American Electric Power Company, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. AEP is an electric utility holding company with regulated generation, transmission and distribution businesses and a smaller competitive generation and marketing operation. This combined unaudited filing covers the three and six months ended June 30, 2023, compared with the same 2022 periods.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $4.37 billion | $4.64 billion | $9.06 billion | $9.23 billion |
| Operating income | $874.7 million | $1.00 billion | $1.58 billion | $1.99 billion |
| Net income attributable to AEP common shareholders | $521.2 million | $524.5 million | $918.2 million | $1.24 billion |
| Diluted EPS | $1.01 | $1.02 | $1.78 | $2.42 |
| Cash flow from operations | Not separately provided for the quarter | $1.88 billion | $2.99 billion |
- Q2 revenue declined about 6% and attributable earnings were nearly flat year over year. For the first half, revenue declined about 2% and attributable earnings fell about 26%.
- Q2 interest expense rose to $460 million from $328 million; first-half interest expense increased to $876 million from $641 million, reflecting higher rates and debt balances.
- First-half cash used in investing was $4.27 billion, including $4.05 billion of construction expenditures. Financing provided $2.18 billion, principally through debt issuance.
- At June 30, total debt was $44.0 billion and common equity was $23.9 billion; debt represented 64.6% of total capitalization, versus 62.9% at year-end 2022. Cash and cash equivalents were $304.9 million.
- Net available liquidity was approximately $3.1 billion, including $5.0 billion of revolving credit facilities. The contractually calculated debt-to-capitalization ratio under AEP’s credit agreement was 61.8%, below its 67.5% limit.
Material changes and drivers
- Management attributed lower earnings to reduced weather-related sales, higher interest expense, unfavorable mark-to-market economic hedges, and prior-year gains on mineral rights. For the first half, the $112 million pretax loss on the expected renewables portfolio sale also weighed on results.
- Q2 earnings in AEP Transmission Holdco increased to $196.4 million from $141.8 million, supported by transmission investment and higher revenues. Generation & Marketing swung to a $32.3 million loss from $72.6 million of earnings, largely reflecting unfavorable hedge activity and prior-year one-time items.
- Weather-normalized retail sales increased 1.5% in Q2 and 2.4% in the first half. Commercial sales growth, including new data center load and economic development, was offset by lower residential usage; actual sales and earnings were affected by milder weather.
- Operating cash flow fell $1.1 billion year over year, chiefly due to working-capital timing, lower collateral held on risk-management contracts and changes in regulatory balances, partly offset by fuel and purchased-power timing.
Outlook, management commentary and key risks
- Management forecasts approximately $6.8 billion of capital expenditures in 2023 and $32.9 billion over 2024–2027, principally for transmission, generation, distribution, renewables and environmental compliance. Funding is expected from operating cash flow, asset-sale proceeds and financing.
- AEP expects to complete the sale of its 1.4 GW competitive contracted renewables portfolio in Q3 2023, subject to CFIUS approval. The agreed value is $1.5 billion, including assumed project debt; expected net cash proceeds are approximately $1.2 billion. The company recorded an $88 million after-tax loss in Q1.
- The planned sale of Kentucky Power and its transmission affiliate was terminated in April 2023 after regulatory approval conditions could not be met. Reclassification to held-and-used resulted in a $335 million reduction to property, plant and equipment, amortized over an estimated 30-year average useful life.
- AEP began sale processes for AEP Energy and AEP Onsite Partners, targeting completion in the first half of 2024, and separately began a sale process for two transmission joint-venture interests. Outcomes and proceeds are uncertain; failure to recover carrying values could reduce earnings.
- Key regulatory exposures include a possible West Virginia fuel-cost disallowance of up to $285 million; a potential Turk Plant AFUDC disallowance of $80–$90 million and possible customer refunds of $0–$195 million; and challenges to transmission formula-rate treatment of net operating loss carryforwards. Management says the Turk disallowance is not probable at June 30.
- SWEPCo faces an $85 million damages claim related to the retired Pirkey Plant and its lignite supply agreement. The parties agreed to a standstill; management cannot estimate a reasonably possible loss range.
- Management said supply-chain disruption and inflation had not materially affected results to date, but have raised costs and extended lead times. Further inflation, interest-rate increases, regulatory outcomes, weather, fuel recovery and environmental rules could affect earnings, cash flow and capital access.
- The Board declared a quarterly dividend of $0.83 per share in July 2023. Management stated it believes AEP has adequate liquidity. AEP’s stated CO₂ goal is net zero by 2045.
Most important facts for investors to verify
- Progress, approvals, final proceeds and any additional accounting effects from the renewables sale and other announced divestiture processes.
- Whether regulatory commissions approve recovery of deferred fuel and storm costs, and the ultimate outcomes of the West Virginia ENEC and Turk Plant proceedings.
- Whether operating cash flow can support the large capital program and dividends while debt and interest costs remain elevated.
- How much of the Generation & Marketing earnings volatility reflects unrealized hedge marks versus underlying operating performance.
- Developments in the Sabine litigation, environmental compliance costs, and the SEC investigation and related shareholder matters involving Ohio House Bill 6.