AMERICAN ELECTRIC POWER CO INC quarterly report, Q1 FY2020

American Electric Power Company, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. AEP is an electric utility holding company with regulated generation, transmission and distribution operations, alongside competitive generation and marketing. The combined filing also covers several subsidiary registrants.

Financial performance and position

Metric	Q1 2020	Q1 2019
Revenue	$3.748 billion	$4.057 billion
Operating income	$751.6 million	$788.4 million
Net income	$499.3 million	$574.1 million
Earnings attributable to AEP common shareholders	$495.2 million	$572.8 million
Diluted EPS	$1.00	$1.16
Cash from operating activities	$615.7 million	$808.3 million

• Revenue declined about 7.6%, common earnings about 13.5%, and diluted EPS about 13.8% year over year. Management attributed lower earnings chiefly to milder weather-related usage and a one-time regulatory provision reversal in 2019; favorable rate proceedings partly offset the decline.
• Operating margin was approximately 20.1%, compared with 19.4% in Q1 2019, calculated as operating income divided by revenue.
• Segment earnings attributable to AEP common shareholders: Vertically Integrated Utilities $245.3 million (prior year $302.4 million); Transmission and Distribution Utilities $116.2 million ($156.5 million); AEP Transmission Holdco $140.6 million ($124.2 million); Generation & Marketing $28.4 million ($40.1 million); Corporate and Other loss $35.3 million (loss of $50.4 million).
• Cash used for investing was $1.766 billion, including $1.793 billion of construction expenditures. Financing provided $2.389 billion; the quarter-end cash, cash equivalents and restricted cash total was $1.671 billion.
• At March 31, total debt was $32.357 billion and AEP common equity was $19.728 billion. Debt-to-total capitalization was 61.8%, up from 59.8% at year-end 2019, principally reflecting borrowing to bolster liquidity.
• Net available liquidity was approximately $2.845 billion. AEP had a $4 billion revolving facility and borrowed the full $1 billion under a 364-day term loan. The credit-agreement debt-to-capitalization ratio was 59.8% against a 67.5% limit.

Changes, outlook and management commentary

• Weather-normalized retail sales volumes fell 0.7% in Q1. Management revised its 2020 forecast to a 3.4% decline overall: industrial down 8%, commercial down 5.6%, and residential up 3%. AEP expected COVID-19 to have a larger sales impact in Q2 than in Q1.
• As of March 31, COVID-19 had not materially affected the financial statements, operations, customer collections or asset impairment assessments. AEP suspended customer disconnections for nonpayment and was pursuing regulatory recovery or deferral of incremental costs. Management could not estimate the pandemic’s ultimate financial effects and warned they could be material.
• Management estimated 2020 capital expenditures of $5.8 billion and approximately $32.9 billion over 2020–2024, excluding the North Central Wind Energy Facilities. It expected to fund spending through operating cash flows and financing. The filing does not provide a clear annual EPS guidance figure.
• AEP reported approximately $1.4 billion of long-term debt and $1.6 billion of short-term debt issued during the first three months of 2020, including the term loan, to support liquidity amid capital-market volatility. The common dividend was declared at $0.70 per share in April.
• Regulatory developments included an Indiana rate order authorizing a phased annual increase of $77 million at a 9.7% ROE, and an April Texas order approving a $40 million annual rate reduction for AEP Texas at a 9.4% ROE, plus customer refunds. APCo requested a $65 million annual increase in its Virginia rate case; it remained pending.

Risks, contingencies and unusual items

• COVID-19 could reduce commercial and industrial demand, impair customer payment ability, disrupt supply chains and construction, and constrain or increase the cost of capital. Renewable project schedules and eligibility for federal production tax credits could also be affected.
• SWEPCo accelerated the planned Dolet Hills retirement to September 2021, with lignite mining expected to cease in June 2020. The change increased estimated asset-retirement-obligation liabilities by $21 million. DHLC and Oxbow had $124 million and $26 million, respectively, of unbilled costs expected to be billed before closure; recovery through fuel clauses is important.
• SWEPCo’s Texas share of the Turk Plant investment is subject to pending litigation; the plant’s net book value was $1.5 billion at quarter-end, and SWEPCo’s Texas jurisdictional share is approximately 33%. A disallowance could affect future earnings and cash flows.
• Virginia HB 443 requires APCo to remove coal-combustion material from ash units at retired Glen Lyn Station. Costs were not yet reasonably estimable; management expected a material ARO revision, while anticipating recovery through a Virginia rate mechanism.
• Other material exposures include environmental compliance and recovery, regulatory proceedings, Rockport Plant lease litigation, a patent-infringement suit and claims concerning the retirement plan. Management could not estimate reasonably possible losses for several proceedings.
• The CARES Act led AEP to recognize a $20 million AMT credit refund receivable. Management was evaluating potential tax recovery under the NOL carryback provision and expected to defer employer payroll-tax payments under the Act.

Important facts for investors to verify

• Whether actual 2020 electricity sales, especially commercial and industrial demand, track AEP’s revised forecasts as the pandemic develops.
• Quarterly cash generation, debt balances, borrowing costs, liquidity and compliance with credit-agreement covenants.
• Regulatory outcomes and timing for rate recovery, customer refunds, COVID-19 cost deferrals and major capital investments.
• Progress, cost recovery and timing for North Central Wind, Dolet Hills closure and lignite obligations, and the Turk Plant and environmental matters.
• Whether reported earnings trends persist after accounting for prior-year one-time regulatory items, weather, tax effects and increased depreciation and interest expense.