Ladies and gentlemen, thank you very much for standing by, and welcome to the American Electric Power Second Quarter 2020 Earnings Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given to you at that time. [Operator Instructions] And as a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Darcy Reese. Please go ahead.

Thank you, Cynthia. Good morning everyone and welcome to the second quarter 2020 earnings call for American Electric Power. We appreciate you taking the time to join us today. 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 Nick Akins, our Chairman, President and Chief Executive Officer, and Brian Tierney, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Okay. Thanks Darcy. And welcome, everyone to American Electric Power's second quarter 2020 earnings call. While, we continue to see the effects of COVID-19 pandemic, AEP has responded well with not only ensuring the safety of our employees and redefining the business processes to accommodate the changed environment and reducing our costs in response to lower revenues, but we also are responding to hurricane and storm activity to ensure the safe and reliable service to our customers. Our team at AEP Texas with support from internal and external resources performed well through Hurricane Hanna to restore power to over 200,000 customers during that recent weather event. And we're now supporting recovery efforts in the Northeast as well. While COVID cases were escalated in some areas, we continue to engage our employees on safe practices to prevent the virus spread both at work and outside of work to set an example in our communities. On the financial front our operating earnings performance has been strong in the face of these challenges. AEP's operating earnings came in for the quarter at $1.08 per share, bringing our year-to-date operating earnings to $2.10 per share versus $1 share for second quarter 2019 and $2.19 per share year-to-date 2019. We are reaffirming our originally stated guidance range of $4.25 to $4.45 per share and our 5% to 7% long-term growth rate. AEP is also adjusting our capital upward during the five-year capital forecast period from $33 billion to $35 billion to accommodate the North Central wind project addition. Also as we stated in the last quarter earnings call, we have continued to evaluate the short-term deferral of $500 million in our 2020 capital program that we talked about last quarter and we are placing $100 million back into the 2020 plan at this point. So…

Thank you, Nick and good morning everyone. I will take us through the second quarter and year-to-date financial results, provide an update on how we were thinking about 2020, including a look at July load, and finish with the review of our balance sheet and liquidity. Let's stop briefly on slide six which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. GAAP earnings for the second quarter were $1.05 per share compared to $0.93 per share in 2019. GAAP earnings through June were $2.05 per share compared to $2.10 per share in 2019. There is a reconciliation of GAAP to operating earnings on pages 15 and 16 of the appendix. Let's turn to slide seven and look at the drivers of quarterly operating earnings by segment. Operating earnings for the second quarter were $1.08 per share or $534 million compared to $1 per share or $494 million in 2019. Operating earnings for Vertically Integrated Utilities were $0.55 per share, up $0.17, driven by lower O&M and higher transmission revenue primarily due to true-ups. Normalized retail load was favorable due to higher-margin residential sales more than offsetting significant decreases in industrial and commercial sales. We will talk more -- in more detail about our expectations around normalized load for the year later in the presentation. Other favorable items included weather and rate changes. These positive items were partially offset by higher depreciation and other taxes and lower wholesale load AFUDC and off-system sales. The transmission and distribution utility segment earned $0.29 per share, up $0.02 from last year. Both O&M and transmission revenue were favorable due to the impact of the transmission true-up on this segment. Increased transmission investment in ERCOT was positive as well. Rate changes were also favorable and partially offset by prior-year…

[Operator Instructions] And our first question will come from the line of Jeremy Tonet with JPMorgan. And your line is open.

Good morning, Jeremy.

Hi. Good morning.

Good morning.

Hi. Thanks for taking my questions here. I wanted to start-off a couple of, I guess, opposing items influencing AEP going forward here North Central wind getting that over the finish line, obviously, a big positive COVID headwind on the other side here. Just wondering, if you could talk a bit more about how these two factors influence I guess your 5% to 7% range with North Central wind? I think we're just looking to see if that could really help you here, or just want to see how everything is shaking out I guess going forward?

Yes. So I mean we look at -- and as Brian mentioned on the COVID activity and the load activity, you're seeing residential load be pretty strong. And certainly as you look forward I think residential load is going to continue to look strong with the work-from-home environment and the business cases that are developed afterwards. And then if you have Commercial and Industrial pickup as well, it could be positive from a financial standpoint. The other regarding North Central and other wind projects and solar projects, we have a real opportunity to transition to that clean energy economy going forward in our service territory and that will really makes us – again, we would be disappointed not to be in the upper part -- upper half of the 5% to 7% range because you have to be bullish about not only where load is going, but also in terms of the transformation from a -- just a pure and simple energy policy perspective regardless of who's in the White House in the next election, we'll continue moving toward a clean energy economy. And then also I think, bolstered by the other opportunities we have whether it's mid-range broadband or other types of activities electric vehicles and so forth that we're going to see the further electrification of this society. So I'm really bullish about this company in particular, but as well the industry.

That makes sense. That's helpful. Thanks. And maybe just kind of building off that with my second question. I think AEP is guiding to $1.3 billion of equity issuance to fund North Central at this point. Just wondering, if you could update us there on your thoughts with regard to is this definitively the path, or is there the potential for portfolio optimization? Is that still an option? I guess, how do you think about...

It absolutely is still an option. And we're looking at all those options to see how to best finance it. We have plenty of time to make those things happen. Nick said that Sundance might be pushed out to the first quarter of 2021, but we're not going to see the rest of those projects coming in Traverse and Maverick until the end of 2021. So all those things are in play whether it's equity or rotation of capital. But for planning purposes we are guiding people to two-thirds equity for that project in aggregate.

Got you. That’s very helpful. Thank you.

Thanks, Jeremy.

Thank you. Our next question comes from the line of Andrew Weisel with Scotiabank. And your line is open.

Good morning, Andrew.

Good morning. First a question on dividends. So at the end of the deck you showed dividends in 2022 at $1.5 billion versus $1.4 billion previously. I also see the footnote that dividend should grow with earnings. My question is, is that increase of $100 million a function of more shares outstanding after the North Central wind equity, or does it imply a step-up in dividend per share along with a step-up in EPS or perhaps both?

I think it'd be some of both because obviously with North Central additional equity involved there, but also as you said I mean our dividend will move with our earnings capability. So I'd say both.

Okay. Great.

Brian, do you have any comments? Okay.

Go ahead.

No, I was just seeing if Brian wanted to just comment on that but he said I covered it.

Okay. Great. On CapEx you mentioned that you're pulling back $100 million of the deferred CapEx. I just want to understand -- be sure I understand what drove that. Is that a function of specific projects being more necessary or more appealing, or is it more a function of the better-than-expected cash flows?

Yes, I think that's a positive story. Some of that is related to new customer connections. And so it was clearly evident that we needed to move that forward. But also we have the capability financially to move it forward. We talked about this last time the deferral of the $500 million we weren't changing the five-year capital plan we were going to maintain that level. And the $500 million was merely being deferred so that we could understand what the COVID issues were going to be. And so we're continually looking at our process going forward in terms of putting that 500 back in in various stages. So what you saw this quarter was the first stage of that.

Very good. If I could just have one more here to clarify the last question from Jeremy. The 5% to 7% range you're pointing to the upper end of that. Is that a function of North Central wind now being included, or is it more that you're pointing to the higher end with or without North Central wind as a one-timer?

Well, certainly, we looked at North Central, but obviously, we continue to track and we believe that the upper half of that guidance range is certainly achievable and something that we again would be disappointed not to be able to get there. So that's clearly an opportunity for us based on the things that I talked about earlier.

It should – North Central wind should certainly solidify our position in the upper half.

Yeah. And keep in mind too at the same time the Achieving Excellence Progam is continuing to grow. So we already have plans in place and you're seeing sort of a crescendo of savings associated with that plan. And the first year 2020 is – some of it's in there, but not much. And when you look at the future years that continues to grow substantially, and certainly, as I've mentioned earlier the addition of Therace and the focus on digitization automation in combination with the learnings from COVID, I think going to further accentuate the benefits from achieving excellence.

That all sounds great. Thank you so much.

Thank you. Our next question comes from the line of James Thalacker with BMO Capital Markets. And your line is open.

Good morning, James.

Hey, good morning, guys. Can you hear me?

Yep, I'm hearing you yes. Good morning.

Okay. Great. Real quick question. I know you had outlined the bending the cost curve EEI down to kind of $2.8 billion. And as COVID took over we're now down at $2.7 billion. It seems like year-to-date if you just look at it on an after-tax basis you guys are already kind of running above that kind of $100 million sort of run rate. How should, we I guess think about the non-tracked O&M versus the additional O&M that you are actually pulling out in response to COVID? And as we think about 2021, is there any guidance, I guess you could give us on how much of that you think will be retainable as we move into next year?

Yeah. So we're at this point James not able to provide obviously specific guidance on 2021. But I'll say, the incremental $100 million that we're able to garner is a combination of sustainable and one-timers. And I think it's a matter of managing our way through the downturn in normalized load and just working as hard as we can to pull out all the stops to make sure that we meet our commitments to shareholders and really target the middle part of that range without impacting customers. And so far, we've been able to do that. There have been some unexpected things that we've seen maybe some things that aren't line items in O&M that have come out. And I think you have things like travel and expense conventions that people go to things like that meals just buildings expense that you have things that just don't happen when everyone's working from home that, I think are more like one-timers but if people go back to work we'll start to put those things back into place. But you've seen our track record over the last nine or 10 years now and it's been keeping a very, very tight range on untracked O&M and we're using those skills that we've learned over the last several years to make sure that we're able to manage our way through this circumstance.

Yeah, I would say, and as Brian mentioned I mean, there's a lot of learnings from COVID-19 and the impacts and how we've operated, and the efficiency of which we've operated. And I think it sort of changes, the perspective and changes the threshold of even, what one-timers are and ongoing, because I think the learnings we have from here we're going to be much different in our approach related to many of these activities. And actually, you would be surprised and I'll certainly talk about this more at the end of the year of what achieving excellence is showing us of things that were buried in the organization that we obviously have an opportunity to take advantage of. And so there's no question that you should expect the continued efficiency around the savings of O&M. And that's in the non-tracked area.

You've seen – on page 34 of the presentation, you've seen the tight range we've been able to keep it in. In terms of bending the curve as we go down to $2.7 billion in non-track, we actually are bending that curve downward at this point.

Yes. Bending to warping. So that's good.

No, that's great. And I guess just as a follow-up, I mean, obviously the run rate has been very, very good. I mean, you did a heroic job, I guess in 2Q just the bulk of it from a year-to-date perspective that's kind of showed up. But as you move through the rest of the year do you feel like you have additional room whether it be onetime or again Nick like you're talking about through just kind of change in workflow to continue to sort of press that down, if you need to if we get sort of resurgence in COVID again?

Yeah. I think number one really, I think about – the processes are in place and the focus of the organization is in place to be able to adjust. And I'm perfectly happy with the foundation that's been put in place for this organization on an ongoing basis. I mean, because if we look at our Achieving Excellence Program, it's not just a onetime program. It's a regular process we're going to go through in budgeting. And it's also a regular process, where they'll go throughout the year, for us to be able to adjust. So we will do what we have to do. And there's no question, that we have the foundation to be able to do it.

Okay. Great.

Yeah.

Well, thank you for taking my question. And best of luck guys.

Thank you.

Thank you. Next we will go to the line of Durgesh Chopra with Evercore ISI. And your line is open.

Good morning, Nick.

Hey good morning.

Oh! That is down. Hello? Hey can you hear me?

Yeah. Go ahead.

Okay. Great, just -- I wanted to follow-up on the O&M $100 million number. What of that $100 million was actually achieved in the quarter?

It will be the O&M CapEx or the O&M -- I'm sorry O&M caps. It's going to be achieved rateably throughout the balance of the year. So from second quarter, third and fourth, think about it being achieved rateably, as we work our way through that.

Understood and I apologize there's like an echo in my -- when I'm speaking. So -- and then, the potential labor initiatives that you outlined is that in addition to the $100 million?

It's all incorporated to get us to that $2.7 billion number.

Understood guys. Thank you so much.

Sure. Thanks.

Thank you. Our next question comes from the line of Sophie Karp with KeyBanc. And your line is open.

Good morning, Sophie.

Hi good morning guys. Good morning. Congrats on the quarter.

Thanks.

And thanks for the time. I'm just curious about -- maybe I can ask you, more of a high-level question. Given the landscape or market landscape that we are seeing right now. Do you see an opportunity maybe an opening to do some rotation in your portfolio of assets maybe high-graded a little bit if you will and divest some? And is there an opportunity for M&A for a more wires focused or like just asset [Technical Difficulty] …

Yeah, Sophie.

…your puts and thoughts on that.

Yeah, sure, we've certainly been consistent in the discussion around any M&A activity or in terms of -- what we can do in terms of rotation. That's always an option that's available to us. And this company is moving toward, a portfolio management approach where obviously we have sources and uses and those sources include the assets we have. And certainly we'll continue to look at those, as opportunities in time with investments that we make. So we will continue to do that. Regarding M&A activity we have a high threshold because we certainly have the ability to invest we have the ability to -- we have the largest transmission system in the country. Certainly our investment in our distribution businesses is continuing to grow considerably. And so, if we can invest that out without a premium, that's a good thing for our shareholders. Now that being said, we look at strategic areas that make sense to us but certainly that threshold is high. And we'll continue to evaluate that. But make no mistake that this company is focused on its ability to continue to grow, but grow efficiently for our shareholders. And we'll continue to do that.

Thank you.

Yeah. Thank you.

Thank you. Our next question will come from the line of Paul Patterson with Glenrock Associates. And your line is open.

Good morning, Paul.

Hey how are you doing?

All right, how are you?

I am managing. No laugh. So I can do like that. And so, I don't think of you guys, being a primary beneficiary or primarily impacted by HB6, but is there any ancillary or anything we should think about with the potential repeal of HB6 in Ohio, that could impact you guys?

Well, certainly with the repeal, it's -- how it's replaced is the issue, and obviously how it's repealed. Because there are some things some interconnections that occurred between HB6 and the regulatory process, where we had regulatory recovery for areas that we need to make sure that's a clean transition that occurs. But on its face, the issues that were involved with that for us should be pretty well taken care of. So that's why we're saying it should be a minimal issue for us. I think it's more of an opportunity for us, because if we're able to -- and really if the state focuses on the clean energy economy going forward, that's going to provide us some opportunities to really do this the right way including nuclear for the -- for our customers going forward.

But if it's not replaced, just because we don't know what's going to happen legislatively and who knows, how should we think about the potential impact?

Yeah. So, if it's not replaced, then it stays the way it is then we should be fine, because there are already...

I mean, it's repealed and they don't -- they repeal it and they don't replace it if you file...

Okay, okay good. Brian?

So, we'll be fine in that circumstance, Paul. We already had decoupling in place for residential and small commercial customers. We were already getting recovery of OVEC through 2024 through the regulatory process rather than 2030, and it allowed us to enter into bilateral contracts with customers, but we haven't signed any bilaterals to date. So, we think will be absolutely fine, if it's repealed and not replaced. But as Nick said, I think there are opportunities to do it right and replace it with something that's more positive.

Yes, we've done bilateral contracts just not with that structure. So…

Okay, great. And then just on the PJM 205, end-of-life transmission planning filing. I know you guys are protesting that with almost every other transmission company. Do you have any sense as to what the potential impact would be from a shareholder perspective on transmission CapEx or anything else, if that 205 filing is accepted by FERC?

Paul, we think it would be pretty minimal to us.

Yeah.

Okay. Good. Awesome, thanks so much.

Thank you.

Thank you. And at this time, I'm showing no other questions in queue. Please go ahead with any closing remarks.

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. Cynthia, would you please give the replay information.

Certainly. Ladies and gentlemen, today's conference call will be available for replay after 5:30 p.m. today and going until August 14 at 3:55 p.m. You may access the AT&T teleconference replay system by dialing 866-207-1041 and entering the access code of 7269937. International participants may dial 402-970-0847. Those numbers once again 866-207-1041 or 402-970-0847 and entering the access code of 7269937. That does conclude your conference for today. Thank you very much for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.