American Electric Power Company Inc (AEP) — Q3 2020 Transcript

Thank you, John. Good morning everyone, and welcome to the third quarter 2020 earnings call for American Electric Power. We appreciate you taking the time to join us today. Our earnings release, presentation slides, and related financial information are available on our website at aep.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning for opening remarks are Nick Akins, our Chairman, President and Chief Executive Officer, and Brian Tierney, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Thank you, Darcy, and welcome to American Electric Power's third quarter 2020 earnings call. The third quarter has been another strong period for AEP. Despite the ongoing challenges posed by COVID-19 and its economic impact, we remain optimistic about our ability to deliver consistent earnings and dividend growth for our shareholders while focusing on our customers and communities as we navigate these challenges. Many of us can relate to the sentiments expressed in Lenny Kravitz's song "Flyaway" about wanting to escape the difficulties of this year. However, we see a light at the end of the tunnel. As we progress through this year, AEP continues to operate within our guidance range, aiming for the midpoint as we approach the final quarter. We are achieving this by managing costs in response to the pandemic, prioritizing employee safety, and assisting our customers in dealing with economic pressures. We are gaining valuable insights during this crisis, including the importance of efficient remote work, capital and operational management, and our commitment to social issues, all of which contribute to building a strong brand as a leading regulated utility. AEP has recently been ranked the highest utility on the Forbes JUST Capital 100 list for 2021. We have also responded to two major storm events, Hurricanes Laura and Delta, affecting our operations in Louisiana. I'm proud of our employees for their dedication during these weather events, ensuring safe and effective service restoration amid COVID-19 protocols, especially crucial as more people work and stay at home. Financially, our operating performance remains strong despite challenges, with operating earnings for the quarter at $1.47 per share compared to $1.46 per share last year, resulting in $3.56 per share for the year-to-date, compared to $3.65 per share at this time last year. We are firmly within our 2020 guidance range of $4.25 to $4.45 and are optimistic about our trajectory into 2021. We are reaffirming our guidance range and our long-term growth rate of 5% to 7%. I'm committed to being in the upper half of that range. Our board has approved a dividend increase of about 6%, aligning with our earnings and within our targeted payout ratio of 60% to 70%, consistent with our growth goals. This is a significant achievement given the challenges we anticipate in the early part of the year. While we have seen success in these turbulent times, we recognize that we are not out of the woods yet. We are witnessing some improvement in industrial and residential demand, but commercial sectors like churches, restaurants, and schools face ongoing difficulties. Brian will elaborate on the economic situation later. We could not have achieved today's positive outcomes without our employees’ diligent efforts to control costs in light of revenue losses due to COVID. Our achieving excellence program has been effective not just in offsetting losses but also as a foundation for future operational and maintenance cost management. We will provide more updates on this in November. Most economists are predicting an improved economy for 2021. As we enter the fourth quarter, we see positive progress, although advancements in industrial and commercial areas may be slow until after the election cycle or in light of any potential second wave of COVID or developments in therapeutics and vaccines. Overall, this has been a productive quarter, and we expect continued improvement into 2021. We continue to follow protocols related to the pandemic, including temperature screening, mask mandates, social distancing, and hygiene practices. Our case numbers are rising with the second wave, leading us to reinforce safety messaging for practices both in and out of the workplace. Thankfully, we haven’t experienced any fatalities due to the virus, but it remains crucial to maintain vigilance and combat complacency. Additionally, we've continued our outreach to employees and communities regarding issues of racial injustice. Our Seize the Moment initiative aims to foster deeper understanding of racial divides and encourage meaningful dialogue about actionable next steps. Before discussing regulatory updates, I'll address any questions regarding HB6 in Ohio. We have no new information from AEP's perspective, and any potential legislative changes seem unlikely to occur soon, especially during an election season. Should changes occur, they are expected to have minimal financial impact on AEP. We will continue to advocate for forward-looking legislation on clean energy, energy efficiency, and technological advancements alongside our customers. Regarding ongoing legal matters related to HB6, we have nothing new to report and maintain our earlier stance. Now, on to regulatory updates. One significant observation from this pandemic is the recognition of the importance of our services to customers and communities. This year, we have navigated the challenges brought by the pandemic and adapted to significant storm activity that has tested our systems and workforce. As we collaborate with regulators to align our operations with customer expectations, we emphasize the necessity of maintaining a strong balance sheet. It is vital for our operating companies to have the cash flows and returns that will attract the capital needed to meet the ongoing demands of our customers and communities. We are still involved in various regulatory proceedings this quarter to align with prior regulatory requirements, address stay-out provisions, and facilitate necessary investments. Ohio has progressed to its most recent base case as required by our earlier ESP settlement, where we are requesting a $41 million rate increase with a 10.15% return on equity, although a procedural schedule is still to be established. APCo filed its base rate case in March, following Virginia law, and we have completed hearings, awaiting the commission's decision. Our residential customers in Virginia have not seen a rate increase in a decade, and we are seeking $37.9 million net of depreciation with a return on equity of 9.9%. We are disappointed by the positions taken by staff and the Attorney General, which do not recognize the necessity of earning an authorized return in the upcoming triennial period. We are confident that the Commission will understand these arguments and the legal obligation to grant us a fair return. A decision is expected in November. Kentucky is undergoing a stay-out provision that lasted until June. We subsequently filed our base rate case on June 29, asking for a $65 million increase with a 10% return on equity. We have also requested to use the remaining unprotected AFDIT funds to assist customers unable to pay their bills, expecting a resolution by the year’s end. In our SWEPCO area, we received approval to create a regulatory asset for costs related to Hurricane Laura and plan to seek similar treatment for Hurricane Delta's costs, hoping the hurricane season concludes safely. In Texas, SWEPCO made its base rate case filing on October 13, where we seek a $90.2 million rate increase with a 10.35% return on equity, while also aiming to increase our storm reserve and vegetation management spending to reduce future outages. We are progressing with our North Central Wind projects that will benefit customers in Louisiana, Arkansas, and Oklahoma. Work has begun at the Sundance facility, expected to be operational by the end of the first quarter of 2021, and site preparation is ongoing for the Maverick and Traverse locations. We expect to acquire the Maverick facility by December 21 and the Traverse facility by early 2022. We have filed settlement true-ups in Arkansas and are nearing completion in Oklahoma, looking forward to the advantages these projects will provide in accessing rich wind resources and promoting a greener energy future. Moving to the equalizer chart on Page 5 of the presentation, our current return on equity is approximately 9%, which we typically target at 9.5% to 10%. The returns are currently below their normalization, but we are also strengthening our equity layers. Regarding AEP Ohio and the discussed rate case, its return on equity is above authorized levels mainly due to favorable regulatory items, offset somewhat by legacy issues. However, we expect year-end returns to trend around the authorized rate of 10%. For APCo, returns are slightly underauthorized due to reduced usage and increased depreciation, although ongoing management of operational expenses has provided some offset. Effective January 2020, costs tied to the last 17.5% of Wheeling Power's interest in the Mitchell plant have become recoverable. As for Virginia's tri-annual review, I’ve already mentioned it. In Kentucky, returns are below authorized levels due to economic conditions and higher expenses during the stay-out period, indicating we have work to do there. For I&M, the return on equity at the end of the third quarter was 10.4%, above authorized levels due to management efficiencies, reduced interest expenses, and rate true-ups, although sales were lower. A slight decline is expected by year-end, consistent with authorized levels in Michigan and Indiana. PSO's return on equity stands at 8%, below its authorized level mainly due to reduced usage and unfavorable weather. PSO’s 2019 base case approved a transmission tracker with a return on equity of 9.4%, and we will continue to advance there. For SWEPCO, the current return on equity is approximately 7.4%, primarily influenced by the Turk Plant not being included in retail rates, impacting by roughly 110 basis points. SWEPCO’s Arkansas base case settlement authorized a $24 million revenue increase with a return of 9.45%. In October, we filed a rate case in Texas, as mentioned. For AEP Texas, returns around 7.5% are below authorized levels, influenced by delays in annual cost recovery filings. We expect earnings to improve with the recent rate case conclusion and the resumption of annual filings, although continued investments in Texas may affect returns. The long-term expectation is for returns to align with authorized levels of 9.4%, but they may hover around 8% at the end of 2020. Regarding our transmission company, AEP Transmission Holdco stands at 9.8%, below the authorized level largely due to an annual revenue true-up from 2020, and is expected to remain within the 9.8% to 10.1% range for the year. Remarkably, the average equity in our operating jurisdictions has shifted, with Transmission Holdco becoming the largest, highlighting our progress. While we continue to invest in transmission, it improves service quality for our customers. In closing, I want to express gratitude to the employees at Oklaunion Power Station, which officially retired after many decades of serving Texas and Oklahoma customers. Oklaunion began construction when I joined AEP, and its retirement underscores both our resilience over the past 114 years and the need for continual adaptation. Thank you to all Oklaunion employees for your years of service. Overall, this has been a solid quarter for AEP, and as we look ahead, I am optimistic about the company's future post-COVID, with a growing need for grid reliability and resilience to support work-from-home dynamics, a transitional shift toward renewable energy, and further electrification of the economy. I believe that overcoming the challenges of 2020 will make us stronger as we enter 2021 and beyond. Brian?

Thank you, Nick and good morning, everyone. I will take us through the third quarter and year-to-date financial results, provide some insight on load in the economy, review our balance sheet and liquidity, and finish with a preview of what we will present at the EEI conference. Let's start briefly on Slide 6, which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. GAAP earnings for the third quarter were $1.51 per share, compared to $1.49 per share in 2019. GAAP earnings through September were $3.56 per share, compared to $3.58 per share last year. There's a reconciliation of GAAP to operating earnings on Pages 15 to 16 of the presentation. Let's turn to Slide 7, and look at the drivers of quarterly operating earnings by segment. Operating earnings for the third quarter were $1.47 per share or $728 million, compared to $1.46 per share or $722 million in 2019. Operating earnings for vertically integrated utilities were $0.85 per share down $0.04. This was driven by unfavorable weather, primarily due to warmer than normal temperatures last year, particularly in September. Other drivers included lower wholesale load and other operating revenue, as well as higher depreciation and taxes, primarily due to timing that were adverse in the fourth quarter. Favorable items included lower O&M, favorable rate changes, and higher transmission revenue. The transmission and distribution utility segment earned $0.31 per share up $0.04 from last year. Favorable items included higher rate changes in transmission revenue, as well as lower O&M. These favorable items were partially offset by unfavorable weather, depreciation, taxes, and interest expense. The AEP Transmission Holdco segment continues to grow, contributing $0.28 per share, an improvement of $0.03. This reflected the return on investment growth as net plant increased by $1.5 billion or 16% since September of last year. Generation and marketing produced operating earnings of $0.13 per share, down $0.03 from last year. This was driven by timing around income taxes and lower wholesale margins. Finally, corporate and other was up a penny from last year, primarily driven by lower taxes related to consolidating items that will reverse by year-end. Let's turn to Slide 8, and review our year-to-date results. Operating earnings through September were $3.56 per share or $1.77 billion, compared to $3.65 per share or $1.8 billion in 2019. Looking at the drivers by segment, operating earnings for vertically integrated utilities were $1.90 per share comparable to last year. Favorable items in this segment included lower O&M, the impact of rate changes across multiple jurisdictions, and higher transmission revenue primarily due to true-ups. Weather was unfavorable due to warmer than normal winter temperatures this year and a warmer summer in 2019. Other decreases included higher depreciation and tax expenses, primarily due to timing and lower revenue items and AFUDC. The transmission and distribution utility segment earned $0.84 per share down a penny from last year. The negative variance was primarily driven by the 2019 reversal of a regulatory provision in Ohio. Other smaller drivers included higher depreciation and interest expense, the roll-off of legacy riders in Ohio, prior year Texas carrying charges, unfavorable weather, and tax expenses. These items were mostly offset by higher rate changes, the recovery of increased transmission investment in OCA and the impact of the Ohio transmission true-up on both O&M and transmission revenue. Other O&M was also favorable due to the concerted effort to decrease O&M expenditures through one-time and sustainable reductions. The AEP Transmission Holdco segment contributed $0.75 per share, down $0.07 from last year due to the impact of the annual true-up and prior year FERC settlements. Our fundamental return on investment growth continued. Generation and marketing produced $0.31 per share, up a penny from last year. The Renewables business grew with asset acquisitions more than offsetting lower wholesale and retail margins and timing around income taxes. O&M sales and other one-time items offset the impact of weaker wholesale prices on the generating business. Finally, Corporate & Other was down $0.02 per share due to higher interest and taxes related to consolidating items that were reversed by year-end and offset by a prior year income tax adjustment. Partially offsetting these items was lower O&M. Overall, we are pleased with our financial results and are confident in confirming our annual operating earnings guidance of $4.25 to $4.45 per share. Turning to Slide 9, let's review the assumptions we shared during the first quarter earnings call to reaffirm guidance. Starting with the topline, we recently updated our retail sales forecast. Third quarter sales came in higher than previously projected. We now expect 2020 normalized sales to come in 2.7% below last year, which is 0.7% better than the load forecast from the first quarter. While the outlook has improved, it is still below the pre-recession forecast used for our original guidance. The favorable sales mix in 2020 has helped to mitigate the impact on earnings. The second item was the impact of weather. While the first quarter weather produced a significant drag, the second quarter and third quarter weather impacts were slightly favorable. In the second quarter presentation, we mentioned that July's weather was quite favorable. However, August and September weather was mild. As a result, we have revised the weather impact on 2020 earnings and now expect a $0.08 drag to 2020 results. The next item is on track with the O&M expense. We had originally planned to drive O&M cost down to $2.8 billion from $3.1 billion in 2019. In response to the expected sales decline, we identified an additional $100 million of savings for both one-time and sustainable reductions and are on track to hit this lower expense target. Finally, we identified approximately $500 million of capital expenditures in the first quarter that could be shifted out of 2020 and into future years. We made this decision to support our cash position through the expected downturn during the pandemic. As we discussed at the second quarter earnings call, results have come in better than expected and we've reinstated approximately $100 million of the $500 million back into 2020. Given the progress we've made on these key assumptions, we were able to reaffirm our 2020 operating earnings guidance range. Now let’s turn to Slide 10 to provide an update on our normalized load. Starting in the lower right corner, our third quarter normalized load was down 2.6%, which was slightly better than the forecast we shared with you in the first quarter. Through September, our normalized sales were down 3% from last year. In the upper left quadrant, our normalized residential sales increased by 3.8% in the quarter. Year-to-date residential sales were up 2.6%. We saw significant increases in our residential load at the beginning of the pandemic. The growth in residential sales has moderated as people returned to work over the summer. Weather normalized residential sales are up across all jurisdictions. Moving clockwise, our normalized commercial sales decreased by 4.6% in the third quarter, bringing the year-to-date decline to 4.9%. As expected, the biggest declines in this class came from schools, churches, restaurants, and hotels. Finally, in the lower left chart, industrial sales decreased by 7.8% in the quarter, bringing the year-to-date decline to 7%. A number of factors have changed the outlook for this class, but the biggest driver is overall economic activity. The industrial sectors that posted the biggest declines for the quarter were mining, oil and gas extraction, and primary metals. By contrast, plastics and rubber manufacturing posted a strong quarter related to the recovery of the automotive industry. Overall, load growth across the service territory followed the pattern we anticipated earlier in the year. During the second quarter, residential sales peaked and commercial and industrial sales hit their lows. Since then, our service territory has been working its way back to more normalized levels. Because some businesses will continue to work remotely, we expect our residential sales to continue at higher levels for some time. Let's take a deeper look into why we raised our outlook for normalized load on Slide 11. The solid bars represent weather normalized load growth by quarter end 2020. The green lines represent the updated load forecast we shared during the first quarter earnings call. At that time, there was still a lot of uncertainty regarding the depth and duration of the economic slowdown and how customers would respond. While that forecast accurately predicted the depth of the contraction in the second quarter, our third quarter results indicated a better recovery than forecasted. Our latest view anticipates a continuation of this trend barring another shutdown of the economy. Now let's move on to Slide 12 and review the company's capitalization and liquidity. Our debt to capital ratio remains unchanged in the third quarter and stands at 61.1%. Our FFO to debt ratio decreased 1.3% during the quarter to 12.8% on a Moody's basis, primarily due to the timing of fuel recovery, storm cost deferrals, and a pension contribution. Importantly, we expect this metric to end the year in the low to mid-teens, consistent with the guidance we have provided. Our liquidity position remains strong at $3.8 billion, supported by a revolving credit facility. Before providing an update on pension funding, I would like to discuss the plan to finance the North Central Wind Project. As a reminder, we have stated that we intend to use equity to finance approximately two-thirds of this $2 billion project. We plan to issue equity in coordination with the completion of the three individual projects that comprise North Central Wind. For this reason, we will take a flexible approach which could include an at-the-market mechanism, asset rotation, as well as traditional secondary offerings. This approach avoids unnecessary dilution and helps us deliver on the 5% to 7% earnings growth rate. Turning to our pension, I am pleased to report that funding increased 3.6% during the quarter to 97%, and our OPEB funding increased 5% to 141%. Strong equity returns were the primary driver for the increases. The pension plan also benefited from a company contribution in the amount of the plan's annual service cost of $111.5 million. Let's wrap this up on Slide 13, so we can get to your questions. We are reaffirming our existing 2020 operating earnings guidance of $4.25 to $4.45 per share. Our message at EEI will be that we are leading the way forward as a premium regulated utility with an ESG focus delivering 5% to 7% earnings growth with dividends growing in line with earnings. Our plan includes the $2 billion North Central Wind project in Oklahoma, benefiting our customers in PSO and SWEPCO as we transition to a cleaner energy future. We will provide detailed drivers for 2021 earnings guidance by segment and updates to our capital expenditure and financing plans. We look forward to talking with many of you at the virtual EEI conference in a couple of weeks. One final item, in 2021, we will release 2020 fourth quarter and full-year earnings in late February, coincident with the filing of the 2020 10-K, like we did last year. With that, I will turn the call over to the operator for your questions.

Good morning, Julien.

Hey, howdy. Thanks for the time, guys. Perhaps just to kick things off. You talked about rolling out and reaffirming or perhaps preemptively reaffirming in the EEI the 5% to 7%. Can you talk a little bit about what's backstopping that? Specifically, in the last few months, we've seen some pretty substantial changes from some of your peers in Virginia. How can that play into APCo? And perhaps also similarly in Indiana, many of your peers are talking about opportunities. You all have perhaps Rockport. Just curious if you can talk about or perhaps foreshadow some of the conversations here on that roll forward, if you don't mind, at the outset.

Julien, I think a lot of the things that we're going to talk about are renewable opportunities in addition to North Central Wind, how we're transitioning from a carbon-based generating fleet much more to a lot of the renewables that the Virginia Clean Energy Act enables and legislation in Indiana enables as well. So we're going to provide a lot more detail on that at EEI and take you through what that looks like. You have the renewable requirement in Virginia; you mentioned APCo. We've got the requirement there. And also Indiana, Michigan, we continue to do renewables in various areas there. We're also doing renewables; we just did the fourth sale in Oklahoma. And then we also have renewable applications here in Ohio that are brewing as well. So, we'll have plenty to talk about. I think we don't spend, and maybe we should spend more time talking about the opportunities we've got available to us from a renewable standpoint. The way I see it is that, we're just on the precipice of a massive transformation to renewable resources. And AEP, if you look at the runway, it's pretty substantial. And that will continue particularly as we do individual relationships with customers, but also in terms of the regulated side as well, through the Integrated Resource Planning process. So we'll certainly talk more about that at November EEI.

Got it. Thanks for entertaining me there. Perhaps, if I can get more detailed here, if you don't mind. I know you all provided a little bit more of you want for 2023 here, but in tandem, you gave an updated view on FFO to total debt under Moody's definition of low to mid-teens versus perhaps prior characterizations of mid-teens. Is that simply a factor of rolling forward here? Or how are you thinking about this at this point?

Julien, the low to mid-teens is completely consistent with our prior messaging on FFO to debt. That outlook was incorporated in Moody's when they made their adjustments back in August. Remember that will continue to improve as some of this accumulative deferred income taxes that are being repaid to the regulatory jurisdictions are occurring much more quickly than we thought—we originally thought 10 years, and it turned out to be five years. That FFO to debt metric will pick up as that rolls off.

Got it. Excellent. Thank you.

Hey, good morning. Thanks. Great. Hey, just digging in a little bit into 2021. I appreciate you’ll share more color at EEI. But could you quantify for us what that 2%, 2.7% sales degradation was year-to-date, part one? And part two, should we assume some of that $51 million year-to-date O&M savings to be carried forward into the next year?

Yes. So let me start with the 2.7% load degradation. It's what you would expect. It's largely commercial and industrial sales. The decrease is being offset by residential. What we've seen is it takes more than just looking at the raw numbers on residential, commercial and industrial; it's really the mix. You remember, we make more margin on residential sales than we do on commercial and industrial. And that mix has come in better than we had anticipated at the beginning of the pandemic. So, it hasn't been as dire as what we thought it might be because of what's happened with the sales mix rather than just the overall decreases. So that's been positive. Looking forward on O&M, we have for a number of years been tightening our belt and been very, very tight around untracked O&M in that $2.8 billion to $3.1 billion range. With what we're doing with achieving excellence and everything else we're doing with sustainable and non-sustainable O&M cuts, I'd anticipate us being towards the lower end of that range going forward.

Understood.

When we look at the load forecast, I mean, if you assume 2021 is going to be better, which we believe it is. And you look at that mix, we don't see residential. I mean, obviously, it will moderate as the economy comes back on the industrial and commercial side, commercial in particular. But still, you’re going to have a continued longstanding remnant of improved residential support just by virtue of what companies have learned from the work-from-home environment. So, I'm a little bit bullish on the load and then at least a financial picture associated with load. And then when you look at the O&M this achieving excellence program, it has truly been a fundamental change for us and augmentation of all the lean activities and other things that we did before. It really is focused on a regular part of our budget process to ensure that we're capturing savings at every step along the way. So, feeling pretty good about the continual progress year-on-year of achieving excellence.

That's great, guys. Thanks for that color. Maybe just initial thoughts and I appreciate that that was going to be in the details, but initial thoughts on elections, taxes, climate plan and implications for AEP?

Yes, so I guess, well, first of all, it's the election, certainly as a noisy election cycle, and who knows what's going to happen here, we never know. We've got 114 years history of managing between the goalposts here, so we'll continue to do that. Our focus is on moving into that clean energy economy. Really, the only difference obviously is maybe the pace at which the change will occur if there's a Biden administration versus Trump. But nevertheless, it doesn't change that much for us because we're focused on moving that clean energy economy as quickly as we can to ensure that we are making that transition into the future that we know is going to happen. Now, who knows where technology will go, even for fossil fuels, nevertheless, we'll continue that transition to renewables and certainly some natural gas to ensure that we are delivering for our customers in the future. From a client perspective, we have an excellent record, and I think that's why we get seen from the ESG community where they know what we're doing and they know what our message is; we're making continual progress. We'll continue to make that progress. When you think about, as I said, in my original write-up, I used the word 'latent' because it is a somewhat of an undeveloped or emerging activity around electrification of the economy, certainly around O&M and what we find with digitization and automation. Of course, as we move forward with the transformation, the generation transformation that we see ahead of us. So that's why I'm feeling pretty good about where this company is heading.

Just a quick update on taxes. If we were to have an increase in taxes, we anticipate that our commissions would handle it. One of two ways and not dissimilar to how they handled tax reform three or four years ago. We anticipate that they would either allow the increase to be deferred until the next rate proceeding or that they would have kind of a one-issue order come out where they would allow us to adjust rates just to reflect the new expected higher income tax rate. In any event, we wouldn't expect it to be a significant driver to earnings or cash for the company going forward.

Great. Thanks. But it could be a modest delve into cash flow, like given sort of a reset in AVIT and amongst other things.

I think the situation is unclear.

Yes, again, we don't anticipate it to be significant one way or the other.

Understood. Thanks, Brian. Thank you, Nick.

Thank you.

Yep.

Good morning, James.

Hey, thanks, everyone. I apologize for the confusion. Good morning. I have two quick questions. First, Brian, regarding the North Central Wind project, I noticed from the slides that Traverse may be delayed by about a quarter. Can you provide some insight on this? Is this primarily due to supply chain issues related to COVID, or is there another factor contributing to the extended timeline?

Yes, a lot of it has to do more so than actual physical things. It's our ability to get permitting and the like done. During the shutdown, it was hard to be able to get into the offices, do land acquisitions, title searches, and things like that. That potentially pushed us back a bit. We're not anticipating anything material there. We still anticipate late this year to early next year, which is one of the signals that due to some of those unanticipated issues largely associated with COVID that that project could have a range of when it would come online.

Hey, James, we feel like it's still going to be the end of the summer, but obviously, it could fall into that range in the first quarter. We're confident of that particular range. Remember, we're not making any progress payments, either. It's sort of we require it when it's done. From a financial perspective, it's fine.

Okay, great. Thanks. I guess, just following up on that same issue. Brian, you talked about three sort of potential ways to finance the final acquisition of those and this has been beat to death. But as you guys look to give 2021 guidance, obviously, an ATM would be something because spread over the full year, but asset rotation or even block equity is really probably something I think, as you were saying, sort of coordinating it with the final close would be something. How are you guys, I guess thinking about that from a modeling perspective, as you present 2021?

It aligns with what Nick mentioned, that we don’t receive the projects until their commercial completion is finished. Once that happens, we can align our equity issuance closely with when the project starts. For instance, we expect Sundance in the first quarter of 2020, which is about a $300 million project. We will manage the equity issuance timing closely with its launch. The next project, anticipated at the end of 2021, will be about $400 million. Lastly, there’s Traverse, which is roughly $1.3 billion and projected for late 2021 or early 2022. Whether we choose an aftermarket program, a follow-on issuance, or asset rotation, we will be able to synchronize these plans closely with when the specific projects start. Thus, from a modeling perspective, the timing we’re discussing will not significantly impact 2021. I would end up reiterating myself by regarding 2021 again.

James, Brian mentioned the options we're looking at. Rest assured internally, we're also being at the death. We'll make sure that we're making the right decisions relative to the timing associated with those investments.

No worries. I understand the in-service space, and it gives you guys a lot of flexibility. The last question, I guess, I just had, and you kind of answered my initial question was going back to the trailing 12 months FFO kind of dip down. You guys were looking for that sort of trend back into kind of where you guys were thinking sort of low to mid-teens, I guess. Are you still targeting that in the sort of '21, '22, '23 timeframe? I know you updated your cash flow forecasts for that recently.

Yes, we are. It's that timeframe, yes.

Okay, perfect. Thank you so much for the time.

Thanks, James.

Good morning, Michael.

Good morning, Nick. Thank you guys for taking my question. And Nick, sorry about your LSU Tigers.

Yes. Alabama is doing good though. I'm sure you're happy with that.

Yes, let's hope they keep coaching. Brian, I want to come back to tax a little bit and who the heck Uncle Sam’s is going to do in the next year or so regarding corporate tax rates. But if there's a change in administration, if there's a higher corporate tax rate, I think we’ve seen numbers floated around 27% or 28%. I get that it's probably not much of an impact on the earnings power one way or another for AEP. But if you're talking to state commissioners or staff at the PSCs or PUCs or others, it is a rate increase on customers. And it's a double whammy because the cost of service goes up due to the higher tax rate and that just kind of flows through rates. But also the flow back of assets kind of slows down or declines. It just strikes me as if I must say utility commissioner for public policy maker and given state you're asking for what could be pretty decent size rate increases on customers coming out of an economic downturn. How does that get offset? I think about it from the customer standpoint. What's the get?

Hey, I think there's no doubt that—and again, I think there was a lot of advantage taken with it with the tax reductions that occurred. You're right, there's no doubt that there will be headroom that is reduced because it is certainly going to be an impact to put those back in. Now, the question is how to put back in or what time frame and that kind of thing. That's why it's so important for us to move forward as quickly as possible and accelerate achieving excellence so that we can mitigate that impact as much as possible. You're looking at it in the face of a definite need for rehabilitation and continued capitalization of the grid to ensure that we have reliability and resiliency of supply, particularly when you're dealing with hurricanes, wildfires, cyber, all those kinds of issues we have to respond to that. There'll be rate increases associated with the implementation of new taxes. I think it's unavoidable, but certainly, it's incumbent on us to make sure we mitigate that as much as possible with our achieving excellence program and other measures. We'll have discussions with the commissions just like we had discussions when tax reform occurred. It's unfortunate we didn't do it over a longer period of time like we had suggested because then it would mitigate even the return of taxes. If we continue vacillating back and forth like this, that's going to be a continual issue for our industry that our regulators need to recognize. We do have to keep some reserve there to ensure that we're not moving customer rates around as much as could be as if it becomes pretty volatile. Your point is well recognized, but we'll do what we can to mitigate the effects, and we'll have those conversations. I think one thing that's also come into play here, though, is the nature of the importance of the service that we provide for everyone to be able to watch their Netflix or do all the things they need to do at home, work from home. All those sorts of activities will change the nature of how we look at residential supply. There's no question that that's going to change going forward. That's why I'm always troubled by the commission saying that AMR versus AMI, for example, the investments we want to make in AMI. It's not because AMI is; you don't just look at the cost of the meters of AMI and the undepreciated balance associated with AMR. You've got to look at what you're leveraging into and that's the customers' ability to adjust to their own energy picture and be able to drive energy efficiency and all those things and give the customer the opportunity to do that as opposed to of the system just deciding in that forum. There are just a lot of things we need to have discussions about with our regulators to really focus on what that future actually means. With the electrification of the economy, that's clearly going to be an issue that we need to deal with to make sure our customers are more resilient, more reliable, and as economical as possible, but also give them the opportunity to make adjustments to their total bill as opposed to dealing on a headline on rate increases.

Just a quick update on taxes. If we were to have an increase in taxes, we anticipate that our commissions would handle it one of two ways and not dissimilar to how they handled tax reform three or four years ago. We anticipate that they would either allow the increase to be deferred until the next rate proceeding or we anticipate that they'd have kind of a one-issue order come out where they would allow us to adjust rates just to reflect the new expected higher income tax rate. In any event, we wouldn't expect it to be a significant driver of earnings or cash for the company going forward.

Great. Thanks. But it could be a modest delve into cash flow, like given sort of a reset in AVIT and amongst other things.

I think the situation is unclear.

Yes, again, we don't anticipate it to be significant one way or the other.

Understood. Thanks, Brian. Thank you, Nick.

Thank you.

Yep.

Hi, good morning. Thanks for taking my questions.

Yes, sure thing. Good morning.

I'm curious, I want to go back to kind of the load composition and the rate case activity. So, as we roll forward and the load dislocation continues to persist, where we have this unusual situation where residential, maybe it’s higher, but C&I is suppressed. That’s not really a normalized picture. So, if you go through your rate cases now, and the future rate cases where this period becomes your test, how do you address that? Did you attempt to normalize? Do you just go with what they actually look like? So, that's my first question, I guess.

Yes. So, we have multiple utilities, right? We have the opportunity to move around capital investment to time it with relative rate case activity to ensure that we are spinning on the right things at the right time. Not to say that we're trying to load the budgets or anything; what we're saying is, when we go through rate case filings, it's important to not only have discussions with the comms about what we're spending on, but what the results of that spending will be. If the load is not increasing, obviously it exaggerates, it certainly challenges the rate impacts because the denominator is not growing. If the denominator is growing, obviously that’s helpful. If it isn’t, you’re still having to make choices about what the priorities are for each regulatory jurisdiction based on discussions with the commissions to help us determine what are we willing to pay for, what are those priorities that exist. Some of those are absolute priorities, and some of them are things that yes, we'd like to do but it may be that we have to work out for a longer period of time before bringing that in. All kinds of dialogues occur relative to what that prioritization should be, and we'll continue doing that with our commissions. We have done, whether it’s gone where the economy is going well or whether the economy has been in a downturn. I think we’re moving toward an upturn. That’ll be helpful.

Sophie, we also have some jurisdictions that have forward-looking test years, so we’ll be able to incorporate a forward-looking view. Then we have places like Ohio, where residential and small commercial are already decoupled. There are lots of mitigations to unusual load circumstances that we find ourselves in right now.

Some of these things are known and reasonable adjustments too, so you have to look at the 2020 test year and say, we had to make these changes because of COVID. COVID is going to be a unique circumstance, and we had to react. The commissions themselves, we had moratoriums on customer cut-offs. There are adjustments we all made in that process, and I think we’ll make those adjustments coming out of that process as well.

Great. Thank you. And then, if I may, a quick follow-up on the Central Wind. You mentioned asset rotation, I guess, as a part of the considerations for equity financing there. What might those be? Is this more of a one-off situation with churn assets in your portfolio? Or could we be looking at something more strategic here? Thank you.

Well, so when we talk about potential assets, we look at everything, and we look at sources and uses. We want the use part of it right now is how do we finance North Central Wind, a major project. Sources can be anything in our portfolio, and that's where portfolio management is going to be a key part of what we do in the future. I'm not going to say specifically what we're looking at or anything like that at this point. But I will say it's incumbent on us to be looking at everything from a source perspective and then focusing on how we deploy capital in the best way and transfer that into really projects like North Central and be able to fund it in the best way to ensure our shareholder value. We will continue to do that. I think you got what the sort of year play out.

Thank you.

Yep.

Great. Thank you for joining us on today's call. As always, the IR team will be available to answer any questions you have. John, please give the replay information.