American Electric Power Company, Inc. (NASDAQ:AEP) Q1 2024 Earnings Call Transcript

American Electric Power Company, Inc. (NASDAQ:AEP) Q1 2024 Earnings Call Transcript April 30, 2024

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Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Abby, and I will be your conference operator today. At this time I like to welcome everyone to the American Electric Power First Quarter 2024 Earnings Conference Call. [Operator Instructions]

Thank you. And I would now like to turn the conference over to Darcy Reese, Vice President of Investor Relations. You may begin.

Darcy Reese: Thank you, Abby. Good morning, everyone, and welcome to the First Quarter 2024 Earnings Call for American Electric Power. We appreciate you taking time today to join us. Our earnings release, presentation slides and related financial information are available on our website at aep.com.

Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning for opening remarks are Ben Fowke, our President and Interim Chief Executive Officer; Chuck Zebula, our Executive Vice President and Chief Financial Officer; and Peggy Simmons, our Executive Vice President of Utilities. We will take your questions following their remarks.

I will now turn the call over to Ben.

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Q&A Session

Benjamin Gwynn Fowke: Well, good morning, and welcome to American Electric Power’s First Quarter 2024 Earnings Call. Shortly, Peggy will give a regulatory update, followed by Chuck, who will provide more detailed financial review.

The summary of our first quarter 2024 business highlights can be found on Slide 6 of today’s presentation. Beginning with AEP’s financial results, today, we announced first quarter 2024 operating earnings of $1.27 per share, a $0.16 increase over 1 year ago. We are also reaffirming AEP’s 2024 full year operating earnings guidance of $5.53 to $5.73. And the long-term earnings growth rate of 6% to 7%.

I’m pleased to note, we achieved a 14.2% FFO to debt ratio this quarter, which is within our stated range. Let me assure you that AEP’s direction and strategy remain on track as this team is fully engaged, energized and working well together to enhance the customer experience and investor value. I’ve reviewed AEP’s financial targets, and I have total confidence in the plan’s achievability.

It’s hard to believe it’s been just 2 months, since I stepped into the role of interim CEO, and it has been a busy and productive 60 days. I’ve had the opportunity to meet with many different stakeholders, including elected officials, regulators, community leaders, customers, investors and, of course, the team right here at AEP. All of these meetings have been very useful in helping shape the initiatives I will discuss shortly.

Before I dive into other business, I want to give you a brief update on the search for a permanent CEO. The process is well underway, and I am certain, based on the talent pool that we’re looking at that we will find the right person to lead AEP. As I mentioned, when we first talked at the end of February, the search will probably take between 6 to 12 months. We will take the time necessary to find the best candidate, and we’re committed to keeping you informed.

So across the AEP system, I see the need to increase capital spend in the future, including incremental investment related to commercial load growth from data centers and resiliency spend. Specific to load growth, the amount of service request is truly staggering and ranges between 10 to 15 gigawatts of incremental load by the end of the decade, in addition to many, many more gigawatts from hundreds of inquiries.

The key to capturing this commercial and industrial growth is to work with parties to make sure that commitments are real and secure, the tariffs and contracts are fair to all customers and growth is self-funded. And of course, that the load can be met. A couple of great examples of new commercial commitments can be evidenced by last week’s announcements from both Amazon Web Services and Google to build large data centers in I&M’s Northern Indiana service territory.

At AEP, we have the largest transmission system in the United States with a high-voltage backbone in the Midwest. We expect more transmission investment possibilities driven by this data center growth, specifically in substations and customer connections. As a side note, I’d like to call attention to AEP’s commercial load in the first quarter of 2024 which grew at 10.5% over the first quarter of last year.

In addition, we will file our system resiliency plan in Texas, no later than the third quarter of this year, related to legislation passed in 2023, including investment related to hardening and modernizing the grid, expanding vegetation management and, of course, wildfire mitigation.

Clearly, a strong balance sheet is critical as we look to fund potential increased capital spend. And I believe incremental growth equity needed to fund smart capital is a positive thing.

That said, we are open to equity alternatives through portfolio optimization, looking at opportunities where price meets execution, while at the same time, staying focused on our efforts to achieve constructive regulatory outcomes. On a similar note, I’d now like to provide a brief update on the sales of our AEP Energy Retail and AEP OnSite Distributed Resources businesses, both of which are included in the Generation & Marketing segment.

We are working through final phases of the process and expect to conclude that process by our second quarter earnings call. Now let’s move on to last week’s newly published federal EPA rules on greenhouse gas standards, coal combustion residuals or CCR, Effluent Limitation Guidelines or ELG.

Although our team is still reviewing the rules, we will likely pursue legal challenges, while working with others, including our states who are aligned with AEP’s commitment to provide customers with reliable and affordable energy. These new regulations in some cases, require the use of unproven technologies, are extremely expensive and establish unreasonable compliance schedules.

We are at a time when our nation needs to add dispatchable generation to support grid reliability and growth, and these rules have the potential to not only prematurely accelerate plant closures, but also discourage new dispatchable generation from being built.

Now turning to labor management. We announced a voluntary severance program earlier this month, taking effect July 1. We expect this initiative will save labor cost of approximately $100 million and will assist us in managing our cost to better serve our customers, allow us to redeploy resources locally in our regulated footprint and finally, mitigate impacts from inflationary pressures and interest rates.

Of course, we will do it so in a way that is fair and equitable to all of our valued employees. So as I mentioned, it’s been a busy and productive couple of months. Have confidence in our strategy and team. I’m excited about the opportunities ahead to drive growth and create value for our investors. We look forward to providing you even more positive updates as we move forward in the year, further solidifying stakeholder confidence in our financial targets.

Before we turn to Peggy for additional updates, know that I am aware of AEP’s regulatory successes and some of our challenges. We continue to review plans to strengthen our regulatory compacts as we work through the past and are ready for the future. Peggy?

Peggy Simmons: Thanks, Ben, and good morning, everyone. Now let’s go to an update on several of AEP’s ongoing regulatory initiatives. We are currently focused on investing more in people resources at the local level, particularly in regulatory and legislative areas.

The utility industry is changing and more now than ever, it’s critical that we enhance our engagement in this dynamic environment. More details of our related regulatory activity can be found in the appendix beginning on Slide 23. AEP’s operating company leaders are running the business and engaged with our state regulators. Higher costs for materials and frequency of cases shines a spotlight on affordability and customer builds are top of mind for us.

We are focused on advancing interest in each of the states we operate to achieve outcomes that are good for our customers, our communities and our investors. This includes economic development work across our service territory, which brings jobs and creates headroom from larger load perspectives.

We continue to reduce our authorized versus actual ROE gap. We’re doing the work and our ROE improved slightly this quarter to 8.9%. Even considering this measure is depressed by approximately 30 basis points from mild weather conditions. Staying with the recent positive developments, I’m pleased to report AEP Ohio’s Electric Security Plan V settlement obtained last summer — excuse me, last September was approved by the commission earlier this month.

This ESP covers a 4-year term of June 2024 through May 2028. As we shared previously, we filed new base cases in Indiana and Michigan in the latter half of 2023. In Indiana, we reached settlement, which was filed in December, and we expect the commission decision by June of this year.

In Michigan, we completed the procedural schedule and expect a relief in that case in July. The team has been busy in 2024 so far, filing an Oklahoma base case for PSO in January and an AEP Texas case in February. Last month, we filed the APCo Virginia biennial rate review, required by statute from legislative changes attained in 2023.

Earlier this month, in SWEPCO, Arkansas and Louisiana jurisdictions we filed the annual formula rate plan. Now on to the regulated resource additions. We continue to advance our 5-year, $9.4 billion regulated renewable capital plan and have a total of $6.6 billion approved by state commissions at APCo, I&M, PSO and SWEPCO. As you can see, we’re making great progress. We are also considering the renewables market local input, as well as evolving reserve margins and resource adequacy as we meet the needs of our customers.

We are advancing toward our fleet transformation targets, which are aligned with and supported by our integrated resource plan. We have pending requests for proposals for a diverse set of additional generation resources at I&M, Kentucky Power, PSO and SWEPCO with more to come from other operating companies, including APCo.

These generation investments are an integral part of our broader capital program, which is 100% focused on regulated assets. Looking ahead, we know there is more work to be done as we advance our regulatory strategies in 2024 to achieve a forecasted regulated ROE of 9.1%. We look forward to continuing to engage constructively with our regulators and strengthening relationships.

With that, I’ll pass it over to Chuck to walk through the performance drivers and details supporting our financials.

Charles Zebula: Thanks, Peggy, and good morning, everyone. Today, I’ll review our financial results for the first quarter, build on Ben’s comments about our service territory load and finish with commentary on our financial metrics and portfolio management activities.

Let’s go to Slide 7, which shows the comparison of GAAP to operating earnings for the quarter. GAAP earnings for the first quarter, were $1.91 per share compared to $0.77 per share last year. There is a detailed reconciliation of GAAP to operating earnings on Page 13 of the presentation today.

One significant item I want to highlight in our GAAP to operating earnings walk is the onetime positive adjustment of $260 million, primarily for the remeasurement of a regulatory liability for excess deferred taxes, due to guidance recently received from the IRS, related to the stand-alone treatment of taxes for ratemaking purposes.

Let’s walk through our quarterly operating earnings performance by segment on Slide 8. Operating earnings for the first quarter totaled $1.27 per share or $670 million, compared to $1.11 per share or $572 million in 2023. This results in a quarter-over-quarter increase of $98 million or $0.16 per share.

Operating earnings for Vertically Integrated Utilities were $0.57 per share, up $0.05. Positive drivers included rate changes across multiple jurisdictions with the PSO base case and the Virginia proceeding being the most significant favorable year-over-year changes in weather and income taxes. These items were partially offset by higher interest, higher depreciation and other taxes.

The Transmission & Distribution Utilities segment earned $0.29 per share, up $0.05 compared to last year. Positive drivers in this segment included rate changes, primarily from the Distribution cost recovery factor in Texas, and the distribution investment rider in Ohio, increased transmission revenue, higher normalized retail load and favorable year-over-year changes in weather. These items were partially offset by higher depreciation, other taxes and interest.

Please note that although weather was a positive variance quarter-over-quarter, in both the Vertically Integrated and T&D segments, weather for the first quarter 2024 was very mild. Compared to normal weather, our estimate of the variance is roughly $80 million unfavorable, which is about $0.12 per share.

The AEP Transmission Holdco segment contributed $0.40 per share, up $0.05 compared to last year, primarily driven by investment growth and favorable income taxes. Generation & Marketing produced $0.12 per share, up $0.03 from last year. Positive drivers included higher generation and retail margins, along with favorable interest expense. These items were partially offset by lower wholesale margins, higher income taxes and lower distributed and renewable generation results compared to the prior year, largely due to the sale of the universal scale assets in the third quarter of 2023.

Finally, Corporate and Other was down $0.02 compared to the prior year, primarily driven by higher interest costs. Moving to Slide 9. Overall retail load continues to accelerate ahead of expectations. This is due to our ongoing success in economic development, as well as the rapidly increasing demand from the many data centers finding a home within our footprint.

Weather normalized retail load grew 2.9% in the first quarter, highlighted by a remarkable 10.5% increase in our commercial load, which is where the data center load is classified. This is a trend we expect to continue over the next several years as the growth of AI and other technologies boost the need for additional data storage and processing. Driving the demand our existing and new projects that have ramped up more quickly than first anticipated, especially with some of our largest customers in Ohio and Texas.

As we refine our forecast for the remainder of this year and next, expect that those projections to move higher to reflect the rapidly evolving situation, as Ben had outlined in his comments. Outside of data centers, our economic development efforts are also helping us maintain growth in industrial load despite softness in manufacturing activity nationally. Industrial load grew 0.4% in the first quarter, roughly in line with expectations for the full year. This was driven primarily by increased activity amongst our plastics, tire and paper manufacturing customers.

We are keeping a close eye on our industrial customers, given the higher interest rates for longer environment. However, the number of large new loads anticipated to come online in the next 2 years, provides us with confidence that demand will remain steady in the face of any economic challenges for our existing customers.

The main takeaway on load, however, is the significant growth in large customers that we continue to bring online across our footprint. As I mentioned earlier, beyond the lookout for higher load projections, as we provide additional guidance later this year.

Let’s move on to Slide 10 to discuss the company’s capitalization and liquidity position. In the top left table, you can see the FFO to debt metric, stands at 14.2% for the 12 months ended March 31, which is a 100 basis point increase from year-end and in alignment with what I discussed on the last 2 earnings calls.

Our debt to cap decreased slightly from year-end and was at 62.8% at quarter end. In the lower left part of this slide, you can see our liquidity summary. Which remains strong at $3.4 billion and is supported by $6 billion in credit facilities that were recently renewed and upsized by $1 billion to support our liquidity.

Lastly, on the qualified pension front, our funding status has remained relatively flat, since the end of the year and ended the first quarter at 100.6%. Let’s go to Slide 11 for a wrap up of today’s message. The first quarter has provided a solid foundation for the rest of the year with a $0.16 increase in earnings per share, compared to the first quarter of last year despite the mild weather conditions that we experienced this winter.

We remain focused on achieving our objective, which include improving the financial performance of our utilities, offsetting cost increases due to inflation to keep electricity affordable and embracing the opportunity to bring economic development to our communities by serving large loads.

As an update, we successfully closed on the sale of our New Mexico solar assets for $107 million in cash proceeds in February, and we continue to work through the final phases of the AEP Energy and AEP OnSite Partners process. We expect to announce the results of the process by our second quarter earnings call.

Our first quarter results give us the confidence to reaffirm our operating earnings guidance range of $5.53 to $5.73 per share. We remain committed to our long-term growth rate of 6% to 7% and FFO to debt solidly in the 14% to 15% range. We appreciate your investment and interest in American Electric Power.

Operator, can you open the call so we can address your questions?

Operator: [Operator Instructions] And your first question comes from Jeremy Tonet with JPMorgan.

Jeremy Tonet: Just wanted to peel in maybe a little bit more on the data center points that you laid out there. And just wondering, we see a lot of forecasts out there on the time line of how quick some want to come to market, and we’re trying to figure out how that matches against the system’s ability to provide the power there in the connects. And just wondering how you see those 2 aligning? What does that mean for AEP over time versus plan?

And just how do you think about, I guess, structuring rates in the right way so that other rate payers don’t bear more of a burden?

Benjamin Gwynn Fowke: Yes, those are all really good questions, Jeremy. And our team has done a tremendous amount of work thinking this through. I mean, first of all, I like to say, here at AEP that really wired for growth. And as you know, we’ve been making significant transmission investments over the years, and that’s going to allow us, I think, to accommodate this first wave of growth we’re seeing from data centers.

And — so in our next 5 years, you will see that load coming on, and you’ll see some of the capital spend — the incremental capital spend to support it. As we get out further in the decade, I think, it’s going to be a function of an additional transmission and perhaps even generation that will need to get built to meet it all.

But this team is working really hard. We have a great economic development team, very supportive business community in States and we’ve done a lot of groundwork to put ourselves in this position. And you’re also seeing, Jeremy, data center load ramp up at the same time. So that’s a natural trend, too.

Now to your latter question, this is one I’ve been keenly focused on. And the good news is we believe that the load growth that will be coming on, will be fair to all customers and in fact, will help us keep our rates affordable across all of our jurisdictions. We are developing new tariffs. Tariffs that require longer-term commitments. Tariffs that require the data centers to deliver on the load expectations that we’re building for obviously, credit quality, et cetera.

And when you do the math, that load growth then benefits all customers. And that’s what I’m really excited about because that was really important to myself and the team that we do keep rates affordable and this growth will do just that.

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

Benjamin Gwynn Fowke: Go ahead, Chuck.

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

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

Benjamin Gwynn Fowke: Well, I can just tell you that the attributes and the qualities we’re looking for remain unchanged from what I described on the fourth quarter call. We are well underway now. We’ve got some really good candidates, impressive candidates. It takes time to sort it all out. And there’s other obviously, things that we need to look at.

But the timetable that I outlined for you just a couple of months ago was 6 to 12. So truncate 2 months off of that, and it’s 4 to 10. And — but that said, we’ll take as much time as we need to get the right person in place, and I’m very confident that we’ll do just that.

Jeremy Tonet: Got it. And actually, if I could just sneak 1 last in. Just wondering on overall corporate strategy, could you talk more about where things stand for AEP decentralization efforts. And looking to kind of more closely align P&L to the end decision maker at the local levels. Just wondering how that’s progressing?

Benjamin Gwynn Fowke: Well, I think it’s — this is a focus of ours. And one of the — and I’m going to turn it over to Peggy, she’s developing — has developed a detailed plan. But one of the things we want to do is put those local resources in our communities. And I know that’s the right thing to do, just talking to stakeholders.