American Electric Power Company, Inc. (AEP) Q3 2011 Earnings Report, Transcript and Summary

Brian X. Tierney - Chief Financial Officer and Executive Vice President Charles E. Zebula - Senior Vice President and Treasurer Michael G. Morris - Chairman, Chief Executive Officer, Chairman Of Executive Committee, Member Of Policy Committee, Chairman Of American Electric Power Service Corporation, Chairman Of Appalachian Power Company, Chairman Of Ohio Power Company, Chairman Of Southwestern Electric Power Company, Chief Executive Officer Of American Electric Power Service Corporation, Chief Executive Officer Of Appalachian Power Company, Chief Executive Officer Of Ohio Power Company And Chief Executive Officer Of Southwestern Electric Po

Michael J. Lapides - Goldman Sachs Group Inc., Research Division Dan Eggers - Crédit Suisse AG, Research Division Jonathan P. Arnold - Deutsche Bank AG, Research Division Paul Patterson - Glenrock Associates LLC Greg Gordon - ISI Group Inc., Research Division Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division Steven I. Fleishman - BofA Merrill Lynch, Research Division

Ladies and gentlemen, thank you for standing by, and welcome at the Third Quarter 2011 Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Treasurer and Senior Vice President, Chuck Zebula. Please go ahead.

Thank you, Cary. Good morning, and welcome to the 2011 Third Quarter Earnings Webcast of American Electric Power. Our earnings release and related financial information are available on our website, aep.com. The presentation slides are also available on our website. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of the factors that may cause results to differ from management's forecast. Joining me this morning are Mike Morris, our Chairman and Chief Executive Officer; and Brian Tierney, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Mike.

Thanks, Chuck and it's always nice when you get Brian's name corrected, it shows how closely we all work together. Welcome to everybody else on the phone, happy to have you here. We're always pleased to be the first in the day, and equally important to be the first in the quarter. Looking forward to sharing with you a number of very interesting successes that we had in a very successful third quarter, for both our shareholders and our customers. I'm always amazed at Page 2, it's that detailed requirement to tell you to be cautious about what you hear. And I know you'll all do that, because you always do and you're right appropriately about how you think American Electric Power is doing. If we turn to Page 3, let me detail for you some of those successes that we are really quite pleased with. First off, on ongoing earnings, we had $1.17 a share, which is $0.02 or $15 million higher than in Q3 2010, and I think what all of us could consider to be a very shaky economy as compared to what we saw in the latter part of 2010 when things appeared to be recovering. Secondly, our GAAP earnings reflecting the appropriate decision by the Texas Supreme Court, were substantially higher than Q3 of 2010 by $373 million. I'll talk a little bit more about the Supreme Court decision a little later. Thirdly, we are announcing a tightening of our 2011 forecast to $3.07 to $3.17 as a range, moving from the $3.10 to $3.20, or the $3.20 that we had been working with as our forecast for 2011. Brian will touch a bit on 2012 as he gives his update. And lastly, or most importantly, on this particular page, the Board of Directors had decided yesterday to increase the dividend by 2.2% or a full $0.01 per share, which takes us on an annual basis to $1.88. And for me anyways, pretty enjoyable to see a consecutive dividend increase for the 8 years of my tenure as Chief Executive Officer of American Electric Power Company. We also announced yesterday that we intend to redeem all of the preferred shares of our operating subsidiaries that will allow us to experience a few million dollars per year in earnings in '12 and beyond. We think it was the appropriate thing to do, and the appropriate time to do that. And lastly, and I would think most importantly, yesterday the Board of Directors in keeping with our long-stated succession planning, elected Nick Atkins to succeed me as Chief Executive Officer and President of American Electric Power on 11/11/11. Nick actually becomes the 10th President of American Electric Power in its over 100-year history, and only the sixth Chief Executive Officer, as for years in the early go most corporations didn't have that slot filled. I'm really pleased that Nick will continue to take the very conservative shareholder customer review that we've established at American Electric Power, continue to give the operating company presidents plenty of runway difficult decisions. But he and others will always keep a sharp eye on the most important decisions that need to be made. With a C-level team, made up of Nick, and Brian Tierney as CFO, Bob Powers, David Feinberg and Dennis Weltz, I really feel pretty comfortable about the team that Nick will be working with. And of course, as Chair, I'll be able to sit back and add some advice when and if it's needed, but most importantly, just simply enjoy the ride myself. Let me turn to Page 4, and talk about some of the other really significant events that happened during Q3. I know there is much worry and concern about the first point on the top of this page, but I must tell you that we were quite pleased to reach a settlement and file a stipulation in the ongoing 2012 through '15 Electric Security Plan here in Ohio. All but 3 folks agreed with the stipulation. Many of the other companies that would market into Ohio are obviously, as you all know, the industrial energy users, which is a bit difficult to understand because their individual customers receive pretty substantial rate decreases by the stip. But of course, FirstEnergy Solutions and OCC weren't signatories to the undertaking, but that is really of no concern because we expect that there would be a debate and there has been. We fully expect an order to be issued by the end the year, and we think that will give great clarity to one of the overhang issues that is of concern to you and us and our Board of Directors and that is the path forward in Ohio. As we look at that particular undertaking, we're pleased with the opportunity to transition to market. We think that, that's the appropriate place for us to go as we continue to address that issue. Secondly, and most importantly with the environmental matters, American Electric Power, along with many others, but clearly following the lead of our company, have made some very honest and straightforward statements about the potential ramifications of multiple events that the Environment Protection Agency is intending to implement in the next short while, which will have a dramatic or could have a dramatic effect on our ability as an industry to continue to keep the lights on 24/7. Our story has been the same from the beginning to today. We continue to meet and have dialogue with the Environmental Protection Agency, the Department of Energy, all of the RTOs that are affected at least by our fleet and the impact that those rules may have on our fleet, as well as on the FERC. We begin to -- some time ago, we began to have conversations with members of Congress, and we're quite pleased to see what the House Republicans have done. Also encouraged by yesterday or earlier this week's announcements by a bipartisan group of senators, both Democratic and Republicans sides of the aisle, addressing the coal ash issue, which is really a piece of legislation that was occasioned by a TV event at the TVA. That isn't the basis for continued regulatory change and we tried to point that out. We're comfortable that some of the decisions that the EPA has made to date have moved into appropriate direction, and we will continue to have that dialogue. Because ours is one that takes away the risk of reliability impact and the unnecessary expense that may be associated with some of these rules. I think that particulate matter subset of the HAPs MACT Rule is a perfect example. For a company like ours, where we today capture 99.7% of all PMs, we're going to be required to go to 99.9%. The environmental benefits from that will be marginal at best, and the forecasted capital investment is on the order of $700 million. It's those kinds of events that we think are you'll [ph] thought through. At the end of the day, stretching the time line out by a few short years, we can reach the same environmental goals that the EPA and others are embracing, and we embrace along with them. So we'll continue to have that dialogue and continue to make those points as we go forward. Our transmission undertakings, which were long announced and slow in growing do in fact, continue to reach some pretty significant success milestones for us. We think that the order on RITELine by the FERC was an appropriate order. It has reasonable rates of return, not the high numbers that we saw in the early undertakings and joint venture transmission plays through the FERC. But reasonable for sure, north of 11%, we think is a great place to put money to work. In fact, with the approval in the ongoing activity in Pioneer, we feel like those partnerships, those joint venture activities, are beginning to gain some speed. Are very quiet, but the quite successful play in the State of Texas through Electricity Transmission Texas is something that we're really quite pleased. We are north of $1 billion capital invested by Q3 '11, and in fact, we'll be north of about $3 billion by 2017. Yet this decade, that's going to make some pretty substantial earnings growth potential for our shareholders as we move forward in those endeavors. Our well discussed and brought forth Transco project concept in our traditional service territory is also on a pretty reasonable path. We'll be north of $1 billion invested some time in calendar year 2012. We will continue to see pretty substantial earnings strength from those activities by improving the reliability and the intellectual capacity of our energy delivery system in our traditional service territory. So we really feel good about the things that are going on there. The last point on Page 4 here, is the verification of what we always thought to be the case. In early 2000, we along with others implemented restructuring endeavors in the state of Texas. The PUCT at the time thought that maybe the approach that we had taken, which was a straight out auction of our facilities, was in violation of the best approach to take. Obviously, we agree wholeheartedly with the Supreme Court of Texas, as they remanded that case back with directions that what was done by us and others were in fact, in compliance with the law. And as you know, the decision has add substantially to the solidness of our balance sheet. And as we look at the recovery of the interest rates over a period of years, we'll add to our earning strength as well. So all in all, the third quarter in almost any way that we would measure it, has been a success for us and we feel very comfortable about that. As we look at our year-end earnings forecasts and the tightening of the zone, we think it addresses an adequate amount of conservatism for the fourth quarter, because we like others, are beginning to see more slowdown in the U.S. economy, but we feel comfortable that we'll be well within the range that we have tightened for you. And lastly, let me simply say that this is my last endeavor on earnings conference call as Chief Executive Officer of American Electric Power. I thank you for the support, the Council, and the professional friendships that we've developed over the many odd years since I've been in the electric business in 1988 at Consumers Power Company, in Northeast Utilities and American Electric Power. With that, I'll turn the call over to Brian, and when he's completed, we look forward to your questions. Brian?

Thank you, Mike. This morning I'll review the quarterly and year-to-date reconciliations for ongoing earnings through the third quarter, review load trends and customer switching data, and provide update on the company's capitalization and liquidity. I'll also provide some comments on 2012, and then wrap up and get to your questions as quickly as possible. On Slide 5, you'll see that ongoing earnings for the third quarter 2011 were $566 million or $1.17 per share. This is $14 million greater than last year's third quarter ongoing earnings of $552 million or $1.15 per share. Highlights for the quarterly comparison include the refund of the provider of last resort charges from the Ohio electric security plan remand, which accounted for a negative comparison of $0.06 per share or $43 million. We anticipate an additional negative quarterly comparison in the fourth quarter of this year of approximately $0.04 per share. Customer switching in Ohio accounted for a negative comparison of $0.04 per share or $33 million. We will examine this issue in greater detail on Slide 8. Operations and Maintenance charges, net of offsets accounted for negative $0.03 per share or $19 million, and were primarily due to higher storm expenses and higher generation maintenance expenses. Weather-normalized retail margins were down $0.02 or $12 million for the quarter. Off-system sales were essentially flat relative to last year's third quarter, and came in at $111 million. Increases in physical margins were largely offset by reductions in trading margins. Physical off-system volumes increased 31% while net generation from our coal fleet was essentially flat for the quarter, net gas generation was up 17%. Our east and west natural gas fleets experienced similar percentage gains quarter-on-quarter, with the east combined cycle fleet outpacing our eastern peakers. In the western part of our system, the addition of the Lamar Stall plant contributed to the quarterly improvement. On the positive side, weather accounted for positive $0.02 per share or $14 million, and was favorable to normal weather by $79 million. This was the warmest quarter in over 30 years for our West service areas, and the seventh warmest in the last 30 years for our East service territories. Other was positive by $0.04 per share, and reflects modest improvements in River Operations, Generation and Marketing and Transmission Operations. Carrying cost income from Texas Central's capacity auction true-up remand agreement, accounted for positive $0.04 per share or $28 million for ongoing earnings. This reflects the carrying cost to income for the 2011 period only. We anticipate recognizing approximately $9 million on ongoing earnings associated with this carrying cost income in the fourth quarter of this year. In the earnings release, you'll see that for GAAP earnings, the company recognized $682 million gross, which is $443 million or $0.92 per share net of taxes from the strain of cost preceding. The Public Utility Commission of Texas hearing on this capacity auction true-up is scheduled for November 28 to 30 and the company expects to securitize the final ordered amount in the first quarter of 2012. Rate changes net of offsets accounted for a positive comparison of $0.07 per share or $53 million compared to last year's third quarter, and came in from a number of our jurisdictions. Turning to Slide 6, you'll see that the company earned $1,310, 000,000 or $2.72 per share in ongoing earnings for the September year-to-date period. This compares favorably by $38 million to last year's ongoing earnings of a $1,272,000,000 or $2.65 per share. As in the quarterly period, POLR charges from the Ohio ESP remand accounted for negative comparison of $0.06 per share or $43 million. Customer switching in Ohio accounted for negative $0.10 or $76 million year-to-date. And again, we'll have more on this later. Operations and maintenance expenses net of offsets increased for the year by $48 million or $0.06 per share, and were mostly driven by higher storm expenses. Weather-normalized retail margins year-to-date were the same as for the quarterly period, down $0.02 per share. On the positive side, off-system sales net of sharing were up $49 million or $0.07 per share. Increases in physical margins were only partially offset by lower trading margin and higher margin sharing with our customers. Year-to-date weather was flat to last year, but up $147 million versus normal. Other was a negative $0.02 comparison to the 2010 year-to-date period. Increases in Transmission Operations, River Operations, and Generation and Marketing were more than offset by 2 positive results that were realized in 2010. One was the gain of a sale of an investment, and two, a positive foreign tax adjustment. Similar to quarterly results, the ongoing Texas Central carrying cost income was positive $0.04 per share, and again, we expect some more positive ongoing earnings from this category in the fourth quarter as well. And finally, rate changes net of offsets were positive $0.22 per share or $163 million versus last year's to date period, and again came from multiple jurisdictions. As Mike stated earlier, the positive year-to-date results allows us to narrow the guidance range for the year to $3.07 per share to $3.17 per share. Turning to Slide 7. You'll see the total weather-normalized sales were up 1.9% for the quarter and up 2.1% for the year-to-date period. Weather-normalized industrial sales have increased 5.2% for the quarter and 5.1% for the year. Increases in industrial sales were led by primary metals, which is up 13% for the quarter and 15% for the year, largely being driven by a large aluminum customer in Ohio, which returned a full load from 2/3 load in the first quarter of this year. Weather-normalized residential load is up 0.5% for the year. For the year-to-date period, residential was particularly strong in our West regulated utilities, where we saw the addition of a system of the Valley Electric Membership Corporation last year, and we see continued lag in our East regulated utilities. The Commercial segment is flat for the year-to-date period and we've see common results between our east and west service territories in this customer class. Turning to Slide 8. You will see that 8.3% of AEP Ohio's load is switched to competitive retail energy suppliers. The majority of that load switching is in Columbus and southern territory, and most of that is in the commercial classes. While the amount of load switching and gross margin associated with it has been larger than forecast, AEP has experienced significant offsets to the margin loss in the form of capacity sales to competitive retail suppliers, off-system sales margins from uncommitted energy and competitive retail margins. Combined, these items offset more than 75% of the lost retail margin. AEP Ohio's filed stipulation seeks a fair price for capacity sold to competitive suppliers, and would have them pay closer to what non-switching customers pay for capacity above certain thresholds. Turning to Slide 9, I'd like to spend some time talking about the progress that's been made in strengthening AEP's balance sheet and liquidity positions. First let me address liquidity. AEP is slightly greater than $3.1 billion in net liquidity, supported by our 2 revolving credit facilities. We've taken advantage of current credit market conditions and our strong balance sheet to increase and lengthen these facilities. In addition, there continues to be strong appetite for AEP's commercial paper. We believe that our net liquidity is strong enough to support our operations through current and future business environments. Next, let's take a look at our total debt to total capitalization ratio. Currently at less than 55%, our debt-to-cap ratio is the best it's been in the last 8 years. This is not by accident. The company has actively reduced costs and capital spending among other credit friendly actions in recent years to improve the company's balance sheet. Finally, looking at our credit metrics. AEP is well within BBB territory. Our FFO to interest coverage is well above 4x, and our FFO to total debt is above 20%. Similar to our debt-to-cap ratio, these coverage ratios are at their highest levels in years. Turning to Slide 10. I think you'll see that our performance in 2011 has been solid. We've reflected increase rates associated with putting capital to work for the service of our customers, and we've been able to convert that in earnings to our shareholders through the rate activity that our President and the OpCos have been able to take. We have positive balance sheet and credit ratio results as we've shown on the prior slide. This certainly will be impacted by the Texas securitization that we anticipate executing in the first quarter of 2012. As we're able to get that equity capital in the door, we'll be able to recapitalize TCC, and then put the balance of those dollars to work in our operating companies, in our transmission JVs and Transcos, and on the environmental spend that we'll need to make to be compliant with the new EPA regulations. We have continued focus on our OpCo model. Our presidents have been out there with their long-term capital plans, their long-term rate plans, engaging in discussions with the regulators and customers about what the impact will be to rates over time, and aggressively and positively working to make those results happen. For the 12-month period, our ROEs for our combined operating companies is at 10.9%, and our operating company presidents and their staffs continue to get things done. Let me spend a few minutes talking about 2012. We are very confident in our ability to grow earnings from 2011 to 2012. There are some headwinds and some things that we need to get resolved, between now and the time when we'd come out with a more detailed guidance for 2012. Those include the Ohio stipulation, which needs to get resolved. I think we've put together a positive stipulation with most of the parties involved. Only a couple outline, and we think that, that will be positively received by the Public Utilities Commission of Ohio. We have an outstanding rate case in Virginia, and we anticipate getting an answer to that by the end of the year. And Mike spent some time talking about the environmental issues, and we certainly expect to have more clarity around those issues as we get to the end of the year. Certainly for the CSAPR rules which go into place in 2012. As we get that certainty, as we come towards the end of the year, we'll be able to put together the more detailed guidance that I know you're looking for, and expect to share that with you early in the new year. We fully anticipate that the $3.25 point estimate guidance will be within the range that we'll be able to share with you in 2012. Finally, I think you'll be able to see that management has been committed to growing earnings and growing the dividend, as our board is committed to that. That's been the hallmark of the Mike Morris era as you could see from the first slide, and I know that Nick Akins is as committed to growing earnings and the dividend for the benefit of our shareholders as Mike was, and we certainly anticipate that to continue. Before I turn the call back over to Cary for questions, I would like to note that this is Mike Morris' final earnings call as CEO of the company. He's had 32 such calls as CEO of the company over the last 8 years, and I think you can see from what we talked about today, he is leaving the company in a considerably stronger financial position than what he found in. I know it's important to Mike and is appreciated by those of us who are employees. He's also left the employees of the company considerably safer than they were when he arrived here. And I know the employees of the company and our families are grateful to him for that. So on behalf of the men and women of American Electric Power, I'd like to thank Mike Morris for his dedication, commitment and leadership to the company, and tell him that we look forward to his continued leadership on the Board of Directors. Thank you, Mike.

Gee, Brian, thanks a lot. It's too bad the comp committee met yesterday. Cary, with that, I'd like to start taking questions.

[Operator Instructions] And our first question comes from Steve Fleishman.

It's Steve Fleishman from Bank of America Merrill Lynch. That was the fastest question I've ever gotten. Mike, first congratulations. We're going to miss you on these calls. A couple of quick things. First on the switching numbers that you're providing. Are those kind of a gross number or is that a net number? Is it net of the customers that you have switched but you've retained in your competitive side?

It is not net of customers that we've retained. And that, Steve, along with off-system sales and capacity sales to those competitive retail energy suppliers are all net of those numbers that we've supplied.

Okay. So both the gross -- both the percentage and the actual dollar margin, are those both gross numbers?

Yes. The numbers on Page 8 are all gross numbers.

And I think Steve, what Brian suggested, and suggest in effect laid out, was that we've recovered about 75% of those gross dollars with the various subsets of service that we provide to credit providers, as well as the recaptured customers.

And Steve, those offsets would come through in the lines for off-system sales and Generation and Marketing.

Okay, great. And then, I guess one other question, I mean, this year you've had the benefit of a lot of favorable weather at least according to your weather-normalization numbers. And I mean, without that, would have been lower level from which to grow, but are there other -- I mean obviously, did the POLR thing hurt within the range? Are there other things may be related to the weather being so hot that maybe your costs were higher? As you think about the weather impact, how do you think about that?

Well, obviously, in this business, warmer-than-normal weather is a blessing on occasion. And as you surely remember, and we've all lived through cooler-than-normal weather, is equally devastating. So what we've done over a series of years really, Steve, as you surely know is, when things are good, we step on the pedal for O&M spending. I think Brian spiked out the impact. We had a unique year in storm effects on the system. None of them large enough to touch the threshold of reserving for future recovery under the 11 jurisdictional states where we do business for the most part. That's obviously an increase in O&M spending. But we also have continued to do more work this year than we've done traditionally, because we wanted to take full advantage of that weather. When you look at the weather impact, most importantly, look at the earnings year-over-year impact of the incredible rate successes we've continued to have in 2011, which is just following a path that we've had since we came here in 2004. So weather has been good to us, it has been like all other utilities. Without that, we would have had some challenges. But each and every year, we've touched our midpoint in earnings, and this would have been 1 more year where we would've reacted to the weather, either constructively as we have or conservatively if we needed to.

Now to the line of Greg Gordon from ISI Group.

Mike, first of all, quick congratulations on a -- by end, when any measures, your very long and distinguished career. So I just want to ask a follow on question related to the first one. So when we look at the $83 million gross, I know you've indicated that there've been significant offsets. But at the beginning of the year, you had indicated you thought you'd be at about 17% switching and a $53 million sort of headwind. That was kind of what was baked in to the midpoint of your guidance. So I guess to ask the question really simply, when you look at the gross number and you look at what you think the net number is, are you ahead of, behind, or on budget on what you expected for the year?

It's clear that it's been a bit more aggressive than we thought that it would have been. I think that had a lot do with the ongoing availability of natural gas-fired kilowatt hours being available in the marketplace. The flip side of that is, of course, what Brian had laid out to the question Steve had asked, is that, that has given us additional kilowatt hours to the put into the market. So we've offset a great deal of it. But it is clearly been more aggressive than we had forecasted.

Right. So on a gross basis more customers have left, but have some of the offsets also been ahead of plan?

Yes, I think that's really accurate way. So net-net, although I don't have the true net-net number in my head, I would tell you on balance, we think we've done real well in that space. And some of our customers had the joy of having others supply energy to them. As you know, in a volatile market, sometimes that joy becomes pain. But at least for this calendar year, the customers have done well, and I would argue the shareholders have surely done well as well.

And, Brian, do you have a sense of what the range outcome is in terms of the -- what your sort of, the net proceeds of the Texas securitization is going to look like at this point?

Yes, we do. So the estimate that's reflected today is the low end and the conservative estimate of what we'd anticipate or being able to securitize. We have filed higher amounts with the Texas Commission. So today what we've recognized is a regulatory asset of the principal amount and the interest carrying charges of that $682 million. There is an incremental equity component that were recognized as the securitization amortizes over time, that's about $116 million, and that brings us to a very low and conservative estimate of $817 million. We have filed with the Texas Commission because we believe that we're entitled to amounts that range from that $817 million, which is actually conservative and low, up to what we believe we'd ultimately be entitled to, which is about $1.2 billion. And we're awaiting the results from that Texas proceeding before we could recognize the higher amounts.

And that will all be determined, Greg, in the current proceedings there in front of the PUCT. But interestingly enough, if you go back to the root our case, the actual foundation case, the commission at that time determined that the appropriate interest rate for AEP Texas, TCC and TNC would in fact, be 11.7%. And so we think the Supreme Court really didn't give them any latitude to make any other choice, that is the rate that they found in the case, and the court didn't give them any direction about whether they should change that. They just said that has been determined in our case. So we think we've got fighting shot at the $1.2 billion that Brian mentioned, and we will be aggressive in our approach because we think our owners deserve that over a period of years that we've waited for the appropriate decision.

And now to the line of Dan Eggers of Crédit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Congratulations, Mike. I guess just your as your role are ending [ph] pretty soon, but can you share your thoughts from the board's perspective on the dividend right now, as it relates to the increase yesterday and kind of how you guys are approaching the payout ratio and growing the dividend here forward?

I think the board was obviously very encouraged to do this one more time. They were cautious for the 2012 view of that same point, because we'll get some clarity about the capital demands on the system. We'll get additional clarity as Brian really pointed out on what Ohio looks like. And there has been some writing that is probably a bit more aggressive than it needs to be about the changing mix of the earnings stream of American Electric Power going forward. You can do a simple calculation to say we'll be 20-plus percent of deregulated if you look at the fleet in Ohio. But the reality of that is that many of the those megawatts will be dedicated to other members of what will become a 3-state pool or a 3-party pool, I should say, actually for 5 states involved in it. As well as the continued serving of municipal and co-op customers here in our service territory. What Brian and I and the management team have really looked at when we look at the overall sequential step to market, is we'll take that Ohio fleet as it continues to free up to as many longer term, more dependable contracts as we can. Yet we're going to keep a pretty solid number of megawatt hours to take full advantage of the volatility in the marketplace. Our commercial operations group as you know, has been very adept at being on the right side of those equations frequently. And Lisa Barton and the transmission group will begin to work hard on de-bottlenecking some of our avenue to the East Coast markets where we'll see substantially different margin. On the upside by getting to some of the higher cost cross-market places, I know our competitors over there won't be happy about that, but open markets are open markets, and we will be the second lowest cost producer in this particular region. But for those who are more heavy nuke, so we look forward to that as it comes in. And it won't be near as risky as I know some have written about. Dan Eggers - Crédit Suisse AG, Research Division: I guess Mike on that point, yes -- when you look at the power poles [ph] as you guys to get developing and the ability for long term contracts, what kind of percentage are you guys targeting as a management team for long-term contract relative to market sales?

Well, a lot of it will be in the overall discussions with the other pool members, because they are going to be eager to have some capacity assigned to them going forward, so that will work that way. It's our view although not yet finalized that the pool will have a different base to it, that it won't be capacity, long short charges but more of focused on energy charges. So we think we'll be able to tie up a certain amount of those megawatts and those kinds of undertakings. And that's yet to be negotiated. But our plan there is that, as it has always been to keep the other states as a whole as we can in that process. And I think in a competitive nature, I'd rather not share exactly the number of megawatts that we intend to put either into that play. To the extent that they're more advantageous for a 12-, 14-, 24-month window, as we look out at the marketplace we'll put more there. The muni coop piece, as you know, we've been hugely successful with that on our Western footprint. And really I've never had the opportunity but for a few endeavors in our Eastern footprint, we'll be a bit more aggressive there as well. I think in that muni coop area, American Electric Power is viewed as an incredibly strong and dependable supplier of kilowatt hours. So we think we will have a great deal of success, but as you know, only time will tell. But I assure you this, that from at least my chair vantage point and I know this Board of Directors very, very well, and I know Nick very well, this will not be a risky play. Dan Eggers - Crédit Suisse AG, Research Division: Okay, and I guess you kind of on that, that one last question on that vein. The other -- the power pole [ph] members, what kind of plans are you guys doing? And what are your conversations you're having with your commissions there as far as them building their own generation for rate base rather than sticking to the historic strong power poles, is that something that's advancing at this point?

Yes, I think if you look at Appalachian Power, particular Virginia, has been desirous of having more direct ownership of their generating capacity. The Dresden facility, which actually will come online earlier than we thought, and has already run some dry-run test. We'll be assigned to Appalachian Virginia and West Virginia, Charles Patton and the team has already gotten rate approval for that or acceptance of that by the 2-state commission, so they are very eager to have that done. The issue in Kentucky will continue to be depending on the environmental regulations, whether we retrofit Big Sandy, we convert Big Sandy some kind of a gas facility or we enter into the power purchase agreements to satisfy Kentucky's need as we a look at that issue going forward. So we think there is a lot of flexibility there. We are in early conversations with commission staffs on those issues. And to date, they are fruitful, they are intended to be constructive. And I think it's pretty safe to say that's what we've experienced.

And now to the line of Michael Lapides from Goldman Sachs.

First of all, Mike, congratulations. Second of all, I have 2 kind of sets of questions or 2 questions. One more, kind of earnings specific for the fourth quarter and then going into 2012 and one more strategic. When I think about earnings so far this year, the POLR remand, I think, you said $0.06 in the third quarter and an incremental $0.04 in the fourth, I assume that drops off beginning in 2012, and I know you had the increased amortization of the POLR disallowance in this quarter that showed up in the D&A cost. Does that continue forward as well on the fourth quarter and then drop off in 2012?

Mike, it does continue, but it comes through a number of different lines in our earnings release format. It comes through line 2, it comes through other income and deductions, as well as depreciation and amortization. And I think for the tie out of which lines of that comes through, I'd refer you to Betty, Joe and Julie for the specifics on that.

That's fine. Mike, when you guys are thinking about Ohio long term, meaning strategically, when you get to market or as you get gradually closer to market, do you want to have as kind of a corporate strategy and maybe it's a combination of you, Brian, Nick and the board kind of thinking about this, do you want the earnings volatility with having a sizable merchant generation fleet? Does that fit into your vision for what AEP is?

First off Michael, thanks for your friendly comments. Not really. Again, we will hold a certain amount of that capacity in reserve and play that volatility market, obviously, intending to take full advantage of -- no matter, which way you look at the EPA implementations. The FERC's 80-plus thousand gigawatts coming offline to the EEI's 40-plus thousand gigawatts coming or 40 gigawatts coming offline, I'm sorry. It's going to put a tremendous amount of pressure on the simple supply-demand equation. We have as a country recovered about 95% of the overall weather-adjusted electric output to the prerecession impacts in calendar 2008. The electrification of the U.S. economy continues to pace. I saw some comments that my good friend Jim Rogers said the other day, I couldn't disagree with him more. We continue to see additional electrification commercially, residentially in the industrial space as well. So we're going to hold some megawatts back for that. But this isn't the board I assure you, Nick. The rest of the seat of the management team and me sitting on the board and watching from the chairs, perched, we're just not big gamblers. There's not much to be gained by that. You may have a great month, you may have a great week, you may even have a great quarter, but I think the proudest comment I can say about commercial operations, which started long before I got here, but during my tenure, we have never ever had a losing quarter. And that's just simply says that we are conservative and smart. And I think those are tremendous talents to have in that particular shop.

And I just want to follow up on that one because I completely understand when you're thinking about having exposure the day ahead or a month ahead or even 12 to 24 months out. But if you own a merchant generation fleet, unless you've got 10- or 20-year PPAs, you have sizable commodity volatility and commodity exposure. So -- and it may not to be in year 1, but as we've seen in the industry for the last couple of years and really for the last 10 years and its worked in both directions, you have the volatility, it's a matter when it shows up. And I guess that comes back to the do you -- or are you comfortable with the concept of having large swings and maybe FY 3 or FY 4 earnings power due to just significant movements in either directions, in other coal prices, capacity prices or energy prices?

No. I mean, it's pretty clear. If you look at what we've done with the fleet that we had to work within our western footprint, long-term contracts are the standard. And there are contracts that fluctuate with every input piece into the cost of electricity and most of them yield in the high kind of mid-double digit returns on equity, capital investment, when you calculate back to the traditional cost of service model. And that will really be what you see us do. We as you know, today if I were out to buy some coal, it would cost me $70, $80, maybe $90 a ton, our overall 2011 number is in the 40s. That's another place where we think we've got a huge competitive advantage. I think that's part of why when you look at the transition of our fleet here in our eastern footprint, some are happy to have the opportunity to compete in our market, lots of them would rather not see us compete in their market. And when our fleet gets free, it will be intriguing to see how successful it is. But again, we just don't have a belly for big plays, big swings. We'll tie up as much of it in the pool arrangements as we can. We'll enter in to some very long-term -- you think of partners of ours like about Buckeyes Power, you think of other major co-ops here in our footprint, AMP Ohio is looking to build some facilities going forward. They may have trouble as almost everyone does, building facilities. So we'll be here to satisfy those kinds of loads as we go forward. We've had success over the years in Virginia, West Virginia, we'll continue to do a lot more of that as we go forward.

Now to the line of Paul Patterson with Glenrock Associates.

Just to circle on this settlement process, is there any potential for it to be altered or to bring more people in? Or should we think of this as pretty much going to be a litigated situation going forward? There's been some certain focus on this MRO test now with the remand coming back, and we also have the Duke Energy settlement. I'm just wondering whether or not this is still sort of -- we're still -- basically, this is going to be litigated, is that how we should see it? Or do you think there could be any change or alteration before a commission?

Paul, I think we're in a hybrid litigation. We have a stipulation that's been signed by all but 3 parties. At the last meeting, we had 47 lawyers there, all but 3 of them were in agreement with the undertaking. Not all of them obviously, some of them were multiple representatives of individual signers to the issue. We have been unable to get OCC to ever join American Electric Power in any settlement, that's just the standard, and we understand that. And we tried very diligently. We made some, what we thought were very reasonable proposals to the OCC, they chose not to sign on. We tried but could not satisfy the near term desires for FirstEnergy and IEU. IEU and FirstEnergy looked like peas in a pod. So we did what we could in that endeavor. The commission staff was very direct on what they needed to sign on to a stipulation. I know within the structure of a regulatory commission, the staff works on its own, it doesn't get direction from the commission. But clearly, they're there in the same building and they know what was required. So it will follow that hybrid litigated path. We're pretty much done with direct testimony and pretty much done with cross-examination of witnesses. The staff stood strong behind the case. There is some concern with MRO issue, but price is not the sole determiner of whether you do or don't pass that test. There are other intangibles and tangibles, and the staff witness was very clear about that. Particularly if you read the redirect testimony, where he proffered that the prices, but one of a number of areas that commission needs to look at. I think as a subset, there is a great deal of support in the state of Ohio for the development of the shale gas play. I think a very unique subset of what our situation provides for is the ability to over time determine that there's some of the Muskingum River facilities might coal retire, and get replaced with new shale gas-fired natural gas. Those are some encouragements. Our customers see some real benefits, and this including as I'd mentioned, many of our large customers a 5% to 10% reduction in their overall rates. And that has always left a puzzle for us, as to why not everyone signed on to those, on to the settlement. But it is what it is. And we've put in a great case, we don't get any signal from anybody that there's concern over that. And the commission will issue an order, whatever it is, we'll take a look at it. If it is a what we filed, obviously, we're happy. If it isn't, we'll take a look at that, and look at what our options are once that's done.

Okay. Assuming they give you something that's pretty close to what you guys have settled on, when you mentioned that to the point estimate for 2012 and you mentioned that it's within your guidance, can you give us a flavor sort of kind of where might it be, sort of in terms of a range that you guys might be contemplating for 2012?

It will be premature to take that step now, Paul. But today, we get that order, and we get clarity on what the environmental spend might need to be in '12, we'll be the first to share that with you. And because of the ESP has some legs on it, and that it will be '12 '13, '14 event, we'll probably give you a pretty good look in the out years as well and how we see utilization of the megawatts as they free up in the marketplace for those years as well.

Okay. And then just finally with the EPA, you sort of suggested that there might be some delays or some sort of more appropriate or more conciliatory sort of timing issues. Could you elaborate a little bit on that? I mean, do you actually think something like that might happen, and how that might show up? Or is that just sort of just you being logical and thinking sort of in a logical way as to how things should happen as to maybe, have it with what we sort of we're seeing on part of the EPA's public statement?

Well, we all have public positions that we take. We have had number of meetings with the administrator. We have had a number of meetings with the system administrator in charge of air [ph]. They are people that we have great respect for. They are quite eager to listen, and have been more than meeting us halfway in an open discussion of the impacts. They, like the RTOs are very concerned about reliability. I don't think anyone in this administration or any administration wants to have the lights flicker or go off in some region of the country by ill-thought-through implementation -- policies that again, at the end of the day, I know my friends in the environmental community are arguing that AEP stands for Trashing the Clean Air Act, and nothing could be further from the truth. What we're suggesting is stretch this thing out to maybe 2018, have some RTO flexibility for 2 more years. Then you can get to the same environmental footprint without the risk of reliability issues. Without the unnecessary expense of all of us falling all over each other to do the same work at the same time. That's why quite honestly, the International Brotherhood of Electrical Workers have been lockstep with us on this issue from day 1. As had the mine workers and boilermakers and some others. There's just a better approach to take to this, and you get to the same environmental conclusion. The healthcare effects, we've got medical folks who say they're not real. They've got medical folks who say, they're absolutely real. Whether or not that ends or wins the argument, it's almost immaterial. What we're trying to do here is be rational. And again, if that happens or doesn't happen, we have a plan. We have a plan. We've already begun some of the hard work that we'll have to implement in '12. We're prepared to do what we need to do. But clearly, it will entail shutting plants prematurely and having the impact on local property tax and employees that, that will have. The other side of the equation is absolutely accurate. Once you begin to put capital money to work, jobs are created. The issue here is will the lights stay on? And that's the argument that we make. So it would be premature for me to say that, "Gee, we really sense that they're moving." But they are listening and they are rational people. And the public announcements that the administrator made in Denver last week or earlier this week, would surely indicate that, that may not be the case. But Democrats on the Hill are beginning to say, "Wait a second," on both the House and the Senate. There are some pretty strong union movements for, "Hey, wait a second." So we're looking forward for some relief. Clearly, the move she made on CSAPR for allowing for a better and longer ability to move resources across state borders was helpful. Not all that needed to be done. We will be able to comment on that, I think, next week or the week after, and we will enter again comments as requested on a better approach to that particular undertaking. So they're listening, and they're adjusting, and we're all going to get to the same place, cleaner air, better air quality. And at the end of the day, more appropriately placed electricity without the reliability risk.

Now to the line of Jonathan Arnold of Deutsche Bank.

Mike, congratulations. Mike, we'll miss you. And if I could just ask on sales. You talked about I think industrial obviously, surprised maybe a little to the upside. Primary metals is the big driver and there's 1 aluminum customer. What's the underlying picture like and how does that relate to where you thought you would be and just some broader comments on the service territory?

Jonathan, industrial have been strong throughout the year. For the first time this quarter that we've seen in our top 10 industrials, 4 of those customers showed some quarter-on-quarter decreases, very modest in about half a percentage point decrease quarter-on-quarter for the year, but of course, remembering there are some pretty significant increases over time that they'd experience already last year. So as Mike was saying, our industrial sales have recovered 95% of their prerecession levels through 2008. So industrial's been very strong. The rate of increase starting to slow down in some of those top 10 industrial sectors. In the residential side, the west is very strong and the east continues to struggle. West is driven by improvements in our Texas and Louisiana service territories, not least of which, is the acquisition as I mentioned, of the Valley Electric Membership Corporation. So residential really sees a split between east and west, west continuing strength, and east continuing to struggle. In the commercial side, both areas continue to struggle. Up for the quarter but year-to-date flat. We had forecast for the full year a recovery in the commercial sector of 0.07%, and it looks like we’re not going to be able to make that for the year, as we're already so far into the year and are just flat. And again, common results across both east and west for the commercial.

It's interesting, Jonathan, when you think about some of the points Brian made out west, when we look at our SWEPCO, our operating company, we have a U.S. steel facility that was shuttered and running at minimum demand, but based on shale oil and shale gas development, throughout that region of the country, it's a 24/7 now. We're beginning to see at AEP Ohio some incredible reactivity in the steel industry for a drill pipe going on. And what that says, is that jobs are coming back in the energy sector. Jobs lead to a better commercial demand and better residential demand. So we're hopeful when we look at '12, like everyone were worried, but we are seeing some signs, and at least on 1/2 of the presidential debate, you're beginning to see everybody talk about energy development. Tom Donohue over at the chamber is starting to say, "Look, there are literally millions of jobs sitting on the shelf, if America would simply develop its energy resource rather than look at it as a negative, we could move this economy forward quickly." I was at the meeting a week ago with Jamie Dimon, well known to all of you, who suggest that from his vantage point, of course has worked well for his a bank. But from his vantage point, the U.S. economy is simply waiting for someone to step on the gas and instead of the break, and getting rid all of these silly regulations would be the first step in the right direction and developing the energy resource base. So I guess, you like, Paul might think I'm running for office. But if I did that would be my platform.

Is it premature to give us some sort of insight into how your -- what your early look on '12 might be in the sales department?

It'll be in that range that Brian talked about, which will include that or will include that 3.25 point.

More of an actual sales number?

Yes, look, we're looking for sales growth not unlike we've looked before. We came into this year looking for something on the order of 1% to 2%, we'll probably look at the same kind of a number going into next year.

That comes from the line of Paul Ridzon for KeyBanc.

Just wondering, if we look into '12, how should we think about the EPS impact of the Supreme Court remand. What's going to happen there?

The TCC remand?

Yes.

Yes. So we've already experience the ongoing earnings impact of the carrying charges. What will start to reflect once we securitize, is the equity component of that realization, of that securitization. And we anticipate that, that will be prorated over the time of the securitization. So it's about to $116 million, and if you say that, that's prorated over the 7-year anticipated securitization period, we'll be able to get that equity component in addition to the interest carrying charges that we'll be able to realize on an ongoing basis.

About 112 divided by 7?

116 of the equity component, divide it by 7. But more weighted towards the front end of the amortization period.

Okay. And you talk about 3.25 point estimate. Does that assume that the Ohio settlement doesn't get tweaked too much from its current form?

Yes, it does. We're assuming the reasonable outcome at which, is what we believe that we filed with the commission, and we don't anticipate much if any tweaking to that, given the parties that we've added on to that stipulation. And we anticipate a positive result as we work very hard to achieve that with the settling parties.

But I think it's important, Paul, that we make sure we make this statement about '12 as we look at it. The 3.25 will be inside of a range. It's not the point estimate that we had before. But this is a team that's used to delivering, and '12 won't be any different than 2004 and every year that we've worked here before that. So it's going to be more challenging than we thought it would be based on what we originally had filed. But it will be a test of the skill sets of this team, which we really never failed to satisfy.

And just back to Jonathan's question about the 5% industrial recoveries on the quarter, is that sustainable or was there anything weird about that other than that smelter coming back?

Yes, I mean, I think the thing that's weird about it is that, we're at now 95% of our prerecession industrial sales. So to assume that, that would continue indefinitely, I think would be unreasonable. As we're approaching that 100% mark, that rate of increase it will certainly expect that to come in over time. And as I said, much of that increase was driven by that primary metals customer, which is our largest industrial customer. And then again, 6 of the top 10 categories, we've still continued to see increases in both the year-on-year and the quarterly, with only some modest falling off of those sales increases from 4 of those top 10 sectors.

And I think it's interesting, Paul, when you look back as we stepped into the 2009 of this, the questions that you were all asking us then, what does this look like? Is this a redo of 1980? And what we said to you then has come to pass. What we said about 1980 was lot of our industrial manufacturing facilities closed down, never to reopen. What we've seen through this recovery in 2010, 2011, that we hope would go on in '12 is that most of them have gone back to a multiple of 24/7 shifts from 1 shift to 2 to 3. The aluminum guys going from 2/3 production to full production. Everything, but Century Aluminum has been back to where we saw it before without any major loss of customers. And Ohio Governor Casey has done an outstanding job of reinvigorating capital investment in Ohio and we will continue to see that throughout our footprint. So we are pleased with all of that. Let me bring this to a close, simply by saying one more time, thanks to each and every one of you for your comments at the outset of your questions, maybe that made your questions a little more friendly, and I appreciate that. Let this old dog go home without too many nicks. But this is a great team, and it's going to be in great hands. And it will continue to be an incredibly low risk as my good friend, Don Mad Money [ph] says, "Low risk, high yield, safer than the U.S. government, invest your money at American Electric Power." Thanks a lot team.

Cary, can you give the replay instructions?

I sure can. And ladies and gentlemen, this call will be available for replay after 11 a.m. Eastern time today through midnight November 2, 2011. You may access the AT&T replay system at any time by dialing 1 (800) 475-6701 and entering the access code of 219233. International participants may dial (320) 365-3844. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.