01—Abstract
Summary
Summary of the 10-K filed February 24, 2016. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) closed 2015 with earnings attributable to common shareholders of $2.05 billiona, or $4.17 per basic share, up from $1.63 billion ($3.34) in 2014.
The increase was driven primarily by successful rate proceedings across its jurisdictions, a $253 millionb after-tax gain on the sale of its commercial barge business (AEP River Operations, closed November 2015), and higher transmission investment. Continuing-operations earnings rose more modestly to $1.76 billion, partly offset by lower off-system sales margins and lower capacity revenue at its merchant generation fleet. The balance sheet and cash flow profile remain capital-intensive.
Total assets reached $61.7 billionc and long-term debt $19.6 billion, with a debt-to-total-capital ratio of 53.2%, improved from 54.2%. Operating cash flow was $4.7 billion against construction expenditures of $4.5 billion, and dividends paid were $1.06 billion ($2.15 per share declared). Management guides to roughly $5 billion of construction spending annually in 2016 through 2018, weighted toward transmission and distribution, with transmission (AEP Transmission Holdco) now a growing share of earnings.
Key risks flagged in the filing include the Clean Power Plan (stayed by the U.S. Supreme Court in February 2016), coal ash and other EPA rules that could accelerate coal unit retirements, a strategic review of the merchant generation fleet that could produce a loss, exposure to PJM capacity auction price volatility, and the pending Ohio ESP/PPA proceedings. Management also disclosed planned retirements and gas conversions of several coal units and noted that cost recovery through regulated rates is not assured for stranded or uneconomic assets.
02—Key points
Key Highlights
- 2015 GAAP earnings attributable to AEP common shareholders of $2,047.1 million ($4.17 per basic share), up 25% from $1,633.8 million ($3.34) in 2014.
- Continuing-operations EPS of $3.59 vs. $3.24 in 2014; the remaining increase came from a $253 million after-tax gain on the November 2015 sale of AEP River Operations.
- Vertically Integrated Utilities earnings rose to $896.5 million from $707.6 million, driven by rate increases in West Virginia and other jurisdictions; Transmission Holdco earnings rose to $191.2 million from $150.8 million.
- Total revenues were $16.45 billion, roughly flat versus $16.38 billion in 2014, as lower wholesale and off-system sales offset retail and transmission growth.
- Operating cash flow of $4.75 billion covered most of the $4.51 billion construction program; dividends paid were $1.06 billion and the quarterly dividend was raised to $0.56 per share.
- Debt-to-total-capital improved to 53.2% from 54.2%; available liquidity was approximately $3.5 billion under $3.5 billion of revolving credit facilities supporting commercial paper.
- Environmental and regulatory exposure remains material: about $3.2–3.8 billion of estimated investment through 2025 to meet proposed rules, with the Clean Power Plan stayed by the Supreme Court in February 2016.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 24, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $16.45B$16.38B | +0.5% |
| Operating Expenses | $13.12B$13.25B | −1.0% |
| Operating Income | $3.33B$3.13B | +6.6% |
| Interest Expense | $873.90M$868.00M | +0.7% |
| Net Income | $2.05B$1.63B | +25.3% |
| EPS (Basic) | $4.17$3.34 | +24.9% |
| EPS (Diluted) | $4.17$3.34 | +24.9% |
| Shares Outstanding (Basic) | 490.34M488.59M | +0.4% |
| Shares Outstanding (Diluted) | 490.57M488.90M | +0.3% |
05—Questions
Frequently Asked Questions
Why did AEP's earnings grow so much in 2015?
Net earnings rose about $413 million, driven mainly by successful rate cases across AEP's utility service territories, higher transmission investment, and a $253 million after-tax gain on selling the AEP River Operations barge business. These gains were partly offset by lower off-system sales margins and reduced capacity revenue at the merchant generation fleet after the AGR-OPCo power supply agreement ended in May 2015.
How much is AEP investing and how will it be funded?
Management forecasts approximately $5 billion of construction expenditures in each of 2016, 2017 and 2018, mainly for transmission, distribution, generation and environmental compliance. The company expects to fund this through operating cash flow supplemented by debt and equity financing; in 2015 it issued about $3.5 billion of long-term debt and $82 million of common stock through incentive and dividend reinvestment plans.
What are the biggest regulatory risks to AEP?
The most significant items are the EPA's Clean Power Plan (CO2 standards for existing plants, stayed by the Supreme Court in February 2016 pending litigation), the Coal Combustion Residuals rule, Mercury and Air Toxics requirements, and ozone standards. These could force earlier retirement of coal units; AEP expects to recover costs in regulated jurisdictions but not for merchant units. Other items include pending Ohio ESP/PPA decisions, a Virginia challenge to suspended biennial reviews, and an ETT (ERCOT transmission) base rate case due by February 2017.
Is the merchant generation business at risk?
Management is evaluating strategic alternatives for its merchant fleet operated by AGR in PJM, including continued ownership, a purchased power arrangement with OPCo, or a sale. No decision or timeline has been set, and certain alternatives could produce a loss. Earnings from these units are also exposed to volatile PJM capacity auction prices, with results ranging from about $27 to $165 per MW-day over the auctions shown.
How strong is AEP's balance sheet?
Long-term debt was $19.6 billion, debt was 53.2% of total capital, and AEP was in compliance with its credit agreement covenant, which caps debt-to-capital at 67.5% (contractually calculated at 50.2%). Liquidity totaled about $3.5 billion of net available credit at year-end. The holding company has no operations of its own, so its ability to pay debt and dividends depends on dividends and loans from its operating subsidiaries.
06—Continue