01—Abstract
Summary
Summary of the 10-K filed February 20, 2015. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported 2014 earnings attributable to common shareholders of $1,634 milliona, or $3.34 per diluted share, up from $1,480 million ($3.04) in 2013 and $1,259 million ($2.60) in 2012.
Total revenues rose to $17.0 billionb from $15.4 billion, driven largely by the Generation & Marketing segment (which grew to $3.85 billion in segment revenue as affiliated sales were restructured) and higher market prices. Operating income increased to $3.2 billion, and 2013 included asset impairments (Muskingum River Unit 5, Big Sandy scrubbers, Amos Unit 3) that did not recur in 2014, flattering the year-over-year comparison. The filing describes a company in transition.
Ohio generation assets were transferred to a competitive affiliate (AGR) at the end of 2013, the Interconnection Agreement was terminated, and management is evaluating strategic alternatives for the merchant generation fleet, which could include a sale or spin-off and could produce losses. AEP's capital program is large: approximately $4.5 billionc of construction expenditures are budgeted for 2015, with $3.8 billion and $3.9 billion forecast for 2016 and 2017. Environmental compliance (CSAPR, MATS, CCR rule, proposed CO2 rules for existing plants) requires an estimated $2.8 to $3.3 billion of additional investment through 2020, and the retirement of roughly 6,500 MW of coal and other units is planned by 2016.
Balance sheet and liquidity remain manageable. Long-term debt was $18.7 billiond and total debt-to-capitalization was 54.3%, unchanged year over year.
Net available liquidity was about $3.0 billion, covenant compliance was reported (debt-to-capital covenant at 67.5%, actual 51%), and the quarterly dividend was raised to $0.53 per share, with 2014 dividends declared at $2.03 per share. Key investor risks include regulatory outcomes (Ohio ESP, Oklahoma and West Virginia rate cases, Texas Turk Plant recovery), PJM capacity price volatility after May 2015, and potential rating-agency actions.
02—Key points
Key Highlights
- 2014 GAAP earnings of $1.63 billion ($3.34 per diluted share), up about 10% from $1.48 billion ($3.04) in 2013, helped by non-recurrence of 2013 impairments and higher off-system and transmission margins.
- Total revenues of $17.0 billion (up 11%) and operating income of $3.2 billion (up 13%); Generation & Marketing segment earnings rose to $367 million from $228 million.
- Transmission investment is a growth engine: AEP Transmission Holdco earnings rose to $151 million from $80 million, with AEPTCo transmission assets of $1.8 billion in service and about $3 billion planned through 2017.
- Capital spending is heavy: about $4.5 billion budgeted for 2015 (environmental, transmission, distribution, generation), and an estimated $2.8-3.3 billion of additional environmental investment through 2020.
- Strategic review of the merchant generation fleet (AGR, Oklaunion stake) is open; alternatives include continued operation, PPA with a regulated affiliate, spin-off or sale, and some outcomes could produce losses.
- Leverage and liquidity are stable: debt-to-capitalization 54.3% (unchanged), about $3.0 billion net liquidity, and quarterly dividend increased to $0.53 per share (2014 declared $2.03).
- Pending regulatory items could affect earnings: Ohio ESP and capacity-charge litigation, Oklahoma and West Virginia base rate cases, Kentucky FAC disallowance ($36 million), Texas Turk Plant recovery, and PJM capacity prices that fall sharply after May 2015.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 20, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $16.38B$14.81B | +10.6% |
| Operating Expenses | $13.25B$11.99B | +10.5% |
| Operating Income | $3.13B$2.82B | +10.8% |
| Interest Expense | $868.00M$890.00M | −2.5% |
| Net Income | $1.63B$1.48B | +10.4% |
| EPS (Basic) | $3.34$3.04 | +9.9% |
| EPS (Diluted) | $3.34$3.04 | +9.9% |
| Shares Outstanding (Basic) | 488.59M486.62M | +0.4% |
| Shares Outstanding (Diluted) | 488.90M487.04M | +0.4% |
05—Questions
Frequently Asked Questions
Why did AEP's earnings increase in 2014?
Net income attributable to common shareholders rose to $1,634 million from $1,480 million. Management cited non-recurrence of 2013 impairments (Muskingum River Unit 5, Big Sandy scrubber disallowance), successful rate proceedings across jurisdictions, higher market prices and off-system sales volumes, and growth in transmission investment. These were partly offset by higher depreciation, plant maintenance, vegetation management, a fuel expense increase from terminating a long-term coal contract, and the non-recurrence of a 2013 U.K. Windfall Tax benefit.
What is the biggest risk to AEP's future cash flows from its generation assets?
The merchant generation fleet is exposed to PJM capacity auction results and to environmental regulation. AGR capacity revenues are expected to decline significantly after May 2015 when the Power Supply Agreement with OPCo ends, with a further decline from June 2016. AEP estimates $2.8-3.3 billion of environmental investment through 2020 and plans to retire about 6,500 MW of units by 2016. Costs for merchant units generally cannot be passed through to customers, so they could reduce net income and cash flow or force early closures.
How much capital will AEP invest and how will it be funded?
Construction expenditures are budgeted at about $4.5 billion for 2015, $3.8 billion for 2016 and $3.9 billion for 2017, including debt AFUDC. Funding is expected from operating cash flow (about $4.6 billion in 2014) and financing, with short-term needs met through commercial paper backed by $3.5 billion of revolving credit facilities. Long-term debt maturities of $2.5 billion fall due in 2015, and management plans to refinance most of them.
Is AEP's balance sheet and dividend at risk?
Based on the filing, leverage is stable: total debt-to-capitalization was 54.3% at year-end 2014, the credit-agreement covenant limit is 67.5% (contractually defined ratio of 51%), and the company was in compliance. Dividends paid were $998 million in 2014, and the quarterly dividend was raised to $0.53. Risks include potential credit rating downgrades, which could raise borrowing costs and trigger collateral demands for power trading, and the parent's reliance on subsidiary dividends since it has no operations of its own.
What regulatory matters could materially affect AEP's results?
Several pending matters could affect earnings: the Ohio ESP (including the $422 million deferred capacity cost balance and the PUCO fixed-fuel-cost audit, about $90 million annually at risk), the Oklahoma base rate case order expected in early 2015, the West Virginia base rate case seeking $181 million, a Kentucky FAC disallowance of $36 million under appeal, and recovery of the Turk Plant's Texas investment. Management says it believes it has adequately reserved for the recorded items, but adverse rulings could reduce future net income.
06—Continue