The American Electric Power third quarter 2023 earnings call began with an introduction from the conference operator, followed by opening remarks from Vice President of Investor Relations Darcy Reese. CEO Julia Sloat then introduced CFO Chuck Zebula, who discussed the company's third quarter performance and their 5-year $40 billion capital plan. Sloat expressed confidence in the company's strategy and their ability to meet customer needs.

AEP has successfully adapted to the changing industry landscape and remains focused on customer needs while also considering stakeholders. They have made progress in simplifying and derisking their business and have had success in regulatory and legislative initiatives. AEP reported strong third quarter earnings and has narrowed their guidance for 2023, reaffirming their long-term growth rate. They have also announced an increase in their dividend and have a positive outlook for O&M management and load growth.

In the third quarter, our FFO to debt was 11.4%, but we expect it to improve and reach our target rate of 14-15% by early 2024. We have been working to simplify and derisk our portfolio, including selling our unregulated renewables portfolio and making progress on other asset sales. We plan to continue selling noncore businesses, including our retail and distributed resources businesses, and completing the strategic review by the end of the year.

In this paragraph, the speaker provides an update on the regulated renewables investment plan for the company. They mention that $6 billion of the $8.6 billion plan has been approved, with an additional $800 million currently under review. They also highlight the approval of two large portfolios, totaling $4.7 billion, in PSO and SWEPCO service territories. Additionally, they mention the approval of owned wind and solar projects in APCo and I&M service territories, with progress being made on a 469-megawatt solar project in Michigan. They also mention the pending approval of a wind farm in PSO territory.

The company has aligned its regulated renewable plants with integrated resource plans and has issued a request for proposals for additional owned resources. They are focused on closing the authorized versus earned ROE gap and have settlements in place for two cases. They have also filed new base cases in two other states and anticipate new rates to be effective next year.

The team at AEP has been active in Texas, passing legislation that allows for utilities to file the DCRF mechanism twice per year and even during a pending rate case. This will help improve AEP's regulatory lag and earned ROE in Texas starting in 2024. In Kentucky, a comprehensive rate review and request for securitization of regulatory assets has been filed and constructive intervener testimony has been submitted. In Oklahoma, a settlement has been reached for PSO's base case with a 9.5% ROE and more efficient cost recovery mechanisms. AEP is also actively managing fuel cost recovery across its jurisdictions, with a shrinking deferred fuel balance. The West Virginia fuel proceeding is nearing resolution.

In April 2023, the company filed two options for consideration in their fuel recovery application. The first option involves amortizing the fuel balance over 3 years, while the second option proposes using the 2023 securitization legislation to manage the deferred fuel balance and securitize other balances. The company is working towards a conclusion in this case by the end of the year and is committed to providing reliable and affordable power to its customers. The company will provide more details on its business strategy, financial targets, and capital plan at the upcoming EEI Conference.

The speaker, who is the CFO of AP, is excited to be leading the finance team and discusses the company's third quarter and year-to-date results. GAAP earnings were $1.83 per share in the third quarter and $3.62 per share year-to-date. Operating earnings were $1.77 per share in the third quarter and $924 million, driven by favorable rate changes, transmission project execution, increased retail load, and favorable O&M.

The favorable drivers for the company in the third quarter included rate changes, increased retail load, depreciation, transmission revenue, and O&M. However, these were partially offset by higher interest expense and unfavorable weather. The vertically integrated segment saw positive weather compared to last year, but depreciation would have been unfavorable if the impact of a lease expiration was excluded. The Transmission & Distribution Utility segment also had favorable drivers, including increased retail load and positive rate changes. The AEP Transmission Holdco segment had favorable investment growth and income taxes. Generation and Marketing had a positive variance due to a renewable sale and higher generation margins. Corporate and Other saw a decrease in earnings due to unfavorable interest.

The year-to-date operating earnings performance by segment is shown on Slide 16 in the appendix of the presentation. The negative year-to-date variance is mainly due to unfavorable weather and higher interest expenses. The third quarter saw favorable O&M compared to the previous year, and the fourth quarter is expected to have over $100 million of favorable O&M. This is due to the timing of spending and cost-saving measures taken by the company. Retail load has been higher than expected all year and is expected to increase by 2.3% compared to 2022, which is three times higher than the original expectations.

The strength of commercial load growth in Ohio, Texas, and Indiana is driving positive trends in the residential class, with a 0.6% increase in Q3. The relationship between customer incomes and inflation is stabilizing, and CPI data shows a decrease in inflationary pressures on residential customers. While residential usage per customer has declined due to energy efficiencies and changing behavior, the addition of 30,000 residential customers has helped offset this. Investor load declined in Q3 due to a pullback in usage by manufacturing customers, but this is expected to reverse in the coming months. Commercial load continues to be strong.

In the third quarter, commercial load increased by 7.5% due to new data center customers in Ohio, Texas, and Indiana. This growth is expected to moderate in 2024 as new projects are completed. The company's efforts to attract economic development have contributed to this growth. The FFO to debt metric increased to 11.4% due to a decrease in debt from the sale of renewable energy and the conversion of equity units. The company anticipates reaching their targeted range of 14% to 15% early next year as FFO improves. A table is included on the slide to show the path to reaching the targeted range.

The company expects a positive impact on FFO of 180 to 190 basis points, bringing the metric to 13% to 14% by the end of the year. This is due to a roll-off of cash collateral, deferred fuel and other outflows, and continued cash recovery of deferred fuel balances. In 2024, there will be a further improvement of 100 basis points due to the roll-off of prior year cash collateral and a weather adjustment. The company has updated their 2023 cash flow, showing an increase in required capital and unchanged equity needs. Their liquidity position remains strong at $3.5 billion, with a debt to cap ratio of 62.4%. This is due to a reduction in debt from a contracted renewable sale and the completion of planned equity units.

The speaker discusses the decrease in funding status for the qualified pension during the quarter, which was largely due to equity and fixed income losses. They also mention their focus on cost management and their commitment to long-term growth. The speaker then addresses a question about their new role and clarifies that they plan to stay on for the foreseeable future.

Charles Zebula is excited about his new role in the company and is committed to staying as long as he is adding value. The company's equity needs will remain unchanged and they expect to maintain a cash flow above 14%. Jeremy Tonet asks about the impact of interest rate changes on the company.

The speaker is asked to elaborate on how the company plans to maintain its 6% to 7% long-term CAGR in a higher interest rate environment, and how this will affect EPS in 2023. The speaker mentions that they will sensibly finance the company and remain committed to mid-grade investment-grade credit. They also plan to offset the headwinds with continued investment, strong loan growth, and positive regulatory outcomes. The company is also actively engaging with state commissions and FERC to build regulatory relationships.

The speaker discusses the importance of collaborating with operating company presidents and their teams to ensure a successful strategic plan that takes into consideration customers' needs and economic factors. They confirm their plan to continue meeting with commissions and mention a change in the waterfall chart compared to previous presentations.

Julia Sloat and Chuck Zebula discuss the drivers and trends that may affect the company's performance in the fourth quarter. They mention that the low commercial load and managing interest expense are important factors to consider. They also mention that 12.5% of the company's debt is floating rate and they are mindful of this. Additionally, they have secured $303 million in rate relief and are confident in their steady approach. Chuck also mentions that O&M management is a drag on the company's performance in the first three quarters.

The company expects to have a net positive on operations and maintenance compared to last year in the fourth quarter. The next question is about the potential factors that could affect their FFO to debt pass side, and the company expects to be solidly within their target ranges. The large increase in load growth is driven by data centers, and this will also impact the updated capital plan.

The company's updated guidance for 2023 shows a significant increase in loan growth, mainly due to data centers in Ohio, Texas, and other locations. Residential segment is soft due to customers feeling the effects of inflation, but the addition of 30,000 customers has helped offset this. Industrial segment has been affected by interest rates and concerns about the economy, but the company expects improvement over time. The capital forecast includes expenses for new data centers and other economic development activities. The speaker asks for clarification on one point.

The question is about the 7.3% guidance for commercial growth in 2023 and whether this trend will continue in the future. The speaker confirms that the trend is expected to continue and that they will keep a close eye on it. They also emphasize the importance of infrastructure and communication with customers to ensure that the necessary infrastructure is in place to accommodate the growth. The next question is from Carly Davenport with Goldman Sachs.

Julia Sloat and Chuck Zebula of NMRD discuss the progress of their asset sales processes and the narrowing time frame for closing the MRB deal. They are pleased with the response received so far on the retail and distributed side and expect to complete the sales processes in the first half of next year. They also provide insight on the drivers of O&M in 4Q and for the full year.

The executive leadership team is focused on prioritizing O&M spend and providing value to customers. They plan to be conservative with O&M spending and eliminate discretionary expenses, but will still target a 14-15% range for FFO. The introduction of large projects may affect this range, but the company intends to maintain it.

Charles Zebula confirms that he has been in discussions with all three rating agencies regarding the recent S&P outlook change. He explains that the move to negative outlook was not a surprise, given the downgrade threshold and the difference in ratings between S&P and Moody's and Fitch. He also mentions that the company is working to improve their business risk and believes that the agencies should reflect this in their evaluations. When asked about West Virginia fuel cost recovery, Julia Sloat clarifies that the company has not yet determined a preferred path and that securitization does not assume an acceleration of coal plant closures.

The current plan is to use securitization to minimize the impact on customer rates, with the option of securitizing fuel and storm costs to make rates neutral. A 3-year smoothing of deferred costs would result in a 12% increase in customer rates. The company's preference is to work with stakeholders and get it done in the fourth quarter. There are three moving pieces between equity, asset sales, and CapEx.

The speaker is discussing how they will finance incremental CapEx and how they will balance it with equity needs. They prioritize maintaining a healthy balance sheet and will use cash proceeds from asset sales to help fund the CapEx plan. The CFO also mentions their metrics for FFO to debt and debt-to-cap ratios. There may be fluctuations in the CapEx plan, but overall it will remain consistent. The speaker also mentions embracing capital opportunities and financing them sensibly. The downgrade thresholds for Moody's and Fitch are not mentioned.

Julia Sloat, speaking on behalf of AEP, clarified that the 13% to 14% target for FFO to debt by the end of the year does not include any potential impact from the resolution of the Virginia fuel recovery. She also mentioned that the total deferred fuel cost balance as of Q3 was $1.2 billion, with $575 million specifically for West Virginia. The O&M expenses for the year are expected to be around $100 million, with the possibility of annualizing some of the expenses in the future.

An analyst asks about the company's plans for cost reduction and the potential impact on next year's budget. The company's management team is focused on prioritizing spending to benefit customers. The analyst also asks about the company's updated load growth projections and how they align with potential opportunities for transmission projects. The company plans to update load growth projections during the EEI conference and is actively pursuing economic development opportunities. Another analyst asks about potential revisions to load growth projections and how they align with PJM's plans for transmission projects. The company plans to update load growth projections during the EEI conference and is actively pursuing economic development opportunities.

In response to a question about implementing interim rates in Kentucky, Julia Sloat of Sophie Karp clarified that they plan to do so and will stay in close contact with stakeholders and the commission. She also mentioned that they engage in conversations about rate mechanisms to reduce weather volatility impact on earnings, but it ultimately depends on stakeholder preferences. Sloat also noted that while they do not have a push towards decoupling, it is considered as an option.

The IR team will be available to answer any additional questions and the replay information for the call will be available for two hours after the completion of the call until November 9, 2023. The number to access the replay is provided and the call has now concluded. Thank you for joining.

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