American Electric Power Company, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, ladies and gentlemen, and thank you for standing by. My name is Abby, and I will be your conference operator today. At this time I like to welcome everyone to the American Electric Power First Quarter 2024 Earnings Conference Call. [Operator Instructions]
Thank you, Abby. Good morning, everyone, and welcome to the First Quarter 2024 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.
Well, good morning, and welcome to American Electric Power's First Quarter 2024 Earnings Call. Shortly, Peggy will give a regulatory update, followed by Chuck, who will provide more detailed financial review.
Thanks, Ben, and good morning, everyone. Now let's go to an update on several of AEP's ongoing regulatory initiatives. We are currently focused on investing more in people resources at the local level, particularly in regulatory and legislative areas.
Thanks, Peggy, and good morning, everyone. Today, I'll review our financial results for the first quarter, build on Ben's comments about our service territory load and finish with commentary on our financial metrics and portfolio management activities.
[Operator Instructions] And your first question comes from Jeremy Tonet with JPMorgan.
Just wanted to peel in maybe a little bit more on the data center points that you laid out there. And just wondering, we see a lot of forecasts out there on the time line of how quick some want to come to market, and we're trying to figure out how that matches against the system's ability to provide the power there in the connects. And just wondering how you see those 2 aligning? What does that mean for AEP over time versus plan?
Yes, those are all really good questions, Jeremy. And our team has done a tremendous amount of work thinking this through. I mean, first of all, I like to say, here at AEP that really wired for growth. And as you know, we've been making significant transmission investments over the years, and that's going to allow us, I think, to accommodate this first wave of growth we're seeing from data centers.
Got it. That's helpful. And maybe just to dive in a little bit more as we think about data center load sensitivity. Should we be thinking that more along the lines of commercial sensitivity or industrial sensitivity, as provided in your guidance if you think about demand outstripping the forecast?
Go ahead, Chuck.
Yes. So I would think of it, Jeremy, more like an industrial customer and that sensitivity there.
Got it. That's helpful. And then just the last one, if I could. As it relates to the external CEO search. Just wondering, has anything changed with regards to, I guess, the characteristics that are in focus for a candidate? How is the pool building at this point? Just wondering if there's any other color that you might be able to share on how the process is going?
Well, I can just tell you that the attributes and the qualities we're looking for remain unchanged from what I described on the fourth quarter call. We are well underway now. We've got some really good candidates, impressive candidates. It takes time to sort it all out. And there's other obviously, things that we need to look at.
Got it. And actually, if I could just sneak 1 last in. Just wondering on overall corporate strategy, could you talk more about where things stand for AEP decentralization efforts. And looking to kind of more closely align P&L to the end decision maker at the local levels. Just wondering how that's progressing?
Well, I think it's -- this is a focus of ours. And one of the -- and I'm going to turn it over to Peggy, she's developing -- has developed a detailed plan. But one of the things we want to do is put those local resources in our communities. And I know that's the right thing to do, just talking to stakeholders.
Yes, Ben, I think you pretty much covered. We have worked with the team and looking at how we can get some more of those -- enhance the resources from a regulatory and legislative perspective, having more boots on the ground.
And we will take our next question from Steve Fleishman with Wolfe Research.
So just in Ohio and Texas, your wires company, but in Indiana, where these last 2 announcements, I think you've got generation too. And are you -- so in some of these recent deals that announced -- the past week, are you supplying the generation as well? And is there going to be a generation need in Indiana related to those?
Well, we do have RFPs outstanding. Peggy, do you want to take that?
Yes. We do have RFPs outstanding in I&M. But to answer your question, yes, and are vertically integrated like Indiana, we will have to serve the generation component, and we are working with those large loads that are coming to us on what that would look like. And we are also focused on, as Ben mentioned earlier, redefining and looking at our tariffs as well. So that will be part of our strategy.
Okay. And just to kind of clarify back to the initial question. So the transmission grid is built up and has capacity to take on these customers near term. But is there still, even near term, is there more capital needed? Or is it more of this after this 5 years?
No, Steve, there'll be more capital needed, but I don't think it will be those massive 765 lines, it can take a long time to get built. We believe the team has done a lot of work on how we could accommodate that load within our footprint, working with PJM and others. And so yes, there'll be more spend, but it will be manageable and doable to the point.
Okay. And then on the FFO to debt, you're in the target range now. Is there anything about that that's kind of -- are you in there for good, do you think now? Is there any -- was there any timing reason? Or is it you're in that and expect to be in it throughout the year?
We were in the range. We expect to be in that range now. Our forecast that we review internally and with the agencies show us being in that range. So that's the plan, and we plan to defend that.
We will take our next question from Shar Pourezza with Guggenheim Partners.
It's actually Jamieson Ward on for Shar. He's on the road and regrets that he's not able to join you today, but we have a couple of questions for you here. The first was just on the annual customer bill increase, the pace there, you reduced it to 3% increases per year through 2028, which is great to see. Does that already take into account the anticipated infrastructure investment needed to support any future data center growth? Or could we see that number be revised as well?
Well, I mean -- the answer is the incremental stuff we're talking about and the incremental transmission investment, it's not included in that, but it's not going to be -- it's not going to drive that from 3 to 4. If anything, it should keep it level and perhaps even drop it a bit.
Got it. Terrific. And then expanding on Jeremy's earlier question, how are you approaching some of the more unique issues presented by data centers, for example, those who want to be behind the meter but still want to have an emergency tariff with the utility or data centers, which, as you mentioned, want to socialize the cost of interconnection through all rate classes but which may not have a major economic impact. If we can just get a bit more detail there.
I'm going to turn it over to Peggy in a second. But listen, it's got to be fair to all customers now, okay? I mean this is a big deal. It's an exciting big deal. But growth needs to be as close to self-funded as possible. And that's what I think we'll get with these tariffs and some of the other analysis that we're looking at.
Yes. So what I would add to Ben's comment there is that on our tariffs, we are looking at what minimum demands are. Most of the large loads are wanting to be connected to the system. But if they want some form of self-generation, we are asking so that we understand that, and we can include that, as part of our planning.
Yes. I mean the worst case scenario, and this is what -- to Peggy's point, what we're preventing is the load doesn't show up consistent with how we built the infrastructure. And when it does show up, it doesn't use, especially on a peak basis, the energy that we built for.
That's very clear. And then on the updated load growth forecast coming later this year, should we assume that at a high level, that means the EEI or are there particular IRPs or other proceedings that we should maybe watch out for? Which could come say, before EEI that would be driving that?
I mean I think the big update will come -- well, I understand EEI in the third quarter's earnings call right on the same, but it would either come on the third quarter or EEI unless there might be drips and drabs that get released before that, but that's what we're planning to do right now.
Understood. Got you. Last question from us is just on asset sales. In the deck, you mentioned remaining committed to simplifying the business in the immediate term with a focus on continued execution of the sale processes. So how should we think about the potential for any additional sales announcements, following the conclusion in the second quarter of the current process for the Retail and Distributed Resources businesses?
It would be on an opportunistic basis. We're going to look at -- we're always open to ideas. Chuck and I and the team have been around a while. We know that sometimes good ideas sound good on paper, but you can't execute on them. So we do filter that through the regulatory screening process, as you can imagine.
And we will take our next question from Carly Davenport with Goldman Sachs.
Maybe just going back to the balance sheet. As you think about your financing needs for the remainder of the year, can you just give us an update there? And if you expect to see any impacts relative to your initial plan with the move that we've seen in rates year-to-date?
Yes. Carly, the plan that we laid out at EEI is still intact. Other than I think at EEI, we had the West Virginia securitization in the plan, and that has been replaced by a Kentucky securitization, nearly of equal amounts.
Great. And then just going back to the commercial load and data centers. As you think about that and the expectation to raise later this year. Could you just talk a little bit about sort of what surprised the plan to the upside so materially thus far? Is it just sort of more success on the economic development front or more consumption from existing customers? Just any color on that would be helpful.
Yes. Carly, it's just mainly the ramp rates of the customers that have hooked up, have come on more rapidly than we anticipated. And so that's why you're seeing those big bumps in commercial load, as we go through the quarters here.
And we will take our next question from Nicholas Campanella with Barclays.
I'll try to keep it to 2. So I guess you talked about this need for growth equity. Can you just elaborate when you anticipate needing that? And what part of this 5-year plan would that be? And then I guess, just -- you do have $700 million to $800 million, I think, a year in your financing walk here of equity needs. Just why not do something sooner than later to kind of knock that out if the opportunity presents itself? I know you don't want to preannounce and go into a strategic review around 2, like you said, but maybe you can kind of give us some additional thoughts on how you're thinking about that.
I'll turn it over to my esteemed colleague here, Chuck.
No, Nick, it's a good question. I mean, look, as we said earlier, right? We're formulating, right, the changes to our plan and how ultimately, right, how financing is going to affect that.
Okay. I appreciate that. And then Chuck, I know that weather at VIU is kind of a $0.10 drag versus normal, but you also have some of these tax items in there as well. Just on the tax item benefits, is that normalizing from last year? Or is that one time in nature, as we kind of think about year-over-year into '25?
Yes. So Jeremy, about half of that will normalize throughout the year and the other half is onetime. Things that happened in '23 that won't happen again in '24. So it's a true increase.
We will take our next question from Durgesh Chopra with Evercore ISI.
I wanted to go back on your commentary, Ben, on portfolio optimization, new financing plan. Just to be clear, the financing plan, the CapEx update, the load board updates. Is that sort of -- should we think of that as a separate process and the CEO search? I'm just thinking about the 2 and are those 2 independent processes that we should think about? Or are they somehow tied? I'm thinking about the cadence of your updates, your new plan and then the parallel CEO search?
I mean, if I understand your question right, are we holding things back until the new CEO gets in place? Is that what you mean?
That's right, Ben. Yes.
No, no. I mean, no. I mean, we typically -- as you know, we typically update all our CapEx and financing plans and all those sorts of things at the time of EEI. And if there's something major in between, obviously, we give you updates. But we're not -- no, I mean I -- this company is not in neutral. I mean we really -- we're moving forward.
You did. That's exactly what I wanted to ask you, a very clear response. And then second question then, again, like you mentioned challenging the EPA proposed ruling. Maybe can you share a little bit more color there? Is it the carbon capture technology that you are referring to? And then you mentioned the accelerated plant retirements? Was that directed towards coal? Just any color you can share there.
Yes. Well, it's a great question. And again, I just -- I harken back to Steve Fleishman's report that came out a couple of months ago, where he talked about our industry, which if you aggregate market cap of somewhere around $0.5 trillion, being responsible for this -- we want our onshore data centers, artificial intelligence, reshoring of manufacturing. And it's our industry that has to do it. And we're going to build all the transmission we possibly can. That's not easy to get built either, but we are going to have to plug in to something.
And we will take our next question from Andrew Weisel with Scotiabank.
Two quick ones here, please. First, to elaborate on the commentary on load growth. Ben, I think, you mentioned that the incremental 10 to 15 gigawatts by the end of the decade. I assume that's across the entire portfolio. Can you talk a bit about the Vertically Integrated Utilities? You have about 20 gigawatts identified through the current IRPs. My question is, how soon might we see more filings to include the new expected load, which there is no doubt coming quickly.
Yes. So when I look at those incremental loads, I mean, Ohio, within the PJM footprint, Ohio is the biggest driver of it, although Indiana is definitely getting its share. And I suspect we will have to do incremental RFPs to capture that load. I can't give you the exact timing of when that would be.
We have -- so Indiana, we have an IRP that's coming up that's going to be later in November. But -- so that will be part of the process as we start to look at how we accommodate some of this load as we start to see it to come on as well. We'll be using those same types of process.
And just maybe outside of data centers, if you look down at SPP, that's a very constrained region as it is right now. They haven't seen a tremendous amount of data center growth today. It doesn't mean they won't. But in the meantime, we've got to make sure we've got adequate load to serve the load that we do know we have.
Okay. Great. That's very helpful. And one quick one on the voluntary separation program. Would there be any kind of meaningful onetime cash outflow associated with that? And if so, how would you finance it?
Yes. I think the -- so it would go into effect midyear, July 1, and so the annual savings that we would see this year would just about offset the severance cost. And then, of course, then on an annualized basis, '25 and beyond would benefit from that. And again, this is about -- yes, okay, I'll just stop there.
And we will take our next question from Ryan Levine with Citi.
On rate design for data center load what duration commitments and load ramp, are you assuming or looking for to help protect residential customers? Any differences on rate design between jurisdictions to call out? Any color is appreciated.
Yes. So I'll take that. Thank you for the question. I mean, generally, we need -- we'd have to be building long-term assets. So we need some commitments that are longer in nature. So I mean, we would think somewhere around the 10-plus, 15-plus year range, but we're working through that process now.
And then in the prepared remarks, you're seeing higher load and potential new investments. In terms of funding that potential new investments in the back half or outside of plan. Any -- how are you thinking about what tools are most advantageous to execute on that potential opportunity?
Well, as Ben mentioned, we would consider everything. Everything is on the table. But I think the underlying tenet is that we will defend our BBB credit.
And we will take our final question from Paul Patterson with Glenrock Associates.
I wanted to circle back on the onetime gain associated with the PLR ruling that you got -- or the letters that you got. What's the ongoing impact of that? And could you just elaborate a little bit more on -- I did read the 10-Q and that section of it, but I just wanted to make sure I fully understood it.
Yes. So thanks for the question, Paul. So that stand-alone ratemaking for tax purposes has really been on our radar for some time now. Really kind of results from some of our affiliates today generate taxable income and others generate tax losses, which has really kind of created the issue for us.
Okay. So that should be a positive going forward, assuming the regulators agree?
Once we're able to go through our jurisdictions and get it into rates. Yes.
And when I read the 10-Q, it said West Virginia was -- they've agreed to the stand-alone approach, correct? In the past, they've been a little bit -- is that right?
Yes, that's correct.
Okay. And then just with respect to transmission, FERC has some stuff coming out in a few weeks. And I was wondering if you had any idea about -- if you know what I'm talking about, it's the planning and what have you, sort of long-awaited reforms.
Yes. As far as the planning, I am told from our experts -- in-house experts that we don't anticipate having much of an impact on us. The grid-enhancing technologies, I'm not quite sure about that one.
So we do use grid-enhancing technologies. And as it relates to the planning information at FERC. I mean, our team has been very involved in it. I mean, I think they're looking at longer planning horizons and things of that nature. So our team has been at the table the whole time working with FERC on those.
Thank you for joining us on today's call. As always, the IR team will be available to answer any additional questions you may have. Abby, would you please give the replay information?
Thank you. This call will be available for replay today approximately 2 hours after the conclusion of the call and will run through Tuesday, May 7, 2024 at 11:59 p.m. Eastern Time. The number to access the replay is 1 -800-770-2030 or 1 -609-800-9909. The conference ID to access the replay is 79-39-795#. Thank you, ladies and gentlemen. This concludes today's call. We appreciate your participation, and you may now disconnect.