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AEP says it is well-positioned for potential tax reform

European Energy Insights February 2021

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AEP says it is well-positioned for potential tax reform

American Electric Power Co. Inc. management believes the company is positioned well for the likelihood that the corporate tax rate is cut by the Trump administration and the Republican-controlled Congress.

Republicans have signaled plans to take up broad tax reform this year that could include Trump's proposal to cut the corporate tax rate to as low as 15% from 35%. Republicans are believed to favor a 20% corporate tax rate, which AEP said it sees as the more likely approach.

"Because we have positioned AEP well with relatively little debt at the parent level and strong balance sheet metrics as well, AEP should be in good shape based on our analysis of potential outcomes," AEP Chairman, President and CEO Nicholas Akins said Jan. 26 on the company's fourth-quarter 2016 earnings call.

AEP indicated that it has low parent-level debt of less than $1 billion and does not expect much impact from the potential for the elimination of interest rate deductibility.

"The majority of the debt we hold is at the operating company level where the elimination of deductibility would be mitigated through the ratemaking process," AEP Executive Vice President and CFO Brian Tierney said on the call.

The company also has "ample organic growth opportunities" and would seek to use any cash freed up through tax reform to reinvest in its system, Tierney said.

The CFO added that AEP has "very few unused tax credits" that would be negatively impacted by a lower corporate tax rate.

"Assuming the elimination of interest expense deductibility, the 100% deductibility of capital expenditures, the elimination of the manufacturing tax credit, and AEP's low level of non-rate regulated debt, AEP's break-even 10-year average tax rate would be 22%. This is positive, since a reduction in the rate to 20% level is being discussed," Tierney said.

Analysts have pointed to deleveraging as a key theme for investor-owned utilities prepping for the negative impacts of tax reform.

AEP has indicated it will use the vast majority of proceeds from its nearly $2.2 billion sale of Midwest generation assets to pay down debt.

"We will refund approximately $1 billion of commercial paper, repay the $500 million AEP Generation Resources term loan facility as well as about $200 million of debt associated with the Lawrenceburg generating facility," Tierney said. "This activity will leave us well positioned to execute our capital plan and is expected to improve our debt to total capitalization ratio by about 200 basis points."