American Electric Power Company, Inc. (AEP) — Q3 2020 Form 10-Q
Business context and period: AEP is an electric utility holding company with regulated generation, transmission and distribution businesses, plus competitive generation and marketing. This combined filing covers AEP and certain subsidiaries. Financial results below are AEP consolidated and unaudited; comparisons are with the three and nine months ended September 30, 2019.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $4.066B | $4.315B | $11.308B | $11.945B |
| Operating income | $943M | $958M | $2.418B | $2.298B |
| Net income | $748M | $734M | $1.762B | $1.767B |
| Earnings attributable to AEP common shareholders | $749M | $734M | $1.765B | $1.768B |
| Diluted EPS | $1.50 | $1.48 | $3.55 | $3.57 |
| Cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $2.922B | $3.350B |
| Cash used for investing activities | Not separately provided for the quarter | Not separately provided for the quarter | $4.707B | $5.358B |
| Cash from financing activities | Not separately provided for the quarter | Not separately provided for the quarter | $1.816B | $2.053B |
For the nine-month period, operating margin (operating income divided by revenue) was approximately 21.4%, versus 19.2% in 2019. Q3 operating margin was approximately 23.2%, versus 22.2%.
- Debt and capital: Total debt was $32.464B at September 30, 2020, up from $29.564B at year-end 2019. Debt was 61.1% of total capitalization, compared with 59.8% at year-end.
- Liquidity: Net available liquidity was approximately $3.760B, including cash, revolving credit availability and a 364-day term loan, after outstanding commercial paper and the term loan. AEP reported $409.7M cash and cash equivalents on its balance sheet and a $4B revolving facility maturing June 2022.
- Capital spending: Nine-month construction expenditures were $4.690B. Management estimated 2020 capital expenditures of $5.9B and forecast approximately $34.9B for 2020–2024.
- Dividend: The board declared a quarterly dividend of $0.74 per share in October 2020; future dividends depend on earnings, cash flow, capital needs and other conditions.
Material changes versus the prior comparable period
- Q3 earnings attributable to common shareholders rose to $749M from $734M; nine-month earnings were nearly flat at $1.765B versus $1.768B.
- Revenue declined 5.8% in Q3 and 5.3% year to date, reflecting lower electricity sales and other revenue changes. Lower fuel and purchased-power costs helped operating income rise year to date despite lower revenue.
- Weather-normalized retail sales volume fell 2.6% in Q3 and 3.0% for the first nine months. Nine-month industrial and commercial volumes declined 7.0% and 4.9%, respectively, while residential volume increased 2.6%.
- Operating cash flow fell $428M year to date, mainly due to working-capital timing, changes in noncurrent assets and a $110M discretionary pension contribution. Investing cash use was lower than 2019, largely because the prior year included renewable acquisitions; construction expenditures increased $354M.
- Transmission investment continued to expand: AEP Transmission Holdco reported $10.824B in net transmission property, up from $9.317B at September 2019.
Outlook, management commentary, risks and unusual items
- COVID-19: Management forecast a 2.7% decrease in 2020 weather-normalized retail sales versus 2019, including projected declines of 6.5% industrial and 4.8% commercial, partly offset by 3.1% growth in residential sales. Management said the nine-month sales decline had not significantly reduced retail margins, in part because residential sales have higher margins and some industrial rates include demand provisions.
- AEP temporarily suspended customer disconnections during the pandemic. By September 30, disconnections had resumed in most regulated jurisdictions, but not Virginia, West Virginia, Kentucky, Arkansas, Louisiana and Tennessee. Management anticipated resuming customary practices in those states in Q4, subject to regulatory developments. Customer collection deterioration and payment extensions could pressure cash flow and liquidity; management did not expect a material allowance impact at the reporting date.
- AEP reported $3.8B of available liquidity and said it considered liquidity adequate. It borrowed the full $1B under a 364-day term loan in March and issued approximately $4B of long-term debt during the first nine months. It deferred $500M of 2020 capital spending in Q1 and reinstated $100M in Q2.
- CARES Act: AEP recorded a discrete $52M tax benefit from carrying a 2019 net operating loss back to 2014, and requested a $95M tax refund. The benefit contributed to reported earnings and should be distinguished from recurring operating performance. AEP and certain subsidiaries also received AMT-credit refunds.
- Storms and plant changes: Hurricane Laura caused estimated SWEPCo incremental operating costs of $69M and capital expenditures of $31M through September 30; $67M of the operating costs had been deferred as a Louisiana regulatory asset. Recovery in all affected jurisdictions was not assured. In October, Hurricane Delta added an estimated $10M–$18M of operating costs and up to $6M of capital expenditures. Oklaunion retired in September 2020; Dolet Hills’ useful life was revised to 2021, with related fuel and closure costs subject to recovery.
- Environmental and regulatory exposure: APCo recorded a $199M increase in estimated Glen Lyn ash-disposal retirement obligations following Virginia legislation, which provides for recovery through a rate mechanism. AEP estimated $500M–$1B of future environmental-compliance investment through 2026. Recovery of costs remains dependent on regulatory outcomes.
- Key proceedings: APCo’s Virginia triennial review involved possible refunds and disputed earnings calculations, with an order expected in November 2020. SWEPCo’s $1.4B Turk Plant book value is exposed to an ongoing Texas prudence/recovery appeal. Ohio HB 6 faced a federal corruption investigation and proposed repeal; changes could affect recovery of renewable-contract and OVEC costs. A shareholder securities class action related to HB 6 was filed in August 2020; management could not estimate a reasonably possible loss.
- Other litigation and contingencies: The filing describes Rockport lease litigation, a mercury-control patent infringement action and retirement-plan benefit claims; management could not estimate reasonably possible loss ranges for these matters. The filing also identifies potential OVEC liquidity and capital-support exposure if other participants fail to meet obligations.
- Capital projects and renewables: PSO and SWEPCo proceeded with the approximately 1,485 MW North Central Wind project, estimated to cost about $2B, with phased in-service targets from 2021 through 2022. Management’s capital forecast is subject to regulatory approval, project execution, market conditions and financing access.
Important facts for investors to verify
- Whether customer collections, disconnection policies and pandemic-related sales trends materially change after September 30, and whether COVID-19 costs are ultimately recoverable.
- Whether AEP obtains the requested CARES Act tax refund and whether subsequent legislation or IRS review changes the tax benefit.
- Regulatory decisions and potential customer refunds in APCo’s Virginia review, OPCo’s DIR audit, and pending base-rate proceedings.
- Recovery of Hurricane Laura and Delta costs, Dolet Hills and Turk Plant investments, and environmental obligations, including Glen Lyn ash removal.
- Developments concerning HB 6, associated litigation and OVEC’s ability to meet its obligations.
- Execution, cost and regulatory status of the North Central Wind project and AEP’s projected $34.9B five-year capital program.
- Debt growth, refinancing needs and continued access to commercial paper and capital markets; reported covenant debt-to-capitalization was 57.7% against a 67.5% limit.