American Electric Power Company, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the American Electric Power third quarter 2021 earnings conference call. At this time, your telephone lines are in a listen-only mode. Later, there will be an opportunity for questions and answers. If you would like to ask a question during the call, please press 1, then 0 on your touchtone phone. You will hear an indication you've been placed into queue, and you may remove yourself from the queue by repeating the 1, then 0 command. If you're on a speakerphone, we ask that you please pick up your handset and to please make certain your phone is unmuted before you press any buttons. And as a reminder, your conference call today is being recorded. I'll now turn the conference call over to your host, Vice President of Investor Relations, Darcy Reese. Go ahead, please.

Thank you, Alan. Good morning, everyone, and welcome to the third quarter 2021 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 discussion of these factors. Joining me this morning for opening remarks are Nick Akins, our Chairman, President, and Chief Executive Officer, and Julie Sloat, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Okay. Thanks, Darcy. Welcome again, everyone, to American Electric Power's third quarter 2021 earnings call. Today we are pleased to report a strong third quarter operating earnings of $1.43 per share for the third quarter. This brings our year-to-date operating earnings to $3.76 per share versus $3.56 per share last year, which gives us confidence in raising the midpoint of our guidance range for 2021. AEP's service territory continues to prove its resiliency and stability with continued economic recovery experienced in the third quarter. In fact, AEP posted its strongest sales quarter in over a decade, and the gross regional product for the AEP footprint in the third quarter was the highest on record, as well as job growth being the strongest since 1984. The strength and diversity of our portfolio, the robustness of our organic growth opportunities, and our consistent ability to execute against our plan places AAP among what we believe should be one of the country's premium regulated utilities. Our strong performance this quarter coupled with the level of economic recovery experience within our footprint provides us once again the confidence needed to raise our midpoint to $4.70 per share and narrow the 2021 guidance range to $4.65 to $4.75 while reaffirming our 5% to 7% long-term earnings growth rate. And as I've stated previously, I would still be disappointed if we were not in that upper half of our long-term growth rate. The driver of our strong performance is the talent and commitment of our employees. Our frontline and central service work teams have continued to adapt to ensure the needs of our customers and communities are met day in and day out throughout the pandemic. Like many industries, the face of work for AAP will never be the same. As employees return to the office, we have taken actions to ensure the safe return to the workplace environment. I remain appreciative of the dedication of our employees and have the utmost confidence in their continuing ability to successfully check and adjust as we adapt to the future. We believe that this new work environment will continue to enable more efficiency, flexibility, and creativity that will contribute to the culture that excels in meeting our strategic objectives. This new future of work, along with digitization and automation, will continue to provide benefits for our Achieving Excellence program. Our growth opportunities over the next decade are significant, driven by our future forward renewables plan of over 16 gigawatts of new renewables resources by 2030, and the transmission and distribution investments needed to support the needs of a clean energy economy for our customers and communities. Additionally, the completion of the strategic review of our Kentucky company's and our decision to move forward with a sale to Liberty Utilities enables us to focus our attention on executing that transaction and delivering on our growth strategy. So let's cover the announced sale of Kentucky Power. Earlier this week on Tuesday at market close, we announced the sale of Kentucky Power and Kentucky Transco to Liberty Utilities, the regulated utility operation of Algonquin Power. The sale is a result of a strategic review that we launched back in April. The sale is subject to regulatory approvals, including approvals from the Federal Energy Regulatory Commission, which is within 180 days, and the Kentucky Public Service Commission within 120 days. The transaction is also subject to federal clearance pursuant to Hart-Scott-Rodino, which typically is within 30 to 60 days, and the clearance from the Committee on Foreign Investment in the United States within 90 and 120 days for that approval. We anticipate making these regulatory filings in late November and early December. Separately, we will file with both the Kentucky, West Virginia, and FERC commissions the necessary changes to the Mitchell-Platt Operating Agreement to accommodate the ELG investments recently approved by the West Virginia Commission. The filing will include a plan to resolve the question of Mitchell ownership post-2028. Both state commissions are expecting these filings as both issued recent orders directing us to do so. These filings will be made in the mid to late November timeframe. We're also very pleased with the outcome of the strategic review and know that the future owner of our Kentucky assets will be a great steward for all stakeholders in Kentucky, our valued employees, customers, and certainly the communities. Lastly, I want to thank all the Kentucky employees and the corporate support employees for their patience during this review and for their continued focus on safety and operational excellence during this period and as the transaction is completed. Now, moving to several of the regulatory activities. In Ohio, we expect an order in the fourth quarter on the settlement reached and filed with the Commission earlier this year. As a reminder, the settlement has broad support from the settling parties, including the Commission staff, the Ohio's Consumers Council, industrial companies, commercial companies, and other entities like the Ohio Hospital Association. Additionally, AEP Ohio's Grid Smart Phase 3 settlement was filed yesterday and it paves the way to continue our deployment of advanced smart grid technologies, including completion of our AMI meter rollout to the remaining 475,000 rural customers. The unopposed settlement, with support from Commission staff, Ohio's Consumers Council, and several of our largest customers, demonstrates that AP Ohio continues to maintain a great working relationship with our regulator and interested parties. Public Service Company of Oklahoma reached a settlement in a rate case with the Oklahoma staff and other parties. The settlement was presented to the commission on October 5th. The black box settlement includes $50.7 million net increase in rates while adding another $102.7 million in base rates. In addition to continuing the practice of allowing some interim recovery of CapEx riders, the rider collecting for Maverick and Sundance North Central wind assets was also included. and the order is expected by year-end with rates reflected in November bills. In Indiana, NEM filed its base rate case on July 1st based on a future test year model seeking $97 million in net revenue increase with a 10% ROE. Major items included recognition of over $500 million in capital investment per year in Indiana, continuation of the transmission tracker, a federal tax rider in the event of a change in federal tax rates, and the advancement of AMI to provide customers greater control and insight into their usage. The hearing is set before the Indiana Utility Regulatory Commission on December 2nd with an order expected by April of 2022. In our Southwestern Electric Power Company jurisdictions, cases are pending in Louisiana, Texas, and Arkansas. The SWEPCO Texas Commission deliberation is set for November 18th. Parties filed exceptions to the preliminary draft order issued by the hearing examiner, and replies to those exceptions were filed yesterday. SWEPCO is seeking a net revenue increase of $73 million with an ROE of 10.35%. Our filing includes investments made from February 2018, accelerated depreciation for the Dole Hills plant, a storm reserve, and increased vegetation management. We expect an order in the fourth quarter with rates being retroactive back to March of 21. In Swepco, Louisiana, testimony has been filed and hearing is scheduled for January of 22. Our case seeks a $73 million net revenue increase and a 10.35% ROE. An order is expected between the second and third quarter of 22. In Swepco, Arkansas, we are seeking a $56 million net revenue increase with a 1035 ROE. The filing contains a formula rate plan for subsequent years and considers the pending retirement of previously announced coal lignite assets. This filing is timed to align with the North Central and service dates and the provided mechanism both for recovery of costs associated with the investment and flow through the PTC to Swepco customers. A hearing is set for March of 2022. Both SWEPCO and PSO continue to make progress to recognize the storm URI expenditures. As a reminder, we filed for recovery of a WAC returned over five years in Louisiana, Arkansas, Oklahoma, and Texas. PSO is moving forward with the state on the securitization of costs as permitted under Oklahoma law. We have continued our efforts to secure approvals and clarity regarding investments necessary to comply with the EPA, CCR, and ELG requirements. We received certificates to construct the CCR compliance plans in Virginia, West Virginia, and Kentucky. While West Virginia approved ELG investments, Virginia and Kentucky did not. West Virginia has since determined it was in the public interest to move forward with ELG investments for all three plants and has issued an order regarding its support of West Virginia investing to preserve the option for these plants to run past 2028, approving both the investment and cost recovery from West Virginia customers. We'll be working with our commissions to implement the West Virginia decision and making the necessary adjustments to respect each state's decision. The Virginia Commission asked us to come back with more information, so we'll do that. We plan to lay out all the options before them on how to satisfy their capacity needs. The Virginia PSC will approve the first-year revenue requirement of $4.8 million for broadband, which means we now have recovery for our rural broadband efforts in both rural Virginia and West Virginia. We continue to engage legislators and commissions in other states and stand ready to invest in synergistic mid-mile broadband to support advanced grid technologies and rural broadband for our communities. We also understand it's all about execution. On September 10th, AEP began commercial operation of the 287-megawatt Maverick Wind Energy Center in north-central Oklahoma. Maverick is one of three wind projects that compose the north-central energy facilities, which will provide 1485 megawatts of clean energy to customers of our PSO and SWEPCO subsidiaries. The Traverse Project, the largest single-site wind farm in North America, is well under construction and will come online in the January to April 2022 timeframe. Transforming the way energy is generated, delivered, and consumed is necessary to support the needs of a clean energy economy, and AAP continues to drive that transformation for the benefit of our customers and communities. With the success of North Central setting the foundation of our future forward regulated renewables platform, We are diligently working on securing additional renewable opportunities for our customers. RFP filings are ongoing and planned in multiple states. So more to come on this as we file for approval of resources as a result of the RFPs that we're out in the market for, which some of you probably have heard of, we will be able to provide greater detail on the progress being made. Further, if federal efforts through the various tax proposals that extend and expand PTCs and ITCs for clean energy resources succeed, even more benefits will be enjoyed by our customers. So I'll move quickly to the equalizer chart at this point. and I'll go quickly through this. So far, the average for the overall regulated operations is currently 9%. We generally target in the 9.5% to 10% range, so obviously we continue to work on that. AP Ohio came in at 9.3% for the third quarter. It was below authorized primarily due to timely recovery of capital investments partially offset by higher O&M expenses. We expect that ROE to trend around authorized levels as we maintain concurrent capital recovery of distribution and transmission investments. We also, as I mentioned earlier, expect a commission order here in the fourth quarter of 21. APCO came in at 7.3%. It's below authorized due to higher amortization primarily related to its higher coal-fired generating assets and higher depreciation from increased Virginia depreciation rates and capital investments. And as you know, we are still at the appeals court appealing the Virginia Supreme Court, which is currently outstanding. We filed an appeal with that Virginia Supreme Court, so we're still waiting on that. As far as Kentucky is concerned, 6.9% below authorized due to loss of load from weak economic conditions and loss of major customers. Transmission revenues were also lowered due to a delay in some capital projects. I&M came in at 10.3%. It's above its authorized ROE, primarily due to increase in sales partially offset by increased O&M and depreciation expenses associated with I&M's continued capital investment programs. As far as PSO is concerned, it came in at 7.6%. It's below its authorized level primarily due to increased capital investment currently not in base rates and higher than anticipated equity due to the extreme February winter weather event. And, of course, we expect a commission order here on the rate case in the fourth quarter of 21. SWEPCO came in at 8.2%. It's below authorized due to increased capital investment currently not in base rates and the continued impact of the Arkansas share of the Turk plant that is not in retail rates. Turk issue, again, accounts for about 110 basis points. that we're not recovering in Arkansas. Again, as I mentioned earlier, we expect various commission orders, particularly in Texas, in the fourth quarter of 2021 that's retroactive back to March. AP Texas came in at 8.2%. It's below authorized primarily due to the significant level of investment in Texas. Of course, we have favorable regulatory treatment there with annual DCRF and biannual TCOS filings to recover rates. So significant levels of investment in Texas will continue to impact the ROE, but the expectation is for the ROE to trend towards an authorized 9.4% in the longer term. AP transmission holdco came in at 11.2%. It was above authorized, primarily driven by differences between actual and forecasted expenses. The transco's benefit from a forward-looking formula rate mechanism, which helps minimize regulatory lag, and that forecasted ROE is around 11% in 2021. So overall, continue to make progress. Cases, obviously, we're waiting to hear the results of several cases that should provide some additional benefits, but that work continues. So in closing, we're executing on all cylinders and continue to drive the results expected of a premium regulated utility. The AP portfolio is one that has enabled our investments in the large side of the business, supporting our transmission investments, including the $0.33 per share this quarter through our AP transmission holdco investments. Our plan to transition our generation fleet and reduce carbon emissions by 80% by 2030 and net zero by 2050 is well underway with two of our three wind facilities of our $2 billion investment in north central wind under our belt, providing a solid foundation for the next decade of growth. Throughout this transition, we remain engaged in a trusted voice on energy transformation efforts, helping to ensure a responsible transition to a clean energy economy, and we'll continue to support federal efforts in that regard. and state efforts as well. Finally, our strong quarter performance gives us the confidence again to set our midpoint at 470 with a range of 465 to 475, and we continue to have all 17,000 employees dedicated to our customers and communities to enable this strong performance. Our discipline in controlling costs, our progress to manage the portfolio, and the significance of our future organic growth opportunities provides us with the confidence needed in raising the midpoint and nearing the guidance range. Two weeks ago, I was really struck by the halftime performance of the Ohio State Buckeyes marching band. They set their goals, in my opinion, really, really high. Never did I expect to see a marching band dedicate their halftime show to the music of Rush. To hear Tom Sawyer, YYZ, Limelight, and others was truly amazing. When they were difficult to even play, even though they were also marching while designing guitar players, drums, and other choreography on the field, The creativity and the execution came through to deliver a truly remarkable show. It made me think of our team at AEP. On November 11th, I've been AEP's CEO for 10 years and fortunate to lead a great company with great people who have an outstanding track record of delivering on the promises made to investors and customers consistently year in and year out. and we fully expect to continue our drive to take this company to the next level toward a clean energy economy and a solid infrastructure foundation by setting aggressive goals and delivering with creativity and solid execution. With that, I'll turn it over to Julie.