美國電力 (AEP) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power fourth quarter 2003 earnings conference call. At this time all participants are in a listen-only mode. Later there will be an opportunity for questions and comments, instructions will be given at that time. If you should require any assistance during today's call, please press star then zero and an AT&T operator will assist you. As a remind this conference is being recorded. I would now like to turn the conference over to our host Senior Vice President of American Electric Power Mr. Armando Pena. Please go ahead.

Thank you. Good morning, all. We're here to discuss AEP's earnings for the fourth quarter and the full year 2003. I expect that you have seen the press release that we issued earlier today. And it is also available on our web page at AEP.com. Also on our web page you will find cash flow and cap structure tables that we will be referring to later in our discussion. The earnings release and other matters that may be discussed on the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties.

Please refer to the SEC filings including in our most recent annual reports on form 10-K and quarter reports on form 10-Q for discussion of factors that may cause results to differ from management projections, forecast, estimates and expectations. Also on the call we will discuss measures of our company performance, that is ongoing earnings versus reported earnings, that differ from those recognized by Generally Accepted Accounting Principles, or GAAP. You can find the reconciliation of these non-GAAP measures on our press release. There are several members of management here today. But our plan is to have brief presentations from Mike Morris, CEO, Tom Shockley, Chief Operating Officer, and Susan Tomasky, Chief Financial Officer. After their remarks we will turn the call over to your questions. So let me now turn the proceedings over to Mike.

Thank you very much, Armando, and I will do my best to be brief. That's a hard assignment for me but I will see how well I can do. I know that many of you are joining us today, notwithstanding a counter effort going on by my good friend Paul Anderson and the Duke story, and we thank you for being here with us. I think what you will hear from Tom and Susan, as it pertains to 2003, is a relatively complicated story. But we will take you through that step by step to try and make certain that all of your questions are touched in one way, shape, or form. In essence, the '03 GAAP earnings were better than '02.

More importantly, the ongoing earnings for '03 were 2.21 a share, which is surely in line with our most recent forecast particularly when you remove the impact of discontinued operations. We are adjusting our 2004 guidance to 2.20 to 2.40 a share, versus our earlier plan of 2.10 to 2.30 and making a commitment to you that by the end of this calendar year, our debt structure will be below 60%. Going forward our story is going to become much less complicated as we narrow our focus down to the utility business and the tremendous growth opportunities that we see there. Not unlike my most recent pass in New England where we were fortunate to have over a billion dollars of transmission investment needed, and covered by the regulatory envelope, here at AEP we have the requirement to invest in excess of $3 billion to improve the ongoing operation of our generation fleet.

This not only is the lowest cost alternative for our customers ranging from 100 to $400 in installed kilowatt, which we think is very important, it equally is good to clean up the environment of the communities where in our generation stations reside and arguably, I guess, to those who live downwind from us. And lastly, we believe that those plants will continue to dispatch in a very appropriate manner, and therefore, adequate rates of return will be recognized by our shareholders as we go. We will continue our divestiture program and our commitment to take both LIG and the European operations to discontinued operations demonstrates our commitment to that plan. We will continue to look at the Houston pipeline opportunity, we believe that there may well be a business case that has a going-forward logic to it, and we will look at that as we continue to evaluate whether to sell that property on a going-forward basis.

We have gone through a very exhaustive process to reflect the total value of our assets going forward. And we have taken a number of impairments to adjust those assets to those values accordingly. We will continue to pursue very solid regulatory relations at both the federal and state level. We believe that that is critically important for us. And we will work very hard and as fast as we can to bring resolution and settlements to ongoing disputes with those agencies. We will, however, continue to hold our ground on many matters in front of us where we feel we have been wronged in the legal sense and believe that we have very strong arguments to be made.

Overall, the operating side of the company had a very solid 2003, with the utilities seeing solid improvements and even our unregulated group doing better than it did in '02, notwithstanding that recorded red numbers. I believe that we are headed toward a very solid future at American Electric Power and surely believe that as we continue to pursue the capital investment in the generation fleet and the continued improvement on our distribution and transmission grid, we will see positive improvements in our earnings capacity going forward. I will ask Tom Shockley, our Vice Chairman and Chief Operating Officer, to give you an update on the ongoing activities of both the regulated and unregulated assets and then of course Susan Tomasky, our EVP, CFO, General Counsel, and house of all knowledge, to update you on all the numbers as we go.

And then look forward to your questions and answers. I would tell that you I feel very comfortable about the '03 story. I think it is honest, straight-forward and is as transparent as we could make it. I feel extremely fortunate to have the '04 opportunities that lay in front of us and look forward to continuing to report our ongoing activities throughout '04 and beyond. Thomas?

Thanks. In 2003, it was really a year of transition for us here at AEP from an operational perspective, as we really tried to reposition the company to focus on maximizing the value of our core assets, and at the same time taking major steps at exiting the nonstrategic businesses that we owned in late 2002. I'm pleased to say that I think we made great progress on both fronts. We started the year with a program focused on cost reduction designed to offset many of the anticipated cost increases that we knew we would see in '03. And we achieved a reduction of $139 million in utility operations O&M. This reduction is particularly gratifying because it was in a year that we experienced unprecedented storm restoration costs. We estimate that our storm costs were $23 million above 2002.

We have nearly 1100 fewer employees, about 5% less, now than we did at the end of 2002. We were able to take advantage of the wholesale market during the year, with an increasing amount of system sales, up nearly 28% in volume. And strong per unit realization, which particularly helped offset some of the pressures from the regulated utilities and the reduction in the '03 versus '02 Texas E-com number. Our third party transmission results were also benefited by strong wholesale sales. Our transmission system took a major step forward by receiving the needed approvals to construct a major 765 line from West Virginia to Virginia. This needed line will be completed in 2007 and further strengthen AEP's strong transmission system.

The robustness of this system was fully appreciated on August 14, 2003, when our customers avoided the blackout that rocked 50 million customers in the east. In addition to our system performing well, during the event our operators responded quickly and correctly. We are at the midpoint timewise of exiting nonstrategic businesses. During 2003, we have disposed of our investment in Brazil, two generating plant facilities in Texas, we have an agreement in place to sell our operations in China, likewise we have an agreement in place with AEP Coal to be disposing of it early in '03 as well. We are in the final stages of disposing our natural gas pipeline in Louisiana, as Mike mentioned. The Houston pipeline assets are still troubled by the Enron bankruptcy and will take more time to get sorted out.

And as Mike mentioned, we're taking an additional look at how those assets might fit into our portfolio, and we'll be prepared to make a strategic decision concurrent with the conclusion of the legal issues. The pending sale of LIG and the reconsideration of HP&L has led us to take impairment shown in fourth quarter '03 on both assets and appropriately move the LIG results to discontinued operations. The situation in the U.K. is winding its way to conclusion by the end of this year. We have taken substantial actions to ready the assets for sale by reducing the ongoing plan obligations for power sales. This will make it easier for a buyer to value. These actions added cost in the fourth quarter of '03. In late '03, we came very close to a transaction to sell these assets due to interest coming from several parties. In the end, this effort was not successful, due to the complexity of the transaction, and the price.

The interest in the assets remain, and this activity has shown that a more advantageous timing for the exit will exist later this year. By the third quarter much of the complexity needed in the transaction will be gone. This is due to the offtake obligations that would have required a towing agreement which will not be needed or at least much reduced. The marketing intelligence has provided us with data to take an impairment on these assets as well. And that was taken in fourth quarter '03, As we move toward disposing the asset later this year. We do expect substantial additional costs to operate and to continue to prepare this asset for disposal later this year.

But we estimate that these discontinued costs in '04 and the impairment just taken will bring an end to this issue. On the generation side, we had a very challenging year with the completion of numerous environmental SCR projects. Our company completed 14 units in 2003, as we prepare for the knock season starting this spring. This year, before the knock season starts, we will also be concluding two additional units. The fleet had a good year. The forced outage rate was up just slightly but on the positive side, the capacity factor improved about a percent. So that was definitely a good thing.

On the regulatory front, we have several activities ongoing. In Ohio, we have reached a stipulation regarding reliability and we're pleased that we think this is good for all parties. Likewise, we will be filing later this week our proposal for the market stabilization period that will be reviewed by the commission. In Oklahoma we have an ongoing process for a rate review there where we are asking for $36 million of additional rates. And in Texas we also have a wires rate case in progress, where we are seeking $66 million, and that will be an outcome that we would expect in the early fall of this year. Likewise in Texas, as I know all of you are following, we have the very major regulatory aspect of disposing of our Texas generation. I can report that is on track. We reached the first major threshold last week, as we reported an agreement to sell our small ownership, or Texas Central's small ownership in Oakley Union. The process continues.

We think it will stay on track, allowing us to file in early fall for our stranded cost recovery that we will be headed to getting approval from from the commission. All of this points to an exciting '04. I think we have very definitely got some challenges as we stay focused on making the transition out of the U.K. as effective and efficiently as we can. The Houston pipeline issues will certainly need to get sorted out as well as staying focused on the very important disposal of the Texas generation. Likewise, we will need to finish effectively the environmental projects we have on the board and look forward, as Mike mentioned, to a pretty robust program continuing in the future on the environmental front. And as always, we look forward to doing everything we can to continue to provide safe and reliable service to our customers.

Susan?

There is, I know, for all of you a great deal to absorb from the press release, and I could not begin to walk you through all of the detail of that number. I think it is very effectively laid out in the attachments in the web site, and of course our IR folks would be available after the call to answer any clarifying questions. What I want to talk about, primarily, is to touch on three major areas, the ongoing earnings results for the year, the major drivers, the effect of the impairments, and the move of LIG and Fiddler's Ferry to discontinued operations. And then finally, I want to note some important items around the financial position of the company specifically capitalization, liquidity, and major issues on cash flow. First of all, with respect to the ongoing earnings of 2003, you saw in the press release a headline number of $2.53 a share on an ongoing basis.

That includes the move of LIG and Fiddler's Ferry to discontinued operation. By designating them as discontinued, as you know, that means they're held for sale. They will be disposed of within 12 months. And their elimination from ongoing earnings had a 22 cent positive effect. Effectively though, for purposes of comparison, we met our recent projections. Because if you ignore the effect of discontinued operations, ongoing earnings will be $2.21 a share, which is effectively the lower end of our guidance range. If you look year over year, the total 2003 ongoing earnings after discontinued operations was 975 a million, which compares to 948 million for 2002. When you compare 2002 to 2003, ongoing EPS of $2.89 to $2.53, you see a lower EPS for 2003, notwithstanding a slightly better dollar earnings.

And that is in essence primarily anyway, the effect of dilution from the $1 billion equity issuance that occurred last January. Talking a little bit about what was going on within the businesses, and the drivers that affected them. On the utility side, there was a $50 million improvement year over year. And that was really the result of a couple of downward items and a couple of major upward items. Obviously, many other details underlying that, but essentially, the downward pressure came from lower retail gross margins in our regulated state, $126 million down on a year to year basis and that was due largely to mild weather. A significant year over year decline was also seen in Texas supply. Again, a number of factors influenced that but the most significant were the capacity option difference. We booked $218 million in '03 versus 262 in '02. As you know, that is a noncash item.

And this is the last year we will see that in earnings. There was also a very significant fuel disallowance in Texas. $100 million that was booked over the third and fourth quarter. We are challenging that fuel disallowance. But because there is currently a standing order in that regard, we were required to book it. Those were the major downsides and they were offset by a couple of very significant positives. Tom talked about our very successful year in system sales. This was a result of a couple of factors. The decline in retail load, obviously, makes more capacity available to the market and we were able to support that with good plant availability.

Our folks were able to take advantage of that and as a result our systems sales numbers were $461 million for this year, which is 160 million better than last year. We also had a success story in utility O&M. We were $139 million better year over year. And that is a very important success story, particularly in the face of increased storm damage, and increased pension costs. The savings came primarily from labor and from insurance savings. On the unregulated side, we did, as Mike noted, have a $29 million improvement year over year on the energy services line. And our IPPs and wind farms also improved. We moved from a $10 million negative to a $4 million positive in '03. And that was the result of the sale of two unprofitable IPPs that occurred in 2003.

And then we also improved performance of the wind farms. For the discontinued operations, Tom talked to a considerable extent about the U.K. I will simply note that the U.K. operations do continue to struggle significantly with very difficult market conditions and with exit costs and we booked $132 million loss in 2003 as a result. Reported earnings, GAAP earnings, for 2003 were 29 cents which is essentially $110 million in net income. That compares to $1.83 negative in 2002, and it reflects charges of 960 million for the fourth quarter, and 865 for 2003. There is a detailed list of all the items that get you from ongoing to reported attached to the sheet and you will see that they include a lot of things, accounting changes and discontinued operations.

But the primary drivers there are the results of the impairments. There are a number, but I want to specifically mention three that are the most significant. First, as Tom said, the information that we got from the U.K. bidding process required us to further impair the U.K. generation assets by $375 million. Similarly, the bidding process for LIG compeled a re-evaluation of both LIG and HPL. And that resulted in an impairment of $340 million, which goes to the gas holdco operations. We also found it appropriate in the fourth quarter to recharacterize the Dow lease as a capital lease and the consequence of that is to bring it on to the balance sheet.

It was already treated on balance sheet by the credit agencies and then in looking at the valuation, which had previously been a product of the Tractabell Offtake agreement. We concluded that while the contract terms were solid, we did not have sufficient confidence that Tractabell is going to honor the contract. It is in litigation. But we also believe that there is substantial risk that even if damages are allocated, they would not fully be collectible and as a consequence, we essentially reflected the market value of the output contract and impaired that facility once it was brought on balance sheet by $168 million. These impairments are obviously significant but what they do reflect is the general market trend in which unregulated activities by AEP, and many of our peers, are being re-evaluated as evidence of reduced value becomes available in the marketplace.

You will notice that this is a fairly comprehensive list. That is because the marketplace is moving, and we do make our quarterly reexaminations, and this is what we saw in this quarter. As you know, we are exiting the U.K. business and the LIG business. We do expect those transactions to close this year. And those values ought to be reasonably solid. Obviously, they will ultimately determine with where those bids come in but we think we have a very solid projection of where they will be. In AP's case, I think it is important to emphasize that the impairments don't represent a significant set back on our path to improving our balance sheet and our focus on the utility business. The debt to cap ratio at year end was 64.4%.

That does reflect a FIN 46 adjustments. The sheets that you are going to be looking at, as you examine our web site, will show this as an increased leverage over where we were at the end of 2002, which was 62.4%. I need to caution you against direct comparisons there. However, and we will be working on data that show this more clearly but in essence the 2002 number does not include the FIN 46 adjustments, and in fact, we had some improvements to the equity line, obviously, we had the issuance of equity last year, we did have some debt reduction, so that on an apples to apples basis we actually have an improvement on a year to year basis on the debt side. We also believe that the agencies fully understand this. We have talked to them extensively, as you know.

We do not attempt to characterize the views of the rating agencies with respect to any of these actions, but I do believe on the basis of this conversation, that they fully understand that we are indeed making significant progress in dealing with the issues that we have that have arisen as a result of our unregulated activities. That we continue to remain firmly committed to improvement of the balance sheet. We have embraced a goal for 2004 year end of having a debt to cap ratio of below 60% and we believe we can accomplish that. And I also emphasize that our FFO coverages remain extremely strong and have not been adversely affected by the action that we've taken. So we think that overall, this continues our step toward balance sheet clarity and improvement. And that's the course that we will take over the coming year. Let me mention liquidity, quickly.

We continued to have an extremely strong liquidity position. We remain solid at $3.5 billion. We continue to hold about $3 billion in total credit lines, and we have available cash of $920 million. What we will be looking toward this year in terms of financial activity on the liquidity side is the renewal of the one-year revolver. It is up for renewal in May. We expect to keep it at the same level, which is about $750 million. We do expect to, at least hope to, be able to extend it out over time so it will be a multi-year, three-year commitment so we don't continue to see the need to renew that credit in such substantial amounts over those years.

Our commercial paper is essentially at $282 million now and we continue to keep it within the 300 to 500 million range. And that leaves us with a net credit position of about $3.5 billion. We intend to remain focused on liquidity this year. In addition to renewing the 750 million, we are going to continue to look at our cash balance. I understand it is quite substantial. As information becomes available to us about the proceeds from the LIG sale and the Texas sale, we will be looking aggressively at debt retirement, that continues to be our objective with respect to the use of that cash. The cash flow details were posted on the web site.

I'm not going to walk through them in great detail. Let me simply mention that the full year cash flow from operations was $2.2 billion, that is an improvement over last year, we spent 1.4 billion in cap ex, we used about $700 million for the repayment of the Fiddler's Ferry debt. We paid off the resources bond, 330 million, and our cash on hand total year end was $1.18 billion. Again 920 million of that is available. As Mike mentioned we are increasing the earnings guidance for next year. We have a very positive outlook and I think a strong financial basis for moving forward next year.

Armando, that's as brief as we can be.

Thank you very much. Tom, we are ready for Q&A. So if you would please give the instructions.

Thank you. Ladies and gentlemen if you wish to ask a question, please press star then one on your touchtone phone. You will hear a tone indicating have you been placed in queue and you may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the numbers. Once again if do you have a question or comment, please press star one at this time. Our first question today comes from the line of Elizabeth Parrella with Merrill Lynch. Please go ahead.

Thank you. In terms of the revised guidance for '04 could you just go into the drivers on that a little bit? It looks like maybe half of the increase comes from moving triple S, the net impact of moving triple S, which loses money, and LIG, I guess, which would have been a small positive to the decops(ph) line?

Elizabeth, that's accurate, about half of it is there. The other half is simply on our ongoing cost control and what we believe to be some improved performance from some of the regulatory events that Tom detailed for you. But we feel very comfortable by moving the guidance up, because we think that that kind of performance is well within our grasp. And it really is a stretch for our team, but it is a stretch that we're all committed to get to.

And just going back to the divestitures, just to be clear on LIG, what's the status of that? Do you actually will have a sale agreement in place? Or --

We are moving toward that position even as we speak. We do have bids in hand. And we're talking to potential successors in interest.

And one last question. Early on, in your remarks, Mike, you talked about $3 billion potential investment, which I think you were indicating was on the generation side. Just wondering if that would all be kind of above the normal level of maintenance, and whether you can put any color around that in terms of how much of that might be environmental as opposed to upgrades, and kind of over what time frame we might see that occur?

You're exactly right, it is on the generation fleet. And that number takes us through the end of this decade. And it will be all additional capital dedicated to the environmental requirements and the commitment of this company to improve its environmental performance going forward. And again, we feel very comfortable with the regulated generating stations because this is clearly the lowest cost option for the customer, better than any physical alternative. Obviously, it has the environmental benefits that I spoke of. And even in those stations where we are in the deregulated market, we will continue to dispatch at below $20 a megawatt hour which will put us high on the dispatch curve and make us feel very good about where we are.

Thank you.

You're welcome.

Our next question comes from the line of Kit Konolige with Morgan Stanley. Please go ahead.

Good morning.

Good morning, Kit.

How are you? Can I follow up a little bit more on Elizabeth's question? Can you give us an idea of when that 3 billion starts kicking in? And what you have planned on that at this point?

Some of it will go to work in '04. I think Tom talked about a couple of SCR projects that are already ongoing. We are in active discussions with various regulatory bodys about how we do that, going forward, Kit. It is very important to us that the regulator joins us in understanding the pluses of what we are going about. I think you heard me mention, the average number, some as low as $100 in installed kilowatt, others as high as 400, that compares to any physical alternative. And as you know, in a national sense, it would be almost impossible for this country to shutter the generation fleet that we have, so it is ongoing performance is very important to us. And we see these as solid capital investments that will perform over a two or three decade horizon as these plants are refurbished and really brought up to clear sky standards.

I assume Ohio is one of the states that you're talking about when you're talking about the regulator getting on board?

Indeed. Ohio, Virginia, West Virginia. All of the states on the eastern side.

Right. The recent West Virginia legislation, I guess it is through the Senate but not the rest of the legislature. Is that legislation compatible with what you're talking about here?

Yeah, in Virginia, Kit, I hate to correct you, but it is always good to catch you with a little faux pas. Yes, that legislation, we think, addresses some of the issues that we have in front of us in Virginia.

Okay. And then in Ohio, can you bring us up to date on -- at the risk of another faux pas, I don't believe you filed yet in Ohio. Is that correct?

You are correct as always. We are in the process of doing that and I believe and hope that we will be able to make that filing yet one day this week. And clearly, continue to be the lowest cost producer here in the State of Ohio and we hope that the PUCO will understand that and support us in that effort.

And so we should expect in that filing, though, to see some noticeable expectation of recovery of capital spending for environmental purposes?

Absolutely.

Okay. Thank you.

You're welcome. Thank you.

Our next question comes from the line of Greg Gordon representing Smith Barney. Please go ahead.

Thanks very much. Hi, Mike.

Hey, Greg.

Fair to say that, philosophically speaking, you believe that the cost that you are going to be spending on clean air compliance are costs that you're going to try to convince the regulators in all the states you operate are costs that ought to be recoverable under whatever regulatory paradigm you're currently operating. Is that fair?

That really is fair. And I know how trite this sounds but this is one of those classic win win wins. I really believe the customers win because of the cheapness of the comparative analysis of any other physical option. The communities clearly benefit because the affluent is cleaner. And of course, our shareholders benefit because we really believe the regulator embraces that for the customer benefit and the community benefit.

One last question. I'm going to throw you a little bit of a softball but I want to hear your response.

I hope I don't foul it off.

Now that you have been there for a little while and you look at the operating performance and the cultural aspects of the company, what do you think you can really do to change both the culture and therefore the operating performance of the company going forward so that we can see some permanent improvement in the earnings and financial performance? Over the last decade the performance at AEP has tended to ebb and flow and we haven't seen, unfortunately, sort of consistent incremental operating performance over time. What do you think you can do as the new CEO that can try to instill some permanence to some superior operating performance going forward?

Well, I think in the most important part is we have spent a great deal of our intellectual capital trying to fight the notion of what you do with a generation fleet. And I think this more constructive embracement of what we need to do for a better environmental performance is, as I said, a very positive aspect. And that, again, will be solid earnings on a going-forward basis for a long period of time. And that should lend some stability on the utility earning potential as we go forward. You're going to see us be more aggressive, if that's possible, in trying to move more energy over our EHP network. We believe that those highways should be at the highest capacity factor we can get them at. I'm not sure we've touched all of the wholesale markets that we can as it pertains to municipals and others inside of our region, territory, so I think you will again see some uptick in that activity. All of that should lead to more steady earnings path as we go forward. On the other side of the fence, Greg, I think AEP, no different than so many other large utilities on the domestic front, took some very aggressive steps in the international market, some were very good, others have proven not to be as we had hoped that they would be. The implosion of the trading portfolio here and elsewhere simply was reflective of events that were really an industry driven event, much more so than a company by company, save Enron. Going forward you will see us be disciplined in that approach. With the size of our fleet, we will continue to buy and sell energy out of those stations, in the open marketplace, and move those contracts on a day to day basis every time that we can, but with the massiveness of the fleet behind the commitments that we will make, we are a very different organization than others who might be in that particular business. You will see a certain amount of urgency about what we're doing. I think many of the issues that Susan talked about in the impairment portfolio are clearly a reflection of the reality of what the market is telling us going forward. And I hope we will continue to build on very solid regulatory relations that the team has established. And I think hopefully put a little more volume to our political voice, which has been somewhat silent.

Thanks, Mike.

You bet. Thank you.

Next we will go to the line of Derrick Voulmit with Copia Capital. Please go ahead.

Good morning.

Good morning, Derrick.

I was just curious if you could talk a little bit about what drove the large reduction in the taxes other than federal income taxes, and if the number you had for '03 is more representative of what we should look at going forward.

Thank you for the question. Beyond my paygrade so I will ask the Chief Accountant to jump in. Joe, can you help us?

Yeah, that decrease is principally a result of just changes in pretax earnings. There was really no substantive change in the effective tax rate.

I'm sorry. This is the taxes other than federal income taxes. Line item I was looking at. You were originally predicting about 750 million, and you ended up at 688 on the year.

If someone else has the data handy, let's see if we can't help Joe get Derrick an answer.

We had some decreases in the state income taxes, as a result of some true-ups in estimates to actuals.

And so the question really is going forward what number should we expect?

Yes.

The ongoing rates should look like what the results in 2003.

Okay. Thank you.

I think that answers your question, Derrick. I hope so.

Yes. Thank you.

We have a follow-up question from the line of Elizabeth Parrella with Merrill Lynch. Please go ahead.

Yes, thanks. Could you just talk now about what the carrying value of triple S is? I think the 375 million was an asset tax impairment.

150 million.

150 million?

Yes.

Isn't that pretty well below what supposedly someone was offering at the end of last year?

We're not really going to comment on what someone was or wasn't offering. There was actually a fair amount of movement there, Elizabeth. What I can say specifically is we certainly took into account what we had in available bids in putting forward that number. And that, we think, is a fair basis, based on the data we got.

In terms of going forward at triple S, the plan now is to kind of flatten out the off take contracts as well as maybe some of the stuff that you've done on the cold side, so that kind of the assets can be sold more on a stand-alone basis? Is that what you're trying to do?

I surely think that's accurate, Elizabeth.

Okay. Thank you.

Our next question is another followup from the line of Kit Konolige with Morgan Stanley. Please go ahead.

Yes, hi. You reported for the utility operations $3.15. And that compares with your, I think it was the most recent prior estimate of $2.98. And my question would be, sort of in combination with Tom's comment about the reduction in O&M, is the $3.15 a kind of representative jumping-off point for the utility that we ought to be, granted there are adjustments with the E-com and so on, but is that a better jumping off point than the 2.98 was?

Thomas?

I don't believe so, kit. I think that that number represents a whole lot of moving parts. And certainly, I think what you see in O&M is something that we will be able to capture and keep going forward. But we've got a lot of other moving parts that won't make the yellow box level out at the 3.15.

Now, I understand it won't level, I mean I didn't expect it to level out at the 2.98, either. I guess my question is, whatever I'm assuming about where it levels out, should I level it out at 15 cents higher now? Or 17 cents higher now? If you see the point of the question.

I do, and I guess I don't have an answer, Kit. I'm not sure we can leverage off of that spot.

Kit, there are a number of moving pieces that are going to affect that. And that's the reason that we're hesitating. First of all, some of the positives that you may see is that we continued to have low to below normal this year. We would hope that that would return. We will see decline, continued decline on the Texas side. You know the generation goes away.

Right.

But that's a major factor that would affect that negatively.

As expected.

As expected.

As previously expected.

Correct. The O&M, again, would be an area that we would take another look at. So you might see that affected. So there are a lot of moving parts that make it hard for me to point directly to that number.

Okay. Fair enough. But the O&M, I think I did hear somebody say, in the O&M was a reduction that you feel that you can sustain.

Yes.

That surely is exactly what we intend to do, kit.

Sounds good to me. Okay, thank you.

Ladies and gentlemen, if there are any additional questions or comments please press star one at this time. We have a question from the line of Andy Smith with Lazarus. Please go ahead.

Good morning.

Good morning, Andy.

How are you guy doing this morning?

Good.

Good. I wanted to see if you guys could give us a little more color. It sounds like you're re-evaluated the HPL sale, maybe be a little later this year depending on the litigation and that sort of thing. If you could just give us little bit of a walk through of your thought process on maybe what has changed there? It sounds like maybe you're seeing something a little more attractive, reasons to keep it. Maybe it is high gas prices. If you could just walk us through the thought process there it would be helpful.

Any, you surely have put your thumb exactly on the pulse of the issue. We believe that there is a going-forward business model for HPL that may allow us to be very successful in the operation of that asset on a going-forward basis. Again, with full reflection of the current status, we have taken an impairment at HPL that we think is appropriate. This is a very important asset in the ongoing supply of energy to the Houston ship channel, and the City of Houston in particular. We believe that the Bammel storage field has some very high potential utilization and the gas supply marketplace as well. We aren't looking at it as a major trading hub. Maybe we did when we first got into the process. We are really more looking at the asset for its true value, which is a major serving pipe facility for the markets that I just mentioned. We see the ship channel being very important and the longer-term LNG play, which everyone in this country surely has some conviction as the right thing, oddly enough, even Alan Greenspan believes that to be the case, and we believe that that business model might make sense. Having said that, we will continue throughout the year to analyze that, to convince ourselves that it is a story worth pursuing with all the vigor going back to maybe one of the questions that Greg had asked earlier on. Meanwhile, we have some ongoing issues with Enron as it pertains to that. And clearly ongoing issues with B of A. We will try to find resolution on that if we can. We feel very strongly about our position in those cases. And we will continue to fight that good fight at any rate. So the divestiture, if it were to happen, would be later in the year, but meanwhile, we will take a real hard look at what I believe could be a successful going-forward business model for that asset.

Okay. Very good. And then on an unrelated question, you guys mentioned parent company expenses were higher, there's litigation contingencies, can you give us a little bit of a breakdown or some detail on that?

I would rather not get too specific about that because some of it has to do with FITs and some of it has to do with litigation. Some that we might settle, some that we might lose. Some that we might win. So although I know that is a big number, the fact of the matter is I would rather keep some of that information for ongoing negotiations.

Okay, but it is fair enough, it sounds like from what you're saying, that the issues that we've seen in the headlines and some of the things that we know about going on, that it is related to some of those things.

Absolutely.

Fair enough. Thanks a lot.

Nothing new. Nothing too strange.

Okay.

But at least some honest view of where we might end up.

Okay, great. Thanks a lot.

Thanks, Andy.

We will go to the line of Vikas Dwvedi with Prudential. Please go ahead.

Good morning.

Good morning, Vikas.

I had a question on the wholesale, the third party sales with respect to coal prices having moved up quite a bit over the past several months. Now that they're in the mid 40 range I was wondering if you guys could review your coal hedging and contracting in terms of kind of how immune you might be from the rising coal prices.

Yeah, sure. With regard to our coal supply for our fleet, we are virtually fully hedged for this year, for '04. That drops down in '05, and then again in '06, as we try to stay out in front of some of the volatility in the market. But at the same time not get hedged out too far into the future as we evaluate what the fleet is going to be needing going forward.

Okay. And do you have those hedge levels available for '05?

We do.

Go ahead.

88.6 for '04. 64 for '05. 56 for '06.

Those are percentages.

Percentages.

Okay, right.

Which I think is exactly what Tom said, we feel comfortable with our '04 position, that's enough for '05 and beyond for now.

It is a very typical pattern for us, as we roll out into the year you will see those numbers increase.

Okay. And do you have any view on the volatility in coal prices in terms of how that market is shaping up over the next few quarters?

I don't think that this is different than this industry has experienced over the last two decades. I think you see these activities where the price does move up, more coal comes into the market and then it comes back down. And we would expect a similar pattern. As the price increases, you are going to see more opportunity for more coal from different places. And we would expect that would have, ultimately, a dampening effect and bring the prices back down, eventually.

And I think one of the pluses of some of the environmental investments that we had spoken of earlier is that it does give us lot of fuel buying flexibility as to the quality of coal we have going forward and we will continue to deliver that benefit to our customers.

We have in the past, and would continue to access a variety of markets. And that over time, particularly since everybody in the market is doing the same thing, that will have a dampening effect as well.

Okay. Thank you.

Thank you.

We have a question from the line of Claude Davis with MFS Investment Management. Please go ahead.

Hi, Mike.

Good morning.

How are you?

I'm fine, thank you.

Good. Just a couple of quick questions. First, if you could refresh us just sort of on the timing and the expectations relative to the Texas divestiture and securitization. And then talk about maybe what the swing factors are in the low and high end of your range of earnings guidance.

As to the first question, we are moving forward with all dispatch, and the we're doing it as closely as we can with the state regulator and their advisors to ensure that when we do get to the stranded cost determination phase we're in good shape. The tail end of the securitization is way too far out for my blood and we're trying very hard to convince everybody to get this done as rapidly as we can, particularly in this low cost interest environment that we find ourselves today. Again, you end up delivering that benefit to your customers and you want to go about that with as much speed as you can. We do have a series of bids in hand. We're continuing to work with the commission's advisors to winnow that down and determine the successors in interest. So I feel that we are on a very solid path there. But I do want to put some urgency and, hopefully, the regulator will appreciate the value of doing that as we go forward. On the earnings guidance itself, some of the big players are how some of the regulatory issues that we spoke of earlier, that we are moving forward in some of the jurisdictions, how they come out. And then, of course, it is a matter of the sales forecast being within the range that we have outlined for ourselves. And as always, we will manage the cost control levers as best we can to be reflective of the sales volume, which is to say we have a stack of things that we want to do if sales perform at or above forecasted level, and a stack of things that we simply won't do if in fact they should fall off. So the range, although broad, we fell very comfortable will be well within that range.

Great. Thank you.

You're welcome.

Our next question is from the line of Andrea Finestein with Millennium Partners. Please go ahead.

Just a followup on an earlier question. With your 2004 guidance, can you give us a sense regarding coal prices, what coal prices you have assumed for the approximately 12% of unhedged coal you have this year? And can you give a sense of sensitivity as to what the impact would be on '05 if the unhedged portion was hedged out at current prices?

Well, that may be again a bit more refined data than we would like to share at this time. We feel, again, comfortable with where we are in the coal portfolio for '04. The unhedged piece of it is well within our control and a price sense as we go forward because of our ability, even in today's environment, to compete different suppliers at different costs and at different qualities, as we go forward. The '05 piece is comfortably hedged and will continue to add to that portfolio as the year unfolds. Sensitivity-wise, coal prices would have to really take a shock up to impact overall earnings as we look at '05.

Can you remind us, how many tons of coal you burned in '03?

How many tons of coal did we burn in '03?

We consume and purchase about 80 million tons a year.

I'm sorry, could you repeat that, I apologize.

80 million tons a year..

80 million, I got it. Thank you, that's helpful. And then similarly, on your assumptions in '04 guidance on all system sales, are you assuming power prices that are relatively consistent with current prices or can you give us a sense of what you're assuming in guidance on that front?

I think we're well within the current price portfolio as we look at that volume for the year. We're not forecasting any significant shifts, plus or minus.

Can you give us sense of sensitivity on that front, as far as changes in power prices versus your guidance? How that would affect your earnings expectations?

Well, that is a big number. And that could have an impact on the number. I don't know, Susan, if you have a range that you would feel comfortable on the sensitivity basis.

We haven't really provided that kind of data. I'm not really that comfortable showing those kind of variations.

Clearly, as you can well imagine, much of that is in a competitive marketplace where we're bidding against other potential suppliers and responding to those who are calling in a short position, looking for us to be an adequate supplier for them, so some of that obviously is proprietary in that sense but it is a big number.

I appreciate it.

One of the issues that works in our favor, and it certainly was the case in '03, is that as we see the retail sales fall off, for whatever reason, we have an opportunity in the wholesale market to make that up. And that was very effective for us in '03. Likewise, if we don't have as much to sell, and you saw system sales go down, it could be because of a good thing happening and that be retail sales going up.

Where the spreads are typically higher.

Got it. Okay. I appreciate the color, guys.

Thanks a lot, Andrea.

We will go to the line of Paul Ridzon with McDonald Investments. Please go ahead.

Good morning. Do you have any '04 segment data at this point?

No, sir.

Second question, can you talk about directionally which way the freight prices have gone in the U.K.?

They've stayed fairly high.

But they're basically flat?

They continue to be volatile, and directionally up.

And then lastly, kind of with the thought that you could keep the Houston pipeline, how should we think about that in the context of kind of previous indications you were getting away from more trading activity?

Well, again, the Houston pipeline asset will be viewed much more traditionally as a delivery system, with a very valuable storage asset tied to it, to continue to serve Entex and others in the greater Houston area. Much, much different from the original plan of using the Bammel storage field as some really high-flying trading operation, which simply didn't materialize.

We should think of it more as more secure cash flow.

Absolutely, with reasonable rates of return. Nothing fancy but, to me, comfortable rates of return.

Thank you very much.

You're welcome. Thanks, Paul.

Our next question is from the line of Dick Cadin with Deutsche Asset Management. Please go ahead.

Yes, thank you. Hello Mike.

Good morning.

How are you?

I'm fine, thanks, and how are you?

Okay, thanks. Question, you talk about the '04 guidance, which is still probably not fully realizing the full potential of this company, so could you give us a flavor of where the challenges and where the opportunities are beyond '04?

Well, I think without question the challenges continue to be in some of the, what we call, investments or the unregulated side, and dealing with those issues, and then beyond '04, the challenges will really have everything to do with maintaining solid returns at the operating companies. And clearly, as you point out, we have not yet realized the true value of these assets and we will continue to work on that as we go forward.

Would you venture to guess what magnitude of improvement is possible?

You never give up, do you? [ Laughter ] Well, I really watched the performance in '04 versus '03 and hopefully that will be a track that we can stay on. Again, nothing dramatic here, but solid year over year improvements in the earning capacity of these assets.

Okay, will follow-up later. Thank you. Thank you, Vic.

Our final question this morning comes from the line of Murphy McCann from PIMCO. Please go ahead.

Good morning. How are you?

Hi, Murphy, how are you?

Good. I wanted to ask a quick question about your trading book. The gross risk management liabilities, short term and long term? And as you realize the value of your generation assets going forward, where do you see that going from here?

Tom?

This would be end of December, we had total assets in the book of 1.234 billion, and liabilities of 928 million for a net value of the contracts of 306 million. As we realized the size and shape of our fleet and our opportunities going forward, we would think this might be a level that would be sustainable as we go forward.

I think that's an excellent question. One of the things that we have had some difficulty with, and will continue to try to refine these facts for you as we go forward, is that on a reported basis we continue to be the dominant player in the megawatt hours delivered. But that has everything to do with the size of our fleet. 85% of the output of that fleet is dedicated to system sales or municipal co-op contracts as we go forward. The rest of the fleet is actively put into use as we go.

I might add, also, on the numbers that I just gave, those are excluding the assets held for sale.

My team reminds me that system sales is a term of art here. What I meant to say was that it is dedicated to our retail customers, which to me, in a historic sense, is system sales.

Okay. Thank you very much.

Nice to have all these people here to help me with my faux pause.

Where is Kit when you need him, right?

Listen, we would like to thank everyone one of you for the time spent with us. We really feel comfortable about our '04 situation and the real test will be the delivery on the expectations as we go forward. And we will get that done.

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