American Electric Power Company, Inc. (AEP) Q2 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded and I would now like to turn the conference over to our host, Ms. Bette Jo Rozsa. Please go ahead maa'm.

Thank you, Linda. Good morning and thank you for joining us today to discuss AEP's 2008 second quarter earnings. If you've not seen the press release issued earlier today, it's available on our web page at aep.com. In addition to the financial schedules included in the press release, the webcast of this call will include charts and graphics referred to by AEP management during the call. An investor information packet is also available at aep.com that includes the consolidated balance sheet and statement of cash flows as well as full income statements for each of our business segments. The earnings release and other matters that may be discussed on the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings including the most recent annual reports on Form 10-K and quarterly reports on Form 10-Q for a discussion of the factors that may cause results to differ from management forecasts and expectations. Also on the call, we will discuss the measures about company's performance, that is ongoing earnings versus reported earnings that differ from those recognized by Generally Accepted Accounting Principles or GAAP. You can find a reconciliation of those non-GAAP measures on our Investor Relations website at aep.com. I'll now turn the call over to Mike Morris, Chairman, President and CEO of the company for opening remarks followed by our CFO, Holly Koeppel who will discuss the financial results for the quarter, then we will have time for your questions. Mike.

Bette Jo, thanks and let me add my thanks to all of you for joining us for this update not only on the second quarter, but the first half of 2008 on what really proves to be an extremely exciting day for us here at American Electric Power, both for our investors and our customers, particularly reflecting upon the Ohio new energy law that controls the way we're going to do business over the next handful of years. We clearly had a very solid second quarter by almost any measure, and Holly will give you much more detail on those points as she makes her presentation. Equally important, we're in the midst of an extremely productive 2008 year and feel very comfortable with the guidance that we provided to you a long time ago about not only 2009 but the guidance that we gave you in October of '07 for 2009, 2010, 2011. Utilizing all of the tools that we found in Senate Bill 221, we really are encouraged by the plan that we designed, actually a plan that we call AEP's commitment to Ohio's future. We think that it sets a very bold path of changing the relationship between an electric utility distribution company in Ohio and its customers and relationship that will be in place for a number of years. We think that we've really accomplished what we intended to do over a long period of time and that was to strike that balance between not only the needs of those who invest in American Electric power, but making sure that our customers and the Ohio economy has an opportunity to thrive as we go forward. Taking the opportunity to partner with Ohio's nascent but growing renewable energy team of entrepreneurs and deploying energy efficiency technology are two of the principles that the Governor and the legislature have built into sections of Senate Bill 221. And I think we have taken full advantage of that as well. We are kind of encouraged by the opportunities. The energy efficiency activities will deploy statewide with a real special focus on the Northeast Columbus metropolitan area where we'll actually have an opportunity to develop and deploy our grid smart technology that you've heard us talk about over the last year or two. And we are excited about that opportunity. Taking full advantage of the deferral concepts that were built into Section 221, we will have an opportunity to hold back some of the devastating impacts that just passing along the cost of escalating fuel could have had on the economy as we go. We feel that by extending the recovery of those fuel cost increases, will allow us to continue to make economic investments to comply with federal and state and environmental requirements, equally important, will allow us to make investments to upgrade and augment our energy delivery system as we go, all directed at seeing to it that we have an opportunity to increase our earnings potential in Ohio for the benefit of our shareholders. All in all, I think the AEP team has created an incredibly creative program that touches on almost every goal that the Governor and the legislature set forth in Senate Bill 221. And I think we've used that to the maximum advantage not only of our customers as I said but our shareholders as well. So I know you'll have a lot of questions about that. Let me move back to 2008 and touch on a few highlights that I think are not only excellent as to the second quarter but are part and parcel of that productive first half of 2008 that we currently have experienced. I think there is no question that system wide, regulatory performance of AEP in 2008 is better than any year we have experienced during in my tenure. As you know, we came into the year seeking about $518 million of rate adjustments. To date, we received $496 million of that. The remaining $22 million are either already approved, waiting for implementation dates or in fact waiting for self implementation dates. Something else that I think is extremely important and something you heard talk about many times before, and that is notwithstanding a doubling of world coal prices, we have been able to hold the impact of those escalating coal prices at less than 20%, comparing 2008 to 2007 for our customers on a system wide basis. And that really includes two points that it's easy to lose sight of. One, we have no synthetic fuels credit to the fuel account in '08 that we did in '07. And of course, we also are seeing an additional burn in 2008 as compared to 2007 because of the excellent performance of our generation fleet. In fact, we are covered with our coal requirements at 95 plus percent in '08, 90 plus percent in 2009, 60 plus percent in 2010 and on throughout the first half for the next decade with ever dwindling percentages as we go. Our commercial operations folks have had a very solid first quarter, taking advantage of unexpectedly high prices for energy in the PJM and in other market areas where we are active. We are quite encouraged by the final approval from the Texas Public Utility Commission for the Turk plant, our ultra super critical plant that will satisfy energy needs at our SWEPCO operating companies out west. We do in fact await the Arkansas Department of Environmental quality permit. However, we feel very comfortable that we will receive that well within this timeline. I think everyone should take note that the Turk plant has embedded in its captive and fixed cost prices kilowatt installed prices that are around $2500, $2600 which by any stretch of today's marketplace tells us that our customer is going to receive great benefit from that station. And of course, the green footprint will be substantially reduced because of the ultra super critical nature of that plant. In the non-utility operating area, we have had a imbalanced year and in that our generation marketing group doing most of their work in ERCOT have had a very successful first half of the year while MEMCO continues to be challenged with very unexpected weather conditions as well as some decrease in economic activity. The water flows in the Mississippi Ohio rivers and others had been extremely high throughout almost the entirety of the first half. However, we feel comfortable about the second half as we look at MEMCO's order book. I think for the first time since maybe 18, 19 months ago, we are beginning to see steel product imports coming up river after we have gone down river with coal facilities ourselves. And obviously with the congested rail traffic on the eastern seaboard, coal delivery with everyone trying to export every ton that they can, there is nothing like MEMCO and its river operations to keep our big power plants fully fueled with excellent price coal products. Lastly, we are very impressed with the continued success of our transmission opportunities. As you know, we announced most recently, a project partnership with Westar in the SPP market area, an additional project just last week with Oklahoma Gas & Electric. We are satisfied, although somewhat disappointed by the speed with which our PATH project in Allegheny moves forward through the PJM. And I want you to know that we were very instrumental in putting forth the settlement to the Public Utility Commission of Texas last week with our ETT subsidiary working in conjunction with other major transmission players to hopefully move along the cres [ph] process in Texas so that we can continue to see success in that area. And as I have said many times before, watch this space because there are a number of other projects that are in consideration and hopefully will be announced before too long. All and all, I look at 2008 as a very productive year. We remain convinced, as I said, that our guidance is appropriate. We will stay within that guidance that we gave you in October of '07 and hopefully, you will join us in appreciating the near term, mid term and long-term investment opportunities at American Electric Power. And with that, I will at long last turn it over to Holly. Holly?

Thanks Mike and I will briefly walk us though the second quarter performance, year-to-date performance, cash flow and capitalization. In the second quarter, as Mike mentioned, we are right on track. Gross margin has been driven in major part by the success in the regulatory arena. We have also had modest positive load growth. Weather has not been our friend this year relative to last year; we are off a bit there. And as Mike mentioned, we are managing fuel costs in line with our expectations, but they are a bit higher this year. Off-System Sales was favorable in the quarter once again. And we are experiencing higher O&M expenses, in line with expectations. Interest expense is and preferred dividends are higher due to increased long-term debt outstanding. Taxes are in line with expectations, the marginal rate remaining in the 30% range in the quarter. And as Mike mentioned, for our non-utility operations, the challenges at MEMCO financially have been more than offset by the success in our Generation and Marketing segment. As you will note, and may remember, we did issue that at the parent earlier this year and so our parent losses are higher due to increased interest expense. Turning to the second quarter, it's much the same story year-to-date. Retail sales, very positive, again predominantly due to rate relief but also supported by additional modest load growth. Weather for the year-to-date is also not favorable when compared to last year and fuel costs are up but in line with expectations. Our system sales, higher prices and higher volumes have contributed to a very strong performance in our commercial operations group. O&M, the decrease on a year-to-date basis if you will recall what we discussed in the first quarter, was due to both rate activity and operational activity at PSO. In the first quarter of '07, we had a pretty dramatic ice storm, but in the first quarter of '08 we recovered the full cost of not only that storm, but the storm that we experienced in December of last year. So for year-to-date, we are slightly down in O&M, but we expect to be in line with expectations on the year. Interest and preferred dividends, again, same, higher due to increased long-term debt outstanding. Income taxes, the effective rate is remaining flat as expected. Non-utility operations, again, Generation and Marketing has more than offset the challenges faced by MEMCO, and as I mentioned before, the parent interest expense is higher due the issuance of the $300 million of debt at the parent. Turning to cash flows. Very strong performance in cash flows, in line with expectations. I would highlight that our cash outlay of $1.6 billion for capital investment is down slightly from last year, in line with expectations as we are winding to the end of our major $5 billion environmental retrofit program. We will also see a modest uplift in our other investing as we are planning to put in place a lease of nuclear fuel at our Cook plant on the books of Indiana Michigan Power and we also added some additional assets to the MEMCO barge line. Finally, financing activities. Common shares are up modestly, predominantly due to the dividend reinvestment program and our changes in long and short-term debt are in line with our capital funding and capital investment plans. Finally, for capitalization on page 7. We ended the quarter at 60.6% debt to cap on a GAAP basis. On a credit adjusted basis, it was 59.7%. As you know, our goal is to maintain a debt to cap on an adjusted basis at or below 60%. The adjustments we make to reported numbers to arrive at our adjusted debt to cap ratio are intended to reflect what we believe is closer to a creditors view. Specifically, we add back the $1.5 billion of capital and operating leases, we add the receivable securitization to reflect rating agency considerations, we deduct the Texas Central securitization bonds of $2.2 billion since they are serviced by Texas customers as well as deducting spent nuclear fuel trust of $260 million since it is fully funded with cash that is not accessible by the company. Subtracting debt and adding directly 50% of the junior subordinated debt issued at the parent in March, the hybrid, that $300 million hybrid that I mentioned earlier is also an adjustment that we believe is consistent with the treatment given by the rating agencies. So at the end of the quarter, we are at an adjusted debt to cap ratio of 59.7%. And with that, Mike, we have covered the numbers.

Thanks a lot Holly and now we'll go ahead and move to the questions and answers.

Okay Linda, we are ready for questions. Question And Answer

[Operator Instructions]. And our first quarter comes from the line of Michael Lapides with Goldman Sachs. Please go ahead sir.

Hey guys, just a real quick question for you on the plan you filed [ph], at what point... first of all, what happens in year four? Second of all, at what point do you wind up getting much closer to market price under this plan?

Well at some time before year four, Michael, we will take a look at where we stand and in fact, either take the MRO option at that point in time or file another electric security plan. We will be moving throughout this entire place much closer to market rates, although we have no ability to accurately forecast market rates four years from now, let alone four weeks from now. But that will be our plan of approach.

Okay. And when we think about the 15% annual increase, that's 15% cash annual increase or is part of that deferred?

That's all cash, the deferral part will be the piece that we'll make certain that we keep that increase on the 15% level, which again we think goes a long way to respecting the economy here in Ohio and quite honestly the struggle that are customers are going through with everything else under the sun going up at that and higher rates.

Okay. Thank you.

Yes, you bet. Thanks.

And our next question comes from the line of Paul Ridzon with KeyBanc. Please go ahead.

That basically my question, but just to summarize, 15% cash increases, what's the absolute increase? What's the deferral on top of that?

Well over a number of years depending on what fuel prices do in the out years, the deferral could be as much as $300 million or $400 million. We begin to bleed some of that fuel cost increase in in the 2011 timeline and a little bit in the 2010 timeline. So it will have a lot to do, Paul, with the way that fuel prices escalate as we go. And as you know, if needed, if that number should get what we feel is unwieldy, we could surely go forward with the securitization tool that was built into Senate Bill 221. It isn't as perfect as it would need to be and it may need some slight legislative tweak. But because of the benefit that securitization would yield to our customers in a cost sense, we would take that approach. And I think that's laid out pretty clearly in the testimony that we put in place with the filing.

So 15, 15, 15?

Yes, sir.

And then depending on what fuel prices do it drives the deferral piece?

Exactly.

Thank you very much.

You bet.

And our next question is coming from the line of Anthony Crowdell with Jefferies. Please go ahead.

Anthony?

Can you hear me now?

Yes.

Okay. Where do you think the Ohio Commission wants to go long term? I mean is their goal... or do you sense that their goal is to get all the utilities in the state to market or do you think it's there just really looking at how to minimize price volatility?

Well, I think if you look at the direction that they received from the House, the Senate and the Governor in the signing of Senate Bill 221, it is ultimately the step... the market... overall power prices closer to market. Clearly, in the near term, I think they fully understand and were instrumental in helping to develop the concept of deferring some of the costs. In the near term, I think like all regulators, they will be driven by the notion of trying to hold rate increases to the most acceptable level that they can while being respectful of those who invest in the utilities as well. That is why we think that the points of our plan have touched on it perfectly. As you know, it was the Commission's direction to all of the utilities to take full advantage of the timeline between the May signing of the law and the somewhat prescribed filing date of July 31, August 1 to be in dialogue with the Commission and others and we took full advantage of that. And I think we've built much of that direction and much of that assistance into this filing as respectful as we could be to their needs while always keeping a eye on the needs of our investors as well.

Thank you.

Yes.

And our next question comes from the line of Elizabeth Parrella with Merrill Lynch. Please go ahead ma'am.

Yes, thank you. Could you gives us a little more color on the ESPs, 15% the same for both subsidiaries? Approximately how much of that translates to a dollar? Does that include kind of the fuel cost for covered components going forward or is that incremental to that 15%?

Elizabeth, the theory is to keep the 15% steady in both of the operating companies. And the fuel will be a plug number if you will to flow through when we can fuel costs rather than deferring all of them. And again as I mentioned earlier, that comes the play little more in the 2011 timeline. But remember also that the Senate Bill 221 directed all of us to do things with renewables, to do things with energy efficiency, to make certain that we had single purpose activities that would increase the reliability of the grid and, as you know, capital investments to ensure that we stay well within the required federal and state environment needs and requirements. So the whole notion of what we have built we think is a very creative way of using all the tools to allow for earnings capital investments as well as flowing through some of the fuel cost as we go.

And you mentioned in terms of the deferral of $300 million to $400 million. Is that cumulative at the end of the three years, what's been built up?

That's our current view of it. Again we can't forecast for you accurately what fuel prices might be. The number could be larger than that, it might be smaller than that; it all depends on how fuel prices go as things unfold in 2011 in particular.

And one last question on, could you just walk through what you proposed on the excessive earnings test in the plan?

Well, there are some pretty detailed consultant testimony that sets a pretty good parameter on how one might go about determining what excessive, substantially excessive earnings might be. And we feel very comfortable with our definition of what that is and the selection of those organizations that you would compare us to. It's impossible for us to forecast for you in any meaningful way the potential impact that that particular piece of SB 221 would have on any of us as we go forward. I can simply tell you this that we feel very comfortable with the testimony that's been filed and we feel that the impact of this program on the earnings strength of the two operating companies is well within the definition as we have laid it out. Equally important is that remember the predicate of Senate Bill 221 causes the Commission to take a look at the ESP and compare it to the potential impact of a market rate option. And when we did that, it's clear that this 15% deferred ESP program is substantially better for our customers than even a market rate option under the controlled environment of Senate Bill 221. And much more importantly, as compared to what would have happened had Senate Bill 3 been the law of the land and all utilities in Ohio had slashed their market prices, which would have been relatively devastating to the Ohio economy, something that you know we have never been an advocate for. We have always looked for the balance that we think we have built end of the filing that we made at 8:30 this morning.

Thank you.

You bet. Thanks.

And our next question comes from the line of Greg Gordon with Citi. Please go ahead.

Thanks. Most of my question of generally been asked and answered. Is there a... as we look at the filing, there is... go on the Ohio PUC website, there is obviously tons of paper work there. Is there an executive summery of the filling available that goes into some of the details?

I think the transmittal letter that we did Greg is a pretty good thumbnail sketch of it. Just for my own visual Craig brought along the package, and to your point, it stands about 7 inches tall. But nonetheless, there is transmittal later we think that sums it up well. And obviously, you can continue to dialogue with Bette Jo and Julie and the IR team and we will continue to provide you others with as much information as we can. It really isn't very complex, notwithstanding the magnitude of the support for it. The concept is very straightforward. It's really employing all of the tools that 221 provided for us and capping the impact on our customers on a year-to-year basis at 15% with of course deferring some of the increased fuel cost that we and others are seeing in the marketplace. We think it's a creative way to minimize the economic hardship that might cause for some of the customers. It addresses the issue of economic development, it addresses the issue of energy efficiency deployment, and it address the issue of not only of satisfying but actually putting under contract more renewable portfolio standard megawatts than low cost for us. So we think in that sense it's touched all of those issues. There are a couple of sub issues that are kind of in trigging the loss still allows for corporate separation we have addressed that issue we think in appropriate way. So I don't think there is any point in 221 that we didn't fully take advantage of and built into the filing. And as I said to the question that was asked while go by Anthony we spend a great deal of time and dialogue with the commission staff, the administration, and the legislative bodies. I don't mean to say by that there is any sense of pre approval or anything along those lines but I do mean to say by that much dialogue has gone on. And we have listened as intently as we could to make certain that we did what we stated now since 2004. And that is we are looking strike balance between our investors and our customers and the Ohio economy.

What are the next steps logistically for investors to watch in terms of moving this forward through the process to approval?

Well, as you know, there is a requirement in SB 221 for the Commission to come to closure on these issues within 150 days. That would say that an order should issue toward the latter part of the calendar year 2008 for actual rate implementation 1/1/09. You will see schedules come out of the Commission. I understand, although surely have no personal knowledge beyond the understanding that today or tomorrow, First Energy and Duke Ohio will make similar filings. I think we all know that Dayton is one year and I doubt that they'll file anything, although they might have some perfunctory requirement to at least show that they are alive and well out on the Western side of the state. But that's going be a real burden for the Commission. One of the beauties of the bill also built in a provision that said should the order not be issued by the end of the year or should the order that's issued be modified in such a way that it's unacceptable to the proponent, that one would go forward and implement a continuation of the rate stabilization plan coupled with a fuel adjustment clause. And we have made provision for that in the filing itself seeking the Commission to recognize it. That is a way for them around this issue. So it's difficult for me to give you any more specificity on the solidness of dates when things will happen. But our filing is in, the testimony is in and the Commission will set the schedule. We may well have a conference to set the schedule with other parties. We have had a chance to dialogue with industrial customers, we have had a chance to dialogue with the OCC and many others. I don't expect I have a lot of cheering, but at least I will expect to hear a lot of we were well aware for what American Electric Power and its Ohio subsidiaries intended to file.

Thank you, Mike.

You bet, Greg. Thanks.

And our next question comes from the line of Dan Eggers with Credit Suisse. Please go ahead.

Good morning.

Good morning, Dan.

Can we talk a little bit about coal exposure and coal pricing? Based on where your hedges are today and where you guys are looking out at the market, what kind of rate increases for the Ohio utilities would be required just for the fuel cost pass through given the 20% increase we are going to see this year?

Well, it's hard for us to give you a specific answer of that question. We'll do the best that we can. The reality for the Ohio companies is that we haven't had an active fuel clause for a long period of time. So there is some lumpiness in the way that one would adjust the going forward fuel cost itself. As we look at fuel under contract for 2009 and 2010, we're still on average buying at or below $50 a ton. We are seeing some basic opportunities because of the magnitude of our buy to become anchor purchasers of new mines being opened. We are actually looking at a number of the resources that we have and have had under our ownership for a number of years to bring in third party mining companies to develop those. And blending all of those opportunities together, we are seeing relatively reasonable prices. Now relatively reasonable is a very difficult term to carrel. The fact of the matter is at $50 a ton, your 1 million MMBtu number is a couple of dollars. That compares very favorably to I guess today gas at $9 or $10 whatever it closed yesterday. It's, as you know, gyrating around pretty substantially of late. But still when you look at the fuel price factor there, we think it's very cost effective. And of course, as you know with the environmental investments we have made, we have been able to burn considerably higher sulfur-based coal, which is priced more appropriately. And like everyone else, we're blending a tremendous amount of western coal into eastern fleet burn that we've not done before.

Okay. If I heard the comments correct earlier, it sounds like the 15% rate increases over the next three years, very little of that based on your plan, is actually going to be fuel and the bulk of it is going to be I guess for lack of a better word base rate type of rate increases?

It'll be a mix of the two. But there will surely be enough deferral to allow for the capital investments for renewables, for the environmental investments, for the energy efficiency deployments, all of things that I had mentioned earlier.

I mean, whereas they haven't read all the thousand pages yet this morning, but how much incremental CapEx are you guys looking at, based on the renewables energy efficiency and all the other pieces out there?

I don't have that number in my head. What you are going to see from us over time, as you have seen from us before, is a pretty good balance of capital deployment on a system wide basis and again I know we are Ohio centric today because of the filing that we have made. But I don't think anyone should lose sight of the overall performance of the 11 operating or this... what we consider to be the 7 operating companies inside of the 11 states. The Ohio companies, because of their lack of fuel clause, have seen some additional flow in their gross margins, but it's dwarfed by the hundreds of millions of gross margin increase that we are seeing at the other operating companies. So the capital will be on the order of $3 billion, not in Ohio individually but as it has been over the last few years.

So you don't see any substantive increases in your CapEx program even to hit the Ohio plant? Is that the right read or is there more set to go [ph]

No, we'll dedicate a little more to Ohio for those activities, but dedicate a little less to the generation side of the business, particularly on the new gen where quite honestly, Dan, we are having a devil of a time getting anybody to realize that this country is heading itself toward a base load power shortage.

Okay. And then one last question, Mike. As filled with this plan, how does that hit with your multi-year EPS targets? You widened the band last year. Does this give you comfort to go towards the higher end of the band or how should we be thinking about that?

Because it's too early to forecast, the potential outcome of this activity what we'd like to do is the, beg your another people's indulgence to give you a much stronger number about '09 in particular at the EEI events later this year and presuming that things moving along we'll happy to share 2010 and 11 and 12 views but I don't know that, that will be available for us.

Okay, thank you.

And our next question comes from the line of David Frank [ph] with Catapult Partners. Please go ahead.

Good morning David.

Hi, good morning. Can you hear me?

Sure, you're fine.

Sorry Mike. I had couple of questions. We've only read through I think a few hundred of these thousand pages so far. So I just wanted to clarify. It looks like when I look at Craig Baker testimony that your three year forecast rate increase was about $2.8 billion between the two utilities. And then when I go over to... I apologize, Leonard Desante's [ph] testimony, on deferrals, it looks like you are running about a $700 million deferral at the end of 11. And again, I may be misreading this, but I just want to find out, is that 700 or whatever the deferral is part of the 2.8 or is that incremental to it?

Well I don't know... I don't have that kind of granularity in my head, David, to answer that question, I think that's a better follow up question that Bette Jo or Julie can answer for you. The deferrals will be driven, as I said, by the potential fuel cost as we go. When I am looking at bulk numbers, we think that deferral by 2011 could grow into the $400 million or $500 million, maybe $300 million range. Leonard's testimonial is all about the accounting approach to how one would go about doing that including the recovery of deferrals that are already on our books for other activities in a historic sense as well as the fuel as we go.

Okay. But you wouldn't know if whatever the deferral number may be, if that's part of the... what looks like $2.8 billion of increases by the end of '11?

I'm not certain and I don't want to give you an answer. That would be inappropriate.

Sure, sure. And Mike, what is the assumption for off-system sales margins? Would you retain those or are those being flowed back to customers?

No that... those are wholesale contracts regulated by the FERC and we think that that revenue stream is excluded from the Ohio retail activities.

And I know that I think historically Columbus Southern has gotten a lot of power from Ohio Power. Maybe technically, it's from the joint dispatch or the interchange agreement between the Eastern utilities. Is there any change to that or we'll... it's essentially being supplying power. Will one utility help the other and if so, at what price?

No, it will always be from the pool, the way that it's operated since the 1950s. As you know, we dispatch from the stack low to high. And most often, Indiana Michigan supplies from their DC Cook station energy to anyone who is short. And then the pool does his magic on the formulas that have been in place for a long period of time. So it isn't simply Ohio centric.

Okay. Great. My last question is do you have an approximate estimate of what your realized coal price will be at the end of '11 for the utilities in Ohio?

No.

Okay. All right. Well, thank you very much.

You bet, thanks David.

And our next question comes from the line of Ashar Khan with SAC Capital. Please go ahead.

Good morning. Congrats.

Good morning, Ashar.

I just kind of... I was trying to... if I understand, I haven't read it so far, we get 15% increases and on top of that, the way I should look at it, if I was looking at it from an earnings perspective, you said 15% increases cover some fuel and some investments, right?

Right.

So and then we get deferred fuel on top of that, right?

Some, yes, that's correct.

So what I basically have to say is that at Columbus Southern Power and the two subs, earnings should be increasing by say roughly double-digit numbers, 10% or so under this filing?

I don't know that that's accurate. It will have so much to do with the amount of fuel that you are recovering as a current expense versus the fuel that you are deferring going forward. And again, because many of those numbers are unknowable right now, I don't know how you could calculate that kind of an impact.

Okay. And then Mike, what... I don't know because I haven't got the testimony, at these numbers, what ROE have you assumed in the filings that these numbers generate?

We really haven't... I mean you will find in the testimony some definition of ROEs, but again, we are not trying bracket any number or build any ROE into the actual capital investments going forward. That will all be within the adjustments that are laid out in some of the reliability riders and things that the Commission does or doesn't approve going forward. So it would be premature to tell you that we have built some number in there that we think will satisfy the excess earnings or any of the other challenges.

Okay. But it will spill out to some number right?

Eventually, of course.

Okay. And you haven't quantified that number in the filing yet?

Well, it's the same utility kinds of returns on equity that you see on other jurisdictions. But no, we haven't quantified that yet.

Okay. And if I can just end up the fuel increase. What is the starting point of that? Is it four years down the road before or what are you asking from? What is the starting point of the fuel increase?

You are trying to be realistic about the fuel that's already built into base rates that the customers are paying and adjusting that to the current world fuel... the current actual fuel prices that you receive. So it's a reflection of the last active fuel clause that we have had in the Ohio utilities.

And that was when?

2001 with a 1999 base, something along that line.

Okay. Okay. Thank you sir very much.

You bet.

And our next question comes from John Kiani with Deutsche Bank. Please go ahead.

Good morning, John.

Good morning Mike, Holly.

Hi.

On slide 15 of your presentation you show updated capital investment forecast and it looks like '09 went down by $416 million and that 2010 went down by $184 million relative to what you showed about a month ago in the June presentation on your website. Can you talk a little bit about those CapEx reductions and what we are seeing there please?

Yes, let me start and then I'll ask Holly to give some granularity there. As you know, we continue to share with all of you the notion of the incredible capital investment opportunities that American Electric Power has across the entire footprint. Those dollars can be spent on generation, distribution or transmission either inside or, as you know in a partnership sense, outside of the traditional AEP requirements. We are in fact stepping down a bit on some of those activities as we finish the environmental build out in the Eastern fleet and look at the environmental requirements for some of the Western stations. And also, if you reflect back to a 2004 or 2005 capital forecast, you would have seen by the 2009 and 2010 dates, some build in for the integrated gas plants, which now of course aren't within the timeline that we are looking at. So you are seeing some capital reductions as we go. Holly, you might want to give additional detail on that?

And we really looked at it operating company by operating company. We saw a couple of opportunities to redeploy capital where it made good sense and was a win-win; for example, a wind farm in Indiana and a reliability rider project in Indiana in conjunction with the rate case. As Mike mentioned, we did pull back in some areas where we were getting the level of regulatory support we were seeking around generation project. We also had a make some adjustments in order to ensure we are in full compliance with the NERC reliability standards for transmission. And so the real bottom line is as you know, annually, we go through a strategic planning process, we scrub down the long-term capital forecast, we refine the estimates detailed by activity at the operating company level and this schedule reflects those refinements. A very modest change in aggregate, but some movement between operating company's projects and jurisdictions aligned with our plans for rate relief.

Okay.

I think if you look at our longer term strategy, we depreciate at about $1.5 billion a year John. So capital investments of $3.3 billion give us an opportunity to continue to grow the rate base earnings strength of the company, which is something that we are encouraged by for the regulated rates of return at the state level. And when you augment that with the incredible success we have had in the transmission out of what I would call our traditional footprint opportunities, again, I find support for my notion obviously that this a great mid-term, long-term investment opportunity for folks who like to be in the utility space.

That's helpful. Just so I can be clear, I know your capital budget is obviously very complicated. But it looks like the majority or a substantial portion of the $416 million decrease in '09 was from transmission and then also distribution. I know you touched on that a little bit, Holly. Can you just give a little bit more color on what exactly... what decisions you made there? And then also, just kind of going forward, as you reevaluate your capital budget, do you think that the trajectory is perhaps downward by tightening it up a little bit and raising the bar perhaps on returns on capital and timing and regulatory lag or you think this is it from the perspective of CapEx coming down?

Well, I think you are right on point that we have really scrubbed down and tightened the focus. And the important point is aligned it with our plans for rate relief and reducing regulatory lag. We are confident that the capital that's being redeployed away from certain distribution projects. And as you know, we have seen a decline in new customer hook ups. We know we are running under in that budget. We have done a lot of reliability enhancement over the past few years. And so what we have done on a jurisdiction-by-jurisdiction basis is look at the work that needs to be done, make sure it aligns with our plans for rate relief and then adjust the capital budget accordingly. So you pretty much summed up what we are looking at. I think this trajectory is one that is sustainable. And as Mike mentioned earlier, we are in the 3 plus billion dollar plus range as a sustained capital need for the company. We think we can raise it and deploy it effectively. In a very manageable time horizon, we are self-funding at that level, and that supports earnings growth accompanied by rate relief in the range of what we've provided to you. So this is really just tightening of the plan that has been out there in front of you for well over a year now.

And I think I would also, John, point to the reality that at least our experiences to date in the transmission partnerships have yielded higher rates of return for equity capital invested. And you would expect us to deploy more aggressively in that area when we can, and that's exactly what we are trying to do here.

This positions us to be able to execute on that very well, Mike, you are right.

Okay. That's helpful. Thank you very much.

You bet.

And our next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead.

Good morning, Paul.

Good morning guys. Just to clarify this, and I am sorry to be a little slow here, the 15% rate increase is off of what base should we think of that being? I mean what is the dollar amount that we should think of the 15% being off of?

Well, it's off of the last RSP rate adjustment that we had. So it'll be the rates at the end of calendar year 2008.

Okay. And that would be, and that, just a general dollar number roughly speaking. Just I mean we would take 15% of that and then each year, for the year that you got outlined here, it would be, that would be the top line growth in terms of rates, is that right?

Exactly and I think one of the most important things for people who focus on again trying to build that balance that we put into it, it ends up for a residential customer to be $15, $16 a month over that cycle of years and that's really pretty acceptable. We hope although, I appreciate the Ohio economy is under some pressure, but again deploying all of the tools that SB 221 gave us, we think that we've touched all of the important goals that the Governor and the legislature put in front of us.

Okay, sure. And then back to service side question on the fuel base that we should be using, we should look at one from 2001, is that we should look at what the fuel costs were for those subsidiaries in 2001 and start from there and associate any increase from there is going to be deferred, is that, how do we think about that?

No. Again, I first of all make sure that you look at it the testimony that Craig put in on the fuel and how one goes about it. The last active fuel clause we had was sometime in '01 and was predicated on a 99 fuel cost. We have of course built into that number, the adjustment of the 7% and 3% that we received over the last three years. We think that's only reasonable. And than we're making the fuel adjustments from there. But not all of that would be deferred again. The 15% annual increase and the revenue flow out of the Ohio Company is, some will be dedicated to recovering fuel as we go. But we didn't want to crowd out the opportunity to address the other important parts of the bill which are to make sure that you are compiling with environmental laws, to make certain that your rehabilitating and maintaining the reliability of your existing delivery system to insure that you are buying a renewable set you'd called for, to insure that your deploying energy efficiency and new energy technologies to try and build on this growing renewable energy efficiency industry base that the Governor, Lieutenant Governor is so strongly in support of along with the Speaker of the House and the President Lieutenant.

I see and to that question somebody asked earlier I think your response with that at this point of is this not the find or quantify those to exactly how that break down is in terms what might be deferred as opposed to what might be recovered in the 15%?

Absolutely.

Okay, so we will have the way more information that you hire [Ph] or something like that?

Yeah and we'll get a pretty clear picture at the tail end of the approval of this plan presuming the commission believes this as an appropriate way to go. And then we'll be able to share with you what we think is recoverable versus what needs to be deferred in the fuel column as we go.

Okay. And then just finally as far as corporate separation is concerned, when do you think you might act on that or what is the timeframe that you guys were thinking in terms of the filing as with everybody else we haven't been able to read it?

Yes. Well I think what you see when read it is that we have had in place from the longest while the authority to functionally separate. We are seeking a continuation of that as an over arching concept. We're asking for some special authority not necessarily implementable in the date that it's approved to recognize three to four generating facilities that really never been and higher there up [Ph] operating company's rate basis, as well as the authority to there in move the assets to other operating subsidiaries within the AEP family of companies. Without an execution date, one would go back and seek the ultimate okay albeit when the execution date became ripe in own minds.

Okay. So the ultimate legal separation will be sometime closer to the full market kind of situation is that?

That's logical but again, I wouldn't tie myself down to that as a concept. That's just one of the approaches that we think, if they gave us the authority that we are seeking here, that we would have the opportunity to employ.

Okay. And when do you think that they will rule on the legal separation issue?

I expect that the totality of the order which again, we hope to be issued some time toward the end of calendar year 2008, so we can implement. The implementation process although my team never believes that I believe in this could take a few weeks. So, we would hope sometime toward the end of the year

Okay, great thanks for it.

You bet, thanks Paul.

And our next question comes from the line of Shalini Mahajan with UBS. Please go ahead.

Thanks. Good morning. Just wanted to... Mike, you mentioned in your comments that if there is not a good resolution on the ESP, the option is always to go back to the RSP with a full fuel cost [ph]. Still, I am just curious as to what would be percentage increase in that scenario that we should be looking at?

I guess I am not really following your question Shalini.

You said in your comments you asked for the 15% increase and obviously you would be looking for fuel cost come out of an order but as a fall back you always have the choice to go back two to three and 7% RFC [Ph] increases that the full fuel cost so and I was just curious and that fall back option what would be the percentage increase that we could be looking at for the Ohio Company in terms of rate increases?

Actually that is an excellent question. If we get to -- what we are seeking is what ESP 221 allows and that is should you get to the end of year and there has been no decision, you do have the authority to extent your RSP rates or program as it was. So would adjust rate by 7 and 3 as we have done historically and then you go to an active fuel clause and I expect we might again try to build into that point if we get there. The concepts of the deferrals we have talked about before, because it wouldn't our intent then, as it is not our intent now, to shock the marketplace with the real fuel recoveries on the order of the kinds of increases that we think that would yield to the customers. So we would expect that the commission would build some kind of a safety valve in that activity and that would be where we go until they, either approve the ESP as filed with moderation or if they rejected out of hand than we would have the opportunity some time early 09 to re-file or select the MRO option. Either of those two as we go.

Okay. And then on the CapEx issue, Holly, I was just curious in ETT has announced a comprehensive plan with other transmission builders to develop the, to do build out in Texas, are those investments part of the CapEx plan of the CapEx forecast?

No, we've always treated the out of footprint, out of the current regulated operating company's transmission activities outside of the current CapEx plan.

Okay. And what are the, what's the timeline that we should be watching for our PUCT to response to the Federal proposals if you could give just some color on that?

Tomorrow would be a perfect time. I really don't know. I do know this that all four of the principle participants and settlement discussions were driven by the reality that the sooner we get the lines approved and built, the better of the PUCT. We'll feel about the entire cress process in reaction to the Texas Legislature that get them a pretty clear path of Texas's desire to build that wind into the program. We're looking at 2011, 2012 for as you know buying rights of way in Texas is probably easier than other parts of the country, because the land is held, massive acreage held by individuals. You have to go through the process of negotiating reasonable 'rights of way' agreements and that. But what we're seeking here, is try to help the commission and truncating a long deliberate and cat fight over who ought to build, what sub section of this $ 4 billion plus undertaking. ETT shares on the order of $1.5 billion to $2 billion. We and MidAmerican are comfortable with it. Much of it's in our traditional footprint. But again, I think this helps speed the thing along. I obviously can't speak for Commissioner... or the Commission or Chairman Smitherman. But I do know that they are eager to get this moving along as quickly as they can.

I think worst case, they were planning an order in the proceeding in February of '09, but every signal they sent is that glad to have result this year to the settlement process which would then allow construction to start possibly as early as the end of 2010. Because they'd like everything in services, as Mike mentioned, by 2012, 2013 timeline.

And I think we should not lose sight that ETT continues to have other transmission investment opportunities in Texas that are being built on a much more current basis. You are already beginning to see, although minor, the earnings impact of the ETT partnership and we expect that to be the case throughout the service territory. I know that SPP and the Westar OG&E projects that were announced over the last couple of weeks are on a very fast track to help decongest part of the SPP and allow for a better flow of the renewable that are available there. As we are pushing as hard we can on the notion of the interstate nature of RTOs approving these with FERC oversight of them and then automatic adjustment clauses at the state level to reflect the socialization of the costs. There is no better spokesperson for that activity than my old friend [indiscernible] who as you know has thrown himself in the middle of the win debate and all people Vice President, Al Gore, spoke to that issue just last week in his challenge to the country. So I think there is finally the appropriate momentum behind the whole concept of the utilization of interest rate transmission grid to allow for a better flow of cost effective electricity across entirely of the eastern interface and one sense the western interface and other sense and achieve as Electric Island on towards so.

Okay, good. Thanks so much for the color.

Sure.

And we do have a question from the line of Danielle Sites [ph] with Sites Research. Please go ahead ma'am.

Hi, just a short question regarding the IGCC projects, is that in definitely postponed or do you see some possibility of decision being made in the near future?

Well, Danielle, as you know, we still stay very strongly on support of the integrative gas combine cycle technology more convinced today then ever before. That the time is right for that to happen. You probably follow that last week, we were the recipients of $133 million of tax credit assign from the Tiko [ph] project that was canceled sometime back. We will continue to or try to find an answer for either the West Virginia or the Ohio undertaking and we have not abandon ion he concept we are bringing it to a reasonable conclusion with design firms to take them to the end there activities and then forgo the actual onsite construction undertakings until we get better clarity on how one would go about a recovering of return of on a capital that didn't invest to built those facilities but we stay every bit intellectually dedicated to the of integrated gas combined cycle. We just having a double of the time, getting the regulatory authorities that are needed and I think you are seeing that across the conterminous 48. But for the few states that have now put in enabling legislation in place for free approval both of the ability to build and more importantly the ability to recover capital required from new power production facilities. There is dearth of investor on utility base load generation being built. Some jurisdictions like our SWEPCO gold and Indiana Commission have been strong enough to approve plants. Some of the Carolinas and others have as well. But there is an onslaught of don't build anything for base load generation. And that has the potential within a decade or so to lead us to the South African prospect of a couple of days a week where we shut down the U.S. economy because we have run out of base load generation, which is just absolute folly in my mind.

Do you expect more decisions should be made as soon as the question marks in Washington will be answered regarding the elections and so on?

Yes. I would think. You are hearing both candidates speak strongly about the notion of seeing to it there's adequate electrical energy to continue to fuel the growth that both of them forecast in the economy through their first term if not through their second term. And it's like any elected official, they dream of those kinds of things. But that may settle some of the case. But at the end of the day as you know, many of these are state centric, public utility, public service, public corporate counsel decision, so look at the states where people are intending to build in the near term. The Carolina, Florida, Kansas Nuclear, some of the others who have upfront approval and upfront capital recovery programs. Short of that, I don't know how anyone builds a 2, 3, 4, 8, 9, 10 billion dollar power plant without better assurances of the recovery of the capital.

Great, Thank you.

You bet. Thanks. Thanks for the question. Let me set my soap box aside here.

Linda, we are at the top of the hour, so we'll have to end the call. But we're happy to take questions in Investor Relations later.

Linda, did you leave us?

Okay. Do you want to take one more question then?

Sure.

Okay. We do have a question from the line of Rudy Torentino [ph] with Morgan Stanley. Please go ahead.

Good morning, Rudy.

Hi, good morning. Can you just update... help me real quick about your coal inventory levels?

We are in great shape. We were at 30 day plan and we are in really solid shape as I said earlier on, thank the Lord for MEMCO and the river operations and the ability to get coal to all of our major power production facilities. There are a few stations in the Eastern footprint where I know the plant manger wouldn't like to here me say we are in great shape because they think the coal power to small. But also hard do get to there is real congestion and in the east the rails are doing our best but that's kid each other they say you get additional opportunity the halt at spot rates coal going to the international market just like co producer they taking full advantage of it. But I am not worried about any our stations not being able generate the gigawatt because we run our fuel.

Okay. Great thanks so much for your help.

You bet again. And again, thanks for all the questions from all of you.

And there our no other questions at this time. Please continue.

You can go ahead and give the replay information now.

All right. And ladies and gentlemen, this conference will be made available for replay after 12:00 PM today until August 7, 2008 at midnight. You may access the AT&T Executive Playback Service at anytime by dialing 1-800-475-6701 and entering the access code 952950. International participants may dial 1-320-365-3844. Again, those numbers are 1-800-475-6701 and 1-320-365-3844 with an access code of 952950. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service.