美國電力 (AEP) 2004 Q2 法說會逐字稿

Ladies and gentleman, thank you for stand standing by and welcome to the American Electric Power second quarter 2004 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; the instructions will be given at that time.

If you should require operator assistance during this call, please press star then zero. As as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Armando Pena, Senior Vice President. Please go ahead.

Good morning all. I expect that you have seen the two press releases that we have out this morning, one on the second quarter earnings and one on the sale of our FFF assets in the U.K. In addition to the financial schedules that are included in the press release package, the condensed consolidated balance sheet and the cash flow statements are available at aep.com.

The earnings release and other matters that may be discussed today contain certain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to our SEC filings, including the most recent annual report on Form 10-K and quarterly reports on Form 10-Q for 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 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 investor relations web-site at www.aep.com.

I will now turn over the proceedings to Mike Morris, the CEO of the company, to lead an opening presentation and we will have time for questions after that.

Thank you, Armando, and thanks to all of you for being with us this morning. We will go into some deep detail as we always try to do on our quarterly performance, year-to-date performance, as well as a bit of an update on a very exciting event, as Armando mentioned, the sale of the FFF assets in the United Kingdom.

When we look at the quarter we actually are quite pleased because overall, the performance was pretty healthy. I say that because if you take out the impact of the $59 million fuel case decision in Texas, we would have been at or above the consensus numbers,or greater, and that makes us feel comfortable with the performance of the Company for the second quarter.

In fact, sales were up in all jurisdictions except for Texas, and again, that's a nice balance to the compares of 2003 second quarter, because as you know, we have some $52 million gap to fill because of no ECOM revenue being available to the Company in 2004. When we look at revenues and margins in the wholesale and off-system sales category, we're up $20 million over a comparative quarter for 2003. We feel very good about that.

Different from many of our neighbors, our coal supply and air allowance inventories remain where we would like them to be. We are, however, less than pleased with the performance of CSX and their rail deliveries, and we're really quite happy to have the [Memco Barge Group] as part of our transportation opportunities, because it is allowing us to balance our coal supplies at facilities that can be touched by our own river transportation.

Most importantly, we feel very comfortable and continue to hold guidance for 2004 between $2.20 and $2.40 cents a share. Having said that, however, I am concerned over the ongoing [O&M] overages in the utility group. Even though we will be under O&M on a year-to-year comparison because of our divestiture of many of our investment activities, in the utility group we are going to be over our O&M budget forecast by probably some $50 to $60 million.

The drivers for those, however, are things that we think make sense. First, we continue to spend a considerable amount of money on our coal fleet to continue to keep those low-cost power plants online is something we think is very important for the benefit of our customers and shareholders. And of course, we have been impacted with the reliability decisions and commitments we have made in the states of Ohio and Oklahoma, as well as overall reliability investments on the transmission and distribution system, not to mention the 11-state geographic footprint lends us to every storm that seems to have come through United States so far this year.

Having said that, because I believe we are in the process of putting together O&M numbers for test year rate reviews, we feel comfortable with our forecast being a bit above budget, particularly because we're still comfortable with our earnings guidance for 2004 and because, quite honestly, the base business continues to be strong. I know that many of you have heard me say on many occasions, when revenues are down we'll pinch the O&M; when revenues are strong we'll let it run a bit, particularly when it's bringing us better plant performance and better liability statistics, which we think are very, very important as we go into the rate proceeding process that we will in the next few years.

Lastly, and really quite excitedly, we are so pleased to report to you that we have been able to divest the FFF assets. Most importantly, the money is already in the bank. This is almost and unheard of procedure where the closing and the sale simultaneously happened. Actually late last night -- actually early this morning, I guess when you think about it -- poor Susan was up all hours of the night preparing not only for this earnings call but signing documents and agreeing to final contract term language.

With that, I'd like to turn it over to our incredibly capable Chief Financial Officer who will give you much more detail on the quarter, on the year-to-date, and the excitement that she brings to the FFF process. Susan?

Thank you. Good morning everyone. I think Mike did a very fine job in summarizing our views with respect to where we are in the quarter. Let me add a little bit of color on the numbers. The second quarter earnings, as you know, were $150 million on an ongoing basis, or 38 cents a share. The key factors that specifically affected that in the second quarter on a year-to-date basis, I'm going to speak primarily, were -- had a number of positives. We had improved sales performance that was reflected in gross margins for the regulated utilities. On a second quarter basis alone, that was 1.5 billion in gross margins in '04, versus 1.38 billion in '03.

We had similarly positive year-to-year trends in Ohio, and also again, for off-system sales. And again, this is in a market that, in terms of overall prices, has been somewhat softer than perhaps we'd seen , but we never see -- we continue to see good strength from our presence in the wholesale marketplace and our opportunities for optimization. With our ability to place off-system sales, as you know, comes improved performance in third party transmission revenues, and we also saw that. We really do want to point you to the improvement we see in margins on the utility side because we think that that does show a fundamental strengthening of our utility.

We are seeing improvements in the economy across the board. They are modest with respect to industrial in the three-plus range, but very substantial given the fact that we have seen flat to declining industrial sales in prior quarters. I think the way we best summarize our view with respect to this; that is, we are beginning to see the pace of increase that we had forecasted. We're seeing it a number of months later than we did, but we do think that this trend will continue to improve in our areas and strengthen our industrial sales over time, as well as the other sectors in our regulated states. We also continue to benefit from cessation of [Cook] amortization. We did receive a weather boost in the earlier part of this year.

Overall, this very strong performance was offset by two challenges, one expected and one not. Mike alluded to to both of these. The ECOM number year-to-date that was in the '03 number was $103 million. You know that we had to overcome that and we substantially have, both through the performance on the unregulated side and the improved performance on the regulated businesses. We also have added and additional $50 million -- $59 million in provision for fuel allowance in this quarter.

This continues to be of great concern to us. We already have, over the course of two years, about $ 210 million reserved against this particular case, based upon the remand to the commission for and additional, perhaps $30 million of risk; again, outside the scope of organal provision. We do believe that there exists about $30 million of additional potential exposure based on the remand but at this point, it is our intent to litigate that as aggressively as we can and we continue to believe there is a possibility of retaining that amount.

The total amount we believe is unsatisfactory, as I think we made very clear in our views to the commission. Mike echoed them, and you can assume a very aggressive, continued legal battle with respect to those amounts. To put, again, a little bit of additional color on the O&M results, Mike described to you our objectives there. I want to emphasize that for the year, we had projected about 130 million year- to-year decline as a result of the additional expenditures we are now planning to make, and have made, with respect to the operating utilities. We see year-to-year about a $60 million decline.

I know that you are probably looking at numbers that tell you on a year-to-year basis that we are $135 million over for year-to-date. But for the overruns I just described in the $50 to $60million range, we expect to make up the rest of that difference out of timing. As a consequence, we had, overall, a total decline in utility operations of 534 million to 486.

Again, we continue to see very substantial improvement in investments that includes improved performance at HPL that I do want to point your attention to, but in addition, significantly, we continued to exit those assets. We continue to improve our performance and as we execute our debt reduction strategy, you'll continue to see the non-utility lines go down as well.

So overall, we're directionally encouraged where utilities are stronger. Our investment drag is materially reduced, FFF has been sold, and this puts us in the position to intelligently spend the money we need the spend in order to ensure the reliability of our system and the continued performance. And I stress again Mike's point, that we do believe that we are well within the guidance range that we talked about for this year.

Let me now talk a little about FFF. I believe that the press release you have has the details. We did transact in cash; it is a $456 million headline price on the transaction. We are currently working through the details with respect to the effect on our balance sheet, effect on earnings; we do expect a gain.

We are currently in the processes of determining that. The gain is likely to be in the range of somewhere of $100 million to $130 million. We do expect that it will be affected by a couple of items and all that that will show in the first -- fourth -- in the third quarter. The major events that are likely to affect that are, of course, performance of the business activity in the month of July, and then there are some minor working capital adjustments that we're currently working through.

When we have those specific numbers available to you, we will have them. The simultaneous close was obviously a very important part of our strategy with respect to the U.K., and it puts us in a position that we now have significant cash available to execute the debt reduction strategy that we have committed to.

You will note, as you look at our balance sheet, we have not seen a significant additional improvement in this quarter toward continue to pay off debt. That is consistent with the strategy that we told you that we would have; that we wanted to see this asset sale come in the door and we'll begin to aggressively apply that to outstanding debt including, of course, the [steel head] transaction.

One last point that I want to make with respect to divestitures is that I think I encourage you all to go back to our presentations and take a look at where we are in relationship to where we expected to be for this year. We have sold AEP coal and [Pushawn]. We have sold some of the TCC plants; all the rest are under contract. Three of the IPP transactions are closed and one is contracted for and expected to be completed. The lake pipelines were sold for $76 million and we're very vigorously working on the storage and do expect, certainly, to have that done this year in the time frames that we spoke about.

So we are very comfortable with the conclusion of the [inaudible] sale, that we have done what needs to be done. There was an item in the press release I'll address, which is what's left in the U.K., and I want make clear that this is not a substantial piece of the FFF or the trading operation.

We continue to have investment in South Coast that we share with Scottish Power, and that continues to operate and continues to bring revenue to the company. It is an asset we could choose to exit on reasonable terms at some point, but obviously not a key piece of our divestment strategy on an ongoing basis.

The last point I want to make is to call your attention to liquidity. We continue to show a very strong liquidity balance; this is before the cash that we see today with respect to [Fiddler's Ferry,] of course. Our quarter end numbers were at about $3.5 billion. We did, as I'm sure you know, replace our credit facility that was up for renewal this year of $750 million; we've replaced it with a $1 billion, three-year facility. So I think we continue to execute there on our strategy to ensure our liquidity and create the basis that we need for the financial strength of of the company going forward. With that I'll conclude, and we can take your questions.

Thank you Susan. Robert, we're ready for questions.

[Operator instructions.] At this time we have a question from the line of Ashar Khan. Please go ahead.

Good morning Mike. Congrats on, I guess, a good quarter and the sale being completed.

Thanks, Ashar.

Can I just ask you, Mike, if you can just update us on the regulatory side of Ohio. Any chance of settlement go through the litigated process in our mind? And then what about other jurisdictions, in terms of rate cases, any kind of better parts of those things as the years come -- next year, or the timing?

Sure let me take those in that order. The most important one, of course as we all know, is Ohio. Today, we are filing our final reply brief and it's really kind of an intriguing read because we are in that final process of briefing the case to the Ohio commission. And some of the interveners don't like Part A of our plan, some of the interveners love it; some of the interveners don't like Part B, some of them love it; some of them don't like Part C, some of them love it.

So what I think we've put in front of the Ohio commission is a well-balanced, meaningful rate- stabilization plan that really touches on all points Chairman [Schreiber] and the commission have asked us to do. I would doubt that there's an opportunity for settlement. I don't know that what we would give to the customers by way of settlement would be something that would be meaningful enough.

And quite honestly, we feel very comfortable with staff supporting us in almost each of the endeavors or the parts of the plan that we have filed. So we would expect that sometime within the next 60 days we'll hear from commission by way of their order, and again, we continue to feel very comfortable about that. I know that [Alan] had an opportunity to be with a number of you in New York not long ago, and cautioned all of you not to read too much into other orders that come out because each of the Ohio utilities is unique to themselves.

And remember that both Columbus and Southern and Ohio Power are the lowest-cost providers in the state. They will maintain that position even if the commission were to grant us everything that we filed in Ohio, so we continue to feel very good about where we are; see no impetus and/or, quite honestly, reason to settle.

We just believe the case has been framed and briefed in a very strong way. As to other jurisdictions, we are in the the process of beginning, going through rate cases in Oklahoma. As you know, that is a case that really won't materialize until much later this year, first part of next year.

Conversely, we were very, very disappointed and continue to be disappointed with activities in Texas. The administrative law judge's proposal for decision was way off base; not based on the factual record that was in front of him. And we have made our case as strongly as we can to commission. As you know, in Texas, the hearing examiners aren't really part of the commission but part of a separate board, and we have taken a very strong position.

I would argue, as we said in our release to our filings for the commission to consider review of the PFD, that the message in Texas is, "Don't spend andy money here," and "Who cares about reliability." Unfortunately, we care about reliability and we very much would like to invest in Texas, and we're hoping that the commission will send us a very different signal in that overall proceeding.

The more important matter in Texas remains in front of the commission, is going through the detailed process of keying up the stranded cost envelope and going through the true up process and filing. Unfortunately, the opportunity for other owners in our facilities, particularly the nuclear facilities, having rights of first refusal -- which now have been exercised -- is going to delay the sale of STP.

Under the law, you are not allowed to file your true up up filing until you have a close on those sales, and you're required to file within 60 days. [Charles Patton and Tom Hagan,] the point individual person for the Texas utilities and the executive vice president of the western utilities, have pledged to me that they'll file one day after closing. So we will have that process going as fast as we can and we will watch that space very closely.

As to the other processes, we really are beginning to look at the concept of rate proceedings in different jurisdictions. It has a lot to do with the ultimate investment in the environmental performance of our plant. As you know, they are spread over different operating companies as we go forward, and we really are beginning to move into that test year timeline in some of those jurisdictions and, therefore, our comments on the O&M spend at the utility group.

Okay. And could just you brief us a little bit on HPL? Susan mentioned the results of being an improving -- I don't know, I might have missed it on some chart. Is there like a stand alone for HPL what it did, and any parts where you're going to keep it or sell it, or on that?

Well, HPL in fact, is performing much better than it did. I think a year-over-year comparison, it's probably $20 or $30 million better. I've got people running hard at the numbers even as we speak, 22 million. So we feel good about its ongoing performance. We are more focused on running it as a traditional, intrastate pipeline storage complex and we're pleased with that.

However, Bank of America continues to fiddle around in the courts with what they believe are their legal rights, which we of course believe have been extinguished because their legal rights really run to Enron. And we're in the midst of that ongoing battle, which really clouds our ability to come to a definitive conclusion what to do.

So what we've told the HPL team is while we continue to fight the good legal fight and try to educate our friends at Bank of America how misguided they are in their endeavors, that we need operate physical assets as best we can. And that's exactly what we are doing.

Thank you very much.

You bet. Thanks for your questions.

Thank you. We'll now go the the line of Dan Eggers with CSFB. Please go ahead.

Good morning.

Good morning, Dan.

First question, last quarter you guys had a nice benefit from the coal trading operations [inaudible] on spare coal you had on the the desk. Was there any of that going on this quarter, first of all?

Indeed, there was. But as we told you at the end of last quarter, it wasn't wasn't sustainable at those levels for the entire year. And as you know, as coal prices have escalated so dramatically in last quarter, we're doing what we think is the appropriate thing to do and that's hold not only our coal inventory, even if we feel long, and holding our air allowances, even if we feel long, for the benefit of our customers as we see the the demand materialize, particularly through the summer cooling months and beyond that.

So I think we're doing exactly the right balance, Dan, not only for our customers but as you know, because we share revenues for off-system sales for our shareholders as well.

I guess, carrying that on, is there any issues with the regulators, or potential issues with the regulators, associated with the profits you guys made in the first quarter or is that something that was shared in the first quarter or to be determined later?

No, I don't think we had that risk. I will they will you this, however, if -- we could monetize a tremendous amount of coal and air allowances but I do believe if we were to do that, we might jeapordize our own ability to cover our system sale needs, which then would yield to some regulatory oversight and potential disallowance as we went forward, or as what I call a regulatory claw back of revenues that would be earned by that.

And I think you know AEP well enough and clearly, my management style is no different from [Lynn Draper] or anyone else, and that is to manage these assets for the balanced well-being of our customers and our shareholders. If we take care of the first group, we will take care of the second group, and that's how Dick Boil and [Chuck Sabula] and our team are managing the coal pile, as well as the air allowance opportunities that we have.

And as you know, we're really -- compared to our neighbors -- we're just light years ahead. We're not in the spot-buying business today, I don't see us in the spot-buying business for the rest of the year. We're not in the allowance-buying business; I don't see us in the allowance-buying business for the rest of the year.

Bob Powers and his team and the physical assets that we've put on the plants are operating way above what we hoped that they would. We just feel very, very comfortable where we stand and unfortunately, we feel sorry for some of our neighbors. However, as I said, Dan, we're a little upset with the railroad folks. I think they're more interested in running profits than taking care of their customers.

Just since you led into that with the rail problems, what is the mix between movement on barges versus rail and how much flexibility do you have to make further changes in response to CSX's problems?

Well, what we're doing is managing around that activity as best we can with barge activities. And remember, we're also being forced -- not forced to, but we as an industry are looking at different trucking requirements in state of Kentucky.

But fortunately, as I mentioned -- and I don't have the specifics, maybe Julie or somebody could get back to you with that data to that specific request -- but we're pleased with the ability to use the Memco barge assets to continue to balance our needs, because if a scheduled train doesn't make it, then we can redirect a barge that was going to Plant A to go to Plant B and satisfy those needs. So we're inventory-wise, at all of our operating plants right about at our summer inventory forecast of about 37 days. We just feel very comfortable with where we are.

Excellent. Thank you, guys.

You bet. And thank you.

Thank you. We'll now go to the line of Paul Ridzon from Key McDonald. Please go ahead.

Good morning. I had a follow-up question on barge business. What opportunities do you see to monetize excess capacity and how much could you offset some of the pressures through that method?

Well, quite honestly, the capacity on the river is very, very tight. We are using as much of our own assets and those that we have under lease and under contract, and the challenge to Chuck Sabula and his team is coal one way, grain the other; let's not let any empty barges move up and down that river. So I think we're really pushing that envelope as much we can. And of course, you can imagine with the tightness and the success that they have had, they're back trying to convince Susan and I to buy more barges.

Can you update us on your coal hedges?

Yeah, surely. As you know, we're 100% covered for this year. We're in the low to mid-80s for '05, and the 60s, 70s for '06. We have a very important ongoing negotiation with one of our principal suppliers, which would substantially move the coverage for '05 up and, to a lesser degree, move the coverage for '06 up, all at what we consider to be way below current spot prices. We are not a spot coal buyer because we don't need to be.

Can you characterize where negotiations are relative to contracts that are rolling off?

Well, I think you're seeing a year-over-year on long-term coal, about a 10% increase in the price. And when you blend that in with our vintage contracts as well as the new ones we're entering into, we feel we're doing and excellent job of managing the fuel costs for benefit of customers.

What's your comp for third quarter on ECOM, or are we done there? What's rolling off for ECOM in the third quarter?

In the third -- Susan?

Well, nothing. We're done with ECOM.

No, but what's the comparator for the third quarter '03? I think that's the question.

Compared to '03, '04, it's the same. We'll see the hundred million -- is that what you mean?

No. You want to know much ECOM we booked in third quarter last year.

Exactly. And fourth.

And fourth.

Yes.

So again, we'll get back to you with the specifics, Paul, but I think it was about $200million in both '02 and '03. That's not going to be here for all of '04.

Given your O&M pressures, would you tend to toward one end or the other of your guidance range of 2.20 to 2.40?

Just like last quarter when you were all trying to get me to trend toward the upper end, I'm not going to trend toward the bottom end. We feel like we're right in the middle and feel very comfortable about that.

How many levers you can use to help offset the O&M?

Of course. Of course. We've still got opportunities to deal with that, but our year-end forecast that we give you is money being wisely spent. And what I don't want to do, after having sat in front of Governor Taft and promising him about reliability and Governor Perry in Texas and many, many others, we're not going to the fail our customers. We continue to trim trees in Oklahoma, it's very important to them. And again, going through the processes we are in those those jurisdictions, we think we're doing the right thing here for our customers.

Between end of the first quarter and the end of second quarter, kind of, what triggered you to go out and spend this extra money? Was it just to increase reliability consciousness?

Much of what happened in second quarter quite honestly, Paul, was the impact of storms rolling through the United States. For those of you who know my history, I used to watch the state of Michigan and pray for storms not to come; then I used to worry about Noreasters. I can't worry anymore. When you go from Texas to Michigan, every time a weather pattern comes across the States, you get hammered. We're 20-30 million over on storm damage alone. But we have made reliability commitments in Oklahoma and in Ohio; we built some of that into our O&M forecast. Were seeing some additional needs to spend money on the coal fleet, although Bob Powers and the nuclear team are underspending in O&M.

So we think we've got it balanced reasonably well, and as I've said many a time, if earnings continue to look good ,we'll spend more money to get ahead a bit of 2005 and do things that we think make sense for our customers. If the revenues were way, way down, we'd be throttling back the O&M in any kind of fashion that we had to do to stay within our range, and we just don't see that impacting us.

But 20 to 30 of the increases is storm overruns?

Yeah. That's pretty accurate.

Okay. Thank you very much.

You bet. And thanks, again, for you question.

We'll now go to the line of [Paul Cleg from Calyon.] Please go ahead.

Yes. Good morning.

Good morning, Paul.

First of all, what was the book value of the coal contracts that were included in the $350 million -- sorry -- or actually was the book value of the coal contracts included in the $350 million that the FFFs were on the books for?

We're going to have to get back to you again, as I said earlier, on all the detail of those numbers. We'll have those out as soon as we can.

Okay. Maybe just another quick couple of questions. Just a question on emissions costs. Are they included at the gross margin level or at the O&M level? And can you just give us a sense of how much you're looking for in terms of an impact form emissions costs in '04 and '05?

The emissions costs are included in the O&M numbers. '04, '05 numbers -- excuse me -- '05, '06 numbers for emissions have been, for us, again, very, very good. We've been very active in the auctions that have been run and really, have been the most successful bidder. We're seeing a bit of an uptick in those numbers, probably not too dissimilar from the coal numbers I just spoke of, as far as an increase. However, I'm glad we have those under contract because as you know, the market is running crazy right now.

Right. Maybe just one quick follow up. Is South Coast at this point a drag on earnings, and how much is it on the books for?

No. It's been written down close to zero and is not a drag on earnings.

Okay. Thank you.

So again, it's a divestiture because it needs to be. We don't want to have our toe in the water since we've taken our leg up to the knee out. But we aren't going to sell it in a panic mode, that's for sure.

Okay. Thanks very much.

Thank you. We'll now go to the line of Elizabeth Parrella with Merrill Lynch.

Yes, thank you. Just going back to your O&M comments indicating that you'd be down 60 million on balance. Is that indicating that on the non-reg side that you would also be overrunning on the non-reg side by about 10-20 million?

Maybe a little bit, Elizabeth, but that number maybe be a bit high. Again, we'll have Julie give you the break down to the dollar if we can, because I know you run a very, very effective analysis of the company.

And then another question would be on the Texas supply contributions. If we were to look at what the results were before the impact of the fuel disallowance, it looked like the numbers were up despite volumes being down this quarter --

That's true.

-- while margins were up so much, or was there something else going on?

Yeah. There are two things going on. First of all, as you know, we have the supply contract with [Centrica] and that has some variability, primarily in terms of volume, and that was a successful run for -- during that period. In addition, the RMR units, which we did not budget a significant contribution from because we don't have any basis upon which to forecast their participation in market, but there is a contribution there as well. We'll try to get to the point where we can break that out for you.

One last question. You mentioned that sales were strong, that weather was favorable last year. Could you quantity what the weather benefit was in the quarter, and what that might have been also versus, say, either normal or year-ago numbers?

Yeah. I think we can. I think maybe if it's okay with you, we'll go on to another question while we try to find that.

Sure. Okay. Thank you.

Thank you. We'll go to the line of Vikas Dwvedi from Prudential. Please go ahead.

Yeah. Good morning. Can you guys give any updates on the early integration at the PGM and how excess power sales are going with respect to that?

Well, the integration into the PGM is at long last going quite well. As you know, this week we were able to come to an agreement with our friends in Virginia over the activities that needed to be negotiated as to how we would share what we see as the potential benefits of activity by joining the PGM.

We hope that the Virginia Corporation Commission sees that as a positive. I know their staff did; they signed on, as did the Attorney General and the industrials, so we feel comfortable about our ability to get into the PGM 1 October. I don't know that that has much of an impact, if any, on the performance of our Texas supply portfolio, if that was your question.

Oh, no. It wasn't really related to the Texas portfolio.

I was hoping it wasn't.

Yeah.

So please restate the Texas question.

The question actually wasn't related to Texas at all.

Oh, I'm sorry. I thought I heard you say the Texas supply.

I think that was the prior question, but mine was really related to if there opportunity sales going into PGM are already being realized.

Well, off course. there have been some. Most of our energy, however, doesn't get too far out of the [ECAR] subregion, but we'll continue to see some opportunities to make additional sales into the PGM market, particularly when we're fully integrated on the first of October. I apologize for not understanding your question.

That's all right. Thank you.

Thank you. And we'll go to the line of [Paul Segal] from Luminous Management. Please go ahead.

Good morning. Congratulations on the good results in the U.K.

Thank you very much, Paul. I was hoping you could clarify for me the $59 million provision for fuel disallowance charge, is that reflected in your ongoing earnings guidance?

It is.

It is. Meaning it's deducted? Or is it excluded?

Yeah. It is included in the number that you see.

It's included in the number. Great. That's all I was looking for. Thank you.

Great that it's in there, bad that it happened.

Right. Thanks again.

Sure.

And once again, ladies and gentleman, if you do have a question you can press star then one at this time. And we'll go to the line of Ali Agha from Wells Fargo Securities. Please go ahead.

Thank you. Good morning.

Good morning, Ali.

Mike, Susan, you may have answered this earlier. I apologize I came on a little late. But as you look forward to your your capital expenditures, particularly on the environmental side, if you could just update us on, again, the game plan on recovering of those expenditures, and really how you look at the lag effect between cash going out the door and ultimate recovery?

First of all, the dollar numbers have not changed, so there's nothing to update on that front. Recovery comes, obviously, from our Eastern states. And the -- you are familiar, I think with our Ohio plan, as we set it out. Assuming we get that recovery, we will be in a position through '08 to cover the recovery of our investment, the recovery on our investment in Ohio for that period of time.

With respect to the other states, we similarly expect to achieve recovery but we haven't announced specific plans for rate cases in all of those areas. We do have a plan that would match opportune times for rate recovery that we're still evaluating in relationship to cash.

For the total of the period, we believe that the amount that we receive from ongoing operations, assuming appropriate rate recovery, will be sufficient to cover the needs that we have. To the extent that there's any variation in timing, we don't think that it would be material enough to require significant changes in the leverage of the company.

So you may see some debt issuances on a year-to-year bases. Obviously, we always look for opportunities to finance through pollution control bonds, but in terms of leverage and effect on balance sheet, we believe over time that we will recover it through rate relief we plan. In terms of dates, we haven't really committed to specific rate recovery plans at this point, but I would note that with respect to Virginia, we do have the opportunity for single issue recovery on those issues and we're exploring the right time to look at that.

Kentucky also has a surcharge. The other major state involved, of course, is West Virginia. And West Virginia, when we go in, we will be going into a fuel -- for a full case, and so you should assume that that case would be a little bit further out.

And given the dynamics involved and the expenditures involved, Mike, how should we think about the dividend policy going forward, at least for the next few years? Should we assume it's sustained at current levels or how do you look at that?

Well, two things, and I'm glad you went to that question. Because quite honestly, the vision that you have to have for the capital investment on the environment adds to these power production facilities is probably a 20-30 year horizon, where you're going to extend the environmental life of these operating assets for that period of time. In the near term, when you think about the lag that Susan mentioned and the rate strategies for that, it doesn't trouble us much because these plants are going to continue to make energy for sub $20 a megawatt hour, into a $40, $50, $60 megawatt hour marketplace.

We feel very good about that. And longer term, these are going to be strong earning assets for our shareholders. The impact on that, as well as our dividend plan, is that we will begin in 2005 to take small steps forward and increase the dividend payout for our shareholders. We think that's a very important thing for us to be able to do.

And we're formulating plans for our year '05, and we'll share those kinds of activities later this year with all of you. But we believe it's time to begin to quite slowly,but in a steady way, raise the dividends for our shareholders.

Okay. And last question. The energy services business, ruling HBL in there, when should we see that unprofitable. And then what's the underlying real earnings power of that business in your mind?

Well, first of all, the AEP Energy services line continues to carry a significant debt component. And with the pay off of [steel head] you will see that aspect removed and we'll be in a position to show the performance of that company. What we believe is that with respect to HPL ,we'll continue to see periodic performance. I don't know, Mike, if you want to talk anything more about some of the fundamentals around that business.

I think HPL, quite honestly, again, without some of that overhanging debt activity is a decent business with positive numbers. And actually as we look at calendar year '04,even with the debt component on it, we're beginning to head toward positive numbers quarter-to-quarter. So we continue to be somewhat encouraged by that. And that really is the challenge to the operators, is let's make this as constructive and strong performing asset as we can. As I mentioned before, while we continue to wrestle with friends from Bank of America on what we believe is their lawsuit without much merit.

Right. And just remind us what's the debt right now on there? The amount.

It's 500 million of steel head is still left, and HPL pays both of that. So 150 million.

So 500 million?

There is 450 million of steel head remaining as of the close of second quarter. And of course, as Susan mentioned, that will be one of the the refinanced, or paid off activities, as we go forward with cash off of FFF.

Right. Okay. Thank you.

Thank you. We'll go to the line of Paul Debbas from Value Line. Please go ahead.

Hi. This is Paul Debbas. Previously, when you'd been asked about the dividends, such as in analyst meeting you had last March, the indication was -- or certainly the appearance was -- that is was something more you looked for over the longer term, not next year. And I wanted to know what's changed since then that makes you feel that your next year would be a good time to start increasing it it?

Well, I can say a couple of things. First of all, there was at the time that we talked to you, considerable uncertainty around the proceeds of our asset sale. We did not know at what point we'd be in the position to achieve our debt reduction strategies, and I think we made pretty clear that that was our first priority. And that is the case. We also have firmed up the plans and our understandings of cash needs around the environmental investment program, and that has put us in the position to be able to expect an opportunity and the cash available for the dividend.

I hope no one was ever under the impression that we didn't treat the dividend as a priority. The decision that was made to reduce the dividend was an extremely painful one for our Board, as we know it was for shareholders. And there has always been a desire to try to bring that back gradually. Our philosophy is that the right thing to do is to to bring it back on a sustained basis, in increments, over time, and to work that into our financial planning whenever we are able to do it.

With the results of the asset sales being successful, with a firm understanding of what we are expecting from, again, the sale of the assets with respect to the Texas divestitures we feel more comfortable. There are, obviously, always uncertainties. We do expect stranded cost to be and important part of our planning, and we're going the pursue recovery there.

But those are essentially the elements and the resolution of questions that have put us in the position to be able to speak more optimistically about the time frame for moving the dividend back up.

Now, your CapEx plans, or the dollar that you're going to be spending on the environmental program changed at all?

Not since we have announce the spend most recently.

Thank you.

Sure.

Thank you. And there are no further questions at this time. Please continue.

Well thank you very much for your attention this morning and we'll turn the call back to Robert who will give you instructions as to how to play this back.

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