美國電力 (AEP) 2009 Q4 法說會逐字稿

Welcome to the fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the call over to our host, Mr. Chuck Zebula. Please go ahead.

Thank you. Good morning and welcome to the 2009 fourth quarter earnings webcast of American Electric Power. Our earnings release and related financial information are available on our website, aep. com. The presentation slides are also available on our website.

Today we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of the factors that may cause results to differ from management's forecast.

Joining me this morning are Mike Morris, our Chairman, President, and Chief Executive Officer, and Brian Tierney, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Mike.

Thanks, Chuck, and welcome to everyone on our fourth quarter 2009 call and a bit of a forecast on 2010. I know that you've already had a chance to read our press release and you've also, of course, had a chance to look at the slide presentation that Brian and I will go through. Let me try to add some color to a few of the bullet points that are on the very first slide in the package.

It's clear from our vantage point anyway that 2009 was a very successful year, particularly when you think about the facilities that we looked at in the beginning of the year, with Cook off line and an uncertain economic downturn and the potential impact that that could have on us as we looked at a very long 12-month cycle. As things unfolded during the year, however, we did see over quarter-to-quarter ongoing activity, first dipping and then stabilizing, and in fact toward the latter part of the year, tipping up. And we were quite encouraged by that.

As you know, we've reported $2.97 a share, obviously in the upper end of -- the upper end of the program that we've put together last time we talked about moving our guidance in 2009 up from its original forecasted number. We were really pleased with that performance and I think the 2,148 people who work at American Electric Power Company did a great job in that regard.

More importantly, looking at what we were faced coming out of 2008 and into 2009 with the incredible capital expenditures we had made over the last handful of years to see to it that we had adequate additions to our plants to continue to provide cost effective electricity for our customers. But we really stabilized the financial condition of the Company, raising on average about $1.8 billion worth of equity [$1.6 billion] in the equity issuance, of course, and almost $200 million by the drip as the year unfolded as well.

But equally important was we really steadied the overall financial ratings and we continue to see at least that particular approach from most of the rating agencies, and we hope to see an uptick in that regard early in 2010 so that we will be equally rated by all three of the principal agencies. Debt ratios in the low 50s, FFO's covering the investment grade ratings that we think are well deserved. I would argue that at least during my tenure and some of the longer term members of our executive council tell me during their terms as well that we're in the strongest financial shape coming out of 2009 than we've ever been.

The regulatory success continues. I know that Brian has talked to many of you about the diversification of our regulatory asset base. We have tried over a number of years to convince you that we understand the process and are relatively successful at it. But when we see some of the single jurisdiction utilities falling into unfortunate situations, it really does add comfort to know that we have a very diversified base from which to get regulatory relief. A total of $725 million in calendar year 2009 added substantially to the earnings strength of the Company. And I would argue continued to serve our customers well, as in most jurisdictions we continue to be if not the lowest, among the lowest cost providers of electric service to those customers.

As you know over the last handful of years, we continued to move forward with fuel recovery applications and approvals in jurisdictions. Coming out of 2009, particularly with the ESP that was approved here in Ohio, we are now active in each of our jurisdictions with year to year recovery of our fuel expenses. That really will go to the benefit of our customers, as it has to our shareholders over the last couple of years, as prices continue to escalate. Because as we look at 2010, we think there will be a 10% or so reduction in the cost of coal as we continue to use that as a principal source of generation for us.

I want to spend just a moment or two on the tracker line that we've got here. As you know, in the utility business, particularly as costs continued to increase and capital continues to be deployed, and refurbishment and upgrades and other activities go forward, it's important that you reduce regulatory lag. We have had that over the last two or three years as one of our goals. And in each of the seven principal operating organizations, we have implemented something north of 100 trackers, automatic adjusters for increases in fees being charged by RTOs, automatic increases for energy efficiency for demand side reductions, for green energy additions, some for vegetation management. All of those continue to reduce the regulatory lag impact that a more classic regulated utility like American Electric Power would feel, but for the implementation of these.

Typically what it does for a customer is that it smooths out the impact of rate activity as you go forward. One of the great benefits of that in a handful of jurisdictions, and you think of December of 2009 when we had a significant storm come through our eastern footprint, in many of our jurisdictions we had the ability to set those funds aside and collect them on a relatively current basis as we go. Again, something that we set out to do a handful of years ago, and we have been extremely successful in getting those things done. I think it works well for the regulator. We know that it works very well for the investor. We believe at at the end of the day, rather than spike the electric rates, it works well for our customers.

American Electric Power for its now 104 years of existence has been a technology leader in the utility business and I would argue in 2009, we continued to shine that reputation. The carbon capture and storage activities that we began a handful of years ago is a dedication to realizing to keep our coal fleet active we would have to take those steps, nothing short of phenomenal. The performance of our team at the Mountaineer station, the dedication of our partners from around the world and others who had witnessed the activity of the first integrated carbon capture and storage project at an electric power plant anywhere in the world were deeply, and I would argue duly impressed with the performance that we saw. We are capturing and storing, and as you know, we've been granted $338 million by the Department of Energy to continue moving forward with what we call taking that project to scale. We will continue to attract partners we would hope from around the world and we'll be pleased with the ultimate activity that continues to go forward there.

The next bullet is probably something that I'm as proud of anything that's ever happened in my career. As you know, in September of 2008 we had an absolutely unexpected, uncontrolled, and total mishap at our Cook unit 1, as turbine vibrations shook that plant to its basic foundation. There were many who thought that the unit 1 would never come back to service and we would be less of a nuclear player than we are today. The men and women at Cook didn't believe it, and the men and women who manage this company didn't believe it either.

And as we said, and as we promised, in calendar year 2009, although it took us until December, we brought unit 1 back to life. And today, we're finding that although we forecasted about a 70-megawatt D rate, based on not having the last two roads of blades in the repaired turbines, we're finding that it's only about a 30-megawatt D rate to the facility. And I think most of you know that our plans are doing (inaudible) in 2011, we will install brand-new rotors in all -- both of the turbine and both of the generators, high and low pressure so we feel comfortable about that.

Ultra supercritical technology deployed only at the Turk station in Arkansas; the Turk station construction continues at pace. The last week or two received a final approval from the Arkansas Department of Air Quality, reinstituting their affirmation -- their belief that the air permit issue should be reaffirmed and they did that and we're pleased with that. That's not to say that those who had not like to see the Turk plant go forward might appeal again, but we feel comfortable where we are. So all in all, when we look at 2009, we call it a very successful year based on the head winds that we faced.

For 2010, we would argue that a steady pace going forward will be the key word for American Electric Power. You know that our earnings guidance has been reaffirmed by the press release that was already issued, $2.80 to $3.20. We would hope that we are able to perform in the middle of that range and feel comfortable that we have every chance to do that.

I would argue that the team has done an excellent job in managing year-over-year O&M expenses at a company as diverse and as large and intricate as American Electric Power. It's difficult to manage an O&M account anything short of about $4 billion a year, but we feel comfortable that we have done a good job at scrubbing down every one of those dollars to ensure that they are in fact invested on behalf of our customers and obviously our shareholders. Rate cases, this year looks like a very small stack when compared to our history over the last handful of years. A total of about $320 million to be recovered over a series of jurisdictions, about $160 million of that already in hand by rates that were approved some years ago that we'll implement as well through 2010.

To say that we will have 100 years of dividends with the dividend that was approved by the Board of Directors yesterday at our strategic planning meeting is nothing short of phenomenal. We will be joining some of you, I would hope, in New York sometime in the early summer to have a chance to ring the bell, recognizing 400 quarters of successful dividends granted to our shareholders. When you look back at our 2009 performance, those shareholders saw a robust 9.4% return on their overall investment when you consider the share price escalation as well as the dividends granted in 2009. And if they are smart enough to continue to reinvest those dividends, that number ticks up into the double digits. And when you look at 2009 financial performance, that surely tells me that our retail base ought to be larger than it is, and I know that our Investor Relations organization is working diligently on that as well.

Issues galore from our friends in Washington, the climate change discussions continue. I think with a truly open eye, there's only way to characterize Copenhagen. It was a massive failure. That doesn't mean to say that the United States ought not go forward. As you know we are strong proponents of Waxman-Markey. We believe that it can and should be enhanced in the Senate.

Many would argue after the Massachusetts election that the opportunity for climate change legislation in 2010 is dead. It's difficult to perceive that it might not be, but last night, of course, the President put his shoulder back to the wheel. Senators Graham and Kerry and Lieberman continue to work diligently towards the potential of a program that would work to everyone's advantage and we will continue to be deeply involved in those activities.

For our customers and for our investors, what is critically important is that there's an allocation of credits, not unlike the occurrence that we all experienced during the Clean Air Act implementation. The notion of allocating or auctioning and then dividending back revenues to customers across the horizon has some political appeal to it, but it also has some political challenge associated with it. I can't imagine refunding to some of the billionaires along the way monies that were collected from the people of Appalachian Power.

I don't imagine that politically that ultimately has much of a chance for survival, but there are those who are championing that point. We would rather see the continuation of a cap and trade program that's predicated on the basis of the Edison Electric Institute formula. We think that's the way to go.

There are some clamoring of late for a utility-only undertaking. I can't of anything that would be any more illogical than that. The utility impact on the overall US carbon footprint is significant, but not dominant. And the utility impact on the world global warming impact is insignificant in any calculation. And saddling up all of our customers in the US economy with a utility-only bill has almost no positive effect on the climate, yet a negative effect on an ever-sensitive economy as we go forward.

There is energy policy afoot though, for renewable standards, for transmission standards. We think one could easily couple with that a deployment of the technology that we are doing at our Mountaineer station on a much wider basis, would be a great place for the United States to go. It would give President Obama a voice in the international dialogue that will continue and culminate with a meeting in Mexico in 2010, and would allow the United States to find its way back to the manufacturing base for the production of that technology and the hard equipment that goes with it.

When we talk about energy jobs, just think in terms of the full scale buildout of Mountaineer station. It would employ about 1000 men and women for over 48 months. Every one of those people making somewhere between $50,000 to $125,000 a year, depending on overtime hours and their skill sets going into it. Although there are jobs associated with green energy, there are many more high paying jobs for the base worker in the United States associated with retro fitting the coal fleet and we will continue to push for those issues as we go forward.

Our growth opportunities are kind of interesting. As you know, we continually believe and will continue to advocate for the transmission assets to be built out more robustly throughout the entire United States. Rationalizing the number of base load generation stations that need to be built going forward can be handled by a more robust transmission grid. Allowing the renewable standards that everyone is so eager to bring to the floor to truly get to market would also be enhanced by a more strong based federal transmission program.

You are well aware of our joint ventures. You're well aware of our intent to form the Transco. Some of them moving at pace, some of them moving slower than we would like. The trans co applications have been filed and interventions have been logged. It's probably ripe for a discussion and settlement, and we feel comfortable about the way that that's going as well.

Rate base opportunities, I've already spoken to the rate cases that will be filed. There are many other rate base opportunities. I would argue that American Electric Power, because of the diverse nature and the scale of the footprint, if Brian had more capital available, then the tolerance of our capital structure would be there. We could continue to invest capital, not only for the benefit of our customers, but our shareholders as well.

We look at 2010 with a bit of an upbeat tick. As I said, at the end of the fourth quarter, our industrial sales showed some strength. Brian will take you through a slide that very much points out the major impact in the industrial downtick, 2009 versus 2008, had everything to do with our metal melting customers. We're comfortable when we read about steel demand growing across the world. It's clear that the China steel manufacturing base isn't large enough to handle the demand that they need. As you know, many of our customers are principal exporters in the metal business in particular, and we think that that all bodes well for us.

We're comfortable with our guidance. We're happy about our success in '09, and Brian will give you much more detail on the performance that we had during that year. Brian?

Thank you, Mike, and good morning, everybody. What I'm going to do is take us through quarter-on-quarter and annual reconciliations. We'll look at some trends and key earning drivers for the quarter and the year, and we'll take a review of some of the key assumptions in our 2010 earnings guidance.

If you look at Page four, you'll notice that for the fourth quarter of 2009, the Company made $238 million versus the $237 million in the fourth quarter of 2008. I'll take you through the earnings per share reconciliations from '08 to '09. In '08, the Company made $0.59 a share. Impacting that positively for the fourth quarter of 2009 was rate relief, which accounted for $178 million or $0.28 a share.

That reflects a diversity of our jurisdictions, where those rate increases came from and is a tribute to the men and women who are working in our operating companies, enhancing those relationships and working with the regulators and the interveners to make sure that we're putting that capital to work and getting timely recovery of our O&M. Load contraction accounted for $70 million for the quarter, or $0.11 a share. As Mike said, that was mostly associated with the eastern industrials and principally some of the primary metals melters.

On the O&M side, 2009 was a difference of $73 million, or $0.12 a share versus the year prior. And you'll remember that we had those storms, principally in the Appalachian Power service territory that were a significant expense in the fourth quarter, in addition to some planned outages that we had. The share count effect resulted in a $0.09 difference for the quarter, reflecting 478 million shares outstanding versus 404 million in the fourth quarter of 2008. Other was $0.02 and that brings the reconciliation down to $0.50 per share for the $238 million for the fourth quarter of 2009. It's important to note, and we'll talk about this in a moment, that off system sales for the quarter was essentially flat to the prior year quarter, and that's the first time that off system sales have approached flat to positive. They have been significantly negative throughout the year as we went through and we think that trend was positive for the fourth quarter.

Let's turn to Slide five and go to the year-to-date reconciliations. It's important to note that for the year, the Company made $1.362 billion in 2009 versus $1.301 billion in 2008. Again, we'll go through some of the major reconciling items on an earnings per share basis. Year-to-date 2008 was actually $3.24 a share. Rate relief was positive to the year for $725 million, as Mike mentioned, or fully $1.17 per share, again, coming from the breadth of our operating companies. Load contraction was a result of $213 million difference, or $0.34 a share, again, primarily associated with the east industrial customers. And we'll talk more about that in detail a little bit later.

Off system sales net of sharing was negative $333 million, or $0.54 a share, and that reflected decreased demand and pricing in the wholesale electricity markets, also associated with the downturn in the economy. O&M for the year was $44 million difference, or $0.07 a share, and most of that was due to the storm damage that we've mentioned earlier. For the year, the share count effect was $0.42 a share, reflecting 459 shares outstanding versus 402 million shares outstanding for the year prior. That brings our year-to-date earnings, as Mike identified earlier in the call, to $2.97 per share. The fact that the Company vested its 2008 gross earnings level in a year with the economic price and weather head winds is a remarkable result.

We'll move to Page six and start looking at some of the key earnings drivers for the quarter, year and forecasted year. By looking at retail load as it's broken down by segment, if you look in the top left-hand part of Slide six, you'll see that residential load for the quarter was down 1.4%, bringing the year-to-date down 0.7% for the year. It's important to note that in the fourth quarter of 2008, our residential load was actually up 4.4%, so that negative 1.4% in the fourth quarter '09 was off a pretty strong base the year prior.

As we look forward to 2010, we're anticipating that residential load will rebound from its '09 level by about 1%. The top right-hand part of the column, we'll take a look -- of the slide, we'll take a look at the commercial loads, which were down only 0.5% versus the prior year in the fourth quarter of '09, bringing the year-to-date number down 0.8%. For 2010, we're looking for a recovery of 2.4% versus the '09 numbers.

The bottom left-hand part of the slide shows what happened to industrial load throughout the year, and that's really where we had our volume fall-offs versus the other segments of retail load. Industrial load for the fourth quarter was down 11.1% versus the year prior, bringing its year-to-date number to down 15.6%. It's important to note that we saw some slight improvement in the fourth quarter of 2009 versus the third quarter of 2009. It's in this load category that we expect to see our largest recovery because it's where we saw our largest fall-off for the year, anticipated to improve 5.3% versus 2009.

We bring it all together in the bottom right-hand part of the slide, where we show total retail loads for the fourth quarter down 4.6%, bringing the year-to-date number down to negative 6.2%. For 2010 and aggregate, we're anticipating that these loads will recover just a modest 1.6% as we go through the year. We think that our retail load forecasts aren't overly optimistic or overly pessimistic as we go into 2010, but really mark something that we believe shoots the mark right down the middle of the fairway.

If we move to Page seven, we'll take a look at industrial sales volumes. And what you're looking at on this slide is the five major industrial sectors that accounted for 59% of the industrial load in the fourth quarter. The top line in the graph, as Mike talked about, is primary metals and you'll see a significant decline between the third quarter of 2008 and the second quarter of 2009. That was primarily a result of two large primary metals companies in the east part of our system.

One of those is in temporary shutdown, and the other has curtailed load, and they are obviously looking for profit metals pricing to bring those loads and those factories back online. The remaining four large industrial sectors that are on the slide were not -- nearly as severely impacted by the recession, most ending the year on an uptick. As we talk to the folks that we have in the field, we've heard from a number of them that our retail industrial customers are having their order books fill up. One of them, a significant load for us, saying that their order book was full throughout the next two months. We're encouraged by some of those signs.

If you turn to Page eight, we'll take a look although east off system sales, which accounts for the preponderance of our off system sales, another key earnings driver for us. On the left-hand side of the slide, you'll see some fourth quarter comparisons that show that both the fourth quarter of 2008 and '09 were down significantly versus the prerecession 2007 levels. Those were reflective of the downturn in prices and demand for wholesale electricity during that period.

What I think many of you will be more interested in is on the right-hand side of Page eight, in terms of what do we think it means for 2010. You'll see that the full year 2009 volumes and prices were down significantly versus 2008, but as we look at forward prices, we think that there will be a -- we see in forward prices a modest uptick in prices being about a 17% increase. Given how our stack falls in the eastern interconnect, that modest increase in prices can result in a dramatic increase in volumes for AEP. And we are forecasting volumes to increase about 65%. AEP stack really is at an in flexion point in the mid-30s to 40s in terms of pricing and once we reach that infection point, so much more of our fleet becomes in the money. We're also modestly encouraged by what we see in the wholesale markets.

If you turn to Page nine, we'll look at some additional earnings drivers for 2010. On the left, Mike alluded to where we were in terms of O&M assumptions. It's important to note that for 2010, we're anticipating only a $23 million increase over 2009 O&M levels. That includes $80 million of increase in employees salaries and benefits, as well as some operational expenses due to some additional equipment that we brought online during the year 2009 and that will be fully reflected in our 2010 numbers. A net $23 million increase over $3.5 billion to $3.6 billion O&M budget shows that as a company, we're being very disciplined in terms of our O&M expenditures.

The last point that Mike referred to was the rate relief assumptions. Remembering that we had a $725 million increase in rates in 2009, we are only looking and only reflecting in our forecast for 2010 this $320 million net of increases net of trackers. $167 million or about 50% has been secured to date. And the amount that's been secured and the amount that we are still to bring in throughout the year, once again, are spread across the breadth of our system, reflecting that diversity of rate experience that we have so that we're not depending on just one rate case to bring in the remaining amount that's out there.

To summarize, we think our load trends are encouraging. We know that wholesale prices are improving and we look to take advantage of that in 2010. The Company is being disciplined about our capital and O&M spending, and our rate relief efforts are on track. As a company, we're prepared to take advantage of a recovering economy. With that, I'll turn it over to Chuck Zebula.

Thank you, Brian. This concludes our formal remarks and, Lola, we are ready to take questions.

(Operator Instructions). And first, we'll go to the line of Paul Patterson with Glenrock Associates. Please go ahead.

Good morning. Can you hear me?

Yes. Sure, Paul. Go ahead.

The tax rate seemed a little bit lower at the utilities for the fourth quarter. Could you elaborate a little bit on that and what your expectation for 2010 is?

Yes, Paul. This is Brian. I'll take that. Our lower tax rate in the fourth quarter of 2009 was reflective of a couple of things. One was bonus tax depreciation, as well as some federal and state income tax true-ups that we realized in the fourth quarter of the year. We're anticipating that our effective tax rate will be much closer to the statutory rate in 2010, and we've put a number in the guidance that's in the 32% to 34% range.

Okay. And then there seems to be some talk of a potential for a -- for legislation in Virginia. That seems to be associated with Appalachian Power. Could you give us an idea about what might be going on there and what your expectation is? Or what your feeling is in terms of what might be -- what might be happening there, I guess.

Yes, Paul. I think that there's an obvious pushback from the implementation of the rate filings that were made at Appalachia in Virginia. We are in dialogue with the legislature and will continue to do that. There is the potential for some kind of a resolution of this matter. I think, again, a legislation earmarked at a single utility when we're among the middle of the pack and costs of electricity in Virginia would be ill advised. But I'm certainly not going to run from the notion that there is potential for that. Our team has been in conversation, will continue to be in conversations with the principal committees inside of the Virginia legislature to see to it that we have an opportunity to understand the concern.

The Virginia restructuring law of a couple of years past allowed for certain things to go forward. It's clear that we've done nothing outside of the box in that sense. But having said that, I appreciate that there has been an ever-escalating impact on the costs of electricity for our financially challenged customers in the Appalachian region of Virginia that we serve, not unlike the rest of the country. To preach to you all would be a bit of an overkill, but everyone who wants green power, everyone who wants clean air, everyone who wants smart meters, everyone who wants everything needs to realize that the cost of basic electric service will continue to increase.

Obviously I would argue way below the value of the product, but nonetheless, I appreciate the pressure and we'll be constantly in the dialogues. Ultimately, the commission has the authority to hear the case on a time line that's predetermined. They will do that and implement whatever rate increases they find to be totally justified, and that will lead to refunds to the customers if that number is below the implemented rate increase that was taken in full compliance for the law toward the latter part of December in 2009.

Okay. Thanks a lot.

Sure.

Thank you. Next we'll go to the line of Daniel Eggers with Credit Suisse. Please go ahead.

Hey, good morning.

Good morning, Dan.

Mike, could you just talk a little bit more about the rate of expectation for economic recovery in your service territories? Your comments in the release in December showed a little uptick. The full-year numbers are not all that ambitious as far as recovery is concerned. Is it a flat recovery, or is it back end loaded from your perspective? And what do you think you would need to see to tick up and get more enthusiastic about recovery at this point?

Well, I think there are two things, as you know, Dan, that really, really drive the overall impact of economic activity at American Electric Power. If you look at 2009, the residential load was really only off 1%. Commercial load was only off 1%. And when you think about the number of people that went out of business, our commercial count actually went up year-over-year, 2009 versus 2008.

We stay relatively encouraged by where those two numbers are. And we would expect that as people hopefully -- pursue into the President's State of the Union last night, begin to be more comfortable that their job is either a bit more secure or that they may well be able to land a job in the not too distant future. We think residential sales will grow a little bit, as Brian suggested in his granular approach to the overall retail sales.

The two things that matter even more so, however, for economic recovery for us have to do with the industrials that Brian spoke to, but also the off system sales which have ticked up substantially, particularly with gas costs up. As you know, we had a double barrel hit in 2009 for off system sales, not only the economic downturn throughout the footprint that our power plants can reach economically, but with natural gas trending at $3.99 for the calendar year, a lot of our coal facilities that would most typically run at $0.028 per kilowatt hour for gas, some of them were on not needed, do not run. At $5.50 gas, which is what the 2010 strip looks like, we feel pretty good about that.

To the basic question of our retail load, we feel comfortable that we're in a reasonable zone. If we continue to see the economy pick up, to Brian's closing comment, we clearly are situated very, very well to take full advantage of that. And we just haven't seen anything beyond the order books that Brian spoke to about some of our large industrials. LMEs would have to go up for some of the other metals before the aluminum guys get back into serious production.

But you probably saw the reports that a couple of the Russian steel manufacturers and Indian steel manufacturers with facilities here in the country are forecasting uptick production. We're encouraged by that. Ford Motors report this morning of their activity quarter-to-quarter and for their forecasts for 2010 is encouraging, not that we are a big Ford supplier, but the raw materials that go into the car production are always inside our service territory one way, shape or form. We feel comfortable about our forecast, but it surely has upside potential. I would argue much more upside potential than downside.

And then, Mike, just thinking about the outlook for CapEx right now, you're holding pretty well to the lowered expectations you set last spring. What would cause the run rate to change from $2 billion maybe towards that $3.5 billion to $4 billion run rate we were seeing a couple of years ago? And how do you see yourself factoring in more capital as we look forward?

I think we've got a pretty good plan for 2010, and we'll stay with that discipline for this year. We think that that's exactly the right amount of money to put to work. And if we look at 2011, it's on pretty much the same plane, although it could step up.

And again, what we would have to see is the sales volumes and cash flows improve so that we could continue to strive toward a more balanced end of cash, free cash flow, if you will. Again, the plan that we have put together for 2010 shows us being positive cash flow for the first time in memory, and maybe for the first time ever. But nonetheless, we're tickled by that whole approach.

But the beauty of the AP system is that we can react in a very constructive way throughout, particularly in those jurisdictions that have trackers. As you know, we have, in the [transfer] formation and ETT in the partnerships, we have taken a great deal of capital requirements off of the more normal capital raising requirements of the parent. We just had a very, very solid financing opportunity in the debt markets for our transmission activities. And we're encouraged by the availability of capital, but there still requires a serious discipline on the balance sheet and we'll continue to keep a sharp eye on that. Low 50s is not where we ought to be as far as debt equity, but mid to higher 50s is still a comfortable place for us to be.

Okay. Thank you very much.

Yes. You bet.

Thank you. And next we'll go to the line of Leslie Rich with Columbia Management. Please go ahead.

Hi, Leslie.

Hi, Mike. I wondered if you could talk about transmission and the delay of path, and some of your longer-term expectations there. And then also if you could clarify one of your comments in the prepared remarks about some of the filings that you said were ripe for settlement. And I just wasn't sure which project you were referring to.

Yes. Sure. Transmission is clearly an achilles heel to everybody's plan for rationalizing the generation fleet for reducing the carbon footprint, and for enhancing the green jobs that are associated with sun and wind as we go forward. Eventually we'll get around to the kind of legislation, enabling out of Washington that will allow for all of that to happen.

As to our projects, the SPP projects are moving along nicely. The CREZ projects in Texas with ETT are moving along rapidly. The PJM project, in particular path, is moving along much more slowly than it ought to be. There are many people who just simply don't want the project to be built and they continue to intervene in any one of a number of jurisdictions, not with an eye toward, is this a good idea or a bad idea, just simply that they don't want to see it built. The PJM continues to follow their own equations. Their demand line has gone from 2012 to 2014, maybe even beyond that.

We continue to move forward with our planning, with our dialogue with folks along the rights of way, with our investments in the engineering design and rights of way acquisition, and many of the things that as you know, are already recoverable through the formulas. We're discouraged by the time line, but we surely are not discouraged by the need, nor are we discouraged that at the end of the day, these kinds of facilities will be built and that American Electric Power will continue to have an opportunity to make some of those significant investments that we've talked to you all about over a period of years. It's unfortunate that it's been a period of years. I started out with the hope that we could begin and finish a project inside of a four or five-year time line, compared to our 18-year time line for the Jackson's Ferry project. I still believe that we'll be inside of a reasonable period of time, but clearly longer than I would like.

On the filing settlement, it really had to do with the application that we made to create the trans co. Many people have intervened. Only a handful of them have intervened in the negative way. And we think that's going to allow for an opportunity, as most FERC filings do, for meeting and discussing the issue and maybe coming to a reasoned resolution so that we can move forward and build the requirements that need to be built inside of our traditional footprint. But do them in a more rapid way, and allow for better balance sheet opportunities at the operating companies by taking those financing and capital requirements to the trans co, rather than to the operating distribution utility.

Okay. Great. Thank you.

Yes. You bet. Thanks, Leslie.

Next we'll go to the line of Paul Ridzon with KeyBanc. Please go ahead.

Good morning. Can you hear me?

We can hear you fine, Paul.

I missed the first part of the call, so I apologize, but is there any --

Everything's going really, really well, if you missed it.

It sounds like it, from what I heard. But any chance that some of the storm costs could get deferral treatment or has that been resolved in all the jurisdictions?

It's -- Paul, this is Brian. It's -- we've deferred a portion of those costs. We've had to set aside an expense, another portion of those costs, but we fully expect overall to be able to get recovery of those storm expenses going forward, whether it's a normal rate cases, or going back to the jurisdictions and trying to see if we can make applications and get deferrals for those costs before the next rate case.

I would only add to that, Paul, that the regulatory compact that you've all heard me speak to many, many times before, remains very strong in the realization that there is nothing more important to the politicos or the regulators, or quite honestly us and the men and women in the field, than getting the the lights back on as rapidly as possible. When we bring crews in from all over the country, ultimately they have to be compensated for the travel time and the time that they spend putting the lights back on. And what we have found, and what most utilities have found across the country is a very, a very solid opportunity at the regulatory arena to recover those dollars, either as you go or, as Brian suggests, after the fact in the base rate case or some other recovery filing.

You might remember that Kentucky was particularly hard hit in very early 2009. All of the Kentucky utilities had an opportunity to recover their costs, including ours. We think that's a healthy way to go about it, because what we really need to do for safety and for security and many other reasons is gelt the lights back on as fast as we can. We'll take care of the recovery or the costs of that as we go forward. And our 11 jurisdictions have all been very good about that. And quite honestly in the [conterminous] 48 anyways, almost all jurisdictions have been good about that.

Can you give an update on the latest developments at [CCP] if any?

Yes. We continue to be in dialogue with folks here in Ohio about that activity. The commission has put out a notice that they are going to address that in one of their early February meetings. We expect that it may be comments on the staff recommendations. But more importantly, I think it will be mostly procedural on the schedule, what needs to be filed, what time lines they need to be filed.

We feel, as I think all of the analytical community did, that the staff positions were interesting. They were complex. But at the end of the day, as we read them, they intended to fully implement the law and be respectful of the idea that earnings needed to be substantially in excess before you would go to a redeployment of those dollars collected in some other time zone for those dollars being actually put to work on behalf of the customers in the adjusted time zone. We'll watch. We'll wait. We'll file all that needs to be filed.

But again, that's one that may lend itself to the opportunity to settle. We're not much of a settling party here in Ohio because there are some members of the Ohio rate process that typically would rather take it to litigation than to settle. But this is one that may be ripe for that approach and we're always willing to do that.

Thank you. And then just lastly, what you're seeing as far as gaining load in other people's footprints and net it against what you might be losing.

The losing is de minimis. It's maybe 300,000 or 400,000 customers here and there, nothing particularly worrisome to us. Customers leave for all kinds of reasons. Frequently the margins are very, very slight, but I would imagine over the years we've probably angered enough folks that they would just as soon be served by anyone other than than us. And as you know, we've put in an application here in Ohio to gain our own hunting license. Once granted, we'll get to safari out on the highway and see what happens.

Okay. Thank you.

And next we'll go to the line of Jonathan Arnold with Deutsche Bank. Please go ahead.

Good morning.

Good morning.

Good morning. My question is on the marketing trading line within off-system sales, where you had a much better 2009 than 2009. What assumption around that piece of it have you made going into 2010 and baked into the guidance lines?

Yes. This is Brian. A significant component of what happened in the fourth quarter was some of the trading and marketing activity, as well as some of the option activity that we've been able to participate in across the eastern part of the United States. We generally don't break out what's trading and what's auctioning -- auction-related activity. But we're going to continue to participate in that.

We have more historical looking numbers going forward, in terms of what's in the forecast. We know what some of those dollars are going to come in to be, but there's always migration and other issues associated with some of that load. We don't want to overestimate what's in these numbers as well. Really probably a return in terms of auction activity to more normal numbers. And the trading activity, we're hoping will be able to improve, as wholesale prices improve. And we see some volatility to the upside of prices, rather than some of the volatility that we've seen over 2009 to the downside of prices.

Jonathan, I apologize for the small gap between you announcing your name and asking your question. Brian was helping me get the right zeros on my customer loss. When I said it was de minimis to the question Paul had asked, I inadvertently said 300,000 customers. For 5.2 million, that may not seem like many. It's really been on the order of 300,000 or so. We apologize for the gap when you announced your name, but Brian was trying to pull himself off the floor and correct my mistake.

We -- actually that was going to be our second question.

Good. Very kind of you to help me get my foot out of my mouth.

Thank you.

And next we'll go to the line of [Alli Aga] with SunTrust Robinson. Please go ahead.

Thank you. Good morning.

Good morning, Alli.

The assumptions that you have for the 2010 contribution from rate increases, you bought a couple of different states with rate cases, et cetera. Could you remind us, again, which one of those, which one or two of those will be the most important ones and where you are in the process there?

Clearly the Virginia case is among the larger ones, and we already talked a bit about that, to the questions that Paul had asked at the outset. And [Swepco] Texas is a relatively large case as well. We've already had some early additional 2010 success in the rate arena, so we will continue to push forward. What I don't want to do, and it's easy to do when you think of the successes and the size of the rate relief that we've needed the over the last handful of years, to think that in essence you need to tackle about $150 million to $160 million sounds like a small run. But to the question that was asked about Virginia before, customers are very concerned in this economic time of any increase in any of their costs.

Just again, so you get a flavor for this, even with the filings that were made in the interim rates that are currently in place in Virginia, a customer who uses 500 KWHs a month, which is probably more of your fixed income, retired people, pay about $60 to $65 a month for their total electric bill. If you're 1000-kilowatt hours a month, which is a more typical customer, you pay about $115 to $120 a month. I'm not trying to make light of that, but we are seeing, as we would all expect as the costs of electricity continues to increase, customer pushback in that sense.

And one other question, going back to the '09 results, when we look at the detailed breakdown that you all gave us, the line item that you're calling parent company and other, which is the bottom line item, that -- the loss there came in much lower than what you had been budgeting even through the nine months. What caused that to happen? Any reason why you've kept the ten number to be as high as you have?

That's primarily driven by two numbers. This is Brian again. And those numbers are the generation of marketing activity and our river transportation business. As we went through the year, particularly in river transportation, we saw that volumes and spot rates for freight continued to be severely depressed and that dragged those numbers down for 2009.

On the generation and marketing side, we just had really some exceptional marketing activity in 2008, particularly in the fourth quarter that wasn't repeated in the fourth quarter of 2009, also dragging down the generation and marketing side. We are anticipating, as the economy would recover, some recovery in the river transportation business in 2010. We, of course, are watching very closely what opportunities are maybe in the generation and marketing side, as they go about their business of selling primarily to munis and co-ops in the Texas region.

I must admit, Alli, I was quite impressed by the President's desire to see the exports go to a doubling in the near term. Our river operations not only, as you know, haul coal for the house account, but also are very, very active on the entire river system in the middle of the country which is one of the principal routes of export. I hope he's successful in that and many other of the endeavors, not all of the endeavors.

And last question, Brian, the line item right below that, parent and other ongoing earnings came in at negative 47 for the year. You had budgeted that to be negative 64 for the year.

Yes.

What caused that to swing that significantly?

A lot of that has been interest expenses. We were just able to manage that a little bit better as we went through the year than what we thought. As we look about having to refinance some of the debt that we have on our system, we anticipate that that will increase and those expenses will go back up in 2010 a bit.

And I think as you look at the debt issuances throughout the year, Alli, the cost of debt capital went down substantially as the year progressed, and the banks got more comfortable and the funds began to flow more freely, probably 7% north in the first quarter and 5% or less in the fourth quarter. It just was a following of the availability of credit over the year.

Fair enough. Thank you.

Yes.

And next we'll go to the line of Michael Lapides with Goldman Sachs. Please go ahead.

Hey, Mike. High level question, when you look out across all of the commissions that regulate your businesses, can you talk about which ones are having the greatest amount of turnover in terms of who the actual commissioners are over the next 12 months, and what kind of directional change, if any, you can foresee out of those specific commissions where turnover might be greatest?

Michael, that's a really, really interesting question. I expect that of you and your colleagues on the phone. There's no big wholesale change in any of the jurisdictions that we're looking at. And as you know, some of them are elected. One of the commissioners in Oklahoma is running for the United States House of Representatives. If he were to be successful in that regard, Commissioner Cloud would become congress person Cloud rather than commissioner.

And the Oklahoma process is pretty straightforward. The governor would appoint someone and then ultimately there would have to be an election to fill that seat. We feel comfortable about the way that that would go. We're in very decent shape in Oklahoma. PSO has held in high regard by the commission

In all of our other jurisdictions, we're also in pretty steady shape. We obviously have one opening in Ohio. The governor already has a list of folks who are being interviewed. There's a process in Ohio. There are some very good names on that list. In fact, I think every name on that list is representative of balanced thinking.

If the backdrop of the question, is there anything going on, like at least some would argue have happened in Florida, we don't see that. We feel very comfortable about where we are here.

Got it. Okay. Thank you, Mike.

Yes. You bet, Michael. Thank you.

And next we'll go to the line of [Anna Stromberg with National Australia]. Please go ahead.

How are you? Thanks for taking the question.

Good day.

I missed the first half of the call. I was just wondering, looking at the presentation, you said -- you mentioned you were just going to give an update on Turk one and I wonder if you could just repeat it.

Yes. The Turk plant continues to go on a pace. We're on schedule, according to our own view, and clearly well within the budget that we set up for the construction of the plant. The Corps of Engineers issued a very important permit to us in December of 2009 so that we're back in full compliance with the Corps requirements. And just two weeks ago, the air permit which was on appeal to the Arkansas air quality organization received a 7-1 supporting vote. Regulatorily, everything that can be done has been done.

As you know, the Certificate of Convenience and Necessity issued by the Arkansas Commission remains in front of the Arkansas Supreme Court. But we -- although we would like that to go the right way because we're convinced that the Arkansas Public Service Commission issued their order fully in compliance with years and years of application of the enabling legislation in Arkansas, we hope that the Supreme Court sees it that way. Even if they didn't, they at best might be remanded to the commission for additional consideration of issuing the CCNs as a single entity, rather than doing the plant and then the transmission. We would expect it to come to the same result and we would continue to build during that period of time.

The people who have petitioned the Supreme Court have asked that the construction be stopped and of course that has been rejected. We feel very comfortable about where we're going, and we're eager to bring ultra supercritical to the United States. We think it's exactly a technology that's needed, particularly for the coals that are available in that part of the world. We're encouraged by everything that we see.

Thank you.

You bet.

And next we'll go to the line of Danielle (inaudible). Please go ahead.

Thanks for taking my questions. I just had two little ones. When do you anticipate you may need new equity? Will that be more like in 2011, 2012?

Danielle, this is Brian. We're not anticipating any equity needs beyond what would be coming in through the drip that we have on right now.

Okay. What was the total impact of the outage of the Cook unit in 2009? Is there a number on that?

Yes, Anna -- Danielle, I'm sorry. That was -- it comes in two lines. The first line is in other operating income, and it was the gross amount there which was just under $200 million. But then there was an offset to that that was close to $80 million which is the amount that we used to reflect, keeping the Indiana-Michigan customers whole relative to fuel because of that outage. Those two offsetting items are both reflected in different lines there.

Great. Thanks a lot.

Thank you, Danielle.

And next we'll go to the line of [Phyllis Gray with Dwight Asset Management]. Please go ahead.

Good morning.

Good morning, Phyllis.

Would you please elaborate on your expectations for free cash flow this year?

Yes. We're anticipating being close to cash flow neutral. Some of the things that weighed down on our cash flow in 2009 were increased fuel deferrals and some of those increased fuel inventories that we had, in addition to CapEx. The CapEx we would address and have talked about, dropping that number about $400 million versus 2009.

We anticipate some significant turnaround in terms of -- the fuel deferrals, will be less than 50% of what they were in 2009. And we anticipate to start working down some of the fuel inventories that we have. With those improvements, which in aggregate would add up to about $1 billion, we anticipate being much, much closer to cash flow neutral, if not slightly positive on a cash flow side for 2010.

And what are the implications for financing plans this coming year?

A few things are going on in terms of financings. We anticipate clearly having to issue much less debt than what we did prior year. We've gotten out in front of what our financing requirements are for 2010, prefunding a significant component of what needs to be done in 2010. We believe we have financing requirements still left of around $1 billion, about 50% of that at the senior unsecured level and another 50% of that, the pollution control tax exempt bonds.

A major component of what we'll be doing in 2010 in terms of our financing requirements is going to be what we're going to be doing with our credit facilities. As they become current, we're certainly going to be looking later this quarter, early next quarter, at renewing, particularly the $1.5 billion in credit facility piece that comes due a year hence. We're going to get on top of that and believe the markets are open and available for us to conclude that activity, as well as the other activity I described.

And any more equity?

No, other than our drip. We don't anticipate anything -- any requirements now or for the next several years.

Thank you very much.

You bet. Thank you.

And next we'll go to the line of David Frank with Catapult. Please go ahead.

Good morning, David.

Good morning, Mike. Question for -- well, maybe for Brian on the O&M. Pretty amazing. You guys sound like you're doing a great job holding the O&M down. What is really causing that?. What is the outlook for maintaining that level of O&M going forward? If you see any kind of snapback in the economy or -- if things stay depressed, will O&M stay lower? How linked is it to growth and how much of it is just temporary?

I think we've done it differently from how some others have done it, in that we didn't just go out and slash and burn on O&M. We've tried to take a thoughtful approach to that. We haven't had significant layoffs the way some of our other colleagues have. But at the same time, we've reduced head count from the first of 2009 to now by over 300 folks. And that incorporates some additions that we've done, like the security force at our Cook nuclear power plant has come on line, well over 100 people. We've still been able to hold -- actually reduce head count by 300 people.

I think the discipline that we've demonstrated is sustainable. As a counter to that, we're certainly adding new facilities. As we do things at Mountaineer around carbon capture and sequestration, as we add new facilities like the Stall plant, the Turk plant, we need new folks to operate those and those are new expenses. What we're trying to do is be as disciplined as we can in a sustainable fashion, but as we do have new costs that are representative of new operations that we're doing, get those into rate base as quickly as we can and make sure that we're being compensated on a timely basis for those.

We're trying to help the President with his jobs bill, David.

Yes. That's nice of you. We really -- it's really permanent. Obviously we would all expect if you open up new facilities to hire new people. But your operating level, if you looked at people versus the current level of operations, or O&M versus current level of operations, that's a sustainable level?

I think the discipline is something that you're going to see sustainable, so we're looking at keeping those costs low. We're looking at making sure that as we go in for rate cases, we can demonstrate that on a benchmark basis, we're being as strict as we can, keeping our eyes focused on costs. As a company and a management team, we're committed to doing that.

Great. Great. Thanks a lot, guys.

You bet, David. Thank you.

Next we'll go to the line of Anthony Crowdell with Jefferies. Please go ahead.

Good morning. I had some questions on the inherent debt at AP. When I looked, it appears you guys are a little over $1 billion indebted to parent, and about $490 million of that is due this March. Are your plans to retire that debt or refinance it to delever the parent and reduce parent expenses?

We haven't made a decision on that yet. Obviously we're looking at that, aware of that maturity is coming due, but we still haven't made a decision on that. We are still watching what happens. Obviously with our credit rating at Moody's, they are looking to see that we do a couple of things here in the next quarter around the credit facility renewal. They are looking to see some load come back. We're looking to show some improvement on those things and get our credit rating in order. But around that piece in particular, we haven't made a decision.

Great. Thank you.

Thanks, Anthony.

And the last question will be a follow-up from the line of Mike Lapides with Goldman Sachs. Please go ahead.

Hey, Mike. We've talked about this before. Just want to circle back with you. Can you talk a little bit about the amount of coal megawatts you own that are currently unscrubbed and of those, the amount that you anticipate retiring versus actually scrubbing over the next, I don't know, four or five years?

Sure, Michael. When we look at the fleet, we probably look at 5000-plus megawatts that over time will find their way to an orderly retirement. And a lot of that has to do with or without a carbon undertaking. It just simply has to do with -- they don't lend themselves because of their efficiencies, their age, and their megawatt size to the capital that would be required to retro fit.

Up to this point in time, we continue to buy credits to take care of their emission requirements and we'll keep doing that. And much of that also is driven by the power price in the marketplace. I think that [Nick Akins] and the team that manage the generation team have done an excellent job of preparing us for a future, almost no matter what the requirements are. We as an industry continue to look at the EPA's care and [camera] rules and their upgrades of those two rules going forward, and the potential of them becoming the principal regulator of carbon and carbon emissions, and that really doesn't change that forecast much.

We think there's an orderly way to go about doing it. Many of the plants are depreciated for the most part. We would make appropriate filings at the principal jurisdictions responsible for those plants to recover the rest of the stranded capital, if you will, not dissimilar from what the nuclear folks did a handful of years ago when they took billions and billions of dollars of capital out of the existing nuclear fleet and called it stranded and are recovering it in many jurisdictions securitized. The coal fleet, if and when the nationally -- let along American Electric Power, if and when it needs to retire, it will mostly be those older, less efficient, that have not been treated in a retro fit basis for the Clean Air Act as it exists. That's about the size of it.

The time line is really stretched out, probably between now and maybe 2020, 2025 before we would see the entirety of that fleet retired. As you know, also in the new source review settlement, there were some commitments to retire facilities. We will continue to stay within the parameters of that agreement and its renegotiated phase, as we should.

Got it. Thank you. And in terms of just near-term retirements, thinking about the next five years, of that 5 gigawatts you mentioned, how much of that could be in the next five, maybe seven years?

Probably something on the order of 1000 to 1500, if you go five to seven years.

Okay. Thank you, guys. Much appreciate it.

Thank you, Michael. And thanks to all of you.

Thank you for joining us on today's call. As always, our IR team will be available to answer any additional questions you may have. Lola, can you please give the replay information?

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