美國電力 (AEP) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the second-quarter 2009 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Chuck Zebula. Please go ahead.

Thank you, Brad. Good morning, and thank you for joining us today to discuss AEP's 2009 second-quarter earnings. If you have not seen the press release issued earlier today, it is available on our webpage 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 forecast and expectations.

Also on the call, we will discuss the measures about Company performance, that is ongoing earnings versus reported earnings that differ from those recognized by generally accepted accounting principles, or GAAP. You can find the reconciliation of these non-GAAP measures on the Investors page of our website at aep.com.

I will now turn the call over to Mike Morris, Chairman, President and CEO of the Company, for opening remarks, followed by our CFO, Holly Koeppel, who will discuss the financial results for the quarter. Then we will have time for your questions. Mike?

Thanks, Chuck. You're getting a whole lot better at introducing Holly and I. At least you got our titles right this time.

Thank you.

Greatly appreciate it. Thanks to everyone who is on the phone. I know you are busy today, so we will get right to it. If you go to slide 3 in our deck, let me start talking about the second quarter highlights for American Electric Power.

As you saw in the earnings release, for the second quarter, we are at $0.68, which we feel is an extremely outstanding quarter, notwithstanding the impact of the drop-off in industrial sales and the very difficult off-system sales market that we continued to work with here throughout the second quarter.

For the year, $1.55 a share on ongoing earnings is nothing short of phenomenal, again, with those challenges. What that shows, I hope, at long last is something that we've talked tirelessly to you all about for a number of years. Capital expenditures made over the last handful of years with appropriate rate treatment have allowed for a very solid revenue stream during a very, very difficult time.

The American Electric Power system, as you know, has experienced $2.7 billion of increase in rate adjustments over the last handful of years for the capital that was put to work. That, coupled with O&M controls, including being about $100 million under budget so far this year, without any fancy names, tells you that we've been on the job.

For guidance for the rest of the year, we are extremely comfortable with our $2.75 to $3.05. No cause in the world to move up or down, but very, very comfortable with where we are.

The Ohio ESP rehearing order was a disappointment. There is no question about that. We felt that the Ormet change from cash collection to deferred collection was to be expected, and that is exactly what they did.

However, the moves that they made on the Waterford and Darby plant were unexpected, unnecessary, and we think ill thought through. We bought those plants in 2005 and 2007 for the incredible prices of Waterford, a combined cycle plant, $256 a kilowatt installed. The peaker Darby plant in 2007 for $200 a kilowatt installed. It was our intent to dedicate those plants to the benefit of our Ohio customers. However, they felt that they didn't need to pay for the costs.

Our intent is to seek some kind of reconsideration of that ill-thought-through decision or move those stations to some other operating company within the AEP family, where we think we can realize the return on investment that you so deserve as investors. As I mentioned, Ormet was much about nothing. It takes it from cash, which isn't good, but puts it in a deferred account, as it was promised when we took on the Ormet load some years ago.

The new-generation activities at Turk plant is an equally unsettling opportunity, but we think one that at the end of the day should work out appropriately. The court of appeals in Arkansas decided that the Arkansas Public Service Commission had misapplied a long-standing statute in dividing the review of the certificates for the power plant and the transmission system, something that the Commission has done for a number of years on a number of applications.

The Public Service Commission of Arkansas has petitioned the Arkansas Supreme Court to review that decision, and in fact, to correct that misappropriation. We joined them in that petition for review and feel comfortable that we might have a reasonable outcome there. Again, as I know we shared with a number of you before, there are options, and we will continue to explore those options as we go forward.

During the interim, with court approval, we continue to build the Turk Station, the first ultra-supercritical coal plant in the United States, something, again, that we think is a great benefit to our SWEPCO customers, and equally important, something of benefit to the American population to demonstrate the continuing lead in power production with ultra-supercritical technology. So although a bit disquieting, we will continue on that plan, and we would hope that that gets resolved sometime toward the latter part of this year or early into 2010.

The last subject on my list is kind of unique, and that is to try to bring you all up to date as best we can on federal legislation. Federal legislation is, as you have frequently heard people say, like sausage-making; there is nothing worse than being at the sausage factory. As you know, we are supporters of Waxman-Markey, and let me explain to you why.

The plusses on allocation and bonus allocations and offsets at 2 billion tons per year really seemed greatly beneficial to our customers as we looked at it. An allocation of about 110 million tons per year at $20 a ton saves our customers $2.2 billion a year. The bonus allocations, which you can earn $90 a ton of credit, is worth as much as $3.6 billion for the other shortfall that we might have.

Offsets today at less than $10 are being gathered for early action activity. And equally important, Waxman-Markey has what we think is a very appropriate international requirement that other countries join us in this global challenge. So when we looked at the activities in Waxman-Markey, we felt that it was surely to the plus side for the benefit of our customers and to address the global environmental challenge.

Not to say that there weren't things that we need to see fixed as we get to the Senate. The allocation of roughly 90% of the utility space isn't up to the par; it ought to be 100%. The timelines for the implementation of the reductions of the cap don't actually match the timelines of technology being available in the marketplace. I know you know that we are pushing that timeline on the technology with the activities that we are undertaking at our Mountaineer Station in West Virginia.

The allocation rampdown from 2025 to 2030 in a five-year cycle is far too short. It would surely be to the benefit of our economies, our customers, our shareholders and the country in general if they stretched out the free allocations to utilities over a 10- or 15-year cycle, which would very much marry up to the technology deployment that again we are pushing the envelope on.

No credits for early actions is absolutely deplorable. When you think of all the years when we've been asked to do things, to say that you can't take those into the calculation of credits already earned is simply unfair. In fact, I remember some years ago having done a swell stand on the portico of the White House with then Vice President Gore, pledging to do early action-things, and then Vice President Gore saying those would always be valuable. I hope that now the advocate Gore changes his mind.

And of course, we think that the transmission concept that was built into Waxman-Markey is equally ill thought through. Effective backup authority in the Western states and illogical backup authority in the Eastern states is just about as silly as it can get. That will get fixed in the Senate.

On the Senate side, we are encouraged by the Energy Bill that Senator Bingaman has been working on. We think the way he treats transmission, particularly inside of a renewable energy standard, is an appropriate way to go about doing it. We believe that the Energy Bill may stand on its own. It will be interesting to see if the Senate can pull together enough votes to do a total global warming, as well as a Senate Energy Bill.

I worry a great deal about the Senate and the White House's comments about the problems of border tariffs starting some kind of a challenge. If we don't address this in a global sense, companies like ours and others ought to stand strong for let's wait until the world is ready, because we can't do it alone.

Now, let me turn this over to Holly for more details on our Company and our first-quarter and first-half earnings. Holly?

Thank you, Mike. The recap of our quarterly performance comparison on page 4, our ongoing earnings for the quarter improved by $41 million when compared with the second quarter last year. Earnings from utility operations were up $62 million on the quarter. Weather had a favorable impact of $0.02 on the quarter, while retail sales increased $226 million of gross margin, primarily due to increased rate release of $215 million and reduced off-system sales sharing margins of $62 million. These increases were somewhat offset by lower industrial sales of $56 million, since industrial load was down 20% quarter-over-quarter.

Our East Regulated Utilities gross margin improved by $43 million, primarily due to rate relief in Virginia and Indiana, as well as lower off-system sales sharing. Load at our East Utilities was down 11% quarter-on-quarter. Our Ohio companies realized gross margin improvement of $130 million on the quarter. This is principally the result of the electric security plan that Mike discussed with you. Ohio retail load declined 14% on the quarter.

Turning to our West Regulated Utilities, gross margins were up by $48 million, driven by rate relief in Oklahoma and our formula rate adjustment in Louisiana, as well as residential and commercial load growth in Oklahoma. Total retail sales in the West declined by only 2% on the quarter.

Margins at our Texas Wires business improved by $5 million, and load declined by 5%. Our off-system sales were down $155 million on the quarter due to lower physical sales volumes and market prices. This is a consequence of both weak market demand and low natural gas prices.

Our marketing and trading activities contributed $52 million on the quarter. This is an increase of $25 million year-on-year. Third-party transmission revenue improved in both SPP and ERCOT for a total of $8 million on the quarter.

Other operating revenues are up $42 million, primarily due to the accidental outage insurance payments associated with the outage at D.C. Cook. As a reminder, approximately 40% of these insurance payments are credited back to customers in our East Utilities to help offset fuel costs.

Turning to O&M, as you will note, it is down $35 million, due mainly to lower plant maintenance outages expenses. We have reduced the amount of contract labor being used for these expenses, as well as throughout the Company.

Depreciation and amortization is up $23 million due to increased plant investment, as we continue capital spending and we are increasing depreciation rates at Ohio Power.

Other income and deductions are down $25 million, primarily due to lower carrying costs in Virginia and lower interest income. The effective tax rate for utility operations was 31.6% in the second quarter of '09 when compared to 30.2% in the second quarter of '08.

Turning to nonutility operations, the single largest change is the decrease in earnings from our generation and marketing segment of $22 million. This decrease is due to lower long-term contract gains in the second quarter of '09, as well as lower ERCOT West power prices.

Finally, as you will recall, we completed our equity offering on April 7 of this year. Therefore, our weighted average shares outstanding increased to 472 million shares on the quarter from a level of 402 million shares in the same quarter in 2008.

Turning now to the year-to-date performance comparison at page 5, ongoing earnings year-to-date were $681 million, which is $9 million less than the prior year. Retail sales increased $286 million, primarily due to increased rate relief of $325 million and reduced off-system sales margin sharing of $116 million. Additionally, weather added another $0.01 to the year, $0.02 when compared with normal.

These increases were offset somewhat by lower industrial sales of $89 million, as industrial load was down 17% year-on-year. We also had a favorable variance in the prior year due to coal contract amendments of $29 million.

Turning to the detail, gross margin at our East Regulated Utilities improved $139 million, primarily due to rate relief in Virginia and Indiana, as well as lower off-system sales sharing. Load at our East Utilities is down 8% year on year. Gross margin in Ohio improved $73 million year-on-year due to our electric security plan, offset by retail load loss of 10%.

West Regulated Utilities' gross margins improved by $64 million, driven by rate relief in Oklahoma and a formula rate adjustment in Louisiana, as well as residential and commercial load growth in Oklahoma. Retail sales in the West are down 5% year-on-year.

Texas Wires business improved their margins by $10 million year-on-year. Load has declined by 3%. Off-system sales were down $291 million due to lower volumes and market prices, reflecting weak market demand and a significant drop in power prices. Marketing and trading margins improved by $35 million year-on-year, and the detail of off-system sales' gross margins can be found at page 15 of the materials provided.

Our other operating revenues are up $104 million year-on-year, primarily due to the D.C. Cook accidental outage insurance payments. Of this amount, approximately $40 million has been credited back to Indiana-Michigan customers to offset increased fuel costs resulting from the loss of the Cook plant.

O&M is up $21 million year-on-year, primarily due to storm restoration costs incurred in the first quarter of 2009. Depreciation and amortization is up $41 million year-on-year due to increased plant investment as we continue our capital spending, and we have also increased depreciation rates at Ohio Power.

Interest expense is up $21 million due to increased long-term debt outstanding and increased interest rates. Other income and deductions are down $35 million, primarily related to lower carrying costs and lower interest income. And our effective tax rate for the utility operations remained at 32.3% in both periods.

Outside of utility operations, again, the largest change is the loss of Parent & Other. This is primarily due to increased interest expense at the parent. Similar to the quarter, year-to-date, our weighted average shares outstanding have changed. Year-to-date, it is 440 million shares for 2009, which compares to a level of 401 million shares for the same period of 2008.

Turning now to cash flow, cash flow from operating activities for 2009 has totaled $867 million, a decrease of $344 million when compared with last year. This variance is largely driven by changes in working capital attributable to increased coal inventories. Without the build in inventory, cash flow from operations would have been approximately equal to results in 2008, despite an approximate 5% decrease in total revenue.

Investing activities are highlighted by cash outlay driven by our capital expenditure program in the amount of $1.55 billion year to date.

Asset sales in 2009 are primarily related to payments from co-owners of the Turk Plant, which is under construction, as Mike mentioned. We also transferred assets from our Texas Wires business to our Texas transmission partnership, ETT, in the amount of $91 million, and affected a sale leaseback transaction for certain barge and boat assets at our AEP River operations.

Other investing includes amounts related to a nuclear fuel purchase for the D.C. Cook Plant of $152 million. Our financing activities provided net cash of $568 million. And the proceeds from the equity issuance of $1.688 billion were used primarily to pay down short-term debt of $1.4 billion.

In 2009, we've issued approximately $1 billion in long-term debt offerings at I&M, Appalachian Power earlier this year. Approximately $372 million of long-term debt has been retired, resulting in a net increase of approximately $700 million in long-term debt. As you will note, we ended the second quarter with a cash balance of $358 million.

Finally, turning to the balance sheet at page 7, we continue to maintain strong capitalization and liquidity. I will draw your attention to the total debt-to-capitalization ratio at the end of the second quarter of 2009, which stands now at 57.3%. You'll also note we have a tremendously strong liquidity position back at $3 billion -- at $2.9 billion. With that, Mike, I'd like to turn it back to you.

Holly, thanks. I always worry when I say I'm going to pass it on to Holly for more detail, but Lord, Lord, Lord did she load you up. Excellent job. Excellent job.

I'll tell you one thing. It demonstrates, at least from our vantage point, and I hope from yours, the value of having the footprint that American Electric Power has with rate cases and sales decreases different from the East and the West, off-system sales activities. And our energy marketing more successful out West than in the east right now, it just shows the benefit of having that portfolio of states to serve. As difficult as they are to manage, we continue, I think, to do a pretty doggone good job.

With that, we will move to the Q&A.

(Operator Instructions) Michael Lapides, Goldman Sachs.

Question for you. Can you give a quick review of the various large-scale transmission ventures or projects, and briefly where they are in terms of the process for approval and when you think kind of the most likely timeline would be?

Sure, Michael. Let me try to do that for you. As you know, the one that we've probably been -- the two that we've been most long after are the buildout of the activities in Texas, with our partnership in electric transmission in Texas. Moving along relatively well. Final applications in front of the PUCT. Build dates, as I remember them, of 2010, 2011, 2013. That will begin to bring additional revenue opportunities into that partnership.

It all -- as Holly pointed out, we've also transferred a number of assets into that partnership, and although they are at a [9.96] return on equity, they are in fact yielding revenues on the transmission side of the equation.

The PATH Project, which is greatly needed to decongest, if you will, some of the activities in the PJM, when you look at the capacity market prices on the congested side versus the non-congested side, you could see why East Coast customers would be eager to have that happen. It is moving along relatively rapidly in front of state regulators. As you know, they have received their FERC approvals. We think that line will be up and running by 2013, 2014, as I remember the dates.

In the Middle West, the project in Indiana with Duke as a partner continues to move forward. That is probably a 2013 play. Further west, the activities in Kansas, where we and the ITC came together with a settlement, which was approved just this week by the Kansas Corporation Commission, should allow for those projects to move forward more rapidly. There, we are simply waiting for an SPP final cost allocation. So that will include projects that will be built in Kansas and stretch into Oklahoma.

As you know, we also have projects in a partnership with Oklahoma Gas & Electric, which is moving along relatively rapidly in the review process, again, SPP project.

So as we've said before, these are near-term, mid-term and ultimately long-term plays. I would argue the wind projects of Dakota into the Central Midwest probably into greater Chicagoland, and from there, into the AEP grid probably are middle next decade because of the magnitude of the undertakings.

So we will begin to see -- we are beginning to see some constructive activity in the transmission subsidiary now. We will continue to see it grow over the near-term years and truly have a total impact on the Company. I think in our review with the Board for a three- or four-year cycle, which we did earlier this week, we are looking at the potential as much as a dollar a share of earnings from the transmission subsidiary alone.

So we feel very comfortable about it. Takes longer than you wish. Clearly needed. Ultimately, the FERC cost allocation and the kinds of things that Bingaman addressed in the bill that I spoke about earlier are the things that will be needed to have a robust buildout of the transmission grid throughout the United States to the benefit of everyone.

Got it. One follow-up one on PATH, and thank you for that overview. Can you give an update on whether there are any significant legal or litigation challenges to PATH?

At the end of the day, there will only be, please don't put this in my backyard, which are not uncommon. But I don't think you're going to find any significant legal challenges that will delay any of that activity. Once you receive final authority from the FERC, which we have, and ultimate authority from the states and the alignments, then you move into an eminent domain world where the argument really gets down to what's my property worth, and there are long-standing methods to take care of that.

But we are routing around the kinds of things that would cause some long-term delay. The day of getting your straightedge out and laying a transmission line out are long gone. We know how to avoid historic sites, environmentally sensitive areas, public areas where people don't want us to be. We learned a lot of lessons over a lot of years, but we are much better at routing transmission lines.

If you could see the Wyoming's Ferry Jackson line, we flew in the towers. They are point-set towers rather than four square set foot towers. We cleared very, very little right-of-way, built through the forests of Virginia and West Virginia, and environmentally accepted. Price is we end up being great places for birds and others to live and eat. So we are sensitive to those things. I don't think you are going to see any major litigation stopping those undertakings.

Got it. Thank you.

Brian Chin, Citi Investment.

I noticed that in the last slide presentation you had, you had a little bit more of an overview on the Ohio ESP. And given the rehearing, can you give us a little bit more up-to-date stance on what some of the numbers look like on the rehearing, or is it a little too early to say?

Not at all. I think -- and I'll ask Holly to augment this, but pretty straightforward. It is what we thought it was going to be. The shift of the Ormet recoveries from current cash to deferral is an issue, but it's an issue that will simply be done by the accounting process.

The $51 million reduction of the costs associated with Waterford and Darby is, we think, as I mentioned, ill thought through. Those are very, very cost-effective power plants that we wanted to put to the advantage of the Ohio customers. But you can't have the plants without the cost. That just isn't fair. It isn't right. And we'll address that issue.

Short of that, everything else they had in there, I thought they did an excellent job. The way that they treated riders outside of the cap calculation; the way that they treated environmental investments outside of the cap calculations; the opportunity to file a distribution rate case gives us the opportunity to address those costs. The transmission riders costs outside of the rate cap, absolutely as we expected it to be.

All in all, it was a tremendous rehearing order, but for the one mistake that we think that they made. And I understand their viewpoint; just don't agree with it. Holly?

On the off-system sales, is that an issue that we are still working through on the rehearing, or is that, you think, resolved to your satisfaction?

Well, they didn't change anything. What they said was two things. One that we think is appropriate is as we go through the significant excess earnings, or SEET test, they will review the notion of treating AEP, the two operating subsidiaries, as a single entity. We think that's good.

And we'll address the issue of whether off-system sales ought to or ought not be included in cap calculations, which of course we don't agree with. But to add that to the workshop dialogue is not an issue whatsoever. It's just, again, an open conversation that helps the Commission and their staff again establish why they eliminated the concept of including that before. And one great thing about American society, and here in the heartland we believe in wholeheartedly, is open dialogue on those kinds of issues is healthy.

Understood.

[Anthony Cordell], Jefferies.

Mike, I just wonder if you could provide an update of the Cook County -- Cook nuclear plant outage.

Cook County is over in Chicago.

Yeah, geography's not my strong point.

No problem at all. I know how busy you folks are these past couple of days.

As you know, unit one is in now the turbine reconstruction process. We were all out there earlier this week and it is moving along apace. We expect that will be buttoned up toward the latter half of October, which is in keeping with our original plans.

So that will come back online, and should -- it will be, as you know, I think we've talked about -- I know we've talked about this before -- it will be derated by about 110 to 120 megawatts, as we've concluded that putting in that last couple of rows of blades would not be in our best interest. The actual replacement rollers are being manufactured. The plan is to put them in in a 2011 refueling outage. That should work in accordance with our plans as we go.

We continue to work, again, hand in hand with our insurance carriers and our contractors. And having seen the work and the detail, the safety and nuclear controls as well. Remember the fuel is still in unit one, and it is still cooking away, so I think our team is doing an excellent job of managing those issues.

The unit two outage, of course, is of concern. We have a recirculating pump seal leak. We've taken the plant off-line, as you know. That project moved ahead of the schedule that we had had it on. However, the conclusion of our team, in a very conservative and appropriate safety nuclear view of the world, has decided now to look at a couple of the other seals on the other recirculating pumps associated with unit two. That unit will be back online in the very near future, clearly some time next week.

And we feel comfortable about that. The most important thing -- and I think you all know this -- but with the operation of a nuclear fleet, it is always about nuclear safety, never about the megawatts, never about megawatts on the system. So our team is doing an excellent job out there, and we are very comfortable with the way that's working out.

Thank you.

Leslie Rich, Columbia Management.

I wondered, Holly, if you would indulge me and go through, a little more slowly this time, the financial implications at the D.C. Cook outage and insurance reimbursement, and what impact that has on earnings versus being flowing through directly to customers.

Sure, Leslie. I would be happy to. I'll hit it at a high level. Year-to-date, it is approximately $100 million of insurance proceeds. As you know, we receive $3.5 million each week that the planet is out of service. Of that amount, approximately 40% is credited back through the fuel clause adjustment mechanisms to the customers of Indiana Michigan Power, leaving a net in the range of $60 million that flows through to earnings.

And separately, Mike, on the Turk Plant, what happens if -- I mean is a possible outcome that Arkansas says forget it? Or is it just a matter of sort of working through a different way to review the recovery mechanism?

Leslie, that is an excellent question. At the end of the day, let's presume that the Supreme Court says no, we think the Court of Appeals got it right. Then we will simply refile the project as a transmission and power plant to the benefit of the demand requirements at the cost advantage that the plant has.

The Commission would review it. I presume the Commission has already concluded that we need the plant and this is the appropriate plant, that we need the transmission, and that the appropriate alignment might well come to the same conclusion. By the time they got done doing all that, of course, the plant would be built and ready to go in service.

The alternative for that is that they say you've simply got it wrong and we think you approved it wrong and you shouldn't have done it. It's an 88 megawatts slice out of a 600 plus megawatt plant, which we could take to market if need be, or we could assign to other companies if need be. So I think there are, as we've shared with all of you, a number of options and alternatives that we might be able to pursue.

Okay, and finally on coal you talked about, Holly, you mentioned contract amendment. Could you talk a little bit more about what you are seeing? I'm sure your stockpiles are high as evidenced by your working capital impact. But sort of as you look forward for your coal contracting for 2010 and 'll, do you continued fuel escalation as an issue, or you think prices have sort of moderated?

Clearly, the coal piles are a bit bigger than I like them. We are at 50 plus days on average. We would rather be 30 plus days on average. I feel a lot better than some of my colleagues who according to EIA at 70 plus days. But we are working them down, one of the things that we jokingly said the other day as we looked at Cook 2 being off-line. At least we're burning some coal.

But the fact of the matter is they are too big. And 2010, we are contracted for and in great shape. Prices are coming down. We think that the coal suppliers, no offense to my good friends, are a little bit bullish on their view of 2011. So we will wait and watch.

As you know, we buy our coal through a series of long-term, short-term, midterm contracts. We are in great shape for 2011, just not in need for paying any of the prices that we think are a handful of dollars per ton too high.

Thank you.

Paul Patterson, Glenrock.

Most of my questions have been answered, but just on weather, I wasn't sure what it was versus normal.

It is very, very slightly favorable, a penny for the quarter, $9 million total versus normal.

Booming out west and pretty bad here in the East.

Okay, great. Thanks a lot.

Greg Gordon, Morgan Stanley.

Can you tell us what you are seeing vis-a-vis demand here in the third quarter, and whether we are seeing further decline in economic demand in your service territories, and whether or not we can expect, hopefully, some positive year-over-year comps in the fourth quarter, since the fourth quarter was so bad last year?

Basically when do you guys project/hope you will start to see a little bit of a stabilization or a recovery in sales?

We love Cash for Clunkers, Greg. A couple of things that matter here. We -- third quarter is just coming in. It is not worth sharing a great deal of data. But we are in fact seeing some of our smaller metal melters go back into business. We are encouraged by that. If the export market picks up -- remember, ours didn't tail off until, as you point out, fourth quarter of '08. And if you look at GDP numbers now for '08, they are falling like a rock in the third and fourth quarter.

So if China's economy and their simulation -- or their stimulus package continues to benefit, we think some of the exporters will pick up some. And we are seeing some of that.

So we look at third quarter. We'll watch it closely. There is no secret that it has been pleasantly cool, in the East anyway, in July. We hope August brings us some blistering weather for all of our customers who love the comfort that we provide them.

And look, if you look at the papers today, as I'm sure you already have, lots of companies are talking about upticks in their business profiles for late third throughout fourth quarter. They can't do that without us, so we hope that they are accurate in what they are forecasting.

To the really granularity that Holly shared with you on the operating companies and the outputs, our residential and commercial sales have been just fine, absolutely fine. It's just industrial, and obviously, the off-system impact that is also associated with industrial, and some pretty cool weather throughout the Eastern half of the United States.

Thank you.

Jeff Coviello, Duquesne Capital.

I had a follow-up on your point on coal. I was just wondering on the 2011 kind of coal expectation the producers have, ballpark where they are. And obviously you think it is a little too high, but I'm not exactly sure what they are asking for at the moment.

I think they are thinking mid-60s, give or take, and we are thinking mid-50s, give or take.

Got it. That's very helpful. Thank you very much.

David Frank, Catapult.

It's actually [Steve Fleishman]. Just a question. I think Brian brought up the question on the off-system sales and the significant excess earnings test. Could you give us some color on how you expect this workshop to work later this year. Like when is it going to start, how are they going to do this, and just how can you get comfortable that it will come out with outcomes that are okay for you?

Again, it will -- I do not know. I know there is a forecasted start date, and we can get that to you afterwards. It is sometime, as I remember, in the August timeframe -- kind of late August after all the vacation cycles. I think it will be a dialogue. There will be people arguing for this, that and the other. We will be doing the same.

One of the things about the PUCO that they do and do very well is they allow for a fulsome discussion and a rational conclusion. And so I don't expect that there will be any curve balls coming out.

They've addressed the issue of off-system sales on many, many occasions here in the state, with the ESPs and the rate stabilization plans before that. It's a pretty clear conclusion from their point, and I can't imagine they changed that much. We'll talk about it and see.

The notion of treating the two utilities as one is very logical when you think about it, because that is the way we dispatch them. That is the way we really treat the customers at the end of the day, even though they have different rate schedules and different rate treatments.

Do you anticipate that they will do this with all the utilities together, or do you think they will do this kind of one by one? Because some of the tests have been set up differently (multiple speakers). For example, Duke agreed to include off-system sales in their settlement.

Because they have none.

Okay. But that's why I'm wondering, though (multiple speakers).

I understand the workshop to be a general conversation, and then you may peel off and come to some conclusion company by company. But the intent is that the workshop would be all-inclusive to begin with.

Okay. And it won't be implemented -- when would the first one be done? It would be for the 2009 year?

I think [Alan] has said all along that he thought that review would be -- you've got to wait until the '09 statistics are all in. Then the review would be sometime during the 2010 first half of the year, and the conclusion of it would come to play sometime in the latter half of 2010.

Okay. Thank you.

Kit Konolige, Soleil.

Question on the O&M. I have a note that -- I think it was Holly -- and again, congratulations on amount of data per minute. Which is good -- you get things done.

Absolutely.

I think you talked about O&M being -- I believe it is down for the second quarter on reduced plant maintenance. And I wondered if you could give us some idea of whether that is a quarter-to-quarter thing, something you can do indefinitely. And if you can spend less maintaining the plants, how come you've been spending more?

Let me try to address those issues. With the falloff in demand throughout the PJM, what we've done, of course, is remove some of our subcritical plants. And because of that, we are not pursuing maintenance that would normally go on at those stations.

So to your question about sustainability of that in the longer term, I would hope not. Because even when we spend the O&M, when those plants are called for for off-system demand, the shareholder benefit is quite obvious.

To the latter part of your question, why do we spend money maintaining plants, that is like I hope on occasion you take your car in to have somebody look at it so it keeps working.

No, I agree with that. I was really trying to get at how -- what is the level of sustainability? Is there a -- is this just a blip, and it will go back to a trendline, and that will --

Really the larger O&M question, Kit, is how are you managing the fullness of the American Electric Power operating and maintenance expense buckets, which tally up about $3.5 billion. Our plan for 2009 was to stay at our incurred expenses in 2008. And as I mentioned, we are a bit ahead of that plan and I am proud about that. It doesn't have a fancy name like AEP 2020 or some such name, but it's an effective cost management by a very detailed and very conservative organization.

Our plan for 2010 will unfold as it unfolds. I don't see any massive stepups in O&M as we look at 2010. We will continue to manage the cost structure. Again, the magnitude of the O&M spend at American Electric Power is dynamic and dramatic, but it is required to make certain that the totality of the system is up and running for the reliability numbers that our customers expect.

No question. Makes sense. Okay, thank you.

Daniel Eggers, Credit Suisse.

Good morning. Mike, just to clarify, you said upwards of a dollar of earnings from transmission. Did you give a timeframe when you thought that could happen?

Before the end of time. It is so hard to forecast when we will get the final authority to build the facilities. But those are projects that we really have in hand, and the partnerships are put together and applications are approved at the FERC and other activities are moving forward. So mid, late next decade, I think you will see that at its final number. But surely along the way, you will see some of those pieces drift into earnings.

You know, kind of given their cutback on CapEx to the more $1.8 billion level, when do you start to see CapEx going into transmission from here, and when should we start to see earnings contribution come directly from some of these bigger projects?

Well, remember, our intent on the $1.8 billion is the CapEx and the traditional utility footprint, not the transmission activities nor the transmission projects, which, as you know, we do many through partnerships and intend to do as stand-alone finance projects. So it isn't in the same category as the $1.8 billion.

You will begin to see -- you are already seeing some in 2009. You will see more in 2010, particularly the assets that Holly mentioned being transferred over to ETT in Texas. Those are transmission assets that are moving energy today, receiving adequate compensation for the energy that they are moving, and that will continue to grow. The schedule for the Texas buildout of the [CREST] activities is aggressive, and those will be some of the first adds to the transmission. And those will probably -- you will begin to see those in the 2011/2012 timeline.

Remember, Dan, our capital commitment is simply our equity contribution, and we will account for this on an equity accounting basis.

So if you've got a $1 billion project, you are only going to show CapEx to your budget of effectively half of that or less?

Yes.

Actually, just the equity portion of that, Dan, so probably more like a quarter of it, if it is a 50-50 joint venture capitalized at 50%.

Okay. And then I guess just one more on the ESP decision on the $51 million decision on costs. When do you think you could have resolution, either through Ohio, through some sort of remediation, or moving to a utility jurisdiction? And should we be backing that $51 million out of plan for the full year on an annualized basis or just on a run rate basis from here forward?

Well, I'll let Holly answer the latter part of that. The first part of that, we will petition the Commission for some reconsideration probably next week.

Mike, do you know the process for trying to get that resolved?

No, I don't. I mean, first off, they will look at it and say, I don't know, this sounds reasonable. They can do something in a hurry. They may decide to have a bit of a rehearing, people to file papers on it. That will be up to them.

As for the second half of your question, the tariffs we are filing will produce within -- lower revenues in the amount of the $51 million for the year of '09. So I would say that you should adjust it on an annual basis.

Does that mean in the third quarter, Holly, we are going to see some sort of stepup in costs to true up for the first half of the year?

I believe it will feather in, not just in the quarter, but through the balance of the year, Dan.

So evenly level, okay. So then we should assume -- and that it still gives you guys comfort within your guidance range, even with that six or seven cents gone (multiple speakers).

Absolutely.

Okay. Thank you.

(Operator Instructions) Paul Ridzon, KeyBank.

Congratulations on a solid quarter in a difficult environment.

Thanks, Paul. I'm glad you understand that.

With the Cook plant, when you have the 11 replacement, could there be an uprate there, with the new turbine technology?

It's interesting. We are looking at a longer-term, pretty significant upgrade at Cook Station, but it wouldn't be just by putting that in. We may get some efficiencies out of the 11 replacement, that's for sure. And we are angling toward that.

But we, as I know you know, continue to look at the most cost-effective way to add additional megawatts. We are not a 15,000 -- or 1500 megawatt player, but we surely have a chance to be somewhere in the 400 to 500 megawatt additional range out at Cook Station.

Just back to PUCO, what was the logic of the disallowing the plants, and kind of what could the alternatives be? Could you elaborate more?

Well, it is a brief explanation by the Commission. They thought that we hadn't explained that the $51 million were needed in a revenue shortfall activity, kind of cost of service view. But I think it's pretty clear if you look at generation in the state of Ohio, it is not supposed to be a cost of service view. So we think there is a little crossover in the thought process there.

And the whole notion of taking two really cost-effective power plants to the benefit of the Ohio customers we thought was to everyone's advantage. But you've got to pay the cost. You can't have the plants without paying the cost. That's just silly. So that is our point.

And it may carry the day, it may not carry. If it doesn't carry the day, then we will ask them to say, fine, if you don't pay for them, then you've got to let us use them. I mean, you can't take them. If they take them without paying for them, then we'll have to go to court here in Ohio, which we will do promptly. It just isn't right.

They denied not O&M, but actual capital costs to cover it?

It is the cost of -- capital cost of operating, as well some subset of it; it is a combination.

And just from an economic standpoint, do you think we've hit the bottom? Do you think we've started up? Or are we still moving down in your view, from the numbers you see in sales?

I'm the last guy in the world you ought to ask that, because I'm an optimist. We see enough activity around -- you saw the housing market tick up a little bit. You saw the unemployment numbers not go up as much as people thought. I'm not kidding you, I sat with a couple of our big metal melders, and Chrysler had an empty showroom across the entire United States. GM coming back online. The metal welders and the car suppliers are ticking away. Delphi just got rid of their entire pension obligation. I don't know who in the heck picked it up. They say the federal government, but they are broke.

We are seeing some signs that tell us things might be getting a little better. Even housing here in Central Ohio, which has been a good driver for us for a long time. And you look at that footprint out west, you know, Texas is still cranking out. You know, you think the shale oil and drill rigs -- shale gas, I mean, and drill rig tickup, that it's all about our Texas load. That is all about our Oklahoma load.

So again, I'm an optimist, so don't go make any bets on that, but I sure hope I'm right.

And Holly, could you review off-system sales (inaudible) and impact (inaudible) sharing?

Sure. I would describe it broadly this way. Our off-system sales are down year on year by approximately 60% in terms of gigawatt hour sales. The total year-to-date of $183 million, $54 million is due to physical sales volumes. $36 million is the Oakley Union payment from our generation and marketing segment back to our Texas companies. And marketing trading has contributed $93 million.

Of the $183 million, approximately half of it is shared back to our East Integrated Utility operating companies. The other half, approximately, is retained by our Ohio operating companies. The detail that I referenced is on page 15 of the handout.

And then Mike, you said you are extremely comfortable, I think was the phrase, with guidance.

Yes, sir, that was the phrase.

Would you care to tip on which side of that centerpoint you are extremely comfortable with?

People will shoot me if I do, but you just heard me talk about being optimistic.

Enough said. Thank you.

Michael Lapides, Goldman Sachs.

One quick follow-up. Mike, you talked a little bit about carbon legislation. Can you talk about your outlook or how you think regulation or even legislation kind of comes down the pike for SOx, NOx and mercury?

Well, I know you know that Administrator Jackson is looking at the -- particularly the Mercury and the NOx piece. I think we will continue to see regulatory changes. As you know, we have proactively and cost-effectively retrofitted all of our large units, completing that schedule even as we speak.

We are able, under that, not only to meet the SOx/NOx requirements, as well as meeting potential future mercury requirements. So we are not overly concerned about any of that. It may lead to activities at some of the very small subcritical units that we have continually looked at for potential retirement dates. It may force some of that earlier than you would expect. But that is not a major impact to us as we go forward.

Having a chance to meet with the Administrator a week ago, she is a very balanced person, and she is trying to implement laws that are already in place in that balanced way.

Clearly, a couple of issues that are there that we are deeply involved with. We think the current activity for 316(b) is appropriate and doesn't need to be changed. We also feel very strongly that although we are more than happy to have additional federal inspection of our ash ponds, that it ought not be considered a hazardous waste. That simply adds a tremendous amount of cost for very little, if any, benefit. So we will continue to participate in those activities with the EPA.

But I am pretty encouraged that she is doing her best to do things that make sense. We had a very constructive meeting with her on lots of issues. So we will continue to comply with all of the laws of the land, and should they change, we will react to them in a constructive way to the benefit of our customers and shareholders as quickly as we can, Michael.

Got it. Thank you.

[Ashar Kahan, Incremental Capital.]

Good morning. Just a question. If I look at the line off-system sales for six months, it is running at $173 million year-to-date. And then the forecast for the year, if I'm right, is something like $280 million. So aren't we running ahead of plan? I was just trying to get a sense of --.

Yes, a little bit. A couple of nice things in that first quarter. As you know, we were extremely successful in the FE auction. I doubt there is going to be another FE auction in the latter half of the year. So again, we are inside of the guidance range that we've given, and you are correct -- we've had a pretty productive first half of the year in a really rotten market.

So Barbara Radous and the commercial ops people deserve a great deal of credit. The energy trading group has been conservative but successful. Our Texas Energy Marketing Partners have equally been successful as they continue to rack up what we consider to be very cost-effective back-to-back contract sales.

Mike, (inaudible) analyze this number at least? Because by taking what has happened in the half year, and the FE contract really starts in June, right? So the majority of the contract is at the back end of the year. Am I correct?

It is never good to take six months and multiply it by two in the utility business. You can go ahead and do that at your peril. I wouldn't.

Okay. But you would agree that benefits of the FE contract are to show up in the later half of the year. Is that correct?

Some of them yes, some of them have already built into the system, because we are already in the process of satisfying those demands.

And some of it will show up through 2011 as the --.

As the contract goes.

Sure.

-- the contract rolls, yes.

Okay. I appreciate it.

It's 10 o'clock, and we greatly appreciate all of you being with us. I know you've got other calls to go to, and for better or worse, we've all got other things we have to do. Other questions, of course, Betty Jo and Julie and the team are here. We are always available to answer those questions.

We thank you very much for your time and your attention. And I guess Betty Jo, I will turn it back to you for -- or Chuck, if there is any other official things you all need to do.

No, just thank you for joining us today. And Brad, can you give the playback information?

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