American Electric Power Company, Inc.

Ladies and gentlemen, thank you very much for standing by, and welcome to the American Electric Power first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given to you at that time. If you should require assistance during today's call, please press star, then zero, and an operator will assist you offline. I would now like to turn the conference over to your first speaker, Ms. Darcy Reese. Please go ahead.

Thank you, Perky. Good morning, everyone, and welcome to the first quarter 2020 earnings call for American Electric Power. Thank you for taking the time today to join us. 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 the future results to differ materially from these statements. Please refer to our SEC filings for discussion of these factors. Our presentation also includes references to non-GAAP financial information. Please refer to the reconciliation of the applicable GAAP measures provided in the appendix of today's presentation. Joining me this morning for opening remarks are Nick Akins, our Chairman, President, and Chief Executive Officer, and Brian Tierney, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Okay, thank you, Darcy. Welcome, and thank you all for joining AEP's first quarter 2020 earnings call. I want to take a moment to extend our sympathies to all those who have been personally impacted by the COVID-19 pandemic. At AEP, we understand that we are all in this together. The AEP Foundation has contributed to charities across our footprint to ensure that we are part of the solution for the customers and communities. In addition to providing our employees with the personal protective equipment they need to do their jobs, we have donated masks, gloves, and other essential items needed by hospitals across our service territory. To further assist those in need within our communities, our customer service representatives have provided assistance in fielding questions on how to secure small business loans. Throughout these challenging times, I continue to be extremely proud of our employees. We have done an outstanding job demonstrating their capacity for being adaptable and and exercising the agility needed to meet the challenges of a rapidly changing situation. As we continue to adapt to the ongoing challenges imposed by COVID-19, we remain committed to keeping our employees safe and keeping America powered through this unprecedented time. Certainly as we head into March during the first quarter, the story for the quarter would have been one in which we have all heard before, mild weather impacted the first quarter, but as we've also heard before, a quarter does not a year make and there is plenty of time to recover from a mild winter. We adjust to these types of issues all the time. But I'm sure you are more interested in the last half of March and what April tells us about the future. I'll get into all that in a minute, but first let's just do the headlines, the financial headlines for the quarter. For the first quarter, we came in with operating earnings of $1.02 per share. We are reaffirming our 2020 operating earnings guidance range of $425 to $445 per share and our 5% to 7% long-term growth rate. AP is doing this because regardless of whether we forecast a V-shaped, U-shaped, or W-shaped COVID-19 recovery, We see our service territory as an arbitrage between residential load and commercial industrial load that is defined really by a pendulum between the financial characteristics of working from home versus the restart of commercial and industrial businesses. With all of this considered along with capital, O&M, credit metrics, and updated load forecast and actions we have taken, we expect to be in the lower half of our guidance range. We are shifting $500 million of capital spending annually substantially contracted renewable business and corporate-related capital for the time being to maintain our commitments to solid credit ratings. We are reaffirming our $33 billion of capital over the five-year period, however. We believe this to be the smart play given our ability to adjust capital quickly to respond to market conditions. We give all of this guidance insight given in an exhaustive review, county by county, of our service territory from a load perspective through April, weather impacts thus far in the year, and expense control measures already put in place to respond to present conditions. We will continue to refine these assumptions as data becomes available. Certainly weather, customer load mix, pace of economic recovery, and continued O&M-related actions will dictate further positive progress within the guidance range. Brian will get into more detail about these assumptions, but I want to reaffirm for you that our balance sheet is strong, credit metrics are good, and liquidity is secure as we move forward. Okay, so let's move on to the specifics related to COVID-19 and its implications to our operations and our financials as we see the year progressing. As many have heard, there is a famous boxing quote from Iron Mike Thompson that is truly appropriate here. Everyone has a plan until they get punched in the mouth. Well, that's what we have faced in the end of this quarter and we'll face probably for the rest of the year. But I'm here to tell you, yes, we've been challenged a little bit, but we are very much still in the match because of our quick responses and agility to be in the position to reaffirm our existing guidance range. I'll start by discussing our employees' commitments to our customers, communities, and our shareholders as we move through the crisis that are referred to at the beginning of my presentation. First, I want to recognize all the health care and first responders who have put themselves in the line of fire to help us all to be more safe and healthy. As a critical infrastructure service company, the frontline employees of our utility have also taken on risk by ensuring we are out in the field responding to substantial storm activity to ensure the resiliency and reliability of electric service so that our hospitals, critical businesses, and customers who are under stay-at-home provisions can continue to benefit, at least for some degree of comfort in these challenging times. We have instituted protection measures for these employees that reflect CDC guidance regarding physical distancing, including smaller work teams, proper hygiene, and appropriate PPE, and testing to minimize risk of contact with the virus. Approximately 12,000, over 70% of AP's employees, have been working from home for several weeks now and will continue to work from home even after stay-at-home provisions are lifted to ensure further precautions and are taken both at home and at the office for employees who must return for various reasons. We have instituted specific COVID-19 adjustments to our health plans and benefits for employees, and as a critical infrastructure business, have continued to pay our employees as they work from home. For most field-level employees, we have also awarded additional days off with pay to enable more time with their families during this time. We have over 82% of our call center employees working from home, and as they not only answer questions customer questions, they are also helping our small businesses get back on their feet by helping them navigate through the SBA loan provisions of the CARE Act. Regarding our customers, we recognize the hardships that this pandemic has brought on and have temporarily suspended all service disconnects for non-payment, and our team of call center professionals have been working diligently to administer more flexible payment arrangements for our commercial and residential customers. Some states have mandated this, but we do so voluntarily, and our state commissions have fully supported these actions through the establishment of deferred accounting and other measures, which I want to take the time to thank them for addressing these issues. Regarding our communities, the AP Foundation has donated over $3 million to support basic human needs to help address hardships from food security, housing, clothing, and other issues during this time. We have donated over 9,000 N95 masks, 110,000 gloves and disposable surgical masks, and 1,200 face shields from our warehouse stocks and 3D printing facilities within our innovation labs. In my 37 years of being in this business, I have never seen the level of coordination and concern by multiple agencies to do the right thing for our customers, our employees, our businesses, and communities. While much focus on this call is on the financials, It is important to remember the part we play in the broader social fabric as a critical infrastructure business, and our effectiveness is defined by the level of cooperation and support from all the agencies that we deal with, our state commissions and governor's offices, federal and state legislators, FERC, NERC, DOE, DHS, NRC, and others, and they all have answered the call, and we at AAP thank them. There is much work yet to do, but I believe all have embraced the capital S for social from an ESG investor perspective. From the operational side, we have had no disruptions to plant or grid operations, while storm activity has been exceptional given the significant storm activity in several of our operating company territories and considering the additional COVID-19 related safety precautions. There has not been a delay in the North Central Wind Facilities construction, and the regulatory cases regarding this project have continued on schedule. As well, future rate cases are on track to be filed, including in Ohio and Kentucky. On the regulatory front, it has been a busy quarter. In fact, we have already received approvals for 96% of the budgeted regulatory recovery for 2020. In March, the Indiana Utility Regulatory Commission authorized a $77 million revenue increase based on a 9.7% ROE. The Commission approved INM's proposed distribution system investments and full tracking of FERC transmission costs. The company had also sought an adjustment to reflect the reallocation of capacity costs associated with termination of certain wholesale contracts, which was denied by the Commission. We have filed for rehearing on this matter. In January, the Michigan Commission approved the settlement of the base rate case, resulting in an increase of $36 million based on a 9.86% ROE. In April, the PUCT, Public Utility Commission of Texas, issued a final order approving the settlement agreement in the AP Texas base rate case, allowing for a 9.4% ROE with a 42.5% equity layer on the company's $5 billion asset base. Also in April, we filed a DCRF, Distribution Cost Recovery Factor, to add approximately $440 million in assets to rate base for distribution investments we made to benefit our customers in AP, Texas. A T-cost filing and transmission cost filing was also made to recover $800 million in transmission investments made over a similar time frame. The company also filed a required base rate case in Virginia as part of the state's annual review. In that filing, the company asked for a 9.9% ROE on a 50-50 cap structure on a $2.5 billion base, resulting in an increase of $64.9 million. Rates would be effective at the end of January 2021. There is no question that these are unprecedented times. I think it goes without saying that we will need to ensure that utilities and commissions work together to to devise creative solutions to the challenges we all face. Tony Clark, former commissioner at the Federal Energy Regulatory Commission, prepared and submitted a white paper to NARUC recognizing the unique challenges the energy industry is facing and the need for regulators to be creative to new solutions. In that article, he called for policymakers at both the federal and state level to be proactive in both the short and long term by targeting measures that support both customers and utilities. Collectively with our legislators and our commissions, we need to work together to recognize the importance of protecting customers and ensuring utilities are able to invest in their systems and maintain the level of service that our communities depend upon, whether through deferrals, preferably riders or forward-looking test years, because cash is key, again, for utilities to be able to adequately invest in critical infrastructure. Two examples within our service territory at the commissions where they've taken a proactive view have been in Texas and Ohio. We believe both are steps in the right direction. In Texas, the commission approved the COVID-19 electricity relief program for residential consumers who are having difficulty paying their bills. A rider has been put in place to fund the ERP that enables AEP Texas to access cash to begin the program costs. In Ohio, commission staff recommended approval of the regulatory asset deferral for future recovery and recovery of the demand ratchet program costs through the existing economic development rider. This will help lessen the impact to industrials who are key employers within the state and protect utilities. We believe both are examples of progressive moves by states to help mitigate the risk associated with COVID-19 to both customers and provide certainty for utilities. Moving on to the North Central project, we continue to make progress on this landmark project to provide significant benefits for our 1.1 million customers in our PSO and SWEPCO states. We received approval of the unanimous settlement in Oklahoma, as well as FERC approval in the first quarter. We expected May to be an important month for the project for the remaining jurisdictions, and I'm pleased to report that yesterday the Arkansas Public Service Commission approved the 155 megawatts, or approximately 10% of the total project, along with the flex-up option. As you recall, the flex-up option allows Arkansas to increase the megawatt allocation should another SWEPCO state reject the application. The commission in that order determined that SWEPCO should use its formula rider to recover its costs. In early March, we filed the unanimous settlement in Louisiana for 268 megawatts, or approximately 18% of the total project, which also included the flex-up option. We expect a decision by the Louisiana Public Service Commission in the May or June timeframe. Lastly, after concluding our hearings in February, we expect a proposal for commission decision from the Texas ALJs in late May. With approvals in Oklahoma, Arkansas, and FERC under our belt, the project has what it needs to go forward at 846 megawatts of the 1,485-megawatt project. Of course, the project can move forward with even more savings for customers and the full $2 billion investment opportunity if either the LPSC approves with the flex-up option or the LPSC and the Public Utility Commission of Texas approves their portion of the full project. Okay, so now I'll talk to the equalizer chart. We can go to that. And for AP Ohio, most of these are weather-related, but for AP Ohio, we've had the roll-off of some of the legacy fuel and capacity-carrying charges. They rolled off, so we expect the trend for the ROE to be at the authorized levels of around 10%, and presently it's at 9.9% for quarter 2020. And APCO... The ROE for APCO at the end of first quarter is 8.7%, and that's driven by lower normalized usage and higher depreciation from increased capital investments and, of course, unfavorable weather. Virginia's first triangle review was filed in March 2020, as I mentioned earlier, and it covers the 2017 to 2019 periods. and an ROE of 9.42% would be used for the tri-annual review with a 70 basis point bandwidth of 8.72% to 10.12% ROE. Kentucky Power, the ROE for Kentucky Power at the end of the first quarter was 6.7%, and that's primarily driven by a loss of load from weak economic conditions, loss of major customers, along with higher expenses and unfavorable weather. We also have been in a stay-out provision associated with rate filings, but that goes away here soon, and we expect to be filing in Kentucky in the July timeframe. I&M, the ROE at I&M is at 10.5%, and we've been implementing new rates for Indiana, which will take place in the second quarter, but we fully expect... to be at the authorized areas of around 9.7% to 9.86%. And then for PSO, PSO is at 9.2%, primarily driven by unfavorable weather. SWEPCO at the end of first quarter was 6.2%, and that was because of a loss of load, unfavorable weather, and continued impact of the Arkansas share of the Turk plant, which accounts for about 112 basis points. The Arkansas base case settlement went in place in December 2019 and is effective January 2020. It approved a $24 million revenue increase there. In AAP Texas, it's at 8%, and that's due to a lag associated with the timing of annual filings and one-time adjustments from our recently finalized base rate case. Favorable regulatory treatment has historically allowed us to file annual DCRF and biannual TCOS filings to recover our costs, and I mentioned those earlier. So there's a lag associated with those, but we should see a pickup there and drive more toward a 9.4% ROE in the long term. And then the transmission holdco, at the end of the first quarter, was 11.5%, and it was driven by higher revenues due to differences between actual and forecasted revenues. So we fully expect the transmission ROE to be in the mid-10% range in 2020. So with that, when there is a pandemic like the one we were experiencing today that has not occurred in 100 years and this nation's economy has been effectively shut down for months, There is no question that everyone is challenged, and AAP is no exception. But we are up to the challenge to recognize not only the role that this company has in the resiliency and restart of our economy, as well as the provision of electric service no matter where our customers are working or living, but also the importance of the consistency and quality of earnings and dividends to our shareholders that makes our work possible. We will strike that balance, respond to challenges, and I'll stick with a boxing analogy with the Sylvester Stallone movie, Rocky, where the music is playing the theme from Rocky and he's running up the steps that represents the adversity of reaching a goal. I believe at the end of the year we all will. The AP, the communities we serve, our customers, and our shareholders will be at the summit raising our arms in victory. Brian? Thank you, Nick, and good morning, everyone.