Earnings Call Transcript - AEP Q2 2022

Operator, Operator

Welcome to the American Electric Power Second Quarter 2022 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions-and-answers session. And as a reminder, your conference call is being recorded. I'll now turn the conference call over to your host, Vice President of Investor Relations, Darcy Reese. Go ahead.

Darcy Reese, Vice President, Investor Relations

Thank you, Alan. Good morning, everyone and welcome to the second quarter 2022 earnings call for American Electric Power. We appreciate you 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. Joining me this morning for opening remarks are Nick Akins, our Chairman, President and Chief Executive Officer; and Julie Sloat, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Nick Akins, Chairman, President & Chief Executive Officer

Okay. Thanks Darcy. Welcome everyone to American Electric Power's second quarter 2022 earnings call. AEP continues to make progress on the strategic initiatives we announced earlier this year with strong execution against our plan resulting in another solid quarter. Later in the call Julie will walk you through our second quarter performance drivers including the strong load increases we're experiencing in our territory, as well as provide additional details surrounding our financial position. But I'll start with the key financial highlights for the quarter. We'll then move to an update on our Kentucky operations sale process and timeline. I will also spend time discussing the progress we are making in our transition to a clean energy future as we simplify and derisk our business profile by divesting unregulated renewable assets while maintaining focus on our responsible generation fleet transformation and regulated renewables execution. I will close by providing some additional insights into our ongoing regulatory activities including our transmission business. We are very pleased with our positive momentum this quarter, delivering operating earnings of $1.20 per share or $618 million. We are moving full speed ahead towards the increased operating earnings guidance range and long-term earnings growth rate we provided during our fourth quarter 2021 earnings call and we are reaffirming both financial targets this quarter. As a reminder we are guiding to an operating earnings guidance range of $4.87 to $5.07 per share for 2022 with a $4.97 midpoint and a long-term earnings growth rate of 6% to 7%. We are also continuing to ensure we are best positioned for value creation as we navigate the macro trends impacting our industry and the broader economy. We are working with states to drive expansion in our service territory while considering global economic uncertainty, inflationary pressures and, of course, customer bills. We're also diversifying our mix of suppliers to minimize supply chain disruptions for our customers and business while also lessening the impact on our capital investment plan. We know that timing of the closing of the sale of Kentucky Power and AEP Kentucky Transco to Liberty is top of mind, and we have been working with Liberty to obtain the approvals necessary for closing this summer. A regulatory timeline of the sale can be found on slide seven of today's presentation. We are pleased to report the Kentucky Commission approved the key milestone in the transaction with an order approving the sale's transfer in early May. As we have discussed previously a prerequisite in our contract with Liberty for closing the sale is approval of new Mitchell operating agreements by both the Kentucky Public Service Commission and the West Virginia Public Service Commission. While we received the related Mitchell orders from the Kentucky Commission on May 3 and the West Virginia Commission on July 1, the two states approved the operating agreement with different formats and some divergent post-2028 plant provisions. However, through the two proceedings, both commissions have indicated an ability to use the existing agreement as a basis to operate the plant going forward and accomplish their differing expectations for investment in operations. For that reason, on July 11, we made a compliance filing in West Virginia, and filed an update with Kentucky, providing an alternative way to move forward with Mitchell operations in the near term. We informed both commissions that we will operate under the existing agreement and manage the new operational focus of the two commissions through the operating committee. In the absence of any new agreements, the existing Mitchell operating agreement is still in effect and we believe no additional regulatory approvals should be required. Since regulatory approval of the new Mitchell operating agreements is a prerequisite in our contract with Liberty for the closing, in the absence of such approvals, we are working with Liberty on the commercial solution for Mitchell-related operations and both parties remain optimistic about reaching a resolution and closing the transaction. At this time, the only regulatory matter currently pending is the Section 203 application at FERC related to the cell transfer, which FERC is currently considering. We are in the final stages of the Kentucky operations sale process and expect to close this summer. Moving to our unregulated renewable portfolio, in May, we closed on the sale of five unregulated development sites located in the Southwest Power Pool area, marking the successful divestiture of the majority of our wind and solar development assets. As we mentioned last quarter, we have also signed an agreement to sell a solar development site in Ohio, with that transition close expected also in the third quarter. In addition, we are in discussions with an interested party for sale of our Flat Ridge II Wind Farm ownership, consisting of 235 megawatts, simplifying the resulting portfolio for our upcoming auctions. These milestones demonstrate our commitment to continued execution. As we announced during our fourth quarter earnings call in February, we are selling our unregulated contracted renewables portfolio in order to simplify and derisk the company and facilitate investment in our regulated businesses. We are in the final stages of preparation of the marketing materials for the auction and expect an official launch of the process no later than early September. After the removal of Flat Ridge II, the portfolio consists of 1,365 megawatts of contracted renewable assets, consisting of 1,200 megawatts of wind and 165 megawatts of solar, geographically diversified throughout the U.S. There has been robust inbound interest in the portfolio and we expect the process to proceed quickly. As a reminder, utilization of contracted renewable sale proceeds is not yet reflected in our multiyear financing plan. We remain focused on maximizing transaction proceeds and directing additional capital to our regulated businesses, where we have a meaningful pipeline of investment opportunities to better serve our customers, as we push toward a clean energy future and enhanced transmission infrastructure. As always, we are open-minded and we'll evaluate all value-additive potential activities, as we focus on our regulated businesses, where we see meaningful long-term opportunities for growth. AEP continues to make significant progress in our transition to clean energy resources through our regulated renewables execution. Details regarding the specific actions we are taking can be found on slides eight and nine in today's presentation. We are also firmly grounded in our principles of resiliency, reliability and affordability while recognizing the increasing value of our diverse resource portfolio against the backdrop of energy-related volatility. SWEPCO is taking steps to secure renewable resources, making regulatory filings in May in Arkansas, Louisiana and Texas to own three renewable turnkey projects totaling 999 megawatts. This $2.2 billion investment is currently reflected in our five-year $38 billion capital plan. SWEPCO expects to issue another RFP in the near term consistent with its RFP for energy and capacity needs. APCo's 409 megawatts of owned solar and wind resources were approved by West Virginia and Virginia, marking an $841 million capital investment that is also included in our current capital plan. Requests for proposals are in process in APCo, I&M and PSO with expected in-service dates in the year-end 2024 and 2025 timeframe. We also expect to make regulatory filings to acquire additional renewable resources prior to year-end 2022. Finally, the U.S. Supreme Court ruling at the end of June related to the federal EPA's regulation of greenhouse gas emissions will not require any changes to AEP's current generation and compliance planning. Our generation fleet transformation plans are well on track. We remain fully committed to our target of an 80% carbon emission reduction by 2030 and net zero by 2050 and we are proud of the work well underway at AEP to help us achieve this goal. Reaching these targets is foundational to our long-term strategy and we believe we are on the right path toward prioritizing regulated investment opportunities and transitioning our generation fleet. Turning now to a brief update on our regulatory activity. Our regulated ROE as of the end of June 2022 is 9.2%. We continue to work through regulatory cases and maintain our focus on reducing our authorized versus actual ROE spreads. Additional regulatory activity in the quarter included a commission order received in May on SWEPCO's Arkansas rate case, including a 9.5% ROE, marking a net revenue increase of $28 million and a capital structure of 55% debt to 45% equity. We are also expecting a decision on SWEPCO's Louisiana rate case in the third quarter. Oral arguments related to APCo's 2020 Virginia base case were held in March 2022 at the Virginia Supreme Court, with an anticipated final decision later this year. FERC recently initiated several rule-making proceedings related to transmission planning, cost allocation, generation interconnection to the transmission grid and extreme weather preparedness. We support the commission in these actions and are in full agreement that reform is needed to build the infrastructure necessary to transition our generation fleet in the most efficient and cost-effective way possible, while also helping achieve our carbon reduction goals. These proposed rules align with AEP’s objectives of developing a more robust, reliable and flexible grid of the future that ultimately reduces cost to customers and strengthens economic development in our communities. Before I turn it over to Julie, I want to take a moment to thank our team for the incredible work that they are doing as we execute against our strategic objectives and deliver for our stakeholders. What's going on today at AEP is a perfect blend of the execution of Bachman–Turner Overdrive's "Takin' Care Of Business" with the edge of Prince's "Let's Go Crazy" in a good sense, of course. We have an incredible market position, a bold mission and the foundation in place to achieve our goals to deliver on our vision of further modernizing our energy grid in order to supply reliable, cleaner, low-cost resources for all the communities we serve. As we think about the future and the next chapter of AEP, we're excited to share more about our plans at AEP's upcoming Analyst Day on October 4 in New York City. We will provide additional detail soon and look forward to seeing you there. Julie, over to you.

Julie Sloat, Chief Financial Officer

Thanks, Nick. Thanks, Darcy. It's good to be with everyone this morning. Good morning and thanks for dialing in. I'm going to walk us through our second quarter and year-to-date results, share some updates on our service territory load, and finish with commentary on our credit metrics and liquidity as well as some thoughts on our guidance, financial targets, and then recap our current portfolio management activities underway. So let's go to slide 10 which shows the comparison of GAAP to operating earnings. GAAP earnings for the second quarter were $1.02 per share compared to $1.16 per share in 2021. GAAP earnings through June were $2.43 per share compared to $2.31 per share in 2021. There's a detailed reconciliation of GAAP to operating earnings on pages 18 and 19 of the presentation today, but I'd like to call out three of the reconciling items that do not affect operating earnings, but relate to our asset optimization activities underway. Specifically, you'll see that we made an adjustment to arrive at our operating for the quarter and year-to-date periods consisting of Kentucky sale costs and the write-off of one of the unregulated universal scale wind projects that's included in the portfolio we're in the process of preparing for sale. The Kentucky sale charge reflects an anticipated reduction in the sales price as we work with Liberty to accommodate adjustments for costs that have been identified through the regulatory approvals that we've received. Turning to the renewable investment write-off, the Flat Ridge II project specifically has continued to see deteriorating performance due to equipment issues and transmission congestion. To avoid another otherwise necessary repowering investment to address the performance issue and complicate our portfolio sales process, we elected to write off the equity investments and are in discussions with an interested party for the sale of ownership interest in Flat Ridge II. Consequently, this will remove the Flat Ridge II project from the portfolio we're preparing for auction, which should help improve the valuation opportunity as investors engage in the sales process, which is scheduled to launch no later than early September. Lastly, I'll mention that we monetized some mineral rights which give rise to a benefit to GAAP, but non-operating earnings, which helps offset the charges I just mentioned. So while I would typically not spend time walking through the GAAP to operating reconciliation, I thought it was appropriate at this time given the milestones we're clearing on the asset optimization front. And while these charges and gains are things that we need to recognize they are entirely driven by our efforts to derisk, simplify and bring cash in the door to support our continued investment in the regulated business. So with that let's go to slide number 11 and walk through our quarterly operating earnings performance. Operating earnings for the second quarter totaled $1.20 per share or $618 million compared to $1.18 per share or $590 million in 2021. Operating earnings for vertically integrated utilities were $0.59 per share, up $0.14. Favorable drivers included rate changes across multiple jurisdictions, positive weather primarily in our western jurisdictions, increased transmission revenue and normalized retail load and income taxes. These items were somewhat offset by increased depreciation and O&M and lower off-system sales. Just as a reminder on the O&M and depreciation front, as I mentioned on the first quarter call and included in our 2022 guidance details because of a change in accounting related to the Rockport Unit 2 lease at I&M, we're seeing approximately $0.05 of favorable O&M offset by $0.05 of unfavorable depreciation in each quarter of 2022, but no consequential earnings impact. And so I'll have a little more to share on load performance and I'll get to that in a minute here. So just hang with me. The Transmission and Distribution Utilities segment earned $0.32 per share, up $0.01 compared to last year. Favorable drivers in this segment included rate changes, load, positive weather in Texas and Ohio and increased transmission revenue. Offsetting these favorable items were unfavorable O&M and depreciation. AEP Transmission Holdco segment contributed $0.27 per share, down $0.07 compared to last year, favorable investment growth of $0.03 was more than offset by an unfavorable true-up of $0.07. As I mentioned last quarter, this is consistent with our guidance. Our 2022 guidance had this segment down by $0.08 year-over-year as a result of the $0.12 of investment growth being more than offset by the annual true-up that occurred this quarter and some favorable comparisons on the tax and financing side. This segment continues to be an important part of our 6% to 7% EPS growth as you well know. Generation and Marketing produced $0.18 per share, up $0.09 from last year. The positive variance is primarily due to the sale of renewable development sites as well as increased generation margins and land sales. Finally, Corporate and Other was down $0.15 per share driven by lower investment gains, increased income taxes and unfavorable interest. The lower investment gains are largely related to charge point gains that we had in the second quarter of 2021 that have reversed this year. The increased income taxes are related to the reduction of a consolidating tax adjustment at the parent. Let's turn to Slide 12 and our year-to-date operating earnings performance. Year-to-date operating earnings totaled $2.42 per share or $1.234 billion, compared to $2.33 per share or $1.160 billion in 2021. Operating earnings for the vertically integrated utilities were $1.18 per share, up $0.18. Similar to the quarter, favorable drivers included rate changes across multiple jurisdictions, positive weather mainly in our western jurisdictions, increased transmission revenue and normalized retail load and income taxes. These items were somewhat offset by increased depreciation and lower off-system sales. Once again the change in accounting around the Rockport Unit 2 lease results in $0.11 of favorable O&M offset by $0.11 of unfavorable depreciation. The Transmission & Distribution Utilities segment earned $0.62 per share, up $0.08 compared to last year. Favorable drivers in this segment included rate changes in Texas and Ohio and increased normalized retail load and transmission revenue. Offsetting these favorable items were unfavorable O&M and depreciation. AEP Transmission Holdco segment $0.62 per share down $0.06 compared to last year. Favorable investment growth of $0.05 was more than offset by unfavorable true-up of $0.07 and increased property taxes. The Generation & Marketing segment produced $0.21 per share, up $0.05 from last year. The positive variance is primarily due to the sale of renewable development sites and increased wholesale margins offset by lower retail margins. Finally, Corporate and Other was down $0.16 per share driven by lower investment gains, unfavorable interest and increased O&M. The lower investment gains again are largely related to charge point gains that we had in 2021 that have reversed this year. Turning to Slide 13. I'm going to provide an update on our normalized load and performance for the quarter. And in general sense the AEP service territory has made significant momentum despite the well-publicized headwinds impacting the macro economy. Starting in the upper left corner, normalized residential sales increased by 1.2% in the second quarter and were up 1% year-to-date compared to 2021. This growth was comprised of growth in both customer counts and weather-normalized usage for both comparisons. While the results were mixed by operating company, the strongest residential growth was in the AEP Texas service territory, which consistently has the strongest customer growth across the AEP system due to favorable demographics. Moving to the right. Weather-normalized commercial sales were up 4.1% compared to last year for both the quarter and year-to-date comparison. This consistent growth in 2022 is spread throughout the service territory. The growth in the commercial sales segment was spread across every operating company and nine of our 10 commercial sectors, the only top commercial sector that is down versus last year is hospitals, which makes sense given that hospitalizations have dropped since earlier in the pandemic. On the flip side, the fastest growing commercial sector is data centers which were up 32% compared to last year. Finally, focusing on the lower left corner, you see that industrial sales posted another strong quarter up 5% for the quarter, and up 5.3% year-to-date compared to last year. Industrial sales were up at every operating company in most of our largest sectors. We experienced double-digit growth in a number of key industries this quarter, including chemicals manufacturing and oil and gas extraction. We also saw robust growth in primary metals manufacturing, paper manufacturing, petroleum products, and coal mining. To summarize, we've experienced broad-based growth throughout the service territory on top of a recovery year. Every operating company has increased its sales in 2022 compared to last year. Growth is also consistent across every major retail class and most of the top commercial and industrial sectors served by AEP. We know the headlines are full of messages about a pending recession, but our sales statistics through the first half of the year show our service territory is still firmly in the expansion phase of the business cycle. We're mindful of the difficult monetary policy decisions being contemplated by the Federal Reserve to address inflationary pressures in the economy and recognize some of these decisions could impact our customers' growth opportunities going forward. But so far we're seeing little evidence that has dampened the economic activity within our footprint through the first two quarters of this year. Moving to slide 14, I want to provide additional context to the load we've experienced so far in 2022, and how it compares to our pre-pandemic sales levels. Starting with the chart on the left, the bars show how the second quarter sales compared to the pre-pandemic baseline in the second quarter of 2019. You'll notice that the total retail sales are 3.6% above pre-pandemic levels. Furthermore, every class is showing higher sales than before the pandemic began. This means that every class is fully recovered and is in the expansion phase of the business cycle. The chart on the right shows the same comparisons for the year-to-date period. You'll notice that, while the numbers are slightly different the message is the same. Through June AEP's normalized sales are 2% above the pre-pandemic levels. And just like the quarter, every class has exceeded pre-pandemic levels on a year-to-date basis. Last year's strong growth numbers were expected considering it was a recovery year from the pandemic shutdowns. This year's growth is perhaps even more impressive considering the growth as compared to a strong recovery year. We'll continue to monitor the economy and its impact on our load over the summer months and we'll provide the results of our updated load forecast this fall. So let's move on to slide 15 to discuss the company's capitalization and liquidity position. On a GAAP basis, our debt-to-capital ratio decreased 0.1% from the prior quarter to 61.4%. Taking a look at the upper right quadrant on this page, you'll see that our FFO to debt metric stands at 13.4% on a Moody's basis, and 13.3% on a GAAP basis, which is a decrease of 0.3% and 0.4% respectively from the prior quarter. The slight decrease can be attributed to an increase in deferred fuel balances, as well as a slight increase in balance sheet debt. As we stated on our last earnings call, we anticipate trending toward our targeted FFO to debt range of 14% to 15% as the year progresses. You can see our liquidity summary on the lower right of the slide: our five-year $4 billion bank revolver and our two-year $1 billion revolving credit facility support our liquidity position, which remains strong at $4.7 billion. On the qualified pension front, while our funding status decreased 0.8% during the quarter, it remains comfortably strong at 105.6%. Negative returns on risk-seeking and fixed income assets during the quarter were the primary drivers of the funded status decrease. However rising interest rates caused plan liabilities to decrease which provided a favorable offset to the negative asset returns. So, let's go to Slide 16 for a quick recap of today's message. The second quarter has provided a solid foundation for the rest of 2022 and we are reaffirming our operating earnings guidance range of $4.87 to $5.07. We continue to be committed to our long-term growth rate of 6% to 7%. We continue to work through the Kentucky Power sale to Liberty and are on-track for a closing later this summer and we'll be launching the auction process for our unregulated contracted renewables business no later than early September. So, before I hand things over to the operator, I'd like to mention one thing. We had previously announced that we would be having an investor conference this year and we've set a date for that. As Nick mentioned we'll be hosting our investor conference in New York City on October 4. So, we really do appreciate your time and attention today. With that I'm going to ask the operator to open the call so we can hear what's on your mind and take any questions that you have.

Operator, Operator

We'll first go to the line of Jeremy Tonet with JPMorgan. Go ahead.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning, Jeremy.

Jeremy Tonet, Analyst (JPMorgan)

Just wanted to start off with load growth trends if I could. Just want to confirm here the full year load growth estimates have not been updated for year-to-date actuals or is there any reason to expect to fall off in the back half of the year?

Julie Sloat, Chief Financial Officer

That is correct. We have not updated anything yet. We are cautiously optimistic. We'll give you an updated view as we get closer to our Analyst Day or at our Analyst Day on October 4. So, stand by for that. As far as what you can expect for the second half, if I look at, for example, the residential load, obviously talk of recession and how inflation is outpacing wage growth could potentially have residential customers shift their behavior a little bit. We'll see. Again, we're cautiously optimistic there, but we do expect that it could be a little bit tempered on this particular customer segment by inflation, energy cost, mortgage rates and the lack of new stimulus — those things that everybody knows about. So no surprise there but just general trends. So we're going to continue to keep a close eye on that particular segment. On the commercial segment, I mentioned earlier that we had great performance in nine of the top sectors — of our 10 top sectors with hospitals being the only one that was down. Again, we're keeping an eye on things like inflation, labor shortages, supply chain and borrowing costs. But again, at this point we don't have a reason to shift away and things continue to click along there. And similar on the industrial side, we see a lot of large customer expansions that are expected to come online throughout the rest of the year, which should support the momentum, but at the end we're cautiously optimistic because we know that the Federal Reserve has a big job in front of it and it has to tap the brakes. So we'll see how that ultimately impacts all of these. But so far, we're in a really good place. So hang tight and we'll be able to give you a little more granular view in terms of our expectations when we come to you this fall.

Nick Akins, Chairman, President & Chief Executive Officer

We said, we told you I guess, it's probably a quarter or two ago, about reinforcing our service territory particularly as it relates to energy and as it relates to onshoring. Our territory has been very strong in terms of both of those categories — manufacturing as well. And that's clearly become a benefit for us. When you think about what's going on in the world today, associated with security aspects, that's really going to drive more towards the ability for onshoring to occur and certainly for energy security. So it bodes well for our territory.

Jeremy Tonet, Analyst (JPMorgan)

Got it. That's great to hear there. And just want to pick up with — I guess, we'll hear more details at the Analyst Day on these points with lower growth but also wanted to see what else we might expect to hear at the Analyst Day. I suspect the sales processes will get some more color there but is there anything else we should be looking for at the Analyst Day?

Nick Akins, Chairman, President & Chief Executive Officer

Yes. There's the sales process. Obviously, everybody wants to know about Kentucky, but also the unregulated contracted renewables will have new data points on that as well. And then of course, a 2022 earnings guidance update, 2023 guidance range will be introduced and also we'll probably roll forward the five-year capital and financing plans through 2027 and there could be other things too. So we will hold that till October 4.

Jeremy Tonet, Analyst (JPMorgan)

Got it. We'll wait for that. And just the last one, if I could. Any thoughts on the renewable sale whether it makes more sense to do as an entire package or in pieces? I realize it's very early stages here, but just wondering if there's any process share on that.

Nick Akins, Chairman, President & Chief Executive Officer

Yes. The team is working at that. Certainly, I think the base case would be to sell all at one time. But if opportunities exist to stage that out with the capital needs, that would be great. So we’re still going through that process and we'll go through it as we talk earlier; we'll be going out to the market here in the September time frame. So we'll know a lot more at that point. More to come in October.

Jeremy Tonet, Analyst (JPMorgan)

Got it. Great. Thank you for that.

Operator, Operator

We'll go next to the line of Julien Dumoulin-Smith. Go ahead.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning, Julien.

Julien Dumoulin-Smith, Analyst (Evercore ISI)

Hi. Good morning, team. Thanks for the opportunity. Appreciate it. So maybe just a follow-up in brief on this operating arrangement in the two states here. What do you need to see from Liberty to be able to move forward at this point in time? I just want to make sure I understand, exactly. Is this just about them acquiescing to sort of the updated position from the two states, or do you really need to resolve, say, a specific transfer value, et cetera here?

Nick Akins, Chairman, President & Chief Executive Officer

Yes Julien. Certainly, Liberty has been a great partner through this entire process. We want to be fair to them because they were obviously looking for certain things out of the transaction. We were looking for certain things. I think it's going to be a matter of going through the process of defining risk going forward. It's not simply saying it's going to be the existing agreements and tough luck we move on. It's really an issue where there is an opportunity for us to get together with them and define that future, because we're going to be partners in that entity going forward. So we might as well get comfortable with that relationship, 100%.

Julien Dumoulin-Smith, Analyst (Evercore ISI)

Yes. Nick, I noticed in the comments you made in the prepared remarks on inflation. Can you elaborate a little bit more on how that ties into both near and longer term? I get that you guys are providing an update in a couple of months here. But just elaborate a little bit on the pressure points that you are seeing of late, define that and how that's cascading through. Maybe speak a little bit to the cadence of labor arrangements for instance, et cetera?

Julie Sloat, Chief Financial Officer

Julien, I'll let Nick talk a little bit about supply and labor. But what we're also watching is in addition to our own costs and working with our individual parties around making sure we have material supplies, equipment and folks that actually do the work, we're also paying attention to what's going on with our customers because, as we talked earlier today, load is a big piece of our driver for earnings year-to-date and this quarter so far and we hope to see that continue. But as we know if the Fed needs to take some action and tap the brakes that could have some dampening effect as it relates to actually all three of our customer segments. Now, as I mentioned earlier, the industrial segment looks reasonably healthy based on the customer expansions that we see in the pipeline, et cetera. But I don't think everyone can entirely escape the consequences. So even from a commercial standpoint, if you look at the real estate segment, in particular, interest rates have a direct impact on that piece of that sector in that business and then of course on the residential side if your wage isn't growing as quickly as your costs you may tend to want to tap the brakes. Not to mention mortgage costs go up as well. So, keeping an eye on it from a customer perspective and managing through it as it relates to our particular P&L. Nick, did you want to say anything about supply chain and labor?

Nick Akins, Chairman, President & Chief Executive Officer

So supply chain has certainly been an area of focus for the company and our supply chain organization has done a great job of getting out ahead of that, understanding the delays that are occurring relative to delivery of transformers and other critical equipment. Inventory levels and supplier diversification are important and, as a large electric utility with extensive transmission and distribution requirements, we have the ability to focus on the supply chain by expanding suppliers and exerting our purchasing leverage. We are watching storm activity and what implications that could have on inventory levels and supply chain. Labor is an issue for everyone and we continue to focus on our frontline employees to ensure that we're meeting customer requirements. We're tuned in to wage rates and changes and we have relationships with contractors and other resources we can pull from. All in all, our capital plan remains secure in terms of the ability to move these projects forward and we believe AEP is in a strong position to continue.

Julien Dumoulin-Smith, Analyst (Evercore ISI)

Super quick clarification on SPP, they've tweaked the reserve margin. Does that impact your procurement efforts at all? I know you have a few things in flight just to clarify.

Nick Akins, Chairman, President & Chief Executive Officer

No it doesn't. We're going through regular integrated resource planning processes with all of the Southwestern Power Pool states. Those processes will continue. The things we're planning — transmission and distribution investments and renewables — are timed such that we have time for the supply chain to catch up relative to solar and wind components. So we're in good shape from that perspective.

Julien Dumoulin-Smith, Analyst (Evercore ISI)

Great. Thank you, guys.

Operator, Operator

We'll go next to the line of Shar Pourreza with Guggenheim Partners. Go ahead.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning, Shar.

Shar Pourreza, Analyst (Guggenheim Partners)

Good morning guys. How are you doing?

Nick Akins, Chairman, President & Chief Executive Officer

Fine, how are you?

Shar Pourreza, Analyst (Guggenheim Partners)

Nick, just on the contracted renewable sales, we're thinking about the process for the sale. There's obviously some conflicting data points out there — rates have picked up materially, there seems to be a few peers in the market selling as well. But on the other hand, given supply chain issues assets on the ground are certainly more valuable. Can you elaborate a bit more on the process when you plan on opening up the data rooms? It's a tight time frame with the Analyst Day. What data points can we get between September when you kick the process off and the Analyst Day, which is only weeks after the process starts? What's giving you a sense?

Nick Akins, Chairman, President & Chief Executive Officer

These are well-known resources and a data room can be opened quickly. Reviews can be done quickly. Interest has been very robust and it will continue to be robust because these assets have steel in the ground and the ability to continue operating. We took out Flat Ridge II, which makes the portfolio stronger. We expect the process to move very quickly, and when we bought similar resources from Sempra we moved quickly. For these asset types the market focus is strong. We feel confident we can move forward quickly and have certainly more information by the time we get to the Analyst Day.

Julie Sloat, Chief Financial Officer

Shar, as an anecdote, when we initially made this announcement, I can tell you that not only was I receiving calls, Nick was receiving calls and Chuck Zebula whose team is running the process was receiving calls — a lot of inbound interest. As far as what you can anticipate, assuming we launch at the very latest in early September we should be able to come back to you by October 4 with color on how that process is going. There are other folks in the market as well, which is why we need to get out there as soon as we can. That is absolutely the objective. Stay tuned — we'll have more color to share with you.

Shar Pourreza, Analyst (Guggenheim Partners)

Do you think you could actually announce a deal on the fourth or the proceeds by then?

Nick Akins, Chairman, President & Chief Executive Officer

No, that will be too tough for that. That will depend on what we get back in terms of one-time versus staged offers; all those things will have to be considered. We'll have more information, but we won't have a finalization by October — probably by the end of the year.

Shar Pourreza, Analyst (Guggenheim Partners)

Got it. Thanks. And just one last one on load growth and the backdrop in general. You've highlighted ongoing strength and pre-pandemic levels. How are you thinking about 2022 in general and where you are within that EPS range, especially given we're into the key months of the summer with Q3? I would think there's obviously a strong tailwind for you for 2022 even though you guys are hedging yourselves a little bit on uncertainties out there.

Nick Akins, Chairman, President & Chief Executive Officer

It's always good to be ahead into the latter part of the year because summer is strong and then the fourth quarter is always uncertain with storm activity and so forth. We feel really good about our position right now. The fundamentals look strong. If you take charge point out of it, this was a very positive quarter and we continue to grow and see momentum. Our load team is optimistic. We feel good about our position and we'll have more to say as we get closer to Analyst Day.

Shar Pourreza, Analyst (Guggenheim Partners)

Okay. Terrific. Thank you guys. Appreciate the color.

Operator, Operator

We'll go next to Steve Fleishman with Wolfe Research. Go ahead please.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning, Steve.

Steve Fleishman, Analyst (Wolfe Research)

Hey, good morning. Thanks. So just a question: I think Julie mentioned on the Kentucky sale, the write-off you took of $0.15. Should we read that as effectively reflecting your expectation of what kind of price change needs to be renegotiated for the Mitchell issue? Is that reflecting that or is that...?

Nick Akins, Chairman, President & Chief Executive Officer

No. That one was really focused on when Liberty and AEP got together to focus on the Kentucky transaction order itself and there were requirements associated with that. We were focused on ensuring we completed that order and addressed those requirements. So that's what that charge reflects.

Steve Fleishman, Analyst (Wolfe Research)

Okay. I guess maybe then just on the difference between Kentucky and West Virginia and how Mitchell is treated. Could you give a little more color on those differences so we can think about the value difference between the two?

Nick Akins, Chairman, President & Chief Executive Officer

Yes. Kentucky had its view of valuation in 2028 and West Virginia had its view in 2028, and they are different. It's not something you're going to resolve today. It becomes an issue of how we get together and think about our continued operating partnership, which could be done through the operating committee of the existing operating agreements and then focus on a later date to consider the risk issues. Kentucky Power will continue to be a partner in Mitchell and when the time comes before 2028 there will have to be reconciliation between what Kentucky and West Virginia want. We want to make sure those risk parameters are taken care of on the front end.

Steve Fleishman, Analyst (Wolfe Research)

But I guess what matters in terms of closing is the arrangement between you and Liberty in terms of closing. So there would be some ability to negotiate some certainty on that?

Nick Akins, Chairman, President & Chief Executive Officer

Yes. Now that we have a third party involved, that drives a different view than when everything was already owned by AEP companies. You have to determine the right approach for Liberty to have that ownership and for AEP to have ownership at arm's length. Our teams have been in constant contact and are working well together. We're optimistic about the transaction.

Steve Fleishman, Analyst (Wolfe Research)

Okay. And then on transmission, anything you expect from FERC in the second half of the year to better identify their interest in getting more transmission built, but at the same time still pressure on ROEs? What are you watching there?

Nick Akins, Chairman, President & Chief Executive Officer

Reliability and resiliency are central for FERC and Congress. FERC has multiple NOPRs around transmission planning, cost allocation, generation interconnection, and extreme weather preparedness. We support the reforms and believe they align with AEP's objectives for a robust, reliable and flexible grid that reduces costs for customers. The ROE discussions, including any potential adders, could take years to resolve, but we'll continue moving forward with investments and look forward to rules that enable timely investments with manageable risk. Overall, FERC is doing a credible job and many of those proposals are consistent with AEP's positions.

Operator, Operator

We'll go next to the line of Durgesh Chopra with Evercore. Go ahead.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning Durgesh.

Durgesh Chopra, Analyst (Evercore ISI)

Hey, good morning team. Quick clarification on the Kentucky sale process: your discussions with Liberty on the Mitchell operating agreement and then the FERC approval — those are two independent processes, right? So you don't have to go back to FERC asking for revised approval once you settle with Liberty on Mitchell?

Nick Akins, Chairman, President & Chief Executive Officer

Yes. We believe with the original agreements and the ability to operate under the operating committee, we can focus on status quo and ensure we're able to move forward with a third-party partner. It's our belief we do not need to go back to FERC for additional approvals.

Durgesh Chopra, Analyst (Evercore ISI)

Got it. And then thoughts on valuation for your renewable assets — how have they evolved since the first quarter? Interest rates have risen, the market has been volatile. Any color you can share ahead of the September launch?

Nick Akins, Chairman, President & Chief Executive Officer

There are headwinds like inflation that impact valuation, but there's also robust interest in these assets. The fact that they continue to produce energy in market environments provides benefits. It's hard to predict specific valuations now; the market will tell us. We removed Flat Ridge II because of its issues so bidders won't be arguing about that project's specific risks; the remaining projects are attractive.

Julie Sloat, Chief Financial Officer

If you're trying to model, we've included breakdowns on slide 44 of the presentation. After removing Flat Ridge II, the portfolio asset value on our balance sheet today is about $2.1 billion, with an equity position around $1.4 billion. We have some projects' debt and tax equity totaling about $272 million. For earnings contribution context: for 2022, in the Generation & Marketing segment guidance midpoint, about $0.13 to $0.17 relates to this portfolio. There is low tax basis associated with it but we have some tax credits available to absorb a tax gain, so that should not be a gating issue for us.

Durgesh Chopra, Analyst (Evercore ISI)

Excellent. Thank you, both. Appreciate the color.

Operator, Operator

We'll go next to the line of Nick Campanella with Credit Suisse. Go ahead.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning, Nick.

Nick Campanella, Analyst (Credit Suisse)

Hey, good morning. Just a quick follow-up on the Kentucky sale reduction. I noticed you have $1.4 billion of proceeds in the funding slides. Can you reaffirm that the cash proceeds at close are unchanged?

Julie Sloat, Chief Financial Officer

We're good. No change in that modeling or those assumptions. We're good.

Nick Campanella, Analyst (Credit Suisse)

Great. And on strategy and the Analyst Day: you've been simplifying the business profile and have sales processes underway. As you think about funding the long-term CapEx plan, are you interested in pursuing further asset sales or are we in the later innings of this portfolio rotation strategy?

Nick Akins, Chairman, President & Chief Executive Officer

We have significant capital to fund and a plan to do it. We'll look at ownership levels of new renewables projects — that will provide additional opportunity. We'll continue to evaluate opportunities to add shareholder value and ensure customers see capital deployment that provides a better experience. This is really the beginning of how our business will endure through the transition. The execution will continue.

Nick Campanella, Analyst (Credit Suisse)

All right. Thank you very much. We'll look to you in October. Thanks.

Operator, Operator

And for our next question we'll go to the line of Stephen Byrd with Morgan Stanley.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning, Steve.

Dave Arcaro, Analyst (Morgan Stanley) — on behalf of Stephen Byrd

Hi. It's Dave Arcaro on for Stephen. Thanks so much for taking our questions. Wondering if you could give your latest expectations around federal climate policy here. Do you expect renewable tax credits to be in an extenders bill potentially towards the end of the year? Anything you expect in terms of climate or clean energy legislation this year?

Nick Akins, Chairman, President & Chief Executive Officer

It's going to be a challenge. There are ongoing discussions, but priorities like healthcare and pharmaceuticals make a large package difficult. The CHIPS Act is moving and is positive for our territory given Intel's fabs. You may see extenders toward the end of the year when ITCs and PTCs roll off. Direct pay is important to us; it could be tested and would be a benefit if implemented. Any extensions or expansions for nuclear and storage would be helpful. We continue to monitor the landscape, but the situation is volatile and may take time to resolve, potentially post-election.

Dave Arcaro, Analyst (Morgan Stanley) — on behalf of Stephen Byrd

Got it. Thanks. That's helpful color. Maybe just one small follow-up. At Flat Ridge, were the issues exclusive to that project? None of the other assets in the portfolio had similar issues?

Nick Akins, Chairman, President & Chief Executive Officer

That's right. Flat Ridge II had specific performance issues; the others do not. That's why we separated that project from the portfolio.

Dave Arcaro, Analyst (Morgan Stanley) — on behalf of Stephen Byrd

Understood. Okay, great. Thanks so much.

Operator, Operator

We will go next to the line of Andrew Weisel with Scotiabank. Go ahead, please.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning, Andrew.

Andrew Weisel, Analyst (Scotiabank)

Thanks. One about coal: between reliability concerns and the Supreme Court ruling you mentioned, do you see any potential to keep some coal plants online beyond their current retirement dates, beyond Mitchell which is unique? Would you consider extending them as peakers or to keep some as intermediate or baseload resources?

Nick Akins, Chairman, President & Chief Executive Officer

We need a rational and reasonable approach to resource transitions. Capacity provided by coal units is important for reliability and resiliency. As we add renewables and storage we can reduce coal capacity factors, but we must ensure demand is met. Community impacts — taxes, schools, local economies — must be considered. Potential options include small modular reactors, hydrogen hubs, or storage where appropriate. Coal has provided important benefits particularly during summer and winter months, and we need to be mindful as we plan transitions.

Andrew Weisel, Analyst (Scotiabank)

Thanks. Very helpful.

Operator, Operator

We'll go next to the line of Michael Lapides with Goldman Sachs. Go ahead.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning.

Michael Lapides, Analyst (Goldman Sachs)

Good morning. Looking at earned ROE versus authorized, how are you thinking about what structural changes in ratemaking you'll seek in the next couple years in jurisdictions that are earning well below authorized — PSO, APCo, SWEPCO? How are you approaching that?

Nick Akins, Chairman, President & Chief Executive Officer

There have been substantial opportunities. Renewables help from an ROE perspective and reduce rates to customers from fuel savings, giving us opportunity to deploy capital. We like forward-looking, formula-based rate mechanisms and concurrent recovery where possible. Trackers for specific investments are also beneficial. We need recognition that cash coming into the utility is important given the large investment programs. We'll keep refining rate adjustment clauses and regulatory approaches; you'll see more from us at Analyst Day.

Julie Sloat, Chief Financial Officer

Michael, on PSO in particular we have securitization completing next month for storm Uri costs, which should alleviate some pressure. We'll be filing another base case. In general, we'll refine use of rate adjustment clauses and trackers across jurisdictions including West Virginia, Virginia and SWEPCO. You'll see more detail on October 4.

Michael Lapides, Analyst (Goldman Sachs)

One quick follow-up. Cardinal in the G&M segment had a big benefit during the quarter given where power prices were versus your delivered cost of coal. How are you thinking about Cardinal going forward?

Nick Akins, Chairman, President & Chief Executive Officer

We plan on completing a transaction with Buckeye related to that plant. They would take ownership of the plant and we would take a PPA back for a certain period. That PPA runs through 2028. That means we will not have any unregulated generation left in Ohio. There's a broader message for Ohio about generation needs, but the Cardinal transaction is in the plans.

Michael Lapides, Analyst (Goldman Sachs)

Got it. Thank you, guys. Appreciate it.

Operator, Operator

We'll go to the line of Sophie Karp with KeyBanc. Go ahead.

Nick Akins, Chairman, President & Chief Executive Officer

Good morning, Sophie.

Sophie Karp, Analyst (KeyBanc)

Hi. Thanks for squeezing me in. On transmission: you emphasized Transmission Holdco remains a key growth engine while also discussing divestitures. How should we think about transmission relative to potential non-core sales? Are you getting questions about a transmission sale and how should we interpret your comments?

Nick Akins, Chairman, President & Chief Executive Officer

Don't read too much into it. Transmission is a core component for investment and for the transition to the future. Transmission is key for resiliency, reliability and optimization as we move to a clean energy environment. We feel very good about our role in transmission and view it as central to our business.

Sophie Karp, Analyst (KeyBanc)

Thanks for clarifying. One housekeeping item: on slide 40 related to new growth opportunity, it seems APCo's opportunity was reduced a bit and solar increased a bit in the 2020 to 2030 timeframe. Is that a project realignment or how should we think about this?

Nick Akins, Chairman, President & Chief Executive Officer

That reflects the April integrated resource plan and is immaterial at this point.

Operator, Operator

And speakers, we have no further lines in queue at this time.

Darcy Reese, Vice President, Investor Relations

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

Operator, Operator

Yes, I will. Ladies and gentlemen, this conference will be made available for replay beginning today, July 27, and that starts at 5:30 p.m. You can access the AT&T replay service by dialing toll-free 866-207-1041. International participants may dial area code 402-970-0847. The access code is 9751677. That replay will be available until August 4, 2022 at midnight. Those numbers again are toll-free 1-866-207-1041, internationally area code 402-970-0847, the access code is 9751677. That will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.