8-K: American Electric Power Reports Mixed 2023 Results, Reaffirms 2024 Guidance

American Electric Power reported a decrease in GAAP earnings for 2023 but an increase in operating earnings, while reaffirming its 2024 operating earnings guidance.

Summary

• American Electric Power (AEP) announced its fourth-quarter and full-year 2023 financial results.
• GAAP earnings for the fourth quarter were $336 million, or $0.64 per share, down from $384 million, or $0.75 per share, in the same period of 2022.
• Operating earnings for the fourth quarter were $647 million, or $1.23 per share, up from $540 million, or $1.05 per share, in the fourth quarter of 2022.
• Full-year 2023 GAAP earnings were $2.2 billion, or $4.26 per share, compared to $2.3 billion, or $4.51 per share, in 2022.
• Full-year 2023 operating earnings were $2.7 billion, or $5.25 per share, compared to $2.6 billion, or $5.09 per share, in 2022.
• The company reaffirmed its 2024 operating earnings guidance range of $5.53 to $5.73 per share.
• AEP is advancing strategic initiatives, including de-risking the business and investing in a modern grid.
• The company is working through the final phases of the sales process for AEP Energy retail and AEP OnSite Partners businesses, expected to conclude by the end of the second quarter.
• AEP expects to complete the sale of its 50% share in the New Mexico Renewable Development to Exus for $115 million by the end of February.
• AEP will retain the Transource business and its share of the Pioneer and Prairie Wind transmission joint ventures.
• The company's 5-year capital plan is $43 billion, with $27.3 billion allocated to transmission and distribution investments.
• AEP has received approval for $6.6 billion of its planned $9.4 billion regulated renewables capital plan.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the increase in operating earnings and reaffirmed guidance, but tempered by the decrease in GAAP earnings and some negative variances in sales data. The company is making progress on strategic initiatives, but faces ongoing risks and challenges.

Positives

• Operating earnings for both the fourth quarter and full year 2023 increased compared to 2022.
• The company's 2023 operating earnings results were within the narrowed guidance range.
• AEP is making significant investments in renewable energy and grid modernization.
• The company is seeing growth in commercial and industrial load.
• AEP is progressing with its strategy to de-risk the business through divestitures.
• The company is on track to meet its carbon emission reduction goals.

Negatives

• GAAP earnings for both the fourth quarter and full year 2023 decreased compared to 2022.
• The difference between GAAP and operating earnings was largely due to disallowances of certain fuel costs and capitalized costs.
• There was a decrease in total retail electric sales for vertically integrated utilities.
• The company experienced a significant decrease in wholesale electric sales for vertically integrated utilities.

Risks

• Changes in economic conditions and electric market demand could impact results.
• Increased global trade tensions and economic sanctions could pose risks.
• Volatility in financial markets and interest rate trends could affect the company's ability to finance projects.
• Weather conditions, including storms and droughts, could impact operations and costs.
• The availability and cost of fuel and the performance of generation plants are ongoing risks.
• New legislation and government regulations could impact the company's operations and profitability.
• The company faces risks related to the transition from fossil generation to renewable energy.
• Cyber security threats and other catastrophic events could disrupt operations.

Future Outlook

AEP management reaffirmed its 2024 operating earnings guidance range of $5.53 to $5.73 per share and a long-term growth rate of 6% to 7%.

Management Comments

• Our team delivered 2023 operating earnings results within our narrowed guidance range as we navigated a dynamic environment of higher interest rates and one of the mildest years for weather in our service territory in the last three decades, Fowke said.
• We are advancing our strategic priorities through investments in the energy system to benefit customers while managing the portfolio, driving efficiencies and lowering O&M costs.
• We also continue our disciplined approach to economic development that resulted in a 7.8% increase in commercial load and a 1.6% increase in industrial load in 2023, bringing jobs and economic growth to our communities.
• We remain focused on executing our 5-year, $43 billion capital plan with $27.3 billion allocated to transmission and distribution investments to ensure reliable, affordable power and enhance service for our customers.
• We've received approval to add more fuel-free renewable resources to serve customers in seven states, representing $6.6 billion of our planned $9.4 billion regulated renewables capital plan.
• We continue to make progress on our strategy to de-risk the business.

Industry Context

The results reflect the challenges and opportunities facing the utility sector, including the transition to renewable energy, grid modernization, and managing costs in a dynamic economic environment. The company's focus on transmission and distribution investments aligns with industry trends towards grid reliability and resilience.

Comparison to Industry Standards

• AEP's operating earnings growth of approximately 3% year-over-year is moderate compared to some peers in the utility sector that have seen higher growth due to specific regional factors or renewable energy initiatives.
• Companies like NextEra Energy (NEE) have demonstrated stronger growth in renewable energy development, while Southern Company (SO) has focused on large-scale nuclear and natural gas projects.
• AEP's capital expenditure plan of $43 billion over five years is substantial, but comparable to other large utilities investing in grid modernization and renewable energy.
• The company's FFO/Debt target of 14% to 15% is within the range of industry benchmarks for investment-grade utilities.
• AEP's focus on de-risking the business through divestitures is a common strategy among utilities seeking to optimize their portfolios.

Management Changes

Stakeholder Impact

• Shareholders may be concerned about the decrease in GAAP earnings but encouraged by the increase in operating earnings and reaffirmed guidance.
• Customers should benefit from the company's investments in grid modernization and renewable energy.
• Employees may be affected by the workforce reduction, but the company is focused on long-term growth and sustainability.
• Suppliers and vendors may see opportunities from the company's capital expenditure plan.

Next Steps

• AEP will host a webcast discussion with financial analysts and investors on February 27, 2024.
• The company expects to complete the sale of its 50% share in the New Mexico Renewable Development by the end of February.
• AEP expects to conclude the sales process for AEP Energy retail and AEP OnSite Partners businesses by the end of the second quarter.

Key Dates

Keywords

earnings, operating earnings, GAAP, renewable energy, transmission, distribution, capital plan, divestiture, grid modernization, carbon emissions