美國電力 (AEP) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power conference call fourth quarter earnings teleconference. At this time all lines are in a listen-only mode. Later, there will be a question-and-answer session and instructions will be given at that time. If you do need assistance during the call today, please press the zero, followed by the star. As a reminder, today's call is being recorded.

At this time I would like to turn the conference over to the Senior Vice President and Treasurer, Mr. Armando Pena. Please go ahead, sir.

Thank you. Good morning. Welcome, all. Before we get started let me remind you that in our press release and in this call today we are discussing issues that may contain forward-looking statements and estimates that are subject to risks and uncertainties. Please refer to our most recent 10Q and 10K filings that may cause rulgts to differ from management's projections, forecasts, estimates and expectations. There are several people in the room here today but I will turn the call over to Linn Draper, Chairman and CEO of the company, who will chair the call. Linn?

Thanks, Armando. Good morning. With me are Susan Tomasky, our CFO, Tom Shockley, Chief Operating Officer, Holly Koeppel, EVP for the Unregulated Business Henry Fayne, Executive Vice President for the Regulated Business and a number of others who will participate in the Q&A session after some opening remarks that Susan and I have prepared.

I plan to discuss the results for 2002 which has been a tough year. Ongoing earnings reached our guidance range but in a manner different than we had projected. We're burdeneded by cost increases and declines in the wholesale business. We face significant balance sheet issues, from writeoffs in the wholesale investments and pension charges. I also want to spend some time talking about our plan for recovery.

First, ongoing earnings for 2002 were $2.89 a share compared with $3.38 last year. It was within our guidance range of $2.85 to $3.15. I believe that the consensus was $2.91. Turning to the 2002 ongoing earnings breakdown on page 8 of the press release, the earnings from utility operations were $3.26 a share, up from $3.19 in 2001, 50 cents of the $3.26 is related to recovery of stranded costs in Texas.

These noncash pretax earnings are included in the Texas wires line and reflect the difference between the actual market price received from the state-mandated auction of 15% of Central Power and Light's generation capacity and the PUCT's estimate of earlier market price derived from its E-COM model. There is $260 million included in this line which represents the activity for all of 2002. It's been established as a regulatory asset that's recoverable through the 2004 true-up process established by Texas Deregulation Law, Senate Bill 7. We hadn't booked these auction amounts earlier because we didn't have a defined process to determine the stranded cost for the 2004 true-up.

The recent plan filed with the PUCT to sell the CP&L generation provides the definition for such a process. We expect the capacity auction to continue through 2003 as provided by the law. The true-up process in 2004 envisions a securitization of stranded costs, including the $260 million already booked. Cash proceeds received by the company from the securitization will be used to reduce capitalization. The securitization debt will be serviced through a surcharge in the wires rates. This debt should not be included by rating agencies in their leverage calculations, just as the $797 million of regulatory assets secured to us by Central Power and Light in 2002 is excluded currently.

Retail gross margins in the other operating utilities were also up by about $270 million due to increased usage by residential customers. On the other hand, systems sales were off by about $105 million, due primarily to lower wholesale prices and availability of generating units. Trading was also down versus 2001 by $214 million, as expected, because of our previously announced plan to reduce trading activity and the fact that earnings from trading in 2001 were exceptionally strong.

O&M expenses were up by $122 million for the year as a result of implementation of Customer Choice in Texas, increased cost of pensions, post-retirement benefits, and insurance. We expect these costs, other than those related to Customer Choice in Texas, to continue to escalate, but we have completed a cost-cutting program that should result in O&M savings of about $200 million for 2003 compared to 2002.

As part of this program, we reduced our workforce by 1300 positions. The performance of the wholesale investments was a major disappointment. The continued poor performance of our U.K. Generation resulted in a loss of $59 million for the year. The group result was a negative $45 million, or 13 cents a share. Other investments were an additional drag of 24 cents, or $79 million. AEP communications lost $36 million, a $12 million improvement over last year.

Other costs of $84 million were offset by the $40 million contribution of Seaboard and City Power prior to their sale at mid year. The other costs of $84 million include $37 million for AEP resources and $32 million of parent company expenses. The results from utility operations, wholesale investments, and other investments were $2.89 a share. For the year, the company reported a loss of $1.57 a share, reflecting approximately a billion and a half in write-offs of several investments, including a billion for the fourth quarter.

Some of the investment writeoffs like communications of $160 million and Volle in Brazil of $140 million were anticipated. The $415 million writedown of the U.K. Generation has been the result of recent analysis which indicate that power prices will not recover to levels required to permit recovery of the original purchase price. Continued weakness in the U.K. market, coupled with the British government's intervention in the competitive market, giving advantage to the supplier British Energy, has been particularly troublesome and detrimental to the recovery of Generation asset values there. The detail on all the write-offs is shown on Page 4 of the press release.

For the fourth quarter ongoing earnings were 52 cents a share compared to 35 cents last year. Earnings from utility operations were 74 cents compared to 24 cents in 2001, a substantial improvement in gross margin of about $375 million is due in part to the recognition of the stranded cost recovery in Texas operations that I mentioned earlier. Year-on-year results would have been flat otherwise. The earnings from utility operations were offset by the performance of wholesale and other investments.

2002 has not been a good year. It's a big disappointment for us and you as well. We've taken steps to reduce operating and capital expenses, we made significant improvements in winding down our speculative trading and therefore reducing the risk of our business. Our gross trading book has dropped to approximately $2.1 billion in assets and $1.9 billion in liabilities at the end of the third quarter. We have done this by carefully managing our counter party credit exposure and have not incurred significant losses.

As we begin a new year, we remain focused on our utility operations where the fundamental earnings power of the company remains. Our balance sheet has been affected by the impairments we took in the fourth quarter of 2002, and also by a change to other comprehensive income of $585 million in pension liability and adjustments. We're committed to strengthening our balance sheet.

First, we continue to look for reduction in O&M expenses. Second, we continue to look for reductions in Cap Ex. Third, we are revising our dividend policy. Our Board of Directors discussed this with Management this week. The Board declared on Wednesday the regular dividend of 60 cents a share for this quarter but Management expects to recommend a 40% reduction in the dividend beginning in the second quarter to a quarterly rate of 35 cents a share. This will result in annual cash savings of $340 million and will immediately improve retained earnings, as well as create free cash flow to improve liquidity and pay down debt. We believe that we've retained significant value in the dividend we preserved and it still produces an attractive yield but it was clearly a painful action.

Fourth, we plan to systematically dispose of noncore assets, principally a portfolio of wholesale investments. Proceeds from these sales will be used to reduce debt. In addition, we continue to evaluate the potential for issuing additional equity. While we don't like the dilutive impact on earnings and the additional cash it requires for dividends, incremental equity may be necessary to further strengthen our balance sheet and maintain credit quality. We plan to continue active dialogue with the rating agencies on this matter. I believe that ultimately a strong triple B credit for the company is in the best interest of all investors.

2002 was a tough and turbulent year. We were pounded by a series of negative events in the energy sector. We face challenges going forward, but AEP is still a strong company. We remain committed to being a low-cost provider of electricity, to serving our customers with excellence, and to providing an attractive return to investors. We will therefore return to the more traditional model of a regulated utility with a small commercial group that ensures maximum value for the output of our generation assets. At this point let me ask Susan to say a few words about liquidity, financing plans, and our cap structure.

Thank you, Linn. First let me address the question of earnings guidance for 2003. We're expecting to provide some more specific information on that subject over the next several weeks. Based on what we know today, you can expect 2003 to be somewhat below this year's performance, probably in the range of about $2.50 to $2.70 per share. That reflects our expectation that the traditional utility business will perform at about the same level year to year and that there will be some additional erosion from the wholesale business.

Our chief concern for the coming year concerns our portfolio of wholesale investments. We are looking at continuing losses from the U.K. Generation at levels potentially higher than the at $59 million of losses in 2002. Although the plant is projected to be cash flow positive, we are going to closely scrutinize the continued advisability of the operations and the assets in the coming months. In addition to seeking performance improvements where possible in those assets that we retained, other also focused on the O&M and Cap Ex reductions across the board for next year. Execution on these plans will be very important to meeting our expectations for next year.

For 2003, as was the case in 2002, we will continue to focus on maintaining our very strong liquidity position. We have credit facilities of $5.5 billion and $1 billion in cash. Against those, we have $1.4 billion outstanding in commercial paper, and $1.6 billion drawn on bank facilities. So on a net basis we still have about $3.5 billion of available liquidity. As I mentioned, the Cap Ex program for 2003 has been reduced about $200 million from prior estimates and it's now expected to be approximately $1.5 billion. We also have a strong financing plan to deal with financings maturitys and it does not require incremental debt.

Our goal is to pay down debt as a result of the initiatives that Linn outlined earlier: Asset sales, further O&M and Cap Ex reduction, dividend reduction, and possibly the sale of equity. We are getting ready to kick off the 2003 financing plan with issuances of about $2 billion for our Texas and Ohio utilities. The proceeds are going to be used substantially to term out the short-term debt that was earlier used to fund maturitys and redemptions. You recall that we had previously planned to refinance that deregulated holding company. The proceeds, in effect, will pay off $1.3 billion drawn on a corporate separation bank facility and a portion of the commercial paper.

We have $1.3 billion in debt maturing in 2003. About one half of it is at the operating utilities and it will be refinanced as it matures during the year. The balance is at the parent company which is $250 million in May and AEP resources, which is $400 million which matures in December. The parent company debt will be financed in the AEP reresources debt will be paid off. We're evaluating a debt at the parent company to refinance these maturitys.

Finally, in 2003 we have most of the $5.5 billion credit facilities coming up for renewal. The $1.275 billion corporation separate bank facility expires in April and it won't be renewed if the Ohio and Texas proceeds as I outlined earlier. The credit facility is due to roll over in May and our plan is to reduce it substantially and replace it with a multiyear facility. Two facilities in Europe totaling $300 million westbound resized in October and that's based on the need of our U.K. business at the time.

The last credit facility of $1 billion isn't due for renewal until May of 2005. These credit facilities are provided by a group of banks and you know the market is extremely difficult as banks are reducing commitments to the energy sector. I believe our plan to reduce substantially the amount of credit we need does pave the way for a result with the banks that meets our liquidity needs going forward.

Now let me talk for a moment about cash flow. For the year 2002, internally generated funds were $1.7 billion, made up of $955 million cash net income, plus $1.5 billion in depreciation, less $650 million for working capital. $1.3 billion from asset sales and $3.9 billion from securities issuances altogether resulted in a total sources of cash of $6.9 billion. The cash uses were $1.7 billion for Cap Ex, $800 million for dividends, and $3.4 million for debt retirement. The overall result is $1 billion in extra cash.

We had $1.3 billion in cash at year end. For 2003 we estimate internal sources of cash at approximately $2.3 billion, including $1.4 billion from depreciation and assuming zero incremental needs for working capital. Long-term debt issuances of $3.3 billion will be used to redeem long and short-term debt. Cap Ex is projected add $1.5 billion and common dividends at $560 million. This results in free cash flow of about $200 million to $300 million.

Finally, before taking your questions, let me say a word about capital structure. We were targeting capital structure of approximately 45% equity and 55% debt by year-end 2002, which is a substantial improvement over the 62% debt ratio at the beginning of that year. We actually accomplished our target by the third quarter through the sale of Seaboard and City Power and the equity issuance in June. However, the equity reductions in the first quarter from asset impairments and pension charges did result in a year-end capitalization of $20 billion, which is 42% equity and 58% debt.

Our plan for 2003 is to achieve a year-end capitalization consistent with the triple B rating which, of course, means further debt reduction. Although the write-offs to give us additional ground to cover, we do have a strong track record of doing what we set out to do to address cap structure concerns. Last year in a very difficult market, we took the steps necessary, including asset disposition and equity issuance to reduce our overall debt by $4 billion. Given the underlying strength of our traditional business and our clear intent to refocus on those fundamentals, as Linn as pointed out, we believe we can do what we need to do to strengthen our position as a strong triple B company.

We have fully briefed the rating agencies on these issues and will continue to work with them to make sure that the steps necessary to address their concern are taken. With that I'll turn it back to Armando and he will field questions.

Yes. And I think, what we will do now Ken, get started if you are ready for the questions.

Very good then. Ladies and gentlemen, if you do wish to ask a question, please press the 1 on your touch tone phone. You will hear a tone indicating you have been placed in queue and you may remove yourself from queue by pressing the pound key. If you did press the 1 prior to this announcement, you may need to do so again at this time, and if you are using a speakerphone, you may need to pick up your handset before pressing the 1. So once again if you do have a question, please press 1 at this time. Our first question then comes from Jamie Waters with J.P. Morgan. Please go ahead.

Thanks and good morning.

Morning.

I guess first on the new guidance range for '03, does that -- I just want to confirm that that does not assume any additional equity issuance?

That's correct.

Or lost earnings from asset sales?

That's correct.

Okay. Can you give us any idea on the plans for asset sales and what those gross proceeds may be and which assets?

We're not really ready to do that yet, Jamie. The first look will be at the noncore investments, as we suggested, and that's where the focus is going to be, but we're still doing some sorting there.

Okay. What about the potential size of the equity issuance? It seems you are thinking what preliminarily about it right now, but have you given any thought to what sort of range we may be talking about?

Of course we've given thought to it, but it's not concrete enough to really speculate on at this point.

Okay. And the last question on the balance sheet. You mentioned targeting a cap structure consistent with a triple B at the end of '03. Can you give us kind of a road map there going from the 42 to 58%, or 42/58 mix? What do you expect that equity-to-debt ratio to be at the end of '03?

We haven't really hit a specific number. Last year, of course, we talked about the 45/55 and that continues to be a good goal. We think that somewhere around that, perhaps we may not get to that by year end, but somewhere around that is strong triple B. As you know, the rating agencies take into account a number of factors in figuring out what to do, including liquidity and coverages.

So we think that on those bases, that combination of factors are strong. That is where we would like to get there. Whether or not we actually hit the 45 is still open. Armando, would you jump in there?

Yeah. Jamie, the -- clearly the leverage is a factor that's used by rating agencies. I think the cash flow coverage, you know, is another factor and, you know, we have a very strong cash flow coverage that keeps us very solidly within our range and it's just a matter of fine-tuning the -- you know, the cap structure and as Susan said, is not a very precise exercise.

But, you know, the target that we have for the year I think, you know, is a reasonable target and, you know, we continue to have dialogue with the rating agencies to see how the combination of the FFO coverage is and the leverage gives us the kind of capital -- the credit quality that we're seeking.

And last question. Can you give us any update at this point as to what impacts to the balance sheet you may see in the current quarter surrounding the trading book?

We don't expect any impacts in the current quarter with respect to the trading books. Are you asking about the 98-10?

Right.

Yeah. We expect to see that as a one-time charge in 2003 and we're not completely done with the calculation, but we do expect it to be in a range under $100 million.

Okay. Thanks.

Thank you. And our next question comes from Raymond Niles with Salomon Smith Barney. Please go ahead.

Good morning. Thank you. Just a couple of questions, if I can. First, can you give a sense as to what the change in the power book was in the quarter, you know, maybe just a sense of, you know, maybe change in assets, trading assets related to the power book?

I'm going to ask Holly to address that, Ray.

We've certainly scaled back the size of our positions, moving from the end of '01 to '02 in terms of the net fair value outstanding. We were at about four fifty last year and we're at about two fifty this year, and as Linn mentioned in his speech, our net assets were about $2.1 billion at year end and liabilities, $1.9.

And how about just, maybe just assets related to power itself? I'm trilg to get -- trying to get a sense of power versus gas. Was most of that reduction due to gas, or how much has occurred on the power side of things?

It's a combination of the two.

Okay. You can't give a specific breakout for power?

Not at this time.

Okay. Second question is just in terms of the quarter, maybe -- I'm sorry, I just want able to find it but, you know, what kind of trading loss did you book in the quarter, just strictly due to trading? I know, you know, before there was disclosure like at a gross margin level related to trading, can you give a sense for that?

Ray, this is Armando. Are you referring to the earlier format where we had the gross margins for trading, for gas, for power?

That's correct.

Yeah, I think we're expecting to have that -- correct me if I'm wrong.

$2 million.

$2 million?

Total.

It's in your breakdown on that Page 8. You know, there's the line that is -- what's the line number?

Line 8.

Line 8, called trading. It was a negative 2. You got it?

Yeah, I have it in front of me here.

Line 8.

Okay. I see that. For the full year, okay.

Oh, for the quarter. The fourth quarter is on Page 6 and the year is on Page 8, I believe.

Okay. And then I guess for the -- two more questions, if I can. If not, I'll go on. But the -- in terms of the quarter, I guess, you know, if we take out the noncash item of 50 cents which, you know, was due to the -- you know, the regulatory recovery, you would have had two cents, you know. So I'm just wondering if you can give a feel for, like, kind of what caused that divergence from, you know, if we take that number out. I mean, was that always part of guidance that you expected that noncash item?

It was not always part of guidance to expect the noncash item. It was an issue that we were aware of, Ray, but until we finalized our plans for stranded cost recovery and defined them in a way that gave us confidence that the recovery was going to occur under SB 7, we had not recorded them. So your underlying question is a good question as to what happened in the quarter.

The answer really is that notwithstanding the fact that overall we had pretty solid plan availability year to year, we did have some plant problems and as a consequence, system sales did not make the contribution that we had expected for the quarter, notwithstanding the fact that we had some weather conditions that might have given us the results we wanted. In addition, we did have O&M expenditures that we had not expected at that time.

Again these are mostly in the sort of absolute ranges, the additional insurance costs, liability claims, those sorts of things, as well as some additional expenses at some of the plants. So as a consequence, those are really the two major contributing factors to the fact that the quarter did not meet our expectations on a discrete element basis.

Those plants, are those coal plants in Ohio area, or can you give a little -- get a little specific?

Yeah. Ray, principally the Rockport plant that's in the Indiana/Michigan area, that company, we have a fuel factor that's fixed and when the Rockport plant or the Cook plant don't run, it hurts badly.

And I failed to mention, Ray, although I'm sure it has leaped off your page that the U.K. plant losses were greater than we had expected and that was a contributing factor, as well as wholesale investments, others performed somewhat less than we had hoped going into the quarter, but those are not material compared to the loss in the U.K..

Okay. One final question. Just, there's a reference to weak commodity prices being a factor in the quarter. And I know the coal spark spread was up a lot year over year. The gas spark spread was down. I mean, can you give a sense as to kind of what you are referring to there in terms of commodity prices specifically?

I think the issue that drove a lot of what you are seeing is that we were trying to check availability of our units and the prices at that time, and unfortunately when the prices were more robust, we did not have -- it's when we were having some of the unit trouble. So even though on a year-to-year basis, the availability is up there. On the specific days, we would have loved to be able to have more capacity for the market, it was not available.

Okay. Thank you very much.

Thanks.

Thank you. We do have a question then from Paul Patterson with Glenn Rock Associates. Please go ahead.

Good morning.

Good morning.

Just a question here. In terms of the equity issuance, when do you think you will have more clarity as to what the size will be? What time frame do you think there might be a better picture, either from the rating agencies or what have you?

There's not much more I can give you on that, Paul. I will tell you that we are expecting -- right now the only action we have pending is with respect to Moody's. And that may come at the end of the month or sometime thereafter. That's critical to us in terms of getting the Ohio and Texas bonds out. And, of course, we'll need established financials, but I really can't give you any sense at this point because we have not made a decision about whether and when any other aspects of the equity decision.

Okay. And then the other question I have for you is the U.K. assets are -- would those be part of the wholesale assets, the noncore assets?

Certainly they would be available for consideration. We're well aware of market conditions in the U.K..

Okay. And then finally, with the trading book, you mentioned that your net asset value was I think at $250 million at the end of the year?

Yes.

Is that because some liabilities have rolled off?

Yes.

Okay. And then finally I guess what I'm wondering is in terms of going forward with EITF '02/'03, you mentioned the writeoff but there may be some net income impact for 2003 and I was wondering if you had any clarity as to what that might be in terms of accrual earnings that may not be there?

Your analysis is correct. We don't have that number at this point. We hope to -- we certainly hope to have it out as soon as we can confirm the calculation.

Okay. Thank you very much.

Thank you. And we do have a question then from Jeff Gildersleeve with Argus Research.

Thank you. I was interested and sort of going back to Jamie's original question about the balance sheet after the charges, the impairments. Did you mention from the total debt-to-cap was after those charges?

Yeah. Your end, including fourth quarter, we're at 42% equity and 58% debt.

Okay. Great. And then looking forward to May with the $2.5 billion facility ...

Yes.

I guess you might look to downsize that a little and --

Yes.

Are you looking at trying to get some multiyear?

Yes. Let me try to put that in context. As I said, the -- you know, we have two major facilities, and the corporate separation facility, which is $1.7 and then the three and a half. Of course, many of the same banks are involved in both of those facilities. So it's reasonable to expect that their evaluation at what they can do will be related.

As I said, we expect a corporate separation facility to go away, and in addition, we would like to also be available and expect to be able to downsize the other one. We don't have a number for you at this point because obviously that will be a product of those discussions in our liquidity needs at that point in time, and where we are with respect to our commercial paper reduction goals. The -- yeah?

Yeah, there is a term out on May '03?

Yes.

Okay. I'm sorry. Go on.

No, that's all right. And then the last point was simply that we will seek in the context of that, we would like to see some bringing net over multiyears so that we're not doing this quite as frequently.

Sure. Thank you. And Armando, just circle back. I know you mentioned FFO coverage and that being of course an important metric for the rating agencies. Do you have last year's twelve months running?

Jeff, you want to talk about that?

Yeah, we do. It's about five times, and that's a function of significantly decreased interest charges due to obviously lower short-term rates and the disposition of seaboard and City power, as well as a reasonable improvement in FFO.

Okay. Thank you.

Thanks.

Thanks. And we do have a question then from Elizabeth Frough with Merrill Lynch. Please go ahead.

Yes, thank you. Just going back to the E-Conn for a minute. Can you tell us how much a share, or 269 pretax would have related just to the fourth quarter rather than the catch-up piece of it?

Yeah, Tom, would you want to venture that?

I can respond to that. Basically this option that sets the price is done quarterly throughout the year and some it would be a consequence of, you know, the fourth quarter throughout the year and I'm not exactly sure how much would have been accrued for each of the quarter, but it would have been pro rata through the year.

But the reason it arises in the fourth quarter for reporting purposes is the certainty that we have gained over the filing of the divestiture plan and the expectation of stranded cost recovery under the terms of Senate Bill 7 and the rules as they were. That's the critical fourth quarter event.

When you say pro rata during the year, I mean, --

We'll get you a breakdown of how the capacity sales roll off.

Follow up on that. Just looking at '03 for the Texas wires business, would you expect the same level of earnings, whether it's made up through this E-COM adjustment or, you know, a greater cash contribution, you know, or would some of this fall off?

We expect the utility business as a whole to be pretty much flat year to year. That includes some organic growth as well as an inclusion of this noncash stranded cost element that will probably be substantial but at a somewhat lower level than it was for this year.

And just moving to the Texas supply business, did you book a gain on the sale of the supply business in Texas to Centrica?

Yes. It's a special -- a one-time event.

I'm sorry. Where is that showing up in one-time events?

It should show up on the list of -- did we -- yeah. If you look in the press release on Page 4, you'll see other special items. No, it shouldn't be 4 --

It's just, it's within this other special items, this $4.9 million?

It's more like $80 million.

Sorry. We were looking off a couple of different sheets here. Basically what we saw with respect to Centrica as a positive was around $80 million. It did in your press release get grouped as other special items, and the key offset is really $54 million, which are restructuring costs and severances associated with our cost-cutting initiatives.

Okay.

That's why it came out to four.

Yeah, and there are a few other little adjustments.

A few other negative items?

Yeah.

Just one last question. Just going forward, you had a pretty big contribution from the Texas supply, RET business in '02. I realize you still have some -- the contract back with Centrica, but how do you think about earnings in that business in '03?

Let me -- of course, we don't have -- the supply business that we've talked about is, maybe Holly in a moment can address what our expectations are around earnings there, but just to remember, our decision to exit Centrica, recognizing the contribution that it made through the current price-to-beat mechanism was an expectation that, from our perspective at least, absent the kind of significant market activity that Centrica intends to undertake, we expect that an erosion of our margins from that price to beat, either through regulatory action that set a different price to beat, or through risks around the volatility of managing that kind of supply obligation. And that's the reason we chose to do it.

So, even though you do see an erosion of earnings on the price-to-beat line as a result of the movement from a price-to-beat supplier to a wholesale supplier, it was not, from our perspective, an erosion that was unanticipated. We had projected that, given the way we could manage that business, prospectively. Which, now, were you also asking about earnings from the supply contract?

Yeah. I was just wondering how you saw that kind of measuring up in what you earned in '02.

Well, it's not appropriate to compare it to exactly to what we earned from '02 but, Holly?

And I would that the erosion will continue, although the Centrica contract is very attractive and profitable for AEP.

Thank you.

Our next question then comes from Kit Konolige with Morgan Stanley. Please go ahead.

Good morning.

Morning, Kit.

Again kind of following along the same lines but with a little wider angle. In your release today, you have a table called utility and marketing operations.

Yes.

And for F Y 2002, you have EPS of $3.26.

Right.

Now, so should we understand from what you've said so far that the EPS from utility and marketing operations in '03 is likely to be also approximately $3.26?

Kit, we haven't specifically given out that number. It's going to certainly be in that range.

Uh-huh, right. So if it's in that range, then the net of all your other operations you are expecting to be negative 70 cents or so as a point?

Yeah. I mean, I understand your math.

Okay. And of that negative 70 cents, can you give us some idea of what are the biggest components of that?

Qualitatively, yes. The biggest components will be Fiddler's Ferry and increased expenses, increased costs around Fiddler's Ferry.

Increased costs, not lower prices?

'Well, increased losses around Fiddler's Ferry as a result of all of those factors.

Right, right. Okay. And so that's the main effect?

That's the major effect, yeah.

Okay. So year over year, you expect Fiddler's Ferry to be much worse than it was even in '02?

Much worse in '02, yeah.

That's even after you've taken the writedown and so your depreciation charges there are going to go down?

You are correct. Wait, I'm sorry.

In conjunction with the evaluation that we did on Fiddler's Ferry, we took into account a lot of issues, and the depreciation was one of the things that, even though the adjustment on the book value was reduced dramatically, we needed to shorten the time period that we could collect that money. So the depreciation did not change that much as a consequence of the book value.

Okay. Let me ask this. What -- I mean, is there -- you talk about potential sales. I assume Fiddler's Ferry is one of those assets?

Fiddler's Ferry would certainly be on a list for potential sale. We have no view right now as to the market receptivity but as you know there aren't a lot of buyers out there for assets in the Generation market in the U.K..

As an alternative to selling it if the market remains bleak as it is, is there any practical way in which you could just shut it down? Would that improve your finances, just not operating it?

We are actually evaluating that right now, Kit. The factors to be taken into consideration, of course, would be labor costs and other matters associated with that, but we actually have a pretty important decisional point in March because at that point in time, we need to decide whether or not to incur the costs to interconnect to the grid, and that it is, of course, included in our projection.

We could save those costs if we decided that it was more opportunity to continue to operate it, and we would do that, assuming that the total picture was an improved position over what we are currently seeing through continued operation.

Kit, we'll take a close look at the cash flow associated with the plant and as we approach that decision point, if it looks cash-flow positive, we'll no doubt continue to run it. Otherwise, we won't.

Fair enough. Okay. Thank you.

Thanks. And we do have a question then from James Falliker with Silcap. Please go ahead.

Good morning.

Good morning.

Just circling back on two issues, one on the working capital, it looks like you said the negative working capital for the end of 2002 was closer to the six fifty range?

Yes.

And you guys had budgeted I think around seven fifty, correct? For the full year?

Go ahead, Armando.

Well, for the full year we had a billion two. We were almost at that level, Jim, at the end of the third quarter.

Right.

So you might be confused with the second half versus the first half. But anyway, yeah, cash came in in the fourth quarter. We had a very good quarter on that. So the networking capital in the fourth quarter decreased by almost $400 million.

And what was the source of the cash?

And that is because we had returns of margin deposits of about $250 million. We brought down inventory by about $60 million, and then a bunch of other, you know, settlements of about $70 million. So we ended up, you know, pretty good position at year end and some very pleasant developments.

And just moving, I guess on that same item into '03, I think previously you guys had looked for potentially a working capital drag of $200 million and I think you are now saying that working capital is essentially going to be flat?

Well we are -- you know, the last numbers that we had shown were in -- you know, we talked to investors in December and we were actually assuming zero needs for working capital in '03.

I think perhaps, you know, what you are thinking of is that this dialogue, we also looked at the '03 projections and if you remember, the sources and uses of cash were very tight and we were saying that we're really looking for some margin there to have a cushion of a couple of hundred million dollars in case that working capital assumption was not good, and I think the numbers that Susan recited earlier -- and then we are probably going to be putting in, you know, table form, you know, for you so that it's all clear, you know, and our web page shows that there is, you know, between $200 million and $300 million of free cash flow for '03 that gives us, you know, that cushion.

Gotcha. And then I guess the last question I had was uniknow that you guys aren't prepared at this point to talk about the magnitude of any sort of equity issuance but I just going back to your comment that your interest coverage is, you know, in the five times range and it looks like your pretax interest coverage is also kind of solidly investment grade, the two metrics that kind of stick out and I think the one that's probably more relevant is just, you know, FFO to total debt which, you know, at the end of the third quarter was still in the 16-17% range. And, you know, just using S&P with a business position 5, you guys need to be kind of at 20% to get to the low end of that range.

How should we be thinking about what sort of metrics you are trying to manage, you know, to continue to stay in that sort of mid triple B range?

Jim, I would just say that the challenge is the conversations with the agencies aren't as simple as if you hit a specific number, you get a specific rating.

Sure.

So I think it's a little bit difficult to say, gee, we're trying to target FFO to debt or even debt to total cap number. That's a point estimate. Rather, it's about the dialogue with the agencies that is ongoing right now so that we can come up to a consensus view of what we need to do, as Susan said, to maintain that strong triple B rating.

Okay. Thanks so much.

Thank you. And we do have a question then from Wenwen Chen with ABM Admiral Please go ahead.

Percent debt ratio and five times coverage that you've cited, does that include the 2 billion in operating leases?

No.

And do the rating agencies evaluate your metrics with the operating leases?

I'm sorry. I couldn't hear you.

Let me see if I can move this up here. Just a minute. Go ahead. I'm sorry. Go ahead. Got it to the max now.

Okay. Can you hear me now?

Yes. Much better.

The debt ratio, you talked about at 58% and five times coverage, does that include the $2 billion in operating leases?

No.

No.

And how are the --

Not $2 billion, either.

That's correct. It's not $2 billion. Let me give you a sense of magnitude, though. If you add the operating leases the way we calculate it, which, again there are various methods the agencies use but by our methods you go 0 to that five times down to about 4.35 times coverage.

Okay. And how about your leverage?

Do I have leverage in front of me? I don't have the exact number. I'll have to get back to you after the call.

Okay. But that is how the agencies evaluate.

Well, we know they -- right, and we know they add the leases back. Again it's just a question of, you know, is it the eight times rent method, the PV of the leases, and that's certainly the method we're using to create the range so we can get a sense for what the agencies are looking at, although we have never been specifically told, yes, we looked at it one way or the other.

Okay. Maybe I can follow up offline with you.

Sure.

And my second question is about the debt you are going to refinance at Texas, in the Texas and Ohio utilities. When would you like to do that?

As soon as we possibly can, possibly February, early February. Yeah.

Okay. Thanks a lot.

Thank you. And we do have a question then from Karen Miller with UBS Warburg. Please go ahead.

Yes. I was wondering if I could just follow up on your discussions with the rating agencies and at this point the fact that you said you are not going to give guidance on either asset sales or equity issuance. If you are expecting a decision from the agencies in the next, let's call it 30 days or so one would expect that you would have to give them some sense of those two metrics if they are going to make an accurate assessment of credit quality.

Is that, A, a good assumption; and, B, should we assume that if you have a commitment toward your current ratings, that you will try to size those two programs in order to maintain your current ratings?

Well, the last is obviously true, that that is an important consideration for us. Obviously there are other factors such as, you know, value from the sale and capability of execution and a whole lot of things go into that, but clearly sizing them in in relationship to the overall result gets us in the satisfaction that triple B metrics is a key factor in all of this, and it is also fair to say that we have the ability to talk a little bit more specifically over some of these issues and they have an awful lot of data with the credit agencies and we give them a great deal of information that -- and I think they will probably have everything they need as these evaluations go forward.

I would only add, we don't expect to say we'll issue active equity and that they would come back and say that's fine and this is your result. It's not that kind of clear-cut dialogue at all.

I understand that, but it is two important points of the discussion.

Sure.

Of course.

Okay. Thank you.

Thanks. And we do have a question then from Paul Ridzon with McDonald investments. Please go ahead.

A couple of questions. One is the 50 cents from the Texas, that should continue into 2003, but it depends on the auction results each quarter in 2003?

Right.

In 2004 that will drop away but you'll receive the cash through a wires charge?

Correct.

That won't flow through as income; is that correct?

No, no.

But we don't receive the cash through the wires charge.

Go ahead.

It's a result of the securityization. So we get the cash at a single point in time and then the recovery occurs through the wires charge, which in turn is the repayment of the securityization box.

Okay. Thank you. Paul Patterson talked about some net income impact of EITF '02/'03. Directionally I assume that could hurt the year. I'm wondering what you've basically assumed when you've issued guidance with regards to that; and then I guess my last question would be regulated assets be timely, you know, a timely solution to solving some of the problems or basically would regulatory approval process make that not an option?

What was the last part of your question again? Whether or not the sale of regulated assets would be an option?

Would the regulatory approval process make that untimely, given the near-term outlook?

Well, certainly depends on the nature of the asset. As you-all know, an electric type transaction takes a lot of regulatory approval, whereas a single asset might not take near as long. So there might be opportunities where assets that are regulated would be something we consider, but it would just be evaluated as we, you know, work through our portfolio.

For example, we just sold a very small distribution piece in Texas, and it wasn't a complicated transaction at all. That wasn't a -- part of the overall capitalization strategy but something that was sort of appropriate, given the configuration of lines down there. I need to ask you to repeat your first question, however.

I didn't -- the impact of the ITF, yeah.

Oh. So you are asking about the positive earnings effect of it coming back in through accrual?

Yeah.

Well, as I said, we're going to give you specifics on guidance but there's nothing in that range at this point.

So we haven't included that in our calculations so far.

So if we are able to calculate and forecast an amount, it would be a positive effect.

Okay. Thank you.

Sure.

Thank you. And our next he question then comes from Igor Rubikoff with Thornberg Investment Management. Please go ahead.

Good morning. According to your insight, how long will it take you to unwind the trading book now as of that in the fourth quarter?

Holly, you want to talk about where we are?

The positions in markets that we are no longer -- where we don't have assets, we are no longer actively trading, we flattened those. And the average duration of the total trading book, including those positions which we flattened in the fourth quarter, for gas it's the end of '03 and for power it's the second half of '04. We would expect 50% of the unrealized value to roll through in those time periods.

And I know you didn't want to give us an exact mix of power and gas within the trading book but approximately is it much more power now than gas or vice versa?

That varies depending on the operation of our storage facility.

Okay. And now going to the noncore assets, the write-offs that you took at telecommunication in Brazil and the assets, I understand it does not imply that they won't have another loss next year, right?

That's true.

I'm talking about -- and what would be the magnitude of this operational loss?

The ongoing losses are related to the fact that we still have debt associated with those assets and we're going to continue to pay interest charges.

Do you consider selling, physically selling them off at a certain point?

Yeah. For telecom in particular, we're actively trying to market those assets.

And in terms of the write-off, how close was this write-off compared to the actual book value of the telecom assets?

For the telecom, essentially all, virtually all.

Okay. Great. Thanks.

And we have time for one last question. That question comes from Paul Debbas with Value Line. Please go ahead, sir.

I have a couple of questions about the dividend. Do you have a payout ratio target and do you expect to increase it gradually from this reduced amount?

We'll just have to evaluate that as time goes on. We thought that the reduction that we have proposed to our Board was proposed at this time, but they will consider on a quarterly basis dividend action.

Thank you.

Thank you. And please go ahead with any closing comments.

Well, we thank you for your questions and we'll be, you know, stand by later next week to follow up with you and we'll be attempting to -- we'll be working to post additional information on our website so that everybody has the same material, and as you know, the call will be replayed. So that concludes our prepared remarks.

Thank you. And, ladies and gentlemen, the replay information for that call is as follows: The conference will be available for replay starting today, Friday, January the 24th, at 1:00 p.m. Eastern time, and will be available then through next Friday, January 31st, at midnight Eastern time. You may access the AT&T executive playback service by dialing 1-800-475-6701 from the United States or Canada or from outside the United States or Canada please dial 320-365-3844 and then enter the access code of 668893.

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