American Electric Power Company Inc (AEP) — Q4 2023 Transcript

Thank you, Regina. Good morning, everyone. And welcome to the fourth quarter 2023 earnings call for American Electric Power. We appreciate you taking time today to join us. 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 Ben Fowke, our Interim President and Chief Executive Officer; Chuck Zebula, our Executive Vice President and Chief Financial Officer; and Peggy Simmons, our Executive Vice President of Utilities. We will take your questions following their remarks. I will now turn the call over to Ben.

Well, thank you, Darcy. Good morning and welcome to American Electric Power’s fourth quarter 2023 earnings call. It's great to have a chance to reconnect with you, although I never thought it would be under these circumstances. As you know, the AEP board of directors made a decision to remove Julie Sloat from her duties as Chair, President and CEO. Taking this action was not easy, but the board believes it was in the best interest of AEP and its stakeholders to do so. On behalf of the board and the entire AEP family, I would like to wish Julie well and thank her for all her contributions. I would also like to assure everyone that Julie's departure was not due to any unethical behavior, disagreements of financial policy, or because of any violation of AEP’s code of conduct. Now, as many of you are aware, after my retirement from Xcel Energy, I joined the AEP board in February of 2022. I was attracted to this board because I was impressed with AEP’s business model, its strong asset base, and the quality of its leadership team and board. I'm even more impressed two years later. In my tenure here, I've seen the AEP team rise to meet multiple challenges. Let me give you some examples, starting with earnings. For 14 years in a row, AEP has met or exceeded earnings guidance, and 2023 is no exception. Our operating earnings came in at $5.25, that's within our guidance range despite $0.37 of unfavorable weather and $0.45 of increased interest cost over the prior year. As you know, controlling O&M expense has been a challenge for the industry. And AEP has met that challenge, essentially keeping O&M flat for the last 10 years, while at the same time doubling its asset base. This team's continuous focus on O&M efficiency is nothing short of excellent. You may also recall that in early 2023, the Texas Commission denied a petition to be part of SWEPCO's 999-megawatt renewables project for $2.2 billion. But the team didn't miss a beat and put the project back on track with Arkansas and Louisiana ultimately stepping up to move forward with the full project. As a result, and including SWEPCO, today we have commission approval of $6.6 billion of new renewable projects throughout AEP’s service territory, representing a 70% achievement of our current 5-year $9.4 billion new generation capital plan. I hope you would agree with me that that is really solid execution. Initiatives to simplify and de-risk our portfolio are squarely in the focus of the board and the management team, and we are pleased with the great progress made. Last year, we completed the sale of our unregulated renewables portfolio, bringing in $1.2 billion of cash proceeds. We should be closing on our New Mexico renewable development solar portfolio within the next day or two. This, in combination with the expected conclusion of our retail and distributed resources sales process in the second quarter, keeps us on schedule to achieve our 2024 asset sales targets. Now, as we move forward, AEP will continue to be a disciplined portfolio manager and we will be willing to take action when price and the ability to execute intersect. To that end, we've made the decision to retain our ownership interest in both our Prairie Wind and Pioneer Transmission joint ventures. We also completed the review of Transource and ultimately determined that owning this joint venture fits strategically within our portfolio. We'd like our remaining assets, and we'll focus going forward on doubling down on our efforts to achieve constructive regulatory outcomes that will allow us to provide the quality of service our customers need and expect. Regarding Icahn Capital, our recent agreement came about from a combination of a constructive dialogue between AEP and the Icahn teams. Like us, the Icahn team believes AEP shares are undervalued and there's meaningful upside potential for our investors. The addition to AEP’s board will bring fresh perspectives as we continue to execute on strategic priorities and enhance value for our stakeholders. Looking ahead, today we are reaffirming our 2024 full year operating earnings guidance range of $5.53 to $5.73, as well as our long-term earnings growth rate of 6% to 7%, which is underpinned by a $43 billion 5-year capital plan, in addition to a 14% to 15% FFO to debt target, which Chuck will expand upon shortly. You should know that I am committed to my role as Interim President and CEO. And I believe I can add value while the board works to identify a permanent successor. So before I turn it over to Peggy for regulatory updates and Chuck for financial review, let me also acknowledge that 2023 has been at times a challenging year for AEP. There have certainly been some twists and turns and a few bumps in the road. But I would encourage all of you to focus on the key opportunities that lie ahead. I have tremendous confidence in our team's ability to achieve our objectives as we work every day to deliver safe, reliable and affordable energy to our customers. With that, I'll turn it over to Peggy.

Thanks, Ben. And good morning, everyone. Now I'd like to turn to an update on our ongoing regulatory and legislative efforts. While we made important regulatory progress in 2023, it is clear that we can do even more to facilitate successful and constructive outcomes. Details of related activities can be found in the appendix on Slides 29 through 31. Closing the authorized versus earned ROE gap is a key area of focus for us. Our fourth quarter ROE came in at 8.8%, a slight improvement over the third quarter. This also reflects impacts of approximately 40 basis points from mild weather conditions in 2023. Our efforts to improve and bridge the ROE gap are supported by work we've done related to the recent passage of legislation that will help position us to provide safe and reliable service while managing costs and reducing regulatory lag. Most importantly, we obtained securitization in Kentucky, a biannual Distribution Cost Recovery Factor or DCRF in Texas, and rate reviews every two years in Virginia. On the regulatory front, we secured several important wins over the course of 2023, including achieving constructive base rate case outcomes in Louisiana, Oklahoma, and Virginia, reestablishing formula rate plans in Arkansas and Louisiana, and reaching a settlement in our Ohio ESP V filings, which were awaiting a commission order. Overall, in 2023, we secured $312 million in rate relief. We also filed new base cases in Indiana, Michigan, and Kentucky in 2023. In Indiana, we have already reached a settlement, which we filed in December, and we expect the commission decision by June of this year. In Michigan, we continue to advance through the process and currently expect a ruling in the case in July. In Kentucky, the base case and securitization application were approved by the commission earlier this year. Other upcoming cases include a new Oklahoma base rate case for PSO, which we filed last month. Additional filings in the first quarter will include an AEP Texas base rate case and the APCo Virginia biennial rate review that should have the benefits of legislative changes attained in 2023. While we reached many constructive outcomes in 2023, we are disappointed in a couple of disallowances recently received. First, in Texas, the commission issued a decision disallowing capitalization of AFUDC related to our Turk plant in mid-December 2023. We filed a motion for reconsideration a week later. In West Virginia, last month, the commission disallowed a portion of our March 2021 to February 2023 under-recovered fuel, and we recently filed an appeal with the West Virginia Supreme Court on February 8. We are also disappointed with the FERC order we received in January 2024 related to treatment of accumulated deferred income taxes associated with net operating loss carryforwards, mostly affecting our Transmission Holdco segment. We just filed for rehearing on February 20. Shortly, Chuck will discuss the related unfavorable net financial impact to 2023 operating earnings. Looking ahead, we know there is more work to be done as we advance our regulatory strategies in 2024 to achieve a forecasted regulated ROE of 9.1%. We are well on our way this year with almost 70% of rate relief either secured or related to mechanisms that are more administrative in nature. We look forward to continuing to engage constructively with our regulators and strengthening relationships at all levels. As Ben mentioned, this year, AEP continued to advance our 5-year $9.4 billion regulated renewables capital plan and now have a total of $6.6 billion approved by various state commissions. More detail of resource additions can be viewed in the appendix on Slides 32 through 34. As previously disclosed, we received approval for APCo's 143 megawatts of wind generation, totaling more than $400 million of investment. This is in addition to the previously approved 209 megawatts of solar and wind projects for approximately $500 million. In 2023, we also received commission approval in both Indiana and Michigan for I&M 469 megawatts of solar projects, representing $1 billion of investment, PSO's 995.5-megawatt renewables portfolio for $2.5 billion, and SWEPCO's 999-megawatt renewables for $2.2 billion. Our fleet transformation goals are aligned with and supported by our integrated resource plan. We have pending requests for proposals for a diverse set of additional generation resources at I&M in Kentucky, PSO, and SWEPCO, with more to come from other operating companies, including APCo. These generation investments are an integral part of our broader capital program, which is 100% focused on regulated assets and the production tax credits that are generated from our renewable energy projects, which provide great value to our customers. In addition to these projects, AEP is advancing an additional $27 billion in investments in our transmission and distribution systems to support reliability and resiliency. These combined investments underpin our 6% to 7% EPS growth commitment while mitigating customer bill impacts. With that, I'll pass it over to Chuck to walk through the performance drivers in detail supporting our financial commitments.

Thanks, Peggy. And good morning to everyone on the call. I'll walk us through the fourth quarter and full year results for 2023, share some updates on our service territory load, our outlook for this year, and finish with commentary on credit metrics and liquidity. Let's go to Slide 9, which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. GAAP earnings for the fourth quarter were $0.64 per share compared to $0.75 per share in 2022. For the year, GAAP earnings were $4.26 compared to $4.51 in 2022. As we have highlighted throughout 2023, our year-to-date comparison of GAAP to operating earnings reflects the gain or loss related to the sale of certain businesses, regulatory outcomes, as well as our typical mark-to-market adjustments as non-operating. Our team is committed to minimizing the variances between GAAP and operating earnings as we go forward. Detailed reconciliations of GAAP to operating earnings are shown on Slide 16 and 17 of the presentation today. Let's quickly cover the fourth quarter. Our fourth quarter earnings came in at $1.23 per share, which was a $0.18 improvement over the same period in 2022. Note that we had $0.25 of favorable O&M and strong performance in our Generation and Marketing segment, partially offset by $0.06 of unfavorable weather, $0.09 of higher interest costs, and lower performance in Transmission Holdco. December weather, in particular, was the 28th warmest out of the last 30 years. For reference, the full details of our fourth quarter results are shown on Slide 15 of the presentation. Let's have a look at our full year results for 2023 on Slide 10. Operating earnings were $5.25 per share compared to $5.09 per share in 2022. Looking at the drivers by segment, operating earnings for Vertically Integrated Utilities were $2.47 per share, down $0.09, mostly due to unfavorable weather, higher interest expense, and higher income taxes. These items were partially offset by rate changes across various operating companies, increased transmission revenue, higher normalized retail load, favorable depreciation, and lower O&M. Once again, depreciation is favorable at the Vertically Integrated segment, primarily due to the expiration of the Rockport Unit 2 lease in December 2022. The Transmission and Distribution Utility segment earned $1.30 per share, up $0.14 from last year. Positive drivers in this segment included increased transmission revenue, rate changes in Texas and Ohio, and lower O&M. Partially offsetting these items were unfavorable weather, higher depreciation, and higher interest expense. The AEP Transmission Holdco segment contributed $1.43 per share, up $0.11 from last year. Positive investment growth of $0.09 and favorable income taxes of $0.05 were the main drivers in this segment. As Peggy mentioned, we received the FERC NOLC order in January, resulting in an unfavorable net impact to consolidated earnings of $0.07 per share, with the majority of that impact occurring at the Transmission Holdco. The impact of this order on our 2024 plan is approximately $0.03 per share. Generation and Marketing produced $0.59 per share, up $0.09 from last year. The positive variance here is primarily due to improved retail and wholesale power margins, the sale of renewable development sites, and favorable impacts associated with the contracted renewable sale in August. These items were partially offset by higher interest expense and unfavorable income taxes. Finally, Corporate and Other was down $0.09 per share, driven by higher interest expense, partially offset by a favorable year-over-year change in investment gains, largely due to investment losses that occurred in the fourth quarter of 2022. As we mentioned earlier, we are reaffirming our guidance range for 2024. For convenience, we've included an updated waterfall bridging our actual 2023 results to the midpoint of our guidance this year in Slide 24. While some variances changed due to last year's actual results, there is no change to our segments or overall guidance. Turning to Slide 11, I'll provide an update on weather normalized load performance. Overall retail load grew 2.5% in 2023. This was stronger than the 0.7% in our original guidance, thanks to an acceleration in data center growth and our commitment to economic development across our service territory. This is most apparent when looking at the incredible expansion in commercial load, shown in the upper right-hand quadrant of the slide. Commercial sales grew 7.8% for the year and were again dominated by data centers. We are encouraged that the gains are becoming more geographically diverse. New projects have come online in Michigan, Kentucky, and Oklahoma to supplement the development of what we see in Ohio and Texas. This is a trend we expect to continue over the next several years as the global demand for data storage and processing accelerates through the growth of AI and other technologies. We expect commercial load to continue to grow from its new higher base this year as projects work their way through the queue and commitments for 2025 are exceptionally robust. I believe that some of the 2025 load is going to accelerate and bleed into this year. Industrial sales grew 1.6%, which you can see in the lower left-hand quadrant of the slide. This is mostly attributable to a number of large industrial loads we've recently added across our service territories, which are more than offsetting any economic challenges seen by our existing customers. We expect industrial load growth to continue to reflect the softness in manufacturing nationally, with only a modest increase this year. However, growth in industrial sales beyond this year should accelerate as borrowing costs moderate and several large loads currently under construction come online. In the upper left-hand corner of the slide, you'll see that residential load declined slightly in 2023. Usage per residential customer has declined for the past two years, as homes have become more energy efficient and workers spend more time in an office instead of at home. The negative impact of inflation on household budgets may be influencing usage as well. On a positive note, we've seen our residential customer base grow consistently in certain regions. In 2023, we added almost 31,000 net new residential customers across our footprint, resulting in a positive offset to this segment. Overall, we're optimistic about the positive trends in load over the next several years, especially from a commercial and industrial perspective. Our conservative approach to estimating large loads gives us a lot of confidence in the growth we forecasted. In our next update, however, I would expect to see some upside in this area. Let's move on to Slide 12 to discuss the company's capitalization and liquidity position. In the top left table, you can see the FFO to debt metric stands at 13.2% for 2023. Positive changes in FFO were as outlined on the third quarter call, and included favorable changes in cash collateral, fuel recovery, and other various drivers. These positive changes were somewhat offset by an $830 million increase in debt during the quarter primarily due to the issuance of long-term debt to prefund our March 2024 AEP parent maturity. We are pleased that the team has overcome strong financial headwinds due to unfavorable weather and an unprecedented increase in interest rates to end the year above Moody's downgrade threshold of 13%. We expect our FFO to debt metric to continue to improve throughout 2024 as we progress towards our targeted range of 14% to 15%. This continued positive trend assumes normal weather for 2024 and continued growth in our cash flows through various regulatory activities, including recovery of our deferred fuel balances of approximately $425 million. Our debt to cap increased from the prior quarter by 60 basis points to 63%, and our parent debt to total debt is approximately 21.7%. In the lower left quadrant of this slide, you can see our liquidity summary, which remains strong at $3.4 billion and is supported by our bank revolver and credit facility. Lastly, on the qualified pension front, our funding status remains unchanged from the prior quarter to end the year at just over 100%. While falling interest rates increased the liability during the quarter, this increase was offset by positive asset returns. Turning to Slide 13, I'll give a quick recap of today's message. We delivered on our commitments for 2023 despite the significant challenges we faced. Weather was one of the mildest years on record for the AEP system in the past 30 years, resulting in a negative $0.37 impact year-over-year and $0.21 versus normal weather. To put a little more context to those numbers, our heating degree days were down 36% compared to normal across the system. Also, interest expense was a $0.45 hurdle to overcome versus 2022 results. We worked diligently throughout the year to reprioritize and balance our plan by adjusting the timing of discretionary spend while staying focused on meeting our core business needs. While admittedly facing some challenges on the regulatory front, we secured many rate outcomes that were critical in supporting our objectives to provide reliable service to our customers. Looking into this year, we are optimistic about the opportunities and prepared to face any challenges ahead of us. We reaffirm our guidance for 2024 of $5.53 to $5.73 per share, our long-term growth rate of 6% to 7%, and an improved balance sheet while continuing to implement our capital program, taking care of the customer, earning our authorized return, and executing on our strategic priorities. I would like to take a moment and thank Julie Sloat for her 23 years with AEP. Julie has made a positive impact on AEP and will be missed by many. Ben, we welcome you to the AEP management team. Your leadership in the industry is well respected, and you will be embraced by the employees of AEP. The entire management team looks forward to working with you and the board as we look to enhance value for all AEP stakeholders. Thank you for your time today. Operator, can you open up the call for questions.

Hey, guys. Good morning.

Good morning. So obviously, the slides are leaning on the successes of AEP. You've reiterated your earnings guidance, balance sheet targets, growth rate, CapEx numbers. I guess outside of some management shuffling, what do you see as broken? I guess, what's the goal of the review? What's on the table, what's off the table?

This is Ben. I don’t believe the term broken applies here. There are certainly areas where improvement is possible. We highlighted many of our accomplishments in the script, yet we also acknowledge the need for better regulatory outcomes. Our strategic priorities remain unchanged. We have completed a review of Transource and intend to retain this asset, which we consider valuable. With the changes FERC is examining, this provides us with numerous options. We will maintain our discipline as portfolio managers, as I've noted in my remarks, and will be open to transactions where favorable pricing and execution opportunities align, which is crucial. Ultimately, enhancing long-term value in this industry involves investing in capital expenditures at one times book value and ensuring effective recovery of that investment. We have performed reasonably well in this regard, but there is room for improvement. We will evaluate the people, processes, and planning that contribute to these outcomes, always keeping in mind what is significant to our local leaders and stakeholders. Listening carefully to their needs at the local level is vital. By doing so, we can significantly improve our chances of success, creating a positive cycle where invested capital benefits not just customers and communities, but shareholders as well. This outlines our plan moving forward.

And do you believe, sort of, do you believe there's some jurisdictions that AEP currently operates where you may not be able to hit those targets as you're thinking about people, process, et cetera?

Well, I think there are areas where we have improvement, but I will turn it over to Peggy and/or Chuck to elaborate on that.

I think as it relates from a regulatory perspective, I do think what we're going to do is continue to build on the constructive legislative and regulatory outcomes that we have had. We're going to further strengthen our regulatory relationships, and we're really going to be keenly focused on execution. I think that some of the disappointments that we had in 2023, we're going to learn from them, and we're going to go back out and focus on execution from that standpoint.

Okay, perfect. Lastly, Ben, as you and the board consider AEP's current position, what qualities are you seeking in the next CEO? Are you looking for someone with previous CEO or President experience from an operating company, a finance or regulatory background, or both? Could you clarify what specific traits you desire in the next successor?

It's definitely an external search. I don't want to narrow it down to any specific background, but I believe we will have a strong list of candidates. AEP is a great company with valuable assets, making it an attractive option for many skilled individuals. It will be wonderful to choose from that talent. Ideally, we're looking for someone who is an experienced executive in the utility industry and is well respected in the investor community. That's very important, along with having excellent leadership qualities. We have a lot of talent at AEP that we want to develop. Ultimately, it would be ideal if the candidate has multi-jurisdictional experience and the capability to achieve regulatory success. While that's a significant wish list, I am confident we will attract many exceptional candidates.

Got it. Terrific. Thank you, guys. I'll pass it to someone else, and good luck on Phase 2. I appreciate it.

Thank you.

Hey, Jeremy.

Hi, good morning.

Good morning.

I just want to kind of continue along these lines, if I could. And I was wondering if you're able to comment, I guess, on the recent agreement AEP announced with Icahn Capital and kind of how that ties into the change at the top here given the relatively short tenure? And just wondering if there's anything else we should be expecting, I guess, along these lines looking forward with Icahn's recent announcement?

I will reiterate what we've communicated in our press release and scripted remarks. The addition of board members from Icahn came after discussions with their team and ours. We welcome their perspective, as they agree with us that AEP shares are undervalued, and we aim to collaborate to enhance shareholder value. Regarding Julie's departure, I cannot provide more details than what has already been shared. It was a decision made by the full board after discussions with Julie, and we concluded that transitioning to a new CEO is the best approach. We will continue to work diligently to deliver shareholder value, and I believe the Icahn board members will offer a fresh perspective as we strive to achieve those objectives.

Got it. That's very helpful. And just as we think about the strategic path going forward at this juncture, are all options on the table or any options off the table? Just want to kind of see the parameters of what we could expect going forward.

We truly value our current assets. We have finished our strategic reviews, and although we are considering prices, we will keep searching for opportunities that benefit our shareholders. We are in a fortunate situation where our assets can help us meet our strategic objectives. Chuck pointed out our FFO to debt metrics and targets, which indicates we are in a solid position. As I mentioned previously, we aim to be effective portfolio managers and will remain open to transactions if the conditions are favorable and execution is feasible. In the meantime, we will focus on the essential tasks that will ultimately deliver the results you expect.

Wonderful. Very helpful. Thank you for that.

You’re welcome.

Hey, good morning, everyone. Thanks for the prepared remarks and taking my questions. Good morning. So I guess, you acknowledged in your remarks, there have been some twists and turns and some regulatory volatility in '23. You had some headwinds that you highlighted from the FERC order on taxes, the Oklahoma rate order, among a few other items. But just the 6% to 7% has been pretty resilient and unchanged this entire time. So can you just maybe help us all understand just what's kind of allowing AEP to absorb these issues and where the offsets have been kind of in the 5-year plan that allows you to continue to reaffirm?

I'll pass it to Chuck shortly, but the $43 billion in our 5-year capital plan supports the 6% to 7% growth target. During years with unfavorable weather or other challenges, our management team shows resilience. This isn’t just about one year; looking back, we've consistently met our commitments for 14 years. There may be regulatory challenges and unexpected events, but historically, we've managed to deliver results. We operate in 11 jurisdictions and will file rate cases, and our track record indicates good performance. When we encounter challenges, we find ways to address them and improve moving forward. Chuck, do you want to add anything?

Yeah. No, Ben, as you said, it's underpinned by the $43 billion 5-year capital plan. I'd also point to what Ben made an observation as a board member and in his opening remarks about our O&M. There's a chart in our deck that you can refer to, right? We've doubled the rate base of this company while basically keeping O&M flat over that entire 10-year period. I think that's a remarkable accomplishment and that's our plan going forward as we continue to grow this company and basically repurpose and reallocate O&M. I also talked in my remarks about the load opportunities. I tend to kind of take a measured approach to this. But we really are optimistic about the opportunities that we're seeing there. As I said, the commercial load growth is just amazing. And we're seeing some good opportunities in economic development activities in industrial as well. And then lastly, of course, underpinning that plan is improved returns. We are not earning where we need to earn, and we need to have the regulatory execution and prudency reviewed to make sure that we are hitting the mark there. So I think all in all, that kind of underpins the plan going forward.

Got it. I appreciate the comments on diversification, the overall plan size, and the operating and maintenance aspect. Thank you for that. Regarding the 6% to 7% compound annual growth rate, is there any specific shaping to that over the five-year plan? Where do you currently see yourself within that range? Additionally, with a new CEO expected to join us later this year, do you anticipate they will support that plan, or will they have more influence over the direction of the company? Thank you.

I will address the first question. Our 5-year plan is centered around the midpoint of this year's guidance. We aim to grow within the 6% to 7% range without any significant fluctuations during that period. I'll let Ben provide more details on the overall plan, including O&M. Thank you. Additionally, regarding the 6% to 7% CAGR, is there any specific shaping of that throughout the 5-year plan? Do you have a current position within that range? And as we anticipate a new CEO joining us in the latter half of this year, do you expect them to adopt this plan, or will they have more influence in determining the company's direction? Thank you.

Yeah. I mean, I think, first of all, we'll take our time, and we'll find the absolute best permanent successor that we can. Part of that process, we obviously will have the strategic discussions. The board is very comfortable with our strategy and our strategic priorities. I suspect that the ultimate permanent successor CEO will also be comfortable with those strategies and perhaps can figure out a better way to execute on them. That would be the goal. But we're not looking at a complete dismantling of our strategic priorities.

Thanks a lot for answering the questions today. I appreciate it.

You’re welcome, Nick.

Hey, good morning. Thank you for taking the questions. A bit of a shift on the asset sale program, I guess, in terms of the decision to retain the transmission joint venture. So could you just talk a little bit about the rationale there and how we should think about your view on transmission as part of the portfolio or potentially as an area of sort of value monetization going forward?

This is Ben. Transmission is a great asset for us, and we are the largest transmission provider in the United States, which we value. We are open to opportunities that could enhance shareholder value, but we don’t feel pressured to make any changes. This situation gives us a stronger position as we look ahead. Chuck, do you want to add anything?

I believe we are also talking about Pioneer and Prairie Wind and our choice to retain those assets. The truth is, these assets generate earnings for AEP and offer attractive returns. Overall, if we were considering selling them, it wouldn't have a significant impact on our financing plan. This aligns with what Ben mentioned. As we evaluated opportunities in competitive transmission and considered our other transmission assets, we are committed to leading in this area. It's essential for us as a leader in transmission to continue to excel, and that is our intention.

That's helpful. Appreciate that. And then, Chuck, probably for you, just a little bit of a shift in tone around the FFO to debt metrics as well for '24. Can you just talk about what we should expect relative to that 14% to 15% range for 2024 on FFO to debt and what the moving pieces are that you're kind of watching that could move you outside of that range?

Yeah. So thank you for that question. And our message has changed a bit there on the timing. But what I would tell you is really kind of timing is not what is most important. It's really the trend that we're on, and then it's hitting the mark of 14%. It's the sustainability of staying in that range as we go through the 5-year plan. Let me comment on a couple of things. Right? We said we would be above 13% by year-end, and we were. We didn't make any excuses for the soft weather that happened in 2023. Note also that 13% is the downgrade threshold at Moody's. Second, right, the trend is very positive. This quarter, we're going to have another roll-off of cash collateral in Q1. I think the number is around $390 million that will come out of the 12-month average. We are also working down our deferred fuel balances. Lastly, right, we clearly show our models and review those with the agencies. Those models indicate that we would be in the range this year and be in the range over the longer term. That's what's most important, right, hitting the mark, trending in that positive direction and staying in the range. So again, the timing, which month or which quarter is not important, it's the three things that I mentioned earlier.

Got it. Thanks very much for the time.

Good morning.

Good morning.

Given the focus on people and processes, how long do you view the company's review of its regulatory strategy to take? And in that context, how is the new review different from how AEP has reviewed its regulatory strategy historically?

I’ll hand it over to Peggy, who is leading this effort. This is not something new; it has been discussed at the board level. I plan to be actively involved with Peggy. We have a strong team, but we need to ensure we take the necessary steps to achieve better outcomes in the future. There is a lot of behind-the-scenes work that goes into processing, executing, and planning a rate case. It can get quite detailed, but those details cumulatively make a significant impact. Peggy, it’s your turn.

I want to express my enthusiasm for collaborating with Ben to discuss our regulatory strategy. We've achieved positive regulatory results in 2023. While we previously highlighted some disappointments, I want to emphasize the legislative efforts we've undertaken, which will help reduce delays. For instance, our biannual rate review in Virginia has improved from a three-year timeframe. We also expect progress in Kentucky, where we approached the situation as a two-step process; we view the outcome from the securitization order received in January as constructive. We aim to build on these advancements. I agree that we have a skilled team, and we will continue to push forward. I look forward to working with Ben on further improvements.

Great. And then unrelated, where do you see the biggest opportunities to benefit from the data center build-out in your service territory? And given your balance sheet constraints, do you have any reservations or concerns around that opportunity?

The biggest opportunity so far have been in Ohio and Texas. In our forecast, for our 5-year plan, we have included the capital needed to serve those customers. If there is incremental growth beyond that, it would be an opportunity that we'd have to evaluate and figure out how we would smartly finance it and meet the generation needs that come with it.

Good morning, Ben and Chuck. I have a couple of questions, one for each of you. Ben, I'm curious about the 1% stake that Icahn has taken and the significant changes in the board. It doesn't seem like a large position, as it includes two voting seats and one non-advisory seat. What are your thoughts on the changes in the board and the possibility of expanding it?

You're correct. I believe Icahn holds around 5.3 million shares. We engaged in discussions with him and agreed on two additional board seats and an advisory position. To reiterate, this was a decision made by the entire board after discussions with Julie and the other members. We concluded that it was in AEP’s best interest to transition to a new CEO. Interpret that as you wish, but I will maintain that it was a decision made by the full board, which is necessary to remove a CEO.

Great. And then, Chuck, two quick questions. It seems the timing for equity has changed. I understand your earlier questions to Carly regarding your goal to exceed the 13% threshold, but I believe the equity may have been pushed back in the near term? Lastly, regarding earned returns, what kind of improvement can we anticipate each year? I'll stop there.

Okay, thanks, Anthony. Our equity needs haven't changed since EEI. You may be referring to maybe an older forecast we had some months back. But what you're seeing in our deck today is consistent with what we've shown at EEI. I'll let Peggy talk about the returns.

For 2024, we are projecting our return on equity for our regulated segments to be 9.1%. We will continue to focus on closing the gap, building on some of the legislative successes we've achieved and reducing some of the lag from that perspective.

Yeah. Our EEI guidance, right, we kind of change the waterfall based on the actual, right? But what's in or out hasn't changed, Paul. As Ben mentioned, we're in the process that we plan to conclude here in the next several months on retail and distributed businesses. He also mentioned that we're closing NMRD today, which there will be a benefit from that sale coming through. But everything is underpinned. Remember, too, when you look at the waterfall, we took the Generation and Marketing segment down to what we would call much more normal contributions. I'm not concerned about the ability to take the proceeds, use them as appropriate to get that accretion as we go forward. But no, it's still the same plan, if you will, as we put out at EEI.

And then Chuck mentioned that the FERC decision is expected to have a $0.03 negative impact on '24. Is that going to be treated as operating EPS? Or is that going to be excluded as non-recurring?

No, it's operating.

And then I guess the last question I have is, currently, there's a proceeding in Kentucky where, I guess, there's recommendations for potential disallowance of fuel and purchased power costs. I think there's also a fuel review that could take place or may be taking place in Louisiana. Can you give us, I guess, an update on what your expectations are and what's happening in those proceedings?

In Kentucky, we have a 2-year fuel review currently in progress, and we are awaiting the outcome of that. We had a hearing earlier this month. What was your other question related to SWEPCO?

Yeah. I think as part of that settlement on the renewables, there was, I guess, the ability of staff to do a review of the fuel?

That was part of the review, which is still ongoing. Darcy can provide you with more information if that wasn't clear enough.

And last question for me. In terms of the 9.1% that you're targeting for this year, I think what type of an improvement do you see as being necessary in order to hit the 6% to 8%? I think in the past, you've talked about needing to improve the earned ROE as part of hitting your targeted growth rate?

Yeah. So over our 5-year plan, we look to be typically to be in the 9.5% range. What we're looking to do is increase by 10 basis points each year. We think that that is achievable. We continue to work through our regulatory outcomes to be able to close that gap.

Good morning. How are you? It seems to me that there isn't much of a change in strategy with the new chapter and managerial shift you're experiencing. Am I seeing this correctly?

Yes, I believe so. The strategy is solid. We just need to focus on executing it, and that's our main priority, Paul.

Okay. I just want to make sure I'm hearing correctly. Also, is there any timing we should consider regarding when a new CEO will be appointed?

Well, let me just say I'm committed to stay as long as it takes. So no shortcuts. But I can't see it being shorter than six months, and hopefully, it doesn't take more than a year. But again, the process will take the time it needs to take to get the absolute right candidate in place.

Okay. Finally, regarding regulatory goals and desires, I've observed that several jurisdictions seem to be looking for lower prices. I'm curious if you are considering any new or innovative regulatory strategies to address these concerns while also increasing investment. I'm sure you're aware of the general concerns, but do you understand what I mean about making investments and possibly avoiding the resistance that appears in some AEP jurisdictions, which seem to hinder new investments that could lead to higher rates? Do you follow what I'm saying?

I believe it’s a great opportunity for economic development given the load growth we see in our jurisdictions. We can play a significant role in this, either by driving that growth or providing the necessary infrastructure. Everyone is eager for this in all areas. However, we will pay close attention to the needs and wants of our jurisdictions and respond appropriately. Peggy or Chuck?

And I'll just briefly add to that. In 2023, we landed 92 new customer load additions totaling about 5-gig and adding additional jobs to our service territory. So I think that that's certainly one area and aspect of how we're going to help with affordability as well.

Yeah. And Paul, clearly, the data center load that we're experiencing is going to create an opportunity to spread fixed costs along a bigger base and improve the headroom opportunity there as well.

Okay, great. And I appreciate it. Good to see you back, Ben. Hopeful as well.

Thank you. Thank you, Paul. I appreciate that.

Thank you for joining us on today’s call. As always, the Investor Relations team will be available to answer any additional questions you may have. Regina, would you please give the replay information?