Q2 2024 Earnings Summary
- AEP is experiencing a significant increase in commercial load due to strong growth from data processing customers, with commercial sales up 12.4% in the quarter and over 20% in the T&D segment. This trend is expected to continue over the coming years based on already signed customer commitments.
- AEP has commitments for more than 15 gigawatts of incremental load by the end of this decade, primarily driven by large data center opportunities. These commitments are backed by letters of agreement and financial obligations from customers.
- The unprecedented demand from new large loads positions AEP to embrace significant growth opportunities. The company is focused on ensuring this growth is beneficial for all customers and is keenly focused on making the right investments for the long-term success of the grid.
- Declining Residential Sales: AEP reported a 4.9% decrease in residential sales in its vertically integrated segment for the quarter compared to last year, primarily due to inflationary pressures and severe weather events impacting regions like SWEPCO, Appalachian Power, and Kentucky Power. Since residential sales are higher-margin, this decline could negatively affect earnings.
- Regulatory Uncertainty Over Data Center Tariffs: The company's growth strategy relies heavily on large data center loads, but the necessary new tariffs for data center customers have not yet been approved, creating regulatory risk and potential delays in realizing expected growth. There is also uncertainty whether customers will accept these new tariffs.
- Potential Lower Margins from Commercial Load Growth: While AEP experienced a significant increase in commercial sales due to data center customers, these are lower-margin compared to residential sales. The growth in commercial load may not fully offset the earnings impact from declining higher-margin residential sales.
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CapEx Increases and Funding
Q: How will you fund increased CapEx from load growth?
A: We expect significant increases in transmission spending, followed by generation and distribution, to support new load growth, particularly from data centers. In the fall, we'll update our plan to incorporate this increased CapEx and ensure our balance sheet remains strong through equity, equity-like products, and potential asset sales. We're committed to maintaining our investment-grade credit ratings. -
Data Center Load Growth
Q: What is the impact of 15 GW data center commitments?
A: We have 15 GW of committed data center load to connect by 2030, backed by letters of agreement where customers financially commit to grid connection costs. This load is split roughly 50% in Texas and 50% in PJM, further divided between our vertically integrated and wires-only utilities. Currently, none of this load can be connected without upgrades, so significant investments are needed. This growth presents an opportunity to benefit all customers by spreading fixed costs over a larger base. -
Funding Plans and Equity Needs
Q: Will you need more equity or asset sales to fund growth?
A: With increased CapEx to support load growth and changes in asset sale proceeds, we anticipate higher equity needs this year by about $100 million. We're exploring various equity alternatives, including equity-like tools such as the junior subordinated notes issued in June. We plan to update our financing plan at EEI, ensuring we maintain our FFO to debt ratio in the 14%–15% range, well above the 13% downgrade threshold. -
Sales Growth Trends
Q: How are sales trends affecting earnings?
A: While we've seen strong commercial sales growth, particularly from data centers, residential sales have decreased due to factors like inflation and storm-related outages. In our vertically integrated utilities, residential sales were down 1.3% year-to-date, while T&D saw an increase of 0.3%, largely due to growth in Texas. Residential sales are higher margin, but we're optimistic that bringing on large loads will spread fixed costs and mitigate customer rate impacts. -
Regulatory and Tariff Developments
Q: Are customers accepting new tariffs for data centers?
A: For customers whose agreements are finalized after tariff approvals, they will be required to adhere to the new tariffs designed to ensure that growth from data centers is beneficial—or at least neutral—to all customers. It's crucial that we get the rules right to manage this significant load growth effectively. -
Leadership Transition and Strategy
Q: Will the new CEO change the strategic direction?
A: Bill is familiar with our strategy and agrees it's the right path. While he will focus on execution and may make some changes after assessing where we are, we don't anticipate significant changes in our strategic direction. -
Natural Gas Generation Plans
Q: Are you adding more gas generation capacity?
A: Yes, recognizing the need for dispatchable resources due to increased reserve margins and load growth, we're proactively acquiring assets like the PSO's natural gas generation purchase and evaluating all technologies through our all-source RFPs. Both existing and new builds of gas generation are being considered as part of our plan. -
Cost Savings and Local Focus
Q: How does the severance program affect local operations?
A: We've met our targets under the voluntary severance program to mitigate inflationary pressures and plan to retain as much of those gains as possible. We're reallocating some resources to enhance engagement at the local level, adding roles in regulatory and legislative areas, and ensuring we have more presence in our communities. -
FFO to Debt Ratios
Q: What's your FFO to debt ratio under Moody's?
A: Our FFO to debt ratio under Moody's methodology is 14.6%, and we plan to maintain it in the 14%–15% range, keeping us well above the 13% downgrade threshold and supporting our investment-grade credit ratings. -
Regulatory Impacts of Supreme Court Decision
Q: How might the Chevron decision affect AEP?
A: It's early to say, but the recent Supreme Court decision could potentially be helpful, giving courts more discretion and not binding them as much to agency interpretations. We intend to challenge several EPA rules, including the CCR Rule, ELG Rule, and 111 Rules, and this decision might aid in those efforts.