American Electric Power Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power Second Quarter 2023 Conference Call. At this time, all parties are in a listen only mode. Later, we will conduct a question and answer session. This call is being recorded. I'd now like to turn the conference over to our host, Vice President of Investor Relations, Ms.

Operator

Darcy Reese. Please go ahead.

Speaker 1

Thank you, Brad. Good morning, everyone, and welcome to the Q2 2023 earnings call for We appreciate you taking time today to join us. Our earnings release, presentation slides and related financial information are available on our website ataepdot 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.

Speaker 1

Joining me this morning for opening remarks are Julie Sloat, Our President and Chief Executive Officer and Ann Kelley, our Chief Financial Officer. We will take your questions following their remarks. I will now turn

Speaker 2

the call over to Julie. Thanks, Darcy. Welcome everyone to American Electric Power's Q2 2023 earnings call. It's good to be with everyone this morning. To rapid time of change in our industry with new opportunities resulting from federal policy shifts and evolving state and customer priorities.

Speaker 2

We also continue to navigate a dynamic environment with rising interest rates and supply chain constraints. In short, it's definitely an exciting time to be at AEP as we make Significant progress on our important stakeholder commitments and strategic objectives, including delivering on our 2023 operating earnings guidance And 6% to 7% annual operating earnings growth, providing dividend growth in line with earnings, strengthening our balance sheet as we move through the next few quarters, actively managing our portfolio, achieving net 0 by 2,045 and central to our purpose, keeping our customer rates affordable. We recently made some organizational adjustments such as the restructuring of our federal affairs function, The realignment of our regulatory team and the refreshment of some of our operating company presidents, these changes will help us operate more effectively and facilitate our success in this ever changing environment. As always, we keep the customer at the center of every decision we make. This is why we engage with our federal and state regulators, so we know how to best support our operating companies, while we balance investor preferences as we grow the business and invest $40,000,000,000 over the next 5 years in new generation resources and our energy delivery infrastructure.

Speaker 2

This morning, I'll provide a brief overview of our 2nd quarter financial performance before getting into our measured and disciplined approach to simplifying and de risking our business profile through our portfolio management activities. Related to this, I'll share some updates regarding our unregulated Contractor Renewables Portfolio Retail and Distributed Resources Businesses and the status of our strategic review of our non core transmission joint ventures. While we still have a lot of work to do on the regulatory front, I'll conclude by providing insight into the recent successes related to our renewables and developments on our regulatory and legislative initiatives as we keep our customers' needs top of mind. A summary of our Q2 2023 business highlights and a high level overview of our financial results can be found on Slide 6 of today's presentation. AP delivered Q2 2023 operating earnings of $1.13 per share or $582,000,000 compared to $1.20 per share or $618,000,000 last year.

Speaker 2

The year over year decline reflects the timing of higher interest rates and the reversal of last year's 2nd quarter 2022 favorable weather. Today, we're pleased to reaffirm our 2023 full year operating earnings guidance range of $5.19 to $5.39 with a 5.29 midpoint and long term earnings growth rate of 6% to 7%. Given our line of sight at this I believe we have the operational flexibility and levers to pull to ensure that we will deliver on our commitment. Later on, Anne is going to talk or walk through our Q2 of 2023 performance drivers and share some perspectives on our load outlook as we drive economic development within our service territory. She'll also share some details supporting our targeted 14% to 15% FFO to debt range.

Speaker 2

While our FFO to debt is 11.1% this quarter, our we continue to execute on our strategic objectives, we remain focused on simplifying and de risking our business profile. To that end, you'll recall that in February of this year, we announced the signed agreement with IRG Acquisition Holdings for the sale of our 13 5 Megawatt unregulated renewables portfolio. A summary of the renewables deal can be found on slide 7. In the Q2, we received FERC 203 approval and clearance from antitrust authorities. The only remaining approval is from the Committee on Foreign Investment in the U.

Speaker 2

S, which we expect to receive in the near term and subsequently close on the sale in August. As we've said, the proceeds from this transaction will be directed to our Core regulated businesses and strengthening of our balance sheet. Turning to Slide 8, let's touch on some other asset sales that we have in progress. In May 2023, we also announced the sale of our New Mexico Renewable Development Solar Portfolio, also known as NMRD. We are currently on track with our fifty-fifty joint venture partner, PNM Resources, to close on this transaction by the end of 2023.

Speaker 2

The sales of our retail and distributed resources businesses are also on schedule to close in the first half of twenty twenty four as previously announced. Please keep in mind That other than the unregulated renewables portfolio proceeds of $1,200,000,000 no other sales Proceeds are reflected in our 5 year cash flow outlook. We will first obtain the signed sales agreements for NMRD and our Retail and Distributed Resources businesses and then incorporate the related proceeds into our cash flow outlook. As part of our commitment to portfolio management, I'm pleased to share some additional news with you today. We're announcing that we've completed the strategic review of 2 of our 3 non core transmission joint ventures and have determined that the sale of AEP's interest in Prairie Wind Transmission and Pioneer Transmission is our preferred path forward.

Speaker 2

We expect to launch the sales processes soon and we'll keep you updated on our progress. In the meantime, we continue our strategic review of TransSource Energy and expect to complete that review by year end. Now let's switch gears to AP's regulated renewables execution and recent successes. Through our 5 year 8 $600,000,000 Regulated Renewables Capital Plans, we now have a total of $5,200,000,000 approved and an additional $1,700,000,000 currently before our commissions for approval. You can find more detail on activities to acquire additional generation resources in in the appendix on Slides 31 through 33.

Speaker 2

In May 2023, the Oklahoma Commission approved PSO's 995.5 Megawatt Renewables Portfolio for $2,500,000,000 which includes 3 wind and 3 solar projects. These projects are projected to be in service toward the end of 2025. For Swepco's 9 99 Megawatt Renewables Portfolio totaling $2,200,000,000 of investments, I'm happy to report that last month both the Arkansas and Louisiana Commissions approved the full portfolio containing 2 wind projects and one solar project.

Speaker 3

We expect the projects will

Speaker 2

be going into service by the 2025 time frame. Since the Texas Commission denied Swepco's application related to these projects, Arkansas will move forward with the 20% Of the portfolio total and Louisiana will flex up with 70%, giving FERC wholesale customers the remaining 10%. We're excited to deliver the benefit of lowest reasonable cost and reliable energy to these communities we serve in Arkansas and Louisiana. We're also currently waiting for commission decisions expected as early as in the Q3 of 2023 for 151 Megawatts of Owned Wind And energy storage at APCO, 4 69 Megawatts of Owned Solar at I and M and 154 Megawatts of Owned Wind at PSO. Importantly, our regulated renewables goals are aligned and supported by our integrated resources plans.

Speaker 2

Accordingly, we've issued requests for proposals for Generation Resources at APCO and INM with more to come from operating companies soon. I'll I'll turn now to updates on several of our ongoing regulatory and legislative initiatives. More detail on our regulatory activities can be found in the appendix on slides 34 through 36. We are unquestionably focused on closing the gap between our authorized versus earned ROEs. While our Q2 ROE came in at 8.6%, this measure was depressed by 40 basis points due to mild weather.

Speaker 2

Closing this gap is going to take a little longer than we had anticipated in our 2023 guidance, which you may recall included a 9.4% ROE. But I'm confident that we'll reduce this gap by year end and still meet our earnings guidance. As we make needed progress in this regard, we are continuing to prioritize Federal, state and customer preferences to meet the needs of our communities that we serve. We look forward to building on our constructive relationships with all of our stake and clearing the path for our operating companies to be effective and successful in their respective service territories. In fact, while being mindful of any ex parte restrictions, I'm personally meeting with many commissioners across AAP's footprint to engage in discussions about our company and what is top of mind for them in the way of priorities and expectations as we work together to do our best to provide this product that is the fundamental enabler for In June 2023, we filed a new base case in Kentucky to address the financial health of the company and establish a path for future investment.

Speaker 2

The application incorporated a comprehensive rate review and a proposed 9.9% ROE with a request to allow for the securitization of $471,000,000 of regulatory assets. This will help to ensure that Kentucky Power is best positioned to provide safe and reliable service, while managing costs to provide affordable service to our customers. We expect that the new rates will be in effect in early 2024. In May 2023, we settled PSO's base case with the commission staff, attorney general and other parties in Oklahoma, providing a path for approval for more efficient cost recovery mechanisms with continuation of the transmission tracker and reestablishment of a distribution tracker. While we await commission decision expected in the Q3 of 2023, we implemented interim rates starting in early June.

Speaker 2

For ABCO Virginia's 2020 to 2022 triennial filed in March of 2023, We're working through regulatory calendar and expect an order later this year. In Texas, legislation was passed last month, which permits utilities to file the Distribution Cost Recovery Factor or DCRF twice per year instead of once per year. The bill also allows DCRS to be used by a utility even if it has a pending base case review proceeding. This important legislation will help improve AEP's regulatory lag in Texas as we make needed distribution investments to bolster the grid in this region. AP's management of fuel cost recovery remains a top priority with deferred fuel balance at 1,400,000,000 As of the Q2 of 2023, we've adapted fuel cost recovery mechanisms across most of our jurisdictions with a focus on balancing customer impact.

Speaker 2

Notably, we are awaiting a decision on our fuel case in West Virginia. Through this spring, we were active at the state legislature and collaborated on a new securitization bill to provide an effective path forward on fuel recovery and other legacy costs, while mitigating customer bill impact. In April 2023 fuel recovery application, we filed 2 options for consideration, one which amortizes the fuel balance over 3 years and alternatively, in an effort to even further minimize cost impacts to customers, We requested West Virginia Commission approval to use securitization to manage our $553,000,000 deferred fuel balance. We also proposed an opportunity within that second option to apply the securitization mechanism to $88,000,000 of deferred storm costs and $1,200,000,000 of legacy coal plant balances with the intention of offering a solution that would essentially have a neutral impact on customer rate. Keep in mind, securitization is the mechanism we can use to address affordability in West Virginia.

Speaker 2

While it's important that we address fuel and storm cost recovery in Let me be clear that the possible securitization of $1,200,000,000 for our AAMUS and Mountaineer coal plant balances is not required to hit our credit metrics, nor does it suggest that there is a change in our current plant retirement schedule of 2,040 for these units. Rather, this is entirely driven by the desire to consider all options to mitigate impact to customer bills. The West Virginia Commission subsequently issued a procedural schedule in the fuel case, including the April 2023 prudency report, which will be addressed in an evidentiary hearing beginning on September 5. This schedule provides an opportunity to ensure focus on cost concerns and a constructive Future in West Virginia, balancing customer and financial impacts. Pending the commission's decision later this year, We can issue bonds to securitize a possible combination of the deferred fuel balance, deferred storm costs and legacy coal plant balances in the first half of twenty twenty four.

Speaker 2

I'm pleased with the progress we've made so far. We still have a lot of work to do as we execute on our plans to meet our commitments, overcome challenges, reach our strategic objectives, engage with stakeholders and keep customers a top priority. Together, we deliver safe, clean, reliable and With that, Anne will now walk you through our 2nd quarter 2023 performance drivers and details supporting our financial targets. Anne?

Speaker 3

Thank you, Julie and Darcy. It's good to be with you all this morning. Thanks for dialing in. I'm going to walk us through our Q2 year to date results, share some updates on our service territory load and finish with commentary on credit metrics and liquidity as well as some thoughts on our guidance, financial targets and portfolio management activities underway. Let's go to slide 9, which shows the comparison of GAAP to operating earnings.

Speaker 3

GAAP earnings for the Q2 were $1.01 per share compared to $1.02 per share in 2022. Year to date GAAP earnings through June were $1.78 per share compared to $2.43 per share in 2022. In our year to date comparison of GAAP to operating earnings, we have reflected the expected loss on the sale of the contracted renewables business as a non operating cost as well as an adjustment costs related to the terminated Kentucky transaction, in addition to our typical mark to market adjustment. Also, Due to new legislation in Texas allowing the recovery of incentive compensation, favorable entry was booked in the Q2 to capitalize previously incurred costs, which was almost entirely reflected as non operating earnings. There is a detailed reconciliation of GAAP to operating earnings on pages 1617 of the presentation Let's walk through our quarterly operating earnings performance by segment on Slide 10.

Speaker 3

Operating earnings for the Q2 totaled $1.13 per share or $582,000,000 compared to $1.20 partially offset by rate increases in our Utilities and Transmission revenue growth in both our Utilities and the Transmission Holding Company segment. The unfavorable weather was largely due to positive weather we saw in the Q2 of 2022. While weather was mild again in the Q2 of 2023, The unfavorable impact was less significant in comparison to the Q1 of this year. Interest continues to be unfavorable the prior year and that is primarily driven by higher debt balances as well as the higher interest rate. The higher debt balance also has resulted in an increase in interest expense as compared to our guidance, but we continue to adjust in other areas to offset this impact.

Speaker 3

Again, we were expecting this variance to be more pronounced in the first half 2023 as interest rates are somewhat stabilized. We also expect the announced sale of our contracted renewables business to close this quarter And the conversion of the $850,000,000 equity units in August to lessen the burden in the second half of the year. Finally, I'd like to note as well that we still expect to see favorable O and M in the second half of the year compared to the prior year, reflecting the timing of O and M spending and near term That we are taking to help offset the unfavorable weather, such as holding positions open, reducing travel and adjusting the timing of discretionary spending. These actions are in addition to our ongoing efficiency efforts that we target to offset the impact of inflation each year. Operating earnings for our vertically integrated utilities were $0.51 per share, down $0.08 Favorable drivers included rate changes across multiple jurisdictions, Depreciation and Off System sales.

Speaker 3

These items were more than offset by the unfavorable weather, interest expense, O and M and lower retail and wholesale load. I will touch on our retail load trends in a couple of minutes. Consistent with our first quarter results, Appreciation is favorable at the vertically integrated utilities segment, primarily due to the expiration of the Rockport Unit 2 lease in December of 2022. I and M should continue to see about $0.055 net favorable depreciation in each of the 1st 3 quarters of 2023, Both an additional $0.035 in Q4. Including the impact of the Rockport lease, depreciation was $0.04 favorable in Q2.

Speaker 3

However, if we exclude the impact of the lease, depreciation would have been about $0.02 unfavorable, which is consistent with the incremental investment in this segment. I also want to mention that the favorable off system sales showing up again in the Q2 is due to the fact that Rockport Unit 2 margins are no longer shared with our retail customers. The Transmission and Distribution Utilities segment earned $0.30 per share, down $0.02 compared to last year. Favorable drivers in this segment, including transmission revenue and rate changes, largely due to the distribution investment rider in Ohio and the distribution cost recovery factor rider in Texas. Offsetting these favorable items were unfavorable weather, lower retail load, Depreciation, O and M and interest.

Speaker 3

The AEP Transmission HoldCo segment contributed $0.38 per share, up 0 point to last year. The main drivers here included favorable investment growth and a favorable year over year change in the true up. You'll recall that we had a negative true up in 2022. Generation and Marketing produced $0.13 per share, down $0.05 from last year. The negative variance is primarily due to the development asset sale and other One time favorable items in 2022 as well as higher interest expense in 2023.

Speaker 3

These unfavorable items are partially offset by higher retail parlor Finally, Corporate and Other was down $0.03 per share, driven primarily by higher interest expense and O and M. These unfavorable items are partially offset by a favorable change in investment gain and income taxes. The favorable change in investment gain is primarily due to an investment loss incurred in the Rating earnings performance will be shown in the appendix of supplemental information going forward. You can find these details on slide 15 of the presentation today. Turning to Slide 11, I'll provide an update on our normalized load performance for the quarter.

Speaker 3

Overall load continues to come in ahead of budget, We are closely monitoring key components of our retail sales in the context of a slowing economy, and we are seeing different trends between our retail customer classes. As we discussed last quarter, our projections already assume that economic conditions will slow in the second half of the year. Recent positive economic data on inflation Any slowdown will be in line with our previous expectations. Beginning in the upper left hand quadrant of the slide, We see a slowing in our residential load compared to a year ago. Our residential customer counts continue to grow, but we are seeing usage decline as many of our customers return to the office and even more are squeezed by the relationship between inflation and income growth.

Speaker 3

That relationship is a key driver of residential usage and we expect to see it stabilize in the second half of the year. This month's CPI data point was an encouraging sign that inflationary pressures on our residential customers are continuing to lessen into the fall. Moving to the lower left hand quadrant of the slide, we can see a noticeable slowing in the industrial class. Though still ahead of year end budget Projections. Industrial load is beginning to reflect the expected slowdown in the outlook for manufacturing across the country.

Speaker 3

This slowing has been broad based across industries and operating companies, but would have been even worse without our ongoing commitment to economic development. We estimate that total industrial load for the quarter would have actually declined by 1.2% if not for growth tied to our economic development efforts. Even with these efforts, however, we do expect industrial load growth to remain subdued due to the tighter financial conditions and slowing levels of demand for finished goods through the end of the year. Outstanding this slowing is a significant boost to our normalized commercial sales that you can see in the upper right corner. Driven by new large customer volumes from our ongoing economic development efforts, year to date commercial load has grown almost 8% year over year in each of the last two quarters.

Speaker 3

We expect our commercial load to continue to outperform through the end of the year, thanks to ongoing technology development Gains in AEP Texas and AEP Ohio should continue to be especially robust with with several new projects scheduled to come online through the end of the year. With the June CPI data, we've now seen deceleration is key components of inflation that the economy has been waiting to see. We think this progress on inflation, coupled with continued resilience in the labor market, dramatically reduces the probability of a severe economic contraction in 2023. Our near and long term load projections are bolstered by our disciplined commitment to economic development across the service area. We know that working with local stakeholders to attract more economic activity is a key strategy to providing value to our customers.

Speaker 3

This allows us We continue to prioritize investments that will improve customer experience, while mitigating the rate impact on our customer base. Great examples of our recent successes are NL in Tulsa and GM in Samsung in Indiana. Both of these economic development wins We'll not only add load to our Industrial segment, but each is also expected to bring more than 1,000 full time jobs that will ultimately benefit our Residential segment and boost the local economy. Let's move on to slide 12 to discuss the company's capitalization and liquidity position. Taking a look at the upper left quadrant in the page, you can see our FFO to debt metric stands at 11.1%, which is a decrease of 30 basis points from last quarter and The primary reason for this decrease is a $1,300,000,000 increase in debt during the quarter, partially due to long term debt issuances at the operating company level to support our capital investments and the return of mark to market Collateral positions associated with the decline in natural gas and power prices.

Speaker 3

Return of collateral reduces our funds from operations, so hits us on both sides of the equation. Without the fluctuations in our mark to market collateral positions over the past 12 months and some remaining impact of deferred fuel, Our FFO to debt metric will be closer to 13.7%. We expect that this metric will improve by year end as we reduce debt after The close of the announced renewable sales and our 2020 equity unit conversion and we see the improvement in funds from operations over prior year in Q4. We remain committed to our targeted FFO to debt range of 14% to 15%, and we expect material improvement by the end of 2023 and to achieve our target in early You can see our liquidity summary in the lower left quadrant of the slide. Our 5 year $4,000,000,000 bank revolver and 2 year $1,000,000,000 revolving credit facility support our liquidity position, which remains strong at 3,100,000,000 On a GAAP basis, our debt to capital ratio increased from the prior quarter by 50 basis points to 64.6%.

Speaker 3

We plan to reduce this percentage in the Q3 as we eliminate debt when we close our announced contracted renewable sale transaction and complete our previously planned equity unit conversion. On the qualified pension front, our funding status increased during the quarter to 102.2%. The funded status improved due to rising rates during the quarter that decreased the liability, while solid equity returns positively impacted planned assets. Let's go to slide 13 for a quick recap of today's message. The unfavorable change in weather, primarily due to positive effects seen in the Q2 of 2020 2 is a significant driver in our quarter over quarter earnings comparison.

Speaker 3

If we remove this effect, we would have been $0.05 favorable compared to the prior year and our results were roughly in line with our expectations for the company as a whole. I will note from a year to date perspective, 2023 weather has been the most mild on record for the AEP system in the past 30 years, resulting in $0.29 EPS impact year over year and about $0.20 versus normal weather. So as we progress through the remainder of the year, we will continue to focus on Taking actions to mitigate this and other headwinds. Overall, our business remains in a strong position and we are reaffirming our operating earnings guidance $5.19 to $5.39 per share. We also continue to be committed to our long term growth rate of 6% to 7%.

Speaker 3

As Julie previously addressed, we are on track to close the sale of our unregulated contracted renewables portfolio in the Q3 this year and our Retail and Distributed Resources business in the first half of twenty twenty four. We've concluded that the sale of our interest in 2 of our transmission joint ventures, Prairie Wind Transmission and Pioneer Transmission, is our preferred path and we continue a strategic review of our TransSource Energy joint venture. These initiatives will help simplify and de risk our business going forward. We really appreciate your time and attention today. And with that, I'm going to ask Brad, to open the call so we can hear what's on your mind and answer any questions that you have.

Operator

Thank I go to Shahriar Pourreza with Guggenheim Partners. Please go ahead.

Speaker 4

Hey, good morning, guys.

Speaker 3

Good morning.

Speaker 5

Good morning. Just on the credit metrics, obviously, a little bit more slippage this quarter, which you highlighted. I guess, can you talk about the pathway to get to that 14% to 15% a little bit more detail? I think 300 basis points Seems like a lot of improvement that's needed in the short timeframe being that it's your early 2024 target. I mean, could we see incremental equity in plan?

Speaker 5

Is the asset sales enough And how important is collecting the unrecovered fuel balance in terms of being able to hit that target, which I guess still stands around $1,400,000,000 Thanks.

Speaker 3

Yes, sure. I'll take that. As we mentioned, the main impact to our FFO to debt is the Timing of the collateral payments, so that's about a 2 40 basis point impact to our FFO to debt. And so that should resolve itself by year end and result in a noticeable improvement. We also have about 100 basis points of favorable impact from the proceeds of the contracted renewable sale and the equity unit conversion.

Speaker 3

So we are confident that we are going to have measurable improvement by the end of the year And be into the range by next year. In our forecast, we don't have any of the securitizations in our cash flows. We do have recovery of deferred fuel, but that is not necessary to be able to get into our current range.

Speaker 5

Got it. Okay, perfect. And then maybe just more of a strategic question for Julian. Obviously, AEP is never CapEx constrained, right? I guess, how do we sort of think about overall financing, especially given the current interest rate And kind of where the stock currently trades.

Speaker 5

Do you have ongoing you do have ongoing needs, right? So as we're thinking about parent leverage And Equity, are more non core asset sales out there or could we actually start to see some more core assets Sales to kind of fund the plan and maybe further simplify the story. Thanks.

Speaker 2

Yes. No, Shar, I so appreciate the question. And you're right, we have a lot of opportunity to put capital to work as it relates to taking care of the customer and delivering reliable affordable service. But as you point out, we need to make sure that we're hitting all the metrics too. So not only do you need to be real mindful of where customer rates are going when we put money to work, I need to make sure that, all my earnings growth targets are going to be hit because I think you guys would be upset with me if that didn't happen.

Speaker 2

So we'll make sure that happens. But I also need to make sure that my balance sheet is really strong too. So let me get to your question around asset sales. We've really been focused on, as you know, the non core related activities that when people buy AEP shares or invest in our bonds, they're not necessarily to buy something that is not a traditional regulated utility type business. So to that end, that's why you see us kind of going through the paces today where we've talked about The unregulated components of our business and while we love transmission, even looking at some of these Transmission investments of the joint ventures that are off our footprint because if we can channel all of our efforts and dollars to taking care of our customers that are regulated in our footprint, So I wouldn't anticipate significant additional activity coming from us for a couple of reasons.

Speaker 2

I think we're pretty cleaned up once we get some of this non core stuff taken care of. I think we're in a good place. I think that There may be some opportunities on the edges, but for the most part, we should be in a really good space to be continuing to look at the regulated pieces of our business, but we also and very candid, Shar, we don't need to engage in asset sales to make the balance sheet work. What we need to do is make sure we're being as efficient as possible. And that's another reason why I want to make Sure that every dollar we do put to work is one that, A, makes sense for our customers, but also is something that makes sense for our service territories.

Speaker 2

And Typically, why I'm calling that out is, it's another reason why I'm out talking with folks in our communities. So whether it's commissioners, customers, etcetera, need to make sure that we're aligned or at least absolutely aware of one another's priorities and then we can make refinements based on those conversations. So I would never say that we're not at all capital constraints because I think we naturally are because we put our own constraints on because we got to take care of customer rates and make sure that we're going to have a really strong balance sheet. We're working on that. As Anne just mentioned, we expect that FFO to debt to look a lot better once we get to year end and going into I think in the interim here, it's going to be just a little bumpy as we work through a couple of the next few months.

Speaker 2

So I wouldn't be too concerned about that. I comfortable with the numbers I'm seeing, but we'll continue to be very disciplined around which dollars we put to work where that is consistent with what our stakeholders need and want, taking care of our customer, and then just being as efficient as we can. So my focus is going to be more at this point on Let's close that gap on the ROE. That's the piece that I can try to do my best to control.

Speaker 6

Got it.

Speaker 5

Terrific. And No, it does. And then we do appreciate some of the salient points you brought up in your prepared remarks as far as the outreach to the regulatory folks and various stakeholders. So thank you for that point.

Speaker 2

Yes. Thank you for the coverage.

Operator

And next we go to Jeremy Tonet with JPMorgan. Please go ahead.

Speaker 4

Hi, good morning.

Speaker 2

Good morning.

Speaker 7

I wanted to kind of follow-up on some points that you were just touching on here, because Some of the dockets and local media attention have highlighted some regulatory pushback in certain areas of late. And you mentioned reaching out to local to build relations there. Just wondering over what timeframe you expect to kind of meet all of them? Is this a change in regulatory strategy where they Hear from headquarters more regularly here. Just wondering how you think about this type of outreach going forward?

Speaker 2

Jeremy, I love that question. So I'm going to tell you from my perspective, this is coming from a former operating company President. So I Keep that hat kind of in my back pocket that I got to throw on from time to time. And so let me start with this. What I hope to do or achieve is Pays the way or clear the path for our operating companies so that they can do the best they can do, boots on the ground.

Speaker 2

And so my objective is to get out to make sure that I'm talking with different commissioners. And by the way, that's already underway. So I've already been out and talking with several folks and I've got my calendar lined up over the next few months to continue to that effort. So I'm not going to get into necessarily exactly who I'm talking to when, but that's well underway, so rest assured that's happening. But I just I want to make sure that they're hearing from me, and that they understand that AEP, the parent or the service corps to support the operating companies.

Speaker 2

And I need them to hear that from me. And more importantly, I just want to be a really good listener so that I can be really good at my job so I can take care of our customers, take care of my team, and then ultimately take care of my investors and the other stakeholders that are party to everything that we're doing here. So I don't want people to think that I'm stepping in the way, or thinking that something's not right, That's not the case at all. I just want to make sure that we're doing everything we can to support the teams so that they can be as successful as they possibly can be. Because here's the other point, right?

Speaker 2

You call out the fact that there are pressure points as it relates to regulatory activities. I think that's going to be what we're dealing with for the next several years. We got a lot of headwinds now. The game's changed. The industry is going through a material transition.

Speaker 2

Each of our space is in a different place as it relates to their economies. And so I think everybody is doing their jobs and that means we got to do ours too. We have been doing it, but We have to be really good listeners and learners and adjusters, and I think that goes for all the different stakeholders. So the more dialogue we can have, I think the smarter we're going to be and if nothing else, that will we only be able to take care of the customer and make sure we're keeping the lights on and delivering this product that makes life possible. But I think we're going to be doing it in a much more effective way and we're going to have to pick up the pace too.

Speaker 2

So we got to do it in a faster way than we've ever done it in our So I think it's exciting. I love getting out and talking with people. You guys know from The Street, I love getting out and talking with you too, so that's not going to stop. So I just got to work my calendar and I'll be upfront and I'm happy to talk about any of the conversations that I've had.

Speaker 7

Got it. That's very helpful. And just One more along these lines dialing in a little bit more. In Kentucky, our local stakeholder conversations highlight A focus on increased distribution investment as a priority as opposed to the more recent, I guess, transmission investment, which could help local stakeholder relations there with the focus on distribution. Just wondering how you see your Kentucky strategy Evolving over time here.

Speaker 2

Yes. I'll tell you, let me start with this. Again, having been a former CFO as well, At 1.6% ROE, yes, we got to work on that. And that to me, when I see that number, That's not a financially healthy, sustainably healthy entity. So that's why we're going through the case activities.

Speaker 2

So we're going to work on that. And that's exactly why we went out and socialized the case well in advance with dozens of meetings with a variety of different stakeholders. So again, Listening and learning, so we understand where everybody is kind of shaken out, but also understanding what it is that we need to do so that we're successful not only in taking care of our customers, but making sure we're doing everything we can to make sure that the stakeholders understand what our objectives are and are comfortable with it. So yes, the objective is to, A, get a plan in place that will allow us to improve the financial Positioning of the company, which then enables us to make future investments to take care of the customers. They need the power to, it doesn't matter which state you're sitting in, but the idea is to engage in these activities, hopefully have a really good case, and I don't expect it to be easy.

Speaker 2

It's not supposed to be easy. If it was easy, everybody would be doing it. So we'll engage in those activities and hopefully get us on a path forward that enables us to continue to invest in a really smart way in in the state that everybody can feel good about.

Speaker 7

Got it. So there's room to pivot towards more distribution over transmission. Sounds like you're Working with stakeholders there?

Speaker 2

Absolutely. And so those are the conversations that we're having. We do know that transmission has been very important to the commission. And so that is top of mind for us as well. And we've worked that into the structures that we've essentially set forth in our case, but at the end of the day, it's the distribution that also matters because we got to keep the lights on.

Speaker 7

Got it. I'll leave it there. Thank you very much.

Speaker 2

You bet. Thank you.

Operator

And next we'll move to Anthony Carudels with Mizuho. Please go ahead.

Speaker 8

Hey, Good morning. Thanks for taking my questions.

Speaker 2

You bet.

Speaker 8

Just first off, Slide 12. Nish, maybe I've been following it too long, but I think over the last 10 years, the total debt to total capitalization has gone from 53%, Now it sits at 65%. I'm just wondering, does that stabilize or where do you see the sweet spot for Total debt to total capitalization?

Speaker 3

Yes, absolutely. Thanks for the question. So it has in stuff as you can see on the graph, I mean 60% is our And that's what we're targeting going forward. As you can see, we're above that right now. We do expect that to decrease With the contract to renewable sale proceeds and also the equity unit conversion, so that's a couple of 100 basis points that will reduce that closer to the

Speaker 8

Great. And then if I stayed on the balance sheet here, I think you've talked about your plan to be in the target, and I hope this is correct, in 2024. If I could Get real granular, when do you think you're going to get into the midpoint of your 14% to 15% range? Is that something you'd talk about?

Speaker 3

Yes. I mean, I would say we're going to be we say we're going to be in the target in 2024 and I think approaching the midpoint probably by the end of 2024. There are the fluctuations, as I mentioned, in FFO that we're experiencing, and that's just really due to timing of quarter over quarter Fund flows. And so you will see, especially in 2023 that it will be pressed till the Q4 when we really see that switch In the collateral collections, in improving our FFO there. So that's what's going to take some time.

Speaker 3

But we do expect it to increase, like I said, materially by the Q4 and then into next year.

Speaker 2

And Anthony It's Andy, just to put a little finer point on it to remember, our threshold that we're sensitive to is 13% as it relates to our Baa2 Ratings from Moody's and so that's why we toggle to the 14% to 15% because what we want to have is cushion. So 14% definitely gives us some cushion. So keep that in mind as well. And the other thing I mentioned in my comments too is, as we proceed through the rest of this year, you can expect maybe a little more pressure as we go through the next couple of months with some improvement as we get to the Q4. I just want to manage those expectations.

Speaker 3

Yes. The other thing just to highlight is that we're talking a lot about the timing of collateral payments, but 80% of that volatility that we're Being relates to our retail business, which as you know is for sale. So once we sell that business, we would expect that reduction in volatility going forward.

Speaker 8

And then just lastly, Julie, I appreciate all the commentary you've given on the regulatory strategy And especially Kentucky, and I know Kentucky has heard a small piece. But when you look at the equalizer chart, I mean, the ROE is pretty low. What's a reasonable assumption for us to use where that ROE could go in By 2024, I mean, does that go to an allowed of 9.9? I'm just curious, how long does it take to recover The regulated returns of the utility.

Speaker 2

Yes. Anthony, it's going to take a while. Do not expect a flash cut. And so, remember, in our case, we Requested a 9.9% ROE. Our current authorized is 9.3%.

Speaker 2

I'm looking at Page number 34 in the slide deck right now. It will be a walk. So that's something we're trying to manage our own expectations around, as well as for you all as you work to model. So stay tuned, and let's let this case proceed and see how things move along and then we can continue to kind of dial that in and give you more direct guidance, okay?

Speaker 8

Great. Thanks so much for taking my questions. I really appreciate it.

Speaker 2

You bet. Thanks for being on the call.

Operator

And we can go to Julien Dumoulin Smith With Bank of America, please go ahead.

Speaker 4

Hey, thank you, Julie and team. Good morning. Appreciate it. Maybe to follow-up On some of the last few questions here, if I can. Just as you think about some of these headwinds here with respect to securitization heading into 2024, obviously, You sound fairly confident, not just in offsetting the weather year to date, but in the 24 items here.

Speaker 4

Can you talk about some of those Tailwinds here are some of the forthcoming offsets. What else gives you the confidence in having that linear trajectory on the 6% to 7% here, If you can speak to that a little bit more. And maybe related to that, can you talk about maybe the timing of some of these items, To the extent which some of those headwinds on securitization bleed into 25% as well. I don't want to be too myopic on the current the next year.

Speaker 3

Yes. No, I mean, what I'll do is I'll start with kind of addressing the 2023 earnings guidance question. As you're welcome, we're $0.18 below prior year and we guided to year over year for the full year, it's about $0.20 improvement. So that's 0.38 That we need to outperform last year for the second half of the year. When I look at this, I think it's helpful to break it down into components.

Speaker 3

So weather was $0.29 over 2022, about $0.20 of that impact is versus normal. And that's where we've taken some action to offset that those headwinds. Interest also is about $0.29 unfavorable year to date. It's running a bit above We had guided to $0.20 but that also didn't include interest on Kentucky because we had expected to sell the business. So that's about $0.10 per year and that's covered in revenue.

Speaker 3

So we had anticipated much of our year over year increase to be in the first half of the year because of the timing of the Fed action. So while we are a little bit short coming into the back half of the year, We also have the proceeds from the contracted renewable sale and equity unit conversion that will help reduce our debt somewhat. And we've taken other actions to offset The increase in rates because it has been the Fed has been tightening a little bit longer. When you look at O and M, Unfavorable to last year in the first half, but we expect this to reverse due to timing of our O and M spending. Our original guidance plan for a reduction of O and M during the second half of the year because last year's spending was a little bit robust on the O and M side in the back half.

Speaker 3

And so we had already anticipated a reduction And then we've taken additional actions like those that I've mentioned to be able to make up for the reduction in weather volume. And then last There's a couple of other things that we're pointing to. One is the favorable trends in commercial load that we expect to continue. And we've also seen favorable results In our Generation and Marketing business that will benefit us this year. So putting that all together, that's what gives us the confidence in our ability to meet our earnings Guidance for this year, in terms of the maintaining the 6% to 7% EPS growth going forward, it's really A story on our capital deployment and we have a very robust capital pipeline that allows us

Speaker 2

to do just that. And Julien, on that note, just to Put an end cap on this. I think the core is solid. And so when you look out in the next few years, as Anne mentioned, We got $40,000,000,000 we're putting to work in terms of capital investment over the next 5 years. To work with our regulators to make sure that we're deploying the dollars where we all agree that they need to go.

Speaker 2

And then at that point, it's really around making sure that we also execute on, I mean, the regulatory plans that we lay out there. But as We've got some strategic asset sales that are underway. So we'll deal with the fact that some of those businesses are falling away, rechanneling those dollars to the regulated pieces of the pieces of the business that will help us from the math perspective and making sure that we're hitting all of those other balance sheet metrics that we need to make sure that we hit, so people aren't worried or concerned. And we got a little more flexibility. So when we have a weather event or something of that nature, we can easily sustain that, but the core is solid and at this point, it's around being efficient, putting the dollars to work where it makes sense and closing the gap on the ROEs.

Speaker 4

Got it. All right. Excellent. And then if I could follow-up briefly on a couple of details. With respect to PSO, obviously, dynamic situation with the ALJ and settlement, can you talk a little bit about your expectations here and maybe about What you had been planning in interim rates, just obviously what happens, how you've been planning, what's reflected in rates, if you don't mind a little bit

Speaker 6

of an update there?

Speaker 2

Yes. So we implemented interim rates in early June, I think it was, as it relates to the settlement that we had to put in place. And at this point, as you mentioned, the ALJ had its report that it is submitted and then File exceptions were filed, I think it was yesterday to the ALJ report. So if you haven't taken a look at that, I would I encourage you to take a look at that. But effectively, the parties to the settlement agreement were absolutely supportive of the settlement agreement, which we would have expected anyway.

Speaker 2

So we felt good about that. And we're going to let this thing play out over the next Couple of weeks really because we're getting pretty close here. Parties have 4 days to respond to the exceptions that were filed and that is effectively August 1st. And then we'll have an oral argument of the exceptions that's scheduled for mid August and we would expect to get an order in September. So stay tuned.

Speaker 2

The process is working And like I mentioned, we've got interim rate in effect, and we will keep you apprised. But do go take a look at the exceptions. I thought that was interesting.

Speaker 4

Duly noted. Thank you. All right. I'll leave it there. Good luck, guys.

Speaker 9

Speak to you soon.

Speaker 2

Thanks, Julian.

Operator

Next, we'll go to David Arcata with Morgan Stanley. Please go ahead. Hey, Good morning.

Speaker 6

Thanks for the questions.

Speaker 2

Good morning.

Speaker 9

Wanted to let's see, could you give some color on what Plans are going forward for Texas in terms of the generation outlook you've had, some challenges there just with the Renewables proposal, I'm wondering how you're thinking about that going forward in terms of strategy and in Generation Solutions?

Speaker 2

Yes, absolutely. Yes. So we did file for rehearing because we need to make sure that we're doing all we need to do from a traditional regulatory and administrative perspective. And then what you can anticipate AEP doing is, essentially running another RFP and running another process so that we can make sure that we're doing what we need to accommodate The capacity situation in Texas, I do believe that Texas understands there is an adequacy issue that we would otherwise have to deal with. So that's something that we will be proceeding forward with.

Speaker 2

So standby and you'll see what we come to the street with here in the not too distant future.

Speaker 9

Got it. And could there be a cell phone option in there? And to the extent there was, would that be, I guess, incremental to what's currently in the renewable generation outlook for CapEx plan?

Speaker 2

Yes. That's a possibility. That's a possibility. But what we would do is accommodate any type of investment in the current CapEx forecast.

Speaker 9

Okay, got it. Understood. And then you do have A couple of other renewable projects out there for approval this quarter in several states. I was just wondering if you can give a sense of your confidence level in those for the proposals that you put forth, and what alternatives you might have if there end up being challenges in any of those?

Speaker 2

Yes. Actually, I'm trying to

Speaker 3

flip the page so we can kind

Speaker 2

of draw everyone's attention to them right now. I'm looking at Page number 32. So for example, we've got an application Open in Virginia and we made the same filing in West Virginia for Appalachian Power Company. We're talking about 151 Megawatts, about $500,000,000 investment for wind and storage capacity there. At this point, the process is proceeding along as we would So I have nothing new to report.

Speaker 2

So stand by there. And trying to think of where else we have open cases in Indiana, Michigan. Looks like staff has been supportive on the Michigan side through those applications and Indiana order is expected in 3Q, so the Q3 of this year. So stay tuned there as well. But so far, constructive and productive when we're moving forward.

Speaker 2

Then of course, we also have, I guess, I should call out the wind investment rockfalls that's included in the base case at PSO, but that's part of the base case So, as you know, I just mentioned that we're well underway in that proceeding.

Speaker 9

Got it. Okay. That's helpful. Thanks so much.

Speaker 2

Thank you.

Operator

And we can go to Sophie Karp with KeyBanc. Please go ahead.

Speaker 10

Hi. Good morning and thank you for taking my questions. I have a couple of questions here. First is on the renewables, right? So clearly, Texas maybe has lesser And I'm just curious if you how much of the incremental What is the thing is left in Louisiana and like other states that picked up slack in this particular instance?

Speaker 10

Is there a risk In the near term, I guess, in your mind that those states would also turn down potential future proposals because of their That's pretty much like full as far as renewable generation goes.

Speaker 2

Sophie, I appreciate that question very much because as you know that's been top of mind for us as we work through that So we obviously got the approval for the 9 99 Megawatts in Louisiana FlexUp. So we're moving In that regard, you may recall that we also had another process that was underway for Swepco in particular. I want to say it was 2,400 megawatts that we were seeking interest in as it relates to how we would put that portfolio together. And so what we've done is we've actually tabled that and we'll be coming back to everyone to say, look, we want to look at this from an all source perspective, including PPAs. So stay tuned on that because there is absolutely a capacity need.

Speaker 2

It's just going to take a little different shape than what we were initially As we are running that RFP process and remember when you probably heard me saying earlier here today on the call, we need to make sure that we're listening to our regulators. And so this is exactly what we're doing as it relates to the conversation and the experience that we just had in Louisiana, Arkansas and Texas. And so we are adjusting and moving forward. So there will be more RFPs. Stay tuned for that.

Speaker 2

And they will be more all source oriented, No different than what we would be doing in Texas. As you call out, yes, it looks like not a lot of interest in renewables there right now. So we need to think about what the other alternatives are, but we will work together with our regulators so that we can make sure that we're doing what the state needs. Because at the end of the day, this is all about making sure that our customers have reliable, affordable, electricity period.

Speaker 3

Yes. And just to reiterate on our capital plan. So, so far, $5,200,000,000 of projects have already been approved and we have another $1,700,000,000 that Julie just talked about in the regulatory process. That's Out of our $8,600,000,000 so we are well on our way. And we also have flexibility with our transmission and distribution investments to fill in to the extent that anything else It gets delayed a little bit in the process with these RFPs.

Speaker 3

Great, great. Thank you.

Speaker 10

And my other question was on the ROEs. Maybe I'm referencing Slide 34 here. My reading is right that the 40 bps depressed by 40 bps on mild weather is Sort of average across the board, so if it wasn't for weather, all of these bubbles would be like roughly 40 bps higher or How should we think about this? There's like a lot of numbers here.

Speaker 2

Yes. That 40 bps is on average, Okay. Let me answer it this way though, because when I'm thinking about what does this mean for the rest of the year? And as I mentioned in my opening comments, We had initially anticipated or expected on a weighted average basis, we'd be about a 9.4% ROE across our operating companies in our 2023 guidance. And so now what we're suggesting is that we have a little bit of a hole that is associated with weather on that ROE, can't make all that up, I don't Unless we had some ridiculous weather circumstance in the back half of this year.

Speaker 2

So we're not going to bet on that because we're going to bet on normal. And so what I would expect We expect to improve from 8.6%. It will not get to that 9.4%. So even if you get closer to 9%, I I think that's reasonable. And our point that we want to make today is despite the fact that we've had pressure, as a result of weather, We're adjusting the sales and we fully well expect to be within our guidance range.

Speaker 2

And so that's the important key to take away today As it relates to our messaging, then with also the understanding behind the scenes, we just need to fundamentally do our very best to make sure we're earning as close as possible to those authorized ROEs beyond the weather situation.

Speaker 10

So just to be clear, the 8.6 is the average with the transmission hold code?

Speaker 2

Yes. With all distribution and weighted average, yes.

Speaker 3

Thank

Operator

you. And next we go to Paul Patterson with Glenrock Associates. Please go ahead.

Speaker 6

Most of my questions have been answered. Only I have a question for you that's a little bit different and that is the Chevron Defense. It looks like that the Supreme Court might act on it. And I'm kind of scratching my head and I was thinking what you guys might be thinking about What might happen if in fact the Chevron doctrine or whatever you want to call it Is substantially changed or repealed or what have you. Have you guys thought about this or I'm sure you thought about it, but any ideas about what you think that might mean for you guys on the ground?

Speaker 2

Paul, I don't have a lot of detail to share with you today. I do know that our legal team is looking into this and our strategy team. But for my day to day right now at the moment, it's not been top of mind. I'm just taking comfort knowing that the rest of the team is working on it. But hey, if you have a conversation, I'm happy Circle back.

Speaker 6

Okay. Sure. It wasn't my first question, but the rest were answered. So thanks so much And I'll follow-up with you guys later.

Speaker 2

That'd be great. Thank you.

Speaker 6

Okay, great. Thank you.

Operator

And we'll go to Paul Fremont with Ladenburg. Please go ahead. Thank you very much. I guess my first question is, If you were to get the securitization proceeds, does that change the equity issuance plans that you lay out on Slide 28?

Speaker 3

No, no, it really doesn't. So if we get the securitization proceeds, what we would do is reinvest that into the other areas within the AEP footprint. So not in APCO, but in the other areas so that we're and making sure that we continue to earn on the investment, while getting the benefit to the Appalachian Power customer.

Operator

And then my second question sort of related is, if you were to get incremental CapEx, what percent should we assume Would the equity funded versus, let's say, debt funded?

Speaker 3

Yes. I mean, I would assume just kind of the average of what we have in this current plan.

Speaker 2

Yes. Paul, we typically get if we have an opportunity to invest more, We're going to try to manage directly back to those target ratios that we throw out there and obviously be mindful of debt to cap as well. So at this point, We're focused entirely on executing on the plan that we already have out in front of you. The issue could be From time to time is how much slides from 1 year to the next, so you're kind of playing with the toothpaste too, right? So you're just passing the CapEx back and forth because we got $40,000,000,000 that we're putting to work.

Speaker 2

And again, at this point, while we always have more opportunities, we need to make sure that this is affordable for our customers as well. So that's going to be another stopping point for us too because we're essentially trying to thread the needle, make sure the balance sheet stays strong, make sure those metrics are absolutely in place, but make sure that our customers are able to afford what we're essentially providing. Our regulators definitely help us with that, but that's also precisely why we have to be really disciplined and not just continuing to spend CapEx that would be fun and nice to spend and actually absolutely make our system stronger and absolutely reliable. But Is that what is necessary to keep the lights on and what customers can afford? So it is a constant balancing act for us.

Operator

Great. Thank you very much.

Speaker 2

You bet. Thank

Operator

you.

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. Brad, would

Speaker 2

you please give the replay information?

Operator

Certainly, thank you. Replay will be available after 11:30 today and running through August 4 at midnight. You can access the AT code 1,289,635. International parties may dial 4029700847. Those numbers again, 1-eight sixty six-two zero seven-ten forty one and four zero two 9,700,847 with the access code 1,289,635.

Operator

This does conclude our call for today. Thanks

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Earnings Conference Call
American Electric Power Q2 2023
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