American Electric Power Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 14 speakers on the call.

Operator

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the American Electric Power Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I would now like to turn the call over to Darcy Reese, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Eric. Good morning, everyone, and welcome to the Q3 2023 earnings call for American Electric Power. We appreciate you taking time today to join us. To 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.

Speaker 1

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 Julie Sloat, our Chair, President and Chief Executive Officer and Chuck Zebula, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Julie.

Speaker 2

Thanks, Darcy. Welcome to American to Power's Q3 2023 earnings call. It's good to be with everyone this morning. Before I discuss our Q3 performance, I would like to introduce our CFO, Chuck Zebula, who will walk us through the results today. Chuck has been with the company for 25 years and has a deep understanding of our business.

Speaker 2

He's hit the ground running in his new role and we're grateful for his leadership. Many of you are familiar with Chuck and I'm confident that you'll enjoy working with him in the CFO role. I'm pleased to share that the execution of our strategy is on track. AAP is well positioned to deliver on our robust to Flexible's 5 year $40,000,000,000 capital plan with an emphasis on our generation fleet transformation and investments in our energy delivery infrastructure as we meet our customer needs. While our industry continues to transform amid this dynamic environment characterized by more extreme weather, to rising interest rates and supply chain constraints.

Speaker 2

AP has continued to adapt and take thoughtful actions to stay our course. We're keeping the customer at the center of every decision we make, while also balancing and listening to our stakeholders who are critical to our success. This quarter, we've made progress on our ongoing efforts to simplify and de risk our business profile through portfolio management, directing all proceeds of those efforts to the regulated business and to balance sheet management, which I'll speak to in more detail in a moment. We've also been working hard on the regulatory front. I'll provide insight into our success in the addition of renewables to our portfolio and the many positive developments on regulatory and legislative initiatives.

Speaker 2

To a summary of our Q3 2023 business updates can be found on Slide 6 of today's presentation. To AP reported strong third quarter operating earnings of $1.77 per share or $924,000,000 We have a flexible business plan that allows us to deliver on our financial commitments while taking into account mild weather in the first half of the year to the higher for longer interest rate environment. As we actively manage the business today, we're narrowing our guidance for 2023 full year operating earnings to a range of $5.24 to 5.34 while reaffirming the 5.29 midpoint and our long term earnings growth rate of 6% to 7%. Moreover, last week, we announced an increase in our dividend, to consistent with our earnings growth rate and within our targeted payout ratio of 60% to 70%. In a few minutes, Chuck will talk about the support we have for our narrowed 2023 earnings guidance range, which includes O and M management and to positive load outlook as we drive economic development within our service territory.

Speaker 2

While our FFO to debt was to 11.4% this quarter. We expect that this metric will improve materially by year end and fall within the targeted range to 14% to 15% in early 2024. Chuck will also touch on the short path to this balance sheet target. We continue to make progress in our efforts to simplify and de risk our portfolio. In August, we announced the completion of the sale of our 13 to 65 Megawatt unregulated renewables portfolio to IRG Acquisition Holdings, which resulted in after tax to proceeds totaling $1,200,000,000 A summary of this sale can be seen on Slide 7.

Speaker 2

We've also made headway on some of our other asset sales that we previously discussed. A summary of this can be referenced on Slide 8. In May, we announced the sale of our New to the Mexico Renewable Development Solar Portfolio, also known as NMRD. The book value of AAP's investment as of September 30 was 119,000,000 We're currently on track with our fifty-fifty joint venture partner PNM Resources as we target to close on this transaction in the late Q4 of this year or to early Q1 of NEXT. We expect to continue the non core business sales processes we have underway as we enter 2024.

Speaker 2

The sales of our retail and distributed resources businesses were launched in August with book values of $244,000,000 $353,000,000 respectively, as of the end of Q3. We expect to reach a sale agreement in the Q1 of next year with an anticipated closing in the first half of twenty twenty four. In July, we announced the sales of Prairie Wind Transmission and Pioneer Transmission, our non core transmission joint ventures. To As of the end of the Q3, AAP's portion of rate base associated with these investments was $107,000,000 We expect to launch the sales process soon and close in 2024. Finally, related to TransSource, while there are no new updates for now, We anticipate completing the strategic review by the end of this year, so please stay tuned.

Speaker 2

AP's portion of rate base to this particular investment joint venture was $348,000,000 as of quarterend. Let me shift gears and provide you with an update on our regulated renewables investment to the plan. The team has remained focused and made solid progress. As you know, we have $8,600,000,000 of regulated renewables in our 5 year capital plan. We now have a total of $6,000,000,000 of the investment plan approved and an additional $800,000,000 currently before commissions for approval, with each of these projects providing valuable fuel savings for our customers.

Speaker 2

More detail on our renewable resource additions can be viewed in the appendix to our next question on slides 32 through 34. As we've previously disclosed, both PSO's 995 to 2.5 Megawatt Renewable Portfolio for $2,500,000,000 and Swepco's 999 Megawatt Renewable Portfolio for 2.2 1,000,000,000 to the Q4 of 2018. At a collective $4,700,000,000 these two portfolios alone comprise a large component of the approved to $6,000,000,000 amount I just mentioned. Additionally, in APCO's service territory, we're also pleased to report a positive development. In September, Virginia approved 143 Megawatts of Owned Wind for more than $400,000,000 building upon ATCO's existing 209 Megawatts of wind and solar projects that were approved last year, which totaled approximately $500,000,000 to Moving across our service territory to I and M, we filed to seek approval for recovery of investment in 2 owned solar projects totaling 4 69 Megawatts, which represents $1,000,000,000 of total investment.

Speaker 2

We're making progress on this front to the call. We received commission approval last month in Indiana for both the 224 Megawatt Mayapple and 245 Megawatt Lake Trout Solar Projects. To in Michigan, the commission approved Mayapple back in August and will decide on lake trout in the Q1 of next year. We also await a commission order expected to any time now for the 154 Megawatt Rock Falls Wind Farm at PSO for approximately $150,000,000 Importantly, our regulated renewables plans are aligned with and supported by our integrated resource plans. We have issued requests for proposals for additional owned resources at APTCO and I and M with more to come from other operating companies in the near future as we listen, learn and respond to state preferences.

Speaker 2

I'd like to turn to updates on our ongoing regulatory and legislative initiatives. We've been engaged in efforts across our service to close the authorized versus earned ROE gap. Our 3rd quarter ROE came in at 8.7%, driven in part by the unfavorable weather in the first half of twenty twenty three that I mentioned earlier, which depressed this measure by 40 basis points. While this is a modest improvement over last quarter, we are aware that more can be done and more needs to be done on this front. Closing the gap will remain a primary focus into 2024 as we keep federal, state and customer preferences top of mind along with meeting the needs of our communities.

Speaker 2

We remain focused on reducing the GAAP going into year end, while still meeting our earnings guidance. To that end, I'm happy to confirm that we have to settlements in place for APCO Virginia's 2020 to 2022 Triennial and AP Ohio's ESP 5, to both cases which were filed earlier this year. We're awaiting commission decisions in these states and Virginia's orders expected in the Q4 of this year and Ohio's will likely be issued in the Q1 of 2024. In addition, we filed new base cases in Indiana and Michigan

Speaker 3

to the Q3. In both filings,

Speaker 2

we requested a 10.5% ROE and case drivers included distribution, investment in technology, enhanced reliability and grid modernization using 2024 forecasted test years. We anticipate the new rates will be in effect next year. The team has been active on the legislative front in Texas with Texas to the SEC. This legislation passed in June allowing utilities to file the Distribution Cost Recovery Factor Mechanism or DCRF twice per year instead of once per year. This legislation also allows the DCRF mechanism to be used by utility even if it has a pending rate case proceeding underway.

Speaker 2

Consequently, the legislation will help improve AAP's regulatory lag in Texas to the tune of approximately 50 basis points in earned ROE starting in 2024. In fact, our April 2023 DCRF filing was approved and rates went into effect in September. To For Kentucky Power, our June 2023 base case application incorporated a comprehensive rate review, a 9.9% ROE and a request to allow for the securitization of $471,000,000 of regulatory assets, ensuring Kentucky Power is best positioned to provide to safe and reliable service while managing costs. Constructive intervener testimony was filed in October, including support for securitization. To our Q4.

Speaker 2

By statute, implementation of interim rates is permissible in January 2024. Moving to PSO, you'll recall that in May, we reached a to settlement with the commission staff, the attorney general and other parties in Oklahoma's PSO base case, which included a 9.5% ROE and provide for approval for more efficient cost recovery mechanisms. We implemented interim rates in June while we await a commission order, which is expected anytime now. As you know, the management of fuel cost recovery is a top priority with AAP's deferred fuel balance across our vertically integrated utilities shrinking sequentially to our Q3 results and totaling $1,200,000,000 as of the end of the Q3 of this year. We have worked with stakeholders to intentionally adapt our fuel cost recovery mechanisms across our jurisdictions to the operator with the objective being to balance cost recovery with customer impacts.

Speaker 2

The West Virginia fuel proceeding is approaching resolution. To Recall in our April 2023 fuel recovery application, we filed 2 options for consideration. One option amortizes the fuel balance over 3 years. To the 2nd option, we respectfully set forth for the West Virginia Commission consideration the use of the 2023 seconduritization legislation to manage our $553,000,000 deferred fuel balance along with securitizing storm cost balances to the net plant balances of generation assets. The generation assets are currently embedded in rates and assumed to operate through 2,040 And securitizing those assets nearly fully offsets the fuel cost recovery impacts to customers.

Speaker 2

We appreciate the engagement with all the stakeholder parties as we work toward a conclusion in this case by year end and a constructive path forward for West Virginia. More detail on regulated activities can be found in the to the appendix on slides 35 through 38. I'm pleased with the progress we've made this quarter and by the great work underway to actively manage the business, to deliver on our commitments and create value for our investors, all while keeping affordability and reliability for our customers at the center of everything we do. We We have a strong team in place and I'm confident that we'll continue to execute on our strategic priorities and advance our capital investment plan to deliver reliable, affordable power to our customers. I look forward to seeing many of you in person at the EEI conference in a couple of weeks.

Speaker 2

At the conference in Phoenix, we'll provide some additional color on our business strategy, to share our 2024 guidance and other financial details, including our 2024 through 2028 capital plan and related 5 year cash flows. Now with that, I'll hand it off to Chuck who will walk through the performance drivers and details supporting our financial targets. Chuck?

Speaker 3

Thank you, Julie. It's good to be with you and everyone on the call this morning. As many of you know, I've been in many different roles at AEP, that this is my first earnings call as the CFO. I'm truly honored to return to the exceptional finance team at AEP and lead this area as we embrace the opportunity to invest in our regulated utilities and serve our customers with affordable and Reliable Electric Service. Today, I will discuss our Q3 year to date results, share some updates on our service territory load and economy and finish with commentary on credit metrics and liquidity, as well as confirming our guidance, financial targets and a recap of our commitments to stakeholders.

Speaker 3

Let's go to Slide 9, which shows the comparison of GAAP to operating earnings. To GAAP earnings for the Q3 were $1.83 per share compared to $1.33 per share in 2022. Year to date GAAP earnings through September were $3.62 per share compared to $3.76 per share in 2022. As was mentioned on the 2nd quarter earnings call, to our year to date comparison of GAAP to operating earnings reflects the loss on the sale of the contracted renewables business as a non operating cost as well as an adjustment to true up cost related to the terminated Kentucky transaction. In addition, we have reflected our typical mark to market adjustment and the impact of capitalized incentive compensation in Texas as non operating earnings as well.

Speaker 3

There is a detailed reconciliation of GAAP to operating earnings on Pages 1718 of the presentation today. Moving to Slide 10, Operating earnings for the Q3 totaled $1.77 per share or $924,000,000 compared to $1.62 per share or $831,000,000 last year. The higher performance compared to last year was primarily driven by favorable rate changes and transmission project execution, increased retail load and favorable O and M across our segments. Operating earnings for vertically integrated utilities were $1 per share, to our Q3 earnings call, up $0.03 from last year. Favorable drivers included rate changes across multiple jurisdictions, to increases in retail load, depreciation, transmission revenue and O and M.

Speaker 3

These items were somewhat offset by higher interest expense and unfavorable weather year over year. The vertically integrated segment to the Q3 of about $0.04 per share, but this was compared to positive weather in the Q3 last year of about $0.06 per share. Consistent with our first and second quarter results, Depreciation was favorable at the vertically integrated segment by $0.01 in quarter 3, primarily due to the expiration of the Rockport Unit 2 lease in December 2022. However, if we exclude the impact of the lease, to depreciation would have been about $0.02 unfavorable, which is consistent with incremental investment activity in our vertically integrated segment. I and M should see an additional $0.02 favorable net depreciation in the 4th quarter as well.

Speaker 3

To the Transmission and Distribution Utility segment earned $0.39 per share, up $0.07 compared to last year. To favorable drivers in this segment included increased retail load, transmission revenue, positive rate changes in Texas and Ohio, and favorable O and M. Partially offsetting these favorable items were higher depreciation and higher interest expense. To the AEP Transmission HoldCo segment contributed $0.39 per share, up $0.06 compared to last year. To favorable investment growth of $0.02 coupled with favorable income taxes of $0.02 are largely driving the change here.

Speaker 3

To Generation and Marketing produced $0.18 per share, up $0.04 from last year. The positive variance is primarily due to favorable impacts associated with the contracted renewable sale in August along with higher generation margins and land sales. These favorable items were partially offset by lower retail and wholesale power margins. To Finally, corporate and other was down $0.05 per share, driven by unfavorable interest and partially offset by Favorable O and M. Please note that our year to date operating earnings performance by segment is shown on Slide 16 in the appendix of our presentation today.

Speaker 3

Many of the positive drivers are the same for the year as for the quarter and the negative year to date variance is driven largely by unfavorable weather and higher interest expenses. Before we move on, I want to add a few more comments on O and M, including our outlook for the remainder of the year. We saw favorable O and M in the Q3 compared to the prior year, which was consistent with our expectations. To for the Q4, we are expecting more than $100,000,000 of favorable O and M versus the prior year, which would bring us to a next favorable position for the full year from a consolidated perspective. To the favorable change anticipated in the Q4 is largely a result of the timing of O and M spending in the prior year, including employee related expenses and a contribution to the AEP Foundation in the Q4 of last year, along with continued actions we have taken such as holding employment positions open, reducing travel and adjusting the timing of discretionary spending.

Speaker 3

Turning to Slide 11, I will provide an update on weather normalized load performance for to the Q3 and our expectations through the end of the year. Overall load has come in ahead of plan all year and the Q3 was no exception. To the bottom right hand quadrant. Normalized retail load grew 2.1 percent in Q3 from a year earlier. You will also notice that we have updated our full year 2023 estimates based on the strong load growth we've experienced year to date.

Speaker 3

Weather normalized retail load is now expected to finish this year to 2.3% higher than 2022, an increase that is nearly 3 times higher than our original expectations. This strength comes from exceptional growth in commercial load, driven by data centers in Ohio, Texas and Indiana, to the Q3 also saw positive trends in our residential class, which is shown in the upper left hand quadrant of the slide. To residential load increased for the first time in more than a year in Q3 with growth of 0.6% from a year earlier. The relationship between customer incomes and inflation is a key driver of residential usage and it has begun to stabilize as expected in the second half of this year. This month CPI data point was yet another encouraging sign that inflationary pressures on our residential customers are continuing to lessen.

Speaker 3

We note that residential usage per customer to have seen slight declines this year as energy efficiencies increase, more workers return to offices and customers' change behavior due to inflation. Fortunately, we are seeing strong enough growth in our customer base, especially in Texas and Ohio, to help partially offset these trends. Year to date, we have added nearly 30,000 residential customers across our footprint. Moving to the lower left hand quadrant of the slide, our industrial load declined in the 3rd quarter, driven by a pullback in usage by some of our key manufacturing customers, mainly chemical, plastic and tire producers, as well as downstream participants of the energy industry. This reflects some of the softness in manufacturing nationally as producers have slowed activity in response to uncertainty around the economic outlook.

Speaker 3

We expect this to reverse itself in the months ahead as recent inflation and jobs data have reduced the probability of a recession occurring in the next year. To we are forecasting industrial load to remain positive through the end of next year and beyond. To moving to the upper right hand quadrant of the slide, we see another impressive quarter for commercial load. In the Q3, commercial load was 7.5% higher than a year ago, driven by the addition of new data center customers, mostly in Ohio, Texas and Indiana. We expect the pace of year over year growth in our commercial load to moderate some in 2024 as new projects work their way through the queue.

Speaker 3

Many of the large projects currently underway within our footprint to won't come fully online until 2025. However, there is upside if a few of these projects move forward to earlier than expected. Many of these gains are directly attributable to our ongoing efforts to facilitate more economic development across our operating footprint. We know that working with local stakeholders to attract more economic activity is a key strategy to providing value to the communities we serve. It allows us to prioritize investments that improve the customer experience, while also mitigating rate impacts on our customer base.

Speaker 3

To moving to Slide 12. In the lower left corner, you can see our FFO to debt metric stands at 11.4%, which is an increase of 30 basis points from last quarter, but continues to be well below our targeted range of 14% to 15%. To the primary reason for the increase is a $1,800,000,000 decrease in debt during the quarter due to long and short term debt retirements driven by proceeds received from our contracted renewable sale and the successful completion of our planned equity units conversion, both of which occurred in August. We expect this metric will continue to improve throughout the remainder of this year and anticipate reaching our targeted range in early next year as we see an improvement in FFO during that time. To We have included a table on this slide that shows the path to the targeted FFO to debt range early next year.

Speaker 3

To these items these are items that impact both the 12 month rolling average as well as an estimated increase in the quarterly FFO. We anticipate a 180 basis points to 190 basis points positive impact to our financial results on FFO that enables the metric to be in the 13% to 14% range by year end based on the following items. To a roll off of roughly $600,000,000 in cash collateral, deferred fuel and other outflows from the Q4 of 2022 and continued cash recovery of deferred fuel balances in the Q4 of this year that totaled between $150,000,000 $200,000,000 in accordance with the regulatory orders we have already received. Moving into 2024, to the continued roll off of prior year cash collateral outfall in the amount of $390,000,000 in the Q1 of 2023 and a $90,000,000 adjustment from unfavorable weather in the Q1 of this year to normal weather in our forecast for next year will result in an incremental 100 basis point improvement, to put us within our target range of 14% to 15%. Also, please note that we have updated our 2023 cash flow as shown on Page 29 in the appendix.

Speaker 3

An increase of $1,200,000,000 in required capital is shown versus the original forecast, mostly due to a decrease of $800,000,000 in cash from ops, largely due to fuel inventory and an increase of $300,000,000 in capital expenditures. To please note that our equity needs for 2023 are unchanged. The remaining years 2024 to 2027, along with revealing 2028 will be updated at the upcoming EEI Conference. To expect that this update will be consistent with our prior equity needs and disclosures. To our next call.

Speaker 3

Moving to Slide 13, you can see our liquidity summary in the middle of the slide. Our 5 year $4,000,000,000 bank revolver and our 2 year $1,000,000,000 revolving credit facility support our liquidity position, which remains strong at $3,500,000,000 On a GAAP basis, our debt to cap decreased from the prior quarter by 220 basis points to 62.4%. This large change can be attributed to the large reduction in debt driven by our contracted renewable sale and the completion of our planned equity units that I mentioned earlier. To On the qualified pension front, our funding status decreased 1.9% during the quarter to 100.3%. This is largely due to equity and fixed income losses in the 3rd quarter as interest rates increased and equity indices fell in both August September.

Speaker 3

These losses are partially offset by a decreased liability due to rising interest rates. Let's go to Slide 14 for a quick recap of today's message. The 3rd quarter produced growth in earnings well above the prior year, driven primarily by favorable rate changes, increased load and favorable O and M, offsetting milder weather and increased interest expense. As we continue to move to the Q4, we are focused on cost management efforts with a goal of mitigating the headwinds we have faced this year, to primarily unfavorable weather and higher interest costs. The strong third quarter results and load growth, to coupled with our proactive plans for the balance of the year, allow us to confidently narrow our operating guidance range to $5.24 to $5.34 per share.

Speaker 3

We also continue to be committed to our long term growth rate to the Q1 of 2019. And as Julie mentioned earlier, our sales efforts to simplify and de risk the AEP portfolio to remain on track. We really appreciate your time and our management team and I look forward to seeing you at the upcoming EEI financial conference in Phoenix. With that, I'm going to ask the operator to open the call so we can hear your questions or comments. Thank you.

Speaker 3

Thank

Speaker 4

you.

Operator

Your first question comes from the line of Nick Campanella with Barclays. Please go ahead.

Speaker 5

Hey, good morning, everyone. Thanks for taking my question here. And congrats, Chuck, on the new role. I wanted to actually start there, if I can. I know that there

Speaker 3

was just some language in

Speaker 5

the 8 ks when you made the executive switch around the mandatory retirement age and your interest in retiring before you reach that age. But I just wanted to ask, are your intentions here to stay on for the foreseeable future? Is this more temporary? Just How should we kind of think about your new role in the company? Thank you.

Speaker 3

Yes. No, thank you for the question. And Look, I am absolutely embracing this opportunity that we have before us. It's very energizing to enter into to a role like this. And although the 8 ks did indicate that, I'm committed to Julie and AEP to ride this out as long as needed, and as long as I'm adding value right to the opportunity.

Speaker 3

So I thank you for the question.

Speaker 5

I appreciate the answer. Thanks a lot. And then appreciate the walk on the FFO. That's helpful. I just wanted to confirm because S and P did move you to negative outlook.

Speaker 5

And I think in your prepared remarks, you said, As you get to EEI, you anticipate equity needs being somewhat unchanged. So Is it the right understanding that if you are in a CapEx rate scenario that your equity needs would still be modest and unchanged versus your prior view? And then secondly, understanding that the 11.4% has some reduction in debt from the renewable proceeds, to the cash flow from those renewable proceeds, I guess, would be rolling off into next year. And I just wanted to triple check that even with the asset sale cash flow dilution, you still see yourselves above the 14 to Prasad. Thank you.

Speaker 3

Yes. Thanks for both questions. So yes, our equity needs will be consistent, to with what we have disclosed prior. I mean, clearly, we'll be updating, right, the years in the cash flow forecast, But expect no surprises there. On to your second question, yes, we tried to highlight to Right.

Speaker 3

On the slide, the FFO slide, the major drivers that you can point to and see to what is rolling out as outflow, but absolutely, right, in our financial models, right, it takes into account, right, the absence of that cash flow. So we do expect to be in those ranges.

Speaker 5

Thanks a lot. We'll see you at EEI. Appreciate it.

Operator

Thank you. Your next question comes from the line of Jeremy Tonet with JPMorgan. Please go ahead.

Speaker 6

Hi, good morning.

Speaker 2

Good morning.

Speaker 6

We have seen a bit of a regime change as it relates to interest rates out there given the sharp moves recently. Just wondering if you could talk a bit more about that and how AAP is able to reaffirm the 6% to 7% to long term CAGR there in what could be a higher for longer interest rate environment? What impacts to DC on EPS post 'twenty three and kind of how do you think about offsetting those headwinds?

Speaker 3

Yes. Jeremy, thank you for the question. I mean, look, we'll be giving you a walk right on 2024 at EEI, But there's no question that we are planning for an interest rate higher for longer environment. We've clearly been able to overcome to there's headwinds this year, but they will persist. So our plan is to, A, sensibly finance this company, to to Straits.

Speaker 3

Some of them are somewhat immediate or very near term, right. Some of them are kind of medium term and then some of them to do have some lag associated with them. So, the reality is some of this will begin to flow through, to remain committed to keeping parent debt in that range, well below 25%, to 19% to 21% is ideal and offsetting those headwinds to Right. With continued investment, we're seeing strong load growth and the positive to regulatory outcomes and closing the ROE gap that Julie just mentioned.

Speaker 6

Got it. That's very helpful there. Thank you for that. Maybe kind of picking up on that last point there. I think on the last call, we discussed a bit or there's some questions regarding outreach to commissions and just building regulatory relationships across Just wondering if you could provide a bit more detail, I guess, on specific initiatives done so far, where you see that going, how you see that kind of to transpiring so far.

Speaker 2

Yes. Nick, thanks for the question. This is Julie. We continue on with that effort in terms of engagement with our various state commissions as well as talking with folks at the FERC level. And it's important to note that we do this in conjunction with our operating company presidents and leadership there.

Speaker 2

My objective and your Senior leadership team's objective is to clear the path for those operating company presidents and those teams so that they can have very good to traction with their respective commissions and their respective economies in the states. So those continue to occur. And honestly, it keeps me educated, so that I can make sure that when we build the strategic plan at the aggregate level, that it makes sense and that we're taking into consideration to our customers' needs and also the economies that are driving all this magic that's happening Across our entire footprint. So it continues steady as she goes in terms of those conversations, and we'll continue to stay out and in front of folks and do our best to support our operating companies. So nothing super exciting to report other than the action is absolutely happening and we'll see that embedded in the cases that we're filing.

Speaker 6

Got it. And just to confirm, the plan is still for you to meet each of the commissions when you're able to do so.

Speaker 2

Yes. Honestly, I enjoy getting out anyway and talking with everybody. Like I said, I think it makes me better at my job. But yes, I'm making the rounds. And I got to be sensitive to what we've got going on in our respective jurisdictions.

Speaker 2

In some cases, I've got ex parte issues I've got to be sensitive to, but I'm absolutely making the rounds and we'll continue to do that because the business is incredibly dynamic, more so than to Ever, and we need to make sure that we're staying in touch with everything that's going on across the entire organization. So that will continue on. To.

Speaker 6

Got it. That's very helpful. Thank you. And just the last one, if I could. The waterfall chart, through 9 months in the presentation today.

Speaker 6

It looks a bit different than, I guess, what we saw in EEI. I was just wondering if you could walk us through some of the puts and takes, the drivers to this and across the different segments and what do you see, I guess, in the Q4 that maybe narrows the gap or just kind of the different to trends happening such as in vertically integrated and with renewables as well.

Speaker 2

Yes. So, I'll start and then I'll hand it off to Chuck. So, what gives us comfort in terms of narrowing that guidance range, when you look at I'm looking at page 16, I'm assuming that's where everybody is right now in terms of that waterfall chart. So what gives us a comfort is, Chuck mentioned that we are able to to effectively, I guess, take up our load forecast, predominantly driven by the commercial load that we're seeing. So that's going to be incorporated into our thoughts for the remainder of the year.

Speaker 2

We're trying to manage the interest expense that's also incredibly important. Another data point to throw out there, a question we keep getting is to what percentage of your debt outstanding is floating rate. It's about 12.5%, if I remember correctly, as of the end of Q3. So that's something that we're being real mindful of. We're also thinking about what regulatory cases that we have already in hand.

Speaker 2

As a matter of fact, you may recall that when we began the year, we had something like $290,000,000 of new rate relief embedded in our forecast. We are actually, well north of that. We are worried about to $303,000,000 of secured rate relief in hand. So that gives us a little more confidence and comfort too as we proceed through the end of the year. So again, it's really just steady as she goes and plug and chug.

Speaker 2

And I don't know, Chuck, if you had anything else you wanted to add to that?

Speaker 3

Yes, sure, Julie. To Look, the other thing is the O and M management. As I mentioned during my comments, if you look at to Slide 16, right, you'll see that O and M is a drag through 3 quarters, right? We expect that to completely reverse itself for year end and actually have be a net positive on O and M year over year, meaning that the 4th quarter to have a substantial difference in O and M versus last year.

Speaker 6

Very helpful. Thank you. I will leave it there.

Speaker 2

All right. Thanks for your questions.

Operator

Thank you. Your next question comes from the line of Shahriar to Pareza with Guggenheim Partners. Please go ahead.

Speaker 4

Good morning. It's Jameson Ward on for Shar. Thank you for taking our question.

Speaker 2

You bet.

Speaker 4

Looking at your new FFO to debt pass slide, could you give us a sense on to what, if anything, could cause any potential slippage like the deferred fuel recovery? And what might dictate you being at the bottom or the top end of that 14% to 15% in 2024. I know you talked previously about being at the midpoint by the end of the year, but since we've got an updated disclosure here, I just wanted to ask Scott again here.

Speaker 3

Yes. No, sure. Thank you. When you look at the charts, Several of these are just simply facts, right, that are going to come out. All the outflows, right, are known numbers, right, that are rolling out of the 12 month average.

Speaker 3

So then we're just subject to the normal variances in FFO that would occur. It's a pre working capital number and the reality is, right, softer weather, to better weather, all those things will influence it, but I think we'll be solidly in both ranges, right, by the timeframes that we talked about.

Speaker 4

To. Got it. Thank you for that. And one more from us. On load growth, What's driving the large I know you'd mentioned data centers, but if you could just talk a bit more about what's driving the large increase for the guidance this year.

Speaker 4

And then more specifically, as we think about the updated capital plan, which you'll be providing, just directionally, Should we expect this higher load growth to be a driver of capital growth opportunities? Thank you.

Speaker 2

Yes. This is Julie. I'll pass it off to Chuck here too. We'll tag team a little bit. But as Chuck mentioned, the primary driver for our load growth as we go into the end of 2023 is

Speaker 3

all around that commercial segment. So if you look at page number 11, you

Speaker 2

look at that upper to the commercial segment. So if you look at page number 11, you look at that upper right hand quadrant, you're going to see a serious or material shift and what our updated guidance looks like versus what we originally had for 2023. The vast majority of that low growth is coming from data centers located in Ohio, to Texas and also Indiana now. And if you look across the rest of the segments there, so residential, a little soft. We talked a little bit about at the beginning of the call here in our monologue or our prepared remarks about the fact that customers are feeling this in the wallet as it relates to inflation, We expect that that's going to improve over time.

Speaker 2

But nevertheless, what's allowing us to get a little more comfort on the residential side is we've added to 30,000 customers year to date. So, that's offset a lot of the otherwise pressure we would have seen in that segment as usage to customers come off a little bit. And on the industrial side, it's really driven by interest rates, and the expectation or I guess, to concerns that there could be some softening in the economy. So, we've seen certain customer segments within that industrial aspect kind of come off a little bit, But we expect over time that that will improve. I don't know, Chuck, is there anything else that I cover that?

Speaker 2

Yes.

Speaker 3

He mentioned that does it drive your capital forecast. And of course, to the new data centers, of course, require capital to hook those customers up. We do have what is known and customers that are coming into our capital forecast going forward. And there are lots of discussions otherwise right in our economic development activities. But everything that we know of and And his firm is in our capital forecast.

Speaker 4

Got you. And just one clarifying one last clarifying question. So our question was really focused around that 7.3% guidance for 23% per commercial versus the 80 basis points originally. Presumably, the infrastructure necessary for those data centers to be receiving a load that they are is in place, especially considering about

Speaker 7

a couple of months left in

Speaker 4

the year. And we obviously saw that you'll be providing 24% and 25 to guidance at EEI. So we're just directionally trying to think, is this a trend likely is this isolated to 'twenty three or is this something that could continue and could drive, Therefore, capital opportunities as you look to serve that increasing commercial data center load. And then that's it for me.

Speaker 2

No, I appreciate the question so much. Yes, that trend, we expect that to continue. I mean, you see the fluctuation a little bit in the commercial segment up in the upper right quadrant of Slide I mentioned earlier. We have projects in the queue, so you kind of see those ebb and flow. But you're right, the infrastructure is in place today.

Speaker 2

To the pending or incoming requests for additional capacity from our customers. So that net customer touch point through our economic development to the team is incredibly important because that allows us to not only have confidence around what our forecast is, but it also drives what the CapEx So, yes, we think that that's going to continue, and we will keep a keen eye on that in particular because the infrastructure has got to

Speaker 1

be there and we got

Speaker 2

to make sure that we're communicating with our customers so that they know exactly what the appropriate and realistic timeline is for them to enter into our service territory so that the infrastructure is there, because it's not something that's done overnight. So, appreciate that question so much, because it is a fine orchestration That absolutely has to happen.

Speaker 4

Thank you very much. Looking forward to seeing you all at EEI in a couple of weeks.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of Carlee Davenport with Goldman Sachs. Please go ahead.

Speaker 8

Hey, good morning. Thanks for taking the questions. Maybe to start, as we just think about the moving pieces on cash sources going forward, Could you talk a little bit about how the asset sales processes are progressing in terms of interest that you're seeing bid ask? And then On the timing side, it seems like a little bit of a narrowing of the timeframe for NMRD, but anything else on the timing side that you'd highlight?

Speaker 2

Yes. I can start and Chuck can jump in here too because Chuck has been really close to the optimization that we've been doing. Anyway, yes, so From an NMRD perspective, we're getting close here. So, I would anticipate a contract being signed in the not too distant future. And then it really is going to be a story around to when can you close.

Speaker 2

So that's going to be driven also by regulatory and it won't need probably FERC approval and depending on who the purchaser is, to that can drive other issues that we'll need to address, so we can give you more precise time on when we can land that jet. So Stay tuned. That one's in the hopper and coming along here relatively quickly. And then, Chuck, did you want to talk a little bit about retail and distributed?

Speaker 3

Yes. You did ask one question I do want to address, right, what's the bid ask. And of course, we're not going to reveal anything like that in a public forum. But we are pleased with the response we received in some of the early results that are indicative of course, but the process kind of goes on. Greg Hall and his Our team are leading that effort.

Speaker 3

There are in the queue remaining this year, to the typical process of management meetings and moving on to final bids either late this year or early next year. So the reality is, right, that's going to take some time to progress, expect to complete that in the first half of next year, and the other sales processes are just shortly behind that.

Speaker 8

Great. Thank you. That's helpful. And then appreciate the color on the drivers on O and M heading into 4Q and for the full year. I guess, how are you thinking about managing O and M into 2024?

Speaker 8

Should we expect to see an uptick that kind of offset some of the efficiencies that you've driven this year That have addressed the mild weather and allowed you to continue to execute on the earnings guidance for 2023.

Speaker 3

Yes. So it's a good question. I could tell you what the discussions amongst the executive leadership team here are really focused on to prioritizing O and M spend and spending both capital and O and M dollars that benefit and provide value to our customers. So we're really targeting the prioritization. We'll be giving guidance on O and M for next year and our waterfall at EEI.

Speaker 3

But expect us to be conservative, right? We're going to manage O and M to the levels, right, that are needed to run our business, to right, but begin to eliminate things that are what we may consider to be discretionary going forward.

Speaker 2

Great. Thank you. Appreciate the color.

Operator

Thank you. Your next question comes from the line of David Tyro with Morgan Stanley. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking my questions.

Speaker 2

You bet.

Speaker 9

I think you've thanks again for the disclosure around the FFO to debt walk into the Q1 of 2024 and you've touched on this a little bit, but I was just wondering how you see that metric track after that point from getting into the range, is it stable to rising from there and kind of staying within the target range going forward when you look

Speaker 4

at the core business outlook.

Speaker 3

Yes. We absolutely to plan to target and be in that 14% to 15% range. I will tell you that the introduction of large projects on a year to year basis, right, may swing that around some. So as you add renewable projects, to In particular, if they come at the end of the calendar year, right, you have the financing costs to related to that, but you don't have the FFO. The rating agencies are very well of that pattern, but to Absolutely, when you pro form a that 14% to 15% is where we intend to be.

Speaker 9

Okay, great. Thanks so much. That's all I had. I appreciate it.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of Anthony Krowdell with Mizuho. Please go ahead.

Speaker 10

Hey, good morning. Welcome back, Chuck. Great to hear from you again.

Speaker 3

Yes. Thank you.

Speaker 10

Just hopefully two quick ones. I think Nick touched on it earlier on recent S and P had revised their outlook on to the holding company. I'm just curious, I guess, your discussions with the rating agencies. We appreciate the detail you provided in this slide deck, especially on your credit improvement. But have you been in discussion of how do you unveil that previously to S and P prior to their rating action or their to outlook change.

Speaker 3

Yes. So, Anthony, I've talked to all 3 rating agencies since to and as well as our treasury team obviously talks to them all the time. I don't think the S and P move to negative outlook was a particular surprise, given the downgrade threshold is 16%. And our rating is split, right? They're at a higher rating, right, than Moody's and Fitch currently.

Speaker 3

So it wasn't a surprise. We continue to work with the agencies to explain to our business risk because we think as we continue to execute on to exiting the unregulated businesses, our business mix should improve and they should begin to reflect that, right in their valuations. So not a surprise, if and when it is downgraded, their ratings would be on par with Moody's and Fitch.

Speaker 10

Great. And then just lastly, you laid out the 2 scenarios regarding West Virginia fuel cost recovery. One is an amortization over 2 years. The other one is the securitization, which also includes accelerating coal plant closures. Given I guess the impact of the balance sheet and all the other moving pieces, does the company have a preferred path in West Virginia?

Speaker 10

And then also When do we get resolution of that from the regulator?

Speaker 2

Yes, I appreciate that question. And let me just clarify the question as well right out of the gate here. To the extent that we've included securitization as an option, that does not assume an acceleration Of coal plant closures, just to be very clear on that. We have those embedded in rates today going through 2,040. So that is the current plan and thinking.

Speaker 2

So the idea of using securitization was entirely driven by how do we minimize the impact on to customer rates, period. And so that was the spirit of why we even contemplated the utilization of the securitization. And that second scenario option that I mentioned where we not only securitize the fuel, but we have, I think, a little bit of storm costs in there as well as those to the balance sheet. Our balance sheet is now open. And then the other alternative was just a 3 year smoothing of those deferral or those deferred costs.

Speaker 2

And that was to the tune. I want to say it was maybe 12% increase in customer rates associated with that subject check. To, as far as what our preference would be, our preference is to get it recovered. Our preference is to be able to work with all the different stakeholders, which is to precisely why we put out the different options and listen to the different stakeholders in the case and just with complete appreciation and sensitivity to the customers in West Virginia that the general median household income tends to be a bit lower than most definitely the national average, but even across to AEP's footprint, it's lower. So we need to be incredibly sensitive, to those wallets.

Speaker 2

So, as far as to preference. Our preference simply is to work with the stakeholders and get it done. And as far as when we might be able to get that done, our expectation is that we get that done here in the Q4. So to tick tock anytime here, okay?

Speaker 10

Great. Thanks for taking my questions.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of Andrew Weisel with Scotiabank. Please go ahead.

Speaker 11

Hey, good morning, everybody.

Speaker 2

Hey, good morning.

Speaker 11

A lot of good information already. So I've only got one left, if You can clarify here. I want to ask about the 3 moving pieces between equity asset sales and CapEx. And I know you're going to talk about this at EEI in a couple of weeks, but My question is that if equity needs are generally going to be consistent, how do we think about how you'll finance incremental CapEx? Typically roll forward the CapEx plan, it tends to go up most years.

Speaker 11

It's currently $40,000,000,000 Does that mean that cash proceeds from these asset sales to help to finance whatever upside there is to the CapEx plan or will you have additional equity until the asset sales to our announced, how do you think about that balancing act?

Speaker 2

Yes. So, I'll let my CFO jump in here. But first things first, We want to have a healthy balance sheet. Okay. So dollars come in the door, we're going to make sure that our metrics work.

Speaker 2

We talked a little bit or a lot about 14% to 15% FFO to debt. We also pay attention to our debt to cap ratios, but 14% to 15% is our gating item for us and metric. So we will look to that metric to see where we're shaking out. Dollars will be placed accordingly as we bring those in the door associated with sales. As far as equity needs go, as Chuck mentioned, I'll use again the phrase steady as she goes.

Speaker 2

On average, we're around 700,000,000 to plus or minus any given year. You see that in the cash flow that we have out here on Page number 29. We are going to continue on with a healthy CapEx to the program. You'll see that extended into 2028 when we talk to you at EEI. But there may be fluctuation like sequentially year to year, But I wouldn't anticipate any material shift or change.

Speaker 2

Again, gating item dollars in the door, take care of the balance sheet, and then we'll fund the rest of the regulated business that way. Chuck, is there anything else you would add to that?

Speaker 3

No. Julie, I think your answer is I really can't add anything. I would just say embrace the capital opportunity And sensibly and smartly finance it.

Speaker 11

Okay, great. That's helpful. And then if you can just remind us what are the downgrade thresholds for Moody's and Fitch?

Speaker 2

To 13% FFO to debt.

Speaker 11

Very good. Congrats again, Chuck, and we'll see you in a couple of weeks.

Speaker 3

Yes. Thank you.

Operator

Thank you. Your next question comes from the line of Durgesh Chopra with Evercore ISI. Please go ahead.

Speaker 7

Hey, thanks for sneaking me here. Chuck, welcome. Look forward to working with you. Hey, just real quick on the FFO to debt metric, I just want to clarify the 13% to 14% target for end of this year. Are you assuming that West Virginia fuel recovery gets resolved?

Speaker 2

No. As a matter of fact, what is assumed in that forecast through that walk you see today It's everything that we already have in hand. So, West Virginia fuel outcome does not disrupt that path at all. That's prospective for us.

Speaker 7

Got it. So, okay. So, any sort of any incremental sort of cash flow bump from there would be accretive to what you show on this slide, right, even for 2024?

Speaker 2

That could be helpful. Yes.

Speaker 7

To Okay, perfect. And then maybe just one quick one real quick. What's the balance, The total deferred fuel cost balance that hasn't been recovered as of the Q3, I know it was like $1,400,000,000 as of Q2?

Speaker 2

To Yes, dollars 1,200,000,000 as of the end of the third quarter, and that's in the aggregate across the AEP footprint or fleet

Speaker 7

to And West Virginia is roughly like $500,000,000 correct?

Speaker 2

West Virginia. Yes, to West Virginia is, well, to be specific, dollars 574,800,000 so call it $575,000,000 We're paying attention to this. That's why I got a little bit of detail here. It's important.

Speaker 7

I appreciate that. Thank you, guys. Appreciate the time.

Speaker 2

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Julien Dumoulin Smith with Bank of America. Please go ahead.

Speaker 12

Hey, thank you, operator. Welcome back, Chuck. Pleasure. So look, Just coming back to that O and M piece, obviously, you put some comments in the script here, dollars 100,000,000 Look, I think that's a solid number. I'm Curious, how do you think about that annualizing here and the ability to annualize some of those factors?

Speaker 12

I get that some of them are kind of discrete in nature here, to certain elections. But again, in an effort to kind of preview a little bit more on that 'twenty four trajectory, I know you've made a couple of allusions to it here. Can you perhaps lean in a bit further in describing how you think about what that could do for next year on the cost side?

Speaker 3

So we're going to lean into that at EEI in about 7 or 8 days or 9 days, whatever it is. But the focus, right, of the management team, as I said earlier, is really on prioritizing the spend And spending dollars where it matters most to our customers. That's the most important thing we can do and our O and M budget will reflect

Speaker 12

that. Yes. No, I respect that, hence the interest. Okay. Wonderful.

Speaker 12

Well, I'll leave it there. And do you mind just on the load front, just to clarify this a little bit further here? I mean, obviously, You have an updated load in the near year that is substantively more robust, and you have to back weighted load growth profile here for 2024, 2025. How do you think about the timeline for revisions and the extent of those revisions to as you see today. Again, I know that this is probably more of an EEI 4Q kind of conversation, but I mean, clearly, we're seeing these kinds of revisions across the PJM footprint.

Speaker 12

How do you think about that? And also maybe how does that tee up with PJM itself here and potential further transmission oriented opportunities?

Speaker 3

Yes. So, as you could see, right, the low growth in particular in commercial is pretty robust. Those numbers We'll be updated when we come to EEI. And as I said earlier, it's embraced the opportunity. To this is a good opportunity for us.

Speaker 3

I think you have to be smart about it and kind of to vet out what is real and what real load is really going to come on and plan your capital investment profile around that. So lots of activity, lots of discussions. Our economic development team is very busy talking in dealing with the opportunity.

Speaker 12

Okay. All right. Well, we'll leave it there. Top of the hour. Good luck, guys.

Speaker 12

Thank you.

Speaker 3

Thank

Operator

you. Thank you. Your next question comes from the line of Sophie Karp with KeyBanc. Please go ahead.

Speaker 13

Hi, good morning guys and thank you for taking my question. Can you please clarify, you mentioned that you to Could implement or rather it's possible to implement interim rates in Kentucky in January. Do you actually intend to do that? Or how does it take So, if politically, it would work out for you there.

Speaker 2

Yes. Generally, Sophie, we try to take advantage of that. So that would be the plan. And of course, we'll stay in close contact with all the stakeholders to our case and the commission. And so other than that, just as we have done in, say, for example, the PSO case, that is typical for us.

Speaker 2

If there's an opportunity to implement rates, we go ahead and do that and kind of risk adjust those in terms of our forecast, and understanding of when cash is going to come in the door and all those items that are so important as we put the forecast out to you guys and have confidence around that. But short answer is, yes, generally speaking, yes, we would expect to put those in place or implement the rates.

Speaker 13

Got it. Thank you. It's helpful. And then just a broader question, I guess. Is there any interest to approach state regulators to and seek mechanisms to reduce weather volatility impact on your earnings.

Speaker 13

I know you're not decoupled in most of your jurisdictions. So Kind of curious if you still like that type of rate mechanisms or would you rather maybe transition over time to to The situation where weather does not impact your earnings that much.

Speaker 2

Yes. We engage in those conversations. And again, that's more of a stakeholder discussion, and see what the temperature and to the questions. As it relates to not only just our preferences, but the preferences and tolerances of the other parties to the cases. That being said, we did have decoupling in Ohio for a while that has since fallen by the wayside, but that's something that we have a regular conversation about.

Speaker 2

So I don't I wouldn't say that we have to a push or a thrust toward getting a decoupling in place, but it is absolutely a tool in the tool bag.

Speaker 13

Okay. Thank you. To

Speaker 3

the operator.

Speaker 1

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. Eric, would you please give the replay information?

Operator

Thank you. This call will be available for replay beginning today and approximately 2 hours after the completion and will run through until Thursday, November 9, 2023, at 11:59 pm Eastern Time. The number to access the replay is 800-770-2030 or 647-362 to 9,199. The conference ID to access the replay is 9,066,570. Thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect your lines.

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Earnings Conference Call
American Electric Power Q3 2023
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