American Electric Power Company, Inc. (AEP) — Q3 2022 Form 10-Q
Business context and reporting period. AEP is an electric utility holding company operating regulated generation, transmission and distribution businesses, alongside competitive generation, marketing and renewable-energy activities. This combined Form 10-Q covers the quarter and nine months ended September 30, 2022; the financial figures below are primarily consolidated AEP results and are unaudited.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $5.526 billion | $4.623 billion | $14.758 billion | $12.731 billion |
| Operating income | $930 million | $1.107 billion | $2.923 billion | $2.728 billion |
| Net income attributable to AEP common shareholders | $684 million | $796 million | $1.923 billion | $1.949 billion |
| Diluted EPS | $1.33 | $1.58 | $3.75 | $3.89 |
- Revenue rose about 20% in Q3 and 16% for the nine months. Earnings attributable to common shareholders fell about 14% in Q3 and 1% year to date.
- Operating margin, calculated as operating income divided by revenue, was approximately 16.8% in Q3 versus 23.9% in the prior-year quarter, and 19.8% year to date versus 21.4%. Higher fuel and purchased-power costs pass through many regulated rate mechanisms, so revenue growth does not necessarily translate into comparable earnings growth.
- Cash flow: Nine-month operating cash flow was $4.733 billion, up from $2.973 billion. Investing cash use was $5.823 billion, including $4.749 billion of construction expenditures; financing provided $1.215 billion. Cash, cash equivalents and restricted cash ended at $577 million, compared with $1.427 billion a year earlier.
- Debt and capitalization: Total debt was $37.752 billion at September 30, versus $36.069 billion at year-end 2021. Debt represented 60.6% of debt and equity capitalization, down from 61.4%, principally reflecting settlement of 2019 equity-unit contracts, partly offset by borrowing for investment.
- Liquidity: Net available liquidity was approximately $3.57 billion, including $5.0 billion of revolving facilities and $522 million of cash, less $1.952 billion of commercial paper outstanding. AEP reported a 57.7% covenant debt-to-capitalization ratio against a 67.5% limit.
Changes versus the prior comparable period
- Q3 earnings declined mainly because of a $195 million pretax loss on the expected Kentucky operations sale and higher depreciation; favorable rate proceedings partly offset the decline.
- For the nine months, earnings also reflected a $263 million pretax loss on the anticipated Kentucky sale and a $188 million impairment of the Flat Ridge 2 wind investment. Offsetting factors included a $116 million mineral-rights sale gain, improved sales volumes, favorable rate outcomes and stronger mark-to-market hedge activity.
- Weather-normalized retail sales volumes increased 2.6% in Q3 and 3.1% year to date. Q3 industrial and commercial volumes increased 6.0% and 3.4%, respectively; residential volumes decreased 0.8%.
- Deferred fuel regulatory assets, excluding the 2021 winter storm event, increased to approximately $1.496 billion from $593 million at December 31, 2021, reflecting fuel and purchased-power costs exceeding amounts collected from customers.
Outlook, management commentary and material risks
- Investment plan: Management forecast approximately $7.6 billion of 2022 capital expenditures and $32.9 billion for 2023–2026, primarily for transmission, generation, distribution, regulated renewables and environmental compliance. Funding is expected from operations, financing and asset-sale proceeds.
- Kentucky sale: AEP amended the proposed sale of KPCo and KTCo, reducing enterprise value from about $2.85 billion to $2.646 billion. Closing was expected in January 2023, subject to FERC approval; expected proceeds net of taxes and transaction fees were approximately $1.2 billion. AEP recorded a cumulative $263 million pretax loss on the anticipated sale.
- Other portfolio review: AEP began a strategic evaluation of AEP Energy, with alternatives including continued ownership or a partial or full sale; management expected to complete the review in the first half of 2023. AEP also pursued a sale of some or all of its competitive contracted renewables portfolio.
- Fuel-cost recovery and regulation: AEP subsidiaries had substantial deferred fuel balances and rate requests pending. PSO received $687 million from Oklahoma ratepayer-backed securitization bonds to reimburse extraordinary 2021 winter-storm costs; customers will repay the bonds over 20 years. SWEPCo reported a further $349 million of 2021 winter-storm fuel costs awaiting recovery across Arkansas, Louisiana and Texas.
- Key proceedings: Outcomes remain uncertain in APCo’s Virginia rate proceedings, SWEPCo’s Turk Plant AFUDC dispute, proposed FERC transmission incentive changes and complaints, and recovery of storm, fuel and environmental-compliance costs. The Turk Plant dispute could result in an estimated $80–$90 million pretax disallowance and potentially $0–$180 million of customer refunds, if resolved adversely.
- Operating and financial risks: Management reported supply-chain delays and inflation raising costs and extending lead times, though no material effect on current-period results was reported. Prolonged disruption could affect future earnings, cash flow and capital execution. Higher interest rates also increase borrowing costs; a 100-basis-point change in benchmark rates on variable-rate debt was estimated to affect annual pretax interest expense by $47 million.
- Energy transition and environment: AEP estimated $300–$500 million of investment through 2026 for existing and proposed environmental requirements. Coal-ash and wastewater rules, potential plant retirements and the ability to recover compliance costs remain material uncertainties. In October 2022, AEP announced a net-zero Scope 1 emissions goal for 2045, five years earlier than its prior goal.
- Tax legislation: The Inflation Reduction Act expanded and extended clean-energy tax credits and established a 15% corporate minimum tax. AEP said it had no material current-period effect apart from tax-credit effects, while noting that future impacts depend on regulatory and tax guidance.
Most important facts for investors to verify
- Whether the Kentucky sale received FERC approval, closed on the expected terms and delivered the anticipated net proceeds.
- Whether deferred fuel, storm-restoration and environmental costs are approved for recovery, and the timing and carrying charges on customer collections.
- Whether pending Virginia and FERC proceedings produce rate changes, refunds or reductions in transmission revenues.
- Whether capital spending, inflation, interest rates and supply constraints alter the financing plan, liquidity or expected returns on investment.
- Whether further losses or impairments arise from the renewables portfolio or other assets under strategic review.