Q3 2024 American Electric Power Company Inc Earnings Call
Thank you, Danica. Good morning everyone and welcome to the third quarter 2024 earnings call for American electric power. We appreciate you taking time today to join us. Our earnings release, presentation slides, and related financial information are available on our website at AEP.com.
Today we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors.
Joining me this morning for opening remarks, our bill for our men, our president and chief executive officer, and Chuck Zabula, our executive vice president and chief financial officer. We will take your questions following their remarks. I will now turn the call over to Bill.
Bill: Thank you Darcy and good morning and everyone. I'm happy to be with you for my first earnings call as AEP's President and CEO. In my remarks this morning, I'll discuss our results and I'll look before turning to the key pillars of our strategy to enhance value for customers and investors.
Bill: I'll then cover regulatory updates before handing it over to Chuck to walk through our financials in more detail. You can find a summary of ¼, 2,024 business highlights on slide 4 of our presentation.
Bill: We have a lot of exciting ground to cover today, but first I'd like to briefly introduce myself to those I haven't had the opportunity to meet yet.
Bill: I spent my entire crew and utility and energy business. Most recently I was at Berkshire Hathaway Energy, which has an asset base 1.4 times the size of AEP, operates in the 11 states but also in Canada and Great Britain, and has a diverse group of regulatory interests.
Bill: While in familiar with most of the industry players, bankers, regulators, companies, and dead investors, I am new to many of the AEP shareholders, and I look forward to delivering for you. With that, I'm honored to join a leader like AEP at a pivotal time for both the organization and our industry.
Bill: Since the Sumin the Roll of CEO, I've met our many stakeholders and the AETP team across our 11 state footprint, including four governors and over 30 regulators and legislators.
Bill: We've had robust discussions about critical initiatives and I've appreciated the opportunity to engage and listen and learn what were the past three months to help shape our vision for the future.
Bill: AEP has built a strong foundation for growth, including our robust transmission system, which represents 55% of AEP's total earnings stream.
Bill: However, we can improve reliability, streamlined cost, news technology better and put power in the hands of local leaders to build financially strong utilities in our communities.
Bill: I look forward to the future and working with the many talented people across the company to drive operational excellence, best in class service, earnings growth and overall success.
Bill: How begin with our financial results.
Bill: Today, we report third quarter 2024 operating earnings of $1.85 per share of $985 million.
Bill: Building on our strong momentum this year, we are confident in narrowing our 2024 full year operating earnings, guidance range to $5.58 to $5.68.
Bill: Maintaining the original $5.63 midpoint.
Bill: As referenced on slide five, today we also formally introduce our 2025 operating earnings guidance range of $5.75 to $5.95.
Speaker Change: We have thought a lot about this range, especially since I've been in the C-E-Roll for just three months.
Bill: The Foundation of our 2025 earnings guidance ranges based on robust growth in our regulated utilities.
Bill: This range also reflects lower contributions from our generation and marketing segment due to reduced scope of activities going forward and lower retail on wholesale margins likely to be realized.
Bill: While AEP's earnings range grows 4% in 2025, you have my commitment that we will do significantly better in 2026 and beyond after we go through an optimization exercise.
Bill: and we re-tool our personnel and processes over the coming months.
Bill: As the new CEO at AEP, I need to establish a record of delivering on promises to you while demonstrating good will to our regulators and customers as we focus on service, reliability and enhanced vegetation management to reduce customer outages.
Speaker Change: My objective is to improve our customer experience and stay colder relationships.
Bill: which over time will result in more positive regulatory outcomes and enable a stable platform for growth.
Bill: AEP's future growth opportunities are very significant as we embrace the large load opportunity in our service territory, as well as substantial upgrades to the distribution system.
Bill: We are focusing on economic development efforts in our state to help address affordability and investing in our energy delivery infrastructure to improve reliability. In addition to new generation to support resource adequacy.
Bill: Because of this tremendous growth, today we are unveiling AEP's new long-term earnings growth rate of 6% to 8% of a 2025 base year.
Bill: and a $5.85 midpoint.
Ball: Ball reinforced by balanced and flexible $54 billion capital plan from 2025 through 2021.
Ball: When I look at this newly raised $54 billion capital plan, which is up more than 25% over the prior $43 billion plan, there is even more upside to go.
Ball: In fact, we see significant opportunity to capture $10 billion in incremental transmission and generation infrastructure investment to satisfy all of the low growth.
Bill: We'll provide more details at E.I. regarding these investment opportunities that drive our updated 8% rate base cagre.
Bill: Note that during the 2025 through 2020-9 timeframe, we also expect our customer rates will go up by less than 3% annually on a system-wide basis due to billhead room created for economic development activities and new generation.
Bill: Understand that this customer rate impact could change due to effects of potential future generation needs. Please refer to Slide 5 and 6.
Bill: As you know, maintaining a strong balance sheet is critical to funding the increased capital spend associated with these growth rates.
Bill: and we remain committed to responsibly financing our capital needs.
Bill: In addition to equity and equity like tools, we will explore asset monetization opportunities to the extent they can be executed upon while achieving the right price.
Bill: If we do explore asset cells, we won't tell you about them until they happen.
Bill: Our newly rolled forward five-year capital and financing plans can be seen in the appendix on slide 13 and 14.
Bill: Turning to Flight 7, our robust financial outlook will be underpinned by a culture of accountability and execution.
Bill: This business is transforming rapidly and we recognize the need for change to better serve our customers.
Bill: Since joining the company in August, we have made several changes to align and simplify the organizational structure to ensure we have the right talent in the right roles to execute our strategy and achieve our objectives.
Bill: For example, our operating company president and chief nuclear officer now report directly to me. While power plants and site managers will report directly to our operating company president.
Bill: We have streamlined the leadership structure by eliminating management layers and reorganizing the service corporation.
Bill: These actions move decision making closer to customers. All to ensure our money-making businesses have the authority they need to accelerate improved performance.
Kaufman: I'm Kaufman, our new structure will help us drive value as we advance three core areas of strategic focus.
Kaufman: Growth and Financial Strength, Customer Service, and Regulatory Integrity. I'd like to spend a few minutes walking through each of these areas.
Kaufman: First, AEP's future growth potential and financial strength is significant with customer commitments for 20 gigawatts of loaded additions through 2029, driven by data center demand, and we have updated our load growth forecast accordingly through 2027.
Kaufman: In fact, large load impacts are already being felt in our service territories, predominantly in Ohio, Texas and Indiana.
Kaufman: This has demonstrated in our third quarter results in which we realized commercial load growth of 7.9% compared to the third quarter of last year. And 10.1% growth year to date in 2024 compared to 2023.
Kaufman: We are committed to supporting this new load growth in our service territory. So we also remain focused on ensuring affordability by fairly allocating costs resulting from associated incremental investments.
Kaufman: This is why we proactively filed the data center tariff in Ohio, the large low tariff modifications in Indiana, Kentucky and West Virginia, and a complaint with Furc related to a co-located load arrangement.
Kaufman: Log growth from data center demand has a potential to benefit all stakeholders, including investors, customers and local communities, but only with fair and proper cost allocation.
Kaufman: While so many things that are for complaint is anti-days center, it is actually the opposite.
Kaufman: We are trying to welcome all data centers to our service territory but making sure that those data centers help all customers.
Kaufman: The second area focus for us is best in class customer service. We will leverage technology to enhance service and better meet our customer's energy needs through reliability and outage reductions while transforming our processes with a focus on efficiency and accountability.
Kaufman: Business Transformation and Technology Innovation will also drive on MDSU plan to help keep customer rates affordable amid rising costs on a growing rate base.
Kaufman: The last pillar of our strategy is regulatory integrity.
Kaufman: We will listen to and respect the preferences of our regulators, policymakers, and communities to achieve positive regulatory outcomes.
Kaufman: If our states want renewables, we will work with them to deliver.
Kaufman: If they want continued operation of coal or investment in gas or nuclear, we will work with them to deliver.
Kaufman: As long as our states pay for what they want and we are treated fairly, we will deliver. At the same time, we will work closely with key stakeholders to advance affordability, system reliability, resiliency and security.
Kaufman: To that end, we have aligned our organizational structure to strengthen our focus at the state level.
Kaufman: and we continue to prioritize improving our earned ROE's as we listen to each of our states and their preferences.
Kaufman: While it would take time for this work to bear fruit, this is headed in the right direction.
Kaufman: Continuing on, our operating companies achieved a number of other positive regulatory developments in the third quarter as well.
Kaufman: Starting with AEP Texas, last month the Commission issued an order approved a unanimous and unopposed comprehensive settlement, which included 9.76% ROI.
Kaufman: The Order was effective October 1st. In Oklahoma, major parties reached a settlement agreement with a 9.5% ROI in early October and the ALJ recommended approval of the settlement without any modifications.
Kaufman: While PSO awaits a commission decision in-remorance, Rampal Minute on October 23.
Kaufman: In Virginia, hearing this held in September related to the Bionno filing, focusing primarily on incremental investment.
Kaufman: A commission order is required in November with rates going into effect in early January 2025.
Kaufman: Last week, App Co refiled its base case in West Virginia. Requested to an 18.8% ROI, while also offering secureization as the rate mitigation concept to the proposed $250.5 million base rate increase.
Kaufman: This Securidization option includes $2.4 billion of un-depreciated plant balances.
Kaufman: CCR and ELG investments fuel the furrows and storm expenses.
Kaufman: While reduced ray base of 1.9 billion would result from securing the plant balances and environmental investments.
Kaufman: In the earnings impact would be dependent on how quickly we redeploy capital throughout the business.
Kaufman: That said, we should have an early indication from the Commission of Securitiesation is preferred, and we would plan capital redeployment accordingly.
Kaufman: The Lemme Be Very Clear. Securitiesation is not included in our new five-year capital and financing plans introduced today, and is not needed to hit our credit metrics.
Kaufman: Rather, securitization is driven by the desire to consider alternative rate case options to mitigate customer bill impacts.
Kaufman: I was highly disappointed by the initial rate case filing that was rejected by West Virginia.
Kaufman: Be sure that going forward, additional internal quality control checks and leadership changes, have been implemented to ensure that each of our operating companies' finalings meet all requirements.
Kaufman: A Ray Case Rejections should not happen like it is in West Virginia and I want to accept this kind of performance from our team.
Kaufman: Moving on to Swapcode, updated Formula Rates went into effect in early August for Louisiana and Med-October for Arkansas.
Kaufman: and finally, I and M issued new request for proposals or RFPs for both owned resources and PPA seeking to secure up to 4,000 megawatts of diverse generation resources for target completion by year and 2028 or 2029 to support new load growth in the region.
Kaufman: Gas Touch, we expect to make the applicable regulatory fine lanes in 2025.
Kaufman: So, when short while the team is making progress towards achieving positive regulatory outcome, we do have more work to do. We look forward to continuing to engage constructively with our regulators and strengthen new relationships.
Kaufman: including by investing more resources at the local level than focusing on delivering what our individual states want as outcomes.
Kaufman: The bottom line here is we have made progress transforming the business over the past three months, but we have significantly more wood to chop.
Kaufman: Before wrapping up, I'd like to briefly update you on the legal item.
Kaufman: AEP and the Security Exchange Commission are engaged in discussions about possible resolution of the SEC's ongoing investigation, and we recorded a loss contingency of $19 million in the third quarter. Given this is an active matter, we don't plan on making any further comments on this matter.
Kaufman: I'd now like to close by reiterating my strong confidence in the tremendous potential for AEP's growth and success well into the future.
Kaufman: With the support, dedication, and hard work of the entire AEP team, we are well positioned to continue providing safe, reliable, and affordable service while advancing our long-term strategy to deliver value to our stakeholders.
Kaufman: Related to our new vision statement of improving customers' lives with reliable, affordable power, we will accomplish this together through commitment and execution.
Kaufman: I look forward to seeing many of you in a few days at EEI. We'll be happy to discuss our newly released financial plans in even more detail. I'll now give the floor to Chuck.
Chuck Zabula: Thank you, Bill. It's been a pleasure working with you over the past three months.
Chuck Zabula: Your leadership and passion for operational excellence and customer service is infectious and everyone at AAP looks forward to working with you to capture the incredible opportunities that we have before us.
Chuck Zabula: Good morning, everyone. Let me move on with the discussion of the third quarter results.
Chuck Zabula: Slide 8 shows the comparison of GAAP to operating earnings for the quarter.
Chuck Zabula: Gap earnings for the third quarter were $1.80 per share compared to $1.83 per share in 2023. Year-to-date gap earnings are $4.35 per share versus $3.62 per share last year.
Chuck Zabula: There's a detailed reconciliation of gap-to-operating earnings for the third quarter and near-to-date results on pages 20 and 21 respectively.
Chuck Zabula: Let's walk through our Operating Earnings Performance by Segment for the third quarter on slide 9.
Chuck Zabula: Operating earnings for the third quarter totaled $185 per share or $985 million compared to $177 per share or $924 million in 2023.
Chuck Zabula: Operating earnings for vertically integrated utilities were one dollar eight cents per share up eight cents.
Chuck Zabula: Positive drivers included rate changes across multiple jurisdictions, driven by outcomes in Virginia and Indiana, higher normalized retail sales, and lower income taxes.
Chuck Zabula: These items were partially offset by higher depreciation and O&M.
Chuck Zabula: The transmission and distribution utility segment earned $0.46 per share, up $0.07 compared to last year.
Chuck Zabula: Positive drivers in this segment include rate changes driven by the distribution cost recovery factor in Texas and the distribution investment rider in Ohio along with higher transmission revenue.
Chuck Zabula: These items were partially offset by lower normalized retail sales and higher depreciation.
Chuck Zabula: The AEP transmission hold co-segment contributed 40 cents per share, upper penny compared to last year, primarily driven by investment growth.
Chuck Zabula: Generation and marketing produced 19 cents per share, up a penny from last year. Favorable drivers included higher retail margins and lower interest expense.
Chuck Zabula: These items were partially offset by lower wholesale margins and higher income taxes compared to last year.
Chuck Zabula: Finally, corporate and other was down nine cents compared to the prior year, primarily driven by higher interest expense, timing of other operating revenue, higher income taxes, and O&M.
Chuck Zabula: The year-to-date operating earnings segment detail is shown on page 16 of the presentation.
Chuck Zabula: Note that year-to-date operating earnings are up 36 cents per share this year, increasing from $4.02 per share in 2023 to $4.38 per share this year, or about a 9% increase year-to-date.
Chuck Zabula: The data on slide 10 shows continued strong growth in load.
Chuck Zabula: Weather normalized retail sales grew 2.1% in the third quarter. This marks the 14th consecutive quarter of low growth across our system.
Chuck Zabula: and year-to-date overall weatherized normalized retail sales grew 2.9 percent.
Chuck Zabula: Declining residential sales have been offset by double-digit growth of 10.1% in commercial sales, thanks to the game-changing developments around data centers and AI.
Chuck Zabula: Also, our industrial sales have consistently grown despite challenging economic conditions for many of our customers.
Chuck Zabula: Our companies have attracted a steady pipeline of economic development projects over the past several years, and those projects are beginning to come to fruition.
Chuck Zabula: Besides the data centers, we also see companies investing in energy, manufacturing, and primary metals, driving consistent growth in our industrial sales.
Chuck Zabula: industrial sales grew one-half of one percent in the quarter, propelled by nearly five percent growth in Texas.
Chuck Zabula: Looking ahead to 2025 and beyond, you'll notice that we have updated our sales projections out to 2027 in this presentation.
Chuck Zabula: new and existing customers spread across our Ohio, Indiana, and Texas service territories.
Chuck Zabula: In the T&D segment, we estimate about 30% year-over-year growth in commercial sales each in AAP Ohio and AAP Texas.
Chuck Zabula: and in the vertically integrated segment, our projections have commercial sales at I&M up nearly 60% year-over-year. Note, this is happening now and in the next several years, not later this decade.
Chuck Zabula: New customer growth will also support a projected increase in industrial sales of 1.6 percent next year, with most of that growth expected to be powered by ongoing economic development in Texas.
Chuck Zabula: We have several large energy and manufacturing loads slated to come online within the next year.
Chuck Zabula: While these numbers are substantial, we take a lot of comfort in the fact that the large load additions reflected in these forecasts are all backed by signed customer financial commitments.
Chuck Zabula: In AEP, Ohio, and INM, nearly all of these loads are backed by take-or-pay contracts.
Chuck Zabula: This means that customers are locked in to pay for a minimum amount of power over the next several years, depending on their local tariff.
Chuck Zabula: Also, the impact of higher loads will enable our fixed costs to be spread over a higher base, benefiting all customers.
Speaker Change: As Bill mentioned, based on contract activity across the system, we expect about 20 gigawatts of additional load to come online through the end of the decade.
Chuck Zabula: For context, our summer peak load at the end of last year was 35 gigawatt. This represents about a 60% increase in peak load in the next six years.
Chuck Zabula: That magnitude of increase in peak load is driving the sales projections that you see in slide 10.
Chuck Zabula: We expect consistent retail growth above 8% over the next 3 years, driven by not only double-digit commercial load increases, but accelerating gains in the industrial space.
Chuck Zabula: Roughly half of the additions are located in our PJM footprint, mostly hyperscale data centers in Ohio and Indiana.
Chuck Zabula: The other half are located almost entirely in AAP, Texas. However, the growth in Texas is more diverse and spread across both data processors and large industrial customers.
Chuck Zabula: The last time we have seen sustained years of load growth in the 8% range, the Beatles in the late 1960s were still making music.
Chuck Zabula: Truly this is a pivotal and transformational time for our company as we work to capture this opportunity.
Chuck Zabula: Let's move on to slide 11.
Chuck Zabula: In the top left table, you can see the FFO to debt metric stands at 14.7% for the 12 months ended September 30th.
Chuck Zabula: which is a 10 basis point increase from the prior quarter. Our debt-to-cap decreased slightly from last quarter and was 62.1% at quarter end.
Chuck Zabula: We understand that in its next credit opinion in March, Moody's intend to change how it treats deferred fuel impacts.
Chuck Zabula: to align the consolidated view of AEP with how our subsidiary company metrics are calculated.
Chuck Zabula: Importantly, based on discussions with Moody's in our Annual Management Meeting last week, their view of AEP's credit is not changing.
Chuck Zabula: and we will continue to exceed our downgrade threshold of 13% in all forecasted periods.
Chuck Zabula: We are committed to a goal of being in the 14 to 15 percent FFO to debt range, and regardless, the impact of deferred fuel on our metrics will dissipate to a normal state over the next two years.
Chuck Zabula: Again, importantly, this does not change our cash inflows or Moody's view of our credit profile.
Chuck Zabula: In the lower left part of this slide, you can see our liquidity summary, which remains strong at $5.5 billion and is supported by $6 billion in credit facilities.
Chuck Zabula: Lastly, on the qualified pension front, our funding status remains stable at 99%.
Chuck Zabula: In summary, our third quarter and year-to-date financial results put us in a strong position to meet our goals this year.
Chuck Zabula: And we are tightening our 2024 guidance range to 558 to 568 per share.
Chuck Zabula: and also in the quarter I'll note that we completed the sale of AEP on-site partners with approximately 320 million of net proceeds received at the end of September.
Chuck Zabula: For 2025, we have set our operating earnings guidance range at $5.75 to $5.95 per share with a guidance midpoint of $5.85, roughly 4% growth from our 2024 midpoint guidance estimate.
Chuck Zabula: Our 2025 Earnings Guidance is based on a strong foundation of growth in our regulated businesses and lower contributions in the generation and marketing segment due to the reduced scope of activities as well as lower expected retail and wholesale margins in the segment.
Chuck Zabula: Going forward, we expect improved performance in our vertically integrated utility segment as we work to narrow the gap between our earned and authorized ROEs and invest where we have alignment with our regulators.
Chuck Zabula: We have also introduced a robust long-term growth rate of 6-8% from the 2025 guidance midpoint.
Chuck Zabula: This is supported.
Chuck Zabula: by a $54 billion capital plan, which is more than a 25% increase from our previous five-year plan.
Chuck Zabula: These investments, with 63% related to wires and 26% related to new generation, result in a five-year rate-based CAGR of nearly 8%.
Chuck Zabula: Future updates to capital are more likely to go up as we continue to see economic development activities in our territories due to our high voltage 765 transmission backbone.
Speaker Change: are attractive industrial footprint in Texas as well as the incremental transmission and generation infrastructure that Bill described earlier.
Chuck Zabula: Our five-year cash flow and financing plan forecast is shown in the appendix on slide 14.
Chuck Zabula: We have consolidated the forecast over the five-year period as impacts in individual years due to large loads, generation investments, and tax credits will have interperiod movement over time.
Chuck Zabula: Note, however, the plan is supported with equity.
Chuck Zabula: equity-like instruments, opportunities to explore portfolio optimization, as well as efficiently monetizing tax credits related to our investments in renewable generation and from our existing nuclear facility.
Chuck Zabula: In addition, we will decouple our dividend growth rate from our earnings growth rate, resulting in a lower dividend payout ratio over time in the range of 55 to 65 percent.
Chuck Zabula: This will allow us to retain additional cash flow to fund our increased capital plan and new growth objectives while maintaining a market competitive shareholder return.
Chuck Zabula: Access to the capital markets is critical, and we will finance sensibly to protect and maintain our balance sheet solidly in the investment grade category.
Chuck Zabula: We appreciate everyone's time today and your interest in AEP. We look forward to seeing many of you at the EEI conference next week.
Chuck Zabula: Operator, can you open the call so that we can address your questions? Thank you.
Speaker Change: 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.
Speaker Change: Your first question comes from Char Perenza with Guggenheim Partners. Please go ahead.
Char Perenza: Hey guys, good morning.
Chuck Zabula: Morning.
Chuck Zabula: Morning, Bill. So obviously big update this morning, cleared the decks and rebased as we're thinking about your new six to eight percent growth rate. Asset sales haven't helped, but anything you can point to that can be maybe incremental to your 25 guide, any tailwinds?
Chuck Zabula: that aren't in plan, like maybe on the cost side.
Chuck Zabula: And as we're thinking about maybe the longer range, you have material load growth driven by the data centers. Has the 20 gigawatts of customer commitment hit any of your numbers, or could some of those opportunities become further accretive as we saw with some of your peers during this earnings season?
Speaker Change: Yeah, thanks Char. With regards to additional opportunities, clearly this year we've done a number of things across the company. We had a voluntary separation plan that
Chuck Zabula: was put in place to help offset inflation as we're looking at.
Chuck Zabula: transforming the company. I did bring on an expert in transformation who's worked with me for many years who will help us
Chuck Zabula: continue to look for opportunities to take costs out of the business.
Chuck Zabula: look for more opportunities to reduce layers of management and expand span of control of the of the management team all in the the effort to remove bureaucracy out of the
Chuck Zabula: out of the company and reduce bloat. And so clearly there's there's opportunities for that. I've, I've just been here three months, so
Chuck Zabula: We've got a lot yet to do.
Chuck Zabula: around the company and so.
Chuck Zabula: We've looked at what we were able to do and made sure that we were confident in what we put into those numbers at this time, but clearly more to do. With regards to the 20 gigawatts
Chuck Zabula: that is essentially in the plan 12 gigawatts of that is in the first three years of the plan with the remainder towards the the end of the plan but we've got
Chuck Zabula: more opportunities out there. As I noted, 10 billion dollars of transmission potential generation development.
Chuck Zabula: Again, as I was...
Chuck Zabula: sorting through the numbers here with the $54 billion capital plan that we have, making sure that that was fully understood and that we could deliver it.
Chuck Zabula: but there's there's much more load growth to come for this company and I would say we're only really limited by our ability to execute on the opportunities that are in front of us. Chuck, anything to add?
Speaker Change: Good. Okay.
Speaker Change: Got it. And then just lastly on the funding source, so $5.35 billion in equity needs. You obviously kind of mentioned asset sales. Can you just give us a sense on the asset? Is it transmission as media has been reporting or the off-goes, an opportunity, and just maybe a sense of timing. When do you need the equity? Thanks.
Speaker Change: Yeah, with regards to potential asset sales and stuff, we won't comment on those until...
Speaker Change: something might happen, but
Chuck Zabula: we're clearly going to consider sort of all of the above to to get us to where we need. Chuck, you want to? Yeah, sure. I would just add to that, you know, in our plan
Chuck Zabula: We also will pursue equity like
Speaker Change: products out there, you know, instruments that give us equity credit.
Speaker Change: You'll note in my comments we are looking you know to decouple our dividend growth rate from our earnings growth rate as well.
Speaker Change: And as far as, you know, any asset monetization opportunities, as Bill said, you know, we're looking holistically at all alternatives.
Speaker Change: You know, as you look at the needs that we have and the timing of such, you know, we will need equity support in 2025 and how that comes, it could come in any of the forms that I just talked.
Speaker Change: Okay, that's perfect. Thanks guys. We'll see you in a couple days. Appreciate it. Yep. Thanks. Sure.
Speaker Change: Thank you very much.
Speaker Change: All right our next question comes from Steve Fleshman with Wolf Research. Please go ahead.
Steve Fleshman: Yeah, hi. Good morning. Thanks for the time. So, first, the...
Steve Fleshman: The new kind of outlook, what are you seeing in terms of earned returns?
Steve Fleshman: across the utilities over the period. Are you.
Steve Fleshman: You know, you've had the issue with the kind of earning below. Do you have that improving over the period by how much? Any sense on that?
Speaker Change: So, as we look at our regulatory opportunities,
Speaker Change: Right now, for the regulated utilities, we're looking at a 9.1% ROE in the plan. As I've gone around and met with the states,
Speaker Change: As I noted in my comments, our focus is changing to where...
Speaker Change: We will be working with them to understand what they want to be able to achieve, and we will work to deliver that with them.
Chuck Zabula: and through that then we would hope to continue to improve.
Chuck Zabula: The relationship that we have with the regulator and hopefully that then also then turns into more positive outcomes.
Chuck Zabula: with regards to ROE and the general relationship that we have. As part of that, we also have to significantly improve our customer service.
Chuck Zabula: I've noted that we have to put more investment into the distribution side of the business, vegetation management, reduce outage time.
Chuck Zabula: and all of that will then go to helping us with regards to our regulatory relations and customer service. So, we're very, very focused on that.
Chuck Zabula: made it around now to
Chuck Zabula: seven of our states in the three months I've been here to meet with the regulators and we're continuing to build those relationships and
Speaker Change: As I noted in West Virginia, we made the new filing very disappointed in the quality of our prior filing. We've made changes internally to correct that.
Speaker Change: We'll be very much focused on these returns and I know how much it adds to our business as we're able to get those closer to our alloweds.
Speaker Change: Thank you. One other question, just on the balance sheet. I appreciate the clear...
Speaker Change: commentary on the Moody's and the deferred fuel. I just want to maybe restate or to clarify what you said. So they are going to make the adjustment. It sounds like you might be temporarily below the 14 to 15 target.
Speaker Change: FFO but above the 13%.
Speaker Change: Downgrade threshold.
Speaker Change: and that overall, the general view of the credit is that it's stable.
Speaker Change: I think that's an accurate representation of what I said.
Speaker Change: Okay.
Speaker Change: Okay, thank you.
Speaker Change: All right, our next question comes from Jeremy Tenet with JP Morgan. Please go ahead.
Speaker Change: Hi, good morning. Good morning.
Jeremy Tenet: I just wanted to speak to the data centers in Ohio, I guess, a little bit more.
Jeremy Tenet: Given the challenge there, could you speak to settlement dynamics in your data center tariff proposal given, you know, all the stakeholder, I guess, you know, views on this?
Speaker Change: Sure, as we've looked at the data center opportunities in in Ohio, one of our fundamental principles around all of this is to ensure that our existing customer base is not negatively impacted by the significant increase in data center load that is being proposed for the state and as such
Jeremy Tenet: We filed a tariff in Ohio that would essentially put
Jeremy Tenet: more pressure on the data centers to
Speaker Change: stand up for the costs that they're creating on the system. And that filing has been going through the process. There's been
Speaker Change: settlements filed by the Data Center Coalition as well as ourselves with a number of other parties.
Speaker Change: including the staff on from the Commission and right now that's moving the hearing on December 3rd and we would expect to get an outcome from the Commission.
Speaker Change: shortly after that, but conversations are still going. We want that load in Ohio. We definitely want it to be on our system, and we want to see that growth, but we also want to make sure that
Speaker Change: Our existing customer base is not negatively impacted by this, and so we'll do what we need to to ensure that we protect that that customer base.
Speaker Change: And I think, honestly, I've worked with data centers for a long time. In my prior role at Berkshire in Iowa in particular, we had a significant customer base of data centers there and
Speaker Change: I've seen how the load comes on and what the commitments are and and so got a pretty good feeling for how this is going to potentially play out and we want to make sure that
Jeremy Tenet: We have everything in place to serve that load, but bottom line is only if we can protect the rest of the customer base.
Speaker Change: Got it. Understood. That's helpful there. Thanks. And I was just wondering if you could talk a little bit as well on the AP, on your JB proposal with First Energy and Dominion as it relates to the transmission project and I guess what you see as unique or beneficial to this offering versus others.
Speaker Change: So that was a great partnership led by our transmission team, Antonio Smith, and the rest of the team there.
Jeremy Tenet: to pull that coalition together and go in and bid on these projects. Obviously,
Jeremy Tenet: PJM is putting forth a significant amount of potential transmission investment and it was our view that we're stronger together as entities and that
Jeremy Tenet: we would have a very, very good chance of...
Jeremy Tenet: winning these projects and so
Jeremy Tenet: that JV came together really well and we're working well together and we're excited about hearing.
Jeremy Tenet: where we might end up later next year, but I have confidence in our team and the team from First Energy and Dominion that
Jeremy Tenet: We're going to come out of this with some really strong opportunities to grow our transmission business.
Speaker Change: Got it, thank you. One quick last one, if I could, just on GNM. It seems like 24 is going to notably outperform initial guidance there, and AP's on the midpoint. So just wondering if there's other segments of the business that are kind of underperforming expectations there. Do you expect them to kind of bounce back?
Speaker Change: next year and also the GNM step down next year given the lower scope of the business as you said. Is that to indicate that there could be sales more likely in this segment than others knowing that you're not going to identify specific asset sales in advance of a path?
Speaker Change: So the GNM segment we're reflecting about 24 cents and lower contributions over
Jeremy Tenet: 2024 and 2025, which is obviously a significant
Jeremy Tenet: significant change for us, but we are seeing good improvement across the rest of our of our lines of business. We're obviously also going to be going after the transmission projects that I noted in my my opening comments.
Jeremy Tenet: And then, as far as other potential asset sales, as again I said, I will consider all things, and if they make sense, we'll take a look at them, but we'll talk about those at the time.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Got it. Thank you for that.
Speaker Change: All right, our next question comes from David Arcaro with Morgan Stanley. Please go ahead.
David Arcaro: Well, hey, good morning. Thanks so much for taking my question. Yeah, good morning.
David Arcaro: Morning, just a bit of a follow-up on that. Could you just help me understand the 26 EPS outlook? Is there no G&M earnings contribution there just so I could make sure I understood that and maybe specifically what's...
Speaker Change: Yeah, thanks for the question, and perhaps the slide you're looking at may not make that clear. We're just showing the change in GNM from 24 to 25. There would still be a contribution from that segment in 26 and beyond.
Speaker Change: got it got it okay thanks for that yep that's more clear
Speaker Change: And then could you touch on how you're thinking about the incremental new generation in terms of the CapEx that has come into the plan? I would assume a lot of that is going to be gas. I'm wondering kind of where and when you'd be investing in that and kind of what the process is to firm that capital up.
Speaker Change: So we do have a lot of gas coming into the system. We've got a number of RFPs out on the street as I mentioned, particularly at I&M.
Speaker Change: and we'll see what kind of prices come in for those for those projects. The CapEx will be spread obviously as those projects come into play, but I'll also say that
Speaker Change: Ah
Speaker Change: as we continue to work with
Speaker Change: Some of our other states, particularly say West Virginia, there's a lot of opportunity yet to be sorted through in those states with regards to the economic development that
Jeremy Tenet: that they are pushing forward. And so, be happy to talk more about these things in detail at the EI meeting coming up, but really excited about the potential opportunities we have across a number of our states.
Speaker Change: Got it. Okay, great. Well, thank you so much.
Speaker Change: All right, our next question comes from Julian DeMolin-Smith with Jeffreys. Please go ahead.
Julian DeMolin-Smith: Hey, good morning, team, guys. Thank you very much. Appreciate it.
Speaker Change: Hey, good morning. How are you?
Julian DeMolin-Smith: Great. Top of the morning. Doing quite well. Thank you. A couple things real quickly.
Julian DeMolin-Smith: First off, on the GNN piece, I know you elaborated a little bit. What's reflected through the course of the plan? Is that more of a static expectation off the 25 baseline or further moderation there? Again, I know you clarified the 9-1 on the utility component, but just on the other piece there if you can.
Speaker Change: Yeah, Julian, I think that the business supports the level that we would see in 2025.
Julian DeMolin-Smith: Okay. All right. Through the plan. Excellent. Thank you for that. Appreciate all the details. And then related here, you know, 765 has really caught a lot of attention across all the RTOs.
Julian DeMolin-Smith: I just want to make sure I understand what's reflected in this new CAPEX baseline as far as 765 adoption goes across the various footprints. And again, I know you provided particularly detail on this coalition here in PGM, but to what extent can we see sort of comparable efforts emerge, say in ERCOT or what-have-you, as some of the 765 details become a little bit more formalized, if you will?
Speaker Change: So obviously we have a big opportunity in ERCOT around the 765 down there in the event that they decide to go that way we've
Julian DeMolin-Smith: put in our proposals for that significant opportunity in the Permian area, significant opportunity on the various backbone.
Julian DeMolin-Smith: growth areas for for Texas.
Julian DeMolin-Smith: That just alone is a good four or five billion dollars of opportunity potential there for us on the 765 front. We've also got
Julian DeMolin-Smith: good 765 opportunities in PJM and SPP as well. And so the fact that AEP is essentially the only US company that
Julian DeMolin-Smith: knows how to build and operate 765, gives us a strong competitive advantage in these situations and certainly something that I'm very excited about to
Julian DeMolin-Smith: to pursue. That's one of the really strong strategic things that frankly AEP has done over the years is build out this 765 KV backbone because it's paying huge dividends right now as all of this load growth is starting to come on and I think that's
Julian DeMolin-Smith: That's being seen by some of the other decision makers around who are looking for ways to
Julian DeMolin-Smith: their ability to move energy. And so with the 765 KV experience that we have, I'm very excited about the opportunity to engage with ERCOT, SVP, and PJM, and maybe a little bit in MISO.
Speaker Change: Yeah, it's pretty exciting. Actually, quick clarification on the utility ROE. You're moderating it to 9.1, seemingly from your earlier plan, despite the accelerating load. Is there something else disintermediating that relationship?
Speaker Change: I could imagine a few things, but I'm curious if there was anything purposeful there.
Speaker Change: Nothing really purposeful. I mean, we're trying to continue to
Speaker Change: increase the ROE and work diligently with the regulators. If you blend in the transmission component of this, we're at 9.3.
Speaker Change: Obviously, we want to continue to get up closer to our allowed, but frankly, we have to earn our way up. As I said, we've had some missteps in West Virginia that we've now corrected with the most recent filing.
Speaker Change: We've got some significant work to do on the customer service side to put us in a better position with our regulators So they're not getting
Speaker Change: complaints from customers and so is
Julian DeMolin-Smith: As this continues to move forward, we've got a tremendous amount of wood to chop in this area, but we're very focused on it.
Speaker Change: have taken our board through the details of reliability and where we sit and we've essentially created a new foundation and we're going to blast off from there to really accelerate our improvements in customer service.
Speaker Change: Excellent, guys. Talk soon.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Nick Campanella with Barclays. Please go ahead.
Nick Campanella: Hey, good morning. Thanks for taking my questions today. You bet. Good morning.
Nick Campanella: You know, I think you talked about working with regulators and
Nick Campanella: policy makers on whatever solutions can facilitate this higher load outlook. You talked a lot about gas, but in your prepared remarks you also talked about nuclear and, you know, Bill, I know you talked about your love for nuclear in the past and maybe you can kind of just expand on your thoughts of how nuclear kind of fits into the AEP strategy, if at all. Thanks.
Speaker Change: Well, first and foremost,
Speaker Change: A number of our customers are pursuing projects based on nuclear power plants.
Nick Campanella: Those are many, many years out as far as I can tell, but we need to continue to work with our customers, and if they want to pursue
Nick Campanella: a small modular reactor type of co-location approach, then we'll work with them and we'll continue to work with the developers of the various technologies that are out there.
Speaker Change: Thank you.
Speaker Change: This is going to require a very significant approach to risk mitigation. It will take
Julian DeMolin-Smith: a combination of the federal government, state government, input from
Julian DeMolin-Smith: the customer and ourself to...
Julian DeMolin-Smith: build some risk mitigation such that our existing customer base isn't carrying the
Julian DeMolin-Smith: the full exposure of something like this. And we'll, with our nuclear team that we have here, we'll continue to follow the various technologies that are being built in Canada with regards to the VWRX and the VWRX.
Julian DeMolin-Smith: The NuScale plant that's being built in Romania. We'll follow those as well as the GE Itachi project.
Julian DeMolin-Smith: at TVA and watch how these are progressing, but ultimately if our customers want this and our states want this
Julian DeMolin-Smith: then we'll have to figure out a way to deliver it. That's what we do. And so I'm...
Julian DeMolin-Smith: Fairly favorable that there'll be one or two designs that make it through the NRC process and
Julian DeMolin-Smith: will start to be built, but...
Julian DeMolin-Smith: We have to figure out the first-of-a-kind risk and make sure that we are not carrying that load and that there's a very broad base of people engaged in this that can help push this along.
Speaker Change: Hey, I really appreciate your thoughts there and.
Speaker Change: Just to tie things off on the on the six to eight percent growth rate, so
Speaker Change: You have 8% rate-based growth, you know, net of some financing drag. You could also be raising CapEx here too. I hear you on the $10 billion. Where do you kind of think you're trending in this new 6 to 8 range over the long term? Do you kind of grow linearly off this midpoint? Could you be kind of higher or lower in certain years? Just trying to understand that. Thank you.
Speaker Change: Yeah, thanks, Nick. You know, the 6 to 8 percent, right, is based off the 2025 new midpoint.
Speaker Change: And, you know, as you can imagine, as Bill described, the kind of components, you know, of our capital plan and, you know, the addition of load over time, I don't expect, you know, it to be completely linear like it may have been in the past.
Julian DeMolin-Smith: So, I do expect, you know, all years to be in that range, but I certainly don't expect a, if our guidance was linear, we would have just said 7%.
Julian DeMolin-Smith: Our guidance is 6 to 8 percent. I think that does mean over the long term we would average somewhere in between there, but I don't expect it necessarily to be linear.
Speaker Change: Very helpful though, still within the ranges. I appreciate the time today. Thanks so much.
Speaker Change: Our next question comes from Carly Davenport with Goldman Sachs. Please go ahead.
Carly Davenport: Hey, good morning. Thanks so much for taking the questions.
Carly Davenport: Maybe just to start a quick follow-up on transmission as we look at the new capital plan, obviously significant increases on that side relative to the prior plan. Just as you think about some of the opportunities in PJM that you ran through in, I think, Jeremy's question, are those all upside to the plan or is there any spend built in in the back end of this plan related to those opportunities?
Julian DeMolin-Smith: Yeah, this is all basically upside to the plan.
Julian DeMolin-Smith: The potential for $10 billion of additional transmission and new generation build-out is what we would be chasing with regards to not only just PJM, but ERCOD, MISO, and SPP as well.
Speaker Change: Got it. Great. That's helpful. And then just lastly, with the increase in the long-term earnings growth rate to that 6% to 8% range, could you just talk a little bit about how you're thinking about dividend growth relative to that range going forward?
Speaker Change: Yeah, so Carly, you know, we have followed a pattern of
Julian DeMolin-Smith: Pretty much matching dividend growth right with our earnings growth
Julian DeMolin-Smith: you know, with the increased capital needs.
Speaker Change: The cash, right, from decoupling, right, the dividend growth from the earnings growth will help fund that.
Speaker Change: And we would be targeting, you know, a payout ratio in the 55 to 65 percent range. Our old policy was 60 to 70. I think right now our payout ratio is in that 63, 64 percent range.
Speaker Change: So we will provide a market competitive total shareholder return opportunity for our shareholders, but that will be decoupled going forward.
Speaker Change: Got it. Great. Thank you so much for the color.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Andrew Wiesel with Scotia Bank. Please go ahead.
Andrew Wiesel: Hi, thank you. Good morning, everyone. If I could first follow up on that dividend question. Are you able to indicate how quickly you expect to go from the roughly 64% to roughly 60%? Or said differently, if earnings are growing at 6% to 8%, what would be a good expectation for dividend growth? Would it be 6% like we've seen or potentially something slower?
Speaker Change: Well, that's a discussion, Andrew, that is, you know, as you know, that the board, you know, approves the dividend and, you know, we will drift down in that range. It won't be anything significantly abrupt.
Andrew Wiesel: to expect there, but you could imagine, right, that we would just drift down in that range as we go through time.
Andrew Wiesel: Okay, so it sounds like something fairly gradual then, if that's maybe a fair way to put it.
Andrew Wiesel: Okay, then I'm
Andrew Wiesel: Great, thank you.
Speaker Change: Ben on equity, I just want to better understand, I see this slide shows 100 million per year of drip and I fully understand your commentary that asset sales or something like a hybrid might mitigate the need, but for modeling purposes, should we take that 5.35 billion and straight line it over 5 years?
Andrew Wiesel: Maybe you could give a little more guidance in terms of timing per year And if this would be an 8 p.m.. Or a block in the absence of one of those alternatives
Andrew Wiesel: Thank you
Andrew Wiesel: Yeah.
Speaker Change: So it's a good question.
Speaker Change: Obviously, you know, consolidating the five-year cash flow, you know, just indicates that there's a lot of options on the table. What I would tell you that, as I said earlier, we do need equity support in some form in 2025 and 2026 to, you know, continue to hit our credit metrics.
Speaker Change: So, you know, I think as you maybe looked at last year's
Speaker Change: You know kind of kind of shape and think of it in a similar similar way
Andrew Wiesel: It was a good way to perhaps look at it, because we do need support in 2025 in some form or fashion.
Andrew Wiesel: We, um...
Andrew Wiesel: are holistically looking at all of the options, including the equity-like securities, which wouldn't show up right in the true equity line on the cash flow.
Speaker Change: Okay, can that be a little more direct? What's embedded in the assumption for share count for 2025?
Speaker Change: I don't have that specifically. We could talk about that at EI.
Speaker Change: Okay, sounds good. Thank you. We can follow up with Darcy later.
Speaker Change: Very good.
Speaker Change: Thank you for watching!
Speaker Change: Thank you for joining us. We'll see you next time.
Speaker Change: Our next question comes from Bill Apicelli with UBS. Please go ahead.
Bill Apicelli: Hi, good morning. Just a question about the, you talked about some of the funding over the years and with the efficient monetization of tax credits. Can you speak to the magnitude of the tax credits? Are these going to be contributing to earnings or is this utilization of transferability to provide funding?
Speaker Change: Yeah, it's just transferability to provide funding. It's neutral to earnings largely. And over the 25 to 27 period, it's roughly $300 million a year.
Bill Apicelli: In the latter two years, there's some ITC opportunities with some solar projects, so you'd be some bigger numbers, but in the next three years, about an average of 300 per year.
Speaker Change: Okay, thank you. And then on.
Speaker Change: The sales outlook
Speaker Change: On residential, so that had been, you know, trailing a little bit behind expectations. You are assuming some improvement, you know, back to relatively flat or slightly positive next year. Maybe, can you speak to what's driving that?
Speaker Change: Yeah, I mean, it's a trend I think that we and others are seeing, you know, in the industry as well.
Speaker Change: You know, as people have returned to work, as inflation has crept in and, you know, the share of the wallet, you know, becomes, you know, more critical, I think you're just seeing, you know, reduced usage.
Bill Apicelli: We are seeing increased customer counts in places like Texas and Oklahoma and Ohio and other areas, but it's not offsetting the existing customer decline in usage.
Bill Apicelli: We do think that that level is off at some point in time. I think there's also probably some continued energy efficiency things creeping in there.
Bill Apicelli: But nonetheless, as you see in our forecast.
Bill Apicelli: You know, after some years of decline, we're now assuming it flat going forward, pretty much.
Speaker Change: Okay. All right. And then just lastly, maybe just you can speak to
Speaker Change: The co-location issues that FERC has recently addressed, you guys did intervene in the case. Maybe can you just highlight what you think your next steps are coming out of FERC or some of the policy issues more broadly?
Speaker Change: Yep, sure. So this is a very simple issue in our mind. If you use the transmission system, you should pay for it.
Bill Apicelli: It's really that simple and our view of
Bill Apicelli: of co-location is that we don't have an issue with co-location. We don't have an issue with data centers looking to
Bill Apicelli: use nuclear power plants as an energy source, but what we do have an issue with is
Bill Apicelli: when they use the transmission system and try not to pay for it, that's a problem for us because that cost gets shifted to other customers. And so, as this process continues to go through the FERC decision-making,
Bill Apicelli: process will continue to reiterate our concerns around cost allocation and at the end of the day for us it's it's just a simple principle if you use the transmission system pay for it and and that's really where we're at.
Speaker Change: Thank you.
Speaker Change: Okay, great. See you next week. Thank you. Thank you.
Speaker Change: Our next question comes from Anthony Crowdell with Mizzou. Please go ahead.
Anthony Crowdell: Hey, good morning. Hey, Nick did, uh, I'm sorry, hey, Chuck, did Nick have you write that Beatles reference?
Anthony Crowdell: Thank you.
Chuck Zabula: I think he may have.
Speaker Change: I think you may have.
Speaker Change: Yeah, so trailing 12 months, as you can see in the deck, we're at 9.0% for the entire regulated complex.
Speaker Change: So I think as you think about going into next year, you should think about that, the regulated utilities in the range of 9.1 and the transco right in that 10.5% range, which then averages things to 9.3.
Speaker Change: Great, and then you talk about the low growth, the data centers, you know, great tailwinds. I'm just curious, it was maybe something investors were asking about maybe six months ago, but even with all this demand, is it taking longer to connect these large customers to the system or it's at a very manageable pace?
Speaker Change: for the company. I'm just thinking that with all this load coming on, you know, whether it's supply chain or just labor connecting all these large customers, but it doesn't appear to be an issue.
Speaker Change: Well, it's certainly a challenge for us to get everyone connected at the speed that they would like to be connected, which is tomorrow for the most part.
Speaker Change: And we're working with data centers to try to find creative ways to
Speaker Change: allow them to continue to build out and and get the power that they need.
Speaker Change: But this is going to be a long-term build-out for us, and we'll try to connect as many data centers as we can onto the system. We'll try to come up with other creative options.
Speaker Change: for those data centers while we get transmission built, but it's going to be an evolution of working with
Speaker Change: the customer working with particularly PJM and then
Speaker Change: our ability to get the construction done. I don't foresee significant supply chain issues at this time. The construction is fairly well spread out, and I think we can manage the supply chain side of this, but we certainly...
Speaker Change: have a very high demand coming on from the data center crowd and we'll work hard to try to accomplish what they want as quickly as we can.
Speaker Change: Thanks for taking my questions. See you in EEI.
Speaker Change: Thank you.
Speaker Change: Thank you for tuning in.
Speaker Change: All right, and our final question from today with Ryan Levine with Citi, please go ahead.
Ryan Levine: Thanks for taking my questions. I guess a couple. One, in terms of your confidence level and your load forecast, you know, how confident are you and when do you think that could evolve?
Speaker Change: Well, as we stated earlier, we've got essentially signed contracts for all of this load, so we feel very confident about the load coming on. Certainly, we're in discussions with a number of other economic development opportunities across a number of our states.
Speaker Change: Those clearly are not in our plan, nor do we know if they'll come to fruition. But for what we're showing you, we have signed agreements and our confidence level is quite high.
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Speaker Change: And then in terms of the recent election, with federal tax rates potentially to change in coming years...
Speaker Change: How exposed is your free cash flow and credit outlook?
Speaker Change: to changes in federal policy.
Speaker Change: and it's on a similar vein. The generation build out and ownership expected in your plan is for an exposure to tariffs that you're thinking through.
Speaker Change: Yeah, I mean it's a question we're going to have to evaluate here as we as we go through time and see what the platform right for the new administration is going to be. So give us some time to to absorb that.
Speaker Change: Okay, thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: 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. Danica, would you please give the replay information?
Speaker Change: Thank you for watching!