Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power Third Quarter 2019 Earnings Release Conference Call. At this point, all participant lines are in a listen-only mode. There will be an opportunity for your questions, and instructions will be given at that time. If you should require any assistance during the call, please press star zero, and an operator will assist you offline. As a reminder, today's call is being recorded. I'll turn the call now over to Ms. Darcy Reese. Please go ahead.
Thank you, John. Good morning, everyone, and welcome to the third quarter 2019 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.
Okay. Thanks, Darcy, welcome to the call. Your first time. Welcome to the call. I'm willing to bet Betty Jo Rosa is still listening even though she's in retirement. Thanks, everyone, for joining AEP's third quarter earnings call. Brian will update you on the financials for the quarter in year-to-date a little later, but I'll summarize my view of the quarter as we go forward. First, we had a great quarter supported by warm weather through September, previous positive regulatory outcomes that are now being reflected in our financial results, continued success in management of O&M expenses. I'd have to say, load is making a comeback. After the lower load last quarter, it is good to see some improvement that generally remains flat to last year but still positive from the second quarter. We're watching this trend closely during the fourth quarter and into next year.
Given all of that, we are raising and narrowing our operating earnings guidance range for 2019 from $4-$4.20 per share to $4.14-$4.24 per share with a new midpoint of $4.19 per share. We're also reaffirming our 5%-7% growth rate based upon our original guidance. Additionally, the AEP board earlier this week authorized an increase of $0.03 per share from $0.67-$0.70 a share, a 4.5% increase. This increase keeps us firmly in the middle of our targeted 60%-70% payout range, and along with last year's increase of 8.1%, averages to a 6.3% increase for the last two years, commensurate with our 5%-7% earnings growth rate. Let's step into a few highlight areas for the quarter.
Regarding our North Central Wind projects, as you recall, we had made filings for state approvals in Oklahoma, Louisiana, Arkansas, and Texas on July 15th. During third quarter, we requested FERC approval of the transaction as well. Also, we would acquire three wind farms currently under development by Invenergy with in-service dates in 2020 and 2021 based upon requirements consistent with the integrated resource plans of both PSO and SWEPCO in the various jurisdictions. Finalized procedural schedules have been determined in all of the state jurisdictions at this point. The Oklahoma Corporation Commission has set the PSO schedule for hearings in January of 2020. The Louisiana Public Service Commission has set the SWEPCO Louisiana hearings for March 2020. The Arkansas Public Service Commission has also set its schedule for March 2020, and the Public Utility Commission of Texas has set the schedule for hearings in February of 2020.
We're currently working with the discovery process in each jurisdiction, and we're on track to receive final decisions by the summer of 2020. I'll remind everyone once again that these projects are not in our capital plan. Regarding regulated solar, HB6 has cleared the path for credits to be applied to our existing solar requests before the Ohio Commission. With this change, we have filed a temporary delay to provide additional clarity concerning project benefits to our customers, and we await a decision from the PUCO. While on the subject of Ohio, we are continuing our focus on HB 247 with hearings progressing well. This bill is important in regards to further grid modernization, technology deployment, and behind-the-meter customer investment opportunities to improve the customer experience.
There is no doubt our business is changing at the distribution level in regards to technology, grid modernization, distributed generation, and further grid and customer-related optimization efficiency opportunities. HB 247 modifies Ohio's electric retail service to allow the company to include these provisions in electric security plans filed with the PUCO. This allows us to provide that continued obligation for our customers to improve the customer experience and be able to provide universal access to the benefits of the clean energy economy. Our contracted renewables, which have benefited from the recently acquired wind facilities, development opportunities, and resources, continues to perform well. The projects are performing toward the upper end of acquisition assumptions, and the development portfolio is making good progress as well.
We have one project that we expect to place in service in 2020 using all the PTC safe harbor equipment and expect to release an announcement of a project backed by a long-term contract with an investment-grade counterparty by the end of the year. There are others in the pipeline that look really good as well. Our regulated utilities continue to perform very well. I just want to take a moment to congratulate our employees at the Cook Nuclear Plant that once again received an INPO excellence rating. We are very pleased with that outcome, and this exemplifies our belief that operational excellence is the foundation for anything else that AEP wishes to achieve from a strategic perspective. We're in the midst of four major rate cases that I'll update you on.
In Arkansas, we filed a settlement of that case that included all the parties that contains a net $18 million increase, a 9.45% ROE with a formula-based rate process for five years. We had not filed a rate case in Arkansas in approximately 10 years, it's important to note this order included no disallowances on the $1.2 billion of investments made on generation and environmental retrofits. The company had requested a $34 million net increase. All in all, a decent settlement to move forward with a new formula-based rate mechanism. The settlement awaits Arkansas Public Service Commission approval, with rates assumed to go into effect in January 2020. In Indiana, we filed a case in May of 2019 for a net increase of $94 million and a 10.5% ROE with a 2020 forecasted test year.
The rate case includes our Innovate Indiana program that supports the continued operation of Cook Nuclear Plant, new smart grid technologies, AMI meters, expansion of electric vehicle charging, and support for renewable energy. Testimonies by I&M and interveners have already been filed. Indiana staff does not file testimony. We filed rebuttal testimony in September, and hearings are currently ongoing. We expect an order on rates to go into effect by March 2020. In Michigan, I&M filed a base rate case in June, requesting a net increase of $52 million and a 10.5% ROE, with also a 2020 forecasted test year. The Michigan plan also included support for the continued operation of Cook Nuclear Plant and a commitment to distribution reliability through equipment upgrades, tree trimming, and AMI meters. Staff and intervener testimony has been filed, with staff recommending a 9.75% ROE with a $38 million revenue increase.
We'll file rebuttal testimony in November, with hearings also being in November, and expect a commission order in April of 2020. Lastly, regarding the AEP Texas rate case, we filed in May a base rate case review that included a net increase of $35 million and a requested ROE of 10.5% with a 2018 test year. The rate request includes increased charges to retail electric providers, REPs, for use of AEP Texas T&D lines, along with refunds and credits associated with the Tax Cuts and Jobs Act of 2017. The PUCT staff in August filed testimony with reductions in both the transmission and distribution revenue requirements based upon a 9.35% ROE, removing various incentive comp and surf expenses, incremental distribution forestry expenses, and other tax and depreciation-related adjustments. The hearings concluded in August. The case has been fully briefed, and we await a PFD from the ALJs in mid-November.
We will file exceptions and expect a ruling from the commission in first quarter of 2020. Summaries of all of these cases are included in the earnings slide presentation. Moving to the economy. This quarter has indicated some bright spots to consider. Many have talked about this economy being driven forward by the consumer because of low unemployment and higher wages. We are seeing that as well in our service territory. While industrial overall is still down but improved from last quarter, residential and commercial are both up more than expected. We have the lowest unemployment on record in our territory going back to 1990, and wages are growing faster than inflation. Even in the industrial sectors, which have improved overall from last quarter, the oil and gas sector growth was the strongest we've seen since 2016.
As you know, our margins are higher on residential and commercial than industrial, so overall financial results are positive. All in all, I would say it's time for a return of optimism regarding the economy. Now moving to the equalizer graph. The overall regulated operations ROE is currently 10.1%. It was 9.7% last quarter. We generally project the ROE for our regulated segments to be combined to be in the nine and a half to 10% range. We have a long track record of delivering these results, and we expect that to continue. The reason for the increase in third quarter 2019 versus second quarter includes the effect of favorable weather this September. I'll also note for you the size of the bubbles in the chart. It's interesting to note that AEP Transmission Holdco is now the second-largest operating utility behind Appalachian Power.
That's interesting to note, and you have several of them that are approximately the same size companies as well that follow on to that. We're continuing to make quite a bit of progress, and it is interesting to note. Moving on to the graph itself on AEP Ohio. The ROE for AEP Ohio at the end of third quarter was 11.3%, and we expect to end 2019 near 11% as the legacy fuel and capacity carrying charges, the POR and the RSR, as they were called, roll off and we continue to invest in the distribution of smart grid. APCo, the ROE for APCo at the end of third quarter 2019 was 9%.
APCo's change in ROE from second quarter 2019 is primarily attributable to favorable weather and rate proceedings when comparing third quarter 2019 with third quarter 2018, partially offset by lower normalized usage in third quarter 2019 versus third quarter 2018. West Virginia, as you recall, West Virginia implemented new base rates in March 2019, which was a $44 million base rate increase based on 9.75% ROE. Virginia's first triannual review is in 2020 and will cover the 2017-2019 periods. An ROE of 9.42% will be used for tri-annual period review with 70 basis points bandwidth ranging from 8.72%-10.12%. That will be coming up. As far as Kentucky Power is concerned, the ROE for Kentucky Power at the end of the third quarter was 7.8%. Kentucky's change in ROE from second quarter is primarily due to slightly favorable normalized usage, weather, and transmission revenues.
We're working on optimizing revenue and scrutinizing the O&M and capital to improve ROE by the end of the year. With I&M at the end of third quarter was 11.6%. I&M's positive performance through the third quarter 2019 is primarily driven by timing of expenses, favorable financing of long-term debt, supportive regulatory environments, and some one-time adjustments. I&M expects to end the year with an ROE around 10.5%, which is higher than authorized ROEs in Indiana and Michigan, primarily due to one-time adjustments. I&M continues to successfully execute its capital programs in generation, transmission, and distribution, and recently filed future test URA cases in Indiana and Michigan to seek timely recovery of ongoing capital costs. Regarding PSO. PSO ended the quarter with an ROE of 11.3%. PSO's increase in ROE was due primarily to summer weather and normalized usage.
PSO received an order on its base case settlement in March 2019, as you recall, approving a $46 million increase in a 9.4% ROE. We've seen a great turnaround in Oklahoma. Matter of fact, Oklahoma is a bright spot from the economic process as well. Oklahoma continues to operate on all cylinders and continue to increase in terms of load. SWEPCO. SWEPCO at the end of third quarter 2019 was 6.7%, the most recent 12-month ROE increase, primarily due to favorable weather and favorable normalized load. We did, as I mentioned, file the Arkansas base rate case, and the settlement's pending there, and an ROE of 9.45% and cap structure of 52.1 debt and 47.9 equity. SWEPCO's ROE continues to be affected by the Arkansas share of the Turk plant that is not in retail rates.
As far as Texas is concerned, the ROE for AEP Texas at the end of the third quarter was 8.8%. The main driver for the increase in ROE is primarily due to favorable summer weather. We expect the ROE to decline by year-end due to lag associated with the timing of annual filings and the base rate review filed with the PUCT in May. Favorable regulatory treatment has allowed us to file annual DCRF and biannual TCOS filings and recover our costs on distribution and transmission-related capital investments. During a rate review year, there is a lag associated with these filings. In addition, continued high levels of investment and timing of our planned comprehensive rate review will continue to have an impact on ROE at AEP Texas in 2019. The ROE for AEP Transmission Holdco at the end of the third quarter was 11.4%.
AEP's Transmission Holdco ROE is higher than second quarter 2019, driven by the prior year radial impact adjustment falling off and by higher revenues due to differences between actual and forecasted revenues in the third quarter. Transmission is forecasting a higher ROE than authorized at the end of fiscal 2019 as a result of higher revenues and a prior year favorable true-up. As we look forward to EEI, you can expect AEP to give further updates regarding continued affirmation of our 5%-7% growth rate, details of capital plans, additional focus on O&M-related initiatives, and any further updates on renewables, rate cases, and other matters. There is no question AEP continues to fire on all cylinders as we continue our promise of being a premium-regulated utility with the consistency and quality of earnings and dividends that our shareholders expect.
We reiterate our intention of achieving the higher end of our 5% to 7% growth rate and would be disappointed not to achieve it. We believe the foundation is there to achieve just that. As The Doobie Brothers, one of the latest nominees, and it's about time they were a nominee for the Rock and Roll Hall of Fame this year, said, "We got to let the music play. What the people need is a way to make them smile." Well, that's what we want for our investors, and we intend on letting a great AEP tune play. Listen to the music. Brian?
Thank you, Nick, and good morning, everyone. I'll take us through the third quarter and year-to-date financial results, provide some update on load and the economy, review our balance sheet and liquidity, and finish with a preview of what we will present at the EEI Conference. Let's stop briefly on slide six, which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. GAAP earnings for the third quarter were $1.49 per share, compared to $1.17 per share in 2018. GAAP earnings through September were $3.58 per share, compared to $3.17 per share in 2008. There is a reconciliation of GAAP to operating earnings in the release. Let's get into the detail on slide seven and look at the drivers of quarterly operating earnings by segment.
Operating earnings for the third quarter were $1.46 per share or $722 million, compared to $1.26 per share or $619 million in 2018. Operating earnings for vertically integrated utilities were $0.89 per share, up $0.18, primarily driven by rate changes, which were favorable by $0.07. Weather was also favorable this quarter, up $0.04 from last year. Smaller impacts for the segment are listed on the slide. The transmission and distribution utility segment earned $0.27 per share, down $0.03 from last year. Earnings in this segment declined due to the roll-off of legacy riders in Ohio and higher O&M, depreciation, and property tax. Partially offset by recovery of increased transmission investment in ERCOT, weather, and rate changes. The AEP Transmission Holdco segment continued to grow, contributing $0.25 per share, an improvement of $0.10 over last year.
This growth reflected the return on incremental rate base, as well as the impact of a non-recurring prior year accounting adjustment. Net plant increased by $1.4 billion, or 18%, since September of last year. Generation and marketing earned $0.16 per share, up $0.08 from last year, primarily driven by favorable taxes that will levelize over the year. This segment reflects the growth in the renewables business and favorable wholesale margins. Corporate and other was down $0.13, primarily due to tax items that will levelize over the year, as well as higher O&M and interest expense. Let's turn to slide eight and review our year-to-date results. Operating earnings through September were $3.65 per share, or $1.8 billion, compared to $3.23 per share, or $1.6 billion in 2018.
Looking at the earnings drivers by segment, operating earnings for vertically integrated utilities were $1.90 per share, up $0.16, with rate changes being the largest driver in the segment. Other positive items included lower O&M and taxes, as well as higher AFUDC. While weather was favorable compared to normal, it was unfavorable compared to last year, subtracting $0.12. Normalized load was also down for the year, and depreciation increased due to incremental investment. Through September, the transmission and distribution utility segment earned $0.85 per share, up $0.07 from last year, influenced by the reversal of a regulatory provision in Ohio. Other favorable drivers included higher rate relief and ERCOT transmission revenue, as well as favorable [CARIN] charges in Texas. Partially offsetting these favorable items were the roll-off of legacy riders in Ohio, unfavorable weather, higher depreciation, property taxes, and O&M.
The AEP Transmission Holdco segment contributed $0.82 per share, up $0.25 from last year. This growth in earnings reflected a return on incremental rate base, a favorable annual true-up in FERC settlement, higher AFUDC, and the non-recurring prior year accounting adjustment. Generation and Marketing produced $0.30 per share. The renewables business grew with the repowering of Trent Mesa and Desert Sky, as well as the acquisition of multiple renewable assets. Increases in retail and wholesale margins were partially offset by lower generation sales due to lower energy prices, plant retirements, and outages. Finally, Corporate and Other was down $0.15, driven by higher tax expense, primarily from consolidating tax items that were reversed by year-end with $0.01 relating to prior period tax adjustments. Interest expense was also higher.
Overall, we are pleased with our financial results and are confident in raising and narrowing our annual operating earnings guidance to $4.14 per share to $4.24. Let's turn to slide nine to provide an update on our system load. Starting in the lower right chart, normalized retail sales were essentially flat for the quarter compared to 2018. This represents a market improvement from our last quarterly update. Third-quarter sales were up at the transmission and distribution utilities and Public Service Company of Oklahoma, while the remaining vertically integrated utilities experienced a decline. For the year-to-date comparison, AEP's normalized retail sales were down 0.6% from last year. Through September, the growth in residential sales was being offset by declining commercial and industrial sales.
You will notice that our latest year-end estimate is projecting normalized retail sales will finish the year down 0.5% from 2018. The mix of sales growth, combined with rate design nuances, give us confidence in our 2019 guidance in light of our load outlook. I will cover rate design later in the presentation. Moving to the upper-left chart, normalized residential sales increased by 0.7% for the quarter. Customer count growth was responsible for 0.3% increase, while the remaining 0.4% was due to improved normalized usage. Third-quarter residential sales were up at several of our operating companies, with the exceptions of Appalachian Power, I&M, and SWEPCO. Year-to-date, normalized residential sales increased by 0.2%, which was mostly driven by an increase in residential customer count. The uptick in residential sales this year is consistent with recent macroeconomic drivers.
Unemployment rates across the AEP service territory are at record lows. Tight labor market has created upward pressure on wages. This has allowed personal incomes to grow faster than inflation through most of 2019. As incomes rise, customers tend to purchase more electricity-consuming products. Moving to the upper-right chart, normalized commercial sales increased by four-tenths of a % for the quarter. The results varied by operating company but were strongest in the transmission and distribution utility segment. Seven of our top 10 commercial sectors posted growth this quarter, with the strongest growth coming from the utilities, hospitals, and accommodation sectors. Through September, normalized commercial sales were down seven-tenths of a % from last year. Not surprising, the sector that posted the biggest drop in commercial sales was traditional retail.
As you can see on this chart, there has been a consistent improvement over the last 12 months in commercial sales growth. Finally, in the lower-left chart, industrial sales decreased by 1.1% for the quarter, which brought the year-to-date comparison to 1.4% below last year. For both periods, industrial sales were down at most operating companies, with the exception of PSO, which has experienced double-digit growth from oil and gas activity. We are fortunate to have these sectors in our industrial mix. The impact of the General Motors strike on our load was negligible. Turning to slide 10, I'll provide a brief update with respect to industrial sales growth by sector. This chart shows the distinction in growth between the oil and gas sectors and all other industrial sectors.
Industrial sales to oil and gas industries increased by 7.8%, which was the strongest growth in these sectors since the first quarter of 2016. This was largely driven by the 16.3% growth in the pipeline and transportation sector. Most of the growth in the quarter was a result of a number of anticipated expansions that will address congestion issues coming out of the major shale regions in our service territory. There are still additional oil and gas-related expansions in development pipeline that will provide more growth over the next 18 months. Focusing your attention on the green bars, the non-oil and gas industrials were down for the quarter, but less so than last quarter. For the AEP system, chemicals manufacturing and transportation equipment manufacturing accounted for most of this impact. Now let's turn to slide 11 and review the status of our regional economies.
As shown in the left chart, GDP growth in AEP's service territory was 2.4% for the quarter, which is three-tenths of a percent above the U.S. The strongest growth for the quarter came from our Oklahoma service territory. All of our service territories experienced GDP growth for the quarter. Moving to the right chart, you see that employment growth for the AEP service territory improved this quarter to eight-tenths of a percent above last year, while U.S. growth moderated slightly in the third quarter. Throughout the AEP footprint, nearly 16,000 jobs were added in the third quarter, with 42% of those coming from the education and healthcare sector. Turning to slide 12, I want to explain a nuance related to customer class rate design.
Since 72% of industrial rates across our system are fixed rather than variable, a 1% decline in industrial load is much less impactful than a 1% decline in residential load, where 82% of the rate is variable. For your reference, a 1% change in industrial sales is worth about $0.02 per share. Now let's move on to slide 13 and review the company's capitalization and liquidity. Our debt-to-total capital ratio improved slightly during the quarter to 58.7%. Our FFO-to-debt ratio was solidly in the Baa1 range at 15.2%, and our net liquidity stood at about $2.6 billion, supported by our revolving credit facility. Our qualified pension funding decreased approximately 2% to 94%. A drop in interest rates increased the pension liability here. OPEB funding decreased approximately 7% to 123%.
This was a result of lower interest rates and a new OPEB liability experience study, both of which increased the OPEB liability. Let's try and wrap this up on slide 14 and get to your questions. The strong results we've delivered year-to-date and our confidence in our plan for the remainder of the year allow us to raise and narrow the operating earnings guidance range to $4.14 per share to $4.24. Our message at EEI will be that we are the premium regulated utility delivering 5%-7% earnings growth with dividends growing in line with earnings. Our plan has line-of-sight transparency to growth and has greatly reduced execution risk. We will provide detailed drivers for 2020 earnings by segment and updates to our capital expenditure and financing plans. One final item. We have historically released fourth quarter and full-year earnings in January of the subsequent year.
In 2020, we will release 2019 full-year and fourth quarter earnings in late February, more coincident with the filing of the 2019 10-K. We look forward to seeing many of you in Orlando in a couple of weeks. With that, I will turn the call over to the operator for your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1. You'll hear a tone indicating you've been placed in the queue. If your question gets answered and you wish to remove yourself from the queue, please press the pound key. Again, star 1 if you have a question. First to the line, we've got Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning.
Good morning.
Congratulations, guys. Hey, perhaps if I can go back to some of the commentary from the last call and brief certainly some variations across the service territory on your sales trends. Would be curious, how does this position you relative to your broad plans and thought process against the 5%-7%? I just want to be exceptionally clear as you think about having posted some good results here in the third quarter and again, reaffirming the higher end.
Yeah. There was no change in our thought process. We're still tracking 5%-7%. We'd be disappointed if we weren't in the upper range of that because obviously, when you look at the components of load here from a financial perspective, it's not having much impact on our plans. By the way, we adjust all the time for weather, for all kinds of things, and we have a big opportunity to do that, and I think there's a real opportunity for us to continue to advance, particularly with the renewables play and everything else that's going on. Even without that, though, I think we're in great shape. It hasn't changed anything.
I think probably last quarter, we probably talked almost too much about the load and the industrial side of things, and really it was nothing compared to what we experienced back in 2009, and we did pretty well weather in that storm. In this case, I think you're seeing some resiliency there from a industrial and manufacturing standpoint, and you're seeing it start to pick up.
As we said, it's also interesting to note, it's great to have diversity in load because we've got the oil and gas activity that's going gangbusters with the transportation sector. Also, you think of what's going on just the consumer side, and everyone's talking about this being a consumer-driven economy, and there's no question that people have more money in their pockets and more people have jobs, and you're seeing that reflected in the numbers that we see. We stand committed to what we've always said before, and we fully expect to be in the upper range, about 5%-7%. Thanks for the clarity there. Pat, I can jump in real quickly. How are you trending on energy supply as you think about it?
You said you might be updating this with respect to EEI, but can you elaborate, at least initially, on how you're trending on the energy supply side of the business? Obviously, there's a number of different moving factors within that segment of the business. Renewables increasing, sort of legacy stuff declining still. How is that trending altogether, if you can give us a little bit of a sense here, especially again, relative to that longer-term 5%-7%?
Yeah. The fact of the matter is, as we've sold off some of the competitive generation and the retiring plants, we're replacing some of those earnings with the renewable business that we have. It's not declining the way you might expect from the sale of the competitive assets and the retirements.
We filled in some of that gap with the renewables, but we don't expect that to be a huge growing business for us going forward. By the way, on the contracted renewables, we continue to do very well in that business. Obviously, it's measured with the $2.2 billion of capital that we've allocated to it. The organization there is doing a wonderful job of being judicious about that. Obviously, the acquisition that we made was very positive. The development opportunities are significant there, and we have some other opportunities that we continue to work on. That pipeline can continue as long as we want it to continue and to what extent we want it to continue. We're able to make that kind of decision regarding that business because we also have a huge transmission business and a growing distribution business.
It's huge already, but there's all kinds of opportunities there. Really our big issue is continuing to manage around a strong and robust balance sheet to continue to deploy the capital.
Great. I'll leave it there. See you guys soon. Cheers.
Thanks.
Next we go to the line of Steve Fleishman with Wolfe Research. Please go ahead.
Morning, Steve.
Hey, good morning. Just first a curious question on the growth at PSO, particularly on energy, because from an energy standpoint, you would've thought that's been the area where the rig count has come down the most. Is there a way to kind of make sense of that?
Well, there have been some industrials that have been placed down there and some expansions. Oklahoma has a governor down there that is really focused on economic development, and I think it's having an impact on the state. We're very happy to see that. There's certainly low rates there and the ability to put these industrials in place. It's probably a more balanced economy as well. Steve, even what you're seeing with rig count, a lot of the growth that we've seen has been in mid and downstream, a lot of that specifically in pipeline transportation, uncongesting a lot of the shale region congestion that's happened over the last several years, it's moving the products and commodities out of those regions.
Okay. That makes sense. Thanks. I think you kind of answered this, but just the renewables acquisition that you made, can you just give us kind of a flavor of how well that's gone versus pro forma, and just how much are you seeing the ability to potentially expand?
Yeah, I think.
Non-utility renewables?
Yeah. We're particularly pleased with the performance of that particular acquisition and really in concert with the other development opportunities that we were focused on. When you think about the acquisition of not only the projects and really the economics was based on the active projects that were ongoing. The developmental opportunities we hardly placed any value on because we didn't know they would happen. In fact, those have continued to progress quite nicely. It really has been an opportunity for us to continue the expansion of that effort. Then you also have to include Santa Rita in that where we've continued to expand from that perspective. I think that business is moving along quite well. We're very disciplined in the way we approach it, and I think it's paid off.
Okay, great. Thank you.
Yeah.
Our next question's from Christopher Turnure with JPMorgan. Please go ahead.
Morning.
Morning, guys. My first question is just on forward-looking guidance. I guess, one, it sounds like you would not put out a 2021 range at EEI for EPS and then to, related to that, can you remind us of the current drivers underlying your 2020 range?
Yeah. We're likely just to focus on 2020 at EEI and reaffirm our 5%-7% earnings growth rate. Remember that our guidance for 2020 is $4.25-$4.45. We're likely to say that that's what it will be again for 2020. The key drivers are the things that you would think about for a traditional premium regulated utility. It's rate outcomes, ability to invest in our organic regulated businesses, our ability to continue to invest in contracted renewables. Of course, things like weather and load will impact the earnings outlook as well. Not to forget, of course, our ability to constrain as we have over many years, O&M spending. We're particularly going to be focused on that in 2020.
You're going to hear more at EEI about our Achieving Excellence program. That really is focused on a forward view of where our business needs to go, and our employees are all energized around it because we have to redefine ourselves going forward. The outcome of that obviously is to be able to deploy more capital but also to reduce O&M because you're able to deploy capital and be able to optimize and drive efficiencies through automation, digitization, and all those kinds of things. For us, it's really a focus on changing that business. The fact that we're coming out with our guidance for 2020 and then the 5%-7% growth rate, I think we're comfortable with just doing that because that element of consistency is there, and we don't expect it to change. You can sort of do your own math.
Typically what we've done is when we go down every year, we just did the math for you. Just think of it from that perspective. The one thing that could change that is the regulated renewables that are not included in the capital plan. You could have a step change and then continue at 5%-7%. That's the kind of thing that we're looking at right now.
A positive step change?
Yeah. A positive step change.
Okay. That's good to hear. It sounds like some of the positive things over the past year that have changed underlying 2020 are potentially curtailed a little bit, maybe by load or other factors, but net-net, you're pretty much coming out to the same place.
No, we're not saying anything's held back in 2020 because obviously our transmission business continues to do well and other components of our business does well. The load itself, there's components of that load that's doing really well. From a financial perspective, load will have not that much of an impact on the earnings of the company. We're not saying that at all. 2020 is full speed ahead, 2021 we'll obviously see the outcome of the regulated renewable piece of it and go from there.
Okay. Excellent. Just given one of your peers in Texas and some of the back and forth in their rate case proceeding, could you give us an update on kind of the latest in the rate case process and dialogue and any thoughts to the overall Texas environment changing?
Well, certainly Texas is Texas. There's all kinds of opinions, and interveners obviously have their opinions. When it comes down to it, AEP Texas is a transmission and distribution utility, and it's very difficult to disallow costs that are spent from a transmission and a distribution perspective. That's going to be up to the Texas Commission. Certainly, we have a different fact pattern than the other one that you referred to. Every case is different, every company is different, the kind of investments are different. We feel good about our position in AEP Texas, and that's why we continue to invest the way we do. Obviously we're looking for a positive outcome as a signal to continue investing.
Okay. Thanks, sir.
Yeah.
Next, we'll go to Greg Gordon with Evercore ISI. Please go ahead.
Hey, Greg. Hey, how are you?
Good morning. Great quarter. Congrats.
Oh. Thanks.
What is the fascination down in Texas with the idea of ring fencing? I know that it's been proposed in both one of your competitors' pending cases as well as staff positions proposing it than yours. I'm just wondering what your perspective on that is and where you think they're coming from. Y
eah. That's probably a better question for the commission than for us. Obviously, during the Oncor proceedings, that's where sort of all this started. Obviously a company like Oncor, they wanted to make sure that there was some local type of control. We're already operating in the state and have been, heck, for 100 years.
I think the commission obviously is interested in how much control is placed within Texas around the assets that they feel like benefit the state of Texas. I suspect you may see some remnants of that showing up in various cases. We have been and are operating in Texas for a long time, and that's not going to change.
Greg, the thing that's ironic, particularly given our situation in Texas, is that we are a net investor in Texas, meaning we're putting debt and equity capital to work in Texas rather than taking it out. For us, I think they want to see us continue doing what we've been doing now for years, which is investing that capital in Texas rather than taking it out. That's what we intend to continue doing.
Texas is one of the fastest-growing territories that we have, and we're not going to fall back on our ability to invest and produce benefits for our customers. In AEP Texas, obviously, we have direct contact with the customers. In your opco portion, it's T&D. Certainly, I think that this line's getting more blurred all the time, and that's probably a feature that needs to be discussed in Texas about how to deal with that. Nevertheless, that's for the strategy part of it in the future.
Thank you. One more. I know it's early days, but has there been any public response from intervener groups with regard to the North Central Wind proposal? Do we see a more accepting initial response than we did in your Wind Catcher proposal? Is it too early to say?
I'd say it's too early to say at this point. There's nothing public that's been out there. I'll say that we purposely filed this to where it had a lot of variability, a lot of optionality to it, and certainly consistent with the ongoing and existing processes of the integrated resource planning of each one of the areas. I would say just that fact alone, we've had at least a more positive reception of how to deal with it. I would have to say, I think things are going reasonably well at this point. Certainly the parties involved know and understand it because after going through Wind Catcher, this one you can really talk about what the differences are and the beneficial differences. If they were concerned about transmission, don't be concerned about it.
If you were concerned about a large area, just one area, don't be concerned about that either. If you're concerned about dependency on one area versus another, don't worry about that either. I think our processes and with the procedural schedules already defined in every jurisdiction, we're rolling along to a summer of getting the approvals and moving ahead.
Fantastic. Thank you, guys.
Yeah, thanks, Craig.
Next we have the line of Gregg Orrill with UBS. Please go ahead.
Yeah, thank you. Good morning. I was wondering if it's possible to get a preview of the CapEx update at EEI, maybe just the drivers, and I assume the backlog would increase?
I really want to save the detail of that for EEI. If you've looked at the trends for how we've been spending dollars over the last decade or so, the preponderance of it going to our regulated properties and the preponderance of that going to the wire side of the business. That trend that you've seen in the past is going to continue in the detail that we're going to release at EEI.
Okay. Thank you. Look forward to it.
Thanks.
Next we have Michael Lapides with Goldman Sachs. Please go ahead.
Hey, Michael.
Good morning, guys. Congrats on a good quarter.
We have a big game coming up.
We got to get our quarterback healthy before we play LSU. That's going to scare the heck out of them then. A couple of things. One, interest rates obviously are way down, especially the long end of the curve. Just curious how you're thinking about what this means for not just pension expenses that flow through the income statement, but also pension contributions.
That's a great question. We plan every year as we go into the year to contribute to the pensions about equal to our annual service cost. For the last two years, both 2019 and 2018, we sort of had a funding holiday. The decrease in interest rates has pushed down our funding a little bit, really into the mid-90s for pensions, and still very well over-funded at the OPEBs. Rates can only go down so much more, I think. I think we don't have much downside on the pension funding, and we'll be watching every year what our funding's going to be. For next year, we plan on putting in about $100 million with annual service cost. We still expect the expense side of that equation to be about zero to maybe a slight positive credit.
That's the good thing about being well-funded on our pension and OPEB. It gives us a lot of flexibility and really no surprises.
Got it. One follow-up. When you think about the dockets, especially obviously PSO and the different SWEPCO states for the North Central Wind process, how do you think this is different than what you went through with Wind Catcher?
I think Wind Catcher was a unique situation. We obviously looked at it and thought that it was a great opportunity for all of these jurisdictions. At the end of the day, it was a large project in one area with a large generation interconnect, transmission, whatever you wanted to call it. You got hung up on the risk associated with that, particularly with all the customer savings and trying to figure that out and making sure that everyone was comfortable with that kind of project. I still stand by it was a great project. There's no question about it. We learned from that. I think the more you stick with the regular processes that the commissions have had longstanding, we've had other renewable projects that we've done the same exact process with that have gone through with no problem.
We wanted to refashion this thing to make sure it was what everybody expected to see. When you look at these projects, there's three different wind farms that are involved with that, with a lot of flexibility on who's in and who's out. It gives us the ability to not only do that, but also not depend upon additional transmission. You don't have to focus on that piece of it. Also for us to be able to look at the project benefits themselves, those benefits are still substantial.
I would say that, and of course, the way it worked out in the bidding itself, I can talk about this, but we chose those three projects because they were much better than the others that were bid from a pricing perspective, but also all three of them happened to be with a party that we have continually done business with on a regular basis, so we're very comfortable with the deliverability of those projects. We feel confident that the savings that we've presented in the various commission filings are secure, and we're very happy about that. Also, we got hung up a little bit on our own natural gas forecast versus standard natural gas forecast out there.
Even though we thought our forecast was a good one, we decided, okay, we're going to just use those standard forecasts for the evaluation so that everybody knew that it was coming from an independent party, and we wouldn't get into the conversation of your forecast is showing more benefits than another standard forecast. We did it from that perspective as well. I think the other big difference, too, we did have a lot of outreach to the individual staffs and so forth at the various commission levels with Wind Catcher to try to explain what it was about. It's sort of a natural progression for us to be able to move to the outreach programs that we have because we've already had substantial discussions of the benefits of wind power in general.
Now it's a matter of, okay, this is what the RFP process says, this is what the wind power that's available, the attractiveness of the wind power, and we're going through the regular process to do it. That communication has been positive, and we've also communicated with other parties in the process, too, to let them know what's going on. I would say that all in all, it's been a much better and probably a much more pleasant experience than before.
Got it. Thank you, Nick. One last thing, tax rates. How should we think about what the consolidated tax rate for income statement reporting purposes is going to be in 2019? What are you assuming in guidance?
For GAAP taxes, we're anticipating about a 2.6%-3% effective tax rate for the year. Obviously driven down by the amortization of the deferred protected and unprotected taxes. For 2019, there's also an AMT credit carry-forward from prior periods. That 2.6%-3% is going to be lower than what we anticipate going forward, where we anticipate a rate after the amortization of the deferred taxes to be about 10% going forward.
Meaning if I think about 2020 tax rate and 2021, you're using about 10% for guidance for those years?
We are, and let me be clear about that. That's what we're using for guidance. That's what's in our numbers. That's what we figure to be around that 10%. If we were to have incremental income because we're maxing to the 75% allowed for the-
Yeah.
taxes. I'm sorry, for the production tax credits. If you were to have incremental income and you were trying to model that in, you should use a 24% rate. Does that make sense?
I think so, but I can follow up offline. Got it.
Let me just try to be clear. What's in our $425-$445 guidance for 2020 assumes an effective tax rate of about 10%. If you were to layer in incremental, you would need to use a 24% rate.
Got it. Understood. It'd have to be a lot of incremental to move the needle on the weighted average.
Yes, sir. Mm-hmm.
Cool. Thank you, Brian, and much appreciated, guys.
Next, we'll go to Angie Storozynski with Macquarie. Please go ahead.
Morning, Angie.
Good morning. Two questions. Just going back to the oil and gas-related sales. You mentioned pipeline investments. We're actually hearing that drillers are switching pumps from diesel to electric, and that could be a meaningful driver of sales growth of electric companies for companies in the shale regions. Are you seeing this?
Yeah, that's been going on for a while, actually, the conversion to electric. Also when you look at the transportation piece, there's a lot of activity around ability to get out of the shale gas fields and get gas out of the shale gas fields. There's a lot of optimization on the transmission side. Hey, Brian?
Yeah. Rather than just on the pumping side, in pipeline transportation, we're seeing a lot of electric compression.
Okay. To that point, you were showing us that the sensitivity of earnings, the changes in industrial sales was actually very low. O&M, the plan that you gave some efficiencies on the O&M side that you plan to unveil at the EEI, that would be actually a more meaningful earnings driver. Is that fair?
Yeah, I think one of the key areas we look at is if we need to deploy capital and reduce O&M, because if you think about load in general, I think this is for many utilities, but load in general, you can't have the expectation of ever-increasing energy demand. You got to really think about efficiency, what it means or what it means to the economy. If you assume that, then the way that you continue to grow from a 5%-7%, which we've confirmed, is not only to deploy capital but to reduce O&M. That's why we say bending the O&M curve or doing those kinds of activities, it's going to be a key component in the future, I would say not just for us, but for just about every utility.
Lastly, I understand that the rate-based renewables are not currently embedded in either your CapEx plan or funding needs. I'm assuming that come mid of next year, you get a green light, at least on a portion of this incremental CapEx.
You would probably have incremental equity needs to fund this spending. Would you consider some sort of an optimization of your current portfolio as a way to pay for this CapEx?
Yes, we would. I think one of the big processes we have going forward will be around optimization of our balance sheet and capital rotation and capital management, and asset management goes with that. Obviously, it'd be a great opportunity to get the wind power resources, and we'll be looking at all kinds of methods to be able to fund that investment.
Very good. Thank you.
Yep, thank you.
Hey, John, we have time for one more call.
That will be from Ali Agha with SunTrust Robinson Humphrey. Please go ahead.
Morning, Ali. Good morning.
First question, Brian or Nick, I just wanted to understand the philosophy behind the annual dividend changes. As you mentioned, last year you moved it up 8%, and I believe that was to get you to the midpoint of your payout ratio. This year it's gone up 4.5%, perhaps brings you a little below that midpoint. Just thinking the lumpiness there, how should we think about the philosophy behind that?
Yeah. We're trying to keep it right in the middle of the payout range. That's what we do this year. You put last year and this year together, it's above the midpoint of our long-term growth rate for earnings. I think the board is trying to reward investors by keeping it right in the midpoint of that 60%-70% stated payout ratio.
It's just unfortunate that we have quarters and years around the annual calendar and stuff like that. A lot of times you're looking at the dividend side of things, and of course, it's going to move generally in that 5%-7%, and it's no secret that it's tagged around the 6% range. We're all committed to staying firmly in the middle of that 60%-70% payout range. There's a lot of things to consider. We got the same questions when we did 8.1% last year. What does that mean? We're reiterating that it will be in line with our 5%-7% growth rate. Year to year, you see just things because of round off and pennies and that kind of thing.
There should not be any interpretation that our board feels any differently about the prospects of growth of this company in the future. We debated that quite a bit because we did want to reaffirm this 5%-7% growth rate. Don't read anything into it.
Gotcha. Last question. With regards to the 2020 range, $425-$445 , that was put out a long time back, I think last EEI, if I recall. A lot has happened. You've got some very good rate scales, or maybe the upper half or the upper end is more comfortable as we sit here today. Any thoughts around that?
We're going to refresh that at EEI, Ali. Nick always says we'd be disappointed if we weren't in the upper end of the range, and I think that's going to be true for 2019 and 2020. Ali, some of these things just sort of have to prove themselves out over time. We went to 5%-7% after we sold the unregulated generation. We were 4%-6% at that point because we felt like that 5%-7% was something that we saw going forward for the long term, and it is a long-term growth rate. We'll have to see. Obviously, we've seen some positive outcomes, and we continue to see that. The question is, okay, how sustainable is that on a long-term basis going forward based on what we see today? We're comfortable with the 5%-7%.
We're getting more comfortable with the upper ranges of 5%-7%. Before you change to 6%-8%, or you asking about 10%, you have to be able to credibly see that for the long term, and that's something you have to sort of warm over to over time.
Understood. Thank you.
Yeah.
Thank you for joining us on today's call. As always, the IR team will be available to answer any additional questions you may have. John, would you please give the replay information?
Certainly. Ladies and gentlemen, the replay starts today at 11:15 A.M. Eastern and will last until October 31st at midnight. You may access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code is 472043. Those numbers again, 1-800-475-6701 or 320-365-3844. The access code 472043. That does conclude your conference for today. Thank you for your participation. You may now disconnect.