Business Context and Reporting Period
American Electric Power Company, Inc. (AEP) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The combined filing also reports for several AEP utility subsidiaries. AEP’s businesses include regulated generation, transmission and distribution, transmission-only operations, and competitive generation and marketing.
Financial Performance
Unless indicated otherwise, figures are in U.S. dollars; financial amounts are in millions.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4,623 | $4,066 | $12,731 | $11,308 |
| Operating income | $1,107 | $943 | $2,728 | $2,418 |
| Net income attributable to AEP common shareholders | $796 | $749 | $1,949 | $1,765 |
| Diluted earnings per share | $1.58 | $1.50 | $3.89 | $3.55 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2,973 | $2,922 |
For the nine-month period, cash used in investing was $4,906 million and cash provided by financing was $2,922 million. Construction expenditures were $4,087 million. Cash, cash equivalents and restricted cash at period-end totaled $1,427 million, including $1,373 million of cash and cash equivalents.
At September 30, 2021, total debt was $37,082 million, up from $33,552 million at year-end 2020. Debt was 62.2% of total capitalization, compared with 61.8%. AEP reported net available liquidity of approximately $5,119 million, including cash and revolving credit capacity, after commercial paper and term-loan balances. Its contractually calculated debt-to-capitalization ratio under credit agreements was 59.3%, below the 67.5% covenant limit.
Segment earnings attributable to AEP common shareholders
| Segment | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Vertically Integrated Utilities | $438 | $394 | $936 | $895 |
| Transmission and Distribution Utilities | $156 | $147 | $424 | $403 |
| AEP Transmission Holdco | $167 | $138 | $508 | $370 |
| Generation & Marketing | $101 | $117 | $190 | $211 |
| Corporate and Other | ($65) | ($47) | ($108) | ($115) |
Material Changes Versus Prior Period
- Q3 common earnings rose approximately 6% and nine-month earnings rose approximately 10%. Management attributed the overall improvement mainly to favorable rate proceedings, higher transmission investment and, for the nine months, greater weather-related usage.
- Transmission Holdco earnings increased substantially, reflecting continued investment in transmission assets and higher transmission revenues.
- Generation & Marketing earnings declined despite stronger gross margin, primarily because 2020 included a significant CARES Act-related tax benefit. Higher commodity prices also generated mark-to-market hedge gains in 2021.
- Nine-month operating cash flow was nearly flat year over year. The February winter storm caused a large deferred-fuel cash outflow, partly offset by working-capital timing and higher earnings.
- Retail demand recovered with economic activity: weather-normalized retail sales increased 3% in Q3 and 2.3% for the nine-month period year over year. Industrial and commercial volumes strengthened; residential volumes declined on a weather-normalized basis.
Outlook, Management Commentary and Key Risks
- Sales and investment: AEP forecast 2021 weather-normalized retail sales growth of 2.2%, including industrial growth of 4.3%, commercial growth of 3.7% and residential decline of 0.9%. Forecast capital expenditures were approximately $6.9 billion for 2021 and $30.4 billion for 2022–2025. The filing does not provide a clear AEP full-year earnings-per-share guidance figure.
- Winter storm recovery: PSO and SWEPCo recorded $1,106 million of deferred retail fuel and purchased-power costs related to February 2021 weather, with another $56 million of SWEPCo wholesale receivables outstanding. Recovery timing, carrying charges and prudency remain subject to regulatory proceedings. Management considers retail recovery probable but expects extended recovery periods to reduce customer bill impacts. Failure to recover costs or obtain reasonable carrying charges could affect earnings and cash flow.
- Storm restoration: AEP reported approximately $215 million of February storm restoration costs for APCo, SWEPCo and KPCo, including $142 million deferred as regulatory assets. Recovery applications and regulatory approvals remain relevant.
- Regulatory and rate matters: Pending cases include base-rate proceedings in Ohio, Texas, Louisiana, Oklahoma and Indiana. A proposed FERC change to transmission RTO incentives could, under management’s preliminary estimate, reduce annual pretax income by $55–$70 million if adopted as proposed. The Turk Plant Texas proceeding could result in an $80–$100 million pretax disallowance, potential customer refunds of up to $160 million, and approximately $15 million of lower annual revenue if the adverse outcome is upheld.
- Portfolio actions: PSO and SWEPCo acquired the Sundance and Maverick wind facilities during 2021; the remaining Traverse facility was targeted for 2022. In October, AEP agreed to sell KPCo and KTCo for approximately $2.85 billion enterprise value, expected to yield about $1.45 billion cash after taxes and transaction fees. Closing was expected in Q2 2022, subject to approvals; AEP expected an immaterial one-time after-tax earnings impact.
- Environmental and generation transition: AEP estimated $350–$700 million of future environmental investments through 2027. Planned or accelerated coal plant retirements and cost recovery remain material considerations; proposed CO₂ goals are an 80% reduction from 2000 levels by 2030 and net-zero generation emissions by 2050.
- Legal and operating risks: AEP is defending shareholder securities and derivative litigation related to Ohio HB 6 and is cooperating with an SEC subpoena. Management said it did not believe the SEC inquiry would materially affect financial condition, results or cash flows, but litigation outcomes are uncertain. COVID-19-related supply disruptions had extended some lead times but had not materially affected results to date; prolonged disruption, inflation, weather, commodity prices and customer collections remain risks.
- Capital return: In October 2021, the board declared a quarterly dividend of $0.78 per share, a $0.04 increase from the July declaration. Future dividends depend on earnings, operating cash flow, capital needs and other conditions.
Important Facts for Investors to Verify
- Progress and final regulatory determinations on recovery, prudency and carrying charges for the $1.106 billion winter-storm retail fuel balance and related wholesale receivables.
- Outcomes and timing of major rate cases, including the Ohio settlement, PSO’s Oklahoma case and SWEPCo’s Texas and Louisiana cases, as well as the Turk Plant appeal and potential exposure.
- Whether AEP’s $6.9 billion 2021 capital plan and $30.4 billion 2022–2025 plan are funded within targeted leverage and liquidity levels; monitor the 62.2% debt-to-capitalization ratio and available liquidity.
- Required regulatory approvals and expected net proceeds from the KPCo/KTCo sale, and completion and cost recovery of the North Central Wind projects.
- Potential earnings volatility from Generation & Marketing hedges, commodity prices and the ChargePoint investment, alongside environmental compliance and accelerated plant-retirement costs.