01—Abstract
Summary
Summary of the 8-K filed February 26, 2024. Cited figures are marked; the original filing is the authoritative source.
American Electric Power (AEP) reported preliminary, unaudited fourth-quarter and full-year 2023 results on February 26, 2024.
For year-end 2023, GAAP earnings were $2.2 billiona, or $4.26 per share, down from $2.3 billion, or $4.51 per share, in 2022. Operating earnings, a non-GAAP measure that excludes special items, were $2.7 billion, or $5.25 per share, up from $5.09 per share in 2022. The gap between GAAP and operating results was driven mainly by a West Virginia fuel cost disallowance (about $181 million after tax), a probable disallowance of Turk Plant capitalized costs (about $80 million), and mark-to-market hedging impacts, partially offset by a one-time remeasurement benefit of excess deferred taxes (about $46 million).
AEP reaffirmed its 2024 operating EPS guidance of $5.53 to $5.73b, a long-term growth rate of 6% to 7%, and an FFO/Debt target of 14% to 15%. Management cited a mild weather year, higher interest rates, and a 5-year, $43 billion capital plan, with $27.3 billion directed to transmission and distribution. Commercial load grew 7.8% and industrial load grew 1.6% in 2023, while total retail sales were roughly flat to down on a consolidated basis for the year.
The company is pursuing a de-risking strategy: it expects to complete the sale of AEP Energy retail and AEP OnSite Partners by the end of the second quarter of 2024, and it closed or planned the sale of its 50% stake in New Mexico Renewable Development for $115 millionc. It decided to retain the Transource business.
Leadership also changed, as Benjamin Fowke III, a board member and former Xcel Energy chairman and CEO, was named interim CEO and president. Investors should weigh the earnings quality issues from regulatory disallowances and the leadership transition against the reaffirmed guidance and capital plan.
02—Key points
Key Highlights
- Full-year 2023 operating EPS of $5.25 beat 2022's $5.09, while GAAP EPS fell to $4.26 from $4.51 due to special items.
- Q4 2023 operating EPS of $1.23 rose from $1.05 a year earlier, while Q4 GAAP EPS fell to $0.64 from $0.75.
- 2024 operating EPS guidance of $5.53 to $5.73 was reaffirmed, with a 6% to 7% long-term growth rate and an FFO/Debt target of 14% to 15%.
- Regulatory disallowances in West Virginia (about $181 million after tax) and a probable disallowance of Turk Plant costs (about $80 million) were the main drivers of the GAAP-to-operating gap.
- The 5-year capital plan totals $43 billion, with $27.3 billion for transmission and distribution and $9.4 billion for regulated renewables, of which $6.6 billion has been approved.
- Portfolio de-risking continues, with the AEP Energy retail and AEP OnSite Partners sales expected to conclude by Q2 2024 and the New Mexico Renewable Development stake sold for $115 million.
- Benjamin Fowke III, former Xcel Energy chairman and CEO, was appointed interim CEO and president, and the company decided to retain the Transource business.
03—Questions
Frequently Asked Questions
Why did GAAP earnings decline in 2023 even though operating earnings rose?
GAAP earnings include special items that operating earnings exclude. In 2023 these included a $181 million after-tax West Virginia fuel cost disallowance, an $80 million Turk Plant impairment, and mark-to-market hedging losses of about $228 million, partly offset by a $46 million benefit from remeasuring excess deferred taxes. Operating earnings reflect the ongoing business, which improved in the Transmission & Distribution, AEP Transmission Holdco, and Generation & Marketing segments.
Is AEP's 2024 earnings guidance still intact?
Yes. Management reaffirmed 2024 operating EPS guidance of $5.53 to $5.73. Because guidance is on an operating (non-GAAP) basis, AEP cannot forecast special items such as divestitures or impairments, so GAAP results may differ.
What is driving AEP's long-term growth outlook?
The primary driver is the $43 billion five-year capital plan, with $27.3 billion for transmission and distribution. Strong commercial and industrial load growth in 2023 (7.8% and 1.6%, respectively) and approved regulated renewable additions support the 6% to 7% long-term growth target. Management noted that 2023 was affected by one of the mildest weather years in its service territory in three decades, which weighed on results.
What does the leadership change mean for investors?
Benjamin Fowke III, a board member and former Xcel Energy chairman and CEO, was named interim CEO and president. The filing does not describe a permanent search timeline, so investors may watch for a permanent appointment and any change in strategic direction, though the company reiterated its existing strategic priorities.
Are AEP's asset sales expected to affect future earnings or cash flow?
The sales of AEP Energy retail and AEP OnSite Partners, expected to close by the end of Q2 2024, and the $115 million sale of the New Mexico Renewable Development stake are part of the de-risking strategy. They may reduce exposure to competitive businesses, but the filing does not quantify their earnings or cash flow impact, and sale proceeds may be needed to fund capital needs.
04—Continue