American Electric Power Company, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power Second Quarter 2020 Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. If you need assistance during the call, you may press star and then zero, and an operator will assist you offline. And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Darcy Reeves.

Please go ahead. Thank you, Cynthia. Good morning, everyone, and welcome to the second quarter 2020 earnings call for American Electric Power. We appreciate you taking the time to join us today. 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 are Nick Akins, our Chairman, President, and Chief Executive Officer, and Brian Tierney, our Chief Financial Officer. We will take your questions following the remarks. I will now turn the call over to Nick.

Okay. Thanks, Darcy. You're welcome, everyone, to American Electric Power's second quarter 2020 earnings call. While we continue to see the effects of COVID-19 pandemic, AP has responded with not only ensuring the safety of our employees and redefining the business processes to accommodate the changed environment and reducing our costs in response to lower revenues, but we also responding to hurricane and storm activity to ensure the safe and reliable service to our customers. Our team at AEP Texas, with support from internal and external resources, performed well through Hurricane Hannah to restore power to over 200,000 customers during that recent weather event, and we're now supporting recovery efforts in the Northeast as well. While COVID cases have escalated in some areas, we continue to engage our employees on safe practices to prevent the virus spread both at work and outside of work to set an example in our communities. On the financial front, our operating earnings performance has been strong in the face of these challenges. AAP's operating earnings came in for the quarter at $1.08 per share, bringing our year-to-date operating earnings to $2.10 per share versus $1 a share for second quarter 2019 and $2.19 per share year-to-date 2019. We are reaffirming our originally stated guidance range of $4.25 to $4.45 per share and our 5% to 7% long-term growth rate. AAP is also adjusting our capital upward during the five-year capital forecast period from $33 billion to $35 billion to accommodate the North Central Wind Project addition. Also, as we stated in the last quarter earnings call, we have continued to evaluate the short-term deferral of $500 million in our 2020 capital program that we talked about last quarter, and we are placing $100 million back into the 2020 plan at this point. So all in all, a constructive quarter given the headwinds of the economy due to COVID. In fact, we continue to make progress toward our target of achieving at least the midpoint of the guidance range. As far as load is concerned, we continue to see the arbitrage between residential load and negative industrial and commercial load during the quarter. As we continue to look for leading indicators as to the health of the state economies, we have been pleased to see the new customer connections remain stable in some jurisdictions increasing from 2019 levels. Looking forward, we expect to see a continued shift to a certain degree from residential load back to commercial and industrial, albeit these shifts will be dependent upon the nature of the pandemic recovery. During the COVID-19 crisis, we continue to take all appropriate measures to ensure the safety of our employees both in the field and for those who can work from home. Temperature testing, masking requirements, social distancing, and hygiene have become the normal course of business in this environment. While our offices are open to employee meetings and certain other activities, we are still asking our employees who can work from home to remain home, most likely through the end of the year. This has not slowed the progress, however, toward redefining our business processes going forward. Our Achieving Excellence program is now back in full swing with the added dimension of work-from-home learnings that will enable us to find even more efficiencies than previously considered. We also, late last year, completed an initial analysis of what a 21st century technology framework would look like. And with the addition of Therese Risch, former JCPenney EVP chief information officer to our team, she has, by the way, hit the ground running, I'm confident the nexus of her efforts around IT and other technologies married with achieving excellence, COVID learnings, and other strategic initiatives will enable us to further define operating efficiencies that will benefit our customers and shareholders. We are on track for the $100 million of cost reductions for this year as we adjust to expectations regarding revenues due to COVID-19 and the first quarter weather deficiencies that we had. And after reviewing our July weather, we have partially made up for the weather issue that we talked about during the first quarter, so we are making progress within the guidance range expectations, and we are now targeting the midpoint of our guidance. As we move closer to 2021 and the addition of north central wind, we will still be disappointed not to be in the upper half of our 5% to 7% long-term growth rate. I would like to spend a little time talking about steps we are taking to internally consider the effects of the recent and ongoing discussions about race in America. AAP is not only engaged externally with various local and national organizations, but we are also open to very frank and open dialogue internally. We call it our seize the moment action plan. This plan includes engagement with our leaders and employees in the organization through internal discussions, external speakers, webcasts, including myself, to be posted internally, and process changes that will continue to make AAP a strong, committed company that enables all of our employees to contribute in an open and transparent fashion. We have a great culture at this company, but we can always do better by understanding the impacts of stereotypes, different perspectives based upon life experiences, the burden placed on employees of color in our organization, and what systemic racism versus individual racism actually means. I believe the dialogue will enable a much deeper discussion that will benefit our diversity and inclusion efforts, as well as enable AAP to be a better partner to our communities as we effectuate lasting change. We can't talk about these cultural attributes without also realizing what our brand projects externally. And that brings me to the second issue that we at AP certainly believe affects our brand. That would be the issues surrounding Ohio House Bill 6 legislation. Let me start by saying that we are not aware of any information suggesting that AP's participation in the process was anything other than lawful and ethical. We have a robust code of ethics and regularly communicate our expectations to our employees that they conduct all business, including advocacy on public policy issues, with integrity, honesty, and in compliance with the law. We consistently advocate for policy positions that benefit our customers, communities, and shareholders, and our advocacy of HB 6 was no different. We ultimately supported the legislation because we believe it maintained important fuel diversity for Ohio, including support for investments in renewables, nuclear generation, and two coal plants operated by OVEG. We were surprised and disappointed to learn of what federal investigators allege was a scheme by the Speaker of the Ohio House and others to enrich themselves, and we, along with you, have been trying to educate ourselves about the criminal complaint and the underlying conduct in it. There has been a lot of speculation in media reports about the identity of various unnamed companies described in the affidavit in support of the complaint. Based on the facts that we know, we do not believe that AAP is any of the companies specifically described in the affidavit. We have not been contacted by any authorities conducting the investigation. If at any point we are, we will cooperate fully. I would also like to discuss 501 organizations more generally. AAP has contributed to a variety of 501 social welfare organizations to promote economic development and educational programs across our service territories. One such organization is Empowering Ohio's Economy, which was organized to promote economic and business development in Ohio. Starting in 2015, AEP contributed a total of $8.7 million to Empowering Ohio's Economy. For a view of publicly available tax forms followed by Empowering Ohio's Economy shows that it made a number of grants over time to a wide variety of charitable organizations under 501c3 and social welfare organizations under 501c4. Our contributions to empowering Ohio's economy to support its mission were appropriate and lawful. Given the ongoing legal proceedings surrounding HB 6 that we are still learning about and that we are unaware of any allegations of wrongdoing involving AAP, I'm going to let those proceedings play out rather than commenting further on this subject. We also understand the concerns that some have expressed regarding the lack of transparency surrounding 501 organizations, which are not required to disclose their donors and amounts donated to them. With that in mind, we will commit to include additional disclosures in our corporate accountability report with respect to contributions that we made to 501 organizations in 2020 and going forward. We also are reviewing best practices and working to improve our policies and processes around political contributions and contributions to 501 entities. Regarding any repeal and replacement of HB 6, we are fully prepared, as we have done previously, to engage in whatever dialogue needs to occur to chart a path in Ohio toward a balanced energy portfolio that moves toward a clean energy future for Ohio. AEP has been very clear since the beginning of the nuclear debate that we were concerned about forging a path toward the adoption of renewables such as solar and wind, along with other technologies such as storage to mobile technologies, to big data analytics to enable a smarter and more efficient grid. HB 6 has some of that, but we were also following HB 247 to move Ohio forward from a clean energy technology perspective. If HB 6 is repealed in a way that appropriately reverses its effects, the financial impact is minimal to AEP. We already had several years of recovery for the OVEC units. HB 6 elongated that. We will continue to recover our energy efficiency contracts entered into before the legislation. AAP Ohio is already decoupled in many respects, and we will continue to pursue bilateral solar and wind projects with customers. As we have said since day one, if our customers are expected to help foot the bill for nuclear, they should also have the opportunity to take full benefit of renewables and movement to a clean energy economy and be able to access technologies that will help them to lower their electric bills. Unrelated to HB 6, but an item that should not be lost in the Ohio legislature, is continued interest in promoting greater broadband access, particularly in rural Ohio. This is an area that we are well positioned to help stimulate by providing middle-mile services to ISPs to advance the service for those communities. We are optimistic that the broadband legislation that passed the House with broad support continues forward. As the pandemic has shown, the digital divide is real and getting more pronounced and the need for broadband access for our customers, particularly rural customers, is desperately needed and we can leverage into our communication system to make broadband access a reality. We have already begun pilots in Virginia and West Virginia, and certainly with our need for large amounts of data from the grid for monitoring and analysis purposes, tangentially providing mid-mile broadband accessibility is clearly a benefit to our communities. On the regulatory front, our base rate case in Ohio was filed earlier this year, where we're seeking a net revenue increase of $41 million, a 10.15% ROE, and continuation of our DER and enhanced service reliability rider. We expect a procedural schedule to be set next month. In Kentucky, we filed our base rate case in July, which should conclude by year-end. We have sought $65 million with a 10% ROE as well as AMI deployment within the state. We sought to be creative in our use of ADFIT funds to help lessen the rate impacts to customers in the state. I am pleased to report that the Texas Commission approved the AEP Texas DCRF settlement agreement, increasing revenue requirement by approximately $39 million, which reflects the $440 million of distribution investment placed in service in 2019. Throughout our territory, new customer interconnects continue to be strong in much of our service territory, in several areas exceeding what we have seen in recent years. While the virus continues to challenge this nation, this provides hope that American commitment and ingenuity will continue to help fuel our recovery. Lastly, we are extremely pleased to have now received all necessary regulatory approvals to move the full North Central Wind investment forward for the benefit of our customers. Although the disappointing PUCT denial of our application results in the project benefits not extending to our Texas customers, we received approvals from the Arkansas Public Service Commission and the Louisiana Public Service Commission in May for their portion and the flex-up option. Approval of the flex-up option was designed to enable the full value of the project to go forward, even if a state elected not to take advantage of the opportunity. We are pleased that the Arkansas Public Service Commission and the Louisiana Public Service Commission, along with the Oklahoma Corporation Commission, have recognized the value of these projects, and we look forward to delivering this value to Arkansas, Louisiana, and Oklahoma customers. With regards to the project schedule due to the COVID-19 pandemic, we expect a minimal delay in the completion of the 199 megawatt Sundance project and expect the project to be delivered in the first quarter of 2021 instead of December 2020. The other two projects are currently expected to be delivered by the developer by the end of 2021. We are pleased to report in May the IRS provided an extra year to the four-year continuity safe harbor related to production tax credit eligibility, so we have an additional year of flexibility should there be any delays to deliver these projects and achieve full value for our customers. Now looking at the equalizer graph on page 5 of the presentation, our overall regulated operations ROE is currently 9.1%. We'd like to target a range overall of 9.5% to 10%, so I'll go into some of the things around weather and other things that have come into play. AP Ohio, the ROE for AP Ohio at the end of the second quarter was 11.1%. Their ROE was above authorized due to favorable regulatory items and a transmission true-up partially offset by the roll-off of legacy fuel and capacity-carrying charge recoveries. We expect the year-end ROE to trend around authorized levels of 10% as we maintain concurrent capital recovery of distribution and transmission investment. In June 2020, as I said earlier, we filed a rate case in Ohio. As far as APCO is concerned, the end of the second quarter was 9.3% ROE. That ROE was below authorized due to lower normalized usage and higher depreciation from increased capital investments. Virginia's first tri-annual review was filed in March 2020 and covers the 17 to 19 periods, and that case is currently ongoing. At Kentucky Power, the ROE is down to 5.7%. It was below authorized due to loss of load from weak economic conditions and loss of major customers along with higher expenses. Transmission revenues were also lowered due to the delay of some capital projects. In June 2020, Kentucky Power filed a new base rate case seeking a $65 million revenue increase and an ROE of 10%. I&M came in at 10.6% for the quarter. The ROE was above authorized due to continued management of O&M expenses, reduced interest expense, and rate true-ups, partially offset by lower normalized usage. I&M's ROE is projected to trend towards 10% at year-end, consistent with authorized ROEs. PSO came in at 9.4% for the quarter. Their ROE is right in line with the authorized level due to management of O&M expenses offset by lower normalization usage. PSO's 2019 base case approved a transmission tracker, a partial distribution tracker, and an ROE of 9.4%, so everything's going well there. SWEPCO came in at 8.3%, and again, it's below authorized due to loss of load and the continued impact of the Arkansas share of the Turk plant, which accounts for about 110 basis points. SWEPCO received an order in its Arkansas-based settlement in December 2019 that's effective in January 2020, approving a $24 million increase in an ROE of 9.45%. AP Texas came in the quarter at 7.4%. Their RE was below authorized due to lag associated with the timing. We discussed this earlier last quarter of the annual cost recovery filings and one-time adjustments from our recently finalized base rate case. Favorable regulatory treatment allows AAP Texas to file annual DCRF and biannual TCOS filings to recover costs on significant capital investments. So while earnings should improve in 2020 with the base rate case finalized and annual filings now resumed, continued levels of investment in Texas will continue to impact the ROE as well. AAP transmission came in at 9.8%. It was below authorized primarily driven by the annual revenue true-up in the second quarter of 2020 and returned the over-collection of 2019 revenues. Transmission is forecasting an ROE in the range of 9.9% to 10.3% for 2020. So that should continue on as the year goes forward. As I've mentioned in the past, our organization has undertaken a comprehensive view of our O&M and capital spending efficiency under a program that we coined Achieving Excellence. I'm excited about this opportunity for our employees because it goes to the heart of how we do work, removing past barriers that may have existed and looking at our processes through a different lens. We are now moving into the implementation phase of this initiative with opportunities for increased O&M savings and increased efficiencies in our capital spending being implemented over the next three years and beyond. This work will serve as the platform and help to integrate other initiatives around organizational design, digitization, end-to-end process efficiency, and work-from-home initiatives. The program will also be a precursor to our annual budgeting process in the future. We will share more information about these initiatives and the expected O&M savings later this year, but we have recently jump-started this initiative by offering an early retirement incentive program for a targeted set of our employees. The program has recently closed, and I'm pleased to say that we have reached our goals of this initiative, where about 200 of our employees have selected to take this incentive to retire. I'm thankful to those who will be leaving the company soon for many reasons, one, for their years of service and dedication to AEP, and for providing the company an opportunity to take advantage of organizational design changes upon their exit. I'll be providing more detail when we wrap up all these initiatives later this fall. Before I turn this over to Brian, particularly with the headwinds we all face today, I'd like to paraphrase some of the lyrics from the song Lost in the Echo by the rock group Linkin Park that I think represents AAP today. Now, this may take a little time for you to figure out what I'm saying here, but nevertheless, the lyrics say, We don't hold back, we hold our own. We can't be mapped, we can't be cloned. We can't see flat, it ain't our tone. What you get from AAP is our consistent focus on being a positive tone, attitude, and performance that will help our communities and customers get through this pandemic and the culture issues that scar our society. We will continue to be uniquely qualified to bring stakeholders together to move toward a clean energy future for our customers and, again, provide the quality dividends and earnings that our shareholders expect. Brian, I'll turn it over to you.