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American Electric Power (NYSE:AEP)

Q4 2010 Earnings Call

January 28, 2011 9:00 a.m. ET

Executives

Chuck Zebula - Treasurer and SVP, Investor Relations

Mike Morris - President, Chairman and CEO

Brian Tierney - EVP and CFO

Analysts

Daniel Eggers - Credit Suisse

Paul Patterson - Glenrock Associates

Bill Appicelli - Morgan Stanley

Steve Fleishman - Bank of America

Michael Lapides - Goldman Sachs

Raymond Leung - Goldman Sachs

Ali Agha - SunTrust

Paul Ridzon - Keybank

Operator

Welcome to the fourth quarter 2010 earnings conference. [Operator Instructions.] I'll now turn the conference to Chuck Zebula, treasurer and senior vice president, investor relations. Please go ahead sir.

Chuck Zebula

Good morning and welcome to the fourth quarter 2010 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.

Mike Morris

Thanks Chuck, and let me join in the welcoming all of you here as we look at 2010 and share a bit of 2011 with you. We're quite pleased with the way that things ended in 2010. By almost any measure that we look at, the overall earnings of $3.03, north of our midpoint $3.00 range that we spoke of as the year went on, and as you'll remember we tightened our ranges throughout the year; tremendous rate success as we've shared with you as the year progressed, and a good foundation for the rate activities in 2011 and beyond.

Overall, the returns on equity for the AEP system were 10.75% collectively. We think that's an extremely strong number. As you know, we had two dividend increases for a total of 12% of an increase as we go, and the total shareholder return was 8.7%, something that we're very pleased with. And lastly, and very importantly, 2010 was another year where AEP did not experience any fatalities. So we're quite pleased in every way that we measure 2010.

When we look at 2011, as you know, we shared with in October, our earnings forecast of somewhere between $3.00 and $3.20, we feel comfortable about our opportunity to perform at that level. We clearly have demonstrated and will continue to demonstrate our ability not only to manage O&M but also to manage the capital spending on our system.

We will continue to put equity capital to work in those jurisdictions where we feel more comfortable with the rate treatment and the rate process, and continue obviously to make those investments necessary to make sure that reliability and customer satisfaction continues to be strong and growing.

Our regulatory play, which we've shared with you, for 2011, has a total stack of required rate increases of some $235 million. To date, $162 of that is already built in to the rates that we're recovering effective on January 1. We do have a settlement in West Virginia that we hope to be approved in the not too distant future. That will add another $45 million and leave us about $28 million short of the total goal that we have for calendar year 2011, and we have a number of current rate proceedings and others that we will file as the year progresses, to fill up that last piece so we feel comfortable about our rate plan as we have before.

Not dissimilar from almost every year at American Electric Power, Ohio and Ohio rate proceedings will take center stage as 2011 unfolds. As many of you know from yesterday's press releases, we filed our ESP plan and will talk about that in a few moments. It obviously is a center stage activity for us, and it will be affected by new commissioners being appointed, but as we've done before we feel comfortable that we'll find a way to manage ourselves through the events in Ohio here as they pertain not only to ESP but to the 2010 seat review, which will go on as you'll remember through calendar year 2011.

A couple of important policy update discussions. Let me spend a few moments. I think you're all very aware of what the Edison Electric Institute and many people call the EPA Train Wreck. It's a series of orders and rules that will come out of the EPA as the year progresses that will have an effect on the generation fleet throughout the country. I know that most people focus on the effects on coal-based generation, but many of them will touch on gas-based generation going forward as well, quite honestly, when you think of the water requirements of the nuclear fleet.

We feel comfortable about where we are in the process of trying to put comments in not only on behalf of EEI, but on behalf of our company through the Business Roundtable and other places where AEP plays in that space. We are encouraged by the comments of President Obama not only with his Executive Order before the State of the Union speech but by comments he made there. We are somewhat heartened to see that Bill Daley coming in as chief of staff may put a business balance on the activities that go forward in the regulatory arena, particularly at the EPA.

I think it's essential, however, that everyone understands it has never been American Electric Power's desire, nor anyone else in the utility space, to undo the Clean Air Act. What we've been asking for, and what we've been seeking, and what we think we'll accomplish is a reasonable timeline to go forward with continuing to improve the quality of air and the production of electricity from a very important segment of the baseload generation fleet in the United States.

We continue to feel, particularly at AEP, that we can manage our way through those challenges and come through 2011 and beyond with a very solid baseload generation fleet, obviously at very acceptable prices for our customers as we go.

Those activities will unfold. As one might expect, there are court challenges, as you know, to many of these undertakings, and again we will be in the middle of that dialogue, both regulatorily and ultimately in the courts if need be.

On the transmission front, we're convinced that the FERC continues to address the issues that are important to all of us who intend to put capital to work in the transmission side of our business. As you know, at AEP we have relatively aggressive plans in that space. We're very pleased with what we see at SPP.

We're a little less than satisfied with the overall progress in the PJM, but we do believe that projects, particularly PATH, that will do a great deal for removing some of the congestion and higher prices in the far eastern zones of the PJM are projects that need to be done and in fact will go forward, and will be done.

We, like everyone else, watch for the order that will be issued in the Notice of Proposal making by the FERC. We're expecting it to happen sometime in the first quarter, and we're encouraged by comments that we hear from commissioners from time to time.

We believe that everyone understands a more robust transmission grid can allow for not only the inclusion of renewable power throughout the country, but a balancing of the amount of baseload generation that might need to be added to the system.

Let me move on to the next couple of pages and talk a bit more granularly about our filing for the ESP. If you look at page four you'll see the large red boxes at the top and really they're directed at the overarching policy issues that we were trying to touch.

The first two - investment in Ohio obviously, and jobs in Ohio - are very important to the government and to the newly elected governor, a very aggressive approach toward creating a more robust economy in Ohio and one that's going to demand ultimately that generation continue to be online and that additional generation be built and brought online.

As you know, that's somewhat problematic in Ohio and it's an interesting challenge that we'll all face, but we think that not only investment in the state and the jobs that that would create are things that the Republican house and senate and the Republican governor will be strongly in favor of as we go.

The last box on the far right really is directed toward what we hear from our customers. I would be surely wrong if I told you that our customers are happy at the cost of electricity. I'm not sure they'd be happy even if it were free, but the fact of the matter is they are very, very concerned about energy security because they too see the U.S. economy and the world economy improving and in that improvement they all know that they're going to have to put more product into the market.

To do that, they want to make sure that there's adequate and price-sensitive energy available to them. So when we look at the overall balance that we tried to put into the electric security plan for the next 29 months, beginning in 2012, it's really directed toward those issues: investment in Ohio, jobs in Ohio, and energy security for our customers.

If you actually look at the bottom half of the slide you'll see again some of the approaches that were built in, and I know that many of you will spend a great deal of your weekend digging through the ESP and coming to your own conclusions. We have predicated the filing itself on the utilities being merged, because by 2012 we believe that to be the case.

We, as you know, have made a merger filing in Ohio. It's not been contested by most, or really hardly any noise about that. So we'd expect that will come to the fore without any difficulties. We have also included what we think is a very appropriate rate redesign issue. Like so many states before, there is what we call, in our vernacular, "rate skewing."

The cost to serve customers is not always the cost that's allocated to the customer class. Typically, residentials have been given some relief in that regard. Industrial's also given some relief in that regard, and commercial customers paying more than the cost of service to serve them. We have tried to address that issue, particularly in the G rate and the rate designs that we put in place in the ESP. We think that they very much mirror what one might see in the marketplace, and we think that that makes sense.

The 29-month window may seem odd because we did a 36-month window before and people were thinking 24 or 36, but we did that for the purposes of synching up with the May cycle for the PJM and we think again that makes a tremendous amount of sense.

Many of our large volume customers are interested in long-term commitments and to provide them with an opportunity to do that we have created the alternate long-term option. Customers who are willing to sign up for a 5-year window of supply from American Electric Power can receive for that commitment a discount to the rates that are filed in the ESP, and we expect that that will be a very usable tool for many of our price-sensitive large-volume industrial customers.

And the next two boxes talk to the things that we've talked about before, the Ohio Growth Fund is our dedicated money to the activities that governor Kasich has been very vocal about, which is to see to it that Ohio is open for business. We want to join in the governor's endeavor and that activity and do what we can to see to it that we bring new jobs to Ohio, new economic activity to Ohio, as well as expanded activity in our current customer base.

We obviously are in need of filing a distribution case. We've not had one since the 1990s and we made our notice of that filing yesterday that addresses itself to a $93 million overall rate increase in the distribution side of the rates that we charge our customers.

Like all rate activities, it will process through its normal cycle. It should be done by the end of 2011 and effective in 2012. And it may be $93 million increase, it may be something different from that, but it will be a classic, typical case.

If you look at page 5, it really is a summary of the many things that I've already spoken about. We think that the ESP finds a reasonable balance between the approaches that we have to take: a very small increase in 2012 of 1.4%, an aggregate increase in 2013 of 2.7%. That's in the G rate itself, the base rate of the ESP. We have a number of provisions for riders to make adjustments to expenses incurred on behalf of the customers, and of course it does not include any of the impact of whatever will come from the distribution rate case as we go forward.

We have tried to cover every activity that we can think of as the ESP would go forward during that 29-month period, and to that end we believe that plug-in electrics will play greatly in that period of time. We'll continue to work on our gridSMART activities in Ohio where we've gotten great support from the commission.

We're convinced that the economic development activities that we're dedicating ourselves to will make sense to the jobs Ohio creation that now will be a standalone entity rather than a subset of the government here in Ohio. We do have a polar provision. It's a bit different from the one that we had in the approved 3-year cycle that we're in the midst of now. And of course, we think it's only reasonable to recover cost of generating facilities that need to be upgraded to comply with federal legislation as well as generating facilities that may well be retired because it doesn't make sense to put that capital to work

All in all, we think we've touched all of the bases that are required, and obviously Brian and I look forward to whatever questions you might have about the ESP filing.

And with that, I'll turn the call over to Brian.

Brian Tierney

Thank you Mike, and good morning to everyone on the call. This morning we will review some detail on the quarterly and annual financial numbers, take a look at load trends, review some 2011 earnings drivers and business initiatives, and then get on to your questions as quickly as possible as Mike said.

Turning to slide 6, you'll see that for ongoing earnings in the fourth quarter of 2010, the company earned $179 million, or $0.38 per share, compared to $238 million, or $0.50 per share for the same period in 2009.

Highlights for the quarter-on-quarter comparison include the significantly excess earnings test, or SEET refund, at Columbus Southern Power Company accounted for -$0.06 per share or $43 million. This is the amount ordered for refund from CSPC proceeding for the year 2009 by the Public Utility Commission of Ohio.

Non-utility earnings net accounted for -$0.07 per share, or $37 million, and reflected the buyout of the fleet lease and a contribution to the AEP Foundation. Other utility operations net accounted for -$0.18 per share or $88 million, and is primarily attributed to higher taxes and the absence of the accidental outage insurance from the Cook Unit One turbine outage. The company's effective tax rate for the fourth quarter of 2010 was higher than the prior-year period.

Additional highlights comparing favorably to last year's fourth quarter include retail margins, which improved $0.02 per share or $18 million, and were primarily associated with increased industrial usage. Weather accounted for positive $0.04, or $26 million, for the quarter, and rate changes accounted for $0.07 per share or $51 million.

Operations and maintenance expense accounted for positive $0.08 or $63 million, net of offsets, due primarily to our cost savings initiatives instituted in 2010 and lower storm restoration expenses quarter-on-quarter.

Turning to slide 7, you'll see that for ongoing earnings for the full year of 2010 the company earned $1.451 billion, or $3.03 per share, compared to $1.362 billion, or $2.97 per share in 2009. This represents a year-on-year gain in ongoing earnings of $89 million, or $0.06 per share.

Highlights for the year-on-year comparison include nonutility operations net, which was -$0.05 per share, or $19 million for the same reason cited for the quarterly comparison, offset by some favorable tax adjustments in the third quarter of 2010. The SEET effect was the same for the year as for the quarter, and -$0.06 per share, or $43 million.

Firm wholesale margin was -$0.10 per share, or $74 million compared to the year prior, and reflects the loss of 2 wholesale customers. The share count effect was -$0.14 per share, reflecting weighted average shares outstanding of 479 million in 2010, versus 459 million shares outstanding in 2009.

Other utility operations net accounted for -$0.52 per share, or $238 million, and primarily reflects the absence of the Cook accidental outage insurance, higher other taxes, higher depreciation, and the higher effective tax rate.

Positive annual ongoing comparisons to last year were retail margins, which accounted for $0.07 per share, or $48 million, reflecting economic recovery, mostly in the industrial class. Off-system sales net of sharing were up $0.08 per share, or $53 million versus 2009.

Although margins on trading and marketing were down 28%, physical sales volumes were up 30% and physical margins were up 80% versus 2009 as around the clock pricing at the AEP gen hub was up 13% on the year.

Operations and maintenance expenses were down in 2010, resulting in a positive variance of $0.14 per share or $97 million. This is a result of our cost-saving initiatives last year as well as lower storm expense.

For ongoing earnings, weather was positive $0.32 per share, or $229 million, compared to 2009. The summer was hot and the winter was cold, and that can be a good thing for an electric utility. For the AEP system, cooling degree days were 58% above 2009 as it was hot across the breadth of our system, and heating degree days were up 9% above 2009 levels and were up throughout our system with the exception of Texas. Rate changes were positive $0.32 per share, or $222 million net of offsets.

Turning to slide 8, we will look at the quarterly and annual as well as forecasted, weather-normalized load trends. In the top left hand panel of the slide, you'll see that residential normalized sales were relatively flat for the year, up 0.6% and for 2011 we're forecasting an increase of 1.9% year-on-year, 0.8% of which we expect to come from the acquisition of the Valley Electric membership cooperative in our SWEPCO service territory.

In the top right hand panel of the slide you'll see that commercialized normalized sales were relatively flat, but were down 0.3% for the quarter and 0.4% for the year. We're forecasting a modest recovery of 0.7% in 2011.

In the bottom left hand panel, you'll see that industrial sales, which were the hardest-hit customer class in 2009, had the strongest rebound in 2010. For fourth quarter of 2010, industrial sales rebounded fully 7% versus 2009 and the annual recovery was in line with our forecast of 5.3%. We'll provide some additional color on the industrial recovery in the next slide. Next year we are forecasting continued recovery in that area of 1.9%.

In the bottom right hand side of the slide, you'll see that total normalized retail sales recovered 1.9% for the quarter and 1.1% for the year. Next year we're forecasting a recovery of 1.7%. AEP's customer counts, another relative measure of our strength, remain steady throughout the year at about $5.2 million. Residential and commercial classes were up a small amount and were offset to some degree by modest decreases in the industrial class. These trends held true across the breadth of the AEP system.

Turning to slide 9, you'll see that some detail for the 5sectors that comprise 60% of our industrial gigawatt hour sales in the fourth quarter of 2010. You'll note that all 5 sectors marked quarterly and annual load increases, led by primary metals, which was up 15.5% on the quarter and 6.5% on the year. The recovery was widespread across our industries and across our service territories. In fact, all of our top 10 industrial sectors notched positive load improvements for the quarter and the year.

Our largest customer, Ormet Aluminum of Hannibal Ohio, has announced plans to return to full load next month. AEP's largest operating unit, AEP Ohio, is proud that its economic development contract with Ormet allowed it to continue operating during the economic downturn and AEP Ohio's competitive rates for electricity are enabling Ormet's return to full load. This is good news not only for AEP and Ormet, but for the people and the economy of eastern Ohio as well, where Ormet's increased business has them putting over 100 people back to work.

Now that we've discussed our 2010 results, let's turn to slide 10 and look at our 2011 outlook. As Mike mentioned, our ongoing earnings guidance for 2011 is $3.00 to $3.20 per share. Key earnings drivers for 2011 are on the left hand side of the page. As noted on slide 8, we are forecasting a modest load recovery of 1.7%, representing an additional $0.10 per share over 2010.

This recovery is anticipated to come from all customer classes, with residential and industrial improving 1.9% and the commercial class recovering 0.7%. Additionally, as Mike said, we anticipate an incremental $0.32 per share from rate changes, representing $235 million.

Of the total needed, as Mike said, we already have secured $162 million, or 69%, the additional 17% is the subject of a currently filed rate adjustment, and the remainder will come through multiple jurisdictions across the AEP system. As a company, we continue our record of finding constructive rate outcomes in our 11 states, and in front of the FERC.

As you all know, in 2010 we demonstrated particular focus on O&M and capital discipline. This will continue in 2011. Our current O&M forecast for the year represents a $34 million decrease net of offsets. This indicates that we are seeing the benefits from our cost reduction initiatives implemented in 2010 and includes managers at the company offsetting annual escalating items such as employee costs.

As we detailed at our analyst meeting in October, we anticipate customer switching in Ohio, primarily in the commercial class at Columbus and Southern Power. And we estimate this will result in incremental load loss in 2011 of 14% of Columbus and Southern's total load, representing $53 million year-on-year, '10-'11. To put this in perspective, the forecasted loss of load represents only 6% of AEP Ohio's retail load and only 1.5% of total AEP system load.

It has come to our attention that a PUCO website noted shopping levels at SCP of 12% at the end of September. This data is not at all consistent with our numbers on switching percentages, and we're currently working with commission staff to resolve the discrepancy.

As a percentage of total CSP load, the year-end number was much closer to our forecasted switch rate of 3% and our forecast of an incremental 14% by year end 2011 is still reasonable. We have both competitive retail and regulatory responses to customer switching and will continue both throughout the year.

Also related to AEP Ohio is the 2010 significantly excess earning test, or SEET, filing. Based on our analysis of the 2009 results, and the PUCO's methodology as outlined in the 2009 SEET order received this month, neither Ohio company, Ohio Power Company or Columbus Southern, had significantly excess earnings in 2010 and we do not believe a refund will be required for that year.

Lastly, related to 2011 earnings, we anticipate a slight decline in off-system sales. While we expect physical volumes to increase due to reduced planned and forced outages, prices remain flat to down relative to 2010. In this low-priced environment, trading and marketing margins will remain under pressure. All that being said, we don't see anything on the horizon at this point to move off-system sales outside of the $250-300 million range for 2011.

Looking at the right hand side of the page, and looking at other business initiatives we're working on in 2011, we're pleased to report that we have 3 operating trans cos - in Ohio, Oklahoma, and Michigan - that are actively investing capital. We have the opportunity to invest over $150 million in our trans cos in 2011, and the transmission team is working hard doing just that. Additional trans co filings will be made during 2011 in other of our operating jurisdictions and we are expecting an order on the settlement that we filed with the FERC regarding the trans co rates for PJM and SPP.

As was the case leading up to our analyst meeting in October, the topic of our system interconnection agreement continues to be on investors' minds. Based on discussions that we've had with regulators in Virginia, Indiana, and other jurisdictions, we're exploring alternatives to the agreement. On January 4 of this year, APCO made a filing with the Virginia SEC that among other things detailed the pool members' intent to terminate the interconnection agreement.

The pool members have in fact provided notice of termination to one another. They now have a framework and a 3-year timeline within which to engage stakeholders in determining the future of this generation pool. The result of this process might be modified, or a different type of pool might be established. There might be bilateral contracts or other commercial arrangements, from surplus to deficit members, or each member of the pool might operate independently.

The general parameters of that discussion and the outcome will be a reasonable solution for all jurisdictions, and it must not harm AEP financially. Remember that AEP took this action of its own volition because we believe that modifications to the pool will be beneficial to the member companies, their customers, and AEP. In fact, most of our jurisdictions like the aspects of a power pool, and don't want to rely exclusively on the market for capacity and/or energy needs.

Bonus depreciation resulted in $230 million favorable cash flow impact to the company in 2010. Some of this benefit was used to reduce risk by funding our pension plan and to facilitate our cost-reduction initiatives. For 2011 through 2013, we expect bonus depreciation to provide approximately $1.2 billion in cash flow benefits based on our current capital spending plan.

At this point in time, we have not yet allocated the additional cash flow for specific uses, but anticipate using the incremental cash flow to reinvest in the growth opportunities in our businesses, reduce risk, and improve our balance sheet.

Which brings me logically to the closing topic, capital allocation and how we think about making capital investments. As we discussed at the October analysts day, we will continue to place incremental capital to work where we have the highest return opportunity and where we can most efficiently convert the capital invested into earnings. That's why we continue to focus on all phases of our transmission business and the components of our utility platform where returns can be earned most efficiently. Pension funding and other risk-reducing strategies will be considered, just as they were in 2010.

Thank you for your time today, and with that I'll turn it back over to the operator and we'll take questions.

Question-and-Answer Session

Operator

[Operator Instructions.] And our first question comes from Daniel Eggers with Credit Suisse. Go ahead please.

Daniel Eggers - Credit Suisse

I'm confident there will be lots of ESP questions. I'm just going to ask one on the topic. But when you guys evaluated the decision between ESP and MRO and then the 29-month time horizon, how do you guys settle at 29 and ESP in the sense that a lot of the things you're going to have to do, whether it be spending, restructuring the power pool. A lot of these projects have a much longer time horizon. How do you guys get comfortable that this deal will set the right precedent to protect your exposure given the fact the ESP has changed since there's an active base in the last couple sessions.

Mike Morris

Well, when we look at that, we just thought that trying to sync up with the actual capacity undertakings of the PJM was probably an important point for us to take, and so we don't see that as exposing ourselves to a great amount of risk in that sense.

Daniel Eggers - Credit Suisse

Okay, so you're comfortable with the idea that whatever policy gets put in place for this ESP will stand as far as riders and pool mechanism and that sort of thing?

Mike Morris

Don't forget, as Brian said in his comments, the pool mechanism is a 3-year look and a process that comes to some reasoned resolution. And it will ultimately fit into that activity going forward, probably past that timeline. If in fact we don't get to some reasoned conclusion with the multiple states as we go forward, the notice to ourselves is withdrawable and we'll just simply use the pool the way we've used it historically. So we don't see the two creating any additional risk that we need to be worried about.

Daniel Eggers - Credit Suisse

On the cash flow outlook for 2011, can you just - a little commentary on the Enron estate payment, the $450 million, was that already accounted for from a cash outlay perspective, or is that going to be cash that goes out the door this year and be impactful either to net debt or use of some of your bonus depreciation proceeds?

Brian Tierney

All of that. That's something that's been on our radar screen that we've been planning for and whether the amount's $425 million or $450 million it's something that from a cash standpoint we've been planning for and certainly the bonus depreciation helps us in that regard in terms of being able to fund that without having to issue incremental debt. So both planned for and bonus depreciation helps us as well.

Daniel Eggers - Credit Suisse

And one last question. Mike, can you just share your thoughts on kind of the industrial recovery. The outlook you guys have for 2011 certainly off trend from what we saw in 2010. Are your customers seeing kind of a constant fade in business? We're hearing other folks looking for a second half recovery? What gives you guys confidence in a notably lower growth rate in '11?

Mike Morris

When we look at that, as you know when we do our load forecasting we are usually very conservative in that regard because that's the whole predicate of how we manage the ongoing business coming into a year. We don't get any signal from our customers that they think there's a lull in the activity that they're seeing, but we didn't want to build a really robust industrial increase beyond what we saw in 2010 which as you know was pretty substantial. So when we look particularly at the metal melders and the LME prices we think not only is Ormet going to be robust for the year, but that if essentially aluminum can solve some of their labor issues going forward they'll come back as well. We should see some uptick in that, and that probably would be in the latter half of the year, but we feel pretty comfortable about the increase that we've built into the overall forecast of what we think industrial sales will be. If it's upside obviously we'll gladly accept that.

Operator

We'll go next to Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Couple quick things. Just the other income and deductions, it looks like you guys are now forecasting something somewhat better than maybe the EI. I just want to try to get a sense of what was going on there for 2011?

Brian Tierney

I don't have a lot of detail for you on that. It's the change year-on-year is going from something like $154 [million] to $211 [million] and I don't recall what we had there.

Paul Patterson - Glenrock Associates

It's about $24 million. It's all right, we can follow up later. I just was wondering if you guys had an answer on that. The other thing is the power pool change. How should we think about that in terms of allocation of expenses among jurisdictions and any ideas about how it might change cost allocations or something of the sort?

Mike Morris

That's exactly the way that we see it. At the end of the day, to the point Brian made and I made earlier on, our approach here is to try to be respectful of the request that was made of us by the Virginia commission, something that we were contemplating doing, but it is in fact the reallocation of cost across the fleet and hopefully a zero sum gain. If we see that to be different from that, then we wouldn't go forward with the undertaking and we'd have the pool continue to work.

But you know, this was something that was created in the 50s and many of our jurisdictions would rather have a direct line of sight to the generating capacity that they need for their own state needs and the growth that they see rather than depending on the pool and the way that the pool works. Because as you know, it can really flip around the amount of cost that one state might pay versus other states based on the member load ratio calculations that are affected by incredibly warm weather in one particular region within the pool versus cooler weather in another region. So we just think it's time to make that adjustment.

However, I want to make certain because I know a lot of people have written about this, that if this tends toward the negative in that the states all believe that there's something more beneficial that they ought to get out of that changing of the pool arrangement we simply won't go forward with it. So no filings have been made in any jurisdiction that would cause us to be concerned about that. This an internal notice to the members of the pool that we may be moving in a different direction.

Paul Patterson - Glenrock Associates

In terms of shopping, what do you think has caused the discrepancy between you and FUCO in terms of the - it seems like a pretty substantial difference in shopping calculation. And just in general, how should we think about shopping exposure going forward? The ESP filing. And maybe just in the whole context of a new legislature, a new governor, is there any thought about revisiting SB221 or - not just you, obviously we're seeing some substantial - actually more sort of substantial kind of activity with Duke and what they're dealing with. I'm just wondering if there's any thought about perhaps going back to the state legislature to sort of maybe clarify some of this stuff? I don't know, it just seems like it might be a big long regulatory process.

Mike Morris

There are two parts to your question. I'll have Brian address the first one then I'll pick up on the latter part.

Brian Tierney

We think there's an apples to apples issue in regard to what numbers were reported on the PUCO website. We know what the numbers that we reported are, and the PUCO staff took numbers from a number of different credit suppliers and the integrity of the numbers and the periodicity of the numbers that were submitted to them are in question. So it's going back and trying to make sure that the comparison of what's been shopped to [inaudible] and we don't think that's the case in the numbers that are on the website.

Mike Morris

So on the second half of your question, as you know we're concerned about shopping in the marketplace. It really has everything to do with mostly our commercial customer class that as I mentioned before has some rate skewing effect. We think that today the competitive retail electric suppliers are getting a free ride on capacity costs. We made a filing at the FERC to address that. As you know, the FERC last week decided that they could not make a change because Ohio had in fact toward the latter part of December created their own price forecast before the capacity charge. We think that that probably was inadvertently low. We've addressed that issue both in the ESP and we will go forward and petition the FERC for re-hearing and in fact they invited us to file a complaint if we thought that the PUCO's number was too low and we'll do that as well. And we'll do that with respect toward the commission. This is not a fight. This is just an approach.

But again, going back to the numbers that Brian shared with you, this is 2,800 gigawatt hours out of an output at American Electric Power just south of 200,000 gigawatt hours a year. So I don't want to minimize it because it's important to us, and as you know we've created AEP retail. They're having some great success in retaining as well as gaining customer share in the other regions within Ohio. And we'll continue to take that approach. As I said, we've made a number of filings and a number of approaches, both at FERC and throughout the ESP, that we think will address the rate skewing and put some fairness in the capacity charge that competitive retail suppliers need to pay. And then with all of that in mind, trying to retackle 221 with a new legislature and a new governor may or may not be an appropriate way to go. I do think, however, in the near and longer term, Ohio is going to have to come to the realization that generation will not be built in the state under the current construct. And at the end of the day Ohio, within maybe 24 months, will be a net importer of electricity, and I know that our operating companies in Michigan, Indiana, Kentucky, West Virginia, Virginia would be happy to sell power into a power-short Ohio. I really don't think that that's in our best interest for the citizens and the businesses here in Ohio, and I expect that the administration and the legislature will come around to that realization soon enough. When you think about the potential number of megawatt hours that could be taken off of the board because of the potential of EPA going amok, it could have a very devastating effect on the price of power particularly here in Ohio. So I expect that that will get addressed. I don't know that going after a shopping fix is worth trying to tackle 221 again.

Operator

And we have a question from Bill Appicelli at Morgan Stanley.

Bill Appicelli - Morgan Stanley

Just had a question about the pool modification charge. How should we look at this $35 million threshold that you put in there for recovery of potential costs and increases that exceed that number? Is that significant in terms of where the - if it's economically neutral in terms of the impact overall? Or how should we think about that?

Brian Tierney

It's not significant. It's a placeholder that's in there to allow the company to absorb any downside before we'd start asking our customers to participate in that. And it's like a number of these riders where we put them in. There's nothing anticipated to flow into that at this point, but we felt it was prudent while we're going in for the ESP filing to have a placeholder in there should there be costs that need to be passed through and felt it was prudent for the company to absorb some component of that first before we asked our customers to participate.

Bill Appicelli - Morgan Stanley

And then on the shopping issue, between what you expect to have realized in 2010 and then your forecast of 14% in 2011, how much load would that leave at the C&I level that would have not been shopped. What would be the incremental exposure be a year into '11 based on your forecast?

Mike Morris

As Brian shared with you, it's an overall 6% of the AEP Ohio load, so it covers most of the class, but again, if in fact the rate design activities that are filed in the ESP when we get to 2012 I think you'll see a real drop off in the number of shopping customers. So it'll still be there and still have the freedom to do that, but their economic advantage will be to stay on the AEP system as a retail customer.

Operator

Next we have Steve Fleishman with Bank of America.

Steve Fleishman - Bank of America

Couple questions. You know, when Duke talks about shopping, they have like a gross shopping and a net, and the net being kind of net of one, customers that they take back on their retail side. Are your - the 3% and the going to 17% is that gross or net?

Brian Tierney

It's gross on the utility side.

Steve Fleishman - Bank of America

Okay. And then also I assume you weren't expecting to get this capacity charge done in your forecast for '11 on shopping? In terms of the one that you filed with the FERC?

Mike Morris

We did not build anything into our numbers for '11 for that. That's accurate.

Steve Fleishman - Bank of America

And then I guess one other question just on that issue. I'm trying to understand why the fact that they would want to use the PJM actual capacity charges, which I think all the other utilities in Ohio are using, why that would not be reasonable for you.

Mike Morris

Well, remember we chose to go on the cost of service calculation of capacity because of the generation fleet that we have available to us and that served our customers well in the past and we think it will serve our shareholders as well as our customers in the future. The PJM number is just simply inappropriately low and it continues to go that way and look at the reaction that New Jersey had to that activity. And I think you'll see other states go forward and do that. When you look in some of those out years and that number gets down to $16, $17 a megawatt day, there's not a power plant that you could build or use anywhere in the world that has that kind of a cost structure. So it's totally illogical.

Steve Fleishman - Bank of America

And just on the issue of Ohio being short potentially in a few years, it seems like west of you there's a lot of excess, particularly in the NI Hub market. It seems like there's even more capacity coming in there. That power can't get into Ohio?

Mike Morris

I didn't mean to imply that Ohio would be short and not available in the marketplace. What I meant to say and really the place that the administration and the legislature will see is that if Ohio is in fact capacity short, and you get down to the price - so let's just argue that the rates go to $70 a megawatt hour because of an inability of baseload generation to satisfy that. Adequate power will flow into the marketplace, but it won't flow in at $40 or $50, it will flow in at $60 or $65. And it just doesn't serve a state like Ohio, which is very aggressive in the economic development. You'll remember the comments of governor Daniels when he made it quite clear that Indiana never intended to be a net importer of electricity and intended to be self-sufficient and an exporter. And I think Ohio feels the same way about its ability to attract new industrial load in particular.

Operator

We have a question from Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

What do you expect in the ESP filing to be the biggest areas of pushback or the biggest topics that could become contentious from both interveners and staff at the PUC?

Mike Morris

Well, I expect that there will be some pretty open discussion about the approach that we're taking to recovery of the current fuel and the deferred fuel, but that really is in keeping with orders that were issued in the existing ESP. I also expect that there will be a pretty good comparison of how is this ESP in aggregate better for the customers than an MRO approach.

And from our vantage point, particularly again putting some reasonable capacity cost charges, we feel that we'll pass the MRO test. So there will be some issue over the riders and the approaches that we've taken. There will be some issue over the bypassable or nonbypassable features for two or three of the riders that we've put in. And we think those will all have an opportunity to be thoroughly discussed and obviously from our vantage point we think what we've done here is a very balanced approach in that regard. Trying to do as I said at the very outset, address the issue of adequate energy supply for my customers as well as adequate energy supply to grow the resource base and continue to make investments in Ohio.

The law itself is pretty clear about nonbypassability of environmental investments. It's pretty clear about nonbypassability of new generation if you need to bring it for the basic requirements to feed the state of Ohio. So there will be discussions about that. I'm sure there will be others who think that's totally unfair, but that's why the ESP was created the way it is. It encourages utilities like ours and others to file for that activity, to build into it the subsets that are necessary to have a meaningful opportunity, not only for customers to receive adequate energy at reasonable prices, but for investors to be encouraged to continue to make capital investments in Ohio.

Should we not get those kinds of activities, the clear message will be invest zero in Ohio going forward and put that capital to work in those jurisdictions and as you know with the breadth of our footprint many places to put money to work at very reasonable rates of return on equity.

Michael Lapides - Goldman Sachs

Follow up. Different topic. At the FERC, do you think we're starting to see a little bit of mean reversion from the FERC in terms of transmission policy? If you look at some of the orders that have come out, whether it was the OT&E order, whether it was the PSE&G order, where maybe QUIP wasn't fully granted or projects weren't fully given 100% incentive rate making. Is it possible we're starting to see a little bit of a turn at the FERC right now?

Mike Morris

Yeah, I think that's a fair way to look at it. That's an exchange I'd make in a minute for cost allocation being appropriate and ultimately with the eminent domain authority that's needed to build out that grid. One of the things that Chairman Wellinghoff has said, and has said it very clearly, as have Commissioner Norris and others, there is fairness in some of the incentives to go forward, but in return you need to put new technology to work on the grid. You need to do a number of things that are really cost effective in the near and long-term. So it's an encouragement to be creative in that regard.

The returns on equity that our projects have received have almost always been predicated on the incredible intellectual capacity of American Electric Power to make the grid better, to make it more efficient. When you add new - as you heard me say many times - if you look at the line loss calculations of our six bundle, 765, [inaudible] on our most recent transmission add, it's less than 1% compared to a system average across the United States of 3% or 4%. So we believe we earn those returns, but I do think there's a reversion to the mean. But it isn't a big deal.

Operator

Our next question comes from Raymond Leung with Goldman Sachs.

Raymond Leung - Goldman Sachs

Most of my questions have been answered about Ohio, but could we talk a little bit about financing plans? It looks like you guys show a net debt issuance number of [$]234 [million]. Could you provide a little more color on what the gross number is and what potential boxes that may need to issue? And if you could also remind me what your strategy is with the April bank line maturity later this year?

Brian Tierney

As you know, we've just been out recently with the PSO redemption that we just had. We have a few more senior notes that we need to do as we go through the year, APCO being a piece of that that we anticipate doing later. We have a number of PCRBs to do, a total of about, over the course of the year, a little over a billion dollars in total financing between the senior secured at PSO and APCO and the PCRBs that we're going to be issuing throughout the year.

In terms of the bank facility, are you talking about the credit facility?

Raymond Leung - Goldman Sachs

Yes, there's an April 2011, like [$]478 [million] or something like that that comes through?

Brian Tierney

Right. So we're taking a hard look at that, and instead of reissuing that facility we're looking at whether or not we do a club facility for that, or whether we do some bilaterals. And in fact we may not reissue all of that. A piece of that is associated with Ohio Power Company, which is cash fat right now, and we might just redeem that piece and bring it in. At the same time, we're looking for the other pieces of that which are APCO and I&M, how we might finance that. Right now it might not make sense for us to do a facility like we have with the VRB and support for the LCs and really doing that as a bilateral or club deal might make a lot more sense for us.

Raymond Leung - Goldman Sachs

And you didn't mention any parent issue with bonus depreciation, does that sort of change - the last time I met with you guys you indicated that you might issue debt at the parent again. Does that look like that's off the table now?

Brian Tierney

Yeah, with the bonus depreciation that's much less likely.

Raymond Leung - Goldman Sachs

And last question, I don't think there's any big issues, but the combination of Ohio Power and Columbus Southern, any covenant issues? Just want to make sure I didn't miss anything. I don't think there is anything with merging those entities.

Brian Tierney

None whatsoever.

Operator

We'll go next to Ali Agha with SunTrust.

Ali Agha - SunTrust

Mike, the filing that you made in Ohio, could you give us some preview - how much discussion was going on with the staff, etc. at the commission? You know, all the different pieces - there are a lot of components to it. Some of it, would that be considered a complete surprise for the commission and the staff, or is this well expected? Can you give us some sense of how much they were anticipating that this was coming?

Mike Morris

Yeah, we took a very aggressive approach to this filing because it obviously is very important for the next 29 months. We have met with our industrial customers, with the folks at the Office of Consumer Counsel weren't too eager to meet, but they were at least made aware of the approaches that we intended to take. We had some very constructive meetings with the commission staff and the commissioners themselves, although as you can well imagine they were very protective of what they saw and what they heard. Our lead on the body language, however, would tell you that there are no surprises in this filing that they weren't well aware of. Our industrial customers made some constructive comments. We tried to take those issues into concern as we went forward. And again, I think we found a reasonable balance here. That's not to say that there won't be a lot of lawyering going on, because as you know you need to run that clock to get paid. So there will be a lot of activity with the case, but it really is pretty fair, pretty balanced, and we believe very firmly that it will come out at a reasonable place when we're done.

Ali Agha - SunTrust

Second question, in the past including I believe at EEI, you've talked about roughly a [$]325 [million] earnings number potentially for 2012. Are you still comfortable with that? How much of that would be really predicated on a successful outcome of this filing?

Mike Morris

We feel very comfortable with the 2012 number. As you know, with the economy continuing to recover we've been talking about a 4-6% earnings range and off of the midpoint of our '11 number, that's almost a 5% increase going to '12 and we feel that that's very achievable. Quite honestly, we didn't build a great deal of upside from an ESP treatment into that number, so we think we've got plenty of room to be successful with that forecast when we look at 2012.

Ali Agha - SunTrust

Last question on a different topic. Your read today on the post-election scenario regarding the environmental legislation and potentially what sensitivities that has for your cap ex ramp, you laid out the '12 cap ex number as well, but just looking beyond that, as these things are coming down the pike what kind of escalation should we be thinking of that $2.9 billion '12 cap ex for you guys?

Mike Morris

When we look at our going forward strategy, it will be a blend, depending on which way the EPA goes and quite honestly through the Business Roundtable, ACE and the EEI as well as our own activities we think that this administration is taking a great deal of note of the impact that this could have on a struggling economy. So we think that many of these requirements might well be stretched out into a timeline that will fit our capital needs and our capital plans very comfortably. I doubt that you'll see us get much above the $2.5-3 billion of capital investment in the '13, '14, '15 timeline because quite honestly we just don't think there'll be an absolute demand requirement to move in that direction because of the potential effect it could have on the economy.

And as you know, particularly for our fleet, we've invested a great deal of money historically and we think we can address many of the mercury needs and other requirements so long as they're reasonable with the beneficial effect of SERs and FGDs going forward. So we' don't see a scenario where we'll have any massive capital uptick going forward because, again, much of our strategy that Nick and the team have shared with all of you go to the notion of retiring units rather than putting capital to work where it absolutely isn't necessary, nor would it be to the customer's advantage. That's really one of the reasons that we've begun the process of bringing the combined cycle gas plant called Dresden online. We began finishing the construction of that project about 2 weeks ago and plan to have that up and running about 2012. So we feel as though we've got a very solid balanced plan toward that and we don't see any long-term, near term capital impact that would put Chuck and Brian in a box.

Operator

And we'll take our final question from Paul Ridzon with Keybank.

Paul Ridzon - Keybank

Mike, you've kind of alluded that you still see a train wreck but maybe it could happen a little bit in slow motion. Is that your latest thinking?

Mike Morris

Yeah, I think that's accurate.

Paul Ridzon - Keybank

And kind of over what timeframe have you come to that conclusion?

Mike Morris

Over the last probably before - this was before the election. We were beginning to have some meaningful discussions with the EPA. We, the EEI, and of course AEP being a principal part of that, as well as legislators on both sides of the aisle in both the house and the senate, and we were getting the impression that with the economy beginning to show signs of life, no one was interested in negative effects to that. Because of the role that we play at the Business Roundtable, we've also alerted many of our larger customers of the effect. Those who have the boiler impacts understand it but many of our other customers aren't that aware of the effect that this could have on them, and I think corporate America has made it pretty clear. So over the last three or four months we've become more and more determined that spreading that thing out with a decade of commitment to it will make a big difference. And then I must tell you that Cancun I think was a game-changer, because people walked out of Cancun with a final belief that China and India, although moving in the right direction, had zero intention of going forward with any major carbon play. Much of the EPA's organization or direction is toward more traditional Clean Air Act events, and as you know, in every decade since the 60s air quality has continued to improve and that will happen here in the 2010s and that will happen through the 2020s. We've got a lot of time to adjust to these issues and that balanced reason going forward on timeline gives us comfort that the capital deployment will be well in line with our needs and our plans as I mentioned to the question that Ali had asked us. So I would say over the last three or four months we're feeling much more comfortable that this will be done in a very reasonable way.

Paul Ridzon - Keybank

And just switching gears, when do you think we're going to see the composition of the Ohio commission stabilized?

Mike Morris

Well, on February 3 there's about 14 or 15 names that the nominating committee will discuss and they'll submit a list of three or four names to the governor's office and he will make his selections. Whether he selects two people at that time or one, and that person being designated as chair is unknowable. And if they select one then, the nominating group will get together and get another list of resumes, winnow them down, and make another recommendation to the governor. So I would expect sometime in the first quarter we'll have a full complement of five appointed commissioners with terms that are understood and there will be a learning curve, no question. But it is what it is. With 11 jurisdictions and commissioners and chairs changing frequently, it's something that we're very familiar with and something that we'll react very constructively to.

Chuck Zebula

Thank you everybody for joining us on today's call. As always, our IR team will be available to answer any additional questions you might have, and operator, could you please give the replay information?

Operator

Ladies and gentlemen, this conference will be available for replay after 11 a.m. today through midnight, Friday, February 4. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 187892. International callers, dial 320-365-3844, using the same access code.

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