美國電力 (AEP) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power fourth quarter 2007 earnings conference call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to Julie Sloat. Please go ahead.

Thanks, Kent. Good morning and thank you for joining us today, to discuss American Electric Power's 2007 fourth quarter and full year quarter earnings. If you have not seen the press release issued earlier today, it is available on our webpage at AEP.com, and a podcast will be available on our webpage at the conclusion of this call.

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 is also available at AEP.com, that includes the consolidated balance sheet and statement of cash flows, as well as full income statements for our utility appraisals, MEMCO operations, generation marketing, and parent and all other.

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 a discussion of the 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 a reconciliation of these non-GAAP measures on our Investor Relations website at aep.com.

I will 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 your questions. Mike?

Thanks a lot, Julie. I am glad you could get that introduction out, so well done! Welcome everybody to the wrap-up of '07, and a bit of a peek at how we feel about 2008. I hope that you have had an opportunity to digest our incredibly detailed, almost incomprehensible press release on earnings, as we typically do, we try to be as transparent as we can. The fact of the matter is, when we look at '07, AEP clipped on every cylinder that it possibly could.

We had an outstanding year with an 8.3% growth in year-over-year ongoing earnings when compared to '06, a 4.9% increase in our shareholder dividend, with our dividend now at a $1.64 a year on an annual basis. We again increased our guidance over the three-year cycle to the 5 to 9% range with a meeting with many of you in October. Received $352 million in incremental rate relief, and favorable rate adjustments in five of our 11 jurisdictions. In fact, in every of those jurisdictions, where we made a rate filing.

We were quite pleased to receive from the Arkansas Commission, the authority to move forward with our ultra super-critical coal plant. We think it is essential for this country to continue to move forward demonstrating the viability of coal, both now and in the future. We brought SCRs and FGDs online, which makes each of our historic plants, or existing plants much more energy-efficient, as well as in the long run, environmentally better. That, we think, will add to the portfolio of opportunities in our PJM footprint, as those plants continue to perform excellently, and with lower cost profiles than they had in the pre-environmental add days.

I think we did an excellent job of managing our fuel supply, as well as the fuel supply costs, during very, very high fuel-price times in 2007, and of course substantially increased a portion of fuel supply costs, that are recovered in the more traditional regulatory proceedings.

All of those points we think speak volumes about how successful we have been inside of the regulatory envelope where American Electric Power does most of its business. We received what we thought were very fair orders from the Public Utility Commission of Texas, not only for our Wires Operating companies in Texas but equally important, if not more so, more our partnership with MidAmerican, which allowed us to go forward and create the Electric Transmission Company of Texas. In fact, we began billing our customers in the last quarter of '07, and are encouraged by the opportunities that that transmission play gives for us as we go.

In the PJM marketplace, we added gas capacity at what we thought were extremely favorable prices, and feel very comfortable about what we were able to accomplish there.

In the SPP footprint, we were able to not only add gas capacity, but as gas capacity that we built, and will ultimately roll into the rate base of the operating companies inside the SPP footprint. We think we received tremendous political, public, customer, and regulatory support for outstanding performance by the men and women of Public Service Company of Oklahoma, who were visited in January by the iceman, and then the iceman cometh again in December.

That recovery was nothing short of phenomenal, and the credit goes to Stuart Salomon and the folks at PSO, and many, many other utilities who came to the aid of PSO, to help us get our customers on in record time. Substantial cost impacts from that storm will be recovered in upcoming rate activities as we go forward.

The wholesale off-system activity housed in our commercial operations also was nothing short of phenomenal in 2007. Not only were they extremely successful in the PJM market, but equally so in the SPP market with off-system sales, and importantly, the creation of our retail and wholesale energy marketing group inside of ERCOT, had a very productive year as well. I know that Holly will detail of those data for you as we go forward, but I feel very satisfied with the way that commercial operations continues to perform year-over-year.

We received an excellent rating from the Institute of Of Nuclear Power Operators, for the overall performance of our DC Cook Nuclear Power Facility, something that has never been received before in the timeline that this was, by our team in that particular area. We feel very, very good about that. We issued our first sustainability report, which talked a great deal about who we are at American Electric Power, what we believe in, and what we strive to become. We are different from many other people, reached out to a large group of constituents in preparation of that report. In fact some of you on the phone helped us in that regard, and we thank you for that.

We signed contracts for additional wind power facilities throughout our eastern footprint, and continue to pursue that both east and west. I know that people look at American Electric Power, and say you are awfully heavy in the coal world, but we do continue to add green power to our portfolio, wherever we are encouraged to do so by the state regulator.

We received only two notices of violation of the myriad of environmental rules and regulations that are implemented at the state level in our 11-state footprint area. For a company the size of American Electric Power, that kind of performance is nothing short of phenomenal, and something that we are very, very proud of.

We rolled out in October, what we think is probably the breakthrough technological opportunity, on the intelligence upgrade of the entire grid, from the power plant inside our customers' businesses and homes. We think Grid Smart will position American Electric Power at the head of that class, as we go into the 2009 and 2010 and beyond timeline, and actually implement that technology in the field, with full support from our 11 in-state regulators, and our customers as well.

Most importantly, and not that importantly to all of you, but surely to the men and women and the families of the employees of American Electric Power, in 2007 for the first time in a number of years, and only the second time in 20 years, we did not lose the life of a single member of our team. That, to me, is something that is outstanding, and something that we hope to be able to sustain in 2008.

And lastly, at the very end of 2007, we announced a series of additional management reassignments, all intended to continue to broaden the horizons, and the scope, and the knowledge base of this incredibly talented team, and the deep bench that we are blessed with at American Electric Power. It is my hope and surely the Board's hope, that a few years down the line, someone sitting with us, and who has met you and dealt with you, will become my successor in 2011.

So we feel very good about 2007, in almost any way that we can look at it, almost any way that we think about it, from financial performance, to regulatory performance, to political sport, environmental performance, internal human performance, team work, a very outstanding year. So as I do with your team, I am sure you do with me, what about 2008? Well, for 2008, as you saw this morning, we have already upped the guidance range from $3.05 to $3.25, to $3.10 to $3.30. You know how we always head for the middle of that range, so that says our target would be $3.20 for 2008.

We feel very comfortable having done that, because we already are well along our way in rate settlements, and rate recoveries, and rate understandings that we think will support that. We have our intent to spend $3.7 billion to enhance the earnings strength, and opportunity of American Electric Power in the years 2009 and beyond. We continue to work diligently with a number of players, trying to bring forward a reasoned answer in Ohio, and feel much more comfortable about that, and I am sure we will get into that in much more detail as we go forward.

We today announced settlement with folks at Suez Energy Marketing and Tractebel, to bring to a close the Dow Plaquemine story, which ended in '06 for us by the sale of that plant to Dow, and now ends in early '08 with a settlement of an outstanding disagreement, over the contract obligations of the Tractebel Electric Marketing Company in America. We feel very comfortable about that, it will add to the cash flow, will help our capital structure, and of course will be part of our reported earnings as we look at 2008.

We continue to move forward on our transmission plans with the assignment of Susan Tomasky as the President of the Transmission organization. A seasoned executive that many of you are familiar with. We see the transmission play becoming very political, and very regulatorially involved as we go forward.

Our partnerships with Allegheny, our expanded partnership with MidAmerican, our partnership with ITC, and others yet to be announced, continue to encourage us that the Federal Energy Regulatory Commission will in fact occupy the space on the transmission front, and we will be prepared to do that.

So with that uncharacteristically long bragging about '07, and framing of '08, I will turn for the details to my abled CFO, Holly Koeppel. Holly?

Well, thanks, Mike. And it was a very successful year, as you have recapped. Once again, we were well-above the midpoint of our guidance range, due to the many factors that you have listed.

If we turn to page 6, our fourth quarter performance drivers, we were blessed with near normal weather, which was positive when compared with the fourth quarter of last year. We have also had tremendous success in the regulatory arena, and rate relief has contributed substantially to the quarter-on-quarter results. We have covered off-system sales, higher volumes and prices have contributed to a substantial quarter-on-quarter uplift in off-system sales.

I am pleased to report that the challenge we were facing with regard to PJM marginal losses, has been substantially addressed through rate relief that we have secured, or is currently pending. We are now recovering or deferring, in both Virginia and West Virginia. We will be filing in Kentucky for recovery of marginal losses through our fuel clause, and we in fact, have settlement pending before the Ohio Commission this week, that would provide for recovery of marginal losses in Ohio.

That leaves only I&M, where in Michigan we currently recover, and in Indiana, it will be included in the filing we will be making again this week. So that is a huge positive that should change what we are seeing, in terms of net transmission revenue, and we will be reflecting marginal losses as part of the retail growth margins on a going-forward basis.

O&M very positive, right on track, save for the storm damage that we incurred in December, as you outlined earlier. Other income and deductions we did see a change, because as you will recall, we returned to regulation under FAS-41 earlier this year. And finally, income tax is a bit of an anomaly there in a year-on-year comparison, in that we resolved a number of prior audits in 2006. We are now current with the service through 2003, and took quite a few reserves in '06. In '07, we then followed up with a fairly aggressive series of amended state income tax returns, that resulted in a lower effective tax rate than would normally be the case in 2007.

For the full year, much the same sorry. Weather was essentially normal, definitely a positive when compared to 2006. Retail sales, the story there is both load growth and rate relief. The load growth in major part in the Ohio companies was due to the addition of that major customer Ormet, which we have discussed with you in the past. Off-system sales, a tremendous success. Again, due to favorable pricing conditions, as well as nimble transactional activity by our trading group.

O&M on track. Depreciation and amortization much in-line with what we predicted. The increased amortization that you will note here relates primarily to our Texas securitization that went into effect in late '06. The higher interest expense on a year-on-year basis, is due to again the Texas securitization. We are now at a fully annualized and normal level, and we will see a continuation in '08, not a step up.

And finally, the Other income and deductions I would spike out, the discontinuance or the reduction in Centrica sharing year-on-year, and the end of the Centrica sharing which will occur in '08. As you will recall we received 70 million in '06, 20 million in '07, and that will drop to zero in '08. That pretty well summarizes the quarter and year-on-year comparisons and the differences between the two.

Turning to cash flows, again right in-line with what we would expect, the schedule is fairly self-explanatory. Changes in working capital were largely driven by the tax discussion that we just had, as well as a shift in receivables and payables. Our cash outlays, we did have a very successful year of CapEx right on-track with our budget of $3.6 billion. We also sold a few assets, the Centrica sharing, which I just mentioned, the Oakley Union sale was finally completed for 46 million, ETT formation resulted in a $70 million transaction, and we finally sold our last IPP, the Sweeney plant for $82 million.

Finally, we did have a successful addition of a number of gas-fired generating plants that you mentioned earlier, Mike. Three plants in particular in '07, the Darby plant $100 million, Lawrenceberg $325 million, and Dresden for $85 million, that plant will be completed by the end of this decade. Our investing activities as noted here, we did issue through the DRIP common shares of 143 million, options exercised at 86 million, and the dividend reinvestment plan 57. The summary is that the change in cash and cash equivalent balances year-on-year, we moved from just over 300 to 178 million.

And finally, ending the year, we had an adjusted debt-to-cap ratio of 58.5%, right in-line with our target of 60% or better, in terms of outstanding debt. As you can see from the schedule on page 9, the adjustments that we make are to add back the off-balance sheet lease of our Rockport Unit 2 of 1.183 billion, and eliminate or deduct the Texas securitization bond outstanding of $2.2 billion.

With that, it is no surprises once again, pretty much a recap of the year, and we can turn to questions.

Thanks, Holly.

Kent, we are ready for questions.

Great. Thank you very much. Ladies and gentlemen, (OPERATOR INSTRUCTIONS) And our first question then this morning comes from the line of John Kiani with Deutsche Banc. Please go ahead.

Good morning, Mike, Holly, Julie.

Good morning, John.

How should we think, Mike, about the potential for maybe a reg asset, and some type of a securitization, as part of a post-'08 rate structure in Ohio?

Well, that is an intriguing way that one might find an answer to the discussions that are ongoing in Ohio. We would love to have that as a process, whereby one could forecast a market price, create that particular reg asset, and use securitization as a means to smooth that out as a way to recover it. It would be wrong for me to tell you that I feel very strongly about that, that that might well happen. But it is a viable tool that has been used in many, many jurisdictions, in more creative ways than even that. But we will see how that unfolds.

I think the most important piece in Ohio right now, John, is the very strong statement and commitment on behalf of the Speaker of the House, to the point that Ohio, the political part of Ohio, needs to define what the energy policy of the state is, so that the implementation by the administrative part of Ohio, being the PUCO, isn't left to fill that void with however they create their determination of market and market viability. That is an essential part of the ongoing discussions, and the ongoing development here in Ohio, we believe a very important part to establish for all four of the operating utilities, as well as the Ohio economy, the road forward.

Thanks, Mike, that is helpful. And then from a transmission perspective, you have made a few comments in your opening remarks about the potential for other joint ventures or other partnerships, certainly that is a growing focus and part of the company. Can you talk a little about it more about what we might see, and what you might be able to do, above and beyond the current partnerships out there?

Yes, we have tried to be very, very straightforward since coming to AEP in 2004. We began to withdraw from the international marketplace, where we along with others, were being severely challenged. And said that we would focus in on what is a very, very intriguing footprint, 11 states covering, luckily 3 RTOs, the ERCOT, as well as SPP, and the PJM, which is of course, most of the northeastern quadrant of the United States, save New York and New England.

However we have always said that the transmission play, and surely the partnership called Electric Transmission America with MidAmerican, is intended to allow for us to pursue transmission projects in a much wider footprint. And we continue to discuss the potential of joining others in endeavors in a footprint much wider than the three power pools that we currently serve in.

I think it would be premature, John, to give you much more data than that. But as an old friend of mine used to tell me in the marketing game, watch this space because we really do have what we think are some very real potentials.

Okay, great. Thanks.

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

Good morning.

Good morning, Dan.

Mike, I was wondering if you can give us some thoughts, there have been a lot of setbacks in the IGCC development business, mostly by other folks out in the market. Can you give me your thoughts on, what is the evolution of that asset type, and kind of where you guys really think we will see one in the ground?

I can tell you more about the former than I can the latter, Dan, but let me do that. There is no question we have never tried to run from the reality that integrated gas combined cycle technology, is in fact, more expensive than pulverized coal, or ultra super critical coal. At the end date, however we believe that that technology with environmental processes fully implemented, will be cost-competitive, if not cost advantageous to others going forward.

We are very comfortable, as is General Electric, with the gas fire, the gas fire technology, as Bob Powers used to say, back when he used to run the power plants, not near as well as Nick, but back when he did that, the integration is really the issue. Our engineers feel very, very comfortable about that.

We have more chemical engineers working at American Electric Power today than we have ever had. It really is, in fact, Dan, it becomes a chemical plant with a power plant on the back, which is a very unique understanding and undertaking for anyone who is going to be in that space. If you look at some of those who have walked away, I am not sure that they were as prepared to take on those challenges as we have been.

So we feel very comfortable with this technology, we will continue to push the envelope in that regard. We think the prices we have put in front of the Commissions in West Virginia and Virginia are very real, very honest. They are high, it is on the order of $3,500 a kilowatt, but we think that that is a good, honest portrayal of the costs that are associated with these activities.

As to the wind, we really believe that we will get authority in West Virginia this year to begin going forward in a much more aggressive fashion. As you know, Appalachian Power is regulated by both jurisdictions. The staff in Virginia is not as comfortable. They are worried about the unknown of tomorrow's carbon requirements, and the unknown of tomorrow's environmental legislation, whatever it might be.

But it is going to take bold commissions to make bold decisions, not unlike the Commission in Indiana did for Duke, Indiana. I am not here to sell Jimmy's stock, but the fact of the matter is, commissions that are willing to make difficult decisions, like Arkansas, are the kinds of commissions that we are encouraged by. Because this country needs baseload generation. And I don't want to wear my Bush hat too many more days, it is getting pretty worn out, but the President made that statement crystal-clear last night.

I was amazed that not only the dutiful Republicans were clapping, but I saw some Democrats clapping as well, when he made those statements about clean coal and clean coal technology. So those who have stepped away have various reasons. Those, like us, who continue to push forward, believe very strongly that this is essential, not only for our customers and our state, but this country as well.

Thanks. If I can finish in the coal conversation, there has obviously been a lot of market focus on rising coal prices and availability, supply. Can you just give us a feel for where you guys are from a supply perspective over the next couple of years, and anything you are seeing we should be aware of by way of kind of coal pricing trends, and what you are contracting for?

Well, there is no question that the coal prices are escalating. When we came into the '07 timeline, we spoke in terms of 7 to 9% increases. We ended up with a 4% increase on average. And again, that speaks volumes about the skill sets of Chuck Cebula, and the fuel supply team that we have here at American Electric Power. When we look at 2008, we are looking at escalations in the double-digit range for coal.

Fortunately, as I also said at the outset of my remarks, we have taken most of our fuel expenses and put them back under the more normal fuel recovery clause mechanism in the 11 jurisdictions where we do business. The only place where we don't have that addressed, and surely might do that, as we go forward, is in Ohio. But coal prices are tough. Coal supply, we are in very good shape, we are fully, we are in the high 80s on coal supply for 2008. Obviously a little less than that in '09, 2010.

We continue to do blend and extends, we continue to see a lot of pressure on the price of coal. We have the opportunity to do a lot more PBR, and we are beginning to do that. Blending that in as the eastern coals, one of the things that you're seeing worldwide, to your question, is that steam coal in the eyes of a coal miner, can look like met coal, when met coal prices get real high as they are today, with the Australia event, you are beginning to see coal exported from the eastern mines, out of Norfolk and other ports, Baltimore I guess, going to the world marketplace.

Oddly enough, some of our suppliers tell us they are having force [major] issues, I would call them price major issues. But we will get them back in-line and those shortages will ultimately be delivered, and that will help us put downward pressure on the price of coal as we go.

Also remember that with scrubbers and things now being added to the plant, we do have a better portfolio of coals that we can burn. And that gives us some additional credits that we can monetize. When we look at the overall cost of coal, we try it take all of that into conclusion. So lots of words to two issues. Costs going up, most of it recovered regulatorially. Volumes very comfortable.

Thanks, Mike.

You bet, thanks, Dan.

Thank you. And we have a question then from the line of David Frank with Catapult Capital, please go ahead.

Hi, Mike, it is actually Steve Fleishman.

Hi, Steve, how are you? Are you playing David today?

I am playing David, yes. Thanks. Two questions. One, I was just wanted to check in from an Ohio standpoint, from relative to the 2009 outlook that you gave last fall, how do you feel about the progress to date, relative to achieving that or potentially even doing better than that?

Well, I feel that we can surely get within the range that we spoke to you all about in October in an earning sense. By the way, that Ohio will unfold. Do I think that we will be at the high end of that range? I am not comfortable with that yet, Steve. I will tell you this, that coming out of the Senate, I was very sick to my tummy watching the House and the Governor, the interplay, I feel much more comfortable.

As you know, Craig Baker, Bob Powers, Kevin Walker, and now Joe Hamrock, have done an excellent job working on that issue, and surely I have been involved with it as much as appropriate. I think Ohio is going to come out fine. One thing that Ohioans have come to realize through a lot of work that we did, and our commercial ops did, there is a viable market. They came over to the trading floor to a person, the press, the elected officials, the leadership in the House, there is no question that there is a viable market.

Equally important, I think Ohio is beginning to realize that there are some very strong legal arguments surrounding the law in 1999. I appreciate the arguments that Tony has, and I have already moved my assets and I will see you all tomorrow, but there are constitutional arguments about the viability of contracts, and contract commitments for the other three utilities as well. I think all of that tells me that Ohio might come out all right, Steve.

Okay. One other quick question. Just I know you have initially opted out of RPM and PJM. I am wondering if you could just remind us, when does that opt-out expire, and how do you think about what you might do after that expiration?

A lot of that has to do with where the Ohio generation fleet will be when that day comes. There is a three-year window. It is a rolling window after that that you can opt-out for any period where the capacity bids are not yet concluded. So we think we have got a number of different times to pull that trigger, and that will have a lot to do, as I said, where the Ohio fleet is.

You can see two things important to American Electric Power, and I hope you all understand how our strategic plans hangs together in that regard. So the resolution of the generation fleet in Ohio, and its freedom to do what might make sense, but equally important is the ability of removing the transmission bottlenecks that don't allow to us get into the extremely tight capacity areas on the very far east side of the PJM.

So when you look at the transmission projects, I-765, PATH, Trail and others, you can imagine that those who really don't want to see those things go, are those who have beautiful little power plants in a locked area, but we are going to help them out, we are going to open up the highway, and let the freedom of composition sweep over that area as well.

Great, thank you.

You bet.

Thanks and we have a question from Greg Gordon with Citigroup. Please go ahead.

Good morning.

Morning, Greg.

So a follow-on to the coal question, as I look through your presentation, and I look at the 2008 midpoint pro forma on page 12, I am sorry, that's not page 12, it's a couple pages later, it is page 15, I apologize.

All right.

You have on the off-system sales line, you have got a meaningful increase in volumes but a meaningful contraction in assumed gross margins achieved. Am I to presume that is mainly the impact of higher coal prices, or are you actually, you will see lower revenues?

Well, I think clearly there is some impact on coal prices there, as to the margins to be realized. But I think it is also just our way of trying to make certain that we do what we have done for '04, '05, '06, and '07, and that is not promise the sky and deliver the sea, but try to give you a good look at the middle ground, that we think is not only achievable, but is built on some conservative data as we look at it.

All right. The second question, the rate relief target is up from 360 million to 518 million, I know that you have also showed us that a big chunk of that is already in hand, 235 million of it. What on the margin are the new revenues that create that delta, and then second, that is a $0.23 increase in earnings, if you just take that gross margin after tax. So what are the offsetting things that cause a $0.05 increase in the guidance range?

Let me try the first part of that. The bulk of that really has to do with the marginal loss activities, and our ability to recover them, and that was not in the earlier numbers that we showed you for rate activities back in October. You know, those are Federally-mandated costs that come down to the state level, and under all jurisdictions, those kinds of costs are recoverable. It is just a matter of timing of that.

And as Holly said in her comments, much of that is already digested. Much of it is already part of settlements that have been agreed to that are being filed or have been filed.

The second part of your question is the difficult part. Yes, that says there is a lot of rate recovery going on. We feel very good about that, but it is way too early in 2008 to get overly bullish on successes that might or might not come our way.

We have no idea what impact the economy might have, although much of our service territory in a manufacturing industrial sense is export-oriented, and if you look at '07 sales, industrial sales were strong. It tailed off just a bit at the end of 2007. So it is just too early to get bullish on where '08 might go. But we feel strong enough or comfortable enough, I should say, to move that up by the $0.05.

So to try and round that out a bit, to give you a sense of the increase in the numbers, over 100 million of it is the marginal losses in Ohio, and that is a dollar for dollar offset, Greg.

So what we are really looking at in terms of incremental are due to two things. The Oklahoma ice storm that Mike mentioned earlier that we will be requesting recovery for, obviously it hadn't happened in October, so it wasn't in our announcement then. As we have announced, that total cost is in the range of 70 million. And we would expect substantial recovery of that.

We will also have updated the timing of our expectations for a Virginia regulatory proceeding, both to recover marginal losses, as well as contemplating possibly a base rate proceeding. So those are the big moving pieces, and the jurisdictions in which we expect to see incremental revenues, relative to what we had out there in October.

Great, so a big chunk of it is a revenue increase offsetting an incremental cost, and then Oklahoma recoveries, and then maybe a Virginia marginal loss. Thank you.

Thank you.

Thanks. And we have a question then from the line of Ashar Khan with SAC Capital. Please go ahead.

Good morning. Congrats.

Thanks, Ashar.

Holly, I think I missed it when Mike was mentioning it, I think one of the major differences between the forecast, the '08 one is a higher wholesale sales, off-system sales, sorry, and I guess it is like 35 versus 30. I am trying to understand why we are forecasting higher versus three months ago?

Just to give you a feel for why it is stepped up, both when compared to '07 actual and October, we did have a change in the Ames tie-in outage schedule. And as you know, this year was a huge year for the major plants being off-line to tie in the environmental retrofit. So we have refined the estimate since October, we always expected '08 to have more gigawatt hours available for sale into the wholesale market.

So is that a good number for going forward '09 onwards?

Those kinds of numbers, more than likely, in that particular range. Although, we'll be doing some Ames tie-ins in '09, and a little bit beyond that as well.

The other point that I got a little coaching from my colleagues here, we did not in October, factor in the additional gigawatt hours. We are now reflecting as sales associated with marginal losses. As you know, when we moved to the marginal loss payment, we now have additional 3% of availability to sell into the market. That is added into total gigawatts available.

Okay. And then I guess is it just conservativeness, that we achieved a margin of 30.4 in '07, and we are forecasting 22.5 for '08?

Well, I think, you know, part of it is the answer to Greg's question, that as coal prices go up, margins get impacted by, you pass along some of that, but not all of that. And then I think there is some comfort in knowing that we think we can hit those kinds of numbers.

Okay. If I can end up, Holly, on the October for '07, you were expecting a loss for parent and ongoing, of I think around 40 million or so, and we ended up the year with a positive 15. I was trying to understand what was the reason between the delta? This is for '07.

I tried to touch on that a little earlier. We had some resolution of tax issues.

Okay.

That we took reserves for in '06. We actually got the IRS decisions in the fourth quarter last year, and that did shift around a bit relative to what we were forecasting. So predominantly taxes.

That is in the parent and the other line item?

Yes.

Okay. Thank you very, very much! I appreciate it.

Thanks, Ashar.

Thanks we have a question from the line of Elizabeth Parella with Merrill Lynch. Please go ahead.

Yes. A couple of questions. One just following up on Ashar's question. What draws the big increase in the parent drag in '08? We have about, I think you have about a $75 million negative swing. Which would be even higher than what you were looking at for '07 initially. What are the drivers there?

Well, in addition to taxes having been a positive this past year, it is compounded by the fact that we do plan to issue hybrids at the parent this year, and so we have an increase in expense that will show up this year. And we have no anticipated positives like the interest reversal that we saw last year.

Okay. And then just going back to some of the new generation projects that you have been working through the regulatory process on, for I believe it is TERC, the Texas AOJ is opposing it, you have got permission in Arkansas, I think you are still waiting in Louisiana, can you maybe give us an update on how that plays out? And then just the whole process on Mountaineer. Where you are, I realize the Virginia staff made some comments on it. If you can bring us up to date on the whole Virginia and West Virginia situation for Mountaineer?

As to the first questions, list Elizabeth, the TERC situation, obviously because there is going to be in Arkansas and the way that SWEPCo does their rate allocations, that was the most important Commission decision.

We await the air permit in Arkansas, which we hope will be coming some time in the first quarter of '08. The AOJ's decision in Texas was couched in the same things that you frequently see, and that is, geez, why build a plant when you can buy it in the market. We believe in the long term that plant is going to add value to the customer base. If you look at SWEPCo's rates in Texas, you would surely say boy, there are some pretty bright people compared to the market price being paid by other customers throughout Texas. So we will see how the Commission sees that same issue. They may see it differently.

And we expect that Louisiana will be in support of it. As we go forward, we haven't seen any signs that are different from that. Should Texas say no, then we will take that part of the plant to the market gladly. But we will go forward and build the TERC plant, and use it to satisfy the already agreed to need in Arkansas, and in Louisiana as we go.

On the West Virginia/ Virginia side, I really couldn't feel more comfortable about the way that West Virginia sees the project. I know you have all heard an some of our tours at Mountaineer when the Governor dropped by, how bullish he is on the issue. We think we will get ultimate authority in West Virginia in '08. We think one of the great things about the Virginia Commission over the years has been that they implement the laws, that the Commonwealth put in place when the delegates speak, the Commission reacts to that. You know, just look back at some E&R cases where wild positions were taken by many, many people, but the Commission followed the law of the Commonwealth of Virginia. Virginia says we need new power plants, there is no question about need, no one challenged the need, not even the Commission, the commission staff. They just went on and on and on about the unknowns.

Well, heck, the unknowns are going to be unknown. That is why they call them that. They are going to be continue to be unknown. Sitting back and not building something that is needed, because we don't know what tomorrow's going to look like, would tell us to wait for tomorrow to come. As you know, that is definitionly impossible.

So we are going to keep pushing forward. We expect we will get the authorities in Virginia, West Virginia to build that station. I can tell you that, that Bechtel and GE and American Electric Power are very eager to get that go-ahead.

Thanks.

Yes, thank you.

Thanks. And we have a question now from the line of Paul Ridzon with KeyBanc. Please go ahead.

What was the total PJM marginal losses you experienced in '07, and how much has been addressed through rate activity behind you?

140-odd million, and about 110-odd million has already been addressed.

The 140 was the absolute or the incremental over '06?

Well, remember, there was no '06, because this was a FERC order coming out in '07, on how to go about doing marginal losses on the system. Obviously, they got it goofed up, but because it is a Federal order, it is recoverable at the state level.

Paul, what you have to take into account also is the fact that we do have that additional 3% to sell in to the market of the, so the 144 is the bill we paid, but we also had higher revenues because we had more megawatt hours to sell. So that 144 is a gross number. I would say net, it is in the range of 30 to 40 million.

Net is 30 to 40?

Yes.

Thank you.

That sounds like 140 less 110, doesn't it? (laughter)

Thanks. And we have a question from the line of Leslie Rich with Columbia Management. Please go ahead.

Good morning. I am wondering if you could update me on the ETT joint venture in Texas with MidAmerican? I guess I am not clear. I thought that the Texas PUC had proposed a below 10% ROE, and that you and MidAmerican were sort of mulling your options. It sounded in your prepared remarks like you had actually incurred expenses, and were moving forward. I am just not clear I understand where you are in that process.

We mulled, and then capitulated, and went forward and created the partnership. We are in fact, moving electrons on the ETT assets.

What I said was that we not only incurred expenses, but we billed those who we were hauling energy for, and lo and behold they have paid us. So ETT is up and running and doing well. It is a 996 return on equity. That is a little off the mark, but in today's marketplace, wouldn't you like to have something paying you 996?

So then going forward, you have proposed some new transmission lines. Are those now awaiting approval by ERCOT or the PUCs?

As you know, we have in fact proposed substantial additional transmission opportunity, and investment in Texas. They are going through the PUCT's credit evaluation, for how they will designate the areas in which projects will be built. We feel very comfortable about our position.

We clearly are well-suited to go forward, and help build out the infrastructure in Texas. The partnership brings the incredible capital opportunity not only from us, but more importantly from MidAmerican, and it brings the incredible transmission experience paralleled by no one in this country to build transmission in Texas. So we feel comfortable about where we are, Leslie.

To what kind of timing could we expect, and sort of what allocations of capital?

Well, it is the plan is something north of a billion dollars at the end of the day. In fact, it is a couple of billion dollars. But the timeline, which is much more important is, the PUCT will make some decisions on that yet this year. They will select some projects. Because of the way things happen in Texas, you could be building later this year, early 2009, if given the go-ahead.

Okay. Great. Thank you.

Thanks. We have a question then from the line of Paul Patterson with Glenrock. Please go ahead.

Good morning. Can you hear me?

I can, Paul, go right ahead, please.

I just want to follow up on the off-system sales thing. If we were to see flat wholesale prices, and what would that do to the actual margin? I am trying to get a sense as to what the coal impact I guess on all-system sales for 2008, versus you guys being kind of conservative.

It is going to be very hard to be fair, Paul. There are three moving pieces, you have too many variables, and not enough equations here, are the fact that we had a terrific year in trading. The volumes that we show for off-system sales are our physical volumes.

Whereas the revenue number or the gross margin numbers are aggregate growth margins, including both physical sales as well as financial transactions. And that obviously skews the math, in terms of the calculated realization per megawatt hour.

But the bottom line is we will have, as you know, our most expensive units are on the margin, that is what shows up in off-system sales. Fuel price increases will serve to disproportionately eat into those margins. And we are not forecasting another gangbuster year in trading, so I think it is fair to say that we have a reasonable degree of conservatism factored into our off-system sales line.

Okay, great. Then the other question I had for you is on the MEMCO northbound freight situation, it seems like you guys are basically banking on a flat year. What caused the northbound rate to sort of fall off, and what in general are you looking at in terms of economic conditions in terms of MEMCO, and larger economic conditions in the economy, and how they might or might not affect MEMCO?

Part of, obviously we see a slowdown in the importation of metals and cement. That was part of the northbound freight that we experienced handsomely so in '06, but didn't see as strong in '07. We are forecasting that to be a bit slow in '08.

We see some pretty good [green] hauling, obviously the activity on the barge side for the coal deliveries will be very, very strong. So we see a pretty flat year, down just a little about it from MEMCO '08 compared to '07, but the value that the entire barge fleet business brings to us, we think is well worth our continued investment, and our continued position in that space, Paul.

Okay, great. Finally, I guess back to Ohio, you said that you are looking for sort of a political consensus with respect to where electric policy should go, which makes a lot of sense. But I am wondering, where do you think that consensus actually is? I mean, it seems that you do hear sort of comments about how people are sort of pro-market but it seems that sort of, with the caveat that they think the market would provide a lower price, if you follow he me, you know what I am saying?

Can you give us a little about it of a flavor as to where you think consensus is actually heading, and when we actually might see something come out of the Public Utility Committee, and whether that would be sort of the final thing? Sort of the pathway that actually you think is most likely to happen here?

Well, I don't think there is any question that Ohioans elected officials in Ohio, believe like almost all Americans that the marketplace is the best place for anyone to find a competitive advantage. I agree with you 100% that my industrial customers would like to have the definition of market being lowest-cost supply. They do that in the supply side of their chain. They don't do that in the sales side of their chain however, we try to remind them of that frequently, but without great success.

The definition of market in, remember how it came out of the Senate, that the definition of market is up to the nuances of the Public Utility Commission of Ohio. Politically, that is untenable. That is like saying we are going to have healthcare, and we will leave it up to the doctors to figure out what the healthcare plan is. Public policy is to be written by public officials, and implemented by administrative agencies, not to be written by administrative agencies. That has been the argument of all four of the Ohio utilities.

The House has seen that, and has taken that on as a very serious political assignment. I expect that they will help define what had market looks like. That will make it much easier for any utility to move to market, when in fact that of those definitional points are hit. So it isn't a matter of the market is $0.03, market is $0.08, market is $0.10, it's a matter of a market is there when there are willing suppliers to come in and bid in the marketplace, which of course there is, and there will be, and there has been.

But it is that definition that will allow companies like American Electric Power to go forward, and do with a we have spoken to from the very, very beginning. Which is we appreciate and I know our customers appreciate, we are the lowest cost supplier in the state of Ohio, and have been for a long, long time.

For us to flash to market in a single year, would put a substantial strain on all of our customers, residential, commercial, as well as industrial. We would stair-step to that market over time. Those who are within mills of market might move there in a season or two, and almost no impact on their customers because they are already paying very, very high prices.

So I think that is how Ohio will unfold, and it will allow us, back to Steve's question, to be well within the range that we spoke to you earlier on, and really to go back to the very first question that John asked, the ability to charge a market price to the utility, but not pass that price along to the customer, create a regulatory asset and a securitization to recover that over time would be a 10-strike for us. But again, that would be speaking beyond what I think is achievable.

Okay. And when do you think we might see some final resolution to this?

I think the time is getting near. There was a very meaningful meeting in front of the House Committee last week, where there was a great deal of discussion by customers and others, as to the certainty that Ohio really would like to see.

There is and will yet be a discussion on the constitutionality of what they are trying to do, that will be the most important meeting going forward, and it will lead us to the potential conclusion of this market definition, so we can bring resolution. Timeline, probably before March, some time in March they go on recess probably for Easter, they might get something done before that.

Okay, great, thanks.

You bet, thanks for the question.

Thank you very much. Speakers we are nearly at the top of the hour. Would you like to go ahead with the closing?

Yes, we are fine, go ahead, Julie.

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