Business context and reporting period
American Electric Power Company, Inc. (AEP) filed this combined, unaudited Form 10-Q for the quarter ended March 31, 2021. AEP is an electric utility holding company with regulated generation, transmission and distribution businesses, as well as competitive generation, marketing and renewable energy activities. Unless noted otherwise, financial amounts below are for AEP consolidated and in U.S. dollars.
Financial performance and condition
| Metric | Q1 2021 | Q1 2020 or prior date |
|---|---|---|
| Revenue | $4.281 billion | $3.748 billion |
| Operating income | $810 million | $752 million |
| Net income | $579 million | $499 million |
| Earnings attributable to AEP common shareholders | $575 million | $495 million |
| Diluted EPS | $1.15 | $1.00 |
| Net cash from operating activities | $(117) million | $616 million |
| Cash used for investing activities | $(1.634) billion | $(1.766) billion |
| Cash from financing activities | $1.637 billion | $2.389 billion |
| Total debt | $35.393 billion | $33.552 billion at Dec. 31, 2020 |
| Debt to total capitalization | 62.5% | 61.8% at Dec. 31, 2020 |
| Net available liquidity | $3.399 billion | — |
Revenue increased 14.2% and earnings attributable to common shareholders rose 16.1% year over year. Operating margin, calculated as operating income divided by revenue, was approximately 18.9%, compared with 20.1% a year earlier. AEP reported $1.493 billion of construction expenditures. Cash and restricted cash totaled $324 million at quarter-end, including $273 million of cash and cash equivalents.
Cash from operations fell sharply, principally because of approximately $1.2 billion of extraordinary winter-storm fuel and purchased-power costs deferred for later customer recovery, along with storm restoration spending. AEP used debt and equity financing to support operations and investment. Its $5 billion revolving credit facilities supported the commercial paper program; the company reported $1.874 billion of commercial paper outstanding and a $500 million 364-day term loan.
Material changes versus the prior comparable period
- Higher residential weather-related usage and favorable rate proceedings supported results. Earnings attributable to common shareholders rose from $495 million to $575 million.
- Transmission and distribution investment lifted AEP Transmission Holdco earnings to $172 million from $141 million. Vertically Integrated Utilities earnings increased to $270 million from $245 million.
- Transmission and Distribution Utilities earnings edged down to $114 million from $116 million. Generation and Marketing earnings rose to $37 million from $28 million, although segment gross margin declined by $10 million, including weaker retail, trading and marketing margins during the February cold-weather price volatility.
- Weather-normalized retail sales volumes declined 1.9% overall: residential increased 1.5%, commercial fell 1.6% and industrial fell 6.1%.
- Debt increased by approximately $1.842 billion from year-end, partly to finance winter-storm-related cash needs and ongoing utility and renewable investment.
Outlook, management commentary, risks and unusual items
- Winter storm recovery: PSO and SWEPCo recorded an estimated $1.185 billion of retail winter-storm fuel and purchased-power costs as regulatory assets; SWEPCo also reported $88 million of related wholesale receivables. Management considers recovery probable, but recovery periods, carrying charges and prudency reviews remain subject to regulatory outcomes. AEP said the storm did not materially affect consolidated Q1 results, but failure to recover costs or obtain reasonable carrying charges could harm future earnings, cash flows and financial condition.
- Storm restoration: Estimated February storm restoration costs included $56.6 million of capital expenditures, $6.0 million of O&M and $130.9 million deferred as regulatory assets across APCo, KPCo and SWEPCo. Recovery remains subject to filings and approvals.
- Capital plan and energy transition: Management forecast approximately $7.5 billion of capital expenditures in 2021 and $29.8 billion for 2022–2025. AEP announced goals to reduce generation-facility CO2 emissions 80% from 2000 levels by 2030 and reach net-zero by 2050. Estimated environmental investment through 2027 is $350 million to $700 million. PSO and SWEPCo’s North Central wind project is expected to cost approximately $2 billion; its first 199 MW facility entered service in April 2021.
- Regulatory exposure: OPCo’s proposed Ohio rate-case settlement would reduce annual base-rate revenue by $68 million, subject to PUCO approval. SWEPCo has pending Texas and Louisiana rate requests of $105 million and $134 million annually, respectively. APCo sought a $40 million annual interim Virginia rate increase in April 2021. A proposed FERC change to transmission RTO incentives could, if adopted as proposed, reduce annual pretax income by an estimated $55 million to $70 million.
- Business and asset decisions: AEP began a strategic evaluation of KPCo ownership, with a decision expected during 2021. Management plans early retirements of several coal facilities, including Dolet Hills in 2021, Pirkey in 2023 and Welsh Units 1 and 3 in 2028; recovery of remaining investment and closure costs is a continuing risk. AEP also agreed after quarter-end to acquire Rockport Unit 2 for $115.5 million when its lease ends in December 2022, subject to customary conditions.
- COVID-19 and demand: Management expected weather-normalized demand to improve during 2021 as vaccination and economic activity advanced, but noted uncertainty around customer collections and the pandemic’s future effects. Disconnection moratoria remained in Arkansas and Virginia at quarter-end; management anticipated customary Virginia disconnections resuming in Q3 2021.
- Unusual earnings item and litigation: AEP recorded a $17 million unrealized gain from its ChargePoint investment in Corporate and Other. AEP also faces securities and derivative shareholder litigation related to Ohio House Bill 6; management could not estimate a reasonably possible loss range.
The filing provides capital spending expectations and certain project and emissions targets, but does not provide a clear full-year earnings or EPS guidance value. Management cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Regulatory approval, prudency findings, recovery timing and carrying charges for the $1.185 billion winter-storm retail costs and recovery and collection of SWEPCo’s wholesale receivables.
- Whether storm restoration costs and other deferred regulatory assets will be recovered in full, and how extended recovery periods affect cash flow and financing needs.
- Final outcomes of the Ohio, Texas, Louisiana and Virginia rate proceedings, and the potential earnings effect of the proposed FERC transmission incentive rule.
- Funding and execution of the $7.5 billion 2021 capital plan and $29.8 billion 2022–2025 plan, alongside higher debt and the company’s 62.5% debt-to-capitalization ratio.
- Coal-plant retirement, environmental compliance and cost-recovery assumptions, and progress on the North Central wind facilities.
- Developments in HB 6-related litigation, KPCo’s strategic review and the Rockport Unit 2 acquisition conditions.