Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Ms.
Darcy Reese, Vice President of Investor Relations. Please go ahead.
Thank you, Toni. Good morning, everyone, and welcome to the Q1 2021 earnings call for American Electric Power. We appreciate you 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. Joining me this morning for opening remarks are Nick Akins, our Chairman, President and Chief Executive Officer and Julie Sloat, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.
Thanks, Darcy, and Welcome again everyone to American Electric Power's Q1 2021 earnings call and Happy Earth Day. Before I get started with our results for the quarter, I just have Say, I was struck with the public relations public reactions to the Chauvin verdict. It's been a long way, but justice and faith in our legal system does prevail. I bring this up because it happens I had chosen a song, which I do every quarter, as you know, for a different reason, but now it serves two purposes. One of the most mesmerizing singers I'd ever heard was the late Marvin Gaye.
I thought of the song when actually thinking about our quarter and the multitude of activities the EP continues to accomplish and was thinking of what's going on, the Marvin Gaye hit from 1971 written during another tumultuous time in America. This song was a plea for peace, justice and understanding perspectives to move forward in a positive way together. As I said, this song was released in 1971, 50 years ago, but it could not be more appropriate today. We need our leaders, our communities and indeed our companies to continue to come together and stop the divisiveness, which the new cycle tends to feed off of and recognize we have a lot more in common than our differences. That would be a great start to advancing this nation in Positive Way.
That being said, getting to my original purpose, as I said earlier, what's going on with AEP as the lyrics say, Hey, man. What's happening? Everything is everything. We're going to do a get down today, boy, I'll tell you. So here we go.
The Q1 of 2021 came in with operating earnings of $1.15 per share versus $1.02 for Q1 2020, which met our expectations particularly given winter storm Yuri's impact in Texas, Arkansas, Louisiana and Oklahoma, which we reported on in last quarter's earnings call. AEP continues to reaffirm our 2021 guidance range of $4.55 to $4.75 per share and our 5% to 7% long term growth rate and we would still be disappointed not to be in the upper half of the guidance range. It's hard to believe it has been over a year since we entered into the pandemic. I continue to be impressed by the resiliency of our employees, their dedication and commitment to our customers and communities. We continue to practice social distancing for encouraging vaccinations and looking forward to putting COVID in the rearview mirror.
As we look towards the future, we are seeing our communities starting to rebound from the shadow of the pandemic. Job growth in electric consumption show continued improvement, supporting our view that the economy within our service territory will continue to rebound. While our normalized load was down 1.9% for the quarter, this is largely attributable to the one time Yuri weather event in February. If not for the disruptive impact of the storm on manufacturing and the supply chain, we believe our load growth would have been more robust and other key signposts continue to point towards a healthy recovery in 2021. Julie will be covering this in more detail later.
We continue to make significant progress in diversifying our generation fleet. Last week, we proudly commissioned the first of our 3 projects that make up our $2,000,000,000 North Central Wind Investment. On April 14, the 199 Megawatt Sundance Wind Energy Center came online on budget, spot the challenges of COVID-nineteen and extreme weather. Commercial operation of the project means our PSO and Swepco, Louisiana and Arkansas customers will start saving on their energy bills by taking advantage of this clean low cost wind resource. We continue to look forward to the Maverick and Traverse projects coming online at the end of 2021 early 2022, respectively.
At EEI, we announced the retirement of several fossil plants, which combined with previously announced retirements results in 8,000 megawatts of planned retirements and expiring PPAs over the next 10 years. This drives the need for incremental capacity, economic energy and furthers the opportunity to continue to transform our fleet and invest in regulated renewables for the benefit of our customers. For each of our vertically integrated companies, we updated our resource plans and identified 15,000 Megawatts of wind and solar investment opportunity over the next 10 years in addition to our North Central wind investment. This amounts to 8,566 more megawatts than we mentioned last November at EEI. In fact, almost 10,000 megawatts are proposed during the 2021 to 2025 time period.
By building on the success of North Central Wind, We are focusing on pursuing regulated renewable investments for the benefit of our shareholders, customers and our communities. We look forward to continuing to work collaboratively with stakeholders as part of our integrated resource planning process, many of which will be filed during the Q4 this year and we'll be issuing requests for proposals for these resources in both the near and over the long term. These updated resource plans are consistent with our emission reduction goals that we announced in February and will put us on a path to achieve 80% reductions in carbon by 2,030 and net zero carbon by 2,050. As we mentioned and our newly released climate report, we are committed to making the energy we provide as clean as possible as fast as we can without compromising reliability, affordability or the Security of the Electric Power Grid. We will provide updates on our progress as we move to the execution stage of what we call our future forward strategy.
By focusing on investments in support of clean, affordable and reliable energy, our customers and communities will be well positioned to adapt to the needs of a clean energy economy. Another important milestone that further enables our clean energy transition, I and M and its affiliate AEG reached an agreement to acquire the 1300 Megawatt Report Unit 2 from the lessors at the end of the lease in 2022. A and M has leased the unit and operated it since construction. If approved by the Indiana Commission, AEP's actions will provide a valuable short term capacity bridge for the company, resolve pending litigation and bring certainty to the closure of both Rockport units by 2028. This agreement also provides further flexibility and advancing our clean energy transition more quickly if appropriate.
Our rate case activity continues It's robust, obviously across all the jurisdictions. In Virginia, Appalachian Power received an order in its Virginia triennial rate case consideration request on March 26. The commission did not change the initial holding. APCO is now focused on its appeal to the Supreme Court of Virginia and the errors in applying the statutes the company believes the commission relied upon to reach its decision. In Ohio, a settlement was reached Showing the productive relationship AEP Ohio has with various Ohio stakeholders, the settlement agreement balance the interest of the settling parties including The commission staff, the Ohio Consumers Council, Industrial Commercial and other entities like the Ohio Hospital Association.
Testimony in support of the settlement was filed by the company and the matter is set for a hearing focused on the settlement agreement on May 12. In our Swepco jurisdictions, we have rate cases pending in Louisiana and Texas and are preparing a filing in Arkansas. In Texas, We are seeking a net revenue increase of $73,000,000 and an ROE of 10.35%. The following included investments made From February 2018, accelerated depreciation for 3 coal plants, an increase in storm reserve and vegetation management. Intervening parties and staff filed testimony.
Company rebuttal testimony is due April 23 and there is a May 19 hearing date. We expect to receive an order in this case by December. In Louisiana, the $93,000,000 net revenue increase seeking a 10.35% ROE is before the commission awaiting a procedural schedule. In Arkansas, SREPCO filed notice that it would not be filing the formula rate update because it would be filing a new base case filing to update rates. This was expected as a result of North Central approval and will incorporate the facilities in base rates in Arkansas.
A notice of intent to file a rate case was also filed in Oklahoma for PSO on March 16. The case will be filed by April 30. The following is intended to address among other things general updates, the eroding ROE and a following requirement related to incorporating the North Central assets in base rates and minimizing the length of the rider recovering those costs. We also continue to engage the Oklahoma, Arkansas, Louisiana and Texas commissions regarding the appropriate mechanisms for recovery of the approximately $1,200,000,000 of fuel expense that occurred with Winter Storm Yuri. AEP continues to request WACC recovery to maintain balance sheet strength and capital structure with the operating companies.
Julie will update the state of the alternatives being discussed. In an otherwise great story, I would be remiss if I did not express extreme disappointment with FERC decision to consider the possible reduction or removal of the RTO 50 basis points adder for transmission investment. As evidenced by every reputable expert on what is necessary to achieve our net zero goals, transmission is an integral part of the solution. Ensuring reliable and resilient grid is foundational to support a clean energy economy. It's vital that federal policy continues to support transmission investments and particularly those that are made by companies who are participants in RTOs.
Participation in RTOs has resulted in ensuring the most efficient Regional solutions are advanced, participation should be encouraged and not discouraged. There is a cost of being in an RTO and upsetting this cost benefit equation could change the dynamic of RTO participation. Under the Federal Power Act, FERC is required to provide incentives to each utility that joins an RTO. FERC's abrupt about based on incentives will certainly lead to litigation as is consistent with this previously well established incorrect approach that incentives should not expire until the utility leaves the RTO. Onto our Achieving Excellence program.
Our Achievement Excellence program, we continue to harness the ideas of our team members by focusing on operational efficiency gains. As a Substantial part of our efforts have been the O and M curve. This specific program is set to deliver sustainable annual O and M savings that will continue to support our earnings growth expectations. I continue to be proud of the wealth of ideas that our team members bring to ensure that we are maximizing the value of services that we provide to our customers and our communities. Lastly, regarding our efforts regarding portfolio management, We now will announce an ongoing strategic review of our Kentucky assets.
We expect to complete this review during 2021. As we have mentioned before And as for all practical purposes, we are a fully regulated utility. We're now focused on portfolio optimization and capital allocation prioritization to address future capital needs with balance sheet expectations while improving shareholder value. So more to come in the future regarding this review. Now I'll move to the equalizer chart.
Overall, our operations ROE is currently 9.1%. We generally target it in the 9.5% to 10% range. The ROEs that we're discussing here are not weather normalized. So keep in mind, We're also thickening equity layers over the last several years as well. So that reflects in the ROEs as well.
So moving to AP Ohio, the ROE for AP Ohio at the end of the Q1 2021 was 10.3%, slightly above the authorized primarily due to timely recovery of capital investments. We expect the ROE to trend around authorized levels as we maintain concurrent capital recovery of distribution and transmission investments. Regarding APCO, the EFCO at the end of Q1 was 8.6% as below authorized due to lower normalized usage, higher amortization primarily related to the retired coal fired generation assets and higher depreciation from increased Virginia depreciation rates and capital investments, partially offset by continued management Of O and M expenses. And keep in mind the Virginia Triennial Review is part of that process as well. Kentucky.
The ROE for Kentucky at the end of Q1 was 4.8%. It's well below authorized due to loss of load from weak economic conditions and loss of major customers along with higher expenses. Transmission revenues were also lower due to the delay of some capital projects. And I've already discussed in relation to Kentucky what we're doing there. The ROE of I and M at the end of the Q1 was 10.4%.
It's above all rise due to continued discipline managing O and M expenses, reduced interest expenses and rate true ups, partially offset by lower than expected retail sales during Q1 2021. Regarding PSO, PSO at the end of Q1 2021 was 9.1%. It's slightly below its authorized level, primarily due to increased capital investment, not currently in base rates, partially offset by continued management Of O and M expenses. And I mentioned earlier, we are giving notification of filing a base rate case there. Swepco That was below authorized at 9.1 percent and due to loss of load and continued impact of the Arkansas share of the truck plant, which we've said on several occasions is about 110 basis points and also partially offset by off system sales In the Q1 2021 resulting from the severe winter storm event.
AEP Texas at the end of the Q1 was 7.7%. It was below authorized primarily due to lag associated with the timing of annual cost recovery filings. Favorable regulatory treatment allows AAP Texas filed DCRF and TCOS filings to recover costs on capital investment. So while the expectation is for the ROE to trend towards an authorized ROE of 9.4% in the longer term continued significant levels of investment in Texas will impact the ROE. And then the ROE for AAT Transmission HoldCo at the end of the first quarter was 10.1%.
AAT Transmission HoldCo's ROE was slightly below authorized primarily driven by the annual revenue true up in the Q2 of 2020 to return the over collection of 2019 revenues. Transmission is forecasting this ROE to be in the mid-ten percent range in 2021. So I'll conclude by stealing a comment from one of our international CEO peers who made the observation that we are in a magical moment for the electric industry given the move to a clean energy future through electrification. It has been a very busy quarter for AEP, but the work really starts now regarding the execution of a plan to transform this company from what was the largest coal fired utility to one of the largest regulated renewable companies in the U. S, An amazing transition that will benefit customers with clean energy with a continued eye on reliability and affordability, along with being the largest transmission supplier in the country that will also benefit from the resource transformation and the further emphasis being placed on infrastructure and electrification Through transportation, AEP is well positioned to experience a truly magic moment in our history that will set the tone for our continued quest of remaining the premier regulated utility.
Julie, I'll turn it over to you.
Thanks, Nick, and thanks Darcy. It's good to be with everyone this morning. I'm going to walk us through the financial results for the quarter, share some thoughts on our service territory load and economy and then finish with a review of our credit metrics and liquidity. So let's go to slide 7, which shows the comparison of GAAP to operating earnings for the quarter. GAAP earnings were $1.16 per share compared to $1 per share in 2020.
There's a reconciliation of GAAP to operating earnings on Page 15 of the presentation today. Let's walk through our quarterly operating earnings performance by segment. This is laid out on slide 8. Operating earnings for the Q1 totaled $1.15 per share or $571,000,000 compared to $1.02 per share or $504,000,000 in 2020. Looking at the drivers by segment, Operating earnings for the vertically integrated utilities were $0.54 per share, up $0.04 driven by the favorable impact of weather due to warmer than normal winter temps and 2020.
Other favorable items in this segment included off system sales, higher transmission revenue and the impact of rate changes across multiple jurisdictions. Partially offsetting these favorable items were higher depreciation, lower normalized retail load, higher O and M, a prior period fuel adjustment and higher other taxes. The Transmission and Distribution Utility segment earned $0.23 per share, down $0.01 from last year. Earnings in this segment declined primarily due to lower normalized retail load attributable in part to storm Yuri. Other smaller decreases included higher depreciation, tax and O and M expenses.
Favorable drivers in this segment included transmission revenue, rate changes and weather. The AP Transmission Holdco segment continued to grow contributing $0.35 per share, an improvement of $0.07 per share from last year. Net plant increased by $1,300,000,000 or 13% since March of last year. Generation and marketing produced 0.06 dollars per share, down a penny from last year. The favorable impact of the retirement of Oakland Union and land sales on the generation business offset the unfavorable ERCOT market prices on the wholesale business during storm Yuri in February.
The decrease in the renewables business was driven by lower energy margins and higher expenses. Finally, corporate and other was up $0.04 per share driven by an investment gain and lower interest expense. Partially offsetting these items was the higher impact of higher taxes. Overall, we experienced solid quarter and we're confident in reaffirming our annual operating earnings guidance. So let's take a look at our normalized load for the quarter on Page 9.
Starting on the lower right corner, our Q1 normalized load came in 1.9% below the Q1 of 2020. There are 2 important factors to consider when evaluating the year over year comparison for the quarter. The first factor is that last year included an extra leap year day. Assuming everything else equal, you would expect about a 1% decline in sales due to one less day in the quarter. And the second factor is that the pandemic started during the last 2 weeks of the 2021st quarter.
In other words, the Q1 analysis is comparing a pre pandemic view of our service territory load to a view after COVID began. Importantly, we still expect a stronger recovery in the second half of this year as vaccinations increase positioning more communities to relax restrictions on businesses without jeopardizing public health and as the benefit of the American Rescue Plan stimulus that was signed in late March works its way through the economy. I'll talk a little bit more about the latest economic projections when we get to Slide 11. So let's take a look at the upper left quadrant. Our normalized residential sales increased by 1.5% in the Q1 compared to last year.
The growth in the residential sales was spread across most operating companies. As the pandemic recovery progresses, growth in residential sales has begun to moderate. While we expect residential sales to decline by 1.1% in 2021, we're assuming a moderate sustained load benefit from this customer class given the stickiness of work from home arrangements for many office workers across our service territory for the foreseeable future. So if you go over to the right, normalized commercial sales decreased by 1.6% in the Q1. Even though commercial sales were down across every operating company excluding Ohio, We are seeing steady sequential improvement since the pandemic began.
In fact, AP Ohio was the 1st operating company to post positive commercial sales growth. This correlates well with the fact that the AEP Ohio territory added the most jobs in the Q1. We also continue to see significant improvement in the same sectors that were hardest hit by the shutdowns in the Q2 of 2020. These sectors include schools, churches, restaurants and hotels. So finally, if you look in the lower left chart, you'll see that industrial sales decreased by 6.1% in the quarter compared to 2020.
Industrial sales were down across every operating company and most industrial sectors. Not surprisingly, the biggest declines were located in the Western territory where storm debris in February was a significant yet temporary disruption to many manufacturing facilities located in ERCOT and SPP. In addition to the numerous electric generators unable to run due to frozen natural gas supply lines, there are a number of other manufacturing processes that rely on natural gas supply to produce their product. Many of those businesses were unable to produce for up to a week while the pipelines were being thought out. And in some cases, industrial loads were installed as long as 42 days in Texas.
So the key takeaway here is that the dip in industrial sales in the Q1 was largely due to the one time winter storm, which does not impact our fundamental outlook. So here's an interesting data point that illustrates this. Our industrial sales in the eastern part of our service territory were down 2.6% as compared to the significant 12 point 8% drop in the western part of our service territory, which was impacted by Yuri. So obviously, that's a pretty dramatic difference. That being said, We're still very bullish about the second half of the year as the U.
S. Acquires a significantly greater concentration of immunity from vaccinations and as the full impact of the additional fiscal stimulus is felt throughout the service territory economy. So let's go over to slide 10, where I can provide a little color on the industrial sales performance in the Q1. The blue bars show the change in sales to our oil and gas customers. In aggregate, The sales to oil and gas sectors were down 9.6% in the Q1 led by the 21% reduction in oil and Gas Extraction.
Most of the decline in this sector is in response to the challenging market signals from last year when the drop in global demand along with the temporary price war caused oil prices to fall below many producers' breakeven point. However, we do not expect the weakness in oil and gas to persist. In fact, natural gas prices in March were up about 60% from last year and domestic oil prices last month have more than doubled since March of 2020. We fully expect the higher prices today will provide the necessary signal that producers are looking for to increase their production within the service territory. And once we see the production increase in the upstream sectors, it's only a matter of time before we see the corresponding increase in the midstream and downstream operations.
The orange bars in the chart show the change in industrial sales excluding oil and gas. While it was still down 3.3% for the quarter, we expect to see stronger improvement in the second half of the year as the global economy recovers from the pandemic. Some of the weakness in manufacturing right now is related to supply chain disruptions. As efforts continue to strengthen the resiliency of the domestic supply chain for manufacturing, the AEP service territory certainly positioned to benefit from any movement in that direction. So let's go over to Slide number 11, where I can provide update that I mentioned a few moments ago on the latest economic conditions within the AEP footprint.
Starting in the lower left chart or on the left chart, you'll see that AP service territory experienced a 1.6% increase in gross regional product compared to the Q1 of 2020. This was much better than the U. S, which had a relatively flat Q1 in terms of year over year GDP growth. The AP service territory was less impacted by the virus and had fewer restrictions on businesses than other parts of the country, which has allowed the regional economy to fare better than the U. S.
Throughout the pandemic. Looking forward, the AP service territory is expected to grow by 5.2% in 2021, lagging the economic recovery in the U. S. As you might expect. Moving to employment on the right, you can see that the job market for the AP service territory has also outperformed the U.
S. Throughout the pandemic. For the quarter, employment growth was only down 1.6%, which was 4.4% better than the U. S. During the Q1.
This is largely the result of the mix of jobs in our local economy, which has a heavier relative concentration of manufacturing and government jobs and a smaller share of leisure and hospitality jobs. Going forward, we expect job growth of 1.7% in 2021. So let's go over to Page 12 to check-in on the company's capitalization and liquidity position. On a GAAP basis, our debt to capital ratio is 22.5%. When adjusted for the storm Yuri event, the ratio remains consistent with our year end 2020 ratio at 61.8 percent.
Let's talk about our FFO to debt metric because as you would expect and as we've been signaling, the impact of Storm Yuri has and will have a temporary and noticeable impact in 2021 on this metric. Taking a look at the upper right quadrant on this page, You see our FFO to debt metric based on the traditional Moody's and GAAP calculated basis as well as on an adjusted Moody's and GAAP calculated basis. On a traditional unadjusted basis, our FFO to debt ratio decreased by 3.9% during the quarter to 9.1% on a Moody's basis. While this is a pretty dramatic impact, the rating agencies are very much aware of this and have taken the metric data point as well as the anticipated recovery into consideration as it relates to our credit rating. On an adjusted basis, the Moody's FFO to debt metric is 12.9%.
To be very clear, this 12.9% figure removes or adjusts the calculation to eliminate the impact of approximately $1,200,000,000 cash outflows associated with covering the unplanned Yuri driven fuel and purchased power in the SPP region directly impacting PSO and Swepco in particular. The metric is also adjusted to remove the effect of the associated debt we used to fund the unplanned payments. This should give you a sense of where we would be from a business as usual perspective, so 12.9% business as usual. As you know, we're frequently in contact with the rating agencies to keep them apprised of all aspects of our business and importantly there is no change in our equity financing plan. On the topic of anticipated recovery.
There is no debate that storm Yuri was an extreme event and consequently the various states would like to resolve recovery dockets as expeditiously as practical. Assuming recovery begins this year, our cash flow metrics will quickly return to the low to mid teens target range next year as expected. So this should be a 1 year phenomenon for us. As many of you know, we have initiated regulatory cases in our respective states to evaluate the costs and determine the recovery plan. Let me provide a quick update where we are in this process.
On February 24, PSO filed with the commission for recovery of fuel costs through a with a regulatory asset and weighted average cost of capital carrying charge and subsequently filed a motion seeking recovery of a $650,000,000 regulatory asset with a 5 year amortization. At this point, PSO has received approval to defer the storm related costs with recovery of the established regulatory asset over 5 years at an interim rate of PSO's short term financing costs, that's like 75 basis points. This is intended to be an interim order and the actual carrying charge will be determined in a future review and the regulatory asset amount is subject to finalization. Importantly, Oklahoma has also taken up a securitization bill to address the extraordinary fuel and purchase power costs felt by all utilities. PSO will evaluate if the securitization is appropriate for the recovery.
And if so, we would expect it to occur as early as next year. In March, the Arkansas Public Service Commission issued an order authorizing recovery of the approximate approximate $113,000,000 Arkansas jurisdictional share of the retail customer fuel costs over 5 years with the carrying charge to be determined at a later date and the actual amount to be recovered, being subject to finalization. We requested a WACC rate, which was supported by the staff. In accordance with the order, Swepco began recovery in this jurisdiction in April. That was at a customer deposit rate of something like 80 basis points.
The recovery period and associated sharing charge will be further reviewed in a hearing that's already been set for July 8 this year, so 2021. In March, Louisiana Public Service Commission approved a special order granting a temporary modification to the fuel adjustment clause to allow utilities to spread recovery over a longer period of time. In April, Swepco began recovery of the Louisiana jurisdictional share of these fuel costs about $150,000,000 based on a 5 year recovery period in a fuel over under recovery mechanism. Swepco will be working with the Louisiana Commission to finalize the actual recovery period and determine the appropriate carrying charge. And in Texas, Sweco intends to file for recovery under a fuel surcharge most likely in the Q2.
Our current plan is to request recovery over 5 years with a WACC carrying charge. Obviously, we have a lot in process on the regulatory recovery front on this matter and we'll keep you apprised as we make progress because as we all know this is extremely important. Let's take a quick moment to visit our liquidity summary on the lower right of slide 12. In March on March 31, April, we renewed its $4,000,000,000 bank revolver for 5 years and also entered into a 2 year $1,000,000,000 revolving credit facility to fortify our liquidity position as we go forward. This place our net liquidity position as of March 31 at a strong $3,400,000,000 Switching years, our qualified pension funding increased 1.7% during the quarter to 103.5% and our OPEB funding increased 9 point percent to 170.5 percent.
Rising interest rates that decreased plan liabilities along with positive equity returns were the primary drivers for the funded status increases in both plans during the Q1. So let's go to slide 13, so we can wrap this thing up and get your questions. But I just want to call out a couple of Before we do that. So top of mind for many folks I know this, we want to mention to you that we've completed the planned $195,000,000 equity funding portion of the North Central Wind Sundance project. We used our at the market mechanism so that we could time the equity need with our purchase of the Sundance project, which occurred last week.
As you know, we will continue to move forward with additional opportunities in the renewable space supporting our ESG focus as we transition toward a clean energy future. Our performance in the Q1 and stability of our regulated business model gives us the confidence to reaffirm our operating earnings guidance range of $4.55 per share to $4.75 per share. Because of our ability to continue to invest in our own system organically, we are confident in our ability to grow the company or stated long term growth rate of 5% to 7%. So we surely do appreciate your time and attention today. And with that, I'm going to turn the call over to the operator for questions.
Thank Our first question comes from the line of Shar Pourreza with Guggenheim Partners. Please go ahead.
Good morning, Shar.
Hey, good morning, guys.
Good morning, everyone.
Good
morning. So the couple of
quick questions here. First on the incremental 8.6 gigs of renewable opportunities that just added to plan, It's early size. Can you maybe touch a little bit on how we should think about these new opportunities in light of the 5% to 7 percent growth that you guide. What sort of financing avenues are you kind of looking Looking at the approval passed and What are you assuming in terms of owned versus TPA?
Yes. I think we have the last part I'll answer your question first. I think we have a pretty compelling argument now for owners of these facilities given even past the winter storm activity that we learned Operationally, certainly what we learned from the really the provisions of the agreements that we put place relative to the approvals really stands better in terms of our ability to manage the project, manage congestion, manage other factors that really provide benefits to our customers. So we're going to make a strong position that we should own those assets. And actually when you think about The strength of the utilities is going to be important for the states to really focus on how do we keep our utilities strong and PPAs don't do it from a capital structure perspective.
We need to make sure that ownership and The ability of operations is key in that regard. Now regarding the other 8,600 megawatts, Yes, it is a sizable number, but obviously when you look at the evaluation of the retirements, when you look at the needs of the operating companies And also North Central certainly showed you can deploy capital and reduce the overall bills to consumers. So when you think about the retirements of coal fired generation, the imposition of additional transmission, Having the benefits of the fuel cost aspects of it are tremendously important. So when you look at the analysis, Having some level of carbon pricing in there certainly increases the focus on the ability for renewables to come into play. And that's certainly what we've been focusing on.
So as you look at The financeability of it. The financeability will pretty much work like it did for North Central, although it is a large number. So we'll have to be very aware of what Our balance sheet strength looks like during the process, the timing of when the different tranches of these renewables come into play, The cash position that supported with these projects coming online and being able to improve as Julie mentioned, this FFO debt Thing where it is today is really a 2021 issue. In 2022, FFO debt comes back up. And certainly with the ability to put these projects in place, it will help in terms of our ability to continue to fund these projects.
So Probably we certainly would like for it all to be incremental. But in reality, when you go through this process, it will probably be Around capital allocation and prioritization associated with that within the existing plan, but also incremental. So it would be a combination of both. Yet to be seen. Obviously, if load continues to grow, if the position relative to The regulatory framework, getting concurrent recovery, making sure that we get off the tax AEIT issues, That's all going to be helpful in terms of our ability to finance.
So it's still a work in progress.
Got it. And then maybe just transitioning to corporate strategy and asset optimization, obviously, the strategic review for Kentucky started. So Brian's Obviously, very busy here. Can we maybe just elaborate on the phase we are in with that process? Has bidders emerged or data rooms open?
And assuming this would backfill most of your wind catch or equity needs, so assuming we aren't looking at a Duke style Indiana GIC transaction, but the entire OpCo. So we should obviously consider leakage share. Any NOLs as well that could be applicable in this case?
Well, Shar, you're always ahead in terms of questions. So, yes, and I really can't answer any of those At this point, because we are in a process and certainly as soon as we have information on it, I think the real issue here is, we have made a deliberate decision to really start our portfolio management approach and evaluating jurisdictions because we are fully regulated. We can look at these areas And determine what the best fit is in terms of future capital needs and what our focus is in terms of moving to a clean energy economy. So And for us to come out and say that we are in a strategic process relative to Kentucky is an Jackie is an important statement in that regard. That's probably as far as we can go right now.
Let me ask you something
a little bit more of
a theoretical question. Would Consider asset rotations above your current equity needs, let's say, from North Central to fund The incremental CapEx in renewables or T and D. I mean, you're within your credit metric guidance, but does it make sense for you to further Improve your balance sheet and simplify your story even further. I mean do you kind of like looking at the stock valuation and does it make maybe more sense to do you think there's incremental value from a multiple standpoint to even have a stronger balance sheet and operating even less states here and I'm thinking maybe Texas.
Well, certainly, like I said, this is At the beginning of this process, but multiple expansion is clearly on our minds and making sure that you can you're investing in the right things at the right places at the right time is going to be incredibly important. And you saw that with North Central of timing The recovery with the actual investments with the turnkey approach that we took. And it's all about the timing of it. It's all about the decisions made to ensure That we are doing proper capital allocation and rotation to manage this process forward. So And like I said earlier, that's going to be a continuing part of our business.
Terrific. Thank you, guys. I'll jump in the queue. Appreciate it. Yes.
Thank you. Next, we go to the line of Julien Dumoulin Smith with Bank of America. Please go ahead. [SPEAKER JULIEN DUMOULIN SMITH:]
Good morning, Julien.
[SPEAKER JULIEN DUMOULIN SMITH:] Hey, good morning. Hey, good morning team. Congratulations on all these updates.
Yes. Well, a lot to digest here today indeed. Yes. If I can, let's start with a higher level question here, right? So you're proposing a lot specifically in TSO.
How do you think about the events that have transpired in Texas and Erie impacting that? And specifically around some intermittent resources like solar In Oklahoma, right? We just haven't seen a lot of that historically. So this is a little bit of new territory for that geography more Than the economics all around. Can you talk to that?
Have you kind of vetted some of the proposals here in the approval process?
Yes. So, obviously, we're right out of the gate in terms of the announcement of what's included in each jurisdiction. So we'll have discussions with the commissions And that's part of the integrated resource planning processes. And keep in mind too, when we do this evaluation during the RFP I mean during the process, It's always solving for whatever the lease cost is in terms of what those resources are. So it shows up as And then solar, typically it's showing up as more wind early on than solar starts to pick up.
But that's Pretty fungible, as you go forward. I mean these plans will change as we go forward based upon where technologies go, Certainly, where the opportunities exist. Now Oklahoma may want more wind and less solar, but that won't matter. It will be a part of The total renewables piece that's included there. The other part of it too is we'll be very mindful Of how much renewables are placed into service in relation to 20 fourseven supply.
And there's some natural gas built into this plan as well that enables more renewables to be put in place. But the real focus Going forward during this transitional period will be for units that provide 20 fourseven to be more of a reliability component, certainly more of a sort of insurance backstop for weather events or other events that may occur that impact the grid security. And we'll have to be very mindful of how those studies actually go. And I'll tell you in our climate report, we saw for 2,050 With a $15 carbon price and then more aggressive $30 carbon price, the 2,035 case didn't solve because Of the timing of getting resources in place and system related issues. So you have to really think about How that's done.
And we've looked at these plans and we certainly believe that with the level of 20 fourseven supply we still have out there and the additional opportunity associated with just the diversity of some of these projects, it's going to be of particular value to our customers going forward. And I guess, I'll just remind you that North Central Had it been operational during this time of the Texas and Oklahoma outages with the Yuri Would have saved customers $227,000,000 So you think about the savings associated with that. And the other thing too, the previous question Someone was there was Shar was asking, when the utilities do it, they focus on the long term. And North Central already had the weather packages already in place, where you don't find that in a large part of the market. So we think the long term when we go after these investments and that's why ownership is clearly important.
Excellent. And just to clarify this
a little bit further, I know that the equity numbers aren't moving around too much Or at all frankly relative to CapEx, but how much capital could be shifted given the latest updates here into the 3 year versus the 5 year outlook here? Just want to understand out of the total 10 year view that you guys are providing today, how much could be in that 3 5 year window as you think about just the Specific timing of each of these dockets that will come up for renewable resources.
Well, yes, as I mentioned, 10,000 of the megawatts Of the 16,000 over 16,000 is in the 2021 to 2025 timeframe. So, it's going to be near term. So when you think about These projects, they take a couple of years to put in place. You'll be looking more at that 23 to 25 for most of it, but some of it was is already in play. There's already RFPs going out for supplies of some of these renewables as we speak.
Donna, Julie, you got anything you want to add to that?
No, you've got that. Perfect. Thank you.
Thank you. Myself next.
Thank you. Our next question comes from the line Stephen Byrd with Morgan Stanley. Please go ahead.
Hi. Thanks so much for taking my question.
Good morning. Yes, Drew. Thanks.
Congrats on a great update and a big movement in renewables, so happy to see that. I wondered if you could just talk a little bit more about As you grow out renewables, whether there might be some additional transmission distribution requirements or stores or just other Things that would sort of be additive as well. It's obviously just huge amount of megawatts. Just curious the other impacts. Yes.
There will be.
And many of these projects, obviously, we'll have to look at the placement of these projects to determine the level of congestion, but also The level of transmission investment that's required. But keep in mind too with what the Biden administration is doing relative To the movement to clean energy, which obviously is a big part of his plan, Large scale transmission will also be incredibly important. So I see With what's going on today and the nexus of all these things coming together, our transmission, which you've always said is As far as the eye can see for a decade, well, it's probably even higher. We don't know what that number is at this point. And I think we got to get through the process and fully understand that.
But when you do the net benefits associated with fuel And the capital cost of the renewables projects and transmission is still a benefit To consumers. So we'll go through that process. But you're right to be bullish about transmission in relation to these investments, but also Everyone else's investments because we are the largest transmission provider in the country and most of this has to come through us.
That's really helpful. And then I wanted to drill into Texas for just a moment. There are some bills, as you know, that are Are floating around that would permit securitization of costs and those look to be, I guess, to me quite helpful from a financing point of view. Just curious how you're thinking about that impact? How might that impact your thoughts on financing?
I appreciate the points you raised earlier that essentially The credit metrics are sort of artificially low at the moment because of the storm, but would some of these bills be especially helpful to you?
Well, certainly the ERCOT portion of Texas, we are essentially a wires company there, So a T and D. So and we have based on our cost provisions in place for recovery of that, We the only real exposure we've got from a wire standpoint is any I guess, some of the reps, they could potentially go bankrupt and but that's where It's going to be important to understand where that goes. And also as far as securitization We've used securitization in the past in Texas and you're seeing it develop for what's classified as storm costs, but it really is Yuri Related investments, we'd be fine with that. Julie, I don't know if you have any thoughts.
No, that'd be great. Great question, Stephen. So we're keeping an eye on what's going on in Oklahoma. There's an opportunity potentially to engage in some securitization activity there. We'd love to get cash in the door.
So if that's something that's Workable, we will absolutely take the cash. And my understanding is, the way that is being at least initially discussed and potentially structured would be such in in such a way that that does not sit on our balance sheet, which makes it even better. So yes, we'll take that cash and with no debt on the balance sheet, we like that very much. So we are definitely poised and ready and waiting.
That's great. And maybe one last quick one, just as we think about this growth in renewables, Any changes in terms of your thoughts on coal retirement dates?
Well, obviously, the move we made On the 2nd Lockport unit solidified at least at 2028. And it could occur earlier depending on what the conditions are and what the evaluations are with the commission and the replacements of capacity. And so we are and actually we're looking for provisions like that even in legislation that's occurring Because you're seeing all kinds of incentives develop for extension of PTCs, ITCs, Direct pay we lock. So direct pay not only for renewable projects, but also for transmission if you have an ITC. But I think also we'd like to see incentives for the The undepreciated plant balances of coal units to further accelerate the ability to retire and obviate the impact To our customers.
But the current plan doesn't assume any of these advancements. So and this happens all the time where we have plans that are out there that are public, The lot of things get worked on and we'll continue to work on these objectives because our objective is to move as quickly as possible To derisk these investments and particularly with new environmental rules with CCR and other things, We're making decisions about these plants and you've seen the last two quarters we've announced earlier retirements of coal and lignite plant operations. So, I would fully expect to see that process to continue.
Very good. Thank you very much. Yes.
Thank you. Our next question comes from the line of Steve Fleishman with Wolfe Research. Please go
ahead. Yes, thanks. Good morning, Nick and team. Good morning.
Thanks, Steve.
How are you doing? I'm doing well. I have a couple of questions on the Kentucky power announcement.
Yes.
So Just I think Nick you said that you're doing a strategic review with a target for year end. So is that a target to basically have a sale done and proceeds by year end or have a Kind of like a sale or other plan announced by year end?
Steve, so I didn't say year end. I said We would get the evaluation done in 2021. That could be earlier in the year, could be later in the year. Obviously, we need to get farther down the road in terms of this process. I can tell you that the process is established, it's ongoing And we're going to move as quickly as possible.
So and we've always talked about the timing of the resolution of anything related to whether it was Kentucky or anything else in relation to The needs around North Central. So, and we still believe that timing fits.
Okay.
So I wasn't saying that it would be the end of the year before we know anything. I just said Yes, during 2021.
Okay. And just is there kind of This may be seem silly, but just is there a reason that this wasn't only part of your slide deck or release or just it was just stated on the call? It's just something just happened, the Board just decided something?
No. I think it was out of respect to our employees Because obviously you can't say something like this from an SEC perspective without some thought around that. But There's the human aspects of it too and employee aspects. Matter of fact, our employees just found out about it when I said it. I have a webcast after this with all employees to talk about this to just sort of alleviate their concerns through the process.
But This is the way it occurs is there's multiple things you have to think about when you're making these kinds of announcements.
Understood. And then just in terms of that's helpful. So in terms of the In terms of thinking about your financing, this would still be potentially directed at replacing The equity needs that you have currently for North Central as a potential book placement for some of that?
Yes. I'll let Julie talk about that.
Steve, yes, thank you for the question. Absolutely, to the extent that we get dollars in the door, that will be a wonderful place to put that to work in terms of being able to sidestep some of the equity need. And we'll see if we can make that happen, absolutely.
We have the ATMs sitting out there that we've accessed, but obviously, it would change the nature of that.
One challenge with Kentucky Power has
a lot of coal plants and exposure, I guess, so to speak. Just do you feel like there's still despite that decent interest to be able to monetize that at a reasonable price?
Yes. And obviously, different parties look at it in different ways and that's what we're going to find out Through the strategic processes is what evaluation Kentucky's ownership of Mitchell in terms of valuation and its impact on overall price It still has value. It still has years to operate. And certainly, if you look at the plan that we presented, you still have a potential renewables opportunity there, Particularly with the potential retirement of Mitchell at some point. So anyone who's looking at this would say It's not in terms of just the valuation of Mitchell, it's evaluation of what you do with it during the transition.
So There's a lot of things to look at from that perspective.
And my last question just on this topic, and my last question is just The overall portfolio optimization kind of that you've been doing, is this a conclusion of that? Or is this something where we could get more?
No. It's going to be an ongoing part of our process. So it's just the beginning.
Great. That's helpful. Thank you very much.
Yes. Okay.
Thank you. Our next question comes from the line of digesh Chopra with Evercore ISI. Please go ahead.
Good morning, digesh. Hey, good morning, Nick. Thank you for taking my question. Just I have 2, but I think you've covered the rest. Just on storm costs, Julie, You're currently deferring those, right, the $1,200,000,000 on the balance sheet.
Can you just remind Thank you. Can you just remind us what is accurate in the 2021 guidance? I'm just thinking about how The regulatory decisions here in the next few months impact your 2021 numbers.
Yes, absolutely. You have it exactly right. We're deferring The storm costs, particularly as it relates to the fuel and purchase power costs, because that's the biggest chunk of the dollars that we had exposure to as it relates to storm and Yuri in particular. And as it relates to what's embedded in our guidance, I will tell you We actually updated our cash flow forecast that's included in the slide deck that you have today to incorporate the impact of this particular circumstance as well as the fact that we did have some ice storms and more I characterize more kind of normal storm related activities that occurred in the eastern portion of our jurisdictions here during the Q1. So all of that is factored into those new cash flow forecast details, which you'll see impacting the cash flow from operations line in the slide included in the deck today.
As you know, we did take on some additional debt to be able to accommodate the fuel and purchase power spike that was not anticipated. And so that is now being absorbed into our 2021 operations and therefore into our earnings. Interestingly, if you look at Page number 8 of the slide deck that we have out there today On the Corporate and Other segment, you'll actually see that interest expense was a benefit to us this time, Despite the fact that we have taken on a little additional debt in that capacity because we took a $500,000,000 term loan on at the parent company interest rates have in terms of interest costs, I should say, was much lower in this particular quarter versus last this year, we do have still have lower debt outstanding from a short term perspective versus last year. So all of those factors interestingly helped to have this impact the one off benefit to us in this particular period. So, steady as she goes, no change in forecast, still feeling really good about where we are.
Hopefully that helps you a little bit.
It does. It does. In a nutshell, it's captured in your EPS guidance, the interest cost and the cash flow metrics Already reflect, the sort of the some of the treatment you might get in terms
of recovery for these costs.
You got it. We did that by design because we wanted to make sure we had a fair amount of integrity in that forecast with particularly when you look at the cash flow metrics and Give a shout out to our fixed income friends because I know that's extremely important.
Understood. Thanks. Just one last one for me. Nick, you mentioned the disappointing Q4. Just what to look for there in terms of next steps?
Is there going to be a rule making procedure and just next steps there, what should we be looking for there?
Yes, there is open for a NOPR right now. So Our comments will be very direct and very focused. I'm sure there'll be others in the industry with that as well. But It just seems like a direct polar opposite to where the administration is trying to go with movement to a clean energy economy. And really, It is directly opposite to years of precedence of encouraging the development of transmission.
So I'm certainly hopeful as we get through the dialogue of what this all means. And actually with RTO J. Rice:] When we originally joined RTO years ago, we were making a lot of money off of through and out Rates of transmission. We traded that in for generation benefits because We were selling a lot of generation. We're not selling generation.
So to any real extent And certainly when you look at the value proposition of an RTO, it is centered on The ability to optimize across a larger jurisdiction, but from an AEP perspective, you got the cost of the RTO and certainly customers need to be able to benefit from that. So if you disrupt That cost benefit opportunity, you will have people making different decisions about RTO participation. So I think it's just sort of a policy move in the wrong direction. But I Certainly, I'm hopeful that the commission comes together on that.
Understood. Is there a timeline As to when they the common period ends and when they might make a final determination yet?
I don't know that there is right now. They have to post the NOBRA in the federal register first. So we're thinking probably a summer timeframe for the Noper. Understood.
Thank you. Appreciate the color. Yes.
Thank you. Our next question comes from the line of Andrew Weisel with Scotiabank. Please go ahead.
Good morning, Andrew. Thanks. Good morning, everyone. Appreciate you squeezing me in late in the call here. First, just to follow-up on the transmission.
Are you able to provide an EPS sensitivity or potential impact if that RTO incentive adder were to be eliminated?
Yes. We had in our Q actually the number for our evaluation. If we lost the entire 50 basis points, It would amount to $55,000,000 to $70,000,000 pre tax. So and that's the evaluation now. Who knows what they're going to do, Because you went in the meeting thinking they may actually go up on the RTO incentive, but It remains to be seen what they decide to do, but that's the impact.
Well, that was the next thing I was going to
ask is do you see any potential of an increase Or do you think that's highly improbable at this point?
I think certainly with what transpired, We're just trying to make sure it stays the same. But if it increases, there's a lot of reasons for it to increase Because RTO participation and the adders associated with transmission, like I said, the expenses of an RTO continue to go up and up. So I think there definitely needs to be an incentive there.
Okay, great. Then just one last follow-up question on the renewables. You talked a bit about the cost savings from coal plant retirements. And I know it's early and the cost will be continuously changing hopefully downward. But from what you see today, do you expect this update to the generation stack to lower Customer bills in most cases all else equal and you mentioned something about a potential carbon policy.
Does your analysis assume some sort of federal clean energy standard? And how would it look from an affordability perspective without that? We've always had a
carbon value in our analysis from a resource planning perspective. And I think it's $15 a ton Is what we've used. In our reports, our climate report, We used 2 cases, a $15 case and a $30 case that was more aggressive. And certainly that brought more that case brought More renewables in more quickly, but that's not reflected in the plan that we've shown here. So, yes, it's certainly something that we're we will continue to look at and evaluate with the commissions.
Just to throw additional finer point on that as well. If carbon pricing is excluded from the equation, the renewable opportunity could get haircut by about 2 gigawatts. So it's not that significant, but want to throw that out there.
Yes, we're looking at this thing as a $15,000,000,000 to $20,000,000,000 investment opportunity. So It would be not much of an impact if you took out the carbon pricing, but You can't plan for anything without putting in a carbon processing these days.
Okay, great. And the affordability question, assuming the carbon is in the ballpark of what you're talking about, how would that affect those?
And we've demonstrated that with North Central. I mean you could put these projects in place. And keep in mind, we're thinking about the resiliency and reliability of the grid So there's limitations and we have to go through that process, but the ones we have in this plan we can do. And certainly When you look at the benefits of North Central, for example, it was $3,000,000,000 of benefit to the customers. And so when you have those kinds of economics in play, if you're able to run your 20 fourseven generation as more of reliability And as an insurance policy essentially and layer in as much renewables as you can, put in transmission to make sure the system continues to operate the way it Good, then it could be a pretty powerful combination to benefit customers in the future.
That's great. Thank you very much for the details. Yes.
Thank you. Our next question comes from the line of Jeremy Tonet with JPMorgan. Please go ahead.
Good morning, Jeremy. Good morning. Thanks for squeezing me in here at the end. Just wanted to touch base on Rockport, if I could, in kind of the decision tree that led to this and just wanted to see what other kind of options You were evaluating just a bit more color would be helpful there. Thanks.
Yes. So Obviously, we were looking at future requirements instead of environmental requirements on the units. And if we kept them operating longer than 2028, that would be a challenge from From an economic perspective, we didn't want to start making those kinds of investments not knowing how long the unit would act the units would actually be operational. So that was a consideration. The other as I mentioned was litigation to clear all that out to make sure we took ownership and we took control.
And then of course the value of the short term bridge that exists that gives us the flexibility to make decisions with the Indiana Commission to focus on what is the right path for that transition. So it gives us a lot of optionality, A lot of flexibility and the control. And by the way, I mean, there's 2 units there. So one we owned, one we leased. And it just made more sense for us to own both of them and make the decision of the plant as a whole and be able to adjust accordingly.
So it worked out well overall from that perspective. And like I said, it gives us a lot of optionality and flexibility. And actually at a pretty at a price that I think it was $115,000,000 So It's an opportunity for us to really pay for that degree of optionality that has considerable value.
Great. That's helpful. I'll stop there. Thanks.
Yes. Sure thing.
Hey, Tani, this is Darcy. We have time for one more question.
Great. Thank you. Our last question comes from Michael Lapides with Goldman Sachs.
Please go ahead. Michael, you snuck in there.
I snuck in at the end. Better late than never. Thank you for taking my question team. Hey Nick, You mentioned Kentucky today. You also outlined the renewable growth platform and plans for the regulated businesses.
And obviously, lots of Renewable Companies Pure Play is trading at pretty good multiples even after the recent share price weakness. Just curious, how do you think about the renewable portfolio at the G and M segment? And whether that piece of the business is truly core to AEP or whether the real growth is obviously in the regulated subsidiaries and maybe the non reg contracted renewable business could potentially be a source of funds for the parent to fund regulated growth?
Yes. So that's been a continual part of our business. Chuck gets allocated capital, AP Energy gets allocated capital And he's perfectly willing to throw it back over the fence because we make evaluations based upon his threshold, Which is commensurate with the regulated part. And also just his business is important because it keeps us in a part of like for example, we're doing a lot of projects here in Ohio directly with customers And it enables us to with customers and corporations actually enables us to be in that business. But at the same time, we're able to manage the capital such that, he can throw it back over the fence if we see a better opportunity on the regulated side.
So we have that working very well where we can make those trade offs on a continual basis. So yes, It can be a source of capital to do some of these things. And again, that lends itself to the portfolio management approach to ensure that we're putting the money in the right place at the right time. So and like I said, he's doing an incredible job with that and that organization. And the fact is they're still doing the renewable part of it, but they're also doing specific relationships with customers with microgrids and those types of applications.
So the value proposition of that business It's so important to us seeing the leading edge of what we need to be doing and making cases in our regulated business To ensure that we continue to grow from those perspectives as well. So all in all, it's working fine. But yes, the answer is yes, we can Utilize that as a source.
Got it. Thank you, Nick. Much appreciated, guys.
Okay.
Hey, Tani.
I just wanted to say thank you for joining us on today's call. As always, the IR team will be available to answer any questions you may have. If you could please give the replay information.
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