American Electric Power is hosting a second quarter 2023 earnings call, led by Vice President of Investor Relations, Ms. Darcy Reese. Julie Sloat, President and Chief Executive Officer, and Ann Kelly, Chief Financial Officer, will be making opening remarks and taking questions afterward. The call is being recorded and forward-looking statements will be made. The call is taking place in a rapidly changing industry with federal policy shifts, state and customer priorities, rising interest rates, and supply chain constraints.

AEP is making significant progress on its stakeholder commitments and strategic objectives, including delivering on its 2023 operating earnings guidance and 6-7% annual operating earnings growth, providing dividend growth, strengthening its balance sheet, and achieving net-zero by 2045. The company has made organizational adjustments to operate more effectively and engage with federal and state regulators to support its operating companies. AEP will provide an overview of its second quarter financial performance and share updates regarding its unregulated contracted renewables portfolio, retail and distributed resources businesses, and its strategic review of its non-core transmission joint ventures. Finally, AEP will discuss its recent successes related to its renewables execution and developments on its regulatory and legislative initiatives.

AEP reported second quarter 2023 operating earnings of $1.13 per share or $582 million, and reaffirmed their 2023 full year operating earnings guidance range of $5.19 to $5.39. They also expect to be in their targeted FFO to debt range of 14%-15% in early 2024. In February, they announced the sale of their 1,365 megawatt unregulated renewables portfolio, which is expected to close in August after receiving FERC 203 approval and clearance from antitrust authorities.

AEP has announced the sale of its New Mexico Renewable Development Solar portfolio, as well as its retail and distributed resources businesses, which are scheduled to close in 2023 and 2024, respectively. The company has also completed the strategic review of two of its three non-core transmission joint ventures and is launching sales processes soon. Lastly, AEP has an $8.6 billion regulated renewables capital plan, of which $5.2 billion has been approved and $1.7 billion is currently before its commissions for approval.

The Oklahoma Commission approved PSO's 995.5 megawatt renewables portfolio for $2.5 billion, which includes three wind and three solar projects, projected to be in service by the end of 2025. Arkansas and Louisiana Commissions approved SWEPCO's 999 megawatt renewables portfolio costing $2.2 billion, containing two wind projects and one solar project, which is expected to be in service by 2025. Texas Commission denied SWEPCO's application related to these projects, so Arkansas will move forward with 20% and Louisiana will flex up with 70%. APCo, I&M, and PSO are awaiting commission decisions for 151 megawatts of owned wind and energy storage, 469 megawatts of owned solar, and 154 megawatts of owned wind, respectively. The company is focused on closing the gap between their authorized and earned ROEs, which is expected to take longer than anticipated in their 2023 guidance.

In the year 2023, AEP has filed a new base case in Kentucky to address the financial health of the company, and has settled PSO's base case with the commission staff in Oklahoma. They have also filed a triennial in Virginia and are expecting an order later in the year. They are confident that they will reduce the gap and still meet their earnings guidance, while prioritizing federal, state, and customer preferences. They are engaging in discussions with commissioners in their footprint to provide safe and reliable service, while managing costs to provide affordable service.

Texas recently passed legislation which allows utilities to file the Distribution Cost Recovery Factor (DCRF) twice a year and use it even if a base case review is pending. AEP is managing its fuel cost recovery with a focus on customer impact, and has proposed two options for consideration in its April 2023 fuel recovery application. One option amortizes the fuel balance over three years, while the second option proposes using securitization to manage the $553 million deferred fuel balance, as well as $88 million of deferred storm costs and $1.2 billion of legacy coal plant balances, with the intention of having a neutral impact on customer rates. Securitization is the mechanism that can be used to address affordability in West Virginia.

Julie and Darcy discussed the potential securitization of $1.2 billion for the Amos and Mountaineer coal plants, which would not change the current retirement schedule of 2040. The West Virginia Commission has issued a procedural schedule for the fuel case, which will be addressed in an evidentiary hearing beginning on September 5. Ann Kelly then discussed the second quarter and year-to-date results, updates on the service territory load, credit metrics and liquidity, as well as guidance, financial targets and portfolio management activities.

In the second quarter of 2023, GAAP earnings were $1.01 per share compared to $1.02 per share in 2022. Operating earnings totaled $1.13 per share or $582 million in 2023, lower than the $1.20 per share or $618 million in 2022. This decrease was attributed to unfavorable weather, interest, and O&M, partially offset by rate increases in the utility and transmission segments. The higher debt balance and interest rates also increased interest expense. A reconciliation of GAAP to operating earnings can be found on Pages 16 and 17 of the presentation.

In the second quarter of 2023, operating earnings for the vertically integrated utilities decreased by $0.08 per share due to unfavorable weather, interest expense, O&M, and lower retail and wholesale load. The expiration of the Rockport Unit 2 lease in December of 2022 is expected to result in $0.055 net favorable depreciation in each of the first three quarters of 2023, plus an additional $0.035 in the fourth quarter. Off-system sales are also expected to be favorable due to the fact that Rockport Unit 2 margins are no longer shared with retail customers. Cost-saving measures such as holding positions open, reducing travel, and adjusting the timing of discretionary spending are being taken to help offset the unfavorable weather.

AEP Transmission Holdco segment contributed $0.38 per share up $0.11 compared to last year, while Generation & Marketing produced $0.13 per share down $0.05 from last year. Corporate and other was down $0.03 per share, driven by higher interest expense and O&M. Load is currently ahead of budget, but is being monitored for changes due to the slowing economy. Details of year-to-date operating earnings performance can be found in the appendix of supplemental information.

The projections for the second half of the year assume an economic slowdown, which is supported by recent inflation data. Residential load is declining due to the relationship between inflation and income growth, which is expected to stabilize in the fall. Industrial load is also slowing due to the outlook for manufacturing across the country, though economic development efforts have helped offset this. Commercial load has grown 8% year-over-year in the last two quarters, largely due to economic development efforts.

AEP expects their commercial load to continue to outperform through the end of the year due to technology development and new projects coming online. The June CPI data has shown a deceleration in key components of inflation, and AEP is committed to economic development across their service area to attract more economic activity and improve customer experience. This is seen in successes such as NL and Tulsa and GM and Samsung in Indiana, which will bring more than 1000 full-time jobs and boost the local economy. AEP's FFO to debt metric is 11.1%, a decrease of 30 basis points from last quarter. This decrease is due to long-term debt issuances and return of mark-to-market collateral positions associated with decline in natural gas and power prices.

This paragraph discusses the impact of weather on the company's earnings in the second quarter of 2022 and how the company's funds from operations, debt-to-capital ratio, and qualified pension funding status have been affected. It also mentions the company's plans to reduce debt and achieve its targeted FFO to debt range of 14-15%. Lastly, the paragraph summarizes the message of the presentation.

AEP is expecting mild weather for 2023, which will have an impact on their earnings per share of $0.29. They are still committed to their long-term growth rate of 6-7%, and are on track to close the sale of their unregulated contracted renewables portfolio and retail and distributed resources business in the third quarter of 2023 and first half of 2024 respectively. They are also considering selling their interest in two transmission joint ventures and are reviewing their Transource Energy joint venture. They are asking for questions from the operator and Guggenheim Partners asked if they will need to do more to reach their credit metrics goal of 14-15%, such as issuing more equity, or if the asset sales will be enough.

Julie Sloat explains that AEP has the opportunity to invest in reliable, affordable service for customers, but must be mindful of customer rates and earnings growth targets when deciding how to use capital. She also emphasizes the importance of hitting all metrics.

AEP is focused on their regulated utilities and customers, and they don't need to sell assets to make their balance sheet work. They want to make sure that every dollar they put to work benefits their customers and service territories. To that end, they are engaging with their community to ensure their investments are beneficial.

Julie Sloat discussed the importance of aligning with stakeholders, such as commissioners and customers, and being aware of their priorities in order to make refinements. She also noted that while there are capital constraints, they can be managed. Sloat's focus is on closing the gap on the ROE and being as efficient as possible. She also mentioned that she and her team are actively reaching out to local commissioners to build relationships.

Julie Sloat explains her strategy of reaching out to commissioners, which she is already doing, to ensure that they understand that the service core exists to support the operating companies. She wants to be a good listener and ensure that the operating companies have the necessary support to be successful and meet the needs of customers, team members, and investors.

Julie Sloat discusses the need to adjust to the changing industry and economy in order to better serve customers. She emphasizes the importance of dialogue between stakeholders and the need to work faster and smarter in order to keep the lights on and deliver the product. She also mentions the focus on increased distribution investment in Kentucky as opposed to transmission investment in order to improve local stakeholder relations. Sloat also acknowledges the need to address the 1.6% ROE in Kentucky.

Julie Sloat is discussing the importance of creating a financial plan that will ensure the company's financial stability and enable it to make future investments to take care of customers. She is engaging with stakeholders to ensure they understand the objectives and are comfortable with the plan. She is also working to create a plan that includes both transmission and distribution to keep the lights on.

Anthony Crowdell asked about the total debt to total capitalization, and Ann Kelly stated that the sweet spot is 60%, which is above the current rate. Julie Sloat then responded that they expect to be in their target range by the end of 2024, and that there may be fluctuations due to quarter-over-quarter fund flows.

Julie Sloat provides an explanation of the regulatory strategy for Kentucky, where the ROE is currently at 9.3%. She explains that the requested ROE is 9.9% and that it will take a while to reach that level. Anthony Crowdell also notes that the threshold for the Baa2 rating from Moody's is 13%, and that 14-15% provides cushion. Ann Kelly adds that 80% of the volatility is due to the retail business, which is for sale.

Ann Kelly explains that the company is $0.18 below prior year and has guided to a $0.20 improvement for the full year. She breaks down the components, noting that weather has had a $0.29 unfavorable impact and interest is running above expectations. She anticipates the year-over-year increase to be in the first half of the year due to the timing of the Fed actions.

The company is confident in its ability to meet its earnings guidance for the year, and is looking forward to continued growth in the future through its $40 billion capital investment over the next five years. The company is also working with regulators to ensure the capital is deployed where necessary, and is looking to execute on its regulatory plans as well as strategic asset sales.

The Oklahoma Public Service Company (PSO) implemented interim rates in June based on a settlement agreement. Exceptions to the ALJ's report on the settlement were filed recently, and the parties to the agreement are supportive. The exceptions will be responded to by August 1st, followed by an oral argument in mid-August and an order in September.

Julie Sloat of AEP is discussing their plans for Texas going forward, including a rehearing and running another RFP to accommodate the capacity situation. She mentions that a cell phone option is a possibility and any type of investment would be accommodated in the current CapEx forecast.

Julie Sloat is discussing renewable energy projects in several states, including Virginia, West Virginia, Michigan, and Indiana. She reports that the process is proceeding as expected, and that staff have been supportive in Michigan. She also mentions a wind investment in Oklahoma that is part of the base case settlement. David Arcaro then asks for more information on the appetite for renewables in Louisiana and other states, to which Julie Sloat does not have an answer.

Julie Sloat explains that they have tabled their RFP process for 2,400 megawatts of renewable generation and will be returning with an all-source perspective that includes PPAs. She also states that they need to listen to their regulators and adjust to the experience they had in Louisiana, Arkansas, and Texas. She emphasizes the importance of providing reliable and affordable electricity for customers.

Ann Kelly explains that the 40 bps weather pressure is an average across the board, and while they cannot make up the difference, they expect to improve from 8.6% to closer to 9%, which is still within their guidance range.

Julie Sloat and Sophie Karp discussed the 8.6% weighted average of all distribution with the Transmission Holdco. Paul Patterson asked what would happen if the Chevron doctrine was changed or repealed, to which Julie Sloat replied that the legal and strategy teams were looking into it. Paul Fremont was then given the opportunity to ask a question.

Julie Sloat and Paul Fremont are discussing if the securitization proceeds would change the equity issuance plans outlined on Slide 28. Sloat states that the proceeds would be reinvested in other areas within the AEP footprint, rather than APCo. Fremont then inquires what percent of any potential CapEx would be equity funded versus debt funded. Sloat suggests that they would aim to manage back to the target ratios, while also being mindful of debt to cap and ensuring that the investments are affordable for customers.

The IR team was available to answer any additional questions and provided a replay of the call which would be available until August 4 at midnight. The replay could be accessed by dialing 1-866-207-1041 (international parties could dial 402-970-0847) and entering the access code 1289635. The call concluded with a reminder that the IR team would be available to answer any additional questions.

This summary was generated with AI and may contain some inaccuracies.