Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power Third Quarter 2020 Earnings Release Conference Call. At this time, all the participant lines are in a listen-only mode. However there will be an opportunity for your questions [Operator Instructions]. As a reminder, today’s call is being recorded. I'll turn the call now over to the Managing Director of Investor Relations, Ms. Darcy Reese. Please go ahead.

Thank you, John. Good morning everyone, and welcome to the third 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 third quarter 2020 earnings call. The third quarter has been another strong quarter for AEP. Despite the continued challenges of COVID-19 and its effects on the economy, we continue to be optimistic about our ability to execute and provide the consistent quality of earnings and dividend growth, our shareholders expect, and provide focus on our customers and communities we serve to get past the multiple challenges, we face as a result of the pandemic. I know many of us have had the feeling during 2020 with these multiple challenges that Lenny Kravitz sang about in a song Flyaway singing, Oh, I want to get away, I want to fly away, yeah, yeah, yeah, probably figuratively and literally. But there is light at the end of the tunnel. As we move through this memorable year, AEP continues to drive firmly within the guidance range with targeting the midpoint, as we move to the last quarter. We're accomplishing this by executing on cost control in response to the pandemic, keeping our employees safe through the crisis by taking all the extra precautions, and working with our customers to alleviate the economic pressures during this time. We are also learning a lot during this crisis, the value of efficient work from home environments, the focus on capital and OEM management, the acceleration of our achieving excellence program, and the focus on social issues that drive a cultural brand that brings everyone into the journey of being the premier regulated utility AEP strives to be. In fact, AEP just made the Forbes JUST Capital 100 list for 2021 being the highest ranked utility on the list. We have also been involved with two major storm events, Hurricanes Laura and Delta, and SWEPCO in Louisiana…

Thank you, Nick and good morning, everyone. I will take us through the third quarter and year-to-date financial results, provide some insight on load in the economy, review our balance sheet and liquidity and finish with a preview of what we will present at the EEI conference. Let's start briefly on Slide 6, which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. GAAP earnings for the third quarter were $1.51 per share, compared to $1.49 per share in 2019. GAAP earnings through September were $3.56 per share, compared to $3.58 per share last year. There's a reconciliation of GAAP to operating earnings on Pages 15 to 16 of the presentation. Let's turn to Slide 7, and look at the drivers of quarterly operating earnings by segment. Operating earnings for the third quarter were $1.47 per share or $728 million, compared to $1.46 per share or $722 million in 2019. Operating earnings for vertically integrated utilities were $0.85 per share down $0.04. This was driven by unfavorable weather, primarily due to warmer than normal temperatures last year, particularly in September. Other drivers including lower wholesale load and other operating revenue, as well as higher depreciation and taxes, primarily due to timing that were averse in the fourth quarter. Favorable items included lower O&M, favorable rate changes and higher transmission revenue. The transmission and distribution utility segment earned $0.31 per share up $0.04 from last year. Favorable items included higher rate changes in transmission revenue, as well as lower O&M. These favorable items were partially offset by unfavorable weather, depreciation, taxes and interest expense. The AEP Transmission Holdco segment continue to grow, contributing $0.28 per share an improvement of $0.03. This reflected the return on investment growth as net plant increased by $1.5 billion or 16%…

Thank you. [Operator Instructions]. And we will go to Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please go ahead.

Good morning, Julien.

Hey, howdy. Thanks for the time, guys. Perhaps just to kick things off. You talked about rolling out and reaffirming or perhaps preemptively reaffirming in the EEI the 5% to 7%. Can you talk a little bit about what's backstopping that? Specifically, in the last few months, we've seen some pretty substantial changes from some of your peers in Virginia. How can that play into APCo? And perhaps also similarly in Indiana, many of your peers are talking about opportunities. You all have perhaps Rockport. Just curious if you can talk about or perhaps foreshadow some of the conversations here on that role forward, if you don't mind, at the outset.

Julien, I think a lot of the things that we're going to talk about are renewable opportunities in addition to North Central Wind, how we're transitioning from a carbon-based generating fleet much more to a lot of the renewables that the Virginia Clean Energy Act enables and legislation in Indiana enables as well. So we're going to provide a lot more detail on that at EEI and take you through what that looks like. You have the renewable requirement in Virginia. You mentioned APCo. We've got the requirement there. And also Indiana, Michigan, we continue to do renewables in various areas there. We're also doing renewables, we just did fourth sale in Oklahoma. And then we also have renewable applications here in Ohio that are brewing as well. So, we'll have plenty to talk about. And I think, we don't we don't spend and then maybe we should spend more talking about the opportunities we've got available to us from a renewable standpoint. But the way I see it is that, we're just on the precipice of a massive transformation to renewable resources. And AEP, if you look at the runway it's pretty substantial. And that will continue particularly as we do individual relationships with customers, but also in terms of the regulated side as well, through the Integrated Resource Planning process. So we'll certainly talk more about that at November EEI.

Got it. Thanks for entertaining me there. Perhaps, if I can get more detailed here, if you don't mind. I know you all provided a little bit more of you want 23 here, but in tandem, you gave an updated view on FFO to total debt under Moody's definition of low to mid-teens versus perhaps prior characterizations of mid-teens. Is that simply a factor of rolling forward here? Or how are you thinking about this at this point?

Julien, the low to mid-teens is completely consistent with our prior messaging on FFO to debt. And that outlook was incorporated in Moody's when they made their adjustments back in August. And remember that will continue to improve as some of this accumulative deferred income taxes that is being repaid to the regulatory jurisdictions are occurring much more quickly than we thought, maybe we originally thinking 10 years. And it turned out to be five years. And that's occurring more quickly. So that FFO to debt metric will pick up as that rolls off.

Got it. Excellent. Thank you.

Yes.

Our next question is from Durgesh Chopra with Evercore ISI. Please go ahead.

Hey, good morning. Thanks. Great. Hey, just digging in a little bit into 2021. I appreciate you'll share more color at EEI. But could you quantify for us what that 2%, 2.7% sales degradation was year-to-date, part one? And part two, should we assume some of that $51 million year-to-date O&M savings to be carried forward into the next year?

Yes. So let me start with the 2.7% load degradation. It's what you would expect. It's largely commercial and industrial sales. The decrease is being offset by residential. And so, what we've seen is it takes more than just looking at the raw numbers on residential, commercial and industrial, it's really the mix. You remember, we make more margin on residential sales than we do on commercial and industrial. And that mix has come in better than we had anticipated at the beginning of the pandemic. So, it's not been as dire as what we thought it might be because of what's happened with the sales mix, rather than just the overall decreases. So that's been positive. Looking forward on O&M, we have for a number of years been tightening our belt and been very, very tight around untracked O&M in that $2.8 billion to $3.1 billion range. And with what we're doing with achieving excellence, and everything else we're doing with sustainable and non-sustainable O&M cuts, I'd anticipate us being towards the lower end of that range going forward.

Understood.

When we look at the load forecast, I mean if you assume 2021 is going to be better, which we believe it is. And you look at that mix, we don't see residential. I mean, obviously, it will moderate as the economy comes back on the industrial and commercial side, commercial in particular. But still, you're going to have a continued longstanding remnant of improved residential support just by virtue of what companies have learned from the work from home environment. So, I'm a little bit bullish on the load and then at least a financial picture associated with load. And then when you look at the O&M this achieving excellence program it has truly been a fundamental change for us and augmentation of all the lean activities and other things that we did before. And it really is focused on a regular part of our budget process to ensure that we're capturing savings and every step along the way. So, feeling pretty good about the continual progress year-on-year of achieving excellence.

That's great, guys. Thanks for that color. Maybe just initial thoughts and I appreciate that that was going to be in the details, but initial thoughts on elections, taxes, climate plan and implications for AEP?

Yes, so I guess, well, first of all, it's the election, certainly as a noisy election cycle, and who knows what's going to happen here, we never know. But we've got 114 years history of managing between the goalposts here, so we'll continue to do that. And our focus is on move into that clean energy economy. So really, the only difference obviously, is maybe the pace at which the change will occur if there's a Biden administration versus Trump. But nevertheless, it doesn't change that much for us, because we're focused on moving that clean energy economy as quickly as we can, to ensure that we are making that transition into the future that we know it's going to happen. Now, who knows where technology will go, even for fossil fuels, but nevertheless, we'll continue that transition to renewables and certainly some natural gas to ensure that we are delivering for our customers in the future. So, from a client perspective, we have an excellent record and I think that's why we get seen from the ESG community where they know what we're doing, they know what our message is, we're making continual progress. And we'll continue to make that progress. And then when you think about, as I said, in my original write up, I used the word latent, because it is a somewhat of an undeveloped or emerging activity around electrification of the economy, certainly around O&M and what we find with digitization and automation. And then, of course, as we move forward with the transformation, the generation transformation that we see ahead of us. So that's, that's why I'm feeling pretty good about where this company is heading.

Just a quick update on taxes. If we were to have an increase in taxes, we anticipate that our commissions would handle it. Really, one of two ways and not dissimilar to how they handled tax reform three or four years ago. We anticipate that they would either allow the increase to be deferred until the next rate proceeding, or we anticipate that they'd have kind of a one issue, order come out where they would allow us to adjust rates just to reflect the new expected higher income tax rate. In any event, we wouldn't expect it to be a significant driver to earnings or cash for the company going forward.

Great. Thanks. But it could be a modest delve into cash flow, like given sort of a reset in AVIT [ph] and amongst other things.

I think the [Indiscernible].

Yes. Again, we don't anticipate it to be significant one way or the other.

Understood. Thanks, Brian. Thank you, Nick.

Thank you.

Yep.

Our next question is from James Thalacker with BMO Capital Markets. Please go ahead.

Good morning, James. Hello?

Hey, thanks, guys. I apologize about the [multiple speakers]. Good morning. Two real quick questions. Just first, I guess, Brian, just addressing, North Central wind, I noticed in the slides that Traverse look like potentially be in service could be pushed out maybe by a quarter or so. Could you talk a little bit about it? Is that just a supply chain issue related to COVID? Or there's something else that was kind of driving that extended outlook?

Yes, a lot of it has to do more so than actual physical things. It's our ability to get permitting and the like done. And so during the shutdown, it was hard to be able to get into the offices, do land acquisitions, title searches and things like that. And that just potentially pushed us back at big teams. We're not in anticipating anything material there. We still anticipate late this year to early next year which is one of the signal that due to some of those unanticipated issues largely associated with COVID that that project could have a range of when it would come online.

Hey, James, we feel like it's still going to be the end of the summer, but obviously it could fall into that range in the first quarter, we're confident of that particular range. But remember, we're not making any progress payments, either. It's sort of we require it when it's done. So from a financial perspective it's fine.

Okay, great. Thanks. And I guess, just following up on that same issue. Brian, you talked about, three sort of potential ways to finance the final acquisition of those and this has been beat to death. But as you guys look to give 2021 guidance, obviously, an ATM would be something because spread over the full year, but asset rotation or even block equity, really probably something I think, as you were saying, sort of coordinating it with the final close would be something maybe closer to the end of the year. How are you guys, I guess thinking about that from a modeling perspective, as you present 2021?

It kind of matches what Nick was saying is that the projects don't -- we don't get the projects until commercial completion is done, we then get the project. And given the discrete nature of them, we can really time the equity issuance very closely with when the project comes online. And James the reason, we need that flexibility, you look at Sundance, which we're anticipating in the first quarter of 2020, that's about a $300 million project. We'll be able to time the equity issuance, if that's what it is closely with when that project comes online. The next one, which we're anticipating at the end of 2021, is about a $400 million project, Maverick. And then the last one is Traverse, which is about $1.3 billion and we talked about that being late 2021, early 2022. We believe that whether it's an aftermarket program, a follow on issuance or asset rotation, we're going to be able to time those very, very closely with when those discrete projects come online. So from a modeling standpoint, the timing that we're talking about really is going to be insignificant to 2021. And I'd start repeating myself and shaping it in 2021.

James, Brian mentioned the options we're looking at. And rest assured internally, we're also being at the death. So, we'll make sure that we're making the right decisions relative to the timing associated with those investments.

No worries. I understand the in service space, and it gives you guys a lot of flexibility. The last question, I guess, I just had, and you kind of answered my initial question was going back to the trailing 12 months FFO kind of dip down. You guys were looking for that sort of trend back into kind of where you guys were thinking sort of low to mid-teens, I guess. Are you still targeting that in the sort of '21, '22, '23 timeframe? I know you updated your cash flow forecasts for that recently.

Yes, we are. It's that timeframe, yes.

Okay, perfect. Thank you so much for the time.

Thanks, James.

And next, we'll go to Michael Lapides with Goldman Sachs. Please go ahead.

Good morning, Michael.

Good morning, Nick. Thank you guys for taking my question. And Nick, sorry about your LSU Tigers.

Yes. Alabama is doing good though. I'm sure you're happy with that.

Yes, let's hope they keep coaching. Brian, I want to come back to tax a little bit and who the heck Uncle Sam’s is going to do in the next year or so regarding corporate tax rates. But if there's a change in administration, if there's a higher corporate tax rate, I think we’ve seen numbers floated around 27% or 28%. I get that it's probably not much of an impact on the earnings power one way or another for AEP. But if you're talking to state commissioners or staff at the PSCs, or PUCs or others, it is a rate increase on customers. And it's a double whammy, because the cost of service goes up due to the higher tax rate and that just kind of flows through rates. But also the flow back of assets kind of slows down or declines. And it just strikes me as if I must say utility commissioner for public policy maker and given state, you're asking for what could be pretty decent size rate increases on customers coming out of an economic downturn. How does that get offset? I think about it from the customer standpoint. What's the get [Indiscernible].

Hey, I think there's no doubt that -- and again, I think there was a lot of advantage taken with it with the tax reductions that occurred. And you're right, there's no doubt that there will be headroom that is reduced, because it is certainly going to be an impact to put those back in. Now, the question is how to put back in or what time frame and that kind of thing. But also that's why it's so important for us to move forward as quickly as possible and accelerate achieving excellence, so that we can mitigate that impact as much as possible. But still, you're looking at it in the face of a definite need for rehabilitation and continued capitalization of the grid to ensure that we have reliability and resiliency of supply, particularly when you're dealing with hurricanes, wildfires, cyber, all those kinds of issues we have to respond to that. So there'll be rate increases associated with the implementation of new taxes. And I think it's unavoidable, but certainly it's incumbent on us to make sure we mitigate that as much as possible with our achieving excellence program and other measures. And we'll have discussions with the commissions, just like we had discussions when tax reform occurred. And, it's unfortunate we didn't do it over a longer period of time like we had suggested, because then it would mitigate even the return of taxes. And if we continue vacillating back and forth like this, that's going to be a continual issue for our industry that our regulators need to recognize. We do have to keep some reserve there to ensure that we're not moving customer rates around, as much as could be as if it becomes pretty volatile. So, your point is well recognized, but we'll…

Got it. Thank you for that, Nick. And then one other question, totally unrelated. I'm thinking about states where you've not really talked about sizable rate base growth and investment. One of those that stands out a little bit is West Virginia. How do you think about going forward, the pace of generation transformation in a state like West Virginia?

Yes, I think, we're looking at all of our states now and all our state jurisdictions, and it's really sort of our resource planning on steroids. And even the dogs like it. And I think there's no question that we're in the process of moving forward with that transformation as quickly as possible, making significant T&D investments, but all and you see that based on the changes in capital. But then when you look at states like West Virginia, we will be -- I think the first step is going to be how we run coal fired capacity, for example, where we have other forms of energy coming in and have lower capacity factors on coal units, but still they be available if those times where, you have severe cold weather, or really warm weather in the summer. So, it's a way we run these facilities during the interim, but then it's also that transition that we make going forward. I think that's true for all of the jurisdictions. And our jurisdictions have been fairly conservative in making that transition. I think that pace can quick and though, as a result of the even the bipartisan focus on continuing to lower emissions in our plant. So, I think there's the catalysts are there. And actually, post-election, who knows what'll happen, but I still see, you're already seeing some Republican and Democratic legislation that's being proposed that tries to answer that question. And if you have that from a national standpoint and the states are moving forward with their own resolutions, and then we can be particularly helpful in ensuring that occurs as quickly as possible.

Got it. Thank you, Nick. Sorry about the [Indiscernible], and I both appreciate it. Thanks guys.

No, that's fine.

Our next question is from the line of Sophie Karp with KeyBanc. Please go ahead.

Hi, good morning. Thanks for taking my questions.

Yes, sure thing. Good morning.

I'm curious, I want to go back to kind of the load composition and the rate case activity. So, as we roll forward and the load dislocation continues to be persist, where we have this unusual situation where residential, maybe it's higher, but C&I is suppressed. And that's not really a normalized picture. So, if you go through your rate cases now, and the future rate cases where this period becomes your test here, right? How do you address that? Did you attempt to normalize? Do you just go with what they actually look like? So, that's my first question, I guess.

Yes. So, we have multiple utilities, right. So, we have the opportunity to move around capital investment to time it with relative rate case activity to ensure that we are spinning on the right things at the right time. Not to say that we're trying to load the budgets or anything, what we're saying is that, that when we go through the rate case, filings, it's important to not only have discussions with the Commissions about what we're spending on, but what the results of that spending will be. So, if the load is not increasing, obviously, it exaggerate. It certainly challenges the rate impacts, because the denominator is not growing. If the denominator is growing, obviously, that's helpful. But if it isn't, you're still having to make choices about what the priorities are for each regulatory jurisdiction based on discussions with the Commissions to help us determine, okay, number one, what are we willing to pay for, number two, what are those priorities that exist. And some of those are absolute priorities and some of them are things that yes, we'd like to do, but it may be that we have to work out for a longer period of time before bringing that in. So, there's all kinds of dialogues that occur, relative to what that prioritization should be. And we'll continue doing that with our Commissions. And we have done, whether it's gone, where the economy is going well, or whether the economy has been in a downturn. I think we're moving toward an upturn. So that's going to be helpful.

Sophie, we also have some jurisdictions that have forward looking test years, so we'll be able to incorporate a forward looking view. And then we have places like Ohio, where residential and small commercial are already decoupled. So, there are lots of mitigations to unusual load circumstances that we find ourselves in right now.

And some of these things are known and reasonable adjustments too, so you have to look at the 2020 test year and say, we had to make these changes because of COVID. And COVID is going to be sort of a unique circumstance and then we had to react. And actually, the Commissions themselves, we had moratoriums on customer cut-offs. So, there is adjustments we all made in that process, and I think we'll make those adjustments coming out of that process as well.

Great. Thank you. And then, if I may a quick follow-up on the Central Wind. You mentioned assets rotation, I guess, as a part of the considerations for equity financing there. What might those be? Is this more of a like one-off situation with churn assets in your portfolio? Or could we be looking at something more strategic here? Thank you.

Well, so when we talk about potential assets, we look at everything, and we look at sources and uses. And obviously, we want the use part of it right now is how do we finance North Central Wind, a major project. And the sources can be anything in our portfolio, and that's where portfolio management is going to be a key part of what we do in the future. So, I'm not going to say, specifically what we're looking at, or anything like that at this point. But what I will say is that it's incumbent on us to be looking at everything from a source perspective, and then focusing on how we deploy capital in the best way and transfer that into really projects like North Central, and be able to fund it in the best way to ensure our shareholder value. And we will continue to do that. So, I think you got what the sort of year play out.

Thank you.

Yep.

And with no further questions, yes, I'll turn it back to you.

Great. Thank you for joining us on today's call. As always, the IR team will be available to answer any questions you have. John, please give the replay information.

Certainly. And Ladies and gentlemen, this conference is available for replay. It starts today October 22, at 11:30 AM Eastern Time, and will last until October 29, at midnight. You may access to the replay at any time by dialing 866-207-1041 or 402-970-0847. The access code is 8222465. Those numbers again 866-207-1041 or 402-970-0847, access code 8222465. That does conclude your conference for today. We thank you for your participation. You may now disconnect.