美國電力 (AEP) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth-quarter 2010 earnings conference. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded. I will now turn the conference over to Chuck Zebula, Treasurer and Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Kathy. Good morning and welcome to the fourth quarter 2010 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 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 let me join in the welcoming all of you here as we look at 2010 and share a bit of 2011 with you.

We are quite pleased with the way that things ended in 2010. By almost any measure that we look at, the overall earnings of $3.03, north of our midpoint $3 range that we spoke of as the year went on, and as you will remember, we tightened our ranges throughout the year. Tremendous rate success, as we have shared with you as the year progressed, and a good foundation for the rate activities in 2011 and beyond.

Overall, the returns on equity for the AEP systems were 10.75% collectively. We think that's an extremely strong number. As you know, we had two dividend increases for a total of 12% of an increase as we go. And the total shareholder return was 8.7%, something that we are very pleased with.

And lastly and very importantly, 2010 was another year where AEP did not experience any fatalities. So we're quite pleased in every way that we measure 2010.

When we look at 2011, as you know, we've shared with you in October our earnings forecast of somewhere between $3 and $3.20. We feel comfortable about our opportunity to perform at that level. We clearly have demonstrated and will continue to demonstrate our ability not only to manage O&M, but also to manage the capital spending on our system. We will continue to put equity capital to work in those jurisdictions where we feel more comfortable with the rate treatment and the rate process, and continue obviously to make those investments necessary to make sure that reliability and customer satisfaction continues to be strong and growing.

Our regulatory plan, which we have shared with you for 2011, has a total stack of required rate increases of some $[235] million to date. $162 million of that is already built into the rates that we're recovering effective on January 1.

We do have a settlement in West Virginia that we hope to be approved in the not-too-distant future. That will add another $45 million, leave us about $28 million short of the total goal that we have for calendar year 2011. And we have a number of current rate proceedings and others that we will file as the year progresses to fill up that last piece, so we feel comfortable about our rate plan as we have before.

Not dissimilar from almost every year at American Electric Power, Ohio and Ohio rate proceedings will take center stage as 2011 unfolds. As many of you know from yesterday's press releases, we filed our ESP plan, and we will talk about that in a few moments. It obviously is a center-stage activity for us and it will be affected by new commissioners being appointed. But as we have done before, we feel comfortable that we will find a way to manage ourselves through the events in Ohio here as they pertain not only to ESP, but to the 2010 seat review, which will go on, as you will remember, through calendar year 2011.

A couple of important policy update discussions, let me spend a few moments. I think you're all very aware of what the Edison Electric Institute and many people call the EPA train wreck. It's a series of orders and rules that will come out of the EPA as the year progresses that will have an effect on the generation fleet throughout the country. I know that most people focus on the effects on coal-based generation, but many of them will touch on gas-based generation going forward, as well, quite honestly, when you think of the water requirements of the nuclear fleet.

We feel comfortable about where we are in the process of trying to put comments in not only on behalf of EEI, but on behalf of our company through the business roundtable and other places where AEP plays in that space. We are encouraged by the comments of President Obama, not only with his executive order before the State of the Union speech, but by comments he made there. We are somewhat heartened to see that -- Bill Daley coming in as Chief of Staff may put a business balance on the activities that go forward in the regulatory arena, particularly at the EPA.

I think it's essential, however, that everyone understands it has never been American Electric Power's desire nor anyone else in the utility space to undo the Clean Air Act. What we've been asking for and what we've been seeking and what we think we will accomplish, is a reasonable timeline, followed with continuing to improve the quality of air and the production of electricity from a very important segment of the baseload generation fleet in the United States.

(technical difficulty) that we can manage our way through those challenges, and come through 2011 and beyond with a very solid baseload generation fleet, obviously at very acceptable prices for our customers as we go.

Those activities will unfold, as one might expect, there are court challenges as you know to many of these undertakings, and again, we will be in the middle of that dialogue both regulatorily and ultimately in the course, if need be.

On the transmission front, we are convinced that the FERC continues to address the issues that are important to all of us who intend to put capital to work in the transmission side of our business as you know. At AEP, we have relatively aggressive plans in that space. We are very pleased with what we see at SPP. We are a little less than satisfied with the overall progress in the PJM, but we do believe that projects, particularly PATH that will do a great deal for removing some of the congestion and higher prices in the far eastern zones of the PJM are projects that need to be done, and in fact, will go forward and will be done.

We, like everyone else, watch for the order that will be issued in the notice of proposed rulemaking by the FERC. We're expecting it to happen sometime in the first quarter, and we are encouraged by comments that we hear from commissioners from time to time.

We believe that everyone understands a more robust transmission grid can allow for not only the inclusion of renewable power throughout the country, but a balancing of the amount of baseload generation that might need to be added to the system.

Let me move on to the next couple of pages and talk a bit more granularly about our filing for the ESP. If you look at page 4, you will see the large red boxes at the top, and really they are directed at the overarching policy issues that we were trying to touch. The first two, investment in Ohio, obviously, and jobs in Ohio are very important to the government and to the newly elected governor, a very aggressive approach toward creating a more robust economy in Ohio, and one that's going to demand, ultimately, that generation continue to be online and that additional generation be built and brought online. As you know, that's somewhat problematic in Ohio and it's an interesting challenge that we will all face, but we think that not only investment in the state and the jobs that that would create are things that the Republican House and Senate and the Republican governor will be strongly in favor of as we go.

The last box on the far right really is directed toward what we hear from our customers. I would be surely wrong if I told you that our customers are happy at the cost of electricity. I'm not sure they would be happy even if it were free, but the fact of the matter is, they are very, very concerned about energy security because they, too, see the US economy and the world economy improving, and in that improvement, they all know that they're going to have to put more product into the market. To do that, they want to make sure that there's adequate and price-sensitive energy available to them.

So when we look at the overall balance that we tried to put into the Electric Security Plan for the next 29 months, beginning in 2012, it's really directed toward those issues -- investment in Ohio, jobs in Ohio, and energy security for our customers.

If you actually look at the bottom half of the slide, you will see again some of the approaches that were built in. And I know that many of you will spend a great deal of your weekend digging through the ESPN coming to your own conclusions. We have predicated the filing itself on the utilities being merged because by 2012, we believe that to be the case where, as you know, have made a merger filing in Ohio. It's not being contested by most or really hardly any noise about that. So we would expect that that will come to the floor without any difficulties.

We have also included what we think is a very appropriate rate redesign issue. Like so many states before, there is, what we call in our vernacular, rate skewing. One of the costs to serve customers is not always the cost that's allocated to the customer class. Typically, residentials have been given some relief in that regard. Industrial has also given some relief in that regard, and commercial customers paying more than the cost of service to serve them. We have tried to address that issue, particularly in the G rate and the rate designs that we put in place in ESP. We think that they very much mirror what one might see in the marketplace, and we think that that makes sense.

The 29-month window may seem odd because we did a 36 window before and people were thinking 24, 36. But we did that for the purposes of syncing up with the May cycle for the PJM, and we think, again, that makes a tremendous amount of sense.

Many of our long, large -- excuse me, many of our large volume customers are interested in long-term commitments. And to provide them with an opportunity to do that, we have created the alternate long-term option. Customers who are willing to sign up for a five-year window of supply from American Electric Power can receive for that commitment a discount to the -- for rates that are filed in the ESP. And we expect that that will be a very usable tool for many of our price-sensitive large volume industrial customers.

And the next two boxes talk to the things that we've talked about before. The Ohio Growth Fund is our dedicated money to the activities that Governor Kasich has been very vocal about, which is to see to it that Ohio is open for business. We want to join in the governor's endeavor in that activity and do what we can to see to it that we bring new jobs to Ohio, new economic activity to Ohio, as well as expanded activity in our current customer base.

We obviously are in need of filing a distribution case. We've not had one since the 1990s, and we made our notice of that filing yesterday. That addresses itself to a $93 million overall rate increase in the distribution side of the rates that we charge our customers.

Like all rate activities, it will process through its normal cycle. It should be done by the end of 2011 and effective in 2012, and it may be $93 million increase, it may be something different from that, but it will be a classic, typical case.

If you look at page 5, it really is a summary of the many things that I've already spoken about. We think that the ESP finds a reasonable balance between the approaches that we have to take, a very small increase in 2012 of 1.4%, an aggregate increase in 2013 of 2.7%. That's in the G rate itself, the base rate of the ESP. We have a number of provisions for riders to make adjustments to expenses incurred on behalf of the customers. And of course, it does not include any of the impact of whatever will come from the distribution rate case as we go forward.

We have tried to cover every activity that we can think of as the ESP would go forward during that 29-month period. And to that end, we believe that plug-in electrics will play greatly in that period of time. We'll continue to work on our grid smart activities in Ohio, where we've gotten great support from the Commission. We are convinced that the economic development activities that we're dedicating ourselves to will make sense to the jobs of Ohio creation and now will be a stand-alone entity rather than subset of the government here in Ohio.

We do have a polar provision that's a bit different from the one that we had in the approved three-year cycle that we're in the midst of now. And of course, we think it's only reasonable to recover costs of generating facilities that need to be upgraded to comply with federal legislation, as well as generating facilities that may well be retired because it doesn't make sense to put that capital to work.

All in all, we think we've touched all of the bases that are required, and, obviously, Brian and I look forward to whatever questions you might have about the ESP filing. And with that, I will turn the call over to Brian.

Thank you, Mike, and good morning to everyone on the call. This morning, we will review some detail in the quarterly and annual financial numbers; take a look at load trends; review some 2011 earnings drivers and business initiatives; and then get on to your questions as quickly as possible, as Mike said.

Turning to slide 6, you will see that for ongoing earnings in the fourth quarter of 2010, the Company earned $179 million or $0.38 per share compared to $238 million or $0.50 per share for the same period in 2009. Highlights for the quarter-on-quarter comparison include the Significantly Excess Earnings Test, or SEET, refund at Columbus Southern Power Company, accounted for negative $0.06 per share or $43 million. This is the amount ordered for refund from CSPC proceeding for the year 2009 by the Public Utilities Commission of Ohio.

Nonutility earnings net accounted for negative $0.07 per share or $37 million and reflected the buyout of a fleet lease and a contribution to the AEP Foundation.

Other utility operations net accounted for negative $0.18 per share, or $88 million, and is primarily attributed to higher taxes and the absence of the accidental outage insurance from the Cook Unit 1 turbine outage. The Company's effective tax rate for the fourth quarter of 2010 was higher than the prior-year period.

Additional highlights comparing favorably to last year's fourth quarter include retail margins, which improved $0.02 per share or $18 million and were primarily associated with the increased industrial usage. Weather accounted for positive $0.04 per share or $26 million for the quarter. And rate changes accounted for positive $0.07 per share or $51 million.

Operations and maintenance expense accounted for positive $0.08 per share or $63 million, net of offsets, due primarily to our cost savings initiatives instituted in 2010 and lower storm restoration expenses quarter on quarter.

Turning to slide 7, you will see that for ongoing earnings for the full year of 2010, the Company earned $1.451 billion, or $3.03 per share, compared to $1.362 billion, or $2.97 per share, in 2009. This represents a year-on-year gain in ongoing earnings of $89 million or $0.06 per share.

Highlights for the year-on-year comparison include nonutility operations net, which was negative $0.05 per share, or $19 million, for the same reason cited for the quarterly comparison, offset by some favorable tax adjustments in the third quarter of 2010; the SEET effect was the same for the year as for the quarter, a negative $0.06 per share or $43 million; firm wholesale margin was negative $0.10 per share or $74 million, compared to the year prior and reflects the loss of two wholesale customers; the share count effect was negative $0.14 per share, reflecting weighted average shares outstanding of 479 million in 2010 versus 459 million shares outstanding in 2009.

Other utility operations net accounted for negative $0.52 per share or $238 million, and primarily reflects the absence of the Cook accidental outage insurance, higher other taxes, higher depreciation, and the higher effective tax rate.

Positive annual ongoing comparisons to last year were retail margins, which accounted for $0.07 per share or $48 million, reflecting economic recovery mostly in the industrial class; off-system sales, net of sharing, were up $0.08 per share or $53 million versus 2009. Although margins on trading and marketing were down 28%, physical sales volumes were up 30%, and physical margins were up 80% versus 2009 as around-the-clock pricing at the AEP gen hub was up 13% on the year.

Operations and maintenance expenses were down in 2010, resulting in a positive variance of $0.14 per share or $97 million. This is a result of our cost saving initiatives last year, as well as lower storm expense. For ongoing earnings, weather was positive $0.32 per share or $229 million compared to [$0.29]. The summer was hot and the winter was cold, and that can be a good thing for an electric utility.

For the AEP system, cooling degree days were 58% above 2009, as it was hot across the breadth of our system, and heating degree days were up 9% above 2009 levels, and were up throughout our system with the exception of Texas. Rate changes were positive $0.32 per share or $222 million net of offsets.

Turning to slide 8, we will look at the quarterly and annual as well as forecasted weather-normalized mode trends. In the top left-hand panel of the slide, you will see that residential normalized sales were relatively flat for the year, up 0.6%, and for 2011, we're forecasting an increase of 1.9% year on year, 0.8 of which we expect to come from the acquisition of the Valley Electric Membership Cooperative in our SWEPCo service territory.

The top right-hand panel of the slide, you will see that commercialized normalized sales were relatively flat, but were down 0.3% for the quarter, and 0.4% for the year. We're forecasting a modest recovery of 0.7% in 2011.

In the bottom left-hand panel, you'll see that industrial sales, which were the hardest hit customer class in 2009, had the strongest rebound in 2010. For fourth quarter of 2010, industrial sales rebounded fully 7% versus 2009, and the annual recovery was in line with our forecast of 5.3%. We will provide some additional color on the industrial recovery on the next slide.

Next year, we are forecasting continued recovery in that area of 1.9%. In the bottom right-hand side of the slide, you will see the total normalized retail sales recovered 1.9% for the quarter and 1.1% for the year. Next year, we are forecasting a recovery of 1.7%.

AEP's customer counts, another relative measure of our strength, remained steady throughout the year at about $5.2 million. Residential and commercial classes were up a small amount, and were offset to some degree by modest decreases in the industrial class. These trends held true across the breadth of the AEP system.

Turning to slide 9, you will see some detail for the five sectors that comprise 60% of our industrial gigawatt hour sales in the fourth quarter of 2010. You'll note that all five sectors mark quarterly and annual load increases, led by primary metals, which was up 15.5% on the quarter and 6.5% on the year. The recovery was widespread across our industries and across our service territories. In fact, all of our top 10 industrial sectors [met] positive load improvements for the quarter and the year.

Our largest customer, Ormet Aluminum of Hannibal, Ohio, has announced plans to return to full load next month. AEP's largest operating unit, AEP Ohio, is proud that its economic development contract with Ormet allowed it to continue operating through the economic downturn, and AEP Ohio's competitive rates for electricity are enabling Ormet's return to full load. This is good news not only for AEP and Ormet, but for the people and the economy of eastern Ohio as well, where Ormet's increased business has been putting over 100 people back to work.

Now that we have discussed our 2010 results, let's turn to slide 10 and look at our 2011 outlook. As Mike mentioned, our ongoing earnings guidance for 2011 is $3 to $3.20 per share. Key earnings drivers for 2011 are on the left-hand side of the page. As noted on slide 8, we are forecasting a modest load recovery of 1.7%, representing an additional $0.10 per share over 2010. This recovery is anticipated to come from all customer classes, with residential and industrial improving 1.9% and the commercial class recovering 0.07%. Additionally, as Mike said, we anticipate an incremental $0.32 per share from rate changes representing $235 million.

Of the total needed, as Mike said, we already have secured $162 million or 69%. An additional 17% is the subject of a currently filed rate adjustment, and the remainder will come through multiple jurisdictions across AEP's system. As a company, we continue our record of finding constructive rate outcomes in our 11 states and in front of the FERC.

As you all know, in 2010, we demonstrated particular focus on O&M and capital discipline. This will continue in 2011. Our current O&M forecast for the year represents a $34 million decrease net of offsets. This indicates that we are seeing the benefits from our cost reduction initiatives implemented in 2010, and includes managers of the Company offsetting annual escalating items such as employee costs.

As we detailed in our analyst meeting in October, we anticipate customers switching in Ohio, primarily in the commercial class at Columbus and Southern Power. And we estimate this will result in incremental load loss in 2011 of 14% of Columbus and Southern's total load, representing $53 million year on year 2010 to 2011.

To put this in perspective, the forecasted loss of load represents only 6% of AEP Ohio's retail load and only 1.5% of total AEP system load.

And it's come to our attention that a PUCO website noted shopping levels at CSP of 12% at the end of September. This data is not at all consistent with our numbers on switching percentages, and we are currently working with Commission staff to resolve the discrepancy.

As a percentage of total CSP load, the year-end number was much closer to our forecasted switch rate of 3%, and our forecast of an incremental 14% by year end 2011 is still reasonable. We have both competitive retail and regulatory responses to customers switching, and we'll continue both throughout the year.

Also related to AEP Ohio is the 2010 Significantly Excess Earnings Test or SEET filing. Based on our analysis of the 2009 results, and the PUCO's methodology as outlined in the 2009 SEET order received this month, neither Ohio Company, Ohio Power Company or Columbus Southern, had significantly excess earnings in 2010, and we do not believe a refund will be required for that year.

Lastly, related to 2011 earnings, we anticipate a slight decline in off-system sales. While we expect physical volumes to increase due to reduced planned and forced outages, prices remain flat to down relative to 2010. In this low-priced environment, trading and marketing margins will remain under pressure. All of that being said, we don't see anything on the horizon at this point to move off-system sales outside of the $250 million to $300 million range for 2011.

Looking at the right-hand side of the page, and looking at other business initiatives we're working on in 2011, we are pleased to report that we have three operating transcos, one in Ohio, Oklahoma and Michigan that are actively investing capital. We have the opportunity to invest over $150 million in our transcos in 2011, and the transmission team is working hard doing just that. Additional transco filings will be made during 2011 in other of our operating jurisdictions, and we are expecting an order on the settlement that we filed with the FERC regarding the transco rates for PJM and SPP.

As was the case leading up to our analyst meeting in October, the topic of our system interconnection agreement continues to be on investor's minds. Based on discussions that we've had with regulators in Virginia, Indiana, and other jurisdictions, we are exploring alternatives to the agreement.

On January 4 of this year, APCo made a filing with the Virginia SEC that, among other things, detailed the pool members' intent to terminate the interconnection agreement. The pool members have, in fact, provided notice of termination to one another. They now have a framework and a three-year timeline within which to engage stakeholders in determining the future of the east generation pool. The result of this process might be modified or a different type of pool might be established. There might be bilateral contracts or other commercial arrangements from surplus to deficit members or each member of the pool might operate independently.

The general parameters of that discussion and the outcome will be a reasonable solution for all jurisdictions, and it must not harm AEP financially. Remember that AEP took this action of its own volition because we believe that modifications to the pool will be beneficial to the member companies, their customers, and AEP. In fact, most of our jurisdictions like the aspects of a power pool and don't want to rely exclusively on the market for capacity and/or energy needs.

Bonus depreciation resulted in $230 million favorable cash flow impact to the Company in 2010. Some of this benefit was used to reduce risk by funding our pension plan and to facilitate our cost reduction initiatives.

For 2011 through 2013, we expect bonus depreciation to provide approximately $1.2 billion in cash flow benefits based on our current capital spending plan. At this point in time, we have not yet allocated the additional cash flow for specific uses, but anticipate using the incremental cash flow to reinvest in the growth opportunities in our businesses, reduce risk and improve our balance sheet.

Which brings me logically to the closing topic, capital allocation, and how we think about making capital investments. As we discussed at the October Analyst Day, we will continue to place incremental capital to work where we have the highest return opportunity and where we can most efficiently convert the capital invested into earnings. That's why we continue to focus on all phases of our transmission business and the components of our utility platform where returns can be earned most sufficiently. Pension funding and other risk-reducing strategies will be considered just as they were in 2010.

Thank you for your time today. And with that, I'll turn it back over to the operator, and we will take questions.

(Operator Instructions). Daniel Eggers, Credit Suisse.

I'm confident that there will be lots of ESP questions. I'm just going to ask one on the topic. But when you guys evaluated the decision between ESP and MRO and then the '29 time horizon, how do you guys settle at '29 in ESP in the sense that a lot of the things you are going to have to do, whether it be spending, restructuring the power pool, a lot of these projects have a much longer time horizon? How do you guys get comfortable that this deal will set the right precedent to protect your exposure given the fact that ESP has changed on such an active basis in the last couple sessions?

Well, when we looked at that, we just thought that trying to sync up with the actual capacity undertakings of the PJM was probably an important point for us to take. And so we don't see that as exposing ourselves to a great amount of risk in that sense, Dan.

Okay. So you are comfortable with the idea that whatever policy gets put in place for this ESP will stand as far as riders and pool mechanism and that sort of thing?

Well, don't forget, as Brian said in his comments, the pool mechanism is a three-year look at a process that comes with some reasoned resolution. And it will ultimately fit into that activity.

Going forward, probably past that timeline, if in fact we don't get to some reasoned conclusion with the multiple states as we go forward, the notice to ourselves is withdrawable, and we will just simply use the pool the way we have used it historically. So we don't see the two creating any additional risk that we need to be worried about.

Okay. On the cash flow outlook for 2011, Brian, can you just, a little commentary on the Enron estate payment, the $450 million. Was that already accounted for from a cash outlay perspective? Or is that going to be cash that goes out the door this year and be impactful either to net debt or use of some of your bonus depreciation proceeds?

All of that, Dan. That's something that's been on our radar screen that we've been planning for, and whether they announce $425 million or $450 million, it's something that from a cash standpoint, we've been planning for. And, certainly, the bonus depreciation helps us in that regard in terms of being able to fund that without having to issue incremental debt. So, both planned for and bonus depreciation helps us as well.

Okay. And one last question, Mike, can you just share your thoughts on kind of the industrial recovery? The outlook you guys have for 2011, certainly off trend from what we saw in 2010. Are your customers seeing kind of a constant fade in business? We're hearing other folks looking for a second-half recovery. Or what gives you guys confidence in a notably lower growth rate in 2011?

Well, when we look at that -- as you know, when we do our load forecasting, we are usually very conservative in that regard because that's the whole predicate of how we manage the ongoing business coming into a year. We don't get any signal from our customers that they think there's a lull in the activity that they are seeing. But we didn't want to build a really robust industrial increase beyond what we saw in 2010, which, as you know, was pretty substantial. So, when we look particularly at the metal melders and the LME prices, we think not only is Ormet going to be robust for the year, but that essentially Aluminum can solve some of their labor issues going forward, they will come back as well. So we should see some uptick in that, and that probably would be in the latter half of the year.

But, we feel pretty comfortable about the increase that we've built into the overall forecast of what we think industrial sales will be. If it's upside, obviously, we will gladly accept that, Dan.

Okay, great. Thank you, guys.

Paul Patterson, Glenrock Associates.

A couple of quick things. Just the other income and deductions, it looks like you guys are now forecasting something somewhat better than maybe the [E9]. And I just wanted to try to get a sense as to what was going on there for 2011, that is.

Yes, I don't have a lot of detail for you on that. The change year on year is going from something like $154 million to $211 million, and I don't recall what we had there.

It's about a $24 million -- it's all right. We can follow up later. I just was wondering if you guys had an answer on that.

We'll get the detail for you.

No problem. The other thing is that -- the power pool change, how should we think about that in terms of allocation of expenses among jurisdictions? And any ideas about how it might change cost allocations or something of the sort?

Well, that's exactly the way that we see it. It's -- at the end of the day, to the point Brian made and I made earlier on, our approach here is to try to be respectful of the request that was made of us by the Virginia Commission, something that we were contemplating doing, but it is in fact a reallocation of costs across the fleet and hopefully a zero-sum gain. If we see that to be different from that, then we wouldn't go forward with the undertaking. We would have the pool continue to work.

But you know, Paul, this was something that was created in the '50s. And many of our jurisdictions would rather have a direct line of sight to the generating capacity that they need for their own state needs and the growth that they see, rather than depending on the pool and the way that the pool works because, as you know, it can really flip around the amount of cost that one state might pay versus other states based on the member load ratio calculations that are affected by incredibly warm weather in one particular region within the pool versus cooler weather in another region. So, we just think it's time to make that adjustment.

However, I want to make certain, because I know a lot of people have written about this, that if this tends toward the negative in that the states all believe that there's something more beneficial that they ought to get out of that changing of the pool arrangement, we simply won't go forward with it.

So, no filings have been made in any jurisdiction that would cause us to be concerned about that. This is an internal notice to the members of the pool that we may be moving in a different direction.

Okay. In terms of shopping, what do you think has caused the discrepancy between you and PUCO in terms of the -- that seems like a pretty substantial difference in shopping calculation.

And just in general, how should we think about shopping exposure going forward, the ESP filing, and just maybe just in the whole context of a new legislature, a new governor, is there any thought about maybe visiting SPP 21? Or -- not just you; obviously, we're seeing some substantial -- actually more sort of substantial kind of activity with Duke and what they are dealing with. I'm just wondering if there's any thought about perhaps going back to a state legislature to sort of maybe clarify some of this stuff or --. I don't know, it just seems like it might be a big, long regulatory process.

Well, there are two parts to your question. I will let Brian address the first one, and I will pick up on the latter part.

Paul, we think there's an apples to apples issue in regard to what numbers were reported on the PUCO website. We know what the numbers that we reported are and they -- the PUCO staff took numbers from a number of different credit suppliers. And the integrity of the numbers and the periodicity of the numbers that were submitted to them are in question. So it's going back and trying to make sure that the comparison of what's been shopped to what our baseload denominator was are apples-to-apples comparisons. And we don't think that's the case in the numbers that are on the website.

So on the second half of your question, as you know, we are concerned about shopping in the marketplace. It really has everything to do with mostly our commercial customer class that, as I mentioned, before, has some rate-skewing effect.

We think that today, the competitive retail electric suppliers are getting a free ride on the capacity cost. We made a filing at the FERC to address that. As you know, the FERC last week decided that they could not make a change because Ohio had, in fact, toward the latter part of December, created their own price forecast for the capacity charge. We think that that probably was inadvertently low.

We've addressed that issue both in the ESP, and we will go forward and petition the FERC for rehearing. And in fact, they invited us to file a complaint if we thought that the PUCO's number was too low, and we will do that as well. And we will do that with respect toward the Commission. This is not a fight. This is just an approach.

But, again, going back to the numbers that Brian shared with you, this is 2800 gigawatt hours out of an output at American Electric Power just south of 200,000 gigawatt hours a year. So, I don't want to minimize it because it's important to us, and as you know, we've created AEP Retail. They're having some great success in retaining as well as gaining customer share in the other regions within Ohio. And we will continue to take that approach.

As I said, we've made a number of filings and a number of approaches both at FERC and throughout the ESP that we think will address the rate skewing and put some fairness in the capacity charge that competitive retail suppliers need to pay.

And then, with all of that in mind, trying to re-tackle 221 with a new legislature and a new governor may or may not be an appropriate way to go.

I do think, however, in the near and longer term, Ohio is going to have to come to the realization that generation will not be built in the state under the current construct. And at the end of the day, Ohio, within maybe 24 months, will be a net importer of electricity. And I know that our operating companies in Michigan, Indiana, Kentucky, West Virginia, Virginia would be happy to sell power into a power-short Ohio. I really don't think that that's in our best interest for the citizens and the businesses here in Ohio.

And I expect that the administration and the legislation will come around to that realization soon enough. When you think about the potential number of megawatt hours that could be taken off of the board because of the potential of EPA going amok, it could have a very devastating effect on the price of power, particularly here in Ohio. So, I expect that that will get addressed. I don't know that going after a shopping fix is worth trying to tackle 221 again.

Okay. Thanks a lot, guys.

Yes, you bet.

Bill Apicelli, Morgan Stanley.

Just had a question about the pool modification charge. How should we look at this, the $35 million kind of threshold that you've put in there for recovery of potential cost increases that exceed that number? Is that significant in terms of where the -- if it's economic neutral in terms of the impact overall? Or how should we think about that?

Bill, it's not significant. It's a placeholder that's in there to allow the Company to absorb any downside before we would start asking our customers to participate in that. And it's like a number of these riders, where we put them in, there's nothing anticipated to flow into that at this point. But we felt it was prudent while we are going in for this ESP filing to have a placeholder in there should there be costs that need to be passed through and felt it was prudent for the Company to absorb some component of that first before we ask our customers to participate.

Okay, thank you. And then, on the shopping issue, between what you expect to have realized in 2010 and then your forecast of 14% in 2011, how much load would that leave at the C&I level that would have not been shopped, or what would the incremental exposure be I guess at year end 2011 based on your forecast?

Well, as Brian shared with you, it's an overall 6% of the AEP Ohio load. So it covers most of the class, but again, if in fact, the rate design activities that are filed in the ESP when we get to 2012, I think you will see a real drop-off in the number of shopping customers. They will still be there and still have the freedom to do that, but their economic advantage will be to stay on the AEP system as a retail customer.

Steve Fleishman, Bank of America.

A couple questions. When Duke talks about shopping, they have like a gross shopping and a net, and the net being kind of net of one of the customers that they take back on their retail side. Are your -- the 3% and the going to 17%, is that gross or net?

That's gross on the utility side.

Okay. And then also, I assume you weren't expecting to get this capacity charge done in your forecast for 2011 on shopping -- in terms of the one that you filed at FERC?

We did not build anything into our numbers for 2011 for that. That's accurate.

Okay, great. And then, I guess one other question, just on that issue, I'm trying to understand why the fact that they would want to use the PJM actual capacity charges, which I think all the other utilities in Ohio are using, why that would not be reasonable for you?

Well, remember we chose to go on the cost of service calculation of capacity because of the generation fleet that we have available to us, and that served our customers well in the past, and we think it will serve our shareholders as well as our customers in the future.

The PJM number is just simply inappropriately low, and it continues to go that way. And look at the reaction that New Jersey had to that activity. And I think you will see other states go forward and do that. When you look in some of those out years and that number gets down to $16, $17 a megawatt day, that's -- you couldn't -- there's not a power plant that you could build or use anywhere in the world that has that kind of a cost structure. So it just -- it's totally illogical, Steve.

Okay. And just on the issue of Ohio being short, potentially in a few years, is it -- it seems like west of you, there's a lot of excess, particularly in the NIHUB market. It seems like there's even more capacity coming in there. Is that -- that power can't get into Ohio?

I didn't mean to imply that Ohio would be short and not available in the marketplace. What I meant to say, and really the place that the administration and the legislature will see, is that if Ohio is, in fact, capacity short, and you get down to the price, so let's just argue that the rates go to $70 a megawatt hour because of inability of baseload generation to satisfy that, adequate power will flow into the marketplace, but it won't flow in at $40 or $50; it will flow in at $60 or $65.

And it just doesn't serve a state like Ohio who is very aggressive in the economic development. You will remember the comments of Governor Daniels when he made it quite clear that Indiana never intended to be a net importer of electricity. It intended to be self-sufficient and an exporter. And I think Ohio feels the same way about its ability to attract new industrial load in particular.

Okay. Thanks so much.

Michael Lapides, Goldman Sachs.

Yes, Mike, what do you expect in the ESP filing to be the biggest areas of pushback or the biggest topics that could become contentious from both interveners and staff at the PUC?

Well, I expect that there will be some pretty open discussion about the approach that we are taking to recovery of the current fuel and the deferred fuel, but that really is in keeping with orders that were issued in the existing ESP. I also expect that there will be a pretty good comparison, Michael, of how is this ESP in aggregate better for the customers than an MRO approach?

And from our vantage point, particularly, again, putting some reasonable capacity cost charges, we feel that we are past the MRO test. So, there will be some issue over the riders and the approaches that we have taken. There will be some issue over the bypassable or non-bypassable features for two or three of the riders that we have put in. And, we think those will all have an opportunity to be thoroughly discussed. And obviously from our vantage point, we think that what we've done here is a very balanced approach in that regard.

Trying to do as I said at the very outset, address the issue of adequate energy supply for my customers, as well as adequate energy supply to grow the resource base and continue to make investments in Ohio.

The law itself was pretty clear about nom-bypass-ability of environmental investments. It's pretty clear about non-bypass-ability of new generation if you need to bring it for the basic requirements to feed the state of Ohio, so there will be discussions about that.

I'm sure there will be others who think that it's totally unfair, but that's why the ESP was created the way it is. It encourages utilities like ours and others to file for that activity, to build into it the subsets that are necessary to have a meaningful opportunity, not only for our customers to receive adequate energy at reasonable prices, but for our investors to be encouraged, to continue to make capital investments in Ohio.

Should we not get those kinds of activities, the clear message will be invest zero in Ohio going forward and put that capital to work in those jurisdictions, and as you know, with the breadth of our footprint, many places to put money to work at very reasonable rates of return on equity.

Follow up, different topic, at the FERC, do you think we're starting to see a little bit of mean reversion from the FERC in terms of transmission policy? If you look at some of the orders that have come out, whether it was OG&E order, whether it was the PSE&G order, where maybe quip wasn't fully granted or projects weren't fully given 100% incentive rate making, is it possible we are starting to see a little bit of a turn at the FERC right now?

Yes, I think that's a fair way to look at it. That's an exchange I would make in a minute for cost allocation being appropriate, and ultimately, with the imminent domain authority that's needed to build out that grid.

One of the things that Chairman Wellinghoff has said, and has said it very clearly, as have Commissioner Norris and others, there is fairness in some of the incentives that go forward, but in return, you need to put new technology to work on the grid. You need to do a number of things that are really cost-effective in the near and long term. So it's an encouragement to be creative in that regard.

The returns on equity that our projects have received have almost always been predicated on the incredible intellectual capacity of American Electric Power to make the grid better, to make it more efficient.

When you add new -- as you heard me say many times, as you look at the line loss calculations of our six-bundle [755] conducting on our most recent transmission add, it's less than 1% compared to a system averaged across the United States of 3% or 4%. So we believe we earn those returns, but I do think there's a reversion to the mean. But it isn't a big deal.

Thank you, Mike.

Raymond Leung, Goldman Sachs.

Most of my questions have been asked -- answered about the Ohio, but can we talk a little bit about financing plans? It looks like you guys show a net debt issuance number of $234 million. Can you provide a little more color on what the gross number is, what potential boxes that may need to issue? And if you could also remind me what your strategy is with the April bank line maturity later this year?

Sure, Raymond. As you know, we've just been out recently with the PSO redemption that we just had. We have a few more senior notes that we need to do as we go through the year, APCo being a piece of that that we anticipate doing later. We have a number of PCRBs to do, a total of about, over the course of the year, a little over $1 billion in total financing between the senior secured at PSO and APCo and the PCRBs that we're going to be issuing throughout the year.

In terms of the bank facility, are you talking about the credit facility?

Yes. There's an April 2011 like $478 million or something like that that comes due.

Right. Yes, so we're taking a hard look at that. And instead of reissuing that facility, we're looking at whether or not we do a club facility for that or whether or not we do some bilaterals. And in fact, we may not reissue all of that. A piece of that is associated with Ohio Power Company, which is cash fat right now, and we might just redeem that piece and bring it in.

At the same time, we're looking for the other pieces of that, which are APCo and I&M, how we might finance that. Right now, it might not make sense for us to do a facility like we have with the VRDN support for the LCs, and really doing that as a bilateral or club deal might make a lot more sense for us.

Okay. And you didn't mention any parent issuances. With bonus depreciation, does that sort of change? I guess the last time I met with you guys, you indicated that you might issue debt at the parent again. Does that look like that's off the table now?

Yes, with the bonus depreciation, that's much less likely.

Okay. And last question, I don't think there's any big issues, but the combination of Ohio power and Columbus Southern, any covenant issues? I just want to make sure I didn't miss anything. I don't think there is anything with merging those two entities.

None whatsoever.

Okay, great. Thank you, guys.

Ali, Agha, SunTrust.

Mike, the filing that you made in Ohio, could you give us some preview of how much discussion was going on with the staff, etc., at the Commission? All the different pieces, there are a lot of components to it. Is some of it, would that be considered a complete surprise for the Commission and the staff, or is this well expected? Can you give us some sense of how much they were anticipating that this was coming?

Yes, we took a very aggressive approach to this filing because it obviously is very important for the next 29 months. We have met with our industrial customers, with the -- the folks at the Office of Consumer Council weren't too eager to meet, but they were at least made aware of the approaches that we intended to take.

We had some very constructive meetings with Commission staff and the commissioners themselves, although, as you can well imagine, they were very protective of what they saw and what they heard.

Our read on the body language, however, would tell you that there are no surprises in this filing that they weren't well aware of.

Our industrial customers made some constructive comments. We tried to take those issues into concern as we went forward. And again, I think we found a reasonable balance here. That's not to say that there won't be a lot of lawyering going on because, as you know, you need to run that clock to get paid, so there will be a lot of activity with the case. But it really is pretty fair, pretty balanced, and we believe very firmly that it will come out at a reasonable place when we're done.

Second question, in the past, (technical difficulty), you've talked about roughly a [$325 million] earnings number potentially for 2012. Are you still comfortable with that? How much of that will be really predicated on a successful outcome of this filing?

Well, we feel very comfortable with the 2012 number. As you know, with the economy continuing to recover, we've been talking about a 4% to 6% earnings range, and off of the midpoint of our 2011 number, that's almost a 5% increase going to 2012, and we feel that that's very achievable. Quite honestly, we didn't build a great deal of upside from an ESP treatment into that number, so we think we've got plenty of room to be successful with that forecast when we look at 2012.

Okay. And last question, Mike, on a different topic, your read today on the post-selection scenario regarding the environmental legislation, and potentially what sensitivity that has for your CapEx ramp? You laid out a 2012 CapEx number as well, but just looking beyond that, as these things are coming down the pike, what kind of escalation should we be thinking of that $2.9 billion 2012 CapEx for you guys?

When we look at our going-forward strategy, it will be a blend. Depending on which way the EPA goes and quite honestly, through the business roundtable, [ACE] and the EEI as well as our own activities, we think that this administration is taking a great deal of note of the impact that this could have on a struggling economy yet. So we think that many of these requirements might well be stretched out into a timeline that will fit our capital needs and our capital plans very comfortably.

I doubt that you will see us get much above the $2.5 billion to $3 billion of capital investment in the 2013, 2014, 2015 timeline because, quite honestly, we just don't think there will be an absolute demand requirement to move in that direction because of the potential effect it could have on the economy.

And as you know, particularly for our fleet, we have invested a great deal of money historically, and we think we can address many of the mercury needs and other requirements so long as they are reasonable with the beneficial effect of SCRs and [FTDs] going forward.

So we don't see a scenario where we will have any massive capital uptick going forward, because again, many of our -- much of our strategy that Nick and the team have shared with all of you go to the notion of retiring units rather than putting capital to work where it absolutely isn't necessary, nor would it be to the customer's advantage. That's really one of the reasons that we have begun the process of bringing the combined cycle gas plant called Dresden online. We began finishing the construction of that project about two weeks ago and plan to have that up and running about 2012.

So, we feel as though we've got a very solid, balanced plan toward that, and we don't see anything long-term, near-term capital impact that would put Chuck and Brian in a box.

Thank you.

Paul Ridzon, KeyBanc.

Mike, you kind of alluded that you still see a train wreck, but maybe it could happen a little bit slower motion. Is that your latest thinking?

Yes; yes, I think that's accurate.

And kind of over what timeframe have you kind of come to that conclusion?

So, over the last -- you know, probably before -- this was before the election, we were beginning to have some meaningful discussions with the EPA, with the EEI and of course AEP being a principal part of that, as well as legislators on both sides of the aisle in both the House and the Senate.

And we were getting the impression that with the economy beginning to show signs of life, no one was interested in negative effects to that. You know, because of the role that we play at the business roundtable, we've also alerted many of our larger customers of the effect. Those who have the boiler impacts understand, but many of our customers aren't that aware of the effect that this could have on them. And I think corporate America has made it pretty clear. So over the last three or four months, we've become more and more determined that spreading that thing out with a decade of commitment to it will make a big difference.

And then I must tell you, Paul, that Cancun, I think, was a game changer. Because people walked out of Cancun with the final belief that China and India, although moving in the right direction, had zero intention of going forward with any major carbon play. Much of the EPA's organization or direction is toward more traditional Clean Air Act events. And as you know, in every decade since the '60s, air quality has continued to improve, and that will happen here in the 2010's and that will happen through 2020's. We've got a lot of the time to adjust to these issues.

And that balanced reason going forward on that timeline gives us comfort that the capital deployment will be well in line with our needs and our plans, as I mentioned in the question that Ali had asked us. So, I would say over the last three or four months, we are feeling much more comfortable that this will be done in a more reasonable way.

Just switching gears, when do you think we're going to see the composition of the Ohio Commission stabilized?

Well, there's -- on February 3, there's about 14 or 15 names that the nominating committee will discuss, and they will submit a list of three or four names to the governor's office and he will make his selections. Whether he selects two people at that time or one, and that person being designated as chair is unknowable. And if they select one then, the nominating group will get together and get another list of resumes, winnow them down and make another recommendation to the governor.

So I would expect sometime in the first quarter we will have a full complement of five appointed commissioners with terms that are understood. And there will be a learning curve, no question.

But, it is what it is. With 11 jurisdictions and commissioners and chairs changing frequently, it's something that we are very familiar with and something that we will react very constructively to.

Thank you very much.

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