American Electric Power Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2022

Key Takeaways

  • Q1 operating EPS of $1.22 beat last year’s $1.15 and management reaffirmed 2022 guidance of $4.87–$5.07 EPS and a long-term 6–7% growth rate.
  • Normalized retail sales grew 3.2%, commercial sales +4.2% and industrial sales +5.5%, pushing load above pre-pandemic levels as economic activity accelerates in AEP’s service territory.
  • AEP expects to close the $2.846 billion sale of Kentucky Power to Liberty in Q2, pending Kentucky PSC decision by May 4 and subsequent FERC clearance and Mitchell operating agreement approvals.
  • In H2 2022 AEP will launch the sale of 1.6 GW of unregulated contracted renewables and has a term sheet on five wind/solar development sites to fund 16 GW regulated renewables by 2030.
  • AEP commissioned its third North Central wind site in March ($2 billion investment), issued RFPs for 800 MW wind and 500 MW solar for 2024–25 service and targets 80% carbon reduction by 2030.
AI Generated. May Contain Errors.
Earnings Conference Call
American Electric Power Q1 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Our strongest quarter over the 4th quarter, we

Speaker 1

are maintaining that momentum and delivering strong results for the Q1 of 2022, with operating earnings for the Q1 coming in at $1.22 per share or $616,000,000 Earlier this year, we made a number of refinements to our strategic initiatives and financial targets. We raised our 2022 operating earnings guidance range and increased our long term earnings growth rate and we have hit the ground running in 2022. Today, we are reaffirming our 2022 full year operating earnings guidance. As a reminder, we are guiding to a range of $4.87 to $5.07 per share for 2022 with a $4.97 midpoint and we also reaffirm our long term earnings growth rate of 6% to 7%. As you'll recall, we announced several significant developments in connection with last quarter's earnings.

Speaker 1

In addition to lifting our 14% to 15% FFO to debt targeted range, we announced the decision to sell all or a portion of contracted renewable assets within the unregulated business. The announcement of this strategic divestiture allowed us to recalibrate our 5 year capital plan of $38,000,000,000 with a $1,500,000,000 shift to transmission and the elimination of growth capital in the contracted renewables business. We are already seeing the positive impacts of these initiatives in quarter 1 and we look forward to continue to execute in these important areas throughout the course the year. We also expect to maintain positive momentum in our economic outlook as we work collaboratively with states to drive economic expansion in our service territory. There is more to come on all that, but I first want to take a step back and highlight some of the other proactive work our team has done.

Speaker 1

As macro trends continue to affect our industry and the economic landscape at large, we are focused on de risking our platform and elevating our strategy to enhance shareholder value. For example, given lingering global supply chain issues, we are diversifying our mix of in order to reduce the impact on our capital investment plan. As a result, AAP has experienced minimal customer or business disruptions to date. With these significant initiatives underway and a track record of thinking creatively, it is truly a team effort and we are lucky to have one of the most talented teams in the business. Regarding Kentucky, we expect to complete the sale of Kentucky Power and AP Kentucky Transco to Liberty in the Q2 of this year.

Speaker 1

The regulatory timeline of the sale is on Slide 7 of today's presentation. In 2021, we announced a comprehensive strategic review of our Kentucky operations, resulting in an agreement to sell those assets for $2,846,000,000 enterprise value. Both parties have been steadily working to obtain approvals to complete this transaction, which is in the public interest. The Kentucky Public Service Commission hearing was held on March 28 March 29. We know that Liberty is well positioned to serve Kentucky customers and are confident our employees in Kentucky will continue to thrive within an organization that prioritizes safety and operational excellence.

Speaker 1

Based on the statutory requirements, we continue to expect to receive decision from the commission on the sale transfer no later than May 4. FERC approval on the sale transfer is also in process. Earlier this week, FERC notified us of a need for more information in the 203 transfer application. This request is not unusual as FERC looks to ensure its record is complete by seeking additional information. We do not believe this request will impact the closing of the deal in the Q2.

Speaker 1

Once a decision is made by the state level next week, we will provide the requested information back to FERC. We'll plan to ask to abide by the original approval timeline to ensure Kentucky customers receive benefits from this transaction in a timely manner. Another significant regulatory milestone for the transaction is gaining approvals on the Mitchell operating agreement, which are a condition of the final sale transfer. Both Kentucky and West Virginia are aware that updated Mitchell operating agreement approvals are needed to put in place the commission orders on environmental compliance issued 2021. The Kentucky Public Service Commission hearings were held on March 1 March 30 and the West Virginia Public Service Commission was held on April 7.

Speaker 1

Parties providing options allowing flexibility for both states to collaborate and reach a common agreement as Kentucky continues to wind down interest in Mitchell plant post-twenty 28. We expect to receive commission decisions on the Mitchell agreements on an expedited basis in May of this year. We plan to file the related FERC application after state commission approvals. Throughout this process, we have established a strong record of benefits of this transaction, most notably the clear and measurable benefits that we see. Okay, now moving on to the contracted renewable asset sale.

Speaker 1

During our Q4 earnings call in February, we announced the decision to sell all or a portion of our unregulated contracted renewables portfolio to simplify and de risk the company and allow us to focus on our regulated business. Our portfolio consists of 1600 megawatts of unregulated contracted renewables, the sale of which will help facilitate the investment of 16,000 megawatts of regulated renewables through 2,030. In the last couple of months, we have made significant progress on this opportunity, including working with an advisor, preparing outside consultant reviews of the technical and market aspects of our portfolio and evaluating our sales strategy and timing. Interest in the sale of the portfolio has been robust. The sale provides a unique opportunity to acquire a large operating with some solar operations as well.

Speaker 1

We expect to launch the sales process sometime during the second half of twenty 22 likely in the August September timeframe and can be accelerated or deaccelerated as needed. Additionally, are pleased to announce we have signed a term sheet to sell most of our wind and solar development portfolio, including 5 sites which are located in Southwest Power Pool. We have also executed an agreement to sell a solar development site here in Ohio. Financial details of these upcoming sales are confidential and will not be disclosed but demonstrate our commitment toward that execution. The reallocation of contracted renewables capital is assumed in our guidance, but utilization of proceeds is not yet reflected in guidance or our multi year financing plan.

Speaker 1

We will seek to maximize transaction proceeds in the sale, avoid dilution and direct the proceeds to investments in our regulated business as we continue to enhance the transmission infrastructure and move forward with our generation fleet transformation. Looking ahead, we will continue our track record optimizing the portfolio and reallocating capital to our regulated business where we continue to see a meaningful long term opportunity for growth. AEP is making significant progress as well in our transition to a clean energy future. In fact, we already have several initiatives underway in line with our sustainability goals and through our regulated renewables execution. Details can be seen on Slides 89.

Speaker 1

In March, we commissioned our 3rd and final North Central wind site, Traverse Wind Energy Center, which is the largest single wind farm built at one time in North America and one of the largest wind facilities worldwide, completing the $2,000,000,000 trifecta investment that includes Sundance and the Maverick Wind Energy Centers. Combined, they are providing 14.80 megawatts of clean energy to our customers in Arkansas, Louisiana and Oklahoma. North Central will save customers an estimated 3,000,000,000 and electricity costs over the next 30 years. In March, we also issued a request for proposal at I and M for 800 megawatts of wind and 500 Megawatts of Solar. Additional RFPs are in process simultaneously at APCO, PSO and Swepco with expected in service dates of 2024 to 2025.

Speaker 1

We expect to make a regulatory filing in the Q2 of this year related to the Swepco's June 2021 RFP. These are long term investments not just for our business and our local communities, but for the global environment as well. Through our current state of coal retirements, we are progressing towards our target of an 80% carbon emissions reduction rate by 2,030 and net 0 by 2,050. Achieving this goal is integral part of our long term strategy to prioritize regulated investment opportunities and transition our generation portfolio. Our plans are very well thought out.

Speaker 1

Continue the movement to a clean energy economy, but remain firmly grounded in the principles resiliency, reliability and affordability, while recognizing the value of diverse portfolio of resources, particularly given today's world of energy related volatility. Last year, we set regulatory foundations in a series of rate cases across multiple jurisdictions. Regulated ROE as of March 31, 2022 is at a steady 9.2% as we continue to work through regulatory cases and focus on reducing authorized versus actual ROE spreads. I and M obtained commission approval in February on our Indiana base case settlement, oral arguments of APCO's 2020 Virginia base case appeal were held in March at the Virginia court with an anticipated final decision this year. We expect to see commission decisions as well on Swepco's rate cases this year in both Arkansas and Louisiana and look forward to keeping you informed on that progress too.

Speaker 1

Blade to FERC, We commend the commission for moving forward with proposed reforms to transmission planning and cost allocation. 1st proposed rule making aligns with our goals of developing more robust, reliable and flexible grid of the future that ultimately reduces cost to customers and strengthens economic development in the communities in which we serve. We believe many of these reforms are needed to build the infrastructure necessary to transition our generation fleet in the most efficient and cost effective way possible and achieve our carbon reduction goals. We look forward to continuing to work collaboratively with the commission on this and any subsequent rule makings and with the RTOs on implementing any new requirements. At the conclusion of our 4th quarter I told you all that AEP stood poised to make even greater headway in 2022.

Speaker 1

And I think it's fair to say we are making good on that promise. Capitalizing on our momentum from 2021, we have continued to execute against our strategic objectives steadily and successfully. As we think about what's next for this year and beyond, we hope to further modernize our energy grid in order to supply reliable, cleaner, low cost resources for all the communities we serve. We will also consider further asset rotation through the lens of de risking and simplification and we'll evaluate any and all value added to potential activities as we focus on our regulated business. As I've said before, AEP is in a very unique position, the largest transmission system, one of the largest renewables build outs and a diverse territory to adjust from the risk of supply chain, load forecast, regulatory risks, etcetera, AEP is the very definition of consistency and opportunity.

Speaker 1

We at AEP as well as our shareholders and customers hold ourselves accountable on the continual execution of all of these strategic objectives. To paraphrase a big hit by the police, every breath you take, every move you make, every step you take, will be watching AEP. And as our CFO would say, we've got this. Julie?

Speaker 2

Thank you, Nick. Thanks, Darcy. It's good to be with you this morning. Thanks for dialing in everyone. I'm going to walk us through our Q1 results, share some updates on our service territory load and finish with commentary on our credit metrics, liquidity as well as some thoughts on our guidance, financial targets and recap our current portfolio management activities underway.

Speaker 2

So let's go to Slide 10, which shows the comparison of GAAP to operating earnings for the quarter. GAAP earnings for the Q1 were $1.41 per share compared to 1.16 dollars per share in 2021. There's a reconciliation of GAAP to operating earnings on Page 16 of the presentation today. Let's walk through our quarterly operating earnings performance by segment on Slide 11. Operating earnings for the Q1 totaled $1.22 per share or $616,000,000 compared to $1.15 per share or $571,000,000 in 2021.

Speaker 2

Operating earnings for the vertically integrated utilities were $0.59 per share, up $0.05 Favorable drivers included rate changes across multiple jurisdictions, normalized load and O and M. These were somewhat offset by increased depreciation, lower off system sales and wholesale load. I'd like to take a second to talk about O and M and depreciation in particular. Because of a change in accounting related to Rockport Unit 2 lease at I and M, we'll see approximately a $0.05 contribution of favorable O and M, consequence offset by in each quarter of 2022, but no consequential earnings impact. And to be clear, this is entirely consistent with the 2022 guidance details we posted in our investor presentations earlier this year.

Speaker 2

More to share on load performance here in a minute, so hang with me on this. The Transmission and Distribution Utilities segment earned $0.30 per share, up $0.07 per compared to last year. Favorable drivers in this segment included rate changes and Ohio normalized load and transmission revenue. Offsetting these favorable items were unfavorable O and M and depreciation. The AEP Transmission Holdco segment contributed $0.34 per share, down a penny compared to last year.

Speaker 2

Investment growth was favorable by 0 point 0 $3 offset by $0.02 of mainly property taxes driven by the increased investment and a penny of income taxes. This is in line with the guidance that we provided to you earlier year, you'll recall that our 2022 guidance had this segment down by 0 point 0 $8 year over year as a result of the 0.12 sense of investment growth being more than offset by the annual true up that will occur in the 2nd quarter and some unfavorable comparisons on the tax and financing side. As you know, This segment continues to be an important part of our 6% to 7% EPS growth. Generation and marketing produced $0.03 per share, down $0.03 from last year. The improvement in wholesale margins was more than offset by lower retail margins and reduced generation.

Speaker 2

You may recall that Storm Yuri had an unfavorable impact on wholesale margins in the Q1 of 2021. Finally, corporate and other was down $0.01 per share driven by increased O and M, lower investment gains and unfavorable interest. These were offset by favorable income taxes. The lower investment gains are largely related to charge point gains that we had in the Q1 of 2021. Turning to Slide 12.

Speaker 2

I'll provide an update on our normalized load performance for the quarter. In a general sense, the AEP service territory is and has now transitioned into the expansionary phase of this business cycle. Starting in the upper left corner, normalized residential sales increased by 0.8 compared to the Q1 of 2021. This growth was composed of growth in both customer counts and weather normalized usage for the quarter. While results were mixed by operating company, the strongest residential growth was at the AP was in the AP service AP Texas service territory, which was partially influenced by the year over year comparison given the customer outages driven by Storm Yuri in the Q1 of 2021.

Speaker 2

A final data point to share regarding residential sales is that our first quarter sales were still 1.1% above their pre pandemic levels over 2 years after the pandemic began. This is driven by a number of factors, including higher numbers of people who are able to work remotely that used to work in offices prior to the pandemic. Moving to the right, weather normalized commercial sales increased by 4.2% compared to the Q1 of 2021. Growth in commercial sales is spread across every operating company in most industries, the largest increase in commercial sales is coming from data centers whose load was up 33% compared to year. In addition, we continue to see strong recovery in the sectors most impacted by the pandemic, such as hotels, schools and churches, Real estate has been booming throughout the entire pandemic.

Speaker 2

AP's normalized commercial sales in the first quarter were 2.5% above their pre pandemic levels, which shows that we've gone beyond recovery and are now in full expansion mode across the territory. If I can now focus your attention on the lower left corner, you'll see that industrial sales posted another very strong quarter, up 5 point percent compared to last year. Industrial sales were up at most operating companies in many of our largest sectors in the Q1. We experienced double digit growth in a number of key industries this quarter, including chemicals manufacturing, oil and gas extraction, Petroleum and Petroleum Products, we also saw robust growth in primary metals manufacturing, coal mining and food manufacturing. Having said that, Q1 industrial sales are still 1.6% behind their pre pandemic levels.

Speaker 2

However, We have a large number of customer expansions that are expected to come online later this year and still fully expect to eclipse our pre COVID industrial sales levels in 2022. We continue to be confident in our full year 2022 guidance for normalized retail load. While we certainly did not anticipate the Russian invasion in Ukraine when we developed 2022 forecast, I'd like to remind you that AEP's service territory is uniquely positioned to benefit from higher energy prices, given the concentration of energy production that is located throughout the AEP footprint. Energy producers in our footprint have responded to higher energy prices, which has resulted in increased economic activity throughout the service territory. Finally, when you pull it all together in the lower right quarter, you'll see that AAP's normalized retail sales increased by 3.2% for the quarter.

Speaker 2

As I mentioned earlier, our load has gone beyond recovery mode and is in full expansion mode. For the quarter, every operating company posted higher normalized sales than last year. Furthermore, our Q1 retail sales were 1.5% above their pre pandemic level, so 50 basis points above pre pandemic levels. To use a sports analogy, I would say our load performance in the Q1 was in the zone. There are many factors outside of our that could influence our results, I want to stress that the positive load story we shared with you today is largely the result of intentional efforts by our employees to promote economic development as a part of our long term strategy to strengthen the communities that we serve.

Speaker 2

We're fully aware of the increased uncertainty that exists in the macro economy, but have put in the work that it takes to ensure that we continue to see growth in our service territory going forward. So let's go over to Page 13 to check on the company's capitalization and liquidity position. On a GAAP basis, our debt to cap ratio increased 60 basis points from the prior quarter to 61.5%, primarily due to an increase in equity from our issuance of AEP common stock in March, which is consistent with our 2022 guidance as the $805,000,000 or the $805,000,000 of equity units we issued 3 years ago converted to equity. Let's talk about our FFO to debt metric. Taking a look at the upper right quadrant on this page, you'll see our FFO to debt metric stands at 13.7% on both a Moody's and a GAAP basis, which is an increase of 3.8% and 3.9%, respectively, from the prior quarter.

Speaker 2

The metrics are calculated off of the 12 month rolling FFO total. So the increase in FFO to debt is mainly a result of the fact that the cash flow drag from February 2021 winter storm Yuri has now dropped off the cash flow from operations calculation. This improvement has significantly narrowed the gap toward achieving our FFO to debt target range 14% to 15%. As we stated on the last earnings call, we anticipate trending toward this target range as the year progresses. Let's take a quick moment to visit our liquidity summary on the lower right side of Slide 13.

Speaker 2

Our 5 year $4,000,000,000 bank revolver and 2 year $1,000,000,000 revolving credit facility support our liquidity position, which remains strong at $3,800,000,000 Switching gears, our qualified pension funding increased 1.6% during the quarter to 106.4%. The rise in rates that decreased plan liabilities was a primary driver for this quarter's gain in funded status. Let's go to Slide 14. This quarter has provided a solid foundation for the rest of 2022 and we're reaffirming our operating earnings guidance range of $4.87 per share to $5.07 per share. We continue to be committed to our long term growth rate of 6% to 7% that we updated on our last earnings call.

Speaker 2

We're working through the Kentucky Power sale of Liberty and expect to close in the Q2. And as Nick mentioned, we've signed an agreement to sell a solar development site in Ohio and entered into a term sheet to sell 5 additional wind and solar sites in SPP on the unregulated side of the business. Additionally, we're preparing to at the unregulated contracted renewables portfolio in the second half of this year and are receiving a significant amount of interest on this. Beyond the portfolio optimization activities underway, we remain focused on the fundamentals, which are executing on the regulated renewables plan, disciplined capital allocation and securing positive regulatory outcomes. Before we break, I want to mention one last thing before we get to your questions.

Speaker 2

And that's to remind everyone that while we have not yet set the date, we will be hosting an investor conference sometime in late September early fall timeframe to give you a broader AEP update. We surely do appreciate your time and attention today. With that, I'm going the operator to open the call so he can hear what's on your mind and answer the questions that you have. Certainly.

Speaker 3

Our first question comes from Julien Dumoulin Smith at Bank of America. Please go ahead. Good morning, Julien.

Speaker 4

Maybe let's start with this, just in terms of the timing of the renewable sale here, can you talk a little bit about how the AD CBD could impact that? I mean, is Just your sense of the ability to get it done, just any comments on that and or implications? Again, I assume minimum. But separately related, how do you think about the timing of proceeds here? Admittedly, this is a little bit faster than what we had perceived.

Speaker 4

Just the proceeds from Liberty and this coming in perhaps a little bit faster than perhaps the equity issuances in your forward plan would otherwise suggest?

Speaker 1

Yes, Julie. So most of our assets are wind assets. So and as we go forward with the transactions, We don't see any issues with that. And as a matter of fact, even on the regulated side, The timing of which we actually need assets for solar and that kind of thing comes later. So, it's a 2024, 2025 timeframe.

Speaker 1

So on both sides of the ledger, we're in good shape from that perspective. And these assets, obviously, we're going to try to time it Appropriately, as we talked about the large portion of the 1.6 gigawatts or the 1600 megawatts, They will be marketed in the Q3. And I'd say we're getting very robust I miss very robust interest Really on both sides, strategic and in terms of any type of private equity, that kind of thing. So it's really To us, the process will continue and there's nothing stopping us. We're in good shape from that perspective.

Speaker 1

And then your second part of your question, Julie, did you have that part?

Speaker 2

Yes. And Julie, let me know if I'm not answering this directly or if you need a little more granularity, specifically as it relates to dollar flows associated with any type of transaction that we enter into. So today, you heard us talk about the fact that we've had a term sheet in place for 5 development sites, those dollars are real small. And so we'll see those show up eventually probably second quarter or third quarter and operating earnings, but obviously not even disclosing those. Not a needle mover for us and not going to change the earnings guidance or anything like that.

Speaker 2

So not to worry on that front. And then as it relates specifically to the broader unregulated renewables contracted portfolio, We'll start the marketing effort in the second half of this year. Obviously, we'll come to you as we have a little more detail to share. We do have an upcoming investor conference, so Stay tuned for that. And then we'll be able to navigate any potential proceeds from transactions.

Speaker 2

As you know, we don't even know exactly how that's ultimately going to look, do we sell them as an entire portfolio? Do we sell them in different pieces? So that's to be determined. So stand by on that. And then obviously continue to work through the process.

Speaker 2

We had expected to close that. We're trending toward the 2nd quarter, as Nick mentioned and I mentioned in my opening remarks. That's already reflected as it relates to Kentucky bringing dollars in, in our plan. You may recall that we eliminated about $1,400,000,000 of equity that we originally had in our 2022 guidance. So, I think we're moving on track.

Speaker 2

Let me know if there's something I didn't address there.

Speaker 1

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

Speaker 4

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

Speaker 1

Well, certainly, the renewables are a key part of being able to really mitigate cost to consumers going forward. So From an industrial standpoint and manufacturing standpoint, we are going to see a lot of that movement to our territory because when you think about on shoring, When you think about strategic reviews of supply chain actions that need to occur within this country, That's going to occur within our territory. So our focus will be and I think from the renewable side, particularly the regulated renewable side, To be able to continue to progress on that is a benefit because a clear benefit for customers and certainly North Central showed that. But I think from an industrial standpoint, it's going to look very good for us. We have the resources for capacity.

Speaker 1

And when you layer in the renewables For the incremental needs of capacity, it's really the best of both worlds to provide reliable secure supply to our industrials and really at a competitive price. So I think we're in great shape from that perspective going forward.

Operator

Next,

Speaker 3

we'll go to Steve Fleishman with Wolfe Research.

Operator

Good morning, Steve. Hey, Nick. Good morning.

Speaker 1

Can you hear me? You sound enthusiastic.

Operator

That is enthusiastic for me. Sorry. Yes. Julian is. So Just on the Kentucky process, There does seem to be a decent amount of people that want different things on the Mitchell operating agreement Can you just talk to your confidence in resolving those issues by the second quarter and just because And just maybe frame the issues and how you think they can get resolved?

Speaker 1

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

Speaker 1

So I think it's positioned very well. There's been a lot of dialogue, lot of settlement discussions associated with that. And Of course, there's a lot of varied opinions, but at the end of the day, we have to do this, because we have 2 commissions that are going different directions relative to the lock of the Mitchell plant. And I think what we've arrived to is a very credible balanced view that allows the optionality that the parties need going forward. So and of course, We certainly will continue to focus on the ELG and CCR expense associated with that in the appropriate manner.

Speaker 1

And that will improve the optionality going forward to where decisions can be made at the appropriate time. I would say we're in a good place and we expect the Mitchell approval to occur very quickly after the transaction approval.

Operator

Okay, great. Thank you. And then just you've been Pretty good and right about federal, the BBB legislation kind of to get done or whatever you want to call it these days. Just curious if you have any latest thoughts and updates There, anything

Speaker 1

changed? Yes. I'll say this. Certainly, Senator Manchin is at the center of all this. But there also is, I think from the original infrastructure package, A group of senators who are coming together to try to focus on some pretty substantial issues.

Speaker 1

And really when you think about Senator Manchin being on both the Armed Services Committee and the Energy Committee and knowing the Ukraine situation and the focus on energy as it relates to it, I think you're going to see, as it relates to it. I think you're going to see at least an attempt to a lot of focus on also talked about the climate provisions. And I think there will be a lot of interest too in the technologies of the hydrogen hubs and particularly in West Virginia. And then there's obviously Murkowski, Barossa, there's others That are engaging in that discussion. The ITCs, PTCs, climate provisions that the industry is looking for.

Speaker 1

I think there's some bipartisan level of support for that. So the question really is Can they get together before really before Memorial Day? And if they're still talking after Memorial Day, it's probably a positive indication. My own personal belief is if it's not successful, we'll probably see an 11th hour type of at the end of the year relative to ITCs and PTCs and perhaps even expansion of those. So I think you'll see us attempt at a smaller bill.

Speaker 1

You'll still get hung up with the pay fors, Particularly with Manchin wanting to get it paid for us and it was obviously a different view on that. So But there's probably some element of recognition that something has to be done to have this country focus on the security of supply, not only for ourselves that the Ukraine situation has demonstrated, but also for Europe and the rest of the world. So That's probably the impetus of getting something done, and it will define the framework of whether something gets done or not. If it doesn't After the election, I think like I said, it's 11th hour or perhaps the IRS and Treasury Make adjustments based upon what's happened relative to supply chain activity. So I think That would be my view of where things are going.

Operator

Great. That's super helpful. Thank you.

Speaker 1

Yes.

Speaker 3

Next, we will go to Shahriar Pourreza with Guggenheim Partners. Please go ahead.

Operator

Hey, good morning guys. Good morning.

Speaker 5

Nick, I just want a question on sort of the renewable comments. And as we're looking kind of at your current RFPs that are in progress, there's sort of a fairly healthy mix between wind and solar and storage. As we're thinking about kind of the upcoming 2021, 2022 IRPs, how are you sort of thinking about the potential tail risks around solar with Circumvention investigations, pricing uncertainties, supply constraints. I guess, how do these tail risk impact the mix for 2021 2022. And do you see any risk to the $8,200,000,000 you've allocated to renewables?

Speaker 5

I mean, we've already seen peers provide some warnings around this and one this morning as well as delays. So I'm just kind of curious how this fits in with your plan?

Speaker 1

Yes. I don't see a lot of risk. And the reason why is because ours is more it's defined through 2,030. A lot of these projects will come into play in the 2024, 2025 time frame. So we have time for not only for the reviews of solar that's occurring with the administration, but also in terms of the supply chain activities to level out somewhat before we're actually out back in the market acquiring these types of resources.

Speaker 1

So we have a little bit of time, I think probably by Q1 next year. We want to see things start to levelize so that we can get that process rolling. In the meantime, we got the resource planning filings that are being made. And keep in mind too, I made this point originally, These plans are really fungible from year to year based upon what we see in terms of the value proposition of each type of resources. So a lot of it's wind, some of it's solar.

Speaker 1

Solar picks up in the later years From a resource plan perspective, so there's time for the solar thing to get resolved. But even if it doesn't, that says there's probably to be more wind or other types of resources that are put in place to support these objectives because remember they're driven by capacity requirements. And we'll continue to evaluate that process. And I'll take a step further too on this. As we've always said that if something were to happen relative to the renewables build out, we've got transmission.

Speaker 1

And transmission, We can soak up a lot of capital from that perspective, because of the focus on providing better customer service, more resilient and reliable grid. So we have that optionality, but I'm not even there yet. I think we're we may be Because the $8,200,000,000 we have in there assumes a certain percentage of those types of resources that we would own. That could be higher. Transmission could be higher.

Speaker 1

So we have optionality around all of that. So I'm not concerned From an AP perspective? Yes, sure. The current gas price environment helps the economic argument. Absolutely, absolutely.

Speaker 1

Because The $3,000,000,000 for North Central was down on our previous gas forecast. And if you looked at that today, it's probably much larger. I think it's really looking good for customers.

Speaker 5

Got it. Got it. And then Nick, just from a financing perspective, as we're thinking about incremental spending that's going to going to come from these future RFPs. Can you just be a little bit more specific on your prepared comments around further asset sales? I mean, You like all your Opcos that remain.

Speaker 5

I guess what could a structure look like? What remains?

Speaker 1

Yes. So and the point I'm making is obviously we're going through the process step by step with the unregulated contracted renewables part. So there's different parts of that business. And then of course, just I think Kentucky was the first shot at it. There's a lot of optimization that can occur.

Speaker 1

We'll just have to evaluate against what the opportunities look like. And if we're if we have I mean, if we have underperforming utilities that don't figure properly into the clean energy transformation where we're actually attracting capital and being able to provide higher levels of return, We have to look at it. So I'm just saying that that process will continue regardless. Not saying and actually We're already too deep and I'm talking about the number 2 deep. In terms of sales, Kentucky, we still have to get across And then the contracted renewables we still get across and then we'll see where we're at that point based upon what we're getting In terms of the feedback of the RFPs, because when these RFPs are ultimately get approved, they will know exactly what the ownership looks like, what the financial requirements are and we'll do what we've always done.

Speaker 1

We'll make sure that we're going through this process making to invest in the right places and we will look at the portfolio and see what makes sense and what doesn't make sense for us to continue to optimize that for shareholder benefit.

Speaker 5

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

Speaker 1

It's difficult to have those kinds of provisions in that kind of agreement. But I can tell you that We in Algonquin are arm in arm getting this thing across the finish line. They very much want to own this property and They've actually stepped up in a considerable way to provide customer benefits to make this transaction attractive to the policymakers and to our customers. So, and of course, I think a seminal event here obviously is May 4, Where the commission will come out with an order and we will look at that order, we'll make determinations on what conditions are in place And at that point in time, we'll make decisions on what it looks like. But I think from the public interest standpoint, the things that the commission ought to be looking at, This transaction is very, very good for Kentucky customers.

Speaker 1

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

Speaker 1

But right now, we're not planning on that.

Speaker 5

Terrific. Thank you guys. Congrats on the results. Appreciate it.

Speaker 1

Yes, sure thing.

Speaker 3

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

Speaker 1

Good morning, Jeremy. Hi, good morning.

Speaker 6

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

Speaker 1

Well, typically and we've done this, we actually plan for 100 and around 130 percent of the budget for transmission. So we have 30 more projects that are occurring that we already have planned scoped ready to go. So layering in these multiple projects is a way for us to not only As opportunities arrive, as the metrics for financials continue to improve, we can layer in more of we can adjust to that based on projects that go one way or another. And then also Recently, we were awarded Texas, a large project in Texas, that's also incremental. So, it was like $1,300,000,000 or so.

Speaker 1

But Those are the kinds of things that will come to pass. And we have every bit of opportunity related to transmission, not only within our own system, but also in terms of the incremental systems around us. And that's why and you asked about FERC and transmission. FERC obviously is taking the right step relative to long term planning, getting the framework for long term planning put in place. That's an important part of the process to speed up some of the planning aspects to ensure that we are making the right investments at the right places.

Speaker 1

We continue and I think FERC will continue to look at even in parallel these issues of cost allocation of even the incentive mechanism, but also in terms of inter regional planning, which AEP will bode well in terms of that because just about everyone interfaces with us. So, as you look at some of these aspects, the more renewables that are needed, certainly the more retirements that are occurring across RTOs is all going to bode well for transmission investment. And we what we see today is not what we're going to see tomorrow. And then if FERC is doing the right thing, which We think they are. It's going to bolster the ability for us to have a more consistent, congruent, clean energy type system across this nation and you can't do that without AEV.

Speaker 6

Got it. Thank you for that. And just shifting gears towards O and M, just wondering what trends you're seeing there. It looked like it was a nickel benefit in vertically integrated, a little bit of a headwind in transmission distribution. And just wondering if you could dive in a little bit more as far as what different transitioning in O and M across the business?

Operator

Yes.

Speaker 2

Happy to, Jeremy, this is Julie. I did call specifically out the O and M trend in vertically integrated utilities. There's a little bit of flipping and switching going on between O and M and depreciation associated with the Rockport Unit 2 lease. That's included in that 2022 guidance that we had provided to you back in February, we updated that page for you. So entirely consistent, yes.

Speaker 2

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

Speaker 2

To the extent that we have any new developments, we'll surely keep you apprised.

Speaker 6

Got it. Thank you. I'll leave it there.

Speaker 3

Perfect. Thank you. And next we'll go to Durgesh Chopra with Evercore ISI.

Speaker 7

Congrats. This is a solid print here. Most of my questions have been asked and answered. I just had a quick clarification as it relates to the Kentucky sale. May 4 is when we get the order for transfer and control.

Speaker 7

Do we need to get sort of the Michel Operating plan agreement before then or how does that play into the May 4th order?

Speaker 1

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

Speaker 7

the transaction side as well. I understand. So they can actually issue an order, the Kentucky Commission can before actually on the transfer For resolving the Michelle sort of ongoing debate for the printing. Yes.

Operator

That's right. That's right.

Speaker 7

Understood. Thank you so much guys. Yes.

Speaker 3

And next we will go to Sophie Karp with KeyBanc.

Speaker 1

Good morning, Sophie.

Speaker 8

Good morning. Thank you for squeezing names here at the end.

Operator

Yes, sure.

Speaker 8

I have a couple of questions for you. So 1st on the load growth, right? Obviously, very healthy numbers here above other industrial regions in the country probably at this point. I'm not sure if 2 quarters is a trend, but let's say, how long do you need to see those numbers in this range that it would be enough to inform maybe your reset in the long term expectations for what the flow should be. Does that make sense?

Speaker 1

Yes. Great question because you're right. 2 quarters Doesn't make a trend, but when you look at the economy within our service territory, We're seeing some very positive indicators for continued expansion and continued economic development. We are our economic development people are extremely busy with multiple opportunities that are coming throughout our territory actually. And so we look at that.

Speaker 1

We look at those and If you were to look at our pipeline of potential opportunities, it is extremely robust. And that gives us confidence in terms of where we think the economy is going to continue to go within our service territory. And of course, We don't see any end to the work from home environment. So we're feeling much better about the prospects of a more robust residential side of things. And then on the industrial side of things.

Speaker 1

And then on the industrial, like I said, the onshoring, the security aspects, The energy play within our service territory, the other aspects of what's going on within the territory with chemicals and manufacturing and so forth, That pace has picked up markedly with expansions and new developments. And some of them are still years away like the Intel manufacturing here in Ohio in our territory. It's substantial. There There'll be 20 to 40 more companies associated with that, that will be locating. So you see those tops of prerequisites that are being put in place, that gives us a lot of positive views about where we think the economy is going.

Speaker 1

We'll watch it. We'll continue to evaluate it. If we go through 3rd quarter see the same thing and 4th quarter the same thing, then you'll probably see Some adjusting going on relative to the 2023 forecast, but that's our load guy will have to tell us that. He's very objective and he's a professor at one of the universities and he Usually he's let me put it this way. He's probably more optimistic now than I've ever seen him and that's a good thing.

Speaker 2

Nick, if I can just jump in there with a finer point too as well. And Sophie, as I made comments in my opening remarks, we are still about 1.6% behind pre pandemic levels on the industrial side of the house. But as I mentioned and as Nick mentioned, we do see expansions that are going to allow us to not only get at 1.6%, but to go beyond that. So we do expect to be beyond the pre pandemic levels. And as a matter of fact, what we've seen so far this year in the first quarter is that 6 of our top 10 secondtors were up.

Speaker 2

So that's a good indication. And then looking forward, we expect to see strong growth in oil and gas as new LNG operations ramp up in Texas, and that began a few quarters back. So we're going to start to see the fruits of that efforts as well. But stay tuned. As you know, we typically if we're going to revise guidance, we've historically done it once we get past our peak season, which is summer.

Speaker 2

But to be perfectly candid, we're looking at constantly. So we will be back to you if there's anything that requires us to get new information in front of you because we'll definitely want to take advantage of that.

Speaker 8

Perfect. Thank you. And my other question is on the RFPs, not to beat that horse, I guess, but I can appreciate the fact that the projects are expected to be commissioned in 'twenty four, 'twenty five time frame, which is a couple of years away to sort out the physical disruptions of maybe equipment availability, etcetera. But in terms of pricing, what should be like people who bid into those therapies, what do you think they should be assuming in terms of pricing? Does that make it difficult with volatility in the pricing of equipment, particularly solar and kind of unpredictability really of where the solar market or storage market might be a year from now, does it make the I guess the process more complicated or

Speaker 1

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

Speaker 1

So really the renewables will be relative to each other not in terms of relative to whether they'll get done or not. So I and I really think we'll be in good shape from that perspective. The other part too is that when you look at the other resources, Really what you're doing is you're putting in renewables and you're also layering in some natural gas in the plan to really give a 20 fourseven supply. Natural gas also is a placeholder for other types of resources, whether it's hydrogen, whether it's small modular reactors, whatever that comes about with new technologies and the grid optimization itself will be a major part of that as well with transmission. So there's a multitude of answers there that will occur.

Speaker 1

But yes, you're right. You would suspect solar, There will be some short term perturbation from an increase perspective that we'll have to deal with. But in the overall scheme of things, when you look at long term, It will still be positive.

Speaker 8

All right. Thanks so much.

Operator

Yes.

Speaker 3

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

Speaker 9

Hey, Nick. Thanks for taking my questions. I have 2 and they're a little bit unrelated. I'm going through the appendices of your slide deck. I'm looking at what you used to call kind of your, I don't have the money chart, the ROE chart for trailing 12 months.

Speaker 9

The equalizer chart, yes. The equalizer chart. Thank you. And one of the things that stands out is PublicServe Oklahoma. And just curious if you can talk a little bit about PSO and a little bit about maybe Wepco and APCO where the earned ROEs are a decent bit below 8%.

Speaker 9

And just kind of how do you think about the trajectory of fixing the split between earned and authorized?

Speaker 1

Yes. So at Swepco, we have rate cases there in 2 of the jurisdictions. In PSO, we will have a rate case as well. And But keep in mind too, we just brought in all the renewables in play, particularly a large chunk of it for PSO and Swevco. So that's now rolling through rates.

Speaker 1

And so we expect that to continue to pick up. Those are and really when you look at the industrial and manufacturing, economic development part of what's going on in those jurisdictions, They are still very positive. So and of course, we continue to invest heavily in those jurisdictions. So And that's why we have an equalizer chart that some will appear lower until we file rate cases and when the investment changes itself. So we are not concerned by that at this point.

Speaker 1

And actually we see PSO and the Swepco jurisdictions with Arkansas, Louisiana in particular are very favorable.

Speaker 9

Okay. And then one follow-up and this may be just a checking in on what was in original guidance. But Just curious for the transmission segment, how much do you think noticing that it's far even down a little bit on a net and EPS perspective year over year for the Q1. Can you remind me what you think the earnings growth trajectory is for the transmission segment in 2022 relative to 2021 and kind of the drivers behind that? Yes, Julie?

Speaker 2

Yes. And so Michael, I have my guidance sheet in front of me for 2022. It's in our presentation that we put out there in our Q4 call. But effectively and actually somebody is going to hand it well, going to hand it to me. But effectively, what we were anticipating was that year over year, we'd be up about 0 point 0 $8 and that was driven by investment growth being up $0.12 And I mentioned this actually in my opening comments as well.

Speaker 2

And then we had a true up that would occur and we knew that was going to be embedded. That's why we have it in the guidance that's associated with the effect. The true

Speaker 1

positive the previous year.

Speaker 2

It was. So it was flipping back and forth. Double counting. Yes. So we had two reasons for that true up.

Speaker 2

I mean, we had spent just a little bit under our budget for the prior year. And as you know, we got forward looking rates, so that's a catch up there. And then we had higher load, we had catch up there too. So we get a little bit of a double counting there, but that's why we had the $0.11 reduction in that true up. And then we had other financing and income that kind of brought that number back down to flip it to a negative $0.08 So in aggregate, for 2022, we assume that we'd have about $1.27 from that particular segment, again driven by investment growth offset by a couple of these other bucket items that I threw out there.

Speaker 2

We are on that And that's why I specifically called that out in my opening comments because if I was trying to model this, that's exactly what I'd be asking.

Speaker 9

So then the growth would be more back into the year, right?

Speaker 2

I guess, it's probably fair enough. We're a little short on the Q1. But yes, I would just expect that we'll continue to see transmission investment continue to plug along through the remainder of the year. At this point, we don't have any changes as it relates to that specific guidance. And we have it out there year by year in our guidance forecast and assumptions pages in our traditional Investor Relations materials.

Speaker 2

Happy to walk through it with you offline if you'd like to do that too.

Speaker 9

I appreciate it. Thank you guys. Super

Speaker 2

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

Speaker 3

Ladies and gentlemen, this conference will be available for replay after 11:30 Eastern Time today through May 5 at midnight. You may access the AT and T replay system at any time by dialing 1-eight 66,207,101 and entering the access code 271-two 9,700,847. Those numbers again are 18 9,700,847, access code 27,326 71. That does conclude our conference for today. Thank you for your participation and for using AT and

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