American Electric Power Company, Inc. (NASDAQ:AEP) Q4 2023 Earnings Call Transcript
American Electric Power Company, Inc. (NASDAQ:AEP) Q4 2023 Earnings Call Transcript February 27, 2024
American Electric Power Company, Inc. misses on earnings expectations. Reported EPS is $1.23 EPS, expectations were $1.27. American Electric Power Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the American Electric Power Fourth Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Darcy Reese, Vice President of Investor Relations. Please go ahead.
Darcy Reese : Thank you, Regina. Good morning, everyone. And welcome to the fourth 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 a discussion of these factors. Joining me this morning for opening remarks are Ben Fowke, our Interim President and Chief Executive Officer; Chuck Zebula, our Executive Vice President and Chief Financial Officer and Peggy Simmons, our Executive Vice President of Utilities. We will take your questions following their remarks. I will now turn the call over to Ben.
Ben Fowke : Well, thank you, Darcy. Good morning and welcome to American Electric Power’s fourth quarter 2023 earnings call. It's great to have a chance to reconnect with you, although I never thought it would be under these circumstances. As you know the AEP board of directors made a decision to remove Julie Sloat from her duties as Chair, President and CEO. Taking this action was not easy, but the board believes it was in the best interest of AEP and its stakeholders to do so. On behalf of the board and the entire AEP family. I would like to wish Julie well and thank her for all her contributions. I would also like to assure everyone that Julie's departure was not due to any unethical behavior, disagreements of financial policy or because of any violation of AEP’s code of conduct.
Now, as many of you are aware after my retirement from Xcel Energy, I joined the AEP board in February of 2022. I was attracted to this board because I was impressed with AEP’s business model, its strong asset base and the quality of its leadership team and board. I'm even more impressed two years later. In my tenure here, I've seen the AEP team rise to meet multiple challenges. Let me give you some examples starting with earnings. For 14 years in a row, AEP has met or exceeded earnings guidance, and 2023 is no exception. Our operating earnings came in at $5.25, that's within our guidance range despite $0.37 of unfavorable weather and $.45 of increased interest cost over the prior year. As you know, controlling O&M expense has been a challenge for the industry.
And AEP has met that challenge, essentially keeping O&M flat for the last 10 years, while at the same time doubling its asset base. This team's continuous focus on O&M efficiency is nothing short of excellent. You may also recall that in early 2023, the Texas Commission denying a petition to be part of SWEPCO is 999-megawatt renewables project for $2.2 billion. But the team didn't miss a beat and put the project back on track with Arkansas and Louisiana ultimately stepping up to move forward with the full project. As a result, and including SWEPCO. Today, we have commission approval of $6.6 billion of new renewable projects throughout AEP’s service territory, representing a 70% achievement of our current 5-year $9.4 billion new generation capital plan.
I hope you would agree with me that that is really solid execution. Initiatives to simplify and de-risk our portfolio are squarely in the focus of the board and the management team. And we are pleased with the great progress made. Last year, we completed the sale of our unregulated renewables portfolio, bringing in $1.2 billion of cash proceeds. We should be closing on our New Mexico renewable development solar portfolio within the next day or two. This in combination with the expected conclusion of our retail and distributed resources sales process in the second quarter, keeps us on schedule to achieve our 2024 asset sales targets. Now as we move forward, AEP will continue to be a disciplined portfolio manager and we will be willing to take action when price and the ability to execute intersect.
To that end, we've made the decision to retain our ownership interest in both our Prairie Wind and Pioneer Transmission joint ventures. We also completed the review of Transource and ultimately determined that owning this joint venture fits strategically within our portfolio. We'd like our remaining assets. And we'll focus going forward on doubling down on our efforts to achieve constructive regulatory outcomes that will allow us to provide the quality of service our customers need and expect. Regarding Icahn Capital, our recent agreement came about from a combination of a constructive dialogue between AEP and the Icahn teams. Like us, the Icahn team believes AEP shares are undervalued and there's meaningful upside potential for our investors.
The addition to AEP’s board will bring fresh perspective as we continue to execute on strategic priorities and enhance value for our stakeholders. Looking ahead, today, we are reaffirming our 2024 full year operating earnings guidance range of $5.53 to $5.73, as well as our long-term earnings growth rate of 6% to 7%, which is underpinned by a $43 billion 5-year capital plan, in addition to 14% to 15% FFO to debt target, which Chuck will expand upon shortly. You should know that I am committed to my role as Interim President and CEO. And I believe I can add value while the board works to identify a permanent successor. So before I turn it over to Peggy for regulatory updates and Chuck for financial review, let me also acknowledge that 2023 has been at times a challenging year at AEP.
There's certainly been some twists and turns and a few bumps in the road. But I would encourage all of you to focus on the key opportunities that lie ahead. I have tremendous confidence in our team's ability to achieve our objectives as we work every day to deliver safe, reliable and affordable energies to our customer. With that, I'll turn it over to Peggy.
Peggy Simmons : Thanks, Ben. And good morning, everyone. Now I'd like to turn to update on our ongoing regulatory and legislative efforts. While we made important regulatory progress in 2023, it is clear that we can do even more to facilitate successful and constructive outcomes. Details of related activities can be found in the appendix on Slides 29 through 31. Closing the authorized versus earned ROE gap is a key area of focus for us. Our fourth quarter ROE came in at 8.8% a slight improvement over third quarter. This also reflects impacts of approximately 40 basis points from mild weather conditions in 2023. Our efforts to improve and bridge the ROE gap is supported by work we've done related to the recent passage of legislation that will help position us to provide safe and reliable service while managing costs and reducing regulatory lag.
Most importantly, we obtained securitization in Kentucky, a biannual Distribution Cost Recovery Factor or DCRF in Texas, and rate reviews every two years in Virginia. On the regulatory front, we secured several important wins over the course of 2023, including achieving constructive base rate case outcomes in Louisiana, Oklahoma, and Virginia, reestablishing formula rate plans in Arkansas and Louisiana and reaching a settlement and our Ohio ESP V filings, which were waiting to commission order. Overall, in 2023, we secured $312 million and rate relief. We also filed new base cases in Indiana, Michigan and Kentucky in 2023. In Indiana, we have already reached a settlement, which we filed in December, and we expect the commission decision by June of this year.
In Michigan, we continue to advance through the process and currently expect a ruling in the case in July. In Kentucky, the base case and securitization application was approved by the commission earlier this year. Other upcoming cases include a new Oklahoma base rate case for PSO, which we filed last month. Additional filings in the first quarter will include an AEP Texas base rate case and the APCo Virginia biennial rate review that should have the benefits of legislative changes attained in 2023. While we reached many constructive outcomes in 2023, we are disappointed in a couple disallowances recently received. First, in Texas, the commission issued a decision disallowing capitalization of AFUDC related to our Turk plant in mid-December 2023.
And we filed a motion for reconsideration a week later. In West Virginia, last month, the commission disallowed a portion of our March 2021 to February 2023 under recovered fuel, and we recently filed an appeal with the West Virginia Supreme Court on February 8. We are also disappointed with the FERC order we received in January 2024 related to treatment of accumulated deferred income taxes associated with net operating loss carryforwards, or NOLC, mostly affecting our Transmission Holdco segment. We just filed for rehearing on February 20. Shortly, Chuck will discuss the related unfavorable net financial impact to 2023 operating earnings. Looking ahead, we know there is more work to be done as we advance our regulatory strategies in 2024 to achieve a forecasted regulated ROE of 9.1%.
We are well on our way this year with almost 70% of rate relief either secured or related to mechanisms that are more administrative in nature. We look forward to continuing to engage constructively with our regulators and strengthening relationships at all levels. As Ben mentioned, this year, AEP continued to advance our 5-year $9.4 billion regulated renewables capital plan and now have a total of $6.6 billion approved by various state commissions. More detail of resource additions can be viewed in the appendix on Slides 32 through 34. As previously disclosed, we received approval for APCo's 143 megawatts of wind generation, totaling more than $400 million of investment. This is in addition to the previously approved 209 megawatts of solar and wind projects for approximately $500 million.
In 2023, we also received commission approval in both Indiana and Michigan for I&M 469 megawatts of solar projects, representing $1 billion of investment, PSO's 995.5-megawatt renewables portfolio for $2.5 billion and SWEPCO's 999-megawatt renewables for $2.2 billion. Our fleet transformation goals are aligned with and supported by our integrated resource plan. We have pending requests for proposals for a diverse set of additional generation resources at I&M in Kentucky, PSO and SWEPCO, with more to come from other operating companies, including APCo. These generation investments are an integral part of our broader capital program, which is 100% focused on regulated assets and the production tax credits that are generated from our renewable energy projects, our path along to and provide great value to our customers.
In addition to these projects, AEP is advancing an additional $27 billion in investments in our transmission and distribution systems to support reliability and resiliency. These combined investments underpin our 6% to 7% EPS growth commitment while mitigating customer bill impacts. With that, I'll pass it over to Chuck to walk through the performance drivers in details supporting our financial commitments.
Chuck Zebula : Thanks, Peggy. And good morning to everyone on the call. I'll walk us through the fourth quarter and full year results for 2023, share some updates on our service territory load, our outlook for this year and finish with commentary on credit metrics and liquidity. Let's go to Slide 9, which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. GAAP earnings for the fourth quarter were $0.64 per share compared to $0.75 per share in 2022. For the year, GAAP earnings were $4.26 compared to $4.51 in 2022. As we have highlighted throughout 2023, our year-to-date comparison of GAAP to operating earnings reflects the gain or loss related to the sale of certain businesses, regulatory outcomes as well as our typical mark-to-market adjustments as non-operating.
Our team is committed to minimizing the variances between GAAP and operating earnings as we go forward. Detailed reconciliations of GAAP to operating earnings are shown on Slide 16 and 17 of the presentation today. Let's quickly cover the fourth quarter. Our fourth quarter earnings came in at $1.23 per share, which was a $0.18 improvement over the same period in 2022. Note that we had $0.25 of favorable O&M and strong performance in our Generation and Marketing segment, partially offset by $0.06 of unfavorable weather, $0.09 of higher interest costs and lower performance in Transmission Holdco. December weather, in particular, was the 28th warmest out of the last 30 years. For reference, the full details of our fourth quarter results are shown on Slide 15 of the presentation.
Let's have a look at our full year results for 2023 on Slide 10. Operating earnings were $5.25 per share compared to $5.09 per share in 2022. Looking at the drivers by segment. Operating earnings for Vertically Integrated Utilities were $2.47 per share, down $0.09, mostly due to unfavorable weather, higher interest expense and higher income taxes. These items were partially offset by rate changes across various operating companies, increased transmission revenue, higher normalized retail load, favorable depreciation and lower O&M. Once again, depreciation is favorable at the Vertically Integrated segment, primarily due to the expiration of the Rockport Unit 2 lease in December 2022. The Transmission and Distribution Utility segment earned $1.30 per share, up $0.14 from last year.
Positive drivers in this segment included increased transmission revenue, rate changes in Texas and Ohio and lower O&M. Partially offsetting these items were unfavorable weather, higher depreciation and higher interest expense. The AEP Transmission Holdco segment contributed $1.43 per share, up $0.11 from last year. Positive investment growth of $0.09 and favorable income taxes of $0.05 were the main drivers in this segment. As Peggy mentioned, we received the FERC NOLC order in January, resulting in an unfavorable net impact to consolidated earnings of $0.07 per share, with the majority of that impact occurring at the Transmission Holdco. The impact of this order to our 2024 plan is approximately $0.03 per share. Generation and Marketing produced $0.59 per share, up $0.09 from last year.
The positive variance here is primarily due to improved retail and wholesale power margins, the sale of renewable development sites and favorable impacts associated with the contracted renewable sale in August. These items were partially offset by higher interest expense and unfavorable income taxes. Finally, Corporate and Other was down $0.09 per share, driven by higher interest expense, partially offset by a favorable year-over-year change in investment gains, largely due to investment losses that occurred in the fourth quarter of 2022. As we mentioned earlier, we are reaffirming our guidance range for 2024. For convenience, we've included an updated waterfall bridging our actual 2023 results to the midpoint of our guidance this year in Slide 24.
While some variances changed due to last year's actual results, there is no change to our segments or overall guidance. Turning to Slide 11, I'll provide an update on weather normalized load performance. Overall retail load grew 2.5% in 2023. This was stronger than the 0.7% in our original guidance, thanks to an acceleration in data center growth and our commitment to economic development across our service territory. This is most apparent when looking at the incredible expansion in commercial load, shown in the upper right-hand quadrant of the slide. Commercial sales grew 7.8% for the year, and were again dominated by data centers. We are encouraged that the gains are becoming more geographically diverse. New projects have come online in Michigan, Kentucky and Oklahoma to supplement the development of what we see in Ohio and Texas.
This is a trend we expect to continue over the next several years as the global demand for data storage and processing accelerates through the growth of AI and other technologies. We expect commercial load to continue to grow from its new higher base this year as projects work their way through the queue and commitments for 2025 are exceptionally robust. I believe that some of the 2025 load is going to accelerate and bleed into this year. Industrial sales grew at 1.6%, which you can see in the lower left-hand quadrant of the slide. This is mostly attributable to a number of large industrial loads we've recently added across our service territories, which are more than offsetting any economic challenges seen by our existing customers. We expect industrial load growth to continue to reflect the softness in manufacturing nationally, with only a modest increase this year.
However, growth in industrial sales beyond this year should accelerate as borrowing costs moderate and several large loads currently under construction come online. In the upper left-hand corner of the slide, you'll see that residential load declined slightly in 2023. Usage per residential customer has declined for the past two years, as homes have become more energy efficient and workers spend more time in an office instead of at home. The negative impact of inflation on household budgets may be influencing usage as well. On a positive note, we've seen our residential customer base grow consistently in certain regions. In 2023, we added almost 31,000 net new residential customers across our footprint, resulting in a positive offset to this segment.
Overall, we're optimistic about the positive trends in load over the next several years, especially from a commercial and industrial perspective. Our conservative approach to estimating large loads gives us a lot of confidence in the growth we forecasted. In our next update, however, I would expect to see some upside in this area. Let's move on to Slide 12 to discuss the company's capitalization and liquidity position. In the top left table, you can see the FFO to debt metric stands at 13.2% for 2023. Positive changes in FFO were as outlined on the third quarter call, and included favorable changes in cash collateral, fuel recovery and other various drivers. These positive changes were somewhat offset by an $830 million increase in debt during the quarter primarily due to the issuance of long-term debt to prefund our March 2024 AEP parent maturity.
We are pleased that the team has overcome strong financial headwinds due to unfavorable weather and an unprecedented increase in interest rates to end the year above Moody's downgrade threshold of 13%. We expect our FFO to debt metric to continue to improve throughout 2024 as we progress towards our targeted range of 14% to 15%. This continued positive trend assumes normal weather for 2024 and continued growth in our cash flows through various regulatory activities, including recovery of our deferred fuel balances of approximately $425 million. Our debt to cap increased from the prior quarter by 60 basis points to 63%, and our parent debt to total debt is approximately 21.7%. In the lower left quadrant of this slide, you can see our liquidity summary, which remains strong at $3.4 billion, and is supported by our bank revolver and credit facility.
Lastly, on the qualified pension front, our funding status remains unchanged from the prior quarter to end the year at just over 100%. While falling interest rates increased the liability during the quarter, this increase was offset by positive asset returns. Turning to Slide 13. I'll give a quick recap of today's message. We delivered on our commitments for 2023 despite the significant challenges we faced. Weather was one of the most mild years on record for the AEP system in the past 30 years, resulting in a negative $0.37 impact year-over-year and $0.21 versus normal weather. To put a little more context to those numbers, our heating degree days were down 36% compared to normal across the system. Also, interest expense was a $0.45 hurdle to overcome versus 2022 results.
We work diligently throughout the year to reprioritize and balance our plan by adjusting the timing of discretionary spend while staying focused on meeting our core business needs. While admittedly facing some challenges on the regulatory front, we secured many rate outcomes that were critical in supporting our objectives to provide reliable service to our customers. Looking into this year, we are optimistic about the opportunities and prepared to face any challenges ahead of us. We reaffirm our guidance for 2024 of $5.53 to $5.73 per share, our long-term growth rate of 6% to 7% and an improved balance sheet while continuing to implement our capital program, taking care of the customer, earning our authorized return and executing on our strategic priorities.
I would like to take a moment and thank Julie Sloat for her 23 years with AEP. Julie has made a positive impact on AEP and will be missed by many. Ben, we welcome you to the AEP management team. Your leadership in the industry is well respected, and you will be embraced by the employees of AEP. The entire management team looks forward to working with you and the board as we look to enhance value for all AEP stakeholders. Thank you for your time today. Operator, can you open up the call for questions.
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