美國電力 (AEP) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AEP third quarter 2005 earnings conference. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over the Vice President of Investor Relations, Julie Sloat. Please go ahead.

Thanks. Good morning and thank you for joining us today to discuss AEP's 2005 third quarter earnings and earnings for the first nine months of 2005. I expect you've seen the press release issued earlier today. It's also available on our web age at AEP.com. In addition, to the financial schedules included in the press release package the webcast of this call will include visual of charts and graphics referred to by AEP management during the call. An Investor information packet will be also be available at AEP.com today, at approximately 11 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 investment and parent companies. The earnings release and other matters that may be discussed today contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings including the most recent annual reports on form 10K and quarter reports on form 10Q for discussion of the factors that may cause results to differ from management projections, forecast, estimates and expectations.

Also on the call, we will discuss the measures about performance that is ongoing earnings versus reported earnings that differ from those recognized by general accepted accounting services or GAAP. You can find a reconciliation of these nonGAAP measures on our Investors Relations website at AEP.com.

I'll now turn the proceedings over the Mike Morris Chairman, President and CEO of the Company to led an opening presentation and then will have time for your questions.

Thank you very much and to those of you who are joining you us, Thanks a lot. I know this is a busy time for you. I'm happy to tell you that American Electric Power is joining the other utilities with solid third quarter performance and year-to-date performance announcements today. We are very pleased with the way that the overall activity has unfolded for the quarter for us. We continue to see not only substantial impact from weather, as you know along with other utilities in this particular reach of the country, but we are also seeing very solid growth in our overall customer account as well as energy utilization.

As you know, we are moving our guidance up. I know at the end of the second quarter, many of you thought we should do that, I think. Susan and I and the management team felt it was premature to do that at the end of the second quarter hoping that the third quarter would be as it has and because of that we're moving the guidance range to $2.55 to $2.65 a share and we'll continue to work towards that range as the last quarter unfolds. Also, I hope that you saw yesterday that we increased the dividends by an annual increase of 6%, $0.02 per share, payable to the shareholders of record in early November.

At long last, we've been able to move in that appropriate direction. I was a bit overwhelmed as you know my tenure here is only about a year and three quarters now. But realizing that American Electric Power has had a dividend for all of the 380 quarters that we have served our shareholders since 1910 is a bit overwhelming, I must say, and I'm back we're on a dividend increase path. And as we said in that press release, we hope we will continue to be able to slowly and steadily grow our dividend over the years. We are at this point in time, also setting forth or guidance range for 2006. It's a healthy $2.50 to $2.70 a share. There's much more data to share with you at the EEI meeting a couple of weeks from now.

We're encouraged by that opportunity as well. As we have told you many times before, we continue to learn and grow and perform better as activities inside of the PJM. We have had a very robust quarters. Sales volumes have been solid as well as margins on the ofF system sales and we hope that is a trend that will continue through the rest of this year and beyond.

As we look at our needs in the integrated resource plan activity, as you know, we have filings in front of the Ohio commission for an integrated gas combine cycle plant. I guess as an anecdotal comment, no matter what Tony Alexander had to say about that, we clearly don't agree with him. At any rate, we also have in front of the commissions in Oklahoma and at SWEPCo, applications for additional facilities that we see as being needed through the integrated resource plan the company has done. To that end, as you know, we in fact have completed the acquisition of the waterford plant and are long on the way to close the plant as well, both needed on the capacity side of what we see as the requirements for our eastern utility operating companies.

Lastly, many regulatory activities going on. The stranded cost recovery proceedings have concluded in a formal sense for TCC. I would argue that our team did an excellent job at presenting the facts as we see them. We are very encouraged that the position the commission staff has taken in that regard and we eagerly await the results of the commission's deliberations in that endeavor. That's a very big event and has a huge potential impact on the company as we go forward.

As you know, from the through and out rate case activities that have gone on over the last couple of the years and the restructuring of the transition process at the FERC, we have made application there to adjust for the conclusion of the seeker rates and we would hope that settlement discussions which have begun in that proceeding will yield results that be be beneficial for our shareholders and our retail customers who should get the benefit of the incredible transmission asset that AEP has and provides to others in the region that use that facility day-in, day-out.

We have rate cases in front of our commissions in Virginia, West Virginia, Kentucky. And we will continue to pursue those cases as they go through the process. Many of them are on a track that we would want them to be on, some a little slower than we hoped, others moving alone more rapidly. As you know, because of the capital investment opportunity that we have at American Electric Power, it's very important that these rate proceedings continue on the pace we have set out. With that, I will turn the podium over to Susan who will take you through a series of slides to update you on third quarter activities and look forward to your questions and our answers, thanks. Susan?

Thanks, Mike. Let's start with the overview of the third quarter '05 performance which was reported earnings for the third quarter of $0.99 versus the ongoing earnings of $0.95. There were several pluses and minuses that led to the differences between those two, and you'll see those on the reconciliation sheet, but I want to call your attention to the two major items associated with that. One was $0.08 gain on the sale of Pacific hydro and that was partially offset by the write-down of [cone] units one and two, which reflects a loss of $0.06 . The ongoing earnings of $0.95 were composed of $0.97 from the utility operations and a -$0.01 from investment and a -$0.01 from the parent company. I'm going to spend most of my time this morning talking about the utility operations.

I would mention in the investment segment that the significant year-to year-difference had to do primarily with the sale of HPL and the elimination of the steelhead debt, the pay down of that debt and therefore the elimination of those losses that showed up in the same period the prior quarter.

If you go to the next slide entitled third quarter '04 utility operations, I want to spend a little time here since obviously, we had number of significant things going on in this quarter. On the utility side, we were up $0.06 year-to-year for the third quarter and the underlying story, we think, is both very satisfying and also pretty interesting. We substantially improved performance over the third quarter last year in both retail and wholesale sales. We were aided also by the transition carrying costs of about $22 million as well as booking for environmental additions of about $10 million in Ohio. If you look a little more specifically at the sales improvement on the retail side, what you see is an 8% increase in sales at the regulated utilities, 10% in Ohio, and 5% in Texas.

Weather contributed about $0.12 of the positive year-over-year, that's about $0.06 cents over normal conditions and the rest really comes from improved customer count and industrial demand growth. We continue to see drag from fuel. In the east in particular, that was about $30 million in Ohio and that was associated with, obviously, the fuel challenges associated with increased transportation costs. Some of the moving around that we did that we talked to you about in the second quarter, and also from the additional burn. Remember, we had significant sales increases and that increases the fuel costs you'll spend in any particular year.

We also saw an excellence performance in off system sales. $69 million over the third quarter from last year. Our commercial operations people took excellent advantage of a very strong plant performance and we thank our plant folks for that. We also had excellent work from the coal group who got us the coal when we needed it. I really want to emphasize Mike's point that our performance in PGM was very strong. We were much benefited by higher prices, but we were also benefited by the performance of our various groups that permitted us to sell into that quite effectively.

We had excellent performance overall for the quarter. And basically that put us in a position to offset not only the higher fuel costs I talked to you about, but the expected significant decrease that we did see in transmission revenues of about $20 million and then also the lower Texas supply margins of $61 million as a result of the divestiture that I think we also to expect.

The last item I'll mention on the quarter is that O&M is up significantly, $67 million from the prior quarter this year. I think we told you the to expect that. We did expect significant catchup over the course of this year. A lot of activity was moved into this quarter. Again, part of our overall philosophy that if dollars are available to us, we do want to do everything we can going into rate cases the to ensure an excellent record on reliability.

The next slide is a summary of the various segments on nine months year-to-date. And that is essentially driven by the same factors I've talked to you about in the quarter. What I would like to do is move from that slide and spend a little bit more time on some notes on the nine-month year-to-date on utility operations. Again, we saw ourselves building on the very positive results in the third quarter and many of the same trends were at work. Utility operations were $0.39 positive year-over-year. And on a year-to-date basis for the regulated utilities, the improved sales were not quite enough to overcome the increased fuel of about $53 million, but we are, as Mike suggested for the long-term, very much encouraged by the trends in customer count increase and we're also pushing forward aggressively on the regulatory relief which will be an important factor next year.

In Ohio, we saw $45 million year-over-year improvement,year-to-date. Again, improved customer count. We had, as you may recall, the $17 million benefit in the second quarter which was result of the emissions [ inaudible] settlement with Buckeye and the off set in Ohio for fuel was $65 million year-to-date. We do continue to see fuel pressure, partly associated with increase burn, partly associated with rising costs and the additional cost of transportation.

Off system sales year-to-date continues that same story. A major positive trend of $103 million. You do see a slight decrease in O&M year-to-year. Our current expectations are that we will come close to being where we thought we'd be by year end. There are some O&M variables we're continuing to look at including the possibility of continued assistance in other parts of the countries which could reduce our total O&M by the time we get to your end.

So let me take turn now to the next slide, which is cash flow. The cash flow from operations was $1.6 billion. $937 million of continuing earnings, and I won't read you the whole slide, but I want to call your attention to a couple of significant items. We do continue to pension funding that we told you you would, that's $306 million year-to-date. We have spent to date, $1.6 billion in CapEx and we've received about $1.6 billion in asset proceeds. We also did have an outflow of about $200 million for the Waterford Plant purchase.

Then going to the last slide on capitalization. I won't say it's my favorite, but I do like it. We find ourselves at the end of the quarter at 56.5% debt to cap on a GAAP basis and 57.2% on a credit adjusted basis. We set our goal to maintain our debt to cap on a 55 to 65% basis. That was a misstatement, it's 55 to 60%. Let me be very clear. We expect by year end for that to edge up somewhat as we continue our capital spend into the year. Mike, that pretty much lays out the details here and I think we should go to questions.

Thank you very much, Susan. Julie, we're ready to try our Q&A.

Kathy, we can go ahead and begin with the questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Dan Eggers with CSFB.

Hey, good morning.

Good morning, Dan.

First question, obviously, there's been a lot of political activity going on in Illinois recently with where this is going. It's become a very politicize process. As you have a similar path in Ohio a few years extended now, can you give any color on what you're hearing from the political front and any thoughts you might want to share about where the path is headed in Ohio at this point?

The only thing I would say to that is that it's quite clear Midwestern states are watching what's going on in Illinois. I wish John Roe and the Amrun team is much success as they can have in that regard. It's clear to me that as we went to rate stabilization beginning in 2006, the if the facts remain the same as we get to the 2009 time frame, I would expect that the Ohio commission and/or the Ohio legislator and/or then the Ohio executive officer would be interested in not having an electric rate shock going through the Ohio company.

To that end, different from some here in the state, American Electric Power would again take the opportunity to try and reach a reasoned position. That would be favorable to our shareholders and investors, but equally supportive of the economy in Ohio. On which, of course, much of our success is predicated.

Got it. Thank you. I don't want to start a battle between Ohio utilities right now, but given the comments made about IGCC construction and people battling that, can you just, for the record, give your opinion on with where it stands and a league presence of what you want to do.

Sure. I think there's no question within the provider of last resort responsibility that we Ohio utility have that one would be very wise to make certain that they had adequate supply to meet that demand and owning the generation facilities inside of the polar responsible organization, I think is an extremely well-thought through policy to handle that issue. Rather than being in the open market like so many gas distribution utilities hoping that you can pass along $14, a million BTU gas costs. We see this as a very rational and conservative way to go about handing that polar responsibility.

And I think that the law is clear enough on that issue. I would expect if an order were to be issued supportive of the integrated gas combined cycle application that's been filed, that someone will test its legality. One of the great things about the legal structure in Ohio is the cord of primaries jurisdiction to review a public utility commission order is the supreme court. It would be taken directly to that level. It would be adjudicated at that level and I would argue, because they've already visited the legality of the entire rate stabilization activity that the court would be supportive of the commission's decision.

Got it. Thank you guys.

Thank you.

We will now go to Andy Smith with J.P. Morgan. Please go ahead.

Good morning.

Good morning, Andy.

A couple questions for you guys. If first was just on some comments in the earnings release. You guy commented on whether being a help in the quarter, but you also talk about eliminating activities that were not essential to the utility operations and that helped, you guys take advantage of the favorable weather. Are you guys talking about like digesting HPL, or were there other structural changes within the company we should think of as an ongoing benefit?

It's the former and if we confused you by that language, I apologize. What we meant to say was really that there were two different things going on. We had the weather and we believe our focus on improving utility operations helped us take advantage of the both the weather conditions, and by that mean, our plants were available, they were running, our capacity factor was up.

We also had the coal available to us beyond what we'd originally planned. In addition, if you just look straight at the number, what you see is that on a quarter basis, some of the improvement is associated with the fact that HPL is gone and we paid off the steelhead debt.

Sure. Okay. I just wanted to clarify is there was something else going on.

Let me jump in for a minute. I would argue to Susan's point that what you see a laser focus on its utility operations diverting itself of all other international and nonessential activities, and if we are good managers of our assets and of our capital, you'll continue to see better utility performance year-over-year because of that. Reliability statistics will get batter, plant performance will continue to get better, fuel procurement, marketing off of commercial ons. This is all we do.

There's no time fractured wondering what's going on in Europe, wondering what's going on in South America. Whether or not a big gas distribution in Texas is paying off. I would expect that that's an underlying strength we have because of that focus and only time will prove whether I'm right or wrong.

Sure. That's very helpful. Just one sort of somewhat related question, is looking at the divestment you did do. You were carrying some overhead and parent expense related to some of those businesses. Is there a little more to come out of that, or would you guys say that's largely cleaned up HPL and all that's gone. So we really any incremental pick up?

It's mostly cleaned up. We did some internal restructuring at corporate center that was fed in part by that. That's already reflected in the numbers as well as reflected in the projections for next year. So it's pretty much done.

That's great. One last question on that and I'll give the line up to someone else. You guys mentioned lower interest expense at parent following the debt buyback of the $550 million. You see a penny pickup in this quarter versus last year, yet you're largely flat on nine months, nine months. Is that timing and we should expect to see more parent savings, or is there some offsetting expense we should think about dampening that.

It's partly timing. You will see a bigger piece of that next year. There are offsets in there. We have less in the way of intercompany loans, so interest cost to the utilities reflected is a positive in the parent also doesn't show up. We can spend some time working out through the mechanics of that so it's more clear to you, but those are the two factors.

Okay. Great, thank for the clarification.

Thanks, Andy.

Our next question is from Kit Konolige with Morgan Stanley. Please go ahead.

Good morning.

Good morning, Kit.

Hi. I might have missed it in your usually comprehensive publications, but can you tell us the capacity factors that you ran at? Say the coal plants in Ohio, for example.

Yes. The system as a whole is 70.7%. That's opposed to 66.58 for the last quarter this is just the quarter number and for the east coal only it was 75.83% as compared to 70.5 in the previous year.

You see, Kit, we see ourselves as a very solid utility with some off system sell upside potential.

That's what I wanted to ask next, was can it get higher than 75%?

Well, that's an excellent question. And we will continue to try to balance the market opportunities. One of the things, and this really goes back a bit to Andy's question. One of the things that is so enjoyable to see, clearly spending time with my folks in the field as well as a number of them who come once a month to share with me stories out in the marketplace or, I should say out in the worker land, people in the control room, understand the benefit of being on at the right time and taking maintenance time at a different cycle time.

We communicate between our commercial oops and our generation fleet. We'll continue to push that number up. Remember, Kit, as we do go into '06, we'll have some tie-in requirements for the environmental activities that will come online, as well as other normal outage that will come through the time cycle. But it's kind of neat to see the operating folks. And I do mean this, the people at the control room panel understanding what the hour-to-hour cost of electricity is and how beneficial it is to be online rather than offline. We would expect to be always putting a bit of upward pressure on that number. When the market gives us those opportunities U our commercial opt people will be there to take advantage of that.

I guess my final part of my, -- three-part question here. It's just one question. Is you're Ohio company's margins are substantially higher than the off system sales, double, right? Which is a little -- a lot different from a lot of other companies where -- when they sell into the open market, they get high margins. I'm just wondering if you can give us some color on, say, the third quarter off system sales and, -- if you're producing at -- I don't know $20 or something like that, I would have expected you'd get substantially higher margins than I see there.

Well, as you know, when we stack up the megawatt hours that are available, the first on the low cost side of that equation goes to our retail customers as part of the overall way that we operate the AEP system in both our east and west footprint. And then the rest at the higher end of the stack goes to the marketplace itself.

What I would argue you've seen in the third quarter, particularly with the performance in the PJM is that we are clearing reasonable margins, taking into account the delta and transportation system as well as the cost of the fuel with the additional burn that Susan mentioned earlier.

Our first and major obligation is to serve our retail load and then of course to take to the market the rest of the production that we have and bring back to our customers by way of service and to our shareholders by the part of that revenue that we can keep for the benefit of our shareholders. That's the way the process works. We're comfortable with the on system sales and growth that we see and happy to have the additional megawatt hours to put into that off system sales market.

Excellent. Okay. Thank you.

You bet, Kit. Thank you.

We have a question from [Asha Kon] with Capital, please go ahead.

Good morning. Congratulations Mike.

Thanks.

Your chairman was here in town at a conference, I guess, conference just an hour ago. I guess what he kind of implied, as you kind of indicated in your marks that this goal into and he wasn't sure which why the courts go at and he talked, you might have to have the legislature involved in the end to get us generational and to stabilize the plans currently and if there are plans going forward as part of it.

My question is, why not get the legislature involved early rather than to have to wait for these court proceedings to go through and then their results and then if they're appealed and if there is the legislatures involvement needed, when is the right time, or why not do it early? Just want to get that part of the equation, your thought on it.

Thanks. I appreciate you call Chairman Shriver my Chairman, because he is the boss. The facts remain that we think there's ample authority for the commission to take that step and it will be tested in the courts. The politics in Ohio, I would argue surely is in favor of additional capital investment tax base in Meg's county, Ohio coal mining job, railroading jobs to bring the fuel to the site.

I would expect the legislation is needed, and I'm not certain that it is, but if Allen's right and something like that's need, it could be achieved in a very reasonable time line. We have had discussions with both the house and the Senate and the executive office about this before and there are many tend up to be supportive if needed and we'll probably follow-up on the conversation that Allen obviously had with you in New York to see what his thinking is on that.

Okay. But Mike isn't it if you can get the legislation, doesn't it help you to provide certainty through this process to us Investors rather than have to wait for a court decision, you know, a year from now.

As you know, legislation is equally challengeable, so even if something were to get passed someone's liable to take it in. Clearly, the rate stabilization was well within the legislative purview of the restructuring here in Ohio and even that got challenged.

It might help a bit, and it might truncate that process by a few months. As I said, we'll take a look at that and if it really is the view that it would be more helpful for Ohio to go forward with what we think is an extremely reasonable plan, then we'll get ourselves involved with that.

If I can just ask you, Mike, on the dividend policy, how should we look forward, going forward from this step up that you did yesterday? A payout level or a growth level or something which the board as, -- is going to follow going forward.

I think that we made mention our plan is the try to get into that 60-65% payout ratio and we'll work toward that end. The whole theory here is to begin a steady opportunity to increase the dividends year-over-year. And that would be our plan of action. We We think our yield is in reasonable shape. This moves up a bit. Something we think our shareholders are quite deserving of and that would be the plan going forward. Slow, steady, dependable growth.

Okay. If I can just end up. Susan, for '06, can we assume that you're expecting the Texas securization happens here?

We're currently in the process of evaluating that. I think we're trying to figure out where that would go no '06, but we're figure some acceleration and we'll show you that at EEI, more specifically.

Thank you.

We will now go to Craig Shere with Calyon Securities. Go ahead, please.

Hi, good quarter.

Thanks Craig.

Susan, on the synergy call, they also had good off system or wholesale generating results, but the comment that a substantial portion related to actually the sale of the mission credits, and I wonder if you can comment if that's had any impact at AEP and also Mike or Susan, as we go into fourth quarter, it's clear that y'all are kind of guiding below where the street is currently, apart from the fact that thus far you've been conserve conservative this year and done well. Would there be any driving factors for that in a more off peak season?

I'll take the first part of that. To tell you that emissions were very nominal part of what we had. It was really, very considerable strength in physical sales and some positives in trading.

When we look at the fourth quarter performance here, we are taking a couple of plants into maintenance mode, large plants on the system, we think that will dampen the amount of megawatt hours we have available to the marketplace. We are very comfortable with where we are on fuel and emissions and the allowances we have in-hand and don't see a need or desire to monetize those, as they will be extremely valuable as we go into the higher emission credit seasons again in '06.

As we think about budgeting into next year on a quarterly basis, would the fact that you're doing some extra fourth quarter O&M reduce some of the costs going '06. Should we assume that we have the percentage of annual EPS allocation a little off in terms of street estimates, can you comment on that?

Let me take that in a few pieces. We are expecting O&M to be largely flat year-to-year. Some of that does reflect some planning in the sense that when we take opportunities to spend money this year, that provide us benefits, but there is not, I would say, significant upside in the range that I've told you associated with a move from O&M dollars from '06 to '05, it's already baked into the range that we're currently showing you. Now, there was another piece at the end of that that I didn't quite get. Could you restate it? Another piece of your question.

I'm trying to figure out as we issue updated '06 quarterly estimates and on into the future if maybe we just have it off a little bit in terms of the percentage that the fourth quarter might represent to the whole year numbers.

Yes. There are a couple of things first of all, I want to make sure that as you're looking at year-over-year number for the fourth quarter you're remembering we booked $109 million of TCC carrying costs in the fourth quarter of last year that will recur only to the extent of the $22 million quarterly amount that we've been booking over the course of this year. That's obviously a significant year to year difference.

With respect to O&M, that's one of the things that's more difficult to predict than we would like it to be for the fourth quarter. You're right to take a look at it. Our goal going into the fourth quarter was to continue the spin catchup. We did move an outage into the fourth quarter and there will be some additional -- modest additional spend associated with that. The counterpressure to that spend is, as I mentioned earlier, we have been sending crews that we would like to be using on our system for reliability spend down to help others who's need is more immediate. That is why there's a fair range of play in the O&M numbers and I think those are the key factors that show a significantly proportionate benefit. That was intentional. It affects revenues from off system sales.

Great, thank you.

Yes.

Next question is from Elizabeth Parrella with Merrill Lynch. Please go ahead.

Yes. Thank you. Could I ask you to elaborate a little bit on the fuel cost increase. You mentioned the Ohio piece for the quarter and the year-to-date. It looks like there must have been some fuel cost reductions in other parts of the system and I was wondering if you have a little bit more of the breakout of the drivers of the overall increase in fuel costs for the quarter and the year-to-date.

You're right. There was a $6.7 million offset that was in the west that affects the total number. $30 million is what we saw in Ohio for the -- it was, that's the total number for the east, but it was all in Ohio.

And I think, Elizabeth, as we told you at the end of the second quarter, we thought that was impact of fuel increases would dampen for the last half of the year and that in fact did happen in third quarter and we hope it continues.

For the year-to-date, I would assume -- the $12 million all in the western part of the system?

Yes.

Okay.

I want to check that, but I believe that's correct.

Okay. Another question for you, the parent company drag tends to bounce a lot by quarter, but last year in the fourth quarter, I think you had something like a $25 million drag. This year-to-date, it's been running a lot lower on a quarterly basis. Is there anything unusual that's happened in the fourth quarter that that should be -- a fairly big number again or should we be expecting something that's more similar to what you've been tracking at this year-to-date.

The latter. We don't foresee any significantly movement. In the fourth quarter there.

Okay. If I could follow up again on the O&M discussion for next year. I know you're going to elaborate more at EEI. The sentence in your press release indicating that you expect to be flat, but you're also expecting an increase in planned maintenance outage. Just trying to reconcile that a little bit. What other things might be going on next year on the O&M line.

Basically the -- I think the two are consistent. I think that we were trying to describe the kind of activity that we saw increasing over time. Our goal is to remain flat so we try to offset that by reductions in other areas. I think that we told you that we were -- we spent a lot of time this year doing some internal restructuring. That will show up as a positive benefit in next year's O&M numbers. They -- there are some other details that we'll be able to lay out as well. I think the notion is philosophically what we're trying to do is have more money available for the direct work that is going on on the facility's that we have and less O&M in overhead and other areas.

Okay. Thank you.

Hey, there's one other thing. The Texas plants are out. That's one other thing that's significant.

You lose the in the first half of '06. Okay, right. Thanks again.

You bet. Thanks for your questions.

We will now go to Gordon Howald with Natexis Bleichroeder, please go ahead.

Great. Thank you. Hey Susan, you had talked earlier -- could you talk about your comment of being able to procure excess coal this past quarter. I just wanted the get a little understanding of what that is. Further, were there any points in the third quarter where you were forced to curtail any production, electric production as a result of coal being shorter than maybe you would have liked it to be.

Yes. Let me mention a couple of things and I want to ask Mike to elaborate on the overall coal situation. First of all, to your latter point, no, there were no circumstances in which we were required to do that. We probably did a little scrambling, but we absolutely never faced that circumstance. Also, the specific reference I made really was to try to put the additional increase in fuel expense in perspective.

We give you a projection based upon a normal year's burn. That would include normal weather as well as our projections given where we're going to see for outage specific to that year and that's what we put in the budget and when we project increases over time it's based on that.

What I did not want you to think is that all of the fuel price increases were simply associated with contract shortfall or transportation problems. We had a piece of that that was associated with the fact that we had to go into the marketplace to get additional coal because we saw increased burn and obviously pay prices that were different from the prices we pay under contract and that was increasing, Mike, I think it might be helpful if you commented a little bit on the overall coal situation.

Sure. Gordon, it's an interesting event that we're all seeing here. I think the -- not only have the rails failed unsubstantially from the west to the east, as you know we're seeing year over year average prices for river base sin coal being sub$10 and north of $15 that has everything to do with the failure of Union Pacific, Burlington Northern to do what they're contracted to do. The industry is severely impacted by that, maybe to a lesser degree than many, many others but nonetheless a cause of great concern.

We're also seeing sub performance on coal production have been in the east where the overall productivity and delivering of the those who are contracted to deliver are having a very difficult time living up to those commitments and whether it has to do with what I call price -- is an open issue that both this company and the open industry continue to view. We have, as I've said many times before and I think many of you have had an opportunity to not only hear from Chuck our principal fuel procurement executive, but others of us, we have the best coal-buying group in the utility space without question.

Susan's point earlier on was that as the burn continued, we were able to procure in excess of an additional million tons of coal in a very cost effective way to take to the market. We were quite pleased with the performance in that regard. The overall coal situation is heavily impacted by the failure of the rail transporter to do their job and some of the coal miners continue to perform up to mare commitments and contractual obligations.

Right. That's great color. Thank you. I guess what I was also trying to figure, was there an opportunity, obviously in 2006, you can't anticipate as being as favorable as what we've had in 2005, is there any upside assuming some of the rail problems ma we've seen get fixed? Is there any -- would you have to limit what you had to do on as a result of those constraints?

I would expect if the rails got back to where they belong and Powder River gets back into the contractual price range, you'll see a reduction in that piece of the fuel that would yield a higher margins from those facilities.

From a production's -- I know that goes back to what Kit's question was on capacity utilization.

To Susan's answer directly to your question, we did not curtail output at any plant because of an unavailability of fuel.

Perfect. I appreciate it, guys. Thank you very much.

Thank you.

Our next question is from Michael Lucas with Appaloosa Management. Go ahead, please.

How's it going? Great quarter.

Thank you.

We're excited about it. I wanted to focus on a few things. It seems these numbers, the spread was up obviously significantly year-over-year. It seems to me it's going to be up a lot more going forward as well. First I'd like to are you putting that number in there, it doesn't seem possible? Of the same type of spread that you've had, like $10. What are you using in your analysis for that forward number in '06 for off system sales?

Remember, Mike, there are two things when we look at the guidance that we've given you for '06. Much of it has to do with plant availability and scheduled tie-in from the environmental investments we've talked to you about over the last couple of years and lack of megawatt hours to put into the market has a dramatic impact on the availability of your off system sales to grow year over year.

We're not certain the spread will stay that high nor the entirety of the year. One would make a real mistake to take today's number and forecast them forward for the next twelve months. I think that would be a bit fool fool hardy to do. We will take advantage of every upside opportunity that is out there, but to build in tool your forecast for the upcoming year, the same kind of activity just is wrong-headed thinking.

It just seems that --

I can't tell you what it's going to be tomorrow, let alone what it's going to be next year.

Likewise. There are some things I can tell you. We've thought over here that you can produce more megawatt, have you proved that in that quarter and furthermore, if you look across the regular utilities in Ohio, et cetera, you had two extra mill out of the regulatory, .4 out of Texas. If we had a cooler summer last year, that you could run the megawatt the same amount of this year and sell them into the market?

Sure.

There's potential -- if this was just a theoretical sales. For the year it's another 20 million megawatt hours.

Exactly.

Okay. Fine. Then just one other things.

Remember.

Lastly. I wanted to see, I also in the press you guys have come out with some natural gas facility I recognize there are a lot of moving parts with that going in, is that to tell me that I could sell some of the that stuff into the mark place into that rate base environment, those natural gas facilities, price withstanding?

No. That, again, the plants we have bought on the combined cycle basis are there for the capacity requirements needed by the RTOs and others as well as the state requirements to serve our retail load and we stack the production up lowest to highest cost, lowest cost to the retail customers on system remaining, off system. You know what?

There are many of us living in a happy gas world, particularly as we sell into that demand market here in the east. In our western footprint, we are also a gas generator for our retail customers and the customers the Oklahoma and some of the SWEPCo locations are being hurt by those same high gas prices. We'd like to see a better balance on the gas side and of course that's why as we look at Oklahoma and SWEPCo, we're looking for a hard fuel generation facilities going forward.

We over here, we love the balance and the utility earnings with tremendous upside in these power markets.

Thank you very much, Michael.

Question from Rudy [Toneteno] with Prudential Equity Group.

Hi, can you give us an idea of how much of your coal is hedged for '06 and '07 and also give guidance as far as how much you're expecting coal costs to -- the coal costs between '06 and '05?

Yes, I can. Basically. We're going into the year close to as we always do. We expect by year end to be 100% hedged going into the year and were certainly above 60% for '06 and

For '07.

That's correct. And the increase -- the increase that we're going to see from '05 to '06 will give you a picture of when we get to EII.

Okay. Thank you very much.

Please press star one now. We'll take the line of Stephen Wang with Citigroup. Go ahead.

Hi, good morning.

Good morning Stephen.

I had a question related to the whole Ohio fuel and your [HSP] plan in Ohio. You have the right to, you know, file for additional 4% increase. Can you give us a status on that and when, if you plan to file that and when that would take place.

As you know, under the rate stabilization plans, the rates will step up at both Ohio power and Columbus southern as we get to calendar year '06 and we will continue to look at the delta that's available to us by way of the filings to ask for additional increasing. We'll watch that as we go to try to make certain that we're providing the most cost-effective energy to our customers, but also making sure we're covering costs as they're incurred by those operating companies. We will simply watch that space and make those filings when we think it's appropriate to do that.

At least right now, there's no plans to file that 4%.

I would say -- there's no plans, there's no activity directly to that end. Part of it is built with the power activity that we filed as well as some of the IGCC recoveries that we filed as well.

Okay. Looking at your CapEx forecast that you guys originally gave for 2005, it was about $2.7 billion. You seem to be -- on that. [INAUDIBLE] Will that roll over into 2006 as a step up in CapEx spending?

I don't know -- I don't think we agree with that calculus. You've got to remember that we have a substantial number of outage scheduled for the fourth quarter so it really doesn't roll off on sort of a pro rata basis. We may be somewhat under by right now our expectations are that we're going to be relatively close to that number. There could be some play there, but more than a hundred, somewhere around there is not what we expect.

Be, you know, to your question, Steve. I think it's important we all understand. If, in fact, you're work on a scrubber or some kind of environmental investment and the schedule falls behind a bit, you are still going to spend that capital going forward and to your '06 CapEx question, we will again share much more data with everybody earlier until November at the EEI meetings. You can expect that capital expenditures will be up in '06 compared to '05 because we continue going forward on the environmental spend.

As I've said many time before, people need to be a bit cautious when they look at the CapEx at American Electric Power because much of it is hinged on whether you do or don't receive the regulatory approval for the up front investment. False in that purview as to some of the other things that we hope to be able to do on the transmission grid in states like Texas. The CapEx number will be robust there's no question. Some of it will be very much predicated on up front approval to go forward with those expenditures.

Okay. The last thing is, on your off system sales, I believe you had some contracts with municipalities that were signed several years ago that were rolling off in 2005 and I was wondering whether or not in your forecast you had already baked in a little of an uptick in your gross margins there with these roll offs?

I think you've seen throughout this year every time our commercial opt group through the wholesale contracting organization signs up a new customer, we make that publicly available to to you and when you do your calculus on that, you should always have in mind that a new contract extension is going to be at a higher, rather than a lower price and we build that in to the range of forecast that we give you for a year like '06. As those contracts roll off, we find that to be a better margin than a frequently is the case in the overall off system sales.

So again, we're looking at longer term arrangements with credit-worthy counterpart customers and we think that's another good business segment for us to be in, all inside of our footprint that we conserve with our own assets in a very profitable way for the benefit of our shareholders and customers.

So Mike, just one follow-up to that. About what percentage of the off systems would you say is already fully hedged out to either municipalities or to other counterparties?

It would be inappropriate in a commercial sense to share that data with you. We've got plenty of energy to satisfy all of the energy demand at the appropriate prices that we see.

Okay. Thank you.

You bet.

Thank you. We have no further questions. Please go ahead with any closing remarks.

Thanks for joining us today. The IR staff will be available the to take any of follow-up questions and if Cathy you can provide the replay information, that would be fantastic.

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