American Electric Power Company, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power third quarter 2020 earnings release conference call. At this point, all the participant lines are in a listen-only mode. However, there will be an opportunity for your questions. You may ask a question by pressing 1, then 0 on your touchstone phone, and you can withdraw your question by repeating the 1-0 command. As a reminder, today's call is being recorded. I'll turn the call now over to the Managing Director of Investor Relations, Ms. Darcy Reese. Please go ahead.

Thank you, John. Good morning, everyone, and welcome to the third 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 their remarks. I will now turn the call over to Nick.

Okay. Thanks, Darcy, and welcome, everyone, to American Electric Power's third quarter 2020 earnings call. The third quarter has been another strong quarter for AP. Despite the continued challenges of COVID-19 and its effects on the economy, we continue to be optimistic about our ability to execute and provide the consistent quality of earnings and dividend growth our shareholders expect and provide focus on our customers and communities we serve to get past the multiple challenges we face as a result of the pandemic. I know many of us have had the feeling during 2020 with its multiple challenges that Lenny Kravitz sang about in his song, Fly Away, singing, oh, I want to get away, I want to fly away, yeah, yeah, yeah, probably figuratively and literally. But there is a lot at the end of the tunnel. As we move through this memorable year, AEP continues to drive firmly within the guidance range with targeting the midpoint as we move to the last quarter. We're accomplishing this by executing on cost control in response to the pandemic, keeping our employees safe through the crisis by taking all the extra precautions, and working with our customers to alleviate the economic pressures during this time. We are also learning a lot during this crisis, the value of efficient work from home environments, the focus on capital and O&M management, the acceleration of our Achieving Excellence program, and the focus on social issues that drive a cultural brand that brings everyone into the journey of being the premier regulated utility AAP strives to be. In fact, AAP just made the Forbes Just Capital 100 list for 2021, being the highest-ranked utility on the list. We've also been involved with two major storm events, Hurricanes Laura and Delta, in SWEPCO's Louisiana Territory. I'm proud of how our employees stepped up during these major weather events in the midst of COVID-19 protocols to effectively and efficiently return service to our customers in a safe manner, just as they do every day to keep the lights on. And now it's even a more important service during work-from-home and stay-at-home environments. Financially, our operating performance continues to be strong in the face of these challenges. AAP's operating earnings for the quarter came in at $1.47 per share versus $1.46 per share last year, bringing us to $3.56 per share for year-to-date 2020 versus $3.65 per share last year at this time. We continue to be firmly within the stated 2020 guidance range of $4.25 to $4.45, and we continue to be optimistic regarding our progress going into 2021. We are reaffirming our current guidance range and our long-term 5% to 7% growth rate. And as I have said previously, I would be disappointed not to be in the upper half of that 5% to 7% range. Our board just approved a dividend increase of approximately 6% in line with our earnings in the middle of our targeted payout ratio of 60% to 70% and consistent with our long-term growth rate of 5% to 7%, an incredible accomplishment given the headwinds we expected we were facing in the first quarter and the second quarter of this year. Even with this success in turbulent times, we are not out of the woods yet, but we are seeing improvement in industrial and residential load. However, commercial loads, such as churches, restaurants, hotels, and schools, not surprisingly, are still challenged. Bron will get into more detail on the economy later. We could not have achieved the outcome that AAP has achieved thus far during the year without our employees' attention in cutting our costs to compensate for losses from the COVID economy. Our Achieving Excellence program is going very well, and not only has it helped us compensate for the revenue losses due to the pandemic, but it has set an excellent catalyst for the future in terms of continued O&M cost control. More to come on this at November EEI. Most economists believe the 2021 economy will improve, and while we are seeing positive progress going into fourth quarter, industrial and commercial progress has slowed, perhaps until after the election cycle or during the second wave of the COVID cases or during the pendency of upcoming therapeutics and vaccines. With all of that said, it has been a very productive quarter, and we expect improvement to continue into 2021. We continue to adhere to COVID pandemic related protocols of temperature testing, mask requirements, social distancing, and hygiene related activities. Our confirmed cases are increasing with the apparent second wave, and we are doubling down on messaging around practicing safeguards outside of the work environment as much as inside. Thankfully, we have not lost anyone due to the virus, but vigilance and fighting complacency is key here. We also have continued our outreach to employees and the communities we serve regarding racial injustice. As I mentioned last quarter, our Seize the Moment initiative is important to reach a deeper understanding of the racial divides that exist and gain perspective from one another about actionable next steps. Before I get to the regulatory updates, I'll just head this off with the past questions about HB 6 in Ohio. I'll just say flatly that we have nothing new to report from AP's perspective. Any potential legislative change is not imminent, particularly given a noisy election cycle, so perhaps we'll hear more after the election. As we have said earlier, any change to the existing legislation is likely to be financially insignificant to AEP, and we will still be pushing for forward-looking legislation regarding clean energy options, energy efficiency, and other technology enhancements at grid scale and with our customers. Regarding the legal issues surrounding HB6, also nothing new to report, and my previous comments stand on this subject. Now for the regulatory update. If there is one observation that has become apparent through this pandemic, it is the acknowledgement of the criticality of the service that we provide to our customers and communities. This year, we have weathered through the effects of the pandemic and overcome significant storm activity that have challenged our system and our workforce. As we work with our regulators to position the company to be able to continue to meet the expectations of our customers and communities, we are stressing the fundamentals of a strong balance sheet. Now more than ever, it is essential for our operating companies to be well positioned to have the cash flows and returns needed to attract the capital necessary to meet the ongoing needs of our customers and communities. And as you all know, we have a number of regulatory proceedings pending before our state regulators this quarter, most of which are needed to conform with previous regulatory stipulations, stay-out provisions, or to address the timing needs of critical investments. Ohio filed its most recent base case June 1st as required under the terms of our prior ESP4 settlement. We are seeking a 41 million rate increase with a 10.15% ROE. A procedural schedule has not been established yet on that case. APCO filed its base rate case in March as required by Virginia law. We have completed hearings and the case has been submitted to the Commission for a decision. Our Virginia residential customers have not experienced a rate increase over the past 10 years. In this case, we have asked for $37.9 million net of depreciation with an ROE of 9.9%. We were disappointed with the position taken by both staff and the AG, which fails to recognize our need to have an opportunity to earn our authorized return over the next tri-year period. We remain confident that the Commission will see through these arguments and recognize their obligation under the law to allow the company an opportunity to earn a fair return. A decision is expected in November. Kentucky was subject to a stay-out provision until June of this year. We subsequently filed our base rate case on June 29th, where we asked for a $65 million increase and an ROE of 10%. The company has also sought to use the remaining unprotected AFDIT funds in Kentucky to offset bills for customers who cannot afford to pay their bills. The Commission elected to combine this request with a base rate case following, and we expect resolution by year end. Last but not least, in our SWEPCO jurisdiction, we received approval from the Commission to create a regulatory asset for the costs associated with Hurricane Laura. We will ask for similar treatments for the costs associated with Hurricane Delta, and we are hopeful that we can put this year's hurricane season safely behind us. In Texas, SWEPCO made its base rate case filing on October 13th, where we are seeking a $90.2 million increase with an ROE of 10.35%. We are also seeking to increase the storm reserve and increase our vegetation management expenditures to minimize the risk of future outages to our Texas customers. We continue to make progress on our north central wind projects, which will benefit our customers in Louisiana, Arkansas, and Oklahoma. Foundation work has commenced at the Sundance facility, which is expected to be in service by the end of first quarter 2021. Invenergy is currently completing final site preparation on both the Maverick and Traverse locations. We continue to expect to acquire the Maverick facility by December 21 and the Traverse facility in the December to first quarter of 2022 timeframe. We have followed our settlement true-up in Arkansas and are finalizing our settlement true-up in Oklahoma. We are looking forward to the benefits that these projects will bring to our customers by providing access to some of the nation's richest wind resources and helping SWEPCO and PSO advance a greener energy future. Okay, so now to the equalizer chart. I'll talk about that. I think it's on page five of the presentation. So our current ROE is about 9%, and we generally target these returns to be in the 9.5% to 10% range. The ROEs below are not weather normalized, and certainly keep in mind that we're also thickening equity layers as well. So I'll talk about AP Ohio first. I just mentioned the rate case there. It's above authorized primarily due to favorable regulatory items, partially offset by the roll-off of the legacy issues that we've been talking about for years regarding the PER and the RSR. But we also expect the year-end ROE to trend around the authorized levels of 10%. For APCO... which I had mentioned earlier, is slightly below authorized due to lower normalized usage and higher depreciation from increased capital investments, partially offset by continued management of the O&M expenses. Effective January 2020 costs associated with the last 17.5% of Wheeling Power's interest in Mitchell Platte became recoverable through APCO and Wheeling rates. And then I already discussed Virginia's tri-annual review. Kentucky, already discussed the rate case there, but they're below, as you can see, well below, authorized due to loss of load from weak economic conditions and loss of major customers along with higher expenses during the stay-out period. So we have a lot of work to do there. The ROE for IEM at the end of third quarter was 10.4%. Its ROE was above authorized due to continued management of OEM expenses, reduced interest expense, and rate true-ups, partially offset by lower commercial industrial sales. IEM's ROE is projected to trend slightly below 10% by year-end, consistent with authorized ROEs in Michigan and in Indiana. PSO. Its ROE is 8% at the end of third quarter. It was below its authorized level, primarily due to lower normalized usage and unfavorable weather in 2020, partially offset by continued management of O&M expenses. PSO's 2019 base case, as you recall, approved a transmission tracker, a partial distribution tracker, and an ROE of 9.4% authorized. So we'll continue to make progress there. SWEPCO, the ROE for SWEPCO is about 7.4%, and as you recall, much of that is related to the Turk plant not being in retail rates in Arkansas, and that impacts it by about 110 basis points. SWEPCO received an order in its Arkansas base case settlement in December 2019, and effective 2020 approved a $24 million revenue increase in ROE of 9.45%. In October 2020, we also filed a rate case in Texas, as I mentioned earlier. In AP Texas, its ROE is around 7.5%. It was below authorized due to lag associated with the timing of annual cost recovery filings. We did not make those filings during the pendency of the previous rate case. and, of course, one-time adjustments from our finalized base rate case itself. Favorable regulatory treatment allows AP Texas to file annual DCRF and TCOS filings, and we've since filed many of those at this point. I think there's been three cases that have been filed. And while earnings should improve in 2020 with the base rate case finalized and annual filings now resumed, continued levels of investment in Texas will impact the ROE. The expectation is for the ROE to trend towards an authorized ROE of 9.4% in the long term, but be around probably 8% by the end of 2020. As far as the transmission company is concerned, AP Transmission Holdco was 9.8%, and it was below authorized, primarily driven by the annual revenue true-up in the second quarter of 2020 to return the over-collection of 2019 revenues. Transmission is forecasted an ROE of 9.8% to 10.1% range in 2020. It is also interesting to note that when you look at the average equity in our operating jurisdictions, the transmission holdco is now the largest. which that's happened for the first quarter. This first quarter, that has actually occurred. So making a lot of progress. But at the same time, though, the investment being made relative to transmission is certainly improving the quality of service to our customers. So very happy with the progress we're making around our T&D investments and its ability to improve customers' experiences. As I close, I'd be remiss in not thanking our employees at the Oakley Union Power Station that was officially retired from service a couple of weeks ago after several decades of providing generation resources in meeting the needs of our customers' electricity demands in Texas and Oklahoma. Oakley Union was under construction about the time I joined AEP out of college. And when you see people and assets retiring, it just further illustrates the resiliency of AAP over the last 114 years. But also that change occurs, and we have to change with it. Thanks again to all the Oakley Union employees through the years. So all in all, a solid quarter for AAP, and I can't resist when thinking about AAP's future post-COVID with the latent value of the need for resiliency and reliability of the grid to support work-from-home environments, Moving forward with the transformation to clean energy resources, which we at AEP are in the beginning stages of, and the further electrification of the economy, we would say in the words of the late Eddie Van Halen, it's about time. This time is our time. And right on, we'll let it shine. I am convinced in overcoming the challenges of 2020, this company will be even stronger as we move into 2021 and beyond. Brian?