美國電力 (AEP) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to American Electric Power's second quarter 2006 earnings call. For the conference call, the participant lines are in a listen only mode. However there will be an opportunity for your questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations - Ms. Julie Sloat. Please go ahead.

Thanks John. Good morning and thank you for joining us today to discuss AEP's 2006 second quarter and six-month year-to-date earnings.

I expect you have seen the press release issued earlier today. It is also available on our webpage at AEP.com. In addition to the financial schedules included in the press release package, the webcast of this call will include visuals of charts and graphics referred to by AEP management during the call. An investor information packet will also be available at AEP.com today at approximately 12 PM. 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 and 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's filings including the most recent annual reports on Form 10-K and quarter reports on Form 10-Q for a discussion of factors that may cause results to differ from management's 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 find a reconciliation of these non GAAP measures on our Investor Relations website at AEP.com.

At this point I will turn the proceedings over to Mike Morris , Chairman, President and CEO of the Company to lead an opening presentation and then there will be time for your questions. Mike.

Julie, thanks a lot and to all of you who are on the phone thanks for being here with us. We are quite excited about where we stand so far in calendar year 2006. As you know from our press release, we feel comfortable earlier than usual to forecast an increase in our earnings guidance range to $2.65 to $2.80 a share versus our earlier guidance of $2.50 to $2.70. Much of that is driven by the continued regulatory success that we have had as we have told you before. The capital investment program continues to be robust although we have taken out about $60 odd million as we shared with you over at the Mountaineer plant for those of you who made that trip with us just a few weeks ago.

For the quarter itself - and Susan will give you a great deal of detail on the quarter earnings - we actually are in the midst of a very strong quarter, which was masked by events of our own doing and a couple of power plants that weren't available to us as we had wished that they had been.

Specifically I think I have shared with most of you the events at the [Cammer] plant where we had a corrosion steam break that was really unexpected and from our sophisticated look at the power plants unforecasted. That gave Bob Powers and Bill Sigmon and the power plant team pause and us, as well, because this is an employee potential exposure to a safety issue. We took all of the plants that were similarly situated off-line and that impacted the second quarter considerably in the off systems sales. But for that, as you know from our earlier conversations we were moving along quite handsomely at the time.Other things that affected - of course, Oklaunion out West came off-line. That was an unplanned outage. It took us a while to sort out exactly what the cause was but again that plant is back online and running very well. And we forecast that it will be with us as the rest of the year unfolds.

A little bit of an extension in the Cook refueling outage of impacted Brian [Tierney]'s team and their ability to put additional gigawatt hours into the marketplace. And but for that we feel very comfortable about where Commercial Ops is for the year.As I think most of you know, we put the Jacksons Ferry Wyoming line in service on June 20th - as we had hoped that we would - and that has really allowed us to move additional megawatts into the Eastern market and we are pleased with that as well.

On the regulatory front, yesterday, it was a very very important day for us. The commission in West Virginia gave final approval to the stipulation and settlement that we and the parties had filed and that - to us - makes West Virginia look a great deal like the state of Ohio. Forecasted rate step ups in the upcoming years as we continue to put capital on the existing fleet in West Virginia and continue to improve our reliability on the T&D side.

As you know, we did get what we think is a very good order from the Federal Energy Regulatory Commission as pertains the way that at the end of the day the FERC might treat transportation revenues with a regional rate design. As Craig Baker always says, everyone is catching up to his view of regional rate designs of about four or five years ago. We hope that is the case. The administrative law judge's order was very well thought through and would hope that the Commission approves that as well.

We continue to move forward with the stranded cost securitization activities in Texas. The Texas Commission and their support and their consultants have been extremely supportive. Our finance group has met with and continues to dialogue with the rating agencies as well as the SEC. We feel comfortable that we will issue those bonds hopefully yet in the month of August if not then, in early September and all things seem to be moving along quite well in Texas.

The Ohio Commission just yesterday or the day before yesterday issued a reliability order for us. You might remember that in that case we had volunteered to spend an additional $5 million on the system. The Commission directed us to spend $10 million. We think that is a good thing for our customers at the end of the day and that it will only lead to increased reliability - something that is very important to them.

I think some of you might remember that we do have a storm damage recovery case in front of the Commission. That has been there for a while. We are quite encouraged by what they did to Dayton Power & Light just a couple of weeks ago as they approved the expenses that DPL experienced in their storm almost in the exact same timeline in calendar year late '04, early '05.

So all in all, we feel very comfortable about the regulatory position that we are in. We await a decision in Indiana on the depreciation case. We await a decision in Virginia on what we call our environmental and reliability case. Short of that, we feel very comfortable about the way things have unfolded so far; and it is those and other reasons that have caused us to move our range of forecast earnings up.

With that, I'll turn the podium over to Susan for considerably more detail on the performance - not only for the quarter but for the Company year-to-date. Susan.

Thanks, Mike. I want to spend most of my time this morning talking about the quarter and then I want to update some additional financial data.

As Mike noted, we have what we consider to be a really very solid quarter but we are down on a quarter to quarter basis $0.44 versus $0.62 for the same period in '05. So I wanted to talk about those differences a bit. There were two important differences between last year and this year that were anticipated. And Mike alluded to both. The first was the sale of the STP which occurred in mid-May of last year and the loss of those revenues associated with that, which were around 25 million of the 49 million quarter to quarter reduction in off-systems sales were obviously going to be reflected in this year's numbers. We also had expected the elimination of the SECA rate and let me talk a little bit about what you see on that third party transmission line that you'll see on the next page as we get to that.

Basically, SECA has two features. As we have told you, we were going to expect to see that the SECA number would go down as that temporary provision ran off in April of this year. That did, indeed, happen and $37 million of the year-over-year negative that is embedded in that utility line is associated with that. In addition as you will see, we have a provision for about $18 million that we are expecting in a FERC settlement. That is against the $200 million and a bit over that in total revenue for SECA that we have collected over the last 16 months. We think that that's potentially a very good outcome and a reasonable one for purposes of preserving those revenues. Those are the two major factors that have contributed to the outcome that you see on the utility line - which is $0.41 a share.

But as Mike mentioned, we also had some additional pressures that were not part of the picture going in, that we've also managed to absorb. The most significant one of course was the additional O&M, that includes several different items - most notably the additional generation dollars that we have talked about, about $13 million for the quarter as well as additional dollars for tree trimming and additional operating and maintenance dollars, with respect to the River Transportation business.

We had a very bright note for the quarter in our investment line, of course; and that is the continued excellent performance of MEMCO. It contended $14 million for the quarter as opposed to 5 million in a comparable quarter of last year and this is a continuation of the excellent Barge conditions, river conditions and of course demand conditions that have driven up freight rates that MEMCO has been in - an excellent position to take advantage of.

If I could turn you to the detail page then entitled "Second Quarter '06 Utility Operation." I want to provide a couple of additional details with respect to the utility operations themselves. Utility operations were down $102 million - $0.27 a share year-over-year. We did have very significant rate increases as you know in Ohio, worth about $58 million and in Kentucky, pretty important successes for us and I also want to point out that we have another $15 million in revenue from our acquisitions of 29,000 [Mon] power customers. A significant accretive transaction for AEP.

I also wanted to note that we had higher margins in the West that contributed to that total for this year; but that combination of events were not significant to offset some of the pressures. Again, the ones we foresaw the STP sale, the end of the SECA as well as the additional higher O&M that we incurred that I think Mike and I have probably fully cover.

We did see [increased] in fuel. We had expected that. As you know we forecast fuel increases every year. The actual costs were -- the delivered cost of coal that we experienced are well in line with what we have expected. We have told you we expect 11 to 13% increases overall and we actually expect -- saw lower than that for the quarter and expect to be closer to the lower end of that range for the year. But with that said, we still did see fuel play a role in offsetting the overall combined positive effect that we had as a result of those rate increases

.Weather was also a factor for the year, particularly providing some downward pressure. I'm sorry -- for the quarter providing some downward pressure, particularly for the East. Across the Company it was a $0.01 drag on earnings versus normal, $0.02 drag versus prior years.In the East utilities, as well, you saw about a 5% load growth even though the cooling degree days were down; but I think it is worth mentioning that we saw industrial customers primarily driving that and that really had to do with the move of the Century aluminum customers over from OPCo to APCo. We did have some increased volume from MUNY and co-op sales; and we think that is going to be a continued positive trend as we are aggressively marketing two traditional MUNY co-op customers with our marketing group. Residential load was down in the East by about 5%. Commercial load by 2%. What you would expect in two sectors that are clearly weather-related.

In Ohio, you see the flip side of the industrial move. The movement away of Century Aluminum from an Ohio customer to the APCo customer. Obviously from a total company affect that is really geography, but also as part of your comparison, as you are looking at Ohio you need to keep in mind that we had a $16 million up last year due to the Buckeye admissions sales. We -- you may recall that we booked 9 million of that for this year and that will be the total amount for year-to-date in the first quarter. So you also do not see that positive effect that we had last year in the Ohio numbers. For that reason, those combined effects we leave the Ohio companies slightly better off year-to-date.

West margins were up significantly and that is good news. That's the utility business. Operating well in a circumstance of good solid demand. The weather was actually positive for us in the West. I mentioned that the offsystem sale line was down 49 million, primarily associated with the difference between the ownership of STP in the comparable period for last year. And then, the O&M total on a year-to-year basis, we have an increase of O&M of $56 million, $13 million having to do with the plant maintenance activity that Mike mentioned. And the other couple of major items were tree trimming which we increased by about $12 million year-over-year for that period. And then we had an additional property insurance payment to our captive coming out of the Cammer incident and that really are the major big-ticket items with respect to the O&M increases for the quarter.

If you turn now to the six-month year-to-date earnings performance, I am not going to spend a great deal of time combining this other then to emphasize we did have some bumps with respect to the second quarter that we knew we had to absorb. And we're extremely pleased with the way in which that has happened. When you couple that with the very strong first quarter performance that we had, we really have laid the groundwork for significant increase in our guidance range for this year. That increase - as Mike has noted - is really based upon the very high level, the certainty with respect to regulatory outcomes that we were able to achieve in the first half of the year. Our increased expectation for the MEMCO barge line and our increased expectations with respect to wholesale sales and the details of all that are set out in one of the pages in the appendix. That outcome is what gave us the basis not only to be able to raise our guidance upward but to be able to eliminate some of the downside risk that we had previously seen so that our revised guidance for the year is $2.65 to $2.80.

What I would like to do just briefly is skip over the cash flow page and point out a couple of items for you that may get your attention. What we see with respect to the second quarter '06, cash flow page - that is two pages forward from where we just were - was that we ended the second quarter of 2006 with a cash balance of $249 million. That compares to an ending cash balance of 607 million from last year and I simply want to remind you that last year we concluded the HPL sale and in the early part of that year -- and we had a cash balance that was unusually high which as you know we put to good use over the subsequent periods.

For the year-to-date the cash flow from operations was 1.137 billion and that is about 550 million in continuing earnings and you see down there the typical adjustments. One that may provoke your question and I will go ahead and answer is the $183 million change in working capital. That is really the results of the fuel inventories and some decreased customer deposits. The change in other assets and liabilities is due to deferred fuel recovery at PSO and SWEPCO.In the investment line, you see cash outlays of about 1.6 billion year-to-date '06. That is driven primarily to the $1.6 billion capital spend. We have received cash of $123 million in asset sales.

About 70 million of that has to do with the Centrica payment and about 30 of it is the Bajio plant, which you know also happened earlier this year.The financing activities for the first half of '06 provided us a net cash increase of 297 million and we ended 2005 with a very minimal short-term debt balance and you see that is up on a year-to-year basis. I think that we told you that, particularly in light of our credit rating increase last year, that we felt we were in a position to take some better advantage of access to short-term debt markets. Indeed we have done that in advance of long-term financing that has put us in a position to have a higher level of flexibility in timing as we go to the long-term debt markets. As a consequence, our net change in cash was a negative 152 million. The ending cash balance that I mentioned of 249 million and we expect to end up the year with a cash balance of 260.

One last quick note on capitalization. We ended the quarter at 57.4% debt to cap on a GAAP basis and 58.2% on a credit adjusted basis. We continue to have the goal of maintaining debt to cap on an adjusted basis in the 60% range and forecast to do that by year end.

With that I think, Mike, why don't we go to questions?

Julie.

John, we're ready for questions.

(OPERATOR INSTRUCTIONS) Greg Gordon with Citigroup.

Good morning. Can you tell us exactly how much or approximately how much MEMCO has actually contributed on an absolute dollar basis in the quarter and for the first half of the year?

Yes we can.

Go ahead.

MEMCO's contribution the second quarter of '06 is $14 million. That compares with the 5 million from last year. $35 million on the year-to-date basis in absolute dollars and the revised guidance for the year is 70 million, Greg.

70 million for the full year?

The full year.

I think what we are seeing at MEMCO is the ongoing impact that Katrina had on the barge fleet on the interstate waterways. Unfortunately, a lot of small players have gone out of business and a number of big players weren't in the position that we were with new barges on order and new tools on order. So unit prices are up and unit utilization factors are up. We see that, as you can tell from Susan's forecast number staying that way through the rest of the year. In fact most of what we see at MEMCO is already under contract for calendar year '06.

And I want to (MULTIPLE SPEAKERS)

Could you refresh my memory as to what the fiscal year total contribution was last year?

It was around 20 million.

And are you guys -- I know you guys obviously haven't given any earnings guidance for next year. It's way too early for that. But can you give us some qualitative understanding of whether these sort of structural pricing changes in the barge business are sort of economically ephemeral or whether -- what sort of issues are we ought to be thinking about trying to figure out sustainable earnings power at that business going forward?

I would argue from the data that we see and some of the forward contracting that we see, 2 08 will be strong for MEMCO. And then I would expect - because there is a space to be filled by others - that we will see a tailoff toward the latter part of '08, '09. More typical to what we see. But again, Greg, got to remember a lot of folks went out of business and as you know fewer units yield higher unit prices and higher unit capacity factors.

The barge manufacturing capacity is also completely committed as we understand it. It may be a while. We certainly don't expect to see additional manufacturing capacity anytime soon as those barges come in pretty much in the timeframe that Mike talked about you might see some flexibility; but this is a pretty tapped out market at this point.

Can you also just update us on the progress you are making in some of these lumpy and potentially accretive capital expenditures on proposed IGCCs? And I think you also announced a small construction program in Oklahoma, as well. Just update us on some of these longer dated projects that have earnings upside, sort of post '08.

Sure. The integrated gas combined cycle activity in Ohio continues to move along as we had hoped that it would. Maybe a bit slower than we would have liked, but as you know the PUCO just approved and we've put in place on 1 July of this year the recovery of the Phase I dollars.

As we had expected and as anyone should expect, the Ohio Commission is waiting for the completion of what we call the Final Engineering Design Study or the FEED study, which will lay considerable more facts in front of them as to the cost of those facilities. And we would expect the Ohio Commission to treat that with a certain amount of dispatch. And I would hope, Greg, that we would get some kind of clear indication late '06, very early '07 on how they will allow us to recover the capital spent on the integrated gas plant here in Ohio. That is a little bit off of our original plan line but, nonetheless, well in keeping with what we think we are going to need to do to continue to serve the growing demand in our Eastern fleet.

As to the integrated project in West Virginia, there is provision for recovery of those expenditures in the settled rate case that I spoke of in my opening comments. We still need to go back to the commission in West Virginia also with the completion of the FEED study for that particular plant. Our expectation is that those will both happen in the fourth quarter of this year and therefore, again, we look for early '07 treatment by the West Virginia Commission as it pertains to that issue. We always need to remember that because of the way Appalachian Power functions, we also need some additional information from the commission in Virginia about that plant as we go forward. And we feel comfortable about that. And those of you who were with us at the Mountaineer plant know that Governor [Mansion] in West Virginia would rather the plant were already in service, but we aren't even that eager to go that fast.

As to the Oklahoma announcement. it's a very important partnership between us, OG&E and [OMPA] - one of the municipal cooperative utilities in Oklahoma - to build a much-needed hard fuel ultra-supercritical plant. We have made filing to the Oklahoma Commission asking for appropriate rate recognition and approval of that facility so it is [a]typical of what American Electric Power is trying to do in the generation side in the entirety of our footprint, Greg. And that is to get as much upfront assurance and cash recovery as we build these much-needed facilities going forward. I would argue that at least the early returns from the Oklahoma politicos and the executive office were very strong in support of the filing that we made there.

Thank you.

Dan Eggers with Credit Suisse.

Good morning. First question, just with some higher cost pressures in Ohio and we are seeing fuel roll through, came give us some flavor on if we should expect that 4% rate adder to get pushed through and how that is going to work?

Remember as it pertains to Ohio in calendar year '06 much of the 4% is already being taken up with some of the way that the Commission is wanting as to treat the Phase I activities of integrated gas. We will continue to look at the 4% writer in '07. We constatnly review that to see where we are. The Ohio fuel situation is really better than it might seem on its face and as Susan said in her comments we originally thought we would see escalations on the 11 to 13% range for fuel calendar year '06.

We are actually at the lower end of that and Chuck [Zsibula] - who many of you have had an opportunity to be with - continues to tell me he hopes he beats the 11%. But we are staying with that as our forecast for now. The automatic step ups will be there calendar '07. The intent of that of course is to cover escalating costs on the G side. We feel relatively comfortable about Ohio and we are seeing some softening in the coal market which may lead to a better '07 experience than we saw in '06. But again second quarter coal escalation considerably softer than first quarter coal escalation in Ohio. So we are feeling pretty good about what we are seeing and of course the West Virginia case now puts fuel recovery in day to day recovery. So but for Ohio and the cap step-ups that we have in Indiana we are recovering true fuel cost on an ongoing basis.

I guess, Mike, since you opened the door on that just from a coal delivery perspective and inventory perspective, how are you guys looking at -- it seems like the rail companies are getting things done. Are you seeing that on your stacks?

We are. We feel very comfortable with the inventory on most of the sites. I keep telling Bob Powers and his team, you've got use of running them more lean stack-wise so let's watch our inventory levels. And they are constantly doing that. The rails are getting better. I think the attention that EEI and some of the principal coal companies brought by bringing some of the rails in front of the FERC, I think Chairman Keller did an excellent job with that when he had them in there. And they are doing what they need to do. We are still a little contract short and we are trying to make reasonable arrangements to solve those contract differences. But we will not let the rails off the hook for the failure to deliver at the quantities and at the sites that they were supposed to do.

Got it. I guess one last question with the increase in guidance. I know you are not going to talk to '7 and '8 and beyond. With these [positive] regulatory developments are you having any feel that long-term growth rates could be stepping up from where you've talked before?

You know us to the a relatively conservative bunch and it's early to give you that kind of a flavor. We do -- this goes back to our short tenure here at American Electric Power, but what we told you all 2 1/2 almost 2 3/4 years ago was that you would begin to see a constant improvement in the regulatory treatment of this Company by the 11 jurisdictions where we do business. And Greg Baker and all of the individual operating company presidents and their individual rate representatives deserve all the credit here. But we are seeing that. We are seeing it in almost every jurisdiction that we look at.

When you look at the Texas securitizations, not by much but we did better than anyone else who went into that arena. And we feel comfortable about that. There is a real strong working relationship between our Treasury group and the Commission and their consultant on getting the securitization done as quickly as we can. I am always a little puzzled by our success or at least hiatus success in Virginia. We don't do as well there as Dominion does. I keep telling [Tom Farrell] please tell me the secret in Virginia. He won't share with the, but we see improved performance in almost all of the jurisdictions and we are encouraged by that. That is a little short of telling you we are bullish going forward but it does tell you that we feel comfortable with the capital spend we're doing. Because it is all driven towards having adequate low-priced generation. It is all driven toward improving the environmental performance of - as you know - very cost-effective power plants and reliability improvements on all of the systems that we function in.

[Paul Patterson] with [Winrock] Associates.

I wanted to thank you for updated guidance. Very helpful and I wanted just to -- you know when you look at the slides in the back, notice that there have been a change in a few of the -- the forecasted items. One is depreciation which before you had increasing. Now you actually have decreasing slightly. I was wondering if you could give us a feel for that? I was also wondering with respect to the O&M that you are looking at, some of which is -- it sounds like it was unexpected. Should we think in general how much of this might actually might not show up in 2007? Or some of these things sound like they were sort of unusual or perhaps anomalies. And how might that behave going forward? I was wondering about that. If you could just sort of touch base on those two things.

Happy to, Paul. Susan will touch the depreciation one.

The depreciation really has to, largely to do with our expectation with respect to the Indiana proceedings where you are going to - as a result of the extension of the nuclear plant, it is appropriate to extend that life from reduced depreciation. So that is why you might see some of that.

I mean I know you know this, Paul but maybe for others on the phone, we went to the NRC as have so many others and asked for a license life extension and received that just this year earlier. So that is part of what is driving that.

And that is pretty much the depreciation decline story.

On the O&M front, I think it's important that - as Susan did with a couple of the larger buckets for the impact so far this year - the events that we went through by taking off the sister plans to the design of the camera station were dollars, Paul, that I would spend every day. Losing those megawatt hours from the commercial ops is unfortunate but I would do that every day, too, rather than put my employees at risk at being in a station where a life-threatening event might happen. Those won't reoccur obviously. We have some of that through the tail of the year.

As Bob goes through, Bob Powers goes through some additional outages that were scheduled but it wasn't scheduled that we would do the x-ray work on the tubing for those plants as well. That will add some costs as we go through the year but those are dollars that I will always be willing to spend.Now on the distribution side where - as we always do when earnings are strong - we are spending forward on tree trimming and reliability. We will continue to do that as well.

Now when you ask about '07 and '08, as you've heard us say so many times before, our expectation is that this Company will be able to manage its O&M at or close to flat going forward. That means we will have to address the issues of inflation. That means we will have to address the ANG issues of salary increases. So I wouldn't expect any spiky OEM going forward. That at the same time I don't expect a big machete on the O&M side. We have a huge system that demands that it be refurbished and cared for. We are doing that on the distribution. We're doing that on the transmission; and we're doing that on the generation side as well.

And Paul as you know and you have heard us say before, we are still bow waving into rate cases as we recover the capital invested on the power plants in some of these jurisdictions. So spending into a rate case makes a heck of a lot of sense, particularly if it isn't impacting your earnings in a real negative way.

So to understand it, the previous guidance did have the Indiana rate case depreciation proceeding in it or the outcome associated with the lengthening of the live (indiscernible) plant. Is that correct?

It was built into some of what we looked at but we -- remember what we said about our earlier guidance. To get to between the 250 and the 270 we needed rate certainty and some jurisdictions, not all jurisdictions. We never expected to get 100% clear the board rate treatment. We have now moved the guidance up because most of that is in hand. The Indiana case will be we think issued soon. And we are okay with that no matter where it lands inside of the increased guidance that we've given you.

Okay. So okay. I guess I understand that. I guess then with respect to the O&M, some of that -- I guess this means that your ability to cut costs in the future considering that some of these were anomalies or whatever. A little unusual. You guys should be on track. It should be easier to attain that. Is that my understanding sort of, with what you are saying?

Yes. I think when you look at the total O&M for the company it is right around 3 billion to 3.1 billion; and that is about where it should be on a going forward basis.

Then just finally other operating revenue. You do seem - that seems to be one of the drivers in the numbers; and I'm trying to just get an idea. What -- if you could just remind us what that other operating revenue is and why you see a better forecast now in 2006 with respect to that?

Yes just give me one second.

Susan's trying to catch up with that particular line. Obviously if that is the investment line it has a lot to do with MEMCO and those activities. Help us out a little more, Paul, with the --

I'm sorry it's line item 6 on slide -- I mean it's -- when you do the breakdown which is very helpful, it is item 6. You got third -- you have transmission revenue third party which you seem to expect to go down a little bit more than you had before. And then you have other operating revenue increasing substantially. I was just wondering what --?

I'm sorry Paul. I couldn't follow where you were but basically that is where we show allowance expenses and I'm sorry -- gains on allowance sales and we do expect to see some additional gain on allowance sales for this year.

One of the things, Paul, that you would expect is that the fleet continues to run more efficiently. We continue to be a participant in the optimization of environmental credits and that has gone really quite well for us so far, calendar year 2006. We don't see any reason for that to change. As we look at our dispatch needs for the tail of the year and our current credit balances on the environment side for the remainder of the year, we see the opportunity to continue to put some of those credits into the marketplace and we will watch that for the opportune time to do it.

Thank you very much.

David Frank with Pequod Capital.

Good morning. I was hoping you could tell us a little bit about the hedging you did, coming into the quarter? How much of the power you sold ahead of time? And what you are seeing and specifically I'm most interested in the Ohio region and what you are seeing for calendar year '07, as far as around the clock, how are prices in your region?

David, as you typically do you ask very important questions for data that I just don't want to share with you because there may be some of our competitors listening in, as well. As you know, we constantly look at the curve and when we are in the near part we are quick to move. Whenever there is an opportunity. Brian and his team always have a certain volume of the gigawatt hours available to put and take when things look good for us. As we look at '07, we don't seek a lot of reason for prices to deteriorate. When I look at natural gas - which is really the price leader in many of the regions that we serve - I don't see the price of natural gas falling substantially. As you know we are in a bit of a gas hiatus right now, because there was such a storage overfill based on last year's very mild winter. But the burn has been substantial. It has been incredibly hot in the Southern part of the country where natural gas is a fuel of choice in and many of the generation machines. So we, like you, watch that storage inventory level day to day. It can cause the price of gas to move as much as $1.00 an M. When we look at winter prices we see that 6, and 7 and $8.00. When we look at early '07, it you have got a reasonable heating demand season in the greater East Coast and upper Midwest gas prices could get very hefty. If they do I would expect electric prices not to go lockstep, but to follow.So when we look at '07, Brian and his team will tie down any price that we think is reasonable and leave anything else to float and we will take it as it comes.

But as you know, our primary business is to make sure that we put those gigawatt hours to our retail customers and the ever-growing municipal co-op market that we see. When you see us continue to move in that space you can read into that that we believe the returns on the megawatts sold into that market are very strong and better that we would get in the day to day short-term market. We always love months like July but they don't come every year.

I had another question on Ohio - just maybe you could give us an update if there is one on, for your thoughts on another RSP. Will there be a move this year do you think towards crafting the next set of rate stabilization plans for Ohio companies? Is this year still too early? Is it a next year event do you think? You have any update for us there?

Yes David. I guess I would tell you that if you are going to do something that would extend the RSP the sooner you get about the discussions the better. As you know, there are diversion views among the two largest utilities here in Ohio. Duke, Ohio is involved in those conversations. As we all try to noodle through what might make sense. [DPO] to a lesser degree. The legislative branch of the government is crystal clear when they tell us please don't bring us a Maryland. And we will try to see if there is a way not to do that. But we should never lose sight of what the law in Ohio is. The law in Ohio says that on January 1, 2009, our generation fleet FE's generation fleet, synergies or excuse me Duke Ohio's generation fleet and DPL's fleet can go to market. And that is the law. As you heard us say many times before we would like to find a reasonable answer if we can. If not, that is the law.

Good luck with the rest of the year.

Craig Shere with Calyon Securities.

Susan, can you quantify what exactly the impact of weather, say, versus normal would have been in Q2 and as incorporated in your changing guidance?

What we saw with respect to 2Q was a negative one set versus normal .0 1 dollars versus normal. That is overall across the Company and a negative $0.02 versus prior year. With respect to the East where it was heavily concentrated it was about $0.035. So that you can get it on average. With respect to the rest of the year we continued -- what we do is we will embed the actual effects that we have for the first six months. And then we assume normal weather for the rest of the year.

So we are still praying for hot weather so we can sell comfort to our customers, Craig.

Okay. But the actual effect in -- so it's a net positive including the July weather for the entire year so far that you've seen?

I don't know that July has been that strong. We don't really have -- obviously we know what sendout has been but we do not know on an overall systemwide basis whether weather has caught up are not. But to Susan's point, when we look at the guidance change that we are sharing with you today, that's based on normal weather for the last half of the year because we already know what the weather was for the first half. Any time it is better than that, that just helps us get to the upper end of the range if possible. If it's worse than that we will be at the lower end of the range.

Okay. There's just not much bait then for net effects of weather versus normal for the entire year in your guidance?

Absolutely not. We always forecast on normal weather and again you have heard me say this before. When things are strong you'll see O&M spending going up. When things are week in the weather world you'll see O&M spending get very frugal.

The only thing I would add, Craig, is that the positive trends that we saw in July were certainly part of the judgment we exercised in looking at postsale sales margin and having confidence around the rest of the year. We just don't attempt to quantify any weather variations.

Yes and that's what a very important point. Because the July experiences on offsystem sales are over with for the most part. But we haven't looked at weather on the retail side.

Great. Remind me what is the negative driver for investments in the second half?

We continue to have -- or we continue on the [Dow] plant and we continue not only to service the interest cost on that investment which is and around $0.03 of the share but we also have additional operating losses and around $0.02 of the share. So those are really the major drivers on the investment side.

Okay and (MULTIPLE SPEAKERS)

That's the (technical difficulty) plant, Craig.

Right. I appreciate that reminder.On Paul's question when we start talking about a mission credit sales. I understand that with plants down for more maintenance in the second quarter, you may have generated less and have more emission credits to sell. So maybe that is up and you'll take advantage of it during the course of the year. But is that just a temporary issue or how should we be thinking about this '07 and beyond?

A couple of things. The burn rate being down some, of course, yields as you suggested some additional credits that may be available. But remember that one of the goals that Bob Powers, [Bill Sigmon] have to continue to improve the efficiency of our plants, lowering the heat rate input which means fewer tons of coal for the same or greater megawatt hours of production, which yields additional credits. On top of that as you know we are now plugging in scrubbers on the system. They are performing at or better than we had forecasted that they would - which yields additional credits. So when we look at the rest of the year, we will be an opportunistic seller or monetizer of those credits if and when we can.

Remember as well, historically, that American Electric Power has always been not only a major participant in the actual auction year but in the out year auctions as well. So that as we look at our book going forward, we feel very comfortable with the amount of credits that we have in hand. The performance of the FGDs and scrubbers that we put on the system or SCRs that we put on the system so that we see no reason not to be able to have that as an additional earnings optimization opportunity as we look at '07 and beyond. But we don't ever want to oversell that because we are in what we think is a very important position but if we need to run our plants more we will need more credits for our own needs and there won't be that much to put into the marketplace.

So we constantly look at that and constantly try to move in the most inopportune times and I think you know from our first quarter data with you we led the lead in opportunistic modernization of credits in quarter one.

Mike, I understand because of these initiatives your long and increasingly long credit so these sales should continue. With credits having fallen so much in price but many companies kind of in your position with having put on pollution control equipment. They are increasing long credits as well. Do you have any thoughts you want to share about the pricing in that market?

I don't think there's any questions that they're soft and they will continue to be soft as we see that performance going forward. Again, that is why it as we look at our years and we look at the opportunity to put those credits into the market or burn them ourselves, it's all built into the price of power and the results that we might get by turning the credit into an electron versus turning the credit into $1.00.

Great. Last question, Mike. I know that you aren't not going to give '07 guidance, but you have issued previously long-term earnings growth guidance on what you think you can achieve. It seems like we are getting a little more traction and a little more certainty on the regulatory front. If we assume the continuation of that and the successful pursuit of IGCCs in both Ohio and West Virginia -- yes West Virginia -- and I know that's an assumption, would you be in the position of increasing that guidance and when would you feel comfortable giving any adjustments to long-term guidance?

I think it's safe to say that we will continue to look at that. As you know from the many meetings we have all had together, capital invested in a regulated utility - which is what we are for the most part - yields earnings growth potential if it's treated appropriately in the regulatory arena.To your point we have seen near-term success. It is critically important that our team continue to build those relationships day in and day out with the in-state financial regulator.

As I mentioned at the top of this discussion the decision that the FERC can and should make as it pertains to the regional rate design, as it pertains to our incredibly important transmission grid it's impossible not to say that there isn't upside in American Electric Power.

However it would be wrong for us to forecast more robust than the numbers we put in front of you but we hope to continue to look at that. And as we get closer and closer to the pluses on that we will try to share that data with you. I see some of this as a replay of my days in New England where Northeast Utilities today - rightfully so because of the hard work that Chuck [Schievry] and the team have done are beginning to reap the rewards of the huge transmission capital investment that they have in front of them or well underway. So as we get nearer to that it is going be safe to build that in but it would be wrong to tell you that today.

On transmission, your proposed transmission project in the Northeast, do you think that and Allegheny can both be done?

Ladies and gentlemen, we apologize. We have lost our host connection. Please stay online we will reconnect momentarily.Once again, ladies and gentlemen our host will be rejoining us. We appreciate your patience.

Craig, are you still with us?

Yes I'm back.

Great. I think I -- well go ahead as the question again because I want to assure you that there was not a power outage here in Columbus. This is the phone company not the electric company. But go ahead with your question please.

Since you brought up the transmission investments you've got a large project proposed longer-term for the Northeast here. Do you think that project is it's either yours or Allegheny's or how should we think about these different proposals for transmission (indiscernible) congestion relief going into (MULTIPLE SPEAKERS)?

I will tell you that as much as I like Paul that project is ours. He is a great follower. He's put in an application that would actually substantiate our 765 line and complement the way that power will flow through that region. As you know, earlier in the week or I guess last week, the FERC gave us the incentive nod that we were looking for. Again Allegheny first came in and said we shouldn't get those incentives and once they saw that we were bound to get them that when in and got them. So I give Paul credit again for being a great follower. As it pertains to the project itself, we are very much intrigued and waiting for the Department of Energy's National Corridor Designation. Extremely comparable that this will be among those. That isn't living as quickly as we would like it but I will tell you that Kevin Kolovar and Clay (indiscernible), and Secretary [Bodman] are surely taking care of their EPA 205 responsibilities and we will see those designations before the end of the year. I fully expect that we will be part of that corridor designation.We now then wait only for the determination by the PJM RTO that hours qualifies as an economic project because it will relieve, as you know, or at least as we forecast something on the order of $1 billion worth of congestion in the PJM. All you really have to do is see the constructive impact at Jacksons Ferry, Wyoming has had on power flowing West to East to realize how important this project is. So we feel comfortable. As you know that is a 2013, '14, 2014 in service date. It goes back to the future of what AEP continues to be and hopefully will be as we build out this potential capital expenditure program that we are surely well in the midst of.

So two lines is too much and yours will be built.

Actually the 500 KV line that Allegheny brought out is a bit complementary to the way that power flows in that part of the state. So I wouldn't say that two lines is too many.

Remember, again, I know it is always amazing when we talk about the $3 billion transmission project, but it is going to move billions of kilowatt hours and the per kilowatt-hour fee for that kind of a capital investment is usually in the mils, not in the pennies. So there is room in the overall transmission grid for that kind of expansion of the system. If you really are after this notion of open competition, what an enhancement of the grid gives you is the ability for all power plants to compete against each other, no matter what their fuel source is. It gives power plants a chance to compete against demand side management. It gives renewables an opportunity to get on the system. If you think of the state of Pennsylvania and Governor Rendell's desire to expand, win capacity in that state that project of ours - what we call the I-765 - will give him and on-ramp just like you would in a highway system and that energy will be able to get to market in a very cost-effective way. So as you can tell we are bullish on our project. We think it is exactly the right thing to do and we think the FERC will see its way to approve it and PJM hopefully will designate it as an economic project. If we can deal with the environmental challenges along the right of way we will be in business.

Thank you.

Good morning. Most of my questions have been answered but I just wanted to just a small tidbit. it. Should we look at the transmission in '07 Susan, the way I look at the numbers? The negative in '07 would be around 50 million pretax just looking at how the quarters have come in from the first and second quarter. Is that a fair number approximately?

Tell me how you are getting that.

I am getting that in transmission revenues. You're pretty much the same first quarter, first quarter this year and then there was a 50 million discrepancy starting with the second quarter -- (MULTIPLE SPEAKERS)

No. There are several factors. (MULTIPLE SPEAKERS)

And thinking then the lag remaining, going into next year would be only around 50 million or so in the next year. Is that a fair thing or no?

Yes. We think it is actually flat next year. Is that what you're saying?

Okay. It is flat next year. So you won't have any more -- because I talked to (MULTIPLE SPEAKERS)

Let me talk a little bit about what is going on here because there are some uncertainties. The number that you see year-to-date includes not only the cessation of the SECA charge which for the quarter is about $37 million because it didn't happen until April. Then there is another $18 million that is a provision for a settlement refund. So that is clearly a one-time event. Now what is going to affect that number year-to-year which is why I'm not really going to give you a 2007 number - we haven't really worked it all out - is that it is only flat if you assume no other regulatory change. And there are many regulatory changes that could happen. One of the things that we had talked about doing, of course, was returning some of that money in other rate cases. We have begun to see some of that in both Kentucky and Ohio. We have it pending in other jurisdictions as well, but we also have the possibility that all of this will be trumped by FERC action confirming the LJ's decision around regional rates which will have the effect of restoring some or all of those total revenues although under a different rate design. So I don't think you -- I can't, today, tell you how to model it for 2007 but I would not -- most importantly do not continue the provisionary year-to-year that you should also be making some assumptions about possible positive rate outcomes, as a result of these activities that are going forward.

And I think we shared with you and others, Ashar, what the impact of an appropriate rate design would be for the - particularly the American Electric Power system and as I said in my opening comments the Administrative Law Judge's conclusions of the case just a week or two ago are extremely favorable to what we were hoping would be done. Not everything we wanted but a very good order. If the Commission improves on that, all the better. If they approve it as is, we feel very comfortable about that. But again Susan pointed out to that the negatives quarter to quarter in comparison has everything to do with SECA going away and settling the SECA case.

Susan, could you just remind me how long does the Centrica deal last? I guess you mentioned it in the beginning of the year (MULTIPLE SPEAKERS). ))Susan Tomasky:We have one more year.

One more year. Does that mean the year 2007?

Yes, 2007, and then as we typically do we will reflect that sharing positive at the beginning (MULTIPLE SPEAKERS)

Of 2008 right?

No. 2007. No.

Don't you book it in earnings the following year?

Yes and it will be in '07 for the 2006 numbers that we are currently experiencing.

Then the 2007 earnings will be reflected in the '08 numbers?

No. when I said one more year I made this year showing up in earnings next year.

So that is the last year?

That's it.

And remember that there is a max on the '06 performance. So it doesn't have the potential upside swing. That was negotiating the entire Centrica arrangement which we did and reported to you in calendar year 2005.

What is the max this year? Is it the same as last year?

It is $20 million.

$20 million. Thank you very much.

Ladies and gentlemen, that will conclude the question-and-answer session. I will turning back to the presenters for any closing comments.

Thanks for joining us today; and if you have any follow-up questions the entire IR staff is available to you. John will now provide replay instructions for those of you would like to tune in again. Thanks, John.

You're welcome. Ladies and gentlemen, this conference is available for replay. It starts today at 1:30 PM Eastern, will last until August 3rd at midnight. You may access the replay at any time by dialing 1-800-475-6701 or 323-365-3844. The access code is 832916. Those numbers again 1800- 475-6701 or 320-365-3844. The access code 832916. That does conclude your conference for today.