American Electric Power Company, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power third quarter 2022 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question, please press 1, then 0 on your touchtone phone. You will hear an acknowledgement tone that's been placed in the queue, and you may remove yourself from queue at any time by repeating the 1-0 command. Should you require assistance during the call, please press a star, then zero, and an operator will assist you offline. And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Darcy Reese. Please go ahead.

Thank you, Lois. Good morning, everyone, and welcome to the third quarter 2022 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 Chair and Chief Executive Officer, and Julie Sloat, our President and Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Okay, thanks, Darcy. Welcome, everyone, to American Electric Power's third quarter 22 earnings call. We continue to make significant progress on our commitments. We have leveraged our scale, our financial strength, portfolio management, and transitioned to a pure play regulated utility. Over the past 10 years, we've had a great record of consistently exceeding our earnings projections and raising guidance, with this quarter being no exception. Today I'll provide a brief recap of the key financial highlights for the quarter, followed by updates on our Kentucky sale process, our unregulated contracted renewables portfolio sale, and the previously announced strategic review of our retail business, all of which are part of our strategy to simplify and de-risk our business profile. I will then spend time discussing our carbon emission reduction goals in addition to our continued emphasis on regulated renewables execution and generation fleet transformation. I will conclude by providing insights into our other ongoing regulatory activities. All of this summarized information can be found on slides six and seven of today's presentation with supporting details in the appendix. So off to the financials. We continue to build on our momentum delivering strong third quarter 2022 operating earnings of $1.62 per share or $831 million. Today we are reaffirming our 2022 narrowed full year operating guidance range as well as our newly introduced 2023 operating earnings guidance range, both of which we had announced at our recent analyst day. As a reminder, we are guiding to a 2022 range of 497 to 507 with an increased midpoint of 502 per share, and our 2023 guidance range is 519 to 531 with a 529 per share midpoint. Our long-term earnings growth rate guidance of 6% to 7% is underpinned by our robust $40 billion capital investment plan for 2023 to 2027, which includes $26 billion in WIRES and $9 billion in regulated renewables investments. Moreover, our dividend growth is in line with our long-term growth rate and within our targeted payout ratio of 60% to 70%. We continue to de-risk our platform and execute our strategy to ensure that we are best positioned for value creation in the face of global economic uncertainty and inflationary pressures. As part of this effort, we are continuing to work with states to drive reliability and resiliency in our service territory amidst customer bill considerations and other macroeconomic factors. In order to lessen the impact on our capital investment plan, we have also diversified our mix of suppliers, which has minimized customer and business supply chain disruptions to date. Later in today's call, Julie will walk through our third quarter performance drivers and share thoughts on the positive load outlook in our service territory, as well as on our targeted 14% to 15% FFO to debt range. So now talking about some of the strategic reviews. True to our steadfast commitment to execution, we're in the final stretch to complete the sale of our Kentucky operations celebrity. As we previously mentioned, FERC told their approval date to December 16th. and we have therefore signed with Liberty to plan for a January 2023 closing date. This date is keyed off of FERC's process and should give confidence to all stakeholders, including employees, customers, communities, and shareholders. It also enables our transition teams to adequately and efficiently plan for the closing. While our sale timeline has shifted over the past year, we are not revising our earnings guidance or any of our equity needs. We are pleased to reach this point and are confident in our ability to close the transaction shortly after the start of the new year. Related to our unregulated contracted renewals portfolio, we launched the sale process for this 1,365-megawatt portfolio in late August 2022 with strong buyer interest from both financial and strategic investors. We recently accepted bids for Phase 1 of the auction process and are proceeding into Phase 2 due diligence with selected bidders. We are on pace for a closing date in the second quarter of 2023. Selling the portfolio will allow AAP to shift focus and rotate capital towards regulated businesses as we continue to transform our generation fleet and enhance transmission infrastructure. As we announced earlier this month on our analyst day, we are pursuing a strategic review of our retail business as we adjust to how our interest in the competitive markets has changed over time. We'll keep you updated on our progress and expect to complete our review in the first half of 2023. We're always considering opportunities to enhance shareholder value, and we'll continue to evaluate potential value-additive opportunities for our regulated businesses against the backdrop of our goal to further simplify and de-risk the business. Now, regarding emission reduction goals, as we mentioned in the analyst day, AAP remains firmly grounded in our principles of resiliency, reliability, and affordability while recognizing the value of our diverse resource portfolio given today's world of energy-related volatility. We are undertaking one of the largest clean energy transformations in the country through our regulated renewable strategy, and we announced our enhanced and accelerated carbon emission reduction goals at our analyst day in early October, as I mentioned earlier. First, we have rebased our near-term emission reduction target, of 80% by 2030, now pegged to a 2005 baseline instead of 2000. Second, we upgrade our near-term reduction target, and as such, all Scope 1 emissions are now included in our carbon emission reduction goals. Lastly, we accelerate our net zero goal by five years from 2050 to 2045. We are confident in our path forward and our ability to hit key milestones in a steady and timely manner. Importantly, These goals are aligned and supported by our latest integrated resource plans in the various states. We will continue our planned retirement and disposition of select fossil fuel units while adding renewables to our generation portfolio. Our 1.5 gigawatt north central wind portfolio, which became fully operational in March of this year, represents only the beginning of our clean energy fleet transition. In addition, we have 17 gigawatts of potential generation additions across different resource types within our vertically integrated utilities over the next 10 years. Combined, this represents 18.5 gigawatts of new generation, which will significantly contribute to AEP's reduced carbon emissions profile and put us on a path to achieve our net zero goal by 2045. As an update, on October 19th, related to SWEPCO's 999 megawatt renewables totaling $2.2 billion of investment, the Arkansas staff filed support of these resources subject to conditions. Commission orders are expected in 2023. As we look to the long term, we are committed to building a reliable and resilient grid to efficiently deliver clean energy to our customers, and we will continue to monitor new technologies that can help us close the gap to net zero while maintaining the highly reliable and affordable delivery of energy that our customers expect. Moreover, newly passed provisions in the Inflation Reduction Act, which is foundational to our clean energy investment strategy, should help bolster advancement of new carbon-free energy sources. The bill includes tax credits for technologies like clean hydrogen production and energy storage, in addition to the technology-neutral tax credits for our carbon-free resources, and we will continue to evaluate these resources through our integrated resource plans. With regard to our ongoing regulatory activities, our regulated ROE as of September 30, 2022, is 9.3% and continues to improve as we work through regulatory cases and continue to make strides in reducing our authorized versus actual ROE gap. In fact, as an update on SWEPCO on September 29, we filed notice to move the 88 megawatts of Turk plant into rates in Arkansas. The full filing will occur within the November-December timeframe, and we will seek a rider to place the 88-megawatt capacity in rates. With respect to our outstanding SWEPCO Louisiana rate case, we are expecting an order in the fourth quarter of 2022. We've also made notable progress on APCO's 2020 Virginia case. As many of you likely recall, we successfully appealed the tri-annual rate order the day following the issuance of the order in November 2020, giving confidence in our position that the order was inconsistent with Virginia statute. We are pleased that the court recently ruled in AAP's favor, preserving our right to seek a retroactive adjustment in addition to the ongoing rate adjustment. Interim rates were implemented in Virginia on October 1st of this year. We've also actively managed the implications of increased fuel costs as we focus on maintaining a balance between cost recovery and customer impacts. As part of this effort, our operating companies continue to work with commissions, regulators, and other stakeholders to educate customers about price surges and put mechanisms in place to alleviate these pressures. For example, we have six-month and two-month clauses in INM and SWEPCO Louisiana, respectively. to help ease the effect of longer-term fuel clauses. We were also able to lengthen the months of fuel recovery in Virginia and Oklahoma and are working with our customers and commissions to make sure we recover that over a longer period of time. As you all know, this will be my last earnings call as I will be transitioning from CEO to Executive Chair on January 1st, and Julie will become CEO of AEP. We're very excited to have an executive of Julie's caliber lead our company. I'm confident in her deep knowledge of AAP as well as the emphasis she places on consistency, quality of earnings and dividends, and shareholder and customer value creation that will be instrumental to AAP's continued success. I'm also confident that she has the heart to be a strong leader. I'm reminded of the lyrics from Rush's Closer to the Heart that I've always related to as a CEO, and it goes something like this. And the men and women who hold high places must be the ones who start to mold a new reality closer to the heart. The role of a CEO in the company, our communities, and our country has changed during my tenure. Julie is the embodiment of a new CEO and will lead this company to even greater success. After 44 earnings calls, my tenure will soon come to an end as CEO of this great company. So I'll end this call with lyrics from a great Led Zeppelin song, And so today, my world, it smiles. And the song title is merely, Thank You. Julie?