Q3 2023 American Electric Power Co Inc Earnings Call
Okay.
Thank you for standing by my name is Eric and I will be your conference operator today.
At this time I would like to welcome everyone to the American Electric power third quarter 2023 earnings call.
Things have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Like to withdraw your question Press Star one again.
Thank you.
And I'd like to turn the call over to Darcy Reese Vice President of Investor Relations. Please go ahead.
Thank you Eric Good morning, everyone and welcome to the third quarter 2023 earnings call for American Electric power. We appreciate your taking time today to join US 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 Julia Sloat, Our chair, President and Chief Executive Officer, and Chuck <unk>, Our Chief Financial Officer.
We will take your questions. Following their remarks, I will now turn the call over to Julie.
Thanks, Darcy and welcome to American Electric Power's third quarter 2023 earnings call. It's good to be with everyone. This morning before I discuss our third quarter performance I would like to introduce our CFO Chuck the balloon who will walk us through the results today Chuck has been with the company for 25 years and has a deep understanding of our business. He has hit the.
The ground running in his new role and we're grateful for his leadership. Many of you are familiar with Chuck and I am confident that you'll enjoy working with him in the CFO role.
I'm pleased to share that the execution of our strategy is on track a P is well positioned to deliver on a robust and flexible five year $40 billion capital plan with an emphasis on our generation fleet transformation and investments in our energy delivery infrastructure as we meet our customer needs while.
While our industry continues to transform amid this dynamic environment characterized by more extreme weather rising interest rates and supply chain constraints. A pea has continued to adapt and take thoughtful actions to stay our course, we're keeping the customer at the center of every decision we make while also balancing and listening to our stakeholders who are critical.
To our success.
This quarter, we've made progress on our ongoing efforts to simplify and Derisk our business profile through portfolio management directing all proceeds of those efforts to the regulated business and to balance sheet management, which I'll speak to in more detail in a moment.
We've also been working hard on the regulatory front I'll provide insight into our success in the additional renewables to our portfolio and the many positive developments on regulatory and legislative initiatives.
A summary of our third quarter 2023 business updates can be found on slide six of todays presentation.
<unk> reported strong third quarter operating earnings of $1 77 per share or $924 million. We have a flexible business plan that allows us to deliver on our financial commitments, while taking into account mild weather in the first half of the year and the higher for longer interest rate environment.
As we actively manage the business today, we're narrowing our guidance for 2023 full year operating earnings to a range of 524 to 534, while reaffirming the 529 midpoint in our long term earnings growth rate of 6% to 7%. Moreover.
Moreover, last week, we announced an increase in our dividend, which is consistent with our earnings growth rate and within our targeted payout ratio of 60% to 70%.
In a few minutes Chuck will talk about the support we have for our narrowed 2023 earnings guidance range, which includes O&M management and positive load outlook as we drive economic development within our service territory.
While our <unk> to debt was 11, 4%. This quarter, we expect that this metric will improve materially by yearend and fall within the targeted range of 14% to 15% in early 2024 took I'll also touch on the short path to this balance sheet target.
We continue to make progress in our efforts to simplify and Derisk our portfolio in August we announced the completion of the sale of our 1365 megawatt unregulated renewables portfolio to IRG acquisition holdings, which resulted in after tax proceeds totaling $1.2 billion of.
In summary, this sale can be seen on slide seven.
We've also made headway on some of our other asset sales that we previously discussed a summary of this can be referenced on slide eight in May we announced the sale of our new Mexico renewable development solar portfolio also known as N. M. R. D. The book value of Aps investment as of September 30th was $119 million.
We're currently on track with our 50 50 joint venture partner PNM resources as we target to close on this transaction in the late fourth quarter of this year or early first quarter of next.
We expect to continue the noncore business sales processes, we have underway as we enter 2024 sales of our retail and distributed resources businesses were launched in August with book values of $244 million and $353 million, respectively. As of the end of the third quarter, we expect to reach a sale agreement in the first quarter of next year with.
Anticipated closing in the first half of 2024.
In July we announced the sales of Prairie wind transmission and pioneer transmission, our noncore transmission joint ventures as of the end of the third quarter Aps portion of rate base associated with these investments was $107 million, we expect to launch the sales process soon and close in 2024 finally related to <unk>.
And source, while Theyre in there there are no new updates for now we anticipate completing the strategic review by the end of this year. So please stay tuned.
Portion of rate base for this particular investment and joint venture was 348 million as of quarter end.
Let me shift gears and provide you with an update on our regulated renewables investment plan. The teams remained focused and made solid progress as you know we have $8 6 billion of regulated renewables in our five year capital plan. We now have a total of $6 billion of the investment plan approved in an additional an additional 800 million Curran.
Before commissions for approval with each of these projects, providing valuable fuel savings for our customers more detail on our renewable resource additions can be viewed in the appendix on slides 32 through 34 as.
As we've previously previously disclosed both P. S. It was 995 five megawatt renewable portfolio for $2 5 billion and swept code 999 megawatt renewable portfolio for $2 2 billion were approved earlier this year at a collective four $7 billion. These two portfolios alone comprise.
A large component of the approved $6 billion amount I just mentioned.
Additionally, in <unk> service territory. We're also pleased to report a positive development in September Virginia approved 143 megawatts of owned wind for more than $400 million building. Upon <unk> existing 209 megawatts of wind and solar projects that were approved last year, which totaled approximately $500 million.
Yeah.
Moving across our service territory to I N M. We filed to seek approval for recovery of two investment of investment in two owned solar projects totaling 469 megawatts, which represents $1 billion of total investment we're making progress on this front as we received commission approval last month in Indiana for both the 224.
What may Apple and 245 megawatt lake trout solar projects.
In Michigan. The Commission approved May Apple back in August and we'll decide on lake trout in the first quarter of next year.
We also await a commission order expected anytime now for the 154 megawatt Rockfalls wind farm at P. S O for approximately $150 million.
Importantly, our regulated renewables plans are aligned with and supported by our integrated resource plans. We have issued a request for proposals for additional owned resources at Opco and I am with more to come from other operating companies in the near future as we listen learn and respond to state preferences.
Now I'd like to turn to updates on our ongoing regulatory and legislative initiatives. We've been engaged in efforts across our service territory to close the authorized versus earned ROE gap, our third quarter ROE came in at eight 7% driven in part by the unfavorable weather in the first half of 2023 that I mentioned earlier, which depressed this measure.
By 40 basis points. While this is a modest improvement over last quarter. We are aware that more can be done and more needs to be done on this front closing the gap will remain a primary focus into 2024 as we keep federal state and customer preferences top of mind, along with meeting the needs of our communities we remain focused on the well.
On reducing the gap going into year end, while still meeting our earnings guidance today.
To that end I'm happy to confirm that we have settlements in place for App Cobra Junius 2020 to 2022, triennial and AEP, Ohio, ESP five both cases, which were filed earlier. This year. We're awaiting commission decisions in these states and then in Virginia as orders expected in the fourth quarter of this year and Ohio's will likely be issue.
In the first quarter of 2024.
In addition, we filed new base cases in Indiana, and Michigan in the third quarter. Both filings we requested in both filings we requested a 10, 5% ROE and case drivers included distribution investment in technology enhanced reliability and grid modernization using 2024 forecasted test years.
We anticipate the new rates will be in effect next year.
The team has been active on the legislative front in Texas with Texas legislation passed in June, allowing utilities to file a distribution cost recovery factor mechanism or D. C. R. F twice per year instead of once per year. This legislation also allows the D. C. RF mechanism to be used by utilities, even if it has a pending rate case proceeding under.
<unk>. Consequently, the legislation will help improve aep's regulatory lag in Texas to the tune of approximately 50 basis points in earned ROE starting in 2024 in fact, our April 2023 D. C. R. F filing was approved and rates went into effect in September.
For Kentucky power, our June 2023 base case application incorporated a comprehensive rate review, a nine 9% Roe.
And a request to allow for the securitization of $471 million of regulatory assets, ensuring Kentucky Power's best positioned to provide safe and reliable service, while managing costs <unk>.
Constructive intervenor testimony was filed in October including support for securitization.
Statute implementation of interim rates is permissible in January 2024.
Moving to P. S O youll recall that in May we reached a settlement with the commission staff the attorney General and other parties in Oklahoma is P. S. O base case, which included a nine 5% ROE and provided for approval for more efficient cost recovery mechanisms, we implemented interim rates in June while we await a commission order.
As expected anytime now.
As you know the management of fuel cost recovery is a top priority with Aps deferred fuel balance across our vertically integrated utilities shrinking sequentially and totaling $1 2 billion as of the end of the third quarter of this year.
I have worked with stakeholders to intentionally adapt our fuel cost recovery mechanisms across our jurisdictions with the objective being to balance cost recovery with customer impacts the.
The West Virginia fuel proceeding is approaching resolution recall in our April 2023 fuel recovery application, we filed two options for consideration one option amortize the fuel balance over three years and the second option, we respectfully set forth for the West Virginia Commission consideration do you use of the 2023 securitization.
<unk> to manage our $553 million deferred fueled balance along with securitizing storm cost balances and net plant balances balances of generation assets.
The generation assets are currently embedded in rates and assumed to operate through 2040 and securitizing those assets nearly fully offsets the fuel cost recovery impacts to customers. We appreciate the engagement with all of the stakeholder participate parties as we work toward a conclusion in this case by yearend and a constructive path forward for West Virginia.
More detail on regulated activities can be found in the appendix on slides through 35 through 38.
I am pleased with the progress we've made this quarter and by the great work underway to actively manage the business deliver on our commitments and create value for our investors all while keeping affordability and reliability for our customers at the center of everything we do we have a strong team in place and I'm confident that we'll continue to execute on our strategic priorities and advance our capital investment plan.
<unk> to deliver reliable affordable power to our customers I look forward to seeing many of you in person at the EI conference in a couple of weeks at the conference in Phoenix will provide some additional color on our business strategy share our 2020 for guidance and other financial details, including our 2024 through 'twenty 'twenty eight capital plan and related five year.
Cash flows now with that I'll hand, it off to Chuck Who'll walk through the performance drivers in detail supporting our financial targets Chuck.
Thank you Julie.
It could be good to be with you and everyone on the call. This morning.
Many of you know I've been in many different roles at AEP, but this is my first earnings call as the CFO I'm truly honored to return to the exceptional finance team at AEP and lead this area as we embrace the opportunity to invest in our regulated utilities and serve our customers with affordable and reliable.
Electric service.
I will discuss our third quarter and year to date results share some updates on our service territory load and the economy and finish with commentary on credit metrics and liquidity as well as confirming our guidance financial targets and a recap of our commitments to stakeholders.
Let's go to slide nine which shows the comparison of GAAP to operating earnings.
<unk> earnings for the third quarter were 183 cents per share compared to 133 cents per share in 2022.
Year to date GAAP earnings through September were $3 62 per share compared to $3 76 per share in 2022.
As was mentioned on our second quarter earnings call our year to date comparison of GAAP to operating earnings reflects the loss on the sale of the contracted renewables business.
Non operating cost as well as an adjustment to true up cost related to the terminated Kentucky transaction in.
In addition, we have reflected our typical mark to market adjustment and the impact of capitalized incentive compensation in Texas as non operating earnings as well.
There is a detailed reconciliation of GAAP to operating earnings on pages, 17, and 18 of the presentation today.
Moving to slide 10.
Operating earnings for the third quarter totaled $1 77 per share or $924 million compared to $1 62 per share or $831 million last year.
Higher performance compared to last year was primarily driven by favorable rate changes and transmission project execution increased retail load and favorable O&M across our segments.
Operating earnings for vertically integrated utilities were $1 per share up three from last year.
We'll drivers included rate changes across multiple jurisdictions increases in retail load depreciation.
Admission revenue and O&M.
These items were somewhat offset by higher interest expense and unfavorable weather year over year.
The vertically integrated segment did see positive weather versus normal in the third quarter of about <unk> <unk> per share, but this was compared to positive weather in the third quarter last year of about six cents per share.
Consistent with our with our first and second quarter results depreciation was favorable at the vertically integrated segment by one cent in quarter three primarily due to the exploration of the Rockport to lease in December 2022.
However, if we exclude the impact of the lease depreciation would've been about <unk> <unk> unfavorable which is consistent with incremental investment activity in our vertically integrated segment.
<unk> should see an additional <unk> <unk> favorable net depreciation in the fourth quarter as well.
The transmission and distribution utility segment earned <unk> 39 per share up seven compared to last year.
Favorable drivers in this segment included increased retail load transmission revenue positive rate changes in Texas, and Ohio and favorable O&M, partially offsetting these favorable items were higher depreciation and higher interest expense.
The AEP transmission Holdco segment contributed 39 per share up <unk> <unk> compared to last year.
Favorable investment growth of two cents, coupled with favorable income taxes of <unk>.
Are the largely driving the change here.
Generation and marketing produced 18 per share up <unk> <unk> from last year.
Positive variance is primarily due to favorable impacts associated with the contracted renewable sale in August along with higher generation margins and land sales.
Favorable items were partially offset by lower end.
Lower retail and wholesale power margins finally, corporate and other was down <unk> <unk> per share driven by unfavorable interest and partially offset by favorable O&M.
Please note that our year to date operating earnings performance by segment is shown on line on slide 16 in the appendix of our presentation today.
Any of the positive drivers are the same for the year as for the quarter and a negative year to date variance is driven largely by unfavorable weather and higher interest expenses.
Before we move on I want to add a few more comments on O&M, including our outlook for the remainder of the year we.
We saw favorable O&M in the third quarter compared to the prior year, which was consistent with our expectations for.
For the fourth quarter, we are expecting more than 100 million of favorable O&M versus the prior year, which bring which would bring us to a net favorable position for the full year from a consolidated perspective.
The favorable change anticipated in the fourth quarter is largely a result of the timing of O&M spending in the prior year.
<unk> employee and employee related expenses and a contribution to the AEP Foundation in the fourth quarter of last year, along with continued actions we have taken such as holding employment positions open reducing travel and adjusting the timing of discretionary spending.
Turning to slide 11, I will provide an update on whether normalized load performance for the quarter and our expectations through the end of the year.
Overall load has come in ahead of plan all year in the third quarter was no exception.
Looking to the bottom right hand quadrant normalized retail load grew two one cents to 1% in Q3 from a year earlier you.
You will also notice that we have updated our full year 2023 estimates.
Based on the strong load growth, we've experienced year to date.
Normalized retail load is now expected to finish this year two 3% higher than 2022, an increase that is nearly three times higher than our original expectations.
This strength comes from exceptional growth in commercial load driven by data centers in Ohio, Texas, and Indiana, but the third quarter also saw positive trends in our residential class, which is shown in the upper left.
Quadrant of the slide.
Residential load increased for the first time in more than a year in Q3 with growth of 6% from a year earlier.
The relationship between customer incomes and inflation is a key driver of residential usage and it has begun to stabilize as expected in the second half of this year.
This month's CPI data point was yet another encouraging sign that inflationary pressures on our residential customers are continuing to lessen.
We note that residential usage per customer is seeing slight declines this year as energy efficiencies increase more workers return to offices and customers change behavior due to inflation.
Fortunately, we are seeing strong enough growth in our customer base, especially in Texas, and Ohio to help partially offset these trends.
Year to date, we have added nearly 30000 residential customers.
Our footprint.
Moving to the lower left hand quadrant of the slide our industrial load declined in the third quarter driven by a pullback in usage by some of our key manufacturing customers, mainly chemical plastic and tire producers as well as downstream participants of the energy industry.
This reflects some of the softness in manufacturing nationally as producers have slowed activity in response to uncertainty around the economic outlook.
We expect this to reverse itself in the months ahead as recent inflation in jobs data have reduced the probability of a recession occurring in the next year, we are forecasting industrial load to remain positive through the end of next year and beyond.
Moving to the upper right hand quadrant of the slide we see another impressive quarter for commercial load.
In the third quarter commercial load was seven 5% higher than a year ago, driven by the addition of new datacenter customers, mostly in Ohio, Texas and Indiana.
We expect the pace of year over year growth in our commercial load to moderate some in 2024 as new projects work their way through the queue.
Many of the large projects currently underway within our footprint won't come fully online until 2025.
However, there is upside of a few of these projects move forward earlier than expected.
Many of these gains are directly attributable to our ongoing efforts.
<unk> more economic development across our operating footprint.
We know that working with local stakeholders to attract more economic activity is a key strategy to providing value to the communities. We serve that allows us to prioritize investments that improve the customer experience, while also mitigating rate impacts on our customer base.
Moving to slide 12.
In the lower left corner, you can see our <unk> to debt metric.
At 11, 4%.
Which is an increase of 30 basis points from last quarter, but continues to be well below our targeted range of 14% to 15%.
Primary reason for the increase is a $1 8 billion decrease in debt during the quarter due to long and short term debt retirements driven by proceeds received from our contracted renewable cell and the successful completion of our planned equity units conversion both of which occurred in August.
We expect this metric will continue to improve throughout the remainder of this year and anticipate reaching our targeted range in early next year as we see an improvement in <unk> during that time.
We have included a table on this slide that shows the path to the targeted <unk> to debt range early next year. These.
These items these are items that impact both the 12 month rolling average as well as an estimated increase in the quarterly S. F O.
We anticipate a 180 to 190 basis point positive impact on <unk> that enables the metric to be in the 13% to 14% range by year end based on the following items.
A roll off of roughly 600 million and cash collateral deferred fuel and other outflows from the fourth quarter of 2022.
And continued cash recovery of deferred fuel balances in the fourth quarter of this year that total between 150 and $200 million in accordance with the regulatory orders we have already received.
Moving into 2024.
<unk> roll off of prior year cash collateral all fall in the amount of $390 million in the first quarter of 2023, and the $90 million adjustment from unfavorable weather in the first quarter of this year to normal weather in our forecast for next year.
Will result in an incremental 100 basis point improvement put us within our target range of 14% to 15%.
Also please note that we have updated our 2023 cash flow as shown on page 29 in the appendix and increase of $1 2 billion in required capital is shown versus the original forecast, mostly due to a decrease of $800 million in cash.
From our ops, largely due to fuel inventory and an increase of $300 million in.
And capital expenditures. Please note that our equity needs for 2023 are unchanged. The remaining years 2024 to 22027, along with rebuilding 2028 will be updated at the upcoming <unk>.
Conference.
Spect that this update will be consistent with our prior equity needs and disclosures.
Moving to slide 13, you can see our liquidity summary in the middle of the slide.
Our five year $4 billion bank revolver.
Our two year $1 billion revolving credit facility to support our liquidity position, which remains strong at $3 5 billion.
On a GAAP basis, our debt to cap decreased from the prior quarter by 220 basis points to 62, 4%.
This large change can be attributed to the large reduction in debt driven by our contracted renewable cell and the completion of our planned equity units that I mentioned earlier.
On the qualified pension front.
Our funding status decreased one 9% during the quarter to 103%.
This was largely due to equity and fixed income losses in the third quarter as interest rates increased and equity indices fell in both August and September.
These losses are partially offset by decreased liability due to rising interest rates.
Let's go to slide 14 for a quick recap of today's message the third quarter produced growth and earnings well above the prior year, driven primarily by favorable rate changes increase slowed and favorable favorable O&M offsetting milder weather and increased interest expense as we.
Continuing to move through the fourth to the fourth quarter. We are focused on cost management efforts with the goal of mitigating the headwinds we have faced this year, primarily unfavorable weather and higher interest costs the.
Our strong third quarter results and load growth coupled with our proactive plans for the balance of the year allow us to confidently narrow our operating guidance range to $5 24 to $5 34 per share.
We also continue to be committed to our long term growth rate of 6% to 7% and as Julie mentioned earlier, our sales efforts to simplify and de risk the portfolio remained on track.
We really appreciate your time and our management team and I look forward to seeing you at the upcoming <unk> Financial conference.
Conference in Phoenix with that I'm going to ask the operator to open the call. So we can hear your questions or comments.
Yeah.
Thank you.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Nick Campanella with Barclays. Please go ahead.
Hey, good morning, everyone. Thanks for thanks for taking my question here.
And congrats Chuck on the on the new role.
I wanted to actually start there if I can.
I know that there was just some language in the 8-K when you made the executive switch around the mandatory retirement age and your interest in retiring before you reach that age, but I just wanted to ask or are your intentions here to stay on for the foreseeable future is this more temporary just how should we kind of think about your new role in the company. Thank you.
Yeah no. Thank you for the question and.
Look I am absolutely embracing this opportunity that we have before us.
It's very energizing to enter into.
Well like this and you know although.
<unk>.
The AK did indicate that I am committed.
Jewelry and AEP to ride this out as long as needed.
And as long as I'm, adding value right to get to the opportunity. So I. Thank you for the question.
Okay.
I appreciate the answer thanks, a lot and then I appreciate the walk on the on the <unk>.
That's helpful. I, just wanted to confirm because S&P didnt move you to negative outlook and I think in your prepared remarks, you said.
As you get to EI.
Do you anticipate equity needs being somewhat unchanged. So is it the right understanding that.
If you are in a capex raise scenario that your equity needs would still be modest and unchanged versus your prior view and then secondly.
Understanding that the 11, 4% has some reduction in debt from the renewable proceeds.
Cash flow from those renewable proceeds I guess would be rolling off into next year and I just wanted to triple check that even with the asset sale cash flow dilution you still see yourselves above 14%. Thank you.
Yeah, Yeah, thanks for both questions.
So yes, our our equity needs will be consistent with what we have disclosed prior I mean, clearly we'll be updating right. The years in the cash flow forecast, but expect no surprises there.
On to your second question.
Yes.
<unk>.
We tried to highlight right on the slide <unk> slide.
The major drivers.
That you can point to and see what is rolling out as outflow, but absolutely right in our financial models right. It takes into account the absence of that cash flow.
So we do expect to be in those ranges.
Thanks, a lot we'll see any I appreciate it.
Thank you. Your next question comes from the line of Jeremy Tonet with Jpmorgan. Please go ahead.
Hi, good morning.
Good morning.
We've seen a bit of a regime change as it relates to interest rates out there given the sharp moves recently just wondering if you could talk a bit more about that and how AEP is able to reaffirm the 6% to 7%.
Long term CAGR there.
What could be a higher for longer interest rate environment impacts do you see an EPS post 'twenty three and kind of how do you think about offsetting those headwinds.
Yeah.
Amy. Thank you for the question I mean look we'll be giving you a walk right on 2024 at the EI, but theres no question that we are planning for an interest rate higher for longer environment.
We've clearly been able to overcome this.
Headwinds this year, but they will persist.
So our plan is to.
A sensibly finances company right continue to remain committed to mid grade.
<unk> grade credit.
And.
Our recovery mechanisms on interest rates. Some of them are are somewhat immediate or very near term right. Some of them are kind of medium term and then some of them.
Do have some lag associated with them. So the reality is some of this will begin to flow through.
We remain committed to keeping parent debt.
In that range well below 25%.
19% to 21% is ideal.
And offsetting those headwinds right with continued investment.
We're seeing strong load growth.
And the positive regulatory outcomes and closing the ROE gap that Julie has mentioned.
Got it Thats very helpful. There. Thank you for that and maybe kind of picking up on that last point. There I think on the last call we discussed a bit or there are some questions regarding outreach to commissions.
And just.
Building.
Regulatory relationships across your jurisdictions. There just wondering if you could provide a bit more detail I guess on specific initiatives done so far where you see that going how you see that kind of.
Yeah.
Transpiring so far.
Yeah, Nick Thanks for the question. This is Julie we continue on with that effort in terms of engagement with our various state commissions as well as talking with folks at the FERC level and it's important to note that we do this in conjunction with our operating company Presidents and leadership there.
And my objective and your senior leadership teams objectives is to clear the path for those operating company presidents and those teams. So that they can have a very good.
Traction with their respective commissions and their respective economies in the states. So those continue to occur and honestly. It just it keeps me educated.
So that I can make sure that when we build a strategic plan at the aggregate level that it makes sense and it were taken into consideration our customers' needs and also the economies that are driving all of this magic that's happening across our entire footprint. So it continues steady as she goes in terms of those convert.
<unk> and we'll continue to stay out and in front of folks and do our best to support our operating companies. So nothing super exciting to report other than.
The action is absolutely happening.
And we will see that embedded in the cases that were filing.
Got it and just to confirm the plan is still for you to meet each of the commissions when youre able to do so.
Yeah, I I honestly, I enjoy getting out anyway, and talking with everybody like I.
I think it makes me better at my job I am making the rounds and you know I got to be sensitive to what we've got going on in our respective jurisdictions and some cases I've got ex parte issues that gotta be sensitive too.
But I'm, absolutely, making the rounds and we'll continue to do that because the business is incredibly dynamic more so than <unk>.
Ever and we need to make sure that we're staying in touch with everything that's going on across the entire organization. So that will continue on.
Got it.
That's very helpful. Thank you and just a last one if I could the waterfall chart.
Through nine months in the presentation today, it looks a bit different than I guess, what we.
We saw in <unk>, just wondering if you could walk us through some of the puts and takes the drivers to this.
And across the different segments and what do you see I guess in the fourth quarter that maybe narrows, the gap or just kind of a different.
Trends happening such as in vertically integrated in with the renewables as well.
Yeah, So I'll start and then I'll hand, it off to Chuck So what gives us comfort in terms of narrowing that guidance range. When you look at I'm looking at page 16, I'm, assuming that's where everybody is right now in terms of that waterfall chart. So what gives US comfort is Chuck mentioned that we are able to effectively.
I guess take up our load forecast predominantly driven by the commercial load that we're seeing so that's going to be incorporated into our thoughts for the remainder of the year. What we're trying to manage the interest expense. That's also an incredibly important another data point to throw out. There is no question. We keep getting is what percentage of your debt outstanding is floating rate it's about <unk>.
12, 5%, if I remember correctly as of the end of the third quarter. So that's something that we're being real mindful of we're also thinking about what regulatory cases that we have already in hand as a matter of fact, you may recall that when we began the year, we had something like $290 million of new rate release embedded in our forecast we are actually.
Well north of that we're worried about $303 million of secured rate relief in hand, so that gives us a little more confidence and comfort too as we proceed through the end of the year. So again, it's really just a steady as she goes and plug and Chuck and I don't know Chuck If you had anything else you wanted to add to that yes sure Julie.
Look the other thing is the O&M O&M management as I mentioned during my comments.
If you look at slide 16, Youll see that O&M as a drag through three quarters, we expect that to completely reverse itself for year end and actually have be a net positive on O&M year over year, meaning that the fourth quarter will have a substantial difference.
O&M versus last year.
Very helpful. Thank you I'll leave it there.
Alright, thanks for your questions.
Thank you. Your next question comes from the line of <unk> <unk> with Guggenheim Partners. Please go ahead.
Good morning, it's James moored on for sure. Thank you for taking our questions.
You bet.
Looking at your new <unk> to that past slide could you give us a sense on what if anything could cause any potential slippage like the deferred fuel recovery.
Might dictate you being at the bottom or the top end of that 14% to 15% in 2024 now you've talked previously about being at the mid point by the end of the year, but.
Updated disclosure here I just wanted to.
Ask that again here.
No sure. Thank you.
When you look at the charts. Several of these are just simply facts right that are going to come out all the outflows are no numbers right that are rolling out of the 12 month average. So then we're just subject to the normal variances.
In <unk> that would occur.
It's a pre working capital capital number and the reality is right softer weather better weather all of those things will influence it but I think we'll be solidly in both ranges right by the time frames that we've talked about.
Got it thank you for that and one more from us on.
Load growth, what's driving the large I know you'd mentioned datacenters, but.
If you could just talk a bit more about what's driving the large increase for the guidance. This year and then more specifically as we think about the updated capital plan, which youll be providing just directionally should we expect this higher load growth to be a driver of capital growth opportunities. Thank you.
This is Julian I'll pass it off to Chuck here too, we'll tag team a little bit, but as Chuck mentioned the primary driver for our loan growth as we go into the end of 2023 is all around that commercial segment. So if you look at page number 11, when you look at that upper right hand, quadrant, youre going to see a serious or material shift.
And what our updated guidance looks like versus what we originally had for 2023. The vast majority of that loan growth is coming from data centers located in Ohio, Texas and also Indiana now and if you look across the rest of the segments. There so residential a.
A little soft we talked a little bit about at the beginning of the call here on our monologue, our prepared remarks about the fact that customers are feeling this in the wallet as it relates to inflation et cetera, we expect that that's going to improve over time, but nevertheless, what's allowing us to get a little more comfort on the residential side is we've added.
30000 customers year to date, so that's offset a lot of the otherwise pressure, we would have seen in that segment as usage per customers come off a little bit on the industrial side.
Driven by interest rates and the expectation I guess concerns that there could be some softening in the economy. So we've seen certain customer.
<unk> segments within that industrial aspect.
Aspect kind of come off a little bit, but we expect over time that that will improve I don't know Chuck is there anything else that I cover that he mentioned that does it drive your capital forecast and of course.
The new data centers of course require cash.
Capital.
Two to hook those customers up.
We do have what is known and customers that are coming into our capital forecast going forward.
And there are lots of discussions otherwise right in our economic development activities.
Everything that we know of and his and his firm is in our capital forecast.
Got you and just one clarifying remarks clarifying question.
So my question was really focused around that seven 3%.
Guidance for 'twenty, three for commercial versus the 80 basis points originally.
Presumably the infrastructure necessary for those data centers to be receiving a load that they are as is in place.
Especially because we only have a couple of months left in the year and.
As you saw that youll be providing 'twenty four 'twenty five.
Guidance.
So we're just directionally trying to think is this a trend likely is this isolated to 'twenty three or is this something that could continue and could drive therefore capital opportunities as you.
Look to serve that increasing commercial data center load and then Thats. It for me no.
No I appreciate the question so much yeah that that trend, we expect that to continue I mean, you see the the fluctuation a little bit in the commercial segment up in the upper right quadrant of that slide I mentioned earlier.
We have projects in the queue. So you kind of see those ebb and flow, but you're right. The infrastructure is in place today.
Pending or incoming requests for additional capacity from our customers. So that net customer touch point through our economic development team is incredibly important because that allows us to not only have confidence around what our forecast is but it also drives with the capex program needs to be so yeah. We think that that's going to continue and we will.
Keep a keen eye on that in particular, because the infrastructure is got to be there and we got to make sure that we're communicating with our customers. So that they know exactly what the appropriate and realistic timeline is for them to enter into our service territory and so that the infrastructure is there because its not something thats done overnight. So I appreciate that question. So much because it is it is fine.
Orchestration that absolutely has to happen.
Thank you very much looking forward to seeing you are already a couple of weeks.
Thank you.
Okay.
Thank you. Your next question comes from the line of Carly Davenport with Goldman Sachs. Please go ahead.
Hey, good morning, Thanks for taking the questions.
Maybe just start as we just think about the moving pieces on cash sources going forward could you talk a little bit about how the asset sales.
<unk> are progressing in terms of interest that youre seeing bid ask and then on the timing side. It seems like a little bit of a narrowing of the timeframe for MMR D, but anything else on the timing side that you'd highlight.
Yeah, Yeah, I can start and Chuck can jump here too because chuck's been really close to the optimization that we've been doing anyway. Yeah. So from an <unk> perspective, we're getting close here. So I would anticipate a contract being signed in the not too distant future and then it really is going to be a story around when can you close so that's going to be driven also by regulatory.
And we will need probably at FERC approval and depending on who the purchaser is that can drive other issues.
Issues that will need to address so we can give you more precise time on when we can land that jet so stay tuned that once they are in the hopper and coming along here relatively quickly and then I'll, let Chuck did you want to talk a little bit about retailing distributed yeah. You did ask one question I do want to address right. What's the data ASP and of course, we're not going to do.
Bill anything like that in a public forum.
But we are pleased with the response we received.
In some of the early.
<unk>.
That are indicative of course, but the process.
It kind of goes on.
Greg Hall, and his team right.
Leading.
That effort.
There are in the queue remainder of this year.
The typical process of management meetings and.
Moving on to final bids either late this year early next year. So the reality is right that's going to take some time to progress.
The split to expect to complete that in the first half of next year.
And the other.
Sales processes are just shortly behind that.
Great. Thank you that's helpful. And then I appreciate the color on the drivers on O&M heading into <unk> and for the full year I guess, how are you thinking about managing O&M into 2024 should we expect to see an uptick that kind of offset some of the efficiencies that you've driven this year.
Have addressed the mild weather and allows you to continue to execute on the on the earnings guidance for 2023.
Yeah. So it's a good question I can tell you what the.
The discussions amongst the executive leadership team here are really focused on prioritizing O&M spend and spending both capital and O&M dollars that benefit and provide value to our customers. So we're really targeting the prioritization.
We'll be giving guidance on O&M for next year in our waterfall at EI, but expect us to be.
To be.
Conservative right, we're going to manage O&M to levels that are needed to run our business right, but begin to eliminate things that are what we may consider to be discretionary.
Forward.
Great. Thank you I appreciate the color.
Yeah.
Thank you. Your next question comes from the line of David Arcaro with Morgan Stanley. Please go ahead.
Hey, good morning, Thanks for taking my questions.
You bet.
Thank you. Thanks again for the disclosure around the FOT to walk into the first quarter of 2024, and you've touched on this a little bit but I was just wondering how you see that metric track after that point from from getting into the range is it stable to rising from there and kind of staying within the target range going forward.
When you look at the core business outlook.
Yes.
Absolutely plan to target and be in that 14% to 15% range I will tell you that.
The introduction of large projects.
On a year to year basis, right may swing that around some so as you add renewable projects in particular, if they come at the end of the calendar year right you have the financing costs related to that but you don't have the assets all the rating agencies are very well of that.
Pattern.
Absolutely when you pro forma that right, 2014% to 15% is where we intend to be.
Okay, great. Thanks, so much thats all I had I appreciate it.
Thank you.
Thank you.
Your next question comes from the line of Anthony crowded with Mizuho. Please go ahead.
Hey, Good morning, welcome back Chuck Great to hear from you again.
Yes. Thank you.
Just hopefully two quick ones I think Nick touched on it earlier on.
A recent S&P has revised their outlook on.
Holding company I'm just curious.
I guess, you had discussions with the rating agencies.
We appreciate the detail you provided in the slide deck, especially on your credit improvement but.
Have you been in discussion how do you unveiled that previously to S&P prior to their ratings or their outlook change.
Yeah.
Anthony I've talked to all three rating agencies since it's coming in and as well as our.
Our treasury team.
Obviously talk to them all the time.
I don't think the S&P moved to negative outlook was a particular surprise.
Even the downgrade threshold is 16%.
And our rating is split right there at a higher rating than Moody's and Fitch currently so it wasn't a surprise we continue to work with the agencies to explain our R.
Our business risk because we think.
As we continue to execute on eggs.
Exiting the unregulated businesses on a basis make should improve and they should begin to reflect that right.
In their evaluations.
Not a surprise.
If and when it is downgraded their ratings would be on par with.
With Moody's and Fitch.
Great and then just lastly, you laid out the two.
Scenarios regarding west Virginia fuel cost recovery. One is one is an amortization over two years. The other one is the securitization, which also includes accelerating coal plant closures, given I guess the impact to the balance sheet and all the other moving pieces does the company have a preferred path in West Virginia, and then also.
When do we get resolution of that from the.
The regulator.
I appreciate that question and let me let me just clarify the question as well right out of the gate here and to the extent that we've included securitization as an option that does not assume an acceleration of coal plant closures just to be very clear on that we have those embedded in rates today going through 2040.
So that is the current plan and thinking so the idea of using securitization that was entirely driven by how do we minimize the impact on customer rates period, and so that was that was the spirit of why we even contemplated the utilization of the securitization.
And that second scenario of option that I mentioned, where we not only securitize the fuel, but we have I think a little bit of storm cost in there as well as those plant balances would effectively render customer rates neutral so no impact okay de minimis.
Then the other alternative was just a three year smoothing of those deferral are those deferred costs.
That was to the tune of I want to say it was maybe 12% increase.
Increase in customer rates associated with that subject check so.
As far as well our preference would be our preference is to get it recovered our preferences to be able to work with all the different stakeholders, which is precisely why we put out the different options and listen to the different stakeholders in the case and just with complete appreciation and sensitivity to the customers in West Virginia that are the <unk>.
Median household income tends to be a bit lower than most definitely the national average, but even across aep's footprint.
It's lower so we need to be incredibly sensitive to those wallets, so as far as preference our preference simply is to work with the stakeholders and get it done and as far as when we might be able to get that done our expectation is that we'd get that done here in the fourth quarter. So tick tock anytime here okay.
Thanks for taking my questions.
Thank you.
Thank you. Your next question comes from the line of Andrew Weisel with Scotiabank. Please go ahead.
Hey, good morning, everybody.
Hey, good morning.
A lot of good information already so I've only got one left if you can clarify here I wanted to ask about the three moving pieces between equity asset sales and Capex and I know youre going to talk about this at <unk> in a couple of weeks, but my question is equity needs are generally going to be consistent how do we think about how you will finance incremental capex you typically.
Roll forward the Capex plan. It tends to go up most years is currently 40 billion does that mean that cash proceeds from these asset sales should help to finance whatever upside there is the capex plan.
Or.
Will you have additional equity until the asset sales are announced.
Do you think about the balancing act.
So now I'll, let my CFO jumping here, but first things first we want to have a healthy balance sheet. Okay. So dollars come in the door, we're going to make sure that our metrics work you know, we talked a little bit or a lot about 14% to 15% <unk> to debt. We also pay attention to our debt to cap ratios, but 14% to 15% as our <unk>.
Getting item for us and metric. So we will look to that metric to see where were shaken out dollars will be placed accordingly, as we bring those in the door associated with sales as far as equity needs to go as Chuck mentioned.
Again, the phrase steady as she goes.
On average, we're around $700 million plus or minus any given year you see that in the cash flow that we have out here on page number 29.
Are you going to continue on with a healthy Capex program, you will see that extended into 2028, when we talk to you at EI, but.
There may be fluctuation like sequentially year to year, but I wouldn't anticipate any material shift or change again gating item dollars and the door take care of the balance sheet and then we will fund the rest of the regulated business that way don't know Chuck is there anything else you would add to that node Julia I think I think your answer is I really can't add anything I would just.
Say embrace the capital opportunity and sensibly and smartly financers.
Okay, Great. That's helpful. And then if you could just remind us what are the downgrade thresholds for Moody's and Fitch.
Yeah, 13, 13% <unk> to debt.
Very good congrats again, and we'll see in a couple of weeks, yes. Thank you.
Thank you. Your next question comes from the line of <unk> Chopra with Evercore ISI. Please go ahead.
Hey, Thanks for sneaking me here Chuck welcome look forward to working with you just a real quick on the photo that metric I just wanted to clarify the 13% to 14% target for end of this year.
Human that best Virginia fuel recovery gets resolved.
No no as a matter of fact, what is assumed in that forecast that walk you see today is everything that we already have in hand, so our west Virginia fuel outcome does not disrupt that path at all that's prospective for us.
Got it so so okay, so any sort of any incremental sort of cash flow bump from there would be.
Accretive to what you show on this slide right even for 'twenty.
That could be helpful. Yeah.
Okay, Perfect and then maybe just one quick one real quick.
What's the balance the total deferred fuel fuel cards balance that hasnt been covered as of the Q3 I know it was like $1 4 billion as of Q2.
Yeah, one 2 billion as of the ended the third quarter.
And that's in the aggregate across the AEP footprint or fleet of utility companies.
In West, Virginia is roughly like $500 million, correct, Little North West, Virginia, West, Virginia, as well to be specific $574 8 million. So call. It $5 75, we're paying attention to this.
That's why I got a little bit of detail here, but it's important.
I appreciate that thank you guys I appreciate the time.
Okay. Thank you.
Thank you. Your next question comes from the line of Julien.
<unk> Smith with Bank of America. Please go ahead.
Hey, Thank you operator welcome back Jack Lazar.
Look.
Just coming back to that O&M piece, obviously, you put some comments in the script here.
Look I think Thats, a solid number I am just curious how do you think about that annualized here and the ability to annualize some of the factors I guess that some of them are kind of discrete in nature here certain elections, but again.
In an effort to kind of preview a little bit more on that 2004 trajectory I know you've made a couple of allusions to it here can you, perhaps leaning a bit further in describing how you think about what that could do for next year.
On the cost side.
So we're going to lean into that.
And about <unk>.
Seven or eight days or nine days whatever it is.
But you know.
The focus right at the management team as I said earlier is really on prioritizing the spend and spending dollars where it matters most to our customers.
That's the most important thing we can do in our O&M budget will reflect that.
Yes.
I respect that hence the interest.
Okay wonderful well I'll leave it there and do you mind just on the loan front just to clarify this a little bit further here I mean, obviously you have an updated load in the near to year that is substantively more robust.
And you have a.
Backward dated load growth profile here for 2000 and 425, how do you think about the timeline for revisions and the extent of those revisions.
As you see them today again I know this is probably more of the EI <unk> kind of conversation but.
Clearly we are seeing these kinds of revisions across the PJM footprint. How do you think about that and also maybe how does that feed up with PJM itself here and potential further transmission oriented opportunities.
Yeah. So as you could see right the low growth in particular in commercial is pretty robust those those numbers will be updated when we come to come to <unk> and <unk>.
I said earlier, it's embrace the opportunity.
You know this this is a good opportunity for US I think you have to be smart about it and kind of that out what is real and what is real load is really going to come on and plan to your capital investment profile around that so lots of activity lots of discussions on economic development team.
<unk> is very busy.
Talking.
And dealing with the opportunity.
Okay, Alright, well, we'll leave it there good luck guys. Thank you. Thank.
Thank you.
Yeah.
Thank you. Your next question comes from the line of Sophie Karp with Keybanc. Please go ahead.
Hi, Good morning, guys and thank you for taking my question.
Can you.
Clarify you mentioned that you could implement or are they.
Possible to implement interim rates in Kentucky in January do you actually intend to do that or how does that sort of politically.
It would work out for you there.
Yeah generally wouldn't so can we try to take advantage of that.
So that would be the plan and of course, we will stay in close contact with all the stakeholders to our case.
And the commission.
So other than that just as we have done in say for example, the PSA. Okay. So that is typical for us. If there is an opportunity to implement rates. We go ahead, and do that and kind of risk adjust those in terms of our forecast.
And an understanding of when cash is going to come in the door and all of those.
Items that are so important as we put the forecast out to you guys and have confidence around that but short answer is yes. Generally speaking, yes, we would expect to put those in place or implement the rates.
Got it. Thanks, that's helpful and then just grow.
The question I guess is there any interest to approach state regulators.
Seek mechanisms to reduce weather volatility impact on your earnings I know you are not decoupled than most of your jurisdictions. So kind of curious if you still like that type of.
Alright mechanisms or would you rather than maybe a transition over time too.
Situation, where whether it does not impact your earnings that much yeah, we engage in those conversations and again, that's more of a stakeholder discussion and see what the temperature tolerance would be as it relates to not only just just our preferences, but the preferences and the tolerances of or the other parties to the cases that being said we did have.
Decoupling in Ohio for a while that has since fallen by the wayside, but that's something that we have a regular conversation about so I don't I wouldn't say that we have a push or a thrust towards getting a decoupling in place, but it is absolutely a tool in the tool bag.
Okay. Thank you.
Okay.
Thank you for joining us on today's call as always the IR team will be available to answer any additional questions. You may have Eric would you. Please give the replay information.
Thank you.
This call will be available for replay beginning today and approximately two hours after the completion and will run through until Thursday November 19, 2023 at 11 59 PM Eastern time.
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Thank you ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect your lines.
Okay.
Yeah.
Okay.
Yeah.
Okay.
Yeah.
Yeah.
Thank you.