美國電力 (AEP) 2008 Q4 法說會逐字稿

Welcome to the fourth quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer period. Instructions will be given at that time.

(Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Chuck Zebula, Treasurer and Vice President of Investor Relations. Please go ahead.

Thank you, Anna. Good morning, and thank you for joining us today to discuss AEP's 2008 fourth quarter earnings. If you have not seen the press release issued earlier today, it is available on 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 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 recent 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 performance; that is ongoing earnings versus reported earnings that differ from those recognized by generally accepted accounting principals or GAAP. You can find the reconciliation of these non-GAAP measures on our Investor Relations website at AEP.com. I will now turn the call over to Mike Morris, Chairman, President and CEO of AEP for opening remarks, followed by our CFO, Holly Koeppel who will discuss our results for the quarter and year, and then we will have time for your questions. Mike?

Chuck, thanks a lot for the introduction. I'm sure you have all had a chance to see the press release. I hope that it leaves you with the same impression that it leaves us, that American Electric Power, as it has done over the last number of years, had very solid earning results in 2008. You may remember we tightened our forecast to $3.15 to $3.25 a share, and ended up at $3.24 on an ongoing basis in the forth quarter and $0.59 per share on the ongoing basis as well.

I always want to touch on the regulatory update because as you know with the capital expenditures that we have made over the last few years, regulatory recovery and balance treatment is very important to folks who invest in American Electric Power as are the capital investments made on behalf of our customers. On our slide, we've highlighted just a couple of interesting regulatory accomplishments. As we came into 2008, you may remember we spoke to the notion that most states were very fair and we felt comfortable, but we were a little troubled by things in Virginia and and a little troubled by things in Oklahoma. To our certain satisfaction, we received extremely favorable rate treatment at Appalachian Power in Virginia in the fourth quarter of 2008 and feel very comfortable about the impacts that that will have on us in 2009 and going forward.

You might remember in the tail end of 2007 and in the very first few days of 2008, we had a very devastating ice storm in Oklahoma. The commission allowed for recovery of some $70 million of that storm cost within weeks of the actual events. That kind of regulatory treatment is just part of what led to a very, very successful regulatory year with overall rate increases of just north of $0.5 billion.

In that regulatory arena as well, the Turk plant received authority from three jurisdictions in the SWEPCo family of companies. And of course we received the air permit toward the latter part of the year and we are well on our way to constructing the facility going forward. We have highlighted for you, back I think in 2006, our partnerships in transmission, our desires to build a transmission grid that will serve the people of this country both near and longer term. In ' 08, we had a number of joint ventures announced with projects throughout the Southwest Power Pool; partners in Kansas, partners in Oklahoma. Projects with our good friends at Duke Energy in Indiana as well as others, we have talked with you about before.

Lastly, when we looked at the economic environment of 2008, but for the latter part of the fourth quarter, it was an outstanding year in almost any way you can look at the US economy. Our footprint being so large and being diverse let us come to a conclusion that the overall economic impact of 2008 left us in pretty high territory. Our overall gigawatt output was 219 billion kilowatt hours which was actually a bit of an uptick from what we sent out in the wires from 2007. I'm not going to run from the fact that the latter part of the fourth quarter was a bit disquieting as we saw certain down ticks, mostly in our industrial loads. Let me just wrap up and tell you very simply that 2008, like so many years before, was a very successful year for American Electric Power in every way we can measure it, except for the overall down tick in share prices utility-wide as well as the entire Dow Jones Utility Index.

When we look at 2009, we see things that are encouraging. We see things that are of some concern. Clearly, we continue to have progress on our transmission initiatives. The path project continues to move forward. The FERC continues to treat that project with appropriate regulatory treatment.

We are encouraged by what our friends at PGM have done. Clearly by having a start date of 2013, rather than 2012 works well for the capital crunch that we all find ourselves in today. At a hearing just a few weeks ago, Chairman Smitherman of the Texas commission mentioned that he thought that $1.1 billion of the [KREZ] projects should go toward our ETT partnership with Mid American. We feel very good about that and we continue to see growth opportunities in transmission. As we told you many years ago, transmission projects don't happen overnight. None of these have and I doubt that any of they will, but they will add to our portfolio of growth capital investment over the near term.

As I mentioned before, the Turk plant continues to move forward. Just this month, we received approval from the Arkansas commission for the transmission lines that will allow that energy to move to market. As you know and I'm sure you are all interested in, we feel very, very comfortable about the current activities at the DC Cook plant.

As you know, all three [rotors] have gone through a process of trying to straighten them out. So far, two out of three are done and the results are quite comfortable for us. The third one is in the process and we don't have any reason to believe that that too won't be satisfactory. I know if you ask our folks at Cook station, they would say we will do everything we can to get that plant back online sometime late in the third quarter or early in the fourth quarter of 2009.

When we look at the Ohio ESP filing and the potential outcomes as we have told you before, it is currently unknowable but we do believe that it will come out with some balance and fairness to our customers in Columbus and Southern, as well as Ohio Power Company. And most importantly, will give us a very good footprint moving into 2010 and 2011. We have already had some pretty serious rate treatment in a very positive way in early 2009. Adjustments of tariffs from the FERC for transmission services rendered to customers across our system, a very reasonable and balanced Oklahoma rate case decision for Public Service of Oklahoma; what we think will be a very balanced and fair treatment of a proposal that's in front of the Indiana commission, awaiting commission signature. And some minor, but nonetheless important upticks in rate charged of our customers in Tennessee.

Ohio has worked out reasonably well I think for Duke. It seems to be working out reasonably well for First Energy. As you know, because the TUCO has decided to take them in a one-off basis, we are next in line. As we've told you before, we continue to be in deep dialogue with many of our customers with the commission staff. We are very comfortable we will find a reason and logical answer for the Ohio process as well.

That leaves us with some comfort to tell you that we are maintaining our earnings guidance. We know that the wedge is wider than we typical like to have it. It remains at $3.00 to $3.40. Post Ohio, we will try to tighten that share for you. Post Ohio, we will try to update you on the many things that that particular order may mean for us in 2009.

The last tagline on my slide here is cash flow. I can assure you we are watching it intently, as you would expect us to do. Capital expenditures, I think you know beginning in 2008, we were at $3.7 billion. Beginning at 2009, we are at $2.5 billion.

We have plenty of room and plenty of flexibility in our own capital expenditures, as we have shared with you frequently. If needed to pull on that lever, we are comfortable, willing and able to do that. That would cause for some dialogue and some coordination with our in-state regulators because it is the same group that are clearly pressured by the economy for raising rates, and also know that capital expenditures need to be made for the reliability and the demand growth we still see on our system.

Financing of overall activities in 2009, we feel comfort will with the plan we have in hand. We are having a serious opportunities in the capital markets without a great deal of concern. We could, if we wanted, to reenter the commercial paper market. It's beginning to that for the A2P2-rated companies like ours We have had some success in I& M and some issuances for the latter half of ' 08 and early here ' 09.

All in all, we look at '09, and you might expect me to say that with an optimistic eye, but I hope not an unrealistic eye. Early results in January show us that send out has been solid. It is in line with what we had forecast it to be.

Clearly, the off systems sales market is impacted by the cost of natural gas. The margins aren't anywhere near where they were. The demand system throughout our off system marketplace isn't what it had been historically, but we will continue to watch that. We feel all of those things were built into the spread that we gave you on the forecast of earnings that we thought would be available to us in 2009. With that, I will turn the podium over to Holly Koeppel. And then, she and I will look forward to your questions. Thanks.

Thank you, Mike. I will briefly recap the fourth quarter performance and then drivers on year-to-date performance. In the fourth quarter, when compared with the same quarter last year, we saw positive results as a consequence of the rate release that Mike covered just a moment ago. We also saw positive loan growth and new customers contributing to increased margins.

As Mike mentioned, we saw reduced off system sales as a consequence of lower market prices and that led to a reduction in the amount of off system sales revenue that we share with our customers. Our margins were impacted negatively by higher fuel costs in Ohio. On the quarter, weather had no impact when compared with last year and we were slightly favorable relative to normal. Operation of -- off system sales were substantially lower due to the lower market prices that Mike mentioned, as well as higher fuel costs rolling in in the quarter. Operation and maintenance expenses were lower. As Mike mentioned, we had the PSO storm in the fourth quarter of last year, the costs of which were recovered this year.

Fortunately, we did not have a major weather event of that magnitude in the fourth quarter of this year. Interest expense and dividend is higher, due to longer term debt outstanding and higher interest rates on our variable rate debt. Finally, our income tax -- effective tax rate was slightly higher in 2008, increasing taxes.

Turning to our non utility operations, river operations had a very, very strong fourth quarter due to increased exports and improved freight rates. And the [parent] and other expense was down, primarily due to favorable tax adjustments in this year. Turning to the year-to-date performance, the major driver of the improvement year-on-year was rate relief, as Mike covered; over $350 million. Positive load growth contributed $74 million. And it was offset by $175 million due to higher fuel in Ohio.

Weather was unfavorable year-on-year by $0.11, but relative to normal had a very minor impact of only $0.02. As you will note on line 5, our off system sales margins were lower year-on-year due to market conditions and trading activity. Operation and maintenance expenses were higher due to various costs and in particular, the PSO ice storm in the fourth quarter as previously mentioned.

Interest expense was also higher due to increased debt outstanding and higher interest rates on variable rate debt. Our income tax rate on the year was flat and therefore, it had very modest impact on overall earnings. In total, our improvement in utility ongoing earnings was $0.30 per share.

Turning to our non utility operations, again, a very, very strong performance year-on-year. River operations was down relatively modestly after having a very challenging first half of the year, while generation and marketing more than offset the decline in our river operations group because of the strong performance in the second half of the year. Parent and other was down modestly due to higher interest expense offset -- and lower interest income.

Finally, turning to capitalization, slide seven, we ended the year at 62.5% debt to total cap on a GAAP basis. On a credit adjusted basis, that metric is 60.7%. Our goal, as you know, is to maintain debt to cap on an adjusted basis at 60% or below. The primary driver of the uptick in the fourth quarter was an adjustment made to accumulated other comprehensive income associated with the change in pension obligations. With that, Mike, I will turn it back to you.

Thanks, a lot. Now, operator to the Q&A part of the call.

(Operator Instructions). Our first question comes from Greg Gordon with Citi Investment Research. Please go ahead.

Yes. Can you talk about the range of potential financing needs, as it pertains to equity for 2009? I know there is some concern, especially given the statements by the rating agencies lately regarding what their response would be to a negative outcome in Ohio, vis-a-vis, you might need to modify your position on equity.

Greg, I think it is pretty safe to say much of the financial income for the year is dependent on what happens in Ohio. We don't share the rating agencies' view of the potential for a negative outcome in Ohio. We think that again, as I mentioned in my comments that it will be reasonable. When we look at our overall financing plan, as you have heard us say many times before, we will look at every one of the tools and every one of the levers that may be available to us.

If equity issuance is something we feel comfortable in doing, we would do that with an eye toward the impact on the existing shareholder, but nothing that would be too dramatic or too reactive. The comments that Moody's made in their evaluation, reaffirming where they stand on Columbus Southern is logical. The calculations at Ohio Power speak for themselves and their determination there too, is also logical. A two notch down tick because of a really draconian ruling out of Ohio is an interesting view of the world, but not an accurate view of the world.

If the Ohio PC were to give you a reasonable opportunity to recover fuel costs through approval of an ESP, do you think that would put you in a position to be within your current plan and not have to change your financing outlook?

First off, I would argue that a dollar-for-dollar recovery of fuel costs is probably a given. That's exactly what they gave FE. That's exactly what they gave Duke. I can't imagine they won't give that to the Ohio operating companies.

The overall piece beyond that however, is what they allow in the ESP for other upticks in revenue requirements because of the cost associated with capital investment on the system that was done over the years. Again, I have no reason to believe that there is any vibration at the PECO in the executive office for punishment directed towards Ohio. I don't see a really draconian order coming out of there. As we've said before, what we intend to do and it would be were mature to do, is to update not only the $3.00 to $3.40 range on forecasted earnings, but to update you as best we can with the proposals that we would go forward with then for making certain we had adequate capital to finance those capital expenditures we have got.

I think it is equally clear and I think the facts speak loudly to this, a year ago as I mentioned, we had a CapEx requirement of $3.7 billion. We throttled that back to $2.5 billion. I assure you we could throttle that back more if we needed to, but I would want to explain that to the regulators as to what it would do and what it would mean. Our plans are in somewhat of a state of flux, but by mid to late February, we ought to have a very solid feeling for where we will go.

As you can imagine and I think as you know, we have been in conversations as I mentioned, with the customers and staff and others here in Ohio. They have chosen to get them done one off. They are close to being done I think with FE. But FE is a better person to ask of that. Once it is done there, I can assure you it will be rapid.

Remember, we filed because we had to file for our tariffs to continue beyond December 28 of 2008, and asked for an extension through January. They provided an extension through February. I think you can read to that that they presume they'll have ours in February and that would be fine with us.

Thank you very much.

Our next question comes from John Kiani from Deutsche Bank.

On slide 16 of your presentation from today, the green bar that shows cash flow from operations for 2009; looks like it is about $2.5 billion -- $2 billion or so. In the last presentation, I found from you all in mid-December, that figure was about $200 million higher. It was about $2.7 billion. Can you talk about what the drivers of that change were, please?

John, at a very high level, we are seeing capital -- additional requirements for working capital that are really tying up some of the cash from operations that we would otherwise see. Predominantly, related to deferred fuel costs and more capital tied up in the coal pile.

That's something you would expect to see normalize over time or is that more of a run rate expectation for what you will have tied up?

For the year of ' 09, it is probably a run rate. We will have additional capital tied up. Because of the cyclical nature of not only the fuel costs, but how we turn the coal pile and in light of increasing coal costs.

Got you. Okay. On slide ten, can you talk a little bit about where the business interruption insurance proceeds show up?

Sure. They are going to show up in your line 1, East Regulated Integrated Utilities, and I believe partially will show up as a reduction in your operation and maintenance expenses.

Most importantly, John, they are showing up at the bank as they should.

And if not in a reduction to expense, it would be in other operating revenue, John. I'm not sure if it is in 7 or 9. Part of it is in margin up in line 1, and the balance will be in either line 7 or 9.

Remember, it is our intent to make sure we hold the I&M customers flat on fuel costs for the change in the generation mix that they are seeing.

I understand. And one other question, as far as off system sales are concerned for 2009, can you talk a little bit about how hedged you are and what your assumption is for either power prices or natural gas prices for the unhedged portion?

We are about 40% hedged and we feel comfortable with that because many of those commitments were made when gas prices were higher and therefore, electric prices were higher and we feel good about that. I must tell you going forward, the fundamentals will tell you that gas prices should be higher than they are. It isn't happening.

I expect gas prices will be under pressure all year and therefore, margins in off-system sales will be under pressure all year. I want you and the others on the phone to understand that we've surely a lot of that built into our range of forecasted earnings for 2009. We didn't come into this as we have ever done before, believing that some great upside would yield some great upside for us. We have always tried to be conservative about this. I think Barbara [Ratis] and the commercial operations people would say we are conservative, maybe not as conservation as she would like to be, but nonetheless conservative.

Would you say that the level of conservatism on the open position is in line with where the forwards have gone or is a little bit better than or worse than the forwards?

Given the multiple choice, I would take in line.

Okay. Thanks, Mike.

You bet.

Our next question comes from Dan Eggers with Credit Suisse.

Mike, you made reference to the fact that you are seeing more customer slow down in the second half of the fourth quarter. I was wondering if you can share more comments on -- between customer classes and geographies, where you see decay and is that continuing into January or was that a December holiday slow down?

That is a great question. It is clear that we are beginning to see and continue to see announcements by our industrial customers that they will be lowering the output of their products, as the recession or the current economic conditions send them very negative signals. However, I would tell you that when we look at January output, we are very much in line -- actually above what we did in ' 07 and very much in line with what we have planned through our mid-month numbers.

Clearly, industrial will be off. Commercial looks flat to slightly up. We're also seeing a lot of commercial folks. If you look at today's journal, there's are kinds of Starbucks and others being closed.

You think of our footprint, we must serve 40 or 50 Circuit City stores in the 11 states that we do business. Just think of our footprint, we are touched by that. But having said that, pockets of the footprint continue to do well in that regard. Most of our industrial customers have very small margins and pay a great deal of their energy bill on their utilizations, based on the peak send outs that trail 12 months behind.

We will see some down tick there. Revenues should be decent, but impacted. We set an all time peak in Appalachia two weeks ago for winter send outs. It is still too early for me to give you much comfort of where we think ' 09 total year output will be. It clearly will not be as robust as the 219 billion kilowatt hours in 2008, we don't think.

My question -- sorry.

I was going to say, the highest margins come on residential and commercial and those seem to be doing very well.

Along those lines, what is the process or what is the band of tolerance around an economic recovery in ' 09 in regards to the guidance? I know there is the Ohio caveat of how things will go. Isolating that piece, do you have of comfort if volumes were down system wide -- 2% to 2.5% that reasonably you would still be within the guidance range?

Absolutely. Because of the footprint, we are slow to see recessions. Unfortunately, we are slow to come out of them on the other side. It is our walk around knowledge that we -- our industrial load never came out of the last recession. Whether that is true or not is open to debate among my colleagues. We would still be well within our guidance range.

Mike, if you could talk a little bit about some of the transmission opportunities out there. You made the announcements for the Great Plains states and what you are seeing out there. With the stimulus package and what is going on in D C., what kinds of opportunities do you have right now?

As you can imagine, we are deeply involved with the current discussions in Washington over the notion that -- we believe at American Electric Power and my colleagues who are in that end of the business, we do not need stimulus bailout TARP money to go forward and finance these projects. The whole notion of allocating costs and getting federal authority to build the systems are the critical points that have to come to pass.

If you think in terms of the more traditional rate-making concept of beneficiary pays, you almost immediately stop any of the oil energy programs to be built that are so desired and embraced by this administration and many in the renewable portfolio standard community. Our current conversations with Senator [Bingham] and others leads us to believe that the country may well have an RPS standard sometime in 2009. If it is going to be meaningful and accomplishable, it will have to have some kine of a federal transmission play associated with it.

The monies that were given to the federal power transmission companies really are for one off projects and don't accomplish much other than helping them build things out things that they either should have built out or simply didn't have the capital to build out before. I do worry about the notion of the government wanting to take this whole thing over. I would think that is a terrible place for them to put their money, but government is government. I've been around long enough to know they frequently do things that are illogical.

The real issue with the transmission projects and we said this in ' 06 when we first announced the whole concept. They take forever. FERC authority would truncate a great deal of that going forward. FERC has been very good about returns on equity, very good about approving projects. We are very much in support of the concept of enhanced returns on equity being predicated on technological advances. We think that plays immediately to American Electric Power's strong suite. We need to have them do that cost allocation piece in the federal oversight. I think that's -- the time is right. My good friend Boon [Pickens] has spent a lot of his money and I thank him for that, raising people's awareness of the significance of what an intra state grid could do.

Do you see a pickup on a federal -- going to FERC do you see that coming out of Congress this year?

I do. I think it will be tied to the renewable portfolio issue. It will be again -- very short sighted to make it just for renewables.

Great. Thank you very much.

Our next question comes from Paul Ridzon with Keybanc.

I had a question about [NEMCO] -- put up a pretty solid quarter and wondering how sticky these trends could be?

You asked the same questions that I ask of the NEMCO team. We were quite impressed with the recovery. It had a lot to do with a number of other people drawing out of river transportation and a number of smaller operations simply folding up shop. If you look at our ' 09 forecast, we show NEMCO being flat year-to-year. If those kinds of rates and particularly those kinds of volumes holdup, that may be another potential uptick. It would keep us well within the range we have shared with you.

We are encouraged by being in that space. I think again, our team has done an excellent job of blending, not only the transport of our own fuel in a very rational and cost effective way, but then utilizing capacities for moving what would have been empty barges up river -- has simply turned out to be a very good business model for us. We feel comfortable about that. It would be wrong for me to say, take fourth quarter '08, multiply it by four and that looks like a great NEMCO year. That would be an over statement of the potential.

We continue to move forward as you might expect with considerably more Powder River Basin blending of fuels into our eastern fleet. Having NEMCO in the river operations inside of our portfolio control allows us to do that in a much more cost effective way than I'm sure some of my colleagues see.

We had a lot of capacity come out of the barge market, given robust scrap prices. Now that steel is in a downturn, are people adding capacity back into the barge market at this point?

I think the current capital crunch is causing people who would love to do that -- not being able to do that. We are not seeing great deal of that. We added to our fleet last year and we will add to it this year, but nonetheless add to it. That continues to give us a strong revenue advantage.

What is the status of the draw? Have you paid that back or is that still outstanding?

Still outstanding.

Obviously, equity garnered a lot of attention this year. Can you go beyond ' 09 and talk about what the financing plans look like?

As Mike mentioned earlier, we have a number of levers to pull. Once we see the outcome in Ohio, we plan to balance -- expect the cash flow from operations with the capital required to run the business, and all other known changes in both cost and cash flow and come up with a balanced plan that takes into consideration the need of the customers, the will of the regulators and the objective of enhancing shareholder value. We'll take the whole portfolio and come back with the most balanced recommendation.

Thank you.

Our next question is from [Danielle] (inaudible).

I was wondering what type of rate release you are assuming for 2009 in your forecast. Also is the $2.5 billion of CapEx the numbers we should use for 2010 or at this point, there is no way of knowing?

Thanks for the out, Daniel but we won't take it. $2.5 billion is probably a reasonable way for us to go forward. As I said in my comments, the capital expenditures on the system are really predicated on an understanding and a support by the rate regulator that we are doing the right thing at the right time for the right reasons.

We continue to push for and have some success with trackers and riders and other activities that gives you a more realistic cash flow to match the capital expenditures. We are in the process, as are many of my colleagues in the business, of trying to carry forward to the regulator the notion that in a more capital available environment, the utility being the local bank for the customers was a viable undertaking. But in today's capital constrained marketplace, that simply is not sustainable.

What you see in Texas, for instance, with a tremendously agressive -- and a project we support very, very strongly going to the upgraded meter reading systems as they are going on throughout the system. All of us, all Texas utilities went to the commission and said, we need a better cash tracking machine to buy the meters and put them in place. [Alla] California which did some prefunding. If you see the capital expenditures for power production facilities in the Southeast, they are going forward aggressively in states that have addressed that up front issue. I think you will see more of that.

When we look at $2.5 billion, we could easily spend $3 billion. We wouldn't be wasting $1 of capital. We would be putting every dollar at good advantage for our customers. It will have a lot to do with how the regulator sees those investments and how current the recovery of cash expended would be. I will let Holly speak to the ' 09 rate activity.

Danielle, we really haven't given an indication of the total amount in the year. Stemming from what Mike reviewed earlier, we had a number of regulatory successes in the latter half of last year. If we look at the impact on this year's margin when compared with last year because we haven't had a full 12 months of those rate increases. We are up already if we assume approval of the cases we have pending before the commission at I&M, we are looking at over $300 million of increased rate relief on an annualized margin basis already this year.

And that's of course without Ohio.

One last quick one. The sharp decline in system sales, do you attribute that mostly to the economy or just opportunities in terms of weather, et cetera?

I think it had a lot to do with the down tick in the economy. It also had a lot to do with gas prices falling as they did. Some of our production which would have gone to those markets, simply didn't.

It is not just the economy, there are other issues there?

The multiplier of gas produced electricity, as compared to some of our higher cost coal stations put some of our stations on the love to have you, but don't need you today.

Thank you.

Our next question is from [Leslie Rich] from [Columbia Management].

I wondered if you can walk through your big transmission projects and give a sense of time line. What kinds of approvals are we anticipating. What moneys will actually be spent in 2009 and 2010 and 2011. I know you said it takes some time, but you have several projects that have been under development for quite awhile. I'm just trying to figure out what the next timeline will be.

That's fine, Leslie. Clearly, there is very little serious capital invested in 2009 on any of the projects. The projects in Texas are probably further along than most. As you know, a number of us are waiting for KREZ results and the actual order that will allow us to get going on that.

As you know as well, in Texas once given the authority to go, you have all the eminent domain rights you will need, buying rights in Texas because it is -- an energy rich state are usually a little less complicated than other parts of the country. Path is moving along. We think the STP projects may go more rapidly because there is a great interest, as you know, in Kansas. The Kansas legislature as well as the regulator has spoken about how quickly they would like to see some of those projects built.

When I look at ' 09 though, I don't see a great deal of capital being required. In 2010, you will begin to see capital clearly for the ETT projects; probably for the project with OG and Weststar and the STP. I think the Duke, Indiana thing will lay over awhile.

Clearly, one that we have talked about far too long, the projects in Michigan ITC are way in the future as well. You will begin to see serious money spent on Path as we get into the latter half of the three-year cycle you mentioned -- probably the latter half of '10 and clearly in '11. I know it is not as specific as you would like to see it, but that is a pretty good view of it.

That's good. That gives me a timeline and an order of which projects to be focusing on. Thank you.

Thanks.

Our next question from Michael Lapides with Goldman Sachs.

Congratulations on a good quarter. Can you give an update, regarding the litigation or the dispute in Arkansas regarding the environmental permits for the Turk plant and what the path is for getting this resolved?

Thanks again for the comment. We really do feel, not only did we have a solid quarter, we had a pretty solid year. We are hoping the same for ' 09 with whatever the economy yields for us. The issue at the Turk station is an appeal of the air permit. It is in the process. Briefs have been filed. It is on a very expedited path.

We have no reason to believe that we won't be successful in that regard. As you know, there was an early go in the request for a stay which was not granted. We took that as a positive that the court was going to view this in a quick fashion. The day they said we could move forward because the stay gets lifted, according to the legal requirements of the filing that they made, we were back in the field.

We are in construction without question. We continue to believe that that will continue unabated. Timeline -- I can't give you a good handle on a timeline, but surely we will have an answer to that issue we would hope early this year.

Just last question, you may have touched on this. I apologize if I missed it. When you think about all system sales volumes for next year, how different from ' 08 levels?

You mean for this year?

Yes, ' 09, I'm sorry.

I was just getting ready to look in my crystal ball to 2010, and I'll tell you it's pretty foggy right now. Volumetrically, I think we ticked it down as well. We can follow-up with more granularity on that. The more important point is our view of off systems sales revenue and off systems sales volumes, and the sharing of that revenue which is required in many jurisdictions is all built into the $3.00, $3.40 we have given you for forecasted earnings in 2009.

Michael, you should expect us to come out with those details -- that level of granular detail once we refine guidance, post Ohio.

Thank you.

Our next question comes from [Anthony] (inaudible).

I want to follow-up on a comment that came from one of Danielle's questions. Mike, did you say that with low gas prices, gas plans are displacing some of your coal plants? Although you would want to operate them, you are not being called to operate them? Or did I just completely misunderstand that?

You got it right. Current gas prices -- again, you are looking at our 200-megawatt coal plants. You are looking at the top of the stack. I know you all know how the pool works.

The most cost effective plants goes to the retail customers and everything we sell off system follows the stack up. When you look at demand cycles with gas prices of $7 and $8 and M -- in 2008, every plant we had ran. When you look at gas prices at $4 and $3 and M, the gas plants are more cost effective than our coal plants.

The important thing to take into consideration is you can't just look at an average. Typically, the units that are on the margin are not only the smaller units. They also in some instances have relatively more expensive coal contracts, squeezing the spark spread further. Most importantly, they are often our highest [admitting] units and we dispatch assuming a cost of SO2 and [NOX]. It is the higher cost units for fuel, the least efficient units because of size and typically, the highest admitting with SO2 and NOX, not retrofitted.

Boy, am I glad Holly used to run a commercial operation.

Is this mostly -- are you seeing these plants -- is there any particular region where you are seeing your coal plants -- gas being dispatched before coal or could you give us a roughly -- what are the heat rates? Are these just really coal plants that are just pegs like 12,000 heat rates that are being dispatched? Or is it 10,000 heat rate coal?

If I said that we has some coal plants that are pegs at 12,000 BTUs, my ancestors would come from the grave and grab me by the throat. The 10,000 BTU plants -- they are still very efficient and very effective. And frequently if you look back at two weeks ago on the AEP system, we ran everything we had because we needed it for our retail demand. We didn't have a megawatt to put in the off system market even if they had called on it. It is a combination of those.

I can't give you geography other than to tell you that -- and this is mostly in the Eastern pool obviously. As Chuck used to always cry about how much coal costs, some of the plants have very unique boilers and therefore, very unique recipes for fuel supply. Those are at the higher end of the stack. It's that simple.

Thanks very much.

Our next question is from (inaudible) from Piper Jaffray.

I just had one really quick question. Would you be able to comment on AEP's smart grid initiatives and how much of your CapEx plans for 2009 will be used for deployment or initiation into the smart grid meter?

I will surely talk about it. The easiest answer to your ' 09 question is it would be very little. The Indiana deployment of about 10,000 meters is part of it. We have part of it built into Ohio for a section northeast of Columbus. We are waiting for the approvals there.

This is a very important point on cash flows matching the deployment of the technology. Our grid smart program is much broader than that. It has a lot to do with upticking the efficiency of the generation station, adding the intellectual capacity to the substation, transferring from lower voltage to higher voltage, better efficiencies along the transmission energy delivery grid, stepping down again with better efficiencies on the distribution grid and then into the house.

As you know, we have partnered up with IBM. We have partnered up with General Electric . We are very deeply involved in deploying grid smart, as we see it which is the totality of the generated kilowatt hour to the point where that kilowatt hour is put to great economic use in the household, the commercial operation or the industrial operation. We continue to work on that.

Huge capital demand in ' 09 -- no. Going forward because we think that energy efficiency model will be exactly where this country should go. We think it is a another space where American Electric Power has an opportunity to lead and make a huge difference. If if I have got my story lines, right -- if you happen to watch the Super Bowl and you see some GE ads that they paid for, look for our name which we didn't pay

Thank you.

You bet.

We have a follow-up question from Michael from Goldman Sachs.

Holly, really, quickly. What do you expect as cash contributions into the pension for the next few years? Not the earnings impact, but just the cash.

Nothing in ' 09, Michael. We are awaiting the final verdict from the [actuaries], but it looks like we're good for '09. In '10, the number is yet to be determined. It will be substantial. It will be in the hundreds of millions. I would say in the range of $300 million is a reasonable planning tool.

Thank you.

Michael, I would add to that, it is really great for me to put a finer point on Holly's answer for once. At any rate, through our involvement with a number of Washington active organizations, there will be a very, very long and meaningful discussion on the entire pension protection act and how people need to fund going forward. Holly gave you a very accurate number as to what we think might be the issue for us in 2010. But I think there is a high likelihood that there will be some addendums that will allow for a longer period of time for funding. Much of it has to do with what the market might do in 2009 and 2010 which could surprise, either negative or positive.

Believe me, we are in great shape in the utility space in pension funding and great shape in corporate America space in pension funding. We will join in the endeavors. In fact, we signed on a letter from National Association -- manufacturers signed on a letter from the business round table -- signed on a letter from the US Chamber. It is a very critical issue that Congress will have to take up. Holly's answer is granularly correct. The politicians are going to weigh-in on this before many segments of -- not only corporate America, but public America -- cities and states and counties are faced with a law they simply can't comply with.

Our final question comes from Don (inaudible).

It is [Neal Stein]. Just had a question on slide 16, it looks like your plan debt issuance went up about $300 million in ' 09 (inaudible). I think operating cash went down a little bit, at least what you are forecasting. Want to understand what you are thinking about.

We were afraid someone was going to have those EEI slides, Neal. (multiple speakers)

It is really back to the comment I made about capital tied up, both in deferred fuel costs recovery and an increased cost on the coal piles. Working capital is going up because coal prices have gone up. And as you know, we maintain about a month's supply of inventory. Some more capital is is tied up there and we have larger fuel cost deferrals because we're going to get that back from customers. More capital is tied up there. That's the vast majority -- essentially on all the difference.

The numbers change since EEI and fuel costs generall have come down since then.

Not for us. As you know we have been below market consistently and we are still below market. Over time, we'll move more towards the market. The market has come in, but we are still below the point to which it has come in. We are expecting a fuel cost increase next year -- actually this year in '09 of 15%. As we see costs going up, we will have more capital tied up in the coal piles and fuel cost deferrals will go up proportionally.

That is an interest point. Yes, market prices are coming down, but because we have been so far below market prices as our contracts mature year-over-year, you are seeing a slow tick up in our costs of coal. That's why we're funding more and more PRB in some of the eastern plants, too. We are trying to make sure we put a cap on that uptick as best we can. Although recovered for the customers, we think it is the right thing to do for them and for us.

Thank you very much.

That was our final question.

Thank you very much.

We would like to thank you again for our participation today. As always, our IR team will be able to answer any additional questions you might have. Anna, would you please give the audience the replay instructions?

Ladies and gentlemen, this conference call will be available at 12:00 PM and remain available through February 5th. To dial the number for the reply is 1-800-475-6701, access code of 980754. That does conclude our conference for today. Thank you for your participation.