Q4 2023 Summary
Updated Jan 10, 2025, 5:10 PM UTC- AEP reaffirms its 6% to 7% EPS growth rate, underpinned by a $43 billion 5-year capital plan, demonstrating resilience despite regulatory challenges and unfavorable weather. The company also highlighted its ability to keep O&M expenses flat while doubling the rate base, showcasing strong operational efficiency.
- Significant load growth from data centers, particularly in Ohio and Texas, is driving commercial sales, which grew 7.8% in 2023. This trend is expected to continue, providing upside potential to AEP's forecasts.
- The recent agreement with Icahn Capital, including the addition of Icahn board members who believe AEP shares are undervalued, brings fresh perspectives aimed at unlocking shareholder value.
- AEP is facing regulatory challenges, including disallowances and unfavorable orders, which have negatively impacted earnings. Specifically, the Texas commission disallowed capitalization of AFUDC related to the Turk Plant, and the West Virginia commission disallowed a portion of under-recovered fuel costs. Additionally, a FERC order related to net operating loss carryforwards had an unfavorable net financial impact to 2023 operating earnings.
- The company acknowledges areas where it needs improvement, particularly in achieving constructive regulatory outcomes, indicating potential difficulties in regulatory environments that could affect future earnings.
- AEP may have balance sheet constraints that could limit its ability to capitalize on growth opportunities, such as the data center build-out in its service territory, requiring careful evaluation of financing for incremental growth beyond the current plan.
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CEO Change and Search
Q: What qualities are you seeking in the next CEO?
A: We are conducting an external search for a seasoned utility executive who is well-known in the investor community, with strong leadership qualities and multi-jurisdictional regulatory experience. We believe AEP is an attractive destination and expect a robust list of candidates. The ideal CEO will help us achieve regulatory success and develop our internal talent. -
Icahn Capital Agreement
Q: How does the Icahn agreement relate to the CEO change?
A: After discussions with Icahn Capital, we added two board members they recommended. Both AEP and Icahn believe our shares are undervalued and aim to unlock shareholder value together. The decision to transition to a new CEO was a full Board decision, made independently to pursue the best path forward. ** , ** -
Strategic Direction Stability
Q: Is there a change in strategy with new leadership?
A: No, our strategy remains sound. We are focusing on better execution to deliver results. The Board is comfortable with our strategic priorities, and we expect the new CEO to embrace them and enhance execution without dismantling our current approach. -
Retaining Transmission Assets
Q: Why did you decide to keep the transmission JV assets?
A: Transmission assets like Pioneer and Prairie Wind contribute earnings and offer attractive returns. Selling them would have minimal impact on our financing plan. As the largest transmission provider in the U.S., we prefer to lead in this space and see significant value in retaining these assets. -
Earnings Guidance Resilience
Q: How do you maintain 6–7% growth despite headwinds?
A: Our $43 billion five-year capital plan underpins our 6–7% growth guidance. Despite regulatory bumps and unfavorable weather, our resilient management team has a 14-year track record of meeting targets. We absorb challenges and focus on execution across our 11 jurisdictions. -
Financial Targets and FFO/Debt Ratio
Q: What is your FFO to debt ratio outlook for 2024?
A: We aim for a sustainable FFO to debt ratio of 14% over our five-year plan. We ended the year above 13%, which is Moody's downgrade threshold. Positive trends include a $390 million cash collateral roll-off in Q1 and reductions in deferred fuel balances, supporting our target. -
Regulatory Strategy Improvements
Q: How are you enhancing your regulatory approach?
A: We're strengthening processes to achieve better regulatory outcomes, focusing on execution and addressing regulatory lag. For example, we've moved to biannual rate reviews in Virginia from a three-year cycle and view recent outcomes in Kentucky as constructive steps forward. ** , ** -
ROE Improvement Goals
Q: What ROE improvements do you expect annually?
A: We're targeting an increase of 10 basis points in regulated ROE each year, aiming for an average of 9.5% over our five-year plan. This will be achieved by working through regulatory outcomes and reducing lag. ** , ** -
Capital Allocation Across Jurisdictions
Q: Will you adjust capital based on regulatory outcomes?
A: We allocate capital to achieve the best returns while ensuring safety and reliability. Input from local jurisdictions shapes our capital needs and can enhance regulatory outcomes. We're committed to investing where we receive constructive regulatory support. -
Data Center Growth Opportunities
Q: How do data centers impact your growth plans?
A: Significant opportunities exist in Ohio and Texas, where we've included necessary capital in our five-year plan to serve data center customers. If growth exceeds expectations, we'll evaluate financing options to support additional investments. ** , ** -
Kentucky and Louisiana Fuel Proceedings
Q: What's the status of fuel cost reviews in KY and LA?
A: In Kentucky, a two-year fuel review is underway; we recently had a hearing and await the outcome. In Louisiana, a similar review is ongoing as part of a settlement related to renewables, and we're actively engaged in the process. -
Equity Needs and Timing
Q: Have your equity needs or timing changed?
A: No, our equity needs remain consistent with what we presented at EEI. Any perceived changes may reference older forecasts; our current plans align with previous communications. -
Load Growth and Affordability
Q: How are you balancing investment and rate concerns?
A: We're experiencing significant load growth, adding 92 new customer loads totaling about 5 GW in 2023, which helps spread fixed costs and improve affordability. We're focusing on economic development to benefit both customers and shareholders. -
Timing of CEO Appointment
Q: When will the new CEO be in place?
A: The search will take as long as necessary to find the right candidate. We expect it to be at least six months, possibly up to a year. Meanwhile, we're committed to maintaining strong leadership during the transition. -
Retail and Distributed Business Contributions
Q: Does 2024 guidance include retail and distributed units?
A: Yes, our 2024 guidance includes contributions from retail and distributed resources, consistent with our prior communications. We're in the process of concluding on these businesses in the coming months. -
FERC Decision Impact on Earnings
Q: Will the $0.03 FERC impact affect operating EPS?
A: Yes, the $0.03 negative impact from the FERC decision will be included in our operating EPS for 2024. -
Regulatory Reviews and Fuel Costs
Q: Are there potential disallowances of fuel costs?
A: Reviews are underway in Kentucky and Louisiana concerning fuel and purchased power costs. We're awaiting outcomes and actively participating to address any concerns.