美國電力 (AEP) 2002 Q3 法說會逐字稿

Thank you for standing by, welcome to the AEP third quarter earnings conference call. At this time, the participants are in a listen-only mode. Later we will conduct a question and answer session with instructions given at that time. If you require assistance press zero and star, and as a reminder today's conference is being recorded. I would like to turn the conference to the treasurer of American electric, Armando Pena, Please go ahead sir.

Thank you and good morning to you all, before we get started let me remind you in our press release we are discussing issue that's may contain forward-looking statements and estimates that are subject to risk and uncertainties. Please refer to our most recent (incomprehensive) filings for a list of factors that may cause result to differ from managements projections, forecasts, estimates and expectations. There are several people in the room here today, but I will turn the call, the proceeding over to Linn Draper, chairman, CEO of the company, who will share the call. Linn?

Good morning. In a decision to Susan Tomasky our CFO, with me in the room are Tom Shockley and Eric Vanderwald. We announce yesterday that Eric, is stepping down from role as EVP of the wholesale business, but is staying around in a consulting capacity to ensure a smooth transition. Holly Koeppel will be responsible for managing our wholesale business focusing on optimizing our energy assets. We will be involved in markets where we own assets. We will be involved in the wholesale markets were we own assets primarily the power markets in the Midwest, Texas and England and Gas markets in the Gulf coast. On going earnings for the third quarter 1.21 were better than the 1.05 than we projected. Customer load for both retail customers under regulated tariffs and off system sales improved over our forecast by 10 cents. Favorable weather and lower than anticipated fuel cost were principal drivers for that improvement. (Incomprehensive) expenses 4 cents below our forecast. I believe earnings projected for 2002 in the range of 2.85 to 3.15 is still appropriate because reduction in energy trading and potential risk in the assumed performance of our wholesale investments. On page 2, 3 and 5 of the press release. We summarize results in the new earnings format we introduced at the EEI meeting earlier this week. The old format is also included, in the back of the release. Compared to the third quarter of 2001, this quarter was lower by 22 cents a share. Earnings from our utility operations on page two of the earnings release were down by 5 cents due to the dilution of issuance of shares earlier this year. Without that diluted effect margins on utility operations were higher by $121 million and were offset by lower margins in trading and marketing of about $57 million. Resulting in net margin increase of about $64 million. As shown on page 6 of the earnings release, $121 million improvement is the sum of wholesale gross margins on energy sales and energy delivery revenue. The off system on the whole sale section includes the value added from our own generation. You will also note that margins on gas trading were positive on $25.7 million in the quarter. The reason we show trading in the retail operation is to reflect new AEP profile where that line will become the optimization of energy assets. O & M expenses were higher by $37 million for the quarter reflecting insurance and OPEV expenses. The $18 million drop in performance from wholesale investments shown on the table of page 3 is essentially from UK generation where higher operating costs have dragged results. The $38 million drop in earnings for other investments reflects lost contributions from sea board and the gain of sale from IPP project in third quarter of last year. For the year to date as shown on page 9 of the earnings release earnings were $2.37 compared to $3.01 last year. Margin from utility operations were up $87 million but offset by reductions in trading and marketing a drop of $231 million. O and M expenses year to date are higher for the same reasons cited earlier. We still believe that $3.00 per share is a good point estimate for 2002. With year to date earnings at $2.37 we need 63 cents in the 4th quarter or 29 cent improvement over 45 cents earned in the fourth quarter last year. We're projecting a 32 to 38 cent a share improvement from utility operations driven from our return to normal weather. Zero earnings from last years lost and lower O and M expenses. Contributions to new investments should be 5 cents higher. Lower than our earlier projection due to the decline of the UK generation. And other investment should contribute 7 cents less mostly because of the loss of sea board's earnings. Going back briefly to the third quarter results, internal sources of funds were approximately $570 million. Cash flow from ongoing earnings and depreciation was about $775 million. Network capital increase by $155 million. Broken down as margin requirements of trading of $100 million, seasonal fuel inventory growth of $70 million and miscellaneous other items at $25 million. The increase in working capital reflects most of $250 we have estimated for the second half of the year. Capital structure at the end of quarter was as we expected about 45 percent equity and 55 percent debt. No incremental debt is anticipated before year end since our remaining financing program is to replace maturing issues. At this point we would be ready to take your questions.

If you wish to ask a question you can press the one on your touch tone phone. You will hear a tone indicating you've been placed in queue. You can remove yourself from queue by pressing the pound key any time. If using speakerphone pick up hand set first before pressing any numbers. One moment for the first question. We have a question from Jay Ianello from UBS Warburg. please Go ahead.

Good morning, There's still a decent amount of play in the fourth quarter estimate, I realize you guys have a lot going on and there's a lot of moving parts, but is part of the play because you are unwinding trading and you don't know how that will play out the book and everything?

I think that's part of it, Jay, and I also think as we said there is the UK generation, there's some room in there in the estimate depending upon how that performance actually materializes. I think we also told you in a third quarter call that other, the new investments did depend upon good performances in the fourth quarter but it was seasonally expected for things like to occur, the improved performance of Memco for example. Also there is always in our performance with respect to system sales in retail play around loads that happens just by virtue of the fact that the winter is a major season for us.

Okay and other question, any update on Moodies where they stand? I know were still waiting to hear back from them.

No, there's no additional information there.

Thank you.

Sure.

Our next question is from Paul Patterson with Glen Rock association. Please go ahead.

Hi, how are you guys doing?

Good how are you?

All right. Want to ask you about the trading operating outlook as it stands know. My notes have expecting $170 million in gross margin for 2002 and $110 for 2003 where are you guys year to date on that gross margin and has it changed at all for 2003 for 2002?

Well in the sheet that we handed out in the E.E.I., first of all we have reformatted what we talked about before so that you now see what had previously been value added in the line of system sales. With respect to pure trading we have effectively zeroed that out in our prospect for 2003. And I think the number that we showed for 2002 was $69 million.

$69 million. So you guys don't expect anything for the fourth quarter right? I think I heard you say that earlier.

That's a good working assumption.

Out of that $110 million and $170 million dollars how much of that is this optimization? I guess.

$110.

100 million is okay. Thanks a lot.

Sure.

Our next question is from Steve Fleishman with Merrill Lynch. Go ahead.

Hi can you hear me?

Yes, Steve.

Susan, can you go through the working capital numbers you provided again?

Maybe we'll ask Armando.

We said there was an increase in working capital of $195 million and $100 million of that was increased margins that we had to post related to the trading activity. $70 million was a seasonal buildup of few inventory that you normally do in anticipation of the higher energy demand in the fourth quarter and the balance of $25 is miscellaneous, we are trying to analyze further.

Okay. Secondly, with respect, can you provide a little more data on what the quarter-end trading mark to market book looked like, what was the asset realization period, things like that. Is that available

Yeah, Steve. If you take the net of the asset liability is that what you're looking for?

Yes.

Unknown Speaker*: It's about $250 million

$250 million?

Unknown Speaker*: Correct. That compares to $185 million in the (inaudible).

How much of that may be more than a year? Just to get a sense in terms of the unwinding?

Do we have that break down yet?

We don't actually have that break down yet, Steve, we're still working through that.

Okay.

To give you a sense of proportion, the gas book was about cut in half since October 9th.

Cut in half since October 9th

So it's moving quickly on the gas side.

Okay.

We'll try to get you --

In June we had about 80% of the book was within 18 months or so.

Yeah.

Okay. One last question, just so I understand with the way the number came in better than you had thought, I guess two weeks ago. Two weeks ago I assumed you probably didn't have the September data and those just came in better in terms of margins and costs, is that the main difference?

That's basically right.

Okay. Thank you.

Sure.

If there are additional questions you may press the one on your phone at this time. One moment. We have a question from Paul Ridzon from McDonald investment. Go ahead.

Do you have more detail between the 4 cent variance report and ongoing earnings looks like you have a benefit of write down?

Working capital associated with the sale of SeaBoard.

Thank you.

Our next question comes from Kit Konolige with Morgan Stanley. Go ahead.

Good morning, I was wondering if you could give us any further idea on your sense of how '03 looks in the U.K. in the sheet you handed out at E.E.I. you had a $16 million loss there. Can you give us any idea of sensitivities there? And secondly, I was wondering if you could comment again on the UK on your investment there and if you see any likelihood of a write down potential there?

I will ask Tom to answer that.

Kit, this is Tom. Basically the numbers you saw earlier are where we think we will come in the UK, those reflect I think low levels with regard to power prices in the UK, we think it makes sense for us to continue to focus on optimizing those assets. It's very much in line with the strategy we have domestically. We will focus on that. it's cash flow positive and with all the turmoil in the UK market there's bound to be some changes, we hope, that would start p moving things in the right direction. We're watching it, but squarely our focus would be to run those units as effectively and generate as much revenue as we can.

Any sense on carrying value of those assets? other people obviously have taken some write downs there.

At this time we don't have any plans for that. Obviously we check that on an ongoing basis. But with it cash flow positive we feel that's the direction we want to go to continue operating them well.

Thank you.

Our next question comes from Tim Fellow, with George Weiss associates

Actually Brad Donovan. Can you tell me what your debt is and what level have you factored in and is that level in the guidance?

This is Armando. The overall cost of goods right now is approximately 6 percent. We project for 2003 that long term debt that we might refinance would cost 7 percent and we also anticipate that short-term debt will gradually rise in our forecast from 2003 from the current level 2.25 to 3.5 percent.

Those are the levels are you projecting?

That's correct.

Do you have plans for equity in '03?

Not at this time.

Okay, thanks so much.

Next question comes from Raymond Niles, Salmon Smith Barney, please go ahead.

Thank you, good morning. Most of my questions have been asked. But I'm wondering if you could share a little bit on what your call spark spread outlook is in your utility service territory and how you have hedged it into '03 and maybe '04 a little bit.

Sure, I don't have the figures in front of me for '04. For '03 we are about on the Ohio generation good 83-85 percent hedged between the portfolio and default obligation with customers. That is slightly greater than the fixed price coal long position, so we are slightly under hedged and that fits with the current view on the coal market.

So basically you would be projecting that coal prices would be falling slightly, is that your view?

Yeah I think we have a little bit of a negative bias. Not huge, but they have been pretty weak throughout most of this year.

That answers my question, thank you.

Our next question comes from Terry Miller from UBS Warburg. Please go ahead.

Could you give us further definition in timing and potential outcome to explore leaving the x communications business.

I would imagine we are very actively looking at it. It comes in pieces for us. One is the resolution of the ASN enterprise. And I would expect that we would move forward on that. We will talk about it over the fourth quarter. We have some ongoing operations that we have embedded in AEP communications primarily as a cost saving measure to continue to work out contractual obligations we had servicing fiber customers there. And we have another piece in C3 communications. I think overall by the end of the year we will have a plan out there whether or not we actually make a decision around exiting what we have left and selling it to someone else or continuing to service the obligations we have could end up being a little longer than that.

Thank you.

Our next question is a follow-up from Paul Ridzon from McDonald Investments please go ahead.

I know you scaled back on acquisition plan, but previously you were looking ft move across the market chain with the barges and coal mines is that still long term what you are thinking strategically and if not is there potential for sales of those assets that you've been acquiring?

In the long term we may do that. We're certainly not going to do anything in the near term with the capital environment we now have. We will constantly be looking at what we have to see if it continue to fit the strategy, but you shouldn't expect us to make acquisitions soon.

Anything that doesn't fit anymore given your shift from the trading?

That certainly isn't impossible but we haven't made a decision to do anything.

Okay, Thank You

Our next question comes from Wen Wen Chin, ABN Emerald, Please go ahead.

Can you update us on refinancing the triple F debt?

We're planning on extending the bridge that we currently have. As you know the market is quite tough for permanent financing now in the UK, so we will seek to extend at least a portion of that bridge and fund whatever difference remains.

How would you fund the remaining portion?

With cash. CP.

We have $3 million Euro facility.

Do you have a deadline for refinancing that?

By the end of the year.

Well the current interim financing is due around the middle of December, but we're well along the way to extend that beyond that base. As Susan said I think we have flexibility even in the worse case where we don't extend the entire amount we have other sources that will allow us to fund the balance.

Okay and when will you have a better idea if you are going forward with the corporate separation?

We're waiting to hear from the F.C.C. that's the remaining regulatory activity. So it's really day-to-day in terms of understanding what their schedule would be at some point in the near future. If we determine that we're not likely to have something at the end of the year we may choose a different course and begin to address some of the maturities that we have through the operating utilities which is always an option for us.

My last question, can you repeat again what your operating cash flow for the quarter was?

Total sources was $570 million. $775 million came from net income and depreciation and there was an increase in working capital of $195 million. Is that enough?

So I should add the $775.

Less the $195 increase in working capital give you the source of $570.

Thank you.

Our next question is a follow-up from Steve Fleishman from Merrill Lynch. Please go ahead.

Two quick follow-ups. First, how much do you have invested in the Telecom businesses?

About $400 million dollars. That's a total of ASN, C3 and AEP communications.

Okay also, I know you were working on a bond sale in Australia, do you have any sense how that is going and what the size is at this point?

We're still waiting word back from the potential investors, next week I would imagine we would have a better sense of that. That would affect the size as well.

We've done the road show, which went very well. And we're now pulling all the investors to get the expression of firm interest and we're waiting feedback any day now. Within a day or two and we expect if everything goes well to conclude this first crunch some time next week.

Okay thank you.

Our next question is from Zack Striber from Duchaine Capital Management please go ahead.

Hi its Zack Striber From Ducaine Capital Management. Can you hear me?

Yes.

As far as the trading and marketing book you mentioned, the net mark to market, can you let us know how the gross trading and market assets and lie abilities have changed or unwound since October 9th?

We're not really able to address that from October 9th.

Yeah we don't have a balance sheet information.

We don't get balance sheet information daily.

Is there a way to give a general changes in terms of that?

The gross gas positions decreased about 47 percent since October 9th. That's easier to take down because it's heavily a financial book and you can take it off, the other side hasn't changed much.

Is there any way on the $13 billion what portion was gas, liquid and what portion is power?

I'm afraid we just don't have that break down.

Okay, thank you so much.

Next question from Eugene Chen from Sutton Brook. Go ahead.

My question is you guys, while some other competitors have taken their medicine in cutting the dividend and issuing equity you have maintained strongly you won't do that. I think we are waiting to hear how the rating agencies come back and review some recent announcements you have had. To the extend they lower the ratings, would that force you to reevaluate whether you would have to reexamine the dividend or selling equity?

I don't think it's useful to speculate around a lot of hypothetical. Clearly our credit rating is extremely important and there are tool available to us. Any number of things we could look at to address concerns of the rating agencies. I don't want to preclude any particular tool and everyone knows a dividend reduction is one of those. But I also think we made clear it's important to us and we think our equity position is strong. We think the progress we have made with respect to our ratios is very strong that we delivered very successfully that we said we would do this year to improve, including asset sales, insurance of equity. So rather than speculate out of outcomes we will continue to work with the rating agencies to get to where we are. If we find our selves in a problem we will do what's appropriate. But I don't think anyone tool should be focused on at this point.

I hear what you're saying. My concern is it's been a really long time relative to other companies, I know S & P in looking at your --

It wasn't preliminary. Those are the ratings.

I understand, but what I was trying to say is May was the last time they commented and they were looking at separation and had your unrated business rated at triple B plus. People would say that seems to be an unrealistic rating given the environment. And that's why I bring this issue up.

I take issue with several pieces of that. First, the ratings that we are currently undergoing, the ratings review were not initiated by the rating agencies as a part of a down grade. They were part of an effort on our part to seek appropriate ratings and to rate some new entities that would be funding sources in the course of corporate separation. So it's incorrect to suggest that rating review was in any matter preliminary or that there was an earlier period of time. I also remind everybody the Standard & Poors confirmed that rating. Standard & Poors looked specifically at our disclosures around the sales of traders and noted that did not, in their view, reflect a need for further consideration. Similarly, with respect to moodies we are in an ongoing process, again, initiated by us, not moodies that is an effort to secure the ratings we previously discussed. The time frame of which you are referring is a time frame in which various changes have occurred. We have supplied new and updated data to moodies, so I don't think there's anything extraordinary about this time frame at all and I think would be inappropriate to make too much of it. The last point is I disagree entirely with your suggestion that the triple B rating is inappropriate --

Not talking about the parent, talking about on the unregulated portion of the business.

If you look at the unregulated side of the business, a very significant portion of the revenues are from the contract. And in particular, long term contract with -- power to supply those customers. 80 percent of the output of those facilities are under secure contracts represented by the generation portion of the historic power rate. We think we have made a very, very strong case in addition to our hedging activities, strong performance of distribution company that's we have absolutely no problem with that rating being credible in relationship to the real view of what our businesses are.

Next question please?

Next question is from Angelo Dreso from Bank of America. Go ahead.

Good morning, if you decide to close down the communication segment, what would the closure cost be?

You mean cost to achieve closure?

Fulfill any obligations, fulfill lease agreement purchases.

We don't have a number for you right now, it would be influenced by how we exit, we hope to address that betner the fourth quarter.

Can you give me a mix of floating debt and swapped from fix to floater.

About 25 percent is floating, I don't think we have anything floating from swaps.

Do you have any initial thoughts on 2003 working capital guidance?

We assumed in our forecast for 2003 which we have handed out that we would have no incremental need for working capital. I expect directionally that there will be positive contributions to working capital as the positions in trading begin to unwind. But, since we don't have a very firm number for that yet, we can assume for now that it will be zero incremental capital in 2003.

Our next question is from Zack Striber from Duchaine.

Just wondering if you could tell us what the Telecom business makes or loses on a gap earnings basis and if it were to go away what effect on your earnings it would be and what's embedded in '03 guidance?

I think we were talking about a $35 million dollar in '02 negative. Most of that is associated wit debt service. I think if it went away, about $15 million of that would go away. That's rough.

Is the debt guaranteed by you folks at the parent level?

It is.

Great thank you.

We have time for one more question from owe say from Jose Almante from Teachers Insurance.

Most of my questions were asked. On the AP communications business, you mentioned you have ongoing service obligations, can you quantify that? That's the dollar amount of the service obligations?

I don't have that handy. We'll see whether or not that's something that could be available offline.

All right. I guess the EI conference mentioned, company manager mentioned the Tatus do you have idea on the resolution of that?

I guess I'm not sure what progress is to be made.

I guess at the conference I was under the impression the company would be working towards removing any sort of triggers, that's what I mean by progress.

I think what we were trying to communicate at the conference is that we have an ability to remove it at any time by paying $225 million dollars. Our point is it remains an attractive financing vehicle for us if at any time we are in danger of the trigger occurring which occurs only if our share price falls below $18.75 for ten consecutive days, we have the option of paying off money and we indicated we would do that. Otherwise I think that we find ourselves in a position of continuing to hold the financing.

If the stock closes a $18.75 or less or ten consecutive days.

All right. Thank you.

I think that was the last question, so I think you all for participating and see you next time.

This conference will be available for replay today at 1:00 p.m. 800-475-6701, 654258 access code. that does conclude our conference, thank you for your participation and using AT&T's executive Teleconference conference service. You may now disconnect.