Business context and reporting period
American Electric Power Company, Inc. (AEP) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. AEP is an electric utility holding company with regulated generation, transmission and distribution businesses and competitive generation and marketing operations. The filing also includes separate reports for several AEP subsidiaries.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $3.494 billion, versus $3.574 billion in 2019 | $7.242 billion, versus $7.630 billion in 2019 |
| Operating income | $722.7 million, versus $551.0 million | $1.474 billion, versus $1.339 billion |
| Net income | $514.5 million, versus $459.1 million | $1.014 billion, versus $1.033 billion |
| Earnings attributable to AEP common shareholders | $520.8 million; diluted EPS $1.05, versus $461.3 million and $0.93 | $1.016 billion; diluted EPS $2.04, versus $1.034 billion and $2.09 |
- Segment trends: Second-quarter earnings rose at Vertically Integrated Utilities ($255.9 million versus $177.7 million), Transmission and Distribution Utilities ($139.5 million versus $131.4 million) and Generation & Marketing ($65.9 million versus $9.4 million), but fell at AEP Transmission Holdco ($91.5 million versus $154.5 million). For the first half, Generation & Marketing increased to $94.3 million from $49.5 million; AEP Transmission Holdco declined to $232.1 million from $278.7 million.
- Margins: AEP’s management-defined, non-GAAP gross margin for Vertically Integrated Utilities was $1.510 billion for Q2, up from $1.424 billion, and $3.065 billion for the first half, up from $2.971 billion. A comparable consolidated gross-margin total is not clearly provided in the filing text.
- Cash flow and investment: First-half operating cash flow was $1.746 billion, down from $1.801 billion. Construction expenditures were $3.245 billion, up from $2.987 billion; investing cash outflow was $3.248 billion, compared with $3.595 billion, which included the 2019 Sempra Renewables acquisition. Financing cash inflow was $1.574 billion, versus $1.740 billion.
- Debt and liquidity: Total debt was $31.852 billion at June 30, compared with $29.564 billion at year-end 2019. Debt-to-total capitalization rose to 61.1% from 59.8%; the credit-agreement covenant limit is 67.5%, and the contractually calculated ratio was 59.2%. Net available liquidity was approximately $2.945 billion, including a $4 billion revolver, a $1 billion 364-day loan and cash, less outstanding commercial paper and the term loan.
- Capital program and dividend: Management estimated 2020 capital expenditures of $5.9 billion and approximately $34.9 billion for 2020–2024. The Board declared a $0.70-per-share quarterly dividend in July 2020.
Material changes versus the prior comparable period
- Q2 earnings attributable to AEP shareholders increased by $59.5 million, mainly due to lower planned operation and maintenance expense and favorable rate proceedings. First-half earnings declined by $18.1 million, primarily reflecting lower weather-related usage and a one-time regulatory-provision reversal in 2019, partly offset by rate increases and lower planned operating costs.
- First-half weather-normalized retail sales volume fell 3.1% year over year. Residential volume rose 1.9%, while industrial and commercial volumes fell 6.6% and 5.0%, respectively. Q2 weather-normalized retail volume fell 5.9%, with residential up 6.2% and industrial and commercial down 12.4% and 10.1%.
- Transmission investment and related depreciation, property taxes and interest costs increased. AEP Transmission Holdco’s transmission property, net, rose to $10.486 billion from $8.980 billion at year-end 2019.
Outlook, commentary, risks and unusual items
- COVID-19 outlook: AEP forecast a 3.4% decline in 2020 weather-normalized retail sales, including industrial down 8%, commercial down 5.6% and residential up 3%. Management said higher-margin residential sales and demand provisions for certain industrial customers had helped limit the first-half effect on retail margins. The company cautioned that prolonged economic disruption, customer payment difficulty, supply-chain constraints or restricted access to capital could materially affect future results, cash flows and financial condition. No material adverse operational or supplier-contract impact, or impairment, was identified as of June 30.
- Customer disconnections for nonpayment were temporarily suspended in many jurisdictions; reinstatement timing varied by state. Receivables aging had deteriorated, and AEP amended its receivables securitization eligibility criteria. Subsidiaries were in compliance at quarter-end, but ineligibility could reduce access to this funding source. Most jurisdictions had authorized deferral of incremental COVID-19 costs; Kentucky and Tennessee had not yet issued initial deferral orders.
- AEP entered a $1 billion 364-day term loan, issued approximately $2.4 billion of long-term debt in the first half, and reported $2.9 billion of available liquidity in its COVID-19 discussion (the detailed liquidity table reports $2.945 billion). It shifted $500 million of 2020 capital expenditures into future periods, then reinstated $100 million in Q2.
- Regulatory and environmental matters: Virginia legislation requires APCo to close certain retired Glen Lyn ash units by removing coal-combustion material. APCo recorded a $199 million increase in estimated asset-retirement obligations; the law provides for recovery through a Virginia environmental rider, with recovery potentially beginning July 2022. SWEPCo accelerated the expected Dolet Hills plant and lignite-mine-related asset lives to September 2021 and recorded a $21 million increase in estimated ARO liabilities; recovery of related future costs remains important.
- Important pending proceedings include APCo’s Virginia triennial review and base-rate case, where an intervenor alleged a $59 million earnings surplus subject to a 70% refund mechanism; SWEPCo’s Turk Plant Texas prudence appeal, involving a $1.4 billion net book value and approximately 33% Texas-jurisdictional share; and Ohio HB 6, whose possible repeal could affect recovery of renewable-contract, OVEC and energy-efficiency costs. AEP reported a federal indictment relating to alleged wrongdoing connected with HB 6; the outcome and its effect on the law were unknown.
- AEP and SWEPCo are proceeding with the 1,485-MW North Central Wind project, estimated to cost approximately $2 billion, following regulatory approvals and an IRS extension of relevant production-tax-credit deadlines. AEP’s environmental compliance investment estimate was $500 million to $1 billion through 2026.
- Subsequent and unusual items: A voluntary retirement program drew 200 participants; AEP expected to record approximately $18 million of expense in August 2020, after the quarter. AEP recorded a $20 million AMT-credit refund receivable under the CARES Act and was evaluating potential NOL carryback recoveries. AEP also terminated a $500 million interest-rate swap in June, receiving a $57 million cash gain that will be amortized through interest expense over time.
Most important facts for investors to verify
- Whether COVID-19 demand declines, customer collections and receivables eligibility materially affect revenue, cash flow or access to receivables financing.
- Progress on the $5.9 billion 2020 capital plan, the $34.9 billion five-year plan and related debt funding, leverage and liquidity.
- Outcomes of the APCo Virginia earnings review, Turk Plant litigation, Ohio HB 6 developments and other rate proceedings that could lead to refunds, disallowances or reduced cost recovery.
- Whether ARO and retirement-related costs—including Glen Lyn and Dolet Hills—are recovered as expected, and whether the projected 2020 sales volumes and capital-spending outlook change.
- Final accounting and timing for the post-quarter retirement-program charge, CARES Act tax recoveries and subsequent debt transactions.