Business Context and Reporting Period
American Electric Power Company, Inc. (AEP) filed this unaudited combined Form 10-Q for the quarter ended March 31, 2022, comparing results with the first quarter of 2021. The filing also covers seven separately reporting utility and transmission subsidiaries. AEP primarily generates, transmits and distributes electricity through regulated utilities, with additional transmission and competitive energy businesses.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $4.593 billion | $4.281 billion | Up 7.3% |
| Operating income | $988.1 million | $810.3 million | Up 21.9% |
| Net income | $718.1 million | $578.8 million | Up 24.1% |
| Earnings attributable to AEP common shareholders | $714.7 million | $575.0 million | Up 24.3% |
| Diluted EPS | $1.41 | $1.15 | Up $0.26 |
| Cash from operating activities | $1.622 billion | $(117.2) million | Improved by $1.739 billion |
| Cash used for investing activities | $(2.893) billion | $(1.634) billion | Use increased $1.259 billion |
Operating margin was approximately 21.5% of revenue, versus 18.9% a year earlier; net income margin was approximately 15.6%, versus 13.5%. AEP reported $725.5 million of cash, cash equivalents and restricted cash at quarter-end, including $675.6 million of cash and cash equivalents. Net available liquidity was approximately $3.8 billion, including revolving credit facilities, cash and other funding sources.
Total debt was $37.24 billion at March 31, 2022, compared with $36.07 billion at year-end 2021. Debt was 60.8% of total debt and equity capitalization, down from 61.4%. AEP’s contractually defined debt-to-capital ratio under its credit agreements was 57.8%, below its 67.5% covenant limit. The Board declared a $0.78 quarterly dividend per share in April 2022.
Material Changes Versus the Prior Period
- Weather-normalized retail sales volumes increased 3.2%; industrial sales rose 5.6% and commercial sales rose 4.2%.
- Earnings improved across Vertically Integrated Utilities ($298.2 million versus $270.4 million), Transmission and Distribution Utilities ($152.8 million versus $114.4 million), and Generation & Marketing ($114.2 million versus $36.6 million). AEP Transmission Holdco earnings were nearly flat at $173.1 million versus $172.0 million.
- Management attributed the consolidated earnings increase mainly to favorable rate outcomes, higher sales volumes and favorable mark-to-market economic hedge activity amid higher commodity prices. Lower unrealized gains on AEP’s ChargePoint investment partly offset the increase.
- Operating cash flow turned positive largely because 2021 included substantial cash outflows for extraordinary fuel and purchased-power costs from the February 2021 winter storm, as well as changes in collateral and storm-related costs. Investing outflows increased with the $1.2 billion acquisition of the Traverse wind project and higher construction spending.
- Common stock issuance generated $809.5 million, primarily from settlement of the 2019 equity units; AEP issued approximately 9.0 million shares for that settlement.
Outlook, Management Commentary and Key Risks
- AEP forecast approximately $7.6 billion of capital expenditures in 2022 and $30.7 billion for 2023–2026, focused on transmission, generation, distribution, regulated renewables and environmental compliance. Funding is expected from operating cash flow, asset-sale proceeds and financing. The filing does not provide a clear consolidated earnings or EPS guidance figure.
- AEP expects to sell all or part of its competitive contracted renewables portfolio, which totaled 1.6 GW at quarter-end; the proposed disposition did not qualify as held for sale at March 31, 2022.
- The proposed sale of Kentucky Power and Kentucky Transco to Liberty for approximately $2.85 billion enterprise value remained subject to regulatory approvals and resolution of Mitchell Plant agreements. AEP expected approximately $1.4 billion of net cash proceeds and a second-quarter 2022 closing; the expected one-time after-tax earnings impact was described as not material.
- PSO and SWEPCo had $681 million and $418 million, respectively, of deferred extraordinary winter-storm fuel and purchased-power costs at quarter-end. Recovery terms and carrying charges remain relevant; Oklahoma’s securitization also required state supreme court approval. SWEPCo’s Texas share was approved for five-year recovery at a 1.65% carrying charge, subject to fuel reconciliation.
- Regulatory and legal outcomes could affect earnings and cash flow. The Turk Plant dispute could result in an estimated $80–$90 million pretax disallowance and potential customer refunds of $0–$180 million, plus an estimated $15 million annual revenue reduction if the disputed AFUDC treatment is rejected. A proposed FERC change to transmission RTO incentives could reduce annual pretax income by an estimated $55–$70 million.
- Other uncertainties include pending utility rate proceedings and recovery of storm, fuel, retired-plant and environmental costs; coal ash and wastewater compliance; and litigation, including shareholder derivative actions related to Ohio HB 6 and a retirement-plan class action. The securities class action related to HB 6 was dismissed with prejudice and was not appealed; AEP continued cooperating with an SEC inquiry.
- Management said COVID-related supply-chain disruptions had not materially affected results to date, but delays, shortages and inflation could increase costs and hinder construction or maintenance. AEP also cited cyber and physical security, commodity-price, interest-rate, counterparty, weather, regulatory and geopolitical risks.
- AEP’s environmental investment estimate was $325–$550 million through 2028. Its stated emissions goals are an 80% reduction in generation-related CO2 emissions from 2000 levels by 2030 and net-zero generation emissions by 2050.
Most Important Facts for Investors to Verify
- Whether rate regulators approve recovery of winter-storm fuel, storm restoration and retired-generation balances, and on what schedules and carrying charges.
- Progress and final terms for the Kentucky operations sale, including required FERC, Kentucky and West Virginia approvals and the Mitchell Plant arrangements.
- Resolution of the Turk Plant AFUDC dispute and the potential disallowance, refunds and ongoing revenue effects.
- Whether AEP delivers its planned capital program amid inflation and supply-chain constraints, and how much is funded through cash flow, dispositions, debt or equity.
- Quarter-to-quarter changes in debt, liquidity, cash flow and derivative/collateral exposures; first-quarter operating cash flow benefited materially from comparisons with extraordinary 2021 storm-related outflows.