American Electric Power Company, Inc. Q2 FY2025 earnings call

New Executives

• In May, Doug Cannon was named President of AEP Transmission. In June, Rob Berntsen was named General Counsel and Johannes Eckert was named Chief Information and Technology Officer.

Financial Performance

• AEP delivered the strongest ever second quarter operating earnings in its 100-year history, with operating earnings of $1.43 per share or $766 million.

Load Growth

• Experiencing transformative load growth across an 11-state footprint, expecting 24 gigawatts of incremental load by the end of the decade (up from 21 gigawatts) backed by signed customer agreements, and 190 gigawatts of additional load in the interconnection queue.

Regulatory and Legislative Achievements

• Ohio has a data center tariff approval, PSO purchased the Green Country Power Plant in Oklahoma, AEP Texas was granted an ERCOT Permian Basin 765 kV transmission project, and progress on SMR and Bloom fuel cell deployment.

Vertically Integrated Utilities had operating earnings of $0.56 per share, up $0.10 from a year earlier. Transmission & Distribution Utilities earned $0.42 per share, up $0.01 from last year. AEP Transmission Holdco contributed $0.42 per share, up $0.03 from last year. Generation & Marketing produced $0.17 per share, up $0.05 from last year. Corporate and Other was relatively flat. AEP Transmission contributes 55% of AEP's total operating earnings.

Earnings Guidance

• Guiding to the upper half of the $5.75 to $5.95 per share operating earnings range for 2025.

Capital Plan

• Expecting to increase the capital plan from $54 billion to approximately $70 billion over 5 years, with approximately 50% allocated to transmission, 40% to generation, and 10% to distribution.

Growth Rate

• Reaffirming the long-term operating earnings growth rate of 6% to 8%.

Capital Allocation Risk

• Need to be prudent in capital allocation to protect the balance sheet and credit metric strength.

Regulatory Change Risk

• Regulatory changes could impact earnings and capital plans.

Q: Congrats on a great quarter. Just a couple of questions for me this morning. So first, Trevor, on the indicative CapEx increase to the $70 billion from the $54 billion in that 5-year window, that you're thinking about for Q3. How do you -- or can you give us some color on the financing needs and the option for that incremental $16 billion? And then in addition to that, given that you've got an Ohio forward test year hopefully coming through the rate case, you've got the universal tracker in Texas. How do you see the impact of this higher CapEx on your growth rate given more real-time recovery? Even if the capital is back-end loaded, back of the envelope math would suggest kind of 100 basis points OnSite, but how do you think about it?

A: Yes, Ross, thanks for those questions. Appreciate it. On the financing on the capital plan, let me just start by saying we have been really proactive in financing the existing $54 billion capital plan. And as I said in my prepared remarks, since January, we've issued that $2.3 billion of equity under a forward and then closed on the $2.82 billion minority interest transmission transaction, which essentially took care of all of our current 5-year equity funding needs. So by doing this, we really don't have near-term equity needs even for an increasing capital plan in the near term. So this gives me a great level of flexibility as we evaluate all options to efficiently finance this plan. But basically, said another way, Ross, we've essentially prefunded 5 years of equity needs in the first 6 months for the $54 billion. And so again, that gives me some level of flexibility. So when I look at this incremental capital, I'm going to continue to prioritize the balance sheet strength as we explore the multiple options around capital structure, including hybrids, growth equity and then again, the strong continuing cash flow from operations, especially given the favorable legislative developments that we've seen that reduces this regulatory lag. So that will increase FFO and also we're focusing on cost management. So together with these factors, I think we will come out in the third quarter with our revised financing strategy. But what it really does is gives me a level of leeway in the near term here to do things in the most efficient way. And then to the long-term growth rate, you raised a good point, and we're seeing, again, robust growth from the $54 billion to this up to $70 billion. But remember, last year, we raised our growth rate when we were 6% to 7%, and we raised it to 6% to 8%. And we really believe this incremental load with capital investments and the financing strategy and this positive regulatory and legislative developments really position us well within the 6% to 8% range. I want to see continued progress on operational and financial performance, coupled with near-term impacts on expanding capital plans before we make any upward revisions to the long-term growth rate. I'm really looking to be disciplined as we balance stakeholder interests, including strengthening the balance sheet and driving long- term growth. These areas, I think, are critically important, Ross, and we really are ensuring we're not trying to prioritize one over the other. The great news is we're seeing so much opportunity for positive financial results given this once in a generational growth, but we're going to be disciplined in how we roll out messaging and how we roll out the financing.

Q: So just, I guess, first, Bill, you mentioned kind of the SMRs. Maybe you can give a little more color on kind of that plans there and just how you're looking at kind of protecting the risk on that?

A: Sure. Steve, thanks for calling in. So our focus right now on SMRs is really on the early site permit work. We've got very strong regulatory support, particularly in Virginia, where we're allowed to invest up to $125 million with recovery there to move forward on the site work. And so we're continuing to go down that path and have the government there be in a very supportive position for us. Similarly, in Indiana, there's a positive regulatory environment there for early site investment. And that's really -- our focus right now is preparing ourselves for the potential down the road. Clearly, if there's an opportunity to do something on behalf of our customers and in partnership with our customers, as I've said many times before, we will make sure that there is extremely strong capital investment protections and that we've got safeguards on our balance sheet and credit ratings and that there's very clear regulatory and government support for anything that would go beyond the early site permit process for us. So very excited about where we're at on our partnership with Virginia, in particular, Governor Youngkin has been incredibly supportive of looking at sites in preparation for what might come, but for now the focus for us is on looking at basically at ground and the availability of potential locations and doing that through the government and the state regulatory environment.

Q: Reflecting on the CapEx increase that you're signaling here, this is the second one. I guess, just 8, 9 months ago, you also increased your CapEx plan by 30% at that time. Here, you've got another kind of 30% increase coming. So I guess I'm just wondering, as we look ahead, is this the new normal? Is there a limit in terms of what you're seeing around CapEx opportunities? Could this -- could we continue to see further escalation in these 5-year CapEx plans as you roll them out?

A: Yes, David, again, what we're seeing is just tremendous growth on the system. And I want to really kind of emphasize where you take a look at our overall peak summer load is 37 gigawatts and we've also announced that we have an incremental 24 gigawatts that is signed up to connect to our system under either LOAs or ESAs. So that takes us north of 60 gigawatts on our system size. And then there's another 190 gigawatts behind that in various stages of development. We know not all of that is going to come online, but even a fraction of that is significant. And so from that perspective, we continue to see opportunity to continue to invest. We're going be disciplined. But even raising our capital plan from $54 billion to up to $70 billion is a sizable growth, and we want to ensure we're digesting that in a way that is disciplined and ensuring we're also protecting our balance sheet as we're continuing to grow this business. But the big thing that I want you to take away here is across our 11-state footprint, we've got a large footprint and a lot of economic and other type of activity looking to connect and so a lot of positive.

Q: Just want to pick up on the capital plan, possibly increasing notably here. You talked a bit about funding, but I wanted to talk a little bit more if you could there. And just wondering as far as how you might prioritize funding or how you see asset sales potentially fitting into, I guess, the pecking order there, particularly with regards to the previous moves to sell Kentucky Power in the past, just wondering how asset sales fit together versus other funding sources?

A: Yes. Well, I appreciate the question. And again, the additional capital for us is incredibly exciting for us. To maybe give you a little bit of a breakdown on that, it's about $2 billion in the I&M for generation, about $3 billion in PSO for generation, about $7 billion in AEP Texas for transmission and then another couple of billion for distribution across the APCos and then a couple of billion across miscellaneous projects. And as we think about that, our focus is really on growth. I'm not really want to sell assets as a strategy. Obviously, we'll look at all alternatives and do what's in our best interest of shareholders. But my focus right now is really looking at the opportunity in front of us and growing this company as best we can.

Q: Nicely done, really, truly remarkable across the board here, so great stuff. In fact, Bill, if I can pick it up -- absolutely. If I can pick it up here, I mean, 20% increase in contracted load here just in 1 quarter up to 24 gigs is remarkable. Can you provide a little bit more color on just the composition? I know you mentioned this a little bit earlier, like what portion of that is like hyperscalers, for instance, if you can speak to that? And then if you can speak to -- like what percentage of these have progressed beyond LOAs to fully executed ESAs. I mean just give us a little bit more color behind the 24. And then if I can take that and just add a subpoint to that, how do you think about your earned ROEs, right? I see the load growth profile per Nick's question. How do you think about it given that you're targeting a 9.3% here this year? Again, obviously, a lot going into that. But the scope of what's possible on earned ROE as you think about this load growth now hitting over the next couple of years versus earlier long-term guide?

A: Yes. Thanks, Julien. So to give you a breakdown of the 24 gigawatts, about 2.5 of that is in the SPP, about 9 of that is in PJM and about 13 of that is in ERCOT. And obviously, we continue to work with our customers. We're getting significant inbounds on the desire to sign up to our system. We've had great success in getting the contracts put in place. And so we're continuing to push forward with the designs and the interconnections for these customers. Interestingly enough, in the SPP, about -- of the 2.5 gigawatts, about 2.1 of that is data centers and about 0.3 gigawatt of that is crypto. And then in PJM, really, that's split across AEP Ohio, I&M and APCo and about 3.7 of that is data centers in Ohio, about 3.1 of that is data centers in I&M and about really just a little bit of that is in APCo. And so ERCOT is probably the more interesting one, which is where we see about 2 gigawatts on data centers, but about 5 gigawatts on crypto. And so Texas is clearly becoming the crypto center for us, and we're making sure we have the appropriate procedures in place to get crypto signed up as most of that as we can with Texas, as I said, becoming sort of the center of crypto right now. And so overall, we're continuing to work through the agreements with these customers. I expect all of them will move to the next level. They're very aggressively wanting to getting contracts signed. So my confidence level on this 24 gigawatts is extremely high. I don't know, Trevor, anything to add?

Q: Just one thing, Bill. And Julien, one of the things that we're excited about here is as we're looking to attract capital to Texas and Oklahoma, when you take a look at Texas, our authorized ROE, call it, roughly 9.7%, 9.76% and our earned ROE is roughly 8.6%. So that's where we're saying 50 to 100 basis point increase with the UTM in Texas. So that will go a long way to adding to the 9.3% overall earned ROE. And then in Oklahoma, similarly, we've got 9.5% and our earned ROE is 8.3%. And with SB 998, that should be pretty beneficial as well. So all very positive in that regard, and that's why we wanted to highlight both the regulatory and the legislative positive outcomes that we think are really driving policy in the states for the benefit of our customers, but it will also be beneficial to our shareholders.

Q: Just a quick follow-up on Nick's question earlier on the 2025 load growth. Should we think about that as just a timing impact in terms of the ramp of some of these larger facilities? Or are there any read-throughs to '26 and beyond?

A: Yes, Carly, thanks for that. I think one of the things when you really look at the C&I load ramp, the big point that we're trying to highlight here is that C&I customers are mainly but based on peak demand. And so higher peak demand, along with the demand minimums embedded in the tariff provisions is driving the revenue stability and really mitigates that earnings volatility. But more importantly, I'd say rising peak demand unlocks the valuable capital investment opportunities, which enables us to continue enhancing and expanding our system. So there's no doubt that data centers are locating within our footprint due to the robust transmission infrastructure that Bill talked about and that we've got available capacity in a lot of our system as well as the other critical resources needed such as fiber and water and land areas. So we will see the C&I load ramp continue, and we feel very confident in that 24 gigawatts of incremental load coming on. And those are, again, backed by signed LOAs and ESAs.

Q: You mentioned on the back of the OBBBA passing, you believe that the renewables plan should be unchanged through '29. But just curious if there's any potential to pull any projects forward to secure the tax credits for customers? Or is there anything embedded in that new potential $70 billion plan to reflect a pull-forward dynamic?

A: Yes. Thanks, Carly. Look, I want to be really clear on this point. I would say right now, we have almost $10 billion of renewables in our capital plan -- in our $54 billion 5-year capital plan. And right now, under what is in OBBBA we believe 100% of those projects will be eligible. Now depending on what ultimately comes out of the EO and the Treasury department's guidelines, as we said on our prepared remarks, there's a couple of projects on the back end of that plan. And I would say worst-case scenario, we would see maybe a couple of billion dollars that we would reallocate from renewables to other sources of generation. But it largely, I would say, this -- the OBBBA does not impact our renewables generation as written right now, and all of our projects qualify.