美國電力 (AEP) 2008 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by, and welcome to the third quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question and answer session with the instructions being 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, Mr. Chuck Zebula Treasurer and Senior Vice-President Investor Relations. Please go ahead, sir.

Thank you, Lori. Good morning, & thank you all for joining us today to discuss AEP's 2008 third quarter earnings. If you have not seen the press release issued earlier today it is available at our web page at 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 AEP.com that includes the consolidated balance and statement of cash flows, as well as full income statements for each of the business segments.

The earnings release today 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 be annual reports on Form 10-K, and quarterly reports on Form 10-Q for a discussion of the factors that may call results to differ from management forecasts and expectations. Also on the call, we will discuss the measures about company performance. That is ongoing earnings versus reporting earnings that differ from those recognized by Generally Accepted Accounting Principles or GAAP. You can find the reconciliation of these non-GAAP measures on our Investor Relations web page at AEP.com. I will now turn the call over to Mike Morris, Chairman, President, and CEO of American Electric Power for opening remarks, followed by our CFO, Holly Koeppel, who will discuss the results for the quarter. Then we will have time for your questions, Mike.

Well, you can sure tell that Chuck reports directly to Holly. Got her name right even after he butchered mine, but so be it. Welcome to everybody on the phone. I'm sure we'll sound like a broken record to some of the utility earnings calls that you've heard so far on the third quarter updates. But I think there is a couple unique aspects of our business platform and business opportunities that we surely want to share with you.

If you look at the first slide that we've got for you, I'll go through these topics and give some color as to how we see these issues. On the economy and outlook, our market place remains not dissimilar for the rest of the country. However, retail sales through the third quarter are actually up 1/2 of 1%. That's some what in line with the forecast that we made coming into calendar year '09 but it is on the short side, if you think in terms of a 1/2 to maybe 1, 1.5% growth. When you look at the impact of weather, it really has been pretty dramatic throughout the third quarter. Overall in the east, weather was off by 5%, the the west it was off by 11%. If you compare that to 2007, in the east we're actually off by 19%, and in the west by the same 11%.

We are in fact beginning to see a slowdown in our industrial customers, particularly the export customers that served us so well through all of the first three quarters of calendar year 2008. October sales through yesterday [send] out are down about 5% give or take; however, the overall send out of the power production facilities are actually up about 1% year-to-date October versus 2007, meaning that we are able to put additional megawatt hours into the off system sales market. However, margins are down there, so you will see the flat performance quarter to quarter when you look at all system sales. All in all, the economy, as we look forward in 2009, looks soft. No question about that. We have seen some rise in bankruptcies, particularly in the commercial marketplace. Everyone seems to be reporting on uncollectible you know we have talk about that before. Actually year-over-year our uncollectible are up by only $400,000. That's a big number, but when you think of the massive revenue flow into AEP, not of that great concern.

We're actually on the low side of uncollectible as a percent of revenue at 1/4 of 1%, and we feel comfortable about that. Wen we look at '09 activities, we're looking at flat sales to down sales, and we'll build our '09 budgets and plans to that end, and we'll share that data with you at our November session in Phoenix Arizona with EEI. When we think about the credit markets that we face, we like all other commercial paper A2P2 folks are out of that space. There is one two-day and some longer that than A2P2 commercial paper available. However, we don't like the pricing and don't feel the need to be in that space currently. As you know, from a release we made not long ago we have taken down 1.9 billion of our bank line. There the cost of capital has been very good, and in fact friendly as the prime rate adjusted down ward. We feel comfortable about the way that we see our cash flow through all of '08, through all of '09, and feel the finance team has done an excellent job in keeping us in pretty good stead.

When we compare ourselves to other utilities, we also feel good about the funding of our pension plans through the end of the third quarter when were 97% funded on the pension, and with a $1 billion in the OPEB fund, we feel we're in great shape on current payments quarter to quarter as we go forward, and that does differentiate us from some of our colleagues. We have a couple of activities going on at AEP that are of great interest to you because they're of great interest to us. The first one on this list is the DC Cook Plant Unit One Outage, an unfortunate event on September 20. Running like a top, we had some additional -- some unexpected and very dramatic vibrations in unit one. The unit shut effort off, as you would expect it to do. There was a hydrogen release inside of the generator, which cause for momentary fire, which did almost no damage to the unit, was actually put out by the fire brigade, and that's kind of intriguing for those of you that think about nuclear, that with in something on the order of 2.5 to 3 minutes, we had fire trucks sitting at the gate from the local firefighters, and we feel all of that worked as it should.

The issue here is how significantly impacted were the internals? Fortunately we did not pierce the casing of the generator as the [Firmy] plant did some years back, and the damage was contained inside for the most part to the operating activities. Every thing has been taken apart. The lay down area and the turbine floor is covered with everything you can imagine in a [cerrito] way. Everything that needs to be reviewed for repair or replacement has been shipped to the manufacturers. We feel that we have a couple of schedules, although we'll be much more certain about this later in the month of November. The potential for being back on-line late first quarter early second is high, but the potential for being offline through the second half of '09 is also a possibility. It will have everything to do with how much substantial repair needs to be done. The early view of the generator rotor tells us that it should be repairable, but it's too early to make that call.

As you know, we dispatched the units in the pool on a stack. This should have very little impact on our customers. We've witnessed these events before with Cook Station offline. It does have an effect on the amount of gigawatt hours that we can put in the overall marketplace, both retail and off system and it will have some effect on our earnings as you take a look at that. As to O&M expense and recovery of expenses associated with the repair and bringing the unit back on-line, both vendor warranties and our Neil insurance program should cover all of those events, and we feel good about that. We do in fact have property damage insurance with a $1 million deductible. We also have business interruption insurance that will begin paying $3.5 million a year after 12 weeks of the event, which means September 20 until about mid-December and that will stay in place for a very long time. So all in all, an unscheduled and unexpected event, but it was handled very well by the men and women of Cook Station. We now see it as a typical generator outage, and if you know anything about American Electric Power, you surely know we know how to fix those types of events.

On the regulatory update, let me start with two rate cases that are very current, update you on Ohio as well. As I think most of you known we were very fortunate to have the opportunity to settle the Appalachian Power Virginia Rate Case this week. There was a one-day hearing, and we expect and hope that an order will be issued on the settlement in the very near future. We did place those rates into effect at the settlement levels, and it's about 81 or 82% of the overall filed number that Appalachian Virginia had requested, so we feel very comfortable about that. As well, in Oklahoma, the staff and other intervenors submit their testimony this week, and we were quite pleased with the fairness and balance that a few of the intervenors filed, both the Attorney Generals office, and the OCC staff were very balanced in their approach, as you can well imagine.

The Oklahoma industrial customers thought that we ought to have a de minimus increase, but I don't think that will be the result of that case either. As to Ohio, we continue in the process that others are going through. We have filed all of our papers. The intervenor's will file their papers beginning today, and next week. I don't expect any love letters from any of the intervenors, but I do expect people to take very strong positions. In this economy, what we had filed in the ESP may seem a difficult hurdle to clear, but I file comfortable when everyone gets a solid view of the logic behind the increases that we are proposing, that there will be some likelihood of reasonable outcome. We have, as others had, been meeting one on one and in groups with other parties to the case, and I don't want to overly play that hand, only I will tell you that both sides are listening and listening intently, and we think that that's very important. I know that you all know that Duke submitted a settlement. Some are worried that the settlement may be presidential. If you think back to the four ESP -- excuse me, rate stabilization plans that we all filed, they were not presidential in any way, I don't expect that ESP will be presidential either, but we'll bring that to a reasonable conclusion as we go forward.

As you know, we had asked the commission if they didn't get the job done by the end of the year, which seems highly unlikely with all of the gas cases, all of the ESP cases that they have if front of them, that they would retroactively allow us to surcharge whenever they do implement the results of our ESP case, which we do expect to happen comfortably within the first quarter of 2009. As to generation and transmission, the Turk Station continues to move forward. We are expecting our air permit, not knowing what it might say, but at least expecting the release of the permit early next month, meaning the first week of November, presuming that permit is supportive of the concept of bringing the Turk plant on-line, we will begin construction immediately. We fully expect that the intervenors who would rather not see any plant built at that sight because of their own nearby land uses will intervene at an appellate level and try to get a stay. Should that happen, we would obviously suspend and follow the courts directive, and if that stay were lifted go right back to the construction. I think it is quite clear to all parties involve that the Turk Station continues to be price advantageous and we believe we have address every concern of the Arkansas Department of Environmental Quality so that we would hope to get a comfortable air permit by them as I mentioned next week.

The Stahl plant, being built in Louisiana, and moving forward also exponentially. We're comfortable that, again, it's a very cost effective combine cycle facility that will serve the customers of SWEPCo very, very well, as will Turk for the customers of SWEPCo in the Arkansas area. As to transmission, things continue to go well. Path, as you know, has gotten through an additional PJM and FERC review. The in service date has been extended to 2013. We think that's a good thing, that will give us an opportunity to continue to work on the alignment and the environmental issues. We're very satisfied with the recommendations by the Texas Utility Commission's staff for the [CRES] activities and the ETT partnership. Our other ETA partnerships with Bircher - Hathaway are going well in Oklahoma, going well in Kansas, and going well in Indiana. All of those continue to move forward at the pace that we had expected. Maybe a little bit slower, but nonetheless as a at pace that will work very well with the current capital markets in front of us. On the national front, American Electric Power led discussions on the need for an Interstate Electric Highway Grid continue to gain great speed. I just hope my friend Boone Pickens hasn't lost so much money that he can't keep his commercials alive because it really has crystallized the need of the story as it pertains to elected officials in Washington.

Lastly, let me talk for a few minutes about earnings, although Holly will give you considerably more color that I will. The quarter, as you known was $0.93 mostly affected by weather, also affected fuel recovery in the state of Ohio, as well as the storm events, about $55 million worth of storm events, all of which will be recovered in rate filings in the jurisdictions where the storms affected us . We will try to recover as well in the SWEPCo service territory where the realization of storm recoveries isn't as automatic as it is in the others. When you look at us year to date we feel comfortable that we're ahead of our '07 performance so far.

So we were swimming along quite handsomely 2008 until we ran into the economic crisis occasion by the events that you are all familiar with. We feel comfortable about our earnings guidance range. We are tightening it 3.15 to 3.25, and feel comfortable with the middle of that range as we did before at 3.10 to 3.30. I'm just trying to say to say to you that it doesn't look like the downside is too big, nor does it look like the upside is available.

With that, I'll turn the matter over to Holly Koeppel.

Thanks, Mike. I I'll briefly cover our third quarter and year-to-date financial performance. As Mike mentioned, our retail sales were off we predominantly due to weather, both being milder than normal, as well as outages due to storms, and it was further hampered by increased fuel costs in Ohio, as Mike mentioned, we do not have an active fuel clause in Ohio. We will have one at the conclusion of our ESP. We do have active fuel clauses in all of our other jurisdictions. So retail sales performance was off 81 million in the quarter compared to the same period prior year. Off system sales remained essentially flat, despite the fact that send out or sales volumes were decreased by about 4%. The addition of other operating revenues, up by 24 million, relates primarily to a 2007 provision for a rate refund in Texas. In a year on your comparison without that, it's up about $14 million.

Operation and maintenance was up 75 million on a quarter to quarter comparison. As Mike has mentioned, predominantly due to the cost of these maintenance outages. We do, however, expect to have either revenue offsets in the current period, or ultimately petition for storm cost recovery. Interest expense and preferred dividends were higher due to increased loan-term debt outstanding, as well as higher interest rates associated with the refinancing of our auction rate securities into a variable rate debt mode. Other income and deductions were higher due to increased interest income and the income taxes, the affective rate remain flat year on year at 33.5% .

Turning to our non-utility operations. River operations, again, experienced a very difficult quarter, challenged by weather-related issues, including in the quarter an oil spill in the New Orleans harbor which limited shipping traffic. The generation and marketing segment, our AEP Energy partners operation, which functions primarily in the ERCOT market area, had another very solid quarter of performance, selling and transacting in ERCOT with municipal customers. Finally, parent and other on-going earnings increased as expected due to higher interest expense and lower interest income. If we look at the year-to-date performance, the story ask very much the same. We have been negatively impacted by weather. It's been offset in major part due to rate relief, as well as positive load growth as Mike mentioned earlier.

We continue to experience a pretty dramatic effect of the inability to recover fuel costs in Ohio. They're higher year on year by $135 million. Net we are ahead on a year-to-year basis by $79 million in our retail sales. Off system sales is also up year on year by $73 million. This is due, as Mike mentioned, to an increase in send out of 2500 gigawatt hours, which helped margin improvement. Finally other operating revenue is essentially flat year on year. Operation and maintenance expense is up modestly in a year on year comparison by $64 million, due, as mentioned earlier, to be storm restoration expenses and other normal cost increases. Interest expense and preferred dividends are higher, due to higher long-term debt outstanding, as well as increased interest rates, and income taxes, the effective rate remains flat year on year at 32.7%.

Turning now to our cash flows. At the end of the third quarter, in September, we had cash flows continuing earnings of $1.2 billion, up substantially year on year. Changes related to operating activities in working capital were largely driven by general and administrative items, and other assets and liabilities changed primarily due to regulatory assets associated with storm cost recovery and other costs we will recover from customers in the future. Investing activities, our cash outlay of $2.6 billion for capital investment for the quarter is flat year on year. The 2008 asset sale proceeds relate primarily to formally contemplated sale lease back transactions that we would enter into. In contrast, in 2007, we had sale proceeds relating to the Centrica transaction, as well as the sale of TCC share of the Oklaunion plant. The change in other temporary cash investments in 2008, relates primarily to the use of the proceeds from the draw on our line of credit facility in September of $600 million, was invested in variable rate securities. The change in other investing relates primarily to the purchase of nuclear fuel for unit one at the Cook Plant. Financing activities. Our common share issuance of 106 million in 2008, is the effect of our dividend reinvestment program, and finally changes in long and short-term debt were driven by our capital funding requirements and capital market activities through the year.

Finally, turning to page seven, I'll briefly summarize our liquidity as of October 28. As you can see, we have total credit facility capacity of $3.9 billion. In early October, we drew an additional $1.4 billion on our line of credit, in addition to the $600 million that I mentioned earlier. That resulted in a net cash invested amount, at October 28, of $1.366 billion. A brief reconciliation of where we were at the end of September, the ending cash balance of $338 million, to the cash and cash investments that we have at October 28, the additional draw of 1.4 billion-- or the additional cash on hand of 1 billion is associated with the draw of 1.4 billion and the paydown of commercial paper of approximately $400 million. And with that Mike, I will turn it back to you for

Thanks, Holly and we are now ready for your questions.

(OPERATOR INSTRUCTIONS). Our first question from the line of with Ashar Khan with SAC Capital. Please go ahead.

Good morning, Mike.

Good morning, Ashar.

Mike, I guess some utilities have been able to cut CapEx What is your capability of cutting capex for the next couple of years? I just wanted to get a sense.

Sure. Well, you know, that's a two-edged sword, as you know. The beauty of the American Electric Power footprint is that we have, as you've heard me say many times before, more capital expenditure opportunities to benefit our customers and our shareholders than we have capital to put to work. Having said that, when we look at 2009, we realize that this is a cycle we're where in we ought to throttle that back. And as we've said before to these kind of questions from the investment community, we feel comfortable with our ability to do that. To that end, it's our expectation that CapEx for '09, will be on the order of 2.5 billion, which is about 750 million reduction from what we had originally planned, and the minute we see the capital markets retreating in a sense of being more viable, we'll [step off] the capital end investment so as no, sir to hurt long-term earnings potential. We don't see a need yet for reductions in the 2010 plant, and the projects that are being laid over are very well, well thought through projects, engineered already at the final point, and will allow us to increase CapEx if need be when the capital markets make that available to us. We'll end this year at 59 and some odd percent debt to equity as we've done before. We keep a very close eye on our debt equity ratios, but I'm not as concerned about some of the other utilities who have reported on major CapEx reductions, because, as I said, we've got the ability to turn that machine around pretty quickly inside of 12 month rate case rate reviews. So we feel comfortable about where we are. But I do complement the team for being proactive in addressing the issue in '09 when capital markets are as tight as they are.

If I known right now the budget is 2.5 in '09, and we go back to, like, 3.3 in '10? Is that what the numbers are right now?

Depends on what the capital markets look like. The 3 3 and 10 could easily go 3 5 3 6, whatever we can afford to do.

But that was my thought was, with lower CapEx in '09, aren't the cash flows now much better suited to cover them, so your statement -- I was a little bit, like, caught off guard that we -- liquidity needs are going to be enough to carry us through '09? I thought by cutting your CapEx, you should be much more comfortable with your cash flow covering those CapEx versus pre-years' forecast. I couldn't make the two statements right in the caution of language in the release.

We're a very conservative bunch, as you know.

Okay. Thank you.

You bet.

Our next question from the line of Dan Eggers with Credit Suisse. Please go ahead.

Good morning.

Good morning.

I was thinking a little bit loud on the Cook outage, thinking about off system sales for next year. Obviously you guys sell a decent amount in the pool. One way is to take out that 1,000 megawatts of capacity, and assuming all system sales go to service load and take that off systems contribution. But I assume there are more assets in the stack that will have the chance to dispatch will become economic without Cook in the pool. Am thinking about some of the replacement issues appropriately?

Oh, you sure are. If you think about Cook at a 1,000 megawatts and give it a run of maybe 340 days, you're talking about 8 billion kilowatt hours out of our normal output, of 200 plus billion kilowatt hours, so it's not inconsequential, but you are thinking about to it appropriately. It will change to stack line-up. It really won't have much of an effect on our retail customers, because they always take low to high, and even during the extended outage, when Cook was offline for NRC reviews, we were able to recover those cost, be rightly so, from our customers out of the retail pool, and we expect that to be the case. But you're right, it will make a difference. What really happens when you look at '09, what will demand look like on the system, what will world energy prices be. As you know, retail markets in the East Coast are very gas sensitive, so if gas -- if natural gas prices go back to the 10, 12, $15 range in the mid-summer markets, which could happen, then you'll see pretty comfortable margins in the off system sales market, if they don't, you won't. And we'll build all of that into our '09 number which we'll share with everybody in November out in Arizona.

And then I guess Mike along those lines, can you -- or one of the guys there, maybe give me some color on what you're seeing in the coal contracting market. How much of a change in the world change from a contracting price perspective are you seeing today versus what we would have talked about on the second quarter earnings call?

Prices are dropping, as you would expect. Settling out maybe 40s, $50 a ton, maybe north of that depending on the quality of the coal. When we look at our year to year numbers going-forward we expect some increases, because as you know can well imagine at the portfolio of coal supply contracts, we have some are tailing off. Others have opener rights. So we see double-digit percent increase when we look at year to year, probably in the teens, but we'll see how we manage that going forward, but we are definitely seeing coal prices come down. As you know, the Chinese import aspects have softened some, because their steel producers are reaching equilibrium in world demand. So we expect to see more of that as the year unfolds. You have to give the US Cole producers credit. They took full advantage of the opportunities they saw with prices at $150 a ton during the summer, exporting, and a lot of our steam coal magically became met coal at $250 a ton, which alkamin that I don't understand much, but economics I understand clearly.

Mike, I guess to clear up that question, if you think about in that $40 to $50 a ton range for coal where you guys are contracting now, is 2009, does that get the whole fuel supply to parity if it stays at this $40 to $50 level, or is it 2010 where we hit parity where there is no longer the roll off of in the money contracts? Just wondering how much longer we have until the escalation is done.

I'm not sure I'm following your question, Dan. We continue to have legacy contracts that will always average down our price of coal versus what you might see in the forward strip of an annual coal priced scenario. I don't know when you're going to see -- when we look at production costs, they will have a tendency to come down now, and that will make a difference in the contracting terms. So, all in all, we see coal flat going up some next year in the market price, but, again, somewhat softened by our own ability to continue to take advantage of more historic contracts at better prices.

Okay. Thank you.

Yes, you bit. Thanks.

We have a question from the line of Greg Gordon with city group. Please go ahead.

Good morning.

Good morning, Greg.

As you think about the puts and takes for next year. Obviously you're -- the big revenue driver from a rate relief perspective would be resolution in Ohio. That's going to be offset by soft sales, both on the retail side and whole sale, because of the quick outage, you're going to be reducing your capital with -- expenditures, which will hopefully reduce financing cost net net. What about FAS 87 pension expense, it is a bigg issue that everyone else is dealing with. You mentioned you don't think you'll have meaningful cash funding needs. At least that was the inference from your statements earlier, but how should we think about your FAS87 expense year over year in '09?

No impact whatsoever. We look--- if they're funding requirements, they'll be in the latter half of 2010, so a little different than some of our colleagues, we feel fine with that.

And on a GAAP perspective, in terms of the operating cost impact?

Greg, we do expect it will be up, but we've taken that into consideration.

Well, you say you've taken that into consideration, but you haven't given us updated guidance.

It's not enough to through us outside the guidance we've given you thus far for -- '09.

Okay. Thank you.

You bet.

A question from the line of Paul Patterson with Glenrock Associates. Please go ahead.

Good morning, guys.

Good morning, Paul.

Just on the DC Cook outage, I'm not sure what the monthly impact of the outage is, you mentioned business interruption insurance and other insurance, if you would give us a little bit more of a flavor as to what the impact is, once you start getting the insurance and what have you.

Well, we're actually already beginning to get funding on the property with the $1million deductible. On the business interruption, it will be $3.5 million a week.

What is the actually outage cost?

Well, we will let you know that when we have a better timeline on how much repair versus replacement comes in. What we've said before, we think we'll have that toward the latter part of next month. You can think in terms of Firmy a few years back was and somewhere on the order of a $200 million, but they pierced the casing there and have some additions, but of course costs have increased since then. But most importantly, and I think this really is significant realization, is under the Nuclear Insurance Limited, all of those costs are totally recoveries.

Okay. So when we're looking at this, I guess we've got the issue you of the plant being out, not being able to sell power, the issue you of actually pairing the plant and what that should cost. Is there a rule of thumb with that, with respect to the absence of being able to sell the power, how should we think about that? Or is this saying we're going to get more detail in November? Do you follow me? In other words, just sort of wondering, depending -- I mine, sometimes these outages, as you know, Mike, they're sort of hard to product. I'm just trying to get sort of a sense as to you've got a couple of variables here in terms of business interruption insurance, the fact the plant is going to be running, just all of that stuff. Do we have any sense as to what -- like what the monthly impact might be with respect to some of those components?

No, I done think -- I begin, I don't think it's going to have that kind of an effect. When you look at the overall size of the AEP fleet, as you know, other outages we would have had taken had Cook been on-line will be delayed until Cook comes back on-line. So we will still be net net with about the same amount of megawatt hours to put into the overall retail-end off system. And the costs associated -- the only Delta there is that those plants cost more than does Cook when it generates, as you know can well imagine, and so net net there's some margin impact in the off system sales arena, really, again, no impact in recoveries costs of retail energies served to our retail customer load.

Okay. So there's going to be that increased costs, and you think most of that will be recoverable, or --

Absolutely.

Okay. In terms of the Duke settlement -- forget the Duke settlement, but just in general, the ability to of you guys to settle in Ohio. As time goes on here, I'm just sort of wondering sort of, not just with you guys, but other parties there, other utilities there, what's the outlook there? What's the opportunity to settle there, time seems to be getting a little shorter as we go on. Obviously, you know what I mean, just where do we -- what should we be thinking about that?

Well, I don't think there's any question -- if there's any silver lining in the Duke activity, it's that it settled, and that -- it's settled. That tells me that other parties are willing to settle. As I mentioned, we have been meeting with them collectively and individually, and though we've not had any break through discusses, we have had very serious listening. On our behalf of what their worries and needs are, on their behalf of what the realities of the cost of energy are going forward. So they've been very productive, Paul, and I would expect that that will lead to a settlement. As you know, the opportunity to get all of that done and even get a settlement in front of the Commission before the end of the year for at least three, FE and us, Dayton would probably come later, is a very tall order. The Commission is swamped with activity. And they are working very hard on all of these issues. We have done public meetings throughout the state of Ohio, and they're intriguing. We have semi-balance between people coming in and saying American Electric Power, AP Ohio, Columbus Southern Ohio power, whatever the actually name is in the service territory, are beloved utilities. However, 15% per year seems awfully tall. It would be nice if they could tighten their belt a little. Our industrial customers come in a little more strong than that, as you might imagine, and as you've heard me say before, and I fully understand this, we love our industrial customers. The actual earnings spread on industrial rates is very small, and they would be angry at the cost of electricity if it were free. So I expect those kinds of things to continue to be the case. But I think we'll settle the case. I don't have any reason to think that we won't.

Okay. And no idea about what the timing might be, through there's a possibility that might slip into next year

Oh, I expect fully -- even if we got a settlement done, I don't think the Commission could dutifully ham before it the end of the year, and that end, it might address itself to some interim activity on 1/1/09, but would clearly be done by the end of the first quarter, '09.

Great, thanks a lot.

Thank you. Thank you for the questions as always they are deep and specific.

And our next question is from Steven Fleishman with Catapult Capital Management.

Hey, Steve. A couple questions. First on the Ohio. I know, as you said, the Duke settlement is not presidential, but I would be curious in your thoughts on how the ROE earnings test put in there would work for you guys. I think it's like, 15%, with, got to put in good will with off system sales et cetera.

Well, let's make sure we get -- even if we were to have a presidential impact from that. We need to get apples and apples line it up here. The fact of the matter is if you take AEP Ohio, as to operating companies, blend them together, some kind of an excess earnings cap in the teens would work. You know, is the off system sales piece from Duke is, is kind of a Red Herring, if you will. They are short, they have been short. They don't have one megawatt hour to sell off system, so the credit is zero, and it will be zero throughout the entire period, so no offense to anyone in the activity, but that was a pretty easy give. Off system sales have never been a credit to the cost of service. We don't expect that there will. There have been statements by must bees of the Commission. They don't think that they ought to be included, and I expect that they would not be.

Okay. And then also you mention that the path line has been extended to 2013?

Yes, PJM did, as they always do, a reevaluation of the needs and alignments, and at the conclusion of that, they laid over from 2012 to 2013, which again, on the capital requirement side of things, works perfectly.

Okay. So when would you start construction on that?

As soon as we get the authority to get going, which I expect --

Okay.

And as you know, Steve, you've within around this business a long time, Americans like their electricity. They want everything to work the minute they flip whatever switch it is that they flip. They just don't want to see any of the facilities that make that possible.

Okay. Great. Thank you.

Yes, you bet. Thanks, Steve.

We have a question from the line of Paul with Keybanc Capital Markets. Please go ahead.

Morning, Mike, how are you

I'm great, Paul, yourself

I'm great, I guess.

and that's how I feel, I guess.

(inaudible) buy bulk rates and fallen off the cliff. Does that hit your barge business, or are you pretty much contracted?

Paul, we typically run a portfolio where about a third of it is booked out long-term, a third about a year ahead, and a third we lead open for spot business, and so certainly it does impact and roll through over a period of time, but we probably have the biggest exposure to whatever the grain harvest is and the fundamentals of supply and demand.

It looks like worldwide food demand won't soften, even to the worldwide economies might soften. We're still going have to fill our bellies.

Just more Mac and Cheese than steak, I think.

You might be right, Paul.

What's the negative arbitrage on the draw?

Right now we are paying at the spread of 405, and we're invested at -- across a range of securities, and so we're probably about 100 basis points negative, in round numbers. That moves, obviously, as the underlying rate moves, the interest rate moves, and of course we're reinvested as fairly short-term, and depending on how we're portfolio that investment out, but I would expect around a 100 basis points.

And if you look at that and compare it to what you would pay for today's 30-day commercial paper, at A2P2 to the extent that it is there, it is considerably less impact in the cost of capital sense, so I think that Chuck and and Holly and the finance time have done a great job of providing for our needs. When we look out into that '09 cycle, we only need to replace $300 million worth of outstanding debt obligations for the entirety of are the year . You couldn't be in a better shape when you think about

And if we put Ohio aside and look at the rest of the jurisdictions from an earnings standpoint, with the potential for negative growth and continued cost escalation, do you think regulatory action could, again Ohio excluded, show earnings growth next year?

There's surely the potential for that. We're now in the fifth year of incredibly balanced regulatory treatment. As you know and you've heard us say many times before, there was a time we worried a great deal about the delivery businesses in Texas, but between the way they allow recovery of transmission costs in Texas, as well as the distribution rate cases that Charles Patton did for us when he was running that, and of course now he's here in Columbus in the rate department, that Texas is doing fine. Oklahoma continues to be an outlier, but I've got to tell you, the staff position in the most recently filed PSO case, and I the swiftness with which they approve the recovery of the storm damages occurred in December of '07 approved in January - February of '08 was nothing short of phenomenal. So we'll look at that closely. Every other jurisdiction has been extreamly dutiful in realizing the realities of the impacts, and setting aside Ohio, no matter how it comes out, just having live fuel clause in Ohio will be a real plus for us as we look at '09.

What is your budgeted fuel under recovery in Ohio that's going to be dropping off?

Well, it's north of the $135 million.

That's year-to-date, right?

Right.

Thank you very much.

Yes, you bet, Paul. Thank.

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

Good morning. A couple of questions. I guess first on Cook, from the question I've been asked, I think if I understand things correctly with Cook, you guys are going to be recovered from Europe expenses for the out , but you lose the off system sales, but the Company believes that output from other plants that are now moved up in -- I guess down in the stock, I would say, they would be able to sell in today's off system sales market just at a smaller margin? that a corrected

Yes, think you have it right, however, remember, the Cook megawatts themselves never go into the off system sale market because they are at the bottom of the stack that always go to the retail customers so it's a megawatt impact not a margin Delta between Cook cost of production and market prices, so it will be up the stack as it's always been. But you've got it exactly right.

Okay. Now, you kind of gave a wide range of when the plant may be back in service. I think, you know, depending on whether it's replacement, or you could repair, could you go through, if you need a new rotor or turbine, you guys are looking at mid-second quarter, end of second quarter, but if you're just repairing the rotor, or is the rotor not the biggest concern in the first part of the, the first quarter?

No question the rotor is the issue you, and the damage of the rotor is the issue you, and we really won't know more about it until we get the final evaluation. It has been shipped back to its point of origin with the Seimen's people, and we expect that -- other indications show it doesn't need to be replaced, but it's too early to tell you.

So if it doesn't need to be replaced then --

We have the potential to be late first quarter, early second quarter. But, Paul said this before in the question that Paul Patterson mentioned, that I've been around nuclear outages all of my life, and we will not be giving any crisp return to service date, because my experiences tell me I'm constantly surprised to the unfortunate side of that event. So that's why I'm giving you the wide ranges that I've ' giving you, and even as we know more data, we will simply lay out for you the best data that we can, but when I went to Northeast Utilities in 1997, I must have updated when Millstone would come on-line about 40 times, and every time, ' was more uncomfortable than the time before. So believe me when I tell you this, there is no better team at an outage management then American Electric Power. We've demonstrated that at the, 80, 90 units that we have around the country. This is simply on the technical side. This isn't on the nuclear side of the plant. This is no different than a generator project at Amos Station or Mitchell Station or Northeastern Station, or any others. We have experts, no offense to any of my colleagues in the utility business, who are multiple factors more capable than they have, so we feel very comfortable about getting this done cost effect and time effectively, but I'm not tell a lot of dates so I'm apologies that we missed it by a day or two.

Thanks. Just a lat question, I guess, on credit. If I look at your metrics right now, it's about 15% of, like, cash flow to debt or, and you having a big maturity in 2010, I think of $1.3 billion. I know you've cut back in the CapEx sightly in 2009 to about 2.5 billion. But, that 2.5 billion of debt maturing 2010 and still maintain the current rating at Moody's and S&P?

We fully expect that we will access capital markets and have the ability to issue additional long-term financing at each of our operating companies, and maintain their ratings, which is why we sized the capital budget where we we have. We also anticipate, market conditions permitting that we will pre-fund some of that as you have mentioned large 2010 maturities that we'll be facing, and we've taken that into consideration and are planning for next year.

And when you think of the CapEx budget, kind of going back to some of the other all question, we depreciate at 1.500 billion, so anytime we're investing north of that, we're growing the earnings potential of the Company near and long-term. So we've got a a lot of room between what our plans are are and what we might have to do should the markets not open up late 2009, or early 2010 for capital replacement of that really tall stack that we do have to address in 2010, Anthony.

And the Company doesn't see a need in the next two to three years of any equity issuance , other than, like, I think it's a dividend investment plan or something like

Yes, we a direct plan like everyone, and I, think that will adequately take care of our needs.

Great. Thanks a lot.

You bet.

Our next from the line of John Kiani with Deutsche Banc. Please go ahead.

Good morning Mike, Holly.

Hi, John.

Is there any impact or how does the decline in coal prices in eastern coal prices particularly, between the time of your ESP filings and then kind of today, and as you go forward and negotiate and work through an event settlement, how, at all, would that impact what's going on?

Well, to the extent that they're lower , that makes the deferred account that we build into the lower, so it's cutting in the right direction, that's all I can say about

And can you give a little bit more color on what years that impacts more than others, since it's obviously a multi-year -- a multi-year proposal? Is it a little more back end loaded where it benefit this 2010 and 2011, increase more than '09, because you perhaps had hedged more of 2009, or is there a substantially benefit in '09 as well?

I again, you've got that granularity exactly right in your head, because we already have made a great deal of the '09 purchases, there are some pricing flexibilities that we have as well in contracts as commodity price goes down, the increases that some of our suppliers had will reverse for them, as well, and we'll take full advantage of all of that, but the positive effect of that will be more on the tail years, 2010, 2011.

Okay. Thanks, my.

Yes, you bet, John. Thanks for the question.

If and we go next tow to line of Elizabeth Parrella with Merrill Lynch. Please go ahead.

Thank you, you mentioned the APCo settlement in Virginia, and also cutting the CapEx for '09. Any update on the rate relief numbers that you had laid out for us in '09 and '10 sort of versus what you're budget and what has been locked in already?

Nothing now, Elizabeth, but we'll share that with you when we do the '09 events mid-November at EEI.

And just turning to that. Is the plan to provide, an update on the '09 guidance then, even that that point, you probably won't have as much clarity as you would like around the Cook situation, and certainly not Ohio?

We do intend to give an update view of '09. The Cook situation, again,, we can -- we can already figure some impact of it into our overall view, and it will be within the range that we give to you, obviously we won't be point specific. It will be a range, and we think that we'll have room to accommodate that. The Ohio event, as you know, could dramatically effect it in a negative sense or a positive sense, and for the longest while, I, thought about just not doing '09, and leaving it as an open issue, but my finance team, as they always do, have educate me to the logic of going forward and making a range statement for '09. I think that's bet are to for you, for us, for anybody that wants to invest in American Electric Power.

What's your thinking in terms of the longer-term outlook. You had a 5 to 9% EPS growth rate targeted through 2010. How do you feel about that straight now in the context of some of the you've laid out for us this morning?

Well, you know I'm quite an optimist, so I guess I'm still in that range, probably trending toward the downside rather than the upside, but as you know, when you look out a few years and the transmission investments begin to play a larger role, the rate recovery activities that we've seen we believe will continue. The overall cost controls at the Company, the overall capital spend opportunities, again can go up or down. We think we can manage inside of that same range. But as we -- as we share the longer-term view with you, we'll update to that as well.

Thank you.

You bet. Thanks Elizabeth.

Our next question from the line of Hugh Wynne with Sanford Bernstein.

Good morning, Mike.

Good morning, Hugh.

I'm confused still about the economic impact of Cook on your off system sales. I just have to imagine that when you dispatch your fleet, you dispatch all the power plants that are economic to run at the prevailing price.

That's correct.

The ones that you don't dispatch are not economic to run, by implication.

That's correct. And remember, PJM calls on those plants rather than us, unless we do a one off contract with somebody, but you're exactly right.

Right. So if you lose 8 million megawatt hours, which was your estimate of the output of Cook, you'll have to do one of two things, start operating plants that previously were not being dispatched, and therefore at the very high end of the stacking, or you may just have to buy power, if that's cheaper. None of that, it seems to me, is going to make up for the fact that you now have to, let's say -- put it this way. You are going to be losing 8 million megawatt hours of production that had been economic, to sell into the market, and replacing it with 8 million megawatt hours of production you buy at market prices, or which is probably marginal at market prices. How can that not affect your off system margins?

Well, let me try to take you through it again, because obviously I haven't been clear. There's a couple of issues that I think that I need to help try to make a bit more clear. First off, we are net energy long, always, in our eastern fleet. You will not see us buying in the market to satisfy any retail customer needs whatsoever. So we won't be buying from the market to satisfy any retail customer needs. You're right in that the economic stack will be different because those megawatt hours are not going to be in the stack, but that's a PJM event, not necessarily an AEP retail customer event. And --

I'm not really concerned about the retail customer. I'm concerned about you and your earnings and your gross margin on the off system sales, right

Absolutely. And the gross margin on the off system sales will be much more impacted by the cost of electricity in the PJM marketplace, than it will be by any event at the Cook Station.

So basically -- let me see if I could maybe paraphrase that, you're going to see a reduction in your off system sales, but it's going to be volume.

Volume.

-- but it's going to be coming from plants that relatively less profitable, really telephone lower margin, because those are the ones that are not going to be used to supply the retail load?

The unit -- the megawatt hours that we have to go in the off system market place will probably not be greatly effected by Cook one way, shape, or form, because they have always been the top of the stack.

Right. And the margins that we'll receive from them will have mow are to do with the power prices in the PJM than it will with the reality that Cook isn't in the mix. Okay. So it's basically the key question then would become does Cook leaving the stack affect power prices and -- in PJM?

And it should.

Possibly in a favorable way, and consequently adding to and margin be for these off system sales?

That's it.

That's -- there's potential that, you bet. But I'm not trying to down play the fact that those megawatt hours not being able will affect the overall performance of our commercial operations in '09, and we'll build that into our guidance as we give you that guidance at EII.

When does the BI run out?

It's a long time. It's full recovery for a year, and then the step down recovery for an extended period of time, which ends up being about two full years I guess.

And is that available with respect to any of these off system sales, or only available to lost output in the retail supply of Cook itself?

Only to the retail supply of Cook.

Thank you very much.

Thanks again.

And a question from the line of Neils [Mellquist] with AllianceBernstein. Please go ahead.

Hi. Could you just comment a little more on what you're seeing in Texas in terms of transmission and the proposed [CRES] zones. Is anything the changing with the weaker economy?

No, not at all. Texas continues to believe very strongly in satisfying the law that was passed, the PUCT, and Chairman Smitherman are dutiful about putting that in place. And even though there's been a dip in oil prices and gas prices, the Texas economy continues to go forward quite strongly. We are seeing growth '08 versus '07 in very few of our market places, Texas at the top of the stack in growth.

Thank you.

You bet.

You have a question from the line of Michael Lapides with Goldman Sachs. Please go ahead.

Hey, one question on the quarter, and then one question on transmission in Texas. In the quarter, however was O&M. How much of that was storm related?

Well, considerably. I'll ask Holly to do nobody granularity on it. And O&M spot in one of the issue wife talk aid beauty for '09, and let me just simply tell you that our to flat to the O&M realities of '08, which means the team will address whatever increases we see in operating of maintenance expenses. Holly?

Well, storms in the quarter Michael were $21 million, on the year, it would be more than double that.

Okay. Thank you. On the -- on the Texas transmission, having gone through all of the -- most of the CRES testimony, and especially staff testimony, seems like they gave roughly a 1.2 billion to 1 entity, and 500 to 600 million to another, two entities that aren't transmission owners in the state currently. Just curious for your views on that, the availability of that, and likely any challenges to, almost a third of the total CRES development going to people who aren't TSOs in the state.

Well, I expect there will be some pressure on that, because anyone who didn't get the amount of pie that they were hoping to get when the the pie was cut into pieces will argue mightily that these folk's are interlopers of one shape or form, but that -- all of that will be settled by the PUCT, and I expect will be settled in a very professional and balanced way. We -- all I can comment on is that Electric Transmission Texas is very pleased with the allocated CRES opportunity investment for us.

Okay. And when will you expect to break ground, or at least be done with the permitting process

Well, I'll tell you one thing about Texas, once they decide to do something, they get about it. Think again you're look at 2013 timeline, maybe better than that if we can, but I expect that will go very, very quickly.

Got it. Thank you, much appreciated.

Thank you. With two questions remaining in the queue, we go to the line of Leslie Rich with Columbia Management.

Hi, Mike, I'm sorry if you already addressed this, but as you talked about your CapEx cut of 750 million in 2009, what -- what category would you place that in, as you -- is that in generation, transmission, distribution? Where is that coming from?

Well, as you would expect, it isn't an across the board percentage reduction. The management team went through a tremendous amount of give and take. We rank ordered the various project, the rate pace timings, the rate offers return at different operating companies and different activities, and it is pretty equally balance among all of them. However, as you might expect, because generation is the larger of the cap requirements that it gave more, but it covers generation transmission distribution, as well as the corporate center activities. So I think the team did an excellent job of balancing that out. Most importantly, any project that is near at hand to have a plus on earnings is going forward, any project where there was substantial capital investment with a long regulatory leg tail on it, will be delayed and done more in line with the regulatory recovery plan. Think you know, Leslie, we've talk to you and others about this on many occasions, if there's any value added of me being at American Electric Power, it's that I raised the sensitive of capital investment and rate of return timing on the entirety of the management team, and I'm proud about the way they've reacted to it so we cut off projects that needed capital in a 2009/2010 time line that might not have rate case until 2011 or 2012. One more and we need to go inspect

Our last question is a follow-up from the line of John Kiani with Deutsche Banc.

Thank you for taking my question.

For now, we haven't heard it yet, but okay for now.

In regards to your comment about lower coal prices, obviously sounds like, it has political benefits associated with it, and the timing is different in in that picks up as we move out in time as of the years of the ESP filing. Can you give a ballpark or rough order of magnitude of how much it reduces the percentage rate increase you were seeking in the years that were included in the ESP?

Remember, it doesn't have any effect on that at all, because the plan was to step the rates up 15% a year. That would -- some of that percentage increase would address the issue you of fuel, but it was always a plug to the 15%.

Got it.. Okay. Thank you.

Thanks, John. And thanks, everybody. I'll now turn this thing back over to Chuck, Zebula, who by now has my name right. Chuck.

Thank you, Mike. I would like to thank everyone for listening today, and as always, the IR team will be available to answer your additional questions. Lori, can you please give our listeners the the replay information.

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