Business context and reporting period
American Electric Power Company, Inc. (AEP) filed a combined Form 10-K for the fiscal year ended December 31, 2021, covering AEP and seven registered utility subsidiaries. AEP is a regulated electric utility holding company serving approximately 5.5 million customers across 11 states, with generation, transmission, distribution and competitive energy businesses. The filing was signed February 24, 2022. Figures below are for AEP consolidated unless otherwise indicated.
Financial performance and condition
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Revenue | $16.792 billion | $14.919 billion | +12.6% |
| Operating income | $3.411 billion | $2.988 billion | +14.2% |
| Net income | $2.488 billion | $2.197 billion | +13.3% |
| Earnings attributable to AEP common shareholders | $2.488 billion | $2.200 billion | +13.1% |
| Diluted EPS | $4.96 | $4.42 | +12.2% |
| Cash flow from operations | $3.840 billion | $3.833 billion | Approximately flat |
| Cash used in investing | $6.434 billion | $6.234 billion | Use increased $200 million |
Operating margin was approximately 20.3% of revenue in 2021, versus 20.0% in 2020. AEP’s reported segment earnings rose in Vertically Integrated Utilities ($1.114 billion versus $1.062 billion), Transmission and Distribution Utilities ($543 million versus $496 million) and AEP Transmission Holdco ($678 million versus $505 million); Generation & Marketing declined to $218 million from $227 million. The filing uses segment gross margin as a non-GAAP measure.
At year-end, total debt was $36.069 billion, including $33.455 billion of long-term debt and $2.614 billion of short-term debt. Debt-to-total capitalization was 61.4%, down from 61.8%. AEP reported $403 million cash and cash equivalents and approximately $4.039 billion of net available liquidity; it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Management attributed higher earnings mainly to favorable rate proceedings, increased transmission investment and weather-related usage, partly offset by higher operation and maintenance costs not recovered through riders.
- Weather-normalized retail sales volumes increased 2.1% year over year; residential sales decreased 1.1%, while commercial and industrial sales rose 4.3% and 3.7%, respectively.
- Winter Storm Uri sharply increased fuel and purchased-power costs. AEP’s vertically integrated utilities’ fossil-fuel cost per MMBtu rose 68%; average delivered natural-gas cost increased to $8.92/MMBtu from $2.14.
- Operating cash flow was nearly unchanged despite higher earnings, principally reflecting approximately $1.1 billion of extraordinary winter-storm fuel and purchased-power expenses not yet recovered from customers.
Outlook, management commentary, risks and unusual items
- Outlook and investment: AEP forecast 2022 weather-normalized retail sales growth of 1.5%. Planned construction expenditures were approximately $7.6 billion in 2022 and $30.7 billion over 2023–2026. AEP declared a quarterly dividend of $0.78 per share in January 2022. The supplied filing text does not provide a consolidated EPS guidance range.
- Asset sale: AEP agreed to sell Kentucky Power (KPCo) and Kentucky Transco (KTCo) for approximately $2.85 billion enterprise value, subject to approvals. Management expected a second-quarter 2022 closing and approximately $1.45 billion in net cash proceeds, primarily to support investment; expected after-tax earnings impact was described as immaterial.
- Competitive renewables: In February 2022, management began a process to sell all or part of AEP Renewables’ competitive contracted portfolio, approximately 1.6 GW. The regulated utilities’ North Central Wind project is approximately 1,484 MW and expected to cost about $2 billion; the final 998-MW facility was targeted for service in the first quarter of 2022.
- Storm recovery and litigation: PSO and SWEPCo recorded deferred winter-storm costs of $679 million and $430 million, respectively. PSO’s securitization received Oklahoma approval in February 2022; recovery terms for SWEPCo’s jurisdictions remained subject to proceedings. AEP Texas reported approximately 100 lawsuits related to the Texas outages; at peak, about 468,000 customers were without power. Management could not predict litigation or investigation outcomes.
- Regulatory and environmental exposure: AEP’s stated goals are an 80% reduction in generating-facility CO2 emissions from 2000 levels by 2030 and net-zero emissions by 2050; estimated 2021 emissions were about 50–51 million metric tons, down 70% from 2000. Coal-ash, water and emissions rules may require additional spending, early retirements or operating changes. FERC proposals on transmission incentives could, under management’s preliminary estimate, reduce annual pretax income by $55–$70 million.
- Other significant uncertainties: Potential recovery of deferred storm/fuel costs, rate-case outcomes, coal-plant retirement costs, the Turk Plant cost-cap dispute, and the Mitchell Plant compliance and ownership arrangements could affect earnings and cash flow. The HB 6 securities class action was dismissed with prejudice without appeal; derivative litigation and an SEC inquiry remained. Management said it did not expect the SEC inquiry to materially affect financial condition, results or cash flows.
PwC issued unqualified opinions on AEP’s consolidated financial statements and internal controls; management reported effective internal control over financial reporting. The auditor identified regulatory accounting and valuation of Level 3 commodity contracts as critical audit matters. AEP reported $4.8 billion of regulatory assets, including $1.0 billion pending final approval, and $8.7 billion of regulatory liabilities, including $0.3 billion pending final determination.
Most important facts for investors to verify
- Progress and final approval of the KPCo/KTCo sale, including actual net proceeds, closing date and Mitchell Plant conditions.
- Recovery, financing costs and collection timing for the $1.109 billion of PSO and SWEPCo winter-storm fuel and power costs, plus SWEPCo’s separate $145 million storm-cost request.
- Whether AEP’s substantial regulatory assets remain recoverable and whether pending rate cases or appeals result in refunds, disallowances or delayed recovery.
- Outcomes of Texas winter-storm claims and investigations, HB 6-related derivative actions and the SEC inquiry.
- Capital spending execution, funding needs, debt levels and liquidity, including the planned $7.6 billion 2022 construction program and the sale of competitive renewables.
- Environmental compliance costs, coal-plant retirement schedules and any final FERC changes to transmission incentive policy.