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American Electric Power Company Inc. (NYSE:AEP)

Q4 2006 Earnings Call

January 30, 2007 9:00 am ET

Executives

Julie Sloat - VP, IR

Mike Morris - Chairman, President, and CEO

Holly Koeppel - EVP and CFO

Tom Hagan - EVP-AEP Utilities-West

Analysts

Ashar Khan - SAC Capital Advisors

Paul Patterson - Credit Suisse First Boston

Dan Eggers - Credit Suisse First Boston

John Kiani - Deutsche Bank Securities

Leslie Rich - Columbia Asset Management.

Vikas Dwivedi - Morgan Stanley

Elizabeth Parrella - Merrill Lynch

Daniele Seitz - Dahlman Rose

Michael Lapides - Goldman Sachs

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2006 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Julie Sloat. Please go ahead.

Julie Sloat

Thanks, Craig. Good morning and thank you for joining us today to discuss AEP's 2006 fourth quarter and 12-month year-to-date earnings. I expect that you’ve seen the press release issued earlier today. It's also available on our web page at aep.com. In addition to the financial schedules included in the press release package, the webcast of this call will include visuals of charts and graphics referred to by AEP management during the call. An investor information packet will also be available at aep.com today at approximately 10 AM that will include the consolidated balance sheet and statement of cash flows, as well as the full income statements for our business segments.

The earnings release and other matters that may be discussed on the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings including the most recent Annual Reports on Form 10-K and Quarter Reports on Form 10-Q for discussion of factors that may cause results to differ from management projections, forecasts, estimates, and expectations.

Also on the call, we will discuss the measures about company performance; that is, ongoing earnings versus reported earnings that differ from those recognized by Generally Accepted Accounting Principles or GAAP. You can find a reconciliation of these non-GAAP measures on our Investor Relations website at aep.com.

I will now turn the proceedings over to Mike Morris, Chairman, President, and CEO of the company to lead an opening presentation and then there will be time for questions. Mike?

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Mike Morris

Thanks a lot, Julie, and thanks to all of you for joining us. 2006 has been -- in fact, was an excellent year for American Electric Power by almost any measure for a company that’s 100 years old. We are pretty proud of what we are able to accomplish at that advanced stage.

Let me try to take you through some of those highlights in a somewhat segmented fashion. I'll talk a bit about 2007 and then turn for much more technical and deep dive detail over to Holly Koeppel. The total shareholder return in 2006 was 18.8%, which we feel was extremely a good performance, not as good as some, but surely very solid performance for a utility that’s very much trying to refocus itself on the regulated model. As you know, we had a 5.4% increase in the dividend, a $0.39 per quarter per share, and of course, we had solid earnings of $2.77 a share, which is reflective of our mid-year upward adjustment in our guidance range that we started the year out with. Our credit adjusted view of the balance sheet leaves us with what we think is the best position that we’ve been in at least five years or more. So, financially, I think 2006 was a very solid year for the shareholders of American Electric Power Company.

Regulatorily, which as you know is extremely important for a company with dedicated assets and the plan that we intend to execute over the next few years was equally constructive in 2006. As you know, we have what we consider to be an extremely rewarding year. We’re receiving rate adjustments on the order of $450 million plus from what was an early year forecast of some $500 million by any measure extremely successful in the regulatory front, which tells us that the operating company model that we put in place in 2004 continues to yield the benefits that we expected it to do.

We had significant progress in reducing the regulatory lag in many of our jurisdictions, so that there are riders and trackers and other means, which allow for a much more current recovery of dollars as spent either capital or O&M. Examples include Kentucky, West Virginia, Virginia, Oklahoma, and we continue to work in many other jurisdictions to accomplish the same.

I don’t think there is any question that the work that our finance team did on the Texas securitization ranks among maybe the best, and clearly according to Commissioner Smitherman, the singularly best Texas securitization process in that great state and we are proud of our team and what was accomplished, not only in the process but in the amount of dollars that were allowed to be securitized versus those that we sought for securitization at the start. And as you know, that whole story isn’t yet over with, because there are a couple of very important appeals that have been taken that may yield even better benefits for our shareholders and ultimately our costumers, as we go forward.

Clearly, the Ohio Public Utility Commission approving the very first phase of the integrated gas combined cycle early in the 2006 timeline was very important. As you know, that is on appeal. We think it’s very important that that appeal run its course with the Supreme Court here in Ohio. We expect that to happen some time hopefully by mid-year if not before in 2007, which we think will give us the green light to continue and to move forward on not only in AEP, Ohio Power, Columbus Southern important project, but quite honestly on a US and worldwide important project.

Clearly, we had solid FERC administrative law judge order, or opinion I should say, on the rate design issue that’s so important to the entire process across the country for rate allocation and rate recovery of an interstate transmission grid.

On a negative side, a couple of outliers, unfortunately the Indiana Commission did not see the logic behind changing the depreciation rate, simply because they would much rather have a total rate review and we continue to work with them. But to say that we were disappointed in that would be an understatement. And lastly, of course, we had what we consider to be a disappointing administrative law judge opinion, as it pertains to the seeker case.

Operationally, again 2006 was a very good year. On the distribution side, we reduced our customer outage duration time to 126 minutes. I know that might sound like a long time for the lights to be out, but when you think of the breadth and the depth of our service territory, that is considerable progress. Just as recent as a few years ago, that number was in the 150-minute range. We really invested millions of dollars in extending our distribution grid to serve new customers throughout all of the 11 states service territory, and of course that will yield solid earnings for us, as we go forward to serve those customers and process that through the regulatory undertakings that are well underway and we will talk to in a minute.

We completed two of the most cost-effective and time-efficient environmentally interties and retrofits on our Mitchell and Mountaineer station. Mitchell was back online, Mountaineer will be shortly. We are really quite pleased with the results that we see from Mike Rencheck and his team they're undertaking. And as you know, that will allow us to continue to produce very cost-effective, environmentally responsible megawatt-hours that to be put to use for our retail customers and in the off-system sales market as well.

We are moving very successfully towards the completion of a couple of other environmental retrofit project at the [AMI] station, Cardinal plant, and others, and we will continue to do that. And that really will bring us to the end of the major CapEx on the environmental program that we spoke to you about a few years ago, and it is already proving rewards to us in the marketplace, as well as in the regulated review of our projects as well.

We ended the project with -- the year with what we think are two very important acquisitions in the generation fleet, the Darby and Lawrenceburg capacity plants, and we also ended the year with the ultimate sale and closing of the Dow Plaquemine plant in Louisiana, which continue to be a drag on earnings, not only in '07, but was forecasted to be the same going forward, quite honestly because of the failure of the Tractebel US marketing company to live up to their contractual obligations.

So on an operational sense, we feel really very, very good about what we were doing and of course we are in the final phases of constructing what we consider to be one of the most technologically advanced interfaces between ERCOT and the Mexico grid, down in the Greater Loreto area in Texas, one of the first, in fact the first such equipment to be installed here in the United States. Our friends in Canada were the first in the world to use this kind of technology.

On the project side of things, we announced and began the process of getting approval for our second integrated gas combined cycle plant in West Virginia. We announced and began the approval process and what we think is one of the most important projects undertaken by any utility, ours included, and that's the I-765 interstate transmission grid, which will save customers and the PJM marketplace something on the order of $1 billion a year in congestion. We will begin the process of allowing a very wholesome competition among different power plants in very different regions that would be served by that undertaking.

We announced and began the approval process for two ultra-supercritical coal-fired power plants, one that serve our ever-growing needs at SWEPCO, in the Arkansas, Louisiana, and SPP Texas market area. And again, announcing again the process to approve an ultra-supercritical plan in partnership with OG&E and OMPA to satisfy public service of Oklahoma's ever-growing needs.

Lastly, and maybe most importantly, we announced and formed what we think is one of the most important partnerships with MidAmerican Energy to continue to build out the Texas transmission grid to satisfy not only that wholesome competition among power plants, but to make certain that distant renewable energy sources have a path to get to marketplace in Texas, and we’re quite encouraged by that. And as you know, also announced the potential of a partnership, should the project be found to be needed to build out a 765 grid in the State of Michigan to serve all of the customers in the lower peninsula of that State, by not only removing congestion, but increasing the reliability of that system considerably for the next few years.

These projects will actually begin to pay benefits to the shareholders, as early as 2007 for much of the Texas undertaking, and ultimately will fill our pipeline for regulated rates of return and customer reliability and service throughout the rest of this decade and beyond.

So again, any way we look at 2006, financially, regulatorily, operationally, projects announced and underway, we feel very, very good about what we all did as a team and what we delivered to you as shareholders, and we thank you for your continued support in that regard.

Now, no different than my own team, when I ask them, what have you done for me lately, I expect that's what you would ask of Holly and I, so let me touch on a few other things that we hope to do, and intend to accomplish in calendar year 2007.

Clearly, the first and most important is to achieve the earnings target within our guidance range of $2.85 to $3.05 a share. We do reaffirm our '08 and '09 guidance, as laid out to you in our October session, and we have every comfort to believe that we will able to hit those numbers, not only with appropriate regulatory recognition of many of the things that we are doing, but some of the projects that I just ticked off for you earlier on.

We expect and hope to receive rate adjustments on the order of $340 million in calendar year '07. We’ve already got just about 50% of that in hand, most recently, receiving approval by the Kentucky Commission to implement the non-regulatory lag, surcharge for the environmental investments, serving our customers in Kentucky.

We continue to review and evaluate the potential for a dividend increase in calendar year 2007 and we will do that with as much respect for the balance sheet and the requirements that we have to put capital to work.

As I said earlier, we will finish the bulk of the environmental retrofits. And of course, that will allow us to continue to put very cost-effective, environmentally responsible, megawatt-hours into not only our retail market, but into that PJM, and other off-system sales opportunities, as we go forward.

We will manage our CapEx on ongoing projects, not to exceed the 3.5 billion target that we talked to you about before and we will continue to manage our O&M spending at or below 3.3 billion, which is about 100 million than we actually experienced in 2006. We have setup, both on the utility side and on the generation side, a process whereby the two principal officers for those areas, Nic Akins and Carl English, have a list of projects that would allow them to overspend the O&M by some 10%, if in fact the weather were cooperative and revenues continued to be strong. And to underspend O&M from budget by about that same 10% to the extent that weather proves not to be supportive of our cash flow and revenue needs as well. We think this is a very creative way to ensure that we find our way inside of that 285 to 305 guidance that we gave you.

I view that pretty much as our day job. And let me share with you a couple of dreams that we have for '07 and what we hope to get done there as well. We will continue to pursue the regulatory approval for the four very important power projects, the two integrated gas plants here in the East, the two ultra-supercritical coal plants southwest. We intend to create the AEP Electric Transmission Company to continue to expand our physical footprint with projects that will continue to serve customers, not only in our 11-state region, but beyond, should good projects come our way. We think that not only allows for that wholesome competition among power plants that I spoke to earlier, but more importantly, and very importantly in the various states, it allows a path for renewable energy, which so frequently is distant from the load pockets to find it's way to those markets as well.

And of course, we have every intent to be very active, not only in influencing, but directing three important legislative regulatory matters that are in front of us. Two at the state level here in Ohio, at what we do, come 2009, whether it's an extension of the rate stabilization plans of some years ago, or whether in fact it is a move to market, and in one way, shape, or form American Electric Power will be in the middle of the discussion, will be in the middle of the debate, and we will find what we think is a balanced approach not only for our shareholders, but our customers as well. The ongoing discussions for re-regulation in the state of Virginia had been joined by our Appalachian Virginian team, We continue to work with the attorney general, other interveners, Dominion Virginia and other players in that dialog and we have every reason to believe that that should come to a very reasoned conclusion that will serve the Commonwealth of Virginia and our customers in that state very well going forward.

And lastly, we too will enter the current feeding frenzy going on in Washington over what to do about green house gases, what to do about the eventual addressing of global warming. And I underline for you as we have many times before that it isn’t AEP warming, it isn’t US warming, it is in fact global warming and we will continue to try and move from the middle and begin bringing forward a central concept that will allow for an addressing of that issue. But will not simply take the manufacturing marketplace of not only AEP but the United States and put it in great jeopardy by having our country commit to something that others simply won't do and therefore not affect global warming in a constructive way, but only effect the US economy and the great US middle class in a very negative way. So, we have got much in front of us for '07. We are eager for the opportunity to prove to you one more time that this team not only can perform inside of that range, but hopefully with appropriate regulatory treatment and commercial operations activity come in at the higher end of that range as the year unfolds. Holly?

Holly Koeppel

Well, thanks Mike. I'll give you a brief recap of the fourth quarter of ‘04 as well as the year, hitting it at a high level so we have adequate time to answer questions at the end. In the fourth quarter, our GAAP earnings of $0.46 relate to ongoing earnings of $0.38, the difference is primarily associated with the gains realized from our sale of interest in ICE. Ongoing earnings of $0.38 are composed of $0.32 from utility operations, $0.04 from investments and $0.02 from the parent.

Investment segments showed continued improvement in the fourth quarter on a year-on-year basis due once again to strong performance of our MEMCO barge operations. We continue to see higher freight rates in a year-on-year comparison as well as strong demand. The $13 million improvement at the parent is attributable to both lower interest expense resulting from the retirement of global notes as well as increased interest income.

In our utility operations, despite the less unfavorable weather, it was more than offset by a higher rate relief and load growth as Mike outlined. Off-system sales were flat year-on-year, and we did see a continued decline in transmission revenue year-on-year associated with the elimination of the Seams Elimination Cost Adjustment at the FERC in April of this year. No surprises in O&M, depreciation or any of the other expense items and on a year-on-year comparisons, fourth quarter earnings are up by $0.05 per share to a total of $0.32.

Moving to the year-on-year comparisons, reported earnings for '06 on a GAAP basis were $2.54, ongoing earnings of $2.77, the $0.23 difference is related primarily to the divestiture of our Dow facility as Mike touched on earlier. Our year-to-date ongoing earnings of $2.77 are composed of $2.61 from utility operations and $0.16 from investments. Once again in investments it's the continued strong performance of MEMCO. The parent company year-to-date reflects $0.13 improvement over last year due to both lower interest expense in '06 as well as higher interest income in '06 and we also incurred a bond buyback cost in '05 which had expenses up a bit last year.

For utility operations, the full year performance of $2.61 compares with $2.80 last year or $0.19 lower. That $60 million decline is associated in major part with weather; a year-on-year comparison we were off $0.16 due to weather alone. Retail sales revenue and load growth, revenue driven primarily by rate relief served to more than offset the weather impact. We did experience higher expenses across the board that contributed to the decline.

Turing quickly to cash flow. Once again, as expected we ended the year with $300 million in cash balance. You may recall that we were a little higher than normal last year, $400 million, due to the sale of HPL.

Our cash flow from operations of $2.7 billion was in line with expectations, probably the biggest swing there that I would call your attention to, was the change in our deferred fuels. This is due to the reactivation of fuel clauses and a number of jurisdictions. As Mike recapped, our investing and cash outlay is driven primarily by our CapEx program, which proceeded on pace, financing activities were also as expected for the year.

And in conclusion our capitalization is right in line as was expected. Our adjusted debt-to-cap of 56.6% at the end of the year is in line and actually very-very strong. But two principle adjustments to that just to refresh everyone's memory, is adding back the proceeds that we received from the Texas securitization bond issuance, and subtracting out the TCC bond issuance and adding back our Rockport lease of 1.2 billion. So in summary at 56.6%, we are well within our targeted range of 60%. Mike?

Mike Morris

We are open for questions-and-answers should anyone have any?

Holly Koeppel

Greg, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Ashar Khan. Please go ahead.

Ashar Khan - SAC Capital Advisors

Good morning and congratulations.

Mike Morris

Thank you very much, Ashar.

Ashar Khan - SAC Capital Advisors

Mike, I don't know; however, if you could, I guess one thing different in the chart this morning is the rate relief numbers for '07. That was there in the Analyst Presentation four months back and what you have for '07. Could you just tell us what the differences are?

Mike Morris

Let me try to rack up the big numbers. Most importantly, we have moved out of that number, the Indiana Depreciation Case, because we are just absolutely convinced that they do not want to address that as a standalone single point issue. We have also adjusted the numbers to be reflective of the final applications that were put in front of the Oklahoma Commission and the Texas Commission as well. So, well inside of the range that we have for 2007, again it's a substantial reduction in the rate relief that we need to get to that goal line. And as I mentioned in my comments, just about half of it, about $160 odd million is already in hand with the -- particularly with the approval of Kentucky last week, it takes us up to almost 170 million in hand.

Ashar Khan - SAC Capital Advisors

Okay. Thanks Mike. And Mike you mentioned regarding the dividend win, usually you did it late last year. Is that something late or it could have happened earlier?

Mike Morris

Well, we will have to see how the year unfolds, Ashar. As you know, the one thing that we have tried to do is reward people who have invested in the company and it just -- I would like to see more of the year unfold, but it is always our intent to continue to move into that 55%-60% payout range, and if we can make a dividend increase and the Board thinks it's a good utilization of the capital, we will do that. But it would be later, rather than earlier specifically.

Ashar Khan - SAC Capital Advisors

And if I can just end up, Holly, one change in gain is that you have a higher sales numbers for the Ohio companies and integrated these companies from what you presented. Is that just the economies looking better or I am just trying to understand what's behind the higher sales numbers in your revised forecast?

Holly Koeppel

It's in part due to that, we are very -- we have refined the numbers since October. But we also have secured an additional major industrial customer reflected in that line, Ormet Aluminum.

Ashar Khan - SAC Capital Advisors

Okay, I appreciate it. Thank you.

Operator

Your next question comes from the line of Paul Patterson. Please go ahead.

Paul Patterson - Credit Suisse First Boston

Hi, good morning. Can you hear me?

Mike Morris

Yes, we can hear you fine Paul, thanks. Good morning to you.

Paul Patterson - Credit Suisse First Boston

O&M spend, I am -- I see what you guys are projecting for 2007. Is that a normalized number or is there additional O&M that you guys are sort of above the normalized number -- normalized O&M spend if you follow me?

Mike Morris

Yes, I would argue that it is a bit above the normalized spend. We have built into that, some O&M dollars that are already in front of the commissions, most importantly here in Ohio, with the $160 odd million reliability filing that's in front of them, obviously part of that is on the O&M side. And it will not be spent, if it isn't granted and the same is true, some of it, of course, will become more run at the middle as we continue to incur additional costs, operating the environmental retrofits and of course the capacity gas machines that were purchased to satisfy the PJM capacity requirements. Those really are money making O&M investments, Paul, so its probably a bit high compared to what would be considered to be a normal run, I know my team doesn't like to hear that, but that's the way I see this.

Paul Patterson - Credit Suisse First Boston

Okay. So although we see a higher than normal O&M spend, there is also higher revenues, that you guys are expecting?

Mike Morris

Oh, absolutely.

Paul Patterson - Credit Suisse First Boston

Okay

Mike Morris

Absolutely and, again as I mentioned before something that Susan began last year and Holly and I've tried to perfect this year. We are really trying to put discipline in the utilities, in the generation, as well as corporate center. So that's why you rack up some projects, and if things go well, these are the things we'd like to do. And if things don't go well revenue wise, these are the things that will simply lay over for another year.

Paul Patterson - Credit Suisse First Boston

Okay. And then in terms of the ongoing tax, I see what you guys are projecting for 2007, is that a normalized effective tax rate that we are looking, at least for the utility operation?

Holly Koeppel

Yes, for '07.

Paul Patterson - Credit Suisse First Boston

Okay. And then finally with MEMCO, it looks like you guys are expecting MEMCO to decrease a bit. Could you just go over a little bit what you are seeing in terms of -- you mentioned how it has been very favorable. What are you seeing in terms of demand and also in terms of supply industry-wide? Are people building more barges or if you can just elaborate a little more on that, just give us a little more [update] on that?

Mike Morris

Sure. Well I can assure you that MEMCO is building more barges and boats. We see this as an ongoing solid operational add to the overall requirement of ensuring that we have adequate fuel supplies at all of our generating stations to satisfy the demand as we see it. To the actual activities themselves, we are barge -- year-to-year the same amount of barges on the rivers. We will add a couple of boats so that we aren't leasing straightforward, but we'll have our own controlled boats to move those barges as well. The difference between what we realized in '06 versus what we are forecasting for '07 Paul, really was the phenomenon of the first quarter of '06 where we were coming out of huge pent up movement requirements post Katrina. And also 2006 was probably one of the most calm years in a weather sense on the river system itself, and we don't try to build calmness in to the river system, because over the years it has shown us high water levels and low water levels that have a real impact on the ability to move freight. So we think we have got a very realistic number. And as we said before, the competition, many of the smaller entities have simply gone out of business. MEMCO continues to be, on a customer rated basis, seen as one of the most effective ways to move commerce on the interstate river system, and we want to maintain that position and continue to have the opportunity, not only to grow that business if its fair. But again utilize it for its principle purpose which is to serve our own coal requirements as we go forward.

Paul Patterson - Credit Suisse First Boston

Thanks a lot guys. Excellent.

Mike Morris

Thanks Paul.

Operator

Your next question comes from the line of Dan Eggers. Please go ahead.

Dan Eggers - Credit Suisse First Boston

Hey good morning.

Mike Morris

Good morning Dan.

Dan Eggers - Credit Suisse First Boston

Could we just talk a little bit more about the transmission projects by way of timing, when we could start to look for announcements and when (inaudible) will start going to work on the next 9 billion I guess?

Mike Morris

I appreciate that very much. The most important and nearest term projects will be the continued build out of the Texas partnership with Greg Able, David Sokol, the MidAmerican team. The way that's unfolding, as you know, Dan, we made a rate filing last week which will cause us to become a public utility subject to the PUCT. We think that's a very important undertaking. It will establish the rates, and it will also establish the early projects that will fall into that partnership and cause MidAmerican to fund their side of the partnership, which will allow us to build considerable other assets already approved in a more regional sense inside of the ERCOT planning process. So you will begin to see -- we hope earnings impacts in a constructive way in '07 from the Texas partnership.

Probably the next most logical project that may come to bear, towards the end of the decade would be the ITC partnership in Michigan, should it be found by MISO and the Michigan Commission to be a project that saves customers and serves a reliability of requirements in the State of Michigan as well. We think that's an important undertaking for MISO and the PJM, and one that if approved is mostly along existing rights of way and probably in a [permit sense] would be easier to do.

SBP, as you know, we have a project in front of them that would be later in the decade approval to be built and go into, not only a cash position, but ultimately in earnings position. Probably early in the next decade. The Interstate-765 system awaits the code or designation from the DOE, which we continue to believe will be early '07. And then lastly awaits the final resolution by the PJM transmission planning process which we also would expect sometime early '07.

As you know, we've talked to the idea of picking up partners on the I-765 project. We have begun those discussions with those who might like to join in that endeavor. And as I mentioned before, we continue to be in discussions with Governor Rendell in the great State of Pennsylvania, to call it other Pennsylvania, about the notion, State of Pennsylvania, about the notion, commonwealth, as Susan reminds me about the notion of adding their Western Wind renewable assets to their Eastern demand centers of the Greater Philadelphia area. So, these projects will fill in very nicely, some of them earning yet this decade, others of them adding strongly to earnings, as the decade moves into the teens.

Dan Eggers - Credit Suisse First Boston

Perfect, thank you. On the legislative activity or I guess activity in Ohio in total as far as RSP, your old market is as concerned, what is the level of dialogue right now and what do you see needing to happen this year to move that forward?

Mike Morris

Well, as you know, because Chairman Schreiber was down in New York the other day and I am sure you or someone from your team said in on those sessions, he is convinced that something can be done that will address the diverse nature of issues that many of us have and it's something that he believes will ultimately need some legislative support as well. So I would expect the early part of '07 will be dedicated to the how or the what, I should say. And then mid-'07, I would hopefully move into the legislative approval process to get that done. And remember, as I have shared with you before and I am sure Chairman Schreiber shared with you, Governor Strickland, our new Governor here in the State of Ohio sees this as a very important center-stage issue in the early part of his administration. The Speaker and the President of the Senate have made both made it quite clear that they do not want to have a state battle, as we witnessed in other states on the eastern seaboard in here, in the upper Midwest. So I expect that we'll find some reasonable way for people to take various approaches that will serve the customers, as well as serve the shareholders of these operating companies sometime early in '07, hopefully qualify it later mid '07 and then filing whatever has to be done to allow the Commission hearing process and the due process requirements of the Ohio regulatory laws to go forward, so that we will all know towards the latter part of the year what '09 is going to look like.

As you know, when we talked to you about our '08 and '09 numbers, '09 in particular, all we built in was an extension of what we have to-date. That would be the floor, if you would, of a program from the way that we see it.

Dan Eggers - Credit Suisse First Boston

Great. Thank you, guys.

Mike Morris

You bet, Dan. Thank you.

Operator

You next question comes from the line of John Kiani. Please go ahead.

John Kiani - Deutsche Bank Securities

Good morning,

Mike Morris

Good morning, John.

John Kiani - Deutsche Bank Securities

Mike, along the lines of the Ohio RSP extension, I know it's still in the -- more in the preliminary stages, as you mentioned. But hypothetically speaking, if there was an RSP extension post-2008, do you have an idea of how many years that could be for?

Mike Morris

Well, that's really a good question. What would be most logical would be another implementation of the stair-step toward market or may be moving to market, but stair-stepping in the impact of that over maybe a three-year cycle. That seems most logical to us, as one way to go forward, and that would say that by 2012, Ohio would be fully integrated into a market choice opportunity and reflective of market prices in the electric marketplace. Again, different people will have different views of that. We continue to strongly believe in the notion that a flash to market in 1109 would have a potential impact on the manufacturing base here in Ohio, which of course would have a ripple impact on the commercial residential demand on Columbus Southern and Ohio Power System, something we are not truly interested in. We want to get to market. That really is the goal, but we don't want to do it at the expense of the Ohio economy and there are ways to work our way around that. But, as I have said many times before, if we can find a resolution, Ohio already has a law and we will simply follow the Ohio law.

John Kiani - Deutsche Bank Securities

That's helpful. So, maybe think of it in terms of several year or multi-year phase-in to market, that could be in excess to two years or maybe closer to three?

Mike Morris

I think that's fair. And again, remember, you could step to market pricing in year one and just simply not collect all of those market prices from the customers in year one. But spread them out over that timeline. That might be another constructive way to the shareholder's benefit to get to the market pricing, to the customers benefit, use it as a regulatory flow-in over that period of time.

John Kiani - Deutsche Bank Securities

Thanks, that's helpful.

Mike Morris

You bet, John. Thanks.

Operator

Your next question comes from the line of Leslie Rich. Please go ahead.

Leslie Rich - Columbia Asset Management.

My questions have all been asked and answered. Thank you.

Mike Morris

Oh, that's great, Leslie. Thanks.

Operator

Your next question comes from line of Vikas Dwivedi. Please go ahead.

Vikas Dwivedi - Morgan Stanley

Yeah, hi, Mike.

Mike Morris

Hey, Vikas, that’s alright, if he can't say your last name.

Vikas Dwivedi - Morgan Stanley

He gave it a good shot.

Mike Morris

He did.

Vikas Dwivedi - Morgan Stanley

Mike, quick question on Virginia, you guys did get the E&R recovery going your way and my question is how does that affect the general rate case given that there were E&R, items in that case as well?

Mike Morris

Well, that -- again, it shows the depth of your comprehension of how these things unfold. We were very pleased with the way E&R turned out. It is the law in Virginia and I am really happy that the Commission, ultimately, implemented the law, as it was written. That’s exactly the way we would hope regulatory, legal interface works. To your point, one could argue that if the Virginia rate case would have come out in a relatively negative way, much of what's required probably on the order of about half of the current request would fall under the E&R requirements as well. So, I don’t to want to make it sound like we got two bites at the apple, but in essence, if the case were to come out very negatively, I wouldn’t overreact to it. I would simply turn around and file under the E&R provisions as well.

Vikas Dwivedi - Morgan Stanley

Okay, got it. And on SWEPCO, can you give a sense for either the timing and/or the size of the request that you guys are building there?

Mike Morris

I would shy away from the request. The timing is under current review, I would expect more on the mid-year cycle range for SWEPCO. We are, as you know, putting together the cost structure, evaluating the current rates of return, and preparing ourselves for that kind of a filing by about mid-year.

Vikas Dwivedi - Morgan Stanley

Okay, got it. Thank you, Mike.

Mike Morris

You bet, Vikas.

Operator

Your next question comes from the line of Elizabeth Parrella. Please go ahead.

Elizabeth Parrella - Merrill Lynch

Thank you. Can you update us on the two IGCC projects, I guess, maybe a month or two ago, you delayed a bit in the sense that I think the cost estimates came back a little higher, somewhat higher than you had thought. Can you talk about what those cost estimates are coming in at relative to expectations, where you go from here, does it still make sense to kind of pursue these until you see maybe what is contained in legislation on carbon, et cetera?

Mike Morris

Well, Elizabeth, let me try to touch that. Look, the facts remain, there is no question that integrated gas combined cycle plant with an avenue for carbon capture and storage is essential to AEP, to our customers here in Ohio and West Virginia. And as I said earlier on and I don’t want to sound too preacher like on this, it's important for this country and important for the world that that technology go forward. We are very comfortable with the design, with the operability, with the guarantees and warrantees that GE are willing to give us on the project. We're quite encouraged by all of that.

The fact remains to your point and to our admission with the extension of the FEED process that, now the prices are higher then we would have thought that they would have been. But remember, the price of general construction is much higher than it was when we started into this. Our need and what we are hoping to be able to demonstrate through this process through the Ohio and West Virginia, Virginia regulator is a project that would be on the order of 20 odd percent more costly than a simple pulverized coal plant.

I think we all know the difficultly seeing our friends in Texas. We have great demands and every intent to go forward, but a very, very huge challenge to build a more traditional pulverized coal plant, and they of course have now moved on to other technologies as well. If we can come in that range, we think that the Ohio Commission, the West Virginia, Virginia commissions will see the logic behind a 50-year plant, which will never get more cost effective than 2008, 9, 10 whenever we get the authority to go forward and build it. So, we continue to work on that.

We are close to a final-final number from our team and we have what we call a Plan B that we are working on, which would be a different project management undertaking, which we think might be more cost-effective and we might well put in front of the Commission; Plan A, which would be the vendors with an overall project manager; Plan B, which would be the vendors with the project management done by American Electric Power on subcontractors at different islands within the footprint of the plan. We will not give up and we will put in front of the regulator an opportunity for them to say yes or no. But these plans, which are needed, will ultimately get billed and 2000 -- approvals in 2007 will yield lower cost plans and approvals in 2009. So we hope that they see the wisdom of all of that in those three jurisdictions.

Elizabeth Parrella - Merrill Lynch

Okay. And if I could just ask you from the fourth quarter what the coal cost increases were, and also for the full year, where your delivered cost of coal standing at? And can you discuss or refresh for us your expectations on the degree of increase you expect for ’07?

Mike Morris

I will ask Holly to give you some of that granular data. I will tell you that Chuck Zebula and his team did better than he thought that they would do, by really quite a wide margin in '06, as prices began to soften. The '07 numbers are looking reasonably good, only because as you know now with Mitchell, Mountaineer being able to burn some of the other coals even though all coals have gone up in price, we’ll see some softening of the impact of that, as we go forward. Holly?

Holly Koeppel

Just to give you a bit more detail around that, Elizabeth, on a fourth quarter comparison, it was up 6% across the company. Year-on-year for the full year it’s up 8%. The split, the west was up about 10% due to continued strong pricing from PRB. In the east, we were up about 5%, less than the uplift in the market due to that fuel switching that Mike outlined for you. In terms of the outlook for next year or actually for this year, we are still forecasting in the range of 7 to 9% increase, which takes into account the continued switch between our low-sulfur and high-sulfur at some of the eastern plants, subsequent to the environmental retrofit.

Mike Morris

And I think that hopefully demonstrates what we said you, as '06 unfolded, there was a time when we thought the increases might be north of 10%, but because of the bulk buying that we do because of the blend and extend contracts that Chuck and his team have negotiated, we feel very comfortable with our coal buying strategies. And remember, one more of our frozen fuels in fact on Dow’s mid-'07, as Indiana fuel cost will adjust come July 1.

Elizabeth Parrella - Merrill Lynch

Okay, thank you.

Operator

Your next question comes from the line of Daniele Seitz. Please go ahead.

Daniele Seitz - Dahlman Rose

Thank you. Most of my questions have been answered, but I was wondering, could you comment on the likelihood that the Virginia Legislature will decide before the -- in this current session?

Mike Morris

Daniele, I would leave that up to my good friend, Tom Farrell. I say that somewhat tongue-in-cheek. It appears as though the Virginia Legislature, the Virginia Attorney General's Office, the Virginia Executive Leadership is very interested in avoiding the kinds of impacts that we see on the Atlantic Seacoast, particularly in Maryland, I think yesterday or the day before the headline was that the Maryland increase really wasn’t 72%, it was 67%, and I think that's what they would love to avoid. So I expect that what's been put in front of them is a reasonable way to be fair to not only the customers in the Commonwealth, but also to be equally supportive of the capital investment that is required. We, as you know, with integrated gas plant, intend to serve our Appalachia, Virginia customers. Dominion has in front of the Commission a power plant that they believe is very essential, coal-fired, that would be built in exactly the right part of the state. You are seeing continued growth in energy demand in Virginia and the fear is that the competing southern states, the Carolinas, Georgia, Alabama, and beyond would attract that capital if the Virginia utilities don’t have reasonable rates of return, and I think that Virginia Legislature has been extremely dutiful and balanced about how to go about doing this. So I have every reason to believe that by this week, a piece of legislation will go in that will come out of conference and hopefully be signed by the governor.

Daniele Seitz - Dahlman Rose

Great. And on another subject and issuance to get a mix on IGCC plant. What is the length of construction there? I mean what is the timing that it takes to get the whole plant built?

Mike Morris

We are looking at a four-year construction cycle. But remember, in a financial sense, with that authority from the commission, will come a cash compensation as we go and build through CWIP or AFUDC or one of those processes that's in front of the commissions.

Daniele Seitz - Dahlman Rose

Great. And it's going back to Virginia you feel that --

Mike Morris

I thought we answered all your questions.

Daniele Seitz - Dahlman Rose

I thought the -- we have to obviously follow a better rate of return for construction, and you say -- did I understand right that you said that you are optimistic that this might be understood?

Mike Morris

Yes, yeah very much so.

Daniele Seitz - Dahlman Rose

Great, thanks.

Mike Morris

You bet. Thanks.

Operator

Your next question comes from the line of Michael Lapides. Please go ahead.

Michael Lapides - Goldman Sachs

Hey guys Michael Lapides of Goldman here.

Mike Morris

Good morning Michael.

Michael Lapides - Goldman Sachs

Good morning. On the Oklahoma and Texas rate cases, can you give a brief overview both of the timeline and procedural schedules, and what you have actually requested in terms of rate increases allowed, ROE and rate basis?

Mike Morris

Hey I sure can. And Oklahoma is on the order of $50 million, and in Texas, combining TCC and TNC it's on the order of $107 million. Rates of return are in the -- Holly, 10 and 11?

Holly Koeppel

10.5 to 11.

Mike Morris

10.5 to 11. Timeline, Texas probably sometime mid year, Oklahoma?

Holly Koeppel

Little bit later in the year.

Mike Morris

Little bit later in the year, midst of third quarter.

Holly Koeppel

Third quarter.

Michael Lapides - Goldman Sachs

And when do you expect staff testimony in both?

Mike Morris

I don't know, Tom Hagan is here with us. I know he has put time on the spot.

Tom Hagan

I think May, in Texas, perhaps a little bit earlier than that and I don't recall the schedule in Oklahoma, but we can get back.

Mike Morris

Yeah, I will make sure that Bette Jo or Julie gives you those actual dates. Okay, Michael.

Michael Lapides - Goldman Sachs

Great. Thanks guys.

Mike Morris

You bet.

Operator

Your next question comes from the line of Phyllis Gray. Please go ahead.

Mike Morris

Good morning, Phyllis.

Operator

Miss Gray, your line is open. Please go ahead.

Mike Morris

As they say in a legal profession, asked and answered. Next.

Operator

We will move on to the line of Elizabeth Parrella. Please go ahead.

Elizabeth Parrella - Merrill Lynch

I just wanted to clarify and not trying to be too picky on this. But I saw that in your analysts' meeting, you had indicated the coal cost increase for '07 was 6% to 8%. Has it changed now to 7% to 9%?

Holly Koeppel

Yes, in part because we are -- we saw a lower cost at yearend than we had previously forecasted, Elizabeth, because we came in lower in '06, the baseline comparison would be 7 to 9 to get back to the exact starting point.

Elizabeth Parrella - Merrill Lynch

So, in terms of like the dollar, the average dollar price per tonne for '07 were --?

Holly Koeppel

Same they were before.

Mike Morris

Right, where we were, but again because of the way math works, the percentage is a bit higher.

Elizabeth Parrella - Merrill Lynch

Okay. Do you have what the average delivery price was in 2006?

Holly Koeppel

I do, $35.10.

Mike Morris

$35.10. That's pretty good, and I had it before Holly.

Holly Koeppel

And we are looking at -- we are still looking at the $38.80 for next year.

Elizabeth Parrella - Merrill Lynch

Okay.

Holly Koeppel

This year. 2007.

Elizabeth Parrella - Merrill Lynch

Thank you.

Mike Morris

Thanks, Elizabeth.

Operator

And at this time, there are no further questions.

Julie Sloat

Great, well this is Julie Sloat. We thank you for you joining us this morning. The investor relations staff will be available for all your research needs. So give us a call later today. And Greg if you could remind everyone of the replay information, that would be fantastic.

Operator

Thank you. Ladies and gentlemen this conference will be available for replay after 12:30 Eastern Time today through February 6. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 854-749. International participants dial 320-365-3844. Those numbers once again are 1-800-475-6701 or 320-365-3844, with the access code 854-749. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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