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American Electric Power Inc (NYSE:AEP)
Q4 2019 Earnings Call
Feb 20, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American Electric Power Fourth Quarter 2019 Earnings Release Conference Call. At this time, all participant lines are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Darcy Reese. Please go ahead.

Darcy Reese -- Managing Director, Investor Relations

Thank you, Tiffany. Good morning, everyone, and welcome to the fourth quarter 2019 earnings call for American Electric Power. Thank you for taking time today to join us. 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. Good morning everyone and thank you for joining us today for AEP's fourth quarter 2019 earnings call.

I'll certainly spend some time reporting on the final quarter of the year and how the year has concluded. But there is no question, AEP has hit the ground running in 2020. I know I live in Columbus, Ohio, and I do look for the Buckeyes if they're not playing LSU. But I have to use LSU analogy given their victory in college football national championship. The way in which the LSU offense executed during the season is the way I feel about our AEP team, whether it's our emphasis on customer experience, regulatory activity, major projects and initiatives, contracted and regulated renewables, capital allocation, O&M optimization, and our focus on culture innovation and operational excellence. These are just a few of the plays in the playbook that continue to be executed flawlessly with the talent that our team possesses. The results of 2019 indicate that, and the success so far in 2020 of major initiatives that I will cover today, indicate that as well. But first, let's discuss 2019. 2019 was a great year for the company. We delivered operating earnings of $0.60 per share for the quarter, bringing our operating earnings for 2019 to $4.24 per share, which was at the top end of our revised guidance range of $4.14 to $4.24 per share.

As we shared at the last EEI Financial Conference, AEP has a habit of hitting the upper half of the guidance range if not exceeding it, and this year has been no exception. As we have said repeatedly, we would be disappointed in not achieving the same track record in the future. Brian will cover GAAP and operating earnings later in today's presentation.

Additionally, for 2019, we had an average regulated ROE of 9.7% for the year, an increase of dividend as well during the fourth quarter 2019. It was also another year of rate case activity with the completion of cases in West Virginia, Oklahoma and Arkansas and additional filings made in Indiana, Michigan and Texas.

We also filed for regulatory approvals at the PSO and SWEPCO jurisdictions, Oklahoma, Arkansas, Louisiana and Texas for North Central Wind of 1,485 megawatt wind investment, all of which I will update later. And during 2019, we acquired the Sempra Wind portfolio, which in addition to our other contract renewables portfolio has delivered beyond our expectations.

Lastly, as we promised during last year's EEI Financial Conference, we are focusing on bending the O&M curve with an eye toward the future. Late last year we kicked off our Achieving Excellence Program to not only further optimize O&M, but set the tone for a sustainable and lasting culture change that constantly demands a forward-looking view of efficiency gains through process and technology reviews.

Brian will give the details of load growth, but I'll frame the discussion by saying that although load decreased in the fourth quarter compared to the previous year, we've seen consistent improvement in our commercial class of customers through 2019, mainly in education, healthcare. And while industrial growth has slowed, we still anticipate further additions in industrial load during 2020. So, we're still projecting an increase in load for 2020.

We have several areas of focus for 2020. First of all, delivering operating earnings within the guidance range of $4.25 to $4.45 per share with a midpoint of $4.35 per share. We will continue to focus on disciplined capital allocation, investing $6.3 billion in capex, substantially in our regulated wires businesses.

We are pleased with the progress of our contracted renewables and fully expect that part of our business to continue to grow as well. Because of very positive focus on fully utilizing our balance sheet for growth in dividends, you can expect a more refined approach to capital allocation rotation as we further develop opportunities for earnings growth associated with the capital we deploy.

We expect to continue to develop 5% to 7% operating earnings growth. And again, we would expect a step change of the base for earnings growth after North Central comes into play and continue with the 5% to 7% growth trajectory beyond that. We anticipate more granularity on that by the time we reach November EEI. Additionally, as we have said before, we will be disappointed if we are not in the upper half of that growth rate.

Additionally, we will be finalizing base rate cases in Indiana, Michigan and Texas, with constructive results, and I will describe -- that I will describe in a minute, and we'll be initiating rate cases in Ohio, Louisiana and most likely Kentucky as well.

First, the cases with settlements. In Michigan I&M filed unanimous settlement in early January of 2020 with the net revenue requirement of $30 million, authorized ROE of 9.86%, and effective date of February 1, 2020. Adjustments for wholesale load loss were approved. So overall, a good settlement that was approved by Michigan Commission in January.

During fourth quarter, the Arkansas base case was completed with a unanimous settlement filed in October and approved by the Arkansas Public Service Commission in December 2019. It included an $18 million net increase, a 9.45% ROE with a cap structure of 52.1%, 47.9%, debt-to-equity, with a formula rate plan process for 5 years.

Regarding Texas, on February 13 of this year, AEP Texas filed a settlement that included a $40 million revenue requirement reduction with a 9.4% ROE and the cap structure of $57.5 million debt, $42.5 million equity along with other disallowances and refunds associated with capital disallowances and tax reform.

The settlement also included deferral of capitalized vegetation management into a regulatory asset collected over 5 years and our commitment to file another base case within 4 years and it left to the PUCT to decide the ring-fencing issue.

It appears the Commission dealt with the ring-fencing issue in a positive way in the CenterPoint case. So hopefully, we'll be treated favorably as well. We anticipate the PUCT will take up the case at the February 27 open meeting.

In the Indiana base case, a hearing was held in October. We continue to await an order and still expect the order to be effective in March of 2020. Regarding the other cases in Ohio, Louisiana and Virginia, SWEPCO Louisiana initiated a base rate proceeding previously ordered by the LPSC. SWEPCO plans to supplement this filing with the cost of service study and additional testimony during 2020 after the present 2017 formula rate plan is completed.

In Ohio, we will file our next distribution rate case by June 2020. We now expect this case to be unusually regard, most likely we'll request a fairly low increase in rates. We will also review the distribution investment rider as part of this case. So, more to come later in 2020 on this case.

In APCo Virginia, we're required to file in March and we'll show that we are below the bottom of the earnings range for the 2017, 2019 triennial period. In December 2019, we impaired $93 million before tax related to the early retirement of three coal units as allowed under Virginia law. This enabled us to file for a rate increase and we would expect new rates to be effective in February 2021.

Now, onto the North Central Wind project. We continue to make positive progress on this 1,485 megawatt wind project that will benefit PSO and SWEPCO customers. In December 2019, we filed a settlement agreement in Oklahoma for 675 megawatts and in late January of this year, we filed a settlement agreement with parties in Arkansas for 171 megawatts. Together, if approved by the Oklahoma and Arkansas commissions, that represents about $1.1 billion of incremental capital opportunity and meets the threshold to move forward with the project regardless of Louisiana and Texas outcomes.

To move forward with the entire project representing $2 billion of incremental investment, we would require Louisiana and Texas to approve their portions or for the other jurisdictions to take advantage of the flex up options in another jurisdiction, if other jurisdictions does not move forward.

While the Oklahoma settlement does not include the flex-up option, the Arkansas settlement does recommend this option. So, for example, if Louisiana were to flex-up, Texas would no longer be required. However, I would say we welcome settlement discussions in both Louisiana and Texas and remain hopeful that these jurisdictions will also recognize the value that these investments will deliver to customers.

First up, the bat for approval is Oklahoma, which is -- its own the signing agenda actually for today and Arkansas approvals are expected in May of this year. So, great progress and we are optimistic about the future of North Central Wind.

Of course, regarding the financing, as you might recall, the current $33 billion capex plan provided the EEI which goes through 2024, supports a 5% to 7% growth rate and does not include North Central Wind. Although the actual size and investment is still yet to be determined and if you were to ask about a base case assumption, our current thinking is to finance the acquisition with somewhere between 50 to 2/3 equity.

We will time the raising of capital with the execution of the project. In the event of any asset sale or rotation, we'll consider relevant proceeds as part of the financial decision. The capex associated with this project will be incremental to the current capex plan and will result in a step change to base in which to measure our continued 5% to 7% growth rate.

We are committed to our 5% to 7% growth rate, and this will not change, but the addition of this project is expected to put us solidly in the upper half of the range.

Now, since we have talked about some of the growth-related issues, let's discuss our Achieving Excellence Program that will enable us to bend the O&M curve. Over the last decade, AEP has successfully been able to manage O&M relatively flat. We historically focused on identifying efficiencies implemented with a lean management system throughout the organization. A couple of years ago we were put in touch with the company EHS Partners, actually through State Auto CEO, at the time to specialize as an engaging company, is to focus on generation and enactment of cost savings ideas.

They have also worked with other companies in our space and came highly recommended. We were not only looking for reviews of existing processes and activities but also with an eye toward digitization optimization and sustainability review in the future. The program is called the Achieving Excellence program and it is an employee-based O&M prioritization and optimization effort to drive down cost in 2020 and beyond.

Going forward, we expect to find additional efficiencies with the program through data analytics, automation, digital tools, use of drones, outsourcing, workforce planning, strategic sourcing and others. We started the intensive process last year and are currently in the process of validating thousands of ideas and are presently targeting approximately 1,000 for validation and execution. Some have already started in order to leverage into 2020.

Examples of ideas include various use of telematics to optimize crew routing and utilization, robotic process automation for labor intensive processes like some aspects of accounting and various uses for drones for boiler distribution inspections and so forth. This process is kicking in the year and will become part of our budgeting process each year and ultimately embedded into our culture of innovation. More to come on that later in the year.

We are no doubt in a transformational time in our industry. Our resources are changing dramatically and we intend on moving toward a clean energy future as quickly as possible. From the North Central project to the recent announcements to the Flat Ridge 3 wind project in Kansas, that's being sold to Evergy, the output is being sold to Evergy, and to our South Bend solar installation that we partnered with Notre Dame on. The IURC, the Indiana Utility Regulatory Commission, just approved that yesterday.

And with Google, Facebook and Amazon, resources are indeed changing. In fact, by the end of 2020, we will have retired over 10,000 megawatts of generation to make way for the resources of the future. This process will continue for AEP and certainly represents another great opportunity to invest capital for the betterment of the customer experience, to improve reliability and resiliency of the grid, and to continue to improve our carbon emissions.

This process will continue in working with our commissions and other stakeholders and through the development of our integrated resource plans. So, when you think about the opportunities for generation, transformation, investment and transmission, the renaissance of distribution, distributed resources and the electrification of transportation in other areas, you can't help but be bullish about the future of this industry, and particularly AEP with checkmarks in every category.

So, now, I'll move to the equalizer graph and talk about some of the individual jurisdictions. So, overall, we have regulated operations ROE of 9.7%. We generally project the ROE for our regulated segments to be combined in the 9.5% to 10% range. Note that AEP Transmission Holdco is now probably our second largest company based on average equity after APCo with AEP Ohio, I&M, SWEPCO and AEP Texas all roughly comparable sizes to each other. And certainly, if PSO approves the North Central project, they will pick up as well. So, we have -- we're actually pretty well off with subsidiaries. They're roughly about the same size with a lot of diversity.

AEP Ohio, the ROE at the end of the fourth quarter was 12.3%. It's 9.6% adjusted for the legacy items and the legacy items are still the legacy fuel and capacity carrying charges that will be rolling off probably during this year. So, we'll start tapering off to the roughly around 10% ROE as those areas roll off.

APCo, at the end of the fourth quarter 2019 was 9.2%, is below authorized due to lower normalized usage, increased other taxes and higher depreciation from increased capital investments, partially offset by favorable weather. West Virginia implemented new base rates in March of 2019, including $44 million base rate increase based at 9.75% ROE. And as I mentioned earlier before, the Virginia triennial review is in 2020 and will cover those periods as well.

As far as Kentucky is concerned, the ROE for Kentucky at the end of fourth quarter was 7.4%, and it's below authorized due to loss of load from weak economic conditions and loss of major customers along with higher expenses. Transmission revenues were also lower due to the delay of some capital projects. I&M at the end of fourth quarter was 11%, ROE was above authorized due to favorable weather, timing of expenses and one-time adjustments. I&M expects ROEs to be in the authorized range going forward with the continued successful execution of capital programs and generation, transmission, distribution and the recent future test year cases in Indiana and Michigan.

PSO, at the end of fourth quarter was 10.7%. PSO's ROE was above authorized, mainly due to favorable one-time true ups and weather. PSO received an order on its base case settlement effective April 2019, approving a $46 million increase of transmission tracker, ROE of 9.4% and the cap structure of 51.86% debt, 48.14% equity.

The ROE for SWEPCO at the end of the fourth quarter was 6.8%. That was below authorized due to loss of load, mainly the wholesale load and continued impact of the Arkansas share of the Turk plant that is not in retail rates. This, and certainly as we said before Turk, that portion of Turk impacts the ROE by about 125 basis points.

SWEPCO received an order in its Arkansas base case settlement, as I mentioned before. So, we expect an uptick on its ROE going forward.

AEP Texas fourth quarter was 7.7%. And as you know, as I just mentioned, the AEP Texas rate case was going on, expecting an output of that pretty soon. And then also, the T cost and DCRF filings that we usually file annually aren't made during the annual period of the rate case.

So, there is a lag associated with that. And while earnings should improve in 2020 after we can resume these annual filings, continued high levels of investment will continue to impact the ROE as well.

So, investing heavily there. The annual trackers are particularly important, and it will be great to resurrect those and keep on going after the outcome of the rate case.

AEP Transmission Holdco, the ROE for AEP Transmission is at 11.5% and is driven by higher revenues due to the differences between actual and forecasted revenues, as well as a favorable true-up. And we expect transmissions forecasting to be in the mid 10% range in 2020.

So, with that said, we're still making progress from that perspective. And the ones that are lower, we have rate cases that are planned and we have a stay-out provision in Kentucky. So, until June, we'll be most likely filing a case then there as well. So, all of them should be moving in the right direction.

So lastly, as many of you know, I'm a lifelong drummer and out of respect for Neil Peart of Rush, one of the greatest drummers of all time, as well as lyricist and novelist, who passed away in January. I'll leave you with this thought before turning it over to Brian. In his novel Clockwork Angels, and the song titled The Garden, he wrote: "The measure of a life is a measure of love and respect. So hard to earn, so easily burned. In the fullness of time a garden to nurture and protect."

This is true in life and is also true for companies like AEP. We strive for our investors and other stakeholders to love what we're doing and respect the work that we do through operational excellence, financial discipline and innovation.

The track record of consistent earnings and dividend quality and the focus on our communities and customers is central to our continued mission of being the premium regulated utility. And once again, last year in 2019, we continue that progress, now on to 2020, rock on. Brian?

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

So, thank you Nick. I'll ask the participants to listen carefully because although it's a little bit subtle, this is in fact me rocking on. So, good morning, everyone. I will take us through the fourth quarter and full year financial results focusing primarily on year-to-date, provide some insight on the economy, review our balance sheet and liquidity and finish with a review of our outlook for 2020.

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 fourth quarter were $0.31 per share compared to $0.74 in 2018. GAAP earnings for the year were $3.89 per share compared to $3.90 per share in 2018. There is a reconciliation of GAAP to operating earnings in the appendix.

We have consistently provided value for our shareholders, outperforming the S&P500 Electric Utilities Index and total shareholder return this year, and both the S&P 500 and Electric Utilities Index over the 3 and 5-year periods respectively.

Let's turn to Slide 7. The fourth quarter operating earnings were $0.60 per share or $294 million, compared to $0.72 per share or $354 million in 2018. The detail by segment is shown in the boxes on the chart. But the change in our regulated businesses was driven by high planned O&M and depreciation, more than offsetting the return on incremental investment.

Generation & Marketing was down $0.07 from last year, primarily driven by the expected timing of taxes. This segment reflects the growth in the renewables business and favorable retail margins, which offset lower capacity and energy margins in the generation business.

Corporate and Other was up $0.02 primarily due to lower income taxes from the expected timing of consolidated tax adjustments, partially offset by higher state taxes.

Let's turn to Slide 8 and review our full-year results. Annual operating earnings for 2019 were $4.24 per share or $2.1 billion, compared to $3.95 per share or $1.9 billion in 2018. Looking at the drivers by segment, operating earnings for the Vertically Integrated Utilities were $2.17 per share, up $0.17 with successful implementation of rate changes being the largest driver.

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 2018, subtracting $0.16. Normalized load was also down for the year and depreciation increased as well.

The Transmission & Distribution Utility segment earned $1 per share, down $0.05 from last year. Earnings in this segment declined due to the roll off of legacy riders in Ohio, lower normalized retail margins and higher O&M, depreciation and property taxes. These items were partially offset by the recovery of increased transmission investment in ERCOT, higher rate changes, the reversal of a regulatory provision in Ohio, favorable carrying charges in Texas and lower income taxes.

The AEP Transmission Holdco segment continues to grow, contributing $1.05 per share, making this the second largest segment for operating earnings. The improvement in earnings of $0.30 over 2018 reflected a return on incremental rate base, the non-recurring prior year accounting adjustment, a favorable annual true up and FERC settlement, as well as higher AFUDC. Net plant increased by $1.5 billion or 18% since December of 2018.

Generation & Marketing produced $0.30 per share. The renewables business grew with the repowering of Trent Mesa and Desert Sky, as well as the acquisition of multiple renewable assets. Increases in retail margins were offset by lower generation sales due to lower energy prices, retirement of plant and outages.

Finally, Corporate and Other was down $0.14 driven by higher tax expense primarily from state taxes and a prior period tax adjustment. Interest expense was also higher. For 2019, we are pleased with our results as we landed in the upper end of our increased earnings guidance range.

Now, let's turn to Slide 9, to provide an update on our system load. Starting in the lower right chart, normalized retail sales declined by 1.5% in the fourth quarter compared to 2018. The growth in commercial sales this quarter was more than offset by the decline in industrial and residential sales.

For 2019, AEP's normalized retail sales were down 0.008% from the prior year. Sales were down across all customer classes and most operating companies in 2019.

Moving counterclockwise, normalized commercial sales increased by 0.5% for the quarter. The results varied by operating company, but were strongest in the Transmission & Distribution Utility segment. The commercial sectors that experienced the fastest growth for the quarter were utilities, government support offices, and accommodation.

For the annual comparison, normalized commercial sales were down 0.004% in 2018. Not surprising, the sector that saw the biggest decline in 2019 with traditional retail. By contrast, there has been consistent improvement over the past 12 months in commercial sales growth.

Moving left, normalized residential sales decreased by 0.009% for the quarter. Residential sales were up in the West Vertically Integrated Utilities, but lost momentum elsewhere. While personal income growth across AEP's footprint outpaced inflation for the quarter it was unable to keep pace with incomes for the rest of the U.S.

For the year, normalized residential sales were essentially flat compared to 2018. Customer counts increased by 0.003%, while normalized usage decreased by 0.004%.

Finally, in the lower left chart, industrial sales decreased by 3.5% in the fourth quarter, which brought the annual comparison to 1.9% below 2018. For both periods, industrial sales were down across most operating companies.

Looking forward to 2020, we are projecting normalized load growth of 0.005% over 2019. The majority of this growth is expected to come from the industrial class, where a number of industrial expansions are expected to come online.

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.

Sales to oil and gas industry has increased by 3.5% in the fourth quarter and end of the year 4.4% higher than 2018. This was largely driven by the 17% growth in the pipeline transportation sector.

Most of this growth was the result of a number of anticipated expansions that addressed congestion in the major shale regions in our service territory. There are additional oil and gas related expansions that should provide continued growth in 2020.

Focusing your attention on the green bars, the non-oil and gas industrials were down 6.1% for the quarter and ended the year down 4.2%. 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 for AEP service territory was 2.1% for the quarter, which is 0.003% below the U.S. All of our service territories experienced GDP growth for the quarter with Texas being the strongest.

Moving to the right chart, employment growth for AEP service territory improved to 0.008% above 2018, while U.S. growth moderated slightly in the fourth quarter. Throughout the AEP footprint, nearly 20,000 jobs were added in the fourth quarter with a third of those coming from the education and healthcare sector.

Now, let's turn to Slide 12 and review the company's capitalization and liquidity. Our debt-to-total-capital ratio increased during the quarter to 59.8% from 58.7%, as we borrowed to fund our investment program.

Our FFO-to-debt ratio stood at 13.5% on a GAAP basis and 13.9% based on Moody's methodology, reflecting increased debt and the impact of the flow back of ADIT through customer rates.

Importantly, this is consistent with the drivers embedded in our guidance provided at the November 2019 EEI Conference. Liquidity remained strong at $2.1 billion, supported by our revolving credit facility.

Our qualified pension funding increased approximately 3% to 97%, and our OPEB funding increased approximately 22% to 145%. Positive equity returns combined with rising yields that decreased pension and OPEB liabilities, resulted in improvements in both plans funded status. The OPEB funded status also benefited from legislation the President signed in December that repeal the Cadillac tax and health insurance fee.

Let's try and wrap this up on Slide 13 and get to your questions. We begin 2020 with a solid track record. Our 2019 earnings were strong as we continue to invest capital in our businesses and earn a return on this investment.

We successfully integrated new contracted renewables into our portfolio. For nine 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. Our dividend payout ratio is solidly in our 60% to 70% targeted range.

Looking ahead to 2020, we are reiterating our operating earnings guidance of $4.25 to $4.45 per share. We will finalize our pending rate cases and move forward with additional opportunities in the renewable space. We will continue our disciplined approach to allocating capital and are confident that there is significant runway in our capital programs to reaffirm our long-term operating earnings growth rate of 5% to 7%.

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 Ali Agha with STRH. Please go ahead.

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

Good morning, Ali.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Good morning, thank you. First question I just wanted to confirm that the 5% to 7% growth rate, is that still based off the original midpoint of 2018?

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

Yes. Yes, it is. Yes.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Okay. And then in the past, I know Nick and Brian, you've talked about -- when you talked about the 5% to 7%, you've talked about hitting the high end of the range. I think today, I heard you say upper half. So, I just wanted to be clear, is the aspiration upper half or is it the high end, which I’ve heard you say in the past as well?

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

Yes. So, we say the upper half as far as the generalization obviously. And as we go forward, there is no question. I mean, we'd be disappointed. It's pretty much the same thing to us.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Okay. And then Nick, can you give us your latest thoughts on Kentucky Power and where that fits in the portfolio? Might that be a source of funding for North Central wind, just how you're thinking about it currently?

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

Well, certainly, we're in a position now to where we can -- we have uses for, certainly, for capital to invest. We're able to look at our entire portfolio and determine, okay, is there an opportunity for rotation, is there an opportunity for sale of assets, those types of things? But certainly, Kentucky remains a part of our portfolio, obviously, as we look at any future positive investment we're making.

I think it's probably safe to say, and you probably see from the FFO to debt and other credit metrics, that they were fully utilized in our balance sheet. So, we're moving into a stage where we have to think about optimization from an ROE standpoint for our investors. And that forces us to look at sources and uses. So, no, I'm not commenting on Kentucky in particular.

I think it's important to say that now we're a fully regulated utility. We can look at investments across the board and see what the best approach is. And I think that's what we're certainly alluding to as we go through this process. And really, with North Central, by the time the investment is needed, we have time to go through that process.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

I got you. Last question, Brian. Looking at your 2020 load growth projections, what's causing residential to fall off more significantly in '20, versus the trend we saw in '19?

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

It's just a normal business cycle, in that we see residential and commercial generally follow industrial. And now, industrial is starting to come out of that and residential and commercial just haven't followed yet. It's really just a normal business cycle.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Got you. Thank you.

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

Thank you, Ali.

Operator

Our next question comes from Andrew Weisel with Scotiabank. Please go ahead.

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

Good morning, Andrew.

Andrew Weisel -- Scotiabank -- Analyst

Hey, good morning. My first question is on dividends. The 2020 increase was 4.5% versus guidance that is growing approximately in line with EPS growth at the high end really at 5% to 7% range. So can you just remind us what the latest thinking is on what to expect going forward and if 6% would be a good bogey?

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

Yes, it's unchanged. We fully expect our dividend growth will be commensurate with our earnings growth. And as you know, we've talked about this, the 4.5% this year and then the previous year was 8.2% or something like that. So, it averages out to 6%. We focus on nominally the 6%, so you can expect that in the future.

Andrew Weisel -- Scotiabank -- Analyst

Okay, great. Just wanted to affirm that. Next question, forgive me if I missed it, but can you describe what you're expecting around FERC approved transmission ROEs for your subs and would you expect your PJM and SPP allowed ROEs to be within the range of the reasonableness?

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

Yes. So, obviously we have that case in the Northeast that is brought up, at least some issues. And certainly, that's been evaluated. A lot of parties have filed to review that outcome of the MISO case. And that was really the one that I think sort of send a message that previously in Northeast there was a mechanism for four different measures and it went to two different measures with MISO and I think it maybe had some unintended consequences hopefully.

But certainly, the industries responded, AEP has responded as far as Transource. We have settlements in the East and the West. And in the East, we have a stay-out provision, and in the West we do not. So, but it wouldn't make any sense for filings to occur while the FERC is continuing to review the outcome of the MISO rehearing that's occurring. So, yes, so the stay-out was in SPP. So, just want to make sure of that.

But nevertheless, right now though, our rates, we view them as consistent with that realm of reasonableness and we continue to see it that way. And I think as we get through the rehearing at FERC, I think there's certainly an opportunity for us to ensure that that's the case going forward.

Andrew Weisel -- Scotiabank -- Analyst

Any sense of when we might have better clarity on that? I know it's a tough process to predict everything at FERC, it's tough to predict in terms of timing.

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

Yes. You have to ask FERC that question, but I think that -- certainly, I think there's necessity to get it resolved quickly because it's brought a lot of unintended risk into the investment and transmission. And I think it's important to get it rectified earlier. And as you might recall, the FERC did start looking at -- actually, our past project as a proxy for evaluation of what an ongoing view should look like and we view that as promising.

And certainly, they have reacted reasonably quickly from that perspective. And I think they recognize that the market is truly watching in terms of what FERC's philosophy is relative to transmission investment, which I believe is unchanged. And actually, I think at least what I've heard from the commissioners and public forums is that the transmission continues to be an investment that's required for optimization of the grid and historically they've incentivized that and I fully expect them to continue to do that.

Andrew Weisel -- Scotiabank -- Analyst

Great, that's very helpful. One last quick one. I know the Texas rate case settlement doesn't directly impact the North Central wind proposal. But did that come up at all in your discussions? Did the interveners give any indication about how they're thinking about it?

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

No. I think they are being dealt with completely separately. AEP Texas is the case -- it's the base case. And then actually, the wind project is in the SWEPCO jurisdiction associated with Texas. So, it's still integrated regulated in that part of Texas and they're used to dealing with wind request. It's happened before. There's a lot of precedence for review of the wind projects, and certainly, we were building upon what we learned from the previous wind catcher activity and filed something that we felt like addressed the concerns during that period of time.

We also dealt with it in a way that's consistent with the integrated resource planning processes and something that's fairly innocuous in terms of review by the Commission. So, we certainly -- and as I said earlier, I think Oklahoma and Arkansas are well on their way, Louisiana and Texas are certainly in the process. So -- and we would certainly are hopeful that they'll continue to see the benefits of that project as well and get it done, very quickly.

Andrew Weisel -- Scotiabank -- Analyst

Right. I know they're separate jurisdictions.

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

Yes.

Andrew Weisel -- Scotiabank -- Analyst

I was just asking, because I think there's a lot of overlapping interveners. But, fair enough. I appreciate the color. Thank you.

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

No, there's not really, I mean, the interveners themselves maybe the same, but the issues are very different.

Andrew Weisel -- Scotiabank -- Analyst

Understood, thanks.

Operator

Our next question comes from Praful Mehta with Citigroup. Please go ahead.

Praful Mehta -- Analyst

Hi. Good morning, guys. Congrats on a good quarter and a good year.

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

Thanks.

Praful Mehta -- Citigroup, Inc.-- Analyst

So, just wanted to clarify, again on the equity point and the credit point first. It was helpful to get the overall perspective on how you look at the portfolio and the credit clearly. At this point, your balance sheet is being utilized well. So, if North Central were to move forward, is the understanding that if there isn't any portfolio optimization opportunity that some equity would be issued at some point? Just wanted to clarify the timing of that and any further thoughts on that credit and equity point?

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

Yes. So, I'll turn it over to Brian in a second, but certainly, our view is that we sort of presented a base case of without any rotation or any of those kinds of activities occurring, we would expect equity to be issued in that 50 to two-thirds range. So, I think that's at least the going-in position. And certainly, we're saying the project is entirely 100% incremental to our existing capital forecast. So, you would expect equity, but if there is any kind of capital rotation or sale of assets that mitigates the need for any portion or all of the equity, then certainly that will be a part of the process. Brian?

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

Yes, the only additional color I'd add to that Praful is, we think that we could time any equity needs consistently with when the projects for North Central Wind would come online, a small portion at the end of 2020 and a much more significant portion at the end of '21.

Praful Mehta -- Citigroup, Inc.-- Analyst

Got it. Okay. So, the earnings and the dilution probably match that helps kind of with the earnings profile then?

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

That's right. We think we could time them very closely.

Praful Mehta -- Citigroup, Inc.-- Analyst

Okay, perfect. And then just secondly on the renewable opportunities which you highlight, is this more utility side renewables or is it more on the unregulated side or both? If you can just give a little bit more color and also how big do you see the opportunity to be? Because clearly, everybody seems to be investing more on that side and there is a significant opportunity. So, if you can scale that for us that would be helpful too.

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

Yes. So, it's on both sides of the ledger. And obviously, we still have integrated regulated jurisdictions and the one South Bend project in partnership with Notre Dame, that's on the regulated Indiana Michigan Power. And then also, there's projects that others have done in our regulated footprint. And as well, on the contracted side, we continue to advance that around the country in various forums, but not just tied to wind power or solar but other projects as well.

And we're sort of unique, I guess, from the contracted business. We cover about every quadrant of the business relationship that customers would expect. And really, our OnSite Partners, our AEP Energy, our AEP Retail, all those come together to really provide sort of an all-in solution for customers.

So, we see the growth occurring on both sides. I think, certainly, North Central, as an example obviously, the way the integrated resource plans in the various jurisdictions are moving forward. And we've added APCo, there is a solar requirement in Virginia and then there is other opportunities for us to do it on the regulated side as well as the unregulated.

And keep in mind, we -- our contracted business. We limit to 10% of the business because of tax reasons. And so, we want the regulated side to grow to enable our contracted business to grow as well. And this is a nice balance for us, and we will continue doing that. And certainly, I would say it's moving very much in both directions. And if you look at post North Central and what's now after the purchase of the Sempra wind assets, we're probably, I mean, roughly half-and-half. So, I think it's a great diverse solutions.

Praful Mehta -- Citigroup, Inc.-- Analyst

Got it. That's super helpful. Given the size of your footprint, and as you said you have opportunities on both sides, do you see that as helping you achieve that higher end or upper end of the 7% or even getting beyond that? I'm just trying to, again, dimension, how big the opportunity could be given you have it on really both sides given your footprint?

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

Yes. I think that's why we said upper half, because there's so many opportunities out there for us and for our ability to continue to grow. Certainly, we're going to have to continue to feed the beast in a way that continues that 5% to 7% growth trajectory. But as we said before, with all the projects that we know that are out there, with the opportunities in front of us, and you can look at our integrated resource plan on the regulated side and see what's in front of us. And you can certainly see -- I think there was a report recently of AEP and just the generation transformation alone, which drives the renewable piece of it along with some natural gas, it's a real opportunity for AEP to continue to enhance that growth pattern. So, really, the fundamentals were there, it's a matter of execution.

Praful Mehta -- Citigroup, Inc.-- Analyst

Got it. Super helpful guys. Thanks so much.

Operator

[Operator Instructions]. Our next question comes from Sophie Karp with KeyBanc. Please go ahead.

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

Good morning, Sophie.

Sophie Karp -- KeyBanc Capital Markets Inc.-- Analyst

Hi. Good morning, guys.

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

Good morning.

Sophie Karp -- KeyBanc Capital Markets Inc.-- Analyst

Thank you for taking my question. So, on North Central Wind, I guess you've had pretty constructive settlements in the couple of jurisdictions by now. Texas being more or less the only one where you're still engaged in active regulatory process. I'm just curious, at what point do you think you have a critical mass to officially call it a go and put it in the plan?

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

Yes, we've got that. Once -- if we get approval from the Oklahoma Commission maybe today, and then we get approval from Arkansas, we have the critical mass for the project to move forward. The question is at what scale? So, with those two projects together, you're already at 846 megawatts of the 1,485, and it's already a $1.1 billion investment. And if you move forward with Louisiana, for example -- and Arkansas, remember has the flex up. So, the flex up means they will take the additional capacity, the wind power capacity, if it's not taken by any of the jurisdictions. So, if Arkansas flexes that and then Louisiana approves with a flex up, then you've got the 1,485 megawatt of the whole project.

Now, obviously, if Texas sees this way to be a part of the project as well, which I believe it should, then each of the states will participate in the full projects. So, right now I'd say with Oklahoma and Arkansas settlements are approved, the project is moving forward. That's a given.

Then the question becomes, okay, at what scale? And that will be determined by the other two jurisdictions and the amount of flex-up that's enabled in those settlements.

So, I'd say you should be happy with the progress right now, and I also think you should be optimistic about this project being fully vetted and fully approved.

Sophie Karp -- KeyBanc Capital Markets Inc.-- Analyst

Terrific. Terrific. Thank you for clarifying this. And then as a follow-up to the same kind of line of thinking, right. It seems like this playbook is working really better than maybe some of the prior projects you're looking at. Is that something that you can use over and over again as you scale up your investments in the renewables maybe on the regulated side?

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

Absolutely. I think there's a pattern here in that -- and that's why I talk so much about the generation transformation that is occurring. We already have -- we're retiring generation, older generation and that's coal and natural gas, and certainly replacing with new resources that provide a real opportunity. And that opportunity is really driven by reducing costs for consumers. And this thing -- North Central is a perfect representation of overall -- the entire project $2 billion in investment, but over $3 billion in savings to customers. And that's one of the key areas for the utility in the future is to be able to deploy capital to reduce customers' bills and that's what we're doing and that's what many of these projects allow us to do.

Sophie Karp -- KeyBanc Capital Markets Inc.-- Analyst

Thank you. I'll jump back into the queue.

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

Thank you.

Operator

Our next question comes from Nas Kumuwela [Phonetic] with Granite Lane [Phonetic]. Please go ahead.

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

Nas.

Nas Kumuwela -- Granite Lane -- Analyst

Hey, Nick, congratulations on LSU.

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

Yes, I put that in there for you.

Nas Kumuwela -- Granite Lane -- Analyst

I wanted to -- I had a clarification for you. Just, when you guys talk about your pro forma for North Central Wind, is that putting you at the high end of the 5% to 7%, or does it put a step up in earnings and then you grow off of that?

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

It will be a step up. It will be a step up -- a step change when North Central gets in, but will continue with the 5% to 7%.

Nas Kumuwela -- Granite Lane -- Analyst

Okay, all right. That's helpful. Thank you very much. I appreciate it.

Operator

[Operator Instructions] No further questions at this time.

Darcy Reese -- Managing Director, Investor Relations

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. Tiffany, would you please give the replay information?

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 11.15 AM Eastern today through midnight February 27. You may access the AT&T teleconference replay system at any time by dialling 1-866-207-1041 and entering access code 7223769. International participants may dial 402-970-0847. Those numbers again are 1-866-207-1041 and for international, 402-970-0847. Access code 7223769.

Duration: 54 minutes

Call participants:

Darcy Reese -- Managing Director, Investor Relations

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

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

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Andrew Weisel -- Scotiabank -- Analyst

Praful Mehta -- Citigroup, Inc. -- Analyst

Sophie Karp -- KeyBanc Capital Markets Inc. -- Analyst

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