American Electric Power Company Inc (AEP) — Q4 2018 Transcript

Thank you, Salina. Good morning, everyone, and welcome to the fourth 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.

Good morning, everyone, and thank you for joining us today for AEP's Fourth Quarter 2018 Earnings Call. As we look back at 2018, we are pleased to report solid earnings for both the quarter and the year. Favorable weather persisted into the fourth quarter, and the economy remained healthy, though it was later impacted by trade tariffs and a strong dollar. That said, 2018 saw the strongest normalized load growth since 2011. We are continuing to see an increase in customer counts and load growth, particularly in the oil and gas sectors and in residential sales. While this is encouraging, we will monitor sector growth in the economy and the composition of customer load growth closely. Earlier this year, we adjusted our guidance for operating earnings from a range of $3.75 to $3.95 per share to $3.88 to $3.98 per share, and we ended the year solidly at $3.95 per share. We are very pleased with our employees' commitment to improving the customer experience while consistently delivering results for our shareholders. 2018 was an impressive year, and I am equally proud of our achievements over the last eight years, which we view as a defining trait of AEP's emerging brand. Let’s review the financial performance for 2018, beginning with the fourth quarter. We reported GAAP earnings of $0.74 per share compared to $0.81 per share in 2017, and operating earnings of $0.72 per share compared to $0.85 per share in 2017. For the year-to-date 2018, total GAAP earnings were $3.90 per share, slightly ahead of $3.89 per share in 2017, while year-to-date total operating earnings reached $3.95 per share compared to $3.68 per share in 2017. The differences between GAAP and operating earnings are mostly attributable to generation plant-related impairments and tax adjustments. We also wrapped up rate cases in five states: Indiana, Michigan, Kentucky, Oklahoma, and Texas. Additionally, we filed rate cases in West Virginia and Oklahoma, which will conclude soon. Tax reform-related activities were notable regulatory efforts, and we expect these processes to proceed efficiently without further impacts in 2019. Despite earlier mentioned headwinds and a rising interest rate environment, AEP is still surpassing performance metrics compared to the S&P 500 Electric Utilities Index and the S&P 500 over one, three, and five-year periods. This affirms our status as a premier regulated utility. Looking ahead to 2019, AEP's operating earnings per share guidance is set at $4 to $4.20 per share. As previously discussed, we are focusing on disciplined capital allocation and identifying additional renewable growth opportunities beyond our financial plan, supported by our capital plan which includes $6.5 billion in 2019. We are disappointed not to be at the upper end of our projected 5% to 7% growth rate. It's important to note that potential regulated renewable opportunities from integrated resource plans in our jurisdictions are not included in our capital forecast but could present upside potential. We are working to improve our operational and maintenance (O&M) expenditures through efficiency gains, process automation, and digitization while implementing technologies that enhance customer experience. Regarding renewables, we have submitted integrated resource plans and requests for proposals in the SWEPCO and PSO jurisdictions, targeting up to 2,200 megawatts of wind resources. Our focus is shifting towards owning these facilities for various strategic reasons, and we intend to file the results of our RFP process in August, with construction completed by the end of 2021 to take advantage of the 80% production tax credit, contributing to earnings in 2022. In Ohio, the review process for a 400-megawatt solar project continues as part of the total 900 megawatts of renewables planned. This week and next week, hearings will discuss the need for these facilities, emphasizing not only capacity but also job creation and economic development interests highlighted by local officials. Low-income customers are supportive because renewable resources promote accessibility. We believe utilities are uniquely positioned to leverage scale to reduce costs and ensure access to such resources and technologies. As for rate cases, we've had a busy year with five completed cases and are awaiting finalizations on those filed in West Virginia and Oklahoma shortly. In West Virginia, we've already submitted a settlement agreement that will take effect in March. In Oklahoma, we are striving for a favorable outcome after two previous attempts to secure progress, with the ongoing regulatory lag presenting challenges. We remain open to settlement discussions, as we await a decision from the Oklahoma Corporation Commission. Overall, our regulated operations have a return on equity (ROE) of 9.7%, down from 10.1% last quarter. We typically expect ROE within the range of 9.5% to 10%. The slight decline is due to increased O&M expenses this quarter compared to lower spending during a milder winter last year. AEP Ohio's ROE was 14.5% at the end of the fourth quarter, driven by ongoing adjustments expected to phase out soon. APCo reported a 9.4% ROE, affected by higher storm restoration costs and tax true-ups. As for Kentucky, the ROE was 9% at the end of the fourth quarter, showing improvement year-over-year. I&M’s ROE stood at 11.4%, reflecting favorable weather and successful rate reviews in Indiana and Michigan. Regarding PSO, the ROE decreased to 6.9%, yet improved compared to last year. The decline this quarter was mainly due to unfavorable retail margins. SWEPCO's ROE was 6.5%, impacted by previous rate case effects and wholesale contract expirations. AEP Texas recorded an 8.5% ROE, down from 8.8% due to timing issues related to annual filings amidst substantial capital investments. AEP Transmission Holdco's ROE was 10%, with recognized differences to be adjusted in our June 2019 revenue rate true-up. In summary, we remain within our expected ROE range of 9.5% to 10%, with anticipated improvements in areas lagging behind. As we progress into 2019, we aim to sustain our strong track record of earnings, having consistently exceeded the midpoint of our guidance each year for the past six years. Remember, our consistency and ability to deliver strong financial and operational results reinforce AEP's status as a premier regulated utility.

Thank you, Nick, and good morning, everyone. I'll take us through the fourth quarter and year-to-date financial results, focusing primarily on year-to-date, provide some insight on loading the economy, review our balance sheet, liquidity, and pensions, and finish with a review of our outlook for 2019. Let's begin on Slide 7, which shows that operating earnings for the fourth quarter were $0.72 per share, or $354 million, compared to $0.85 per share, or $420 million, in 2017. Most of this year-over-year variance was expected and came from higher O&M as we reduced spending in 2017 in response to that year's unfavorable weather. All the detail by segment is shown in the boxes on the chart, but the change in the regulated businesses was driven by higher O&M and decreased load, more than offsetting a return on incremental investment to serve our customers. The generation of marketing segment produced operating earnings of $0.07 per share, up $0.02 from last year due to higher energy margins and favorable income taxes. Corporate and Other was down $0.10 due to higher O&M, interest, and income tax expenses. Turning to Slide 8, we will review the year-to-date comparison in more detail. Our annual operating earnings for 2018 was $3.95 per share, or $1.9 billion, compared to $3.68 per share, or $1.8 billion, in 2017. This difference can primarily be attributed to favorable weather and recovery of incremental investment, partially offset by higher O&M as we reduced spending in 2017. Our regulated segments experienced growth for the year. And as expected, our competitive generation of marketing business was down due to last year's asset sales. Looking at the earning drivers by segment, operating earnings for Vertically Integrated Utilities were $2 per share, up $0.36, with the single largest driver being weather, which added $0.33. Looking at total degree days, 2018 was the highest in the last 30 years while 2017 ranked 29th. Successful implementation of rate changes adds another $0.26. Other favorable items included higher transmission revenues in AFUDC as well as lower non-service pension costs and income taxes. Offsetting these items were anticipated decreases in wholesale load and lower normalized retail margins as well as increased O&M and depreciation expenses. The transmission and distribution utilities segment was $1.05 per share, up $0.04 from last year. Favorable drivers included higher rate changes, normalized load and weather as well as lower non-service pension costs. These were partially offset by higher depreciation. The AEP Transmission Holdco segment contributed $0.75 per share, up $0.03 over 2017. This growth reflected the return on incremental rate base, which was mostly offset by prior period accounting adjustments and minimal formula rate true-ups this year compared to the larger one in 2017. Net plant grew by $1.4 billion or 21% since December of 2017. The generation of marketing segment produced earnings of $0.29 per share, down $0.01 from last year due to the sale of assets and mostly offset by favorable income taxes. Finally, Corporate and Other was down $0.15 per share from last year due to the prior year investment gains and higher interest, O&M, and income tax expenses. We are pleased with our results for 2018. As Nick said, we landed in the upper end of the updated earnings guidance range. Now let's turn to Slide 9 for an update on normalized load growth. Starting in the lower right chart, normalized retail sales decreased by seven-tenths of a percent for the quarter but ended the year up eight-tenths of a percent compared to 2017. Even with the modest load performance over the last half of 2018, normalized load growth for the year was the strongest AEP has experienced since 2011. Every operating company experienced normalized growth in retail sales in 2018 with the exception of Kentucky Power. Moving clockwise, industrial sales increased by three-tenths of a percent for the quarter and ended the year 2% higher than 2017. The growth in industrial sales moderated in the fourth quarter and was driven by increases in the oil and gas sectors. Industrial sales, excluding oil and gas, experienced a slight contraction in the quarter. This was driven by a more restrictive U.S. trade policy, a weaker global economy, a stronger dollar, and lower energy prices. In the upper left chart, normalized residential sales increased by two-tenths of a percent for the quarter and ended the year up six-tenths of a percent over 2017. Growth in residential sales was mostly due to customer count growth while normalized usage was down half a percent for the quarter. For the year, residential customer counts increased by six-tenths of a percent, which is twice the growth experienced in 2017. Finally, in the upper right chart, commercial sales decreased by 2.8% in the fourth quarter and ended the year down half a percent from 2017. Commercial sales were down across all our operating companies for the quarter and the year. The estimates for load growth presented on this chart differ slightly from what we showed at the EEI conference in the fall due to the fact that we now have actual numbers for the full year of 2018 rather than the estimates we had at that time. Our actual load estimate for 2019 has not changed. Now let's turn to Slide 10 and review the status of our regional economies. As shown in the upper left chart, GDP growth in AEP service territory was 2.8% for the quarter, which is three-tenths of a percent below the U.S. The U.S. economy has eclipsed that of AEP service territory since the tariffs went into effect in the second quarter. As discussed on previous calls, AEP has a higher exposure to tariff given its higher concentration to export manufacturing. In fact, 38% of all U.S. exports originate in the 11 states served by our regulated utilities. The upper right chart shows the gap between employment growth is narrowing between AEP service territory and the U.S. The U.S. has experienced stable job growth over the past 2 years, and the job market within AEP's footprint has continued to improve. For the quarter, job growth in AEP's territory was 1.3% with higher growth in the West. The unemployment rate for AEP's territory fell to 4.1% this quarter, which is the lowest level on record. The sectors that added the most jobs this quarter were professional and business services, education and health services, and leisure and hospitality. The final chart at the bottom shows that income growth within AEP's footprint has not kept pace with the U.S. in recent months. For the quarter, personal income growth for AEP was two-tenths of a percent below the U.S. Income growth is a key driver for residential and commercial sales growth. It is too early to know what the impact of the partial federal government shutdown will have on our economy. The federal government share of unemployment across our territory ranges between seven-tenths of a percent in Arkansas to 7.2% in Texas, with some portion of these numbers being unaffected military employees. The longer the shutdown lasts, the higher impact we would expect to see in residential commercial sales due to lower personal income and spending. Overall, 2018 was a strong year for the economy in AEP service territory. The boost to incomes from a robust job market and tax reform created momentum earlier in the year that carried us through the headwinds of the tariffs, stronger dollar, and higher interest rates. We expect economic growth to continue in 2019. Now let's move to Slide 11 and review the company's capitalization, liquidity, and pensions. Our debt to total capital ratio increased slightly during the quarter to 57%. Our FFO to debt ratio was solidly in the Baa1 range at 17.8% and our net liquidity stood at about $3.1 billion supported by our revolving credit facility. Our qualified pension funding decreased to 99%, and our OPEB funding decreased to 129%. A drop in yields increased the liabilities for both plans while at the same time falling equity prices attracted from asset returns. Our fixed income holdings provided a positive offset to the liability increases in equity losses. Investors have been asking if our pension expense estimates are increasing in 2019 due to market volatility rate in 2018. We are not seeing a meaningful change in our assumed pension expense. This is largely due to having what we believe are appropriately conservative assumptions regarding discount rate for liabilities and the expected rate of return for investments. We are also comfortable with our asset allocation. As we disclose at EEI, our assumed pension discount rate for 2018 was 3.65%, and for 2019, it's 4.3%. Our assumed asset rate of return has increased slightly by 25 basis points to 6.25%. Our target asset allocation is 25% equities, 60% fixed income, and 15% alternatives. Our combined pension, OPEB, pretax expense was a credit of $65 million in 2018, and we expect a credit of $59 million in 2019. Now let's wrap this up on Slide 12 and try to get to your questions. We begin 2019 with a solid track record. Our earnings were strong in 2018 as we continue to invest capital in our businesses. For 8 years now, we have maintained O&M discipline and kept spending net of assets in a tight range of between $2.8 billion and $3.1 billion. In addition, over time, we have grown our dividend with earnings and expect to be able to do so going forward. Last year, AEP's Board of Directors increased the quarterly dividend by 8.1% on an annual basis. This increase, along with the midpoint of our 2019 earnings guidance range, brings our payout ratio to the middle of our 60% to 70% targeted range. Looking ahead to 2019, we are reiterating our operating earnings guidance of $4 to $4.20 per share. We will finalize our pending rate cases and move forward with opportunities in the renewables space. We will continue our disciplined approach to allocating capital and are confident that there is significant runway in our capital programs to reaffirm our 5% to 7% operating earnings growth rate. With that, I will turn the call over to the operator for your questions.

Good morning.

How are you doing?

Good, congratulations. So let me go back to where you started the call a little bit. Certainly, we're impressed by the comment on being disappointed, but not being at the high end of that 5% to 7% range. Can you comment a little bit on what gives you that confidence today just given some of the macro business at the end of the year? But also, I just wanted to understand what your expectations are for moderating ROE in Ohio. I know we've been talking about it for a little bit. But basically, are you still talking about being at the higher end potentially despite having that moderation? And what are the other pluses this year as you think about it?

Yes. So yes, we do expect the high end of that moderation. And also, as I look at the year going into it, certainly with the capital plan that we put out there, the consistency associated with that as well, the opportunities that exist in front of us, we continue to look at those opportunities. Certainly, the integrated resource plans are applied with the various states, what we're doing not only from that from a video and incurred perspective. I think we have more tailwinds than headwinds. And when we look at the plan that we put forward, it's a solid plan. And as I've reiterated several times, it doesn't include some real opportunities out there for us to even achieve better results. So - and I don't - and really, I really think of that as sustainable results, not like up 1 year down, another year, that kind of thing. We pride ourselves on that element of consistency. And certainly, the capital plan demonstrates that, but also the opportunities ahead of us, they are more singular opportunities, more singles and doubles because, obviously, if we've gotten something like Wind Catcher, for example, front-end loaded, many of the integrated resource plan activities, but in this case, following these plans and the smaller projects that will come into play, and we'll see the continuing improvement. I think we have a great case for the utility and for the AEP utilities to own and use assets. And depending on the outcome of that, certainly, I would suspect some positive movement from that perspective. So I feel good about it. I think I feel good about our culture of the organization. Our culture is around innovation, but it's also definitely around bending the O&M curve and addressing the issues in front of us. I mean, you look at the - for example, the weather last year in '17 versus last 2 years ago versus '18, very mild weather in '17. Earnings still came in where we really we're telling the market they would come in at. '18, it was ahead, still came in where we said it would be and, obviously, beat the midpoint. So we had some resiliency that's built in our organization, the culture of the organization that will address those kinds of results. So I'm optimistic.

Excellent. Can you comment or perhaps elaborate, rather, on some new developments in Oklahoma? You alluded to several potential positives, riders, and other new mechanisms. I'll leave it broad in Oklahoma. You helped improve your earned ROEs. What does that mean with respect to another rate case? Or do you think, largely, you can achieve some of these through the current rate case? I know it's still pending, but I just want to understand at least from a more of a process perspective how you're thinking about it here.

Yes. Certainly, I don't want to presuppose the outcome. It'd be great if we got a considerable result in this rate case to get us back on an even footing. And certainly, Walmart, I guess, was one of the interveners that had - that's obviously performance-based ratemaking. I don't know about that. But certainly, looking forward, looking test years. So that'd be a great outcome to be able to look at forward-looking test years and as well some of the other - even - I think it was the Attorney General, maybe someone else, but was open to actually putting in an additional generation and additional distribution-related rider activity. So - and I still have work to do with the industrials. They were probably the most negative from an intervener perspective. But I really believe when you look at the discussions and what was centered versus the last case and the previous case, there is at least now recognition of the issues that we have, and there's no doubt that the issues that we're discussing are well known by the commissioners and certainly the interveners. So I'm hopeful that it can certainly move to a more positive outcome. What we're looking for, obviously, is progress, and we expect progress. And I think there has to be a clear message around that because we've languished since 2013 in Oklahoma, and that just has to change. And as a matter of fact, with the integrated resource plans we have filed in those various states, PSO in Oklahoma, obviously, is one of those, we just need a positive outcome rate case to make additional investments of that kind in the state. And obviously, the timing will work out so that we'll be able to make those kinds of decisions. And then I think it's pretty well known now that also, Oklahoma is like our second corporate headquarters to us. With over 600 people, they focus on primarily the Western properties but also some of the Eastern activities as well. Those are not PSO employees. They are AEP employees. So we should put AEP on top of a building there so Oklahoma knows that we do have a significant presence there. And I think that's important, and I think it's important to the livelihoods of the Tulsa area, but also I think it's important for this company to be able to have a central location like that that we're able to operate out of at. So there's a lot of things in the context of all this that's probably becoming well known, and hopefully, will drive us to a better outcome.

Excellent. Thank you. Best of luck.

Thank you.

Morning, Jonathan.

Hi. Morning. Just to go back to your comments on the upper end of the - upper range of the 5% to 7%. Were those specific to 2019 guidance or were they more statements about your confidence in executing in that range over the 5-year plan? I wasn't quite clear when you set it at the outset.

Yes, we mentioned a long-term growth rate of 5% to 7% for future periods. It's important to note that renewable projects won't be operational until 2022, which affects the financial aspect. While our focus is on the long-term, we anticipate that the growth trajectory will remain consistent. We expect to see developments in 2019, 2020, 2021, and beyond, presenting real opportunities each year. Consequently, we are positioning ourselves to achieve this 5% to 7% growth rate.

Okay. So that upper range was going to be over the plan effectively?

Yes, that's right.

Yes. Great. And just the slowdown you saw in sales in the fourth quarter, can you give us a little more of a sense of why you remain confident keeping the 2019 sales estimate unchanged from EEI and maybe some color on what you're seeing early this year and what you're hearing from your customers?

Yes, Brian can provide more details, but I see that the economy is somewhat subdued due to trade issues. As Brian mentioned, many companies in our area are affected by this, and once these barriers are lifted, we believe the economy will get back on its previous path. It is certainly a challenging situation. There is potential for a positive shift, and we are hearing more encouraging discussions from our national leaders. We hope this trend continues. Additionally, we are pleased to see a significant increase in customer counts, which reflects strong fundamentals. While the global economy may impact us, much of this is likely influenced by tariffs.

Jon, a lot of the growth that we anticipate in 2019 is going to be driven by the industrial space, and particularly industrial space in the oil and gas sector. We see a lot of company proposed and company invested customer investments in expansions in that area, and they are close at hand. We expect a lot of those to come on in 2019. In the fourth quarter, oil and gas was up 5.6%. In the third quarter, it was up 7.7%, and we expect that expansion to continue in 2019.

Brian, can you do the math for us, though? How much that wasn't oil and gas was down in 4Q?

Yes. In the fourth quarter, it was down six-tenths of a percent non-oil and gas industrial. And in the third quarter, non-oil and gas industrial was up six-tenths of a percent.

Okay. And so obviously, your outlook is premised on an assumption with growth continues. You're talking about the plan, having built resilience in the company. Talk to me a little bit about how resilient you think your plan is maybe if that view doesn't pan out.

Yes. If you look at the change from 2017 to 2018 in terms of weather and how we adjusted operations and maintenance in both years to meet our targets, it shows our resilience. Regardless of weather conditions, load growth, or tariff impacts, we actively manage our rates throughout the year, making necessary adjustments to ensure we achieve our goals. The weather changes from year to year illustrate that resilience.

I believe we're observing a specific impact from the tariffs on the industrial sector, especially concerning the supply to major industrial companies and similar establishments. This appears to be having an immediate effect. As the industrial sector begins to recover, I anticipate that the commercial side will also start to improve.

First question, Nick or Brian, just reconfirming, when you talk about the 5% to 7% growth rate, what's the base of the change? Have you rolled it forward? Or can you just remind us the base year for that?

It's the midpoint of 2018 guidance, so it's off 3.85.

Off 3.85, I got you.

Yes, yes…

Okay. And then the renewables that you talked about in Ohio and in other places, the potential, if you do get approvals for those, can you just remind us in aggregate what kind of incremental CapEx we'd be talking about?

Yes. So as for the renewables in Ohio that we've been talking about, it's not incremental CapEx, right? So the solar that we're talking about is PPAs, so that's not CapEx. For the competitive renewables, okay, so I'm not talking about Ohio, but I'm talking about Chuck's business for the 5-year period, '19 forward, we anticipate spending about $2.2 billion over that 5-year period.

But the renewables associated with the regulated side of the integrated resource plans of PSO and SWEPCO would have additional capital requirements based upon what the ownership percentage winds up being.

And important to say, Nick, because we get these questions, the earnings associated with that are not reflected in our numbers today.

That's right. That's right. And as far as Ohio is concerned, we elected not to participate in the construction of the project. But at the end of the day, when we get approval, there is an added component to the plan going forward that really reinforces our cap structure at AEP Ohio and evaluates the risk associated with the long-term PPA of that sort into construction. So you'll still see the earnings impact of the Ohio solar as well.

I see. But just to be clear, from a regulated rate base perspective, there's no incremental CapEx associated with the Ohio renewables? Did I…

No. And actually, when the bids come in in March, we'll have a better understanding of what the CapEx looks like.

That's for the consumer protection plan.

Okay. And the CapEx numbers that you have in the slide, no changes there since EEI. Is that correct?

That's correct.

And my last question on Oklahoma, Nick, I mean, again, assuming that the outcome is suboptimal or not as good as you would like it to be, what's your latest thinking there? Does that still give you hope that you can keep pushing and then maybe get to that end result? Or how are you thinking about Oklahoma post this current rate case?

I think some of the positions taken by interveners and others offer some hope and acknowledgment of the issues, but I won't assume the outcome because I've done that twice before, and the results are uncertain. The issue should be widely recognized. From the interveners' responses, it appears to be slightly better than before, which can be seen as a positive sign, but we won't know for sure until we engage in discussions with them and go through this process. What really matters is what the Oklahoma commission will determine regarding the running order. They need to acknowledge the value that PSO brings to the state, and that’s what we are looking for. As I've mentioned earlier, we will wait for the results and then decide on the next steps.

Can you just clarify, when you say bend the O&M curve, is that not decelerating O&M growth? Is that fattening or is it negative growth?

Negative.

Yes, negative. By bending, we mean it is negative.

Can you kind of give a percentage to think about over the next few years?

Yes. So we haven't said what that would be, Paul. If you look at our $2.8 to $3.1 billion that we've been in for about the last 8 years, we're looking to break through that and turn that negative, and we have plans to do that. It includes what we've done on lean activities, what we've done in process improvement. It includes automation, box. It includes partnering with third-party suppliers, like what we've done with an accounting and tax initiative with Accenture. And it's bringing all those things to build across the company that we're going to try and break through that $2.8 billion of non-spending that's not altered in past years.

And then just to clarify, the 5% to 7% does not include renewables at PSO or SWEPCO or Chuck's business, is that correct?

It includes the capital in Chuck's business, the $2.2 billion over the plan. It does not include the regulated renewables. It does not include Ohio.

And then any projects that could be impacted by the situation in FERC?

No, no. We don't see any projects impacted from that perspective because FERC obviously continues to advance transmission spending. And actually, the resource projects themselves, yes, we've moved to West transmission off of those. So I'm assuming it's on the transmission.

Yes.

We don't see any impacts there.

And finally, with the 2.8% reduction in commercial sales, is that just clearly volatility? Or is there something along the line there?

We think it's clearly volatility. We don't see that continuing as a trend into 2019. It could have been associated with higher consumer interest costs in some demand-side management that we across our system, but we don't see that as continuing into the new year.

So I just wanted to understand in Chuck's business, any exposure to PG&E or California Utilities that we should be aware or thinking about?

No. That is the right answer. Very fortunate in that regard. A lot of our optics are with our municipal co-ops and used customers.

Okay, great. That's a relief. I wanted to touch on the strategic review you mentioned before, particularly regarding Oklahoma. From a strategic standpoint, is there anything we should consider about the utilities? If the desired outcomes aren't achieved, is that still a possibility, or is it likely too distant, at least not a concern for 2019?

I believe every utility we manage should thrive and achieve success. If they can grow and receive appropriate regulatory support, that’s a positive outcome. A few years ago, we discussed Kentucky, and it has significantly improved. We concentrated on our regulatory relationship and the partnerships we have, alongside promoting economic development in Kentucky. The situation has changed dramatically. For PSO, it is now recognized and is pivotal in our strategy as we aim to contribute to Oklahoma's economic growth while ensuring investments enhance customer experiences in the state. We possess a range of assets, and their performance is crucial. If any are underperforming, we will need to address that for our shareholders' benefit. Often, significant efforts go into correcting underperformance, yet some claim PSO faces a revenue issue, when in fact it’s not the case. Managing seven utilities, we know what it takes to deliver essential customer services, and PSO consistently ranks high in performance. For both residential and industrial customers, it’s vital to pay attention to the developments in Oklahoma as they could affect future presence and customer experiences, which we want to avoid. As we assess our assets, we will keep optimizing our portfolio based on our observations.

Okay, that's very helpful. Finally, you have been able to navigate through various years. It seems that if you continue to face restrictions from Dallas and other macroeconomic factors that do not work in your favor, should we be concerned about the '19 profile? Or do you believe you have sufficient resources to manage potential macro challenges affecting the earnings for '19?

Yes, I think we're fine. Over the past few years, we've experienced fluctuations in customer classes, with residential seeing a decline having a greater impact than commercial or industrial. The mix of customers affects our margins, as they differ across classes. However, our service territory is diverse, representing all parts of the economy, and our customer mix itself is quite resilient. We have several internal adjustments that can counterbalance one another. If the economy were to experience ongoing challenges and we observed a consistent negative quarterly trend, we would take the necessary measures to ensure our financial health, and we plan to do so. Still, I believe we're in a good position. We'll monitor this quarter and the next, with the hope of seeing positive developments from the federal government. Immigration issues need to be addressed, and the two parties should resume dialogue, which might lead to progress for the economy. They need to get moving.

So just two quick questions. One, just to be clear, you said the anchor for the 5% to 7% is 3.85 in '18?

Yes.

Okay. So I mean, I guess this is just logically correct, but the high end of the guidance range for '19 would put you above 7%. You're not indicating that this is more of a long-term target rather than an annual goal we will stick to tightly, is that correct?

That's right. ROE is in the midpoint of 5% to 7%. When considering the opportunities available to us within that 5% to 7% range, there are more tailwinds than headwinds.

There's been some discussion about this. You continue to provide a financial forecast that, despite the increase in leverage since 2013, the funds from operations compared to that metric remains quite strong, around 18%. You are still confident that during this forecast period, there will likely be no decline in your funds from operations relative to that metric.

We haven't said that. We do anticipate that it will decrease over the time period, and we expect it to approach the 15% level during the term of the forecast.

Okay, okay. Well, that's a higher number than other people have prognosticated anyway. So just wanted to make sure we understood what you thought the trend was.

We're very interested in the FFO to that percentage, and we intend to maintain our credit rating.

Okay. So you think 15% is sort of regular trend down to over this forecast period?

In that area, yes.

Thanks, Greg.

Operator, we have time for one more question.

I have a bigger picture question. So we are hearing about this precipitous drop in prices for solar power and that more and more senior customers are signing contracts with PPAs simply because they see it as a way to hedge against variability in falling natural gas prices that also seem to be at places that are not below favorable solar power curves. So 2 questions. Do you see it as a risk to your vertically integrated utilities given that you do have conventional generation assets? And number two, is there a way to tap into this growth beyond that $2.2 billion that you're planning to spend on renewables on the commercial side?

First of all, we don't perceive a risk since we are actively engaged in these discussions. We are in talks with many customers about their specific resource requirements, and we are exploring various technologies that can facilitate this for large clients. This provides us with a solid opportunity to engage in meaningful dialogue. Additionally, we are witnessing advancements in solar and energy storage applications, and in the transportation sector, we expect to compensate for any losses through growth in sales channels, particularly with the rise of electric transportation. There are significant opportunities for us, and AEP is well-positioned to concentrate on these matters rather than being distracted by potential crises, all while ensuring we maintain our operational excellence to focus on these initiatives. This is applicable not only to our regulated segments, but we are also collaborating with regulators to expand our approach. For instance, continuity of service transcends just providing a distribution line into homes; it involves incorporating energy storage solutions to ensure ongoing service during outages. We are committed to developing smart cities and engaging our customers in substantial ways, which we view as key to the future, and we will not fall behind in this regard. In fact, from a technological perspective, we are leading the way in these innovations. We are running pilot programs across all our operating companies exploring various aspects of these technologies, and we are fully committed to encouraging that growth.

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. Selina, would you please give the replay information?