美國電力 (AEP) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power First Quarter Earnings Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Ms. Darcy Reese. Please go ahead.

Thank you, Katie. Good morning everyone and welcome to the First Quarter 2022 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 everyone to American Electric Power's First Quarter 2022 Earnings Call. I'm pleased to be able to share another strong quarter with you during which we have set a great foundation for the year with many exciting opportunities ahead. For the purposes of today's call, I will begin by providing a brief recap of our financial performance, highlighting the various refinements we have made to our strategic initiatives and financial targets since year end. I will then provide an update on our Kentucky sale process before turning to our contracted renewable asset sale and regulated renewables execution strategy and progress.

Finally, I will end with a few insights into our other ongoing regulatory activities. Building off our momentum coming out of our fourth quarter, our direction and strategy remain well on track. We continue to focus on generation fleet transformation and making investments in our energy delivery infrastructure to support decarbonization and expanded electrification while simultaneously simplifying and derisking our business profile. On the heels of reporting our strongest ever fourth quarter, we are maintaining that momentum and delivering strong results for the first quarter of 2022, with operating earnings for the first quarter coming in at $1.22 per share or $616 million.

Earlier this year, we made a number of refinements to our strategic initiatives and financial targets. We raised our 2022 operating earnings guidance range and increased our long-term earnings growth rate, and we have hit the ground running in 2022. Today, we are reaffirming 2022 full year operating earnings guidance. As a reminder, we are guiding to a range of $4.87 to $5.07 per share for 2022, with a $4.97 midpoint, and we also reaffirm our long-term earnings growth rate of 6% to 7%.

As you'll recall, we announced several significant developments in connection with last quarter's earnings. In addition to lifting our 14% to 15% FFO to debt targeted range, we announced the decision to sell all or a portion of contracted renewable assets within the unregulated business. The announcement of this strategic divestiture allowed us to recalibrate our 5-year capital plan of $38 billion with a $1.5 billion shift to transmission and the elimination of growth capital in the contracted renewables business.

We are already seeing the positive impacts of these initiatives in quarter 1, and we look forward to continue to execute in these important areas throughout the course of the year. We also expect to maintain positive momentum in our economic outlook as we work collaboratively with states to drive economic expansion in our service territory.

There is more to come on all of that, but I first want to take a step back and highlight some of the other proactive work our team has done. As macro trends continue to affect our industry and the economic landscape at large, we are focused on derisking our platform and elevating our strategy to enhance shareholder value.

For example, given lingering global supply chain issues, we are diversifying our mix of suppliers in order to reduce the impact on our capital investment plan. As a result, AEP has experienced minimal customer or business disruptions to date. With these significant initiatives underway and a track record of thinking creatively, it is truly a team effort, and we are lucky to have one of the most talented teams in the business.

Regarding Kentucky, we expect to complete the sale of Kentucky Power and AEP Kentucky Transco to Liberty in the second quarter of this year. A regulatory timeline of the sale is on Slide 7 of today's presentation. In 2021, we announced a comprehensive strategic review of our Kentucky operations, resulting in an agreement to sell those assets for $2.846 billion enterprise value.

Both parties have been steadily working to obtain the necessary approvals to complete this transaction, which is in the public interest. The Kentucky Public Service Commission hearing was held on March 28 and March 29. We know that Liberty is well positioned to serve Kentucky customers and are confident our employees in Kentucky will continue to thrive within an organization that prioritizes safety and operational excellence. Based on the statutory requirements, we continue to expect to receive a decision from the commission on the sale transfer no later than May 4.

FERC approval on the sales transfer is also in process. Earlier this week, FERC notified us of a need for more information in the 203 transfer application. This request is not unusual as FERC looks to ensure its record is complete by seeking additional information. We do not believe this request will impact the closing of the deal in the second quarter.

Once the decision is made by the state level next week, we will provide the requested information back to FERC. We'll plan to ask FERC to apply by the original approval time line to ensure Kentucky customers receive benefits from this transaction in a timely manner.

Another significant regulatory milestone for the transaction is gaining approvals on the Mitchell operating agreement, which are a condition of the final sale transfer. Both Kentucky and West Virginia are aware that updated (inaudible) operating agreement approvals are needed to put in place the commission orders on environmental compliance issued in 2021.

The Kentucky Public Service Commission hearings were held on March 1 and March 30, and the West Virginia Public Service Commission was held on April 7. Parties providing options allowing flexibility for both states to collaborate and reach a common agreement as Kentucky continues to wind down interest in Mitchell plant post-2028. We expect to receive commission decisions on the Mitchell agreements on an expedited basis in May of this year. We plan to file the related FERC application after state commission approvals.

Throughout the process, we have established a strong record of benefits of this transaction, most notably the clear and measurable customer benefits that we see.

Okay. Now moving on to the contracted renewable asset sales. During our fourth quarter earnings call in February, we announced the decision to sell all or a portion of our unregulated contracted renewables portfolio to simplify and derisk the company and allow us to focus on our regulated business.

Our portfolio consists of 1,600 megawatts of unregulated contracted renewables, the sale of which will help facilitate the investment of 16,000 megawatts of regulated renewables through 2030. In the last couple of months, we have made significant progress on this opportunity, including working with an adviser, preparing outside consultant reviews of the technical and market aspects of our portfolio and evaluating our sales strategy and timing. Interest in the sale of the portfolio has been robust. The sale provides a unique opportunity to acquire large operating wind portfolio complemented with some solar operations as well.

We expect to launch the sales process sometime during the second half of 2022, likely in the August, September time frame and can be accelerated or deaccelerated as needed. Additionally, we are pleased to announce that we have signed a term sheet to sell most of our wind and solar development portfolio, including 5 sites, which are located in Southwest Power Pool. We have also executed an agreement to sell a solar development site here in Ohio. Financial details of these upcoming sales are confidential and will not be disclosed but demonstrate our commitment toward that execution.

The reallocation of contracted renewables capital is assumed in our guidance, but utilization of proceeds has not yet reflected in guidance or our multiyear financing plan. We will seek to maximize the transaction proceeds in the sale, avoid dilution and direct the proceeds to investments in our regulated business as we continue to enhance the transmission infrastructure and move forward with our generation fleet transformation.

Looking ahead, we will continue our track record of optimizing the portfolio and reallocating capital to our regulated business, where we continue to see a meaningful long-term opportunity for growth.

AEP is making significant progress as well in our transition to a clean energy future. In fact, we already have several initiatives underway in line with our sustainability goals and through our regulated renewables execution. Details can be seen on Slides 8 and 9.

In March, we commissioned our third and final North Central Wind site, Traverse Wind Energy Center, which is the largest single wind farm built at one time in North America and one of the largest wind facilities worldwide, completing the $2 billion trifecta investment that includes Sundance and the Maverick Wind energy centers. Combined, they are providing 1,484 megawatts of clean energy to our customers in Arkansas, Louisiana and Oklahoma. North Central will save customers an estimated $3 billion in electricity costs over the next 30 years.

In March, we also issued a request for proposal at I&M for 800 megawatts of wind and 500 megawatts of solar. Additional RFPs are in process simultaneously at APCo, PSO and SWEPCO with expected in-service dates to 2024 to 2025. We expect to make a regulatory filing in the second quarter of this year related to the SWEPCO's June 2021 RFP. These are long-term investments, not just for our business and our local communities but for the global environment as well.

Though our current state of coal retirements, we are progressing towards our target of an 80% carbon emissions reduction rate by 2030 and net 0 by 2050. Achieving this goal is an integral part of our long-term strategy to prioritize and regulate investment opportunities and transition our generation portfolio. Our plans are very well thought out: continue the movement to a clean energy economy, but remain firmly grounded in the principles of resiliency, reliability and affordability while recognizing the value of a diverse portfolio of resources, particularly given today's world of energy-related volatility.

Last year, we set regulatory foundations in a series of rate cases across multiple jurisdictions. Regulated ROE as of March 31, 2022, is at a steady 9.2% as we continue to work through regulatory cases and focus on reducing authorized versus actual ROE spreads.

I&M obtained commission approval in February on our Indiana base case settlement. Oral arguments of APCo's 2020 Virginia base case appeal were held in March at the Virginia Supreme Court with an anticipated final decision this year.

We expect to see commission decisions as well on SWEPCO's rate cases this year in both Arkansas and Louisiana and look forward to keeping you that progress, too.

[Delay] the FERC. We commend the commission for moving forward with proposed reforms to transmission planning and cost allocation. First proposed rule making aligns with our goal developing a more robust, reliable and flexible grid of the future that ultimately reduces cost to customers and strengthens economic development in the communities in which we serve.

We believe many of these reforms are needed to build the infrastructure necessary to transition our generation fleet in the most efficient and cost-effective way possible and achieve our carbon reduction goals. We look forward to continuing to work collaboratively with the commission on this and any subsequent rule makings and with the RTOs on implementing any new requirements.

At the conclusion of our fourth quarter call, I told you all that AEP has been poised to make even greater headway in 2022. And I think it's fair to say, we are making good on that promise. Capitalizing on our momentum from 2021, we have continued to execute against our strategic objectives steadily and successfully. As we think about what's next for this year and beyond, we hope to further modernize our energy grid in order to supply reliable, cleaner, low-cost resources for all the communities we serve. We will also consider further asset rotation through the lens of derisking and simplification, and we'll evaluate any and all value-additive potential activities as we focus on our regulated business.

As I've said before, AEP is in a very unique position, the largest transmission system, one of the largest renewables buildout and a diverse territory to adjust from the risk of supply chain, load forecast, regulatory risks, et cetera, AEP is the very definition of consistency and opportunity. We, at AEP, as well as our shareholders and customers, hold ourselves accountable on the continual execution of all of these strategic objectives. To paraphrase a big hit by the Police, every breath you take, every move you make, every step you take, we'll be watching AEP.

And as our CFO would say, we've got this. Julie?

Thank you, Nick. Thanks, Darcy. It's good to be to you this morning. Thanks for dialing in, everyone. I'm going to walk us through our first quarter results, share some updates on our service territory load and finish with commentary on our credit metrics, liquidity as well as some thoughts on our guidance, financial targets and recap our current portfolio management activities underway.

So let's go to Slide 10, which shows the comparison of GAAP to operating earnings for the quarter. GAAP earnings for the first quarter were $1.41 per share compared to $1.16 per share in 2021. There's a reconciliation of GAAP to operating earnings on Page 16 of the presentation today.

Let's work through our quarterly operating earnings performance by segment on Slide 11. Operating earnings for the first quarter totaled $1.22 per share or $616 million compared to $1.15 per share or $571 million in 2021. Operating earnings for the Vertically Integrated Utilities were $0.59 per share, up $0.05. Favorable drivers included rate changes across multiple jurisdictions, normalized load and O&M. They were somewhat offset by increased depreciation, lower off-system sales and wholesale load.

I'd like to take a second to talk about O&M and depreciation, in particular, because of a change in accounting related to Rockport Unit 2 lease at I&M. We'll see approximately a $0.05 contribution of favorable O&M consequence, offset by $0.05 of unfavorable depreciation in each quarter of 2022, but no consequential earnings impact. And to be clear, this is entirely consistent with the 2022 guidance details we posted in our investor presentations earlier this year.

More to share on load performance here in a minute so hang with me on this. The Transmission and Distribution Utilities segment earned $0.30 per share, up $0.07 compared to last year. Favorable drivers in this segment included rate changes in Texas and Ohio, normalized load and transmission revenue. Offsetting these favorable items were unfavorable O&M and depreciation. The AEP Transmission Holdco segment contributed $0.34 per share, down $0.01 compared to last year. Investment growth was favorable by $0.03, offset by $0.02 of mainly property taxes driven by the increased investment and $0.01 of income taxes.

This is in line with the guidance that we provided to you earlier this year. You'll recall that our 2022 guidance had this segment down by $0.08 year-over-year as a result of the $0.20 of investment growth being more than offset by the annual true-up that will occur in the second quarter and some unfavorable comparisons on the tax and financing side. As you know, this segment continues to be an important part of our 6% to 7% EPS growth.

Generation & Marketing produced $0.03 per share, down $0.03 from last year. The improvement in wholesale margins was more than offset by lower retail margins and reduced generation. You may recall that storm Uri had an unfavorable impact on wholesale margins in the first quarter of 2021.

Finally, Corporate and Other was down $0.01 per share, driven by increased O&M, lower investment gains and unfavorable interest. These were offset by favorable income taxes. The lower investment gains are largely related to charge point gains that we had in the first quarter of 2021.

Turning to Slide 12. I'll provide an update on our normalized load performance for the quarter. In a general sense, the AEP service territory is extremely fertile for economic growth right now. In fact, as of the first quarter, our load has officially fully recovered from a pandemic recession and has now transitioned into the expansionary phase of this business cycle.

Starting in the upper left corner, normalized residential sales increased by 0.8% compared to the first quarter of 2021. This growth was composed of growth in both customer counts and weather normalized usage for the quarter. While results were mixed by operating company, the strongest residential growth was at the AEP service -- was in the AEP Texas service territory, which was partially influenced by the year-over-year comparison given the customer outages driven by Storm Uri in the first quarter of 2021.

A final data point to share regarding residential sales is that our first quarter sales were still 1.1% above their pre-pandemic levels over 2 years after the pandemic began. This is driven by a number of factors, including higher numbers of people who are able to work remotely that used to work in offices prior to the pandemic.

Moving to the right, weather-normalized commercial sales increased by 4.2% compared to the first quarter of 2021. The growth in commercial sales is spread across every operating company in most industries. The largest increase in commercial sales is coming from data centers, whose load was up 33% compared to last year.

In addition, we continue to see strong recovery in the sectors most impacted by the pandemic, such as hotels, schools and churches. Real estate has been booming throughout the entire pandemic. AEP's normalized commercial sales in the first quarter were 2.5% above their pre-pandemic levels, which shows that we've gone beyond recovery and are now in full expansion mode across the territory.

If I can now focus your attention on the lower left corner, you'll see that industrial sales posted another very strong quarter, up 5.6% compared to last year. Industrial sales were up at most operating companies in many of our largest sectors in the first quarter.

We expect double-digit growth in a number of key industries this quarter, including chemicals, manufacturing, oil and gas extraction, petroleum and petroleum products. We also saw robust growth in primary metals manufacturing, coal mining and food manufacturing. Having said that, first quarter industrial sales are still 1.6% behind their pre-pandemic levels. However, we have a large number of customer expansions that are expected to come on later this year and still fully expect to eclipse our pre-COVID industrial sales levels in 2022. We continue to be confident in our full year 2022 guidance for normalized retail load.

While we certainly did not anticipate the Russian invasion in Ukraine when we developed the 2022 forecast, I'd like to remind you that AEP service territory is uniquely positioned to benefit from higher energy prices given the concentration of energy production that is located throughout the AEP footprint. Energy producers in our footprint have responded to higher energy prices, which has resulted in increased economic activity throughout the service territory.

Finally, when you pull it all together in the lower right corner, you'll see that AEP's normalized retail sales increased by 3.2% for the quarter. As I mentioned earlier, our load has gone beyond recovery mode and is in full expansion mode. For the quarter, every operating company posted a higher normalized sales than last year. Furthermore, our first quarter retail sales were up -- were 0.5% above their prepandemic level. So 50 basis points above pre-pandemic levels.

To use a sports analogy, I would say our load performance in the first quarter was in the zone. There are many factors outside of our control that could influence our results. I want to stress that the positive load story we shared with you today is largely the result of intentional efforts by our employees to promote economic development as a part of our long-term strategy to strengthen the communities that we serve. We're fully aware of the increased uncertainty that exists in the macro economy. But have put in work that it takes to ensure that we continue to see growth in our service territory going forward.

So let's go over to Page 13 to check on the company's capitalization and liquidity position. On a GAAP basis, our debt-to-cap ratio increased 60 basis points from the prior quarter to 61.5%, primarily due to an increase in equity from our issuance of AEP common stock in March, which is consistent with our 2022 guidance as the $805 million -- or the $805 million of equity units we issued 3 years ago converted to equity.

Let's talk about our FFO to debt metric. Taking a look at the upper right quadrant on this page, you'll see our FFO to debt metric stands at 13.7% on both a Moody's and a GAAP basis, which is an increase of 3.8% and 3.9%, respectively, from the prior quarter. The metrics are calculated off of the 12-month rolling FFO total. So the increase in FFO to debt is mainly a result of the fact that the cash flow drag from February 2021, winter storm Uri has now dropped off the cash flow from operations calculations. This improvement has significantly narrowed the gap toward achieving our FFO to debt target range of 14% to 15%. As we stated on the last earnings call, we anticipate trending toward this target range as the year progresses.

Let's take a quick moment to visit our liquidity summary on right side of Slide 13. Our 5-year $4 billion bank revolver and 2-year $1 billion revolving credit facility support our liquidity position, which remains strong at $3.8 billion.

Switching gears, our qualified pension funding increased 1.6% during the quarter to 106.4%. The rise in interest rates that decreased planned liabilities was a primary driver for this quarter's gain in funded status.

Let's go to Slide 14. This quarter has provided a solid foundation for the rest of 2022, and we're reaffirming our operating earnings guidance range $4.87 per share to $5.07 per share. We continue to be committed to our long-term growth rate of 6% to 7% that we updated on our last earnings call. We're working through the Kentucky Power sale to Liberty and expect to close in the second quarter. And as Nick mentioned, we've signed an agreement to sell a solar development site in Ohio and have entered into a term sheet to sell 5 additional wind and solar sites in SPP on the unregulated side of the business.

Additionally, we're preparing to market the unregulated contracted renewables portfolio in the second half of this year and are receiving a significant amount of interest on this. Beyond the portfolio optimization, activity is underway. We remain focused on the fundamentals, which are executing on the regulated renewables plan, disciplined capital allocation and securing positive regulatory outcomes.

Before we break, I want to mention one last thing before we get to your questions. And that's to remind everyone that while we have not yet set the date, we will be doing an investor conference sometime in late September or early fall time frame to give you a broader AEP update.

We surely do appreciate your time and attention today. With that, I'm going to ask the operator to open the call so we can hear what's on your mind and to answer the questions that you have.

(Operator Instructions) The first question comes from Julien Dumoulin-Smith at Bank of America.

Maybe let's start with this. Just in terms of the timing of the renewable sale here, can you talk a little bit about how the [AD/CVD] stuff could impact that? I mean is that (inaudible) on just your sense of the ability to get it done today? Just any comments on that and/or implications. Again, I assume (inaudible) separately and related, how do you think about the timing of proceeds here? Admittedly, this is a little bit faster than what we had perceived. Just talk about the proceeds from Liberty and this coming in, perhaps a little bit faster than perhaps the equity issuances in your forward plan would otherwise suggest.

Yes, Julien. So most of our assets are wind assets. So -- and as we go forward with the transactions, we don't see any issues with that. And as a matter of fact, even on the regulated side, the timing of which we actually need assets for solar and that kind of thing comes later. So it's a '24, '25 time frame. So on both sides of the ledger, we're in good shape from that perspective. And these assets, obviously, we're going to try to time it appropriately as we talked about the large portion of the 1.6 gigawatts or the 1,600 megawatts. They will be marketed in the third quarter.

And I'd say we're getting very robust -- I miss very robust answer on -- really on both sides of strategics and in terms of any type of private equity, that kind of thing. So it's really -- to us, the process will continue, and there's nothing stopping it. So we're in good shape from that perspective. And then your second part of your question, Julia, did you have that part?

Yes. And Julien, if I'm not answering this directly or if you need a little more granularity, specifically as it relates to dollar flows associated with any type of transaction that we enter into.

So today, you're going to talk about the fact that we have a term sheet in place for 5 development sites. Those dollars are real small. And so we'll see those show up eventually, probably second quarter or third quarter in operating earnings, but obviously not even disclosing those, not a needle mover for us and not going to change the earnings guidance or anything like that, so not to worry on that front.

And then as it relates specifically to the broader unregulated renewables contracted portfolio. We'll start the marketing effort in the second half of this year. Obviously, we'll come to you as we have a little more detail to share. We do have an upcoming investor conference. So stay tuned for that. And then we'll be able to navigate any potential proceeds from transactions. As you know, we don't even know exactly how that's ultimately going to look. Do we sell them as an entire portfolio? Do we sell them in different pieces? So that's to be determined so stand by on that.

And then obviously, we continue to work through the Kentucky process. We had expected to close that; we're trending towards the second quarter. As Nick mentioned and I mentioned in my opening remarks, that's already reflected as it relates to Kentucky bringing dollars in our plan. You may recall that we eliminated about $1.4 billion of equity that we originally had in our 2022 guidance.

So I think we're moving on track. Let me know if there's something I didn't address there.

Yes. And since we're really moving on the universal scale assets. They're project specific. So we can go through that process and time it any way that we wish to do it. So that's -- and actually, their action will move pretty quickly. So we'll go through that process and we'll define that better and that probably be part of our Analyst Day discussion.

Speaking of Analyst Day discussion, just super quick, if I can, an important point. How do you think about just approaching your customers directly with this energy price environment, doing well on industrial in C&I sales growth? Presumably your customers are interested. We heard this from Entergy. Can you perhaps elaborate how you're thinking about that opportunity here in this elevated environment as a further angle to your renewable aspiration?

Well, certainly, the renewables are a key part of being able to really mitigate cost to consumers going forward. So from an industrial standpoint and a manufacturing standpoint, we're going to see a lot of that movement to our territory because when you think about onshoring, when you think about strategic reviews of supply chain actions that need to occur within this country, that's going to occur within our territory. So our focus will be -- and I think from the renewable side, particularly the regulator renewable side to be able to continue to progress on that is a benefit because a clear benefit for customers and certainly North Central showed that.

But I think from an industrial standpoint, it's going to look very good for us. We have the resources for capacity. And when you layer in the renewables for the incremental needs of capacity, it's really the best of both worlds to provide reliable, secure supply to our industrials and really at a competitive price. So I think we're in great shape from that perspective going forward.

Next, we'll go to Steve Fleishman with Wolfe Research.

So just -- just on the Kentucky process, there does seem to be a decent amount of people that want different things on the mutual operating agreement. Can you just talk to your confidence in resolving those issues by the second quarter and just maybe frame the issues and how you think they can get resolved?

Yes, obviously, there's been a lot of focus on the Mitchell agreements themselves. And we've certainly tried to accommodate the multiple parties that are involved and made it as flexible as possible. And obviously, the issue is 2028 and how you reconcile that going forward. And from a state perspective, I think we're in a good place because it does provide the flexibility to find whatever value proposition there is at that point. And there also is optionality around the ability to potentially separate the units to allow each individual commission to make their own decisions relative to these units. So I think it's positioned very well.

There's been a lot of dialogue, a lot of settlement discussions associated with that. And a lot of -- of course, there's a lot of varied opinions but at the end of the day, we have to do this because we have 2 commissions that are going in different directions relative to the life of the Mitchell plant. And I think what we've arrived to is a very credible balanced view that allows the optionality that the parties need going forward.

So -- and of course, we certainly will continue to focus on the ELG and CCR expense associated with that in the appropriate matter. And that will improve the optionality going forward to where a decision is going to be made at the appropriate time. But I would say we're in a good place, and we expect the Mitchell approvals to occur very quickly after the transaction approval.

Okay. Great. And then just you've been pretty good and right about federal, the BBB legislation kind of to get done or whatever you want to call it these days. Just curious, if you have any latest thoughts and updates there? Anything changed?

I'll say I'll say this. Certainly, Manchin -- Senator Manchin is at the center of all this. But there also is, I think, from the original infrastructure package, a group of senators who are coming together to try to focus on some pretty substantial issues. And really, when you think about Senator Manchin being on both the Armed Services Committee and the Energy Committee and knowing the Ukraine situation and the focus on energy as it relates to it. I think you're going to see at least an attempt and a lot of focus on how to support natural gas, LNG, expansion for pipeline capability. And then, of course, he's also talked about the climate provisions. And I think there'll be a lot of interest too in the technologies of the hydrogen hubs and particularly, in West Virginia.

And then there's obviously Murkowski, Barrasso. There's others that are engaging in that discussion. The ITC, PTC, the climate provisions that the industry is looking for, I think there's some bipartisan level of support for that.

So the question really is, can they get together before -- really before Memorial Day. And it they're still talking after Memorial Day, it's probably a positive indication. My own personal belief is if it's not successful, we'll probably see an 11th hour type of at the end of the year relative to ITCs and PTCs and perhaps even expansion of those. So I think you'll see an attempt at a smaller bill. You'll still get hung up with the pay-fors, particularly with Manchin wanting to get it paid for. Sinema is obviously a different view on that, so, but there's probably some element of recognition that something has to be done to have this country focus on the security of supply, not only for ourselves, but the Ukraine situation has demonstrated, but also for Europe and the rest of the world.

So that's probably the impetus of getting something done, and it'll define the framework of whether something gets done or not. If it doesn't, after the election, I think, like I said, it's 11th hour or perhaps the [DRF] and Treasury make adjustments based upon what's happened relative to supply chain activity. So I think that's -- that would be my view of where things are going.

Next, we will go to Shar Pourreza with Guggenheim Partners.

I just had a question on sort of the renewable comments. And as we're looking kind of at your current RFPs that are in progress, there's sort of a fairly healthy mix between wind and solar and storage. As we're thinking about kind of the upcoming '21-'22 RFPs, how are you sort of thinking about the potential tail risks around solar with circumvention investigation, there's pricing uncertainties, you have a lot of constraints. I guess, these tail risks impact the mix for '21 and '22. And do you see any risk to the $8.2 billion you've allocated to renewables? I mean we've already seen 2 peers provide some warnings around this and 1 this morning as well as delays. So I'm just kind of curious how this fits in with your plan. .

Yes. I don't see a lot of risk. And the reason why is because ours is more through 2030. A lot of these projects will come into play in the '24, '25 time frame. So we have time for -- not only for the reviews of solar that's occurring with the administration, but also in terms of the supply chain activities to level out somewhat before we're actually out back in the market, acquiring these types of resources. So we have a little bit of time, I think probably by first quarter next year, we want to see things start to levelize so that we can get that process rolling.

In the meantime, we got the resource planning filings that are being made. And keep in mind, too, I made this point originally, these plans are really fungible from year to year based upon what we see in terms of the value proposition of each type of resources. So a lot of it's wind, some of it's solar, solar picks up in the later years from a resource plan perspective. So there's time for the solar thing to get resolved.

But even if it doesn't, that says there's probably going to be more wind or other types of resources that are put in place to support these objectives because remember, they're driven by capacity requirements and we'll continue to evaluate that process. And I'll take a step further to you on this is we've always said that if something were to happen relative to the renewables build-out, we've got transmission. And transmission, we can soak up a lot of capital from that perspective because of the focus on providing better customer service, more resilient and reliable grid. So we have that optionality, but I'm not even there yet. I think we're -- we may be -- because the $8.2 billion we have in there assumes a certain percentage of those types of resources that we would own. That could be higher, transmission could be higher. So we have optionality around all of that. So I'm not concerned from an AEP perspective.

For sure, the current gas price environment helps the economic argument?

Absolutely. Absolutely. Because the $3 billion for North Central was done on a previous gas forecast. And if you look at that today, it's probably much larger. I think it's really looking good for customers.

Got it. Got it. And just from a financing perspective, as we're thinking about incremental spending that's going to come from these future RFPs. Can you just be a little bit more specific on your prepared comments around further asset sales? I mean you like all your [opcos] that remain, I guess, what could a structure look like? What remains?

Yes. So -- and the point I'm making is, obviously, we're going through the process step by step with the unregulated contract and renewables part. So there's different parts of that business. And then, of course, just I think Kentucky was the first shot at it. There's a lot of optimization that can occur. We'll just have to evaluate against what the opportunities look like.

And if we're -- if we have -- I mean if we have underperforming utilities that don't figure properly into the clean energy transformation where we're actually attracting capital and being able to provide higher levels of return, then we have to look at it.

So I'm just saying that, that process will continue regardless. Not saying -- and actually, we're already too deep and probably the #2 deep in terms of sale of Kentucky, we still have to get across and then the contracted renewables, we still get across.

And then we'll see where we're at that point based upon what we're getting in terms of the feedback of the RFPs because when these RFPs are going to ultimately get approved, they will know exactly what the ownership looks like, what the financial requirements are, and we'll do what we've always done. We'll make sure that we're going through this process, making -- to invest in the right places. And we will look at the portfolio and see what makes sense and what doesn't make sense for us to continue to optimize that for shareholder benefit.

And then just one quick follow-up from Steve's question is, obviously, we appreciate the confidence around the operating agreement in the Kentucky sale and reiterating the timing of the deal. But just to bookend it. Assuming there's maybe an adverse ruling or something that's not palatable, can you just remind us, I think does Algonquin have a material adverse change clause? Is there a time frame when they can walk away from the deal as we're just thinking about a bookend?

It's difficult to have those kinds of provisions in that kind of agreement. But I can tell you that we and Algonquin are arm in arm getting this thing across the finish line. They very much want to own this property. And they've actually stepped up in a considerable way to provide good customer benefits to make this transaction attractive to the policy makers and to the customers.

So -- and of course, I think a seminal event here, obviously, is May 4, where the commission will come out with an order. And we will look at that order. We'll make determinations on what conditions are in place. And at that point in time, we'll make decisions on what it looks like. But I think from the public interest standpoint, the things that the commission ought to be looking at, this transaction is very, very good for Kentucky customers.

And if there are -- I think everyone has to be sort of level-headed about all this because when you get through this process, you actually have a time frame now for customer benefits to occur, substantial benefits. And that's really a driver to get this thing done as quickly as possible, particularly in this energy-related environment. So I really don't anticipate that happening, but if it did, we'll do what we always do. We'll figure out what the options are and what the possibilities are and go from there. But right now, we're not planning on that.

And next, we'll go to the line of Jeremy Tonet with JPMorgan.

I just wanted to pivot a little bit towards transmission here. And given the MISO planning makes it a little bit outside of you guys footprint, but also as you mentioned, the FERC transmission planning and AEP stepping up CapEx towards transmission here. Just wondering if you could dive in a little bit more as far as what -- which specific areas projects might materialize? Or any other color you could provide on specific transmission opportunities, incremental at this point?

Well, typically, and we've done this, we actually plan for 130% of the budget for transmission. So we have 30% more projects that are occurring that we already have planned, scoped, ready to go. So layering in these multiple projects is a way for us to not only -- as opportunities arrive, as the metrics for financials continue to improve, we can layer in more of that. We can adjust to that based on projects that go one way or another.

And then also recently, we were awarded Texas, a large project in Texas that's also incremental. So it was like $1.3 billion or so. But those are the kinds of things that will come to pass. And we have every bit of opportunity related to transmission, not only within our own system, but also in terms of the incremental systems around us.

And that's why -- and you asked about FERC and transmission, FERC, obviously, is taking the right step relative to long-term planning, getting the framework for a long-term planning put in place. That's an important part of the process to speed up some of the planning aspects to ensure that we are making the right investments at the right places. We continue, and I think FERC will continue to look at even in parallel, these issues of cost allocation, of even the incentive mechanism, but also in terms of interregional planning, which AEP will bode well in terms of that because just about everyone interfaces with us.

So as you look at some of these aspects, the more renewables that are needed, certainly, the more retirements that are occurring across RTOs is all going to bode well for transmission investment. And we -- what we see today is not what we're going to see tomorrow. And if FERC is doing the right thing, which we think they are, it's going to bolster the ability for us to have a more consistent congruent clean energy type system across this nation, and you can't do that without AEP.

Got it. And just shifting gears towards O&M. Just wondering what trends you're seeing there? It looked like it was a $0.05 benefit in Vertically Integrated, a little bit of a headwind in Transmission & Distribution. I'm just wondering if you could dive in a little bit more as far as what different trends you're seeing in O&M across the business. .

Yes. Yes, happy to, Jeremy, this is Julie. I didn't call specifically out the O&M trend in Vertically Integrated Utilities. There's a little bit of flipping and switching going on between O&M and depreciation associated with the Rockport Unit 2 lease. That's included in that 2022 guidance that we had provided to you back in February. We updated that page for you, so entirely consistent.

Yes, and we're absolutely watching O&M as we continue to navigate inflationary pressures, et cetera. At this point, I would tell you, I think we're right in line with where we thought we'd be. So we're keeping our fingers crossed. And the team is working like heck to make sure that we've got supply chain and supply chain is being addressed, et cetera. But at this point, that guidance that we gave to you stands pat. So nothing new to report other than the fact that the team is working really hard to make sure that those numbers come in, in line. To the extent that we have any new developments, we'll surely keep you apprised.

And next, we'll go to Durgesh Chopra with Evercore ISI.

Congrats. This is (inaudible) here. Most of my questions have been asked and answered. I just had a quick clarification as it relates to the Kentucky sale. The -- May 4 is when we get the order or transfer in control. Do we need to get the Mitchell operating plan agreement before then? Or how does that play into the May 4 order?

No, that will likely come after, shortly thereafter. And the way we look at it is, obviously, you want the transfer agreement done. But as far as the Mitchell agreement approval, we expect that to occur shortly thereafter with both commissions because it's an important aspect of it and something I think that really helps for the transaction side as well.

I understand. So they can actually issue an order, the Kentucky Commission can before actually -- on the transfer before resolving the Mitchell sort of ongoing decrease of different things?

That's right. That's right.

And next, we will go to Sophie Karp with KeyBanc.

I have a couple of questions here. So first on the loan growth, right, obviously, very healthy numbers here, above other industrial regions in the country, probably at this point. I'm not sure if 2 quarters is a trend. But let's say, how long do you need to see those numbers in this range that it would be enough to inform maybe your reset in the long term expectations for what the load should be? Does that make sense?

Yes, that's a great question because you're right. 2 quarters doesn't make a trend. But when you look at the economy within our service territory, we're seeing some very positive indicators for continued expansion and continued economic development. We are -- our economic development people are extremely busy with multiple opportunities that are coming throughout our territory, actually. And so we look at that, we look at the -- and sort of -- if you were to look at our pipeline of potential opportunities, it is extremely robust, and that gives us confidence in terms of where we think the economy is going to continue to go within our service territory.

And of course, we don't see any end to the work-from-home environment. So we're feeling much better about the prospects of a more robust residential side of things. And then on the industrial, like I said, the onshoring, the security aspects, the energy play within our service territory, the other aspects of what's going on within the territory with chemicals and manufacturing and so forth, that pace has picked up markedly with expansions and new developments. And some of them are still years away like the [NTL] manufacturing here in here in Ohio in our territory.

It's substantial. There'll be 20 to 40 more companies associated with that. It will be locations. So you see those types of prerequisites that are being put in place that gives us a lot of positive views about where we think the economy is going. We'll watch it. We'll continue to evaluate it. If we go through third quarter, see the same thing and the fourth quarter, the same thing, then you'll probably see some adjusting going on relative to the 2023 forecast. But that's -- our load guy will have to tell us that. He's very objective and he's a professor at one of the universities and he -- usually, he's -- let me put it this way, he's probably more optimistic now than I've ever seen him, and that's a good thing.

If I can just jump in there with a finer point, too, as well. And so as I made comments in my opening remarks, we are still about 1.6% behind pre-pandemic levels on the industrial side of the house. But as I mentioned and as Nick mentioned, we do see expansions that are going to allow us to not only get past that 1.6%, but to go beyond that. So we do expect to be beyond the pre-pandemic levels. And as a matter of fact, what we've seen so far this year in the first quarter is that 6 of our top 10 sectors were up. So that's a good indication. And then looking forward, we expect to see strong growth in oil and gas as new LNG operations ramp up in Texas, and that began a few quarters back. So we're going to start to see the fruits of that efforts as well.

But stay tuned, as you know, we typically -- if we're going to revise guidance, we've historically done it once we get past our peak season, which is summer. But to be perfectly candid, we're looking at this constantly. So we will be back to you if there's anything that requires us to get new information in front of you because we definitely want to take advantage of that.

Perfect. My other question is on the (inaudible), not to get to that core, I guess. But I appreciate the fact that the projects are expected to be commissioned in '24, '25 time frame, which is a couple of years away to sort out the physical disruption of the equipment availability, et cetera. In terms of pricing, what should be -- the people who bid into those (inaudible), what you think they should be (inaudible) in terms of prices. Does that make it difficult, the volatility in the pricing of equipment, particularly solar and unpredictability of where the solar market or storage market might be a year from now. Does it make, I guess, the process more complicated?

Yes. I think it will make it more complicated, but not insurmountable because whatever increases you may see from a solar perspective, the overall project benefits will still be positive. Now it may change the relationship between wind and solar in the integrated resource plan. Solar may come later than what we thought because, if wind continues to progress in our resource plan, a lot of it was wind to start and then eventually as it was based on pricing and everything else, solar would start to pick up and at some point, overcome the wind asset, and then you move into other technologies. That condition may change based on that.

But you also -- I mean you'll probably see that in the framework of increased gas prices, too. So really, the renewables will be relative to each other, not in terms of relative to whether they'll get done or not. So -- and I really think we'll be in good shape from that perspective.

The other part, too, is that when you look at the other resources, really what you're doing is you're putting in renewables and you're also layering in some natural gas in the plan to really give a 24/7 supply. Natural gas also is a placeholder for other types of resources, whether it's hydrogen, whether it's smart reactors or whatever that comes up out with new technologies. And the grid optimization itself will be a major part of that as well with transmission. So there's bit of multitude of answers there that will occur. But yes, you're right, you would suspect solar. There will be some short-term perturbation from an increase perspective that we'll have to deal with. But in the overall scheme of things, when you look out long term, it will still be positive.

And our last question comes from Michael Lapides with Goldman Sachs.

Nick, I have 2 and they're a little bit unrelated. I'm going to the appendices of your slide deck. I'm looking at what you used to call kind of your -- I don't know, the money chart, the ROE chart for trailing 12 month (inaudible)

The equalizer chart.

The equalizer chart. And one of the things that stands out is Public Service Oklahoma. And just curious, if you can talk a little bit about PSO and a little bit about maybe SWEPCO and APCo, where the earned ROEs are a decent bit below 8%. And just kind of how do you think about the trajectory of "fixing" the split between earned and authorized?

Yes. So at SWEPCO, we have rate cases there in 2 of the jurisdictions and PSO, we will have a rate case as well. And -- but keep in mind, too, we just brought in all the renewables in play, particularly a large chunk of it for PSO and SWEPCO. So that's now -- that's now rolling through rates. And so we expect that to continue to pick up. Those are -- and really, when you look at the industrial and manufacturing economic development part of what's going on in those jurisdictions, they're still very positive. So -- and of course, we continue to invest heavily in those jurisdictions. So -- and that's why we have an equalizer chart that some will appear lower until we file rate cases and when the investment changes itself. So we're not concerned by that at this point. And actually, we see PSO and the SWEPCO jurisdictions with Arkansas, Louisiana, in particular, very favorable.

Got it. Okay. And then one follow-up, and this may be just a (inaudible) on what was in original guidance. But just curious, for the Transmission segment, how much do you think noticing that [stock's] even down a little bit on net income and EPS perspective year-over-year for the first quarter? Can you remind me what you think the earnings growth trajectory is for just the Transmission segment in '22 relative to '21 and kind of the drivers behind that?

Julie?

Yes. And so Michael, I don't have my guidance sheet in front of me for 2022. It's in our presentation that we put out there in our fourth quarter call. But effectively, and actually, somebody is going to hand it to me. But effectively, what we were anticipating was that year-over-year, we'd be off about $0.08, and that was driven by investment growth being up $0.12. And I mentioned this actually in my opening comments as well. And then we had a true up that would occur and we knew that was going to be embedded. That's why we have it in the guidance, that's associated with the...

It was positive the previous year.

So it's flipping back and forth. So we had 2 reasons for that true up. I mean we had spent just a little bit under our budget for the prior year. And as you know, we've got forward-looking rates, so that's a catch-up there. And then we had higher load. So we had catch up there, too. So we did a little bit of a double counting there. But that's why we had the $0.11 reduction in that true up.

And then we had other financing and income taxes that kind of brought that number back down to flip it to a negative $0.08. So in aggregate, for 2022, we assumed that we'd have about $1.27 from that particular segment, again, driven by investment growth, offset by a couple of these other bucket items that I threw out there. We are on that trajectory. And that's why I specifically called that out in my opening comments because if I was trying to model this, that's exactly what I'd be asking.

So then (inaudible) would be more into the year?

It's -- I guess, it's very fair enough. We're a little short on the first quarter -- but yes, I would just expect that we'll continue to see transmission investment, continue to plug along through the remainder of the year. At this point, we don't have any changes as it relates to that specific guidance. And we have it out there year by year in our guidance forecast and assumptions pages in our traditional Investor Relations materials. Happy to walk through it with you offline, if you'd like to do that, too.

Thank you for joining us on today's call. As always, the IR team will be available to answer any additional questions you may have. Katie, would you please give the replay information.

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