01—Abstract
Summary
Summary of the 10-K filed February 20, 2020. Cited figures are marked; the original filing is the authoritative source.
AEP's 2019 Form 10-K (filed February 20, 2020) shows a utility holding company that earned $1.921 billiona attributable to common shareholders, essentially flat versus $1.924 billion in 2018, with diluted EPS of $3.88 versus $3.90.
Management attributed the flat result mainly to a decline in weather-related usage and a $156 millionb increase in asset impairments and other related charges, partly offset by favorable rate proceedings and higher transmission investment. Operating income fell about 3% to $2.59 billion, while total revenues declined roughly 4% to $15.56 billion, reflecting lower wholesale and fuel-related pass-through revenue and Tax Reform refunds. The balance sheet expanded considerably.
Total assets rose to $75.9 billionc from $68.8 billion, driven by $6.1 billion of construction expenditures and the $918 million net cash acquisition of Sempra Renewables LLC and Santa Rita East. Long-term debt climbed to $26.7 billion from $23.3 billion, and the debt-to-total-capital ratio increased to 59.8% from 57.0%. Operating cash flow dropped to $4.27 billion from $5.22 billion, leaving free cash flow negative after capex, and dividends paid rose to $1.35 billion.
The company's 2020 capital budget is about $6.3 billiond, with a further $26.6 billion forecast for 2021 through 2024, and management has signaled a strategic shift away from coal, with CO2 emissions down 65% since 2000 and new 2030 and 2050 reduction targets. Key risks flagged in the filing include a negative rating outlook from one agency tied to cash flow-to-debt metrics, the pending outcome of the 2019 Texas and Indiana base rate cases, the ongoing Rockport NSR and lease litigation, OVEC financial exposure, and the Virginia triennial earnings test for APCo. Coal-fired generation fell to 45% of capacity in 2019 from 70% in 2005.
02—Key points
Key Highlights
- Net earnings attributable to AEP common shareholders were $1.921 billion ($3.88 diluted EPS), essentially flat versus 2018, as lower weather-related usage and a $156 million asset impairment charge offset favorable rate proceedings and transmission growth.
- Total revenues declined about 4% to $15.56 billion, while operating income fell to $2.59 billion from $2.68 billion.
- Capital spending was about $6.05 billion in 2019, with a 2020 budget of $6.3 billion and $26.6 billion projected for 2021-2024, mainly for transmission, distribution and renewables.
- Operating cash flow fell to $4.27 billion from $5.22 billion, and the company has relied on rising debt, with long-term debt up to $26.7 billion and the debt-to-capital ratio at 59.8%.
- The Sempra Renewables acquisition (724 MW of wind and battery assets) and Santa Rita East (75% interest, 227 MW) expanded AEP's contracted renewable portfolio, with another 128 MW Flat Ridge 3 project under construction.
- The Transmission Holdco segment grew earnings to $516 million from $370 million on higher FERC-approved transmission investment, now the fastest-growing contributor.
- AEP set intermediate and long-term CO2 goals (70% reduction by 2030 and over 80% by 2050 from 2000 levels) and reported that 2019 emissions were already down 65%, with coal falling to 45% of generating capacity.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 20, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $15.56B$16.20B | −3.9% |
| Operating Expenses | $12.97B$13.51B | −4.0% |
| Operating Income | $2.59B$2.68B | −3.4% |
| Interest Expense | $1.07B$984.40M | +8.9% |
| Net Income | $1.92B$1.93B | −0.6% |
| EPS (Basic) | $3.89$3.90 | −0.3% |
| EPS (Diluted) | $3.88$3.90 | −0.5% |
| Shares Outstanding (Basic) | 493.69M492.77M | +0.2% |
| Shares Outstanding (Diluted) | 495.31M493.76M | +0.3% |
05—Questions
Frequently Asked Questions
Why did AEP's earnings stay flat in 2019 despite significant investment growth?
Earnings were nearly unchanged at $1.921 billion versus $1.924 billion. Lower weather-related usage, Tax Reform refunds, and a $156 million impairment (including a $93 million Virginia charge tied to previously retired coal plants and a $33 million Texas disallowance) offset growth from rate cases and transmission investment.
How is AEP funding its large capital program, and is leverage a concern?
Capital spending is funded through operating cash flow and debt. Long-term debt rose about $3.4 billion to $26.7 billion, and debt-to-total-capital increased to 59.8%. The company reported $2.1 billion of net available liquidity and remained within its 67.5% covenant limit (57.4% on a contractual basis). One rating agency has a negative outlook tied to cash flow-to-debt metrics, which could raise borrowing costs.
What regulatory outcomes could materially affect future results?
Key items include the PUCT decision on the Texas base rate case settlement (a $40 million annual reduction plus refunds), the IURC order on I&M's $172 million Indiana request, APCo's triennial earnings review due by March 2020, the Turk Plant prudence appeal at the Texas Supreme Court, and FERC transmission ROE proceedings. Adverse rulings could require refunds or write-offs.
How is AEP positioned on the energy transition and carbon regulation?
AEP has cut CO2 emissions 65% since 2000 and plans to shift further from coal, with new 2030 and 2050 targets. Renewables are growing through acquisitions and contracted projects, and the Oklahoma North Central Wind project (1,485 MW, about $2 billion) is pending approval. Still, the company faces ongoing exposure to environmental compliance costs, estimated at $500 million to $1 billion through 2026, and to stranded-asset risk on coal units scheduled for retirement.
06—Continue