American Electric Power (NYSE:AEP) on Oct. 23 reported 3Q13 earnings, which when reported in accordance with generally accepted accounting principals (GAAP) declined to $433m compared with $487m for 3Q12, but the company says the drop is primarily due to two impairment charges associated with construction activities at two generating plants.
When special items were excluded, operating earnings for 3Q13 were $533m, or $100m higher than GAAP earnings.
“The difference this quarter is mainly attributable to the surprising decision by the PUCT, the Public Utility Commission of Texas, to include [allowance for funds used during construction (AFUDC)] in the cost cap related to the Turk power plant at [Southwestern Electric Power Company], and a smaller impairment related to the Big Sandy plant scrubber project cost that was disallowed as part of the order in Kentucky approving 50% of the Mitchell plant to be transferred to Kentucky Power rate base,” Nick Akins, AEP president and CEO, explained during the third-quarter earnings call Oct. 23
The Texas impairment charge was $111m, and was related to the inclusion of AFUDC in the cost cap on construction of the John W. Turk Jr. plant. Akins said AEP plans to file a rehearing request and ask the PUCT to revisit its decision.
“To not allow [construction work in progress (CWIP)] recovery, which we’d requested, and also to not allow AFUDC recovery would send a bad policy message on a prudently incurred generation investment … particularly for a state that desperately needs to incent new generation capacity,” Akins said.
A second impairment charge was associated primarily with the Big Sandy Plant scrubber project in Kentucky, and was $33m. Akins said that, aside from the impairment charge, the Kentucky order marked a significant step in the process of bifurcating a portion of AEP’s business operations.
“The recent approval of the Mitchell generation transfer to Kentucky Power was a very positive development for meeting the generation needs of our Kentucky customers, and we expect to complete that transaction by year end,” Akins said. “We are still waiting for a decision from the West Virginia Public Service Commission and are confident that we will be in a position to separate our Ohio generation assets from our Ohio wires business by the end of the year.”
Overall, Akins was positive about the company’s financial performance.
“Despite the impairments, we performed well from an operating perspective,” he said. “Positive transmission performance contributed as well.”
The company’s revenue from transmission operations increased to $22m during 3Q13, up from $14m in 3Q12. The company credits increased transmission investment for the increase. Third-party transmission revenue rose to $158m during the quarter, marking a $29m increase from $129m during 3Q12. The company said that increase was primarily the result of increased revenues in the PJM Interconnection.
Akins characterized the just-ended period as “a good, strong quarter,” and said he was pleased with the company’s overall financial performance, especially in the face of what he described as a tenuous economic recovery.
“I call it a ‘whack-a-mole’ economy because the growth in each sector has not been well-synchronized to indicate true, overall economic growth,” he said.
Generation and marketing revenue dropped to $4m during 3Q13, compared to $10m in 3Q12.
Operating earnings from utility operations comprise the largest portion of AEP’s revenue. Utility GAAP earnings during 3Q13 were $408m, compared to $470M in 3Q12. On a non-GAAP basis, those earnings were $29m higher than in third-quarter 2012. The company accounts for its third-party transmission revenue in its utility operations earnings.