American Electric Power Company, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to American Electric Power first quarter 2023 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, please press 1, then 0 on your telephone keypad. You'll 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 using a speakerphone, we ask that you please pick up your handset and to make certain that your phone is unmuted before pressing any buttons. As a reminder, your call today is being recorded. I'll now turn the conference call over to your host, Vice President of Investor Relations, Darcy Reese. Please go ahead.

Thank you, Alan. Good morning, everyone, and welcome to the first quarter 2023 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 discussion of these factors. Joining me this morning for opening remarks are Julie Sloat, our President and Chief Executive Officer, and Ann Kelley, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Julie.

Thanks Darcy. Welcome everyone to AEP's first quarter 2023 earnings call. It's good to be with everyone this morning. Our direction and strategy remain on track with an emphasis on our generation fleet transformation and continued investment in our energy delivery infrastructure, which is all embedded in our five-year $40 billion capital plan. I'll start with an overview of our financial performance for the first quarter before discussing our Kentucky operations following the termination of our transaction with Liberty. I'll then provide some updates on our unregulated contracted renewable sale, retail business review, and other strategic plans before closing with some insight into our progress on the regulatory and legislative front as we work to implement important new initiatives to ensure our customers' and communities' needs are met and continue to come first, which you know enables us to deliver on our financial stakeholder commitments as well. A summary of our first quarter of 2023 business highlights can be found on slide six of today's presentation. have a long-standing history of consistently delivering on our strategic objectives and we're pleased to share that this quarter is no different turning to a high-level overview of our financial results i can tell you that aep delivered first quarter 2023 operating earnings of a dollar 11 per share or 572 million dollars whether this quarter ranked as one of the mildest in the past 30 years resulting in an unfavorable impact of first quarter results despite this Our thoughtful and disciplined approach to managing the business enables us to reaffirm our 2023 full-year operating guidance range of $5.19 per share to $5.39 per share, with a $5.29 per share midpoint and long-term earnings growth rate range of 6% to 7%. We're confident in the built-in flexibility we have in our business to ensure that we successfully deliver on our financial commitments and continue AP's strong track record of financial performance. We're also pleased to report that AEP has experienced minimal financial and operational supply chain impacts to date, primarily due to our successful efforts to diversify our mix of suppliers and increase our order quantities to minimize the impact on our robust capital investment plan. Anna will walk through our first quarter performance drivers and share some perspective on our positive load outlook as we continue to drive our economic development and service territory expansion. She'll also review the drivers to support our targeted 14 to 15% FFO to debt range. While our FFO to debt is at 11.4% this quarter, I am confident this metric will improve materially by year end. As I mentioned to you on last quarter's call, simplifying and de-risking our business profile is one of our top strategic priorities. By actively managing our portfolio and demonstrating a clear commitment to a disciplined execution of initiatives and transactions, we continue to deliver significant benefits to our stakeholders. Actively managing our portfolio also means staying flexible and being ready to change our focus and adapt our strategy when it becomes clear that certain transactions or initiatives may no longer be viable. A few weeks ago, our team was faced with this very challenge. On April 17th, we announced the termination of the sale of our Kentucky operations to Liberty. Ensuring the best outcome for stakeholders remains our top priority, and we took a disciplined approach to evaluating the continued pursuit of a sale and what that would mean in terms of economics, regulatory expectations, timing, and certainty. We ultimately determined that the better outcome was to terminate the pending sale transaction and to continue our work to develop a clear strategy for our Kentucky operations. I'm thankful for the team's ability to react and adapt to shifting circumstances for the long-term benefit of our customers, employees, and investors. After the termination of the sale, AP met with the Kentucky commissioners and key stakeholders. We discussed Kentucky Power's future and the collaboration needed so that we may continue to serve our customers in a reliable manner while ensuring the financial health and discipline of Kentucky Power moving forward. In the near term, we're renewing our focus on the region and our support of the communities we serve. You'll see in the earnings call materials today that Kentucky Power's earned ROE for the 12-month period ending the first quarter of 2023 is 2.9%. This does not reflect a financially healthy utility, which needs to be resolved in consideration of the interests of all stakeholders. The underperformance is due in part to a number of unique issues that are and will be addressed for improvement over the course of the next year. As we think about the opportunities ahead for our Kentucky operations, the actions we will be engaged in include a refocus on economic development, enhanced local system reliability, and controlling customer costs. We plan to file a base case in Kentucky in June with an expected six-month commission approval process with new rates taking effect in January 2024. Other factors that will be beneficial in improving the financial profile and performance include using securitization to recover deferred storm costs and legacy generating plant balances and right-sizing the rate base. While we pivot in Kentucky, we're focused on the successful execution of other key transactions. In February 2023, we announced an agreement with IRG Acquisition Holdings for the sale of our 1,360 megawatt unregulated renewables portfolio. A summary of the renewable sale can be found on slide seven. All regulatory filings were made in March, and at this time we're waiting on approval from FERC under Section 203 and clearance from the Committee on Foreign Investment in the United States and Euro Antitrust. We already have cleared Hart-Scott-Rodino approval and China Antitrust. Consistent with our prior messaging, we expect this sale to close near the end of our second quarter 2023, depending on the timing of regulatory approvals. The proceeds from the transaction will be directed to our regulated businesses as we transform our generation fleet and enhance the electric delivery infrastructure. Furthering our commitment to simplify and de-risk the company, and summarized on slide eight, we've agreed with our joint venture partner, PNM Resources, to sell our portfolio of operating and developing solar projects in New Mexico. This 50-50 partnership is known as New Mexico Renewable Development, or NMRD, and we hold this within our unregulated operations portfolio at AEP. NMRD owns eight operating solar projects totaling 135 megawatts, one 50-megawatt project currently under construction, and six development projects totaling 440 megawatts. Last week, an advisor was selected to move forward with the sale process. We anticipate making a sale announcement early in the fourth quarter of this year, and we'll target closing by the end of 2023, subject to timing of regulatory approvals. We also have some news to share with you today. As you know, in October 2022, we announced the strategic review of our AEP energy retail business, which primarily operates in the PJM markets. We've completed that strategic review and decided that we will start a sale process for that business And we'll also fold into the process AEP onsite partners, which is our unregulated distributed resources business. We've hired an advisor to move forward and we'll keep you updated on the progress. We expect to launch the sale process sometime this summer, and we'll update you with the details along the way, but currently expect the completion of this transaction in the first half of 2024. We're focused on our core regulated utility operations and continue to evaluate all value additive potential activities to enhance their performance and look for opportunities to recycle capital. As a consequence of this effort, we decided to pursue a strategic review of three of our non-core transmission joint venture businesses, including AEP's interest in Prairie Wind Transmission, Pioneer Transmission, TransSource Energy. These businesses total approximately $551 million in net plant investment for AEP, and consists of 370 line miles and four substations of in-service assets, as well as various projects under development in PJM and SPP. We'll definitely keep you updated on our progress, but we expect to complete our review by the end of 2023 with a conclusion that consists of remaining in or divesting some or all of the businesses. So let's switch gears and talk about AEP's regulated renewables execution. I'm pleased to share that we continue to make significant progress on our transition to a clean energy economy that provides more stable and predictable costs to our customers. Through our five-year $8.6 billion regulated renewables capital plan, we have a total of $6.7 billion approved or before our commissions. Most recently, in March to be specific, we made regulatory filings for $1 billion of investment at I&M representing 469 megawatts of solar energy and another 151 megawatts of owned wind and storage at APCO for $466 million. Public Service of Oklahoma Company, along with other parties, filed a settlement in early April of 2023 in the fuel-free power plan case, which relates to PSO's 995.5 megawatt solar and wind portfolio for $2.5 billion. Like in any other negotiation, the settlement we focused on the assurance of customer benefits without undue risk to the company. In this case, the settlement provided crucial capacity without fuel expense that will help address PSO's large capacity need. The case took a positive step forward last week when the judge issued a preliminary opinion approving the settlement on April 27th, and the commission has the case on its agenda for today, May 4th. For SWEPCO's 999 megawatt renewables project, which represents a $2.2 billion investment, parties recently filed an Arkansas settlement in January for these owned wind and solar resources. In another positive development in Texas, the administrative law judge that oversaw the evidentiary hearing issued the preliminary order which recommended project approval. And in Louisiana, we reached a settlement. However, we were disappointed that the Louisiana Commission did not approve the settlement on April 26th. but we remain optimistic that the matter will be reconsidered at the next meeting this month. We look forward to the continued consideration in Louisiana and orders coming in Arkansas and Texas in the second quarter. It's important to note that our regulated renewables goals are aligned and supported by our integrated resource plans focused on reliability and customer affordability. In accordance with these plans, we have requests for proposals issued or preparing to be issued for additional resources at each of our vertically integrated utilities. We plan to make related regulatory filings over the next year while taking into consideration commission preferences from previous RFP processes. Now, let me provide an update on several of our ongoing regulatory and legislative initiatives. We're focused on reducing our authorized versus ROE gap. Have some work to do on that as our ROE was at 8.8% this quarter, driven in part by the unfavorable weather conditions that I mentioned earlier. On the effort to close the gap, I am happy to report that we reached the settlement and gained commission approval in January 2023 that closed out our SWEPCO Louisiana base case. A key to this case was the ability to reset rates and recover costs under a formula rate plan. We have already put this into action as we filed under this provision last month. Similarly, in April, AEP filed a formula rate review in Arkansas, which was authorized by that commission in the last base case. As we advance through 2023, the team is actively pursuing rider recovery of the 88 megawatts of the Turk plant, not currently in Arkansas rates. And the current base case in Oklahoma is set for hearing on May 9th. So we're making progress on the regulatory front. We also worked closely with our stakeholders on the legislative front in Virginia to improve the former triennial rate case process. The new biennial rate process became law in April after an active legislative session APCO filed its last triennial in March of 2023 for the 2020 through 2022 period. The new law will require APCO to file its first biennial in 2024 with the biennial continuing in subsequent two-year periods. So it's going to work like this. The pending triennial will put rates in place for 2024 while we litigate the biennial in 2024 for rates effective in 2025. And we can help you with your modeling needs once we get a little further down the line here. Pivoting to our fuel cost recovery efforts for a minute, our management of fuel cost recovery is a top priority for us with our total deferred fuel balance at $1.6 billion as of our first quarter. We adapted our fuel clause recovery across all of our jurisdictions with a focus on balancing customer impacts. In Texas, the commission approved the $83 million special fuel surcharge filed in October of 2022 and was being recovered subject to review since February 2023, so making progress there. We are aware of the staff prudence filing last Friday, April 28th in West Virginia that recommended a disallowance of certain fuel costs. The recommendation was rooted in the commission's prior reference to a 69% capacity factor at our coal facilities. Prudence review is a report produced by an outside consulting firm hired by the staff. The report relies on factors beyond AP's control and takes issue with some of the practices taken to ensure that our power plants would have fuel available to provide electricity during the peak winter period. Those in the area are very familiar with how the historic swing in fuel costs over the past two years placed extreme pressure on the system and fuel recovery mechanisms. We advocated for the securitization legislation that recently passed in West Virginia, knowing it provided an effective path to deal with those issues. In line with this strategy, APCO made a filing on April 28, seeking West Virginia Commission approval to utilize the new securitization tool to pay off the $553 million deferred fuel balance as of February 28, 2023. The filing also proposes to apply the mechanism to certain storm costs and legacy coal costs in a manner that minimizes cost impacts to customers while still addressing these historical costs. Related to the consultant's prudence recommendation, the new APCO filing also lays out the environment APCO was operating in over this volatile fuel time or time in fuel costs and the actions taken to ensure coal would be available on the most extreme days on the system. Our plan is to collaborate with the Commission to address customer and deferred fuel concerns together for a constructive path forward in West Virginia. After receiving the Commission approval, the plan would be to issue bonds to securitize a combination deferred fuel balance, deferred storm costs, and legacy coal plan balances in the amount of $1.84 billion in the first half of 2024. So wrapping it up, I'm pleased with the progress we're making, capitalizing on our momentum from 2022. We continue to deliver on our commitments and execute against our strategic objectives. We're taking a thoughtful and disciplined approach to simplify and de-risk our business and investments we make to support our positive earnings growth outlook. I proudly lead a team whose experience and expertise have made it possible for AEP to to lay new groundwork for future success while also responding and adapting to the rapid changes we're seeing in our industry. Together, we're delivering safe, clean, affordable, and reliable energy to our customers and communities, all while creating values for our investors. With that, Anne, I will ask her to now walk through the first quarter performance drivers and provide us with some details on our financing targets. So, to you, Anne.