American Electric Power Company Inc (AEP) — Q1 2024 Transcript

Thank you, Abby. Good morning, everyone, and welcome to the First Quarter 2024 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 President and Interim 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, good morning, and welcome to American Electric Power's First Quarter 2024 Earnings Call. Shortly, Peggy will give a regulatory update, followed by Chuck, who will provide a more detailed financial review. The summary of our first quarter 2024 business highlights can be found on Slide 6 of today's presentation. Beginning with AEP's financial results, today, we announced first quarter 2024 operating earnings of $1.27 per share, a $0.16 increase over last year. We are also reaffirming AEP's 2024 full year operating earnings guidance of $5.53 to $5.73, and the long-term earnings growth rate of 6% to 7%. I'm pleased to note that we achieved a 14.2% FFO to debt ratio this quarter, which is within our stated range. Let me assure you that AEP's direction and strategy remain on track as this team is fully engaged, energized and working well together to enhance the customer experience and investor value. I've reviewed AEP's financial targets, and I have total confidence in the plan's achievability. It's hard to believe it's been just 2 months since I stepped into the role of interim CEO, and it has been a busy and productive 60 days. I've had the opportunity to meet with many different stakeholders, including elected officials, regulators, community leaders, customers, investors, and, of course, the team right here at AEP. All of these meetings have been very useful in helping shape the initiatives I will discuss shortly. Before I dive into other business, I want to give you a brief update on the search for a permanent CEO. The process is well underway, and I am certain, based on the talent pool that we're looking at, that we will find the right person to lead AEP. As I mentioned, when we first spoke at the end of February, the search will probably take between 6 to 12 months. We will take the time necessary to find the best candidate, and we're committed to keeping you informed. Across the AEP system, I see the need to increase capital spending in the future, including incremental investment related to commercial load growth from data centers and resiliency spending. Specific to load growth, the amount of service requests is staggering, ranging between 10 to 15 gigawatts of incremental load by the end of the decade, in addition to many more gigawatts from hundreds of inquiries. The key to capturing this commercial and industrial growth is to work with parties to ensure that commitments are real and secure, that the tariffs and contracts are fair to all customers, and that growth is self-funded. A couple of great examples of new commercial commitments can be evidenced by last week's announcements from both Amazon Web Services and Google to build large data centers in I&M's Northern Indiana service territory. At AEP, we have the largest transmission system in the United States with a high-voltage backbone in the Midwest. We expect more transmission investment opportunities driven by this data center growth, specifically in substations and customer connections. As a side note, I'd like to call attention to AEP's commercial load in the first quarter of 2024, which grew at 10.5% over the first quarter of last year. In addition, we will file our system resiliency plan in Texas no later than the third quarter of this year, related to legislation passed in 2023, including investment in hardening and modernizing the grid, expanding vegetation management, and wildfire mitigation. A strong balance sheet is critical as we look to fund potential increased capital spending. I believe incremental growth equity needed to fund smart capital is a positive thing. That said, we are open to equity alternatives through portfolio optimization, looking at opportunities where price meets execution, while at the same time, staying focused on our efforts to achieve constructive regulatory outcomes. I also want to provide a brief update on the sales of our AEP Energy Retail and AEP OnSite Distributed Resources businesses, both of which are included in the Generation & Marketing segment. We are working through the final phases of the process and expect to conclude that process by our second-quarter earnings call. Now let's move on to last week's newly published federal EPA rules on greenhouse gas standards, coal combustion residuals, and Effluent Limitation Guidelines. Although our team is still reviewing the rules, we will likely pursue legal challenges while working with others, including our states who are aligned with AEP's commitment to provide customers with reliable and affordable energy. These new regulations, in some cases, require the use of unproven technologies, are extremely expensive, and establish unreasonable compliance schedules. Our nation needs to add dispatchable generation to support grid reliability and growth, and these rules have the potential to not only prematurely accelerate plant closures but also discourage new dispatchable generation from being built. Now turning to labor management, we announced a voluntary severance program earlier this month, taking effect July 1. We expect this initiative will save labor costs of approximately $100 million and will assist us in managing our costs to better serve our customers, allow us to redeploy resources locally in our regulated footprint, and finally, mitigate impacts from inflationary pressures and interest rates. We will do this fairly and equitably for all of our valued employees. It's been a busy and productive couple of months, and I have confidence in our strategy and team. I'm excited about the opportunities ahead to drive growth and create value for our investors. We look forward to providing you with even more positive updates as we move forward in the year, further solidifying stakeholder confidence in our financial targets. Before we turn to Peggy for additional updates, know that I am aware of AEP's regulatory successes and some of our challenges. We continue to review plans to strengthen our regulatory compacts as we work through the past and are ready for the future. Peggy?

Thanks, Ben, and good morning, everyone. Now let's go to an update on several of AEP's ongoing regulatory initiatives. We are currently focused on investing more in local resources, particularly in regulatory and legislative areas. The utility industry is changing, and more now than ever, it's critical that we enhance our engagement in this dynamic environment. More details of our related regulatory activity can be found in the appendix beginning on Slide 23. AEP's operating company leaders are running the business and are engaged with our state regulators. Higher costs for materials and frequency of cases shines a spotlight on affordability, and customer builds are top of mind for us. We are focused on advancing interests in each of the states we operate to achieve outcomes that are beneficial for our customers, communities, and investors. This includes economic development work across our service territory, which brings jobs and creates headroom from larger load perspectives. We continue to reduce our authorized versus actual ROE gap. Our ROE improved slightly this quarter to 8.9%, even considering this measure is depressed by approximately 30 basis points from mild weather conditions. Staying with the recent positive developments, I'm pleased to report AEP Ohio's Electric Security Plan V settlement obtained last September was approved by the commission earlier this month. This ESP covers a 4-year term from June 2024 through May 2028. As we shared previously, we filed new base cases in Indiana and Michigan in the latter half of 2023. In Indiana, we reached a settlement that was filed in December, and we expect the commission decision by June of this year. In Michigan, we completed the procedural schedule and expect a ruling in that case in July. The team has been busy in 2024, filing an Oklahoma base case for PSO in January and an AEP Texas case in February. Last month, we filed the APCo Virginia biennial rate review, required by statute due to legislative changes attained in 2023. Earlier this month, in SWEPCO, Arkansas and Louisiana jurisdictions, we filed the annual formula rate plan. Now, on to the regulated resource additions. We continue to advance our 5-year, $9.4 billion regulated renewable capital plan and have a total of $6.6 billion approved by state commissions at APCo, I&M, PSO, and SWEPCO. As you can see, we're making great progress. We are also considering the renewables market, local input, and evolving reserve margins and resource adequacy as we meet the needs of our customers. We are advancing toward our fleet transformation targets, which 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, Kentucky Power, 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. 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 look forward to continuing to engage constructively with our regulators and strengthening relationships. With that, I'll pass it over to Chuck to walk through the performance drivers and details supporting our financials.

Thanks, Peggy, and good morning, everyone. Today, I'll review our financial results for the first quarter, build on Ben's comments about our service territory load, and finish with commentary on our financial metrics and portfolio management activities. Let's go to Slide 7, which shows the comparison of GAAP to operating earnings for the quarter. GAAP earnings for the first quarter were $1.91 per share compared to $0.77 per share last year. There is a detailed reconciliation of GAAP to operating earnings on Page 13 of today's presentation. One significant item I want to highlight in our GAAP to operating earnings walk is the one-time positive adjustment of $260 million, primarily for the remeasurement of a regulatory liability for excess deferred taxes due to guidance recently received from the IRS, related to the stand-alone treatment of taxes for ratemaking purposes. Let's walk through our quarterly operating earnings performance by segment on Slide 8. Operating earnings for the first quarter totaled $1.27 per share or $670 million, compared to $1.11 per share or $572 million in 2023. This results in a quarter-over-quarter increase of $98 million or $0.16 per share. Operating earnings for Vertically Integrated Utilities were $0.57 per share, up $0.05. Positive drivers included rate changes across multiple jurisdictions with the PSO base case and the Virginia proceeding being the most significant favorable year-over-year changes in weather and income taxes. These items were partially offset by higher interest, higher depreciation, and other taxes. The Transmission & Distribution Utilities segment earned $0.29 per share, up $0.05 compared to last year. Positive drivers in this segment included rate changes, primarily from the Distribution cost recovery factor in Texas, and the distribution investment rider in Ohio, increased transmission revenue, higher normalized retail load, and favorable year-over-year changes in weather. Please note that although weather was a positive variance quarter-over-quarter, in both the Vertically Integrated and T&D segments, weather for the first quarter of 2024 was very mild. Compared to normal weather, our estimate of the variance is roughly $80 million unfavorable, which is about $0.12 per share. The AEP Transmission Holdco segment contributed $0.40 per share, up $0.05 compared to last year, primarily driven by investment growth and favorable income taxes. Generation & Marketing produced $0.12 per share, up $0.03 from last year. Positive drivers included higher generation and retail margins, along with favorable interest expense. These items were partially offset by lower wholesale margins, higher income taxes, and lower distributed and renewable generation results compared to the prior year, largely due to the sale of universal scale assets in the third quarter of 2023. Finally, Corporate and Other was down $0.02 compared to the prior year, primarily driven by higher interest costs. Moving to Slide 9, overall retail load continues to accelerate ahead of expectations. This is due to our ongoing success in economic development, as well as the rapidly increasing demand from many data centers finding a home within our footprint. Weather-normalized retail load grew 2.9% in the first quarter, highlighted by a remarkable 10.5% increase in our commercial load, which is where the data center load is classified. This is a trend we expect to continue over the next several years as the growth of AI and other technologies boost the need for additional data storage and processing. Driving this demand are existing and new projects that have ramped up more quickly than we anticipated, especially with some of our largest customers in Ohio and Texas. As we refine our forecast for the remainder of this year and next, expect those projections to be higher to reflect the rapidly evolving situation, as Ben outlined in his comments. Outside of data centers, our economic development efforts are also helping us maintain growth in industrial load despite softness in manufacturing activity nationally. Industrial load grew 0.4% in the first quarter, roughly in line with expectations for the full year. This was driven primarily by increased activity among our plastics, tire, and paper manufacturing customers. We are keeping a close eye on our industrial customers, given the prolonged higher interest rates. However, the number of large new loads anticipated to come online in the next 2 years provides us with confidence that demand will remain steady despite any economic challenges for our existing customers. The main takeaway on load, however, is the significant growth in large customers that we continue to bring online across our footprint. As I mentioned earlier, be on the lookout for higher load projections as we provide additional guidance later this year. Let's move on to Slide 10 to discuss the company's capitalization and liquidity position. In the top left table, you can see the FFO to debt metric stands at 14.2% for the 12 months ended March 31, which is a 100 basis point increase from year-end and is in alignment with what I discussed on the last 2 earnings calls. Our debt to cap decreased slightly from year-end and was at 62.8% at quarter-end. In the lower left part of this slide, you can see our liquidity summary, which remains strong at $3.4 billion and is supported by $6 billion in credit facilities that were recently renewed and upsized by $1 billion to support our liquidity. Lastly, on the qualified pension front, our funding status has remained relatively flat since the end of the year and ended the first quarter at 100.6%. To wrap up today's message on Slide 11, the first quarter has provided a solid foundation for the rest of the year with a $0.16 increase in earnings per share compared to the first quarter of last year despite the mild weather conditions we experienced this winter. We remain focused on achieving our objectives, which include improving the financial performance of our utilities, offsetting cost increases due to inflation to keep electricity affordable, and embracing the opportunity to bring economic development to our communities by serving large loads. As an update, we successfully closed on the sale of our New Mexico solar assets for $107 million in cash proceeds in February, and we continue to work through the final phases of the AEP Energy and AEP OnSite Partners process. We expect to announce the results of the process by our second-quarter earnings call. Our first-quarter results give us the confidence to reaffirm our operating earnings guidance range of $5.53 to $5.73 per share. We remain committed to our long-term growth rate of 6% to 7% and FFO to debt solidly in the 14% to 15% range. We appreciate your investment and interest in American Electric Power. Operator, can you open the call so we can address your questions?

Just wanted to peel in maybe a little bit more on the data center points that you laid out there. I'm just wondering, we see a lot of forecasts out there regarding the timeline of how quickly some want to come to market, and we're trying to figure out how that matches against the system's ability to provide the power there in the connects. I'm also curious about how you see those two aligning. What does that mean for AEP over time versus plan? And how do you think about structuring rates in the right way so that other ratepayers don't bear more of a burden?

Yes, those are all really good questions, Jeremy. Our team has done a tremendous amount of work thinking this through. First of all, I like to say here at AEP that we're really wired for growth. As you know, we've been making significant transmission investments over the years, which will allow us, I think, to accommodate this first wave of growth we're seeing from data centers. So in the next 5 years, you will see that load coming on, and you'll see some of the incremental capital spending to support it. As we get further into the decade, I think it will be a function of additional transmission and perhaps even generation that will need to be built to meet it all. Our team is working hard. We have a great economic development team, and we have a very supportive business community in the states, and we've done a lot of groundwork to put ourselves in this position. You're also seeing, Jeremy, data center load ramp up at the same time, which is a natural trend too. To your latter question, this is one I've been keenly focused on. The good news is we believe that the load growth coming on will be fair to all customers and will help us keep our rates affordable across all jurisdictions. We are developing new tariffs that require longer-term commitments and that require the data centers to deliver on the load expectations that we're building for, obviously with credit quality, etc. When you do the math, that load growth benefits all customers, and that's what I'm really excited about, because it was very important to myself and the team that we keep rates affordable, and this growth will do just that.

Got it. That's helpful. And maybe just to dive in a little bit more as we think about data center load sensitivity. Should we be thinking that more along the lines of commercial sensitivity or industrial sensitivity, as provided in your guidance if you think about demand outstripping the forecast?

Yes. I would think of it, Jeremy, more like an industrial customer and that sensitivity there.

Got it. That's helpful. And then just the last one, if I could. As it relates to the external CEO search, has anything changed regarding the characteristics that are in focus for a candidate? How is the pool building at this point? Just wondering if there's any other color that you might be able to share on how the process is going.

I can tell you that the attributes and qualities we're looking for remain unchanged from what I described on the fourth quarter call. We are well underway now, and we have some really good candidates, impressive candidates. It takes time to sort it all out. There are, of course, other factors that we need to look at. The timetable that I outlined for you a couple of months ago was 6 to 12 months. So truncate 2 months off of that, and it's now 4 to 10. But we'll take as much time as we need to find the right person to fill the position, and I am very confident that we will do just that.

Got it. If I could just sneak in one last one. Just wondering about the overall corporate strategy, could you talk more about where things stand for AEP decentralization efforts? We're looking to more closely align P&L with the end decision makers at the local levels. How is that progressing?

This is a focus of ours. One of the things we want to do is put local resources in our communities. I know that's the right thing to do just talking to stakeholders. It costs money to do that, which is one of the reasons we did the voluntary severance, so we can free up some of those resources going forward to make those critical investments in our communities. Peggy, do you want to add anything?

Yes, Ben, I think you pretty much covered it. We have worked with the team on how we can enhance the resources from a regulatory and legislative perspective, having more boots on the ground. There's a lot of change in our industry, and having folks out there having these ongoing conversations is really important. So we're working through that process, and more to come on that topic.

In Ohio and Texas, your wires company, but in Indiana, where these last two announcements were made, are you supplying the generation as well? Is there going to be a generation need in Indiana related to those?

We do have RFPs outstanding. Peggy, do you want to take that?

Yes, we do have RFPs outstanding in I&M. To answer your question, yes, in some of these vertically integrated states like Indiana, we will have to serve the generation component, and we are working with those large loads that are coming to us on what that would look like. We are also focused on redefining and looking at our tariffs as well, which will be part of our strategy.

Just to clarify, the transmission grid is built up and has the capacity to take on these customers near term. But is there still more capital needed in the near term, or is it more after the five years?

No, Steve, there'll be more capital needed, but I don't think it will be those massive 765 lines, which take a long time to get built. We believe the team has done a lot of work on how we could accommodate that load within our footprint, working with PJM and others. So yes, there will be more spending, but it will be manageable.

Okay. And then on the FFO to debt, you're in the target range now. Are you in there for good? Do you think now? Is there any timing reason? Or do you expect to be in it throughout the year?

We are in the range, and we expect to remain in that range now. Our forecast that we review internally and with the agencies shows us being in that range. So that's the plan, and we intend to defend that.

Just on the annual customer bill increase, you reduced it to 3% increases per year through 2028, which is great to see. Does that already take into account the anticipated infrastructure investment needed to support any future data center growth? Or could we see that number be revised as well?

The answer is the incremental stuff we're talking about and the incremental transmission investment, it's not included in that. But it's not going to drive that from 3 to 4. If anything, it should keep it level and perhaps even drop it a bit. We've done a lot of work making sure that the incremental investment that we would need to make over the forecast 5-year timeframe is actually at a level that is accretive to keeping customer rates affordable. That's why I'm very confident moving forward with it.

Got it. Terrific. Expanding on previous questions, how are you approaching some unique issues presented by data centers, for example, those who want to be behind the meter but still want to have an emergency tariff with the utility, or data centers which want to socialize the cost of interconnection through all rate classes but may not have a major economic impact? Can we get a bit more detail here?

I'm going to turn it over to Peggy in a second. But listen, it's got to be fair to all customers now. This is a big deal, and it's an exciting big deal. But growth needs to be as close to self-funded as possible. We're going to achieve that with these tariffs and some of the other analysis that we're looking at.

What I would add to Ben's comment is that on our tariffs, we are looking at what minimum demands are. Most of the large loads want to be connected to the system. If they want some form of self-generation, we need to understand that, and we can include that in our planning. We're trying to gather all of that information upfront so we can appropriately serve customers and ensure that it's fair and balanced for all customers, with everyone paying their fair share.

The worst-case scenario we want to prevent is if the load doesn't show up consistent with how we built the infrastructure. If it does show up, it won't necessarily use, especially on a peak basis, the energy that we built in anticipation of this load. We have to ensure that these large loads don't jeopardize reliability. These tariffs address that too. If we do all these things, then growth is good for all, and that's what we're pushing for.

Very clear. On the updated load growth forecast coming later this year, should we assume the EEI or are there particular IRPs or other proceedings that we should watch for that could come before the EEI driving that?

The big update will come, I believe, in the third quarter's earnings call, but we may have some smaller updates before then.

Last question from us is about asset sales. You mentioned remaining committed to simplifying the business in the immediate term with a focus on continued execution of the sale processes. How should we think about the potential for any additional sales announcements following the conclusion of the current processes for the Retail and Distributed Resources businesses?

It would be on an opportunistic basis. We're always open to ideas. Chuck and I and the team have been around a while. We know sometimes good ideas sound good on paper, but you can't execute on them. So we filter that through the regulatory screening process, as you can imagine. And we like our assets. The price has to be right. But we won't be undergoing any large strategic reviews or early announcements regarding this. If an opportunity arises and we can execute on it, then you'll hear about it. In the meantime, our status quo plan is a strong one, and any equity we issue to fund additional incremental CapEx will be for smart growth, benefiting all, and keeping our balance sheet strong.

Going back to the balance sheet, as you think about your financing needs for the remainder of the year, can you provide an update?

The plan we laid out at EEI is still intact. At EEI, we mentioned the West Virginia securitization in the plan; that has been replaced by a Kentucky securitization of nearly equal amounts. So the plan remains intact, and there have been no significant changes, and we're proceeding according to that.

Great. Just going back to the commercial load and data centers. Could you speak about what has exceeded expectations substantially thus far?

It's mainly the ramp-up rates of the customers that have hooked up; they have come on more rapidly than we anticipated, which is why you're seeing those big bumps in commercial load throughout the quarters.

You talked about the need for growth equity. Can you elaborate on when you anticipate needing that?

As mentioned, we have $400 million in equity this year, followed by $800 million in equal amounts in the following two years. Strong balance sheet maintenance is a priority for us as we put out additional capital forecasts.

Understood. And on the tax item benefits, is that normalizing from last year, or is that onetime in nature as we think about year-over-year into '25?

About half of that will normalize throughout the year, while the other half is onetime due to things that happened in '23 that won't happen again in '24. So it's a true increase.

I wanted to go back on your commentary about portfolio optimization and the new financing plan. Should we see that as a separate process from the CEO search? Are those two independent processes?

If I understand your question, are we holding things back until the new CEO is in place? No, we typically update our CapEx and financing plans at the time of EEI. We're not in neutral; we're moving forward and focused on accommodating growth, fair rates for all, and providing more control and resources at the local level.

Thank you for the clarity. Regarding the proposed EPA ruling, could you share more? Is it about carbon capture technology you referenced, and are accelerated plant retirements directed toward coal?

Yes, it's a great question. Our industry has made significant progress in carbon reduction, and we are willing to do even more. However, we must consider affordability, reliability, and resiliency. We need dispatchable generation and cannot ignore that, even with emerging technologies. We intend to defend our grid and customers while complying with new regulations.

To elaborate on the load growth, you mentioned incremental 10 to 15 gigawatts by the end of the decade. Can you speak about the Vertically Integrated Utilities? How soon might we see filings to include the new expected load?

Ohio, within the PJM footprint, is the biggest driver of this load, and Indiana is definitely contributing as well. We will likely have to do incremental RFPs to capture that load, but I can't give you exact timing.

We have an IRP coming up in Indiana that will be later in November, which will be part of how we accommodate some of this load coming on.

Additionally, we must ensure we have adequate load to serve existing commitments. In Ohio, although we don't own generation, we will need to invest in Transmission.

Would there be any meaningful one-time cash outflow associated with the voluntary separation program? If so, how would you finance it?

The severance program takes effect mid-year, on July 1. The annual savings this year will cover the severance cost just about. The annualized benefit will come in '25 and beyond, enhancing our ability to make critical investments.

On rate design for data center load, what duration commitments and load ramp are you assuming to protect residential customers? Are there differences in rate design between jurisdictions?

Generally, building long-term assets requires commitments that are longer in nature, somewhere around the 10-plus to 15-plus year range, but we're currently working through that process.

With the mentioned higher load and potential new investments, how are you thinking about what tools are most advantageous to execute those opportunities?

Everything is on the table, but we will defend our BBB credit as we navigate these opportunities.

I wanted to circle back on the one-time gain associated with the PLR ruling you received earlier. What is the ongoing impact of that?

The stand-alone ratemaking for tax purposes has been a priority for us. We received the PLRs in the first quarter and are working with regulators on making the necessary adjustments to rates going forward.

And regarding transmission, is understanding you may have insights on upcoming FERC planning reforms?

As far as the planning, our in-house experts do not anticipate much of an impact on us. We do implement grid-enhancing technologies.

Our team has been very involved with FERC as they explore longer planning horizons and related topics.

Thank you for joining us on today's call. As always, the IR team will be available to answer any additional questions you may have.