美國電力 (AEP) 2008 Q2 法說會逐字稿

Welcome to the second quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Miss Bette Jo Rozsa. Please go ahead, ma'am.

Thank you, Linda. Good morning and thank you for joining us today to discuss AEP's 2008 second quarter earnings. If you have not seen the press release issued earlier today, it is available on our web page at www.aep.com. In addition to the financial schedules included in the press release, the webcast of this call will include charts and graphics referred to by AEP management during the call. An investor information packet is also available at www.aep.com, that includes the consolidated balance sheet and statement of cash flows, as well as full income statements for each of our business segments. 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 annual reports on Form 10-K and quarterly reports on Form 10-Q for a discussion of the factors that may cause results to differ from management's forecast and expectations. Also on the call we will discuss the measures of our company's 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 those non-GAAP measures on our investor relations website at www.aep.com. I will now turn the call over to Mike Morris, Chairman, President and CEO of the Company for opening remarks, followed by our CFO, Holly Koeppel, who will discuss the financial results for the quarter. Then we will have time for your questions. Mike.

Betty Joe, thanks. And let me add my thanks to all of you for joining us for this update, not only on the second quarter, but the first half of 2008. On what really proves to be an extremely exciting day for us here at American Electric Power, both for our investors and our customers, particularly reflecting upon the Ohio New Energy law that controls the way we are going to do business over the next handful of years. We clearly had a very solid second quarter by almost any measure and Holly will give you much more detail on those points as she makes her presentation. Equally important, we are in the midst of an extremely productive 2008 year and feel very comfortable with the guidance that we provided to you a long time ago about not only 2009, but the guidance that we gave you in October of '07 for 2009, 2010, 2011. Utilizing all of the tools that we found in Senate Bill 221, we really are encouraged by the plan that we have designed. Actually a plan that we call AEP's Commitment to Ohio's Future.

We think that it sets a very bold path of changing the relationship between an electric utility distribution company in Ohio and its customers in a relationship that will be in place for a number of years. We think that we have really accomplished what we intended to do over a long period of time and that was to strike that balance between not only the needs of those who invest in American Electric Power, but making sure that our customers and the Ohio economy has an opportunity to thrive as we go forward. Taking the opportunity to partner with Ohio's mesa but growing renewable energy team of entrepreneurs and deploying energy efficiency technology are two of the principles that the governor and the legislature built into sections of Senate Bill 221. I think we have taken full advantage of that as well. We are kind of encouraged by the opportunities.

The energy efficiency activities we'll deploy statewide with a real special focus on the northeast Columbus metropolitan area, where we will actually have an opportunity to develop and deploy our grid smart technology that you have heard us talk about over the last year or two. And we are excited about that opportunity. Taking full advantage of the deferral concepts that were built into Section 221, we will have an opportunity to hold back some of the devastating impacts that just passing along the cost of escalating fuel could have had on the economy as we go. We feel that by extending the recovery of those fuel costs increases will allow us to continue to make economic investments to comply with federal and state and environmental requirements. Equally important, will allow us to make investments to upgrade and augment our energy delivery system as we go, all directed at seeing to it that we have an opportunity to increase our earnings potential in Ohio for the benefit of our shareholders.

All in all, I think the AEP team has created an incredibly creative program that touches on almost every goal that the governor and the legislature set forth in senate bill 221. And I think we have used that to the maximum advantage, not only of our customers, as I have said, but our shareholders as well. I know you will have a lot of questions about that. Let me move back to 2008 and touch on a few highlights that I think are not only excellent as to the second quarter, but are part and parcel of that productive first half of 2008 that we currently have experienced. I think there is no question that systemwide, the regulatory performance of AEP in 2008 is better than any year we have experienced here in my tenure. As you know, we came into the year seeking about $518 million of rate adjustments. To date we have receive $496 million of that. The remaining $22 million are either already approved, waiting for implementation dates or in fact, waiting for self-implementation dates.

Something else that I think is extremely important and something you heard me talk about many times before and that is, notwithstanding a doubling of world coal prices, we have been able to hold the impact of those escalating coal prices at less than 20%, comparing 2008 to 2007, for our customers on a systemwide basis. And that really includes two points that it is easy to lose sight of. One, we have no synthetic fuels credit to the fuel account in '08 that we did in '07 and of course, we also are seeing an additional burn in 2008 as compared to 2007 because of the excellent performance of our generation fleet. In fact, we are covered with our coal requirements at 95% plus in '08, 90% plus 2009, 60% plus in 2010 and on throughout the first half of the next decade with ever dwindling percentages as we go. Our commercial operation folks have had a very solid first quarter, taking advantage of unexpectedly high prices for energy in the PJM and in other market areas where we are active.

We are quite encouraged by the final approval from the Texas Public Utility Commission for the Turk plant, our ultra super critical plant that will satisfy energy needs at our SWEPCO operating companies out west. We do in fact await the Arkansas Department of Environmental Quality permit. However, we feel very comfortable that we will receive that well within this time line. I think everyone should take note that the Turk plant has embedded in its captive and fixed cost prices, kilowatt installed prices that are around $2500, $2,600. Which, by any stretch of today's market place, tells us that our customers are going to receive great benefit from that station and of course the green footprint will be substantially reduced because of the ultra super critical nature of that plant. In the nonutility operating area, we have had a imbalanced year in that our generation marketing group, doing most of the work in ERCOT, have had a very successful first half of the year, while MEMCO continues to be challenged with very unexpected weather conditions, as well as some decrease in economic activity.

The water flows on the Mississippi, Ohio river and others have been extremely high throughout almost the entirety of the first half. However, we feel comfortable about the second half as we look at MEMCO's order book. I think for the first time since maybe 18, 19 months ago, we are beginning to see steel product imports coming up river after we have gone down river with coal facilities ourselves. And obviously with the congested rail traffic on the eastern seaboard, coal delivery with everyone trying to export every ton that they can, there is nothing like MEMCO and its river operations to keep our big power plants fully fueled with excellent priced coal product. Lastly, we are very impressed with the continued success of our transmission opportunities. As you know, we announced most recently a project partnership with Weststar in the SPP market area. An additional project just last week with Oklahoma Gas and Electric.

We are satisfied, although some what disappointed by the speed with which our past project in Allegheny moves forward through the PJM. And I want you to know that we were very instrumental in putting forth the settlement to the Public Utility Commission of Texas last week with our ETT subsidiary working in conjunction with other major transmission players to, hopefully, move along the CREZ process in Texas so that we can continue to see success in that area. As I have said many times before, watch this space because there are a number of other projects that are in consideration and hopefully will be announced before too long. All and all I look at 2008 as a very productive year. We remain convinced, as I said, that our guidance is appropriate. We will stay within that guidance that we gave you in October of '07. And hopefully, you will join us in appreciating the near-term, mid-term and long-term investment opportunities at American Electric Power. And with that, I will at long last turn it over to Holly. Holly?

Thanks, Mike. I will briefly walk us through the second quarter performance, year-to-date performance, cash long capitalization. In the second quarter, as Mike mentioned, we are right on track. Growth margin has been driven in major part by the success in the regulatory arena. We have also had modest positive load growth. Weather has not been our friend this year relative to last year. We are off a bit there. And as Mike mentioned, we are managing fuel costs in line with our expectations, but they are a bit higher this year. Off system sales was favorable in the quarter once again and we are experiencing higher O&M expenses in line with expectations. Interest expense is and preferred dividends are higher due to increased long-term debt outstanding. Taxes are in line with expectations. The marginal rate remaining in the 30% range in the quarter.

As Mike mentioned, for our nonutility operations, the challenges at MEMCO financially have been more than offset by the success in our generation and marketing segment. As you will note and may remember, we did issue debt at the parent earlier this year and so our parent losses are higher due to increased interest expense. Turning to the second quarter, it is much the same story year-to-date. Retail sales very positive, again predominantly due to rate release but also supported by additional modest load growth. Weather for the year-to-date is also not favorable when compared to last year. And fuel costs are up, but in line with expectations. Off system sales, higher prices and higher volumes have contributed to a very strong performance in our commercial operations group. O&M, the decrease on a year-to-date basis, if you will recall what we discussed in the first quarter, was due to both rate activity and operational activity at PSO.

In the first quarter of '07 we had a pretty dramatic ice storm. But in the first quarter of '08 we recovered the full cost of not only that storm but the storm that we experienced in December of last year. So for year-to-date we are slightly down in O&M, but we expect to be in line with expectations on the year. Interest and preferred dividends, again, the same. Higher due to increased long-term debt outstanding. Income taxes, the effective rate is remaining flat, as expected. Nonutility operations, again, generation and marketing has more than offset the challenges faced by MEMCO. And as I mentioned before, the parent interest expense is higher due to the issuance of the $300 million of debt at the parent. Turning to cash flows, very strong performance in cash flows in line with expectations. I would highlight that our cash outlay of $1.6 billion for capital investment is down slightly from last year in line with expectations, as we are winding to the end of our major $5 billion environmentally retrofit program.

We will also see a modest uplift in our other investing as we are planning to put in place a lease of nuclear fuel at our Cook plant on the books of Indiana Michigan Power and we also added some additional assets to the MEMCO barge line. Finally, financing activities. Common shares are up modestly, predominately due to the dividend reinvestment program and our changes in long and short-term debt are in line with the our capital funding and capital investment plans. Finally, for capitalization at page seven, we ended the quarter at 60.6% debt to cap on a GAAP basis. On a credit adjusted basis, it was 59.7%. As you know, our goal is to maintain a debt to cap on an adjusted bases at or below 60%. The adjustments we make to reported numbers to arrive at our adjusted debt to cap ratio are intended to reflect what we believe is closer to a creditor's view. Specifically, we add back the $1.5 billion of capital and operating leases. We add the receivable securitization to reflect rating agency considerations.

We deduct the Texas Central securitization bonds of $2.2 billion, since their serviced by Texas customers, as well as deducting spent nuclear fuel trust of $260 million, since it is fully funded with cash that is not accessible by the company. Subtracting debt and adding to equity 50% of the junior subordinated debt issued at the parent in March, the hybrid, that $300 million hybrid that I mentioned earlier is also an adjustment that we believe is consistent with the treatment given by the rating agencies. So, at the end of the quarter, we are at an adjusted debt to cap ratio of 59.7%. With that, Mike, we covered the numbers.

Thanks a lot, Holly. And now we will go ahead and move to the questions and answers.

Okay, Linda, we are ready for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Michael Lapides with Goldman Sachs.

Hi, guys, just a real quick question for you on the planning files. At what point -- first of all, what happens in year four? Second of all, at what point do you wind up getting much closer to market price under this plan?

Well, at some time before year four, Michael, we will take a look at where we stand and in fact, either take the MRO option at that point in time or file another electric security plan. We will be moving throughout this entire place much closer to market rates, although we have no ability to accurately forecast market rates four years from now, let alone four weeks from now. That will be our plan of approach.

Okay. And when we think about the 15% annual increase. That is a 15% cash annual increase or is part of that deferred.

That is all cash. The deferral part will be the piece that will make certain that we keep that increase on the 15% level, which again, we think goes a long way to respecting the economy here in Ohio and quite honestly, the struggle that our customers are going through with everything else under the sun going up at that and higher rates.

Okay. Thank you.

You bet. Thanks.

Our next question comes from the line of Paul Ridzon with KeyBanc.

Actually that was basically my question. But just to summarize. 15% cash increases, what is the absolute increase, what is with the deferral on top of that.

Well, over a number of years, depending on what fuel prices do in the outyears, the deferral could be as much as $300 million or $400 million. We begin to bleed some of that fuel cost increase in in the 2011 time line, a little bit in the 2010 time line, so it will have a lot to do, Paul, with the way that fuel prices escalate as we go. And as you know, if needed, if that number should get what we feel is unwieldy, we could surely go forward with the securitization tool that was built into senate bill 221. It isn't as perfect as it would need to be and it may need some slight legislative tweak, but because of the benefit that securitization would yield to our customers in a cost sense, we would take that approach. And I think that is laid out pretty clearly in the testimony that we put in place with the filing.

So, 15, 15, 15?

Yes, sir.

And then depending on what fuel prices do, it drives the deferral piece?

Exactly.

Thank you very much.

You bet.

And our next question comes from the line of Anthony Crowdell with Jefferies. Please go ahead.

Anthony?

Guys hear me now?

Yes.

Okay. Where do you think the Ohio commission wants to go long-term? Is their goal -- or do you sense that their goal is to get all the utilities in the state to market or do you think they are just really looking at how to minimize price volatility?

I think if you look at the direction that they received from the house to senate and the governor in the signing of senate bill 221, it is ultimately the step, the market, the overall power price is closer to market. Clearly in the near term, I think they fully understand and were instrumental in helping to develop the concept of deferring some of the costs. In the near term, I think, like all regulators, they will be driven by the notion of trying to hold rate increases to the most acceptable level that they can while being respectful of those who invest in the utilities as well. That's why we think that the points of our plan have touched on it perfectly. As you know, it was the commission's direction to all of the utilities to take full advantage of the timeline between the May signing of the law and the somewhat prescribed filing date of July 31, August 1, to be in dialogue with the commission and others and we took full advantage of that and I think we built much of that direction and much of that assistance into this filing as respectful as we could be to their needs, while always keeping an eye on the needs of our investors as well.

Thank you.

Yes.

Our next question comes from the lean of Elizabeth Parrella with Merrill Lynch. Please go ahead.

Yes, thank you. Could you give us a little more color on the ESPs. The 15% is the same for both subsidiaries, approximately how much does that translate to in dollars? Does that include the fuel cost recovery component going forward or is that incremental to that 15%.

Elizabeth, the theory here is to keep the 15% steady in both of the operating companies. And the fuel will be a plug number, if you will, to flow through when we can the fuel cost rather than deferring all of them. Again, as I mentioned earlier, that comes to play a little more in the 2011 timeline. But remember also that the senate bill 221 directed all of us to do things with renewables, to do things with energy efficiency to make certain that we had single purpose activities that would increase the reliability of the grid. And as you know, capital investments to insure that we stay well within the required federal and state environmental needs and requirements. So the whole notion of what we've built, we think, is a very creative way of using all the tools to allow for earnings capital investments, as well as flowing through some of the fuel cost as we go.

And you mentioned in terms of the deferrals $300 million to $400 million. Is that cumulative at the end of the three years, what's been built up?

that is our current view of it. Again, we can't forecast for you accurately what fuel prices might be. The number could be larger than that. It might be smaller than that. It all depends on how fuel prices go as things unfold in 2011, in particular.

And one last question on it. Could you just walk through what you propose on the excessive earnings test in the plan?

Well, there is some pretty detailed consultant testimony that sets a pretty good parameter on how one might go about determining what excessive, substantially excessive earnings might be. We feel very comfortable with our definition of what that is and the selection of those organizations that you would compare us to. It is impossible for us to forecast for you in any meaningful way the potential impact that that particular piece of SB 221 would have on any of us as we go forward. I can simply tell you this that we feel very comfortable with the testimony that has been filed and we feel that the impact of this program on the earnings strength of the two operating companies is well within the definition as we have laid it out.

Equally important is that remember the predicate of senate bill 221 causes the commission to take a look at the ESP and compare it to the potential impact of a market rate option. And when we did that, it is clear that this 15% deferred ESP program is substantially better for our customers than even a market rate option under the controlled environment of senate bill 221. And much more importantly, as compared to what would have happened had senate bill three been the law of the land and all utilities in Ohio had flashed to market prices, which would have been relatively devastating to the Ohio economy, something that you know we have never been an advocate for. We've always looked for the balance that we think we built unto the filing that we made at 8:30 this morning.

Thank you.

You bet. Thanks.

Our next question comes from the line of Greg Gordon with Citi, please go ahead.

Thanks. Most of my questions have generally been asked and answered. Is there a -- as we look at the filing, there is - go on the Ohio PC website, there is, obviously, tons of paper work there. Is there an executive summary of the filing available that goes into some of the details.

I think the transmittal letter that we did, Greg, is a pretty good thumb nail sketch of it. Just for my own visual Craig brought along the package and to your point it stands about at 7 inches tall. Nonetheless, there is the transmittal letter, we think that sums it up well, And obviously, you can continue to dialogue with Bette Jo and Julie and the IR team and we will continue to provide you and others with as much information as we can. It really isn't very complex, notwithstanding the magnitude of the support for it. The concept is very straightforward. It is really employing all of the tools that 221 provided for us. And capping the impact on our customers on a year to year basis at 15% with, of course, deferring some of the increased fuel cost that we and others are seeing in the market place.

We think it is a creative way to minimize the economic hardship that that might cause for some of the customers. It addresses the issue of economic development. It addresses the issue of energy efficiency deployment. It addresses the issue, not only of satisfying but actually putting under contract more renewable portfolio standard megawatts than the law calls for. So we think that, in that sense, it has touched all of those issues. There are a couple of sub-issues that are kind of intriguing. The law still allows for corporate separation. We've addressed that issue, we think, in an appropriate way. So I don't think there's any point in 221 that we didn't fully take advantage of and build into the filing.

As I said to the question that was asked awhile ago by Anthony, we've spent a great deal of time and dialogue with the commission, the commission staff, the administration, the legislative bodies. I don't mean to say by that that there is any sense of preapproval or anything along those lines, but I do mean to say by that, that much dialogue has gone on and we have listened as intently as we could to make certain that we did what we've stated from now since 2004 and that is we are looking to strike balance between our investors and our customers and the Ohio economy.

What are the next steps logistically for investors to watch in terms of moving this forward through the process to approval.

Well, as you know there is a requirement in SB 221 for the commission to come to closure on these issues within 150 days. That would say that an order should issue toward the latter part of the calendar year 2008 for actual rate implementation 1109. You will see schedules come out of the commission. I understand, although surely have no personal knowledge beyond the understanding, that today or tomorrow First Energy and Duke Ohio will make similar filings. I think we all know that Dayton is one year off and I doubt that they will file anything. Although they might have some perfunctory requirement to at least show that they are alive and well out in the western side of the state. But that is going to be a real burden for the commission.

One of the beauties of the bill also built in a provision that said should the order not be issued by the end of the year or should the order that is issued be modified in such a way that it is unacceptable to the proponent, that one would go forward and implement a continuation of the rate stabilization plan, coupled with a fuel adjustment clause and we have made provision for that in the filing itself seeking the commission to recognize that that is a way for them around this issue. So, it is difficult for me to give you any more specificity on the solidness of dates when things will happen. Our filing is in. The testimony is in. And the commission will set the schedule. We may well have a conference to set the schedule with our other parties.

We have had a chance to dialogue with industrial customers. We have had a chance to dialogue with the OCC and many others. I don't expect I'll hear a lot of cheering, but at least I will expect to hear a lot of we were well aware of why the American Electric Power and its Ohio subsidiaries intended to file. Thank you, Mike.

You bet, Greg, thanks.

Our next question comes from the line of Dan Eggers with Credit Suisse.

Good morning. Can we talk a little bit about coal exposure and coal pricing. Based on where your hedges are today and where you guys are looking out at the market? What kind of rate increases for the Ohio utilities would be required just for the fuel cost pass through given the 20% increase we are going to see this year?

Well, it is hard for us to give you a specific answer to that question. We will do the best that we can. The reality for the Ohio companies is that we haven't had an active fuel cost for a long period of time, so there is some lumpiness in the way that one would adjust the going forward fuel cost itself. As we look at fuel under contract for 2009 and 2010, we are still on average buying at or below $50 a ton. We are seeing some basic opportunities because of the magnitude of our buy to become anchor purchasers of new mines being opened. We are actually looking at a number of the resources that we have and have had under our ownership for a number of years to bring in third party mining companies to develop those. And blending all of those opportunities together, we are seeing relatively reasonable prices.

Now, relatively reasonable is a very difficult term to coral. The fact of the matter is at $50 a ton your million Mmbtu numbers a couple of dollars. That compares very favorably to today gas at $9 or $10, whatever it closed yesterday. As you know gyrating around pretty substantially of late. Still, with you look at the fuel price factor there, we think it's very cost effective and of course, as you know, with the environmental investments we've made, we have been able to burn considerably higher sulfur based coal, which is priced more appropriately. And like everyone else, we are blending a tremendous amount of western coal into our eastern fleet burn that we have not done before.

Okay. If I heard the comments correct earlier it sounded like the 15% rate increase is over the next three years. Very little of that based on your plan is actually going to be fuel and the bulk of it is going to be, for lack of a better word, base rate type of rate increases.

It will be a mix of the two but there will surely be enough deferral to allow for the capital investments for renewables, for the environmental investments, for the energy efficiency deployments. All of the things that I had mentioned earlier.

I am embarrassed to say I haven't read all thousand pages yet this morning. How much incremental CapEx were you guys looking at based on the renewables energy efficiency and all the other pieces out there?

I don't have that number in my head. What you are going to see from us over time, as you have seen from us before, is a pretty good balance of capital deployment on a systemwide basis. I know we are Ohio centric today because of the filing that we have made, but I don't think anyone should ose sight of the overall performance of the 11 operating or what we consider to be the seven operating companies inside of the 11 states. The Ohio companies, because of their lack of fuel clause, I have seen some additional flow in their gross margins, but it is dwarfed by the hundreds of millions of gross margin increase that we are seeing at the other operating companies. The capital will be on the order of $3 billion, not in Ohio individually, but as it has been over the last few years.

You don't see any substantive increases in your CapEx program even to hit the Ohio plan. Is that the right read or is there more dollars have to go?

No, we will dedicate a little more to Ohio for those activities, but dedicate a little less to the generation side of the business, particularly on the new gen, where quite honestly, Dan, we are having a devil of a time getting anybody to realize that this country is heading itself toward a base load power shortage.

One last question, Mike. As filed with this plan, how does that fit with your multi-year EPS targets. You widened the band last year. Does this give you comfort to go toward the higher end the band. Or how should we be thinking about that.

Because it is too early to forecast the potential outcome of this activity, what we would like to do is beg your and other people's indulgence to give you a much stronger number about '09, in particular, at the EEI events later this year and presuming that things are moving along, we will be happy to share 2010 and '11 and '12 views. But I don't know that that will be available for us.

The next question comes from the line of David Frank with Catapult Partners.

Good morning, David.

Hi. Good morning, can you hear me.

Sure, it's fine.

Sorry, Mike. Had a couple of questions. We have only read through a few hundred of these thousand pages so far. So, I just wanted to clarify, it looks like when I look at Craig Baker's testimony, that your three year forecast rate increase is about $2.8 billion between the two utilities and when I go over to, I apologize, Leonard Assante's testimony, on deferrals it looks like you are running about $700 million deferral at the end of '11. And again I may be misreading this. I just want to find out is that 700, or whatever the deferral is, part of the 2.8 or is that incremental to it?

I don't know. I don't have that kind of granularity in my head, David, to answer that question. I think that's a better follow up question that Betty Jo or Julie can answer for you. The deferrals will be driven, as I said, by the potential fuel cost as we go. When I am looking at bulk numbers, we think that deferral by 2011 could grow into the 400 million or 500 million, maybe 300 million range. Leonard's testimony is all about the accounting approach to how one would go about doing that, including the recovery of deferrals that are already on our books for other activities in a historic sense as well as the fuel as we go.

Okay. You wouldn't know of whatever the deferral number may be, if that's part of the what looks like 2.8 billion of increases by the end of '11.

I am not certain and I don't want to give you an answer that would be inappropriate.

Sure. And, Mike, what is the assumption for all systems sales margins, would you retain those or are those being flowed back to customers?

No, those are wholesale contracts, regulated by the FDRC and we think that that revenue stream is excluded from the Ohio retail activities.

I know that, I think historically, Columbus Southern has gotten a lot of power from Ohio Power, maybe technically it is from the joint dispatch or the interchange agreement between the eastern utilities. Is there any change to that or will it essentially being supply and power, will one utility help the other and if so at what price?

It will always be from the pool, the way that it's operated since the 1950s. As you know we dispatch from the stack load of high. And most often Indiana, Michigan supplies from their DC Cook Station energy to anyone who is short and then the pool does its magic on the formulas that have been in place for a long period of time. So it is not simply Ohio centric.

And my last questions, do you have an approximate estimate of what your realized coal price will be at the end of '11 for the utilities in Ohio?

No.

Okay. All right. Thank you very much.

You bet, thanks David.

Our next question comes from the line of Ashar Khan with SAC Capital.

I was trying to, if I understand, I haven't read it so far, we get 15% increases and on top of that, the way I should look at it if I was looking at it from an earnings perspective. You said 15% increases covers some fuel and some investments right?

Right.

So -- and then we get deferred fuel on top of that, right?

Some, yes. That is correct.

What I basically have to say is that Columbus Southern Power and the two subs, earnings should be increasing by say roughly double-digits numbers, 10% or so under this filing.

I don't know that that is accurate. It will have so much to do with the amount of fuel that you are recovering as a current expense versus the fuel that you are deferring going forward. And again, because many of those numbers are unknowable right now, I don't know how you could calculate that kind of an impact.

Mike, I don't know, I haven't gotten the testimony. These numbers, ROE have you assumed in the filings that these numbers generate?

We really haven't. You will find in the testimony some definition of ROE's, but again we are not trying to bracket any number or build any ROE into the actual capital investments going forward. That will all be within the adjustments that are laid out and some of the reliability writers and things that the commission does or doesn't approve going forward. So it would be premature to tell you that we built some number in there that we think will satisfy the excess earnings or any of the other challenges.

But it will spill out to some number, right?

Naturally, of course.

And you haven't quantified that number in the filing yet.

Well it is the same utility kinds of returns on equity that you see in other jurisdictions. But no we haven't quantified that yet.

If I can just end up with the fuel increase, what is the starting point of that. Is it four years down the road before, or what are you asking from, what is the starting point of the fuel increase.

You are trying to be realistic about the fuel that is already built into the base rates that the customers are paying and adjusting it to the current world, the current actual fuel prices that you received. So, it is a reflection of the last active fuel clause that we have had in the Ohio utilities.

That was when?

2001 with a 1999 base, something along that line.

Okay. Thank you, sir, very much.

You bet.

Our next question comes from John Kiani with Deutsche Bank.

Morning, Mike, Holly.

Morning.

On slide 15 of your presentation you show updated capital investment forecast and it looks like '09 went down by $416 million and that 2010 went down by $184 million relative to what you showed about a month ago in a June presentation on your website. Can you talk a little bit about those CapEx reductions and what we are seeing there, please.

Yes, let me start and then I will ask Holly to give some granularity there. As you know, we continue to share with all of you, the notion of the incredible capital investment opportunities that American Electric Power has across to the entire footprint. Those dollars can be spent on generation, distribution or transmission, either inside or as you know, in a partnership sense outside of the traditional AEP requirement. We are in fact stepping down a bit on some of those activities as we finish the environmental build-out in the eastern fleet and look at the environmental requirements for some of the western stations. And also, if you reflect back to a 2004 or '04 capital forecast, you would have seen by the 2009 and 2010 dates, some build-in for the integrated gas plants which now, of course, are not within the time line that we are looking at. So you are seeing some capital reductions as we go. Holly, you might want to give additional detail.

We really looked at it operating company by operating company. We saw a couple of opportunities to redeploy capital where it made good sense and was a win/win, for example a wind farm in Indiana and a reliability writer projects in Indiana in conjunction with the rate case. As Mike mentioned, we did pull back in some areas where we weren't getting the level of regulatory support we were seeking around generation projects. We have also had to make some adjustments in order to ensure we are in full compliance with the NERC reliability standards for transmissions and -- so the real bottom-line is, as you know, annually we go through a strategic planning process. We scrub down the long-term capital forecast, we refine the estimates, detailed by activity at the operating company level and this schedule reflects those refinements. A very modest change in aggregate, but some movement between operating companies, projects and jurisdictions aligned with our plans for rate relief.

I think if you look at our longer term strategy, we depreciate at about $1.5 billion a year, John. So capital investments of $3.3 billion give us an opportunity to continue to grow the rate base earnings strength of the company, which is something that we are encouraged by for the regulated rates of return at the state level and when you augment that with the incredible success we have had in the transmission out of what I would call our traditional footprint opportunities, again, I find support for my notion that obviously that this is a great mid-term long-term investment opportunity for folks who like to be in the utility space.

That's helpful. Just so I can be clear. I know your capital budget is obviously very complicated. But it looks like the majority or a substantial portion of the $416 million decrease in '09 was from transmission and then also distribution. I know you touched on that a little bit, Holly. Can you just give a little bit more color on what exactly, what decisions you made there. And then also just kind of going forward as you reevaluate your capital budget. do you think that the trajectory is perhaps downward by tightening it up a little bit and raising the bar perhaps on returns on capital and timings and regulatory lag. Or you think this is it from the perspective of CapEx coming down.

Well, I think you are right on point that we have really scrubbed down and tightened the focus and the important point is aligned it with our plans for rate release and reducing regulatory lag. We are confident that the capital that is being redeployed away from certain distribution projects and as you know, we have seen a decline in new customer hook ups. We know we are running under in the budget. We have done a lot of reliability enhancement over the past few years and so what we have done on a jurisdiction by jurisdiction basis is look at the work that needs to be done, make sure it aligns with our plans for rate relief and then adjust the capital budget accordingly. So you pretty much summed up what we are looking at.

I think this trajectory is one that is sustainable. And as Mike mentioned earlier, we are in the $3 billion plus range as a sustained capital need for the company. We think we can raise it and deploy it effectively in a very manageable time horizon, we are self funding at that level, and that supports earnings growth accompanied by rate relief in the range of what we have provided to you. This is really just tightening up of the plan that has been out there in front of you for well over a year now.

I think it also, John, points to the reality that at least our experiences to date in the transmission partnerships have yielded higher rates of return for equity capital invested and you would expect us to deploy more aggressively in that area when we can and that's exactly what we are trying to do here.

This positions us to be able to execute on that very well, Mike. You are right.

That's helpful. Thank you very much.

You bet.

Our next question comes from the line of Paul Patterson with Glenrock Associates.

Good morning, Paul.

Good morning, guys. Just to clarify this and I am sorry to be a little slow here. The 15% rate increase is off of what base should we think of that being. What is the dollar amount that we should think of the 15% being off of?

Well, it is off of the last RSP rate adjustment that we had. So it will be the rates at the end of calendar year 2008.

Just a general dollar number roughly speaking. I mean, we take 15% of that and then each year for the years that you got outlined here that would be the top-line growth in terms of rates. Is that right.

Exactly. I think one of the most important things for people to focus on, again trying to build that balance that we put into it, it ends up for a residential customer to be $15, $16 a month over that cycle of years. And that is really pretty acceptable, we hope. Although, I appreciate the Ohio economy is under some pressure, but again, deploying all of the tools that senate bill 221 gave us, we think that we have touched all of the important goals that the governor and the legislature put in front of us.

Okay, sure. Then back to Ashar's question on the fuel base that we should be using. We should be looking at one from 2001. We should look at what the fuel cost were for those subsidiaries in 2001 and start from there and associate any increase from there is going to be deferred? How do we think about that?

No. Again, first off, make sure that you look at the testimony that Craig put in on the fuel and how one goes about it. The last active fuel cause we had was some time in '01 and it was predicated on a '99 fuel cost. We have, of course, built into that number the adjustment of the 7% and 3% that we received over the last three years. We think that is only reasonable. And then we are making the fuel adjustments from there. But not all of that will be deferred.

Again, the 15% annual increase in the revenue flow out of the Ohio companies, some will be dedicated to recovering fuel as we go but we didn't want to crowd out the opportunity to address the other important parts of the bill, which are to make sure that you are complying with environmental laws, to make certain that you are rehabilitating and maintaining the reliability of your existing delivery system to ensure that you are buying the renewables that are called for to ensure that you are deploying energy efficiency and new energy technologies to try and build on this growing renewable energy efficiency industry base that the Lieutenant Governor is so strongly in support of along with the Speaker of the House and the President of the Senate.

I see. And to that question, somebody asked it earlier, I think your response is that at this point it is just not defined or quantified as to exactly how the breakdown is in terms of what might be deferred as opposed to what might be recovered in the 15%.

Absolutely.

So we will have to wait for more information, EEI or something like that.

We will get a pretty clear picture at the tail end of the approval of this plan, presuming the commission believes this is an appropriate way to go and then we will be able to share with you what we think is recoverable versus what needs to be deferred in the fuel column as we go.

Okay. Finally, as far as the corporate separation is concerned, when do you think you might act on that? Or what is the time frame that you guys were thinking in terms of the filing, as with everybody else, we haven't been able to read it.

I think what you will see when you read it is that we have had in place for the longest while, the authority to functionally separate. We are seeking a continuation of that as an overarching concept . We are asking for some special authority, not necessarily implementable in the day that it is approved, to recognize three or four generating facilities that really have never been in either of the operating companies' rate basis, as well as the authority to there in move the assets to other operating subsidiaries within the AEP family of companies. Without an execution date one would go back and seek the ultimate okay of it when the execution date became ripe in our own

Okay. So the ultimate legal separation would be sometime closer to the full market kind of situation is that?

That's logical, but again, I wouldn't tie myself down to that as a concept. That is just one of the approaches that we think, if they gave us the authority that we are seeking here, that we would have the opportunity to employ.

Okay. When do you think that they will rule on the legal separation issue.

I expect that the totality of the order, which again we hope to be issued sometime toward the end of calendar year 2008 so we can implement. You know the implementation process, although my team never believes that I believe in this, could take a few weeks. We'd hope sometime toward the end of the year.

Great. Thanks a lot, guys.

You bet, thanks, Paul.

Our next question comes from the line of Shalini Mahajan with UBS. Please go ahead.

Thanks, good morning. Just wanted to, and Mike, you mentioned in your comments that if there is not a good resolution on the ESP, the option is already to go back to the (inaudible) with a full field pass through. I'm just curious as to what would be the percentage increase in the scenario that we should be looking at.

I guess I am not really following your question, Shalini.

You said in your comments you have asked for an 15% increase and obviously you would be looking for, to quote you, come out with an order, but as a fall back you always have the choice to go back to the 3% and 7% RSP increases with a fuel fuel pass through. I was just curious in that fall back option, what would be the percentage increase that we could be looking at for the Ohio companies in terms of rate increases.

Actually, that's an excellent question. If we get -- what we are seeking is what SB 221 allows. And that is should you get to the end the year and there has been no decision, you do have the authority to extend your RSP rates or program, as it was. so we would adjust rates by 7% and 3%, as we have done historically, and then you go to an active fuel clause and I expect we might again try to build into that point, if we get there, the concepts of the deferrals that we have talked about before, because it wouldn't be our intent then as it is not our intent now to shock the market place with real fuel recoveries on the order of the kinds of increases that is we think that would yield to the customer. So we would expect that the commission would build some kind of a safety valve in that activity and that would be where we go until the a, either approve the ESP as filed with moderation or if they reject it out of hand, then we would have the opportunity sometime early '09 to refile or select the MRO option. Either of those two as we go.

Okay. Then on the topics issue, Holly, I was just curious and ETT has announced a comprehensive plan with other transmission builders to develop the, to do the buildout in Texas, are those investments part of the CapEx plans of the CapEx forecast.

No, we have always treated the out of footprint, out of the current regulated operating companies transmission activities outside of the current CapEx plan?

Okay. What is the time line that we should be watching for PUCD to respond to the federal proposals, if you could give just some color on that.

Tomorrow, would be a perfect time, but I really don't know. I do know this, that all four of the principle participants in the settlement discussions were driven by the reality that the sooner we get the lines approved and built, the better the PUCD will feel about the entire CREZ process in reaction to the Texas legislature that gave them a pretty clear path of Texas' desire to build that wind into the program. We are looking at 2011, 2012. As you know, buying rights of way in Texas is probably easier than other parts of the country because land is held, massive acreage held by individuals. You are going to have to go through the process of negotiating reasonable rights of way agreements and that.

But what we are seeking here is to try to help the commission in truncating a long, deliberate cat fight over who ought to build what subsection of this $4 billion plus undertaking. ETT shares on the order of $1.5 billion to $2 billion. We in mid-America are very comfortable with that. Much of it is in our traditional footprint. But again, I think this helps speed the thing along. I obviously can't speak for commissioner or the commission or Chairman Spiderman, but I do know that they are eager to get this moving along as quickly as they can.

I think worse case, they were planning an order in the proceeding in February of '09, but every signal they have sent is they would love to have it resolved this year through the settlement process, which would then allow construction to start possibly as early as the end of 2010, because they would like everything in service, as Mike mentioned, by the 2012, 2013 time line.

And I think we should not lose sight that ETT continues to have other transmission investment opportunities in Texas that are being built on a much more current basis. You are already beginning to see, although minor, the earnings impact of the ETT partnership and we expect that to be the case throughout the service territory. I know that FPP and the Weststar OG&E projects that were announced over the last couple of weeks are on a very fast track to help decongest part of the SPP and allow for a better flow of the renewables that are available there. As you know, we are pushing as hard as we can on the notion of the interstate nature of RTOs approving these with FERC oversight of them and then automatic adjustment clauses at the state level to reflect the socialization of the costs.

There is no better spokesperson for that activity than my old friend T Boone Pickens, who, as you know, has thrown himself in the middle of the wind debate and of all people, Vice President Al Gore spoke to that issue just last week in his challenge to the country. So, I think there is finally the appropriate momentum behind the whole concept of the utilization of the interstate transmission grid to allow for a better flow of cost effective electricity across the entirety of the eastern interface in one sense, the western interface in the other sense, and ERCOT as an electric island unto itself.

Thanks so much for the color.

We do have a question from the line of Daniele Seitz with Seitz Research. Please go ahead.

Hi, just a short question regarding the IGCC projects. Is that indefinitely postponed or do you see some possibility of decisions being made in the near future.

Well, Daniele, as you know, we still stay very strongly in support of the integrated gas combined cycle technology. More convinced today than every before that the time is right for that to happen. You probably follow that last week we were the recipients of $133 million of tax credits assigned from the Peko Project that was cancelled some time back. We will continue to try to find an answer for either the West Virginia or the Ohio undertaking. We have not abandoned the concept,. We are bringing it to a reasonable conclusion with the design firms to take them to the end of their activities and then forego the actual on site construction undertakings until we get better clarity on how one would go about recovering return of and on the capital that you would invest to build those facilities.

But we stay every bit intellectually dedicated to the concept of integrated gas combined cycle. We just are having a devil of a time getting the regulatory authorities that are needed. And I think you are seeing that play out across the conterminous forth eight. But for the few states that have now put enabling legislation in place for preapproval both of the ability to build and, more importantly, the ability to recover capital required for new power production facilities, there is a dearth of investor owned utility base load generation being built. Some jurisdictions, like our SWEPCO and the Indiana Commissions, have been strong enough to approve plants. Some of the Carolinas and others have as well. But there is an onslaught of don't build anything for base load generation. And that has the potential within a decade or so to lead us to the South African prospect of a couple of days a week where we shut down the US economy because we have run out of base loan generation, which is just absolute folly, in my mind.

Do you expect more decisions to be made as soon as the question marks in Washington will be answered regarding the elections and so on.

Yes, I would think so. You are hearing both candidates speak strongly about the notion of seeing to it that there is adequate electrical energy to continue to fuel the growth that both of them forecast in the economy through their first term, if not through their second term. And it is like any elected official, they dream of those kinds of things. But that may settle some of the case, but at the end of the day, as you know, many of these are state centric public utility, public service. public corporate counsel decisions. Look at the states where people are intending to build in the near-term, the Carolinas, Florida, Kansas nuclear, some of the others who have up-front approval and up-front capital recovery programs. Short of that, I don't know how anyone builds a $2 billion, $3 billion, $4 billion, $8 billion, $9 billion, $10 billion power plant without better assurances of the recovery of the capital.

Right, thank you.

You bet, thanks. Thanks for the question. Let me set my soapbox aside here.

Linda, we are at the top of the hour, so we will have to end the call, but be happy to take questions in Investor Relations later.

Linda, did you leave us.

Okay, do you want to take one more question then.

Sure.

We do have a questions from the line of Rudy Tolentino with Morgan Stanley.

Good morning, Rudy.

Hi, good morning. Can you just update me real quick about your coal inventory levels.

We are in great shape. We are a 30 day plan and we are in really solid shape. As I said earlier on, thank the lord for MEMCO and the river operations and the ability to get coal to all of our major power production facilities. There are a few stations in the eastern footprint where I know the plant manager wouldn't like to hear me say we are great shape, because they think the coal pile is too small. But those are hard to get to. There is rail congestion in the east. The rails are doing their best. but let's not kid each other, if they get additional opportunity to haul at spot rates coal going to the international market, just like coal producers, they are taking full advantage of it But, I'm not worried about any of our stations not being able to generate their gigawatt hours because we have run out of fuel.

Okay, great. Thanks so much for your help.

You bet, Rudy. And thanks for all the questions from all of you.

There are no other questions at this time, please continue.

You can go ahead and give the replay information now.

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