01—Abstract
Summary
Summary of the 10-K filed February 28, 2017. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) closed 2016 with earnings attributable to common shareholders of $611 milliona ($1.24 per diluted share), down sharply from $2.05 billion ($4.17) in 2015.
The decline was driven almost entirely by a $2.3 billionb pretax impairment of merchant coal-fired generation, Racine hydro, Wind Farms and coal reserves recorded in Q3 2016, which pushed the Generation & Marketing segment to a $1.2 billion loss. Excluding that charge, the regulated core performed well: Vertically Integrated Utilities earned $980 million (up from $897 million), Transmission and Distribution Utilities earned $482 million (up from $352 million), and AEP Transmission Holdco earned $266 million (up from $191 million), reflecting favorable rate proceedings and continued transmission investment. The company is reshaping its portfolio toward regulated assets.
In January 2017 AEP closed the sale of Darby, Gavin, Lawrenceburg and Waterford plants (5,329 MW) for about $2.2 billionc, with roughly $1.2 billion of net after-tax proceeds earmarked mainly for debt reduction and regulated investment, including transmission and contracted renewables. AGR's remaining generation fell to 2,732 MW after the sale, and total generating capacity dropped to about 26,000 MW from about 31,000 MW. Management guides to $5.7 billion of 2017 construction spending and $11.6 billion over 2018-2019, funded by operating cash flow and financing, while holding a $0.59 quarterly dividend (about $2.36 annualized).
Key risks investors should weigh include an FERC complaint seeking to cut the PJM transmission base ROE from 10.99% to 8.32% with potential refunds, the Ohio Global Settlement and pending PPA/ESP proceedings, rising environmental compliance capex (an estimated $4.3d-4.9 billion through 2025 for fossil fleet upgrades), the proposed federal tax reform that could return about $4 billion of excess deferred taxes to customers, and the continued merchant-coal exposure that remains under strategic review. Consolidated debt was about $22.1 billion at year-end, with a 53.6% contractually defined debt-to-capital ratio versus a 67.5% covenant.
02—Key points
Key Highlights
- Reported 2016 earnings of $611 million ($1.24/share) versus $2.05 billion ($4.17/share) in 2015, mainly due to a $2.3 billion pretax merchant generation impairment in Q3 2016
- Regulated segments grew: Vertically Integrated Utilities earnings rose to $980 million and Transmission and Distribution Utilities to $482 million; AEP Transmission Holdco rose to $266 million
- Completed sale of Darby, Gavin, Lawrenceburg and Waterford (5,329 MW) in January 2017 for about $2.2 billion, with roughly $1.2 billion net proceeds for debt reduction and regulated investment
- Generating capacity falls from about 31,000 MW to about 26,000 MW after the 2017 asset sales, shifting the mix toward regulated and renewable assets
- Projected 2017 construction expenditures of $5.7 billion, with $11.6 billion forecast for 2018-2019 mainly in transmission, distribution and environmental compliance
- FERC complaint seeks to reduce PJM transmission base ROE from 10.99% to 8.32%, with possible refunds; proposed federal tax reform could return about $4 billion of excess deferred taxes to customers
- Quarterly dividend held at $0.59 per share declared for January 2017; year-end debt-to-capital of 53.6% sits well inside the 67.5% covenant
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 28, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $16.38B$16.45B | −0.4% |
| Operating Expenses | $15.22B$13.12B | +16.0% |
| Operating Income | $1.16B$3.33B | −65.1% |
| Interest Expense | $877.20M$873.90M | +0.4% |
| Net Income | $610.90M$2.05B | −70.2% |
| EPS (Basic) | $1.24$4.17 | −70.3% |
| EPS (Diluted) | $1.24$4.17 | −70.3% |
| Shares Outstanding (Basic) | 491.50M490.34M | +0.2% |
| Shares Outstanding (Diluted) | 491.66M490.57M | +0.2% |
05—Questions
Frequently Asked Questions
Why did AEP's net income fall so sharply in 2016?
The main driver was a $2.3 billion pretax impairment recorded in Q3 2016 on merchant coal-fired generation, Racine hydro, Wind Farms and coal reserves. Lower wholesale power prices and reduced capacity revenue also weighed on the Generation & Marketing segment, which posted a $1.2 billion loss. Regulated segments grew, partly offsetting the charge.
How is AEP shifting its business mix?
AEP is selling merchant generation (the 5,329 MW sale closed in January 2017) and reinvesting in regulated transmission and distribution, plus contracted renewables. Transmission-related earnings through AEP Transmission Holdco rose to $266 million in 2016, and management expects a growing share of future earnings to come from transmission.
What are the biggest regulatory risks to earnings?
The FERC transmission ROE complaint could lower revenues and require refunds. Ohio proceedings, including the PPA rider, the Global Settlement and SEET matters, could affect OPCo's recovery. Environmental rules such as CSAPR, the Clean Power Plan (currently stayed) and the coal ash rule add cost pressure on the coal fleet, and recovery is not assured for competitive units.
Is AEP's balance sheet and dividend under pressure?
Debt is about $22.1 billion, with a contractually defined debt-to-capital ratio of 53.6% against a 67.5% covenant, leaving meaningful headroom. Dividends paid were about $1.1 billion in 2016, a payout of about 183% of GAAP earnings given the impairment, versus roughly 52% in 2015. Asset sale proceeds are expected to reduce debt and support the dividend, which management has continued to raise over time.
What does the capital spending plan look like?
Budgeted construction spending is $5.7 billion for 2017 and $11.6 billion for 2018-2019 combined. Most of it goes to transmission ($2.9 billion in 2017 at AEP Transmission Holdco alone), distribution and environmental compliance, with the State Transcos alone planning about $4.4 billion of additional transmission investment through 2019.
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