01—Abstract
Summary
Summary of the 10-K filed February 21, 2019. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported 2018 earnings attributable to common shareholders of $1.92 billiona, or $3.90 per diluted share, essentially flat versus $1.91 billion ($3.88) in 2017, with the 2017 comparison distorted by a $226 million gain on the sale of merchant generation assets.
Total revenues rose 5% to $16.2 billionb, driven by weather-related usage and rate proceedings, while operating income fell to $2.68 billion from $3.53 billion because the 2017 period included that gain. Net income was pressured by lower income tax expense from the federal rate cut to 21% under Tax Reform, which partly offset higher operation, maintenance, depreciation, and interest costs. The balance sheet is levered and investment is heavy.
Total assets reached $68.8 billionc and long-term debt $23.3 billion, pushing the debt-to-capital ratio up to 57.0% from 55.5%. Management budgeted about $7.8 billion of 2019 capital expenditures, with $25.1 billion forecast for 2020 through 2023, concentrated in transmission and distribution. The company also agreed in February 2019 to acquire Sempra Renewables for about $1.1 billion, expected to close in mid-2019 subject to regulatory approvals.
The strategic direction is a planned shift away from coal: coal represented 47%d of generating capacity in 2018 versus 70% in 2005, and AEP set intermediate and long-term CO2 reduction goals of 60% by 2030 and 80% by 2050 from 2000 levels. Key risks flagged include pending FERC transmission return-on-equity complaints, the Rockport Plant Unit 2 litigation, the Turk Plant prudence appeal in Texas, OVEC exposure, and tax refund proceedings that could reduce revenue in several states.
02—Key points
Key Highlights
- Earnings attributable to common shareholders of $1.92 billion ($3.90 per diluted share) in 2018, roughly flat versus 2017 ($3.88) after adjusting for the 2017 $226 million gain on merchant generation asset sales.
- Total revenues increased about 5% to $16.2 billion, supported by a $251 million weather-related usage benefit and recovery of incremental plant investment through rate cases.
- Operating income declined to $2.68 billion from $3.53 billion, reflecting the non-recurring 2017 asset sale gain, higher O&M, and higher depreciation.
- Capital spending plan of approximately $7.8 billion for 2019 and $25.1 billion for 2020-2023, primarily transmission and distribution, supporting a growing rate base.
- Debt-to-capital ratio rose to 57.0% from 55.5% as borrowing funded the investment program; the revolving credit covenant limit is 67.5% and the company reported 55.4% on the contractual basis.
- Coal share of generating capacity fell to 47% (from 70% in 2005), with CO2 emissions down 59% from 2000 levels and new 2030 and 2050 reduction targets of 60% and 80%.
- Pending $1.1 billion acquisition of Sempra Renewables (724 MW of wind and battery assets) is expected to close in mid-2019, subject to FERC and antitrust approvals.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 21, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $16.20B$15.42B | +5.0% |
| Operating Expenses | $13.51B$11.90B | +13.6% |
| Operating Income | $2.68B$3.52B | −23.9% |
| Interest Expense | $984.40M$895.00M | +10.0% |
| Net Income | $1.93B$1.91B | +1.0% |
| EPS (Basic) | $3.90$3.89 | +0.3% |
| EPS (Diluted) | $3.90$3.88 | +0.5% |
| Shares Outstanding (Basic) | 492.77M491.81M | +0.2% |
| Shares Outstanding (Diluted) | 493.76M492.61M | +0.2% |
05—Questions
Frequently Asked Questions
Why did operating income fall in 2018 even though revenues grew?
The 2017 results included a $226 million pretax gain from selling merchant generation plants, which was not repeated in 2018. Higher other operation and maintenance expense, depreciation from a larger asset base, and a $168 million Tax Reform-related rate refund also weighed on operating income, partly offset by weather-driven usage and rate increases.
How did the 2017 Tax Reform change affect AEP's earnings?
The federal corporate tax rate fell from 35% to 21%, which reduced income tax expense by about $854 million in 2018. Much of this benefit is being returned to customers through rate refunds and reductions of excess deferred taxes, so the net earnings benefit is smaller than the headline tax savings and is spread across regulatory proceedings in several states.
What are the main regulatory risks facing AEP's transmission business?
A significant share of earnings comes from FERC-regulated transmission. Complaints at FERC seek to reduce the base return on equity for AEP's PJM transmission companies from 10.99% to as low as 8.32%, and the SPP complaint seeks reductions from 10.7%. A PJM settlement at a 9.85% base ROE is pending FERC approval, and the outcome could require refunds and lower future revenue.
How exposed is AEP to coal and environmental regulation?
Coal still accounts for roughly 47% of generating capacity, and AEP expects to retire more coal units and invest between $650 million and $1.5 billion in environmental compliance through 2025. Changing federal CO2 and coal ash rules, plus the Rockport Plant Unit 2 litigation and pending consent-decree modifications, create cost and timing uncertainty for remaining coal assets.
What does the Sempra acquisition mean for AEP's growth strategy?
The $1.1 billion purchase adds 724 MW of wind generation and battery assets, with $551 million paid in cash, $343 million of assumed project debt, and $162 million of noncontrolling tax equity interests. It advances AEP's shift toward renewables and contracted generation, and its closing is subject to FERC and federal antitrust clearance, expected in mid-2019.
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