American Electric Power (AEP) Q4 2018 Earnings Conference Call Transcript

American Electric Power (AEP 0.45%)
Q4 2018 Earnings Conference Call
Jan. 24, 2019 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power fourth-quarter 2018 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would like to now turn the conference over to our host, Managing Director of Investor Relations Bette Jo Rozsa. Please go ahead.

Bette Jo Rozsa -- Managing Director of Investor Relations

Thank you, Selena. Good morning, everyone, and welcome to the fourth-quarter 2018 earnings call for American Electric Power. Thank you for taking the time to join us today. Our earnings release, presentation slides and related financial information are available on our website at aep.com.

Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Our presentation also includes references to non-GAAP financial information.

Please refer to the reconciliation of the applicable GAAP measures provided in the appendix of today's presentation. Joining me this morning for opening remarks are Nick Akins, our chairman, president and chief executive officer; and Brian Tierney, our chief financial officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Nick Akins -- Chairman, President and Chief Executive Officer

OK. Thanks, Bette Jo. Good morning, everyone, and thank you for joining us today for AEP's fourth-quarter 2018 earnings call. As we move into the new year and look back at 2018, we are pleased to report solid earnings for the quarter and for the year.

Favorable weather continued into the fourth quarter, with the economy remaining healthy albeit tempered later in the year by the negative impacts of trade tariffs issues and the strong dollar. With that said, 2018 was the strongest for normalized load growth since 2011. We continue to see customer counts pick up and load growth continue and, primarily, the oil and gas sectors and residential sales growth as well. Overall good, but we'll keep a close watch on the sector growth in the economy and the customer load growth makeup.

As you all know, we earlier, during third-quarter 2018, revised our guidance for operating earnings from $3.75 to $3.95 per share to $3.88 to $3.98 per share. It came in for the year solidly in the upper end of the revised guidance at $3.95 per share. We're very pleased with how our employees continue to work to provide a better customer experience while being dependably consistent to our shareholders on delivering these results. 2018 was clearly -- has been a great year, but I am even more pleased with the track record over the last eight years of what we have achieved.

Brian and I and the rest of the team take this very personally and see this as one of the hallmarks of the emerging brand of AEP. So let's take a look at the actual numbers for 2018. Starting with the financial performance for the fourth quarter. We came in with GAAP earnings of $0.74 per share versus $0.81 per share in 2017 and operating earnings of $0.72 per share versus $0.85 per share in 2017.

This brought the year-to-date 2018 total GAAP earnings to $3.90 per share versus $3.89 per share in 2017 and year-to-date 2018 total operating earnings to $3.95 per share versus $3.68 per share in 2017. The difference between the GAAP and the operating earnings primarily being generation plant-related impairments and tax adjustments. We also concluded rate cases in five states. It was a pretty heavy year from that perspective.

Indiana, Michigan, Kentucky, Oklahoma and Texas. AEP also filed rate cases in two states, West Virginia and Oklahoma, which will conclude early this year. Tax reform related activities were also major regulatory undertakings in the AEP state jurisdiction as well. All are proceeding well, and orders generally ranging from primarily excess unprotected ADIT refunds being amortized over various periods or applied against depreciation or various riders.

Almost all of the states have concluded orders reflecting these adjustments, and we do not expect any additional impacts during 2019. Moreover, even with the headwinds described earlier and an increasing interest rate environment, AEP continues to outperform the S&P 500 Electric Utilities Index and the S&P 500 over the one-year, three-year and five-year periods. Again, as I said last year at this time, the very definition of a premium regulated utility. So a great performance in the past, but in recognition of one of this year's Rock Hall of Fame inductees, Janet Jackson, and the title of one of her songs, What Have You Done For Me Lately, let's talk about what we see in 2019.

AEP's operating earnings per share guidance range for 2019 is $4 to $4.20 per share. As we had said during EEI Financial last November and continue to say with the capital plan we have outlined for the next five years, including $6.5 billion in 2019, our focus on disciplined capital allocation among our businesses and additional opportunities to grow renewables beyond our financial plan, we would be very disappointed to not ultimately be in the upper range of our 5% to 7% growth rate. Additionally, I will reiterate the regulated renewables opportunities represented by the various integrated resource plans filed in our state jurisdictions are not included in our capital forecast, so upside potential certainly exist. We also continue to work to bend the O&M curve through efficiencies, process automation and digitization as well as implement technologies to drive efficiencies while improving the customer experience.

Regarding the renewables opportunities, we have filed integrated resource plans and RFPs with all of the SWEPCO and PSO state jurisdictions representing up to 2,200 megawatts of wind resources. On March 1, there's a new focus on the ownership of these facilities, primarily due to factors such as balance sheet optimization, scalability opportunities, deliverability and various other risks versus the use of PPAs. We will file the results of the RFP process in August, and each state regulatory circumstance will determine the path forward. Our view is that all construction will be completed by the end of 2021, thereby taking advantage of the 80% PTC value and contribute to earnings starting in 2022.

The Ohio 400-megawatt solar review process continues, which is part of the 900 megawatts renewables contemplated for AEP Ohio. Hearings are continuing this week into next week regarding the question of need for these facilities, really focused on a strict definition based on capacity or other broader stated issues regarding renewables, job creation, state economic development, which Governor DeWine is very interested in, and others. It is interesting to note low-income customers support us in this case because of the accessibility of renewable resources that would not otherwise be available. This position goes directly to the message that utilities are inherently equipped to provide the scale to reduce costs and the ability to provide universal access to these types of resources and technologies.

After the hearings, we will continue to push this process forward to resolve this important question for Ohio. As far as rate cases are concerned, we contemplate -- we completed a heavy load of rate cases in 2018, as I mentioned earlier, in the five states. And we await the finalization of the already filed West Virginia and Oklahoma rate cases soon this year. We will also be filing rate cases in Arkansas and Texas soon as well.

Regarding the West Virginia rate case, we have already filed a settlement agreement among the major parties, including the staff that is effective in March, so we should get an order soon from the commission. Regarding Oklahoma, as you all know, this is our third try to receive a positive outcome in Oklahoma, where we have been locally underachieving from a financial viewpoint while providing excellent customer satisfaction and operational performance. Interveners and staff testimony has been filed, and we believe our tenor of where we stand at this point is even keeled with some bright spots of at least recognizing while perhaps concerned with the concept of performance-based ratemaking for various reasons, there may be options for distribution riders for forward test years that could alleviate the pressure of regulatory lag. The ROEs filed by the parties were slightly higher than the proposals from last -- the last case we went through but are still among the lowest in the nation.

Is Oklahoma really open for business and economic development as the new Oklahoma governor expresses? We'll find out. We are always open to settlement discussions with the parties to resolve these important issues, but we have a long way to go. And no doubt, it will come down to the Oklahoma Corporation Commission making the ultimate call. I would ask them as our referee to make the right call and not be like the NFC championship game.

This is important from the perspective of the integrity of the regulatory process in Oklahoma, the help of PSO and its ability to invest in the state and from an economic-development standpoint that concerns there's significant AEP presence; not PSO, but AEP of over 600 employees centralized in Tulsa. We expect interim rates in Oklahoma to be in place in April and an order from the commission soon thereafter. So now I'll turn it over to the equalizer chart and talk about some of the state actions here. Overall, the regulated operations ROE is currently 9.7% versus 10.1% last quarter.

I'll remind you that we generally project the ROE for our regulated segments combined to be in the 9.5% to 10% range. The primary reason for the slight decline from quarter 4 versus quarter 3 was the increase in O&M in fourth quarter this year versus the lower spend as we had very tempered weather last year in the fourth quarter. So some adjustments were made there. As far as AEP Ohio is concerned, the ROE for AEP Ohio at the end of the fourth-quarter 2018 was 14.5%.

The primary drivers, obviously, continue to be some of the adjustments that were made previously, the RSRs, the fuel, the PIRR, those kinds of adjustments that are going to roll off by the end of -- some rolled off by the end of last year, and some will roll off toward the middle part of this year. We expect to see the ROEs come closer to the authorized range as we go forward. APCo. The ROE for APCo at the end of the fourth-quarter 2018 was 9.4% compared to 9.9% at the end of third quarter.

APCo's changing ROE from third quarter is primarily attributable to higher storm restoration expense during the fourth quarter and a tax true-up. And again, I will remind you there's a settlement agreement that will become effective in March 2019. In Virginia, APCo's first triennial review is in 2020 and will -- would cover the 2017 to 2019 periods. For the first triennial case and for rate adjustment clauses in the period of December 2018 to November 2020, the Virginia Corporation Commission authorized the 9.42% ROE, which will be the reference going into the period to determine whether APCo's Virginia earnings for the three-year period are within the allowed range.

The approved ROE for West Virginia is 9.75% right now. In Kentucky, the ROE for Kentucky at the end of fourth quarter was 9% compared to 9.2% at the end of third quarter. Kentucky Power continued to perform well in 2018 from a 5.1% ROE at the end of 2017 to the 9% ROE at the end of 2018. So great progress in Kentucky.

I&M. The ROE at I&M at the end of the fourth quarter was 11.4% versus 12% in third quarter. I&M posted strong results in 2018, primarily driven by favorable weather. This, with an O&M spending and onetime true-ups associated with the regulatory items.

Favorable rate reviews in both Indiana and Michigan also contributed to the strong year. And then as far as PSO is concerned, the ROE we've talked about previously is 6.9% versus 7.7% at the end of third quarter. PSO's ROE continues to improve over last year, which was 5.92%, but it was slightly down in the fourth quarter, mainly due to unfavorable normalized retail margins. However, the ROE continues to be challenged, primarily because of ongoing regulatory lag, and as you know, we have a rate case filed there to resolve some of those issues.

SWEPCO, their ROE at the end of fourth quarter was 6.5% versus 7.4% at the end of third quarter. Primary reason for the decrease in the ROE is the impact of the most recent Texas rate case. The company recorded $31 million in December 2017 that related back to an implementation date of May 2017. SWEPCO's ROE continues to be affected by the Arkansas share of the Turk plant that's not in retail rates.

This impacts ROE by about 135 basis points. SWEPCO also had contracts expire with certain wholesale customers during the period as well, so that had an effect. We plan to file an Arkansas base rate case this year, so we'll continue with that to try to address SWEPCO's issues. AEP Texas at the end of the fourth quarter was 8.5% versus 8.8% at the end of third quarter.

While earnings have grown year-over-year, the reason for the declining ROE is due to lag associated with the timing of annual filings as we continue to make significant capital investments, along with some timing-related to O&M spend. Favorable regulatory treatment has allowed us to file annual DCRF and biennial TCOS filings, but the fast growth in rate base and associated property taxes and depreciation has made lag a more significant factor, so we continue to invest heavily down there. AEP Transmission Holdco. The ROE for Transmission at the end of fourth quarter was 10% versus 10.4% in third quarter, and it's primarily lower in the third quarter due to differences between actual taxes and equity balances versus projected taxes and equity balances filed in our former rate revenue applications.

This difference will be recognized in our June 2019 formula rate true-up. So all in all, still within the range we had talked about previously, the 9.5% to 10%. We expect to continue in that range, and we also expect continual improvement in the ones that are hanging a little bit lower. So as we move forward into 2019, we are intent on building upon a tremendous track record of delivering earnings well within our guidance range and, in fact, in the last six years, have exceeded the midpoint of our guidance range each and every year.

Borrowing the lyrics from another of this year's Rock Hall of Fame inductees, Def Leppard, from the song Hysteria, our consistency and quality of delivering positive financial and operational results, it's such a magical mysteria. When you get that feeling, better start believing that AEP is, in fact, the premium regulated utility. I have two scores to settle real quickly. At Noz, I hope you're having a great day, and Scott, I need more Cow Belle.

Brian?

Brian Tierney -- Chief Financial Officer

Thank you, Nick, and good morning, everyone. I'll take us through the fourth-quarter and year-to-date financial results, focusing primarily on year to date; provide some insight on load in the economy; review our balance sheet, liquidity and pensions; and finish with a review of our outlook for 2019. Let's begin on Slide 7, which shows that operating earnings for the fourth quarter were $0.72 per share or $354 million compared to $0.85 per share or $420 million in 2017. Most of this year-over-year variance was expected and came from higher O&M as we reduced spending in 2017 in response to that year's unfavorable weather.

All the detail by segment is shown in the boxes on the chart, but the change in unregulated businesses was driven by higher O&M and decreased load, more than offsetting the return on incremental investment to serve our customers. The Generation & Marketing segment produced operating earnings of $0.07 per share, up $0.02 from last year, due to higher energy margins and favorable income taxes. Corporate and Other was down $0.10 due to higher O&M interest and income tax expenses. Turning to Slide 8, we will review the year-to-date comparison in more detail.

Our annual operating earnings for 2018 was $3.95 per share or $1.9 billion compared to $3.68 per share or $1.8 billion in 2017. This difference can primarily be attributed to favorable weather and recovery of incremental investment, partially offset by higher O&M as we reduced spending in 2017. Our regulated segments experienced growth for the year. And as expected, our competitive Generation & Marketing business was down due to last year's asset sales.

Looking at the earning drivers by segment. Operating earnings for Vertically Integrated Utilities were $2 per share, up $0.36, with the single largest driver being weather, which added $0.33. Looking at total degree days. 2018 was the highest in the last 30 years while 2017 ranked 29th.

Successful implementation of rate changes added another $0.26. Other favorable items included higher transmission revenues in AFUDC as well as lower non-service pension costs and income taxes. Offsetting these items were anticipated decreases in wholesale load and lower normalized retail margins as well as increased O&M and depreciation expenses. The transmission and distribution utilities segment from $1.05 per share, up $0.04 from last year.

Favorable drivers included higher rate changes, normalized load and weather as well as lower non-service pension costs. These were partially offset by higher depreciation. The AEP Transmission Holdco segment contributed $0.75 per share, up $0.03 over 2017. This growth reflected a return on incremental rate base, which was mostly offset by prior period accounting adjustments and minimal formula rate true-ups this year compared to the larger one in 2017.

Net plant grew by $1.4 billion or 21% since December of 2017. The Generation & Marketing segment produced earnings of $0.29 per share, down $0.01 from last year, due to the sale of assets and mostly offset by favorable income taxes. Finally, Corporate and Other was down $0.15 per share from last year due to the prior year investment gains and higher interest, O&M and income tax expenses. We are pleased with our results for 2018.

As Nick said, we landed in the upper end of our updated earnings guidance range. Now let's turn to Slide 9 for an update on normalized load growth. Starting in the lower right chart, normalized retail sales decreased by 0.7% for the quarter but ended the year up 0.8% of a percent compared to 2017. Even with the modest load performance over the last half of 2018, normalized load growth for the year was the strongest AEP has experienced since 2011.

Every operating company experienced normalized growth in retail sales in 2018, with the exception of Kentucky Power. Moving clockwise. Industrial sales increased by 0.3% for the quarter and ended the year 2% higher than 2017. The growth in industrial sales moderated in the fourth quarter and was driven by increases in the oil and gas sectors.

Industrial sales, excluding oil and gas, experienced a slight contraction in the quarter. This was driven by a more restrictive U.S. trade policy, a weaker global economy, a stronger dollar and lower energy prices. In the upper-left chart, normalized residential sales increased by 0.2% for the quarter and ended the year up 0.6% over 2017.

Growth in residential sales was mostly due to customer count growth while normalized usage was down 0.5% for the quarter. For the year, residential customer counts increased by 0.6%, which is twice the growth experienced in 2017. Finally, in the upper right chart, commercial sales decreased by 2.8% in the fourth quarter and ended the year down 0.5% from 2017. Commercial sales were down across all our operating companies for the quarter and the year.

The estimates for load growth presented on this chart differ slightly from what we showed at the EEI conference in fall due to the fact that we now have actual numbers for the full year of 2018 rather than the estimates we had at that time. Our actual load estimate for 2019 has not changed. Now let's turn to Slide 10 and review the status of our regional economies. As shown in the upper left chart, GDP growth in AEP service territory was 2.8% for the quarter, which is 0.3% below the U.S.

The U.S. economy has eclipsed that of the AEP service territory since the tariffs went into effect in the second quarter. As discussed on previous calls, AEP has a higher exposure to tariff given its higher concentration to export manufacturing. In fact, 38% of all U.S.

exports originate in the 11 states served by our regulated utilities. The upper-right chart shows the gap between employment growth is narrowing between AEP service territory and the U.S. The U.S. has experienced stable job growth over the past two years, and the job market within AEP's footprint has continued to improve.

For the quarter, job growth in AEP's territory was 1.3% with higher growth in the West. The unemployment rate for AEP's territory fell to 4.1% this quarter, which is the lowest level on record. The sectors that added the most job this quarter were professional and business services, education and health services and leisure and hospitality. The final chart at the bottom shows the income growth within AEP's footprint has not kept pace with the U.S.

in recent months. For the quarter, personal income growth for AEP was 0.2% below the U.S. Income growth is a key driver for residential and commercial sales growth. It is too early to know what the impact of the partial federal government shutdown will have on our economy.

Federal government share of unemployment across our territory ranges between 0.7% in Arkansas to 7.2% in Texas, with some portion of these numbers being unaffected military employees. The longer the shutdown lasts, the higher impact we would expect to see in residential and commercial sales due to lower personal income and spending. Overall, 2018 was a strong year for the economy in AEP service territory. The boost to incomes from a robust job market and tax reform created momentum earlier in the year that carried us through the headwinds of the tariffs, stronger dollar and higher interest rates.

We expect economic growth to continue in 2019. Now let's move to Slide 11 and review the company's capitalization, liquidity and pensions. Our debt to total capital ratio increased slightly during the quarter to 57%. Our FFO to debt ratio was solidly in the Baa1 range at 17.8%.

And our net liquidity stood at about $3.1 billion, supported by our revolving credit facility. Our qualified pension funding decreased to 99%, and our OPEB funding decreased to 129%. A drop in yields increased the liabilities for both plans while, at the same time, falling equity prices detract it from asset returns. Our fixed income holdings provided a positive offset to the liability increases and equity losses.

Investors have been asking if our pension expense estimates are increasing in 2019 due to market volatility late in 2018. We are not seeing a meaningful change in our assumed pension expense. This is largely due to having what we believe are appropriately conservative assumptions regarding discount rate for liabilities and the expected rate of return for investments. We are also comfortable with our asset allocation.

As we disclosed at EEI, our assumed pension discount rate for 2018 was 3.65%, and for 2019, it's 4.3%. Our assumed asset rate of return has increased slightly by 25 basis points to 6.25%. Our target asset allocation is 25% equities, 60% fixed income and 15% alternatives. Our combined pension, OPEB, pre-tax expense was a credit of $65 million in 2018, and we expect a credit of $59 million in 2019.

Now let's wrap this up on Slide 12 and try to get to your questions. We begin 2019 with a solid track record. Our earnings were strong in 2018 as we continued to invest capital in our businesses. For eight years now, we have maintained O&M discipline and kept spending net of offsets in a tight range of between $2.8 billion and $3.1 billion.

In addition, over time, we have grown our dividend with earnings and expect to be able to do so going forward. Last year, AEP's board of directors increased the quarterly dividend by 8.1% on an annual basis. This increase, along with the midpoint of our 2019 earnings guidance range, brings our payout ratio to the middle of our 60% to 70% targeted range. Looking ahead to 2019, we are reiterating our operating earnings guidance of $4 to $4.20 per share.

We will finalize our pending rate cases and move forward with opportunities in the renewables space. We will continue our disciplined approach to allocating capital and are confident that there is significant runway in our capital programs to reaffirm our 5% to 7% operating earnings growth rate. With that, I will turn the call over to the operator for your questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Julien Dumoulin-Smith with Bank of America. Your line is open.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, good morning.

Nick Akins -- Chairman, President and Chief Executive Officer

How are you doing? Good.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Good. Congratulations. So Nick, let me go back to where you started the call a little bit. And certainly, I was impressed by the comments on being disappointed at not being at the high end of that 5% to 7% range.

Can you comment a little bit on what gives you that confidence today just given some of the moving pieces at the end of the year? But also, I just wanted to understand what your expectations are for that moderating ROE in Ohio. I know we've been talking about it for a little bit. But basically, are you still talking about being at the higher end potentially despite having that moderation? And where are the other pluses this year as you think about it?

Nick Akins -- Chairman, President and Chief Executive Officer

Yes. So yes, we do expect the higher end of that moderation. And also, as I look at the year, going into it, certainly, with the capital plan that we've put out there, the consistency associated with that as well, the opportunities that exist in front of us, we continue to look at those opportunities. Certainly, the integrated resource plans are a positive with the various states, what we're doing, not only from that -- from a bending O&M curve perspective.

I think we have more tailwinds than headwinds. And when we look at the plan that we put forward, it's a solid plan. And as I have reiterated several times, it doesn't include some real opportunities out there for us to even achieve better results. So -- and I don't -- and really we think of that as sustainable results, not like up one year, down another year, that kind of thing.

We pride ourselves in that element of consistency. And certainly, the capital plan demonstrates that, but also the opportunities ahead of us, they're more singular opportunities, more singles and doubles because, obviously, if we had gotten something like Wind Catcher, for example, it was a front-end loaded -- many of the integrated resource plan activities. But in this case, we're following these plans, and we have these smaller projects that will come into play. And we'll see the continuing improvement.

I think we have a great case for the utility and for -- within the AEP utilities to own these assets. And depending upon the outcome of that, certainly, I would suspect some positive movement from that perspective. So I feel good about it. I think I feel good about our culture of the organization.

Our culture is around innovation, but it's also definitely around bending the O&M curve and addressing the issues in front of us. And I mean, if you look at the -- for example, the weather last year in '17 versus -- or now it's two years ago -- versus '18, very mild weather in '17. Earnings still came in where we really were telling the market they would come in at. '18, it was ahead.

It still came in where we said it would be and, obviously, beat the midpoint. So we have some resiliency that's built in, in our organization and the culture of the organization that really drives to those kinds of results. So I'm optimistic.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

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

Nick Akins -- Chairman, President and Chief Executive Officer

Yes. Certainly, I don't want to presuppose the outcome. It'd be great if we got pretty considerable result in this rate case to get us back on an even footing. And certainly, Walmart, I guess, was one of the interveners that had -- that's obviously performance-based ratemaking.

I don't know about that. But certainly, look at forward-looking test years, well, that'd be a great outcome to be able to look at forward-looking test years. And as well, some of the other -- even -- I think it was the Attorney General, maybe someone else, but was open to actually putting in additional generation -- additional distribution-related rider activity. So -- and I still have work to do with the industrials.

They were probably the most negative from an intervener perspective. But I really believe when you look at the discussions and what it was centered versus the last case and the previous case, there at least now is recognition of the issues that we have. And there is no doubt that the issues that we're discussing are well-known by the commissioners and, certainly, the interveners. So I'm hopeful that it could certainly move to a more positive outcome.

What we're looking for, obviously, is progress, and we expect progress. And I think there has to be a clear message around that because we've languished since 2013 in Oklahoma, and that just has to change. And as a matter of fact, with the integrated resource plans we have filed in those various states, PSO in Oklahoma, obviously, is one of those. We need to see a positive outcome of rate case before we make additional investments of that kind in the state.

And obviously, the timing will work out to where we'll be able to make those kinds of decisions. And then I think it's pretty well-known now that Tulsa, Oklahoma is like a second corporate headquarters to us. With over 600 people there that focus on primarily the Western properties but also some of the Eastern activities as well. Those are not PSO employees.

They are AEP employees. So we should put AEP up on top of the building there so that Oklahoma knows that we do have a significant presence there. And I think that's important. And I think it's important to the livelihoods of the Tulsa area, but also I think it's important for this company to be able to have a central location like that, that we're able to operate out of.

So there's a lot of things in the context of all this that's probably becoming more well-known and, hopefully, will drive us to a better outcome.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Excellent. Thank you. Best of luck.

Nick Akins -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Jonathan Arnold of Deutsche Bank. Your line is open.

Jonathan Arnold -- Deutsche Bank -- Analyst

Morning. Just to go back to your comments on the upper end of the -- or upper range of the 5% to 7%. Was there a specific 2019 guidance? Or were they more a statement about your confidence in executing in that range over the five-year plan? I wasn't quite clear when you said it at the outset.

Nick Akins -- Chairman, President and Chief Executive Officer

Yes, yes. We said 5% to 7% growth rate -- long-term growth rate over future periods. And obviously, when you put in renewables, they're not going to be in place until 2022. From a financial standpoint, that's part of it.

So it's -- I would say it's geared more toward the long-term, but the trajectory should hold true. And there'll be things that come in during '19. There'll be things that come in during '20 and '21 and in the future years. So I think we have real opportunities in each and every year.

But obviously, we're positioning this as part of our 5% to 7% growth rate.

Jonathan Arnold -- Deutsche Bank -- Analyst

OK. So that upper range was kind of over the plan effectively?

Nick Akins -- Chairman, President and Chief Executive Officer

Yes. That's right.

Jonathan Arnold -- Deutsche Bank -- Analyst

Yes. Great. Thank you, Nick, for that. And then on -- just the slowdown you saw in sales in the fourth quarter.

Could you give us a little more of a sense of why you remain confident keeping the 2019 sales estimate unchanged from EEI? And maybe some color on what you're seeing early this year and what you're hearing from your customers?

Nick Akins -- Chairman, President and Chief Executive Officer

Yes. Certainly, Brian can cover this in more detail, but the way I see it is we're seeing somewhat of a tempered economy because of the trade issues. And as Brian mentioned, we have a lot of companies in our territory that are -- certainly, trade has an impact. And once those shackles come off, we believe the economy will continue on its previous trajectory.

And so it's certainly difficult to tell when that's going to happen. But I think you're hearing some more promising dialogue from our national leaders. Let's hope that continues to be the case. But even then, I guess, probably, we look at customer counts.

Customer counts is up considerably, so we're very happy with that. And the fundamentals, seeing this still be in place for the economy continue to roll along. From the world-economy perspective, obviously, that would have an impact. But I think that's probably, again, tariff-driven from many respects.

Brian Tierney -- Chief Financial Officer

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

In the third quarter, it was up 7.7%. And we expect that expansion to continue in 2019.

Jonathan Arnold -- Deutsche Bank -- Analyst

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

Brian Tierney -- Chief Financial Officer

Yes. In the fourth quarter, it was down 0.6% non-oil and gas industrial. And in the third quarter, non-oil and gas industrial was up 0.6%.

Jonathan Arnold -- Deutsche Bank -- Analyst

OK. And then -- so obviously, your outlook is premised on the assumption that growth continues. And you talked about the plan, having been building resilience in the company, talk maybe a little bit about how resilient you think your plan is to -- and maybe if that view doesn't pan out.

Brian Tierney -- Chief Financial Officer

Yes. I think if you look at -- and Nick talked about it, the change that we had year on year, '17 to '18, in terms of weather and how we were able to adjust O&M in both years to be able to hit our numbers, I think that demonstrates that resilience. So whether it's weather, whether it's load growth, whether it's tariff impact or whatever, we actively manage our rate throughout the year, putting the brakes on or the accelerator on as the case may be to get work done, what we need to get done. So I think just the weather year on year demonstrates that resiliency.

Nick Akins -- Chairman, President and Chief Executive Officer

And I think we're seeing sort of a -- if you put a microscope to it, with the industrials impacted by the tariffs in particular, the commercials and particularly the supply to the major industrials in those kinds of establishments will have an impact. And I think we're probably seeing somewhat of an immediate impact there. And again, I think as the industrials start to pick back up, the commercials should start to come back as well.

Jonathan Arnold -- Deutsche Bank -- Analyst

Thank you, guys.

Operator

Thank you. And our next question comes from the line of Ali Agha of SunTrust. Your line is open.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning. First question, Nick or Brian, just reconfirming, when you talk about the 5% to 7% growth rate, what's the base? Have we changed it? Have you rolled it forward? Or can you just remind us the base here for that?

Brian Tierney -- Chief Financial Officer

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

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Off 3.85%, I got you.

Brian Tierney -- Chief Financial Officer

Yes, yes.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

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

Brian Tierney -- Chief Financial Officer

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

Nick Akins -- Chairman, President and Chief Executive Officer

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

Brian Tierney -- Chief Financial Officer

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

Nick Akins -- Chairman, President and Chief Executive Officer

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

So you'll still see the earnings impact of the Ohio solar as well.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

I see. But just to be clear, the -- from a regulated rate-base perspective, there is no incremental CAPEX associated with the Ohio renewables? Did I get that right?

Nick Akins -- Chairman, President and Chief Executive Officer

And actually, when the bids come in, in March, we'll have a better understanding of what the CAPEX looks like.

Brian Tierney -- Chief Financial Officer

It's for the consumer protection plan.

Nick Akins -- Chairman, President and Chief Executive Officer

Yes.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

OK. And the CAPEX numbers that you have in the back of the slide, no changes there since EEI. Is that correct?

Brian Tierney -- Chief Financial Officer

That's correct.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

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

Nick Akins -- Chairman, President and Chief Executive Officer

I think some of the positions taken by the interveners and others, there is some cause for hope that at least there is recognition of the issues, but I'm not going to presuppose the outcome because I did that two times before, and who knows what the outcome will be. Certainly, the issue should be very well-known. I would say that just based on the response of the interveners, it's marginally better than what -- how they responded earlier. So I guess you can look at that as some positive, but we won't know until we get into the discussions with them or -- and go through this process.

And really, what matters is what the Oklahoma commission comes up with in terms of rendering order. And they recognize the value that PSO provides to the state. And so that's what we're looking for. And if -- and as I have said earlier, we will wait for those results, and then we will make determinations of what the next steps are.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Understood. Thank you.

Operator

Thank you. And our next question comes from the line of Paul Ridzon of KeyBanc. Your line is open.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Good morning. Could you just clarify, when you say bend the O&M curve, is that decelerating O&M growth? Is that fattening? Or is it negative growth?

Brian Tierney -- Chief Financial Officer

Negative.

Nick Akins -- Chairman, President and Chief Executive Officer

Yes, negative. We really -- by bending, we want it to go negative.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

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

Brian Tierney -- Chief Financial Officer

Yes. So we haven't said what that would be, Paul. If you look at our $2.8 billion to $3.1 billion that we've been in for about the last eight years, we're looking to break through that and turn that negative. And we have plans to do that.

It includes what we've done on lean activities, what we've done in process improvement. It includes automation, box. It includes partnering with third-party suppliers, like what we've done with an accounting and tax initiative with Accenture. And it's bringing all those things to bear across the company that we're going to try and break through that $2.8 billion of none -- of spending that's not altered in pass throughs.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

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

Nick Akins -- Chairman, President and Chief Executive Officer

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

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

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

Nick Akins -- Chairman, President and Chief Executive Officer

No, no. We don't see any projects impacted from that perspective because FERC obviously continues to advance transmission spending. And actually, the resource projects themselves, we've moved to less transmission involved with those. So I'm assuming you're talking about transmission.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Yes. Sorry.

Nick Akins -- Chairman, President and Chief Executive Officer

Yes, yes, yes. So we don't see any impacts there.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

And then finally, is the 2.8% reduction in commercial sales, is that just quarterly volatility? Or was there something more underlying there?

Brian Tierney -- Chief Financial Officer

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

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Thank you very much.

Operator

Thank you. And our next question comes from the line of Praful Mehta with Citigroup. Your line is open.

Praful Mehta -- Citigroup -- Analyst

Good morning. So just, first, I wanted to understand, in Chuck's business, any exposure to PG&E or California utilities that we should be aware of or thinking about?

Nick Akins -- Chairman, President and Chief Executive Officer

No. There is the right answer. We're very fortunate in that regard. A lot of our offtakes are with municipals, co-ops and end use customers.

Praful Mehta -- Citigroup -- Analyst

OK, great. Yes, sort of dodged a bullet which is great. And I guess just touching on the review, I guess, strategic review that you have talked about in the past, and obviously, you've touched on Oklahoma already. But just from a strategic perspective, is there any view that we should be thinking about around any of the utilities? If they don't -- if you don't get the outcomes you're looking for, is that still on the table right now? Or is that too far out, at least not a 2019 event?

Nick Akins -- Chairman, President and Chief Executive Officer

Well, I think -- and the way we look at it is every utility that we have, we wanted to grow and prosper. And to the extent that they can grow and prosper and have proper regulatory treatment, it's a great outcome. I think, about three years ago, we -- and I guess, for years we were talking about Kentucky, and Kentucky has turned around. We focused on two things, the regulatory relationship and the compact that we have there, but also our emphasis placed upon economic development in the state of Kentucky.

And that picture has turned around markedly. For PSO, PSO is now in the radar screen and probably in the middle of the radar screen because we definitely want to be a part of the economic development picture of Oklahoma. And we definitely want to be able to move forward in a very positive way on investments that benefit the customer experience in that state. So the way we look at it is we have a set of assets.

And if they perform well, fine. If they're chronically underperforming, then we have to take steps in some fashion to alleviate that situation for our shareholders. And really, the focus because many times, when you have an underachiever, a lot of effort goes into trying to reconcile the situation. And there are some that say that PSO doesn't have a revenue problem, it has a spending problem.

And that is just so far from the truth. It's just incredible because we run seven utilities, and we run those utilities in much the same fashion. And we know what it takes to provide the customer service that's required. And PSO has been at the top of the list in terms of its performance.

And I really believe that if you're a residential customer, if you're an industrial customer, you should really take a hard look at what's happening there in Oklahoma, and it could very well have an impact on not only the presence in the future, but also the customer experience itself, and we don't want that to happen. So as we look at these assets, obviously, we'll continue to make steps to further optimize our portfolio based upon what we see.

Praful Mehta -- Citigroup -- Analyst

OK. That's super helpful. And then -- and finally, clearly, you guys have been able to manage through different load profile years. And it sounds like if you do have the shackles that are continuing to stay, let's say, from Dallas and other constraints from a macro perspective, and it just doesn't work in your favor, is there any time that we should be worried about the '19 profile? Or do you think you have enough tools from the toolkit to manage through any of those potentially macro challenges around the earnings for '19?

Nick Akins -- Chairman, President and Chief Executive Officer

Yes, I think we're fine. We've had -- and if you look over the last two years, three years and maybe even longer than that, we've had perturbations of our customer class going up and down. And actually, residential going down has even more of an impact than commercial or industrial. And so the mix, obviously, has an impact because the margins are different based upon each customer class.

But our service territory is very diverse, very -- certainly, every part of the economy is represented. And our customer mix is really pretty resilient in and of itself. So there's a lot of internal levers that continue to adjust for one another from that perspective. But at the same time, we will adjust when the economy is -- if the economy were to chronically be suffering, and we saw that on a continual successive quarterly trend, then we would certainly make adjustments that were necessary to ensure that we remain financially healthy, and we intend on doing that.

But I really believe we're in good shape from that perspective. And we'll watch this next quarter and the quarter after, and hopefully, we'll see some progress in the federal government side. I think certainly immigration needs to get solved, and the two parties need to start talking to one another again. And maybe that will warm up, and then they'll move to greater and better things for the economy, but they've got to get going.

Praful Mehta -- Citigroup -- Analyst

Gotcha. Thanks so much, guys, and congratulations.

Operator

Thank you. And our next question comes from the line of Greg Gordon with ISI. Your line is open.

Greg Gordon -- Evercore ISI -- Analyst

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

Brian Tierney -- Chief Financial Officer

Yes.

Nick Akins -- Chairman, President and Chief Executive Officer

Yes.

Greg Gordon -- Evercore ISI -- Analyst

Great. OK. So I mean, I guess this is just tautologically correct, but the high end of the guidance range for '19, which put -- would put you above 7%. You're not -- this is more of a long-term target than an annual we're going to be tight inside the stance type of guidance?

Nick Akins -- Chairman, President and Chief Executive Officer

Yes, that's right. I mean, when you look at the midpoint of the 5% to 7%. And then you look at the opportunities available to us in that 5% to 7% bandwidth, it's -- like I said, there's more tailwinds than headwinds.

Greg Gordon -- Evercore ISI -- Analyst

And then just one final question because there's just -- there has been some conversation about this. You continue to give us a financial forecast that even though the absolute level of leverage has come up since 2013, the FFO to debt metric continues to be really resilient at just around 18%. And you're still confident that through this forecast period, you can maintain -- that there'll be no deterioration in your FFO to debt metrics?

Nick Akins -- Chairman, President and Chief Executive Officer

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

Greg Gordon -- Evercore ISI -- Analyst

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

Nick Akins -- Chairman, President and Chief Executive Officer

We're very interested in the FFO to debt percentage, and we intend on maintaining our credit rating.

Greg Gordon -- Evercore ISI -- Analyst

OK. So you think 15% is the -- is sort of where you'll trend down to over this forecast period?

Nick Akins -- Chairman, President and Chief Executive Officer

That area, yes.

Greg Gordon -- Evercore ISI -- Analyst

OK. Thank you.

Brian Tierney -- Chief Financial Officer

Thanks, Greg.

Bette Jo Rozsa -- Managing Director of Investor Relations

Operator, we have time for one more question.

Operator

Perfect. And our next question comes from the line of Angie Storozynski of Macquarie. Your line is open.

Angie Storozynski -- Macquarie Research -- Analyst

Good morning. Thanks for taking my question. I have a bigger picture question. So we are hearing about this precipitous drop in prices for solar power and that more and more C&I customers are signing this contract for PPA simply because they see it as a way to hedge against utility and forward metric aspirations, but also those PPA seem to be at prices which are now below billable solar power curves.

So two questions. Do you see it as a risk to your Vertically Integrated Utilities given that you do have commercial generation assets? And number two, is there a way to tap into this growth beyond that $2.2 billion that you're planning to spend on renewables on the commercial side?

Nick Akins -- Chairman, President and Chief Executive Officer

I would say, first of all, we don't see a risk if we're doing it, and we are doing it. And I think we are in discussions with many customers about what their specific resource needs are. We're also looking at various technologies that enable that to happen, and some of these are large customers. So we really have an opportunity to engage in that discussion.

But the other part of it, too, is you see solar, you see energy storage. Those types of applications continue to advance, and that -- and certainly, on the transportation sector, you're making up whatever you're going to lose. You're going to make it up with channel growth -- sales channel growth, particularly associated with the advent of electric transportation. So there's real opportunities for us to engage in that.

And I think AEP is in a very favorable situation of being able to focus on those types of issues as opposed to something that some calamity that's occurred. And we're intent on making sure that we maintain our operational excellence so that we can focus on those particular types of activities. And certainly, that's happening not only on the regulated side. Now obviously, we're having to work with the regulators to broaden the perspective there.

For example, continuity of service is not just a distribution line going to home. It's distribution with energy storage derived through outages and really drive toward continuity of service as opposed to just basic service. Certainly, what we're doing with Smart City, what we're doing with other applications and engaging customers in a very substantial sense, those are things that we see as the future. And we're not going to be -- get left behind from that perspective.

And as a matter of fact, from a technology standpoint, we're at the forefront of these technologies across the gamut. So we have pilots running in every one of our operating companies on various aspects of these technologies, and we intend on that channel growth to occur.

Angie Storozynski -- Macquarie Research -- Analyst

OK. Thank you.

Bette Jo Rozsa -- Managing Director of Investor Relations

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

Operator

Ladies and gentlemen, this conference will be available for replay after 11:15 AM today until 11:59 PM on January 31. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 461331. International participants, please dial (320) 365-3844. [Operator signoff]

Duration: 61 minutes

Call Participants:

Bette Jo Rozsa -- Managing Director of Investor Relations

Nick Akins -- Chairman, President and Chief Executive Officer

Brian Tierney -- Chief Financial Officer

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Jonathan Arnold -- Deutsche Bank -- Analyst

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Praful Mehta -- Citigroup -- Analyst

Greg Gordon -- Evercore ISI -- Analyst

Angie Storozynski -- Macquarie Research -- Analyst

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