Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power 4th Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.
I would like to now turn the conference over to our host, Managing Director of Investor Relations, Betty Jarrotta. Please go ahead.
Thank you, Selena. Good morning, everyone, and welcome to the Q4 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.
Okay. Thanks, Betty Jo. Good morning, everyone, and thank you for joining us today for AEP's 4th quarter 2018 earnings call. As we move into the New Year and look back at 2018, we are pleased to report solid earnings for the quarter and for the year. Favorable weather continued into the 4th quarter with the economy remaining healthy, albeit tempered later in the year by the negative impacts of trade tariffs issues and a strong dollar.
With that said, 2018 was the strongest for normalized load growth since 2011. We continue to see customer accounts pick up and load growth continue in primarily the oil and gas sectors and residential sales growth as well. Overall, good, but we'll keep a close watch on the sector growth in the economy and the customer load growth makeup. As you all know, we earlier during Q3 2018 revised our guidance for operating earnings from $3.75 to $3.95 per share to $3.88 to $3.98 per share and came in for the year solidly in the upper end of the revised guidance at $3.95 per share. We're very pleased with how our employees continue to work to provide a better customer experience while being dependably consistent to our shareholders on delivering these results.
2018 was clearly has been a great year, but I'm even more pleased with the track record over the last 8 years of what we have achieved. Brian and I and the rest of the team take this very personally and see this as one of the hallmarks of the emerging brand of AEP. So let's take a look at the actual numbers for 2018. Starting with the financial performance for the Q4, we came in with GAAP earnings of $0.74 per share versus $0.81 per share in 2017 and operating earnings of $0.72 per share versus $0.85 per share in 2017. This brought the year to date 2018 total GAAP earnings to $3.90 per share versus $3.89 per share in 2017 and year to date 2018 total operating earnings to $3.95 per share versus $3.68 per share in 2017.
The difference between the GAAP and operating earnings primarily being generation plant related impairments and tax adjustments. We also concluded rate cases in 5 states. It was a pretty heavy year from that perspective: Indiana, Michigan, Kentucky, Oklahoma and Texas. AAP also filed rate cases in 2 states, West Virginia and Oklahoma, which will conclude early this year. Tax reform related activities were also major regulatory undertakings in the AEP state jurisdictions as well.
All have proceeded well and orders generally ranging from primarily excess unprotected ADIT refunds being amortized over various periods or applied against depreciation or various Rogers. Almost all of the states have concluded orders reflecting these adjustments, and we do not expect any additional impacts during 2019. Moreover, even with the headwinds described earlier and an increasing interest rate environment, AAP continues to outperform the S and P 500 Electric Steelies Index and the S and P 500 over the 1 year, 3 year and 5 year periods. Again, as I said last year at this time, the very definition of a premium regulated utility. So great performance in the past, but in recognition of 1 of this year's Rock Hall of Fame inductees, Janet Jackson, and the title of one of her songs, What Have You Done For Me Lately, let's talk about what we see in 2019.
AAP's operating earnings per share guidance range for 2019 is $4 to $0.04 per share. As we have said during EI Financial last November and continue to say with the capital plan we have outlined for the next 5 years, including $6,500,000,000 in 2019, our focus on disciplined capital allocation among our businesses and additional opportunities to grow renewables beyond our financial plan, we would be very disappointed to not ultimately be in the upper range of our 5% to 7% growth rate. Additionally, I will reiterate the regulated renewables opportunities represented by the various integrated resource plans filed in our state jurisdictions are not included in our capital forecast, so upside potential certainly exists. We also continue to work to bend the OEM curve through efficiencies, process automation and digitization as well as implement technologies to drive efficiencies while improving the customer experience. Regarding the renewables opportunities, we have filed integrated resource plans and RFPs with all of the Swetco and PSO state jurisdictions representing up to 2,200 megawatts of wind resources.
On March 1, bids were due focused on ownership of these facilities primarily due to factors such as balance sheet optimization, scalability opportunities, deliverability and various other risks versus the use of PPAs. We will follow the results of the RFP process in August, and each state regulatory value and contribute to earnings starting in 2022. The Ohio 400 Megawatt solar review process continues, which is part of the 900 Megawatts renewables contemplated for AP Ohio. Hearings are continuing this week into next week regarding the question of need for these facilities, really focused on a strict definition based on capacity or other broader stated issues regarding renewables, job creation, state economic development, which Governor DeJuan is very in, and others. It is interesting to note low income customers support us in this case because of the accessibility of renewable resources that would not otherwise be available.
This position goes directly to the message that utilities are inherently equipped to provide the scale to reduce costs and the ability to provide universal access to these types of resources and technologies. After the hearings, we will continue to push this process forward to resolve this important question for Ohio. As far as rate cases are concerned, we contemplate we completed a heavy load of rate cases in 2018, as I mentioned earlier, in the 5 states, and we await the finalization of the already be filing rate cases in Arkansas and Texas soon as well. Regarding the West Virginia rate case, we have already filed a settlement agreement among the major parties, including the staff that is effective in March, so we should get an order soon from the commission. Regarding Oklahoma, as you all know, this is our 3rd try to receive a positive outcome in Oklahoma, where we have been woefully underachieving from a financial viewpoint while providing excellent customer satisfaction and operational performance.
Interveners and staff testimony has been filed, and we believe our tenor of where we stand at this point is even keeled with some bright spots of at least recognizing, while perhaps concerned with the concept performance based rate making for various reasons, there may be options for distribution riders or forward test years that could alleviate the pressure of regulatory lag. The ROEs filed by the parties were slightly higher than the proposals from last the last case we went through, but are still among the lowest in the nation. Is Oklahoma really open for business and economic development as the new Oklahoma governor expresses? We'll find out. We're always open to settlement discussions with the parties to resolve these important issues, but we have a long way to go.
And it no doubt will come down to the Oklahoma Corporation Commission making the ultimate call. I would ask them as our referee to make the right call and not be like the NFC championship game. This is important. From the perspective of the integrity of the regulatory process in Oklahoma, the health of PSO and its ability to invest in the state and from an economic development standpoint that concerns the significant AEP presence, not PSO, but AEP, of over 600 employees centralized in Tulsa. We expect interim rates in Oklahoma to be in place in April and an order from the commission soon thereafter.
So now I'll turn over to the equalizer chart and talk about some of the state actions here. Overall, the regulated operations ROE is currently 9.7% versus 10.1% last quarter. I'll remind you that we generally project the ROE for our regulated segments combined to be in the 9.5% to 10% range. The primary reason for the slight decline from quarter 4 versus quarter 3 was the increase in O and M in Q4 this year versus the lower spend as we had very tempered weather last year in the 4th quarter. So some adjustments were made there.
As far as AEP Ohio is concerned, the ROE for AEP Ohio at the end of the Q4 2018 was 14.5 percent. The primary drivers obviously continue to be some of the adjustments that were made previously, the RSRs, the fuel, the per, those kinds of adjustments that are going to roll off by the end of some roll off by the end of last year and some will roll off toward the middle part of this year. We expect to see the ROEs come closer to the authorized range as we go forward. APCO. The ROE for APCO at the end of the Q4 2018 was 9.4% compared to 9.9% at the end of the 3rd quarter.
APCO's change in ROE from the 3rd quarter is primarily attributable to higher storm restoration expense during the Q4 and a tax true up. And again, I'll remind you there's a settlement agreement that will become effective in March 2019. In Virginia, APCO's first tri annual review is in 2020 and will cover the 2017 to 2019 periods.
For the
1st triangle case and for rate adjustment clauses in the period of December 2018 to November 2020, the Virginia Corporation Commission authorized a 9.42% ROE, which will be the reference going into the period to determine whether APCO's Virginia earnings for the 3 year period are within the allowed range. The approved ROE for West Virginia is 9.75% right now. In Kentucky, the ROE for Kentucky at the end of 4th quarter was 9% compared to 9.2% at the end of 3rd quarter. Kentucky Power continued to perform well in 2018 from a 5.1% ROE at the end of 2017 to the 9.0% ROE at the end of 2018. So great progress in Kentucky.
INM, the ROE in I and M at the end of the 4th quarter was 11.4% versus 12% in 3rd quarter. I and M posted strong results in 2018, primarily driven by favorable weather, this was O and M spending and one time true ups associated with the regulatory items. Favorable rate reviews in both Indiana and Michigan also contributed to the strong year. And then as far as PSO is concerned, the ROE we talked about previously is 6.9% versus 7.7% at the end of 3rd quarter. PSO's ROE continues to improve over last year, which was 5.92 percent but was slightly down in 4th quarter, mainly due to unfavorable normalized retail margins.
However, the ROE continues to be challenged primarily because of ongoing regulatory lag. And as you know, we have a rate case filed there to resolve some of those issues. Swebco, their ROE at the end of the 4th quarter was 6.5% versus 7.4% at the end of 3rd quarter. Primary reason for the decrease in the ROE is the impact of the most recent Texas rate case. The company reported $31,000,000 in December 2017 that related back to implementation date of May 2017.
Swepco's ROE continues to be affected by the Arkansas share of the Turk plant. It's not in retail rates. This impacts ROE by about 135 basis points. Swetco also had contracts expire with certain wholesale customers during the period as well, so that had an effect. We plan to file an Arkansas base rate case this year, so we'll continue with that to try to address the Swetco's issues.
AAP Texas, at the end of the 4th quarter, was 8.5% versus 8.8% at the end of 3rd quarter. While earnings have grown year over year, the reason for the declining ROE is due to lag associated with the timing of annual filings as we continue to make significant capital investments along with some timing related O and M spend. Favorable regulatory treatment has allowed us to file annual DCRF and biannual TCOS filings but the fast growth in rate base and associated property taxes and depreciation has made lag a more significant factor. So we continue to invest heavily down there. AEP transmission holdco, the ROE for transmission at the end of 4th quarter was 10% versus 10.4% in 3rd quarter, and it's primarily lower in the 3rd quarter due to differences between actual taxes and equity balances versus projected taxes and equity balance filed in our form a rate revenue applications.
These difference will be recognized in our June 2019 form a rate true up. So all in all, still within the range we've talked about previously, the 9.5% to 10%. We expect it to continue in that range, and we also expect continual improvement in the ones that are hanging a little bit lower. So as we move forward into 2019, we are intent on building upon a tremendous track record of delivering earnings well within our guidance range and in fact, in the last 6 years have exceeded the midpoint of our guidance range each and every year. Barring the lyrics from another of this year's Rock Hall of Fame inductees, Def Leppard and LaSalle MYSTERIA, our consistency and quality of delivering positive financial operational results is such a magical mystery.
When you get that feeling, better start believing that AEP is, in fact, the premium regulated utility. I have two scores to settle real quickly. Nas, I hope you're having a great day. And Scott, I need more cowbell. Brian?
Thank you, Mick, and good morning, everyone. I'll take us through the Q4 year to date financial results, focusing primarily on year to date, provide some insight on load in 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 4th quarter were $0.72 per share or $354,000,000 compared to $0.85 per share or $420,000,000 in 2017. Most of this year over year variance was expected and came from higher O and 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 our regulated businesses was driven by higher O and M and decreased load more than offsetting the return on incremental investment to serve our customers.
The Generation and 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 and 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 were $3.95 per share or $1,900,000,000 compared to $3.68 per share or $1,800,000,000 in 2017. This difference can primarily be attributed to favorable weather and recovery of incremental investment, partially offset by higher O and M as we reduced spending in 2017.
Our regulated segments experienced growth for the year and as expected our competitive generation and 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 at 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 and M and depreciation expenses. The Transmission and Distribution Utility segment earned $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 AUP 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 2017. Net plant grew by $1,400,000,000 or 21% since December of 2017.
The Generation and 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 and M and income tax expenses. We are pleased with our results for 2018. As Mick said, we landed in the upper end of our 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 0.7 percent for the quarter, but ended the year up 0.8 percent compared to 2017. Even with the modest load performance over the last half of twenty eighteen, 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 0.3% for the quarter and ended the year 2% higher than 2017. The growth in industrial sales moderated in the 4th 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 2 tenths of a percent for the quarter and ended the year 0.6% over 2017.
The growth in residential sales was mostly due to customer count growth, while normalized usage was down 0.5% for the quarter. For the year, residential customer counts increased by 0.6 percent, which is twice the growth experienced in 2017. Finally, in the upper right chart, commercial sales decreased by 2.8% in the 4th quarter and ended the year down 0.5% from 2017. Commercial sales were down across all operating companies for the quarter the year. The estimates for load growth presented on this chart differ slightly from what we showed at the EDI conference in fall due to the fact that we now have actual numbers for the full year 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 ADP service territory 2.8% for the quarter, which is 0.3% below the U. S. The U.
S. Economy had eclipsed that of the AUP service territory since the tariffs went into effect in the Q2. 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. Sectors that added the most job this quarter were professional and business services, education and health services and leisure and hospitality. The final chart at the bottom shows the 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 0.2% 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.
Federal government share of unemployment across our territory ranges between 0.7 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 and 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 percent. Our FFO to debt ratio was solidly in the Baa1 range at 17.8% and our net liquidity stood at about $3,100,000,000 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 detracted 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 late 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 disclosed 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 percent equities, 60% fixed income and 15% alternatives. Our combined pension, OPEB pretax expense was a credit of $65,000,000 in 2018 and we expect a credit of $59,000,000 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 and M discipline and kept spending net of offsets in a tight range of between $2,800,000,000 $3,100,000,000 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 renewable 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.
And our first question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is open.
[SPEAKER JULIEN
DUMOULIN SMITH:] Hey, good morning. How are you doing?
Good. Good. Congratulations. So Nick, let me go back to where you started the call a little bit and certainly was impressed by the comments on being disappointed of 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 moving pieces at the end
of the year? But also, I just wanted to understand what your expectations are for that 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 where are the other pluses this year as you think about it?
Yes. So yes, we do expect the hiring of that moderation. And also, as I look at the year going into it, certainly with the capital plan that we've 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 a positive in various states.
What we're doing not only from that, from a VINEO and M curve 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 a better result. 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 in that element of consistency.
And some of the capital plan demonstrates that, but also the opportunities ahead of us, there are more singular opportunities, more singles and doubles because obviously, if we had gotten something like Wind Catcher, for example, it was a front end loaded many of the integrated resource plan activities. But in this case, we're following these plans, and there'll be smaller projects that'll come into play, and we'll see the continuing improvement. I think we have a great case for the utility and for the AP utilities to own these assets. And depending upon 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 and M curve and addressing the issues in front of us. And if you look at the for example, the weather last year in 'seventeen versus or now it's 2 years ago, versus 2018, very mild weather in 2017. Earnings still came in where we really were telling the market they would come in at. 2018, it was ahead, still came in where we said it would be and obviously beat the midpoint.
So we have some resiliency that's built in, in our organization and the culture of the organization that really drives those kinds of results. So I'm optimistic.
Excellent. And can
you comment or perhaps elaborate rather on some of the developments in Oklahoma? You alluded to several potential positive riders and other new mechanisms, I'll leave it abroad, in Oklahoma to help improve your earned ROEs. What does that mean with respect to another rate case? Or do you think largely you could achieve some of this through the current rate case? And I know it's still pending, but I just want to understand at least from
more of a process perspective, how you're thinking about it here. Yes. I certainly don't want to presuppose the outcome. It'd be great if we got pretty considerable result in this rate case to get us back on even footing. And certainly, Walmart, I guess, was one of the interveners that had said, obviously, performance based rate making.
Don't know about that, but certainly, look at forward looking test years. Well, 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 additional generation additional distribution related rider activity. So and I was 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 at least now is 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 they could 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 matter of fact, with the integrated resource plans we have filed in those various states, PSO and Oklahoma obviously is one of those, we need to see a positive outcome of a rate case before we make additional investments of that kind in the state. And obviously, the timing will work out to where we'll be able to make those kinds of decisions. And then I think it's pretty well known now that Tulsa, Oklahoma is like a second corporate headquarters to us with over 600 people there that focus on primarily the Western properties but also some of the Eastern activities as well. Those are not PSO employees. They're AEP employees.
So we should put AEP up on top of the building there so that Oklahoma knows that we do have a significant presence there. And I think that's important. I think it's important to the livelihood 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. So there's a lot of things in the context of all this. It's probably becoming more well known and hopefully will drop us to a better outcome.
Excellent. Thank you. Best of luck. Thank you.
Thank you. And our next question comes from the line of Jonathan Arnold of Deutsche Bank. Your line is open.
Good morning, Jonathan.
Just can I 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 a statement about your confidence in executing in that range on over the 5 year plan? I wasn't quite clear when you said it at the outset.
Yes. We said 5% to 7% growth rate, long term growth rate over the future periods. And obviously, when you put in renewables, it's not going to be in place until 2022. From a financial standpoint, that's part of it. So it's I would say it's geared more toward the long term, but the trajectory should hold true.
And there'll be things that come in during 2019. There'll be things that come in during 2020 2021 and in the future years. So I think we have real opportunities in each and every year, but obviously, we're positioning this as part of our 5% to 7% growth rate.
Okay. So that upper range was kind of over the plan effectively?
Yes, that's right.
Yes. Great. Thank you, Nick, for that. And then on just the slowdown you saw in sales in the Q4, could 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. Certainly, Brian can cover this in more detail, but the way I see it is we're seeing somewhat of a tempered economy because of the trade issues. And as Brian mentioned, we have a lot of companies in our territory that are certainly, trade has an impact. And once those shackles come off, we believe the economy will continue on its previous trajectory. And so it's certainly difficult to tell when that's going to happen, but I think you're hearing some more promising dialogue from our national leaders.
Let's hope that continues to be the case. But even then, I guess probably we looked at customer counts. Customer counts is up considerably, so we're very happy with that. And the fundamentals seem to still be in place for the economy to continue to roll along. From the world economy perspective, obviously, that would have an impact, but I think that's probably, again, tariff driven in many respects.
Joel, 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 investment customer invested in expansions in that area and they are close in hand. We expect a lot of those to come on in 2019. In the Q4, oil and gas was up 5.6%. In the 3rd quarter, it was up 7.7%.
And we expect that expansion to continue in 2019.
Brian, can you do the math for us on how much everything that wasn't oil and gas was down in 4Q?
Yes. In the 4th quarter, it was down 0.6 percent non oil and gas industrial. And in the Q3, non oil and gas industrial was up 0.6%.
Okay. And then, so obviously, your outlook is premised on assumption that growth continues. You talked about the plan having been building resilience at the company. Can you talk maybe a little bit about how resilient you think your plan is to maybe if that view doesn't pan out?
Yes. I think if you look at, and Nick talked about it, the change that we had year on year '17 to 'eighteen in terms of weather and how we were able to adjust O and M in both years to be able to hit our numbers, I think that demonstrates that resilience. So whether it's weather, whether it's load growth, whether it's tariff impact or whatever, we actively manage our way throughout the year, putting the brakes on or the accelerator on as the case may be to get work done that we need to get done. So I think just the weather year on year demonstrates that resiliency. Yes.
I think we're seeing sort of a if you put a microscope to it, with the industrials impacted by the tariffs, in particular, the commercials, particularly the supply to the major industrials and those kinds of establishments will have an impact. And I think we're probably seeing somewhat of an immediate impact there. And again, I think as the industrial start to pick back up, the commercial should start to come back as well.
Thank you, guys.
Yes.
Thank you. And our next question comes from the line of Ali Agha of SunTrust. Your line is open.
First question, Nik of mine, just reconfirming, when you talk about the 5% to 7% growth rate, what's the base? Have you changed? Have you rolled it forward? Or can you just remind us the base here for that?
It's the midpoint of 2018 guidance. So it's off 385. Off 385. I got you. Yes.
Yes. 380.
I see. 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 and roughly over what we did?
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 are going to be 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 2019 forward, we anticipate spending about $2,200,000,000 over that 5 year period. But the renewables associated with the regulated side, the Integrated Resource Plans of PSO and Swepco, that would be additional capital requirements based upon really 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 approval, there is an added component to the plan going forward that really reinforces our cap structure at AP Ohio and evaluates the risk associated with 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 Ohio Renewables to that point.
Happen? And actually, when the bids come in, in March, we'll have a better understanding of what the CapEx looks like. It's for the consumer protection plan. Yes.
Okay. And the CapEx numbers that you have in the back of the slide, no changes there since EEI. Is that correct?
That's correct.
Yes. 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 maybe get to the end result? Or how are you thinking about Oklahoma post this current rate case?
I think some of the positions taken by the intervenors and others, there is some cause for hope that at least there's recognition of the issues. But I'm not going to pre suppose the outcome because I did that 2 times before, and who knows what the outcome will be. Certainly, the issue should be very well known. I would say that just based on the response of the interveners, it's marginally better than what how they responded earlier. So I guess you can look at that as some positive, but we won't know until we get into discussions with them or and go through this process.
And really, what matters is what the provides to the that PSO provides to the state. And so that's what we're looking for. And if and as I've said earlier, we will wait for those results, and then we'll make determinations of what the next steps are.
Understood. Thank you.
Yes.
Thank you. And our next question comes from the line of Paul Ridzon of KeyBanc. Your line is open. Good morning.
Good morning, Paul. Can you just clarify, when you say bend the O and M curve, is that decelerating O and M growth? Is that flattening? Or is it negative growth?
Negative. Yes, negative. We really by bending, we want it to go negative.
Can you kind of give a percentage kind of 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 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 on process improvement. It includes automation box. It includes partnering with 3rd party suppliers, like what we've done with an accounting and tax initiative with Accenture.
And it's bringing all those things to bear across the company that we're going to try and break through that $2,800,000,000 of non of spending that's not altered in past dues.
And then just to clarify, the 5% to 7% does not include Renewables FPSO or Swepco or Chuck's business. Is that correct?
It includes the capital in Chuck's business. The $2,200,000,000 over the plan, it does not include the regulated renewables and does not include Ohio. Thank you. And
any projects that could be impacted by the situation at FERC?
No. No, we don't see any projects impacted from that perspective because FERC obviously continues to advance transition spending. And actually, the resource projects themselves, we've moved to less transmission involved with those. So I'm assuming you're talking about transmission.
Yes, sorry.
Yes. Yes.
So we don't see any impacts there.
And then finally, the 2.8% reduction in commercial sales, is that just quarterly volatility? Or was there something more underlying there?
We think it's quarterly volatility. We don't see that continuing as a trend into 2019. Could have been associated with higher consumer interest costs and some demand side management that we see across our system, but we don't see that as continuing into the new year.
Thank you very much.
Thank you. And our next question comes from the line of Praful Mehta with Citigroup. Your line is
open. Good morning, Praful. Hi, guys. Good morning.
Good morning. So I just first want to understand in Chuck's business, any exposure to PG and E or California utilities that we should be aware of or thinking about? No. Okay. Great.
Yes.
That's the right answer. Very fortunate in that regard. A lot of our offtakes are with municipal's co ops and end use customers.
Okay, great. Yes, sort of dodge the bullet, which is great. I guess just touching on the review, I guess strategic review that you've talked about in the past and obviously you've touched on Oklahoma already. But just from a strategic perspective, is there any view that we should be thinking about around any of the utilities if they don't, if you don't get the outcomes you're looking Is that still on the table right now? Or is that too far out, at least not a 2019 event?
Well, I think and the way we look at it is every utility that we have, we wanted to grow and prosper. And to the extent that they can grow and prosper and have proper regulatory treatment, it's a great outcome. I think a couple of 3 years ago, I guess for years, we were talking about Kentucky, and Kentucky has turned around. We focused on 2 things, the regulatory relationship and the compact that we have there, but also our emphasis placed upon economic development in the state of Kentucky. And that picture has turned around markedly for PSO.
PSO is now in the radar screen and probably in the middle of the radar screen because we definitely want to be a part of the economic development picture of Oklahoma, and we definitely want to be to move forward in a very positive way on investments that benefit the customer experience in that state. So the way we look at it is we have a set of assets, and if they perform well fine, if they're chronically underperforming, then we have to take steps in some fashion to alleviate that situation for our shareholders and really the focus because many times, when you have an underachiever, a lot of effort goes and do trying to reconcile the situation. And there's some that say that PSO doesn't have a revenue problem, it has a spending problem. And that is just so far from the truth, it's just incredible because we run 7 utilities, and we run those utilities in much the same fashion. And we know what it takes to provide the customer service that's required, and PSO has been at the top of the list in terms of its performance.
And I really believe that if you're a residential customer, if you're an industrial customer, you should really take a hard look at what's happening there in Oklahoma, and it could very well have an impact on not only the presence in the future but also the customer experience itself, and we don't want that to happen. So as we look at these assets, obviously, we'll continue to make steps to further optimize our portfolio based upon what we see.
Got you. That's super helpful. And then finally, clearly, you guys have been able to manage through different load profile years. It sounds like if you do have the shackles that are continuing to stay, let's say, from tariffs and other constraints from a macro perspective And if Veda doesn't work in your favor, is there any time that we should be worried about the 2019 profile? Or do you think you have enough tools in the toolkit to manage through any of those potentially macro challenges around the earnings for 2019?
Yes. I think we're fine. We've had and if you looked over the last 2 years, 3 years and maybe even longer than that, we've had perturbations of customer class going up and down and actually residential going down has more of an impact than commercial or industrial. And so the mix obviously has an impact because the margins are different based upon each customer class. But our service territory is very diverse, very certainly, every part of the economy is represented, and our customer mix is really pretty resilient in and of itself.
So there's a lot of internal levers that continue to adjust for one another from that perspective. But at the same time, we will adjust when the economy is if the economy were to chronically be suffering and we saw that on a continual successive quarterly trend, then we would certainly make adjustments that were necessary to ensure that we remain financially healthy, and we intend on doing that. But I really believe we're in good shape from that perspective. We will watch this next quarter and the quarter after, and hopefully, we'll see some progress in the federal government side. I think certainly, immigration needs to get solved, and the 2 parties need to start talking to one another again.
And maybe that will warm up, and then they'll move to greater and better things for the economy, but they've got to get going.
Got you. Thanks so much guys and congratulations.
Thank you. And our next question comes from the line of Greg Gordon with
ISI. So just two quick questions. 1, just to be clear, you said the anchor for the $5,000,000 to $7,000,000 is $385,000,000 in $18,000,000
Yes.
Great. Okay. So I mean, I guess this is just tautologically correct, but the high end of the guidance range for 2019, which would put you above 7%, you're not this is more of a long term target than an annual we're going to be tight inside the SPAMs type of guidance?
Yes, that's right.
That's right.
I think when you look at the midpoint of the 5% to 7% and then you look at the opportunities available to us in that 5% to 7% bandwidth, it's like I said, it's more tailwinds than headwinds.
And then just one final question because there's been some conversation about this. You continue to give us a financial forecast that even though the absolute level of leverage has come up since 2013, the FFO to debt metric continues to be really resilient at just around 18%. And you're still confident that through this forecast period, you can maintain there'll be no deterioration in your FFO to debt metrics?
No, 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 turn of the forecast.
Okay. Okay. Well, that's a higher number than other people have prognosticated anyway. So I just wanted to make sure we understood what you thought the trend was.
No. We're very interested in the FFO debt percentage, and we intend on maintaining our credit ratings.
Okay. So you think 15% is the is sort of where you'll trend down to over this forecast period?
That area, yes.
Okay. Thank you.
Thanks, Greg.
Operator, we have time for one more question.
Perfect. Our next question comes from the line of Andy Storozynski of Macquarie. Your line is open.
Good morning. Thanks for taking my question. Good morning. I have a bigger picture question. So we are hearing about a precipitous drop in prices for solar power and that more and more C and I customers are signing those contracts for PPAs simply because they see it as a way to hedge against volatility and forward natural gas prices, but also those PTA seem to be at prices which are now below observable forward power curves.
So two questions. Do you see it as a risk to your vertically integrated utilities, given that you do have commercial generation assets? And number 2, is there a way to tap into this growth beyond that $2,200,000,000 that you're planning to spend on renewables on the commercial side?
I would say, first of all, we don't see a risk if we're doing it, and we are doing it. And I think we are in discussions with many customers about what their specific resource needs are. We're also looking at various technologies that enable that to happen, and some of these are large customers. So we really have an opportunity to engage in that discussion. But the other part of it, too, is you see solar, you see energy storage.
Those types of applications continue to advance. And that and with certainly on the transportation sector, you're making up whatever you're going to lose, you're going to make it up with channel growth, sales channel growth, particularly associated with the advent of electric transportation. So there's real opportunities for us to engage in that, and I think AEP is in a very favorable situation of being able to focus on those types of issues as opposed to something that some calamity that's occurred. And we're intent on making sure we maintain our operational excellence so that we can focus on those particular types of activities. And certainly, that's happening not only on the regulated side, and obviously, we're having to work with the regulators to broaden the perspective there.
For example, continuity of service is not just a distribution line going to the home. It's distribution with energy storage derived through outages and really drive toward continuity of service as opposed to just basic service. Certainly, what we're doing with smart cities, what we're doing with other applications and engaging customers in a very substantial sense, those are things that we see as the future, and we're not going to get left behind from that perspective. And as a matter of fact, from a technology standpoint, we're at the forefront of these technologies across the gamut. So we have pilots running in every one of our operating companies on various aspects of these technologies, and we intend on that channel growth to occur.
Okay. Thank you.
Yes.
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. Selena, would you please give the replay information?
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