Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power Fourth Quarter 2016 Earnings Conference Call. For the conference, all participant lines are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I’ll to turn the conference over to Ms. Bette Jo Rozsa. Please go ahead.

Thank you, John. Good morning, everyone, and welcome to the fourth quarter 2016 earnings call for American Electric Power. We appreciate you taking the time 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.

Thanks, Bette Jo. Good morning, everyone, and thank you, once again, for joining AEP’s fourth quarter 2016 earnings call. I’m very pleased to report that AEP finished the year off strong with GAAP earnings coming in at $0.76 per share and operating earnings at $0.67 a share versus $0.96 per share and $0.48 per share, respectively, in fourth quarter 2015. This brings the year-to-date earnings to $1.24 per share GAAP and $3.94 per share operating for the year compared to $4.17 per share and $3.69 per share, respectively, for 2015. So, overall, finishing up strong in 2016 due to some tax-related settlements. Of course, the GAAP difference between 2015 and 2016 was primarily driven by the write-off we took in third quarter 2016 of the mainly Ohio competitive generation. This was a year of reducing risk and volatility of earnings for the company in the future and reinforcing our balance sheet to provide a strong platform for future growth. We also increased our dividend 5.4% in 2016 and improved our overall regulated operating ROE. As you know, we set operating guidance for 2017 at $3.55 to $3.75 per share with the $3.65 mid-point due to the rebasing after the unregulated generation asset sale and establishing a long-term future growth rate of 5 to 7%. We continue to reaffirm this guidance range and long-term growth rate. Load growth, as Brian will discuss in more detail later, was positive for the first quarter in over a year but was still minimal. So we continue to watch the economy closely particularly now that we have a new presidential administration with a pro-growth agenda. President Trump’s focus of enhancing the ability for manufacturing industries to thrive and produce jobs, well that's AEP’s service territory, his focus on balance portfolio of energy resources including fossil…

Thank you, Nick, and good morning, everyone. I will take us through the financial results for both the quarter and the year. I will also provide some insight on load in the economy, review our balance sheet strength and liquidity position, discuss potential tax reform impacts and finish with a preview of 2017. Let's begin on Slide 6, which shows that operating earnings for the fourth quarter were $0.67 per share or $330 million compared to $0.48 per share or $233 million for 2015. As you can see, all of our regulated segments experienced growth for the quarter compared to last year. As did our competitive generation and marketing business. The growth in our regulated businesses was driven by positive weather impacts, a lower effective tax rate and rate impacts that reflected increased investment to serve our customers. The quarterly comparison in the transmission and distribution utilities segment was negatively impacted by a global regulatory settlement that we recently filed in Ohio. However, this settlement closes 17 cases and largely clears the deck of lingering historical rate cases. Many associated with regulatory transition in the state. Hearings on the settlement were earlier this week and we expect an order before February 28. The agreement covers the capacity pricing case, the retail stability writer case, the Phase-In Recovery Rider case, the double counting of capacity issue, and several historical fuel cases, as well as two significantly excessive earnings test cases. We appreciate the hard work of interveners and commission staff to help resolve these issues globally. Now, we have a healthy AEP Ohio wires company with little financial overhang from the regulatory transition. It was a long road, but we have finally arrived at a steady state of electric utility regulation in Ohio. AEP Ohio will focus is capital investment on…

[Operator Instructions] And first one, Greg Gordon with Evercore ISI. Please go ahead.

Thanks. Great end of the year, guys. Good numbers. I only have one question and 27 parts on tax reform. The $2.2 billion cash coming in, you gave us $1.1 billion paying down CP, $0.5 billion for another tranche of debt and $200 million for another tranche, so that does leave some excess cash. Should we assume that gets consumed in a normal course of business for capital and dividends?

It does, Greg. We also anticipate being a tax payer by dent of the transaction so we anticipate quarterly tax payments as well and those would begin in the first quarter.

Okay. And just to be clear on your comments you made on tax, out of the gate if reform were to take the form that you use as your base case there, there would initially be a headwind associated with the return of rate base capital. But you think that you could, as most companies did in 2016, when bonus depreciation was extended, find enough customer-friendly projects to invest in that talks at that? I just want to be clear that's what you are saying.

We do, Greg, and we believe that would be for our capital spend a fairly modest percentage increase.

Okay. That was going to be my next question. Could you size the quantum of how much you would have to increase your capital spend every year to offset that?

Call it between $300 million and $400 million.

Perfect. Thank you, guys. Thanks a lot.

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

Thank you. Good morning. Brian, can you just quantify, what were the drivers for the lower-than-expected tax in the fourth quarter? And what's the effective tax rate we should assume, 2017 and beyond?

Perfect Ali. So we said overall that the tax impact for the year was $0.17 when you include corporate and other in that as well when you are not breaking it out by segment that impact comes down to about $0.13. And let me break out for you what the composition of that is. Resolution of prior period audits was about $0.02 per share. There was a Texas policy change that allowed for a lower taxable income that included a deduction for T&D expense that added about $0.04, some tax planning that we did that allowed some prior period charitable deductions to come through, added about $0.03 and then there were other currently accrued adjustments that mostly included tax to book differences accounted for on a flow-through basis that were about $0.04. So that's the composition of the $0.13 difference and the rate that we assume going forward is 35%.

Yes. And second question in terms of Nick you'd mentioned you are working with the Ohio legislature. Can you give a sense of what exactly what it is that you would like to see change and what the mechanics would be? Would that be a new bill that they would introduce or how would this work technically?

Yes. I mentioned AEP is sort of moving forward with a clean slate, so we really are focused on the ability to invest in new generation and its sort of a broad context, but certainly we want to be able to put renewables in place, perhaps natural gas, other forms of resources, distributed energy resources. Those are key areas for us in terms of the build-out of the – what we believe is the smart grid of the future and all the interoperability issues associated with it. So we want to have provisions that may be shrinking of the needs provision of the existing legislation, for example, to allow us a more prescriptive path to the commission for recovery of those expenses. So once we – we would file something for new resource of some kind and it would go through the commission proceedings and we would be. And certainly, we’d like the legislation to be prescriptive in terms of how the commission deals with that, so that it would be very clear. So we're not winding up back at the Ohio Supreme Court all the time. That's really what we're after and some questions always come up about obligation to serve and that kind of thing, but really we're starting with a clean slate and we want to be able to – we now file these things as opposed to have some obligation to serve that looks like a re-regulation. So there's still a lot of discussions about that, but AEP certainly is focused on that provision. Because we're doing very well from the regulatory structure in Ohio relative to transmission distribution and the interface associated with that so we want to be able to augment that growth potential here in Ohio as well.

Yes. And last question Brian, I just wanted to clarify a point you'd made, the fact that the merchant asset sales will happen sooner than March 31 that should resume. Did I hear that you guys felt you could offset that earlier than expected sale with other efforts or that you are just pointing out that maybe that $0.09, $0.10 number may be lower, keeps you in the range, but we should consider that in our numbers. I just want to be clear what you were saying.

It’s the latter, Ali. The $0.09 that we had expected given the March 31 sale will be less. We’re going to need to try to find a way to offset that, but we’re still in the range.

I got it. Thank you.

Next, we’ll go to Jonathan Arnold with Deutsche Bank. Please go ahead.

Good morning, guys. Just a quick question on sales. Brian, I think you said you were feeling more optimistic about 2017. But when I look at the analyst day, what you are forecasting now, it seems to be a little lower and then 2016 also came in a little lower. So could you just reconcile your comment about feeling better? Is that relative to the past or relative to coming in to the Analyst Day?

Relative to the past. So the slide that I took us through on the regional economies shows that through 2016 a lot of our service areas were in recession. But towards the end of 2016, they started to come out and started to show some growth. As we saw, oil and natural gas prices start to improve. We started to see improvement in the industrial regions that have exposure to oil and gas. If prices stay the same or continue to improve, we expect that trend to continue into 2017. Most of our growth in 2017 is forecasted to come from the industrial sector.

Right, so would you say your forecast -- you feel more conservative -- your forecast more conservative relative to what you are actually seeing now or it's similar?

No. We think our forecast reflects what we’re seeing right now, which is some improvement in industrial, particularly oil and gas.

We’re actually seeing a lot of oil and gas projects that aren’t just being talked about. They’re already in the pipeline and being – and under construction of some kind. So that tells us a lot about what will actually true-up in that stream of new projects that are occurring because when we started going down in 2016 we had all these projects and at the end of 2015 that we thought were coming in 2016 but they weren’t materializing or at least there was a propensity to slow them down because obviously prices were coming down. But now we’re seeing a different direction. So if you look at those underlying fundamentals relative to the automobile industry, relative to oil and gas activity starting to pick up and actually confirmed projects that are under construction, it makes you somewhat optimistic but at the same time, we are being very careful about this economy like we have been for several quarters now in terms of we really need to see a trend develop.

Great. Thank you guys and if I could just following up on the Ohio legislation. Nick can you give us a little more sense of when in the year you would anticipate this coming together and is there -- do you already have a draft bill, do you know who might sponsor it? Or are we still at the more exploratory stage?

Yes, we are still in discussions with the other parties that would be involved with this thing and obviously all the utilities and others and really we have to get it nailed down on the provisions, all the provisions that will go into the bill and some parties are looking for different thing than others, so we have to manage through that process a little bit but the legislature obviously is being kept up to speed on what's going on and we are having regular meetings with leaders in the legislature. So nothing is going to happen that’s really unknown at this point. I think really a major focus right now is not to burden the legislation with provisions that may slow it down because if you start talking about reregulation or obligation to serve, all those kinds of things, it just brings in more issues associated with how, okay, do you actually restructure this market, but if it's surgical in terms of its approach and actually there may be other surgical provisions of other companies want, let's put those together and move forward very quickly through the legislature. So I'm still thinking probably second quarter, we will have something that we can have someone sponsor.

So Q2, a bill material and then we start to see the shape of it?

Yes, again, there's already drafts of legislation that are circulating around and we just need to make sure all the parties are comfortable with that. And so it is a work in progress with the new legislature as well here in Ohio and from AEP's perspective, like I said, its additive to our ability to invest in this state. We already have some measure of renewables that are in place and we have to bid for those and that kind of thing but this is really centered on ensuring that we're able to address really what Ohio wants to do regarding its energy future, and our part in it. And so, that's where it stands right now.

Great. Thank you.

Our next question is from Julien Dumoulin-Smith with UBS. Please go ahead.

Good morning. Maybe to just follow-up on the last question to, if you permit me, you mentioned burdensome provisions. Can you elaborate a little bit? What would you not want to see as part of this that might get it dragged down vis-a-vis timing or ultimately palatability and I have got a few others.

Yes. I think from AEP's perspective and obviously you'll have to ask the others, but from AEP's perspective to try to have AEP Ohio responsible for capacity in the future. I mean, we sort of lived through that and done that and obviously if you try to have AEP Ohio responsible for capacity and having to go out or – because obviously we're in the process of selling our generation, so you could wind up in a situation where we have long-term large PPAs and that would be a balance sheet issue for AEP Ohio. So you think about that obligation and of course the obligation to serve in, and it becomes pretty onerous in terms – not only in terms of how we deal with the financial picture of AEP Ohio going forward, but also in terms of you're trying to restructure a market and everyone, if you try – if you put that – invest it back with the utilities then you would basically have to go through a whole lot of discussions with multiple parties of what does that mean and how do you deal with that completely different structure, short of re-regulation. So if it's more surgical in its approach in terms of new facilities or that kind of thing, then I think it's a lot easier.

Got it but no opposition to nuclear, for instance?

Well, I'll let FE speak on the nuclear point, but we'll say this from AEP's perspective, if there is support – and I don't call it like New York or Illinois, but if there is support in terms of ZEC or something like that for nuclear, I'm supportive of that being in legislation as long as ZEC gets attributable to FE's connected customers. And so, because we're a little different in Ohio than the other states. AEP Ohio doesn’t have any nuclear and the others don’t either. So I think you have to sort of think about that. But overall I’m very supportive of nuclear. I think it’s a travesty that these nuclear units are getting retired. And if there is any kind of state support that can be given to support these nuclear units, that’s a good thing because this competitive market – we call it a market and PJM is not working for long-term base load capacity. So I really believe that there should be some – there can be some provision, but the cost of that can’t be borne by our customers because AEP Ohio is moving toward its own set of resources including renewables. And we want to make sure that there is the ability for us to invest in relation to impact on customer rates. So that’s really long answer to the short question, but I think it says a lot in terms of where things are going.

Right and if I may follow up on the Ohio side, obviously you've got a settlement here. You obviously posted pretty healthy ROEs. Can you just give us a little bit more of a summary in terms of what that settlement means vis-a-vis your prospective earnings and maybe just give us a little bit a sense of how you expect the cadence of your earnings at that subsidiary to proceed given where you stand today?

Yes. I think from AEP Ohio’s perspective, it certainly clears out all the overhang associated with all these cases. So it really puts us in a great position I mean, obviously, the capacity of the Supreme Court – the Ohio Supreme Court had remanded back the issues on the capacity and the RSR payment, and it gets all that squared away. And then, of course, some other historical fuel cases are resolved too that had been hanging out for years and then as well as too excess of earnings there. So it really provides a clean slate going forward. So I fully expect AEP Ohio to continue to be a very good investment from a wires perspective. Transmission and distribution that we’re trying to do – and I think the commission is somewhat responsive to this, and that is with the Smart Cities challenge in Columbus, we are working on interoperability with the grid, going back to transportation, and we want to be able to do that throughout our territories. But certainly Ohio and Columbus, Ohio, is central to that theme going forward. And I really believe we’ll have a supportive commission in that regard. So I think that really bodes well for the investment potential in AEP Ohio, but also the benefits for customers and the commission should be very happy with that.

Great, thank you.

Next we’ll go to Paul Ridzon with KeyBanc. Please go ahead.

Good morning, and congratulations on a solid year.

Thanks.

Looking at, I think it's slide 9, your economic forecast, you issued guidance November 1, before the election, before OPEC had cut production. Is there a tailwind now hidden in the midpoint of your guidance here. Obviously you've got one offset on the timing of the sale, the generation, but it looks like the world has improved since you gave guidance.

Yes, so it has right, as you look at the trends of what's happened with GDPs there they seem to be coming from contraction into growth and we've reflected that in the update for our numbers. You will see on Slide 8, our numbers are slightly different than what they were on page 24 of our release at the Analyst Day but what that really reflects is the passage of another quarter, new data being updated and us looking at the dead reckoning forecast that we have for our service areas for 2017.

I think you have to look at is, I know business get repetitive quarter after quarter but these quarters are a snapshot in time that we don't see intuitively obvious long-term trends that we can really hang our head on in terms of how the year goes. So I would say if we continue to see bolstering activity in the second quarter and then we will continue looking at what that means in terms of load forecast and keep in mind too it's the mixture of load to. Weather -- if it's industrial load that's picking up, the margins on industrial load are much less than others. So you have to really look at this thing in the context of overall trends moving forward throughout the economy and will just have to take that quarter by quarter and make a determination.

And then, on your pension discussion, I missed it, you said there would be an expense of $15 million in 2017. What was that expense and what was it in 2016?

It's the after-tax expense for both pension and OPEB, so it's after-tax O&M pension and OPEB, about $15 million and it was roughly the same in 2016.

That is 15?

Yes.

And then a question from my tech analyst. Now that you have got Ohio pretty much cleaned up, when do you think you can start the AMI spend?

Grid smart.

Yes, the grid smart, we were set for hearing, I think it was yesterday. They delayed it until next week. So we should get a decision then and be off and running.

Thank you very much.

The next question is from Stephen Byrd with Morgan Stanley. Please go ahead.

Hi. Good morning. I just wanted a quick question on Ohio restructuring. In your discussion with the other utilities in the state, do have a sense that you all are on the same page? Are there still key issues that have to be resolved to make sure that you all are arm in arm as you think about legislation?

I think, I'd say, generally, we recognize we need to be arm in arm, but there's still outstanding issues that we need to resolve. And – but I really believe that the participants are motivated to move this process forward because they understand the importance of the restructuring effort here in Ohio. So I'd say the parties are motivated, but still there's issues that we have to resolve specifically related to if it's a surgical legislation.

Understood. And then tax reform, I think we are all trying to get our arms around the implications and the slide you laid out was very helpful. When we think about -- you laid out your breakeven tax rate at 22% and maybe just a dumb mechanical question, but there's some discussion that maybe the corporate tax rate goes down to 25% and not 20% or 15%. If it were at 25% instead of the 20%, could you just talk through some mechanically earnings power and other impacts from that kind of an outcome?

Yes, so if it's 25% rather than 22% or less, it means that from a net income standpoint the takeaways that we would have from interest deductibility would not outweigh the reduction in the tax rate that we're talking about. Does that make sense?

Okay. So it would be a net drag compared to say a 22% or 20% outcome and we could try to mechanically how to trace that out?

Correct.

Okay. That's all I had. Thank you very much.

And next we’ll go to Steve Fleishman with Wolfe Research. Please go ahead.

Good morning. Hi. First, thank you for setting a high bar on tax reform disclosures. We will see if others can get close to this, thanks. A couple questions. On the former PPA assets, could you give us an update on resolving the future of those?

Yes. On the former PPA assets, as I mentioned, we’re talking to the other parties. And really it focuses on what the swap potential is and, of course, looking at units that may – I mean, you look at him and say, well, we should go ahead and retire them. And then if there is consolidation of interest, then is there a strategic process that needs to continue in some variation associated with those. And I would say those conversations are going very well. Timing of those conversations I still suspect we’ll be completing something certainly in 2017. So obviously it’s pretty complicated given that there is multiple owners. But also there is multiple issues to be dealt with in terms of how you move forward from whatever the result maybe of the discussions with the parties themselves. But I would say those conversations are going very good.

Okay. Secondly, just on the transmission business, you had that 206 filing. And then, I think, did you make the 205 filing?

We did.

Okay.

We did the 205 filing.

And is there any updates on either of those or is that just going to be a long process?

Yes. On the 205 filing, I think, we have – it's a March timeframe for, I guess, for the forecast to act and then the 206 filing that’s still sitting out there. And it may be a couple years. But obviously that process will continue, if they decide to set it for hearing or whatever. But we haven’t heard anything else on there.

And then lastly, is there any update on your renewables investment program that the $1 billion you are targeting. Are you, I think, obviously after your analyst day we had the Trump election win that was unexpected and the like. So I'm curious just how are you feeling about being able to get to the $1 billion of renewables that you are targeting?

Yes. I think Chuck still has his $1 billion number out there. I think he is probably over a third of the way. But we’re going to be very selective. And as I said earlier and we have our return thresholds that we expect, and we have not changed those return thresholds. He continues to be involved with projects and if he can't make it to $1 billion, he will give it back to us and we will put it somewhere else including transmission and other places. So I think we are going to continue with the same degree of discipline that we have today regardless of what happened to tax provisions or anything else and so it's not -- this is not where AEP is trying to form some major business. It really is focused on an augmentation that's disciplined and has a return expectation associated with it that actually contributes to what we are trying to achieve. So that process hasn't changed at all and Chuck continues to be involved with projects both solar and wind and we will continue with that.

Great, thank you.

Next, we will go to Paul Patterson with Glenrock Associates. Please go ahead.

Hi, how are you doing. So most of the questions have been answered, but I've just got a really basic one and that is, we've seen tax reform proposals before. Obviously this seems like it's got momentum to it and it doesn't -- it looks like you guys have, your disclosure is pretty clear and the impact doesn't look necessarily huge. But it's pretty disruptive in many ways, generally speaking, to different players. And I just was wondering, when you're looking at this and when you're talking to your people, what do you think the chances are and I know it's a tough -- I'm not holding you to it or anything. But what are the chances that we actually see something this dramatic being enacted? It just seems rather -- I don't know, we've seen it before and things don't usually happen like this. When you look at this landscape now, if you had to guess fifty-fifty, what would you say is the chance of this actually-- these proposals substantially getting enacted.

I wouldn’t say -- I don't know that we've had a Trump administration before too, the pace at which he is moving already and I think a lot of these things have been pinned up for years and on its face you'll say it's pretty daunting to get tax reform done in these multiple things that we are talking about particularly when you take away interest expense deductibility and issues like that. That's going to be tough. I'm not saying that it can't get done because I think there's probably enough movement out there of a lot of companies who want to see that tax rate come down, and I think the importance of American industry going forward to be competitive internationally. I think that process will move forward and it becomes an issue of, okay, how do you pay for it? And that's where interest expense deductibility and all that kind of stuff comes in. As far as the industry is concerned, I still think right now the Trump Administration is dealing with ACA. They – the tax reform could come after that. Although, infrastructure seems to be a key issue as well. So it remains to be seen. I think it'll probably be later in the year before we really see things that we can really latch onto to fully understand where this thing is going and so we'll continue to look at our tax situation and consideration of that but it is something we'll watch very closely. And if it is a broad tax reform package, we probably dealt with in our analysis here, some of the extremes that would occur. If you take 100% expensing and interest expense deductions away, that's pretty considerable. So I think that's probably as much of a stress test as you're going to get. As far as the industry is concerned, and AEP's position, we would – we think that our industry is the most heavily – it is the capitalized industry by far of anyone in the US. And when you talk about interest expense deductibility and deductions and how the impact ultimately customers, you really have to think twice about that. So I really believe there ought to be a utility exception because we typically pass our rates through to customers and the benefits in there to manufacturing and other endeavors that we have for the economy. So whether that can get done or not is another question. But certainly we really have to look at those provisions and how it applies to our capital intensive industry. And we’ll obviously be active in Washington associated with that thought as well.

And that will be from the line of Anthony Crowdell with Jefferies. Please go ahead.

Hi, thanks for squeezing me in, Nick. I appreciate it. I guess on Ohio restructuring, AEP is already taking the pain of getting rid of oil generation of the utility in the and maybe have not and AEP is looking more forward-looking with future generation needs potentially in this restructuring bill. Do you think we could see an Ohio back to what we had as we moved to market where the state gets split and the restructuring as differently in the northern part of the state than in the southern part of the state?

I really don't see that. I think you hit up on a point though that different companies may be looking for different provisions based upon where they stand today and somehow we’ve got to make sure that an industry restructuring package is transparent enough and people will understand it well enough to accommodate some of these varied interests. And that’s really – that’s part of the challenge. And so we will just have to see how things work out from that perspective.

Great. Thanks for taking my question. I’m glad your blue jackets are relevant now.

Yes. I know. They are really relevant. Aren’t they?

Yes, they are.

It’s only taken like two decades.

Unfortunately, at the expense of my rangers, but yes.

Well, thank you, everyone, for joining us on today’s call. As always, the IR team will be available to answer any additional questions you may have. I guess that now includes tax. John, would you please give the replay information?

Certainly. And, ladies and gentlemen, this conference is available for replay. It starts today at 11:15 AM, Eastern Time, and will last until February 2, at midnight. You can access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code is 415052. Those numbers, again, 800-475-6701 or 320-365-3844, and the access code is 415052. That does conclude your conference for today. Thank you for your participation. You may now disconnect.