Ladies and gentlemen, thank you for standing by. Welcome to the American Electric Power Fourth Quarter 2015 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Bette Jo Rozsa. Please go ahead.

Thank you, Tom. Good morning, everyone and welcome to the fourth quarter 2015 earnings call for American Electric Power. We are glad that you are able to join us today. Our earnings release, presentation slides and related financial information are available on our website at aep.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning for opening remarks are Nick Akins, our Chairman, President and Chief Executive Officer and Brian Tierney, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Okay. Thanks, Bette Jo. Good morning, everyone and thank you for joining AEP’s fourth quarter 2015 earnings call. 2015 will be remembered as a year of significant transition that culminated a 4-year process of focusing on the fundamentals of our business to drive consistency, execution and discipline while driving toward a strategic vision of what the next premium regulated utility should look like. The balance sheet of AEP is strong and we continue to deliver for our shareholders quarter after quarter from a dividend and earnings growth perspective despite various headwinds that have occurred along the way. This quarter and the year, 2015 are no exceptions. First, let’s talk about the fourth quarter. Fourth quarter ‘15 GAAP and operating earnings came in at $0.96 per share and $0.48 per share respectively compared with fourth quarter ‘14 GAAP and operating earnings of $0.39 per share and $0.48 per share respectively. The difference in fourth quarter 2015 GAAP and operating earnings being mainly driven by the sale of AEP River Operations. Fourth quarter was unusual in the sense that winter particularly in December never occurred. It was more like an April. Even so, operating earnings were consistent with fourth quarter last year even though we gave back approximately $0.11 per share cold weather related load margins finishing the year solidly within our revised guidance range at $3.69 per share operating. The year finished at $4.17 per share on a GAAP basis as well compared with ‘14 results of $3.34 per share and $3.43 per share GAAP and operating earnings respectively. As can be seen on the graph on the right of Page 3 of the presentation, AEP has consistently performed better than the utility index for the 1, 3 and 5-year periods and as well outperformed the S&P 500 Index over the…

Thank you, Nick and good morning everyone. I will be taking us through the financial results for both the quarter and the year with most of the focus on the annual results. Let’s begin on Slide 6 with the fourth quarter comparison where operating earnings for both years were $0.48 per share despite extremely mild temperatures which adversely affected the quarter by $0.11 per share as well as lower earnings from our competitive businesses. Total company earnings were unchanged from last year. These unfavorable drivers were effectively offset by favorable rate proceedings, the absence of unfavorable regulatory provisions from 2014 and the decline in the effective tax rate, each of which added $0.09 to the fourth quarter of 2015. Turning to Slide 7, you will see that the fourth quarter’s earnings when added to the results through September pushed our annual operating earnings to $3.69 per share compared to $3.43 per share in 2014, an increase of 7.6%. The increase in earnings for our largest segment, Vertically Integrated Utilities, was the primary factor contributing to the overall increase in earnings. The major drivers for this segment include the favorable effects of rate changes, regulatory provisions and lower O&M and income tax expenses, partially offset by reduced margins from retail and wholesale energy sales. Rate changes were recognized across many of our jurisdictions, adding $0.31 per share to the year. This favorable effect on earnings is related to incremental investment to serve our customers as well as the successful transfer of the Mitchell plant to Wheeling Power. The effective regulatory provisions bolstered boosted earnings by $0.12 per share due to the Virginia legislative change and the unfavorable Kentucky fuel order in 2014. Lower O&M expense for this segment favorably affected comparison by $0.06 per share, primarily driven by lower employee-related costs.…

[Operator Instructions] Our first question is from the line of Greg Gordon with Evercore ISI. Please go ahead.

Thanks. Good morning, guys.

Good morning, Greg. How are you?

I am well. My first question goes to your last point, when I look at Slide 31 of the handout, certainly one of the hallmarks of the company under your management has been a very, very focused on balance sheet integrity. And what I see here is that from ‘16 to ‘18, you are – even with the increase in capital spending, because there is such a significant increase in cash from operations, your ‘16 to ‘18 excess capital required is down by $1.1 billion, plus your debt capital market needs are also down by $1.1 billion, doesn’t that basically flow to retained earnings and further potentially strengthen the balance sheet from here?

It does, Greg. And so the issue is, part of what we talk about here is increasing the CapEx sum. But as we get the increase in retained earnings that also increases our ability to access debt capital markets and we will be reviewing that as we evaluate our plans as we enter a period where we will be spending in order to get ready for the Clean Power Plan and other opportunities like that later this decade.

But it’s fair just eyeballing this to say that exiting ‘18, the balance sheet should be in an even stronger position than it is today, unless you decide to spend further capital over the period?

Yes. We have not consumed all of the excess cash that bonus depreciation extension has created for us.

Great, that was my key question. Thanks. I will let somebody else ask and go the back if I have more.

Yes. It is interesting Greg, that this time around, Congress instead of waiting until the end of the year to give the existing year, they did the 5 years. So it really helped in terms of the cash and capital planning. And you are right we didn’t have it utilized all of the capital available to us. But nevertheless, we will continue to focus on additional opportunities for us, particularly as it relates to infrastructure spending.

Our next question is from the line of Michael Weinstein with UBS. Please go ahead.

Hello, just a follow-up on Greg’s question. Does that mean that you could in theory lever up more on certain subsidiaries as for just transmission going forward, is that one of the possibilities?

Yes. So debt avoidance is one of the possibilities that we are looking at. Obviously, the closest thing that we have done is spending incremental CapEx. But debt avoidance and/or levering up our opportunities that the incremental cash makes available to us.

I am just thinking of the stronger balance sheet you could also lever – increase the leverage on that subsidiary?

We could, Michael.

Okay. And then also I was wondering if you can go into a little bit more detail as to why you think sales forecast for the shale plays will continue to be in 0.9% or continue to grow going forward that you don’t see any potential problems, I guess in the next 2 years or considering the low prices?

It is interesting because we continue to see more and more opportunities for the electric load to continue to pick up in addition to compressor loads, optimization within the fields of sales, improved production of the existing wells, that continues. And of course, we are also looking very closely at new opportunities that are coming online that have been identified, engaging the progress of them coming in 2016 as well. So we continue to – and we are in very close touch with our customers out there, particularly ones who have discussed expansion or addition of new facilities and keeping in touch with them about timing of projects and the additional load associated with that. So we are keeping our ear close to the ground on all of that activity.

Next question is from the line of Praful Mehta with Citigroup. Please go ahead.

Hi guys.

Hello.

Hi, my question was firstly on the EPS and cash flow guidance that you have for ‘16 and obviously the cash flow guidance going out as well, what is embedded in that in terms of both the PPA and also the outcome of the strategic review?

Yes. We don’t have anything in there for that forecast at this point. And what we will do, obviously we want to get the PPA done and evaluate fully where we are at in terms of not only the incremental, any incremental earnings associated with the PPA. But obviously, we have other factors we are looking at in terms of load and other issues to look at. So we will deal with that one when that time comes.

Got it. Just to be clear, if there is a PPA, outcome is positive, then that obviously is an incremental upside to the guidance you have right now, is that fair?

So we have to work through that process and fully understand it first. So I don’t want to get out on a limb and tell you that that would be the case. But obviously, getting the PPA in place will be very good for the company. But we are also looking at, like I said other things that may – because I think at the first quarter, we will probably have a better handle on what load looks like and then see that the relative degree of consistency to make it good, really a good forecast in terms of guidance and that kind of thing.

Praful, I think if we were to get new data sets around a PPA and/or disposition of a business, I think it would be incumbent on us to provide and update the guidance and we would do that.

Thanks. That’s very helpful. And then secondly, I heard there is rumblings around a legal challenge associated with the PPA, who knows where that goes, but just trying to understand, if that legal challenge comes up, how does that impact strategic review of the non-PPA assets, because I am assuming the outcome of that legal challenge would have an impact on the buyers view about the value of the assets?

Well, okay, so let’s keep in mind there is really two sets of assets here. One is the ones that are covered under the PPA. And the other are probably rumblings and probably more than rumblings. At this point there is filings have been made apparently. And if you have the PPA piece of it, that’s really about 3,000 megawatts of generation nominally. Then you have the other 6,000 megawatts out there normally that would be associated with the remaining unregulated. So if there is a case out there, I think anyone that would look at it, if it’s only unregulated part of the generation, they – there will be people who are buying unregulated assets and fully understand the risk associated with that. As far as the PPA is concerned, we will continue to progress associated with the PPA. Those cases will work themselves through. We feel like we are in very good shape from a legal perspective. There is a lot of dust being kicked up. But that’s what happens when you try to do progressive things, particularly things that have the state supported self as opposed to waiting on a Federal outcome for a long-term capacity market for example. So I think any perspective buyer in a transaction on unregulated generation, they would fully understand what the issues are and the risk involved.

Our next question is from the line of Christopher Turnure with JPMorgan. Please go ahead.

Good morning guys.

Good morning.

I have more kind of CapEx and balance sheet questions here to kind of follow on some of the previous questions as well. First, on the incremental CapEx of $2 billion over 2 years, kind of what’s embedded in that, it looks like it’s mostly transmission related, but is there any incremental renewables in there that stem from the PPA settlement. And then also on your ability to finance that capital kind of how do you think about the moving parts there, especially in ‘17 and ‘18 given the fact that you are not assuming any kind of asset sale proceeds, any PPA incremental cash. And I think my understanding of your tax situation was that even though bonus depreciation is certainly adding to your potential in outer years, you probably wouldn’t have been a cash tax payer in ‘17 and ‘18 anyway. So how does the bonus depreciation going to help your cash in those years to finance some of this incremental capital?

So let me touch the point on what’s covered under the $2 billion that’s included. Yes, you are right, a majority of it is transmission. And then there is some on the rest of the regulated activity. But there is also a piece in there associated with as you mentioned renewable projects. But it’s not related to the PPA. It’s really not to the Ohio PPA. It’s related to other arrangements, there are other PPA arrangements that we have for long-term PPAs with solar projects, universities and that kind of thing. So it very much supports what we are trying to achieve from a customer side of things. We go out and we participate in arrangements that with long-term PPAs with creditworthy counterparties to ensure that we can put those kinds of facilities in place. And you see a category there. I think that’s competitive parts, where that competitive part is really around our onsite partners’ opportunities associated with projects that they are doing with that are supported by long-term PPAs.

So – and let me address Chris for the last part of your question. Without the extension of bonus depreciation, we were going to be significant taxpayers beginning in 2016 and in 2017 and going forward. So, this does significantly change our cash position. And as Nick just said in his response, we have not committed dollars yet for the renewables associated with the PPA. If that’s gets passed, that will be an opportunity for incremental investment that’s currently not in our CapEx plans. And if there were any proceeds from sale of any assets or businesses that we have that would be incremental to our balance sheet and cash flow position as well.

Okay, great. That’s very clear. And then just another kind of follow-up on the load side here. You mentioned that you do kind of expect somewhat of a continuance in the E&P and energy-related sectors there in growth or at least stability there. Kind of what else are you thinking in terms of growth by customer class that underlies your 80 basis points of growth overall for next year?

Well, certainly, all our manufacturing, travel and leisure, those categories continue to grow. Brian, you may have others?

Healthcare and business services are other areas that we are seeing growth, particularly in places like Ohio and I&M.

We mentioned RV sales and I remember when President Obama was running for office in 2008, one of the places that he was going is the sign of a downturn economy was Elkhart, Indiana. And if you look at Elkhart, Indiana now, it’s just absolutely booming with RV sales being up as much as they are. So, that’s another sector where we are seeing significant improvement.

Our next question is from the line of Anthony Crowdell with Jefferies. Please go ahead.

Hey, good morning. I appreciate the Star Trek reference in last quarter, but back to the future. Just a couple of questions. First, easy one on your favorite equalizer slide, transmission ROE is coming down in ‘16. You said there is some lag there. Do you think that returns back in ‘17?

I don’t have those numbers, but I would expect as we continue to accelerate transmission, I think it will probably stay pretty steady be my guess, but we obviously have to look at the investment cycle there, but obviously transmission continues to be a near-term investment recovery perspective and as long as we can accelerate it and bring those earnings in, which we started to do obviously last year, then we can mitigate the impact of the ROE drop. And then you also have couple of other things that are occurring in there as well. ETT, ROE is also forecasted to decrease from 11.7 down to 10.4. So, that’s sort of embedded in there as well. And obviously, you will have interim T calls, filings need to be made. And so I fully expect it to stay relatively consistent with that.

Also staying with the equalizer slide if I look at Kentucky Power, I mean, that’s the smallest ball here. I guess, it’s the smallest contributor for earnings. With the market and people paying exorbitant premiums for at least some of these smaller utilities, any thought of monetizing that? It doesn’t really seem instrumental into the AEP story and it’s also lagging your ROEs there.

I get that question quite often. And Kentucky, on the one hand, it certainly is a regulated jurisdiction. So, we are still in the process of becoming more fully regulated and I sort of measure it up from that approach. Number one, it’s a regulated entity. Number two, it’s been one that it was one of the first to do a rider for cyber. It was one of the first to allow the transfer of Mitchell. So, while it maybe small, there are some positive things about that jurisdiction that we obviously have to take a look at. But what you are saying obviously is we see that going on in the market as well. But at this point, we are focused on being a premium regulated utility and that means we need to deal with the issues that everyone is asking us about and that is our strategic discussion around the unregulated generation. So, that’s really where our primary focus, if we did something with a regulated entity at this point, we would become more unregulated and that’s not the direction that we are going.

Our next question is from the line of Gregg Orrill with Barclays. Please go ahead.

Good morning.

Yes, thank you. Good morning. Two quick questions. First, if you have any update around timing of merchant sale how you are thinking about that? I know you said you expect Ohio PPA order soon after the briefs are done. And then second on the O&M slide, the $2.8 billion for ‘16, ex-riders and trackers, maybe is that a fair assumption to kind of back into what that is from ‘15 and assume that continues or maybe provide some guidance around what that is for riders and trackers? Thank you.

Yes. I will let Brian cover the second one. On the first one, on the merchant sale piece as you talked about, I think the timing is still, as I said earlier, we need – it’s sequential in terms of outcomes, but not sequential in terms of the activity that’s going on. We are already in a strategic process around the unregulated generation. The question is what’s in and what’s out? So, we will get through the PPA approach with Ohio. Hopefully, they will make a decision here and it should be after over 2 years, be in a decent decision to make a decision quickly. And then we know and understand what we are dealing with, with the rest of the fleet. And so that process we would expect would move very quickly and I would expect us to be in a good position to get that done as quickly as possible as well and that is a focus to make sure that we complete that activity in 2016.

Gregg, this is Brian. A little bit over $1 billion in offsets that we are talking about in terms of trackers. And in terms of how we get there from ‘15 to ‘16 in O&M it’s employee-related expense. It’s one-time reductions that we will be doing and we have been planning for the reduction in capacity revenues in Ohio now for the last 3 years. So we have had as a management team, our focus on the fact that they go away fully in 2016 so whether it’s lean initiatives, procurement initiatives, one-timers that we are doing, some of the benefit that we got in 2015, we are able to move expenses out of ‘16 into ‘15. We have really been very, very focused on maintaining that O&M discipline for the first full year of no capacity revenues in Ohio and it’s all those initiatives together that are allowing us to get to that $2.8 billion level.

Thank you.

Next question is from the line of Paul Ridzon with KeyBanc. Please go ahead.

Good morning, Paul.

Good morning. Just wondering what you are seeing as far as buyer interest out there? Are you still talking to private equity? This would be for the non-PPA assets?

Well, we have had to be really careful with that obviously. We do have an ongoing process and I would not be surprised if private equity involved with that, because they are interested in that kind of business. But I probably should stop there, because obviously, that’s an ongoing process.

Our next question is from the line of Paul Patterson with Glenrock Associates. Please go ahead.

Good morning.

Can you hear me?

Yes, yes.

I am sorry, okay. I wanted to touch base to you on two things. Just first on the non-PPA merchant plants, just I apologize if I am a little slow on this. What is exactly the decision process on them?

So, once we get past the PPA part of the approach, then on the rest of those assets, it really is centered around number one valuation, because these, we feel, like are really competitive units and ones that positioned well in the marketplace. So if there is an opportunity to understand what the valuation of that is. And obviously, there is ensuring that there are parties involved that are interested in those assets. And so we will go through that process very quickly. And there is – certainly, there is an opportunity there. But we obviously want to understand what the economics look like for that kind of transaction and what it means to our business going forward. And this is not a share of sale. So we are going to be very mindful about what it means to our shareholders in terms of not only in terms of any potential dilution if that exists or what we do with the proceeds. It’s just as important as the question of what you do with the assets in sales. There is a multitude of different things that we have to think about in that process. As you know, we are in a pretty good cash position, capital position right now. And to go through that process or it could be more cash associated with that. So we have to really think about just as much on the use of proceeds and obviously what it does to shareholders as well. So we will go through that process and really that’s the nature of it. And it’s a relatively simple process for the set of units.

Okay. And then with the [indiscernible] energy what have you challenge that was made at FERC regarding the waiver, they want the waiver rescinded regarding the affiliate PPA, what – do you guys have any comments on that?

Yes. We feel pretty strongly about our position. And obviously, they perceive that maybe they didn’t think we would even get this close to getting the PPA done. And we have PPAs now. We have got PPAs for solar in Ohio. We have OBEC generation that’s under a PPA. We have got in other regulated jurisdictions and there is no difference between those activities and what we are doing here. And really, it centers on the notion of whether there is customer choice or not. And in fact, FERC has said before the customer choice does exist in Ohio. Leads us up to Ohio determines the mechanism under which that proceeds and there is precedence for that. So we feel pretty strongly about our position. I think as far as FERC is concerned, it’s asked and answered. And I think when you look at the case that’s been filed, I would presume they proceed of trying to address it there when they may be have difficulty addressing Ohio and we have had a case for 2 years where they could have been involved with that and our settlement is, keep in mind, we have a settlement with a lot of significant parties in this case. So yes, there are some on the outside looking in and they are going to do what they need to do. But the settlement of the parties exists. It’s a good settlement. And certainly, it’s one that addresses the Ohio issues and that’s what we are about. I don’t know, they have their own motivations about what they want to achieve. But we are wanting to achieve consistency from a pricing perspective for consumers protection, for consumers for a sliver of their energy needs. But customers still have the ability to choose in Ohio. They can choose any supplier. So – and that has not changed. So I think we feel good about it.

Our next question is from the line of Ali Agha with SunTrust. Please go ahead.

Thank you.

Good morning Ali.

Good morning Nick. Nick, I wanted to clarify points you have made earlier. So as you are looking at these sales of the non-PPA merchant assets, we are looking at a market where commodity prices are down, the valuation on public equity merchant power stocks down significantly. So how big of a concern is that and I mean is that a scenario where if the price is not right you stay back and you keep this or strategically as you have emphasized to us many times, you want this to be 100% regulated business, just wanted to understand your thought process in terms of how this plays out?

Yes. As we look at this, yes, you could look at the present energy market, present natural gas prices. And a lot of people get hung up on, if prices are high, then the world has changed and there is assumptions about what valuations are to be and when the world is low, there is again 180 degrees different assumptions about how the world ought to be. These decisions are made on long-term decisions and mainly driven by capacity markets. And for buyers of these assets, they are looking at long-term capacity markets and long-term energy prices. And they are making bets based upon where they think those energy prices are going to go. So it’s the same discussion that we would have before. But again, these are a great set of assets. And for anyone, even on a low energy market, you have got to look at margins and margins are what’s driving the valuation. So and then from a capacity market, the same thing. So I think there are so many – if you look out in the long-term, there are so many issues involved here. There is going to come down to any valuation would be around what someone else perceives the forward curve to be for capacity and for energy and then our version of it and we will see where it goes. But if somebody comes in and tries to lowball us, then we feel pretty good about these assets. They sit really good in the market and – but our presumption going in is that we will determine the outcome of what we do with these assets.

So just to clarify, Nick, I mean on the one hand, is that a strategic decision made at AEP, look these assets are going in one way or another, we are 100% regulated over the division be more sensitive to valuation as you are suggesting?

There is going in, we plan on being the next premium regulated utility. And that is the strategic driver. Now valuation, obviously we have to look at and make determination, well is the valuation consideration enough for us to move ahead from that perspective. Because keep in mind, I mean you are looking at things like currency value improvement, PE multiple improvement, multiple expansion, what you do with the proceeds, all those types of things that are also part of the evaluation. Because with River Ops, we changed from a volatile earnings stream to one that by reinvesting that cash we were able to focus on a continual, consistent earnings growth stream. And that’s what – how we are looking at this as well. I mean it’s a volatile. It may be great, it may be positive, but it’s still volatile. And so we have to look at that and determine the balance of that kind of determination versus what we can do with the proceeds and ensure shareholder value on a consistent basis going forward. That’s the way we look at it. So unless somebody – I mean I don’t think we are going to get any low balls in this thing. I really don’t believe that because it’s a great set of assets.

Understood. Last question, unrelated, just to be clear on the bonus depreciation, so the CapEx goes up in ‘17, ‘18, obviously has positive earnings implications, but more near-term in ‘16, any earnings headwinds from bonus depreciation we should be factoring to our thinking for this year?

No.

No, we are one of the utilities that has a ready willing and able, remember the transmission graph we always have, the green and the blue on top that we were looking for capital. We found capital.

Operator, we have time for one more question.

Your last question is from word from the line of Shahriar Pourreza with Guggenheim Partners. Please go ahead.

Good morning everyone.

Good morning.

Sorry if this question was asked. I had to hop on late. But just on the higher CapEx call that you released this morning, just want to confirm, is there still levers to increase that budget under the assumption the you sell the 5 gigawatts, so can you redeploy it, avoid some sort of dilution or are we thinking a little bit more buybacks now that you have already raised you CapEx?

Sure. So the plan that we have laid out does not assume anything around proceeds of sale from non-PPA assets. So the plan that you have is a business as usual CapEx plan and the things were to change, I anticipate that Nick and I will come out with revised guidance and use of proceeds.

Okay, good. So, you could reaccelerate further CapEx additions about what we have done today?

All the things that are available for people to do with proceeds or things that would be available to us, we obviously look first to reinvest in our organic businesses and with the incremental cash that we got associated with bonus depreciation that was our first and best use of those dollars. So, they are obviously a spade of other things that are available to us. But you would anticipate Nick and I would come out and tell you what those things would be at that time.

Got it. Excellent, okay. And then just one last question on the strategic review of the 5 gigawatts, obviously, there is obviously potential buyers here. Is there some optionality in this transaction where you can layer in the other 3 gigawatts if you don’t get the PPA approved? Is that – is there – is there sort of that optionality?

Yes, if the PPA is not approved, then all of the assets will be in that strategic evaluation.

Okay. Well, thank you for joining us on today’s call. As always, the IR team will be available to answer any additional questions you may have. And Tom, that concludes the call.

Ladies and gentlemen, that does conclude your conference for today. I want to thank you all for your participation and for using AT&T teleconference services. You may now disconnect.