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Edited Transcript of AEP earnings conference call or presentation 20-Feb-20 2:00pm GMT

Q4 2019 American Electric Power Company Inc Earnings Call

COLUMBUS Feb 22, 2020 (Thomson StreetEvents) -- Edited Transcript of American Electric Power Company Inc earnings conference call or presentation Thursday, February 20, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian X. Tierney

American Electric Power Company, Inc. - Executive VP & CFO

* Darcy Reese

AEP Texas Central Company - Director, IR

* Nicholas K. Akins

American Electric Power Company, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Ali Agha

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Andrew Marc Weisel

Scotiabank Global Banking and Markets, Research Division - Analyst

* Naaz Khumawala

* Praful Mehta

Citigroup Inc, Research Division - Director

* Sophie Ksenia Karp

KeyBanc Capital Markets Inc., Research Division - Director and Senior Analyst of Electric Utilities & Power

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the American Electric Power Fourth Quarter 2019 Earnings Conference Call. (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.

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Darcy Reese, AEP Texas Central Company - Director, IR [2]

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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.

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [3]

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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 is concluded, but there is no question AEP has hit the ground running in 2020.

I know I live in Columbus, Ohio, and I do root for the Buckeyes if they're not playing LSU. But I have to use an LSU analogy, given their victory in the college football and 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 showed 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 and increased the dividend as well during 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 of Oklahoma, Arkansas, Louisiana and Texas for North Central Wind, a 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 contracted renewals 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 sustainable and lasting culture change that constantly demands a forward-looking view of efficiency gains, due process and technology reviews.

Brian will get into 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 and health care. And while industrial growth has slowed, we still anticipate further additions in industrial load during 2020, so we are 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 and dividends, you can expect a more refined approach to capital allocation and 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 a 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 would 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 a unanimous settlement in early January of 2020 with a 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 the Michigan commission in January.

During fourth quarter, the Arkansas base case was completed with the unanimous settlement filed in October and approved by the Arkansas Public Service Commission in December 2019. It included an $18 million net increase and 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 a cap structure of 57.5% debt, 42.5% 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.

In our commitment to file another base case within 4 years and -- 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, it will 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 regarded, and most likely we'll request a fairly low increase in rate. 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 are required to file in March, and we'll show that we earned 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 3 coal units that's allowed under Virginia law. This enables us to file for a rate increase, and we would expect new rates to be effective in February 2021.

Now on to 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 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 another jurisdiction 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 to bat for approvals is Oklahoma, which is -- it's on 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 to EEI, which goes through 2024, supports a 5% to 7% growth rate and does not include North Central Wind. Although the actual size of an 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 a company, EHS Partners, actually through State Auto's CEO at the time, that specializes in engaging companies 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 costs 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 into gear and will become part of a budgeting process each year and ultimately embedded into our culture of innovation. More to come on that later in the year.

We are in 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 of 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, 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 and distributed resources and the electrification of transportation and other areas, you can't help but be bullish about the future of this industry and, in particular 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. And 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'll pick up as well. So we have -- we're actually pretty well off with subsidiaries that are 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 those 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 of 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 a $44 million base rate increase based at 9.75% ROE. And as I mentioned earlier before, the Virginia triennial review is in 2020, and I'll 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 onetime adjustments. I&M expects ROEs to be in the authorized range going forward with the continued successful execution of capital programs in generation, transmission and 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 onetime true-ups and weather. PSO received an order in its base case settlement effective April 2019 approving a $46 million increase of transmission tracker, ROE of 9.4%, a 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, we -- as I just mentioned, the AEP Texas rate case was going on, expecting an output of that pretty soon. And then also, the TCOS and DCRF filings that we usually file annually aren't made during the annual period of the rate case, so there's 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'll be great to resurrect those and keep them going after the outcome of the rate case.

AEP Transmission Holdco. The ROE for AEP transmission is 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 transmission's forecasting to be in the mid-10% range in 2020. So with that said, we're still making progress from that perspective. And if the ones -- if they're 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 a lyricist and novelist, he 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 to 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 continued that progress.

Now on to 2020. Rock on, Brian.

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Brian X. Tierney, American Electric Power Company, Inc. - Executive VP & CFO [4]

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So thank you, Nick. I'll ask the call participants to listen carefully because, although it's a little bit subtle, this is, in fact, me rocking on.

So good morning, everyone. I'll take us through the fourth quarter and full year financial results, focusing primarily on year-to-date and provide some insight on load and 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 period. 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&P 500 Electric Utilities Index in total shareholder return this year, in 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 higher 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 Utilities 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 nonrecurring 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 0.8% from the prior year. Sales were down across all customer classes in 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 Utilities 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 0.4% in 2018. Not surprising, the sectors that saw the biggest decline in 2019 was 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 0.9% 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 0.3%, while normalized usage decreased by 0.4%.

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 0.5% 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 will provide a brief update with respect to industrial sales growth by sector. This chart shows the distinction and growth between the oil and gas sectors and all other industrial sectors. Sales to oil and gas industries increased by 3.5% in the fourth quarter and ended 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 address congestion in the major oil -- 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 nonoil 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 on the left chart, GDP growth for AEP service territory was 2.1% for the quarter, which is 0.3% 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 the AEP service territory improved to 0.8% 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 1/3 of those coming from the education and health care 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 flowback of ADIT through customer rates. Importantly, this is consistent with the drivers embedded in our guidance provided at the November 2019 EEI conference. Liquidity remains 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 repealed 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 9 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ali Agha with STRH.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [3]

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Yes. Yes, it is.

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Brian X. Tierney, American Electric Power Company, Inc. - Executive VP & CFO [4]

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Yes.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [5]

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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 just wanted to be clear, is the aspiration upper half? Or is it the high end, which I heard you say in the past as well?

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [6]

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Yes. So we say the upper half as far as a generalization, obviously, and as we go forward. There's no question -- I mean we'd be disappointed if -- it's pretty much the same thing to us.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [7]

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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?

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [8]

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Well, certainly, we're in a position now to where we can -- when 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 a 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 we're fully utilizing 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.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [9]

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I got you. The last question, Brian. I'm 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?

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Brian X. Tierney, American Electric Power Company, Inc. - Executive VP & CFO [10]

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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.

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Operator [11]

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Our next question comes from Andrew Weisel with Scotiabank.

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Andrew Marc Weisel, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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My first question is on dividends. The 2020 increase was 4.5% versus guidance, have it growing approximately in line with EPS growth at the high end, really, to the 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?

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [13]

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Yes, it's unchanged. We fully expect our dividend growth to 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.

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Andrew Marc Weisel, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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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 SBP-allowed ROEs to be within the range of the reasonableness?

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [15]

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Yes. So obviously, we have that case in the Northeast that has brought up at least some issues. And certainly, that's being evaluated. A lot of parties have filed to review that outcome of the MISO case. And that was really the one that, that I think sort of sent a message. Previously, in Northeast, there is a mechanism for 4 different measures, and they went to 2 different measures with MISO. And I think it maybe had some unintended consequences, hopefully. But certainly, the industry's responded. AEP's responded as far as Transource. Our -- we have settlements in our -- in the East and the West. And in the East, we have a stay-out provision. In the West, we do not. So they're -- 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 an SBP. 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.

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Andrew Marc Weisel, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [17]

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Yes. Yes. You have to ask FERC that question. But I think that -- certainly, I think there is a 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 PATH 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.

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Andrew Marc Weisel, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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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?

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [19]

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No. I think they're being dealt with completely separately. AEP Texas is the case that -- it's a 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 precedents for a 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 but 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 -- or hopeful that they'll continue to see the benefits of that project as well and get it done very quickly.

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Andrew Marc Weisel, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Right. No. I know they're separate jurisdictions. I'll just add because I think there's a lot of overlapping intervenors. But fair enough. I appreciate the color.

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [21]

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No. There's not really -- I mean the intervenors themselves may be the same but the issues are very different.

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Operator [22]

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Our next question comes from Praful Mehta with Citigroup.

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Praful Mehta, Citigroup Inc, Research Division - Director [23]

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Congrats on a good quarter and a good year.

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [24]

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Thanks.

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Praful Mehta, Citigroup Inc, Research Division - Director [25]

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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 want to clarify the timing of that, and any further thoughts on that credit and equity point.

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [26]

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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 2/3 range. So I think that's at least a going-in position. And certainly, the -- we're seeing the project is entirely 100% incremental to our existing capital forecast, so you would expect equity. But if there's any kind of capital rotation or sale of assets that mitigates the need for any portion or all the equity then, certainly, that will be a part of the process. Brian?

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Brian X. Tierney, American Electric Power Company, Inc. - Executive VP & CFO [27]

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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.

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Praful Mehta, Citigroup Inc, Research Division - Director [28]

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

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Brian X. Tierney, American Electric Power Company, Inc. - Executive VP & CFO [29]

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

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Praful Mehta, Citigroup Inc, Research Division - Director [30]

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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.

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [31]

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Yes. So it's on both sides -- both sides of the ledger. And obviously, we still have integrated regulated jurisdictions. And the 1 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 forms, 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 on-site partners, our AEP Energy or 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, with -- or certainly North Wind -- or North Central, as an example, obviously, the way the integrated resource plans of various jurisdictions are moving forward. I know out of APCo there's a solar requirement in Virginia. And then there's other opportunities for us to do it on the regulated side as well as in the unregulated.

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 that's a nice balance for us, and we'll 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 solution.

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Praful Mehta, Citigroup Inc, Research Division - Director [32]

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Got it. That's super helpful. And 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 gain dimension how big the opportunity could be, given you have it on really both sides given your footprint.

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [33]

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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 are there. It's a matter of execution.

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Operator [34]

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(Operator Instructions) Our next question comes from Sophie Karp with Keybank.

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Sophie Ksenia Karp, KeyBanc Capital Markets Inc., Research Division - Director and Senior Analyst of Electric Utilities & Power [35]

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So on North Central Wind, I guess you've had pretty constructive settlements in a couple of jurisdictions by now, Texas being more or less the only one where you're still engaged in an 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 in the plan?

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [36]

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Yes. We've got that. Once the -- 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 2 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 that they'll take the additional capacity -- the capacity -- the wind power capacity, if it's not taken by another jurisdiction. So if Arkansas flexes up and then Louisiana approves with a flex up, then you've got the 1,485 megawatts of the whole project. Now, obviously, if Texas sees its way to be a part of the project as well, which I believe they should, then each of the states will participate in the full project. So right now, I'd say, with Oklahoma and Arkansas, if the 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 2 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 think -- I also think you should be optimistic about this project being fully wetted and fully approved.

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Sophie Ksenia Karp, KeyBanc Capital Markets Inc., Research Division - Director and Senior Analyst of Electric Utilities & Power [37]

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Terrific, terrific. 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 renewables, maybe on the regulated side?

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [38]

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Oh, absolutely. I think there's a pattern here, and that's why I talked so much about the generation's transformation that's occurring. We're -- 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, the North Central, is a perfect representation of an overall -- of 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.

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Operator [39]

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Our next question comes from Naaz Khumawala with [Granite Lane].

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Naaz Khumawala, [40]

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Congratulations on LSU.

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [41]

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Yes. I put that in there for you.

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Naaz Khumawala, [42]

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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?

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Nicholas K. Akins, American Electric Power Company, Inc. - Chairman, President & CEO [43]

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It'll be a step up. It'll be a step up -- a step change when North Central gets in, but we'll continue at the 5% to 7%.

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Operator [44]

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(Operator Instructions) No further questions at this time.

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Darcy Reese, AEP Texas Central Company - Director, IR [45]

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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?

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Operator [46]

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Thank you. Ladies and gentlemen, this conference will be available for replay after 11:15 a.m. Eastern today through midnight, February 27. You may access the AT&T Teleconference Replay System at any time by dialing 1 (866) 207-1041 and entering access code 7223769. International participants may dial (402) 970-0847.

That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.