Q4 2021 American Electric Power Company Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the American Electric power fourth quarter 2021 earnings call.
At this time all lines are in a listen only mode.
We will conduct a question and answer session.
You have a question or comment that any time, you make your way by pressing one and then zero.
Once again, if you have a question or comment to us by pressing one and then zero.
If you need assistance during the call press Star Zero and an operator will assist you offline and as a reminder, today's conference call is being recorded.
I'd now like to turn the conference over to Darcy Reese. Please go ahead.
Thank you Cynthia good morning, everyone and welcome to the fourth quarter 2021 earnings call for American Electric power. We appreciate your taking the time to join US today, our earnings release presentation slides and related financial information are available on our website at AEP Dot 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 Nick Akins, Our chairman President and Chief Executive Officer, and Julie slowed our Chief Financial Officer, We will take your <unk>.
<unk> following their remarks, I will now turn the call over to Nick Okay. Thanks, Darcy welcome everyone to American Electric Power's fourth quarter 2021 earnings call I'm sure you all had time to read the earnings release and have seen all of that we were able to accomplish in 2021.
All the results of several regulatory related cases that actually came in after the natural last November AEP has come into 2022 flying the.
The lyrics of a song about <unk>, Richie and the Commodores actually the first concert I actually catered backstage when I was younger blowing Haas is new we could make it from the beginning AEP has now moved from 4% to 6% to 5% to 7% the 6% to 7% long term growth rate because of our purposeful steps to.
<unk> growth opportunities and Derisk. The AEP portfolio. This process will continue we have so much to look forward to in 2022, but for the purposes of today's call I'm going to start by providing a brief recap of our financial performance and then I want to talk about the evolution of the next steps we are taking in the execution of our business.
<unk> as well as the impact on our financing targets as we hone in on both our regulated generation transformation and our energy delivery infrastructure investments.
These are continued refinements that we believe will not only allow us to better serve our customers, but will generate enhanced value for our investors as well.
Finally, I will provide an update on the various strategic and regulatory initiatives that are already underway.
Starting with the recap or for natural highlights we reported strong results for the fourth quarter navigating difficult macro headwinds, while maintaining our balance sheet and increasing our quarterly dividend. In fact, this quarter was our strongest ever fourth quarter coming in above consensus estimates with fourth quarter.
GAAP earnings of $1 seven per share and operating earnings of 98 per share, bringing our GAAP and operating earnings to 497 per share and $4 74 per share year to date, respectively.
Our strong financial performance in the quarter generated regulated ROE of nine 2% with improved equity layers and enabled us to increase the quarter's dividend from <unk> 74 to 78 per share as announced in October of 'twenty one.
Our performance risk firmly on the regulatory foundations laid this past year with a series of rate case activity across our jurisdictions. Cynthia we received constructive base case orders in Ohio, and Oklahoma and we reached a settlement in Indiana that the commission approved yesterday, and we anticipate shortly finalizing our other base.
Rate cases, and swept go and P. S O.
Our management team continues to make significant headway in our strategic growth plan and transformation in 2021, the comprehensive strategic review of our Kentucky operations resulted in agreement to sell Kentucky power and AEP, Kentucky Transco for more than $2 8 billion after receiving the necessary regulatory approvals, we expect this sale to close.
In the second quarter of 2022, notwithstanding the recent withdrawal of our FERC related.
Profiling related to the Mitchell operating agreement. The completion of this transaction is expected to net AEP approximately 1.45 billion in cash after taxes and transaction fees proceeds we will we will use to invest in regulated renewables and transmission.
AEP is building on our strong record of actively managing our portfolio to support our growth as we invest in a clean energy future, while while delivering increased returns to shareholders and integral part of our long term strategy as a prioritization of aep's regulated investment opportunities and the optimization of our assets to that end today.
We are announcing the elimination of growth capital allocated to the contracted renewables in our 2022 to 2026 forecast and our intent to ultimately sell all or a portion of our contracted renewables portfolio and our generation of marketing business segment to help fund our growth growing capital requirements and our regulated portfolio.
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In making this decision our team carefully considered the renewable opportunities in the context of our competitive business existing competition in this space our ability to efficiently monetize the PTC or ITC tax credits as regulated opportunities come to fruition the attention needed to manage the size of this business relative to our overall regulated business.
And the potential value of this business represents to others, who are committed to contracted renewable development and operations.
We are fully confident that the sale of this portfolio of both simplify and derisk, our business, while allowing us to allocate proceeds and that's an additional capital to our regulated business, where we see a meaningful pipeline of investment opportunities to better serve our customers and participate in the energy transition.
This shift in direction enables us to recalibrate, our 2022 to 2026 capital plan shifting approximately $1 5 billion of investment capital to transmission and raising it to $14 4 billion of the 38 billion five year plan.
The capital originally allocated to the unregulated generation and marketing segment will drop from $1 7 billion of the 38 billion five year plan to 400 million the remaining $400 million in the generation of marketing segment will be largely allocated to maintenance capital and distributed generation assets.
Our investment opportunities remain dynamic and AEP operating companies will continue to develop integrated resource plans and grid enhancement plans over the near and long term in collaboration with stakeholders. This process continues to make substantial progress as shown on slide 43.
The earnings deck overall, we are targeting wind additions of approximately $8 six gigawatts of solar additions of approximately six six gigawatts by 2030 for which we have allocated $8 2 billion in our current five year capital plan.
The migration from contracted renewables to significant increases in our regulated renewables, we will ensure that AEP maintains the talent and resources to execute this plan.
The capital plan also includes $24 8 billion allocated to grid investments with the changes discussed and the expected completion of the sale of Kentucky power. We plan on an analyst day presentation. Soon after the sale is completed the further update on all of these important initiatives now.
Now shifting gears to our regulated renewables opportunity AEP has a positive record of actively managing our portfolio to support the growth of the company as we invest in our regulated business and renewable generation to transform and build a cleaner more modern energy system and we made significant progress on our regulated renewables opportunity in 2021.
Our plan.
As to reduce carbon emissions by 80% by 2030 and achieve net zero by 2050 is well underway. The 998 megawatt traverse project the largest single wind farm built at one time in North America is in the final stages of commissioning and we expect the facility to go online soon the combined investment in the <unk>.
<unk> project, along with Maverick and Sundance.
Which both became operational in 2021 represent investment in renewable energy of approximately $2 billion and will save P. S O and swept go customers in Arkansas, Louisiana, and Oklahoma, an estimated $3 billion in electricity cost over the next 30 years.
These three projects add 1400, and 84 megawatts of regulated renewable energy to our portfolio and we recently issued rfps for renewable resources for one one gigawatts at Opco and one three gigawatts. It on M. We expect to make regulatory filings and obtain the necessary approvals for projects selected from.
<unk> our processes at Atco ion M <unk> co.
We are truly transforming the energy grid to better integrate renewable resources delivering the low cost reliable energy there our customers rely on while simultaneously empowering positive social economic and environmental change in the communities. We serve and we believe we can successfully enhance shareholder returns in the process.
Finally, insignificantly I'd like to speak to a few develops that highlight the economic volatility.
Vitality and prospects of the communities we serve.
Our economic development team has been focusing on working collaboratively with our states to drive expansion within our service territory. As you know in January Intel announced plans to build two new lead leading edge chip manufacturing facilities in Ohio for an initial investment of more than $20 billion over in West, Virginia, Nucor announced in <unk>.
<unk> that it will build its new $2 7 billion in state of the art facility in Mason County, West, Virginia further attached technologies will be moving its thermal components activities from Israel to Tulsa.
Bringing 900 jobs to the region in total our economic development team reported 1900 megawatts of new load supporting over 20000, new jobs announced in 2021 and thus far in 2022.
As evidenced by these wins, we are proud to play a vital part in the infrastructure that enables job creating projects of this con in our service territories. Moreover, in today's environment, especially in today's environment as companies in our country focus on energy and supply chain security Our service territory is prime to benefit.
We are committed to remaining a good steward for the communities in which we operate as we transition to a clean energy future through our just transition effort, we support affected communities through a coal through our coal plants retirement by providing job placement services were displaced workers backspace display replacement and funding sources to support diversification.
This just transition program has been applied as a model for the country and enabling positive social and economic transitions for affected communities.
As I said at the outset, we have a lot to look forward to in 2022.
As we recast our capital allocation and Derisk the business, we feel confident in lifting and tightening our earnings growth target range from 5% to 7% to 6% to 7%. It has always been my preference to be in the upper half of the 5% to 7% range and since we have demonstrated a track record of being able to deliver on these projections year in and year out.
We are electing to revise the range to 6% to 7% Accordingly, we will be lifting our 2022 operating earnings guidance range by two to.
To 487% to five <unk> seven per share with a midpoint of 497.
To reflect the increase in growth rate target range. Lastly, we are increasing our funds from operations to debt target to a range of 14% to 15% from 13, 5% to 15%, which we mentioned that November YOD throughout this process and beyond we will be committed to maintaining a strong balance sheet we discuss.
This at November <unk>.
And can confirm that our <unk> to debt and credit metrics have improved markedly as we expected.
Over the past decade, AEP has achieved impressive and sustained long term growth consistently meeting and exceeding earnings projections, while continuing to raise guidance are highly qualified board and management team are executing a strategic plan that leverages, the Aps scale financial strength effective portfolio management and diversity of regulatory jurisdictions to deliver.
Safe clean and reliable services for our customers, while creating significant value for all AEP shareholders.
Also committed to examining and looking beyond the traditional forms of equity to fund the growth going forward and our track record since 2015 and asset sales have been active and produce accretive opportunities for our shareholders. Our transformation strategy is working and the investments we are making will continue to support our solid earnings growth in <unk>.
Salt AEP.
The AAP stands poised to make great headway in 2022.
And continue to capitalize on this momentum our organic growth opportunities for the next decade, and our consistent ability to execute against our plan make it possible to set our sights high for this year and beyond before I hand things over to Julie I, just wanted to take a moment to acknowledge the unwavering commitment and dedication of our employees.
In the midst of another store and field winter our employees have continued to prioritize the safety and security of our customers across all of our jurisdictions with significant ice storms impacting most of our territory in the past few weeks I've been truly humbled by their tireless efforts to deliver on our initiatives and provide for our communities ultimately there.
Our passion for the work we do is what makes our business. So extraordinary with that I'll turn things over to Julie who is going to walk you through the financial results for the quarter.
Thank you very much thanks, Darcy, it's going to be with everyone. This morning, thanks for everyone and thanks to everyone for dialing in I'm going to walk us through the fourth quarter and full year results and then share some updates on our service territory load and then finish with some commentary on our financing plans credit metrics and liquidity as well as some thoughts on our revised guidance financial targets.
Portfolio management, So let's go to slide 10, which shows the comparison of GAAP to operating earnings for the quarter and year to date periods GAAP earnings for the fourth quarter were $1 seven per share compared to 88 cents per share in 2020 GAAP earnings for the year were $4 97 per share compared to $4 44 per share in two.
<unk> thousand 20, there is a reconciliation of GAAP to operating earnings on pages 17, and 18 of the presentation today, let's walk through our quarterly operating earnings performance by segment, which is on slide 11.
Operating earnings for the fourth quarter totaled <unk> 98 per share or $496 million compared to 87 per share or $433 million in 2020 operating earnings for the vertically integrated utilities were <unk> 39 per share up eight cents favorable drivers included rate changes across multiple jurisdictions.
<unk> increased transmission revenue and lower income tax these items were somewhat offset by lower normalized growth and higher depreciation depreciation I'll talk about load a little bit more here in a minute the transmission and distribution utility segment earned <unk> 25 per share up six cents compared to last year favorable drivers in this segment included rate changes.
Normalized load and transmission revenues.
Offsetting these favorable items were unfavorable December weather and increased depreciation AEP transmission Holdco segment continued to grow contributing <unk> 33 per share, which was an improvement of six cents driven by the return on the investment growth.
Generation and marketing produced <unk> <unk> per share up a penny from last year, largely due to favorable income taxes wholesale margins offset by lower generation and land sales finally, corporate and other was down <unk> 10 per share driven by lower investment gains and unfavorable income taxes are lower investment gains are largely related to charge point gains we had in the fall.
Quarter of last year.
Let's have a look at our year to date results on slide 12 operating earnings for 2021 totaled $4.74 or $2 $4 billion compared to $4 44 per share or $2 $2 billion in 2020.
Looking at the drivers by segment operating earnings for the vertically integrated utilities were $2.26 per share up five cents due to rate changes across multiple our various operating companies.
Favorable weather and increased transmission revenue.
Offsetting these favorable variances were higher O&M as we return to a more normal level of O&M increased depreciation expense and lower normalized retail load primarily in the residential class on.
The transmission and distribution and distribution utility segment earned <unk> earned $8 10 per share up seven from last year earnings. In this segment were up due to higher transmission revenue rate changes and increased normalized retail load metric, which is mainly in the residential and commercial classes.
Offsetting these favorable variances were increases in O&M depreciation and other taxes essentially property taxes related to the increase investment levels.
The AEP transmission Holdco segment contributed $8 35 per share up 32 cents from last year related to investment growth and a favorable year over year true up.
Generation and marketing produced 26 per share downturn last from last year, largely due to favorable one time items in the prior year associated with the downward revision of the Oakley Union, a aro liability and contemplation of the plant shut down and the sale of the cone cell plant <unk>.
Additionally, while we had a land sales in both years the level of sales was lower in 2021 versus 2020, finally, corporate and other was down <unk> <unk> per share you'll notice that we aren't talking about investment gains in the year to date as we had a lot of timing differences across the quarters between 2020 in 2021, but net net were flat for the year.
The year over year decline in this segment was primarily driven by slightly higher O&M interest expense and income taxes.
Let's go to slide 13, I'll update you on our normalized load performance for the quarter. Let me begin by providing you with a couple of interesting stats and highlight the status of the recovering throughout the AEP service territory.
First is the fact that we ended the year within 2% of our pre pandemic sales levels and fully expect to exceed those levels in 2022, Aep's normalized load growth in 2021 was the strongest we've experienced in over a decade driven by the historic economic recovery throughout the service territory and to build on that our current pre.
<unk> suggests that 2022 will be the second strongest year for load growth over the past decade following behind 2021.
So let's start on the upper left corner normalized residential sales were down one 9% compared to the fourth quarter of 2020, bringing the annual decrease in residential sales in 2021 to one 1%. The decline was spread across every operating company. However, the decline in residential sales in 2021 was largely driven by the comparison basis.
2020, when Covid restrictions were at their highest levels, even though residential sales were down compared to 2020, there were still 2% above their pre pandemic levels. In 2019. In addition residential customer accounts increased by seven tenths of a percent in 2021, which was the second strongest year for customer growth and <unk>.
Over a decade customer growth with nearly twice as strong in the west up <unk>, 9% when compared to the east territory, which was up <unk>, 5%.
Last item to point out on the residential chart is that Youll notice that we added the projected 2022 growth to the right of the chart. We're projecting a modest decrease in residential sales in 2022, recognizing that there will not be likely another fiscal stimulus to boost the economy in 2022 like we had the past two years.
So moving over to the right weather normalized commercial sales increased by four 3% for both the quarter and the annual comparison. This made 2021 of the strongest year for commercial sales in AEP history.
2021 included a strong bounce back in the sectors most impacted by the pandemic such as schools churches in hotels, but the strongest growth in commercial sales came from the growth in data centers, especially in central Ohio.
Looking forward, we expect a modest decline in commercial sales growth in 2022, recognizing the challenging condition businesses are managing with inflation, the labor shortages and higher interest rates expected in 2022. So if we move to the lower left corner, you'll see that the industrial sales also posted a very strong quarter industrial sales for the quarter increased.
By two 4%, bringing the annual growth up to three 7%.
Real sales were up at most operating companies in the quarter and mainly are in many of the largest sectors.
Looking forward, we're projecting five 7% growth in the industrial sales in 2022. This is mostly the result of a number of new large customer expansions that will be coming online as a result of our continued focus on economic development. Finally, when you pull it altogether in the lower right corner, you will see that Aep's normalized retail sales increased by one 4% for the quarter.
And ended the year up two 1% above 2020 levels by all indications the recovery from the pandemic is locked in here in our service territory is positioned to benefit from the future economic growth.
Let's have a quick look at the company's capitalization and liquidity position beginning on page 14 on a GAAP basis, our debt to capital ratio increased <unk>, 1% from the prior quarter to 62, 1% when adjusted for the storm you reinvent the ratio is slightly lower than it was at year end 2020, and now stands at 61, 4%.
Let's talk about our <unk> to debt metric the impact of storm Aerie continues to have a temporary and noticeable impact on this metric taking a look at the upper right quadrant of this page you'll see our <unk> to debt metric based on the traditional Moody's and GAAP calculated basis as well as on an adjusted Moody's and GAAP calculated basis on and on and on adjusted.
Moody's basis, our <unk> to debt ratio decreased by <unk>, 3% during the quarter to nine 9% as you know the rating agencies continue to take the anticipated recovery into consideration as it relates to our credit rating.
On an adjusted basis, the Moody's <unk> to debt metric is 13, 3% as mentioned in prior calls this 13, 3% figure removes or adjust the calculation to eliminate the impact of approximately $1 2 billion of cash outflows associated with covering the unplanned Yuri driven fuel and purchase power costs.
And the SPP region directly impacting S peso and swept co in particular.
Metric is also adjusted to remove the effect of the associated debt, we used to fund the unplanned payments. They should give you a sense of where we are or where we would be from a business as usual perspective as Nick mentioned, we're now targeting an <unk> to debt metric in the 14% to 15% range, which is commensurate with the <unk> to triple B flat stable rating.
We expected and we expect to see this metric to begin to trend toward this new range of 14% to 15% in the latter half of 2022 as we make progress on the regulatory matters that are underway, including the recovery of your cost as you know we're in frequent contact with the rating agencies to keep them apprised of all aspects of our <unk>.
Business in the in the presentation today on page 48, Youll see our financing plan and aside from some modifications around the capital allocation and refinements on cash flows everything remains intact as well as the general gist of the financing plan, including equity let's.
Let's quickly visit our liquidity summary on the lower right side of this slide between our bank revolver capacity and cash balance our liquidity position remains strong at $4 billion and in the lower left you can see our qualified pension funding continues to be strong increasing one 2% during the quarter to 104, 8%. So let's go to slide 15.
Initiatives that we talked about today set a strong foundation for 2022 and beyond all of which I would submit to you include a commitment to a boost in our earnings power credit position and high grading of our asset portfolio, while de risking and simplifying our business profile. So to quickly recap of particular interest to our investor community our equity investor.
We are lifting and tightening our long term earnings growth rate to 6% to 7%. Consequently, we're increasing our 2022 earnings guidance range to $4 87 to $5 seven per share up two cents from the original guidance.
Particular interest to our fixed income lender in credit rating agency community. In addition to our equity investors, we're lifting and tightening our <unk> to debt target range to 14% to 15%, which is consistent with <unk> to stable and triple B flat stable rating and of interest to all of our financial stakeholders. We are committed to the active management high grading and simplification.
<unk> of our asset portfolio to support our growth and transition to a clean energy future as a regulated utility holding company. The sale of our Kentucky operations is on track to close in the second quarter of this year and is reflected in our earnings guidance assumptions for 2022, and as we announced today, we've eliminated the growth capital in our contracted renewables area move there.
Capital transmission and announced the sale process of all or a portion of the unregulated contract renewable portfolio with the goal of maximizing value. We've already begun to reflect a portion of this asset rotation or a five year $338 billion capex guidance as evidenced by the $1 $5 billion increase in transmission investment.
And the $1 $3 billion reduction in the unregulated generation and marketing segment.
While the reallocation of capital has now assumed in the guidance range. We have updated for you. The utilization of sales proceeds is not yet reflected in the multiyear financing plans. Therefore, what you can anticipate hearing or seeing from US is that we will operate within the increased earnings growth and credit metrics financial targets. We provided to you today working with.
And those targets funds from the sale activities will be directed to our regulated business as we continue our efforts to enhance the transmission infrastructure and to effectuate our generation transformation. Additionally, depending on the timing of the sale of our unregulated contract renewables portfolio or any future asset optimization activities, we will have.
A bias toward reducing and or avoiding future equity needs.
You would expect we will update our guidance details once we have announcements and we can share with you we're confident in our ability to deliver on our new and improved promises to you given our focus on disciplined capital allocation solid execution and positively positive regulatory outcomes. We really appreciate your time today I'm going to hand, it back to the operator now so we can get your questions.
Thank you and once again, ladies and gentlemen for questions or comments press, one and then zero once again, that's one and then zero for your questions or comments.
Our first question, we will go to the line of Steve Fleishman with Wolfe Research and your line is open.
Yeah, Hey, good morning.
Can you hear me, Okay, Nick Yep.
Okay, great. Thanks.
Chip.
On the renewables.
Renewables assets that Youre selling could you give us maybe a little.
Info if you have it maybe for 2021 actuals, even just the the earnings or the EBITDA.
Cash flow.
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That business those assets.
Yeah.
It's round.
Yeah, It's 15 cents yeah, Steve This is Julia I'm jumping here with some financial details and I know that because I was jumping with some additional color. Let me let me talk about how we're thinking about this for 2022, because as you know 2021 was a bit of an anomaly with storm here, so that kind of led to some different.
Earnings streams that probably are not indicative of the asset base. So for 2022.
What we're thinking is and Theres a little bit of wiggle room in here talk about mid teens in terms of sense in terms of contribution to 2022 earnings. So if you want to kind of put a band around it I don't know, 13% to 17 cents associated with those assets in particular, if that gives you a little order of magnitude there.
That's helpful and do you have do you have a sense of kind of EBITDA.
I I don't have something to share with you today and as you know the renewable portfolio.
In terms of contracted assets is comprised of about.
<unk> thousand 500 megawatts of capacity and that obviously varies from project to project and as we said in our opening comments, we would be looking to you know.
Monetize a portion or all of that over a period of time. So obviously that will vary by asset and project specifically so that's the only reason I'm being a little opaque on the EBITDA.
And you and you'll see you'll see.
Some sales occur.
Probably in 2022, and then more in 2023.
Okay.
That's helpful.
And then the.
Can you just one last financial question on that can you just remind me what the.
If theres any debt directly on those assets or not.
Yeah. Steve. This is Julie there is project specific debt and Theres, a tax equity obligation component to it as well so as of 12 31 21, the debt component was around $252 million tax equity about 123, so all in you're talking about 375.
Yeah.
That's super helpful. Thanks, and then yeah.
One other question I'll leave it to others. Please just.
The.
Curious just on the renewables there's been.
A lot of cost inflation pressure on renewables, obviously theres inflation pressure.
Conventional as well, maybe even more but just how are you feeling about.
Kind of managing that within your Rfps.
Still showing that.
Economically it just makes sense for your key states.
We actually are.
Feel good about it because.
With diverse coming online that's really the last major physical edition for for this year and then most of the renewables that are being applied for or in that 24 25 range. So you still have time for supply chain to pick up and then certainly from a pricing perspective.
<unk> to be able to adjust so so we feel we feel really good about our position because we're not we're not in the middle of something where where we're having to having to have to adjust in and then so.
That's a we're in a good position going forward.
Great. That's helpful. Congrats on the announcements.
Thank you.
Our next question comes from the line of sharp Carrizo with Guggenheim Partners and your line is open.
Good morning, guys. Good morning, guys.
<unk>.
Just one.
Kind of SaaS to the one point.
In the prepared remarks, but I guess can you elaborate.
Then how youre thinking about additional asset optimization opportunities should the <unk> at the various states kind of work in your favor I mean, I guess strategic private infrastructure seem to continue to want to pay up for assets, which were obviously you can see in this morning.
Did I hear you right that the message is is that as you're thinking about incremental capital opportunities to fund the renewables through the IR piece that issuing traditional equity as a last resort.
Yes.
Actually.
And I've said this where we have to pinnacle's of growth. We've got the transmission side, which we have plenty of capability relative to project flow to be able to check and adjust along the way there.
It's huge.
Then of course on the renewable side of things we.
We have approximately in there.
But at 50%.
Estimate for ownership, which is sort of a you know.
A view going into it but I can say that because of after storm Yuri.
After many of the effects in terms of utility ownership, we believe that ownership level is going to be higher than that a matter of fact in the in the.
Virginia side, it looks like 75% of it.
As owned and the other filings were making is.
Primarily 100% owned so so.
And that really says to us that.
Youre seeing a continual progression of really the standard view of portfolio management going forward. I think you are in the age of that.
And asset optimization.
To ensure that we're putting our capital in the right places and that that says there's a prioritization scheme as we go forward and I can't say today.
What that prioritization scheme looks like but certainly Kentucky was an example of that first.
First it was the unregulated generation before that it was the.
I guess it was the barge line facilities, and and and Youre seeing that step toward clarification simplification.
And making sure that we are optimizing the capital in the right places and today we have.
As I said earlier the transmission in particular.
We will not give up our position as being the largest transmission provider in this country by far.
We have the bandwidth we have the ability to move projects forward.
On the renewable side.
We're at the leading edge, leading a front edge of a major transformation, that's going to benefit our ability to not only.
Our help in terms of customer rates, because the renewables being brought in.
But also to be able to deploy the capital necessary to make that happen. So so you're going to see a continual process.
<unk> of <unk>.
Moving forward with those kinds of activities and the fact of the matter is.
Our renewables are now focused on capacity replacements and so that's a natural progression of what occurs within the regulated framework and for us.
It puts us in great shape to make sure that these projects are actually needed theyre actually produce benefits for consumers and we have the backup capacity to provide for the demand periods.
We're in a great position for this transformation, that's why we wont take advantage of it. So so for those jurisdictions that meet those those.
Areas where transmission.
Ability to participate in the clean energy transformation those will be the high priority assets that we look at going forward.
Okay perfect that's helpful and then.
Just lastly on the growth rate ticking up to six to seven on one hand, it's consistent with your past comments about being in the top half of the trajectory, but on the other hand, youre basically telling the market you don't see any situations, where do you see growth at 5% rate, which is great. As we think about sort of your wind and solar opportunities.
Through 2006, which hasnt really changed from prior disclosures how do we think about these in the context of your updated growth trajectory could they be accretive or simply extend the runway and then are you assuming any sort of win assumptions in the updated growth guidance. Thank you.
Yeah, you know.
The way it sits right now we look for sustainability when we make these adjustments associated with when you're.
With the growth rate, particularly the long term growth rate, we would not have made this long term growth rate. If we didn't see a solid progression of the sustainability of the 6% to 7% and actually the project flow that youre seeing.
Certainly the reallocation of capital.
And actually.
This is sort of an aside but certainly.
When we go from contracted renewables to the migration to a full suite of regulated renewables. It's we want to keep the talent that we have to to make that transition and really focus on that effort. So so I would say that the fundamentals are in place for continued optimization. So.
Lithification, a 6% to 7% validation of a midpoint.
Higher than our previous mid point.
And confirms to investors that we feel really good.
About the position that we're in and as we go as we go along we will see what happens, but but we always look at when we make guidance changes in long term growth changes, we look at the sustainability of that for years to come because consistency and quality of earnings and dividend.
Paramount to us.
Terrific Congrats guys today, thank you very much thanks.
Thank you.
Our next question comes from the line of Jeremy.
Tonet.
And.
He is with J P. Morgan your line is open.
Hi, good morning.
Good morning, Jeremy.
Just wanted to bring a finer point to the equity question, if I could it seems like the asset.
Asset sale timing could be kind of in pieces here I was just wondering does this lineup, we're really kind of completely removes equity from the planned at this point or just trying to.
Get a finer point on what equity these could look like post a successful sale here.
I think it would be great. If we could map it exactly to what the equity needs are in the future.
But I can say that certainly this is a big part of our ability to manage the portfolio. So that we obviate the need for for new equity, but you still have Atms you still have the convertibles that are coming on during that period of time, but at this point, we sit really good Oh no no.
Jeremy you're right on and in an ideal situation, we would like to stick the landing on everyday equity issuance and be able to kind of sidestep that and have a really strong balance sheet in conjunction with that I will see how ultimately the timing goes as I mentioned in my opening comments, there will be a bias toward trying.
Trying to alleviate that pressure that you might otherwise perceive around equity issuances, but as you know if you look at our financing plan, there's not a lot out there $100 million of drip in in 2023 and as Nick mentioned, we've got the convertibles that convert this year and next year. So we're in good shape, but you know to the extent that we can maximize value of asset.
Sales in time, those yeah that that would be definitely something we'd be interested in doing.
But again the idea is to hit on all of those objectives six five to 6% to 7% earnings growth hit a nicely and comfortably in the guidance range that we gave to you for 2022 and make sure that we're right alongside with the solid balance sheet metrics of a 14% to 15% for that episode and that statistic.
<expletive> .
So we'll thread the needle.
Got it that's that's very helpful. There and just.
I just wanted to come back to bending the curve on O&M and just updated thoughts there on I guess, how you see that progressing in this kind of inflationary environment any incremental thoughts you could share there.
Yeah. So obviously, we're taking a good hard look at that our achieving excellence program. That's been in place for a couple a couple three years now and and it's really showing the value of our organization completely going through and actually the truth.
None.
One of the silver linings of Covid. If there is a silver lining of Covid as it made us think about what was truly needed for the company going forward.
Particularly when you made all of these adjustments to compensate for what we thought would be a really negative.
Approach to the economy during that period, so we're going to take those learnings and continue to focus on bending the O&M curve.
And of course that becomes even more of a challenge given labor rates given.
Certainly.
If there is supply chain related activities on the long term.
But we.
We feel really confident in our ability to continue to bend that curve or at least hold it flat, but we will certainly continue to focus on that and that's a huge part of of what we're doing because.
All of these pieces sort of fit together.
For every dollar of O&M.
Right.
We were able to put $7 of capital in.
In place with a reduction so we have the focus on reducing the O&M as much as possible and it's advantageous to us because we have a huge pop line of additional capital opportunities that we could take advantage of for the betterment of customer service and so forth.
And it's all it all sort of ties together the load forecast is clearly up.
Been positive recently and it looks like it's going to continue to be positive.
That's good for cash flow and good for our ability to invest and then certainly all those things sort of fit together, but we will continue to focus in on all of those activities going forward.
Got it that's very helpful. I'll leave it there thanks Yep.
Yep.
Thank you.
Our next question comes from the line of Julien Dumoulin Smith.
With Bank of America your.
Your line is open.
Hey, good morning team thanks for the time.
I think if I can if I could follow up a little bit on the last couple of questions here.
He says that you are successful in shall we say fully offsetting equity here, where does that puts you again I know youre, taking a moment now to raise your guidance ranges.
How do you think about being within that range to the context that you removed this equity as well it would seem like this is the likely fairly accretive move to divest renewables, given where the transaction multiples have been.
Yes, obviously, we're going to have to get in that process and understand what the actual benefits are and of course youre dealing with with <unk>.
Ptc's itc's value of those the timing of of of those kinds of activities as well and so.
We're gonna have to sort of feel our way through that part of it but.
Certainly the stage is set and.
And we're looking at.
Somewhat of a phased approach.
<unk>, which not.
Not only matches the equity needs, but also matches the business valuation itself.
And I think that's gonna be.
Clear issue for us to focus on as we go forward, but.
Julie I think you went out and I think I think you're hitting on it I mean, the other thing that will make sure that we're sensitive to Julian is obviously customer rates always sensitive to that but to Nick's point. This allows us to set the runway.
Again gives us confidence and the boost to the growth rate of 6% to 7% for the obvious reasons and then the objective is to again maintain the balance sheet continue to derisk and simplify the business portfolio and make sure that we're hitting comfortably in the guidance range that we give to you as you know we give that to you sequentially every year, we come out with a new guidance range.
For the upcoming year, and we'll continue to fine tune that.
The ability that we have to accelerate and D accelerate.
As a tremendous value and certainly from the from the contracted renewables process that we go through that's going to be a benefit our ability to accelerate and de accelerate.
It's whether it's transmission whether it's renewables.
Those are clear options that we have available to us that we didn't have before and when you think about the progress that we're going to make and the ability to focus on even.
Continuing to advance the capital the capital needs.
That's something that all of these things are going to have to come together, but I can tell you that the foundation and the clear optimism around that continues to dip.
To benefit us in and.
It'll be a it'll be a process and that's why I mentioned the analyst day.
I think it's gonna be important in the analyst day for us to.
To not only obviously.
Celebrate the sale of Kentucky.
But also to focus in on what the.
What the transactions are going to look like what the structure of these these deals are going to look like the timing and be able to also talk about what.
What capital looks like in the future.
Based on what we're seeing relative to load and everything else.
And if I can just one more quick one.
Why now is maybe the question right I mean I appreciate the guidance raise altogether, but just curious on the timing obviously you all make it.
Sort of an annual update of EI you talked about.
As a perspective, just curious on what gives you the confidence now I'm appreciative of the asset sales.
No. Thanks for the question because.
At November .
There was a lot still outstanding we had 10 cases going on out there I know, we've got a lot of questions about okay.
Why has it taken so long in Ohio as your relationship what's it like in Ohio, and it was like two weeks after that that we got both cases done.
And they were they were they were clean orders and our relationship is great with with with the regulators in Ohio and with the legislature. So.
And then you had all the other cases that we're still outstanding.
<unk> through an emo in Rockport certainly there was the BSO base case. It was done right at the end of the year. So you had all these things going on but the other thing too is you know.
Kentucky transaction is still ongoing.
And in the process.
It started like I said it started with the unregulated generation and certainly everything we knew beforehand that we need to need to solidify the.
The consistency of our earnings going forward will Kentucky was the first of a.
Of the <unk>.
Primary business units.
We really took a look at and and now that that process is ongoing okay. What's the next step.
And our evolution and when you think about those two pinnacle's of growth everything that we're gonna be doing supports that.
Ability to move that forward we know.
And.
It wasn't lost on us that.
During November <unk> when.
When we when we reduce the transmission investment there was there was a.
Unintended message that that somehow.
<unk> mission pipeline was ending or or there were challenges associated with with the projects and that was not the case I mean, we said that then.
And we continue to.
To fortify that matches I think it was important for us to come out.
At this earnings call and set the record straight on.
On what.
Firmness of the foundation of this company and its ability to move forward in a very very positive way and and.
I wasn't going to let November stand.
Okay.
Thanks.
That might be helpful to Julian as well so when we look back at 2021.
The rate relief, we had assumed in guidance was something like $230 million as we got in and closed in on the end of the year, we had already secured something like 112% of that so we were over what we had anticipated that gave us some momentum and are.
Looking at 2022, so there's an updated 2022 waterfall for guidance in the presentation. Today, that's got the actualization for 2021, and then some refinements for 2022 in conjunction with the growth rate uplift, but we're assuming about $381 million of rate relief and this is before the Indiana settlement that went to.
Approved yesterday, we had already secured a 55% of that so we're north of 55% I need to go back and do the math.
Goose that number up to accommodate.
The order that we got for Indiana, but again, validating and giving us confidence that now is the time to do this obviously came in with a strong year in 2021, giving us the momentum and assurance around those those regulatory recoveries that we had anticipated and a little bit more. So that's that gives you a little bit of a statistic to match what.
Nick just shared with you and as I've said at the beginning of the call.
This process is not over.
We are continuing the.
Process of really fine tuning the.
The optimization around all of our assets and certainly from a resource perspective to be able to take.
The contracted renewables and the talent that's there and.
And be able to migrate that over to a massive.
The build out associated with regulated renewables is a great opportunity for us and certainly everyone involved with it because.
This process is going to continue and and and.
And certainly we wanted to register.
That we will end and have been a participant in that process, but the one hour question is important I mean, the one hour question is is that we're at the precipice sort.
Sort of restage. This I guess it was third quarter last year, but but we're at the precipice of substantial movement toward a clean energy economy, you can do it with the transformation of renewables you can do it with.
Certainly with other types of technologies that are developing but it also requires transmission.
And certainly the just the refurbishment of transmission and distribution by the way.
We have a huge pop line relative to distribution to that's been identified that's.
That's really all of those are opportunities for us to focus in on what's truly important to our customers, but also to our shareholders.
Thank you guys again.
Yep.
Thank you.
Our next question comes from the line of the guest Chopra with Evercore ISI.
Your line is open.
Good morning.
Hey, good morning, Nick.
Julien quickly to follow up on the economics of the <unk>.
But potentially renewable so.
Should we be expecting a tax leakage, there or you have enough Nols.
On the tax you offset that.
Yeah Yeah.
Would expect a little tax leakage, there, but as you know we're not entirely efficient with our tax credits. So we got a little bit of wiggle room, because we've got some tax credits sitting on the bench. So I wouldn't necessarily look to that being as a stumbling block or a material gating item for us. So we will be able to manage through that.
Okay. Thanks, and just one all the other questions were asked and answered just one Nick what's the confidence level in getting sort of the Kentucky sale done in Q2.
You sort of saw the headlines have you sort of you know.
Kind of rejoined the petition.
From Europe .
On the plants. So maybe just talk to that what what what drove that decision overdrawing repetition and the confidence level of closing that transaction in Q2. Thank you.
Yes, sure thing or obviously.
The state of Kentucky was concerned about.
The FERC case, and the timing of it.
How it would impact their schedule so.
Certainly we recognize that and wanted to accommodate the Kentucky Commission.
So we pulled down the FERC filing.
And.
Well, we'll certainly re follow the FERC filing after Kentucky and.
As they review.
And of course.
Uh huh.
With the state approvals.
That particular time, we may get a quicker response from FERC. So.
And that's I think they have 60 days, but it could happen earlier than that but still that keeps us in in the in the second quarter.
To be made of June to June timeframe, but still in the second quarter. So.
That's not.
Issue for us and I know that.
There is certainly a lot of dialogue will occur already has relative to two.
Two Mitchell and how it works and then also in terms of in terms of what <unk>.
<unk> may think about the.
The transaction, but that's a typical anytime you get into a.
Sale of AR.
In a transaction.
That kind of thing will occur and there'll be there'll be discussions and we'll get it all resolved.
So we're still we're still very confident that we're going to get that done because actually.
The new the new owner.
Has made commitments of jobs and those types of activities.
Within the state of the state of Kentucky, and I think it's really important for anyone looking at this transaction to recognize that.
Putting this utility in the hands of a reputable operator.
They'll do a good job managing the investments but also.
Good job in the communities and they're very focused on that so really the.
This process should be a forward looking process not a past process past looking process.
I really think that that's going to carry the day.
Got it thank you very much and congrats on the announcement today.
Thank you.
Thank you.
Our next question comes from the line of Andrew Weisel with Scotiabank and your line is open.
Good morning, Andrew Good morning, everyone.
Good morning.
First question forgive me, if I missed it but the new 67 growth range is that anchored off the midpoint of the new 2022 guidance and am I right that 2022 guidance includes contributions from contracted renewables, but not from Kentucky.
That's when you've got that exactly right on all fronts right on.
It is 'twenty to 'twenty two.
New Rebase.
Okay.
B a rebase assuming the contracted renewables business does get sold in other words would if I can.
Six 5% after new 2022 midpoint, what I need to lower that after an asset sale.
I think you should look at the contracted renewables is supporting the 6% to 7% with a base of 22.
To add a finer point to that as well to.
Get right to the heart of your question, we do not expect to Rebase our earnings when we take action on selling these assets in particular and as we mentioned it will take a little bit of an accordion feature to it in the sense that overtime. These transactions will occur. So we've got some flexibility there and even with the redeployment of the cash coming in the door back to the.
Our regulated utilities, so whether it's transmission or a combination of transmission and regulated renewables, we feel confident that we'll be able to maintain the guidance ranges and continue along the trajectory.
Okay, great and that makes sense. Given you said it was about 15 cents of EPS versus $5 or so for the business overall.
And then lastly, just to confirm can you comment on dividends given the change to the EPS growth outlook and the potential asset sales how should we think about the dividend growth outlook from here.
No change there of dividends will be commensurate with the earnings growth.
Terrific. Thank you very much.
Okay.
Thank you.
Our next question will come from the line of Nick Campanella with Credit Suisse and your line is open.
Good morning, Nick.
Hey, good morning team. Thanks for taking my question.
Just looking at the 14% to 15% of the total debt on the funding slides.
Just curious what the feedback then from the agencies on the potential to sell some of the unregulated stuff and the fact that your business mix is increasing to more regulated earnings do you expect any change in your minimum thresholds here.
Actually we are having conversations and as I mentioned earlier, we keep them apprised of all aspects of our business. So from a credit risk profile perspective, this should be viewed as a favorable step again.
A commitment and continued twist towards traditional regulated.
Portfolio of assets, so I can't speak for them as it relates to what those thresholds would be but 14% to 15%.
Most definitely within the with it as it relates to a solid and strong balance sheet I would submit to you again <unk> two stable triple B flat stable that's.
That's where we expect to me with that 14% to 15% and.
Please do reach out to the credit rating agencies to make sure that they're armed with everything we know so that they can take care of you all.
Absolutely absolutely.
Yeah, and then just regarding the sales forecast and your comments regarding economic growth.
So this year it seems like industrial is really driving.
Overall consolidated weather normalized growth higher can you just speak to what's baked into the long term forecast year end.
If we remain in a higher commodity price environment into 'twenty three 'twenty four how could that change things for AEP.
Any long term forecast, we tend to we tend to temper. It we're actually getting the process of a new forecast, but but right now we.
We estimate about 1% increase.
And I think youll see that.
In 2000 and.
What was overall, one five or something like that one 6%. So so we're going into the year, assuming the 1% and and with the with the.
It would invest.
With investments being made by these large customers industrials is always a leading edge relative to commercials and residential so.
And then also when you look at the numbers one year over another.
It isn't quite apples and apples because of Covid.
And the impacts there so youll see a reduction in the residential but if you look at pre COVID-19 .
It's more it's higher because of the stay at home environment has continued our work from home environment is continues so so we get the benefits of a more robust residential at.
At the same time industrial picking up and in fact, when you look at our service territory in relation to what's going on internationally.
We do have strong energy growth in energy related activities in our territories and manufacturing activities and with onshoring around security. That's the point I was making earlier.
We're going to we're going to wind up working pretty well from from.