Q1 2020 Earnings Call

May 6, 2020

Ladies and gentlemen, thank you very much for standing by welcome to the American Electric power first quarter 2020 earnings call.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given to you at that time. If you should require assistance during today's call. Please press Star then zero and then operator will assist you offline I would now like to turn the conference over to your first.

Good Miss Darcy weeks. Please go ahead.

Thank you perky good morning, everyone and welcome to the first quarter 2020 earnings call for American Electric power. Thank you for taking the time today to join us.

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 of the future results to differ materially from these statements. Please refer to our FCC filings for a discussion of these factors.

Our presentation also includes references to non-GAAP financial information. Please refer to the reconciliation of the applicable GAAP measures provided in the appendix of today's presentation.

Joining me this morning for opening remarks are Nicky against our Chairman, President and Chief Executive Officer, and Brian Tierney, Our Chief Financial Officer, We will take your questions. Following their remarks, I will now turn the call overdone.

Okay. Thank you Darcy welcome and thank you all for joining a piece first quarter 2020 earnings call.

I want to take a moment to extend our sympathies to all those who have been personally impacted by the cobot night gene pandemic and they pay we understand that we were all in this together the HP Foundation has contributed charities across our footprint to ensure that we were part of the solution for the customers and communities. In addition to providing our employees where the personal protective equipment.

They need to do their jobs, we have donated mass clubs and other a central items needed by hospitals across our service territory further assess those a need within our communities our customer service representatives that provide assistance in fielding questions on how to secure a small business loans.

Throughout these challenging times I continued to be extremely proud of our employees. We have done an outstanding job demonstrating their capacity for being adaptable and exercising the agility needed to meet the challenges of rapidly changing situation.

As we continue to adapt to the ongoing challenges oppose back overnight chain, we remain committed to keeping our employees safe and keeping America powered through this unprecedented times.

Certainly as we head into March during the first quarter the story for the quarter would've been one in which we have all hard before mild weather impacted the first quarter, but as we've also heard before a quarter does not a year, making there is plenty of time to recover from a mild winter. We adjusted these types of issues all the time, but I'm sure you are more interested in the last.

Half of March and what April tells us about the future I'll get into all that in a minute, but first let's just do the headlines financial headlines for the quarter.

For the first quarter, we came in with the operating earnings of dollar two per share. We are reaffirming our 2020 operating earnings guidance range of for 25 to 445 per share and our 5% to 7% long term growth rate.

HP is doing this because regardless of whether we forecast a V shaped U shaped or w. shape cobot Nike recovery, we see our service territory as an arbitrage between residential load and commercial industrial load is defined really BOP handle them between the financial characteristics of working from home versus the restart of commercial industry.

For all businesses.

All of its considered along with capital O. and U.M. credit metrics and updated load forecast and actions. We've taken we expect to be in the lower half of our guidance range. We're shifting 500 million of capital spending substantially contracted renewable business in corporate related capital for the time being to maintain our commitment to solid credit.

Ratings, we are reaffirming our 33 billion of capital over the five year period. However.

We believe this to be the smart play given our ability to adjust capital quickly to respond to market conditions. We give all of this guidance inside given an exhaustive review county by County of our service territory from a load perspective through April weather impacts thus far in the year.

I mean expense control measures already put in place to respond to present conditions. We will continue to refine these assumptions as data becomes available certainly whether customer load mix pace of economic recovery and continue though and the I'm related actions will dictate further positive progress within the guidance range, Brian will get into more.

Detail about these assumptions, but I want to reaffirm for you that our cap that our balance sheet. The strong credit metrics are good and liquidity a secure as we move forward.

Okay. So lets move onto the specifics related to cope with not seen in its implications to our operations and our financials as we see the year progressing as many of our there is a famous boxing quote from our and Mark Thompson is truly appropriate here everyone has a plan until they get punched in the mouth well that's what we have faced in the end of this quarter will face probably for the.

The rest of the year, but I'm here to tell you, yes, weve, yes, we've been challenged a little bit, but we're very much still in the match because of our quick responses and agility to be in the position to reaffirm our existing guidance range I'll start by discussing our employees commitments to our customers communities and our shareholders as we move through the crisis there.

Referred to at the beginning of my presentation.

First I want to recognize all the health care at first responders, who have put themselves in a lot of far to help us all to be more safe and healthy as a critical infrastructure service company. The front line employees of our utility of also taken on risk while ensuring we are out in the field responding to this substantial storm activity to ensure the resiliency.

And reliability of electric service. So there are hospitals critical businesses and customers who are under stay at home provisions can continue to benefit at least for some degree of copper in these challenging times.

We have instituted protection measures for these employees that reflects CDC guidance regarding physical distant seeing including smaller work teams proper hygiene inappropriate PB and testing to minimize risk of contact with the virus approximately 12000 over 70% of eight these employees have been working from home for several weeks now and will come.

We need to work from home even after stay at home provisions are lifted to ensure a further precautions are taken both at home and at the office for employees, who must return for various reasons.

We have instituted specific over 19 adjustments to our health plans and benefits for employees and as a critical infrastructure business have continued to pay our employees as they work from home for most field level employees. We have also awarded additional days off with pay to enable more time with their families. During this time, we have over 82% of our call Center employee.

He's working from home and as they not only answer customer questions. There also helping our small businesses get back on their feet by helping them navigate through the SP alone provisions of the care Act.

Regarding our customers, we recognize the hardships and this this pandemic as brought down and have temporarily suspended all service disconnects for non payment and our team of call center professionals have been working diligently to administer we're flexible payment arrangements for our commercial and residential customers. Some states of mandated this but we do so voluntarily and.

Our stake emissions of fully supported these actions through the establishment of deferred accounting and other measures, which I want to take the time to thank them for addressing these issues.

Regarding our communities. The foundation has donated over 3 million to support basic human needs to help address hardships room food security housing clothing and other issues. During this time, we have donated over 9000 in 95 mask, a 110000 gloves and disposable surgical masks and 1200 base.

Yes yields from our warehouse stocks and Threed printing facilities within our innovation labs.

In my 37 years of being in this business I've never seen the level of coordination and concerned by multiple agencies to do the right thing for our customers our employees our businesses in communities while much focus on this call is on the financials is important to remember the part we play in the broader social fabric as a critical infrastructure business.

And our effectiveness as defined by the level of cooperation and support from all the agencies that we deal with our state commissions and governors offices federal and state legislators for NERC deal, we DHS NRC and others and they all have answered the call and whether they be thank them, there's much work yet to yet.

Do but I believe all have embraced the capital we asked for social from an DSG investor perspective.

From the operational side, we have had no disruptions to plant or grid operations, while storm activity has been exceptional given the significant storm activity in several of our operating company territories and considering the additional cove and not Dean related safety precautions. There has not been a delay in the north central when facilities construction and the regulatory cases regarding.

This project have continued on schedule as well future rate cases are on track to be filed including in Ohio and Kentucky.

On the regulatory front it has been a busy quarter. In fact, we've already received approvals for 96% of the budget regulatory recovery for Twentytwenty.

In March the Indiana utility regulatory Commission authorized 77 million revenue increase based on the non 0.7% our OE. The commission approved diagrams proposed distribution system investments and full tracking of FERC transmission cost. The company. It also saw an adjustment to reflect the reallocation of capacity costs associated with termination of certain.

Wholesale contracts, which was denied by the commission we have filed for rehearing on this matter.

In January that the Michigan Commission approved the settlement of the base rate case, resulting in an increase of 36 million based on a non 0.86% or are we in April the PCT public utility Commission to Texas issued a final order approving the settlement agreement in the Texas base rate case, allowing for a non 0.4% ROI.

With a 42.5% equity layer on the company's 5 billion asset base.

Also in April we filed a DC RF distribution cost recovery factor to add approximately 440 million in assets the rate base for distribution investments, we made to benefit our customers Navy, Texas, a ti costs falling and transmission costs falling was also made to recover 800 million and transmission investments made over similar type.

Right.

The company also filed a required base rate case in Virginia as part of the states for annual review and that following the company asked for a 9.9% are we on a 50 50 cap structure on a two 2.5 billion dollar base, resulting in an increase of 64.9 million rates would be effective at the end of January 2021.

There is no question that these are unprecedented times I think it goes without saying that we will need to ensure that utilities and commissions work together to devise creative solutions to the challenges we all face Tony Clark former Commissioner at the Federal Energy Regulatory Commission prepared and submitted a white paper to Nehru recognizing the unique challenges the in energy.

The industry is facing and the need for regulators to be creative and due to new solutions and that article he called for policymakers at both the federal and state level to be proactive in both the short and long term by targeting measures that support both customers utilities collectively with our legislators and our commissions we need to work together to recognize.

As the importance of protecting customers and ensuring utilities are able to invest in their systems and maintain the level of service that are communities depends upon.

Whether through deferrals preferably riders are forward looking test years, because cash is king again for utilities to be able to adequately invest in critical infrastructure.

Two examples within our service territory at the commissions of.

Where they've taken a proactive you have been in Texas and Ohio. We believe both are steps are the right direction in Texas. The Commission approved the Cove adopting elect electricity relief program for residential consumers, who are having difficulty paying their bills. A rider has been put in place to fund the ERP that enables ATP, Texas to access cash the began the.

Program costs.

Hi, O Commission staff or recommended approval of the regulatory asset deferral for future recovery and rig and recovery of the demand Ratchet program costs through the existing economic development rider. This will help lessen the impact to industrials you are key employers within the state and protect utilities. We believe both are examples of progressive moves by.

States to help mitigate the risk associated with Cove, and not team to both customers and provide certainty for utilities.

Moving onto the North Central project, we continue to make progress on this landmark project provides significant benefits for our 1.1 million customers in our FPSO and Swepco States. We received approval of the net unanimous settlement in Oklahoma as well as FERC approval in the first quarter, we expected made to be an important month for the.

Project for the remaining jurisdictions and I'm pleased to report that yesterday, the Arkansas Public Service Commission approved the 155 megawatts or approximately 10% of the total project along with the flex up option as you recall the flex up option allows Arkansas to increase the megawatt allocation should another swepco state right.

Reject the application the commission in that order to determine the Swepco should use as formula rate rider to recover its calls in early March we filed a unanimous settlement in Louisiana for 268 megawatts or approximately 18% of the total project, which also includes the flex up option, we expected decision by Louisiana.

Public Service Commission and the May or June timeframe lastly, after concluding our hearings in February we expect to proposal for commission decision from the Texas sale Jays in late May with approvals in Oklahoma, Arkansas and FERC under our belt. The project has what it needs to go forward at 846 megawatts of the 1400 eight.

85 megawatt project of course, the project and move forward with even more savings for customers and the full 2 billion investment opportunity if either the LP FC approves with the flex up option or the LP assay in the public utility Commission of Texas approves their portion of the full project.

Okay. So now I'll talk to the equalizer chart, we can go to that and for a few Ohio. Most of these are weather related but for a few Ohio, we've had the roll off the some of the legacy fuel and capacity hearing charges. They rolled off so we expect that.

Trends of the are we to the authorized levels around 10%.

Presently as a non no not 0.9% for quarter 2020.

And ABKCO the ROE for Atco at the end of first quarter is 8.7% and that's driven by normalized lower normalized usage and a higher depreciation from increased capital investments and of course unfavorable weather.

Virginia's first Tri annual review as filed in March 2020, as I mentioned earlier.

And it covers the 2017 to 19 periods.

And our ROE of 9.42% would be used for the Tri Annual review was 70 base basis point bandwidth of 8.72% to 10.12% RV, Kentucky power the ROI for Doug power at the end of first quarter was 6.7% and that's probably driven by a loss of load from weak economic.

Conditions loss of major customers, along with higher expenses and unfavorable weather.

We're also have been in a stay out provision.

Associated with rate filings, but that goes away here soon and we expect to be falling in Kentucky in July timeframe.

Yeah.

The ROI read on the M is at 10.5% and Weve been implementing new rates.

For Indiana, which will take place in the second quarter.

But we fully expect.

They are to be at the authorized areas of around 9.7% to 9.86%.

And then for.

DSO.

So is it 9.2% primarily driven by unfavorable weather swepco at the end of first quarter was 6.2% now is because of also load a unfavorable weather and continued impact of the Arkansas share of the turned plant which is accounted for about 112.

Basis points.

The Arkansas base case settlement in December went in place in December 2019, and as effective January 2020 approved to 24 million revenue increase there.

In the Texas is at 8% and that's due to a lag associated with the timing of annual filings.

And one time adjustments from our recently filed finalized base rate case.

Favorable regulatory treatment has historically allowed us to fall annual DC, RF and biannual ti costs filings to recover our cost I mentioned those earlier, so there's a lag associated with those but we should see a pickup there.

And drive more toward a 9.4% or are we in the long term.

And then the transmission Holdco, it's at at the end of first quarter was 11.5% and it was driven by higher revenues due to differences between actual and forecasted revenues. So we fully expect the transmission or are we to be in the mid 10% range.

In in 2020.

So with that when there is a pandemic lock the one we were experiencing today that has not occurred in a 100 years and this nations economy has been effectively shut down for a much. There's no question that everyone is challenging the is known as is no exception, but we are up to the challenge to recognize not only the role of this company has in the resiliency in risk.

Restart of our economy as well as a provision of electric service no matter, where our customers are working or living but also the importance of the consistency and quality of earnings and dividends to our shareholders that makes it makes our work possible. We will strike that balance responded challenges and I'll stick with a boxing analogy with the Sylvester Stallone movie rock.

Where the music displaying the theme from Rockies running up the steps that represents the university of reaching a goal I believe at the end of the year. We all will the the communities we serve our customers and our shareholders will be at the summit, raising or arms and victory Brian.

Thank you Nick and good morning, everyone.

We'll take us through the financial results for the quarter provide some insight into how we're thinking about 2020, including an update on April load and finish with the review about our balance sheet and liquidity.

Let's start briefly on slide seven which shows the comparison of gap to operating earnings for the quarter GAAP earnings were $1 per share compared to $1.16 cents per share in 2019, Theres a reconciliation of GAAP to operating earnings in the appendix.

Let's turn to slide eight and look at the drivers of quarterly operating earnings.

Operating earnings for the first quarter were one dollar and two cents per share or $504 million compared to $1.19 cents per share or 500 $585 million in 2019.

Looking at the drivers by segment operating earnings for vertically integrated utilities were 50 cents per share down 13 cents earnings in this segment declined primarily due to warmer than normal winter weather and lower normalize retail load.

Other small decreases included higher depreciation higher tax expense and lower wholesale load AFUDC and off system sales.

Favorable drivers included rate changes and higher transmission revenue.

Okay.

The transmission and distribution utilities segment earned 24 cents per share down eight cents from last year, primarily driven by the 2019 reversal of a regulatory provision in Ohio.

Other smaller drivers included higher depreciation the roll off of legacy riders in Ohio and unfavorable weather.

These items were partially offset by higher rate changes normalize retail load and recovery of increased.

Transmission investments in ERCOT as well as lower over them.

The AGP transmission Holdco segment continue to grow contributing 28 cents per share an improvement of three cents over last year.

Net plant increased by $1.5 billion or 18% since March of last year.

Generation of marketing produced earnings of seven cents per share down two cents from last year. The renewables business grew with the acquisition of multiple renewable assets.

Increases in retail margins were more than offset by timing around income taxes, and lower generation sales due to lower energy prices and plant retirements.

Finally, corporate and other was up three cents per share primarily driven by lower taxes relating to a prior year income tax adjustment and other consolidating items that were reversed by year end.

Other variances related to higher interest expense and lower own them.

Earlier in the call Nick indicated that we are reaffirming our 2020 operating earnings guidance range of $4 in 25 cents per share $4.45 per share and would likely be in the lower half of that range.

Let me give you some of the detail that leads us to that outcome on slide nine and then I'll provide more detail on each of the key assumptions in the following slides.

Our economic forecast in group uses Moody's analytics as a key input to our models in April Moody's published a county level forecast that included their projected income impact of Cobot 19 on our service territory. We use this new data along with updated assumptions from our customer service engineers to come up with revised retail sales.

Projections for the year.

We now expect residential sales to increase 3% over 2019 levels largely driven by all the activity. There is taking place in residences rather than in places of work or in the classroom.

Conversely, we are anticipating commercial sales contractions of 5.6% and industrial sales declines of 8% over 2019 levels.

Many businesses have shifted their operations to a mostly online platform, while others employers have had to make the difficult decision to furlough will reduce employee headcount until market demand is restored.

These retail forecast, we still expect an overall decline in sales of 3.4%.

This updated load would impact our prior forecast negatively by 15 cents per share.

We've already discussed our year to date negative impact from mild weather of 11 cents per share.

In response to these circumstances, we have taken action to reduce untracked operations and maintenance expenses by an additional $100 million, resulting in a positive expectation of 17 cents per share for the year.

The net result of load weather and no one m. reductions would have a negative nine cents per share impact for the year, leaving us inside but in the lower half of the original operating earnings guidance range.

We realized moratoriums on disconnects and the economic impact to our customers may have.

On our cash receipts.

In response to this we've initiated a shift of $500 million of capital expenditures out of Twentytwenty to be placed into the future years of Twentytwenty one to 2024.

As we made these deferrals, we were mindful of customer and reliable reliability impacts in fact about $200 million of these investments were in our competitive renewables business and about $100 million were corporate investments.

The shifts can be ramped up or down going forward in response to how events play out in real time.

With this moderate level of capital shifting we are able to reaffirm or 5% to 7% long term growth rate off of our original 2019 operating earnings guidance range.

Regarding potential increases in bad debt across our jurisdictions, we have already received orders in Texas, Arkansas, Louisiana in Virginia to set up regulatory assets related to covert 19 costs.

Other states, where we have filed for recovery of Cobot related deferrals include Ohio, Michigan, Tennessee and Oklahoma.

We have tried on the slide to provide some of the detail for Howard Corona virus and oil and gas events will impact NPS operating earnings guidance operating earnings for 2020, instead of taking you through the details of our scenario planning, let me highlight some of the items that could positively and negatively impact our view as we make our way through the year.

On the positive side, a sharp V shape recovery that is more dramatic than the gradual recovery from a second quarter low point that we have assumed would improve results. Additionally, mitigation of Corona virus infection rates, leading the economy to open up sooner than we have assumed would improve results.

Great or increase in residential sales and an improvement in commercial and industrial sales would further improve our outlook.

We have experienced a mild winter if that carried forward into a warmer than normal summer that would have positive earnings implications.

Another positive would be if we could garner incremental savings to what we have assumed at the 2.7 billion dollar level of on track to own them expenses.

The items that would create negative impacts to our assumptions for the year are largely the opposite of the positives.

Prolong U shaped or dramatic l. shaped recovery would be more negative than our assumptions increase corona virus infection rates could lead to weaker economic conditions for longer periods than we have assumed potentially impairing our outlook for the year.

In addition continued mild weather into our own them expenses beyond our control like for storms could negatively impact the outlook for 2020.

We have tried our best using data experience and judgment to update and share our outlook with you for 2020, we've tried not to be on reasonably optimistic nor pessimistic.

This outlook allows us to reaffirm our 2020 operating earnings guidance range with a view that we are likely to be in the lower half of the range.

Now, let's turn to slide 10, and provide an update on our system load focusing on our outlook for the balance of the year.

Our first quarter normalized load was down seven tenths of a percent compared to last year.

Our residential and industrial sales were both down for the quarter, while commercial sales were essentially flat.

Our original guidance for the year assumed half a percent normalized load.

Load growth.

Clearly a lot has changed since that forecast was developed.

Since then we have taken a fresh look at our forecast and now expect expect our total load to end the year down 3.4% on a weather normalized basis with meaningful changes in customer mix and related margins.

For 2020, we anticipate a significant contraction in the second quarter, followed by a gradual recovery over the balance of the year.

In the upper left quadrant, we raised our residential outlook for 2020% to 3%.

We are seeing significant increases in a residential load during the stay at home period.

Even after our states begin to reopen their economies in the second quarter. It is our expectation that many employees will continue to work from home.

Having said this we expect the strongest residential growth in the second quarter with some tapering off during the second half of the year.

Moving clockwise our commercial sales outlook is now assuming a 5.75, 0.6% decline from 2019 levels prior to the cobot outbreak, we experienced consistent improvement in our commercial sales class over the past year.

However, once the stay at home provisions were in place we experienced significant declines in our sales Trojan to traditional retail stores hotels restaurants churches and schools.

However, not all commercial was negatively impacted by the outbreak sales to hospitals and government support offices were up substantially in the first quarter.

When you consider the challenges many businesses will will face trying to introduce social distancing protocols into their normal operations. We are projecting a difficult second quarter for commercial sales with modest improvement through the remainder of the year.

Finally in the lower left chart the outlook for industrial sales has changed significantly we now expect 2000 2020.

2020, industrial sales to come in 8% below 2019 levels.

Number effect a number factors have changed the outlook for this class, but the biggest driver is the overall drop in economic activity.

Over the past several weeks, we have learned and number of large industrial customers that are either idling their production, we're reducing their output temporarily until market conditions improve.

In addition, a number of expansions we have previously assumed to come online later this year have been delayed or purpose build these delays should be reversed as the economy gradually recovers.

Since nearly 30% of our industrial sales come from the oil and gas sectors. Let me explain recent trailed sales trends in the sector.

Surprisingly sales for the oil and gas sectors in the first quarter increased by 9.7%, which was the strongest quarter we've experienced since 2016.

Most of that growth came from the pipeline transportation sector, which was up 28% for the first quarter.

Going forward, we expect some reduction in oil and gas extraction that will be offset by growth in the midstream and downstream operations.

We don't normally report on monthly load numbers, but since we have the data let's took take a look at April load on slide 11.

Total normalize retail load for April was down 4.3% with the relationship between the retail classes being similar to what we have soon assumed for the balance of the year.

Not surprising given the number of people relegated to their homes normalized residential sales were up 6% for the month.

Equally not surprising normalized commercial sales were down 7.7 for the month with the biggest declines being in schools churches restaurants and hotels.

Industrial sales were down 10% for the month biggest decline was in sectors that support the automotive industry, while we experienced strong sales growth in pipeline transportation and food manufacturing sectors.

Looking at April results the relationship between the classes also known as sales mix as well as the levels of sales in each class are consistent with the assumptions. We have made for the second quarter of our balance of your assumptions.

Moving on to slide 12, let's discuss some load sensitivities and highlight some of our rate recovery mechanisms.

The three pie charts show that by segment and in total about half of our Nonfuel revenues come from the residential class.

Applying the 3% growth, we're now projecting for residential sales in total to the sensitivities. We provided at last year's EEI Financial Conference, we would pick up 12 cents a share from higher residential sales.

Repeating the same calculations for the projected load loss in the commercial and industrial classes would produce a drag of approximately 11 cents and 16 cents per share respectively.

When you add these three impacts together you get the 15 cents per share impact we identified on slide nine.

Finally retail rate design has a couple of features that stabilize our revenues during an economic downturn.

First most of our large industrial terrace include demand provisions designed to cover the fixed portion of utility costs. These provisions remain in place even when volumes are down.

Second in our residential customer class, we've had some success over the years better aligning the fixed portion of customer rates with fixed costs.

Together these rate considerations provide a stabilizing effect on our revenues, even when steel sales volumes decline.

Turning to slide 13, another key assumption as the weather as mentioned earlier, whether in the first quarter was extremely mild the green bar in the first quarter shows that mild weather cost $71 million compared to normal which was $65 million worse than the first quarter of last year.

While our outlook assumes normal weather for the remainder of the year. This chart shows the weather can change significantly as evidenced by last year's experience.

If we were to have another warm summer like we did in 2019 that could offset the 11 cents drag for weather in the fourth quarter that we showed you on slide nine.

Our management team has proven track record of adapting our plans to changing conditions as necessary in years. When the weather has provided a tailwind we have accelerated spending to provide stability to our earnings in line with their 5% to 7% growth targets.

In years, where weather has been less accommodating we've been able to shift our spending to future years to achieve the same goal you can expect this management team will react similarly this year.

Turning to slide 14, you can see that for nine years now we have maintained owned them disciplined and kept spending that of offsets in a tight range of between 2.8 and $3.1 billion.

We had originally planned to drive down over them costs in 2000 $20 billion to $2.8 billion.

In response to the expected decline in sales, we now plan to reduce over them spend by an additional $100 million.

Brands like the achieving excellent excellence program and additional onetime an extraordinary reductions will help us to achieve those reductions.

Now, let's move on to Slide 15 interview, the company's capitalization and liquidity.

Our debt to total capital ratio increased during the quarter from 59.8% to 61.8%.

The increase in the debt component is attributable to financings to support our ongoing investment program and to fortify our liquidity position to enjoy it to ensure smooth operational financing during this period of market volatility.

As you would expect the increase in debt combined with the ongoing pressure associated with the flow back of 80 I T resulted in place in pressure on our FFO to debt metric, which at quarter end stood at 12.5% on the Moody's basis.

The decline in the metric is also temporarily influenced by the $1 billion 364 day term loan the company proactively obtained in late March.

Despite the temporary decline in this metric rating agencies view this enhanced liquidity as credit positive.

Adjusting for this facility and associated cash balances the metric would be 13%.

Our liquidity at the end of the quarter remains strong at 2.8 billion.

Since then our commercial paper balances have dropped to $1.6 billion and our liquidity position has increased to $3.1 billion.

Our qualified pension funding increased approximately 4% to 93% and our OPEB funding decreased approximately 15% to 130%.

Pension and OPEB equity returns were negative, 23% and negative 22% respectively for the quarter.

And were the primary reasons pensions and OPEB funding decreased.

Fixed income returns of approximately 7% and 6% in the pension and OPEB, respectively served to offset some of the equity losses.

We've worked hard over the years to focus on pension and OPEB funding and are pleased with how the asset portfolios have performed in spite of recent market volatility.

Let's wrap this up on slide 16, so we can quickly get to your questions.

In response to the economic downturn and related implications.

He has responded quickly reduce our own im spending by an additional $100 million for 2020.

This action combined with our updated load forecast allows us to reaffirm our existing operating earnings guidance of 2020 from two that from $4 in 25 cents to $4.45 per share.

In addition in response uncertainties about cash flows related to reduce customer demand and potential delays and customers seats. We are shifting about $500 million and capital expenditures out of 2020 and ended the period 2021 to 2024, we can adjust the timing and size of the shift in reaction to how events play out relative to our assumptions.

Because of our ability to continue invest in our own system organically, we're confident in our ability to grow the company at our stated long term growth rate of 5% to 7%.

We continue to make progress on obtaining approvals for our $2 billion North Central Wind project in Oklahoma and plan to proceed when approvals are obtained.

With that I'll turn the call call over to the operator for your questions.

Thank you, ladies and gentlemen, if you wish to ask a question. Please press one than zero on your telephone keypad you may we draw your question at any time by repeating the one female commissioner.

If you are using the speakerphone, please pick up your handset before passing the number.

Once again, if you do have a question. Please press one then zero at this time and one moment for the first question.

And our first question comes from the line of Steve Beard with Morgan Stanley. Please go ahead.

Hi, Good morning, I Hope you all are doing well worn Steve.

Thanks for the update on a lot of lot of topics I wanted to talk first just about a two of your rate cases, Indiana, and Michigan, where I believe the test year is going to be a 2020 test year. How do you think about that sort of test year in light of Cove it load adjustment.

Covered related expenses as as you think do that rate case in sort of how to approach 2020, given it's such an unusual year.

Yes so.

Yeah, and then at least Indiana, we have a forward test year views and and I think is probably will be particularly important as we go in for these cases.

For there to be in understanding that we are dealing with a cove and related year. If it is a test year, but wherever you have for test years, though you can you can account for that going forward and the rate, making but but certainly we'd be a we'd be certainly tuned into the process, whether you pro forma and or do other things I think there's price.

Really.

At least opportunities for discussion about that because cove and the 2020 is going to be an unusual year and and to be used for for test years will be particularly challenging you have to really go to some form of pro forma viewed it that has the the level of investments the level of of.

Business activity that you would normally see so.

I would expect or.

Our commissions to be reasonable and that approach in both those cases, Steve we had forward looking test years, and we do have orders effective in both of those jurisdictions.

Okay. That's helpful that makes sense that you'd sort of try to work through the adjustments makes sense on north central wins, some great progress there that's a really encouraging I guess I had two related questions on north central.

If you do get those additional approvals that you're waiting for such as in Louisiana, Texas can you sort of quickly flex the plan to to go to the higher megawatt level and then I guess related Lee you've obviously deferred some capex do you have that flexibility to deploy whatever capital Uni two to kind of make this a bigger project or.

Sure.

As you are sort of capital position caution against sort of a significant ramp up in capex. This year, just kind of thinking through the growth of north central Yes. So originally north north North North Central is was not in our capital plan, So and so when we get approval for that there will be dealing with a depth different financing model ASO.

Shaded with that as far as the megawatt level and the amount of investment.

Ah, Yes, if we if we get approval for for Louisiana For example, and Louisiana also approves the up rate, which is in the settlement arrangement.

Then we would have the fall a 2 billion investment opportunity. There we already know we're going forward to the project that was the importance of Arkansas approval.

So the projects moving forward. The question is what size and then when Louisiana proves that and hopefully with a flex up as well then that's the full 2 billion or if Texas takes their portion.

Then than all the up operating jurisdictions will be taking their their particular portions.

As we go forward now there is additional opportunity for renewables and those in those areas.

The integrated resource plan is have a the capability for that but we felt like as we originally said about this project there was sort of a break point between the the.

Opportunities that exist around the wind farm projects in the pricing and we wanted to make absolutely sure that the pricing was was very effective and produce very positive savings for our customers. So we always go out for bid again to fill the fill the rest of that from an resource planning perspective, Steve will will be full speed ahead on the cap.

Next associated with north central when one way or the others. Nick mentioned that it's not in the 33 billion that we had previously identified for the five years 2020 to 2024 and we've previously said that we anticipate.

Equity component of that investment to be between 50% and 66%.

Yep.

That's super helpful. I'll, let others ask questions. Thank you.

Thank you.

Thank you and our next question comes from the line Turkeys Chappell with Evercore. Please go ahead.

Hey, good morning, guys, Hey, good morning, guys. Thanks for taking my question.

I have to do just the first one on 2020 or the guidance range here. The 15, one five cents EPS hit.

What are you assuming in terms of declining trends for the rest of the I guess, what I'm asking is are you assuming some onto a recovery in Q2 Q4, just curious as to what you're assuming in terms of profiling for the rest of the year sure. So we are assuming that the second quarter be the lowest quarter for load and that there would be.

Hey, gradual recovery over the balance of 2020 and into the first quarter of 2021.

Got it perfect and then can you comment on just Youre.

As you mean that you kind of hit your lower half of the EPS guidance range for this year, where would that puts you in terms of credit metrics at the voted debt versus.

You are targeted metrics and then any color that you can provide us with your recent conversations if you've had with movies on some of the changes that you've made to your plans.

So we've really been.

We anticipate year end being FFO to debt in that 13 to 14.

<unk> percent range, we've we've communicated that with S&P and Moody's.

Had dialogues with them as late as yesterday.

They understand where we are.

And what we're doing I think they were encouraged to see us flex a little bit our capex for the balance of the year in response to anticipated.

The lower cash flows than what we had anticipated and and they're supportive of that.

They were they viewed what Julie and her team did around the through the term loan facility as being credit positive and they are.

Fully aware apprised of what we're doing and.

You should ask them, but I think I think there answer would be supportive.

Great. That's why it guys. Thank you very much yeah. Thanks, yes.

Thank you and our next question comes from the line.

Julien Dumoulin with Bank of America. Please go ahead.

Born Julien Hey, good morning. Thank.

All while comment perhaps just picking up one last question left off start here on guidance endpoints money.

How do you think about the reduction in cap.

I just want to reconcile that.

It seems that you're not really changing ever voted debt expectations, but you are bringing down capex altogether, why do that and relative to no change in earnings here just a walk through the thought process. There and then also.

It seems that it doesn't necessarily have too much of an earnings impact given the.

Corporate nature some of the Capex I just want to make sure whether you want that correctly as well.

Sure Julian Thanks for the question. So we are anticipating there to be some reduction in cash flow. This year associated with two things one lower custard customer demand and then too we have eliminated.

Disconnects.

Currently and so we think that customers will pay us slower than what they have in the past, we're not seeing the impact of that in a significant way yet it's too early but in anticipation of lower cash flows to maintain those FFO to debt metrics. We felt it was imprudent to at least engage the motor on our ability to scale back cap.

Correct.

In regards to the no impact on future earnings we tried to do it in places that have either lower regulatory lag or the increase in earnings isn't as great. So Nick mentioned that some of that reduction is in the competitive renewable space and some of that reduction has also at Corp.

Capital things like IP and things like that that are much slower to flow into.

Customer rates during rate cases things that we were careful not to cut or things like transmission, where we're spending on customer resilience and reliability and we have those formula base rates to update and get that capex into rates on a on a.

Fairly efficient basis. So we were really thoughtful about how we cut that small or shifted that small amount of capex and and.

We made sure that it wasn't impacting earnings Julian I think you're reading it right, though I mean.

We're being as transparent as we possibly can be through this process using the the the latest information method, we got the load information April load information yesterday.

So we're trying to be as transparent as possible, but also taking the right smart appropriate steps to ensure they were able to be agile enough to do what we need to do.

So I think you're reading your reading that right Oh, we obviously would put that capital back in as quickly as possible as if it and then and then and as Brian mentioned, we're not only mitigating any impacts to the earnings capability, but also I'm thinking ahead into.

In terms of where we deploy that capital in the future. So and then we also have north central coming about so those things are occurring we're trying to managed through this year in a very positive fashion and really a defensive posture.

And then and then set ourselves up for for for the future years.

And 21 and beyond so so and we'll continue that approach and obviously, if we get a hot summer for example will throw capital back into it means all kinds of things that can adjust and then from a residential standpoint.

Third our residential load for April was was 66%.

And we're saying, 3%. So we don't know exactly how this is going to play out, particularly with with changing dynamics of business cases themselves changing I mean, we had a nationwide recently come out and say that there are people going to be working from home and and and.

We have 17000 employees.

And 22.

12000 are working from home, we may be looking through our achieving excellence program, which we have already accelerated.

To look at you know how you look how you look at people working from home and maybe the whole business case changes from that perspective, and and also reduces though and further so so we we are in the process of doing all that but we're just trying to be as transparent as possible as you are reading the tea leaves right.

Got it excellent let me just clarify that.

Transcript.

You all reaffirmed intends to file rate cases in various geography.

Openshift heightening necessarily it sounds like.

Anymore.

The same time I don't want to Taiwan to the other does it shipped any expectations with respect to asset sales. This vogel strategic reviews, so to make sure on the same page there and I.

You can further capital needs yeah, no it doesn't change.

As a matter of fact.

We will continue those cases, I mean, obviously as I mentioned, Kentucky, we stay out provision.

We need to follow case.

And we'll we'll do that when that stay out provision is lifted and then.

That would be effective January onest of 21, and then then for Ohio. Obviously were were due to follow case, there as well is a pretty moderate case, but but nevertheless.

As far as we can tell I mean, everything is going exactly like we had planned now you may see some procedural schedules change, but the end result in the end date and dates are changing so that's that's a that's where we're at today.

Alright, great. Thank you.

Yep.

Thank you and our next question comes from the line.

Michael.

Repeated with Goldman Sachs sacks. Please go ahead.

Good morning to Michael.

Did a better cap pronouncing my last name that most people.

[laughter].

Same problem.

Uh huh.

Handful of question, one I am not be a little more specific on Capex. So 500 million kite 200 million is that the nonregulated renewable hundred a model Michael Yeah, 500, 500 million shifted shifted my bad Yeah, I've laid out yet [laughter].

About that.

[laughter] 500 shifted 200 is that.

The nonregulated renewable 100 days that corporate what's the other 200.

Theres Theres another 75 to 100 million that is in our distribution and our Opcos and then the other hundred is spread across organizations, but not in the transmission side of the business.

Got it okay.

That's fine.

The other question is is there any scenario, where you could delay given all that's going on in the world all the uncertainty about demand about getting the impact of disconnects, there any regulatory scenario, where you could actually postpone or or or push out the EPA, Ohio rate case.

No I don't we don't we don't see that happening because obviously you know we're required to file a case and and actually it's a pretty pretty moderate k.. So I think that that there really isn't any reason to to do.

Delay it at this point I think Mike I think mix answer earlier was there could be a delay in the procedural schedule. We would still expect to get the result of the case when we originally had yep.

Got it.

Final question, and thereby Aaron and everybody knows everybody knows about it as well so is there won't be as surprised anybody.

No that is pretty pretty a neg pretty a negligible impact on customers to in that case too.

Now if that makes that kind of time and then last question developed on a great job managing down anywhere near the last four years.

Again, a lot of only NIM out of the company it saves the customers money, it's good for shareholder.

At what point do you think the long term rate of change you know when in management starts to flatten now being occur or the ability to keep taking out more or becoming more efficient just starts to flatten out a pizza chain slows.

No I at [laughter].

We've had lots of conversations about that but every every day.

Sure Youre surprised by by some new innovation or something that can change that the trajectory of OEM expense, we spend 4 billion year I think a 2.8 billion.

Is not tracked and when you look at some of the opportunities that are available and actually I think I think.

Yep.

If there is a silver lining in there in the Corona virus.

Endemic it is that we weaken really reevaluate.

What it means to get our business done because we've been very effective at this the people working from home and actually productivity has not suffered as a result, and we still have the obviously the field employees that are still out there working as well, but you see the innovations that are occurring.

I think I think we have years ahead of us to continue to optimize OEM expense and when you think it's going to level out something new comes about and I think thats going to be I'm going to be a continual opportunity for us and when you we actually and.

And you probably saw we announced 'em we.

We have a new senior vice president over our.

Actually the digital experience as our chief information and Technology Officer, who is joining the company.

We wanted to make sure that we put a technology the customer experience and and certainly our charge innovation hub and those kinds of things together.

To really focus the organization on on what the future holds and what it can mean in terms of Oh, a NIM in the future. So so I think it's it's.

I think I think we don't we don't know the answer to that and really you don't want to know you want to just keep keep pressing forward and and we'll do that.

Got it thank you Nick much appreciated.

Thank you and our next question comes from the line of Jeremy Tom with JP Morgan. Please go ahead.

Good morning, good morning. Thanks.

Thanks for having a here yep.

Let me wrong, but I can kind of pass you might have provided a multiyear view of financing needs in the earnings deck and I think I made a mistake here. So didn't know if there is kind of any changes to how you're thinking about funding capex going forward here.

Is there any interplay with kind of where we are Moody's is that right now if you think about that.

Jeremy there's really no change in our funding Capex and I I think the big thing we did really at the last call is give some insight into how we were going to fund north central win and the idea that we'd be doing that between 50 and 60% equity.

We've always been fairly conservative in a.

Balance sheet management, and we're going to continue that.

Going forward.

Got it and that's it for me Thanks for taking my question.

Yes.

Thank you.

Thank you and our next question comes from the line or change the lack of with.

PMO capital market. Please go ahead.

All right Joe.

Hey, how are you guys. Thanks for taking my call.

Sure.

Just following up on Jeremys question, just wondering on brine and Nick as you guys are getting closer to the north central wind.

Approvals have you sort of sharp and your idea on how you're thinking about financing that and especially have you looked a little bit more maybe some cycling some.

Current assets as opposed to accessing the capital markets specifically.

So.

James we do have a little bit of time for that right. The smaller portion of of north central when thats going to come about $300 million at the end of 20, which would really make the financing of that a 21 event and then we have really until the end of 21 to go forward with that.

So how we come up with the equity portion of that whether its capital rotation or whether it's the equity capital markets are still things that we have plenty of time to to work through but I think the important assumption was the range of percentage of equity that we use for that project and Thats, where we talked about it.

Being in the 50% to 66% of the project, yet and really probably the main message is all the options that were available to us before is still on the table and still being considered and there hasn't been any any change from a timing perspective, and our ability to get that done.

So.

I'd say, we're still at the same place, we were and and well we're ready to execute I think it's just a matter of us getting getting the ducks all in a row to ensure that that were at the right place at the right.

Sure sure I just wasn't sure. If you guys were looking at you know.

The potential for augmenting some of the equity with.

The recycling of assets.

They are became a regulatory proceeding or something like that that would have to be sort of taken into consideration.

Yep.

We've said for a really over a year now that or with capital rotation, but also sale of assets is on the table is as part of that process. We're obligated do that for.

From a shareholder perspective, and and we will certainly do that.

Thank you very much appreciate the time.

Thank you and our next question comes from the line of Sofia.

Keybanc. Please go ahead.

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