Ohio-based American Electric Power (AEP, Financial), a $34.6 billion regulated electric utility, reported 5.4% revenue decline year over year in the first half to $7.5 billion and 3.6% drop in profits to $967 million (12.9% margin compared to 12.6% in the prior-year period).
Profits fell despite the company’s decline in overall expenses by 8.3% year over year.
In addition, American Electric reaffirmed its 2017 GAAP earnings per share (EPS) of $3.8 to $4 compared to $1.24 in 2016:
"We are on track to achieve our operating earnings guidance range of $3.55 to $3.75 per share this year, despite the negative impact of very mild temperatures. We anticipated lower operating earnings performance this quarter compared with last year, due to the sale of competitive generation assets and the positive impacts from regulatory true ups and reversals a year ago. The remainder of the year will benefit from lower operating and maintenance expenses compared to last year."
"Overall economic conditions are getting better in the states we serve, consistent with the improvement we've projected in our 2017 operating earnings guidance. Industrial load increased by 4% this quarter, and we are now seeing positive industrial sales results across most industries in our service area. We are optimistic that this stronger industrial demand will lead to future improvements in commercial and residential load later this year.
"Our transmission business continues to expand, reflecting the increased investments we are making to provide enhanced grid reliability and resilience for customers. Our Transmission Holding Co. business contributed 26 cents per share for the quarter, an increase of 7 cents from the same period last year."Â –Â Nicholas K. Akins, American Electric chairman, president and CEO
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Valuations
American Electric is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 49.6 times vs. the industry median of 17.6 times, a price-book (P/B) ratio of 2 times vs. 1.6 times and a price-sales (P/S) ratio of 2 times vs. 1.7 times.
The company had a trailing dividend yield of 3.3% with 161% payout ratio.
Average 2017 revenue and EPS estimates indicated forward multiples of 2.3 times and 19 times.
Total returns
American Electric has outperformed the broader Standard & Poor's 500 index so far this year with 14.12% total returns vs. the index’s 11.82%.
American Electric Power
According to filings, American Electric Power was incorporated in 1906 and reorganized in 1925. The company is a public utility holding company that owns, directly or indirectly, all of the outstanding common stock of its public utility subsidiaries and varying percentages of other subsidiaries.
The service areas of American Electric’s public utility subsidiaries cover portions of the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. The transmission networks are interconnected with extensive distribution facilities in the territories served.
The public utility subsidiaries of American Electric have traditionally provided electric service, consisting of generation, transmission and distribution, on an integrated basis to their retail customers (1).
American Electric has four segments: Vertically Integrated Utilities, Transmission and Distribution Utilities, AEP Transmission Holdco, and Generation & Marketing.
Vertically Integrated Utilities
This division is responsible for generation, transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by American Electric and its subsidiaries.
In the first half, revenue in the vertically integrated utilities rose 0.9% year over year to $4.41 billion (55% of total unadjusted sales) and had an earnings margin of 7.7% compared with 11% in the year prior.
Transmission and Distribution Utilities
This segment is in charge of transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by OPCo and AEP Texas.
In the past six months of operations, revenue in the transmission and distribution business fell 2.4% year over year to $2.14 billion (27% of total unadjusted sales) and had margins of 10.8% vs. 10.6% in the year prior.
AEP Transmission Holdco
This segment is responsible for the development, construction and operation of transmission facilities through investments in the State Transcos and Transmission Joint Ventures. Further, these investments have PUCT-approved or FERC-approved returns on equity.
In the past six months, revenue in the transmission holdco (investments) soared 61% to $403 million (5% of unadjusted sales) and had margins of 49.6% compared with 55% in the year-earlier period.
Generation & Marketing
Revenue in this segment, meanwhile, fell 30% year over year to $1 billion (13% of unadjusted sales) and had margins of 21% vs. 8% in the year prior.
Sales and profits
In the past three years, American Electric recorded revenue growth average of 2.2%, profit decline average of (-)25.5% and profit margin average of 8.6%.
Cash, debt and book value
As of June, American Electric had $172.4 million in cash and cash equivalents and $21.4 billion in debt with debt-equity ratio 1.2 times vs. 1.18 times in the same period last year. Overall debt declined by $200 million while equity also dropped by $562 million.
Goodwill seemed negligible in the company’s $62.7 billion assets while book value declined by 3% year over year to $17.9 billion.
Cash flow
In the first half, American Electric’s cash flow from operations was nearly flat at (-)0.51% year over year to $1.7 billion. Capital expenditures were $2.51 billion leaving the company with (-)$793 million free cash outflow compared to (-)$560 million in outflows the prior year period.
Despite the outflows, the company allocated $584.9 million in dividends to shareholders while having placed $761 million in debt repayments net any issuances.
The cash flow summary
In the past three years, American Electric allocated $13.76 billion in capital expenditures, raised $2.7 billion in debt net repayments and other financing activities, raised $189 million in share issuances, accumulated $124 million in free cash flow but paid out $3.18 billion in dividends.
Conclusion
Other than the complex discussion of segments that made it hard to decipher certain operational segment performance in recent quarters, American Electric had a general decline in business operations in recent months. Despite this, the utility does expect steady operational performance by fiscal year end this year.
Meanwhile, American Electric carried a significantly leveraged balance sheet at 1.2 times while having been able to provide billions more in shareholder dividends to its shareholders generously despite minimal free cash flow generation in recent years.
Analysts have an average price target of $71.26 vs. $70.43 at the time of writing. Applying three-year revenue growth, P/S averages and a 20% margin indicated a figure of $49 per share.
In summary, American Electric is a pass and for those who want to realize a certain amount of paper gains, this could be a good time.
Notes
- Company filings
Restructuring laws in Michigan, Ohio and the ERCOT area of Texas have caused American Electric public utility subsidiaries in those states to unbundle previously integrated regulated rates for their retail customers. In Ohio, AEP’s regulated utility operates its distribution and transmission assets while its former generation assets are owned and operated by affiliates.
The member companies of the AEP System have contractual, financial and other business relationships with the other member companies, such as participation in the AEP System savings and retirement plans and tax returns, sales of electricity and transportation and handling of fuel. The companies of the AEP System also obtain certain accounting, administrative, information systems, engineering, financial, legal, maintenance and other services at cost from a common provider, AEPSC.
Disclosure: I do not have shares in any of the companies mentioned.
