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. [Operator Instructions] 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 a discussion of these factors. Joining me this morning for opening remarks are Julie Sloat, our President and Chief Executive Officer; and Ann Kelly, 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 and 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 2023 business highlights can be found on Slide 6 of today's presentation. We 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 $1.11 per share, or $572 million. Weather 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, and with a $5.29 per share mid -- $5.29 per share midpoint and long-term earnings growth rate of -- growth rate range of 6% to 7%. We're confident in the built-in…

Thank you, Julie and Darcy. It's good to be with you all this morning, and thanks for dialing in. I'm going to walk us through our first quarter results, share some updates on our service territory load and finish with commentary on credit metrics and liquidity, as well as some thoughts on our guidance, financial targets, and portfolio management. Let's go to Slide 9, which shows the comparison of GAAP to operating earnings for the quarter. GAAP earnings for the first quarter were $0.77 per share compared to $1.41 per share in 2022. For the quarter, I'll mention that we reflected the loss on the expected sale of the contracted renewables business as a non-operating cost, as well as an adjustment to true-up expected cost related to the Kentucky transaction in addition to our typical mark-to-market adjustment. There's a detailed reconciliation of GAAP to operating earnings on Page 15 of the presentation deck. Let's walk through our quarterly operating earnings performance by segment on Slide 10. Operating earnings for the quarter totaled $1.11 per share or $572 million compared to $1.22 per share or $616 million in 2022. The lower performance was primarily driven by the unfavorable weather, as Julie mentioned. When looking at historical weather in the first quarter of the past 30 years, we've only seen one quarter with more mild weather than the first quarter of 2023. Operating earnings for our Vertically Integrated Utilities were $0.52 per share, down $0.07. Favorable drivers included rate changes across multiple jurisdictions, normalized retail load, off-system sales primarily associated with Rockport Unit 2, transmission revenue and depreciation. I have more to share and load and performance, and we'll get to that in a minute. These items were more than offset by unfavorable weather, higher O&M and income taxes largely related to…

Thank you. [Operator Instructions] Our first question will come from the line of David Arcaro with J.P. Morgan. Go ahead.

Hi, thanks so much for my question. Dave Arcaro at Morgan Stanley. Let's see, maybe starting on the transmission business, I was wondering if you could elaborate a little bit on your strategic thinking there. What makes those assets non-core? Why that size of assets? And wondering what you're thinking -- if it does come to a divestiture decision, what you would plan to do with the proceeds? Could that reduce equity needs in the plan from here?

Yeah, thanks so much. Appreciate the question. As we continue to talk about simplifying the business, I wouldn't necessarily put the transmission strategic review of the JVs as a derisking, because we are very comfortable with the risk profile of transmission, JV or otherwise. So that being said, this is more about simplification and really focusing on our ability to deal with customers in our footprint. So, nothing wrong with these assets. We love the assets. But we'd really like to take those dollars and channel them toward the traditional core utility business and transco utility business we have at American Electric Power. So -- and why Transource and Pioneer and Prairie Wind? Again, those are outside of our traditional footprint that we have today. ETT is a little different, and it is not necessarily under currently -- or not under current review at this point, as we focus on these pieces that are outside of our footprint. So, we'll see how this goes as far as utilizing any proceeds that we would have from a sale transaction should that occur. Again, this is a strategic review. We haven't made any decisions yet. What you should expect us to do is the same thing we've been talking about, dollars get channeled to traditional investment in the regulated utility operations. Clearly, have a lot to do on the transmission side. But when you bring dollars in the door, our expectation is to maintain a very healthy balance sheet. We've got a little bit of work to do. Ann talked about that in her opening comments. The metric should heal by the end of the year. So, we feel confident in that regard. But going out further in the timeline, we would always look to make sure the metrics are good. And then if we can, responsibly reduce equity issuances in future periods. But again, strategic review underway. We'll keep you apprised. And I would expect this would be more of a story as we get through the end of 2023 with the strategic review. And if anything were to occur, being 2024 story for us. So, thank you for the question.

We'll go next to line of Jeremy Tonet with J.P. Morgan. Go ahead.

Hi. This is actually Aidan Kelly on for Jeremy. Good morning. So just shifting to the New Mexico and retail distributed resources sales, could you talk more about the prospective of buyer market you're seeing right now? Any insight on the type of buyer you would be interested here? Also, just any language on OnSite Partners as well with the G&M segment would be great. Thanks.

Yeah, you bet. So let me take a couple of different tacts at this. So number one, as you know, we've had a strategic review underway for the retail business. So that shouldn't be a surprise. Scooping in the OnSite Partners businesses is the new addition today. Those comprise about -- Energy Partners is about, I'd say, $0.04 of -- I'm sorry, I should say, retail business is about $0.04 of the component that we're talking about in terms 2023 guidance. OnSite Partners is about $0.02. So let me give you those parameters, so you know exactly what we're talking about. NMRD is about $0.01 of the 2023 guidance. You got a few pennies there that we're playing with. As far as who are the likely buyers, let me answer it this way. We're already dealing with a multitude of buyers from our unregulated contracted renewables business. So, we're very familiar with that space because we have that contract underway with that piece of the business. NMRD, I would think would fit more closely with that type of activity in terms of the parties that might be interested in that particular asset base. But then let's move to the retail business. I think you got a little bit more of a narrower or more unique buyer set for that particular piece of the business. And then -- and I won't go into any names, but just given the nature of the business, the field narrows just a touch. And then on the distributed part of the business, meaning OnSite Partners, it got hundreds of parties that could be potentially interested in that. The other thing that we're thinking about is when we start working with our financial advisor to move forward with the transaction, there could be a situation where you have a combined platform where both the retail and the distributed pieces of the business are put together and sold that way. But we're completely open to separating the [two tube] (ph) just because you've got different buyer bases. Can't really opine on it yet just because we're just getting started with it, but we will absolutely keep you apprised of what our progress is and what we're experiencing as we move through time here. So early stages, but well underway in terms of getting the financial advisor kicked off and then the process started.

We have a follow-up question from the line of David Arcara with Morgan Stanley. One moment, please. Apparently, that line is not in queue. We'll go next to the line of Shar Pourreza with Guggenheim Securities. Go ahead, please.

Hi. This is James Ward on for Shar. Thank you for taking our questions. First, as you look towards your June rate case filing in Kentucky, how are you thinking about the key asks in this case? And as a follow-up, could you expand on how you see capital allocation to this jurisdiction developing in the context of your overall investment plans over the forecast period?

I still appreciate that. And I get it, you guys have a really busy morning. So, I know we have different names who don't typically cover us. So, I just -- I'm still appreciative of your time and attention today. Lots of companies reporting. So that being said, on the Kentucky front, stay tuned, because what you'll -- you should expect us to do is be in conversations with the different stakeholders, with the commission, and staff in particular in Kentucky to make sure we're scratching all the inches. We want to be successful in the arena. And we are going to absolutely have a very thoughtful approach in sensitivity to reliability. We need to make sure that we're keeping the lights on and keeping them affordable for the state of Kentucky and the area that we serve in particular. So, I have a lot of granularity to share with you today other than to assure you that we will be working collaboratively with the partners in that jurisdiction. So, extremely important to us particularly when you look at where the current ROE is. We need to get that up. We need that utility company to be in a healthy situation so we can continue to have low cost capital allocated to that particular piece of the business. And then, I'll ask Ann to talk a little bit about our capital allocation and how we're going to digest that from Kentucky.

Right. So, our capital plan, the $40 billion capital plan going forward is not going to change. We would just be reallocating from other areas within the same segment. So, you would expect to see the transmission, distribution, generation, all those planned numbers for the five-year timeframe will stay the same. We will just allocate within jurisdictions to Kentucky to make sure that they are focused on reliability, as Julie mentioned.

Our next question will come from the line of Durgesh Chopra with Evercore. Go ahead.

Hey. Good morning, team. Thanks for giving me time. Hey, just I know you gave us property plant and equipment number on the transmission assets, which are up for strategic review. Is there a rate base number that you have handy that you can share with us? If not, I'll just follow-up with Darcy.

You know what, Durgesh, thank you so much for your question. I don't have a rate base number in front of me. We can absolutely get that to you though. So, we'll circle back with you. But the $551 million, as you point out, is the net plant position that is attributable to AEP in particular.

We'll go next to the line of Andrew Weisel with Scotiabank. Go ahead.

Hi, good morning. Thank you. First question on the balance sheet. Just to clarify, if none of these transactions move forward besides contracted renewables, what's your degree of confidence in the targeted credit metrics and FFO guidance, and over what time period?

Yeah. So what I talked about earlier was based on that scenario. We have not modeled in any additional asset sales transactions besides the contracted applicable. So, we would expect an improvement by year-end and getting it within our targeted metrics early next year.

We'll now go to the line of Anthony -- pardon me, Anthony Crowdell with Mizuho. Please go ahead.

Great. I guess two quick questions. One is on Slide 27 that shows the underearning gap. I guess when I look at the like five OPCos that are under earning anywhere between 90 to greater basis points. What's a reasonable assumption of underearning we could assume when you closed that gap and during what timeframe? And then the follow-up is -- and I may have not heard correctly. I think -- I don't know if it's a Turk plant or the Rockport plant, you've bought back or it's maybe not part of lease or maybe I didn't hear that correctly. Does that now move to the G&M segment in reporting? Thank you.

Yes. Thanks so much for the question. I'm going to take your first one on the ROEs. I'm going to back up the truck a little bit. You may recall when we provided 2023 earnings guidance, the average ROE across the system for our regulated businesses was going to be around 9.4%. Today, as you know, we're at 8.8%. So here's my expectation. I expect we're going to close that gap as we get toward the end of the year. And as you know, I mentioned several different regulatory filings and successes that we've had in 2023 that are going to help us close that gap. So we feel confident that gap will close, but I do expect that we'll be a little under that 9.4%. Importantly, we have not changed our earnings guidance, so we still plan to get within the goalpost on the earnings guidance and growth rates. So I'm not worried about that either, but it's going to take us a little longer to close the gap versus the 9.4% that we had in that 2023 guidance. So, I'll leave you with that. And as you know, we're not dependent on any single one utility company to get in a direct earning level relative to authorized, that's the benefit of having a portfolio of utilities. But boy, I surely would love to close that gap and be within 10s of basis points versus the authorized in each of our jurisdictions. That's an objective. It's just going to take us a little while to get there because, as you know, these things have a little bit of a lead time on them. So stand by and know the guidance is sound. And then on the Rockport unit, that actually it becomes a merchant unit. And I believe that's captured in, what, our Vertically Integrated Utilities segment, right? And that would be captured as off-system sales, okay? So, hopefully, that will help you with your modeling needs there, too.

And that's due to the ownership structure. So, we didn't want to move it because it's still owned by the Vertically Integrated Utilities.

We have a follow-up question from the line of Shar Pourreza with Guggenheim. Go ahead.

Hi. James Ward here again. Thank you for this follow-up. Unrelated to the prior question, just wanted to ask, assuming the successful eventual sales of both your retail business, distributed resources and the three non-core transmission JVs you highlighted today, how should we think about the source of funds for future financing needs? And specifically, will asset sales and capital recycling always factor into your financing approach? Or is there a point at which you would no longer look to recycle assets? Thank you.

Yes, I -- this is Julie. I'll hand it to Ann here in a minute. Here's how I look at it. Simplification and derisking the business should be part of our fabric. So, we are going to continually look at where the best use and highest value is for each of the dollars that we put to work. So I think that's our job is to make sure that the portfolio of assets we have is the best we can have in the highest earnings. You go back to the question I just answered around earning your authorized ROE, we have to do better at that, and we'll continue to do better at that as we go down the path here. So, I do think you should keep that in back of the mind. We will continue to keep you updated on and signal to you if we think there's a business that might fit that profile that we would consider recycling it. But the ones that you see us talking about today are the ones that are absolutely those in terms of strategic review on the JV side of the house, transmission that -- we love transmission, but we may be able to put that to better use inside the traditional footprint. And then, clearly, on the unregulated side of the house, we want to derisk and simplify. It makes complete sense to move forward with those actions that we outlined today. So Ann, I don't know if you want to talk any more about or add any additional color to that?

Yeah, I mean you're absolutely right, Julie. And when we look at the cash flows, which are on Slide 24 that we've only modeled in the contracted renewables sale here. So any additional sales proceeds will also be able to strengthen the balance sheet. And as we mentioned, we could potentially selectively reduce the equity issuances going forward, while maintaining the same capital plan.

Our next question will come from the line of Sophie Karp with KeyBanc. Go ahead.

Hi. Good morning, and thank you for taking my question. I wanted to ask you about the Texas utilities and the ROE gap there. I guess in Texas, the regulatory recovery mechanisms are very constructive, right? So, you have your DCRF and TCOS and whatnot. So what needs to be, I guess, addressed there to close that gap specifically? Could you speak to that?

Yeah, I still appreciate that question. So thanks for being on the call today. We're working on it. So let me start with the backdrop on the story. As you know, we continue to channel a great deal of capital to AEP Texas. We do think the recovery mechanisms there are very good. We always think there's opportunity for improvement. So I'll talk about that here in a moment. But one of the things that we've gotten comfortable with, with the touch of underearning relative to authorized in Texas, is the amount of growth that we have in Texas. So on average, we can grow earnings there at 10%, but I got to take a little bit of a haircut because no regulatory recovery is perfect. But we're trying to work on that. And so for example, if you read on Page Number 27, there's some commentary under the little earnings bubble there that we talk about bi-annual TCOS filings to recover significant capital investment. Those good things. We love that. We do have some legislation that is in process and working through that relates specifically to the DCRF and the ability to shorten that timeframe. So maybe we can do that twice a year versus annually. So that will help to kind of close that gap a little bit. And then there's also some legislation around cap structures, too, that might be helpful to us. So, we're trying to work all the different angles. Not to mention the other thing that we're thinking about and continue to talk about is, a way to continue to use those excellent cost recovery mechanisms that are much more progressive in Texas throughout the period, even when you're in for a base case. So, we're trying to use the legislative aspects as well as just trying to be as efficient as possible to close that gap. But we've been comfortable in the near term, taking the little bit of a hit relative to authorized on the ROE because we can grow earnings there and the demand is there. So that was the rationale. But we love the business. We're just trying to make it better in terms of recovery.

We'll go now to the line of Julien Dumoulin-Smith with Bank of America. Go ahead.

Hey, good morning, team. Thank you guys very much. Appreciate the time. Just following up on a couple of the remarks earlier. Just can you elaborate a little bit more on next steps here as you think about Louisiana? Obviously, a little bit of a setback here, but you alluded to potentially putting this back on the -- or maybe not you all, but perhaps the commission electing to reconsider the matter next month. Can you elaborate on the procedural element there, but also some of the other avenues, there's a flex consideration here that can be pursued to the extent to which there may be different outcomes?

Yes. Julien, thank you for being on the call today. And that is absolutely top of mind for us. As you know, and I mentioned in my opening comments, we're able to get to a settlement agreement and the Louisiana staff filed constructive testimony with conditional approval, all that good stuff. So, we want to continue to work that angle. And actually, one of the commissioners suggested that the decision could be recalled at the next meeting for reconsideration once some additional information is shared. So, we have that top of mind for us. So here's what you should expect from SWEPCO. You should expect to see us seeking rehearing in which we continue to be optimistic that we can pool this across the goal line. So, stay tuned on that. I don't want to get too much in the weeds on it just yet because we're literally in game with that right now. And then specifically, we would hope that this is going to move forward, and we'll have all three jurisdictions stepping in line and be able to absorb with positivity, the applications that we have in front of them. But do we have flexibility in terms of flexing up in the other jurisdictions? On a discrete basis, we think that there is that opportunity with the different projects that we have that are included in that filing. So again, nothing specific to share today. But rest assured, we're looking at all the different tools and angles in the tool bag there that we're able to use should we need a different route if Louisiana can't get there. But we're optimistic and we're having conversations, so stay tuned.

We'll go next to the line of Paul Fremont with Ladenburg. Go ahead.

Thank you. I guess my first question is on FFO to debt. In order to hit the sort of the 14% to 15% targeted range, should we assume that you need to basically collect on the $1.6 billion in fuel deferrals? And can you give us a sense of the timing that you would expect to recover those amounts?

Yes, I'll take that, Julie. So, we would expect to collect over the extended timeframes that we have already agreed upon within our jurisdictions. And with respect to West Virginia, we have that model taking advantage of the securitization in the first quarter or the first half of next year.

We have a follow-up question from the line of Sophie Karp with KeyBanc. Go ahead.

Hi. Thank you for giving me more time. If I can ask a follow-up on Kentucky, right, like asked differently, when you spoke to regulators there, and clearly, you need to bring the ROE up, right? But what kind of a rate increase would that require for Kentucky rate payers? And like do you get the sense of kind of like the upper limit of the appetite that the regulators might have for rate increases in this environment?

Yeah. So, let me answer that this way. I don't have specific numbers to share with you today because when we actually had the conversation, we hadn't announced earnings yet, okay? So that's new information today, that's public today. And so this will be the go-back conversation that we'll have. And again, the plan is truly to collaborate, because I'm confident that the commission and the commissioners are interested in having a very sound -- financially sound utility company. And so we'll all be working in that same direction. Now as far as tools in the tool bag, obviously, we'll try to influence the top-line with economic development and things of that nature. That takes a little longer, as you know, because it's got a little longer lead time on it. But we know we're really successful with that, too. So stay tuned. And then, of course, we'll be very sensitive to cost as well. The other thing that will be top of mind for us is using the new tools in the tool bag is securitization, okay? So, we've got deferred storm costs that are sitting on the balance sheet. We have an opportunity to take care of net plant of legacy coal plants that's sitting on the balance sheet, too, to the tune of something like $290 million associated with Big Sandy. So those are things that we'll be able to securitize and then kind of back into what -- how we need to make that math work. And I mentioned that also talks about or at least strikes at the idea of kind of rightsizing the rate base. So, we work with the commission and all the various stakeholders in the state of Kentucky that we deal with to make sure that we're getting where we need to be. But honestly, from my seat and from a utility seat, just 2.9%, it's not healthy. We need to get it in a healthy situation. And that will be top of mind for us, because we've got to keep the lights on to and keep it affordable. So stay tuned. We don't have a lot of color to share today because we're literally in game. This is a new data point with 2.9%, okay? But Sophie, thank you for jumping back in line.

We have a follow-up question from Paul Fremont with Ladenburg. Go ahead.

Thanks. So, the assumption is that you will -- that you're assuming you'll get securitization in West Virginia as part of getting to the -- to that 14% to 15% FFO to debt?

Paul, this is Julie. Actually, securitization will be a great thing, and that helps us, give us a little more flexibility, more importantly, it's good for the customer. And so, when we filed for our new ENEC filing that we made on what was it like February -- I'm sorry, April 28, I think, was the date that we filed it. What you'll see is that we have two proposed options to recover the fuel balance in our filing. And one is to spread the recovery over three years, and the other is to use securitization for the under-recovered fuel balance. And as part of that, we also looked in as an option, again, with the idea and backdrop and motivation is to protect the customer rates because we can't have them trying to swallow a watermelon here is to essentially securitize plant balances from legacy coal plants, so Amos and Mountaineer in particular, and I think we have some storm costs in there as well. And so when I mentioned today, that $1.84 billion number that we would like to securitize, that's all in. And so, we're trying to give the commission options so that we can all work collectively to make sure that the citizens and customers of West Virginia are protected, but that we still have a healthy utility and we're able to hit the balance sheet metrics that we need. So, it's doable. It's absolutely doable, we'll just need to move through the process.

And one thing just to add on FFO to debt, when you think about just the quarterly dynamics, in Q4 of last year, due to market conditions, we did have a significant outflow of collateral as well as an increase in deferred fuel. So, as we get through that this year, and that quarter rolls off, that will significantly help our FFO to debt as well.

[Operator Instructions] We have a follow-up question from Paul Fremont with Ladenburg. Pardon me, that line did not open up. We have Bill Appicelli with UBS. Go ahead.

Hi, good morning. Most of my questions have been asked and answered. But just a question around the timing of the approval for the contracted renewable sale. You made the filing on March 22. I guess what gives you the comfort that you'll get approval in Q2? And I guess what's the -- what do you need to demonstrate in those filings to get approval both at FERC and on the Committee on Foreign Investment?

Yes. So as far as FERC and the other two approvals that we'll need to get, let me answer it this way. When we made the filing initially, we had requested at FERC a 60-day approval process. So, we would like to get an order within 60 days. May 22 would be 60 days. And given that this is normal kind of traditional business unregulated, not tied to significant customers and multiple stakeholders, we don't anticipate any material roadblock as it relates to getting not only FERC approval, but the clearance from the Committee on Foreign Investment in the United States and/or approval under any of the applicable competition loss. So we're comfortable with where we are and expect that we should have that in pretty short order, which gives us confidence to say we think that we'll get this done by the end of the second quarter at the latest. But we'll keep you apprised if anything were to come up. But at this point, we're past commentary periods, and everything seems to be going relatively smoothly. So, anyway, I'll leave it at that, and suggest that if anything shifts, we'll be right in front of you immediately.

We have no further lines in queue at this time.

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. Alan, would you please give the replay information?

Thank you. Ladies and gentlemen, this conference will be made available for replay beginning today, May 4, 2023, at 11:30 a.m. Eastern Time through May 11, 2023, at midnight. During that time, you can access the AT&T Executive Playback service by dialing toll-free, 866-207-1041, internationally, you may dial area code 402-970-0847, and the access code is 2036342. Those numbers again are toll-free, 866-207-1041, internationally, area code 402-970-0847, and the access code 2036342. That will conclude your conference call for today. Thank you for your participation, and for using AT&T Event Teleconferencing. You may now disconnect.