Q3 2019 Earnings Call

October 24, 2019

Ladies and gentlemen, thank you for standing by and welcome to the American Electric power third quarter 2019 earnings release Conference call at this point all the participant lines Arnold listen only mode. There will be an opportunity for your questions and instructions will be given at that time.

If you should require any assistance during the call. Please press star zero and operator will assist you offline as a reminder, today's call is being recorded I'll turn the call now often as Darcy research. Please go ahead.

Thank you John Good morning, everyone and welcome to the third quarter 20, like <unk> earnings call for American Electric power. Thank you for taking the time to join US today earnings release presentation slides and related financial information are available on our website at <unk> Dot com today, we will be making forward looking statements. During the call. There are many factors that may cause future.

But thanks for.

Everyone for joining a piece third quarter earnings call.

Bridal update you on the financials for the quarter in year to date, a little later, but I'll summarize my view of the quarter a as we go forward first we had a great quarter supported by warm weather through September previous pause or regulatory outcomes that are now being reflected in our financial results continued success in management or one m. expenses and I'd have to say.

Say, a load is making a comeback after the lower load last quarter is good to see some improvement the generally remains flat to last year, but still positive from the second quarter. We're watching this trend closely during the fourth quarter and into next year, given all of that we are raising and narrowing our operating earnings guidance range 20, I changed from $4 to.

Or 20 per share to for 14 to for 24 per share with a new midpoint for 19 per share. We're also reaffirming reaffirming our 5% to 7% growth rate based upon our original guidance. Additionally, the HP Board earlier. This week authorized an increase of three cents per share from 67 cents to 70 cents. This year at four point.

<unk> percent increase this increase keeps us firmly in the middle of our targeted 60% to 70% payout range and along with last year's increase of 8.1% averages <unk> to a 6.3% increase for the last two years [laughter] commensurate with our 5% to 7% earnings growth rate. We continue to expect the dividend to grow in line with our earnings and firmly within our.

Targeted payout ratio.

So let's step is a few hot areas for the quarter regarding our north central wind projects. As you recall, we had made falling for state approvals in Oklahoma, Louisiana, Arkansas, and Texas on July 15th in during third quarter, we requested FERC approval of the transaction as well also we would acquire three wind farms current.

For hearings in January of 2020, Louisiana Public Service Commission has set the Swepco, Louisiana hearings for March 2020, the Arkansas Public Service Commission has also said its scheduled for March 2020, and the public utility Commission of Texas is that the schedule for hearings in February of 2020. So we're currently working with discovery process.

In each jurisdiction and we're on track to receive final decisions by the summer of 2020, I'll remind everyone. Once again at these projects are not in our capital plan.

To our existing solar request before the hock imagine with this change will we have filed a temporary delay to provide additional clarity concerning project benefits to our customers and we await a decision from the P. USIO.

Well on the subject of Ohio, a we're continuing our focus on H.B. to 47 with hearing is progressing well. This bill is important in regards to further grid modernization technology deployment and behind the meter customer investment opportunities to improve the customer experience. There's no doubt our business is changing at the distribution level in regards to technology.

Our contracted renewables, which benefited from the recently acquired when facilities development opportunities and resources continues to perform well the projects are performing toward the upper end of.

We filed rebuttal testimony in September and hearings are currently ongoing we expect an order and rates to go into effect by March 2020.

We will fall rebuttal testimony in November with hearing is also being in November and expect the commission order in April of 2020.

<unk> percent, our OE, removing various incentive comp inserv expenses anchor rail distribution force re expenses and other tax and depreciation related adjustments. The hearings concluded in August the case has been fully briefed and we await a P.F. the from the L. Jayson mid November .

The overall rig a regulated operations. Our OE is currently 10.1% it was 9.7% last quarter.

We generally reject the ROI for our regulated segment said to be a combined to be ended on the half the 10% range. We have a long track record of delivering these results and we expect that to continue.

Moving onto the graph itself, the an 80, Ohio, the our we've raised the Ohio at the end of third quarter was 11.3%.

For 2% will be used for Tri annual period review was 70 basis points bandwidth ranging from 8.72 to 10.1, too so that will be coming up.

What I am I am at the end of third quarter was 11.6% items positive performance through the third quarter lighting is primarily driven by timing of expenses favorable financing of long term debt supportive regulatory environments, and some onetime adjustments item expects to end the year within our we around 10.5% which is high.

Regarding P.S., though.

Swepco Swepco at the end of third quarter 2019 was 6.7%. The most recent 12 month or are we increased primarily due to favorable weather innovate and favorable normalized load. We did as I mentioned follow the Arkansas base rate case, no settlements the pending there.

All regulatory treatment has allowed us to fall annual DC RF and by annual T. calls filings and recover our cost on distribution and transmission related capital investments, but during a rate review year. There is a lag associated with these volumes. In addition continued high levels of investment and Tommy of our plan comprehensive rate review will continue to have an issue.

So as we as we look forward to E. R. You can expect a b to give further updates regarding continued affirmation of our 5% to 7% growth rate details of capital plans additional focus on OEM related initiatives and any further updates on renewables rate cases and other matters.

17 cents per share in 2018.

Operating earnings for vertically integrated utilities were 89 cents per share up 18 cents, primarily driven by rate changes, which were favorable by seven cents.

In this segment declined due to the roll off of legacy riders in Ohio, and higher Oh, and them depreciation and property taxes.

These items were partially offset by recovery of increase transmission investment in ERCOT weather and rate changes.

Generation marketing earned 16 cents per share of eight cents from last year, primarily driven by favorable taxes that were levelize over the year.

The segment reflects the growth in the renewables business and favorable wholesale margins.

Corporate and other was down 13 cents, primarily due to tax items that will levelize over the year as well as higher own EM and interest expense.

Let's turn to slide eight and review our year to date results.

Operating earnings through September $3.65 per share the $1.8 billion compared to $3.23 per share or $1.6 billion in 2018.

Looking at the earnings drivers by segment operating earnings per vertically integrated utilities were $1.90 cents per share up 16 cents with rate changes being the largest driver in the segment.

Other positive items included lower own them and taxes as well as higher a if you do see.

Normalized load was also down for the year and depreciation increased due to incremental investment.

Through September the transmission and distribution utilities segment earned 85 cents per share up seven cents from last year influenced by the reversal of a regulatory provision in Ohio.

Other favorable drivers included higher rate relief and were cut transmission revenue as well as favorable carrying charges in Texas.

Partially offsetting these favorable items, where the roll off of legacy writers in Ohio unfavorable weather higher depreciation property taxes and knowing them.

They pay transmission Holdco segment contributed 82 cents per share up 25 cents from last year. This growth in earnings reflected a return on incremental rate base, a favorable annual true up in Fourq settlement higher AFUDC and the nonrecurring prior year accounting adjustment.

Finally, corporate and other was down 15 cents driven by higher tax expense, primarily from consolidating tax items that will reverse by year end with a penny relating to prior period tax adjustments interest expense was also higher.

Overall, we're pleased with our financial results and are confident in raising and narrowing our annual operating earnings guidance to $4 in 14 cents per share to $4 in 24 cents.

Starting in the lower right chart normalized retail sales were essentially flat for the quarter compared to 2018. This represents a market improvement from our last quarterly update.

Third quarter sales were up at the transmission and distribution utilities and public service company of Oklahoma, while the remaining vertically integrated utilities experienced a decline.

For the year to date comparison, a piece normalized retail sales were down six tenths of a percent from last year.

Through September the growth in residential sales is being offset by decline in commercial and industrial sales.

You will notice that our latest year, an estimate is projecting normalize retail sales will finish the you're down five tenths of a percent from 2018.

The mix of sales.

Sales growth combined with rate design nuances give us confidence in our 2019 guidance in light of our load outlook.

Cover rate design later in the presentation.

Year to date normalized residential sales increased by two tenths of a <unk> percent, which was mostly driven by an increase in residential customer count.

Sedation sectors.

Through September normalize commercial sales were down seven tenths of 1% from last year not surprising the sector that posted the biggest drop in commercial sales was traditional retail.

As you can see on this chart theres been a consistent improvement over the last 12 months in commercial sales growth.

Finally in the lower left chart industrial sales decreased by 1.1% for the quarter, which brought the year to date comparison to 1.4% below last year for both periods industrial sales were down at most operating companies with the exception of PS, a which is experienced double digit growth from oil and gas activity. We're fortunate to have.

Of these sectors in our industrial mix.

Impact of the general Motors strike on our load was negligible.

Turning to slide 10, I'll provide a brief update with respect to industrial sales growth by sector. This chart shows the distinction growth between the oil and gas sectors and all other industrial sectors.

Industrial sales to oil and gas industries increased by 7.8%, which was the strongest growth in these sectors. Since the first quarter of 2016. This was largely driven by the 16.3% growth in the pipeline transportation sector.

Most of the growth in the quarter was the result of a number of anticipated expansions that will address congestion issues coming out of the major shale regions in our service territory.

There are still additional oil and gas related expansions in the development pipeline that will provide more growth over the next 18 months.

Focusing your attention on the green bars, the non oil and gas industrials were down for the quarter, but less so than last quarter for the ERP system chemical chemicals manufacturing and transportation equipment manufacturing accounted for most of this impact.

Now, let's turn to slide 11 interview the status of a regional economies.

All of our service territories experienced GDP growth for the quarter.

Moving to the right chart, you see that employment growth for the ATP service territory improved this quarter to eight tenths of a percent above last year, while U.S. growth moderated slightly in the third quarter.

[laughter] turning to slide it.

Well I want to explain a nuance related to customer class rig design.

Since 72% of industrial rates across our system, our fixed rather than variable a 1% decline in industrial load is much less impactful than a 1% decline in residential load were 82% of the rate is variable for your reference a 1% change and industrial sales is worth.

Oh PEM funding decreased approximately 7% to 123%. This was the result of lower interest rates and a new OPEB liability experienced study both of which increased the OPEB liability.

Let's try and wrap this up on slide 14, and get to your questions. The strong results, we've delivered year to date and our confidence in our plan for the remainder of the year allow us to raise a narrow the operating earnings guidance range to $4 in 14 cents per share to $4.24.

Our message it he I will be that we are the premium regulated utility delivering 5% to 7% earnings growth with dividends growing in line with earnings. Our plan has line of sight transparency to growth and has greatly reduced execution risk.

One final item, we have historically release fourth quarter and full year earnings in January of the subsequent year in 2020, we will release 2019 full year and fourth quarter earnings in late February more can to more coincident with the filing by the 2019 10-K.

We look forward to seeing many of you in Orlando and a couple of weeks and with that I will turn the call over to the operator for your questions.

Thank you and ladies and gentlemen, if you would like to ask your question. Please press star one you'll hear a town, indicating when placed in the queue. If your question gets answer you do you wish to remove yourself from the Q. Please press the pound key again star one if you have a question.

And freshman line when Julien Dumoulin Smith with Bank of America Merrill Lynch. Please go ahead.

Good morning, Congratulations again.

So perhaps if I if I go back to some of the commentary from the last call. A brief certainly some some variations across the service territory on your sales trend wouldn't be curious how does this position you relative to your broad plans and thought process against the five to seven just want to be exceptionally clear.

As you think about having poses some good result here in third quarter and again reaffirming the higher end, yes, you know there's no change in our thought process, we're still tracking 5% to 7% we'd visit disappointed if we weren't in the upper range of that.

Because obviously.

When you look at the components of load here from a financial perspective is not having much impact on our plans I'm there and go by the way we adjust all the time [laughter] for weather for all kinds of things and we have a big opportunity to do that and I think there's there's a real opportunity for us to can.

Dan you to add to advance a and particularly with the a with the renewables play and everything else is going on so.

Even without that though I think I think we're in great shape.

As a change anything of any probably last quarter, we probably talked a almost too much about the about the load and the industrial side of things and it really it was nothing compared to what we experienced Bakken in 2009, and we we that did pretty well.

Some resiliency there from from a a industrial and manufacturing standpoint, and you're seeing it started to pick up and and from the yeah. It and as we said it's also interesting to note, it's great to have diversity and load because.

We've got the oil and gas activity, that's going gang busters with with the transportation sector. And then also you think of what's going on on just the consumer side and everyone's talking about this being a consumer driven economy and and there's no question that people have more money in their pockets and more people have jobs and and your.

We stand committed to what Weve, what we've always said before and and Oh, we fully expect to be in the upper range that 5% to 7%.

Well, thanks for the clarity there and then perhaps if I can jump in real quickly.

Trending on energy supply as you think about the and you said you might be updating this with respect to IAI, but.

Can you elaborate at least initially and how you're trending on the energy supply side of the business. Obviously, there's a number of different moving factors with in that segment of the business renewables increasing for the legacy stuff declining still how is that trending altogether. If you can give us a little bit a sense here.

Especially again relative to that longer term five to seven.

Yeah, it's going to be up versus what we've talked about last year, Andy I, but the fact of the matter is as we've sold off some of the competitive generation or retiring plants, we're replacing some of those earnings with the renewable business that we have so.

It's not declining the way you might expect from from the sale of the competitive assets and the retirements, but.

But we filled in some of that gap with renewables, but we don't expect that to be a huge growing business for us going forward and by the way on the contract contracted renewables.

The organization there is doing a wonderful job of being judicious about that obviously the the acquisition that we made was very positive that the development opportunities are a significant there and we have some some other opportunities that we continue to add to work on so that that pipeline.

On a can continue as long as we wanted to continue into what extent, we wanted to continue but but we're able to make that guy decision.

Great I'll leave it there so you guys do cheers.

Thanks.

Next in line of Steve Fleishman with Wolfe Research. Please go ahead.

Born Steve Hey, Good morning, you know I'm just a first a curious question on the growth. It appears so particularly on energy because.

Makes sense of that.

Well you know there has been some into industrials the in place down there.

And some expansions and so.

There's there's certainly low rates, there and the ability to to put the these industrials in place, but but obviously, it's probably a more a more balanced economy as well, Steve even what you're seeing with rig count a lot of the growth that we've seen has been in mid and downstream and again a lot.

Out of that specifically and pipeline transportation on Congesting, a lot of the a lot of the.

Congestion that's happened over the last several years and it's moving the the products and commodities out in those regions.

Okay that makes sense, thanks, and just yeah, I think you kind of answered this but just.

The renewables acquisition that you made.

Can you just give us kind of a flavor of.

How well that's gone versus pro forma and just how much are you seeing the ability to potentially expand.

I think were non utility renewables.

Yes, there were particularly pleased with the performance of that particular acquisition and really in concert with.

With the other.

Development opportunities that we were focused on but when you think about.

The acquisition of not only the projects and really the economics was based on the active projects that were ongoing the developmental opportunities.

We hardly placed any value on because we didnt know they would happen, but in fact, a those have continued to progress quite nicely. So.

I think that business is moving along quite well, we're very disciplined and the way we approach it and I think it's paid off.

Okay, great. Thank you yeah.

Morning.

Hi, guys. My first question is just on forward looking guidance I guess, one it sounds like you would not put out a 2021 range.

Hi for free B.S., and then you related to that can you remind us of the current drivers underlying your 2020 range.

We're likely just to focus on 2020, Eddie I and reaffirm our 5% to 7% earnings growth rate remember that our guidance for 2020 is for 25 to 445, and we're likely to to say that that's what it will be again.

For 2020.

And the key drivers are the things that you would think about for a traditional premium regulated utility. It's it's a great outcomes ability to invest in our organic regulated businesses our ability to continue to invest in contracted renewables and then of course things like weather and load will impact.

Will impact the earnings outlook as well, so im not to forget of course, our ability to constrain as we have over many years Oh in m. spending and were particularly going to be focused on that in 2020.

There really is focused on a forward view of where our business needs to go in our employees or are all energized around it because.

We have to redefine ourselves going forward and the outcome of that obviously is is you know to be able to deploy more capital, but but also to reduce reduce though and the M.

Because you're able to deploy capital and be able to optimize and drive efficiencies.

Through automation, Digitization, and all those kinds of things and and so for US it's really a focus on changing that business and the fact that we're coming out with.

With a with our our guidance for 2020 and in the 5% to 7% growth rate I think we were comfortable with just just doing that because.

That element consistency is there and we don't expect it to change I mean, you can sort of do your own math and and typically what we've done is when we are going out another year. We just did the math for you. So.

Just think of it from that perspective now the one thing that could change that change that is the regulated renewables that or are they are not included in the capital plan. So you could have a a a step change and then continue at 5% to 7% so.

A positive step to positive step James.

Provision business continues to do well and and other components of our business does well and then the load itself. There's components of that load is doing really well and from a financial perspective.

Okay excellent Yeah, and then just given.

One of your peers in Texas, and some of the back and forth in their rate case proceeding can you give us an update on kind of the latest and a rate case process and dialogue and any thoughts to the overall, Texas environment changing.

He Texas is a transmission and distribution utility and its very difficult to do 'em disallow costs that are spent from a transmission and distribution perspective, so that's going to be up to the Texas Commission and and certainly we have a a different.

Back pattern than than a a then the other one that you referred to.

And every cases different every company is different the kind of investments are different so.

We feel we feel good about our position in a b, Texas.

And that's why we continue to invest the way we do so obviously, we're looking for a positive outcome as a signal to continue investing.

Okay. Thanks.

Yep.

Next we only Greg Gordon with Evercore ISI. Please go ahead.

Hi, Greg Hey, how are you guys good morning to great quarter, Congrats on that thanks.

What is what is the the fascination down in Texas with the idea of ring fencing I know that it's been proposed in both the one of your competitors pending cases, as well as staff positions proposing it than yours and.

Now I'm just wondering what your perspective on that is and where you think they're coming from.

That's probably a better question for the Commission. Then then then for us, but obviously when you're in the or the encore proceedings as we're sort of all this all this started.

And obviously a company like encore they wanted to make sure that there are some some local top of control and we're already operating in the state and have been for <unk>.

<unk> <unk> for 100 years and.

Uh huh.

I think I think the commission obviously is interested in how much control is placed within Texas around the the assets that they feel like that that no benefit the state of Texas. So.

So I suspect you know you may see some remnants of that showing up in various cases, but but you know we have been in our operating in Texas for a long time, and and and that's not going to change Craig the thing that ironic, particularly given our situation in Texas is that.

We are a net investor in Texas meeting were put in debt and equity capital to work in Texas, rather than taking it out so for US you know I think they'd want to see US continue doing what we've been doing now for years, which is investing that capital in Texas, rather than taking it out and that's what we're intend to continue doing Texas.

As one of the fastest growing territories that we have and and we're not going to I mean, we're not going to fall back on our ability to invest and then produce benefits for our for our customers and and in East, Texas, Obviously, as we have direct contact with the customers and Eurocopter portion is it DMD, but.

Certainly I think that this this lines getting more blurred all the time and that's probably a future that needs to be discussed in Texas about how to deal with that.

Thank you one more I know, it's early days, but.

Any public.

You know response from.

Intervenor groups with regard to the North Central wind proposal and you know do we see a more sort of accepting initial initial response than we did in your your when catcher proposal or is it too early to say.

We purposely fall this to where it had a lot of variability lot of optionality to it.

And certainly a consistent with the ongoing existing processes of the integrated resource planning of each one of the areas and I and I would say just that fact alone yeah. We've had a more at least a more positive reception of how to deal with it.

And and so I would always have to safe I think things are going reasonably well at this point and and certainly the the parties involved a no and I understand it because after going through.

When catch or a this when you can really talk about what the differences are and and the beneficial differences. If they were concerned about transmission don't be concerned about it. If you are concerned about the large area just one one area, but don't be concerned about that either.

And if you're concerned about.

Dependency on on a one area versus another don't worry about that either so so I think our our processes and where the procedural schedules already defined and every jurisdiction a we're rolling along to to US a summer.

And Patrick Thank you guys yeah. Thanks, Greg.

And next one line of Gregg Orrill with yes. Please go ahead, we wanted.

Yes. Thank you good morning.

I was wondering if it's possible to get a preview of the Capex update at E. Maybe just a.

Maybe to the drivers and I assume the.

The backlog would increase.

So and so I really want to say the detail that for E. But if you looked at the trends for how we've been spending dollars over the last decade, or so the preponderance of it going to our regulated properties and the preponderance of that going to the wire side of the business so that trend.

You've seen in the past is going to continue into detail that we're going to releasing it yet.

Okay. Thank you look forward.

Thanks.

Next well to on Michael Lumpiness with Goldman Sachs. Please go ahead.

I know I'm good morning, guys congrats on a good quarter.

Gain coming up I, you know, we've got to get a quarterback healthy before we play Elisha definitely the heck out of Manhattan.

Got a couple of things one <unk> interest rates.

Lastly, our way down, especially the long into the curve just curious how you're thinking about what this means for not just pension expenses that flow through the income statement, but also pension contributions.

So that's a great question, we plan to every year as we go into the year to pay to contribute to the pensions about equal to our annual service cost.

For the last two years, both 19, an 18, we sort of had a funding holiday.

And and the decrease in interest rates has pushed down our funding a little bit really into the mid ninetys for pensions and still very well over funded at the Opebs, but you know rates can only go down so much more I think and so I think we don't have much.

Much downside on the pension fund again, we'll be watching every year, what our funding is gonna be for next year, we plan on putting in about 100 million service annual service cost and we still expect.

Got it and then one follow up when you think about the dockets, especially obviously petco and in a different swepco states for <unk> for the north central wins process.

How do you think this is different than what you went through with when cash or.

I think I think when catcher was was a unique situation I mean, we obviously you looked at it and thought that that it was a great opportunity for all of these all of these jurisdictions.

But you know as at the end of the day <unk>.

There was it was it was a large project and why one area with a large generation interconnect transmission whatever you want to call it and and you got hung up on the risk associated with that particularly with all the all the.

I have had a longstanding I mean, we've had other renewable projects that we've.

We chose to me projects because they were they were much better than the others that there were a bid.

A wind power in general now it's a matter of Okay. This is what the RFP process. As this is what the the wind power that's available the attractiveness of the wind power and we're going through the regular process to do it and that that that communication has been positive and we've also communicated with other parties in the <unk>.

So for GAAP taxes were anticipating about a 2.6% to 3% effective tax rate for the year.

We are but and let me be clear about that that's what we're using for guidance. That's what's in our numbers. That's what we figure to be around that 10%. If we were to have incremental income because we're maximizing to the 75% allowed for the gap or taxes. If we were I'm sorry for the for the production tax.

Just going back to the oil and gas related sales. So you mentioned pipeline investments that were actually hearing that trailers, just switching palm from diesel to electric and that could be a meaningful driver Oh sales growth of I'd like to companies that theres companies and a you know.

<unk> shale regions are you seeing this and that's been going on for a while actually the conversion to electric and then also when you look at the transportation fees. There's there's a lot of activity around the ability to get out of the shale gas fields and Ah do get gas out of the shale gas feels it is not a lot of optimism.

Load in general I think business for many utilities, but load in general you can't have the expectation of ever increasing energy demand you got to you got really think about efficiency, what it means or what it means the economy and also if you. If you assume that then then the way that you continue to grow from.

Have a incremental equity needs.

You know one of the big processes, we have going forward will be around.

Around optimization of our balance sheet and capital capital rotation.

And capital management, and and asset management goes with that.

Oh, Yeah, obviously, a great opportunity to to get a the when the wind power resources and will be we'd be looking at all kinds of methods to be able to know to fund that investment.

And that will be from a alianca with Suntrust Robinson Humphrey. Please go ahead.

First question.

Then in changes as you mentioned last year, you ended up 8% and I believe that was to get you to the midpoint of your payout ratio. This yet it's gone up 4.5%, perhaps been Julian and below that midpoint. So just thinking the lumpiness there.

By keeping it right in the midpoint of that 60% to 70% a stated payout ratio has just been fortunate that we have you know quarters and and years around the annual calendar and stuff like that but but latimes you're looking at these look on these the dividends side of things and.

We got the same questions when we at when we did 8.1 last <unk> percent last last year, what does that mean, so so you were reiterating that that it will be in line with our 5% to 7% growth rate.

A week, we debated that quite a bit and because we did want to reaffirm. This this 5% to 7% growth rate. So.

Range, and and I think that's going to be true for 2019, and 2020 and and <unk>.

[laughter].

Q3 2019 Earnings Call

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