美國電力 (AEP) 2005 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the second quarter 2005 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will been given at that time. If you should require assistance during the call please press star then zero. As a reminder, this conferences being recorded. I'd now like to turn the conference over to your host Ms.Julie Sloat, Vice President of Investor Relations, please go ahead.

Thanks Stacy. Good morning and that you for joining us today to discuss AEP's second quarter 2005 earnings and the earnings for the first six months of this year. I expect that you've seen the press released earlier today. It's also on our web page at aep.com. In addition to the financial schedules included in the press release package, the web cast of this call will include visuals of charts and graphics used by AEP management during the call. An investor information packet will also be available at aep.com today at approximately 10 a.m. that will include the consolidated balance sheet and statement of cash flows as well as full income statements for our utility operations, gas operations, investments in parent company.

The earnings release and other matters that may be discussed on the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings including the most recent annual report on Form 10-K and quarter report on 10-Q for discussion of factors that may cause results to differ from management projections, forecasts, estimates and expectations. Also on the call we will discuss the measures about company performance. That is ongoing earnings versus reported earnings that differ from those recognized by generally accepted accounting principles, or GAAP. You can file a reconciliation of these non-GAAP matters on our investor relations website at aep.com. I'll now turn over the proceedings to Mike Morris, Chairman, President and CEO. of the company to lead an opening presentation and then there'll be time for questions.

Thanks, Julie, and thanks to all of you for being with us. Like so many other utilities, we have experienced a very successful first half of 2005. Our second quarter results, which as Julie just mentioned, $0.61 per share on an ongoing basis and $0.58 per share on GAAP basis are considerably better than we thought they might be and we're pleased with what we have seen. And it really is relevant active of growth that we're seeing throughout our territories not so much by weather as one might expect and equally important, we have experienced the best results since joining the PJM of late. And we think that has so much to do with our ongoing learning that you've heard us talk about so many times before about, but probably more important is the continued performance of our generation fleet during periods of high demand. So, we have seen increased volumes and increased margins, all of which have been to our shareholders advantage as well as our customers. On top of that, we are beginning to experience what I would have expected some time ago, but at least we are now beginning to experience very reasonable O&M cost control throughout the year. I don't expect that our current status on O&M will remain through the end of the year as there are timing differences that do have an impact on some of that activity, but going-forward, I feel very comfortable that American Electric Power is beginning to react to the O&M control that I think is so important for us going forward.

We see a number of very positive events then to date and it just isn't fair to stay only on that side of the equation. There have been challenges and will continue to be challenges as the year unfolds. We, again, like so many others, are troubled by a couple of events on the coal side of the equation. The first really is an availability issue and that has so much to do with the early year river rage along the great river system in the east. Compounded now by the derailments in May from Powder Basin River coal coming to market at the kind of volumes that people expect. And of course the tightness of supply has added to the pricing issue that we and others are facing. I really raise the derailment issue in that it is of concern to the industry and to American Electric Power, for us, considerably less so than others who are reliant upon Powder River Basin coal. As you know, it really affects our Rockport and Welsh plant probably more than any others, but again, as you might expect, our team has worked our way through that by adjusting fuel blends on the eastern side and, again, doing things to reroute coal delivers to those stations who are in the greatest need, and I'm very pleased with the way that our team has performed.

We have shared with you before we thought that our year over year coal escalation would be in the order of 10 percent. That isn't going to maintain, it surely hasn't to date. On the eastern side of particular, we are probably 2 to 4 percent higher than that. However, it would be wrong for you to simply take that math and run it for the calendar year because we will continue to manage the over all cost of fuel, which in our world also contains the transportation equation as well as the environmental emission credit equation as well. So we will continue to manage toward that goal and hopefully by the end of the year we'll be a bit the more back in line. But we have seen those price escalators, none the less.

On the escalation side as well, you've heard us speak many times about the very high opportunity that we have at AEP to invest $3.7 billion on environmental improvements at our power production facilities, so as to keep those very cost effective plants in operation for an extended period of time, that number now as we got more and more dollars in hand for projects done as well as into the second and third phase of project estimation, has escalated to 4.1 billion. I'm not troubled by that other than in the cash sense, and Susan will address that and other issues as she shares with us some of her views of where we stand today and tomorrow. But I am encouraged by knowing that we're well ahead of the pack again. The engineering talent is hard to find and we have much of it lined up. The actual construction contracts are hard to enter into. We have them lined up and price capped. So we feel comfortable with where we are particularly as we juxtapose ourselves to others in our space.

We continue to see a couple of opportunities. I know you know that we purchased the Waterford Gas combined cycle facility. That was done for capacity requirements on our existing fleet with the growth that we are seeing in year-over-year demand, and we will continue to look around for those kind of distress assets which we think solve part of the capacity equation at very cost effective prices.

I know that some of you are aware of the order that we received from the Ohio Public Utility Commission not long ago requesting that we try to find an answer for the Allegheny, Ohio subsidiary [INDISCERNIBLE] and Power and see if we can't find a way to bring those customers inside of the AEP Ohio utility fold. And we continue to work on that as diligently as we can in reaction to what we think is an opportunity, not only to assist our friends at the Commission, but at the end of the day, to add to the customer count at American Electric Power.

Many other rate activities going on. All of which seem to be heading in at least the right direction. You've heard me say before that we're encouraged by the settlement opportunities that we've experienced in the Texas Wires case, in the Public Service of Oklahoma rate review case, and others that have been in front of us. As you know, the center stage is occupied by the stranded cost activities in Texas. We feel comfortable with where we are and what we have done and if given the opportunity to bring that to settlement prior to the extended timeline that the overall play of the regulatory process would bring us, we will try to do just that.

We continue to be encouraged by some of the things that we see coming out of the Federal Energy Regulatory Commission as we work on the SECA rate issue and the over all implementation of a regional rate design for a regional transmission organization. We think that it's very important that we continue to press on that issue because it is critically important to this company. And equally important, I think, to the country if in fact our RTOs and RTO light, or RTO like-activities are going to continue to develop as I expect that they will.

That leaves me with at least one concluding thought and that has everything to do with our guidance. You know from our press release that we continue to stay in the 2.30 to 2.50 range. Which we think that that's appropriate, but it's quite clear to us that one could get comfortable being a bit on the upside of the mid-case point as the year unfolds. However, July and August are critically important months to every electric utility and what we don't want to do is overstate what we might be able to deliver to you as the year goes on. And then understand perform as the year unfolds. So we feel comfortable about where we are guidance-wise. We feel that if you're in the, again, above the midpoint in that calculation, you're probably going to be in a good zone. With that, I pass the baton to Susan who will fill you in with many more of the details. Susan?

Thanks, Mike. I'm going to talk to you a bit the from the slides that I think you have, so if you go to what I have numbered 4, which is the second quarter '05 earnings reportings summary, you see reflected on a segment basis, the information that Mike gave you, which were reported earnings at $0.58 compared to the ongoing earnings that you see here of $0.61. The $0.03 difference is basically contributable to severance cost, as a result of a company-wide operations review that we began in the first half of this year. The ongoing earnings are composed of $0.68 from a very solid utility operations performance and a negative $0.07 from the parent company, which is basically flat year to year. I am going to go into more detail on the utility operations in a minute, but I did want to note that although the investment segment from $0.07 per share basis is inconsequential, the investment segment does show a loss of 2 million versus the 9 million loss from last year. That includes not only the benefit of the various divestitures but also a positive improvement of our MEMCO Barge operation year-to-year having to do with their effective taking advantage of increase freight rates.

Let's go on to the next page which is the second quarter '05 utilities performance, and what I'd like to do is highlight some of the major trends that Mike identified as influencing these outcomes for this year. The major things that you want to focus on, I think, are the increased retail sales that do show positive operational opportunities for our customers, and therefore, for us throughout our system, carrying costs on Texas stranded costs and Ohio environmental costs, which you see in the other income and deduction lines. We did have higher margins in off-system sales on a year-to-year basis by about $38 million I think indicating our comfort, particularly in these peak periods with PJM as well as the operational performance of our plants, as Mike suggested. And then the lower O&M items pretty significant 750 billion versus the 818 that we saw last year.

There was pressure, as Mike mentioned, from fuel as you might expect. For our regulated utilities, primarily APCO and I&M, that represented about $36 million in decreased margin year to year. That was partially offset by increased customer count and then certainly industrial usage which was up on the regulated utilities by about 4 percent. The performance at our Ohio companies, as you see, was quite positive on a year-to-year basis and was quite helpful in offsetting the margin erosion at the regulated utilities. Ohio, too, we saw some pressure associated with the increased fuel costs. That was about $8 million but there were other positive variances that offset that. We did benefit again in Ohio from increased sales in all customer classes and the total retail load was up about 4 percent. There was a slight benefit from weather but, as Mike suggested, overall retail load shows gains in usage as well. And we recognize a gain of approximately $17 million from emission allowances that we got from Buckeye Power as part of a previous agreement, and that is also reflected in the Ohio numbers. On the negative side, you see I think people would have expected this, $36 million gross margin drop at Texas supply which is mainly the result of the generation divestitures, which were sold in July of '04 plus the STP nuclear plant sale which was completed in mid-May of this year.

Let me talk for a minute now about the O&M expenses. Again, $68 million from the prior period, by comparison and that reflects a combination of items. Mike mentioned the differences in timing. This has to do with timing changes in our plans for some distribution activities as well as some power plan outages. Those have been moved to the fall and we expect those dollars to be spent. We have -- we did have some decreased storm damage on a year-to-year basis and that's a positive force as well. And we did, of course, benefit as you would expect in the second quarter from decreased O&M expenses at the Texas plants which we no longer own. So in sum with respect to O&M, let me re-emphasize what Mike said because a great deal of this is associated with timing changes that were appropriate to do for an operational perspective. We do expect to continue to see those dollars. The other point I want to make with respect to O&M that I think is important is I think you should see a theme here through the operational review that was conducted of reduced O&M at corporate center activities. A lot of focus on those efficiencies. And a shift of O&M dollars. The kind of investment and operation that secures us the ability to improve our operations longer term.

I'll do a quick mention of where that takes us year-to-date. If you go to the next slide on the six month year-to-date performance, the trends underlying this performance, in the parent company activity, we are, as you can see here, $1.49 that's $1.56 from utilities operations. A positive 3 from investments. The parent company expense is a little larger than that last year and that really has to do primarily with the activities that we engaged in. The share buy back cost. The cost associated with the refinancing. And then of course, we have lower interest income in the first quarter and a little bit into the second which I think you're all familiar with. The trends underlying this, as I've suggested are pretty much the trends that we've seen throughout the year and were reflected in the second quarter discussion, so I'm not going to go over that. But there is a slide that you'll see on the next page that goes over that in some detail.

Let's talk for a minute about cash flow. Cash flow from operations was about $900 million. You see the detail underlying that and I point you in particular to the spin with respect to pension funding. We did fund our pension by $200 million. This is on a year-to-date basis. We had told you that we expected to fund about $400 million for our pension this year, and that continues to be our plan. We spent about $1 billion in CapEx during the first half of the year and we did collect asset sale proceeds of a $1.5 billion. We repurchased some common shares in the amount of just a little understand $400 million. We retired short and long-term debt for a net amount of 353. And as a consequence, our net change in cash during the first half of 2005 was $287 million, and we have an ending cash balance for the quarter of 607. I'd simply note with respect to capitalization, and you find the detail of that on the next page, that we ended the quarter at 58.6 debt to cap on a GAAP basis. The credit adjusted basis, and you see the calculation for that there, is 57.7. And our goal continues to be to maintain a debt cap in the range of 55 to 60 percent. Obviously as we continue with our capital spend, you may see that moving up more toward the 60 percent range. I think that's all I want to cover at this point up front. And let's go back to Mike, and we'll take your questions.

Stacy, we're ready for questions.

Thank you ladies and gentlemen. [OPERATOR INSTRUCTIONS] Our first question we'll go to the line of Kit Konolige with Morgan Stanley, please go ahead.

Good morning. Congratulations.

Thank you, Kit.

Just wanted to ask one or two details about the earnings increments and then maybe your take on the some aspects of the energy bill? First of all, so as I read this, it looks like the bulk of the improvement was lower O&M, and then a lot of the rest of it was higher margins on coal even though coal is more expensive, the price you can sell it at off system, is -- the margins have expanded even more. Is that an accurate description?

It is, kit. It's not only higher margin reflective, I mean higher revenues but also higher margins which mean that we're, I think, continuing as I've said to learn and get a little smarter about how things work in the PJM, and the higher volumes have everything to do with the plants being there when needed. But don't forget, there was very strong retail performance as well inside of our more traditional footprint with weather adjusted sales being very strong.

And that's something that you didn't really expect, I guess?

Well, it just shows that the growth that we have seen is real. The customer counts continue to go up. We are very impressed with northwest Arkansas and the greater Shreveport area and Louisiana as well as some unexpected growth, quite honestly, in our Virginia territory. So we're pleased with what we're seeing here and hopefully the economic development activities that we dedicate ourselves to will continue to lead us in that direction.

Is it -- is it too early to think about the ultimate regulatory structure of the Ohio companies at this point?

Probably so. As you know, First Energy continues to speak in terms of there's a law on the books, let's go to market. I continue to speak in terms of nice idea, don't know if it's accomplishable. And somewhere in between may lie the factual answer to that issue. We're -- we're encouraged by what we, as a group of utilities in Ohio, continue to see out of the PUCO. We think it's an extremely balanced commission, tough, nonetheless about you realistic about the impacts that are going forward activities will have or could have on the Ohio economy, which, of course, we're all very concerned about all four of the utilities here. But expect, Kit, that at the end of the day, there will be some reasoned way to move forward. As you know, 2006 is a gubernatorial year in Ohio and that may have some impact on how all of these things unfold in a timeline, but clearly, prior to January the 1st of 2009 we've going to have to come up with some kind of issue that addresses that issue.

Does -- do the Ohio -- do your Ohio companies still continue to report rather high returns on equity?

Yes, they do. Yes, they do, well within what we would consider to be a band of reasonableness, but they are performing very well. And again, that has a lot to do with cost control, reliability improvements and, therefore, more customer usage, but, yes, they are experiencing solid rates of return.

Okay. And then finally, just kind of broadly, because obviously, it is not even the law yet, but with the energy bill, I guess, looking closer to being an energy law, I -- I assume that the transmission aspects of that will be important to you. Do you have any sense of that? And how about any idea of as FERC seems to wants to move towards an RPM and PJM, if that would have any effect on you?

Well, clearly, there are things in the energy bill which I expect will pass the senate this morning at about 10:30 or so and then get to the President's desk for a signing ceremony one day next week, I would imagine. The transmission aspects are very important to us. We believe that the change in the acceleration of the depreciation of course will allow for additional capital to flow into that side of the business, and we think that's a very strong thing, not only for the industry, but in particular, for AEP. We --

-- can I interrupt you one second? Is that new dollars that go in or have accelerated depreciation, or does that apply to all dollars that exist in transmission now?

New dollars.

Right. Okay.

And we see that as being important for appreciation. And of course, the accelerated depreciation for environmental investments made on plants after 1976 is very important to AEP and will continue to be pleased with that activity. One of the things that's in their, Kit, that you know, is extremely significant to us is the investment tax credit issue for the coal gasification activity. We -- this week received what we think is supportive testimony although with some questions from the PUCO staff. But equally important, we see some real price advantage by the investment tax credit that the energy bill has in it.

And we are seeing a national support for an integrated gas combined cycle facility, and that dove tails back into your question about what does Ohio do about those kind of facilities going forward, because it's clear to me and I think to this industry, that a major base load facilities are not going to be billed in a merchant model. I know that all of the new start participants are looking for some kind of regulatory treatment in a more traditional sense rather than building new nuclear into a merchant role and we surely won't build integrated combined gas cycle facilities into a merchant role.

Okay. Thank you very much.

You're welcome. Thanks for your question.

Thank you, we have a question from the line of Rudy Talantino from Prudential Equity Group. Please go ahead.

Hi, good morning.

Good morning.

Earlier in the year you guided O&M expenses at $3.1 billion. Is that still a good number for the remainder of the year?

Yes, it'll be a bit below that as Mike was suggesting, we expect to capture a by the of the under run we have year-to-date. About you I do -- don't want you to over estimate that. We do not have a revised estimate. And we expect to capture some of it. But as I said, a large portion of the current year to date under run is associated with timing issues. We want to get that work done on our power plants and our distribution system because of the benefit that it gets us over the long term, so we will spend those dollars.

Okay. And as far as going forward, you're talking about, you know, managing O&M costs. What would be a good -- a growth rate for O&M or do you expect to keep O& M expenses flat year-over-year?

Well, we'll share much more of that data with you as we move toward the fall EEIE finance meetings, but I think those of you who have seen me manage O&M before, control is what's important to me and we'll continue to do that. Susan mentioned that we've gone through a reorganization, a re-look at the corporate center activity and, you know, titles have been reduced and numbers of officers have been reduced, something that was essential, and the teamwork in that endeavor was really quite impressive. One of our senior officers working himself out of an assignment. And I take that as high dedication to making sure that we're being as cost effective as we can. So this is a big footprint and it demands a considerable amount of O&M to be spent year in and year out to continue to keep the reliability, which is so important to us, up.

As you know, we are moving into a demanding, yet, I think potentially successful rate case cycle in almost many every of those 11 jurisdictions, and spending O&M into a rate case is always a wise thing to do. Reliability commitments have been made. Commitments that we're living up to. And as I said many, many times before, when you're in the middle of a strong performance year, you want to get as much work done as you can because there will be other years where the performance isn't that strong, and you need to trim back on some of that flexible O&M spending that's out there. So if you're a tree, and you're in our right of way, look out, here we come.

Okay. And I just have a real quick question with regard to your FERC transmission filing, your transmission rates case filing. I understand that you're trying to recover $486 million -- your revenue request is like $486 million. Does that include the loss through and out transmission -- the lost SECA charges when they expire?

The accurate way, I think to describe it is it is a substitute for most but not all of the lost SECA charges. It is not precisely filing for the lost SECA charges, it's is a different rate design approach, but we would expect to recover a large portion of those revenues. I really think it's important that we don't miss the reality of what it is that we have filed. If you -- if you go to the current license plate design rate that's being implemented or has been implemented in the PJM, you get a real distortion as to who is paying for the system versus who ought to pay for the system, and those who are more heavily using the system to transfer energy from power plants east or power plants west to demand east are getting a free ride, that's not a regional rate. That's a local rate that is totally uncalled for, and we will continue to push on that issue, and we're encouraged by the opportunity inside of this case to continue to bring our view of the world forward. Because I think without question, when you speak to the FERC staff and commissioners, they all are seeking that regional rate design for regional transmission operations and the license plate approach simply isn't the right approach.

Okay. So your essentially pushing for it. In your current filings, you've kind of mentioned your rates are for license plate rates but you're also trying to push for just a different rate design to shift cost, is that what you are trying to do?

Not to shift cost but to assign cost to where they're truly being born and that's what we call the highway, byway rate. If you're going to utilize the back bone of the eastern enter interface, which is our transmission grid, you have to pay something for that transport. And the local lower voltage levels truly do lend themselves to the license plate rate structure, and we think that is just a better approach to again regionalizing the real benefit that one gets from having a transmission grid like the AEP system inside of the PJM, rather than, quite honestly, getting a free ride over the entirety of the 765 grid which just isn't accurate nor is it appropriate.

Okay. Thank you very much.

You bet.

Thank you. We have a question from the line of Elizabeth Parella with Merrill Lynch. Please go ahead.

Yes, thank you. One the 68 million reduction in O&M expense, you mentioned several drivers. Is it possible to kind of break out for us how that 68 million came about?

,I can give you a couple of the pieces and then we'll track down to see whether or not we can do more later, Elizabeth. The decrease storm damage is about $20 million. Of that, there was about 18 million that was associated with the divestiture of the Texas generation plant. And the bulk of the rest of it is going to be associated with the timing differences.

Okay. And you mentioned higher fuel cost in the second quarter between a couple of -- between Ohio and the retail companies, I guess the unrecovered piece of higher fuel cost, which is $44 million.

Right.

Is that all coal?

Yes, it is.

Okay, so year-to-date, we're up about 94 million in terms of unrecovered coal costs?

That's pretty close.

Okay, and that's, as Mike said, tracking it higher than a 10 percent increase. Where do you think you kind of wind up at the end of the year, and what causes things to get a little bit easier for you in the seconds half?

Well, I think, again, Elizabeth, as I mentioned, doubling of that number would put you way beyond what we expect to experience. We will continue to see leveling of what we believe is the impact of the PBR numbers. As you know from meetings that you've been with us, we are seeing better '06, '07 prices going-forward. And as we go toward the end of the year, we also continue to sell coal to some who are in a tougher spots than we are, and I'm happy to say that many of my brothers and sisters are in tough shape.

And of course, we are long on credits as well as we're seeing the benefit of the incredible flowing now out of the east to satisfy the PBR shortfalls on our MEMCO. So, when we look at the totality of the impact of fuel on the AEP system, we're not pleased with where we are, but I know we are in considerably better shape than anyone else burning a lot of coal.

If I could add just a couple of points to that, Elizabeth. One thing that may help you out on the math a little bit, there is a $25 million reclass from O&M to fuel in the that SLEMCO numbers which show up on the regulated side. So you need to take that out of your calculation as far as the east is concerned, and so to say it was all east, is not technically correct because there's that $25 million issue. The other thing that I want to -- but in terms of increased costs, it is correct, it's all on the east and it's all related to coal.

Second, there are mitigating factors, although the total number in terms of fuel costs may go up, as Mike was suggesting, we do have the opportunity to manage around that in some respects. As you know, it's a circle of issues for us, SO2 allowances, transportation costs and the actual cost of fuel. We've actually seen a bit of reduction this quarter in SO2 emissions. That has a lot to do with burning more compliance coal. A decision that you can make and that may actually end up increasing, you have to worry about, of course, the price of additional compliance coal, so that's to be thought about. The other factor to think about, I don't have numbers around this for you, but another factor to think about that some of the year-to-year increase simply has to do with burning more coal because we had higher demand than we contracted for. That sends us to the spot market. So it's not overall a bad thing as long as we are getting more than we're paying to produce it, which of course we are.

And that 25 million reclass, was that in the second quarter, or --

Is it spread out? It's about half over the first half of the year.

Okay. And just one other question. On the environmental CapEx budget which you raised $400 million. Can you talk about why you increased it? Is it other projects that you feel a need to do. Is it higher equipment costs, higher services costs. What kind of drove the increase?

Actually there's a couple of issues here, Elizabeth. The way that we go through our project analysis and the forecast of the environmental spend between now and the end of the decade is a three-part review. The first is a raw engineering design and estimate of the potential cost of going forward. The second more detailed is the engineering phase where you actually look at the footprint of the power plant in a much more detailed sense and begin to gather some of the subsoil characteristics as to the ability to hold a thousand foot tower and those kinds of activities. And that really does begin to hone in your price considerably better. And then last, is to sign the contracts for the actual construction and performance. We, like everyone else have been affected by escalating prices in engineering talent, escalating prices in concrete, escalating prices in the building and buying of the necessary lands and material for land fills and those kind of activities.

But equally important, we have allowed for our engineering group to make some additional boiler changes so that once done, we will be able to burn even a larger range of coal types. As you know, much of what a power plant can do has all to do with the boilers ability to handle different classes of coal, different poundage of sulfur and coal and those kind of activities. So we thought overall, that these decisions would lead to, again, a much better story as we get to the productive years of those plants and what we think will be a very advantageous place for our customers and our shareholders. So combination of some escalators, more importantly, a combination of getting closer and closer to the real design. And then lastly and equally important, allowing for the flexibility of additional boiler modification so as to accommodate a wider range of coal for availability issues down the road as well as pricing issues down the road.

Okay, thank you.

Thank you. We have a question from the line of Paul Ridzon from Key McDonald. Please go ahead.

Morning. Mike, you said that in strong years, you ramp the O&M up but it seems like O&M is coming down in '05 from the previous 3.1 forecast. Just is that the result of diligence and your, you know, maybe net-net it is going up but you're offsetting with opportunities?

I think that's a pretty accurate way to say it. When you offered me this great big white softball, I want to make sure I hit it hard. I would argue its the superior management, but in reality, we are -- we are truly spending as -- as aggressively as we can to ensure that we have a very good platform moving not only into the rate reviews but equally important, moving into and living up to the reliability commitments that we have made to state regulators in our territory as you know, or I hope you'll recall that in Oklahoma and in particular, we were allowed for a rate rider on tree trimming, and we are about that with as much vigor as you can get. In fact, we have seen the positive impact of that out on the Oklahoma system with very similar storms coming through on similar timelines and the recovery periods are reduced by days. That's very important to the Oklahoma regularity. In fact, we have gone in and asked for an increase in the rider so that we can do even more good work on the reliability side.

So it really is an aggressive spend. But watching the other side of the equation as well, to ensure that we don't over spend, I want to get as much out of every dollar that we put on the system as we possibly can.

With your integration in PJM could you ever find yourself in a position where you would welcome mild midwest weather in the summer.

I don't think -- I don't think we're ever interested in mild weather. We're interested in comforting our customers. And the more uncomfortable, the happier we are. One of the issues that is very important to us, and this is a great learning about the PJM activity, and that is and you've heard me say this before, when you day ahead in a 1,300 megawatt facility, it had better be there on the actual day whether the demand is made and the scheduling is made. And not only have our commercial operations folks done an excellent job and continue everyday, every month to get better and better at what we're doing inside of the PJM, the power plant operators are the real key to your success or failure in that model. So I'm not interested in mild weather, I'm interested in calm weather, but hot and sticky is really good.

Are their wholesale opportunities in the current gas environment that are better than the retail opportunities?.

Well, in some instances, sure, and that's one of the issues that we constantly measure ourselves against. And when you see things like the Waterford plant being added to the portfolio, that gives you additional capacity sales into a wholesale market place that can be extremely rewarding. In fact our commercial ops people continue to pursue the two and three year wholesale power contract at known prices, which when we put our forward curve on them, tell us that's a better deal than play the bouncing market place.

What was impact of weather on the quarter?

The actual impact was $0.02 a share second quarter. And a minus penny in the first quarter. So the first half year I think we're up a penny by weather.

Is that versus normal?

Yes, sir.

Just one question -- two more questions. What's driving industrial demand and how does the energy bill shape your view about potential capital allegations toward transmission, and if it did go toward transmission, where would it come from?

A couple of things. We continue to see relatively strong demand on the industrial side, so the manufacturing base that we serve in our footprint, continues to see production increases, so we're not selling inventory anymore. As you know, in much of our service territory, we, too, are auto related but, fortunately, we're on the auto side of cars that sells versus cars that sit and we continue to see pretty solid growth in that activity.

On the energy bill, it really does encourage some capital on the transmission side. For us, probably the biggest opportunities in the transmission world is continuing to join in the ERCOT transmission bill to bring the wind farms of western Texas to the demand centers of metropolitan Dallas and other reaches there.

The issue you ask, the last issue you ask is the hardest, and that is where does Susan get the capital? So every time that we continue to go forward and do things in a more cost effective way, if we can find chunky amounts of capital we'll put them to work on it transmission side.

You have your eyes on any chunky pieces of capital?

No, Susan keeps telling me the cupboard is bare. I can't believe that.

What are the industrial sectors that, is it automotive that you're seeing the most strength from?

We've seen increases in steal production and chemicals in the west which is, as Mike said, the steel drives the -- is driven by the automobile industry.

Okay. Thank you very much.

You bet. Thanks for your questions.

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

Thank you and good morning.

Good morning, Ali.

I apologize if some of this may have been covered earlier, I come on a little late. Susan, first off, the effective tax rate had come down to about 30 percent in the quarter. Is this what we should model for the year or was that abberation for the quarter?

No, that's about right, Ali. So that should be our full-year number as well. Yes.

Okay. And secondly, I wanted to get a better handle on why the guidance was not changed. You know, you've done a $1.49 through the first half, last year second half you did $1.22. So, even if you were flat, you should be well above your guidance. So, what is it that couldn't cause you not to be above this guidance range.

Well, again, as I mentioned and you may not have heard it, I think it's safe for people to be north of the midpoint of the guidance range, but we really, July, August, September, that's a terribly important quarter for every electric utility. This one among them. And again, having heard what we've said about spending additional O&M dollars into a solid performance year, are some of the things that we will continue to focus on as we go forward. And so what we, again, don't want to do is over promise, under deliver, and I don't think we're being recklessly conservative here. I just think that we're just being very realistic about an excellent first half. And all of the things in place for the second half that we think will add value for our shareholders. But let's wait a little longer, and we'll see where we go.

Mike, there's no regulatory income or any of those kind of income streams that have a big falloff in the second half or something like that?

No, there shouldn't be. We, as you know, have made some regular tore filings in Virginia which are very important to us. We will soon make a very important regulatory filing in West Virginia. I don't see any down side there. In fact, as you can well imagine, knowing me, that I see nothing but upside in that world. But we'll continue to pursue that.

On the environmental CapEx side, with this higher budget, et cetera, are you folks still confident that that 4.1 billion spent can happen without any equity issuance over that time period?

That's a longer term question and we continue to look at that. There may well be a need for equity capital to be raised. Remember, that much of what we are seeking on the capital side, even on the environmental spin, not unlike the Ohio rate stabilization, you're going to see us continue to pursue that kind of approach where capital flows in as construction goes forward. We know that that's a different model than the regulatory environment is used to, but we and others continue to see a success in that regard, and we are going to pursue that in as many jurisdictions as we can.

And last question, Mike, just to go over that again, in the past, you've laid out where the coal earnings potential could be on the environmental CapEx regulatory treatment. When you see that play out, when at the earliest could you see that really cumulatively hit you on the bottom line?

Well, we now are in that process of folding much of that into the overall rate structure and as I mentioned, Virginia was filed the first of July. We'll make a filing in West Virginia. We've made our notice of filing, we'll make that filing in the month of August. We'll continue to look at the opportunity for additional filings under the 4 percent going-forward activity with the rate stabilization plan. You'll see a Kentucky filing in the not too distant future to pursue the Kentucky flow through activities on a yea- to-year basis. You will probably see an overall rate filing in the west as we settle matters in Louisiana. We will make another filing in Oklahoma before too long. So we'll begin to see the constructive impact of that probably as early as '06, and carrying through '07 and beyond.

Thank you.

You bet. Thank you.

Thank you. Ones again, if you wish to ask a question, please press star one. And we have a question from with Ashar Khan with SAC Capital Please go ahead.

Good morning.

Good morning, Ashar.

Could you just give us a little bit on what's happening in Texas in terms of the proceedings, chances for settlement? How is that looking as we go in for the second half of the year?

Ashar, as you've heard me say before, there is a foundation for the opportunity of settlement discussions. Where we appear to be in Texas is that the seriousness of those opportunities will materialize next month, in the month of August, and we are encouraged by some of the indicative conversations we have had with, most importantly, some of the Texas industrial customers. The constant byway build up of the carrying charge, of course, is the majority impetus for them.

And just bringing this to closure is an equally important impetus to us. The issue that we would like to do is wrap it up in its entirety. By that, I mean not only a settlement as to the dollar issue, but equally important, a settlement as to the ability to go forward and securitize without yet another time consuming regulatory evaluation. And then I think the ground is fertile for that crop to maybe come forward and we'll continue to work on that.

Okay. And Susan, on a smaller note, this Texas supply line, what can we expect now going forward on a quarter -- on a quarterly? What kind of run rates can we expect over there?

Well, we don't have a quarterly run rate for you. I think that what you can expect is continued margins around, from an operations perspective and around the range that -- that we have going forward. The [INDISCERNIBLE] supply agreement is gone but there was an offset with respect to that. It may well continue to decline.

Okay. Because this quarter you still had STP in there, right?

Yes.

So until whenever you sold it off, correct?

That's right. That's precisely correct and that's a good refinement.

-- I'm just trying to understand --

--- STP is about right to to look at.

Can you tell us how much STP contributed in the second quarter so we can significantly isolate that impact?

I don't have that off the top of my head but that's a number that we can supply.

Okay. Thank you very much.

Sure.

Thank you. We have a question from the line of Paul Debbas from Value Line. Please go ahead.

Hi. This is Paul Debbas.

Hi Paul.

Hi. Now given the increase in environmental CapEx and the possible increase CapEx for transmission and other things, does that affect your thoughts on possibly increasing the dividend at all?

No. We continue to do our financial planning with a view toward hopefully having an opportunity to increase the dividend ever so slightly. If not yet this year, in 2006, and we're building that into our model and we'll share that data with you as I said later in the year, at the EEI event, as to what we see in 706.

Okay, but you don't have any specific pay out ratio targets or anything like that that you can speak about now?

No, sir. We really feel strongly about this issue, that our obligation to the shareholders is to make the wisest use of the capital that's available to us. And to date, in our view of the world, yes, indeed, subject to appropriate regulatory treatment, but nonetheless, in our view of the world, putting that back to work in the capital opportunities that we see, is the best way to go.

Having said that, I do want to make certain that we have a dividend increase as soon as we can. It won't be dramatic but it will be important, and equally true, we need to make sure that there's a sustainability associated with that. So the finance team continues to work very hard toward that end. And hopefully we'll be able to make some constructive comments about that as the year goes forward.

Thank you.

And at this time there are no questions in queue. Please continue.

Great. Well that concludes our call for today. If you'd like to stay on line, there'll be replay instructions, otherwise, the investor relations staff is available to you if you have any follow-up questions. Thanks.

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