美國電力 (AEP) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host. Ms. Bette Jo Rozsa.

Thank you Kaylee, good morning everyone and welcome to the first-quarter 2016 earnings call for American Electric Power. We are glad you were able to join us today. Our earnings release, presentation slides, and related financial information are available on our website at aep.com.

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

Joining me this morning for opening remarks are Nick Akins, 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 Nick.

Thanks Bette Jo. Good morning everyone, and thank you for joining AEP's first-quarter earnings call. Financially 2016 is off to a steady start that delivered earnings consistent with our plan for the year, so all is in good shape there. It was not without challenges though, we overcame the winter that never happened and of course, the anticipated changes from 2015. Such as loss of capacity revenues, related to the Ohio transition order that ended in May 2015. And the loss of AEP River Operations revenue due to the sale that occurred late last year. Positive rate changes continued benefits of managing expenses, and discipline market hedging activities enabled GAAP and operating earnings to come in at a $1.02 per share, this compares with $1.29 and $1.28 per share of GAAP and operating earnings respectively for 2015.

The impact of weather was significant for the quarter. Brian will cover this in detail a bit later, but we had the sixth warmest winter in the last 30 years in 2016 and remember, we are comparing against the second coldest winter in 2015. So considering this difference, I would say we had a great quarter from and earnings perspective that showed the resiliency of our plan for the year and the strength of our foundation for continued growth. We are reaffirming our guidance range $3.60 to $3.80 per share and our 4% to 6% growth rate to further signal our confidence in how the year is likely to shape up for AEP.

I'm sure many of you have questions concerning last night's FERC order. So let me put some perspective on that. Obviously, we are disappointed with the FERC decision to review our PPA arrangement under the EDGAR rules based upon the presence of non-bypassable charges. That being said, we embarked on the best mechanism within the existing Ohio legislation that we felt could withstand legal scrutiny that would allow the Ohio commission to have a say regarding the long-term viability of resources, and the development of new resources within the state.

The positive note regarding Ohio activities during the fourth quarter is that the PUCO did the right thing. They approved the PPA. And not only sent message regarding investment and resources located with the state, but also focused on moving towards a balanced set of resources that included renewable development that would've advance any potential clean power plant objectives. But FERC has spoken and unless we have the patience for what could be a lengthy review process by FERC, this option could be off the table.

So here's what I want to be absolutely clear about, AEP is moving toward being a premium regulated utility. One that is advancing toward being the next-generation energy provider that has a vibrant energy grid, with not only a balanced set of generation resources, but the technology of tomorrow to enable a clean, reliable, and affordable energy product to our customers. We have no interest in getting involved in a protracted FERC state jurisdictional dispute so we will move as expeditiously on plan B as possible to resolve any uncertainty regarding our being the next premium regulated utility.

So, this is a two-prong approach that will be pursued in parallel. So, we can still meet our objectives as quickly as possible.

Number one, we already have a strategic review that I will update you later regarding the non-PPA assets. We will begin a strategic process for the PPA assets as well. Number two, will push for re-regulation in the Ohio legislature to repeal and replace SB221, or enable the transfer of and cost recovery for certain resources in AEP Ohio thereby eliminating the need for a PPA. This will secure Ohio's role in determining its own resource mix with a structure that enables long and short-term deployment of generation related resources in the state.

These two prongs will progress in parallel, and whichever results in AEP becoming fully regulated earliest will be completed. All of these state related issues are occurring out of frustration with organized markets such as PJM, that have an inherent inability to allow states to make decisions regarding their own resources. Ohio needs to decide expeditiously, does it want to control its own development of resources within the state? Or leave it to PJM and the federal government, who have conflicting multi state interest?

Regarding the Ohio Supreme Court decisions, we believe these two remanded cases should be taken up together at the PUCO because they clearly are interrelated. The first order concerning the capacity charge and the energy credit set by the PUCO the court said clearly that the AEP should recover our generation capacity costs and that PUCO erred in its use of the energy credit, and should have listened to AEP's concerns. The second order concerning the rate stabilization recovery mechanism, said that it was permissible to have deferred capacity costs recovered in the RSR but not the component of the RSR that reflected transition or financial integrity revenue.

All these together say that the remand to the PUCO requires the recovery of all of AEP's capacity cost. Therefore, once the dust settles on which buckets costs are attributed to, AEP expects results to be mutual or positive to earnings.

The last topic to review is an update of our strategic process. So that you will know where we are at, we have opened a confidential data room, there is considerable interest by several parties, and the process is moving according to schedule with final bids in the third quarter, and aggressively completing a transaction by the end of the year.

Now, at this point, I'll move to the equalizer chart on the next page to talk about some of the state regulatory activities. Overall, we're seeing a 9.4% return as you recall from the last quarter, it was 9.6%, but we expected it to come down during the first half of the year, and then move back up toward that approximately 10% that we had discussed earlier. So, everything is still on plan for that.

Looking at Ohio Power, the ROE for AEP Ohio is in line with our expectations and we expect to finish this year in line with the 11.9% ROE forecasted. For APCO, the decrease in ROE from December to March, is primarily due to unfavorable weather this winter, a 2015 reversal of previous regulatory provisions as well as the performance of the merchant portion of the Mitchell plant.

The 2015 West Virginia base rate case included a delayed billing of $25 million of the base rate increased to residential customers until July 2016. So we'll see that start to kick in and as they phase in the Company's ROE is expected to trend at or near the 2016 forecasted ROE.

For Kentucky Power, we're seeing the expected continual improvement at quarter end, the commission authorized a $45 million rate increase that was effective in July, 2015. This rate case will continue to improve the ROE during 2016 as the year goes on.

For I&M, it achieved in ROE of 10.2% I&M continues to benefit from a good regulatory frameworks in place for the major capital investment programs it has going on, Rockport, SCR solar, the nuclear lifecycle management at Cook, and transmission PJM related projects. So I&M is well-positioned for another positive year in 2016.

PSO's ROE is generally in line with expectations. In December, as you recall the Oklahoma Corporation Commission heard the rate case and PSO implemented an interim base rate increase of $75 million that's subject to [refine] on January 15. That's kicked in and we should expect that ROE to continue to improve.

SWEPCO, we expect to see some improvement in ROEs from some recent filings but they continue to be challenged by some of the wholesale revenue that is rolling off there, but also the positive indications are they are filing an application in Arkansas that went into effect March 24 to recover our retrofit investments in Welsh and Flint Creek Power Plants. In Texas, we filed transmission distribution riders there as well.

In AEP Texas, the ongoing distribution capital investment in TCC to serve higher levels of electric load, and to maintain that reliability of the grid, has gradually lowered the regulated ROE over time. On April 6, TCC and TNC filed distribution cost recovery factor filings, seeking recovery of distribution investment from July 2006 through December 2015, with rates expected to go into effect September 1. AEP Transmission Holdco, the transmission side of things, it's return is 10.9% which is in line with expectations. 2016 forecast is 10.2% because of the heavy investments being made there as well.

So all in all, it's then a great quarter. The fundamentals are showing through the Company and certainly, we have several opportunities and we'll continue to work on those. It has been eventful, but our employees' discipline and execution toward a common strategic objective is becoming more evident every day. N

o doubt our progress will continue toward being that next premium regulated utility. I can't help but say, because I just got back from the Rock 'n Roll Hall of Fame induction ceremony, I'll will end with a quote from a famous Rock 'n Roll Hall of Fame inductee, it says you will always tell when the grove is working or not, that was from 2004 inductee Prince. At American Electric Power, I can tell you the grove is working.

So Brian?

Thank you Nick, and good morning everyone. I will take us through the financial results for the first quarter, provide our latest insight on load and the economy and finish with review of our balance sheet strength and liquidity position.

Turning to slide 5, operating earnings for the first quarter were $1.02 per share, or $501 million, compared to $625 million or $1.28 per share in 2015. At the highest level, the decline in earnings this year was driven by unfavorable weather conditions and the expected decline in earnings in the Generation and Marketing segment due to the reduction in Ohio capacity revenues. These unfavorable drivers were partially offset by rate changes, growth and normalized margins in our regulated businesses, and higher earnings in our AEP Transmission Holdco segment.

With that as an overview, let's look at the drivers by segment. Earnings for the vertically integrated utility segment were $0.57 per share down $0.04, with the single largest driver being winter weather, which negatively impacted earnings for the segment by $0.11 per share. As Nick said earlier, 2016 was the sixth warmest winter, and 2015 with the second coldest winter for AEP in the last 30 years.

Other major drivers for the segment include the reversal of a 2015 regulatory provision in APCO produced a drag on earnings of $0.03 per share. Off system sales declined by $0.02 per share due to substantially lower power prices. Higher O&M expense unfavorably effected this segment by $0.04 per share, primarily driven by higher employee related costs.

Partially offsetting these unfavorable items, were rate changes which were recognized cross many of our jurisdictions, adding $0.06 per share to the quarter and higher margins on retail sales, mostly related to the timing and mix of sales, which added $0.04 per share. We will look in detail at load and the economy in the next three slides.

Finally, this quarter was bolstered by $0.04 per share from a lower effective income tax rate due to prior year tax adjustments, and tax versus book timing difference accounted for on a flow-through basis. Transmission and Distribution utility segment earned $0.22 per share for the quarter, up $0.02 from last year. This segment's major drivers included rate changes, higher transmission revenues in the Texas Companies and lower O&M expense each of which added $0.01 per share for that segment.

The O&M reduction was due in large part to a contribution to the Ohio growth fund, made in 2015 that was not repeated this year. Partially offsetting these favorable items, is a decline of $0.01 per share, related to milder weather in Texas compared to last year.

Our AEP Transmission Holdco segment continues to grow, contributing $0.09 per share for the quarter an improvement of $0.02. Net plant, less deferred taxes grew by approximately $910 million, an increase of 39% since last March.

The Generation and Marketing segment produced earnings of $0.14 per share, down $0.24 from last year. Capacity revenues were lower by $0.12 per share, due to plant retirements and the transition of Ohio standard service offer to full market pricing. Energy margins were lower by $0.07 per share, due to power prices liquidating 32% lower than last year.

While the trading and marketing organization performed well, it was not able to replicate last year's exceptional results, and was off $0.03 per share. Corporate and other was down $0.02 per share from last year, primarily the result of having no earnings from AEP River Operations, due it to its sale in late 2015.

Despite mild weather, softness in residential sales, and power prices, our performance for the quarter was solid. We had been planning for a couple of years to be ready for the capacity revenue challenges in 2016 and our actions in planning leave us well-positioned to achieve our earnings targets for the year.

Now let's take a look at Slide 6 to review normalized load performance. Starting in the lower right chart, our normalized retail sales were essentially flat for the quarter. However, the other charts on this slide show the growth in commercial and industrial sales is being offset the decline in residential sales.

Normalized residential sales were down 1.6% for the quarter, although we experienced modest growth in our residential customer accounts compared to last year. Most of the customer account growth was concentrated in Texas, where favorable demographic support new household formation. This was partially offset by fewer customers in our Eastern territory, specifically around the Appellation Coal Basin.

On the positive side, commercial sales grew by 7/10 of 1%. This growth was spread across most of our operating companies, which is consistent with the growth in the service sector employment that we experienced across AEP service territory.

Finally, industrial sales grew by 9/10 of 1% this quarter. The majority this growth came from the oil and gas sectors, which I will discuss in more detail later. The growth in these sectors help offset the drag from the primary metals and mining sectors. The weak global demand, oversupply of Asian steel, and strong dollar combined to create challenging markets for export manufacturers within our footprint.

Now let's turn to slide 7 to look the most recent economic data for AEP's service territory. Starting at the top of GDP, you see the estimated 1.8% growth for AEP's service area is now only 3/10 of 1% behind the US, for the first time since 2014, our Eastern territory is now growing faster than the US, this was not the case for our Western territory, where there is greater exposure to lower oil and gas prices. While the nation benefited from lower fuel prices, AEP's regional economies supporting these shale plays are expecting the negative impact of lost jobs.

The charts at the bottom show that employment growth within AEP service area is holding steady but still lags behind the US by 6/10 of 1%. It's no surprise the job growth in AEP's Eastern territory exceeds the Western service area by 0.5%, given what we just discussed. The sectors showing the strongest job growth for the quarter include construction, leisure and hospitality, and education and health services. These gains were somewhat offset by the decline in natural resources and mining jobs.

Today, there are 16,000 fewer natural resources and mining employees working in our service territory than last year. Approximately 12,000 of those jobs were located in our Western footprint.

Now, let's turn to slide 8 to review our industrial sales trends by region. As we briefly mentioned earlier, we continue to see the strongest growth in our industrial sales to the oil and gas sectors.

The chart in the upper left shows our industrial sales in shale counties were up over 9% versus last year. This is in spite of the fact that oil prices, rig counts, and employment in the oil and gas extraction segment were down significantly from last year. The bottom left chart shows the growth in oil and gas sectors was spread across all major shale plays within AEP's service territory, with the strongest growth coming from the Eagle Ford, Permian and Marcellus regions.

The map on the right now includes our coal counties shown in blue. I want to highlight these counties, since we're seeing significant [erosion] in our industrial sales as well as customer counts in this area.

In the upper left chart, our industrial sales in the coal counties were down over 17% is quarter. Low natural gas prices and environmental regulations, combined with the drop in metals production and corresponding demand for metallurgical coal have created a perfect storm for Appalachian coal producers. You are likely familiar with the number of bankruptcies and mine closures that have been announced over the past year, citing these exact reasons.

Outside of our shale and coal counties, the rest of AEP's industrials were up nearly 1% for the quarter. Some examples of industries that are still seeing modest growth this year include, transportation manufacturing, and plastics and rubber manufacturing, both of which are tied to auto sales where production benefited from lower fuel prices.

Now let's turn to slide 9 to review the Company's capitalization and liquidity. Our debt to total capital rose by 5/10 of 1% this quarter, and remains healthy at 53.7%. Our credit metrics, FFO interest coverage and FFO to debt are solidly in the BBB and BAA1 range at 5.45 times and 20% respectively.

Our qualified pension funding decreased 3% this quarter to 94%. Although plan assets increased by 1.2%, plan liabilities increased by 4.5%, due to the discount rate coming in lower than the assumed rate of 4.3%. We plan on funding our pension with about $93 million in the second quarter, equal to the estimated service costs for the year.

Our OPEB funding now stands at 104%. Plan assets decreased by 1% and plan liabilities increased 4%, for the same reasons as the pension plan. The estimated O&M to service both plans this year is expected to be about $20 million.

Finally, our net liquidity stands at about $3.2 billion, and is supported by our two revolving credit facilities that extend into the summers of 2017 and 2018. During the second quarter of this year, we plan to refinance these facilities with an anticipated tenor expected to extend into June of 2021. Altogether, AEP's balance sheet, liquidity, and credit metrics are strong and will allow us to fund our Utility Operations, growth, and dividends under all reasonably foreseeable conditions.

And finally, so we can quickly get your questions, let's turn to slide 10. I want to reiterate that the first quarter's results were in line with our expectations in spite of last night's late breaking news, we remain on track to earn within our previously announced operating guiding range of $3.60 to $3.80 per share for 2016. As Nick said earlier, our previously announced strategic review of our competitive generation business will continue according to schedule and we will share the results of that process as soon as we can. We expect that to be in the third quarter.

With that, I will turn the call over to the operator for your questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead.

Morning guys.

Good morning Jonathan, or good afternoon or whatever it is to you.

I think it's the morning but thank you for [such crisp] comments on short notice. One question I had is, you talked about the plan with the PPA assets to engage in a parallel path strategic review or re-regulation. Is it possible that strategic review could somehow be folded into the ongoing process around the non-PPA assets? Or do you see these as definitely a separate track?

Well we, will start the process obviously with the PPA assets. But we don't want to slow down the other assets. We are still looking at that to see what can be done to address it. But we don't want to slow down the existing processes going on. We're going to stay on schedule. And we're going to continue cranking away. And then we'll initiate the process, and actually initiating a process on the PPA assets is relatively easy to do because, we have already done it for the non-PPA assets. So it can move along relatively quickly as well. The question is, to all of a sudden to roll it into the existing process it may be challenging. We'll just have to take a look at that.

And then, clarify on timing. I think Nick, in your remarks, you said you had hoped to have the process fully wrapped up for the non-PPA assets by the end of the year. I think. I heard Brian say you would update us on the third quarter. Is there a possibility that year end is the outside date and things happen quicker?

Obviously, we would want an announcement in the third quarter, and then we'd want to close as quickly as we can. And we've been able to close transactions relatively quickly before and it's a known set of assets. So we feel like it may be aggressive, but we want to close by the end of the year.

Can you share when bids are due or anything like that?

We have initial bids in a cycle that I think occurs during the second quarter. And then the third quarter will be final bids.

Okay. Great. And then the other part of the parallel path, where are you on this re-regulation proposal? Is it at a standing start? Or is there some momentum in the background? We've obviously just heard the Chairman of the PUC step off the dais or about to. Can you update us on how you see that. How likely it is that something could really materialize faster than a strategic review?

I'll make a distinction, because even before we started the PPA, I said the State of Ohio needed to decide. But I had also said the commission needs to decide. Because we were trying to do something within the purview of the existing legislation. And it had been left up to the deference of the commission to decide. In this case, we are not talking about the commission. Obviously, we'd love for the commission to be part of that process. They need to be part of the process. This is a legislative issue. And our concern is, and I think there has to be a broader concern by the State of Ohio and that's represented by the legislature.

What do we do to enable Ohio to take a firm hold of the capacity and energy situation within the state, the development of new resources, the jobs, taxes, and all those things we talked about earlier? And, it is not like you're starting at ground zero to do this. I think the issues in Ohio are well known from an energy policy perspective. Matter of fact, we just got through with a review through the Ohio Business Roundtable, the Columbus Partnership has been involved. There is definitely already steps being taken.

It's a question of, okay what steps? And there you are talking about, okay, is there a stopgap measure to basically allow the transfer of certain assets within the State of Ohio, to AEP Ohio directly and avoid any kind of affiliate transaction? Which I would say, is probably a better chance of accomplishing something like that than full a re-regulation.

But, I wouldn't take that off the table either. I think there are broader issues that are involved here. For instance, if Ohio wants to move forward with renewables and renewable implementation and balance out the portfolio and focus on natural gas, those are clearly areas that can fall within some form of re-regulation.

Would a transfer like you suggest require FERC approval?

Yes, but that kind of approval they have already done before. We already did it for netbook transfers from what was our Ohio fleet, to other jurisdictions and they were approved without a hitch. So, I think there's probably plenty of precedence on that one.

Thank you, Nick, I'll let someone else get in. Thank you for your time this morning.

Okay. Thank you.

The next we have Michael Weinstein with UBS. Good morning Michael.

Hi good morning how are you doing?

Just fine.

In the case of, let's say total re-regulation, is the Ohio fleet enough to serve returning loads? I'm thinking about a much larger implication that might entail for the utility. Or do have to build additional generation under that kind of scenario?

So, the first answer is no there is not enough. Secondly, we'd have to deal with the capacity deficiency, either through the market or building new capacity. And I think it's a perfect opportunity for the State of Ohio to look at natural gas and renewables to fill out that approach. And as long as Ohio has control in doing that kind of thing, then we are ready, willing, and able to move that direction.

Have you already been in touch with the members of the legislature to begin the process at this point? Or is this basically initial reaction off last night's news?

I'm not going to address that. I think, certainly people are aware of the issues with energy policy in Ohio. And there have been discussions relative to PPA with legislators. And they are fully aware of what the issues are. And, it's not a huge stretch for them to ask the question, why don't you just reregulate?

Would be more accurate to say this is more like a three track process? Where deregulation is track one, and track two might be transferring plants into rate base? And the third is to sell the plants through another process, right?

I think we have to look at, and probably do have to have discussions about what is the most expedient process. Because, I mean there are several options here that we can talk about. And some of them may be stopgap, some of them may be longer term. And certainly I think that others in the state will agree, we need to respond quickly to enable us to continue to do what Ohio wants us to do with that generation. And so, I'd say, we're obviously discussing several options internally among ourselves. But we haven't gone out with specific policy objectives, at least detailed objectives, on how we want to approach it because obviously, we want to do what's the most expeditious way to do it because in my book, the race is on. The race is on between our option of the strategic evaluation, versus our option to have some form of re-regulation coverage. And it may be a misnomer to call it reregulation, but we'll have to see what that means. I think AEP has reached the point where it's time to get this resolved once and for all.

Thanks a lot guys.

Yes.

Thank you, we'll go next to the line Paul Patterson with Glenrock Associates.

Good morning, Paul.

Good morning. So just to understand this, the transfer if you were able to transfer stuff into rate base, that would require legislation? Is that not correct?

Yes, we'd need approval from a legislative standpoint to transfer back into AEP Ohio.

How long do think that might take legislatively? How should we think about that as analysts? How quickly do you think that might be? That they might be practically able to address something like this?

That is probably what we're going to find out. As far as your timeline, you ought to be going by our other option of the strategic evaluation. If we do something earlier, that's great.

Okay. I got you. You want resolution one way or the other pretty quickly, it sounds like.

Yes, we're not waiting.

Here's just an idea, and if it's crazy let me know. What about the idea of, since this is an affiliate issue, at least the FERC order that came out. Simply, AEP's assigning the PPA to [FE] and FE assigning the PPA to AEP. I realize there would probably have to be some changes. But since PUCO doesn't seem have an issue with it, I'm wondering is that something that could realistically address the issue? You follow what I'm saying?

I follow what you're saying. I think probably FERC would follow what you are saying too. I think that would probably wind up being an issue because FERC, they hinge their order. It wasn't just an order saying come in and let's take a look at it. Is was basically saying we don't like the non-bypassables.

In the context of an affiliate transaction, though. This would not be an affiliate transaction then. I realize it a legalistic, right? You guys would not be affiliates at that point.

We'll certainly look at that option.

Okay.

I just don't want to introduce any novel issues that would drive our schedule to be even longer. I think anything to do relative to FERC at this point, most likely would be a longer schedule. Will have to look at it and see. Obviously, we'll hold those kind of options open. I'm just trying to say our primary options are number one and number two that I talked about earlier.

Okay. Thanks so much. Appreciate it.

Yes.

We'll go next to the line of Anthony Crowdell with Jefferies.

Good morning. Is a reasonable, maybe you don't want to answer, whether the re-regulation scenario or some type of cost of service return on these assets is like a two-year event? Or no clarity on that at all?

No. It's not a two-year event. I don't think it's a two-year event. These issues are well known. And really, what we ask for [in] Senate Bill 221, if you scrap that and it goes back to the previous legislation, then there's opportunities there. Or it could be specific issues that are dealt with within a smaller legislation that is a stopgap measure to allow the transfer. And so I think that's a relatively simple thing to think about.

All right great. And a quick follow up, are there any other instances at all that AEP uses an affiliate waiver that may also be contested?

No. I don't think we have anything else there.

Great. Thank you so much for taking my question.

Thank you we will go next to the line of Ali Agha with SunTrust.

Good morning Ali.

Just to clarify your overall thinking on your merchant exposure. I think you said for the non-PPA assets, announced something by Q3 get it all done by year-end. Is the plane for the PPA assets, whatever happens to be done by year end as well? Or could this spill into 2017?

I think realistically, the PPA assets could likely fall into 2017 but I wouldn't think far into 2017. Because, it's -- obviously we have to get a confidential data room with all the analysis, and all the things around those units done. The parties that are interested in capacity in PJM, they are pretty well known now. I think there's probably things you can do to shorten the schedule. But I think, to get the non-PPA assets done by year-end, is an aggressive posture, but doable. But I think probably the PPA assets could fallen into first or second quarter next year.

Also you have said in the past, the PPA assets are the most competitively threatened higher cost goal assets. I mean, is one scenario to just throw in the towel and say, you know what, the market isn't giving us the right signals. We don't have any of the revenues. We may just shut down this capacity?

I think we need more data before we can make that kind of decision. I think you have to test the market. And who knows, you can have a strong summer and the whole world changes. So I wouldn't have any conjecture on that at this point.

Okay. And just from a timing perspective, can you just remind us, when does the legislature meet? I mean what is their schedule? So, if it doesn't happen in this current one, when is the next time they meet, if that is the option we will also be focused on?

Yes, they can meet any time.

I see.

They're in session now, but obviously with the presidential election and all that kind of stuff, could slow things down. But that doesn't stop you from doing all the education and everything until after the presidential activities are over.

I see. And fair to say that the FERC coming in, that is not done, you're not getting involved in Ohio versus FERC that kind of thing?

I'm sorry, Ali. I missed that question.

The FERC jumping in and stopping the waiver, did I hear your comments right? That you don't see any avenue there? That it will just take too long and that's not a realistic path for that whole process to play itself out?

Yes. That's fallen back to the third option. And really, we will have to take a closer look from a legal perspective. Can the FERC process be short changed at all? And any provisions that could occur there. I think FERC has pretty well spoken. We could perhaps ultimately prevail. But it's a long securest route to get there unless we can find a way to get a more clear and concise and quick response from FERC. I think that's probably a longer hurtle at this point.

Last question Nick, when you look at your Company the premier utility company, assuming these (inaudible) assets are ultimately gone, does 4% to 6% still look at the realistic growth target? Or could you look it at a perhaps even higher target, given the growth that your transmission business is showing for the next several years?

Yes, I think we will probably give you some more insight on that in November at EEI. But it is clear, that we're reaffirming the 4% to 6% for now. And then you see the utility growth that's occurring. We show those numbers too. Once we are fully regulated, we will give a view of what that looks like going forward as well.

Thank you.

Yes.

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

Good morning Paul.

Is there any potential if you get expedition reregulation that there might be better value in putting some of the non-PPA assets in the rate base?

We don't know the answer to that at this point. Because the assets that were in the non-PPA side of things, they were natural gas assets and the market has certainly valued those assets. We will have to look at the numbers and responses. We'll know that pretty soon and then we'll be able to tell you. At this point, I think it's just conjecture to assume that. But we'll be looking at all the options. Don't worry about that.

Who is in the data room? Is it private equity, is it strategic?

Yes, there's plenty of parties that are in the data room. I just wouldn't want to go any further than that at this point. They'll become known pretty soon.

Okay, if we can move out of Ohio, and go a little further south. Louisiana is going to talk today about their tax items. Any insight what you expect to come out of that?

Yes, from a Louisiana perspective, I think, it's really taking a step out there to start the deal with the phantom tax issue. Texas has dealt with it before and that obviously, was taken care of. West Virginia, the same thing. So unless Louisiana wants to be unique from every other jurisdiction, if they do choose to do something like that, then they are going a very different route. And obviously, there's no ex parte communications in Louisiana. We'll obviously be having discussions about that with our commissioners.

(Indiscernible - multiple speakers).

Do have anything you want to add?

No.

Okay, thanks for the update

We will go next to the line of Greg Orrell with Barclays.

Thanks. My questions have been asked and answered.

Thanks Greg. Good morning anyway.

We will go next to the line of Michael Lapides with Goldman Sachs.

Good morning Michael.

Morning guys and thanks for taking my question. I wanted to focus on the core business actually and looking at Slide 4. Are we seeing degradation? If I were to look at the same slide for the last year or so, are you seeing some degradation? I mean I will use a handful of examples. PSO, AEP Texas, SWEPCO, pretty big subsidiaries numbers appear potentially heading the wrong direction, or have headed the wrong direction there. Can you give more detail about the dollar rate increase requests at SWEPCO and AEP Texas? When you expect those to go in? And what kind of impact that you expect that to have in regulated returns in both markets?

Let me start with Texas first. TCC and TNC, we recently filed the distribution cost recovery factors there. And those requests are TCC, about $54 million. TNC about $16 million. In terms of when we expect them to come in place, the proposed effective date for both of those is September 1 of this year. And so the effect of those increases would come in, in this chart, over the course of the following 12 months in that regard. In SWEPCO, we also have a Texas TCRF that's in and we have requested an increase of about $4.9 million, very small average customer increase. In addition, we've had a SWEPCO distribution cost recovery factor where we have requested other $9.2 million. So very much trying to take advantage of the relatively quick recovery mechanisms that they have with the cost recovery filings that are short of a full rate case in Texas. And trying to get those increases reflected as quickly as possible to help get those Texas and SWEPCO are always moving in the right direction. In PSO, we've implemented a rate increase effective January 1 of this year. Subject to refund, and are expecting an order out of the Oklahoma Commission sometime this quarter. And again, that should have that PSO ROE moving in the right direction up closer to the, you know upper 9%s closer to 10% range.

Keep in mind Michael, some of this is deliberate too. Transmissions for example, we are spending a lot of money there. And obviously, there's a great recovery mechanism but we are still chasing recovery mechanism because we are investing so much. And in the other jurisdictions now we are following rate cases to catch up in certain areas. All in all, we look at it like, we are managing these across-the-board. So, some maybe you're are seeing drop a little bit. But there may be specific reasons for that, that we're investing, or that we expect ratemaking aspects to come round at some point.

But we're making very deliberate choices. And even during the first quarter, we didn't cut back on our planned O&M or any of those activities because it's the first quarter. Generally, you'd have to say that if you looked at it two years ago, we were probably at 10.3% that we estimated for the year. But you're still in that 10% area and that's where we try to manage this thing to ensure we're meeting that threshold across-the-board. So, I wouldn't be looking at SWEPCO, for example and saying, that's the general trend for everyone. We have talked about the specific issue at SWEPCO and that [turk piece] the 88 megawatts of Arkansas that we really need to resolve but timing is going to be an issue there.

The equalizer chart you referred to on slide 4, Michael, is very much a heads-up display for us. And when we see those lower ROE's, we are either taking action or have taken action to get those improved. And you see that across-the-board, whenever you see those bubbles or balls there, whatever you want to call them, getting into the lower end of the range.

Got it. I want to follow up and I know it's a small subsidiary for you, but if I look at Kentucky earning 5.5%, you've got nine months of the rate increase already in effect right now. So, you only have one more quarter of the rate hike coming in. What do you do structurally or process-wise to get that closer to a normal earned return level?

In Kentucky, we will likely be making another filing. So, when that occurs, you'll continue to see that improvement as well. I look at Kentucky like the little engine that could. Because we get some progressive things out of Kentucky, like the cyber rider that we had. And obviously, it was the first jurisdiction we were able to do a transfer to. So, there are some benefits of being in the Kentucky jurisdiction. You have to look at this thing in the overall context, it is a small bubble. But it is one that is on the uptick from an ROE perspective. And we'll continue progressing that way.

Got it. Last question. At the regulated subs, especially T&D and the vertically integrated utilities, what is in guidance for O&M growth year over year?

It's either flat to down Michael. It's that trend that we've had going back to 2011, to have it be between that 2.6% and 2.8% range and we are about the middle of that for 2016.

About 2.9% yes.

2.75% really. And Michael that's non-bypassable, non-offset O&M. Okay?

Understood. I was is trying to check on that. Because O&M the tends to have a big impact on earned returns as well. Thanks guys. Much appreciated.

Thank you.

We are next to the line of [Profil Meta] with Citigroup.

Hi guys. I'm sorry to go back to the PPA assets. On the non-PPA, I'm a little confused with the timing and the sequencing. Because if you're goal is to get an exit quickly on the non-PPA assets, but you also want to attempt to try to re-regulate, I just don't see how the timing works. Because if you want to sell the assets, you probably have to execute pretty quickly, rather than waiting to re-regulate? Could you help me understand how the timing could work there?

So there are two different things here. The non-PPA assets are part of the process that is already ongoing. And that process is already in play. There's already confidential data rooms, there's already review going on. There's all kinds of things going on with that transaction and really the schedule is pretty aggressive. But we are going to get it done.

Sorry, I meant the PPA assets.

Okay. So the PPA assets. Obviously, we will have to do the same thing there, in terms of getting a lot of data associated with that. Just think about the original non-PPA assets are plants that are wholly owned. There's no partners. There's primarily natural gas, which is pretty easy to evaluate, with Gavin obviously. And Gavin is the piece that people have to take a look at as well. The other set of assets, I'm sure, we've got to get a lot of data and information together for them, to present them in a positive way. To ensure that potential investors can look at those assets and give them time to do that. So we wouldn't want to slow down the existing non-PPA for that. You can only move so quickly with those kinds of transactions. Particularly as it relates to the existing PPA assets. So we will start the process, we will move as quickly as we can. But I'm just try to be realistic, in that it will take a little bit longer than the existing schedule we have for the non-PPA. And, what it also says is, the reregulation or anything any potential option thereof, is going to have to move very aggressively. And so we don't have any time to spare on that because I think that's not the critical path. The critical path, we have two projects. One, the existing non-PPA. And then now we have the existing PPA assets. And we will move as quickly as we can. There's been a lot of homework done on it. A lot of analysis done on it. So we don't have to do any of that and recreate it. We have to make sure our process is robust enough so that people can understand probably a more complex set of resources.

That is very helpful. Secondly, for both the assets, PPA and non-PPA, could you remind us giving the timing difference, but broadly both will be sold. If that is the base case, could you remind us in terms of the tax basis or the tax leakage expectation, if any? And the use of proceeds, if it's just going to be for reinvesting in transmission side? Or are you also going to do some shared buybacks?

We've not shared the tax basis on those assets. And really, the use of proceeds discussion would be likely timed to when we would announce what a transaction would be. But we have a great opportunity to reinvest in our organic business with those proceeds as you saw us do when we had bonus tax depreciation got extended. We were able to increase the CapEx for 2017 and 2018 by $1 billion, immediately most of that going into the wire side of the business. But a more fullsome discussion on what we would do with use of proceeds would likely be an analyst day following the announcement of the resolution of that strategic review.

What I can tell you is we're very mindful of -- is that we have a whole laundry list of potential places to put any available cash that comes in. You named one of them obviously, transmission which we have substantial ability there. There's other things on the list that we continue to invest in. Not only operating companies, but also on the competitive side with purchase power arrangements. Those are opportunities that we can continue to develop in anticipation of cash proceeds coming in. But what I want to make sure of is, that we're not just going to get pile of cash and have it burn a hole in our pocket and we wind up doing something stupid.

Very helpful. Thank you guys.

We'll go next to the line of Shahriar Pourreza with Guggenheim.

Good morning everyone. Most of my questions were answered. But just on the legislative route, I know it's not probably the primary route you want to take. This is probably the first instance that I can remember that all of the utilities seem like they are unified within the state. So when you're thinking about taking the legislative route, is this something you are going to collaborate with your neighboring utilities? And has this been a preliminary discussion?

Yes, I think our interests are consistently aligned because there's a problem and everyone knows there's a problem. And for some probably it's more of a problem than others. But it's still a problem. So we are going to continue to address it. And you'll have to ask Chuck at FE and others what their thoughts are. I would venture to say that our interests are aligned in many ways from that respect because there is a problem.

Got it, okay good. And lastly not to throw in another parallel path. Is there an option to hold a competitive RFB process for the PPAs and allow the other GenCos to bid into this?

The question is, is there enough capacity? I would just have to take a look at that.

Got it. Okay good. And lastly here, by-passable.

Let me just say this though. I really don't want to get to a point where we have 10 options that we are evaluating, because I think it's pretty clear we need to do.

Got it. Okay great. I probably know answer to this, a by-passable route on the PPAs is not something you'd want to take up?

Well, that is an option. But we will have to investigate it and see what actually that means for the company financially but that is an option that has been initially discussed. But whether that prevails or not, will have to take a look and see.

Excellent. Thanks so much guys.

Yes.

And our next question comes from the line of Jim von Riesemann of Mizuho. Please go ahead.

Good morning Jim.

Morning, how are you?

Just fine.

I have a couple of semantic type questions. So the Ohio legislature is supposed to end in mid-June. When is the last date to submit a bill? And do you need to have a bill submitted in order for the governor to call a special session?

We will have to take a look at that. I don't know. There's no deadline for legislation being introduced.

Okay. The second question is, if you go this other route, and this whole FERC process does not work out, are you still subject to the refund that they discussed in the order yesterday?

Nothing has been collected yet so there is nothing to refund.

Okay.

The refund order stays in effect if we were to begin collecting. But, given what they said about the waiver, we can't begin collecting because we can't implement the PPA. So there's nothing to refund.

We weren't collecting Jim.

I was just making sure.

We were not collecting until June 1. No problem there.

An entirely different topic. Do have any comments or thoughts from the Senate energy bill that has been passed there and needs to go to reconciliation?

Yes I think certainly Senator [Michalski] has been working very hard to get bipartisan support for the bill. It has energy efficiency provisions. It has provisions for the grid. Certainly, the focus on making sure the grid is reliable. I think that's a good bill. And obviously, it has to go to conference and Fred Upton has been working on the other side, on the House side. So they will have to put those two together and they are very different in some respects.

We'll have to work through that process. But overall though, anything that Congress and the Senate can do to come together from a bipartisan standpoint to focus on reliability of the grid, integration of all these activities that were having to deal with, is a good thing. I think it's a good start.

Now, there's some heavier lift issues that eventually will need to be addressed. But you have to start somewhere. I think Lisa Murkowski done a great job. I think it is Cantwell on the other side of the aisle. But it's good to see.

Is a premature to discuss what impact might have in your company? The bill, in terms of incremental capital?

Even for what it's doing in terms of things like renewables, I think it would be potentially more wires investment for us which we been very effective at implementing to enable solar and wind development. It is only an upside at this point. We haven't quantified what that is yet, Jim. We think it's a positive opportunity for us.

I don't think it's anything we are concerned about.

Okay, that's what I was going after. Thank you.

Operator, we have time for one more question.

And that will come from the line of Michael Worms of BMO.

I made it. Good morning, how you doing?

Just fine.

When we go potential for re-regulation, I believe you indicated earlier there's not enough generation to meet load. And so the question would be, under such a scenario, what would the impact be to the consumer? In terms of billing out the system to meet the load relative to what the market pricing is today under the current environment?

So we have neither created nor destroyed capacity out the market. So there may have to be interim solutions of capacity to get through until the state can actually decide, what does an integrated resource plan look like for the state going forward? So, the capacity is probably available. But, because we have transferred out capacity as well, and retired capacity, we will need to make sure we have a plan to recover from that. I think from the customer standpoint, to put new capacity in place, or buy existing capacity that's out on the market, would be a positive thing to provide certainty in terms of their bills in the future. And I see a very volatile future for Ohio customers and usually that volatility happens at bad times where customers can ill afford to be able to pay a bill. I think, the utilities focus, particularly an integrated utility, is a big budget biller. And when you open it up to market forces, the budget biller is not in the game anymore. So, I think there's value in that.

Thank you very much. I appreciate it.

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

Certainly. Ladies and gentlemen today's conference will be available for replay after 11:15 A.M. Eastern time today, running through May 5 at midnight. You may access AT&T teleconference replay system by dialing 1-800-475-6701 and entering the access code of 390998. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 390998. That does conclude your conference for today. Thank you for participation, and for using ATT executive teleconference service. You may now disconnect.