American Electric Power Company, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power Fourth 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, 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 Reese.

Please go ahead. Thank you, Cynthia. Good morning, everyone, and welcome to the fourth quarter 2020 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 are Nick Akins, our chairman, president, and chief executive officer, as well as Julie Sloat, our chief financial officer. We will take your questions following the remarks. I will now turn the call over to Nick.

Good. Thanks, Darcy. And Darcy says happy birthday, Betty Jo Rosa. This one's for you. Welcome, everyone, to the American Electric Power's fourth quarter 2020 earnings call. 2020 was a year of tremendous challenges, the likes of which we have never seen. It appears that 2021 has thus far had its own set of challenges. Our hearts go out to everyone that has been and are impacted by the ongoing challenges of COVID and to all the customers impacted by the severe cold and ice conditions that precipitated significant outages from Texas to West Virginia and beyond. There will be plenty of opportunities to do a postmortem of the conditions that led to these outages and to address changes to help ensure these kinds of events do not occur again. But as of now, getting customers back and some return to normalcy is paramount in everyone's mind. I'll discuss these issues a little later, but I want to tell you in the midst of significant challenges come tremendous accomplishments that make us even stronger for the future, and AP is once again delivered. The fourth quarter further illustrated the resiliency of AAP and its employees to deliver and exceed expectations in ensuring the consistent quality of earnings and dividend growth that you would expect from a premium regulated utility. AEP's operating earnings for the quarter came in at 87 cents a share, ending the year at 444 per share, which is the top of the operating earnings range that we projected for 2020. An excellent outcome, buoyed by our employees' aggressive moves to control costs during the COVID downturn of the economy, the arbitrage of residential to industrial and commercial loads that we discussed in previous earnings calls, and certain tax and investment-related outcomes that went our way, along with positive regulatory outcomes in several of our cases that concluded in 2020. Given the progress that we have made on cost control with our Achieving Excellence program and in updating our load forecast for 2021, AEP is now revising our operating earnings guidance range for 2021 upward from a midpoint of 461 per share to 465 per share, bringing our new guidance range to 455 to 475 per share. We're also rebasing our 5% to 7% operating earnings growth rate on the new 2021 guidance range and continue in our view that we would be disappointed not to be in the upper half of the guidance range. AEP is reaffirming our $37 billion five-year capital plan and are committed to our credit ratings quality as we move forward. Additionally, after further analysis, as we do each and every year through our corporate accountability reporting process, AEP is now prepared to accelerate our carbon dioxide emission reduction goals to reach 80% by 2030 and to achieve net zero by 2050. We will be releasing a new climate scenario analysis report during the first quarter that has been over a year in the making, and you will find this to be a state-of-the-art report covering everything from extensive scenario analysis of carbon reduction efforts to technology innovations to just transition-related aspects of the complex path before us as we require substantial stakeholder engagement as we go along. Like all these commercials, but wait, there's more. As I mentioned to you in the last earnings call, we are refining our integrated resource plan recommendations for all of our operating jurisdictions, which we'll roll out at our next first quarter 21 earnings call or before. Just a brief teaser on the future plans, we are proposing up to 3,300 megawatts of new renewable energy to serve SWEPCO customers to be delivered in the 2025 to 2028 timeframe. We will give further updates on this, as I said, by next quarter's earnings call. AEP has a lot of work to do to manage regulatory and project-related activities, as well as financial activities that are respectful to our balance sheet and credit metrics. I'm reminded of one of my favorite movies, Gladiator, in which Maximus Decimus Meridius says, the time for half measures and talk are over. It is time for serious execution by AP to transform ourselves to embrace our clean energy future on behalf and for our customers and communities. Additionally, we will actively manage our portfolio of assets and companies to enable this movement to while ensuring our balance sheet and credit metric strength as we define this path forward. This execution has been recently evidenced by our sale of the Racine hydro plant. This form of asset optimization will continue as we focus on our core growth opportunities. Moving on to our economy and load, the AP load forecast is up considering the recent improvement in our commercial and industrial loads, still trailing pre-COVID levels, but improving. We are optimistic about the recovery in both our service territory and with load during 2021. Modest overall growth should occur, led by industrials and a focus on infrastructure by the administration and in developing the hardening and resiliency-related investments such as pipelines, natural gas distribution, and other infrastructure, particularly after the winter weather events. Julie will be covering load-related topics in more detail in a couple of minutes. Our rate case activity across our jurisdictions continues to be robust. In Virginia, Appalachian Power received an order in its Virginia tri-annual rate case on November 24, 2020. We were extremely disappointed in the Commission's finding that APCO finished the tri-annual within the earnings band and therefore was not entitled to a rate increase. This result hinged on the Commission's determination that APCO should have amortized the disposition of certain coal plant balances over 10 years starting in June 2015 versus impairing the assets in 2019, which we believe was consistent with state law. The company believed the commission erred in this determination, and as a result, immediately sought both rehearing and appealed the decision to the Virginia Supreme Court. Some more to come on that. AAP Ohio filed its base rate case in June of 2020. The parties have been engaged in ongoing settlement discussions and will update the Commission on or before March 4th as to whether a settlement was reached. If not, the Commission will proceed with a full hearing, but I will say that the settlement discussions continue to be positive and constructive. In Kentucky, the Commission issued a constructive order on January 13th awarding the company a net revenue increase of $52 million out of its $65 million request with a 9.3% ROE and modified the transmission tracker from 80% to 100%. In our SWEPCO jurisdictions, we have rate cases pending in Louisiana and Texas. SWEPCO filed its Texas case in October seeking a net revenue increase of $73 million and ROE of 10.35%. The filing included investments made from February 2018, accelerated depreciation for three coal plants, and an increase in storm reserves and vegetation management. Hearings are scheduled for the end of May, with a final order expected at the end of October. In Louisiana, the company followed its base rate case on December 18th, seeking a 10.35% ROE and a net revenue increase of $93 million. A little over a month into the year, and we've experienced ice storms in the east and record cold temperatures in the west. Our APCO and Kentucky territories sustained significant ice and tree damage to our transmission and distribution system with back-to-back storms. Our teams, along with significant support from our operating companies and mutual assistance teams, have made headway on restoring service to our impacted communities. We intend to file for the appropriate regulatory recovery as we have with other major storms. The tragedy that unfolded in Texas is an important one for me to address. First and foremost, again, our thoughts and prayers go out to the people of Texas, and particularly to those families and communities who lost family members or experienced loss and damage as a result of the polar vortex that engulfed the state. As you know, our AEP Texas affiliate provides energy delivery services to a little over 1 million customers in the state. The unprecedented weather conditions required ARCOT to direct AEP and others to immediately curtail load and to operate in an emergency condition to maintain the stability and integrity of the Texas grid. During this event, Our focus centered on responding to the directives from ERCOT to ensure that the flow of available power continued throughout this crisis. We also worked with our communities to identify critical loads such as hospitals and other first responder resources in an effort to mitigate the impacts of key resources within our communities. Throughout this emergency, I could not have been more proud of our team's response in dealing with a situation that confronted them. This event serves as a sober reminder as to the critical nature of our nation's energy supply in maintaining and supporting not only our economy but also our fundamental way of life. As a T&D utility with cost-based rates in the ERCOT portion of Texas, our AEP Texas subsidiary is not a generator nor is it a retail electric provider, so we expect minimal, if any, financial impact from the ERCOT Texas weather events. Our AEP wind assets in ERCOT began to experience outages on February 10th and started returning to service on February 19th. We expect all three wind farms to be returned to full availability soon. We have no financial exposure from our hedges, which are all based upon unit contingent performance. Also, financial performance related to wholesale loads served by AEP Energy Partners and ERCOT is not material. In the SPP, we also experienced minimal load shedding events, but fuel costs were substantially higher during this event. And as you know, we recover fuel through our fuel clauses as a pass-through. That being said, in the SWEPCO and PSO jurisdictions, We will work with the various state commissions on any alternative fuel recovery mechanisms to lessen the impacts to our customers, much like we do with major storm costs, but we have to be respectful of the cash flow metrics and the capital structure of the company going forward. So certainly a way to average cost of capital is extremely important from that perspective. These events, along with others around the country, have indicated the need for specific policy changes that focus on further refinements in reliability and resiliency of the grid. Specifically, we would encourage more robust reliability assessments across electric, gas, and other critical infrastructure classes to determine where interdependencies exist. And market designs that promote adequate capacity levels and increase generation reserve margins to provide a sufficient safety net during emergency situations. In addition to counteractive frequency, intensity, and impact of storms, we need to ensure a higher level of system resilience by implementing transmission planning and interconnection reforms to enable regions to lean on each other during times of crisis, as well as winterization requirements for power plants, natural gas delivery systems, and critical infrastructure. I actually, in 2014, testified before the Senate Energy Committee regarding some of these recommendations after the polar vortex that hit the PJM territories. All stakeholders must do better to address the issues that led us to these failures that have impacted so many customers at the worst possible time. Whether it's winter and summer weather event reliability or the speed at which the clean energy future can occur, AEP stands ready to be an active participant in resolving these issues, both from the state and national perspective. We will also remain active on other significant issues impacting our society, from racial injustice to COVID-related safety, as we strive to advance in a positive way the communities that we are so fortunate to serve. So now I'll move to the equalizer chart. And that's, I think, the second page of the handout. And I'll go through that. So our overall ROE is 9.1% across the board. We generally target the ROE for our regulated segments combined to be in the 9.5% to 10% range. But as you see, the ROEs below are not weather normalized. And keep in mind that we're also thickening the equity layers as we go along as well. And you'll also note in the table, at least the indication of the size of the bubbles that you see. AAP Transmission Holdco is now our largest company based on average equity, followed by APCO with AAP Texas, INM, AAP Ohio, and SWEPCO being comparable to each other. So first with AAP Ohio, the ROE for AAP Ohio at the end of the fourth quarter was 10.7%. AP Ohio's ROE was above authorized primarily due to favorable regulatory items partially offset by the roll off of the legacy fuel and capacity carrying charge recoveries that we discussed in the past. We expect the 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, AP Ohio followed the base case and certainly we'll see an outcome of that pretty soon. APCO, the ROE for APCO at the end of the fourth quarter was 8.6%. Its ROE was below authorized due to lower normalized usage and higher amortization and depreciation from increased Virginia depreciation rates and increased capital investments, partially offset by lower O&M expenses. And, of course, we already talked about the Virginia tri-annual review. APCO did subsequently file a petition for reconsideration with the commission, which was granted in December 2020 and resulted in suspension of that final order at this point. As far as Kentucky is concerned, we ended the fourth quarter at 5.5%. The ROE 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. And of course, you knew we filed a base rate case there, so we fully expect that ROE to improve after the rate case outcome. Its ROE is 11.4%. I&M's ROE was above authorized due to continued management of O&M expenses, reduced interest expense, and raised true-ups, partially offset by lower commercial and industrial sales. I&M is projecting to trend below 10%, consistent with the authorized ROEs of 9.86% in Michigan and 9.7% in Indiana. The ROE there is 9%. Its ROE 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. And PSO's 2019 base case approved a transmission tracker, a partial distribution tracker, and an ROE of 9.4%. PSO's 2019 base case settlement also required filing a case no later than October of 2021. So more to come on that. SWEPCO, the ROE for SWEPCO at the end of the fourth quarter was 7.5%. ROE was below authorized due to loss of load and a continued impact of the Arkansas share of TURC, which we've discussed several times. That equates to about 110 basis points discount associated with TURC. And then in October 2020, as you know, I've already talked about this, filed a Texas case, and then we recently filed a Louisiana case as well, so more to come on that one. AAP Texas, the ROE is 7.9% at the end of the fourth quarter. It's below authorized due to lag associated with the timing of annual cost recovery filings and one-time adjustments from our finalized base rate case earlier in 2020. Favorable regulatory treatment allows AP Texas to file annual DCRF and biannual T-cost filings to recover costs on capital investment and had to wait until after the rate case to file those. While the exception is for the ROE to trend towards an authorized ROE of 9.4% in the longer term, continued significant levels of investment in Texas will continue to impact the ROE. AP Transmission Hold Co., Came in at fourth quarter at 9.9%. 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. And then transmission is forecasting their ROE to be in the mid-10% range in 2021. So all in all, an outstanding year both financially and operationally given the significant challenges in 2020. And we were off to a great start in 2021. AAP has shown time and time again our agility and resilience in meeting our objective of consistent quality of earnings and dividends that embody a truly premium electric utility. And as we emerge from the COVID challenge and get the economy back on track in 2021 while working on a clean energy future, to paraphrase the lyrics of Johnny Nash who passed away in 2020, I can see clearly now the rain is gone and we can remove all obstacles in our way to a bright, sunshiny day. As many of you already know, Brian Tierney has moved on to take over our focus on corporate strategy after serving over 11 years as CFO. I want to thank him for his dedication to the company and to our investors while in this important role. Now I'll turn it over to our new CFO, who many of you already know, Julie Sloat. She approaches everything with the infectious energy and focus that will take AAP to the next level. Even Brian would agree with that. Julie, you're up.