AEP - NASDAQ

Thank you for standing by. My name is Danica and I will be your conference operator today. At this time, I would like to welcome everyone to the American Electric Power's Third Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would like to turn the conference over to Darcy Reese, Vice-President of Investor Relations. Please go ahead.

Thank you, Danica. Good morning, everyone, and welcome to the third quarter 2024 earnings call for American Electric Power. We appreciate you taking time today to join us. 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 discussion of these factors. Joining me this morning for opening remarks are Bill Fehrman, our President and Chief Executive Officer and Chuck

Thank you, Darcy and good morning everyone. I'm happy to be with you for my first earnings call as AEP's President and CEO. In my remarks this morning, I'll discuss our results and outlook before turning to the key pillars of our strategy to enhance value for customers and investors. I'll then cover regulatory updates before handing it over to Chuck to walk through our financials in more detail. You can find a summary of third quarter 2024 business highlights on Slide 4 of our presentation. We have a lot of exciting ground to cover today, but first I'd like to briefly introduce myself to those I haven't had the opportunity to meet yet. I spent my entire career in the utility and energy business. Most recently I was at Berkshire Hathaway Energy, which has an asset base 1.4 times the size of AEP, operates in 11 states but also in Canada and Great Britain and has a diverse group of regulatory interests. While I'm familiar with most of the industry players, bankers, regulators, companies and debt investors, I am new to many of the AEP shareholders and I look forward to delivering for you. With that, I'm honored to join a leader like AEP at a pivotal time for both the organization and our industry. Since assuming the role of CEO, I've met our many stakeholders and the AEP team across our 11 state footprint, including four governors and over 30 regulators and legislators. We've had robust discussions about critical initiatives and I've appreciated the opportunity to engage, listen and learn over the past three months to help shape our vision for the future. AEP has built a strong foundation for growth, including our robust transmission system, which represents 55% of AEP's total earnings stream. However, we can improve reliability, streamline cost, use technology better, and put power in the hands of local leaders to build financially strong utilities in our communities. I look forward to the future and working with the many talented people across the company to drive operational excellence, best-in-class service earnings growth and overall success. I'll begin with our financial results. Today we report third quarter 2024 operating earnings of $1.85 per share, or $985 million. Building on our strong momentum this year we are confident in narrowing our 2024 full year operating earnings guidance range to $5.58 to $5.68, maintaining the original $5.63 midpoint. As referenced on Slide 5, today we also formally introduce our 2025 operating earnings guidance range of $5.75 to $5.95. We have thought a lot about this range, especially since I've been in the CEO role for just three months. The foundation of our 2025 earnings guidance range is based on robust growth in our regulated utilities. This range also reflects lower contributions from our generation and marketing segment due to reduced scope of activities going forward and lower retail and wholesale margins likely to be realized. While AEP's earnings range rose 4% in 2025, you have my commitment that we will do significantly better in 2026 and beyond after we go through an optimization exercise and we retool our personnel and processes over the coming months. As the new CEO at AEP, I need to establish a record of delivering on promises to you while demonstrating goodwill to our regulators and customers as we focus on service, reliability and enhanced vegetation management to reduce customer outages. My objective is to improve our customer experience and stakeholder relationships which over time will result in more positive regulatory outcomes and enable a stable platform for growth. AEP's future growth opportunities are very significant as we embrace the large load opportunity in our service territory as well as substantial upgrades to the distribution system. We are focusing on economic development efforts in our states to help address affordability and investing in our energy delivery infrastructure to improve reliability in addition to new generation to support resource adequacy. Because of this tremendous growth, today we are unveiling AEP's new long-term earnings growth rate of 6% to 8% off a 2025 base year and a $5.85 midpoint, all reinforced by a balanced and flexible $54 billion capital plan from 2025 through 2029. When I look at this newly raised $54 billion capital plan, which is up more than 25% over the prior $43 billion plan, there is even more upside to go. In fact, we see significant opportunity to capture $10 billion in incremental transmission and generation infrastructure investment to satisfy all of the load growth. We will provide more details at EEI regarding these investment opportunities that drive our updated 8% rate base CAGR. Note that during the 2025 through 2029 timeframe, we also expect our customer rates will go up by less than 3% annually on a system wide basis due to built headroom created from economic development activities and new generation. Understand that this customer rate impact could change due to effects of potential future generation needs. Please refer to slides 5 and 6. As you know, maintaining a strong balance sheet is critical to funding the increased capital spend associated with these growth rates and we remain committed to responsibly financing our capital needs. In addition to equity and equity like tools, we will explore asset monetization opportunities to the extent they can be executed upon while achieving the right price. If we do explore asset sales, we won't tell you about them until they happen. Our newly rolled forward five year capital and financing plans can be seen in the appendix on slides 13 and 14. Turning to slide 7, our robust financial outlook will be underpinned by a culture of accountability and execution. This business is transforming rapidly and we recognize the need for change to better serve our customers. Since joining the company in August, we have made several changes to align and simplify the organizational structure to ensure we have the right talent and the right roles to execute our strategy and achieve our objectives. For example, our operating company Presidents and Chief Nuclear Officer now report directly to me, while power plants and site managers will report directly to our operating Company Presidents. We have streamlined the leadership structure by eliminating management layers and reorganizing the service corporation. These actions move decision making closer to customers, all to ensure our money making businesses have the authority they need to accelerate improved performance. I'm confident our new structure will help us drive value as we advance three core areas of strategic focus, growth and financial strength, customer service and regulatory integrity. I'd like to spend a few minutes walking through each of these areas. First, AEP's future growth potential and financial strength is significant with customer commitments for 20 gigawatts of load additions through 2029 driven by data center demand and we have updated our load growth forecast accordingly through 2027. In fact, large load impacts are already being felt in our service territories, predominantly in Ohio, Texas and Indiana. This is demonstrated in our third quarter results in which we realized commercial load growth of 7.9% compared to the third quarter of last year and 10.1% growth year-to-date in 2024 compared to 2023. We are committed to supporting this new load growth in our service territory, but we also remain focused on ensuring affordability by fairly allocating costs resulting from associated incremental investments. This is why we proactively filed the data center tariff in Ohio, the large load tariff modifications in Indiana, Kentucky and West Virginia, and a complaint with FERC related to a co-located load arrangement. Load growth from data center demand has the potential to benefit all stakeholders including investors, customers and local communities, but only with fair and proper cost allocation. While some may think that our FERC complaint is anti-data center, it is actually the opposite. We are trying to welcome all data centers to our service territory by making sure that those data centers help all customers. The second area of focus for us is best-in-class customer service. We will leverage technology to enhance service and better meet our customers’ energy needs through reliability and outage reductions while transforming our processes with a focus on efficiency and accountability. Business transformation and technology innovation will also drive O&M discipline to help keep customer rates affordable amid rising costs and a growing rate base. The last pillar of our strategy is regulatory integrity. We will listen to and respect the preferences of our regulators, policymakers and communities to achieve positive regulatory outcomes. If our states want renewables, we will work with them to deliver. If they want continued operation of coal or investment in gas or nuclear, we will work with them to deliver. As long as our states pay for what they want and we are treated fairly, we will deliver. At the same time, we will work closely with key stakeholders to advance affordability, system reliability, resiliency and security. To that end, we have aligned our organizational structure to strengthen our focus at the state level, and we continue to prioritize improving our earned ROEs as we listen to each of our states and their preferences. While it will take time for this work to bear fruit, this is headed in the right direction. Continuing on our operating companies achieved a number of other positive regulatory developments in the third quarter as well. Starting with AEP Texas, last month, the Commission issued an order approving a unanimous and unopposed comprehensive settlement which included a 9.76% ROE. The order was effective October 1st. In Oklahoma, major parties reached a settlement agreement with a 9.5% ROE in early October, and the ALJ recommended approval of the settlement without any modifications. While PSO awaits a commission decision, interim rates were implemented on October 23rd. In Virginia, a hearing was held in September related to the biennial filing, focusing primarily on incremental investment. A Commission order is required in November, with rates going into effect in early January 2025. Last week, APCO refiled its base case in West Virginia, requesting a 10.8% ROE while also offering securitization as the rate mitigation concept to the proposed $250.5 million base rate increase. This securitization option includes $2.4 billion of undepreciated plant balances, CCR and ELG investments, fuel deferrals and storm expenses. While reduced rate base of $1.9 billion would result from securitizing the plant balances and environmental investments, any earnings impact would be dependent on how quickly we redeploy capital throughout the business. That said, we should have an early indication from the Commission if securitization is preferred and we would plan capital redeployment accordingly. But let me be very clear, securitization is not included in our new five year capital and financing plans introduced today and is not needed to hit our credit metrics. Rather, securitization is driven by the desire to consider alternative rate case options to mitigate customer bill impacts. I was highly disappointed by the initial rate case filing that was rejected by West Virginia. Be assured that going forward, additional internal quality control checks and leadership changes have been implemented to ensure that each of our operating companies filings meet all requirements. A rate case rejection should not happen like it did in West Virginia, and I won't accept this kind of performance from our team. Moving on to SWEPCO, updated formula rates went into effect in early August for Louisiana, in mid-October for Arkansas. And finally, I&M issued new requests for proposals or RFPs for both owned resources and PPAs seeking to secure up to 4,000 megawatts of diverse generation resources for target completion by year end 2028 or 2029 to support new load growth in the region. As such, we expect to make the applicable regulatory filings in 2025. So in short, while the team is making progress towards achieving positive regulatory outcomes, we do have more work to do. We look forward to continuing to engage constructively with our regulators and strengthen new relationships, including by investing more resources at the local level and focusing on delivering what our individual states want as outcomes. The bottom line here is we have made progress transforming the business over the past three months, but we have significantly more wood to chop. Before wrapping up, I'd like to briefly update you on a legal item. AEP and the Security Exchange Commission are engaged in discussions about possible resolution of the SEC's ongoing investigation and we recorded a loss contingency of $19 million in the third quarter. Given this is an active matter, we don't plan on making any further comments on this matter. I'd now like to close by reiterating my strong confidence in the tremendous potential for AEP's growth and success well into the future. With the support, dedication and hard work of the entire AEP team, we are well positioned to continue providing safe, reliable and affordable service while advancing our long-term strategy to deliver value to our stakeholders. Related to our new vision statement of improving customer’s lives with reliable, affordable power, we will accomplish this together through commitment and execution. I look forward to seeing many of you in a few days at EEI where we'll be happy to discuss our newly released financial plans in even more detail. I'll now give the floor to Chuck.

Thank you, Bill. It's been a pleasure working with you over the past three months. Your leadership and passion for operational excellence and customer service is infectious, and everyone at AEP looks forward to working with you to capture the incredible opportunities that we have before us. Good morning everyone. Let me move on with the discussion of the third quarter results. Slide 8 shows the comparison of GAAP to operating earnings for the quarter. GAAP earnings for the third quarter were $1.80 per share compared to $1.83 per share in 2023. Year-to-date, GAAP earnings are $4.35 per share versus $3.62 per share last year. There's a detailed reconciliation of GAAP to operating earnings for the third quarter and year-to-date results on pages 20 and 21, respectively. Let's walk through our operating earnings performance by segment for the third quarter on Slide 9. Operating earnings for the third quarter totaled $1.85 per share, or $985 million, compared to $1.77 per share, or $924 million in 2023. Operating earnings for vertically integrated utilities were $1.08 per share, up $0.08. Positive drivers included rate changes across multiple jurisdictions driven by outcomes in Virginia and Indiana, higher normalized retail sales and lower income taxes. These items were partially offset by higher depreciation and O&M. The transmission and distribution utility segment earned $0.46 per share, up $0.07 compared to last year. Positive drivers in this segment include rate changes driven by the distribution cost recovery factor in Texas and the distribution investment rider in Ohio along with higher transmission revenue. These items were partially offset by lower normalized retail sales and higher depreciation. The AEP transmission Holdco segment contributed $0.40 per share, up a penny compared to last year, primarily driven by investment growth. Generation and marketing produced $0.19 per share, up a penny from last year. Favorable drivers included higher retail margins and lower interest expense. These items were partially offset by lower wholesale margins and higher income taxes compared to last year. Finally, Corporate and Other was down $0.09 compared to the prior year, primarily driven by higher interest expense, timing of other operating revenue, higher income taxes and O&M. The year-to-date operating earnings segment detail is shown on page 16 of the presentation. Note that year-to-date, operating earnings are up $0.36 per share this year, increasing from $4.02 per share in 2023 to $4.38 per share this year or about a 9% increase year-to-date. The data on Slide 10 shows continued strong growth in load. Weather normalized retail sales grew 2.1% in the third quarter. This marks the 14th consecutive quarter of load growth across our system, and year-to-date overall weatherized normalized retail sales grew 2.9%. Declining residential sales have been offset by double-digit growth of 10.1% in commercial sales. Thanks to the game changing developments around data centers and AI. Also, our industrial sales have consistently grown despite challenging economic conditions for many of our customers. Our companies have attracted a steady pipeline of economic development projects over the past several years and those projects are beginning to come to fruition. Besides the data centers, we also see companies investing in energy, manufacturing and primary metals driving consistent growth in our industrial sales. Industrial sales grew 1/2 of 1% in the quarter, propelled by nearly 5% growth in Texas. Looking ahead to 2025 and beyond, you'll notice that we have updated our sales projections out to 2027 in this presentation. Looking first at 2025, we are projecting overall sales to increase by an additional 8.3% over our estimate for this year. Flat residential sales will continue to be offset by double-digit growth in the commercial segment. This growth is propelled by a mix of new and existing customers spread across our Ohio, Indiana and Texas service territories. In the T&D segment, we estimate about 30% year-over-year growth in commercial sales each in AEP Ohio and AEP Texas. And in the vertically integrated segment, our projections have commercial sales at I&M up nearly 60% year-over-year. Note this is happening now, and in the next several years, not later this decade. New customer growth will also support a projected increase in industrial sales of 1.6% next year, with most of that growth expected to be powered by ongoing economic development in Texas. We have several large energy and manufacturing loads slated to come online within the next year. While these numbers are substantial, we take a lot of comfort in the fact that the large load additions reflected in these forecasts are all backed by signed customer financial commitments. In AEP Ohio and I&M, nearly all of these loads are backed by take or pay contracts. This means that customers are locked in to pay for a minimum amount of power over the next several years depending on their local tariff. Also, the impact of higher loads will enable our fixed costs to be spread over a higher base, benefiting all customers. As Bill mentioned, based on contract activity across the system, we expect about 20 gigawatts of additional load to come online through the end of the decade. For context, our summer peak load at the end of last year was 35 gigawatt. This represents about a 60% increase in peak load in the next six years. That magnitude of increase in peak load is driving the sales projections that you see in Slide 10. We expect consistent retail growth above 8% over the next three years, driven by not only double digit commercial load increases, but accelerating gains in the industrial space. Roughly half of the additions are located in our PJM footprint, mostly hyper scale data centers in Ohio and Indiana. The other half are located almost entirely in AEP Texas. However, the growth in Texas is more diverse and spread across both data processors and large industrial customers. The last time we have seen sustained years of load growth in the 8% range. The Beatles in the late 1960s were still making music. Truly, this is a pivotal and transformational time for our company as we work to capture this opportunity. Let's move on to slide 11. In the top left table you can see the FFO to Debt Metric stands at 14.7% for the 12 months ended September 30, which is a 10 basis point increase from the prior quarter. Our debt-to-cap decreased slightly from last quarter and was 62.1% at quarter end. We understand that in its next credit opinion in March, Moody's intend to change how it treats deferred fuel impacts to align the consolidated view of AEP without how our subsidiary company metrics are calculated. Importantly, based on discussions with Moody's in our annual management meeting last week, their view of AEP's credit is not changing and we will continue to exceed our downgrade threshold of 13% in all forecasted periods. We are committed to a goal of being in the 14% to 15% FFO-to-debt range and regardless the impact of deferred fuel on our metrics will dissipate to a normal state over the next two years. Again, importantly, this does not change our cash inflows or Moody's view of our credit profile. In the lower left part of this slide you can see our liquidity summary which remains strong at 5.5 billion and is supported by 6 billion in credit facilities. Lastly, on the qualified pension front, our funding status remains stable at 99%. In summary, our third quarter and year-to-date financial results put us in a strong position to meet our goals this year and we are tightening our 2024 guidance range to $558 to $568 per share and also in the quarter, I'll note that we completed the sale of AEP on site partners with approximately $320 million of net proceeds received at the end of September. For 2025, we have set our operating earnings guidance range at $575 to $595 per share with a guidance midpoint of $585 roughly 4% growth from our 2024 midpoint guidance estimate. Our 2025 earnings guidance is based on a strong foundation of growth in our regulated businesses and lower contributions in the generation and marketing segment due to the reduced scope of activities as well as lower expected retail and wholesale margins in the segment. Going forward, we expect improved performance in our vertically integrated utility segment as we work to narrow the gap between our earned and authorized ROEs and invest where we have alignment with our regulators. We have also introduced a robust long-term growth rate of 6% to 8% from the 2025 guidance midpoint. This is supported by a $54 billion capital plan which is more than a 25% increase from our previous five year plan. These investments with 63% related to wires and 26% related to new generation result in a five year rate base CAGR of nearly 8%. Future updates to capital are more likely to go up as we continue to see economic development activities in our territories due to our high voltage 765 transmission backbone, our attractive industrial footprint in Texas, as well as the incremental transmission and generation infrastructure that Bill described earlier. Our 5-year cash flow and financing plan forecast is shown in the Appendix on Slide 14. We have consolidated the forecast over the five year period as impacts in individual years due to large loads, generation investments and tax credits will have inter-period movement over time. Note however, the plan is supported with equity, equity like instruments, opportunities to explore, portfolio optimization as well as efficiently monetizing tax credits related to our investments in renewable generation and from our existing nuclear facility. In addition, we will decouple our dividend growth rate from our earnings growth rate resulting in a lower dividend payout ratio over time in the range of 55% to 65%. This will allow us to retain additional cash flow to fund our increased capital plan and new growth objectives while maintaining a market competitive shareholder return. Access to the capital markets is critical and we will finance sensibly to protect and maintain our balance sheet solidly in the investment grade category. We appreciate everyone's time today and your interest in AEP. We look forward to seeing many of you at the EEI conference next week. Operator, can you open the call so that we can address your questions? Thank you.

Thank you. [Operator Instructions] Your first question comes from Shar Pourezza with Guggenheim Partners. Please go ahead.

Hey, guys. Good morning.

Morning.

Morning, Bill. So, obviously, big update this morning. Cleared the decks and rebased as we're thinking about your new 6% to 8% growth rate. Asset sales haven't helped, but anything you can point to that can be maybe incremental to your 2025 guide. Any tailwinds that aren't in plan, like maybe on the cost side and as we're thinking about maybe the longer range, you have material load growth driven by the data centers. Has the 20 gigawatts of customer commitments hit any of your numbers? Or could some of those opportunities become further accretive as we saw with some of your peers during this earnings season? Thanks.

Yes, thanks, Shar. With regards to additional opportunities, clearly this year we've done a number of things across the company. We had a voluntary separation plan that was put in place to help offset inflation. And as we're looking at transforming the company, I did bring on an expert in transformation who's worked with me for many years, who will help us continue to look for opportunities to take costs out of the business, look for more opportunities to reduce layers of management and expand span of control of the management team. All in the effort to remove bureaucracy out of the company and reduce bloat. And so clearly there's opportunities for that. I've just been here three months, so we've got a lot yet to do. As I noted in my comments, a lot of wood to chop yet around the company. And so we've looked at what we were able to do and made sure that we were confident in what we put into those numbers at this time. But clearly more to do with regards to the 20 gigawatts that is essentially in the plan. 12 gigawatts of that is in the first three years of the plan, with the remainder towards the end of the plan. But we've got more opportunities out there. As I noted, $10 billion of transmission potential generation development. Again, as I was sorting through the numbers here with the $54 billion capital plan that we have, making sure that that was fully understood and that we could deliver it. But there's much more load growth to come for this company and I would say we're only really limited by our ability to execute on the opportunities that are in front of us. Chuck, anything to add?

Okay, got it. And then just lastly on the funding source. So 5.35 billion in equity needs. You obviously kind of mentioned asset sales. Can you just give us a sense on the asset? Is it transmission as media has been reporting, or the off goes an opportunity and just maybe a sense of timing? When do you need the equity? Thanks.

Yes, with regards to potential asset sales and stuff, we won't comment on those until something might happen, but we're clearly going to consider sort of all of the above to get us to where we need. Chuck, you want to.

Yes, sure. I would just add to that, in our plan we also will pursue equity like products out there, instruments that give us equity credit. You'll note in my comments, we are looking to decouple our dividend growth rate from our earnings growth rate as well, which would drift the payout ratio lower as well. We do have PTC and ITC monetization and as far as any asset monetization opportunities, as Bill said, we are looking holistically at all alternatives. As you look at the needs that we have and the timing of such, we will need equity support in 2025 and how and how that comes it could come in any of the forms that I just talked.

Okay, that's perfect. Thanks, guys. We'll see you in a couple days. Appreciate it.

Yes. Thanks, Shar.

All right, our next question comes from Steve Fleischman with Wolfe Research. Please go ahead.

Yes, hi. Good morning. Thanks for the time. So first, the new kind of outlook. What are you seeing in terms of earned returns across the utilities over the period? Are you you've had the issue with the earning below? Do you have that improving over the period by how much? Any sense on that?

So as we look at our regulatory opportunities right now for the regulated utilities, we're looking at a 9.1% ROE tend to plan. As I've gone around and met with the states, as I noted in my comments, our focus is changing to where we will be working with them to understand what they want to be able to achieve, and we will work to deliver that with them. And through that, then we would hope to continue to improve the relationship that we have with the regulator. And hopefully that then also then turns into more positive outcomes with regards to ROE and the general relationship that we have. As part of that, we also have to significantly improve our customer service. I've noted that we have to put more investment into the distribution side of the business, vegetation management, reduce outage time, and all of that will then go to helping us with regards to our regulatory relations and customer service. So we're very, very focused on that. I've made it around now to seven of our states in the three months I've been here to meet with the regulators, and we're continuing to build those relationships. And as I noted in West Virginia, we made the new filing very disappointed in the quality of our prior filing. We've made changes internally to correct that. And so we'll be very much focused on these returns. And I know how much it adds to our business as we're able to get those closer to our allowance.

Thank you. One other question just on the balance sheet. I appreciate the clear commentary on the Moody's and the deferred fuel. I just want to maybe restate or to clarify what you said. So they are going to make the adjustment. It sounds like you might be temporarily below the 14 to 15 target, but above the 13% downgrade threshold. And that overall the general view of the credit is that it's stable. Is that fair?

I think that's an accurate representation of what I said.

Okay. Okay, thank you.

All right, our next question comes from Jeremy Tonet with JPMorgan. Please go ahead.

Hi, good morning.

Good morning.

Just wanted to speak to the data centers in Ohio, I guess, a little bit more. And given the challenge there, could you speak to settlement dynamics in your data center tariff proposal, given, all the stakeholder, I guess, views on this?

Sure. As we've looked at the data center opportunities in Ohio, one of our fundamental principles around all of this is to ensure that our existing customer base is not negatively impacted by the significant increase in data center load that is being proposed for the state. And as such, we filed a tariff in Ohio that would essentially put more pressure on the data centers to stand up for the costs that they're creating on the system. And that filing has been going through the process. There's been settlements filed by the data center coalition, as well as ourselves with a number of other parties, including the staff from the commission. And right now that's moving the hearing on December 3rd, and we would expect to get an outcome from the commission shortly after that. But conversations are still going. We want that load in Ohio. We definitely want it to be on our system and we want to see that growth, but we also want to make sure that our existing customer base is not negatively impacted by this. And so we'll do what we need to ensure that we protect that customer base. And I think, honestly I've worked with data centers for a long time. In my prior role at Berkshire and Iowa in particular, we had a significant customer base of data centers there. And I've seen how the load comes on and what the commitments are, and so got a pretty good feeling for how this is going to potentially play out. And we want to make sure that we have everything in place to serve that load, but bottom line is only if we can protect the rest of the customer base.

Got it. Understood. That's helpful there. Thanks. And was just wondering if you could talk a little bit as well on the AEP on your JV proposal with FirstEnergy and Dominion as it relates to the transmission project and I guess what you see as unique or beneficial to this offering versus others.

So that was a great partnership led by our transmission team, Antonio Smith and the rest of the team there to pull that coalition together and go in and bid on these projects. Obviously, PJM is putting forth a significant amount of potential transmission investment and it was our view that we're stronger together as entities and that we would have a very, very good chance of winning these projects. And so that JV came together really well and we're working well together and we're excited about hearing where we might end up later next year. But I have confidence in our team and the team from FirstEnergy and Dominion that we're going to come out of this with some really strong opportunities to grow our transmission business.

Got it. Thank you. One quick last one, if I could just on G&M, seems like 2024 is going to notably outperform initial guidance there and AEP is on the midpoint. So just wondering if there's other segments of the business that are kind of underperforming expectations there. Do you expect them to kind of bounce back next year and also the G&M step down next year given the lower scope of the business, as you said, is that to indicate that there could be sales more likely in this segment than others, knowing that you're not going to identify specific asset sales in advance of them happening?

So the G&M segment we're reflecting about $0.24 and lower contributions over 2024 and 2025, which is obviously a significant change for us. But we are seeing good improvement across the rest of our lines of business. We're obviously also going to be going after the transmission projects that I noted in my opening comments. And then as far as other potential asset sales as again I said I will consider all things and if they make sense we'll take a look at them, but we'll talk about those at the time.

Got it. Thank you for that.

Our next question comes from David Arcaro with Morgan Stanley. Please go ahead.

Good morning. Thanks so much for taking my question.

Yes, good morning.

Morning. Just a bit of a follow up on that. Could you just help me understand the 26 EPS outlook? Is there no G&M earnings contribution there just so I could make sure I understood that and maybe specifically what's driving it to zero there? Is that an implied sale or exit of those businesses or something else?

Yes, thanks for the question. And perhaps the slide you're looking at may not make that clear. We're just showing the change in G&M from 2024 to 2025. There would still be a contribution from that segment in 2026 and beyond.

Got it, got it. Okay, thanks for that. Yes, that's more clear. And then could you touch on how you're thinking about the incremental new generation in terms of the CapEx that has come into the plan? I would assume a lot of that is going to be gas. I'm wondering kind of where, where and when you'd be investing in that kind of what the process is to firm that capital up.

So we do have a lot of gas coming into the system. We've got a number of RFPs out on the street as I mentioned, particularly at I&M, and we’ll see what kind of prices come in for those projects. The CapEx will be spread obviously as those projects come into play. But I'll also say that as we continue to work with some of our other states, particularly say West Virginia, there's a lot of opportunity yet to be sorted through in those states with regards to the economic development that they are pushing forward. And so be happy to talk more about these things in detail at the EEI meeting coming up. But really excited about the potential opportunities we have across a number of our states.

Got it. Okay, great. Well, thank you so much.

All right, our next question comes from Julien Dumoulin-Smith with Jefferies. Please go ahead.

Hey, good morning team guys. Thank you very much. Appreciate it.

Hey, good morning.

Good morning. Doing quite well, thank you. A couple things real quickly. First off on the G&M piece, I know you elaborated a little bit what's reflected through the course of the plan. Is that more of a static expectation off the 2025 baseline or further moderation there? Again, I know you clarified the 9:1 on the utility component, but just on the other piece there if you can.

Yes, Julien, I think that the business supports the level that we would see in 2025.

Okay, all right. Through the plan. Excellent. Thank you for that. Appreciate all the details. And then related here, you know, 765 has really caught a lot of attention across all the RTOs. I just want to make sure I understand what's reflected in this new CapEx baseline as far as 765 adoption goes across the various footprints. And again, I know you provided particularly detail on this coalition here in PGM. But to what extent can we see sort of comparable efforts emerge, say in ERCOT or what have you, as some of the 765 details become a little bit more formalized here, if you will.

So obviously we have a big opportunity in ERCOT around the 765 down there in the event that they decide to go that way. We've put in our proposals for that significant opportunity in the Permian area, significant opportunity on the various backbone growth areas for, for Texas. That just alone is a good $4 billion or $5 billion of opportunity potential there for us on the 765 front. We've also got good 765 opportunities in PJM and SVP as well. And so the fact that AEP is essentially the only U.S. Company that knows how to build and operate 765 gives us a strong competitive advantage in these situations and certainly something that I'm very excited about to pursue. That's one of the really strong strategic things that frankly AEP has done over the years is build out this 765kV backbone because it's paying huge dividends right now as all of this load growth is starting to combine. And I think that's being seen by some of the other decision makers around who are looking for ways to significantly increase their ability to move energy. And so with the 765kV experience that we have, I'm very excited about the opportunity to engage with ERCOT, SVP and PJM and maybe a little bit in MISO.

Yes, it's pretty exciting, actually. Quick clarification on the utility ROE. You're moderating it to 9:1 seemingly from your earlier plan despite the accelerating load. Is there something else disintermediating that relationship? I mean, I could imagine a few things, but I'm curious if there was anything purposeful there.

Nothing really purposeful. We're trying to continue to increase the ROE and work diligently with the regulators. If you blend in, the transmission component of this, we're at 9:3. Obviously we want to continue to get up closer to our allowance, but frankly, we have to earn our way up. As I said, we've had some mishaps in West Virginia that we've now corrected with the most recent filing, and we've got some significant work to do on the customer service side to put us in a better position with our regulator so they're not getting complaints from customers. And so as this continues to move forward, we've got a tremendous amount of wood to chop in this area, but we're very focused on it. We've taken our board through the details of reliability and where we sit, and we've essentially created a new foundation and we're going to blast off from there to really accelerate our improvements in customer service.

Excellent, guys. Talk soon.

Thank you.

Our next question comes from Nick Campanella with Barclays. Please go ahead.

Hey, good morning. Thanks for taking my questions today.

You bet. Good morning.

I wasn't around for the Beatles, but I'm excited to be here for the load growth and I wanted to come back to the generation comments? I think you talked about working with regulators and policymakers on whatever solutions can facilitate this higher load outlook. You talked a lot about gas, but in your prepared remarks you also talked about nuclear. And Bill, I know you talked about your love for nuclear in the past, and maybe you can kind of just expand on your thoughts of how nuclear kind of fits into the AEP strategy, if at all. Thanks.

Sure. Well, first and foremost, a number of our customers are pursuing projects based on nuclear power plants, and those are many, many years out, as far as I can tell. But we need to continue to work with our customers and if they want to pursue a small modular reactor type of co-location approach, then we'll work with them and we'll continue to work with developers of the various technologies that are out there. But this is going to require a very significant approach to risk mitigation. It will take a combination of the federal government, state government, input from the customer and ourself to build some risk mitigation such that our existing customer base isn't carrying the full exposure of something like this. And we'll, with our nuclear team that we have here, we'll continue to follow the various technologies that are being built in Canada with regards to the BWRX and the new scale plant that's being built in Romania. We'll follow those as well as the GE Hitachi project at TVA and watch how these are progressing. But ultimately if our customers want this and our states want this, then we'll have to figure out a way to deliver it. That's what we do. And so I'm fairly favorable that there'll be one or two designs that make it through the NRC process and will start to be built. But we have to figure out the first of a kind risk and make sure that we are not carrying that, that load and that there's a very broad base of people engaged in this that can help push this along.

Hey, I really appreciate your thoughts there. And just to tie things off on the 6% to 8% growth rate, so you have 8% rate base growth net of some financing drag. You could also be raising CapEx here too, I hear you on the 10 billion. Where do you kind of think you're trending in this new 6% to 8% range? Over the long-term, do you kind of grow linearly off this midpoint? Could you be kind of higher or lower in certain years? Just trying to understand that. Thank you.

Yes, thanks Nick. The 6% to 8% right is based off the 2025 new midpoint. And as you can imagine, as Bill described, the kind of components of our capital plan and the addition of load over time, I don't expect it to be completely linear like it may have been in the past. So I do expect all years to be in that range. But I certainly don't expect a --if our guidance was linear, we would have just said 7%. Our guidance is 6% to 8%. I think that does mean over the long-term we would average somewhere in between there, but I don't expect it necessarily to be linear.

Very helpful though, still within the ranges. I appreciate the time today. Thanks so much.

Our next question comes from Carly Davenport with Goldman Sachs. Please go ahead.

Hey, good morning. Thanks so much for taking the questions. Maybe just to start a quick follow up on transmission as we look at the new capital plan, obviously significant increases on that side relative to the prior plan. Just as you think about some of the opportunities in PJM that you ran through in I think Jeremy's question, are those all upside to the plan or is there any spend built in in the back end of this plan related to those opportunities?

Yes, this is all basically upside to the plan. And as I mentioned in my remarks, the potential for $10 billion of additional transmission and new generation build out is what we would be chasing with regards to not only just PJM, but ERCOT, MISO and SPP as well.

Got it. Great, that's helpful. And then just lastly, with the increase in the long-term earnings growth rate to that 6% to 8% range, could you just talk a little bit about how you're thinking about dividend growth relative to that range going forward?

Yes. So Carly, we have followed a pattern of pretty much matching dividend growth, right. With our earnings growth, with the increased capital needs, the cash right from decoupling. Right. The dividend growth from the earnings growth will help fund that. And we would be targeting, a payout ratio in the 55% to 65% range. Our old policy was 60% to 70%. I think right now our payout ratio is in that 63%, 64% range. So we will provide a market competitive total shareholder return opportunity for our shareholders. But that will be decoupled going forward.

Got it. Great. Thank you so much for the color.

Our next question comes from Andrew Wiesel with Scotiabank. Please go ahead.

Hi. Thank you. Good morning everyone. If I could first follow up on that dividend question. Are you able to indicate how quickly you expect to go from the roughly 64% to roughly 60%? Or said differently, if earnings are growing at 6% to 8%, what would be a good expectation for dividend growth? Would it be 6% like we've seen, or potentially something slower?

Well, that's a discussion, Andrew. That is, as you know that the board, approves the dividend and we will drift down in that range. It won't be anything significantly abrupt to expect there, but you could imagine, right. That we would just drift down in that range as we go through time.

Okay, so sounds like something fairly gradual then. If that's maybe a fair way to put it. Okay. Then on the -- great, thank you. Then on equity, I just want to better understand, I see this slide shows 100 million per year of drip and I fully understand your commentary that asset sales or something like a hybrid might mitigate the need. But for modeling purposes, should we take that 5.35 billion and straight line it over five years? Maybe you could give a little more guidance in terms of timing per year and if this would be an ATM or a block in the absence of one of those alternatives. Thank you.

Yes, so it's a good question. Obviously, consolidating the five year cash flow, just indicates that there's a lot of options on the table. What I would tell you that as I said earlier, we do need equity support in some form in 2025 and 2026 to continue to hit our credit metrics. So I think, as you maybe looked at last year's kind of shape and think of it in a similar way, is a good way to perhaps look at it because we do need support in 2025 in some form or fashion. And we are holistically looking at all of the options, including the equity like securities which wouldn't show up in the true equity line on the cash flow.

Okay, can that be a little more direct? What's embedded in the assumption for share count for 2025?

I don't have that specifically. We could talk about that at EEI.

Okay, sounds good.

You could follow up with Darcy later.

Very good.

Our next question comes from Bill Appicelli with UBS. Please go ahead.

Hi, good morning. Just a question about the. You talked about some of the funding over the years and with the efficient monetization tax credits, can you speak to the magnitude of the tax credits or these going to be contributing to earnings or is this utilization of transferability to provide funding?

Yes, it's just transferability to provide funding. It's neutral to earnings largely. And over the 2025 to 2027 period, it's roughly $300 million a year. In the latter two years there's some ITC opportunities with some solar projects. So you'd be some big, bigger numbers, but in the next three years, about an average of 300 per year.

Okay, thank you. And then on the sales outlook on residential, so that had been, trailing a little bit behind expectations, but you are assuming some improvement, back to relatively flatter or slightly positive next year maybe. Can you speak to what's driving that?

Yes, I mean, it's a trend I think that we and others are seeing in the industry as well as people have returned to work as inflation has crept in and the share of the wallet becomes more critical. I think you're just seeing reduced usage. We are seeing increased customer counts, in places like Texas and Oklahoma and Ohio and other areas. But it's not offsetting, right. The existing customer decline in usage. We do think that that levels off at some point in time. I think there's also probably some energy, continued energy efficiency things creeping in there. But nonetheless, we're as we, as you see in our forecast, after some years of decline, we're now assuming it flat going forward pretty much.

Okay. All right. And then just lastly, maybe just you can speak to the colocation issues, that FERC has recently addressed. You guys did intervene in the case. Maybe can you just highlight what you think next steps are, coming out of FERC or some of the policy issues more broadly?

Yes sure. So this is a very simple issue in our mind. If you use the transmission system, you should pay for it. It's really that simple. And our view of colocation is that we don't have an issue with colocation. We don't have an issue with data centers looking to use nuclear power plants as an energy source. But what we do have an issue with is when they use the transmission system and try not to pay for it. That's a problem for us because that cost gets shifted to other customers. And so as this process continues to go through the FERC decision making process, we'll continue to reiterate our concerns around cost allocation. And at the end of the day for us it's, it's just a simple principle. If you use the transmission system, pay for it. And that's really where we're at.

Okay, great. See you next week. Thank you.

Thank you.

Our next question comes from Anthony Crowdell with Mizuho. Please go ahead.

Hey, good morning. Hey, Nick. Did. I'm sorry, Chuck, did Nick have you write that Beatles reference?

I think he may have. I think he may have.

Well, that's great. Just two cleanups. I think one of them to Julien's question on the ROE improvement that you're seeing, 9.1%. What's a fair assumption where we should start baking in that improvement? Is it gradual over time or is that something you think we could bake in a certain year?

Yes. So trailing 12 months, as you could see in the deck, we're at 9.0% for the entire regulated complex. So I think as you think about going into next year, you should think about that. The regulated utilities in the range of 9.1% and the Transco right in that 10.5% range, which then averages things to 9.3%.

Great. And then you talk about the load growth, the data centers, great tailwinds. I'm just curious. It was maybe something investors were asking about maybe six months ago, but even with all this demand, is it taking longer to connect these large customers to the system or. It's at a very manageable pace for the company. I'm just thinking that with all this load coming on, whether it's supply chain or just labor connecting all these large customers, but it doesn't appear to be an issue.

Well, it's certainly a challenge for us to get everyone connected at the speed that they would like to be connected, which is tomorrow for the most part. And we're working with data centers to try to find creative ways to allow them to continue to build out and get the power that they need. But this is going to be a long-term build out for us and we'll try to connect as many data centers as we can onto the system. We'll try to come up with other creative options for those data centers while we get transmission built. But it's going to be an evolution of working with the customer, working with particularly PJM and then our ability to get the construction done. I don't foresee significant supply chain issues at this time. The construction is fairly well spread out and I think we can manage the supply chain side of this. But we certainly have a very high demand coming on from the data center crowd and will work hard to try to accomplish what they want as quickly as we can.

Thanks for taking my questions. See you in EEI.

Thank you.

All right, and our final question from today with Ryan Levine with Citi. Please go ahead.

Thanks for taking my questions. I guess a couple one, in terms of your confidence level and these load forecasts, how confident are you and when do you think you that could evolve?

Well, as we stated earlier, we've got essentially signed contracts for all of this load, so we feel very confident about the load coming on. Certainly we're in discussions with a number of other economic development opportunities across a number of our states. Those clearly are not in our plan, nor do we know if they'll come to fruition. But for what we're showing you, we have signed agreements and our confidence level is quite high.

And then in terms of the recent election, with federal tax rates potentially to change in coming years, how exposed is your free cash flow and credit outlook to changes in federal policy And I guess on a similar vein, you have generation build out and ownership expected in your plan. Is there any exposure to tariffs that you're thinking through?

Yes, I mean, it's a question we're going to have to evaluate here as we go through time and see what the platform for the new administration is going to be. So give us some time to absorb that.

Okay. Thanks for taking my questions.

Yes. Thank you.

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. Danica, would you please give the replay information?