American Electric Power Company Inc (AEP) — Q2 2018 Transcript

Thank you, Paul. Good morning, everyone, and welcome to the second quarter 2018 earnings call for American Electric Power. Thank you for 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. Our presentation also includes references to non-GAAP financial information. Please refer to the reconciliation of the applicable GAAP measures provided in the appendix of today's presentation. 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.

Thanks, Bette Jo. Good morning, everyone, and welcome again to AEP's second quarter 2018 earnings call. We just completed a very healthy second quarter financially, primarily due to weather, a continued strong economy in the regions of the country that we serve, and further resolution of rate-making activities. And, of course, while not complete yet, further approvals occurring regarding Wind Catcher that I'll cover later. The weather has been a significant story for the quarter. In a nutshell, the second quarter was bipolar with no spring. As proof that we did not have a spring this year, get this: The second quarter 2018 was the fourth coldest second quarter and the second warmest second quarter in the AEP system in nearly 50 years, because winter went well into April and summer came early in May. So, we benefited from that from both angles. Additionally, regarding the economy in the service territory, the AEP service territory economy and load performance continues to be as strong as it has been in years. Brian will be covering the weather and economic information in more detail later. With that said, we are reaffirming our guidance for the year of $3.75 per share to $3.95 per share and our 5% to 7% growth rate, and as we have said previously, this base plan does not include Wind Catcher. We are also giving our first signal of 2021 capital budgets assuming no Wind Catcher to reinforce that our investment thesis as a foundational benchmark is and has been our continued guidance that reflects a long-term 5% to 7% growth rate. Getting to the financials for the quarter, we had strong earnings for the second quarter 2018 with a $1.07 per share GAAP and a $1.01 per share operating versus $0.76 a share GAAP and $0.75 a share operating, respectively, in 2017. So, overall, a great quarter. This brings year-to-date earnings on a GAAP and operating basis to $2 per share and $1.97 per share respectively versus year-to-date 2017 earnings of $1.97 GAAP and $1.72 per share operating. So, overall, a strong quarter and a strong year so far. In terms of the regulatory update, I'm sure many on this call want to hear about our thoughts on Wind Catcher. First, I am pleased with the Arkansas, Louisiana, and FERC approvals we have achieved thus far. The focus now is almost entirely on Texas and Oklahoma to complete the regulatory approvals necessary to continue towards financing and construction. We heard both commissions register their concerns about appropriate customer protection-related issues, landowner considerations in Oklahoma, the needed time to review, and render thoughtful decisions, and employment-related information benefiting each state. Most of these issues were also considered in the other state jurisdiction as well and these values were recognized in the various state approvals as well as settlements with the parties. AEP, PSO and SWEPCO, from the very beginning, have worked extensively to evaluate the risks of the project to our shareholders and our customers to deliver the important benefits of lower customer bills, valuable hedges on future energy prices, and diversity of supply while achieving substantial economic benefits to the states involved with this project. Chair Walker and the other commissioners in Texas asked us to review our customer protections in relation to other outcomes in a previous case involving Xcel SPS and had questions regarding employment from a Texas perspective supporting the project. We responded with a letter detailing side-by-side comparisons of not only the customer protection mechanisms with the previous SPS order, but also the additional hold harmless provision items that are guaranteed from the Arkansas, Louisiana, and Oklahoma settlement and outcomes. As with any other state jurisdictions, we discussed the substantial employment and economic development benefits of this project as well. These provisions go well beyond any assurances provided for other types of generation such as natural gas. Additionally, our letter indicated that in response to concerns in Oklahoma and Texas regarding the timing required to review the case by the commissioners, we negotiated with our supplier partners a further four-week time delay until the end of August to accommodate further consideration. The letter indicates our position on the deal parameters in response to commission concerns as well as indications of the necessary timing for a decision. I want to be clear; this letter is meant to be supportive and responsive to commission concerns, but it is necessary because we at AEP are bound by externalities that we have limited or no control over to drive the need for a decision to move forward, namely, time to construct the project, to deal with right-of-way landowners in as flexible a fashion as possible to minimize potential condemnations, and to obtain full value of the PTCs to meet our customer guarantees and produce substantial benefits to our customers. This project started with a degree of excitement, primarily driven by our view from a strategic sense of what we can do to minimize what we call the percentage of budget impacting our customers. We recognize that if we can spend capital to reduce customers' bills, it's a win-win that will not only define the utility of the future but ensure that we remain relevant to our customers. We are not bound by the coal lobby, the natural gas lobby, or the renewables lobby. We are committed to a diverse energy portfolio that provides inherent risk management benefits to our customers. And in the case of Oklahoma, as the State of Texas has done with the CRES build-out, the importance of this project is to ensure that all resources, including natural gas and renewables, indigenous to the state can produce diversity of supply and economic development benefits for the states that we are proud to serve. We have another hearing before the Texas Commission tomorrow, and we stand ready to answer any questions that the commissioners may have, and Oklahoma is contemplating its order as we speak. AEP believes, through multiple negotiations and commission feedback received in these states, we have struck a balance between our shareholder, our customer, and the state interest impacted by this important project. We look forward to an ultimate resolution by the end of August. Because football season is upon us, I'm using a football analogy. We're deep in the red zone with time running out, third down with two plays to go, needing a touchdown with both plays already called; they're called Texas and Oklahoma. Get your beer and chicken wings for an exciting month ahead. From a shareholder perspective, there have been questions regarding the time limit for a decision and the risk that the company is willing to take on the Wind Catcher project. Certainly, there are parameters that can be dealt with around the edges, but the deal structure and timing are embodied in the letter to Chair Walker and was also sent to the Oklahoma Commission. We need some consistency in the approach and communications to both of these commissions to bring the decision-making to a common view. We will certainly live with the outcome that emerges from both the Oklahoma and Texas commissions, and we'll know we gave it our best shot with this very unique and ingenious project regardless of the outcome. Certainly, we would like Wind Catcher to be approved and move forward, but to reiterate, the foundation of this company remains solid, and our growth plans continue to support a 5% to 7% growth trajectory regardless. Our investors can count on the constant earnings and dividend growth they have come to expect from a premium regulated utility. Brian will introduce our 2021 capital plan that further demonstrates our commitment to this growth rate. We at AEP, nor others, can predict what these two commissions will do to answer the question of whether AEP can move forward with Wind Catcher. But we'll know soon, we'll know soon by the end of August. And as Bob Dylan said, the answer my friend is blowing in the wind. Now, let's move to the equalizer chart. So, as we go through the various states, overall, our regulated operations ROE is approximately 10% versus 9.5% last quarter. Overall, we generally project the ROE to be around that 10% range, given our geographic diversity. Some companies will be up, some will be down, but as we demonstrated by our historical performance, we are generally in that 9.5% to 10% range. Furthermore, as we noted on the slides, we have recently completed five state rate cases and one is in process which will help some of the underperforming companies. So, I guess as we review these individual companies, looking at AEP Ohio, the ROE for AEP Ohio at the end of the second quarter 2018 was 13.8%. Keep in mind that includes some legacy items associated with previous activities related to deregulation that occurred before; those will roll out now primarily by the end of the year with a small portion continuing into next year. So, we show this 13.8% overall, with those legacy items, but the actual return on equity is 12.1% for Ohio. Moving to APCo, the APCo ROE at the end of 2018 was 9.7%, and APCo's improvement is primarily due to weather. West Virginia is earning in the high 7% range, and that's why we have a rate case that's been filed for a rate increase of $115 million with rates effective in March of 2019 in that state. Of course, Virginia is still – we have established tri-annual rate reviews, and AEP's first review for APCo Virginia will be in 2020 and will cover the 2017-2019 timeframe. Moving to Kentucky, the ROE for Kentucky at the end of the second quarter 2018 was 8.7%. Their rate case is complete, helping drive the turnaround along with better-than-normal weather conditions for the first half of the year. We expect to earn near the authorized return by the end of the year in Kentucky, and, of course, their continued long-term strategic plan is around economic development in that region, and certainly, our president there has had a lot of success in moving that process forward. So, we expect big things there. I&M achieved their ROE of 11.9% at the end of the second quarter 2018. I&M had a positive start to 2018, primarily driven by strong sales in all segments, favorable weather, disciplined OEM spending, and favorable one-time true-ups associated with regulatory items. So, I&M continues to spend capital, of course, at nuclear stations and in distribution and transmission. Their base rates went into effect in both the Michigan and Indiana jurisdictions as a result of the last rate cases. PSO, the ROE for PSO at the end of the second quarter was 6.5%. PSO's earned ROE has been slightly boosted by positive weather, but we still are challenged based on regulatory lag in that state. So, we'll be following another rate case in Oklahoma in the third quarter of 2018 to help address this regulatory lag and other matters. As for SWEPCO, the ROE of SWEPCO at the end of the second quarter was 6.8%. The primary reason for the increase is improved weather over the last year. Results also reflect a full quarter of rate relief implemented late last year in our Louisiana and Texas jurisdictions. Of course, the ROE continues to be burdened by the overall Arkansas share of the Turk plant, the 88 megawatts in Turk, and we continue to look for a home for that. AEP Texas, the ROE there is – for the second quarter, was 9.5%. While earnings have grown year-over-year, the reason for the declining ROE is due to timing of annual T cost filings as we continue to make significant transmission investments along with some timing related to O&M spend. So, still, a very good opportunity there in AEP Texas. AEP Transmission Holdco, the ROE there is at 11.2%. It's lower than first quarter ROE as a result of the 12-month rolling income calculation. The second quarter 2018 had a smaller true-up reflecting the new forward formula rates that are now in the process of being implemented. So, that's the overview; overall, things are going pretty well from an ROE perspective. We continue to work on and see the results of the five rate cases that we filed last year and, of course, we have one going on now and one pending. So, we'll continue with that approach to ensure that we continue to manage around that 10%. Second quarter and year-to-date have moved along positively, and the third quarter will be definitive for Wind Catcher. AEP will continue with a firm foundation that provides excellent value for our shareholders and our customers. So, I'll turn it over to Brian. Brian?

Thank you, Nick, and good morning, everyone. I'll take us through the second quarter and year-to-date financial results, provide some insight on load in the economy, review our balance sheet and liquidity, and provide detail on our 2021 base case capital expenditures and equity needs. Let's begin on slide 6 which shows that operating earnings for the second quarter were $1.01 per share or $498 million compared to $0.75 per share or $370 million in 2017. Most of this year-over-year growth came from weather and the recovery of incremental investment to serve our customers. Looking at the drivers by segment, earnings for the Vertically Integrated Utilities were $0.56 per share, up $0.31. Weather was a large driver in this quarter with most of the $0.12 increase driven by warmer than normal temperatures in the late spring. Rate changes were also favorable due to the recovery of incremental investment across multiple jurisdictions and formula rate true-ups. For this segment, other small impacts contributed as well. The Transmission & Distribution Utility segment earned $0.23 per share comparable to last year. As anticipated, AEP Transmission Holdco segment was unfavorable to the second quarter last year due to the minimal formula rate true-up this year compared to the larger one in the second quarter of 2017. This was expected due to the change in methodology to fully forward-looking test years. This impact was partially offset by increased investment which has grown by $1.7 billion since last June. Generation & Marketing produced earnings of $0.05 per share, up $0.01 from last year, and Corporate and Other was down $0.01 due to higher interest. Let's turn to slide 7 and review our year-to-date results. Operating earnings through June were $1.97 per share or $972 million, compared to $1.72 per share or $845 million in 2017. Our regulated segments experienced growth for the year and, as expected, our competitive Generation & Marketing business was down due to last year's asset sales. Let's look at the earnings drivers by segment. Operating earnings for the Vertically Integrated Utilities were $1.03 per share, up $0.34 with the single largest driver being weather which added $0.24. Successful implementation of rate changes added another $0.14. Other favorable items included higher transmission revenues and normalized load. Offsetting these drivers were anticipated decreases in our wholesale load as well as increased O&M and depreciation expenses. Through June, the Transmission & Distribution Utilities segment earned $0.49 per share, up $0.02 from last year. Favorable drivers included higher rate changes, normalized load, and weather, which were partially offset by higher depreciation. The AEP Transmission Holdco segment contributed $0.42 per share, up $0.01 from last year. This growth in earnings reflected our return on incremental rate base and small non-recurring items which were mostly offset by the larger prior year formula rate true-up. Generation & Marketing produced earnings of $0.13 per share, down $0.05 from last year, again, mostly due to the sale of the assets. Finally, Corporate and Other was down $0.07 per share from last year due to higher interest and tax expenses and a prior-year investment gain. Overall, we are pleased with our results and confident in reaffirming our annual operating earnings guidance. Now, let's turn to slide 8 for an update on normalized load growth. The load story has been positive through the first half of 2018. Starting in the lower-right chart, our normalized retail sales increased by 2% for the quarter and were up 1.7% year-to-date, both of which are above expectations for the year. In both comparisons, we experienced normalized load growth across all three retail classes. Moving clockwise, industrial sales increased by 3% for the quarter and grew by 2.8% compared to the first half of last year. Industrial sales have been strong for over a year now with growth spread across most industries and operating companies. The sectors that posted the strongest growth in this quarter were all energy-related which is consistent with rising oil prices. In the upper-left chart normalized residential sales were up 2.1% for the quarter and 1.7% for the year. The chart shows consistent improvement in residential sales over the past year. Once again, growth was spread across nearly every operating company. Through June, customer accounts were up 0.5% compared to last year which is the strongest we've experienced since 2015. Weather-normalized usage was also up 1.7% this quarter and 1.2% year-to-date which correlates with the recent improvement in household incomes, which I'll discuss in more detail in the next slide. Finally, in the upper-right chart, commercial sales increased 0.7% in the second quarter and increased 0.6% through June. The growth in commercial sales was not as strong as in other classes, but still positive. Now, let's move on to slide 9 and review the status of our regional economies. As shown in the upper left chart, GDP growth in AEP service territory exceeded the U.S. by 0.10% for the second quarter. In fact, the economy in AEP service territory has been growing at a faster pace than the U.S. since the second quarter of 2017. The upper right chart shows the gap in unemployment growth narrowing between AEP service territory and the U.S. While U.S. job growth has been stable over the past year, AEP's job growth has continued to improve. For the quarter, job growth in AEP's territory was 1.1% with higher growth in our western territory. Another key indicator for measuring the health of the labor market is the unemployment rate. While the U.S. unemployment rate is the lowest it has been since the early 2000s, unemployment in AEP service territory is currently at its record low and is expected to fall further. One key driver of the tightening labor market has been changing demographics. As more baby boomers retire, businesses are looking to fill those positions from the available labor force. In some industries, businesses are struggling to find qualified labor. As the competition for labor has increased, wages have finally started to rise. The bottom chart on this page shows growth in personal income. Through the first half of 2018, income growth within AEP service territory has exceeded the U.S. For the quarter, AEP customer incomes were 4.6% higher than last year. The increase in income is a key driver for the higher residential usage this year. Overall, higher energy prices and incomes and a relatively healthy global economy have combined to create a positive environment for sales through the first half of 2018. However, tightening labor markets, higher inflation, and escalating trade tensions are items with potential headwinds for the second half. Now, let's turn to slide 10 and review the company's capitalization and liquidity. Our debt to total capital ratio increased 0.2% during the quarter to 56.8%. Our FFO to debt ratio was solidly in the Baa1 range at 19.3%, and our net liquidity stood at about $1.4 billion supported by our revolving credit facility. Our Qualified Pension Funding improved to 103%, and our OPEB funding improved to 134%. For both plans, the funded status improved due to rising interest rates, driving a decrease in liabilities that more than offset asset losses. Now, let's turn to slide 11 and review some detail about 2021 CapEx and capital needs. As Nick mentioned and as we've talked about before, AEP has a solid organic growth plan that supports our 5% to 7% growth rate. In particular, we have robust Transmission & Distribution capital expenditure opportunities for the foreseeable future, exclusive of Wind Catcher. To demonstrate this confidence, we are introducing our 2021 plan, which includes $6.3 billion of capital expenditures, of which 100% is allocated to our regulated businesses in contracted renewables and 75% is allocated to wires. In the appendix of our presentation on page 34, we show the pinwheel detail for where the capital will be spent. Similar to 2020, an incremental $400 million of equity above our DRIP is required to support that spend and maintain our capital metrics. Let's try and wrap this up on slide 12, so we can get to your questions. We will obtain clarity on the Wind Catcher project and continue working with regulators to provide the best solution for customers regarding tax reform. Our base plan is robust and supports our 5% to 7% growth rate even before the addition of Wind Catcher. Our year-to-date performance and the stability of our regulated business model give us the confidence to reaffirm our operating earnings guidance range of $3.75 to $3.95 per share. With that, I will turn the call over to the operator for your questions.

Good morning, Julien.

Hi. Good morning. This is Claire for Julien. Hey, good morning. Good morning, team. Thanks for taking my question. My first question is recognizing that you guys will continue to work on regulatory approvals for Wind Catcher. Can you give a little more color on what other configurations or what other projects you could replace it with that would still take advantage of the one PTC and the other PPA contracting structures as well? Just curious about any options there? Thank you.

Yeah. So, Claire, we continue to look at other opportunities; we have the renewables projects in Ohio, for example. We obviously continue that process. There will be other opportunities, but tax reform has certainly changed some of the economics of some of these projects, particularly with lower capacity factors. So, we'll continue to look for opportunities to replace it. But remember, Wind Catcher was incremental to our base plan. So, and our base plan obviously supports the 5% to 7% growth rate and investment in transmission and other areas in our regulated companies. So, if Wind Catcher were not to happen, there'll still be opportunities for those kinds of resources to be applied through our resource plans in those particular states, but obviously, we don't want to miss the opportunity for Wind Catcher because it's a great way to deal with the resource plans in all of those states at one time rather than independently with perhaps less efficient projects. So, we'll continue to take a look at it.

Great. That's really helpful. And my second question is – this is a little early, I think. For your CapEx update, can you give a little more color as to why you're doing it before November and potentially any color around more than just the 75% of wires, how you're increasing above your 2020 run rate?

Yeah. So, let me answer the first one, Claire. We keep getting questions about how solid our go-forward plan is and what's the ability to keep investing organically in our own businesses, and we wanted to provide some clarity to that, to show that we have plenty of runway to invest organically in our own system, primarily in the wires side of the business with some regulated and contracted renewables as well. So, people are asking how long can you keep doing that for? And we wanted to provide some clarity. It's out there, and we have plenty of runway to keep doing that and felt that the disclosure at this time might be helpful to people as they think about our stock.

There seems to be some confusion about whether Wind Catcher was required for us to continue with our 5% to 7% long-term growth rate. The answer to that is no, it's not required to do that. Our base plan is built around 5% to 7%, and Wind Catcher was incremental. We just wanted to make sure that that was abundantly clear and that people weren't looking across the cliff and expecting something different regardless of the outcome. Now, if we get it, that's great. But if we don't, well, okay, we'll move forward with our plan.

Got it. That's helpful. I will drop out of the queue. Thanks so much.

Thanks.

Good morning, Ali.

Thank you, good morning. Good morning. First up, on Wind Catcher, Nick, to be clear, if either Texas or Oklahoma does not approve, can the project still go forward or do you need both of those approvals for this project to happen?

Yeah. My going-in assumption is we need both of those approvals because these are regulated jurisdictions, and that's where the needs are. Certainly, our strong preferences for that project is sized based upon the wind farm that's in existence with the transmission line, and to do something different than that would be suboptimal, so we're really focused on making sure that all of the jurisdictions approve it.

Okay. And then, secondly, we've seen it now a few times. What I would call, the drop-dead date keeps getting shifted back. Now, you're telling us it's the end of August. So, in reality, when you look at the physical aspect of having it all built by the end of 2020, when exactly do you need to have this started? And, I guess, related to that, I'm sure you've been observing your stock has been under a fair amount of pressure while this uncertainty is out there. So, at what point do you make the call that the base plan is so strong that we are maybe better off getting this uncertainty off the table and walking away here?

Yeah, Ali. We've already started with right-of-way. We've also done other construction-related activities because we don't have time. Your question is a very fair question, though, from an investor standpoint. We cannot afford to continue to allow this thing to languish given construction has started, and the company is incurring expenses associated with it, our supply contracts. I think it’s known now that the target dates for ordering long lead time equipment through these major contracts was around that August 6 timeframe, and we were able to negotiate and look at the project plans and evaluate what we could possibly do, and that's where the end of August came from. So – and in deference to the commissions, both commissions, certainly, it appeared Chairman Murphy wanted to take more time, and Chairman Walker wanted to take more time and wished they had more time. We tried to accommodate that by the additional time necessary to get past – I know there's a lot going on with election season and all kinds of things occurring. So, we're saying the end of August, and that's where we're at. For us to go beyond that is going to be extremely difficult with major commitments of these large capital items, and that's just not going to happen without the approvals necessary. It's not because we're trying to be hard; it's that we're getting pressed. And it's unfortunate that we didn't have several years to evaluate this project, but the PTC is the 100% value. We're trying to secure it for customer benefits and we've got to be able to finish the project in time to enable that to happen. I mean, it's a 60% off-sale, and if you don't want to take advantage of it, then just tell us. And I think that's basically what I've been saying to the commissions. We've offered this opportunity, and it is a real, distinct, and positive opportunity, but we need an answer and we need it by the end of August. Certainly, from the risk perspective relative to deal parameters, we've been in negotiations with parties in all these states, and you're now seeing the culmination of multiple sets of negotiations with varied parties and I think we've rounded up with the best balance we could. I'm hopeful that the commissions will look at that and consider our track record and what we're trying to do. We're focused on providing as much benefit as we can to our customers.

Yes. No, I really appreciate that. Brian, one quick one for you. Can you just remind us of the rate increases that you had budgeted for 2018 in your guidance? How much are now locked in for you?

So, we were calling for a little bit over $300 million, and we're about 80-or-so percent locked in.

Thank you.

Thanks.

Hey, Steve.

Hi, good morning. A couple of questions. Hi, Nick. So I guess, first just to clarify, the 5% to 7% growth rate – I think officially you've only given after 2019 but should we interpret that with this capital plan, it would extend through this 2021?

Yeah. We’ve provided detail through 2020. Now, we're giving an incremental year, but we see that 5% to 7% growth rate as far as we can see.

Great. Okay. And then, secondly, on Wind Catcher. One - there’s a reasonable chance that one outcome could be approval with conditions. So, that then leads to another process of do conditions work or not? So, when you're giving this kind of end of August deadline, is that, you just need to make a go/no-go call by then or...

Yeah. That's right. That's right, Steve. And it also means – and you're exactly right on that the deal parameters. We saw the sense of urgency. So, when we sent the letter into the commission, it was really responsive because really the discussion had been around 103% on the cost gap, while SPS was 102.5%, so we changed it to a 102.5%. I mean – and it's those things that Chairman Walker was bringing up. Okay, we said we were going to match up the SPS, then we had the hold harmless provisions. It went even beyond. And that was really responsive to her and her concerns and those of the other commissioners as well, and of course, the Oklahoma Commissioner's too. So, we put our best foot forward to say, this is the parameters of what a deal would look like. I'd say that – I had mentioned this earlier in my comments, and I guess it was on purpose – but there is – you can play around with the edges, but the main parameters of the deal have been discussed for really a year now. And with multiple parties, those provisions are pretty well-defined. For us to take on more risk beyond those parameters is not likely to happen either. I guess, I'm just saying, we sort of cut to the chase. And we cut to the chase based on the responses of what the commissioners were telling us, and we put our best foot forward. Our best foot forward is there from a parameter perspective and from a timing perspective. And what I've said all along is we need an answer. Back to Ali's question of, we've had pressure on our stock. Well, because no one knows exactly where we're taking this and I'm just reinforcing to you that we're about to take this to a closing one way or another. Because we've got to get on with other decisions to be made relative to enhancing our shareholders value, and that's what we're going to do.

Okay. And then, I guess one other question in that light. So, if you go back about, I think, 6 to 12 months, you had talked about concern about the Oklahoma regulatory environment and I don't think you were that happy with the rate order. Early this year and then we'll see what happens with Wind Catcher, but just is that still kind of an issue that's in play based on the outcome here?

I think, actually – I think we've made a lot of progress from an Oklahoma standpoint just because of the dialogue that we've been having relative to the Wind Catcher case. The dialogue we've had post-rate case environments and pre-rate case environments. I think the issues are becoming more known from an Oklahoma perspective. I think we've done a really good job of trying to do the best we can for Oklahoma customers. I think that's starting to get recognized, and I really believe we have the real potential of being on an upward trajectory regarding PSO because of – and I can tell you there has been a lot of discussion post-rate cases and that kind of thing, but the kind of discussions we've had relative to Wind Catcher and really the stretch that we've put in here to try our best for Oklahoma customers is not going unrecognized. And as I mentioned earlier, there will be another rate case filing in the third quarter in Texas and in Oklahoma. That will be – I think that will be sort of a new beginning and one where we can really look at the issues in Oklahoma. I think there's a better understanding of what the issues are, and we have some great commissioners there that understand what the issues are. So, we're hopeful that we can make progress there.

Okay. Thank you.

Hey Paul.

Hi. How are you doing?

Just right.

Just procedurally, what should we expect, I guess – what procedurally is expected to happen on Thursday in Texas? I know you guys have lengthened the period for decision-making, but I'm just wondering what – is it possible to get a decision on Thursday?

Yeah, I don't know the answer to that. I think there's probably, in my mind, a couple of options. One is that the commission does decide to vote on the arrangement based on the input that we provided. The other option, probably could be more likely, would be that – Chairman Walker had talked about coming up with a list of questions and we responded to the ones we knew of. There may be other questions. So, there could be questions answered and then there's two weeks, I think, two weeks from then, is another commission hearing. So, whether we're on the docket or not, I don't know, but there is opportunities now that we've given to the end of August for that kind of thing to occur. So, that's up to the commission. But that's sort of the way that – the two alternatives that I see. I'd rather have them approve it at Thursday; that'd be great.

Yeah, get some closure here. But...

Yeah.

And then, also – and just to clarify on the Ali Agha's question. There is really, I guess, no sort of Wind Catcher light or – I mean, basically, you guys might do other things; obviously, you're always looking for things and other opportunities, but it sounds like, essentially, kind of a pretty much not really given to any significant modification. If this doesn't happen, we shouldn't think of there being a sort of Wind Catcher light opportunity per se with respect to this project, is that correct?

That's correct. I think you could see, I mean, obviously, with the integrated resource plans that we followed, you may see smaller projects develop in some fashion, but they could be renewables and may not be renewables. So, you really – but you won't see another Wind Catcher-like project because that one has – that one's very unique in its scope and scale and the benefits provided. And so, you're probably moving to either less efficient type of opportunities, and there certainly will continue to develop those kinds of options. But keep in mind, you should look at AEP as a 5% to 7% foundational growth stock with all these little incremental opportunities.

Awesome. Thanks so much.

Yes.

Hey, Angie. How are you?

Hi. How are you?

Good.

So, I have a bigger picture question. So, the electricity utilities industry is clearly evolving, and I'm trying to have some lessons learned from what has happened in Europe. And I'm asking this because about 50% of your CapEx plan is transmission spending through 2021, and yet we have seen it in Europe that transmission CapEx or transmission investments have been falling because utilities are choosing instead to go with distributed generation, sometimes backed by batteries.

Right.

And we're hearing the same types of ideas now coming up from Midwestern utilities. And so, my question is, one, do you think that you need to somehow diversify your growth plan? And two, was Wind Catcher basically an attempt to become less dependent on transmission spending, or was it somewhat completely independent?

Angie, you should be involved with our strategy sessions because there's no question that this industry is changing dramatically. We recognize that at some point in time transmission will essentially saturate in some fashion, but that horizon is really a decade out. Because in the U.S., which is – I really talk a lot to the people at RWE Energy, Ineo, and other areas of Europe as well. They're much more compartmentalized, but they're also, from a renewables perspective, the renewables are starting to slow down somewhat, at least large-scale renewables. But in the U.S., that's still developing. We have to think about, though – and you're exactly right – as you bridge from the transmission-related investment, we see the incoming growth strategy around the innovation on the Distribution side. In the past, if you think about the way we've been investing, a huge amount of what we invested 5, 10 years ago was generation-related, then it became transmission-related. Now, you're seeing the continued development of transmission. Eventually, that will saturate, but the growing part of it now is the distribution investment at the operating companies focused on bringing about the – effectuating new technologies and development associated with either distributed resources, Big Data analytics, all the optimization activities going on. Those are clearly opportunities for us in the future. That's why we're focused on the customer and on making sure that we are able to deliver those types of technologies. We are the only U.S. utility that's part of an international consortium that conducts essentially a shark tank around the world. I just got back from California where there were 2,000 start-ups evaluated, and it was narrowed down to a list of 15. We're doing pilots with four of them at least at this point, and that's where the future is starting to develop. You're exactly right. Bending the O&M curve is a big part of what we're doing because, obviously, with optimization, efficiencies, digital experiences, all those types of things benefit that; but capitalization will continue to be transmissioned, and then you'll see an emerging distribution component as well. So, as far as the eye can see, we're in great shape from an investment standpoint because of that transition.

Okay. That's all I have. Thank you.

Thank you.

Thanks so much.

Hey, Praful.

Hi guys.

How are you doing?

Good. So, thanks for all the color on Wind Catcher. I guess – and you're reiterating the 5% to 7% growth. I guess my question is, if Wind Catcher does go through, is the right way to think about it that Wind Catcher will be all incremental growth to the 5% to 7% or will there be some capital allocation limitation when you say the 5% to 7% doesn't all add up with incremental Wind Catcher, but it's somewhere in between? How should we think about that kind of mix if you did get Wind Catcher?

So, think of it as incremental. What we've announced to date, some of that could be pushed out in time, but still within the 5% to 7% growth rate. Does that make sense?

Okay. But there is a little bit of room of something getting pushed out just to kind of fit the Wind Catcher CapEx in there, is that right?

Absolutely.

Got you. All right. And then, given the strong quarter and the weather help I guess in Q2, is there any reason why kind of guidance is maintained right now at the same level?

Yeah. You know what a big swing for us the third quarter is, and there are big items that will be ins and outs. I think Nick talked about some of the expenses that we're having with Wind Catcher as we go forward in time. It doesn't make sense for us to change the guidance at this point. The way we see it, we're still inside that range that we've identified, and if there's any change to that, we'd likely be making that after the third quarter.

And there are things that we usually use weather as an opportunity to move O&M. So, you could see some O&M move that was in 2019 to 2018 or that kind of thing; we typically do that on a regular basis. We do want to show that certainty and consistency around 5% to 7% in our earnings guidance. Now, you can only do that to a certain extent, right? So, if you do wind up with the rest of the year or like the first part of the year, then who knows how much you can absolutely – that you can do? Our view is really that credibility around the guidance that we put out in making sure that we can deliver on that regardless of what's going on with the weather as we demonstrated last year and then continue that as we go forward. So, we'll – and as Brian said, typically, we wait for third quarter to determine what the future holds in terms of guidance.

Got you. That's super helpful color. And then, finally, just now that you'll soon have some form of decision on Wind Catcher and tax reform kind of is done and – or at least mostly known in terms of what to play out the scenarios are, is there any strategic review that we should be thinking about that you guys are looking at in terms of your business mix or just anything that needs to be cleaned up internally? Or do you think, currently, the kind of combination of businesses or utilities you have is the right fit and there's nothing really to be done on the strategic side?

Yeah. We've already done it. We already done sort of a major house-cleaning. So, we're a pretty pristine stock, and when you – now, that being said, we're always looking at ways to optimize our portfolio. But obviously, they’re all centered around ensuring that we are able to deliver on the guidance and the growth rates that we've laid out, and that's why we show – you can – and this sort of comes and goes. I mean, you can have a jurisdiction or a state jurisdiction that says, okay, it's suffering and maybe we should do something. Well, it takes a little time to figure out, is that a – just a systemic problem or do we need to do something about it? But that's really the way we look at it. I mean, it is portfolio management, but it's smart portfolio management around the delivery expectations around our growth rate and our guidance.

Got you. Thanks so much. Super helpful.

Yes.

And operator, we can – we have time for one more question.

Good morning, Anthony.

Hey. Good morning.

Morning.

Hey, Nick, I'll direct it to you to give Brian a little break from doing all the talking. But just quickly, any agreement that you reach or the detail that you reached in Texas or Oklahoma, but is there a most favored nation that hold harmless guarantee will apply to the other two jurisdictions?

Yeah. So, all of the jurisdictions have a hold harmless provision, so – and that's really the key part of it. Every adjustment we make is not just an adjustment in that jurisdiction, it's adjustment across the board. So, that's why we have to be particularly careful from a risk perspective, and that's why we've laid out in the letter what our expectation is. The FERC customers are obviously treated differently because of their own arrangements, but that's really the way it works.

Is that the biggest hurdle, you believe, for the Oklahoma and Texas commissions? Is this hold harmless or are there other details that are what's delaying it in those two states?

Well, I think certainly election season in Oklahoma is pretty distracting. You have some parties in the states, like the Attorney General in Oklahoma, that they did a settlement deal with the staff that had provisions that were way off base. A lot of discussion about that. I think there's just a lot of confusion out there, and sometimes you focus so much on the margins of what could happen to this and could happen to that, it's almost like finishing up a contract versus looking at the amazing benefits across the board that are out there. So, you’re getting hung up in a lot of that kind of dialogue. In Texas, you've got the industrials and others that now, at least the attorney for the industrials that are using different gas forecasts and all that kind of stuff, which confuses the parties that are listening. When you get past all of that and get to the facts, then I think we'll be in much better shape.

Great.

Yeah. My dad used to be a used car salesman and sold Chevys in Louisiana.

Maybe you should have rethought about Texas or Oklahoma, but thanks for taking my question.

Yeah. Yeah, thanks.

Okay. Well, thank you everyone for joining us on today's call. As always, the IR team will be available to answer any additional questions you may have. Paul, would you please give the replay information?