美國電力 (AEP) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

I would now turn it over to your host, Bette Jo Rozsa. Please go ahead.

Thank you, Sean. Good morning, everyone, and welcome to the second-quarter 2016 earnings call for American Electric Power. We are glad that you are able to join us today. Our earnings release, presentations 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 are 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.

Okay, thanks, Bette Jo. Good morning, everyone, and thank you once again for joining AEP's second-quarter 2016 earnings call. AEP had a strong second quarter, with GAAP and operating earnings coming in at $1.02 per share and $0.95 per share, respectively, bringing the year-to-date earnings to $2.04 per share on a GAAP basis and $1.97 per share on an operating basis.

This compares favorably to the second-quarter 2015 GAAP and operating earnings of $0.88 per share. The 2016 year-to-date earnings compare unfavorably to 2015, primarily driven by the significant weather and energy market differences experienced in the first quarter of 2015 versus first quarter of 2016, as we reported last quarter. These results clearly keep us on pace to meet our operating earnings guidance range of $3.60 to $3.80 per share, which we're reaffirming.

We are also reaffirming our 4% to 6% growth rate, so overall, a steady as she goes quarter, with the discipline and consistency that our investors have come to expect from AEP. Our focus on the utility operations transmission growth, expansion of our customer sales channels, process optimization, and the disciplined deployment of capital on O&M expenses continues to drive positive results for our shareholders and customers.

While externally it may appear to be relatively calm quarter, there has been substantial activity internally that further demonstrates the direction of AEP in its strategy to be the next premium regulated utility. We recently established a Chief Customer Officer, a role assumed by Bruce Evans, our former AEP Texas President, that provides a focus on improving our customer experience.

This Organizational redesign will focus on addressing the evolving nexus that exists between the regulatory framework, emerging technologies that enhance the customer service, and deploying the analytics and technologies of the future to address resource needs and to optimize smart grid applications.

As we progress with a substantial build out of transmission and distribution to accommodate large-scale optimization and renewal of the grid, along with a development of additional sales channels that provide growth, we are emerging as an energy Company that provides solutions for our customers through both the classical regulated envelope that provides universal access and tailored solutions for customers.

AEP's culture is one of openness, collaboration, and innovation, and I have no doubt that AEP, when focused on the investments in the largest transmission system in the US, and the energy grid of tomorrow, will continue to evolve to be the next premium regulated energy Company. Also, during the second quarter, we continued our strategic review of the competitive generation.

Keep in mind, we now have two tranches of generation, the first of which we've called the non-PPA assets for lack of a better term, which essentially is the natural gas units in the Gavin coal station. The process for this tranche is going according to plan and continues beyond initial bids that were received in the second quarter, with final bids due in August. I can say that the response has been robust and we are confident that the process will move toward the conclusion of the strategic review in the coming months.

We have also begun the planning for the disposition of any cash proceeds to ensure an earnings trajectory that replaces lost earnings as quickly as possible. This could include some ramp-up capital spending in transmission and other actions that we have done previously, and because of immediate recognition of PTC benefits, one business we're currently wrapping up is our investment in long-term solar arrangements, as well.

The second tranche, the previous referred to PPA assets, are in the initial phase of preparing the assets for a process much like the non-PPA assets. This process will occur in parallel with our focused efforts toward restructuring in Ohio. We will be discussing these issues and implications in more detail during the coming months leading up to November EEI.

To follow up on the Ohio restructuring discussion, for those of you who do not know, several of our Company sites have shown up in the latest craze of Pokemon Go. One of those sites was our turbine sitting in the front of our 1 Riverside Plaza corporate headquarters. The virtual reality of a Pokemon next to our generator turbine in Ohio made me think that it may be good for a game, but if the generator was virtual, we might have a real problem on our hands.

That is where Ohio is heading if it depends too much on federal markets that do not value the long-term base load generation. I invite you to look at the PJM website, PJM.com, to review the generation mix of the peak during the warm days we have been experiencing lately. The vast majority of capacity at the time of the peak is delivered by coal and nuclear resources that are not valued properly in the market construct.

Moreover, these markets do not take into account other issues that are of state concern such as placing the generation, balanced portfolios, jobs, taxes, and other state issues. These markets, including PJM, need to be improved to adjust to these realities. With FERC's order essentially taking the Ohio PPA proposal approved order by the Ohio Commission off the table, which I discussed last quarter, AEP is addressing the situation by pursuing restructuring in Ohio.

Note this is restructuring, not reregulation. Our proposal for legislation is now being discussed with various stakeholders and involves the ability to transfer existing generation and invest in new generations, such as natural gas and renewables, by AEP Ohio. The proposed legislation strikes a balance between our ability to invest and maintain generation in the state and the customer's ability to use generation suppliers.

This overall process would allow AEP Ohio to move forward with the transition of generation resources in a responsible way that would benefit the state of Ohio and AEP and its customers. The legislation would address any potential FERC jurisdictional matters, while allowing the state to take control of its own resources, as well as any transition in visions under initiatives such as the Clean Power Plan. In the absence of restructuring legislation, AEP will continue with the strategic process with a second tranche generation.

We continue to analyze the load situation in our service territory. Shale gas load has tailed off in recent months, along of course with mining. While industrial load has dropped, commercial and residential load increased, so from quarter to quarter, the last several years have overall been a mixed bag and hard to read, much like the economy, in general. Brian will address the load-related issues in more detail in a few minutes.

Moving to the equalizer chart on page 4 that shows our various operating areas, our overall ROE continues to improve. As we mentioned last quarter, it is now at 9.8% versus 9.4% that we recorded last quarter, and is still expected to move toward our forecasted 10.1% overall ROE for 2016. So all is moving according to plan.

Here's the story for each of the regulated business units. For Ohio Power, the ROE for AEP Ohio at the end of the second quarter was 13.3%. We expect it to be more favorable than the forecast 11.9% at the end of the year. The improved ROE forecast is primarily due to AEP Ohio receiving a regulatory order related to the PIR, the Phase-In Recovery Rider, that allows us to recover accumulated deferred fuel costs with [curing] charges, as approved by the commission in the ESP I case.

And also a $21 million increase in retail margin due to a regulatory reversal provision that occurred and then a favorable annual PJM transmission formula rate through-up. So OPCo, Ohio Power, is doing very well at this point and we continue to expect that.

APCo, the increased in ROE is primarily due to a one-time recognition of deferred billing in West Virginia, as approved by the Public Service Commission of West Virginia in June of 2016. The 2015 West Virginia base rate case included a delayed billing of $25 million of the annual base rate increase to residential customers until July 2016.

As these revenues phase in, the Company's ROE is expected to trend near the 2016 forecasted ROE. APCo does continue to monitor reduction in industrial and residential load, particularly in the coal depressed areas of the state. We are watching that very closely.

Kentucky Power, we are seeing the expected continual improvement at quarter-end. The commission authorized a $45 million rate increase effective July 2015 and this rate case will continue to improve the ROE in 2016. Also they are continuing to watch their economy, as well.

I&M achieved an ROE of 10.1%. I&M continues to benefit from reasonable regulatory frameworks in place for those major capital investment programs that we have had in the state, generation such as Rockport, the solar projects, nuclear with the loss cycle management at Cook, and transmission projects, as well. So I&M is well-positioned for another positive year in 2016.

PSO, its ROE is generally aligned with expectations. Oklahoma's economy continues to experience a slowdown, due in large part to low oil prices and reduced oil and gas activity in the state. In December 2015, the Oklahoma Corporation Commission heard the rate case and PSO implemented an interim base rate increase of $75 million, subject to refund in January of 2016, so a final commission order is expected on that in the fourth quarter.

SWEPCO 2016 revenues were challenged by the weakness in oil and natural gas prices. Some wholesale revenue is rolling off, as wholesale customers exercise options for self-generation or market participation, but we filed an application in Arkansas that went into effect March 24 to recover our retrofit investments in Welsh and Flint Creek.

Then in Texas we filed transmission distribution riders, as well, in that state, so we continue to make various filings in those states to improve the ROE. AEP Texas, the ongoing distribution capital investment at AEP Texas to serve higher levels of electric load and maintain the reliability of the grid had gradually lowered the regulated ROE overtime.

The ROE should continue to improve, however, due to the recently approved $56 million DCRF settlement that will go into effect September 1, 2016. That is that distribution cost recovery factor, for those of you who do not know what DCRF is.

AEP Transmission Holdco, the Transmission Holdco's return of 11.7% is outperforming the 2016 forecast of 10.2%. The increase in ROE is really focused on a true-up, an annual true-up that occurs in the transmission formula, so we expect that ROE to come down during the year, but still expect it to be around 10.7% by year-end, so that is a known and measurable process that we are going through there.

Overall, 9.8% continues to track upward and we're pleased with the progress that the operating companies have made. Overall, another great quarter for AEP. This quarter has been a continued approach by AEP to ensure consistency, discipline, and execution to provide quality shareholder value.

It is hard for anyone from outside of AEP to see the Company I see from inside, with the dedication and innovation of our approximately 18,000 employees. So I'll just put it this way. I happen to play drums in a band at an event in Cleveland last week, where we backed up the Marshall Tucker band. We played some Bruce Springsteen and it's still on mind so I'll just end up by just saying, baby, we were born to run. Brian?

Thank you, Boss, and good morning, everyone. I'll take us through the second-quarter and year-to-date financial results, provide our latest insight on load in the economy, and finish with a review of our balance sheet strength and liquidity position.

Turning to slide 5, operating earnings for the second quarter were $0.95 per share, or $466 million, compared to $0.88 per share, or $429 million in 2015. Overall, the increase in earnings was driven by rate changes, including the reversal of a regulatory provision, and lower O&M in our regulated utilities and higher earnings in our AEP Transmission Holdco segment, both of which were partially offset by the expected decline in the Generation and Marketing segment.

Earnings for the Vertically Integrated Utilities segment were $0.43 per share in the second quarter for both 2016 and 2015. Lower O&M due to decreased plant outage expenses and recovery of incremental investment to serve our customers were offset by lower margins on retail sales and decreased off-system sales margins due to lower energy prices.

The Transmission and Distribution Utilities segment earned $0.25 per share for the quarter, up $0.09 from last year. This segment's major variances included the reversal of a previous regulatory provision in Ohio, adding $0.03 per share, and higher margins on retail sales, which added $0.02 per share. Other favorable drivers, each adding $0.01 per share, were rate changes, higher ERCOT transmission revenue, and lower O&M expense.

Our AEP Transmission Holdco segment continues to grow, contributing $0.19 per share for the quarter, an improvement of $0.06. The growth in earnings reflects our return on incremental investment, and includes the impact of the annual true-up for the formula rate mechanism. Net plant investment less deferred taxes grew by approximately $840 million, an increase of 32% since last June.

The Generation and Marketing segment produced earnings of $0.09 per share, down $0.07 from last year. Capacity revenues were lower by $0.07 due to plant retirements and the transition of Ohio to full market pricing. Energy margins were lower by $0.03 per share, due to power prices liquidating 18% lower than last year.

On the positive side, the commercial organization in our competitive business performed well and wholesale trading and marketing was favorable by $0.01 this quarter. Corporate and Other was down $0.01 from last year due to higher O&M expense.

Let's turn to slide 6 and I will briefly highlight our year-to-date results. Operating earnings through June were $1.97 per share, or $967 million, compared to $2.15 per share, or $1.1 billion in 2015. The detail is on the slide for those of you who would like it.

But overall the decrease in earnings was driven by the expected decline in earnings in the Generation and Marketing segment, less favorable weather conditions in the first quarter, depressed power prices, and the disposition of our River business last year. These unfavorable drivers were partially offset by rate changes, a change in the effective tax rate, growth in normalized margin, and increased earnings in our transmission businesses.

Now let's take a look at slide 7 to review normalized load performance. For both the quarterly and year-to-date comparisons, the message is the same. Our normalized retail sales were down compared to last year because the increase in residential and commercial sales was more than offset by the drop in industrial load.

In the lower right chart, our normalized retail sales were down 0.4% for the quarter and 0.3% year-to-date. For both periods, the strong sales performance in our Texas territory is being offset by the weakness in Appalachian and Kentucky regions. This illustrates the benefit of geographic diversity.

Normalized residential sales in the upper left rebounded in the second quarter and are now essentially flat compared to last year. Through the first half of 2016, our residential sales, customer counts, and normalized usage were all essentially flat.

In the upper right, commercial sales grew by 1% for the quarter and are up a 0.8% year-to-date. This growth was spread across several of our operating companies, the strongest growth occurred with the T&D Utilities segment. This is consistent with some of the economic data I will share with you on the next slide.

Finally, industrial sales dropped by 4% this quarter and are down 1.6% through June. The sustained drop in energy prices, weak global demand, and strong dollar have combined to form a challenging environment for manufacturers. For the quarter, industrial sales declined in seven of our top 10 industrial sectors.

The two sectors that grew in the second quarter were pipeline transportation and transportation equipment manufacturing. The petroleum and coal product sector was flat for the quarter. I will provide additional color on our industrial sales later.

Now let's to slide 8 to look at the most recent economic data for AEP service territory. Starting at the top with GDP, the estimated 1.3% growth for AEP is only 0.3% behind the US. The upper right chart shows that our Eastern territory is not only growing faster than our Western territory, but is now exceeding the US.

This is not the case for our Western territory, where there is greater exposure to lower oil and gas prices. Depressed energy prices have created a noticeable slowing in our Western footprint. While the nation benefits from lower fuel prices, AEP's regional economies supporting these shale plays are experiencing the impact of lost jobs.

The charts at the bottom show that employment growth for AEP is holding steady at 1.1%, but still lags the US rest by 0.6%. It is not surprising to see job growth in AEP's Eastern territory exceeding the West, given what we just discussed. Earlier in the presentation, I mentioned that our commercial sales were the strongest in our T&D Utilities segment.

That matches the employment data for our service territory as well. Over to two-thirds of all jobs added in 2016 have been in Ohio and Texas. 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 over 22,000 fewer employees in that sector than last year and approximately 15,000 of those jobs were located in our Western footprint.

Now let's turn to slide 9 to review our industrial sales by trends -- trends by region, I am sorry. Over the last several years, our industrial sales growth has largely been tied to the oil and gas activity around the major shale plays. Up until this quarter, sales to the oil and gas sectors have been fairly resilient, despite low energy prices.

The chart in the upper left shows that the tide has started to turn. AEP's industrial sales in shale counties this quarter actually declined by 0.3%. Specifically, the decline is largely coming from our upstream oil and gas extraction sector, which experienced a 6% decline for the quarter.

The map on the right identifies our coal counties shown in blue. I want to highlight these counties, since we continue to see 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 14% for this quarter, while sales to the mining sector alone were down nearly 18%.

Low natural gas prices, environmental regulations, lower demand from the utility sector, and less demand globally for metallurgical coal have created a bad situation for Appalachian coal producers. Outside of our shale and coal counties, the rest of AEP's industrial sales were down 3.3% for the quarter.

Now let's move on to slide 10 to review the Company's capitalization and liquidity. Our total debt-to-capital ratio crept up by 0.3% during the quarter and remains healthy at 54%. Our credit metrics, FFO interest coverage, and FFO-to-debt are solidly in the BBB and BAA1 range at 5.6 times and 20.2%, respectively.

Our qualitative pension funding remained unchanged for the quarter at 94%. Although play in assets increased during the quarter, so did play in liabilities due to the discount rate coming in lower than assumed. During the month of June, we funded about $86 million to play in assets, an amount equal to the estimated service cost for the year.

Our OPEB funding now stands at 101%. Play in assets increased by 0.2%, but play in liabilities increased 3.1% due to dropping discount rates. The overall impact dropped our OPEB funding ratio by 2.9%. The estimated after-tax O&M expense for both plans this year is expected to be about $13 million.

Finally, our net liquidity stands at about $2.3 billion and is supported by our two revolving credit facilities. During the second quarter, our treasury team worked with our banking partners to amend and extend our key credit facilities. We now have a $3 billion facility that extends into June of 2021 and a second $500 million facility that expires in June of 2018.

This tiered structure allows for maximum flexibility, as we continue our strategic review of our competitive generation assets. 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.

Now let's turn to slide 11 and wrap this up so we can get your questions. We are pleased with our earnings results for the second quarter of this year. Gains in our wires businesses more than offset expected decreases in our competitive businesses, due to lower energy prices and deregulation in Ohio.

As we look towards the second half of 2016, we believe that our regulated businesses will more than offset any challenges presented by our Generation and Marketing segment, giving us the confidence to reaffirm our operating earnings guidance range of $3.60 to $3.80 per share.

Finally, as Nick mentioned earlier, the strategic review of our competitive generation remains on track and we hope to have news for you in that regard either later this quarter or early next quarter.

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

(Operator Instructions)

Greg Gordon, Evercore Finance.

Thanks, good morning.

Good morning, Greg.

Looking at the numbers, the quarter was obviously great, but the sales trends in industrial are a bit concerning, especially if you just extrapolate them out, on a compounding basis. I've heard some concern from investors just around the ability to meet the 4% to 6% earnings growth aspiration, if in fact, the sales growth targets that you laid out when you laid that target out a year or so ago fail to materialize.

You aspire to be a premium utility. Premium utilities do not blame changes in the outlook for not meeting their growth rate. So how do you aspire to optimize your plan through time if industrial sales continue to be a drag on the plan?

The last four years have shown us a couple of things. One is the inconsistency of load from quarter to quarter, and obviously, we have had to work through that. The other thing, the last four years has shown us, we have to adjust to it. When you think about the levers that we have around O&M, but we also have emerging revenue sides, as well.

The transmission continues pick up. There's no question that we will have to continue to invest in the grid, and in particular, transmission as well. Then we also have other investments, like solar and those kinds of relationships with customers that are improving earnings, as well. So when you look at the 4% to 6%, we are still confident in the 4% to 6%, and as we go through the year, we'll certainly be able to fine-tune that in more detail.

But the overall message is we feel like we have the ability, as we have done in the last four years, to be able to compensate for any of these issues that occur. There is no question, any business has to adjust based upon what the sales forecast looks like, but also they've got to look at the revenue side, as well, to ensure that we are doing everything we can do there to do its work, as well.

So, Greg, I know, there is a lot of concern out there about load forecast going forward, if you trend it out, and of course, what we do with the unregulated generation, but at the end of the day, we are going to adjust to it. We take very seriously the consistency that we have built and maintained over the last four years and we do not intend on giving that up.

Great. That is great. Also when I look at the balance sheet, you guys have ascended to a position of having one of the strongest parent balance sheets amongst what I consider your utility holding company peers, if you look at the FFO- to-debt metrics, the debt-to-EBITDA and thus?

Yes.

You've got a lot of balance sheet capacity. How do you think about that stored value and how you might use it going forward?

Yes. We look at it as stored value. It gives us a lot of opportunity, but we have the ability to invest indigenously within our own footprint, and we also, from a transmission standpoint and other revenue producers that we are working on to really define that, whether it is the energy company of the future or whatever you want to call it.

But there is no doubt that we've built up a strong balance sheet with great credit metrics, and obviously, we intend on maintaining that, but at the same time there is the ability for us to look at various options for the use of that debt. It's actually good place to be in, but also in this day and age, and how the economy is doing and what's going on there, it is a good place to be.

Greg, you know this Management team and you know how we've used balance sheet in the past. It has been on prudent, regulated type utility investments and you would expect us to spend any of that balance sheet capacity in a similar vein going forward.

Great. Thanks, guys.

Anthony Crowdell, Jefferies.

Good morning, Anthony.

Good morning, Nick. Just two questions. First question on Ohio. You have had another utility in your state apply for a regulated plan, looks like it's going to be a wires charge to grow, to make more of a robust grade. Does AEP make a similar filing, given that staff has commended that?

Ultimately, we can always do that. That is an option for us to do. AEP is in a different place. We have some outstanding issues that we are working through with the commission, the PIR that we just got was one of those, but we also have the Supreme Court cases on capacity that have come and on the RSR so we are working through a list of outstanding issues.

Each one of those is generally positive for AEP, so we are going to work though those and get them resolved and it's a great opportunity for us to do that. And at the end of the day, if that other company is successful, then obviously, we will take a hard look at that.

But we want to make sure that we are investing in this state and those areas that make sense and we are doing well from a transmission and distribution perspective. We have got to get this generation thing settled once and for all.

Then following up on Greg's question, you mentioned you guys have a strong balance sheet, highlighted all of that capacity you have. You're going through the changes with the Generation and Marketing segment right now.

Southern's call yesterday highlight the success at Southern Power finding all these renewable projects. Do we see the Generation and Marketing business for AEP in a year or two looking more like a Southern Power with a lot more renewals? Is that going to be the focus as we go forward or is it just really managing the fleet or just winding it down and just being a wires company or regulated company?

No, clearly, and we are probably a little more quiet about it because the major part of our business is around infrastructure, infrastructure development on the transmission side. We have a huge transmission system, so we have a lot of ability to invest. But you're always looking for sources of new revenue and we see it as another tool in the toolbox to be able to focus on enhancements of earnings because obviously there is near-term benefits of the protection tax credits and we are out there doing that.

We just did a universal scale, or utility scale project, in Utah that has not been announced yet. We cannot say who but it is a 20 megawatt project. And then we also have several other small projects with municipalities and so forth in New York and other locations around the country. We have been doing that and we know how to do that.

What we really are focused on, though, is ensuring that we do have a place to deploy our capital in the wisest fashion. That can certainly augment our business, but our main focus is to focus on the infrastructure and what it means. It goes beyond solar. It goes to relationships with customers and I alluded to that in my opening discussion.

You have much broader relationships with some of these customers that goes beyond solar. It goes to obviously renewables but storage; we are very focused on storage aspects. An investor in Greensmith, for example -- the integration of solar and wind, but also in energy storage, and you see those applications coming together from a distribution standpoint and that is going to be a huge benefit to us.

So obviously we want to be in the solar business, but we also want to be in the wind power, but it is really addressing tailored needs of customers focused around that customer experience. In ancillary fashion, it's coming to pass, but we will probably be getting larger at it, but we will be good at it, we will be focused on ultimately those customer experience out of things.

My last thing is, just to make sure I understand correctly, it looks like you'll look at multiple opportunities maybe to bridge the gap on the [gen car] marketing and one of those may be a solar ITC bridge there. Is that correct or that's not what you said?

Yes, essentially that is right, but at the same time, we want the earnings driven by the utility business to drive that consistency. If you are able to augment with long-term purchase power arrangements, whether it is solar or whether it is anything else, then it is quasi-regulated that we can show consistency.

That is the first thing we measure it on, so we are not on their doing solar just for solar's sake, or solar with counter parties that we're not sure they are going to be there are not. We are being very selective about what solar projects and what counter parties we become involved with. Certainly Chuck Zebula, who is running that business, you probably all know him, he is very structured in the way he addresses these things, just like he did with even a lot of the sun regulated generation.

We performed extremely well in doing that business regardless of whether we should be in it or not, that is another question, but when we do it, it is very disciplined, it is very structured, and it is very focused on what we're trying to achieve. So you are exactly right. For us, if you look at the use of proceeds, if we have cash proceeds coming in from a transaction, then obviously one of the issues that we talked about earlier was repurchase of stock.

But obviously if you can invest in a long-term solar project and take the PTCs upfront, that it is also a great measure for investment as opposed to buying back stock. So there is a lot of things that are on the table that we are preparing as we work through the process of that disposition of cash, for example.

To be the energy company of the future you've got to be involved with all these facets of the business and understand the facets of the business, but you've got to be very disciplined in your approach. We just have -- I wouldn't say a different view in terms of whether all these resources that should be a valid set of resources,

We agree on that. The issue is we are very focused on the wires piece of it and how it interacts with the customer. And in the future, you are going to see a lot of these distributed solutions that are driven by the customer interaction at the distribution level and we are going to be there to do it.

Great. Thanks for taking my questions.

Julien Dumoulin-Smith, UBS.

Good morning, Julien.

Good morning. Quick follow-up, if you will, on the process here. When you're thinking about the legislative effort, whether restructured or what have you, when do you make a final call here? You talked about the end of this quarter, early next, making a decision on the sale. Is this a potential for you to stretch into next year to try to get it done, given the limited window on legislation this year?

Let me give you an idea of at least my perception of the timing here. We have the framework of legislation that we are addressing with stakeholders now. And that is whether it is legislators, whether it is others, that are important to the discussion process, other participants in the market, those kinds of things. We are going to focus on that's between now and November.

Then November is when the Ohio legislation comes back into place. Keep in mind, I am talking about the first tranche of assets; this is really regarding the second tranche, which is what formerly was the PPA assets. So the first tranche, that is moving along; it is already -- the train has left the station, and it is moving forward.

The second tranche, I am saying from the restructuring standpoint, we are going through and have the legislation, have discussions with stakeholders, get that process in place in November when Ohio, the legislature comes back into session. It will be a lame-duck session so we'll have to make sure that we are focused on those legislators that will still be around and the future leaders of that organization.

That way we can hit the ground running with legislation that has already been by and large vetted and discussed in the first quarter, by the first of the year. So in the first quarter, you're starting with the new legislature. I think we're going to know pretty quickly whether people are open to the possibility of this kind of thing happening or not.

At that point in time, we have already started our secondary process that I talked about around the PPA assets, getting the data room ready, all that stuff, and we will make a determination of where we think Ohio is going to go. Ohio, many people did not think PPA would happen in Ohio and it did happen.

I still think there's going to be some form of restructuring in Ohio because there has to be. But the question becomes, number one, are people receptive to; number two, is the time frame appropriate for what we are trying to achieve. The driver here will be that secondary process.

We will have to get some determination as to whether the openness and the collaboration in the state of Ohio would work to get something done during [dependency] of all that. So that is where we are at. When we think about that, you're probably thinking the decisional process in the first quarter of next year that we know whether Ohio, if there's a chance of moving forward with the thing or not. That will tell us what we need to know.

Got it. And then just to keep going with that same theme, you alluded to new investment, as well. I am curious, even if you pursue the sale, do you pursue legislation extra to open that door, as well? And to that, what kind of generation and how do you envision that today?

Yes. I have made it very clear in the state that we're not going to invest any generation in this state, period, until something is resolved from a restructuring standpoint that enables us to invest and do it in a wise fashion. The legislation includes the ability for AEP Ohio to not only transfer those assets that were under the PPA to AEP Ohio, but also to be able to have a mechanism for investment in future generation.

Obviously, the state of Ohio is very interested in getting natural gas going. There is a lot of discussion about there's three or four natural gas units getting built. That is woefully inadequate of what the Ohio load actually is. So there is a capacity deficiency in Ohio.

If Ohio wants to take advantage of additional natural gas build-out, the additional structural addition, such as pipeline infrastructure, electric transmission infrastructure, the economic development follow-on to all that, there's no reason for Ohio to give that up. So there has to be a mechanism to do that and that is what we are after.

And just to clarify, renewables, as well, in the legislation? Obviously, that is a hot button issue this year?

Yes. Renewables, as well. We've had discussions. There is different opinions on wind; there's different opinions on solar. Most are for solar; some are against wind. But there's dialogue to where we can probably reach some happy medium.

Great. Thank you.

Michael Weinstein, Credit Suisse.

Good morning, Michael.

Good morning. Just a follow-up with Julien's question, you had mentioned that this is not reregulation, this is restructuring. I'm just curious about what the -- why the deemphasis on reregulation and what pushback to see if that term was used or proposed?

Reregulation has the connotation that everything is going to be slammed back into the wires company and there won't be any ability to shop and other participants cannot participate in a market. So we are focused on reaching that balance of the ability for the utility to invest, but also others to invest, as well, and customers to be able to choose.

That is really the distinction. Reregulation just has a larger connotation to it and it actually is a much heavier lift to put the entirely genie back in the bottle.

Right. So it's the spectrum of possible options, one where you would have everything put in, one where you have only certain assets, like the PPA assets, and then perhaps maybe on the other end of the spectrum might be only to allow the utilities to only invest in new assets? I don't know if that's also something that might happen?

That is not our preference, obviously. That is going to be determined on this second tranche of generation, for sure. Our intention is to make sure that we can transfer these assets back into the large Company and enable the ability for us to continue to invest in new generation in a credible fashion.

It will take a legislative mechanism to do that. And we also obviously want to make sure that we accommodate other participants in the markets in some fashion and that is part of the dialogue. But those two things are what we are after.

As a reinvestment possibility, at the solar investments that you were talking about, how big do you see that getting in terms of contributing to the 4% to 6% growth rate versus, let's say, the Transmission Holdco growth that you were forecasting for that segment?

We plan on updating that at EEI in November, particularly as it relates to 2017 and beyond. We know what it is for this year and it's been pretty good. It's $15 million to $20 million has been added for this year.

Those projects are the huge pipeline of projects. You've probably heard others talk about, there is a lot of solar projects out there, but we are going to pick and choose the ones that match up to what our degree of risk is and we want to make sure that, that business continues to grow. But we are going to be very disciplined in our approach. So we will have more on that at EEI in November.

Great. Look forward to it. Thank you.

Okay. It's not that. It's what we are doing with wind power or with energy storage, as well. And it could be even more defined energy service relationships, as well.

Right. Right.

Paul Patterson, Glenrock Associates.

Good morning, Paul.

Good morning. Just in terms of the tax audit, could you elaborate a little more what happened there and if it's going to maybe impact taxes going forward?

It should not impact tax rates going forward at all. It was a favorable federal tax adjustment related to a settlement of a federal tax audit issue, where we had a tax valuation allowance recorded in 2011. Talk about how legacy of an issue this is, that was related to litigation that stemmed out of the Enron bankruptcy.

So we are going back pretty far in history. These things take a long time to work their way through the IRS, and ultimately, a congressional committee, and that is what happened on this. So it is great to get that resolved and behind us, but do not expect anything like that to be a recurring item.

Okay, great. On the reregulation or restructuring, just to make sure I understand, it sounds like you will be -- I was not clear as to whether or not November, the lame-duck session, was when things might be clearer to you or what that meant in terms of whether something actually might happen then or whether you were really looking at the first quarter of 2017?

I am thinking it really is more of a soaking period because what we want to do is, in November, be talking to the other stakeholders and come to the legislature with what we believe is a balanced package that other participants in the markets can latch onto as well. If we do that, then discussions we've already had with the legislators, we are trying to get to every legislator we can that we know is going to still be around.

That would be a -- November, we'll get an early indication of where things are going, but really nothing -- I do not expect anything can happen until the first of the year when the new legislature comes in. But obviously we will know who is coming in so we can have that soaking period from November to December, and then in earnest move that legislation forward.

I know that is aggressive, but what we will be looking for is really the feedback that we get in terms of not only whether it can get done or not, but in terms of timing would be an important considerations for us. So I do not see legislation actually getting done until first quarter or second quarter of next year, but if we know it is coming and we know what is entailed in it, then we can plan for it.

Okay. Then when you mentioned stakeholders, are we talked about other merchant generators? The reason for the question is, as you know, it seems less their generation is included or what have you, that there is this vehement take no prisoners, no, no, no, no, on anything like restructuring or what have you because of the fear that they might not be as competitive, if you follow me. Is their participation something critical here or how should we think about the stakeholders [thoughts] that you're mentioning?

I certainly think that they are part of the equation, and certainly, we want to be able accommodate, as much as we can, the investments that have been made in the state of some of these independent power producers. Keep in mind, they can still have PPAs because they are not affiliated.

So there are opportunities for them to actually confirm earnings in a period where obviously being an independent power producer -- it's not a good time to be in that business right now. I am not going to go into who we have been having discussions with or anything like that, but I would have to say that they are an important part of the puzzle here.

Okay. Thanks so much.

Yes.

Paul Ridzon, KeyBanc.

Good morning, Paul.

Good morning. Can you just once again review the priorities for the proceeds from the non-PPA assets?

The proceeds for the non-PPA assets, okay, so that process will go forward and the priority will be, we will look at as much ramping up as we can do relative to a transmission investment and other types of investments to fill -- to make sure that the earnings come in as quickly as possible. Obviously, solar could be a piece of that, as well, and we are obviously looking at other measures that we can do to invest more quickly to address the level of cash that is coming in. We'll obviously fill in more of the detail of that in November, as well.

Paul, we would like to be able to come out and have an analyst day when we do have something to announce on that strategic review that is underway. We would have a detailed discussion of that at that time.

Thank you. And you indicated that the process was preceding fairly -- you characterized it as going well. Can we use the Duke Ohio assets on a dollar per kilowatt basis? Is that a reasonable proxy?

Paul, I do not want to tell you which ones, which assets to use. With your knowledge of the industry, you could probably come up with something that would be reasonable for what those would be. Others have. Some have missed it terribly but the smarter people like you in the industry can figure it out pretty readily.

As I mentioned earlier, we have a robust set of bidders, so I'd hate to give them any guidance at this point.

Understood. And that's 5,000 megawatts of non-PPA?

Yes.

Thank you very much.

Steve Fleishman, Wolfe Research.

Good morning, Steve.

Yes. Good morning. Just clarity on timing of the non-PPA outcome?

From the non-PPA piece, we'll get final bids in August. It will probably take -- it could be third quarter, early fourth quarter, to have a completed deal that we would announce at that point in time. Then the process would occur relative to closing and that could fall into 2017, but obviously, the deal will be done and we will get to closing. It all likelihood, it will take, once the deal is done, it could take around six months, maybe nine months to actually close.

Okay. Also you mentioned some of the weakness in your coal country subsidiary facilities. Are you planning to get rereleased in the areas, or given that they are depressed, is there other ways that you might be able to find solutions there? It seems like politicians want to find a way to invest in new things in this area so I am just curious how you are thinking about that?

There are other a couple of things, Steve. In Kentucky, in particular, we just had some rate release and we're looking at when it makes sense for us to go back in. But in Kentucky, in particular, the governor's office is looking at ways to try and attract new businesses and retain the businesses in those areas that are negatively impacted by what is happening with coal. We, from an economic development perspective, are certainly working with the governor and the state legislators to try and see how we can be a productive part of that.

Steve -- and keep in mind, too, we have converted some of the coal to natural gas, as well. So the Big Sandy side is converted to natural gas, Clinch River is converted to natural gas. Those are operational now and you'll probably see more natural gas build out.

But also on the renewable side, you will continue to see expansion from that perspective. And as Brian mentioned, we actually have been working -- our economic development people have been working with the states to present these sites as Brownfield sites for manufacturing and industrial, so we are working to try to reinforce those service territories as much as we possibly can.

Okay. Thanks.

Yes. I would say, though, that there is a lot of damage that has been done to coal country. There is no question about it. Whoever gets elected in this process really needs to focus one way or another on reinforcing a hugely depressed area and each one of them has their own way.

Hillary Clinton wants to do several billion, focused on rehabilitating, from a jobs perspective, and that kind of thing. That seems like a longer-term issue. Of course, Donald Trump is on the other side saying he's putting the miners back to work, and I do not know exactly how that works but we will -- but either way both of them, they really ought to be focused on reinvigorating that part of the country since it has been so devastated by what's happened recently.

Operator, we have time for one more call. One more question.

Ali Agha, SunTrust.

Thank you, Ali.

Good morning. First, just to bring closure to the overall margin portfolio that, the exit here. If I'm hearing you right, the PPA and non-PPA assets announced late Q3, early Q4 take six to nine months to close from there. The PPA assets, will you have something to announce in Q1 or are you going to follow the legislative process, and maybe that spills over into Q2? Not quite clear on when the final closure happens on that portfolio?

You read that right. We are going to have to gauge the receptivity from the legislature that comes into play at that point in time and will have a lot of groundwork already done. So we'll have a good feeling by first quarter of where this is going to go.

Keep in mind, that second tranche is continuing in parallel, so we are not slowing down on that. What we are saying is we are going to gauge that first quarter and you may get an announcement from us if we are not sensing that is going in the right direction Ohio, then we will say we've got the second tranche, it is moving along, and we will give an update to that.

If we see that legislation can get done, then there will be an expectation to get that legislation done as quickly as possible, but we will have continued running the tranche until we know for sure that legislation is going to happen. So I would say, you are going to something from us first quarter, perhaps the beginning of second quarter, but I believe first quarter, you'll hear from us, some very significant thoughts around that.

Okay. And then second, given how load trends have played out through the first half, are you still sticking to the 0.9% target for the year or should we be adjusting that?

Ali, if we do an update, being half way through the year, and looking at where we have been year-to-date, we'd anticipate being closer to flat by year-end versus 2015.

Okay. Last question, when we look at the transmission growth profile you have laid out for us, the Trans [Co business] through 2019, that is growing well above 4% to 6%. It is becoming a bigger piece of your overall earnings, as well.

So when you look at this Company beyond the merger, just on a regulated basis and if your [P&B], et cetera grows pretty much in line with everybody and the transmission grows the way it is, might we be looking at an overall portfolio that has a growth rate north of 4% to 6%, just looking at those numbers?

Ali, we are going to provide a more fulsome update on longer-term growth rate when we would get together after the announcement of the conclusion of the strategic review of the assets. We'd like to have an analyst day when we go into all that, reset a growth rate if it is time to do that, and take a look at use of proceeds, if that is what we're facing about time, and give you a more fulsome view hopefully later this -- in the autumn this year.

So without answering -- which we will answer, obviously, later in the year, as Brian said -- you have really brought up the kind of Company this is going to be in the future and that will be one driven by transmission distribution focused on wires and the convolution of resources and energy services associated with that. So it's going to be a very, very good Company going forward from a consistency basis, but also from an investment standpoint and what we are investing in, it will position us very well for the next 100 years.

Right. But the regular business should pretty much be growing with your [rate biz] investment. Is that fair?

That is fair.

Okay. Thank you.

Thank you.

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

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