美國電力 (AEP) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter 2004 earnings conference call. At this time all participant lines are in a listen-only mode. Later we will conduct a question-and-answer session. 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 your host for today, Ms. Julie Sloat. Please go ahead.

Good morning and thank you for joining us today to discuss AEP's fourth-quarter earnings, earnings for the full year 2004 and the Company's 2005 earnings guidance. I expect that you have seen the press release issued earlier today. It is also available on our webpage at AEP.com. In addition to the financial schedules included in the press release package, the webcast of this call will include visuals of charts and graphics referred to by AEP management during the call.

I am also pleased to report that we are introducing a new quarterly investor packet that will be made available at AEP.com today at approximately 1 PM Eastern. This will include the consolidated balance sheet and statement of cash flows, as well as full income statements for our utility operations, gas operations, investments and parent company that will enable you to transition from the earnings release and guidance format to which you have become accustomed to our consolidated income statement that is present in our SEC filings.

We hope this new quarterly earnings package provides you with the additional clarity and simplifies your research efforts. The earnings release and other matters that may be discussed on the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings included in 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 will discuss the measures about 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 website at AEP.com. Now I will turn the proceedings over to Mike Morris, Chairman, President and CEO of the company.

Julie, thank you very much and I too would like to thank you for being here. We are obviously happy that you are interested in the outcome of activities at AEP. For 2004 I hope that you appreciate we set out to do a number of things, and quite honestly from our vantage point at least we were able to accomplish almost all of those things that we said that we would do this year. Obviously as you know from looking at the data that we have provided to you, there have been many pluses, many minuses, many things that came off exactly as planned and others that didn't. But all in all I am very pleased with the outcome of the activity for my first year here at American Electric Power.

Most importantly, we delivered inside of the earnings guidance that we told you that we would, staying within that range of 220 to 240 with the overall results at $2.33 a share. We feel very comfortable about that, and again that became a focus for this management team that we stayed with all year. And with the pluses and the minuses we were able to accomplish that goal, and we're very happy about that. We told you at the outset of the year that we would get our balance sheet in shape by reducing it below the 60 percent debt level, and we were able to accomplish that as well by paying down in excess of $2 billion of debt throughout the year by utilizing the proceeds from the asset sales and other cash that we had on hand.

We started the year with a long list of activities that we wanted to remove from our balance sheet to remove from our day-to-day management obligation, and I am so happy to tell you that as you know, those things have been accomplished. Most importantly of course the sale of the triple F facilities which was about a midyear '04 event and we feel comfortable about refocusing very, very laserlike on our utility businesses going forward.

To that end, we spoke to you about the reorganization back into an operating company model such that it would give us the opportunity to spend considerably more time on local events and local affairs at the local level. I believe it gives us a better opportunity to deal with day and day out with the regulator, the legislator and the executives of the states wherein those operating companies perform. I am very happy with the results of that. I am pleased with the individuals that we have managing those companies and of course the management team that oversees them from Columbus on a day in day out basis.

I hope that as you see some of the orders coming out and we will talk obviously a bit later about the events yesterday here in Ohio, but equally important events in Texas of a week ago on the rate case proceedings in front of the Texas Commission. A rider issued by our friends at the Oklahoma Commission for PSO, and what we hope will be a reasonable resolution to open issues in Louisiana as we continue the dialog with those regulators, as well.

We were able to settle at the end of the year and announced yet this week the activities with the three federal agencies who are concerned about the gas trading activities of some years gone past. I appreciate that that is a very large number, but it is what allowed us to settle with all of the agencies. I think that makes us different from any of the others who are still under investigation and negotiations but we are pleased to have that behind us as well.

Operationally the integration into the P.J. M. could not have gone more smoothly. As you know from the many days we have spent with you since one October of last year, we are not economically where we want to be yet with the P.J. M., we continue to grow. We continue to learn. The best news is that December was better than November. November was better than October. And we will continue to perform, we believe, at that higher level and are challenging our team in '05 to continue to do that.

We obviously began an announcement a very significant announcement not only for this Company but for this industry because we do need to build new base load generation facilities. This Company as it has done with its great history has again put a stake in the ground different from many others in that we intend to build commercial integrated, combined cycle facilities that will take AEP to another level as others are working on new supercritical coal plants we have moved to the next generation, and we are proud about that. And we will continue to work on those activities as we go forward.

And importantly, not only in a financial sense where last year as well as '05 and beyond but for our employees and retirees we were able to make substantial contributions to our pension funds on the West operating side of the business and continue to make progress on the East, as well. Just so that the team doesn't rest too long on their laurels I know you would not want us to and surely wouldn't allow that to happen, let me talk a few moments about what our plans are for 2005. I know that in today's release you are familiar that our guidance range has moved up by a dime in both lower and the upper end so that the '05 guidance is $2.30 to $2.50 a share. We think that represents reasonable growth year-over-year earnings not easily accomplished, but we will continue to focus on that as we did in '04, and I am comfortable that we will stay within that range as the year unfolds.

One of the things that Susan and I are pleased with is that we were able to hold a utility O&M flat when we look at 2005's budget as compared to 2004. And as you look at the overall company of course O&M has gone down substantially, but much of that has to do with the divestiture of the assets along the way. We will continue to maintain our debt ratio below the 60 percent level, as you have heard us say many times before, we are not intending to put a great deal of cash to work on the balance sheet. We simply want to stay at that sub 60 percent level in the operating cash flows as Susan will talk about and the overall retained earnings will grow as the year unfolds and we will be able to stay there as well.

We will make additional pension funding contributions, particularly on the eastern side of the AEP family of employees to the tune of $100 million a quarter in '05. We think that will put us in very good shape on a more robust funding basis for the pensions for all of our employees and we think that is a very important thing to do, and of course gives us the financial reward of doing that, as well. We will continue to alienate those assets that don't fit within our plan, as you know we have sold yet have not closed, on the South Texas project and the Texas central ownership interest in Oakley Union. We will work very diligently on that as the year unfolds as well.

Probably a number that to some will be a bit of a surprise but to us not because it is well in tune with our plans and that is that we will substantially increase the capital expenditures at the utilities in 2005, taking that overall number north of $2.7 billion. This reflects our dedicated endeavors to continue to clean up the environmental performance of our operating stations, which as you know continue to produce extremely low cost megawatt hours. We are very bullish about this; we think it is exactly the right thing to do. The market is sending us signals that we believe these environmental investments will allow us the flexibility to manage that others in our region, other coal burners simply won't be able to take advantage of. We believe the environmental investments give us the opportunity to diversify our fuel supply base, and therefore put some negotiating price pressure on the ever-increasing cost of coal. It also of course reflects the very high price that emission allowances have been experiencing throughout 2004, and we expect 2005 and beyond.

So again I think this is a differentiator for AEP. I think it puts our solid coal based generation fleet in a very envious position as we look at those plants against which we will compete in the open marketplace. We will continue to work very hard with the regulator to ensure that there is adequate respect going from us to them; that they understand the investments that are being made are for the benefit of our customers, that we believe the reliability improvements and environmental improvements extending, the economic and environmental life a very low cost power production facilities are all in the best interest of our customers, and we will stay very much dedicated to that plan.

Sometime in early 2005 we will finalize the IGCC site or sites, and we will make an announcement to that effect. And as you know from previous conversations that we have had, the determiner not only are the physical assets and the attributes that the site needs to have, but the regulatory path that the jurisdictions wherein those plants would be facilitated or would be located will accommodate our needs to have some upfront arrangement and understanding as to how one would recover the capital return of and on that capital invested as well.

And of course, as we have said before, we will continue to look at and evaluate the potential for a dividend increase sometime in calendar year 2005; again as we have said before, it won't be massive. We hope it would be, we will have the opportunity to do that and if we do, hopefully we would be able to sustain that on a going forward basis, and those would be our plans.

And lastly for 2005, we intend to divest Houston pipeline. With that, I will turn the call over to Susan.

Mike has given you a pretty good rundown on both '04 and an overview of '05. I would like to not spend a great deal of time on the quarter, primarily because the quarter for the most part shows trends that we have seen throughout the year. So if you want to go -- if you're following along, if you want to go to page 8 of the slides, let me talk a little bit about the 12 months performance and then spent most of our time on the elements that went into the 2005 forecast.

First, let me point you to the difference between the reported earnings and the ongoing earnings, reported earnings were $2.75 cents per share. The major difference between the two, as you have seen in prior years, is discontinued operations and in particular the special items resulting from the gains of assets. The most significant of that, of course, being reflected in '04 was the sale of triple S and the IP piece.

The ongoing earnings of $2.33 do include $2.64 from utility operations, a -13 from investment, -18 cents of the parent company, both of those of course represent improvements year to year. The 20 cent drop in ongoing earnings year on year results on the utility are primarily from the loss of ECOM (ph) revenues, which is $218 million pretax that we saw in 2003 that you knew would not come forward. Of course, that was offset to a substantial extent from the benefits that we saw, we booked 109 million in ongoing earnings as a result of the decision of the Supreme Court in Texas, and the subsequent PUCT decision confirming our ability to book carrying costs. And that was reflected as a positive. You can see that in the other income and deductions line on 14.

As I believe you expected we also saw Texas supply margins decline. That was offset to some extent by sales growth in higher levels of optimization in our system sales. The weather did have a negative impact on earnings of approximately 3 cents versus last year, and a negative of 7 cents versus normal. We had told you that you would see O&M year-to-date increases of $205 million and that is indeed what we have seen. This is a conscious effort that we made to be able to bring some expenses into line as we've prepared for rate cases, and that is in fact what we did.

The interest expense for the year showed an improvement of $48 million. Obviously reflecting the effect of our refinancing activity and the very substantial paydown of debt that we have. And for the 12 months year-to-date, the investment segment improvement was significant. That reflects improvements in the operations of HPL, as well as the continued wind down activity around AEP resources.

Turning next to cash flow which is reflected on page 9 of what you see, the cash flow from operations in 2004 was about $2.6 billion. That includes continuing earnings of 1 billion, adjustments for depreciation and amortization of 1.3 and pension funding that occurred in 2004 of $200 million. As Mike said, we intend to continue that activity. This 200 million did permit us to avoid an increase in the AOCI calculation for this year to some extent, and we will be able, our target is to be able to get to that same point with respect to the full amount of our pension through the additional funding that we have planned for this year. And we think that is a very excellent high-level use of our cash.

We spent 1.7 billion in CapEx in 2000, (ph) and we had asset sales proceeds of 1.3 billion. We retired 2.2 billion in long-term and short-term debt, and we paid about 500 million in dividends. So we saw a net change in our cash of 2004 that was just over $500 million, and we ended up with a cash balance of $20.

Turning to the next page on capitalization, this is a graphic representation of Mike's earlier, which we did indeed reach the debt target that we set out to accomplish this year on a GAAP basis, as well as on an adjusted basis. We reduced our long-term debt by 1.8, as I said, and the total debt by 2.2. We did get a positive outlook from Moody's in August, and we are going to work hard with them the beginning of this year to try to seek an upgrade. And there you see our year end numbers at the end of the fourth quarter; the debt to cap on the balance sheet was 59.1 percent, which is a slight improvement over where we were at the end of last quarter.

What I would like to do now is turn to the next slide which is 11 on your package, and talk a little bit about the elements that go into our 2005 guidance range from 2.30 to 2.50 a share. The guidance range that you see is based on 399 million shares outstanding, and we are going to see a dip in utility earnings that we will more than offset by reducing again the drag from investments and from the parent company.

Let's look a little bit at utility operation, and there is some very solid utility news in there. We are continuing to see retail sales increase. We obviously will assume normal weather but we are also going to see, we believe, some fairly steady economic growth. Three percent for residential, 2.4 for commercial which of course is weather-related and then the 1.6 percent for industrial customers. We do expect that we will move up on the performance of our off system sales; that it has to do largely with improvement expected in power prices. We have talked a lot about what we see with respect to coal prices. We have told you we expect about a 10 percent increase this year, and that continues to be the right number to bake into our forecast from our perspective. We are looking at an average cost of about $31 a ton in the coming year, about $1.48 per MMBTU, which is about a 10 percent increase over the actual outcome that we saw in 2004.

Now despite the cost pressures that we talk about and that we continue to see, we expect O&M to remain flat in 2005, and that has largely to do with reduced expenses associated with the sale of the TCC generation asset. We have been working hard and have accomplished some reductions in our overall employee expense, and of course this assumption is based upon normal weather conditions. We did have significant storm expense in 2004. We have a forecast for that to come down a bit, although it is certainly the case that we've seen some early storms; we like to think of it as getting the storms out of the way early. But we are absolutely committed to keep our O&M flat for this year, and we will manage around those issues absolutely as best we can.

It is also important to remember that while the utility O&M is projected to be flat, we do expect the total O&M to be down by $87 million for the year. I would mention one other thing with respect to investments. You see in this slide that we have $11 million that we had expected to make from our gas operations that will not be there, but we believe it will be more than offset by the beneficial use we will make of the cash from the sale of HPL, which was announced yesterday. Needless to say, we are extremely pleased by the outcome of that sale. We have not had an opportunity, because our work on that was done fairly expeditiously, we haven't had an opportunity to bring those numbers forward into our cash forecast as I will show you when we come to the next page, but we are extremely pleased to have that available to be put to work into the utility business and in the financial management of the Company in the coming year.

If you then turn to the cash flow projections which are on the next page, our current projections -- again this is without the benefit of the HPL sale -- shows us with a pretty substantial cash advantage, cash balance at year end of 858 million. And that is even in the face of the accelerated capital spending program and the contributions to funding of the pension fund that are both reflected in the numbers that you see there I would also mention that we have 345 million in cash flow from common equity that relates to the 345 million of equity units that are outstanding today that do convert to common shares in October. And we do have -- I'm sorry in August -- and we do have the dilutive effect of that on an August forward basis. That's about 2 cents; on an annualized basis that would be 5 cents. But we did build the assumption of that conversion into these numbers. So we would absorb both the dilution but have the added benefit of the issuance of the equity.

That is also the reason by the way you see an increase in the total shares outstanding from the 396 of 2004 that you see on an annualized basis for 2005. We remain committed as I suggested and as Mike has confirmed, that we are going to keep the debt cap ratio under 60 percent. We may see opportunity given the available cash that we have for further debt reduction; we are going to weigh those cash utilization objectives that we have with our commitment to the CapEx spend, which is ultimately the means by which we grow this business and grow the returns, as well as other uses for the cash.

And I would like to then ask you to turn to page 13, which is an attempt to lay out for you in a little bit more detail what we see in the way of the increased CapEx program. This is a significant increase year to year, but it is attributable to some very hard work commitment on part of our groups to really plan this investment appropriately and in the most efficient way possible. And we think this is the right number for us for '05. First of all, you have, you are probably comparing this to some of the environmental numbers that we've seen, and I do want to say that we've got in here 583 million increase year to year. And that has a lot to do with a decision to accelerate the environmental investment that we've seen in the past. That has a lot to do with the economic value that we see in putting these scrubbers on and avoiding future market prices around allowances, which continues to be a very significant cost pressure for us. It also puts us in the position of being environmentally compliant earlier.

But it is over the long-term we think an advantage to be able to put these scrubbers in. So that is a fairly substantial amount of money that you're going to see as a result of that. We also have identified another 135 million increase in generation related investment. These are boilers and turbine projects and these are appropriate things to be doing. They are classic maintenance CapEx that you want to do in relationship to the extended outages that we have as a result of the environmental plant. So we have stepped up a bit with respect to those investments to make sure that the environmental investment will bear fruit in the form of continued appropriate maintenance capital maintenance and operation of the plant.

We are going to see $51 million new generation projects and that really is primarily the IGCC as well as some transmission work related to some facilities in the East and possible new developments in the West. And we are going to have 9 million more in nuclear investments that has related to the reactor vessel head replacement. We are also going to see some increases on the energy delivery side. We are going to see $166 million increase in transmission line work. This is mostly the Wyoming Jackson Ferry line. But we are also committed to another $130 million increase in distribution, primarily due to reliability improvements. That is a very important piece of our puzzle going forward as we move into rate activities in many of our states.

We will also see 2005 CapEx to be covered by cash flows from operations of 2.2, and additional asset divestiture proceeds that we are expecting this year, the STP and Oakley Union, obviously we have helped our cash base substantially by the HPL sale.

Let's then turn to page 14 and I just want to summarize briefly some of the risks and upsides that give rise to the range that we talk about. And our earnings guidance is designed to withstand a range of risks and uncertainties. Obviously the outcome of the Ohio decision is an important one to us for planning purposes. We are very satisfied that we've got a fair outcome and one that gives us a basis for going forward. And so 5 effects (ph) as you know had to do with our requests for deferrals of RTOs and certain costs, Commission did not approve the deferrals, but they did in its place authorize for us to be able to begin to collect in '06 a, what is called a polar writer, (ph)and that should put us in a position where we are able to establish a regulatory asset this year to reflect non-cash earnings and we would expect them to be on the order of about $60 million.

Another key issue for us is going to be the operation within the PJM environment. We are seeing regular improvement, and that will be we hope an upside. But there is certainly movement in the range either way with respect to that. The others are the things that you typically see, plant availability and weather being significant variables for us and also with respect to fuel costs. We think that we have embedded into the budget an appropriate rise for fuel costs, and as you know we did manage on a year to year basis to be pretty much where we thought we were for '04. That was not because there were a shortage of issues to address. It was because our folks managed it pretty effectively, and we expect to see the same thing in the coming year.

So we do not offer you a 2005 without challenges, but we do offer you a 2005 we believe that is going to show us an opportunity for meaningful earnings improvement and above all an opportunity to build upon the debt reduction, the asset sales that we've seen and the refocus on the utility business to put us in a position so that we can make the investments and then go to our regulators and seek recovery of the kind of investment that they encourage us to make. So with that, I will close, and let's go to questions.

(OPERATOR INSTRUCTIONS) Jose Almonte (ph).

A quick question with respect to the Houston pipeline transaction. Is there anything in that transaction that would be analogous to AEP making demand charge payments to energy transfer partners or assuming some sort of revenue responsibility? (multiple speakers)Or going forward and for what duration?

Not at all. It's a complete sale of 98 percent of AEP's interest in Houston pipeline.

All right. Thank you.

And the cash is.

And no obligation on AEP's part to provide any sort of revenue on a go forward basis?

No, absolutely not.

Kit Konolige with Morgan Stanley.

A couple of unrelated questions. First of all, Susan, on the cash flow projection page it appears to me that this does not include the proceeds from HLP. Is that correct?

That's correct.

So we should add those in as more proceeds from sales and potentially displacing net borrowing or something like that.

That's right, one billion more -- the truth was that we prepared these slides before we were absolutely sure that we would be able to complete and announce this today. It is another billion dollars, and you can assume that we are going to be busy planning the best use of that cash going forward, and certainly further debt reduction are among the things that we are going to look at.

And I think I heard Mike or you suggest, which I would guess would be the case that net net that that transaction would be accretive to earnings. Can you give us any sense of the magnitude of that?

You know, I can't give you a huge sense of magnitude, but if you look at what we had been projecting which was $11 million for this year and you just assume that we are not able to do anything extraordinary with it, and that we put simply put it in the bank and sit on it and I assure you we will do better than that, you're still talking about money market earning 2 percent on $1 billion. So obviously net net we're doing better than that, but we are there are obviously things that we can do, reduction of higher cost debt being an obvious one that would put us in a position to return better than that. So yes I think it is easy to say that it will be net net a positive.

Okay, and finally an area that you mentioned and we talked about this previously, Susan. But the cost of the emission allowances and you indicate that they are obviously huge increase there having an influence on more capital spending. Can you give us any better idea of for example, how much you spent on emissions, what the income statement effect of EA's was in '04 versus projected '05, that sort of thing? And where it might go in the future with the environmental spending?

I need to think about that for a second, in terms of the '04 to '05 number. But I -- there is no upside risk baked in our analysis we don't think with respect to increases from the projected numbers that we've given you for '04. What we are looking at -- give me one second. I will look at the data here. What we are really talking about is about a $16 million a ton increase with respect to SO 2 (ph) from '04 to '05 and about 22 for (indiscernible) dollars per ton, and its embedded in the forecast.

That's dollars of emission credits purchased. Kit, what we are seeing in the market place quite honestly is an opportunity to sell to some who are in considerably worse shape than we are environmentally. And to take advantage of buying in the auctions as we have done historically. As you know we were the 97 percent winner of auctions a year ago on these credits both NOx and SOx, and as you can well imagine the intellectual capital on the coal management side of this Company is matched by no one, so we are seeing the fruit of those labors and those advantages that we have in '06. And we -- in '05 I mean and we really expect to see that go forward, as well.

Okay. Thanks a lot.

Ashar Kahn (ph) with SAC Capital.

Good afternoon or good morning, but congratulations Mike on a good Ohio order.

Thank you very much, Ashar. You know how hard those activities are. We really do feel that it was very balanced. Its in the best interest of our customers without question and really does provide the impetus that we think our shareholders deserve for what we're doing trying to keep the low-cost power plants up and running for their benefit.

Mike, knowing the framework and I guess the way the Commission came out, the order it gives you the leeway to increase your CapEx and ask for recovery. How are you taking now in those terms? You got the ability to ask for an extra increase 4 percent. Will that be a tact knowing that as you are building up your CapEx for '05 and I guess for '06 is that some route that you will take, and if you will take that route, when can we see you coming and asking for the Commission for those extra revenues in '06?

Clearly that's an option that is available to us, and what we will try to do is continue to manage the CapEx as we go forward and not make those filings unless absolutely necessary. I think the Commission has sent a very strong signal to all of the Ohio utilities that the stairstep rate increases to what might be a market clearing number in 2008 is exactly the way to go. And we will see how that unfolds.

Our real challenge in '05, and its one that we are prepared to tackle, is the other side of the investment, and that is in the state of West Virginia. And we will have a plan which we think will hopefully bear fruit that will be equally rewarding to us as we go. Because again, you can't run from the benefit of these capital investments for the customers. I hope that you heard Susan's number even in the face of coal price increases, our average fuel number is less than 1.5 cents per kilowatt-hour. That gives us a massive price advantage in the markets that we are playing today. I am of course as you know a good chunk of those revenues flow right back to our customers as a credit to the retail cost of service. So Commissions hopefully beyond Ohio will begin to see the benefit of what it is we're doing for the customers and the shareholders without question.

So we should assume that you just are not going to ask for higher increases than what is granted and I guess the remaining investment on capital will come from other rate jurisdictions. Could you just amplify what is the plan for West Virginia and Virginia going forward that we can see?

As you know, Virginia already has a single purpose rate filing undertaking, and West Virginia is a more traditional rate of return, and that has a lot to do with many other moving parts. And will just continue to move along that line as the year unfolds.

And can we see a rate case filing this year?

Maybe toward the latter part of the year. I think that is a reasonable assumption, but it could be also that we could make some arrangement with the people in West Virginia, and we will see what happens with that kind of an approach.

Okay. And in your thoughts on the dividend, is that something which you will consider towards later end of the year? In terms of timing?

Well, we will continue to watch the year unfold. Clearly as Susan said, the early January events with storms and other things are disquieting, to say the least. But it's better to have them in January than it is to have them at the end of December, so we will watch as the year unfolds. And again I don't want to send mixed signals here. It is clearly our preference for a dividend increase if we can find a way to begin on what would be a reasonable, yet sustainable path for us to pursue.

Okay, and if I could just end up you had mentioned to us flooding when you were here two weeks back in the Ohio River, could you just bring us up to date what's happening in the fuel and wintry (ph) levels?

Again this is all about the people at American Electric Power, but we have been able to manage our way through probably one of the most trying times on the river for our power production facilities in West Virginia, Virginia and Ohio. And it has been something to watch, Ashar, it really has. We are very satisfied with our inventory levels at all of the stations. They are at levels we have never seen before, yet the operators are day in day out able to accomplish satisfy the demand requirements that are put on us by the P.J.M. We of course as you can well imagine in those fuel procurement states where we have the flowthrough opportunity will in fact be going back to explain to those in state regulators that there is a huge delta between coal bought during periods of emergency and coal not delivered under our longer-term better price contracts simply because we can't move physical assets on the water. So we've got some issues in front of us in '05, but I hope that my short tenure in this Company's incredible history in that world has demonstrated to all of you that we are up to those challenges.

Paul Patterson with Glenrock Associates.

I wanted to touch base with you guys on slide 11 and line item 14 other income and deductions. You mentioned here that 2004, 2005 other income and deductions include return on stranded, Texas stranded cost of 100 million and $101 million, respectively. When you came into New York you said you were looking at getting perhaps booking a return on that. And when you go to the cash flow statement on I think it is slide 12, you guys show the non-cash benefit of TCC ECOM and carrying cost of 304 going to one-to-one. Could you explain just a little bit about what's going on there or what we're looking at?

I'm not sure I know, understand completely your question to the 2 slides, but I can certainly tell you about what's going on with TCC. Would that help?

That would be great.

Basically what you saw in 2004 were two components. The component that is in ongoing is $109 million. The component you will also see in the as reported page what is really a net positive one, but it has two significant pieces underlying it, one of it is about 193 million, which is carrying costs from the prior periods '02 and '03, which we believe were appropriate to show in as reported, but not in ongoing because it is not at the current year. Offsetting that, however, is $186 million in basically depreciation adjustment that we were also required to take. This is all the process of reconciling AEP's current position against what we understand with confidence around the outcome of the CenterPoint case. So what you see is a 2004 effect that is the combined effect of both prior periods and the current periods. What you see in '05 is simply current which is going to be on an ongoing basis. Does that help?

That does help, so in other words what we are seeing here is that because of the what happened in December, the final order associated with CenterPoint you guys are now able to recognize this carrying cost that will be filing later this year and hopefully sometime not too long after that, the Commission will grant you something like that so you are --.

Exactly.

You might remember Paul when we were in New York two weeks ago this the DNT is not only our accountant but they are also CenterPoint accountants, so we were not only allowed to but in fact required to.

Great. Now that's a benefit. Now the other thing I want to ask you about is when you mentioned the Reg (ph) assets and the order in Ohio and that you got, you didn't get the deferrals, but you got, you think you got enough treatment here that you can book a Reg asset. That is basically on earnings basis, is that basically equate one for the other? In other words you're going to get the same earnings treatment as the deferral would have given you in '05, is the right?

That is what we believe, yes.

We really believe again that this was an appropriate way for the Commission to deal with the issue of because you're inside of a previous implementation of the law here in the State of Ohio. And this is exactly the way that will allow us to create that asset and recover it going forward as a polar writer.

And finally the dividend, you know if you look at the cash flow you notice there is a $45 million increase in dividend expense. And of course there is a few more shares outstanding but not that many. So that would indicate that perhaps you are thinking of perhaps paying out about 10 cents a share more?

No. It's a $5 million difference.

Oh, it is a $5 million difference, I am sorry, I don't know what happened there.

(multiple speakers) reading glasses, Paul.

I didn't say that Paul, she did.

Fair enough, you guys also look like you are looking at a 7 percent increase in Texas Wires gigawatt hour growth.

Yes, we are.

Sounds pretty high, is that weather-related or.

Part of it is weather year to year and then we also see more significant growth there. (multiple speakers) There is also some prior periods of adjustments.

Some adjustments?

Yes.

From the (indiscernible) the way that they allocate those activities but as you've heard me say before, particularly in TCC what we are seeing is the kind of growth that people in Arizona and Florida typically see. It's incredible, Paul. Residential sales up 8 percent year-over-year just because of the growth that we are seeing.

Okay, great. Thanks a lot, guys.

David Reynolds, Banc of America Securities.

Just wanted to ask a quick question on the issues you had with the Ohio River and so on. I think Mike was saying that there is going to be a need to talk to regulators about the fact that there are costs associated with this, and there is a big delta between having to buy in the short-term market and your steady-state deliveries. Could you -- is it possible to quantify what we are talking about in the '05 numbers, A? B, are those costs included your current guidance? And C, how much of the coal deliveries are, their effectiveness are in Ohio? So if you can kind of flush that out a little bit.

Those are pretty broad ranging questions; what I was simply trying to do was set the stage for all of us to understand that there are ups and downs when you operate a utility as large as AEP. And that the events of -- you're looking at a 20-day window in January here. The river really is pretty much back into reasonable operation. We are beginning to see contract coal flow again. Over the year we will work our way through all of this. Some of it, much of it has been delivered into the West Virginia and Ohio area. And as you know, that is a market clearing issue, but market clearing for everyone. Believe me when I tell you, again, that AEP's swiftness with addressing this issue will give us a price advantage over what we think other coal burning power plants along the river will see in the same environment.

Okay. I guess just to get back to one of the points there, the costs associated with this, this is all included in your expectations of 230 to 250 for '05?

Absolutely, and we think over a twelve-month horizon there will be lots of pluses and lots of minuses. And again, I am glad what we are facing here came to us in January and not on December 25th.

Thank you.

Dan Eggers with CSFB.

Good morning. A question. With all the environmental CapEx you guys have, just in general, the CapEx you have planned for '05, how do you think that's going to affect plan availability in the carry-through to off-system sales?

That's an excellent question. It obviously has an impact as you take the facilities off-line and do the final connect. As you can imagine, much of this is built and goes into that final connect period. We have looked at that and built that into the flow of megawatt hours that will be available to us for off-system sales and will continue to manage to that tune, as we go forward. I would tell you that I feel much more comfortable about our ability to deal with those unknowns as the year unfolds, and I am day-in day-out, with plants coming and going off-line. But again, I know you know this and I don't want to brag too much about my commercial ops people and my power plant operating people, but this is all built into a very intricate plan so that those plants will be off in shoulder months when price opportunities are less than non-shoulder months. Clearly they will be off during off-peak hours as compared to on-peak hours, if it is that much of a truncated scheduled. So we don't build a lot of that logic into the range that we've given to you.

Got it. Great. Susan, I wonder if you could just, a little more on the pension funding, how much expense or how much benefit I guess you will have, or lower expense, in '05 versus '04 based on what you have put in already and what you plan to put in? Is that more of an offset to a lower discount rate or anything else?

In terms of overall earnings benefit, it is not a lot. It's about a penny. We had already been planning to put significantly more year to year earnings expense from '04 to '05. So we will see some benefit. It is cheap benefit for us. It really has to do with financial, first of all. We are, by fully funding at this point, we avoid the balance sheet impacts that you typically see with the AOCI. It's very favorable from a credit perspective because even though it doesn't, the full liability may or may not be reflected in the balance sheet from the credit agencies perspective, to have this fully funded is a very significant risk reduction. So in terms of prioritizing cash, it is a very good thing to do. Obviously it is beneficial for our employees, as well.

I was going to add to that because Susan gave you the perfect CFO answer, Dan, but you should see my e-mails. I've got an energized workforce who just think that we are absolutely great people for fully funding our pensions for them.

Is this going to be helpful with some of the regulatory filings you guys have upcoming?

Sure, to the extent I've got energized workers who are going to work harder on reliability and taking care of the customers though, (indiscernible) to all of our benefit.

Got it. One more. Can you just give us the hedge positions for coal for '05, '06, '07? I assume you're full for '05 already.

We are pretty full for '05.

It's in the 85 plus percent range for '06, and I will only give you Chuck Zebula's qualifier on '05. If we could tell him to the spoonful how much coal we need, he could tell us to the spoonful how much is hedged. But we are 100 percent covered in all instances that we see in the '05 timeline leaving a little gap for pluses and minuses.

Tom O'Neill, Lehman Brothers.

Just had a quick question on some prior comments I heard you make about the cost of coal generation with the environmental CapEx. I think you said it would raise the average cost from 16 to 18 to 18 to 20.

On that range, I think that's right, Tom.

I just wanted to understand what was in that. Is that an all-inclusive property tax depreciation carry cost O&M, or is that just a component?

When you look at -- it really builds in what we consider to be the fuel, all the pluses and minuses that go with handling scrubbers and handling the NOx machines. So it is a lot of products as well as disposing of the waste that comes out of that process as well. But it does not address itself to the capital side of the physical add. And in those jurisdictions where the plants are rate based, that capital is handled in a rate base environment. And to the extent that you're in open marketplace you're still getting the benefit of the power production and that is an offset by the capital invested, as well.

Okay. And then just one question to clarify the '05 guidance. That was set before contemplating any potential accretion from the sale of the pipe?

As Susan said, that is true, obviously, but we had already built in $11 million of benefit from the operation of the gas assets in calendar '05. And the challenge here will be back, back to Kit's question, is to take that capital and put it to productive use that yields more than $11 million worth of benefit to the shareholder.

Okay. It seems like a low bar. Thank you.

That is what I told the team.

David Frank (ph) with Zimmer Lucas Partners.

Good morning.

David, how is your hand?

Much better, thank you. I wanted to ask you a question. Your return assumed on the reg asset, what is it -- the Texas reg asset?

It's about 8 percent. That is on the debt component.

The debt component.

Yes, that's all be booked was the debt.

Now obviously CenterPoint was authorized 11 plus percent. Will you be increasing that to the full allowed return going forward?

We will not increase it on a non-cash basis. It is a potential upside when we get to a final decision, that additional amount.

And then that would be retroactive collection?

Well, is not a retroactive collection because it is all collected in the securitized amount. But it would be calculated on a retroactive basis to the full amount of the periods that are affected by this.

So you will be earning, theoretically, you'll be earning 11 plus percent on the full balance from the beginning of the time period, and you accrue interest on the interest as well, I guess?

Yes.

Okay. And what is the expected return that you will get on your investment in the pension fund?

8.75, I think is what are assumption is.

That's pretax?

Yes.

Okay. And what caused the 10 percent increase in O&M in the fourth quarter year-over-year?

Storms, primarily.

About how much of that was storm expense?

It was a big chunk of it, 25 out of 40 million, something on that order, David.

25 million?

Yes. There was another 10 that was simply part of this intentional decision to move some cost from '05 to '04 because it was more efficient to do it during that time period.

Okay. You spoke before about rising emissions expenses. Could you tell us what the total expense for mission credits for 2004 was and what you're forecasting for 2005?

It was on the order of 50 million or so in '04, and probably directionally that or maybe a little more as we look at '05.

That's for total emissions allowances -- total emissions allowances for 2004 was 50 million?

It's on that order, yes David.

Okay, so relatively flat. And do you have an estimate of what the impact of weather was for 2004 versus normal? You quantify heating degree days in the press release, but do you have an estimate?

Give us a second.

It was -- let me just do a little quick math here and I will get it for you. Just to scare everybody, I can do math. 7 cents a share, give or take.

Okay. Well, it sounds like you have a lot of things working in your favor now for 2005. Are you guys going to be coming to New York anytime soon and holding a conference?

We have something scheduled for March. Yes, March second, you'll be receiving an invitation for that but we will be at the UBS conference February 17th.

Okay. Congratulations on a lot of recent positive news flow.

Thank you very much, David.

Greg Gordon, Smith Barney.

David asked, I only had one question, it was David's question but he also asked all 27 parts of it. I am just kidding; David will call me later to (multiple speakers) I have a bit of an esoteric question on CapEx. I sort of understand what you're doing as far as increased transmission CapEx and what you're doing on the generation and emissions side, but if it's possible could you go into a little bit more granular detail, what the increased capital spending is for specifically on the distribution side?

I know you talked about reliability in general, but what types of capital equipment are you sort of purchasing, and what type of expenditures are you making in order to achieve those, what you think are needed reliability upgrades and why now?

Well, a couple of things. On the distribution capital there are two chunky areas, the first one quite honestly is the best news for a business like ours, and that is capital spent to attach new customers to the system. And we are seeing a growth in that year-over-year, and we are very encouraged by what we see there. There is no better distribution capital for a company like ours to spend.

You got some demand push then?

Oh, indeed, oh indeed and that is as I say really good news. The second chunk piece of it is this reliability issue, and some of it has to do with an enhanced clearing approach which would allow for the capitalization of the right-of-way trimming to ensure that you aren't affecting the wires in a negative sense at a more traditional O&M tree trimming process might yield for you. And equally important is replacement of and refurbishment of equipment A, that needs replacement or B, is simply tired.

So a portion of that is capitalization of what might have been previously expense to tree trimming?

No, just that we have really gone much more aggressive after the tree trimming aspect of the overall management of a distribution system. If you think in terms of where does a utility react to bad cost events, it reacts by not trimming trees because it is the least impact if in reliability near-term and the most rewarding financially near-term. But it does come back to get you. And AEP like so many other companies, spent a number of years trimming back the amount of dollars spent on right-of-way maintenance and finds itself now through regulatory settlements in Ohio, Oklahoma, Indiana and other jurisdictions, Louisiana and some others that come to mind quite quickly moving forward more aggressively in that regard. And some of that is capitalized, some of it is expensed and that is kind of the arithmetic that you go through.

Thanks very much. Appreciate the explanation.

Thanks for the question.

Michael Worms, Harris Nesbitt.

Actually one very quick question and then a little bit more detail on something else. With regard to the emission allowances that you had mentioned about 50 million in 2004 is that a net number net of emissions sold, or is that no cost?

That's cost.

The second question is with regard to the slide 14 your risks and uncertainties, can you can give us a little more color as to what kind of risks or uncertainties are involved in the PJM environment?

As we had said to you before, Mike and others, we are growing at an incredible way in PJM with an understanding of how to bid our plants into the PJM market process, how to be advantageous, opportunistically on locational marginal pricing and/or congestion pricing. So it really is a learning curve that is not easy. And it has as much downside potential -- it has downside and upside -- I would argue it has more upside than downside but we are just a baby in that game. But we are in dog years gaining knowledge.

This will conclude our call for today. Thanks for joining us; the IR staff will be available to take any questions that you have this afternoon. And Doug, if you can give everyone the replay instructions that would be fantastic.

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