Adverse regulatory rulings hit the bottom lines of utilities, power providers

The financial impacts of recent, tough regulatory decisions were a dominant discussion topic for power and utility executives during fourth-quarter 2023 earnings calls, from impairments and spending cuts to a potential court case and C-suite changes.

American Electric Power Co. Inc. (AEP) announced Feb. 26 the replacement of President and CEO Julie Sloat with Benjamin Fowke III, former head of Xcel Energy Inc., a leadership change that came shortly after the addition of two Icahn Capital LP-backed directors to the AEP board and followed a series of regulatory stumbles.

In January, AEP disclosed a $222 million fourth-quarter 2023 writedown after West Virginia regulators disallowed recovery of a portion of accumulated costs sought by subsidiaries Appalachian Power Co. and Wheeling Power Co. AEP is appealing the Public Service Commission of West Virginia's order on expanded net energy costs with the West Virginia Supreme Court, management said.

The company in 2023 also terminated the sale of subsidiary Kentucky Power Co. to Algonquin Power & Utilities Corp. in light of the deal's rejection by the Federal Energy Regulatory Commission; received a "challenging decision" in Texas rejecting the acquisition of renewables capacity; and was awarded a lower return on equity by the Oklahoma Corporation Commission than what was included in a settlement reached in Public Service Co. of Oklahoma's rate case.

While the board reassured investors that Sloat's involuntary termination did not result from any disagreement about AEP's trajectory, Fowke emphasized the company is looking for regulatory expertise in its next chief executive.

"Ultimately, it would be ideal if they have multi-jurisdictional experience and the ability to achieve regulatory success," Fowke said about AEP's external CEO search during an earnings conference call. "That's a big wish list."

AEP Executive Vice President and CFO Charles Zebula, who was named CFO in October 2023 when the previous official was fired, also acknowledged that the company is "not earning where we need to earn, and we need to have the regulatory execution and prudency reviewed to make sure, right, that we are hitting the mark there."

Rate case repercussions

Ameren Corp., Exelon Corp. and WEC Energy Group Inc., meanwhile, detailed financial repercussions from recent natural gas and electric rate case decisions in Illinois.

WEC took a $178.9 million hit to fourth-quarter earnings after the Illinois Commerce Commission (ICC) disallowed capital costs that subsidiaries The Peoples Gas Light and Coke Co. and North Shore Gas Co. had already spent on the construction and improvement of service centers and a gas infrastructure project.

As a result, Board Chairman Gale Klappa said WEC would decrease planned spending on its Illinois gas delivery system by $800 million over the next five years.

"That's virtually all related to the cessation of work," Klappa said Feb. 1 on the company's earnings call. "If we were able to make the top end of our 2024 guidance, $4.90 [per share], we would have recovered virtually the entire hit from the Illinois rate order."

Ameren plans to reduce Illinois spending by $400 million through 2027, and Exelon will trim planned spending in the state by $1.25 billion through 2026 after the ICC rejected multiyear grid plan proposals by their electric utility subsidiaries and authorized lower-than-expected equity returns.

The commission determined in December 2023 that the four-year electric distribution grid plans proposed by Ameren Illinois Co. and Commonwealth Edison Co. (ComEd) did not adequately describe community benefits, transparency, affordability or cost-effectiveness and did not comply with the state's 2021 climate act, which requires 50% renewable energy by 2040 and 100% clean energy by 2050.

Ameren introduced 2024 earnings guidance of $4.52 to $4.72 per share, but President and CEO Martin Lyons said the company anticipates "earnings growth to trend below the midpoint of our range until the outlook in Illinois improves or the impacts of other growth opportunities are realized."

Exelon Executive Vice President and CFO Jeanne Jones took a similar tone, saying on the company's Feb. 21 call that the regulatory environment in the state "will further cause volatile quarterly earnings shaping in '24."

"We simply cannot invest at the same pace under an ROE that does not fairly recognize ComEd's cost of financing to do so, especially in the current interest rate and inflation environment," Jones added.

Ameren Illinois and ComEd plan to file revised grid plans.

Clean energy considerations

Eversource Energy, meanwhile, recorded a $1.95 billion impairment after taxes related to its offshore wind business, which the company plans to exit through an announced $1.1 billion sale of its 50% stake in two projects to Global Infrastructure Management LLC and a sale of its 50% stake in a third project to joint venture partner Ørsted A/S.

The bulk of that impairment stemmed from a New York Public Service Commission decision in October 2023 to reject a petition to increase its contracted offtake price from the 924-MW Sunrise Wind project to account for ballooning costs.

"These challenges, coupled with the lack of pricing flexibility, inherent in contracts approved by state regulators, result in a projected investment return substantially below our required thresholds," Eversource President, CEO and Chairman Joseph Nolan said on the Feb. 14 earnings call.

New York state announced the selection of an updated Sunrise Wind project under a new contract Feb. 29, paving the way for Ørsted to acquire Eversource's stake and become the sole owner.

Constellation Energy Corp. still hopes to pair a new nuclear production tax credit with a $3/kg tax credit for hydrogen produced by power sources that do not emit carbon, but guidance from the US Treasury Department has put those plans on ice for now.

The proposed framework for the 45V production tax credit would require electricity that powers hydrogen production to come from new rather than existing clean sources, a concept known as additionality. Constellation's planned $900 million production facility would be part of the Midwest Alliance for Clean Hydrogen hub, but President and CEO Joe Dominguez reiterated the company will nix the project absent significant changes in the final rule.

"We've stayed in the game on the hydrogen hub in Illinois because [the US Energy Department] has asked us to, and they're covering the cost, pending the outcome of the final rule," Dominguez said during an earnings conference call. "If we don't get the right final rule, we'll head into litigation, but we'll suspend further capital deployment or opportunities in hydrogen until we get an outcome from the courts."