Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power Second Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded, and replay information will be given out at the conclusion of the conference. I will now turn the call over to your host, Bette Jo Rosa. Please go ahead.

Thank you, Kevin. Good morning, everyone, and welcome to the second quarter 2019 earnings call for American Electric Power. Thank you for taking the time to join us today. Our earnings release, presentation slides and related financial information are available on our website, at aep.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Our presentation also includes references to non-GAAP financial information. Please refer to the reconciliation of the applicable GAAP measures provided in the appendix of today's presentation. Joining me this morning for our 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. However, before I turn the call over to Nick, I would like to share with you that this will be my last earnings call here at AEP. After 39 years with the company, including 22 years in IR, I have decided to retire effective September 30. While I thoroughly enjoy my role here at AEP and interacting with all of you, there are other adventures I would like to explore and decided now is the right time. Nick and Brian have graciously invited me to come to EEI Fall Conference so that I can say goodbye to you, and I look forward to seeing you there. In the meantime, I'm leaving you all in very good hands with Darcy Reese, who most of you already know; and our new addition to IR, Tom Scott, who many of you will get to meet in the coming months. I will now turn the call over to Nick.

Thanks, Bette Jo. Before I get started with the earnings call, I would like to recognize Bette Jo for the wonderful job she's done representing this company and our investors. I am a CEO that's been trained by Bette Jo Rosa. I have the permanent bruises on my shins to prove it. I've looked to her for guidance, no pun intended, with the message of our company, and we will sorely miss her. She mentioned to me that she actually did our first earnings call and has done all of them since. 114 years of earnings call is a lot, just kidding. She's been with the company 39 years, and we have done earnings calls beginning in 2009. So again, Bette Jo, thank you. Now off to the second quarter. We are doing this a little differently this time. I'm deferring the actual discussion of the GAAP and operating financial performance to Brian's part of the presentation other than to say it was another steady-as-she-goes quarter with financial operating performance consistent with our expectations. So no surprise there. We continue to confirm our operating guidance for the year of $4 to $4.20 per share for the year and our long-term 5% to 7% growth rate. And of course, our Board earlier this year approved the second quarter dividend consistent with our financial plan, which Brian will also cover in more detail. While the financials for the quarter met our expectations, there were some important catalysts for future growth that developed during the quarter. I'll continue by covering those as well as other highlights and topics for the quarter that we believe you might all be interested in. First, we made several wind resource filings in Arkansas, Louisiana, Texas and Oklahoma and our SWEPCO and PSO operating companies consistent with our…

Thank you, Nick and good morning, everyone. I will take us through the second quarter and year-to-date financial results, provide some insight on load in the economy, and finish with a review of our balance sheet and liquidity. Let's stop briefly on Slide 6, which shows the comparison of GAAP to operating earnings for the quarter and the year-to-date periods. GAAP earnings for the second quarter were $0.93 per share compared to $1.07 per share in 2018. GAAP earnings through June were $2.10 per share compared to $2 per share in 2018. There is a reconciliation of GAAP to operating earnings in the appendix. Let's go into the detail on Slide 7 and look at the drivers of quarterly operating earnings by segment. Operating earnings for the second quarter were $1 per share or $494 million compared to $1.01 per share or $498 million in 2018. Operating earnings for the vertically integrated utilities were $0.38 per share, down $0.18. Weather was the largest driver of the variants this quarter down $0.13 from last year, driven by the warmer than normal temperatures experienced in the spring of 2018. Normalized load was also unfavorable with decreases across all classes. We will talk more in detail about our normalized load and regional economies a little bit later. Rate changes helped offset these declines. You can see other smaller impacts for this segment listed on the slide. The transmission and distribution utility segment earned $0.27 per share, up $0.04 from last year. Favorable items included rate changes and recovery of increased transmission investment in ERCOT as well as favorable carrying charges and taxes. These favorable items were partially offset by higher depreciation and property taxes on the increased investment and higher O&M due to storms. The AEP transmission holdco segment continued to grow, contributing…

Thank you. [Operator Instructions] Our first question is Greg Gordon, Evercore. Please go ahead.

Good morning. Greg.

Good morning. Bette Jo, like an institution is leaving its very – I'm happy for you but at the same time sad that we're going to miss you. Looking forward to seeing you. That's my question. That's it. Just kidding. No, my question is with regard…

Ask her if she's going to stay longer.

My question is with regard just a little bit more thought perhaps on what's going on, on the demand side. I mean, clearly, on the industrial side, you've been upfront on saying that things are a little bit behind plan. And you point to the trade tensions and other factors. At the same time, it looks like the demand from the oil and gas sectors remain strong except, we're seeing signs of significant weakening and activity there in real-time. So how do you guys manage around the potential volatility in those areas in the economy if they wind up trending weaker than planned over the next several years?

Greg, we've always, of course, monitored load and what's going on with that. And we've tried to adjust over time our O&M spend in response to how load is impacted either by trade tariffs, the dollar or things like weather. And we saw that impact this quarter as well. You mentioned seeing slowdown in oil and gas. We're kind of seeing the opposite of that. We're seeing uptick in oil and gas right now including expansions through the end of the year. And whereas previously, we've seen things really on the upstream side, we're now starting to see things on the mid and downstream side as the infrastructure comes in to fulfill what's been happening in the producing part of that industry. So, we're still seeing uptick in oil and gas and anticipate increases in that throughout the balance of the year. But we are subject as everyone else to what's happening with the general economy and weather. We've been very successful in responding to that over the last several years and anticipate doing the same going forward.

The interesting thing is, Greg, the oil prices remain at least relatively decent and like, I guess, natural gas prices continue to be relatively low. But there's a lot of oil field activity. But also, as Brian said, the infrastructure pipeline activity continues because there's a lot of production that can't – and that's why prices are so low in live territories. They just can't get the transmission capabilities. So, a lot of work continues in that regard. The other part is even our industrial base is pretty diversified. And it's unusual to see several of them line up. Eight out of 10, I believe the sectors are decreasing. And you can really point to the tariff activity. So, if that gets resolved, we should be in much better shape in our territory. That being said, there is expansion going on. Matter of fact, there was just an announcement in Corpus Christi of a large expansion there. It was announced a couple days ago. So, we continue to see the pipeline of activity. And I think we just need to get past these tariff issues so that people really understand and companies understand the rules of the game so they can make investments. So, we'll get there. But until then, we'll do what we've always done. No matter what's going on with all the fundamentals associated with our business, we pull the levers we need to make sure externally, we revive that consistent quality of earnings going forward. So, if the economy's adjusting, we have to adjust.

Clear. Thank you.

Yes.

And our next question is from the line of Julien Dumoulin-Smith, Bank of America. Please go ahead.

Good morning, Julien.

Good morning. This is Alex calling in for Julien. Congratulations, by the way, Bette Jo.

Thank you.

I have two quick questions. And one is first on Ohio. I was wondering if you have looked into and could detail the impact of decoupling from the Ohio Bill 6. I know that this is something that First Energy is exploring. And I was wondering if this could potentially be a positive for you as well.

Well, we're already decoupled in Ohio. So, that really isn't an issue for us.

Okay, great. And then my second question is plans for AMI in SWEPCO, if this could also be another positive for the company and if so, when we might anticipate future announcements about it.

Yes. I think it will be positive for SWEPCO. And certainly, we want to go about the process as quickly as possible to get AMI metering put in place as a predicate for many of the technologies that we're working with. So, it's important to do that. I think you're probably going to be seeing a focus on that very soon now that the whole installation is done.

Okay. Thank you. And also including Arkansas and states like that rather than just Texas?

Well, certainly, we'll install AMI metering wherever we can install it. And I'd have to check, but I'm pretty sure we could do that in the other states already. We just haven't gotten to the point of moving that process ahead in those jurisdictions yet, but we're getting there.

Okay. Thank you so much. Thanks for taking my questions.

We had recently installed some AMR meters in SWEPCO. And so, we're really managing through dealing with the replacement of those at the same time of putting in AMI metering. So, it's one of those areas where timing is going to be really important. And certainly, the regulatory process will be key in terms of the implementation.

Okay. Thank you again.

Yes.

Next question is Steve Fleishman, Wolfe Research. Please go ahead.

Good morning, Steve.

Hey. Good morning. Bette Jo, congratulations. Definitely wish you the best.

Thank you.

So just – this maybe – I don't know if you have this detail, but out of curiosity, when you talk about the strength in oil and gas, is there a big difference between the AEP east and AEP west businesses? Is it mainly in the west?

Yes. Steve, yes. So we're seeing it in the west, particularly in Texas and Oklahoma.

Okay. How about the AEP east oil and gas? Is that down or flat or still up?

It's still up. But it's not to the degree that the west part is.

Okay. And then maybe could you just talk about maybe a little more color on the regulatory approval process on North West – North Wind and just kind of timelines and the like?

Yes. So, I guess, the beauty of all this is it's using the standard integrated resource plan processes. And we'll go through the normal hearings, but we're expecting to have an outcome in about a year. The filings have just been made. And obviously, we'll go through the testimony and all that kind of stuff in the meantime. We'll try to move it as expeditiously as we can to take advantage of the PTCs. But we expect the procedural schedules to come out soon, but our expectation is it'll take about a year to get those approvals.

Okay. And do you just need to prove that – you don't need to prove need, you just need to prove this is least cost or in the public interest?

Well, yes. That's right. There is capacity needs and TSO. And then SWEPCO is looking at it from really a customer benefit perspective.

Got it. Okay. Thank you.

Yes. Really nothing unusual about these filings. And that's probably the good thing. We went after Wind Catcher because it was a unique opportunity. And we certainly wanted to be able to perform that project. But it was outside the regulatory process and all that stuff. And the risk involved of large transmission. So, this is a very different proposition within the framework of the existing processes. So, we feel good about it.

Okay. Thank you.

Our next question is from the line of Angie Storozynski, Macquarie. Please go ahead.

Thank you. Bette Jo, congratulations. So, two questions. You mentioned that the Sempra Wind portfolio, both the operating assets and the development pipeline are actually exceeding your expectations. That together with some of the cost-cutting, is that enough to keep you in the middle of your guidance range for this year?

Yes, we feel good about where we stand for the guidance of this year and with the additions there along with our optimization activities. But also, we have gone through several series of rate cases in previous years that continue to benefit us as well. So, I mean, obviously, there's a lot of issues to look at, a lot of areas where – every year we have positives and negatives. But all in all, it comes down to where we fully support the guidance that we give. And I don't see an issue there at all.

Okay. And the secondly, so you have those additional growth drivers like the AMI, CapEx, potentially rate case renewables and stuff on PSO. How should we think about those? Are those going to elongate the current growth rate for the company? I.e., there's going to be some production of, say, transmission spending or some other CapEx to basically keep the growth rate changed? Or is this incremental to the current growth rate?

Yes. So, we continue to look at what the future holds and still an obviously long-term growth rate of 5% to 7%. We'd be disappointed if it wasn't in the upper end of that because we expect to get approvals for these additional wind projects that we haven't included in our plan. We're watching the economy obviously. And you tell me what the timing is of getting the tariff issues resolved. But they'll probably get resolve before the election I would presume. If that's the case, then we should be in really good shape. And of course, every year that goes by – we're a large company. And fueling 5% to 7% growth is more and more of a challenge. But that's why we look at things like what is going on with our contractor renewables, the value of the Sempra deal, what's going on with the regulated additions, not just regulated additions in the Western territories but in the Eastern territories as well, particularly with the legislation. And keep in mind too I think it's really important to focus on what Ohio has just done. It's opened up the ability for us to work directly with customers on the AEP Ohio side where they wanted to because there's customers who have said, we want you to do our solar projects. We want you to do the resources for these facilities. And to this point, we've been unable to say that AEP Ohio could do that. Now we can. And so, I think that's going to fuel a further expansion from a renewables standpoint and from a resource standpoint, microgrids, and so forth. And watch this House Bill 247 because I think that's really important around what we do on the digitization, automation, the technologies at the distribution side. And…

Just one follow-up to the balance sheet management. You never mentioned how you're going to finance those rate-based renewables at SWEPCO and PSO. Is it fair to say that this update is coming only once the approvals are in, i.e., about 12 months from now?

Absolutely, Angie. So, obviously, when we talked about this opportunity, it's not what we've laid out in our current financing plans. This would be incremental to it. And we would update that as we get approvals. But I think you've seen from us in the past really putting generally equal measures of debt and equity together to finance our capital plans and really fairly conservative management of our balance sheet. And I think you'll see that continuing going forward.

Great. Thank you.

Thanks.

Next question is from Ali Agha, SunTrust. Please go ahead.

Thank you. Good morning. Bette Jo, best wishes to you as well.

Thank you.

First question, Nick or Brian, just wanted to clarify the growth outlook. I recall I think in the past when you've talked about your base plan. And that was before you announced the wind projects and renewable projects that you thought that your base plan could track you to the high end of the 5% to 7% growth rate. Is that still your expectation? And if you get these wind approvals, could that theoretically actually take you above the 5% to 7% growth rate?

Well, I've always said and I continue to say we believe it certainly will make 5% to 7% more robust. And we'd be disappointed if we weren't in the upper end. And we're going have to get through and determine what happens to the load going forward. We have the growth opportunities there. But if you have tempering aspects of load growth, I think it'd be probably good for us right now to stand padded at the 5% to 7% what we said previously that we expect to be and certainly would be disappointed if we weren't in the upper end of that 5% to 7%.

Okay. And then more near-term again, just to clarify. You've brought down your load expectations for this year from up 1% to now slightly down. Weather obviously has been a drag. Can you just remind us in the very short-term what are sort of the immediate offsets to think about that could help you this year? Is it all O&M? Or is that something that's actually gone better than perhaps budgeted to offset that?

Yes, Ali. It's a couple things. One is O&M, the other one is we've had some positive rate outcomes that have outpaced our expectations for the year.

I see. Okay. And then lastly, just to also clarify, assuming that the entire $2 billion management is approved, would you consider that all incremental? Or is there an opportunity for you to standout some of the base CapEx and fit it in within the current CapEx profile?

We've not made a determination on that yet, Ali.

Gotcha. Thank you.

Thanks.

And next question is from the line of Michael Lapides, Goldman Sachs. Please go ahead.

Hey, guys. Morning, guys. I got a longer-term question for you. When you look around across the jurisdictions, where do you lack regulatory mechanisms that you would like to see to get put in place? Which of the jurisdictions where you think your regulatory team has the most wood to chop? And how do you think that process plays out in those few jurisdictions? What's on your wish list?

Yes. I have a lot of wishes. But we have about 65, two-thirds to 70% of our rate recovery is through tracker-rider mechanisms. So, we're doing pretty well from that perspective. But there are things obviously I'd like to see because the utility business right now, we're needing to invest in the resiliency and the reliability of this grid and really refurbish the grid in a major way. And that tells me that it'd be great to have more forward-looking type of test years like we do in Indiana. The formula-based rate mechanisms are really good. But there's still some wet lagging. But they're better than waiting on rate cases and stuff. And I think it's important to have mechanisms in place where there are formula-based rates, where there are forward-test years. Those kinds of things need to be in place to allow us to continue to invest and not impact our balance sheet from an FFO to debt perspective. And keep in mind, AEP did not go out for additional equity or anything with tax reforms. So, certainly, it brought our credit metrics in to something that obviously, we need to watch, particularly as you're investing capital. And then with load decreasing and revenue having an impact associated with that, that's going to further impact the FFO to debt. So, we're watching that very closely, those metrics to preserve our balance sheet. And then that's obviously something we're going have to continue to work through. So, I don't know if you have anything to add, Brian.

Michael, we don't have any jurisdictions where we have real concerns any longer. There's been a lot of progress that's been made in places like Oklahoma where we still have integrated utilities, and it's not just wires only. One of the initiatives that we're working on and taking a close look at from the terms of the risk of the customer and ourselves are the depreciation rates associated with our fossil generating stations and making sure that they're in line. So, that's an initiative that all of our vertically integrated utilities are looking at. We made some headway in that in regards to the Rockport generation depreciation in Indiana where we had an offset associated with the flowback of the deferred income taxes. We were able to shorten up the depreciation period and not impact customer rates by having that offset from the deferred income tax flowback. So, that's an initiative that we're working across the jurisdictions. But kind of a blessing, we don't have any that we would call trouble jurisdictions today. The jurisdictions are operating well. And our operating companies have strong relationships with the regulators and legislatures. And we're getting good outcomes like Nick described in Ohio. So, there's no sore point that we are overly concerned about but just some broad-based initiatives that we continue to work.

Yes. A lot of balls on our equalizer chart, it's either because of weather or that we continue to invest heavily in these jurisdictions. But it's clearly important for us. And you're seeing advancement of formula-based rate mechanisms. Arkansas, for example. We now have some significant riders in TSO in Oklahoma. And of course, the other riders in Indiana, Michigan, and so forth. And those are beneficial. But if I look at two things forward-looking for this industry, with the issues of cyber, physical security, refurbishment of the grid, ensuring that we maintain a reliable system going forward, it's imperative that we're able to invest and recover on a timely basis. And that tells me, formula-based rates, I'll take it. Forward-test years, even better. And we need to work that around the horn across all the jurisdictions.

Got it, guys. Thank you. Very thorough answer. Much appreciated.

Operator, we have time for one more call.

Okay. And that question is from the line of Praful Mehta, Citi. Please go ahead.

Good morning Praful.

Hi. Morning. And congratulations, Bette Jo. All the best.

Thank you.

So, maybe the first question on Slide 9, where you have the industrial growth and I know you've touched on this in the past. But just wanted to confirm, year-to-date down 1.5%. But your budget clearly is positive. So, you clearly see already things that are in place that would increase in load between now and year-end. Is that right, just to confirm?

That's correct, Praful. And when we see expansions that are out a year or more than a year, we need to really weight those for probability of them coming in. We feel pretty confident about things as close in as six months.

Yes. Exactly. That's what I would have got. So, thanks for confirming. And secondly, maybe on the credit point that you all made because you have all these opportunities for investment, and you will be conservative by the sounds of it on the financing side, just wanted to understand how the cash effective tax rate fits into that because it's helpful, on slide 34, you've indicated around a 5% cash tax rate. Is that something that you expect will stay around that level? Or you expect that to change? And would that put any pressure on the metrics over time?

So, we do expect the cash tax rate to be around that 5.25% going forward. Clearly, the flowback of the deferred taxes is a big use of our cash these days. But remember, we had gone in with this strong balance sheet before tax reform thinking we were going become a big payor of taxes. And now that we're not a big payor of taxes, we're a big flow backer of deferred income tax. I don't think that's a word. But we are now flowing back significant amounts of deferred taxes. So, for this year, given the orders that we had, we had anticipated flowing back both protected and unprotected, about $267 million. We're now going to be flowing back about $330 million in 2019. Going forward, in the next three years, we anticipate that number being a lot closer to about $200 million.

Gotcha. And that was a choice in terms of flowing back more this year given you have some room on the metrics?

It was a choice by our regulators.

Gotcha. All right. Well, thank you so much. Really appreciate the color.

Thanks Praful.

Thank you for joining us on today's call. And thank you all for the kind comments on the phone and all your emails. I'm a bit overwhelmed right now. And as always, the IR team will be available to answer any additional questions you may have. Kevin, would you please give the replay information?

Thank you. Ladies and gentlemen, if you wish to call the replay number, you will call 1800-475-6701 with the access code 469236. International calls may dial area code 320-365-3844. Those numbers again: 1800-475-6701 with the access code 469236. International callers, 320-365-3844 with the access code of 469236. Now that does conclude your conference. We do thank you for joining. You may now disconnect.