美國電力 (AEP) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American Electric Power third-quarter 2006 earnings call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Ms.Julie Sloat. Please go ahead.

Thanks, Pat. Good morning and thank you for joining us today to discuss AEP's 2006 third-quarter and nine-month year-to-date earnings. I expect that you have seen the press release issued earlier today. It's 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 10 a.m. that will include the consolidated balance sheet and statement of cash flows, as well as full income statements for our utility operations, gas operations, investments 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 filings, including the most recent annual reports on form 10-K and quarter reports on form 10-Q for discussion of factors that may cause results to differ from management projections, forecasts, estimates and expectations. Also on the call we will discuss the measures about Company performance. That is ongoing earnings versus reported earnings that differ from those recognized by Generally Accepted Accounting Principles or GAAP. You can find the reconciliation of these non-GAAP measures on our Investor Relations website at aep.com. I'll now 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 questions. Mike?

Thanks a lot, Julie. I appreciate you being the lawyer today and making that statement. Welcome to all of you who have joined us today. It's a bit anti-climatic after already having told you earlier in the month what we thought third-quarter earnings would be with our pre-release on our 10-10 meeting. However, I hope you see that in fact the quarter closed as we had hoped that it would and thought it would and we feel very comfortable about where we ended up at $0.99 per share on an ongoing basis. As you know the sale of the Dow Plaquemine Plant, which was occasioned by the failure of the Tractebel Energy Marketing USA to live up to their contract terms, did have an impact on that quarter activity.

However, as I hope you will remember in our discussions with you, we see that as a constructive change for us, not only in '06 but in '07 and beyond on the cost of running the plant and being responsible for supplying steam to Dow and power at contract prices. The rest of the month in the quarter went pretty much as scheduled. Sales were strong. Holly will talk a bit about that. We were disappointed without question. We told you before that the Indiana and Virginia rate cases surely weren't coming out in a timely fashion. I guess like jury proceedings when it takes a long time you can't expect good things to happen and in fact that's what we were experienced with. We're not overly concerned. The Indiana depreciation case had an interesting order, wherein the Commission said that the accounting was right, but that the implementation of accounting wasn't necessary. We're not sure that's accurate. We continue to evaluate our potentials. We might well go back and ask the Commission to reconsider that point and if not we might well go forward in a court proceeding because it's very important that utilities get their accounting right as they go forward. So that's one that we will continue to watch that space. As to the Virginia E&R case, as you know, I think the administrative law judge and I guess they shared with you at one of the Merrill conferences not long ago. She really decided it on a process basis and laid out the going-forward undertaking that one would have to pursue to implement the Virginia single purpose rate review issue as it pertains to reliability and/or environmental investments.

And we were quite pleased with that but you might remember that I mentioned we weren't satisfied with the result because she said that you couldn't cover retroactive expenses and we don't think that that's right. And we were really emboldened by the Attorney General's filing to the Virginia Commission on the 13th of October, where they joined us really in arguing that that's a misreading of the law . That in fact the process that the ALJ laid out is accurate, but that this conclusion that you couldn't go back to the date that the law was passed, simply was wrong legally and we share that opinion and made that argument in our brief and we'll watch what the Virginia Commission does with that.

As to the overall Appalachia, Virginia rate case, we have testimony from various parties. I'm not overly concerned about positions that people have taken. But we'll continue to pursue. As you know, that case testimony begins, I believe, in the month of December. And we'll go through the process as one would expect. Our off-system sales were strong. Weather did impact the latter part of September in the retail side and again Holly will be more granular in those presentations. We continue not only to feel very comfortable with our guidance range for 2006, but equally comfortable with the guidance range that we talked to you about for '07, '08 and '09 on our meeting of October the 10th.

Remember, as we laid that out to you, the upper end of those ranges would have us experiencing tremendous regulatory success. The lower range of those - - or the lower end of those ranges would find us with one or two disappointing regulatory outcomes. So again we feel very comfortable about the story that we shared with you on 10/10, equally comfortable with the forecast of earnings for calendar year 2006 and we'll continue to plow forward as we go. Holly?

Thanks Mike. For the third quarter comparison year on year, we reported GAAP earnings of $0.67 this quarter and ongoing earnings of $0.99. GAAP earnings were less than ongoing earnings as a consequence of the after tax impairment of the Dow Plaquemine divestiture as Mike has previously discussed. That transaction was announced September 1st . Ongoing earnings of $0.99 are composed of $0.96 from utility operations, $0.04 from investments, and a negative $0.01 from the parent company.

Our utility operations were essentially flat year-over-year. $0.97 in the third quarter of '05 versus $0.96 this quarter. Rate increases, primarily in Ohio and Kentucky as well as the robust off-system sales that Mike mentioned, were largely offset in the quarter by unfavorable weather year to year, increasing O&M and depreciation expenses as well as a decrease in third-party transmission revenues. On a cents per share basis weather was slightly better than normal by about $0.01 but on a year to year comparison for the quarter, we were down $0.05 due to weather primarily in our eastern operating companies. Off-system sales were $75 million higher this quarter compared to last year primarily due to the strong performance of our east generation fleet in July and August as well as favorable results in our regional auction participation and the liquidation of financial hedge positions that were taken following the storms in the Gulf last fall.

Volume was down modestly just over 600 gigawatt hours primarily due to outages we experienced in September. Depreciation and amortization expense was higher by $41 million, attributable to our Virginia E&R write-off that Mike previously mentioned, as well as an increase in deferred carrying cost associated with environmental retrofits in Ohio which we began amortizing. Other income and deductions declined by $24 million, again associated with our position taken on the Virginia E&R as a result of the Hearing Examiner's decision. Our investment segments continued to show strong performance. On a quarter-to-quarter comparison, it was up $18 million primarily due to MEMCO where we we continue to experience higher freight rates underpinned by strong demand and a tight barge supply. Turning to the year-to-date performance, reported earnings year-to-date for September '06 were $2.08 with ongoing of $2.39. Again the differential is due primarily to the Dow Plaquemine Cogen sale. For the nine months year to date ongoing earnings of $2.39 are composed of $2.29 from utility operations, $0.12 from investments, and a negative $0.02 from the parent. Utility operations decreased year on year by $78 million during the first nine months. Higher retail sales associated with customer growth and rate relief mainly associated with the Ohio RSP were offset by the weather, a reduction in transmission revenues which was previously mentioned and increased O&M due to higher plant outages and planned reliability spending.

We also experienced higher depreciation and amortization year on year, higher interest expense as well as lower other income and deductions again due to the Virginia E&R write-off. The impact of weather for the year on year comparison was a negative $0.11. When compared with normal, we are $0.06 below normal for the year. Again, this is attributable to our eastern operating companies. The investment segment has improved year-over-year contributing an additional $45 million or $0.12 again due to the continued strong performance at MEMCO. While parent company year to date reflects a favorable $0.09 improvement over last year, attributable primarily to bond buy-back costs that we experienced in '05. Turning to the cash flow, we ended the third quarter of 2006 with a cash balance of $259 million. This compares to a cash balance at the end of the third quarter of '05 of $849 million. You may recall that our cash balance was high last year primarily as a result of the HPL sale.

For year-to-date cash flow from operations is $2.2 billion, consisting of $815 million in continuing earnings. When we add back the depreciation and amortization of $1.1 billion, the pretax effect of the Dow impairment of $209 million as well as changes in working capital and our other assets and liabilities, we arrive at the $2.2 billion. Our investing activities required cash outlays of $2.47 billion, driven primarily by $2.445 billion in CapEx. We did receive $137 million in cash from asset sales in the first quarter of '06 as covered with you then, it was primarily due to our Centrica sharing payments as well as the sale of the Bajio plant. Financing activities year to date provided net cash increase of $119 million. As a result, our net change in cash was a negative $142 million, which produced an ending cash balance of $259 million. As you may know and as we discussed with you on October the 10th, on October 11th, we received the proceeds of $1.7 billion from our Texas securitization bond at TCC. TCC then paid a special dividend of $585 million to the parent from these proceeds.

The Company has also called a number of senior notes - - we have also called $275 million of 5.5 senior notes due in 2013 and redeemed $340 million inner company note. We are expecting to arrive at a cap structure of 60% debt and 40% capital after we have met the accelerated payments required by the competitive transition charge order at that company. Turning to capitalization, we ended the quarter at 57.2% debt-to-cap. On a credit adjusted basis the metrics were 57.9%. As you know, our goal is to maintain a debt-to-cap ratio on a credit adjusted basis in the 60% range.

The adjustments we make to reported numbers to arrive at our adjusted debt-to-cap ratio are intended to reflect what we think is closer to a creditor's view. The adjustments include items such as adding back debt associated with our $1.2 billion Rockport lease and $30 million of preferred stock, not subject to mandatory redemption, and subtracting from that amount the debt from TCC securitization bond since they're serviced by Texas customers. TCC First mortgage bond that has been defeased as well as the Nuclear Spent Fuel Trust since it is fully funded with cash that is not available to the Company. With that, Mike, we'll turn to questions.

Thank you very much, Holly. And we look forward to your questions and hopefully our answers.

Alright thank you ladies and gentlemen. (Operator Instructions) Our first question is from the line of Michael Lapides. Please go ahead.

One easy question. When in - - when or how should we think about the process for when discussion will occur to resolve what happens in Ohio after 2008? Timeline for that?

Sure. It's clear that as you know from one-on-one meetings that we've had the office of consumer council has submitted a concept proposal. I think others are beginning to talk about that. We're clearly in the midst of very important gubernatorial election process here in Ohio so the legislature is beginning to talk about it. I would expect the dialogue will heat up post election and be a center stage issue '07. I don't think anyone wants to wait until the bewitching hour of '08 to figure out what we're going to do at the end of that calendar year. So I would think that's a reasonable timeline and I appreciate that as an opening question. It's an easy answer.

Thank you.

You bet.

Thank you. Our next question is from the line of John Kiani. Please go ahead.

Good Morning.

Good morning, John.

Sorry I joined the call just a little bit late. But can you - -

You didn't hear all the good news then?

Can you give a little bit more color on your initial comments on what regulatory disallowances were baked into the mid-point or the low end of the guidance range?

No, I think that would be unfair to get that granular with the data because we don't usually look at it that way. On a balk basis what I tried to say was that when we give a range, it has on the upper end very successful regulatory undertaking which as you know we've mostly experienced in calendar '06. To Holly's point, we did take the impact of the Virginia E&R case in this quarter. However, if, in fact, the Attorney General's right and our brief holds up, you'll see that as a real positive as we go into '07. As to the depreciation case, you know, it's a really open issue. The Indiana decision by the commission clearly states that the accounting is right. But that the change isn't necessary.

Well, you know, the accounting rules are accounting rules and if the accounting is right it might be appropriate to implement the right accounting, and we'll just have to see how that goes. So, you know, I don't think that we gave any more detail than that. What I did say was that our updated forecast for '06 continues to be as we thought it would be and as you know, that's increase from where we started the year because of the successes that we've had through the calendar '06 and we see no reason whatsoever to have any worry about our '07, '08 and '09 numbers.

Got it. Thank you.

You bet, John, thanks.

Thank you. Our next question is from Craig Shere. Please go ahead.

Hi, two questions. First one, Holly, what's driving depreciation guidance? I mean, if you look at the first nine months, we're averaging $3.47 a quarter. The '07 guidance is averaging $3.53 a quarter. The Indiana depreciation case is put off and yet fourth quarter appears to be $2.75 if I'm understanding the full year minus the nine months. And then I had another question.

A couple of things. We did have an impact in the depreciation charge in the quarter associated with, in essence, a catchup of deferred charges under the Virginia environmental and reliability rider. That impact was over $12 million. Above and beyond the fact that we have been continuing to depreciate at current rates associated with Indiana. And so there was no adjustment associated with Indiana in the quarter, but there was an adjustment associated with our interpretation and response in Virginia with regard to the E&R filing.

And I'm sorry, the $12 million was for the third quarter or the fourth quarter?

Third.

Okay so third quarter is more than a normal run rate would be based on the way you all are accounting for things now?

Exactly. Thank you.

Okay. So-and-so you're implementing the Indiana depreciation now or you're not implementing it now?

It's under review and we have not implemented it.

Okay. Okay. But even if I subtract $12 million, I'm not getting to the $2.75 in the fourth quarter.

I don't know that I am either.

Do you want to come back to us on that?

Yeah, I think it would be better if we did, John, because I'm with you. If you take $3.47 and take off $12 million, that won't get you there so we'll have to see how that works.

Yeah.

Mike or Holly, whoever feels comfortable with the second question. Mike, you mentioned the kind of range of guidance is somewhat dictated by success with rate filings. But I guess this is a bit of a takeoff on both John and Mike's questions. As I understand it, you know, pursuant to Mike's question, your long-term guidance assumes a continuation of the existing RSP growth in Ohio come 2009 whereas it reasonably could be better than that. And also your guidance excludes potential contributions from the Ohio transmission investment reliability rider, the proposed PGM and SPP transmission investments and anything from IGCC projects. Is that correct?

That's correct, John, and true to the point. We see those as potential up sides if things work well, but I hope and this was part of the theme of our time together in earlier October - - in early October, and that this management team's intent is to give you a robust view of our tomorrows that is achievable with a great deal of hard work and accomplishment. If we do better than that, I'll be as pleased as you will be as will the shareholders and the investors, but what I don't want to do is promise incredible growth opportunities that simply might not be accomplishable, because I think it's important to give you the strength that we think we see in our going-forward world and deliver on that if not better than that rather than deliver some incredible number that some of my colleagues threw out and later on tell you how sorry we didn't make that.

That's fair. Let me rephrase my question a little bit to get some color. Do you feel that excluding these items from your guidance is appropriate conservativism or is it just that the bulk of returns from these items are going to be beyond the forecast horizon?

Well, it's a combination of the two. As you say, I would expect the integrated gas activity as a real plus to the strength of this company going forward will be beyond that horizon. However, the filing that we made with the commission here on reliability in Ohio would be well within the horizon as would some of the others that you mentioned. So it's kind of some are in and some are out of that timeline.

Great. I appreciate the help.

You bet, thanks a lot, Craig.

All right. Thank you. Our next question is from Anthony Crowdell, please go ahead.

Good morning. I think I'm just following up on the depreciation case in Indiana. I believe the '07 number included the $70 million from the depreciation case. I just wanted to go over what the options to resolve this? Is there a rate filing that you could do or you may bring it to the court system. Can you just go over the options to resolve the depreciation case?

You know, you're still in a timeline where we can go back to the commission and ask them to reconsider their decision, and that would be the first move that we would take. Then we would have to - - if the commission decides that what didn't you understand about what we told you, then we actually would have to take a look at the appropriateness and the requirement to have proper accounting versus the ongoing relationship with the Indiana commission which is extremely important to us as well. It is clear that the license life of the Cook plan has been extended. It is clear, therefore, that the depreciation life of the asset has been extended. And the appropriate accounting would call for that to be implemented.

The issue here, of course, is that we're in a period of a rate freeze. This had no impacts on the right side of the plus or minus because this is accounting entries and really affects the shareholder's position of having the depreciation schedules match the reality of what the accounting rules cause us to do. It's a unique wrinkle, and who knows what might come of that. Once we're through with the regulatory process, that may give us an opportunity to visit with the commission to seek guidance on what else they might suggest that we do because it just is wrong for any utility I&M or any other of our operating companies or really any other utility to have a depreciation schedule that doesn't match the accounting rules.

Thank you.

All right. Thank you. And we do have a question from Paul Ridzon, please go ahead.

Good morning, Paul.

Good morning Mike, how are you?

Good.

Any update on your strategic partner in Texas or are those talks still ongoing?

See in you Las Vegas. I'm sorry, what we mentioned was that we thought we would share that data with folks when we got to the EEI financial meeting in Las Vegas and I still have that hope, and I have every reason to believe that we'll be able to make those announcements then.

It sounds like it's not across the goal line yet?

Well I wouldn't go that far. But it's not across the goal line to where we want to share what we think is really kind of a intriguing under taking.

And then secondly, I thought I heard some mention of liquidating hedges, kind of wondering if you could give some flavor as to the impact of that and more detail what that was, around the hurricane.

Yeah, we moved pretty aggressively to lock down a bit of our open position entered into some very attractively priced hedge positions that have liquidated in this quarter in particular.

What was the benefit realized from those?

We tend not to try and reveal that, but it was in excess of $70 million.

Those are power sales or what kind of hedges were those?

For the quarter. It was due to both - - power and gas but predominantly power.

Okay. Thank you.

You bet, thanks, Paul.

Thank you. And our next question is from Elizabeth Parrella. Please go ahead.

Thank you. Just following up on that last question, are any of those hedges continuing into subsequent quarters, fourth quarter '07? And kind of a related question. When you look at your '07 guidance for all systems sales in total which I think is $672 million of margin contributions, is it possible to say how much of that, of those dollars are effectively locked or hedged in already?

I would say that we're comfortable that the fourth quarter we will continue to experience very attractive hedge liquidations. And we're very confident with our guidance around that for all systems sales. For '07, as you know, a portion of it is locked in, but it continues to move as we see opportunities in the market and we take advantage of those opportunities.

Remember, Elizabeth, that much of what we have experienced, even here in '06, was kind of a unique set of facts that plays very well for our footprints, particularly inside of the PGM larger market footprint now and that is if the weather is off, saying that it's a bit warmer than normal here, that gives the generation fleet and Brian Tierney and Commercial Ops considerable amount of megawatt hours to put into that marketplace. So when you compare the '05 or excuse me the '06 performance to the '07 forecast, that's just reflective of what we think is achievable but again has some potential strength with it. And unless you have a follow-up question, I'm a little disappointed you aren't going to ask me about my '06 coal prices, because as everyone else we're experiencing some down draft in the prices coal and Chuck Zebula who I know you know very well and his team have done an excellent job, where we were looking at 10 to 13% year-over-year increase, we're now looking at an 8 to 10.

Okay. And just other, two other quick questions if I may. Were emission allowance sales meaningful this quarter relative to where they've been in past quarters or can you tell us how much they were?

We didn't have much in the way of the - - we had less in the third quarter of '06 than we had in - - wait, I've got this reversed, Julie, don't I? Yeah - - I'm sorry, I'm reading off the chart here and the columns are reversed. We sold more this quarter than we did in the same quarter last year, and it was in the range of $20 million.

And the last question on the regulatory side if we could just go back to Indiana for a minute. Can you tell us what your earnings ROE-wise in Indiana?

No I sure can't. I would tell you that it's a reasonable range viewed at the authorized rate of return from the last official rate review that we've had in Indiana.

Okay. Thank you.

You bet.

Thank you. And we have a question from the line of Dan Eggers. Please go ahead.

Hi, good morning.

Good morning.

Oh, a nitpicky question first on MEMCO. It look like you guys exceeded the full year '06 guidance. Can I assume that we'll look to fourth quarter?

This is the time of year when activity slows down a bit on the river. We were out with the MEMCO team a while ago. We feel comfortable with the '06. We'll ends up with pluses as the last couple of months unfolds but we see a bit upside potential but not a greatly deal. I wouldn't take third quarter and implement fourth quarter results to it.

And if we look to next year you exceeded your guidance at '07 at MEMCO for the first three-quarters of 06. Is that attributable to the fact that 06 was just better than normal and we should see some normalization next year?

I think if you look at the MEMCO numbers '06 to '07. We had an opportunistic [inaudible] on the barge system and we took that opportunity. Those barges will fall off lease and unless we can fill that in, we'll simply have less barges that'll continue to move product on the river so we'll be looking forward to that but as you can well imagine, those who would lease equipment like that year-over-year and I think lease rates ought to go up as well so we'll be cautious about how we go about doing that.

Okay. All system sales, you said you guys had a good July and August plants performance if I were to look at gross margins and strip out the $70 million of opportunity in his tick matches and those to get repeated to that magnitudes. Your gross margin per megawatts per hour were up 10% probably. Is that largely a function of July and August really hitting the sweet spot as far as the plants operating? Is there an opportunity that could occur again in the future?

I think you've got that exactly right, Dan, and I would say tell you that that's the charge that Nick Aikens and Bill Sigmund and Mike Rencheck have is to make certain that our facilities are as prepared to run 24/7 during those periods of high demand. As you know, we're tying in Mitchell and Mountaineer environmental add-ons even as we speak so we'll be well prepared for the '07 demand cycle. If you look at the refueling outages at Cook, the reactor vessel had activity that's going quite nicely even as we speak.

It obviously isn't a shoulder month and we always try to time our outages along those lines. We have had an extremely successful run with the fleet. But remember while we put capital work on the environment side of the plants, Bill Sigmund and his team are doing a great time of refurbishment on the more traditional side of the power plant aswell so I have every expectation that we'll have more than adequate generation capacity and have every confidence in Brian Tierney and the Commercial Ops folks that they'll turn that into the highest margin achievable for us.

And I guess Mike not to belabor this but July and August were pretty hot months for you guys. So you would assume a more of that available capacity would have committed to incumbent loads if you assume a more normal weather environment, does that mean that there's even more output potentially available to sell into the good margin period?

What we see, Dan, if you see a really high peak demand, we won't have additional megawatts to put into the marketplace because the peak demand would be across the footprint. However, you would see prices escalate substantially in those areas that are generation-short and not power transmission-short and we would take full advantage of that.

Okay. Thank you, guys.

Yeah, you bet.

Thank you. And our next question is from Grego Gordon Please go ahead.

Hi, Mike long time no see.

Yeah I'll say - - How is that he that little girl of yours.

She's okay Most of the the detailed questions on the quarter were answered so let me ask you a broader question as we approach the mid-term elections here and on a national level, federal level and a state level it appears that the democrats may gain significant traction. What types of legal & regulatory changes would you envision we should be thinking about when it comes to your profile in terms of carbon regulation, dividend taxes, the willingness of the state level to promote IGCC? Is the mid-term election meaningful or should we be focused on the presidential election in '08?

I would expect that you're asking pretty detailed questions and one person's political view is not necessarily a majority. But to your question let me simply say, as to the carbon issue, I would expect you ought to look to the '08 presidential election as being the potential change there. If you move into a house and senate change and it becomes a very aggressive carbon cycle, I would expect from statements made by the White House that that would be among the first vetoes that the White House would exercise. I could be wrong about that but at least that's one's impression. As to the state house issue on integrated gas, governor mansion is not up for re-election nor is the Virginia Governor so that shouldnt affect the Appalachia under-taking. Here in Ohio, remember that congressman Stricklands, who apparently has a relatively large lead but as you know, prognosticators frequently miss the mark, but should the congressman be successful, he serve's Meg's county, he understands the potential upside that the IGCC plants here in Ohio would mean for that county. But, again, that is a regulatory process.

As I said before, I would expect that Chairman Shriver would continue to serve under either democratic or republican administration because he's registered independent. As to the regulatory change across the footprints. I can't think of a jurisdiction where a gubernatorial change would have a negative impact. Governor Daniels isn't up for reelection. Governor Granholm in Michigan is but everything seems to go reasonably well there. The Kentucky issue is clearly right, but Texas looks like Governor Perry succeeds.

So we watch that pretty closely. Governor Huckabee isn't standing for re-election but Sandy Hocksteader has done a tremendous job with the Arkansas commission and I'm sure a succeeding Governor might want her to continue to sit. So when we look at landscape, the elections don't trouble us at all. The only thing that troubles us is how much the Democrats hate any idea that republican, and how much Republicans hate any idea that's democratic. And that's just my want for the country to get overall this battle and get on with managing the economy and managing the potential for this country. I'll get off my political soapbox now.

Thanks, Mike.

You bet, Greg, thanks.

(Operator Instructions) And we do have a follow-up question from Craig Sheer. Please go ahead.

I just want to see if Holly had a chance to check on the depreciation or maybe we could say just take it offline if there hasn't been enough time.

Yeah, the differential we believe is associated with the Texas retail claw back but if you'd like to close the loop with Betty-Jo or Julie after this you call, please give them a ring.

Great, thanks a lot.

Thank you. And I'm showing no further questions at this time. Please continue.

Well, thank you very much for taking the time to be with us. I know you've got a handful of other calls to do today. We're quite pleased with the quarter. Quite pleased with our guidance for not only '06, but 7, 8 and 9. Thanks for the support. Bye now.

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