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American Electric Power Inc (NYSE:AEP)
Q3 2019 Earnings Call
Oct 24, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power Third Quarter 2019 Earnings Release Conference Call. [Operator Instructions] There will be an opportunity for your questions, and instructions will be given at that time. [Operator Instructions] I will turn the call now over to Ms. Darcy Reese. Please go ahead.

Darcy Reese -- Director, Investor Relations

Thank you, John. Good morning, everyone, and welcome to the Third Quarter 2019 Earnings Call for American Electric Power. Thank you for taking the time to join us today. Our earnings release, presentation slides and related financial information are available on our website at aep.com. Today we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors.

Our presentation also includes references to non-GAAP financial information. Please refer to the reconciliation of the applicable GAAP measures provided in the Appendix of today's presentation. Joining me this morning for opening remarks are Nick Akins, our Chairman, President and Chief Executive Officer; and Brian Tierney, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Okay. Thanks, Darcy, and welcome to the call. You're first-time on the call. I’m willing to bet Bette Jo Rosa is still listening, even though she is in retirement, but thanks for everyone for joining AEP’s third quarter earnings call. Brian will update you on the financial for the quarter and year-to-date a little later, but I'll summarize my view of the quarter as we go forward.

First, we had a great quarter supported by warm weather through September, previous positive regulatory outcomes that are now being reflected in our financial results, continued success in management or O&M expenses. And I have to say load is making a comeback. After the lower load last quarter, it is good to see some improvement that generally remains flat to last year, but still positive from the second quarter. We're watching this trend closely during the fourth quarter and into next year. Given all of that, we are raising and narrowing our operating earnings guidance range for 2019 from $4 to $4.20 per share to $4.14 to $4.24 per share with a new midpoint of $4.19 per share. We're also reaffirming our 5% to 7% growth rate based upon our original guidance.

Additionally, the AEP Board earlier this week authorized an increase of $0.03 per share from $0.67 to $0.70 a share, a 4.5% increase. This increase keeps us firmly in the middle of our targeted 60% to 70% payout range, and along with last year's increase of 8.1% averages to a 6.3% increase for the last two years, commensurate with our 5% to 7% earnings growth rate. We continue to expect the dividend to grow in line with our earnings and firmly within our targeted payout ratio.

So let's step into a few highlight areas for the quarter. Regarding our North Central Wind projects, as you recall, we had made filings for state approvals in Oklahoma, Louisiana, Arkansas and Texas on July 15, and during third quarter, we requested FERC approval of the transaction as well. Also we would acquire three wind farms, currently under development by Invenergy within service dates in 2020 and 2021, based upon requirements consistent with the integrated resource plans of both PSO and SWEPCO in the various jurisdictions. Finalized procedural schedules have been determined in all of the state jurisdictions at this point. The Oklahoma Corporation Commission has set the PSO scheduled for hearings in January of 2020. The Louisiana Public Service Commission has set the SWEPCO Louisiana hearings for March 2020, The Arkansas Public Service Commission has also set it's scheduled for March 2020, and The Public Utility Commission of Texas has set the schedule for hearings in February of 2020. So we're currently working with the discovery process in each jurisdiction, and we're on track to receive final decisions by the summer of 2020. I'll remind everyone once again that these projects are not in our capital plan.

Regarding regulated solar, HB6 has cleared the path for credits to be applied to our existing solar request before the Ohio Commission. With this change, we have filed a temporary delay to provide additional clarity concerning project benefits to our customers and we await a decision from the PUCO.

While on the subject of Ohio, we are continuing our focus on HB 247 with hearings progressing well. This bill is important in regards to further grid modernization, technology deployment and behind the meter customer investment opportunities to improve the customer experience. There is no doubt our business is changing at the distribution level in regards to technology, grid modernization, distributed generation and further grid and customer-related optimization efficiency opportunities, HB 247 modifies Ohio's electric retail service to allow the company to include these provisions in electric security plans, followed with the PUCO. This allows us to provide that continued obligation for our customers to improve the customer experience and be able to provide universal access to the benefits of the clean energy economy.

Our contracted renewables, which have benefited from the recently acquired wind facilities, development opportunities and resources, continues to perform well. The projects are performing toward the upper end of acquisition assumptions, and the development portfolio is making good progress as well. We have one project that we expect to place in service in 2020 using all of the PTC's safe harbor equipment and expect to release an announcement of a project backed by a long-term contract with an investment grade counter party by the end of the year. And there are others in the pipeline that look really good as well.

Our regulated utilities continue to perform very well. I just want to take a moment to congratulate our employees of the Cook Nuclear Plant, that once again, received an INPO excellence rating. We are very pleased with that outcome, and this exemplifies our belief that operational excellence is the foundation for anything else that AEP wishes to achieve from a strategic perspective.

We're in the midst of four major rate cases that I'll update you on. In Arkansas, we filed a settlement of that case that included all the parties that contains a net $18 million increase, a 9.45% ROE with the formula-based rate process for 5 years. Because we have not filed a rate case in Arkansas in approximately 10 years, it's important to note this order included no dis-allowances on $1.2 billion of investments made on generation and environmental retrofits. The company had requested a $34 million net increase, so all in all, a decent settlement to move forward with the new formula-based rate mechanism. The settlement awaits Arkansas Public Service Commission approval with the rates assume to go into effect in January 2020.

In Indiana, we filed a case in May of 2019 for a net increase of $94 million and a 10.5% ROE with the 2020 forecasted test year. The rate case includes our "Innovate Indiana" program that supports the continued operation of Cook Nuclear Plant, new smart grid technologies, AMI meters, expansion of electric vehicle charging and support for renewable energy. Testimonies by I&M and interveners have already been filed, and Indiana staff does not filed testimony. We filed a rebuttal testimony in September and hearings are currently ongoing. We expect an order and rates to go into effect by March 2020.

In Michigan, I&M filed a base rate case in June requesting a net increase of $52 million, and a 10.5% ROE, with also a 2020 forecasted test year. The Michigan plan also included support for the continued operation of Cook Nuclear Plant and a commitment to distribution reliability through equipment upgrades, tree trimming and AMI meters. Staff and intervener testimony has been filed with staff recommending a 9.75% ROE with a $38 million revenue increase. We'll file a rebuttal testimony in November with hearings also being in November and expect a commission order in April of 2020.

And lastly, regarding the AEP Texas rate case we filed in May, a base rate case review that included a net increase of $35 million and a requested ROE of 10.5% with the 2018 test year. The rate request includes increased charges to retail electric providers, REPs for use of AEP Texas T&D lines along with refunds and credits associated with the Tax Cuts and Jobs Act of 2017. The PUCT staff in August filed testimony with reductions in both the transmission and distribution revenue requirements based upon a 9.35% ROE removing various incentive comp and SERP expenses, incremental distribution forestry expenses and other tax and depreciation related adjustments. The hearings concluded in August. The case has been fully briefed, and we await a PFD from the ALJs in mid-November. We will then file exceptions and expect a ruling from the commission in first quarter of 2020. Summaries of all of these cases are included in the earnings slide presentation.

Now moving to the economy. This quarter has indicated some bright spots to consider. Many have talked about this economy being driven forward by the consumer because of low unemployment and higher wages. We are seeing that as well in our service territory. While industrial, overall, is still down, but improved from last quarter, residential and commercial are both up more than expected. We have the lowest unemployment on record in our territory going back to 1990 and wages are growing faster than inflation. And even in the industrial sectors, which have improved overall from last quarter, the oil and gas sector growth was the strongest we've seen since 2016. As you know, our margins are higher on residential and commercial than industrial, so overall financial results are positive. So all-in-all, I would say, it's time for a return of optimism regarding the economy.

So now moving to the equalizer graph, the overall regulated operations ROE is currently 10.1%, it was 9.7% last quarter. We generally project the ROE for our regulated segments to be combined to be in the 9.5% to 10% range. We have a long track record of delivering these results and we expect that to continue. The reason for the increase in third quarter 2019 versus second quarter includes the effect of favorable weather this September.

I'll also note for you the size of the bubbles in the chart. It's interesting to note that AEP Transmission Holdco is now the second largest operating utility behind Appalachian Power. So that's interesting to note, and you have several of them that are approximately the same size companies as well that follow-on to that. So we're continuing to make quite a bit of progress, and it is interesting to note.

Moving on to the graph itself, on AEP Ohio, the ROE for AEP Ohio at the end of the third quarter was 11.3%, and we expect to end 2019 near 11% as the legacy fuel and capacity carrying charges, the PIRR and the RSR, as they’re called roll-off, and we continue to invest in the distribution smart grid.

APCo, the ROE for APCo at the end of third quarter 2019 was 9%. APCo’s change in ROE for the second quarter '19 is primarily attributable to favorable weather and rate proceedings when comparing third quarter 2019 with third quarter '18, partially offset by lower normalized usage in third quarter '19 versus third quarter '18. West Virginia, as you recall, West Virginia implemented new base rates in March 2019, which was a $44 million base rate increase based on 9.75% ROE. Virginia's first triannual review is in 2020, and we'll cover the 2017 to '19 periods, and ROE of 9.42% will be used for triannual period review with 70 basis points bandwidth ranging from 8.72% to 10.12%, so that will be coming out.

As far as Kentucky Power is concerned, the ROE for Kentucky Power at the end of third quarter was 7.8%. Kentucky's change in ROE from second quarter is primarily due to a slightly favorable normalized usage weather and transmission revenues. We're working on optimizing revenue and scrutinizing the O&M and capital to improve ROE by the end of the year.

With I&M, I&M at the end of third quarter was 11.6%. I&M's positive performance through the third quarter '19 is primarily driven by timing of expenses, favorable financing of long-term debt, supportive regulatory environments and some one-time adjustments. I&M expects to end the year with an ROE around 10.5%, which is higher than authorized ROEs in Indiana, Michigan, primarily due to one-time adjustments. I&M continues to successfully execute its capital programs in generation, transmission and distribution, and recently filed future test year rate cases in Indiana, Michigan, just to seek timely recovery of ongoing capital costs.

Regarding PSO, PSO ended the quarter with an ROE at 11.3%. PSO’s increase in ROE was due primarily to summer weather and normalized usage. PSO received an order on its base case settlement in March 2019, as you recall, approving a $46 million increase in a 9.4% ROE. So we've seen a great turnaround in Oklahoma. And in fact, Oklahoma is a bright spot from the economic process as well. Oklahoma continues to operate on all cylinders and continue to increase in terms of load.

SWEPCo, SWEPCo at the end of third quarter 2019 was 6.7%, the most recent 12-month ROE increased primarily due to favorable weather and favorable normalized load. We did, as I mentioned, filed an Arkansas base rate case and the settlements that are pending there, an ROE of 9.45% and cap structure of 52.1% debt and 47.9% equity. SWEPCo's ROE continues to be affected by the Arkansas share of the Turk plant that is not in retail rates.

As far as Texas is concerned, the ROE for AEP Texas at the end of the third quarter was 8.8%. The main driver for the increase in ROE is primarily due to favorable summer weather. We expect the ROE to decline by year end due to lag associated with the timing of annual filings in the base rate review filed with the PUCT in May. Favorable regulatory treatment has allowed us to file annual DCRF and biannual TCOS filings and recover our cost on distribution and transmission related capital investments. But during a rate review year, there is a lag associated with these filings. In addition, continued high levels of investment and timing of our planned comprehensive rate review will continue to have an impact on ROE in AEP Texas in 2019.

And then the ROE for AEP Transmission Holdco at the end of the third quarter was 11.4%. AEP's Transmission Holdco ROE is higher than second quarter '19, driven by the prior year radial impact adjustment falling off, and by higher revenues due to differences between actual and forecasted revenues in third quarter. Transmission is forecasting a higher ROE than authorized at the end of fiscal 2019, as a result of higher revenues and a prior year favorable true-up.

So, as we look forward to EEI, you can expect AEP to give further updates regarding continued affirmation of our 5% to 7% growth rate, details of capital plans, additional focus on O&M related initiatives, and any further updates on renewables, rate cases and other matters. There is no question AEP continues to fire on all cylinders as we continue our promise of being a premium regulated utility with the consistency in quality of earnings and dividends that our shareholders expect. We reiterate our intention of achieving the higher end of our 5% to 7% growth rate would be disappointed not to achieve it. We believe the foundation is there to achieve just that. As the Doobie Brothers, one of the latest nominees, and it's about time they were a nominee for the Rock Hall of Fame this year, said, We got to let the music play what the people need is a way to make them smile. Well, that's what we want for our investors and we intend on letting a great AEP tune in play, so listen to the music. Brian?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Thank you, Nick, and good morning, everyone. I will take us through the third quarter and year-to-date financial results, provide some update on load in the economy, review our balance sheet and liquidity, and finish with a preview of what we will present at the EEI conference.

Let's start briefly on Slide 6, which shows the comparison of GAAP to operating earnings for the quarter and year-to-date periods. GAAP earnings for the third quarter were $1.49 per share compared to $1.17 per share in 2018. GAAP earnings through September were $3.58 per share compared to $3.17 per share in 2008 [Phonetic]. There is a reconciliation of GAAP to operating earnings in the release.

Let's get into the detail on Slide 7, and look at the drivers of quarterly operating earnings by segment. Operating earnings for the third quarter were $1.46 per share or $722 million compared to $1.26 per share or $619 million in 2018. Operating earnings for Vertically Integrated Utilities were $0.89 per share, up $0.18, primarily driven by rate changes, which were favorable by $0.07. Weather was also favorable this quarter, up $0.04 from last year. Smaller impacts for this segment are listed on the slide.

The Transmission and Distribution Utilities segment earned $0.27 per share, down $0.03 from last year. Earnings in this segment declined due to the roll off of legacy riders in Ohio and higher O&M, depreciation and property taxes. These items were partially offset by recovery of the increased transmission investment in ERCOT, weather and rate changes.

The AEP Transmission Holdco segment continued to grow contributing $0.25 per share, an improvement of $0.10 over the last year. This growth reflected the return on incremental rate base as well as the impact of a nonrecurring prior year accounting adjustment. Net plant increased by $1.4 billion, or 18%, since September of last year.

Generation & Marketing earned $0.16 per share, up $0.08 from last year, primarily driven by favorable taxes that will levelize over the year. This segment reflects the growth in the renewables business and favorable wholesale margins.

Corporate and Other was down $0.13, primarily due to tax items that will levelize over the year, as well as higher O&M and interest expense.

Let's turn to Slide 8, and review our year-to-date results. Operating earnings through September were $3.65 per share, or $1.8 billion, compared to $3.23 per share, or $1.6 billion in 2018. Looking at the earnings drivers by segment, operating earnings for Vertically Integrated Utilities were $1.90 per share, up $0.16, with rate changes being the largest driver in the segment. Other positive items included lower O&M and taxes, as well as higher AFUDC. While weather was favorable compared to normal, it was unfavorable compared to last year, subtracting $0.12. Normalized load was also down for the year and depreciation increased due to incremental investment.

Through September, the Transmission and Distribution Utilities segment earned $0.85 per share, up $0.07 from last year, influenced by the reversal of a regulatory provision in Ohio. Other favorable drivers included higher rate relief and ERCOT transmission revenue as well as favorable carrying charges in Texas. Partially offsetting these favorable items were the roll off of legacy riders in Ohio, unfavorable weather, higher depreciation of property taxes and O&M. The AEP Transmission Holdco segment contributed $0.82 per share, up $0.25 from last year. This growth in earnings reflected a return on incremental rate base, a favorable annual true-up in FERC settlement, higher AFUDC, and the nonrecurring prior year accounting adjustment. Generation & Marketing produced $0.30 per share. The renewable business grew with the re-powering of Trent Mesa and Desert Sky as well as the acquisition of multiple renewable assets. Increases in retail and wholesale margins were partially offset by lower generation sales due to lower energy prices, plant retirements and outages. Finally, Corporate and Other was down $0.15, driven by higher tax expense, primarily from consolidating tax items that will reverse by year-end with a penny relating to prior period tax adjustments. Interest expense is also higher. Overall, we are pleased with our financial results, and are confident in raising and narrowing our annual operating earnings guidance to $4.14 to $4.24.

Now let's turn to Slide 9 to provide an update on our system load. Starting in the lower right chart, normalized retail sales were essentially flat for the quarter compared to 2018. This represents a market improvement from our last quarterly update. Third quarter sales were up at the Transmission and Distribution Utilities and public service company of Oklahoma, while the remaining vertically integrated utilities experienced the decline. For the year-to-date comparison, AEP’s normalized retail sales were six tenth of a percent from last year. Through September, the growth in residential sales was being offset by the decline in commercial and industrial sales. You will notice that our latest year end estimate is projecting normalized retail sales will finish the year down five tenths of a percent from 2018. The mix of sales of growth combined with rate design nuances give us confidence in our 2019 guidance in light of our load outlook. I will cover rate design later in the presentation.

Moving to the upper left chart, normalized residential sales increased by seven tenths of a percent for the quarter. Customer count growth was responsible for three tenths of a percent increase, while the remaining four tenths was due to improved normalized usage. Third quarter residential sales were up at several of our operating companies with the exceptions of Appalachian Power, I&M and SWEPCO. Year-to-date normalized residential sales increased by two tenths of a percent, which was mostly driven by an increase in residential customer count. The uptick in residential sales this year is consistent with recent macro economic drivers. Unemployment rates across the AEP service territory are at record lows. Tight labor market has created upward pressure on wages. This has allowed personal incomes to grow faster than inflation through most of 2019. As incomes rise, customers tend to purchase more electricity consuming products.

Moving to the upper right chart, normalized commercial sales increased by four tenths of a percent for the quarter. The results varied by operating company, but were strongest in the Transmission and Distribution Utilities segment. Seven of our top 10 commercial sectors posted growth this quarter with the strongest growth coming from the utilities, hospitals and accommodation sectors. Through September, normalized commercial sales were down seven tenths of a percent from last year, not surprising the sector that posted the biggest drop in commercial sales was traditional retail. As you can see on this chart, there has been a consistent improvement over the last 12 months in commercial sales growth.

Finally, in the lower left chart, industrial sales decreased by 1.1% for the quarter, which brought the year-to-date comparison to 1.4% below last year. For both periods, industrial sales were down at most operating companies with the exception of PSO, which has experienced double-digit growth from oil and gas activity. We are fortunate to have these sectors in our industrial mix. The impact of the General Motors strike on our load was negligible.

Turning to Slide 10, I'll provide a brief update with respect to industrial sales growth by sector. This chart shows the distinction in growth between the oil and gas sectors and all other industrial sectors. Industrial sales to oil and gas industry has increased by 7.8%, which was the strongest growth in these sectors since the first quarter of 2016. This was largely driven by the 16.3% growth in the pipeline transportation sector. Most of the growth in the quarter was a result of a number of anticipated expansions that will address congestion issues coming out of the major shale regions and our service territory. There are still additional oil and gas related expansions in the development pipeline that will provide more growth over the next 18 months. Focusing your attention on the green bars, the non-oil and gas industrials were down for the quarter, but less so than last quarter. For the AEP System, chemicals manufacturing and transportation equipment manufacturing accounted for most of this impact.

Now let's turn to Slide 11 and review the status of our regional economies. As shown in the left chart, GDP growth in AEP service territory was 2.4% for the quarter, which is three tenths of a percent above the US. The strongest growth for the quarter came from our Oklahoma service territory. All of our service territories experienced GDP growth for the quarter.

Moving to the right chart, you see that employment growth for the AEP service territory improved this quarter to eight tenths of a percent above last year, while US growth moderated slightly in the third quarter. Throughout the AEP footprint, nearly 16,000 jobs were added in the third quarter with 42% of those coming from the education and healthcare sector.

Turning to Slide 12, I want to explain a nuance related to customer class rate design. Since 72% of industrial rates across our system are fixed rather than variable, a 1% decline in industrial load is much less impactful than a 1% decline in residential load where 82% of the rate is variable. For your reference, a 1% change in industrial sales is worth about $0.02 per share.

Now let's move on to Slide 13 and review the company's capitalization and liquidity. Our debt-to-total capital ratio improved slightly during the quarter to 58.7%, our FFO-to-debt ratio was solidly in the BAA1 range at 15.2%, and our net liquidity stood at about $2.6 billion, supported by our revolving credit facility. Our qualified pension funding decreased approximately 2% to 94%, a drop in interest rates increased the pension liability here. OPEB funding decreased approximately 7% to 123%. This was a result of lower interest rates and a new OPEB liability experienced study, both of which increased the OPEB liability.

Let's try and wrap this up on Slide 14 and get to your questions. The strong results we have delivered year-to-date and our confidence in our plan for the remainder of the year allow us to raise and narrow the operating earnings guidance range to $4.14 per share to $4.24. Our message at EEI will be that we are the premium regulated utility, delivering 5% to 7% earnings growth with dividends growing in line with earnings. Our plan has line of sight transparency to growth and has greatly reduced execution risk. We will provide detailed drivers for 2020 earnings by segment, an update to our capital expenditure and financing plans.

One final item, we have historically released fourth quarter and full year earnings in January of the subsequent year. In 2020 we will release 2019 full year and fourth quarter earnings in late February, more coincident with the filing of the 2019 10-K. We look forward to seeing many of you in Orland in a couple of weeks. And with that, I will turn the call over to the operator for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And first from the line of Julien Dumoulin Smith with Bank of America, Merrill Lynch. Please go ahead.

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

Hey, good morning and congratulations, guys. So perhaps, if I can go back to some of the commentary from the last call in brief, certainly some variations across the service territory on your sales trends, would be curious how does this position you relative to your broad plans and thought process against the 5% to 7%? Just want to be exceptionally clear, as you think about having posted some good results here in the third quarter, and again reaffirming the higher end.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah, there is no change in our thought process. We're still tracking 5% to 7%. We'd be disappointed if we weren't in the upper range of that. Because, obviously, when you look at the components of load here from a financial perspective, it's not having much impact on our plans. And by the way, we adjust all the time for weather, for all kinds of things, and we have a big opportunity to do that. And I think there is a real opportunity for us to continue to advance, particularly with the renewables play and everything else that’s going on. So even without that, though, I think, we're in great shape. So it hasn't changed anything. I think, probably, last quarter, we probably talked almost too much about the load and the industrial side of things. And really, it was nothing compared to what we experienced back in 2009, and we did pretty well weathering that storm.

So, but in this case, I think you're seeing some resiliency there from a industrial and manufacturing standpoint, and you're seeing it start to pick up. And from the -- and as we said, it's also interesting to note, it's great to have diversity and load because we've got the oil and gas activity that's going gangbusters with the transportation sector, and then also you think of what's going on just the consumer side. And everyone is talking about this being a consumer-driven economy, and there is no question that people have more money in their pockets and more people have jobs, and you're seeing that reflected in the numbers that we see. So we stand committed to what we've always said before, and we fully expect to be in the upper range of that 5% to 7%.

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

So thanks for the clarity there. And then, perhaps, if I can jump in real quickly, how are you trending on energy supply as you think about the -- and you said you might be updating this with respect to EEI, but can you elaborate at least initially on how you're trending on the energy supply side of the business? Obviously, there's a number of different moving factors within that segment of the business, renewables increasing, for the legacy stuff declining still. How is that trending altogether, if you can give us a little bit of a sense here, especially, again, relative to that longer-term 5% to 7%?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah, it's going to be up versus what we talked about last year at EEI. But the fact of the matter is, as we've sold off some of the competitive generation and the retiring plans, we're replacing some of those earnings with the renewable business that we have. So it's not declining the way you might expect from the sale of the competitive assets and the retirements, but we filled in some of that gap with the renewable, but we don't expect that to be a huge growing business for us going forward.

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

And by the way on the contract -- contracted renewable, we continue to do very well in that business. Obviously, it's measured with the $2.2 billion of capital that we've allocated to it. The organization there is doing a wonderful job of being judicious about that. Obviously, the acquisition that we made was very positive that the development opportunities are significant there, and we have some other opportunities that we continue to work on. So that pipeline can continue as long as we wanted to continue and to what extent we want to continue. But we're able to make that kind of decision regarding that business because we also have a huge transmission business and a growing distribution business. It's huge already, but there is all kinds of opportunities there. So really our big issue is continuing to manage around a strong and robust balance sheet continue to deploy the capital.

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

Great. I'll leave it there. See you guys soon.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Thanks.

Operator

Next, we’ll go to the line of Steve Fleishman with Wolfe Research. Please go ahead.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Good morning, Steve.

Steve Fleishman -- Wolfe Research -- Analyst

Hey, good morning. I'm -- just a -- first a curious question on the growth at PSO, particularly on energy, because from an energy standpoint, you would have thought that's been the area where the rig count has come down the most. So is there a way to kind of make sense of that?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Well, there has been some industrials that they have in place down there and some expansions. And so, Oklahoma has a governor down there that is really focused on economic development, and, I think, it's having an impact on the state. We're very happy to see that. There is certainly low rates there and the ability to put these industrials in place. But it's probably a more balanced economy as well.

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Steve, even what you're seeing with rig count, a lot of the growth that we've seen has been in mid and downstream, and a lot of that, specifically, in pipeline transportation uncongesting a lot of the shale region congestion that's happened over the last several years, and it's moving the products and commodities out of those regions.

Steve Fleishman -- Wolfe Research -- Analyst

Okay, that makes sense. Thanks. And just, I think, you kind of answered this, but just the renewables acquisition that you made, can you just give us kind of a flavor of how well that's gone versus pro forma, and just how much are you seeing the ability to potentially expand that were not utility renewables?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Yes. So we're particularly pleased with the performance of that particular acquisition, and really in concert with with the other development opportunities that we were focused on. But when you think about the acquisition of not only the projects, and really their economics was based on the active projects, that were ongoing, the developmental opportunities we've hardly placed any value on because we didn't know they would happen, but in fact those have continued to progress quite nicely.

So it really has been an opportunity for us to continue the expansion of that effort. And then you also have to include Santa Rita in that where we’ve continued to expand from that perspective. So I think that business is moving along quite well. We're very disciplined in the way we approach it. And I think it's paid off.

Steve Fleishman -- Wolfe Research -- Analyst

Okay, great. Thank you.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah.

Operator

Our next question is from Christopher Turner with JPMorgan. Please go ahead.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Good morning.

Christopher Turner -- JPMorgan -- Analyst

Good morning guys. My first question is just on forward-looking guidance. I guess, one, it sounds like you would not put out 2021 range at EEI for EPS. And then, two, related to that, can you remind us of the current drivers underlying your 2020 range?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Yeah. So we're likely just to focus on 2020 at EEI and reaffirm our 5% to 7% earnings growth rate. Remember that our guidance for 2020 is $4.25 to $4.45. And we're likely to say that that's what it will be again for 2020. And the key drivers of the things that you would think about for a traditional premium regulated utility, it's rate outcomes, ability to invest in our organic regulated businesses, our ability to continue to invest in contracted renewables, and then, of course, things like weather and load will impact the earnings outlook as well. So not to forget, of course, our ability to constrain as we have over many years, O&M spending, and we're particularly going to be focused on that in 2020.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

You’re going to hear more at EEI about our achieving excellence program that really is focused on a forward view of where our business needs to go and our employees are all energized around it, because we have to redefine our sales going forward. And the outcome of that, obviously, is to be able to deploy more capital, but also to reduce O&M, because you are able to deploy capital and be able to optimize and drive efficiencies through automation digitization and all those kinds of things.

And so for us it's really a focus on changing that business. And the fact that we're coming out with our guidance for 2020 and then the 5% to 7% growth rate. I think, we are comfortable with just doing that because that element of consistency is there, and we don't expect it to change. I mean you can sort of do your own math. And typically what we've done is, when we’re going out of the year, we just did the math for you. So just think of it from that perspective. Now the one thing that could change that is the regulated renewables that are not included in the capital plan. So you could have a step change, and then continue at 5% to 7%. So that's the kind of thing we're looking at right now.

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

A positive step change.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah, positive step change.

Christopher Turner -- JPMorgan -- Analyst

Okay, that's good to hear. So it sounds like some of the positive things over the past year that have changed underlying 2020 are potentially curtailed a little bit, maybe by load or other factors, but net-net, you're pretty much compared to the same place?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Oh, no, we're not say anything is held back in 2020, because, obviously, our transmission business continues to do well and other components of our business does well, and then the load itself, there is components of that load that's doing really well. And from a financial perspective, load will have not that much of an impact on the earnings of the company. So we're not saying that at all. I mean 2020, it’s full speed ahead, and then '21 will obviously see the outcome of the regulated renewable piece of it, and go from there.

Christopher Turner -- JPMorgan -- Analyst

Okay, excellent. And then, just given one of your peers in Texas and some of the back and forth in their rate case proceeding, can you give us an update on kind of the latest in the rate case process and dialog and any thoughts to the overall Texas environment changing?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Well, certainly, Texas is Texas. I mean there is all kinds of opinions and interveners obviously have their opinions. But when it comes down to it, AEP Texas is a transmission and distribution utility. And it's very difficult to disallow costs that are spent from a transmission and a distribution perspective. So that's going to be up to the Texas Commission. And certainly, we have a different pattern than the other one that you referred to. And, every case is different, every company is different, the kind of investments are different. So we feel good about our position in AEP Texas. That's why we continue to invest the way we do. So obviously, we are looking for a positive outcome as a signal to continue investing.

Christopher Turner -- JPMorgan -- Analyst

Okay. Thanks, Nick.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah.

Operator

Next, we’ll go to Greg Gordon with Ever core ISI. Please go ahead.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Hi, Greg.

Greg Gordon -- Evercore ISI -- Analyst

Hey, how are you? Good morning. Great quarter, congrats.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah, thanks.

Greg Gordon -- Evercore ISI -- Analyst

What is the fascination down in Texas with the idea of ring-fencing? I know that it's been proposed in both the -- one of your competitors pending cases as well as staff position is proposing it tenures. [Phonetic] And I'm just wondering what your perspective on that is, and where do you think they're coming from?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah. It's probably better question for the Commission than for us. But, obviously, when -- during the Oncor proceedings that's where sort of all of this started. And obviously, a company like Oncor, they want to make sure that there were some local type of control. And we are already operating in the state and have been for 100 years. And I think the commission, obviously, is interested in how much control was placed within Texas around the assets that they feel like that benefit the state of Texas. So I suspect you may see some remnants of that showing up in various cases, but we have been and are operating in Texas for a long time, and that's not going to change.

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Greg, the thing that's ironic, particularly, given our situation in Texas is that we are a net investor in Texas, meaning we are putting debt and equity capital to work in Texas, rather than taking it out. So for us, I think, they wanted to see us continue doing what we've been doing now for years, which is investing that capital in Texas, rather than taking it out, and that's what we intend to continue doing. Texas is one of the fastest growing territories that we have, and we're not going to, I mean, we're not going to fall back on our ability to invest and produce benefits for our customers. And East Texas, obviously, it's -- we have direct contact with the customers in the ERCOT portion -- it's T&D. But, certainly, I think that this line is getting more blurred all the time, and that's probably a future that needs to be discussed in Texas about how to deal with that. But nevertheless, that's gone for the strategy part of it in the future.

Greg Gordon -- Evercore ISI -- Analyst

Thank you. One more, I know, it's early days, but what is the sort of -- has there been any public response from intervener groups with regard to the North Central Wind proposal? And do we see a more sort of accepting initial response than we did in your Wind Catcher proposal? Or is it too early to say?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

I'd say it's too early to say. At this point there's nothing public that has been out there. But I will say that, we purposely filed this to where it had a lot of variability, a lot of optionally to it, and certainly consistent with the ongoing and existing processes of the integrated resource planning of each one of the areas. And I would say just that fact alone, we've had a more -- at least a more positive reception of how to deal with it.

And so, I would have to say things are going reasonably well at this point. And certainly, the parties involved, no one understands it, because after going through Wind Catcher, this one, you can really talk about what the differences are and the beneficial differences, if they were concerned about transmission, don't be concerned about it. If you are concerned about a large area, just one area of -- don't be concerned about that either. And if you're concerned about dependency on one area versus another, don't worry about that either. So I think our processes and with the procedural schedules already defined in every jurisdiction, we're rolling along to summer of getting the approvals and moving ahead.

Greg Gordon -- Evercore ISI -- Analyst

Fantastic. Thank you guys.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah. Thanks, Greg.

Operator

And next from the line of Gregg Orrill with UBS. Please go ahead.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Good morning.

Gregg Orrill -- UBS -- Analyst

Yeah. Thank you. Good morning. I was wondering if it's possible to get a preview of the capex update at EEI, maybe just -- maybe the drivers and I assume that the backlog would increase?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

So I really want to save the detail of that for EEI. But if you've looked at the trends for how we've been spending dollars over the last decade or so, the preponderance of it going to our regulated properties and the preponderance of that going to the wire-side of the business. So that trend that you've seen in the past is going to continue in the detail that we're going to release at EEI.

Gregg Orrill -- UBS -- Analyst

Okay, thank you. I look forward.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Thanks.

Operator

Next we move to Michael Lapides with Goldman Sachs. Please go ahead.

Michael Lapides -- Goldman Sachs -- Analyst

Good morning guys. Congrats on a good quarter.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah. Big game coming up.

Michael Lapides -- Goldman Sachs -- Analyst

We've got to get a quarter back healthy before we play [Indecipherable]. Couple of things, one, interest rates, obviously, are way down, especially the long end of the curve. Just curious how you're thinking about what this means for not just pension expenses that flow through the income statement, but also pension contributions?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

So that's a great question. We plan every year as we go into the year to pay, to contribute through the pensions about equal to our annual service cost. For the last two years, both '19 and '18, we sort of had a funding holiday, and the decrease in interest rates has pushed down our funding a little bit really into the mid '90s for pensions, and still very well over-funded at the OPEBs. But rates can only go down so much more, I think. And so I think, we don't have much downside on the pension fund. Again, we'll be watching every year what our funding is going to be. For next year, we plan on putting in about $100 million with annual service cost. And we still expect the expense side of that equation to be about zero to maybe a slight positive credit.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

That's a good thing about being well funded on our pension and OPEB. It gives us a lot of flexibility, and really no surprises.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. And then one follow-up, when you think about the dockets, especially, obviously, PSO in the different SWEPCo states for the North Central Wind process. How do you think this is different than what you went through with Wind Catcher?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

I think Wind Catcher was a unique situation. I mean we obviously looked at it and thought that it was a great opportunity for all of these jurisdictions. But -- at the end of the day, there was a large project in one area with a large generation, interconnect, transmission, whatever you want to call it. And you got to hung up on the risk associated with that, particularly with all the customer savings and trying to figure that out and making sure that everyone was comfortable with that kind of project. I still stand by, it was a great project. There is no question about it, but we learned from that.

And I think the more you stick with the regular processes of the commissions are -- have had long-standing, I mean, we've had other renewable projects that we've done the same exact process with, that have gone through with no problem. We want to refashion this thing to make sure it was what everybody expected to see. And when you look at these projects there is three different wind farms that are involved with that with a lot of flexibility on who is in and who is out. And it gives us the ability to not only do that, but also not depend upon additional transmission.

So you don't have to focus on that piece of it. And then also for us to be able to look at the project benefits themselves, those benefits are still substantial. So I would say that, and, of course, the way it worked out in the bidding itself, I didn’t talk about this, but we chose those three projects because they were much better than the others that were bid from a pricing perspective, but also all three of them happen to be with a party that we have continually done business with on a regular basis. So we're very comfortable with the deliverability of those projects. And we feel confident that the savings that we've presented in the various commission filings are secure, and we're very happy about that.

And then also part we got hung up a little bit on our own natural gas forecast versus standard natural gas forecast out there. So even though we thought our forecast was a good one, we decided, okay, we're going to just use a -- those standard forecasts for the evaluations so that everybody knew that it was coming from an independent party and we wouldn't get into the conversation of your forecast is showing more benefits and another standard forecasts. So we did it from that perspective as well. I think the other big difference too, we did have a lot of outreach to the individual staffs and so forth at the various commission levels, with Wind Catcher, they try to explain what it was about.

Well, it's sort of a natural progression for us to be able to move to the outreach programs that we have because we've already had substantial discussions of the benefits of wind power in general. Now, it's a matter of, okay, this is what the RFP process is, this is what the wind power that's available, the attractiveness of the wind power and we're going through the regular process to do it. And that communication has been positive, and we've also communicated with other parties in the process too to let them know what's going on. So, I would say that all-in-all, it's been a much better and probably a much more pleasant experience than before.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you, Nick. One last thing, tax rates, how should we think about what the consolidated tax rate for income statement reporting purposes, it's going to be in 2019, like what are you assuming in guidance?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

So for GAAP taxes, we're anticipating about a 2.6% to 3%, effective tax rate for the year, obviously, driven down by the amortization of the deferred protected and unprotected taxes. But for 2019, there's also an AMT credit carry-forward from prior periods. So that 2.6% to 3% is going to be lower than what we anticipate going forward where we anticipate a rate after the amortization of the deferred taxes to be about 10% going forward.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Meaning if I think about 2020 tax rate in 2021, you're using about 10% for guidance for those years.

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

We are, but, and let me be clear about that. That's what we're using for guidance. That's what's in our numbers. That's what we figure to be around that 10%. If we were to have incremental income because we're maxing to the 75% allowed for the deferred taxes, if we were -- I'm sorry, for the production tax credits, if you were to have incremental income and you were trying to model that in, you should use a 24% rate. Does that make sense?

Michael Lapides -- Goldman Sachs -- Analyst

I think so, but I can follow-up offline guys.

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

All right. So let me just try to be clear. What's in our $4.25 to $4.45 guidance for 2020 assumes an effective tax rate of about 10%. If you were to layer in incremental you would need to use a 24% rate.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Understood. So you'd have to -- it has to be a lot of incremental to move the needle on the weighted average.

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Yes, sir.

Michael Lapides -- Goldman Sachs -- Analyst

Cool. Thank you, Brian. Much appreciate it guys.

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Thanks, Michael.

Operator

Next we'll go to Angie Storozynski with Macquarie. Please go ahead.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Morning, Angie.

Angie Storozynski -- Macquarie -- Analyst

Good morning. So two questions. First going back to the oil and gas related sales. So you mentioned pipeline investments. But we're actually hearing that drillers are switching pumps from diesel to electric, and that could be a meaningful driver of sales growth of electric companies, that serves companies in the shale regions. Are you seeing this?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Angie, yeah, that's been going on for a while, actually, the conversion to electric. And then also when you look at the transportation fees, there is a lot of activity around ability to get out of the shale gas fields, and to get gas out of the shale gas field. So it is not a lot of optimization on the transmission side. Brian?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Yeah, it's a lot of -- rather than just on the pumping side and pipeline transportation, we're seeing a lot of electric compression.

Angie Storozynski -- Macquarie -- Analyst

Okay. And then, to that point, you were showing us of the sensitivity of earnings, so changes in industrial sales is actually really low. So O&M, the plan that you give some efficiencies on the O&M side that you plan to unveil at the EEI, that would be actually a more meaningful earnings driver. Is that fair?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah, I think, one of the key areas we look at is -- we need to deploy capital and reduce O&M, because if you think about load in general, I think, this is for many Utilities, but load in general, you can't have the expectation of ever increasing energy demand, you got to really think about efficiency, what it means, and what it means to the economy. And also, if you assume that, then the way that you continue to grow from a 5% to 7%, which we've confirmed, is not only to deploy capital, but to reduce O&M. So it's a -- and that's why we say bending the O&M curve or doing those kinds of activities is going to be a key component in the future, I would say not for us -- but -- not just for us, but for just about every utility.

Angie Storozynski -- Macquarie -- Analyst

Okay. And lastly, so I understand that the rate-based renewables are not currently embedded in either your capex plan or funding needs. I mean, assuming that come mid of next year, you get a green light, at least on the portion of this incremental capex, you would probably have incremental equity needs to fund this spending. Would you consider some sort of an optimization of your current portfolio as a way to pay for this capex?

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yes, we would. And I think, one of the big processes we have going forward will be around optimization of our balance sheet and capital -- capital rotation, and capital management, and asset management goes with that. Obviously, it'd be a great opportunity to get the wind power resources, and we will be looking at all kinds of methods to be able to fund that investment.

Angie Storozynski -- Macquarie -- Analyst

Very good. Thank you.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah. Thank you.

Darcy Reese -- Director, Investor Relations

Hey, John, we have time for one more call.

Operator

And that will be from Ali Agha with SunTrust Robinson Humphrey. Please go ahead.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good morning. First question, Brian or Nick, I just wanted to understand the philosophy behind the annual dividend changes. As you mentioned, last year you moved it up 8%, and I believe that was to get you to the midpoint of your payout ratio. This year it's gone up 4.5%, perhaps, brings you little below that midpoint. So just thinking the lumpiness there, how should we think about the philosophy behind that?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

Yeah, we're trying to keep it right in the middle of the payout range, and that's what we do this year. You put last year and this year together, it's above the mid point of our long-term growth rate for earnings. And I think the Board is trying to reward investors by keeping it right in the midpoint of that 60% to 70% on a stated payout ratio.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

It's just unfortunate that we have quarters and years around the annual calendar and stuff like that, but a lot times you're looking at these -- the dividend side of things, and, of course, it's going to move generally in that 5% to 7%. And there is no secret that it's tagged around the 6% range. And we are committed to stay in -- firmly, in the middle of that 60% to 70% payout range, but there's a lot of things to consider. I mean, we got the same questions when we did it at 8.1% last year. What does that mean? So we're reiterating that it will be in line with our 5% to 7% growth rate. But year-to-year, you see just things that round off on pennies and that kind of thing. There should not be any interpretation that our Board feels any differently about the prospects of growth of this company in the future. And so, we debated that quite a bit because we did want to reaffirm this 5% to 7% growth rate. So don't read anything into it.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Got you. And then last question. With regards to the 2020 range of $4.25 to $4.45, I mean that was put out a long time back, I think, last EEI, if I recall, and lots has happened. You've got some very good rate case outcomes, Oklahoma, etc. So any thought on that? I mean, and especially, how '19 is turning out that maybe you could move that up, or maybe the upper half or the brand is more comfortable as we sit here today? Any thoughts around that?

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

We're just -- we're going to refresh that at EEI, Ali, but, Nick always says we we'd be disappointed if we weren't in the upper end of the range, and I think that's going to be true. For 2019 and 2020 and...

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Ali, some of these things just sort of have to prove themselves up over time. And we went to 5% to 7% after we sold the unregulated generation, we were at 4% to 6% at that point, because we felt like that 5% to 7% was something that we saw going forward for the long term, and it is a long-term growth rate. So we'll have to see -- obviously, we're seeing some positive outcomes, and we continue to see that. The question is, okay, how sustainable is that on a long-term basis going forward based on what we see today. And we're comfortable with the 5% to 7%, we're getting more comfortable with the upper ranges of 5% to 7%. But -- before you change to 6% to 8%, or you've asked about 10%, it's -- you have to be able to credibly see that for the long term, and that's something you have to sort of warm over to over time.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Understood. Thank you.

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Yeah.

Darcy Reese -- Director, Investor Relations

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

Operator

Definitely. Ladies and gentlemen, the replay starts today in 11.15 A.M. Eastern. It will last until October 31 at midnight. You may access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code is 472043. Those numbers again 1800-475-6701 or 320-365-3844. The access code 472043.

Duration: 64 minutes

Call participants:

Darcy Reese -- Director, Investor Relations

Nicholas K. Akins -- Chairman, President and Chief Executive Officer

Brian X. Tierney -- Executive Vice President and Chief Financial Officer

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

Steve Fleishman -- Wolfe Research -- Analyst

Christopher Turner -- JPMorgan -- Analyst

Greg Gordon -- Evercore ISI -- Analyst

Gregg Orrill -- UBS -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Angie Storozynski -- Macquarie -- Analyst

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

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