美國電力 (AEP) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American Electric Power first quarter 2004 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. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, American Electric Power's Senior Vice President, Mr. Armando Pena. Please go ahead.

Thank you and good morning everyone. We're here to talk about AEP's earnings for the first quarter 2004 and I expect that you've seen the press release that we issued earlier today. It is also available on our web page at AEP.com, together with other financial information that we are going to be discussing this morning.

The earnings release and other matters that may be discussed in the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings including the most recent annual reports on Form 10-K, and quarterly reports on Form 10-Q. For a discussion of factors that may cause results to differ from management projections, forecasts estimates and expectations. Also on the call we will discuss the measures about Company's 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 investor relations website at www.AEP.com.

I now will turn the proceedings over seating ever to Mike Morris, Chairman, President and CEO of the Company to begin our opening remarks, and then at the end of our remarks, we will have time for questions. Mike.

Thank you very much Armando. Welcome all of you to our quarterly update on earnings for the Company. First quarter of 2004 was a very solid quarter. The results, we feel are very positive in a sense that our ongoing earnings were strong, and as expected. We're quite encouraged by what we see at the utility operations as well as our commercial operations, with both retail sales and our Off-System Sales activities.

At the utilities, we have spent considerably more in the first quarter in O&M than we had budgeted and in a compared quarter to the first of 2003. Much of that has to do, however, with an early maintenance schedule on our power plant activities as well as updated and more quickly going after the tree-trimming activities on a distribution and transmission grid. All directed at following the issues at NERC in last year's outage, trying to get ahead of the tree-trimming schedule so that our reliability continues to be strong. I assure you at the end of the year our O&M numbers will be as we had forecasted or lower. And that means that it will be about $138 million less than it was for the total corporation, in 2003.

I am very encouraged by the first quarter activity for the asset divestitures. We have taken a tremendous amount of effort to put speed as well as balance in what we're trying to do, and I feel comfortable with those issues that now have been sold. Some of them closed and the rest of them progressing very rapidly. We continue to work with potential buyers of the FFF power plants in the UK and again feel comfortable with the way that that will unfold as calendar year '04 moves forward.

We continue also to work very hard at selling the storage assets associated with the LIG facilities and feel comfortable about that. I am sure that all of you saw the press release late yesterday on the ultimate settlement with Enron as to the HP&L bankruptcy issue and the debate that we were having with them. We feel comfortable about having significantly different title and ownership aspects as it pertains to Houston pipeline and will continue to evaluate what we think are any one of a number of very strong opportunities for HPL. I'm happy to say that the cash flow is up and the volumes going through the system are up in the first quarter on a year-over-year comparison, and we feel very comfortable about that as well.

In the regulatory world, matters continue to move forward in Ohio with the rate stabilization filing that was made in the first quarter. We are encouraged by signs that we see from the PUCO in the way that they're handling other cases. Our schedule has been delayed by two weeks, which sounds unfortunate, however, those who had intervened in the case had asked for a month delay in the schedule so that they could continue to deal with First Energy and Cinergy before they got to the AEP case, and the commission issued an order that only extended the schedule by two weeks, and we read that to be constructive. I think that the reappointment and the final confirmation of Chairman Schreiber is a very good thing for all of us here in Ohio in that he continues to have a very balanced view of how to go forward with restructuring here in our home state.

As to the legislation in Virginia, I know that we have talked about this before, the governor has signed into law continuation of the restructuring process in Virginia, which we think is good for not only our customers, but our shareholders as well and as you might recall, we have a couple of carve-outs to address the issue of additional capital spent for both reliability and environmental improvement of our plants there. So we feel that that is a constructive move.

On the integration of AEP into the PJM, I hope that all of you saw the filing that was made with the FERC where we and the Kentucky folks and others have come together on agreement as to how AEP East would go into PJM and An agreement with Kentucky. We are waiting for the Kentucky commission to approve a settlement that was reached among many parties and we hope that that will happen in the very near-term. I am also happy to say that we are in dialogue with Virginia, and other of the states who would benefit from AEP joining into PJM; have joined in that dialogue and we think that we will be able to reach some reasoned resolution is it pertains to that activity. The same can be said for the SPP RTO. We continue to work as closely as we can with the states on the AEP WEFT system and we're comfortable with dialogues that we have had with our friends at the Arkansas commission and we will continue to work with them as we go-forward.

Lastly, I would simply like to affirm our guidance for 2004. We still feel very comfortable with our $2.20 to $2.40 per share earnings forecast. We're beginning to see solid economic recovery in our general service territories, save the industrial load in Texas, we're seeing quarter-over-quarter by way of comparison growth on a weather adjusted basis. Retail sales are up in the residential and in the commercial activities. So, we're beginning to see the fruits of a slow but steady economic recovery. As you know, many of our states continue to be in the lower quartile states on the recovery path, but when we look at industrial sales, and the commercial sales, we feel very comfortable about what we're seeing.

With that, I will turn the matter-of-fact over to Susan Tomasky, our Chief Financial Officer, who will take us through many of the numbers and then we look forward to your Q&A. Susan.

Thank you. Our first quarter reported earnings as laid out in the press release were $278 million or 70 cents a share. When you adjust that number for discontinued operations and the key items there were $1 million negative for LIG, 12 million negative for the UK as well as positive special items, specifically the sale of PUSHON (ph) which was a $6 million gain; we have ongoing results of 285 million or 72 cents a share. The compares well with 2003 on an ongoing earnings basis. Because if you look at the $444 million reported number for 2003, that reflects a one-time as you will recall 242 million FASB 143 adjustment, and so that the ongoing earnings for 2003 were actually 255 million, and the performance on the year-to-year basis was better by $130 million. However, owing to the 8 cent dilutive effect of last year's equity issuance, what we really see are per-share results, dead on year-to-year at 72 cents a share.

We're pleased with these first quarter results because they reflect solid execution of our plan, and because they show overall positive performance and as Mike said, it permits us to confirm our '04 guidance. I will point you to a couple of items to note. First (technical difficulty) gross margins for our regulated utilities and the Ohio Companies were up slightly, notwithstanding mild weather and you can see the details of our press release. Gross margins for Texas Wires were down year-to-year, this was as expected due almost entirely to the end of the booking of ECOM which as you know is recoverable in a future period as part of our cost proceeding.

The most significant positive for us was the Off-System Sales number in power optimization which was a $56 million positive associated with cold transactions and power optimization as part of the overall Off-Systems Sales number.

The O&M increase, as Mike said, was year-over-year. Pretty much as expected. There are some timing differences from quarter-to-quarter, but in general we're very much on track to get to our overwrought corporate goals with respect to O&M. When you look at the investment, you will see that they are still in negative, but much less of a drag than last year again reflecting the execution of the divestitures, and operational improvements that we committed to at the beginning of this year.

GAAP whole coal (ph) was unlike last year. We did not see a replication of the unusual market circumstances and the one-time event which contributed to a significant loss in the first quarter. We continue to carry a significant amount of debt, about 6 million of that $10 million negative at whole coal. And we will, as you know, contemplate the paying off of the Steelhead (ph) financing, probably in the third quarter. We also, I would point you to the UK performance, which was a $12 million negative, that includes in fact year-to-year improvement in the operation of the plants, but negative associated with the flattening of coal and freight positions in the continued execution of our exit strategy at a reasonable cost from the trading activities in the UK.

Let me turn briefly to some of the financial issues and if you look at the cash flow, and I'm not going to blissfully read you every number, but I want to point you to the fact that we had 291 million in continuing -- in cash from continuing earnings after you make the adjustments for depreciation, working capital, and other matters, we have 901 million cash flow from operations.

The investment in CAPEX was $309 million. Our financing activities year-to-date were -- involved cash outlays of $576 million, including primarily 341 million of long-term debt retirement, 300 -- 138 million for the dividend, and 103 million net short-term debt reduction. So that the net cash from operations for the quarter on a continuing basis were $71 million. If you add in the cash on hand, we have $1.253 billion for the quarter.

Let me note a couple of balance sheet items. The debt-to-cap at the end of the quarter on a GAAP basis was 63.1 percent versus the 64.6 percent at a year end. If you look at the creditor view, the rating agency view, where you add in the leases but eliminate a number of other items including securitization, and you 80 percent equity credits to our mandatory convertibles, we have -- we end up a 62.5 and of course when you add in the available cash, you see that we end up at the end of the day quarter with 59.7. Our target, by the way, continues to be 60 percent on the rating agencies or creditor view basis.

Let me mention one other thing that puts us on the way of our goals for the financial activity for the year. We went to market with our revolver, as you know we were seeking $750 million, seeking to spread out that over several years; we were extremely successful in that marketplace. We have made a decision to upsize it from 750 to 1 billion. We are currently conducting an assessment of market conditions and our liquidity needs may put us in a position to be able to downsize next year's revolver by a corresponding amount.

That is the summary of our activity and where we were for the quarter, and I think its time for questions.

(OPERATOR INSTRUCTIONS) Jack Lawrence (ph) from Vanguard.

I appreciate you taking my call. I apologize if you already covered this, but I was wondering if you to give us more flavor on where the trading books stand, and what your long-term plans are there with regard to taking on risk or winding it down?

Our plans are unchanged with respect to our trading activity. We have exited all activity outside of the footprint of our organization on the power side and adjacent territories. We continue to limit our power optimization activities to trading around the assets that we currently have. Our significant reductions in VAR, our commodity by commodity specific stock plus, limits which are very tightly controlled, remain in place, so there is really not any change directionally at all with respect to our business. The coal activity that you see which is reflected in the gain that we show really was a circumstance of the fact that we do -- if someone who burns 75 million tons of coal a year, buy an awful lot of it and sometimes we sell it.

When we find ourselves in a circumstance, as we did with future positions and an opportunity to see a significant run-up in price, we did take advantage of those circumstances. Also, there were a number of other transactions going on at the same time in that that were essentially improving our inventory and establishing an effective management of our coal inventory overtime. That is something that you're going to see with a company that manages as much call as we do from time to time. Although it is hard to imagine seeing the kind of individual run-up that would result in this kind of gain in the future. I think that is a fair summary. I don't know if you would want to add anything, Mike.

The only thing I would add that on our European operations as well, we decided in the first quarter to totally flatten the books, so that we take away any volatility that we have even though that is being handled as a discontinued operation. We just thought that was a better approach for us to take.

Great. With respect to be coal, are you guys currently extending your hedging contracts or are you kind of sitting on the sidelines right now?

We manage that very actively and in a sense it is not a significant departure from the way AEP has always very actively managed its coal. We have a mix of long-term and short-term contracts, we are fortunate enough to be not overly dependent upon the spot market. We are constantly looking for new suppliers from a variety of different sources, and we try our best to put our plants into position to be able to handle coal from a lot of different sources, so there is really no single answer to your question. We never sit on the sidelines. You can't do that when you have the kind of coal needs that we have, but we don't have an urgent need to enter the marketplace on a short-term basis to fill out inventories. We do it as it is opportunistic for us.

Also, as we continue to put the environmental improvement assets on the back of the power plants, that gives us flexibility in a coal buying range of coal types. So that also says for a while we will wait on some of the plans for major purchases while coal prices sort themselves out in the near-term.

Great. Thanks very much.

Dan Eggers representing Credit Suisse First Boston.

First question, now that you guys have made progress and gotten the Texas assets sold, can you give us an update on what the calendar looks like for progressing dealing with the regulators and have you been able to accelerate that at all?

The Texas restructuring law, Dan, has a lot of timelines built into it. What we can do, and in fact are doing, is moving our applications up as fast as we can. We now know exactly what at least the sale price for the various assets at TCC, what those numbers are. That helps us calculate the power plant stranded costs simply subtracting the sales price from the book. We continue to work with the commission to see if there isn't some way to speed that entire process up to take advantage of securitization while interest rates remain low.

As you know, the schedule calls for the rest of the process to happen in '04, the true ups in late '04, early '05; securitization hearings then in '05, and hopefully, having all of that done in that calendar year is not spilling into early '06) And we're trying everything that we can think up to speed that matter up. If we can do it, I know the commission at least would love to do that but the law is relatively proscriptive as to how we have to go about doing that.

What has been the receptiveness to the idea of accelerating the securitization as interest rates start to rise?

I think they would tell you that they are encouraged by that opportunity, and as I mention, we're trying to hard to find a way to go about doing that. We have been in dialogue with some of the commissioners as well as some of the staff. Even the interveners, if you realize that the earlier you do that, the more beneficial it will be. We ought to be able to come around to that, but I don't want to give you any false impressions that we think this is going to happen. Again, we continue to push very hard for that because it is so logical.

Okay. I guess if you to give a little color on your response to FERC SMA PUSH (ph), and how you guys are planning to respond?

Well as you know, we still have some timeline before we need to respond. We think that FERC is at least heading in the right direction by trying to give credit for some of the realities of the larger power producers with retail market loads that are still tied to this power production facilities. We will make those kinds of filings at the FERC. But our overall view of that issue is that in fact, when companies like ours join SPP as an RTO and PJM as RTO, the access to those transmission grids are in fact open to all comers. Every power plant will complete against every other and that market test, I think loses some of its impact. I know the Chair at the FERC doesn't necessarily share that view, but that doesn't mean that we won't will continue to try selling it to him.

Understood. Thank you very much.

Kit Konolige with Morgan Stanley.

Two areas of questioning. One is, could you, Susan, you touched on this, but maybe you could give us an a little more detail on the what is meant by coal optimization and power optimization? I understood from what you so that coal optimization is kind of trading around your coal inventories?

I think that is fair. Although I do want to emphasize that this is not an extremely liquid market. We don't have a huge staff of people sitting around looking to take price steps on coal. Essentially what happened is we have a procurement function. We did have some residual positions from our coal trading book. That is no longer an active organization. All of our activities are within our procurement function at this point. And so, what we are essentially doing is we are looking for opportunities to maximize the value of the coal assets that we have. The goal is, keeping the inventories where we need to at a reasonable price, and to diversifying our supply. Within that context when we see opportunities that are within our pretty conservative trading limits across the board, we will take them and we saw in the first quarter an extraordinary run-up in prices. And we had an opportunity to engage in some transactions that brought that value in the door.

With respect to power, again, within the footprint that we have, we engage in forward transactions, and there are from time to time opportunities within those positions to buy and sell. To exit a particular position, take a profit. As long as we are constantly mindful of ensuring that our real goal here is making sure that our requirements, obligations are met, that our native load are met. We will from time to time take advantage of these opportunities. The proportion value that you see there is a reasonable thing to look to, although of course, the market conditions change from quarter-to-quarter, and we can't predict that.

The key for us, Kit, I think is that we found sort of a happy medium to having significantly reduced all of our risk tolerances across the board having reduced our geographic reach, having reduced our staff. We now find that on a day-to-day basis we can manage some of this activity, bring some dollars in the door, and still keep our eyes focused on selling the output of the generation.

To follow up on that, should I going forward -- should I view the -- you talk about a 26 million gain on coal optimization, 30 million on power optimization. Should I view that in the nature of a one-time achievement this quarter that could go either way in future quarters, or are you at a new higher level of earnings as a result of that?

I guess I would like to pick option three. Which is a little different from both of the things you said. First, let's separate out coal, which I think is clearly a one-time thing given those market conditions. I won't tell you that it will never show up again, but not an unusually liquid market and not one that we spend a great deal of time playing in other than in our procurement functions.

With respect to power, you can't really speculate on price movements so you can't really tell -- I can't really tell you whether or not we will ever see that again, but I do think it is substantial by comparison to what we have seen over the last year in similar quarters. What I will tell you, which is your key question is are we would going to see losses comparable to those gains? I believe the answer is no and the reason for that is that we are not -- given power VAR limits and our stocks loss limits, we are not out there taking substantial one-time positions. These values are incremental, they are over time, we have built into our risk management systems now. We think much more effective ways to stop the incremental build of these transactions, so we are better positioned -- because we are not looking for the moon here. We are looking for a little bit of incremental value over and above simply placing our power as a price taker into the market. We are in a position where we can be much more effective in disciplining against any loss.

I also really emphasize the commodity by commodity limits. We do not, even when we see beneficial conditions in the market, we don't up open our VAR. If we're going to limit activity, if we're going to increase activity in one area, we automatically limit it in another. So I feel very comfortable that based on the way this is being managed at this point, the prospect of significant earnings volatility swings are not great. I also, for that reason, am not prepared to promise you automatic plusses around this optimization going forward. We will continue to look for that, but our performance planning is around the placement of our power in the market at competitive prices.

Have you reported here, and I have missed it, or would you report your margins on the Off-System Sales? This quarter versus the year ago quarter or something like that?

I think we've got the realizations here, just give me a second.

One of the things I would add to the coal activity, Kit, is that whenever we find ourselves in either coal or power in a long situation it has always been our believe that in exit strategy would be to place that in the market if the prices supported it, and we saw that in the first quarter.

So we should think of you at least for this year as having the fact that you were selling coal in the first quarter would seem to indicate that you don't have a problem. People are worried about with other companies, are they going to get enough coal?

I think that is a very fair statement, yes.

I don't to make too many logical leaps here but.

Every now and again we do something.

That's me not you. I'm trying to just make sure I'm sticking to the basics.

Yes and so are we.

The 2004 actual gross margin on Off-System Sales was 94 million. We told you that 56 of that is associated with the combination of the optimizations on both coal. I was looking at the wrong one. 168. 56 of that is associated with the optimizations split half-and-half basically between the coal and the power. You should not assume, our projection for the year remains the same even inclusive of these numbers.

Okay. Finally, one other area. I apologize for taking all of these questions. In the areas of ongoing results in the segment, so ongoing EPS for investments was negative one cent in '04? Q1 and ongoing from parent negative three cents, I think I heard you say that parent was substantially a large part of it was just the debt at the parent? Correct.

That is correct.

Can I look at these numbers and just annualize them, or because if so, obviously, you are going to beat those parts of your projection for the year?

I can't recommend that you annualize them, Kit. I send you back to the projections we had for '04, and tell you that it continues to be our hope and our expectation that we're driving towards doing better than that on investments. Certainly we should do better than that on parent. Some of the parent number, which shows a substantial reduction over the course of the year has to do with some debt reallocation. So, for example, communications, we had expected originally that we would move that debt from the communications line to the parents. It appears we won't do that, and by mid-year, these numbers may be meaningful enough that it's appropriate to try to put together reconciliation of that. It is really too early to try to do that now.

With respect to communications then, that would have the effect of keeping debt at a discontinued operation?

(multiple speakers)

Maybe it should be.

We will think about that, Kit. You always have good ideas. Basically what I'm really saying here is both of those numbers we're going to try to bring down. We're off to a good start on them but one quarter doesn't make a trend.

And then as long as I'm asking about these broad segments, how would you described your progress towards $2.66 that you have budgeted as the mid-point for the aggregated utility?

On utility operations?

I think we feel pretty comfortable there.

Thank you.

Wen Wen Chin (ph) with ABN Amro.

Good morning. Have you guys taken a first stab at the new FERC market power screens? Do you think that you would pass those screens?

I think we have a better chance on the new tests than we had on the old tests. That is for sure. There is still as you say there are two screens. I think we may do better on the second screen than on the first screen. But, we continue to look at our facts and our members as we go. Again, as I said to one of the comments we made in the overall opening statements, we see that has a plus compared to where we were. But we really believe the larger issue is down the road somewhere at the end of the day and open access transmission grid allows power plants to compete against each other on a very, very wide basis. If you think of Exelon and us joining PJM, you could have power plants in our backyard competing for load in Chicago or Philadelphia or anywhere along the East Coast. That really is the in gain that the FERC I believe is after. And really should be after.

Do you have any opinion on the costs plus pricing? If you are shown to have market power?

Well, it all depends on how those formulas unfold. If the FERC wants you to recast the returns on equity on your generation facilities like they've done on transmission facilities, and they get the plus on the cost side high enough, someone might be better off in that world than in market pricing world.

Okay. On the trading book, the speculative trading book, is there any way you can quantify how much longer it will take to completely flatten that book and how big the book is at this point?

Again, I am not sure that a speculative trading book is a fair way to characterize what we're trying to do. I think Susan has gone on at length to try to make certain that all of you on the phone have a flavor for what it is that we're trying to do. We see a tremendous amount of day-to-day in day-out and as you know we have a tremendous amount of power production day in, day out, and that usually exceeds the power demand of our utility customers, and we are as aggressive in the marketplace as we can be with that. Selling to municipals and co-ops and day ahead markets, and those kinds of things. I don't think that we have an open position that bothers us. Most of what we're doing is '04, some '05, not much more than that. We have some historic things that stretch out longer than that that were entered into in the '01, '02 timeline when we much more aggressive, but I feel pretty comfortable where we are.

The transmission book is flat, it remains flat and we have on our website the maturity period. That hasn't changed.

So, there will always be some book there to support your optimizations?

Absolutely. You can't have 38,000 megawatts of generation without having a book associated with not only it, but activities around it as well.

Okay. Thank you very much.

Elizabeth Parrella with Merrill Lynch.

Just going back to the system sales comments, you mentioned that this doesn't change your outlook for the year, which I think you have been saying is pretty much flat with the 461 last year. I'm just a little surprised by that given the level of contribution this quarter and the fact that a big piece -- at least on this coal side, came from something that seemed to be unusual and I would think might not have been reflected in your guidance comments initially. So, I just wanted to probe a little bit more as to why not -- be a little bit more optimistic with respect to the level of contributions from system sales this year?

I must tell you, Elizabeth, that as you know we now call those Off-System Sales but I'm happy to hear you say that we ought to be a the bit more aggressive or optimistic about what we see. Again, I think Susan said it best. One quarters simply does not make a trend for the year. We feel very comfortable with our performance for that quarter. However, much needs to be unfolded before we feel comfortable in saying there is more opportunity to be on the high side of our range rather than on the low side of our range. It really is premature to take that approach. We are seeing solid on-peak pricing, we saw some solid off-peak pricing, but much of that could change as we go-forward.

As a follow-up, the activity on the coal side, did that change your hedging percentages on your coal supply needs for your native load, etc.? Could you update us on what those percentages stand at for this year?

Sure. That didn't have any effect on that in all. We continued to be hedged as we have told you before, totally so in '04 and we are growing the covered position in '05 and '06 every day that we can at appropriate prices.

The percentages now for '05 and '06?

I'm sorry.

The coal hedging percentages for '05 and '06, do you have those numbers?

We're in excess of 75 percent for '05 and around 60 percent for '06.

One other question, going back to your comment on O&M. Mike, I think at the beginning you mentioned that your expectations on the total corporation level you would be down versus '03 I think the number was about -- (multiple speakers) .

138 is what we have been talking about.

That assumes that the utility is up a little over 100 million?

109 million.

Okay so you would be down over 200 at the non-utility or non-regulated stuff?

Yes, ma'am.

Okay. One last question. Could you just update us on the Texas plant sale process in terms of closing those sales, the right of first refusal, regulatory approvals, etc.?

Well, again the closing of some of the sales are moving along were quickly than others. On the right of first refusal we do believe that we're getting indications from a couple of folks who have those rights that they may step and take that position. That will not slow down our process of trying to put together the true up filings and get those filed because the math won't change even if the title and ownership changes. So, we continue to move that along as quickly as we can. I expect in some instances that may or may not hurry things up as you go to getting final approval from various regulatory bodies on the success or an interest. But we are pleased to say that everything has been sold, and we are moving as fast as we can to make our filings to start the clock ticking on true up and ultimately securitization.

Okay. Thank you.

Thanks for your questions.

Paul Ridzon with Key McDonald.

Have you given update? You mentioned freight in the UK kind of has stabilized. Can you just get more flavor as to what is happening in that market?

From our perspective, we basically took a lot of actions in the first quarter to flatten out our positions and to reduce our market risk. We do the losses that we reflected which think we were actually modest compared to where we saw conditions at the end of last year. It put us in a position to be able to do that, so we are quite comfortable going forward. I don't think the fundamentals around the freight market internationally are changing all that much. We continue to see the international pressure particularly from China you see some fluctuations. I don't think the major players have changed very much. I think we took advantage of some short-term conditions to be able to flatten our positions. In relatively good order, and that is consistent with our exit strategy.

Could you give some flavor as to your power optimization and coal optimization, kind of what dynamics you are capitalizing on here? Are you selling met coal, replacing it with steam coal, or just kind of a flavor for what is happening?

Well, that is a bit deep for us to go through at this conversation. It just again is an opportunity to test our theory that if you need an exit strategy for coal that you feel you're long in, can you put it in the market? Remember that coal buyers -- there's not many folks out there with credit quality that you are impressed with. It is a hard market, and we're not trying to trade one kind of coal for another, it was just an ongoing day to day buying, selling opportunity that we saw and continue to see.

As you have gotten longer for '05 and '06, can you comment on the pricing environment that you have been able to do that in relative to what you are replacing?

We are seeing, obviously whenever we see an opportunity to buy in what we believe to be a price that will be reasonable in the '05 '06 timeline, we jump on that opportunity. Our overall strategy is trying to keep the prices below $30 on average as we go-forward and we've had some success with that.

Thank you very much.

Ashar Kahn (ph) with SAC Capital.

Good morning and congrats on a nice quarter. Mike, with the Virginia law in place, can you tell us what your framework is in terms of recovery and investment you talked about in New York as to how you would proceed under the new law? As we look forward?

What we will do is of course take a balance on the performance of the Virginia-based APCo companies and then take a look at the actual capital spend on the power plants that are allocated over to those rate-making processes. And then make the appropriate filings asking for the very narrow rate treatment as it pertains to environmental improvement and/or reliability improvement. We think that gives us a tremendous amount of flexibility to go forward with our spending program. Long before we get into that event, however, we want to make certain that we've had an opportunity to have a meaningful dialogue with the Corporation Commission in Virginia to make sure that they are in the general agreement with what we do. As you know, regulators can never give you their final opinion until cases are heard. But we would want to work with them so that they would understand what we're doing and why we are doing it, not unlike we were able to do with the rate stabilization filing here in Ohio with the dialogue with the staff as we go forward.

Could you just tell us the time frame that you might expect some kind of a rate filing in that jurisdiction?

It's premature for me to tell you that. I would say surely not in '04, but possibly in the '05 timeline.

Any update on the Texas Central rate case where you stand on that I guess we are expecting some kind of a decision this summer?

We are. As you know, we continue to be in settlement discussions with the various participants in Texas. I would tell you that some of the participants in those discussions are somewhere beyond left field. What we're trying to do is find a mid ground with at least the commission staff and others where we might have a chance to do something constructive in that regard. We have filed, as you know, for a $66.5 million increase. I would expect that if we come to any resolution by way of settlement it will surely be an increase, but I don't know that it would be near that high of a number.

I appreciate it. Thank you.

Thanks for your comments.

(indiscernible), Lumis (ph) Management.

I was just wondering about your plans for it HPO, especially now that there has been some resolution with Enron?

Sure, most importantly, and I said this in my opening comments, we are encouraged by the volumes increasing on the HPL and the cash flows increasing as well when you compare quarter-to-quarter. Of course we didn't have the first quarter effect of being short gas when it got cold and Houston needed us to supply under our power under our gas supply contract. We continue to look at any one of the number of potential capital structures around HPL. Clearly we need to do some retirement of debt on that asset. We continue to see very strong improvement in EBITDAs, and as you know, we see equally strong sales potential, when you look at what at least we calculate from the TOPCO announcements earlier this week. We are very comfortable with where we are. We will continue to evaluate the potential of keeping the asset and/or selling the asset and restructuring it in a capital sense as we go forward, but I'm again most encouraged by volumes up and cash up.

In terms of any timing issues, if you were to salvage (indiscernible) or do whatever, are there any -- is there a time frame during which you can do that?

I feel like I did years ago when people asked me almost every other day when the Millstone stations were coming back online and I hate to giving dates, but as you know, I'm a believing believer in urgency when you do things. So we will move as quickly as we can, but I think one, having Enron behind us now, and knowing that we have a very different ownership position in the assets now than we did had, I feel very comfortable with where we are. I think there are many opportunities, we're surely getting a great deal of interest from potential buyers, and that tells us that even as we sit and continue to look at how we would improve the performance of the asset going forward, the market appetite is heating up as well. So what I don't want to do if it in fact is becoming a stronger seller's market, I don't know to sell early.

Thank you.

(OPERATOR INSTRUCTIONS) Ali Agha from Wells Fargo Securities.

Susan, just one more clarification on the power optimization results that you were mentioning today. That $30 million increase, how much of that if any was related to mark-to-market based increase?

Nearly all of that was mark-to-market.

All of that was mark-to-market?

Power optimization, yes.

Could you also remind us what are your current full-year '04 and '05 CAPEX budgets?

About 1.5 billion in '04 and a little more than that, about 1.6 billion or so, in '05.

Mike, one other question. Could you also remind us, when do you expect at this stage to be able to join PJM, assuming everything goes forward as planned? And what are the financial implications we should be thinking about for AEP once you join PJM?

We believe by October of this year that surely the plan that we're on, and much of that has to do with, of course, trying to find some way to coordinate our activities with Virginia. On the cost side of things, as you know, there are costs associated with joining the PJM. We believe that those are all recoverable from the various rate agencies at the state level, and we will obviously hold those costs for that ultimate recovery on the books of those operating companies.

Lastly, we think joining PJM gives our fleet an opportunity to compete in a much broader base with a much easier route to market, and we will see pluses and minuses because we will be competing against some very low-cost nuclear stations, but at the same time we will be competing against some very high-cost coal and gas plants.

The cost to join PJM, have you budgeted those in your '04 costs?

Yes, sir.

Thank you.

Murphy McCann (ph) with Tempo (ph).

Two quick things. Could you please review where you are in your Texas businesses year-to-date versus your targets for the year?

Sure.

Were flipping to the Texas Page for you.

We don't put out quarterly forecasts, so we're not going to be measuring specifically year-to-date. I will tell you with respect to the Texas Wires which is the critical items year-to-year where you saw a reduction, the 56 million differential on a year-to-year basis is very much what we would have expected, so we consider the projection on Texas Wires to continue to be solid. Similarly with respect to the Texas Supply, there is some noise in that that has to do with the fact that the RMR units have run a bit more than we expected. But all of that is well within the range, so I would say within both Texas Wires and Texas Supply, we're pretty much on track.

Thanks. And O&M, can you explain the increases? Kind of broadly?

Sure. I think very simply, much of it went to the power plants as we are getting prepared for the NOx season, doing a lot of work at Amos station and other facilities on the East fleet. A year ago, you might remember in the first quarter the weather was very, very cold, so we delayed a considerable amount of power plant work in the first quarter, so when you compare quarter-to-quarter you see a number that is relatively high. Some of the O&M number is associated of course with activities on the transmission grid, and you have revenues that really offset that, so that is a bit of a false number inside of a larger quarter-to-quarter comparison. Other than that, tree-trimming for reliability, getting ahead of the lease, coming out and getting a much stronger much mild trimming per dollar spent. We think that is a smart thing to do. We believe, as I said, that will lead us at the end of the year to be at our O&M number or below it.

Thank you very much.

Kit Konolige with Morgan Stanley.

On the gross margin on Off-System Sales, Susan, can you give us any sense, any flavor for how much availability you had from the plants? Whether there was any differentiation there? In other words, operationally, were the economics better, worse or the same for the plants once you take out the trading around the assets impact?

Nuclear up, fossil down, overall, down just a little bit.

Fossil was down. I saw fossil output was down Off System, is that just a demand matter or were the plants --?

Again, it had something to do as I just said with the maintenance that we're trying to get done before we get into the NOx season. That is why we were off. Everything really has been running reasonably well. Bob Powers and Bill Sigman and that team deserve a lot of credit for keeping those facilities moving in the right direction. We are encouraged by that.

Excellent. Thank you.

Mr. Pena, there are no further questions at this time.

Thank you very much to everyone for participating and I believe that are now going to give everyone instructions as to out a replay and listen to this call later if they want to.

This conference will be available for replay after 1:00 PM today. Until May 6th at midnight. You may access the AT&T Executive Play Back Service at anytime by dialing 1-800-475-6701 and entering the access code of 726 936. International participants may dial 1-320-365-3844. Those numbers once again are 1-800-475-6701, international participants 1-320-365-3844. Please enter the access code of 726 936. That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.