美國電力 (AEP) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power third quarter 2004 earnings call.

[Operator Instructions].

I would now like to turn the conference over to your host, Senior Vice President, Armando Pena. Please go ahead.

Good morning, everyone. We're here to discuss American Electric Power's earnings for the third quarter and the nine months here today for 2004. I expect that you have seen the press release that we issued earlier today. It is also available at our web site at aep.com.

In addition to the financial schedules that are included in the press release package, the condensed balance sheet and cash flow statements are also available at aep.com.

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 discussion of factors that may 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 principals or GAAP. You can find the reconciliation of these non-GAAP measures on our Investor Relations web site at aep.com as well. I will now turn the proceedings over to Michael Morris, Chairman, President, CEO of the company to lead an opening presentation followed by Susan Tomasky and then there will be time for questions at the end. Mike.

Armando, thank you very much. Ladies and gentlemen on the phone, I appreciate you being here. I know you have got a very busy day. Having spent the last seven years of my life in the greater New England, New York area, I know that all of you stayed up late last night to find out that the Yankees might pull it off one more time. For those in New York who are Mets fans congratulations. For those of you Red Sox fans congratulations. For those of you Yankee fans you now know what it feels like to be a Tiger fan.

Having said that let me also begin by thanking Armando. I think all of you know that Armando is planning on his final retirement from this company at the end of the year and this is the last earnings conference call that he will be here to give such eloquent introduction to the program that Susan and I will take you through. Armando, we thank you for your career of dedication to this company and your relationships built over many years with all of those on the phone.

Let me begin by telling you how excited we are about third quarter results. In the face of warmer than normal, excuse me, cooler than normal weather you can tell my gas background coming out, we were able to have a very, very successful third quarter at the company as well as at the operating utilities.

At long last we are seeing some very robust improvement in our industrial sales, which many of us, including certain candidates for the presidency have been saying is coming, is coming, is coming, but for us it has happened.

What we saw in the third quarter was flat commercial sales compared to budget, residential sales off budget as you would expect because they are mostly impacted by weather and very strong increase in industrial sales on the order of 6%. This actually helped the operating utilities to put forth some pretty good numbers to really overcome the weather as well as a pretty good chunk of the E-COM that we are missing of course in the Texas operations in Q3 2004 versus Q3 2003. So, all in all we are very pleased with the earnings release and the activities that we have for the third quarter.

I also would note that our operating and maintenance expense for the quarter were flat as compared to the same performance in 2003, and we are pretty pleased with that as well. Because of that, of course, I'm happy to tell you that we continue to feel very, very comfortable with our current guidance of $2.20 to $2.40 a share for calendar year 04 and we are hopefully well on our way in this quarter to achieving those goals.

I think you also know that there has been a flurry of asset sales throughout all of calendar year 04, but the third quarter in particular and actually early fourth quarter has brought many of those sales to closure and because of that, we have received over $1.2 billion and have been able to utilize that cash to pay down debt, and we have now accomplished our end of year goal of having the debt portion of our overall capital structure at or below 60% by the end of the third quarter and Susan will share some of that information with you as well.

We have, as you know, also integrated into the PJM. It is beginning to demonstrate, as we thought that there were an opportunity for us to see a much wider footprint, an opportunity for our power production facilities to dispatch into a much wider footprint.

However, we do not have enough data to share with you anything other than that the integration went relatively smoothly, that we compliment Phillip Harris and the PJM team for their hard work on that event. I must tell you, it was an intriguing activity.

The very night of the first debate when Pat Wood and others joined the AEP and PJM team for that integration in Valley Forge, Pennsylvania, and that really went as smoothly as we could have expected. In fact, I'm a little worried, I got a congratulatory note from Pat and you never know what that means when the chair of the FERC thanks you for doing something, we will see how that works out as time goes forward.

Lastly, I would at least touch on a few of the regulatory issues that we continue to feel comfortable about the activities in Ohio, notwithstanding orders issued to other utilities. I think that the chair in Ohio and the commission have made it quite clear, that don't read too much into any single order.

I would tell you that we continue to be concerned over some of the events that are in the Synergy case but continue to believe that there's solid support for the approaches that we have taken.

I would tell you this, that we continue to see regulatory delay, however, because the Synergy case has contain a considerable period of time, really as has the bid process for First Energy, a process that continues to morph from the original order to the ultimate implementation of that bidding process, one that actually raises the interest of AEP through our commercial ops is to maybe participate in certain segments of the bid process that will go forward in the not too distant future.

We continue to watch with great interest the activities in Texas with particularly an eye toward the treatment of CenterPoint, but again I would caution, as has the Texas commission that one case does not necessarily lead to conclusions in any of the other cases. CenterPoint, as you know, has touched on many of the same issues that all of the other Texas Utilities have gone through, some of them are very positive for us, some of them are not positive for us, and we continue to watch that space with tremendous interest. It is way too early for us to tell you anything other than that.

Our Texas case is next in line and until the commission finalizes their activities as they pertain to CenterPoint, we have not been able to attract much attention. Some might say that is good and some might say that is bad, we will see how that goes.

I continue to believe that there is the opportunity in our case, because some of the ground rules will have been determined to maybe enter into some sort of settlement activity with the various players in the state of Texas, and if that's available to us, we will continue to pursue that course of action, presuming that that might lead to a more friendly treatment of the activities filed by our Texas utilities.

Other cases continue as they always do, to go slower than you would like, but we don't want to read anything too dramatic into any of that. I would argue that or at least offer that we continue to believe that the regulatory relationships that have built up over a number of years continue to serve us well and as you know we focus a great deal of our personal attention as well as that of the senior management team on those issues.

With that, I will turn the matter over to Susan, so that she can take us through the more statistical analysis of what we have going on. Again, I simply close by saying a very good third quarter in light of some significant challenges handed to us by the weather-makers and Armando to you, again, thanks so much for your tremendous help over my short tenure, but all these years with this company.

Thank you Mike.

Susan.

As Armando mentioned, you should have on your press release some additional pages that summarize the results, and I am not going to walk through all of these pages in great detail, but if you start with page 6 of your earnings release, I will focus primarily on some of the details around utility operations.

The reported earnings for the third quarter were $1.34 per share and ongoing earnings were $0.80, the $0.54 difference primarily is the result of discontinued operations and more significantly the gain on the asset sales that we saw in the third quarter.

The ongoing earnings of $0.80 were composed of a $0.91 performance from the utility operation, which Mike generally described and a negative $0.08 from investments and another negative $0.03 from the parent company. The $0.09 drop in the earnings versus last year generally can be largely attributed to the absence of E-COM revenues in Texas, which is about $0.10.

I know most of you had expected a more negative impact than we saw from weather. For us, it was really largely offset by the improvements in the economy that Mike noted, reflected in industrial load as well as lower expenses on a quarter-to-quarter basis.

For the integrated utilities, which as you know are nine states excluding Ohio and Texas, the retail load grew by 1%, even though cooling degree days were 7% lower in the east and 15% lower in the west. Lower residential sales of about 2% and flat commercial sales were offset by a 6% improvement in industrial load. On a cents per share basis the weather produced a negative impact of about $0.04 in the period versus last year which is negative $0.06 versus normal.

In Ohio, where we have a fuel freeze, we did see some margin erosion due to the higher fuel prices of about $11 million. Retail load was down by about 1% and the 5% increase that we saw in industrial load, as you see, paralleling the increase that we saw in the regulated utilities, in the case of Ohio, really isn't sufficient to offset the decline that we saw largely weather related from residential and commercial sales.

The residential sales were down about 6% and commercial sales were down about 4%. The margins from these two customer classes are higher which is why we didn't see the same offset there that we saw with the regulated utilities. So overall, the Ohio companies contributed lower gross margins of $20 million on a year-to-year basis.

There was a $49 million drop in gross margins in Texas wires but that was largely due to the loss or the absence, in effect, of the E-COM revenues, which is about $61 million for the quarter. We did have a partial offset because of higher residential and commercial sales.

We had reduced gross margins on a year-to-year basis from off system sales and that was primarily the result of less favorable optimization on a year-to-year basis. Sales were strong but we did have lower margins because of fuel, and O&M expenses overall were flat for the quarter. The interest expenses was lower by $17 million due to the financing completed in 2003, and as Mike suggested, the substantial pay down of debt.

With respect to the investment segment we showed a loss of 32 million or $0.08 per share, and that's compared to the loss that we saw last year for this period of $0.06 a share. The bulk of this releases to HPL which in fact has substantially improved the pipeline operation and we have also seen a reduction in interest expense, but we continue to have the timing and accounting disconnect between the time of the inventory valuation on a mark-to-market basis and the realization that occurs as we settle over time.

So we're going to see this negative effect, turnaround, and those benefits come in through the end of next year and through the first quarter of next year. The parent company expenses are down in the third quarter, and that's contributing to an overall improvement in earnings of about $12 million.

Let's talk a little bit about year-to-date performance, and what you see in general is a continuation, you see that the third quarter is the continuation of the trend that we saw earlier in the year. Reported earnings for the year-to-date are $2.30 and ongoing earnings $1.91 per share, and the difference again are primarily have to do with the disk ops and the special items shown primarily in this quarter.

The strong utility operations that we have seen, again, continue through the third quarter. The $0.30 drop in ongoing earnings on a year-to-year basis is primarily the results of the loss of the E-COM revenues on a year-to-date basis that's a $169 million or pre-tax $0.28 a share after tax.

The Texas supply margins declines were offset by sales growth and a higher level of optimization and weather had a negative impact on earnings of approximately $0.03 versus last year and a negative $0.06 versus normal. Utility O&M year-to-date shows an increase of $138 million. As we discussed during our second quarter earnings call this does reflect a conscious effort to improve service reliability.

And I expect O&M expenses for the year to be up by about a $168 million for utility operations over prior year but lower for the total company compared to last year's expenses by about $90 million. Interest expense for the nine months will show a substantial improvement of $28 million, reflecting the impact of refinancing activity and the very substantial pay down of debt. I am not going to go in detail through the written material that you have for the rest of the document. But I do want to point your attention to a number of other significant items.

First of all, the losses from the investment line on a year-to-date basis were $45 million versus the $111 million that we saw last year, and that reflects several major items, the exit from the non-core businesses, that continued to be shown in those items. That would be item exit from businesses other than those shown in disc ops. Am improved performance from HPL, which as you know in the third quarter was off-set by this one-time inventory mark, reduced interest expenses, and then also this year we did not experience the significant losses, about $34 million that we saw last year from the transition book, which as you know is flat and continues to roll-off.

The liquidity for the company continues to remain very strong. We have $4 billion in cash and available lines of credit, and as consequence we have chosen to bring our CP down to about a $180 million from the $554 million level that you saw at the end of the second quarter.

Our cash on hand is $1.2 billion. The year-to-date cash flow is 2.27. We had asset proceeds as Mike mentioned of $1.2 billion and our CapEx year-to-date stands at about a billion dollars.

We do expect now, the FTP sale to be concluded in the first quarter of next year, rather than the end of this year, but obviously that does not have a significant effect on our cash position and it certainly does not have an effect on us, meeting our debt pay down obligations and commitments which we have already -- as Mike suggested -- have completed.

Let me talk a little about that, to be a little bit more specific, our goal is to have a debt/Cap on an adjusted basis below 60% at the end of 2004. And we did reach this goal by the end of this third quarter using our asset sale proceeds.

At the end of the third quarter the debt to Cap was taken directly from the balance sheet and it was 60.8% and that compares to the 63.3% that we had at the end of the last quarter. This is a level at which we are comfortable. We will see some additional debt reduction over the coming quarter, we do expect, as we have suggested previously to pay down steel head we will continue to manage effectively around this range you may over the longer term see us continue to buy back some parent bonds if the market opportunity provides that, but we do not see all that we need to go much below this through the course of this year and this gets us to where we need to be.

With that, I will turn it back to Mike for some questions.

Thank you very much Susan. That we're ready for our questions now.

Thank you ladies and gentlemen.

[Operator Instructions]

Our first question is from line of Dan Eggers of Credit Suisse First Boston. Please go ahead.

Hi, good morning. First question on the off system sales with the some margin compression with higher fuel costs, is this something we should look for as a bit of a structural changes we have seen a higher coal costs or do you think the market with more demand will balance out and the margins fluctuate back to what they have been historically?

Well, that's an interesting question and that we will see that over the upcoming couple of quarters. What we're seeing on margin compressions typically has to do with areas where we're selling into a frozen fuel market even on the retail side let alone off system because on the off system market were competing against other fuels.

And even though we're seeing some increase in the overall cost of coal, it hasn't been that dramatic and compared to what we're seeing in some of the increases for the gas plants that we compete against so, we believe and only time will tell if it's accurate, that the footprint, which is heavy gas at PJM. may improve to be beneficial, but as I said we don't have any results that would indicate that yet. .

Okay, and then just to make sure I understand this on the gas lost, the bookmark this quarter, was that just a function over gas prices were at end of the quarter where the gas was put in the inventory and it is just a mark that you will recover as higher priced environment?

Yes.

That's exactly right, Dan. And as I always say to my friends in the accounting world, you have taken a very simple business and turned it into a complicated mess. But the money will flow back to us as the gas now comes out of the reservoir in the late fourth quarter, early first quarter of 2005.

Okay, and then I guess along that same conversation, you guys had a nice first half of the year by transacting on the coal side. Did you guys have any coal trading profits in the third quarter? And is there any way you can give us a little color on what that has been for the year?

There's nothing significant in those numbers associated with coal trading.

Okay, thank you guys.

Yes, thank you, Dan.

We will go to the line of Kit Konolige from Morgan Stanley. Please go ahead.

Good morning guys nice quarter.

Thank you.

Thanks Kit, thanks very much.

Mike, I wonder if you would care to expand a little bit on, first of all, the overall regulatory environment in Ohio? I know you made some remarks a little while ago about you're seeing, if I quote you correctly, an increased demand for re-regulation in this state. Do you still believe that is -- is that -- does that fit with the auction in FirstEnergy and maybe you can give us some sense of how you think that auction is going to go?

Sure Kit. Let me try to touch on that issue. No, the regulatory environment in Ohio is among the more balanced that we see throughout the country. I know that many of you rate Ohio as the best. I wouldn't go that far and I don't think it's fair to take them that far. But it is typically a balanced view.

The notion of a potential re-regulation has more to do with the going-forward needs in the state for additional base load capacity to be built. I think if you listen to the team from Akron, they would tell you that there's probably a need in the not too distant future for them look at their base load generation fleet. I know our friends in Cincinnati have talked at length about their ultimate needs for additional ultimate capacity.

And as you know, here at American Electric Power we're looking at building something north of a thousand megawatts to satisfy the eastern fleet base load capacity demand. That is really a side issue of a different ilk than to say they're going to re-regulate that to an absolutely traditional model.

And only a legislative environment in 2005 will lead to us a better handle on how that might be viewed, Kit. Because these investments are, as you know, substantial, I think the rate of return view on a going forward plant is going to be very important. That's not to say that the legislature might not feel comfortable leaving some of the historic plants in a competitive market place.

As to the second side of your question, it appears to me at least that as we get to the final formulation of the first energy auction process, it may take on many of the characteristics of the events that have gone on throughout the other PGM fingerprint states.

And it may in fact bring a number of potential players into that undertaking. I don't think that that changes the general need for base load capacity because I don't -- I'm not sure that you can auction off the demands of all of the operating utilities in Ohio and have that demand satisfied by out-of-state production facilities, so I think the state is probably going to look at that, both regulatorily and legislatively, in 05 to see how we handle the going-forward needs.

Again, as we mentioned in the small update, industrial sales continue to pick up. Commercial has been strong, as you know, over the last number of quarters, and residential is there, if and when we need to comfort our customers. So there's really quite a bit of demand increase that we're seeing in our upper-Midwest territories here so I think the state has to wrestle with that.

Let me follow with one question. You guys have a projection of substantially higher capital spending, you know, beginning in the near future and going for a couple of years. In your view, is that reasonably covered by revenues, if you get what you're going for in the proceedings before the commission now?

Again, remember that much of that money is dedicated to adding environment capital on the back of our existing fleet, and the simple answer is yes, most of that would be covered by that process. Remember again that of that 3.5billion, about 1.8 is dedicated to the current law, 1.7 dedicated to clear skies and we're looking for signals not only from the state as to how we will handle the latter part of that, but we're equally looking to the EPA and maybe an administration change or maybe the staying the course with the current administration in Washington as we go forward.

Okay, thank you.

Thanks, Kit, and thanks for your compliment.

And we move to the line of Paul Patterson from Glenmark Associates, please go ahead.

Good morning guys. How are you?

Paul, how are you doing today?

All right. I wanted to touch base with you on taxes. It looks to me like your tax rate fell for the quarter and it also looks like there's lower taxes other than income. I was just wondering if you could elaborate on those things?

We - I'd actually ask John Buonaiuto, our Chief Accounting Officer, to be ready to respond to this question.

Hi, Paul. Thanks. Susan. On the income taxes what I can tell you is that the decline in taxes there for the quarter is really principally driven by pre-tax income. Pre-tax income is down on the quarter compared to the prior quarter and that contributed to about $33 million of decline in income taxes.

The remainder of it is really just true-offs around our tax estimate. Because as we report taxes throughout the year, we're doing it on an estimated basis. We just recently filed a federal tax return and we're just getting to the -- to a true-off from those estimates to the actual results and that's the little bit of disconnect from the $33 million change against pre-tax to the overall $41 million decline there.

On the taxes other than income, that's really driven by the fact that we have got really hundreds of jurisdictions driving that number. We have got impacts from property valuation changes, rate changes, and changes in our fixed asset base and that's driving that number. Sometimes that number is up, sometimes it's down in this particular case, it happens to be down.

So going forward, should we expect it to serve -- where should we sort of expect it to level out? Is there any way we can sort of normalize that? It's sort of unusual for property taxes for things to go down, right?

I -- extrapolate any major trends from these numbers, Paul.

And in fact if you look at the number year-to-date, that number going up slightly it's up about $9 million as opposed to the impact in the third quarter on a standalone basis..

I would look more to our history because there haven't been any radical changes that affect this than I would extrapolate a lot from this quarter.

Okay, great. And the other thing I wanted to ask you was, I was impressed by this industrial demand growth. I was wondering is there any particular industry or, I mean, is this just broad-based industrial demand growth? If you could elaborate a little more on what is driving that and where are you seeing it? Are you seeing it in all of your utilities or -- just if you could give a little more about that?

It really has been pretty much across the board. And as you know, we're a heavy industrial utility supplier in many of our reaches and a very important chemical utility supplier in the western side of our fleet. And we're seeing, as you can well imagine, all of the steel folks seem to continue to do better. That puts tremendous demand on the system. There's nothing quite as frightening to a power plant operator as to see an arc furnace come on and nothing is quite as pleasing to me to see that happen.

But we're seeing it pretty much across the fleet, across the industries, and we take that as a good-news indicator. When we talk to our customers, they're seeing a tremendous increase in demand for their goods and products. And it doesn't appear to be an inventory builder. It really appears to be satisfaction of international demand as well as national demand.

Okay, and then just finally on the Ohio profits, I'm sorry if I missed this but do you guys have a more updated schedule as to when you think we might get some action from the commission?

We continue to believe, Paul, that something will happen in the fourth quarter. It clearly is time on the overall timeline. But as you can well imagine, with the significant decision in the Synergy case and the petitions for rehearing, as well as the ongoing meaningful give-and-take dialogue on the FE auction I don't think our had that center stage attention that it needs. I'd would suggest all they have to do is approve what we filed to lessen their work flow but I don't think they're interested in that. But we still believe that this will be a fourth quarter event

Okay. Great. Thanks a lot. Congratulations to Armando and good luck to him and see you guys later.

Thanks.

Thank you very much Paul.

And we go to the line of Paul Ridzon from Key McDonald. Please go ahead.

I would like to echo Paul's congratulation for Armando. Enjoy it Armando. You have earned it. I want to find what the gas mark was and how negative it was.

It's about $16 million.

Pre-tax?

No, after tax. So you can see, again, if you back that out, you can see that HPL is actually beginning to perform better than we -- as we had expected it could over time.

There's no way to quantify how much that will come in the fourth quarter and first because we don't know where the prices are going?

We can take a look and see if we can. I don't have that off the top of my head today.

And what do you look for out of fourth quarter O and M?

As I said, I think we should be at the year-end, we expect to be up $100 to $163 million year-over-year. 168 on utility ops. Lowered by 90 million.

The overall company of course is lower. But Carl English and the folks responsible for managing the utilities are taking a hard look at fourth quarter, what needs to be done, and how we will manage our expenditures in that regard.

As you know, as we said at the end of the second quarter, we will continue to do all that we can to enhance reliability and security on our system to make certain that the power production facilities are getting the capital and the O and M that they need to continue to operate and we watch that as closely as we can. If it were to begin having a negative impact on earnings, we would begin to throttle back those things that we could adjust.

But as long as we're in this environment, we think that it makes a lot of sense to continue to get ahead of the reliability curve and to make certain that our plants have the opportunity to be as productive as they can in the first and second quarter of next year.

Have you done any capital budgeting to give you a sense of where O and M is going next year?

We're in the midst of doing all of that now. As you know, for us, this is the time of the year when most of us begin to give our own view of 2005. I know that many of you have numbers posted. Because of the pending Ohio decision, it's going to be very difficult for us to do that in a premature sense but I can obviously assure you that we're hard after the budget process inside the organization for 2005.

And, Mike, would you review your take on how you perceive AEP as potentially playing in the FC auction?

Well, only in that our commercial ops activity, of course, day in and day out looks at market opportunities. I think you saw most recently we announced some term sales to the city of Bristol and the Blue Ridge power authority, so we continue to look at those opportunities. It could be that FE will provide our commercial ops a great opportunity to sell right here in our neighborhood at a relatively handsome price, depending on how the market unfolds. So if this ends up being one of the classic stair-step auctions, we will probably bid different megawatts in at different prices and see where we're successful.

You know from our conversations at the end of last quarter that we just did that in the last general market auction in Jersey and with some success. This one is much closer to home and this one is a - for that sense has some intrigue. You will recall there was a time when it looked as though the auction process was going to be for someone to sweep the board and take the entirety of that load and of course we don't have adequate capacity to satisfy our own needs and fill FE's needs as well, so we weren't going to be able to play in that kind of environment. But because they have now gone to a different structure, it does look inviting and our commercial ops folks continue to look at the potential to bid into that play.

Okay, thank you very much.

You're welcome. Thanks Paul.

We have a question from the line of Ali Agha from Wells Fargo. Please go ahead.

Thank you. Susan or Mike, when you look at the reduction you had so far in your interest expense as well as your parent company expenses year-over-year, would you categorize that as being ahead of plan or on plan? How would you categorize that it versus your expectations going into the year?

Interest expense is ahead of plan.

Okay. And what about the -- and the parent company reduction, Susan, I guess is also corporate interest expense reduction primarily?

Primarily, yes.

Okay and secondly, when you look at the variance that you have implied in your fourth quarter results or your full year estimate for the year, the $0.20 variance, where do you see the biggest sort of swing items that could cause that kind of variance either positive or negative?

If you're speaking about the range of 2.20 to 2.40, we just left in our forecast from January of this year, and many events, as you know, go on inside of an operating company, particularly one as large as American Electric Power in a year-over-year since so we think that is a very decent range. Obviously, you can average the range. If you look at street consensus, it's on the order of the 2.30, 2.31, 2.29 range. Some were fearful that we would be forced to move it down but we were happy to tell you that is not the case. We still feel very comfortable with that range and not uncomfortable with the consensus street analysis as it stands today.

And Mike the last question, you talked about the true-up process in Texas. Could you give us a quick update on the rate case that you had filed in Texas, where you are in that process?

We are in the process of waiting for a redetermination by the Administrative Law Judge. You may remember that -- and again I know you know the Texas structure. But the ALJ's work in a different governmental entity than do the regulatory commission and commissioners.

And when they issued the order, we raised a number of what we thought were substantial issues on appeal to the commission, and the case has been remanded to the Administrative Law Judge to address those issues. Maybe the penultimate issue for us is that the ALJ believes we had filed the rate case, where, in fact, the states -- excuse me the cities, which have the authority in Texas to call for a rate review were the moving parties.

So because of that, the burden of proof is substantially different. It's not us to prove why need an increase, it's them to prove why we need a decrease and we will just have to see. We're waiting for the ALJ to conclude. There was specific points in the remand for reconsideration. I don't want to hold out that we think this will be a clean sweep and we will come back with some tremendously positive story. But I do believe that even the commission believed, that the points we raised on appeal were valid but for that, they wouldn't have remanded it back.

So we wait, supposedly any day, for an ALJ determination and then it goes back to the commission for an oral discussion, as you know, from the bench and then an order and then a process of petitioning for reconsideration and on and on and on.

Thank you, Mike.

You bet, Ali. Thank you.

Our next question is from the line of David Reynolds from Banc of America Securities. Please go ahead.

Good morning, everyone.

Good morning, David.

Congratulations Armando. It's been a long run.

He won't admit how long, Dave.

Just a quick question. And I'll try to keep it pretty direct here. I know there has been a number of encouraging changes for competitive suppliers in the FE auction construct. To get right to the chase, is there -- do you believe or is there a percentage handicapping that you can put on it in your views as to whether or not this auction is going to be successful for competitive suppliers or whether or not the price is simply too low and it's going to be too difficult to match?

Well, I would tell you that clearly there's going to be some megawatts that sell into that in a successful sense. Whether they sweep the board and take all of that load? I'm surely not comfortable that that will happen. But we watch with great interest. I think our friends at Constellation have made it quite clear that they intend to be aggressive and they intend to be very, very active in this process. And we will have to watch all of that unfold.

Our desire here will be to take chunks of it that fit our profile and our available capacity and we -- and we believe we will be successful in that regard. We think there's plenty of margin room for some of our power production facilities into that market.

Let me just follow up and try to clarify the question a little bit. We're in a non-shaped, single-price, averaged auction, which is going to be the determiner of whether this thing succeeds or fails. Clearly, there are going to be some traunches and some assets that fit those load profiles: I guess the bigger question is, can enough players -- in your view, can enough players participate at a price that allows them to, you know, average down and be better than the $46 or $47 a megawatt/hour that is basically the put price for FE?

David, let me try to touch on that in a couple of different ways. Clearly, there will be some who play below those prices and there will be comfortable to be in there, having gone through many of these activities both back at CMS and Northeast Utilities. We all have a price wherein we say it's not worth playing, but I expect a lot of people will be able to fit into that model. But do recall what the Ohio regulatory view of the world is here. This isn't to benefit independent power producers. This is to benefit the customers of First Energy.

And I would argue that $46 or $47 a megawatt hour is a very competitive price for those customers when you look at coal running at $50 or $60 a ton. When you look at gas, gas today is 7.30 or 7.40, some such number, oil at $50-plus a barrel.

The customers are going to be benefit no matter how those comes out even if FE is the sole provider, and that was the Ohio commission's goal and that was the structure of the Ohio Legislative implementation of re-- of deregulation, if you will. It had little to do with trying to support the IPP world and they had everything to do, we are trying to offer lower prices to the Ohio customers. Again, I think that's the logic behind the rate stabilization plans that the commission has asked all of us to file.

Okay, thanks, I appreciate that. That was very good. Thank you.

We have a question from the line of Raymond Lund (ph) from Bear Stearns. Please go ahead.

Hey, Mike, how are you.

Ray, how are you?

Good. Best of luck to you Armando, also. Just a question about Susan's comment about managing the liabilities particularly at the parent company about potentially buying back parent debt. How would you sort of go about that and have you repurchased any bonds to date?

We're not talking about a program here. We have been in the market from time to time with respect to the parent debt, as you know, the parent debt, the parent debt does not roll off until 2006. So if there is some opportunity in the marketplace to buy back some of that debt, we may do so. But we have no program by which we intend to do that. We don't intend to do it in any substantial measure.

Have you repurchased any at all so far?

A little bit.

Okay, Thank you.

Sure.

Elizabeth Parrella from Merrill Lynch. Please go ahead.

Thank you. A couple of questions.

Sure.

Could you refresh for us on the Ohio case, I think you had asked for permission to defer some costs this year, related to R.T.O. participation, start-up costs, etc. Could you remind us what those costs were, and how much they might be, if you were successful in to being allowed to defer them? I assume you have been expensing them so far?

Yeah, give us one second.

Elizabeth, this is Joe. The number that we're deferring is in the $40 million to $60 million range and they're principally start-up costs..

Relating to the R.T.O.?

Related to the R.T.O, yeah.

Is, is that piece allocated to the Ohio utilities now?

No, that's the overall cost which of course would be spread out overall of the operating companies. Some we will hold in abeyance for further clearance, some jurisdictions. Elizabeth, we have agreed that, that we won't seek those recoveries.

But are these being deferred already now?

Well, in many instances they're being extensible, we have made those commitments to various regulatory bodies, and in others they would be deferred, because again they're an acceptable federal expense, that you ought to be able to recover through the overall state regulatory process.

But we have had such deferrals in Ohio, Elizabeth, 16 and 20.

I'm sorry. I didn't catch that Susan.

The plan is to defer in Ohio $16 million in 06 a T.S.P., $20 million in OPTCO. But that's what w've asked for authority to do.

Right. Okay, and in Texas, you did not take any additional or incur any additional fuel cost and so allowances this quarter?

Did not.

No, ma'am..

Thank you.

Thank you very much Elizabeth.

[Operator Instructions].

And we have a question from the line of Margaret Jones, from ABN Amro.

I'm sorry if you got into this, and I missed it. Could you talk about the current state of coal hedging and actually how would that be impacted by your participation in the FE auction?

The situation with our coal hedging is that we do have obviously our supplies in place for the end of this year, and we did mention earlier that we saw in this quarter about an $11 million erosion of margins associated with the increased coal costs, that we saw over the -- as compared to last year.

With respect to the future for 2005, we have basically been suggesting that we see about a 3% increase in our costs across the board. We continue to re-evaluate that. I'm sorry, a 10% increase, across the board.

And for next year, we are hedged at about 81%. We, of course, will continue to evaluate that. The effect that has on our position with respect to FE, is the same as the effect it has with respect to everywhere else that we sell. The market price is actually, the market price, as you know, and we bid against what we think is appropriate. Our margins will be affected obviously by those inputs.

On the -- actually on the hedging for going forward, where we have reached a conclusion of an arrangement with one of our major coal suppliers, which really in 05 now has us in the 94% hedged and 80-odd% in the 2006 time line as well.

So, we feel comfortable with where we are. As you know, the cost of coal continues to go up though. The impact of the numbers that Susan just mentioned in the third quarter, unfortunately have a lot to do with suppliers of ours, who have gone out of business. Obviously, we will pursue contractual rights through our legal shop on those activities.

And when anyone supplying at $20 or $30 goes out of business, so we need to keep the coal pile where we want it, here in the market buying $40, $50, $60 coal, you have being impacted by it. I can only tell you that, as compared to many other coal buying and coal burning utilities, we have been less impacted than most by that, but nonetheless, it amazes me when prices escalate the way that they have, that some of these folks are still going under, but they are.

Thank you.

And we have a question from the line of Stephen Wong with Smith Barney. Please go ahead.

Hi, Mike and Susan.

Hi.

I was calling about -- if you guys had a -- I saw that your cash balance has increased quite significantly over the last quarter, and I was wondering what, have you guys had some sort of debt to cap target going forward, now that you hit your goal for 2004?

We haven't embraced a debt-to-cap target that is different from the one that you see. We have indicated debt, to us an appropriate range, is around 55 to 60%, debt. We are comfortable with where we are. What you may see over time is that particularly, as we get closer to 06 in the parent bond roll, roll-out that the composition particularly of the long-term debt will be different, we will be looking obviously to have more utility debt, less parent debt.

So, when we're looking to 05 we shouldn't be expecting too much more of the debt pay-down program?

No.

As you know, if we continue to receive appropriate signals from the various jurisdictions responsible for the in-state power plants, we will continue to put that capital back to what we believe is good use in making certain that those very cost-effective power-production plants have an extended environmental life.

And we think that's the best place for us to put the cash coming into the company at the current time. And as you know, we will continue and hopefully have an opportunity to do something constructive on a dividend front. But there is much in front of us before we can make those kinds of commitments.

Okay. And when you guys -- in your slides here, you guys are showing on the Texas supply R.E.P, still being a fairly significant contributor for the quarter. When we look, going forward is that going to be declining significantly down to almost nothing?

Well, the Texas supply line is mostly not obviously rep revenues, and has to do with the wholesale supply activity. We do expect to see further decline from that. We have (inaudible) a contract which is rolling off; of course we're finishing off the sale of those assets. We do expect to see STP, into next year. But we have a little bit of generation left, but yes, you're right to see that as a decline.

And Mike, have you just seen any emissions cost issues related to your fleet? You know Synergy and some of the others, have been talking about how emission costs have been impacting them, quite a bit, and not being able to pass that through. What is your situation there at AEP right now?

We as you know from past auction announcements are among the most aggressive emission purchasers and have been, and will continue to be going forward. We find ourselves in a very enviable position on the emission front in that, every emission credit that was bought at auction is more valuable in the marketplace today, than it was the day we bought, and that increases almost daily. So we're in very, very comfortable shape on the emission front.

So, on the emissions side you guys have a excess supply basically to watch how it is going?

Well you know how the market works. If I said we were long, my commercial ops folks would bang me on the head. We're balanced. We're right where we want to be.

Great. Thank you.

Thank you, and our final question comes from Rie Toentino (ph) from Prudential Equity Group. Please go ahead.

Good morning.

Hi, good morning. I was just curious if you could provide an update concerning the recovery of through and out transmission revenues. I understand now since that you joined the PJM, the transmission market structure has changed. So you know, you don't get those through and out revenues anymore, and I was curious if you could provide an update?

It's currently in front of the FERC. We have all made filings within the last week or so, and now people are filing reply briefs to the briefs that were filed. It has always been our contemplation, of that joining the PJM, would be a cash and revenue neutral activity for us at least as it pertains to the activity on the wires, and we see that as, something that is very important to us going forward. Remember, however, if you were to take away through and out rates on the wires, in the way that they balance the PJM, RTO you would probably see an up-tick in the margins that you get from the generation fleet.

Okay, Can you give, like the timing as far as, when you expect to hear from FERC?

We expect to hear from them in early December. Something has to go into effect on December 1 under their current plan.

That's I guess why I was suggesting at the very outset that a congratulatory note from our Chairman is a nice thing to receive and just I hope he gives me that in the order that he issues.

All right, thank you very much..

Ladies and gentlemen, thanks again for joining us. I know you have a very-very busy day. To each of you individually have taken the time to congratulate Armando. You know, Armando is one of the few individuals with the company that started back in New York. So I guess I have never asked whether you're a Texas Ranger fan or a Houston Astros fan but --

I'm moving to the Texas side.

I know you are.

Thanks now being with us. I know you have a very busy day.