revenue. Expenses rose, including depreciation, operating and maintenance costs, and interest; lower income taxes substantially supported reported earnings.
- Management attributed higher common earnings mainly to weather-related usage and favorable rate proceedings. Weather-normalized retail sales volumes rose 0.3% in Q3 and 1.2% year to date; industrial sales grew 2.4% and 2.6%, respectively.
- Net cash from operations was $3.933 billion for the first nine months, versus $3.124 billion a year earlier. Investing cash outflow was $4.689 billion, chiefly construction spending; financing provided $1.281 billion. Cash, cash equivalents and restricted cash ended at $937.5 million.
- At September 30, total debt was $25.017 billion, including $22.774 billion of long-term debt and $2.243 billion of short-term debt. Debt was 56.8% of total capitalization, up from 55.5% at year-end 2017. Cash and cash equivalents alone were $788.3 million.
- Available liquidity was approximately $2.315 billion at September 30. The then-$3 billion revolving facility was increased to $4 billion and extended to June 2022 in October 2018. AEP reported compliance with its 67.5% debt-to-capital covenant; the contractually calculated ratio was 55.1%.
Material changes, outlook and key issues
- Tax reform: The federal corporate tax rate fell from 35% to 21%. AEP recorded estimated customer revenue-refund provisions of $150 million for the rate reduction and $36 million for Excess ADIT amortization. Approximately $4.3 billion of Excess ADIT, plus a related $1.1 billion pretax liability, was recorded in regulatory liabilities. Management said tax reform was not expected to materially affect net income, but expected lower future cash flows, including from reduced bonus depreciation and customer refunds. The provisional tax analysis was expected to be completed in Q4 2018.
- Capital investment: Forecast construction expenditures are approximately $24 billion for 2018–2021, expected to be funded with operating cash flows and financing. Transmission and distribution investment drove higher construction outlays and debt.
- Projects and assets: PSO and SWEPCo cancelled the approximately $4.5 billion Wind Catcher project in July after Texas regulators denied approval. AEP recorded a $35 million Q3 impairment for the Racine hydro project after higher reconstruction estimates; further cost revisions could cause additional losses. Management announced Oklaunion’s planned closure by October 2020 and, in October, Conesville’s planned closure in May 2020; closures were not expected to materially affect financial results.
- Storm recovery: AEP Texas reported about $150 million of deferred storm-cost regulatory assets, including $127 million related to Hurricane Harvey, and $205 million of Harvey-related capital expenditures. It sought recovery of estimated total storm costs of $425 million; regulatory review and settlement discussions remained ongoing. Failure to recover costs through insurance or rates could adversely affect results and cash flow.
- Regulatory and legal exposure: A Texas appellate court reversed a ruling affirming the prudence of SWEPCo’s Turk Plant and remanded the matter; SWEPCo planned to appeal. FERC decisions remained pending on PJM and SPP transmission returns, with potential for rate reductions and refunds. Management also highlighted possible OVEC liquidity and support needs: AEP’s three participating utilities were responsible for $611 million of OVEC’s approximately $1.4 billion debt through their contractual participation shares, amid a co-owner’s bankruptcy.
- Environmental and operating risks: AEP estimated $650 million to $1.5 billion of investment through 2025 to address existing and proposed environmental requirements. Management cited regulatory recovery, fuel and power costs, weather, interest rates, generation performance, capital-market access, litigation and cyber threats as risks.
- Guidance: The filing provides a construction-spending forecast, but no clear company-wide earnings guidance or quantified near-term earnings outlook. Management stated it believed liquidity was adequate and capital-market access sufficient for anticipated needs.
Most important facts for investors to verify
- Whether operating performance and cash generation can support the elevated construction program, dividends and increased debt.
- Final customer refunds, Excess ADIT treatment and the resulting effects on future revenue, earnings and cash flow.
- Regulatory recovery and timing for Hurricane Harvey costs, and the outcome of the Turk Plant, transmission-return and other rate proceedings.
- Any additional costs or impairments following Wind Catcher’s cancellation and the Racine impairment; confirm the planned plant closures and associated impacts.
- Potential obligations or funding needs tied to OVEC and other guarantees, and the status of FERC proceedings and related refund exposure.