Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Julie Sloat - VP, IR and Strategic Initiatives

Michael G. Morris - Chairman, President, and CEO

Holly Koeppel - EVP and CFO

Analysts

Daniel Eggers - Credit Suisse

John Kiani - Deutsche Bank

Paul Patterson - Glenrock Associates

Rudy Tolentino - Morgan Stanley

Danielle Seitz - Dahlman Rose & Company

Paul Ridzon - KeyBanc

Ashar Khan - SAC Capital

American Electric Power (AEP) Q2 FY07 Earnings Call July 31, 2007 ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power Second Quarter 2007 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder today's call is being recorded.

At this time I'd like to turn the conference over to Julie Sloat. Please go ahead.

Julie Sloat - Vice President, Investor Relations and Strategic Initiatives

Thanks, Ken. Good morning and thank you for joining us today to discuss AEP's 2007 second quarter earnings. If you've not seen the press release issued earlier today, it's available on our web page at aep.com and a pod cast will be available on our web page at the conclusion of this call. In addition to the financial schedules included in the press release, the web cast of this call will include visuals of charts and graphics referred to by AEP management during the call. An investor information packet is also available at aep.com that includes the consolidated balance sheet and statement of cash flows as well as full income statements for our utility operations, gas operations, investments in parent company.

The earnings release and other matters that may be discussed on the call today contains 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 web site at aep.com.

I'll 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 your questions. Mike?

Michael G. Morris - Chairman, President, and Chief Executive Officer

Julie, thanks a lot and to all of you on the phone thanks for being here with us. We are quite encouraged by the quarter performance of American Electric Power for the second quarter 2007. And of course that adds for relatively comfortable first half of the year of calendar year 2007.

As you know, from looking at slide 3, we had earnings of $0.64 a share, which takes us up to $1.33 a share on the ongoing basis year-to-date. And with that of course, we're happy to reaffirm our ongoing earnings guidance for the year of $2.85 to $3.05. A number of interesting things going on in our spaces, I know you know. We joined as Senator Bingaman and Senator Specter along with others to be supportive of the Low Carbon Economy Act of 2007. So, it's unique to see how the politicians come up with these catchy titles. But the fact of the matter is, we think the Bingaman Bill is probably the most logical, the most balanced and the most realistic of the many things being banded about in Washington D. C. by not only folks in the House but people... excuse me folks in the Senate but people in the House as well.

We think the dates are reasonable as the targets are accomplishable, equally important it does subscribe to the whole theory of a safety valve which we think is critically important on a national basis so that all utility customers will have to deal with carbon constraints as we go forward will have some predicate upon which to make capital investments, buy offsets in the market or continue to push the technology forward. We are very aware that there are some who thinks that's probably a false hope that it would be better if there were no safety valve, but we are of the opinion that that leads to an almost uncontrolled and unknowable cost of carbon going forward which we think would not be in the best interest of anyone, customers or investors in the utility space.

So, we’re encouraged by that and of course because it is global warming and they… the Senator Bingaman has wholeheartedly adopted what we call the IDEW/AEP global approach and we are quite encouraged by all of that as well. I think you also asked that we put a great deal of interest in ongoing activity in the most recent PJM auction for capacity '08 and '09. The numbers came in extremely strong, and we were quite pleased by that for two reasons. One, for our customers benefits because we have chosen to be a self-supplier, we continue to save our retail customers a lot of money, quarter-to-quarter, the year-to-year and we think that is exactly what we should be doing for them.

And equally important, excess capacity that we have over our retail demand was put in that marketplace at those relatively high numbers on an average $111 a megawatt day. So we're quite encouraged by the PJM auction and the way that it came out. That of course leads me to the never-ending update on the Ohio regulatory activities and the regulatory activities throughout our system. For the most part, the State of Ohio continues to debate, discuss, and think true potential approaches for the post 2008 rate stabilization period.

You have heard us save many times before that it is our impression and our hope that we can craft a reasonable compromise that will allow for us to receive market or near market prices, without the rate shocks that may come to that with our customers. That might sound like an extension of rate stabilization, we will continue to work on those goals and share with you everything that we know as soon as there is some concreteness around those discussions.

In Virginia, I think you know that the beginning of this month, we filed to adjust our environmental reliability tracker; we filed for a fuel adjustment, which is provided for under the new Virginia law. And of course, made our filing in support of the West Virginia integrated gas combined cycle plant, in Virginia as well. Oklahoma, the rate case activities are over, we await an order and hope for the best there as we always do. In Indiana, very much impressed with the adoption of the depreciation case associated in a settlement with the Indiana Consumer Council, quite encouraged by what we see going on in Indiana and of course as of July '07 the fuel cap went away in Indiana. We will continue to pursue fuel cost recoveries in that state as well.

Lastly, and we think encouragingly on a transmission front, we continue to move forward. The Electric Transmission Texas LLC hearings have closed. We think from ... all we can tell from those hearing that the Texas Commissioners for the most part were very much in favor of the project. One of the major concerns of course is the overall cost to the retail customer in Texas. We understand that, we think that we adequately answered the questions that were asked by the Commissioners to demonstrate that those particular projects will allow for a much more competitive wholesale market in Texas and save the customers money.

We are encouraged by the activities what we now call the past, joint venture, I think of you all will remember that is our I-765 projects, the PJM has approved it, FDRC of course had preliminary approvals of that before and we continue to pursue those. Later yet this year we expect to put in front of the Michigan Commission, MISO and others, the Michigan 765 KV study that we have done in association with ITC and we think that's moving relatively well.

Southwest Power Pool and their determination of the issues that would need to be built in a transmission sense, to help for the general flow of power in that market area went really quite nicely for us. We think that the 765 lines that they in fact did put into their final study overlaid almost particularly those that we've suggested to them in our submittal to their request. So we are encouraged by the way the transmission projects move forward, but we don't want to build in a false hope or a false timeline. We would hope that the ETC goes forward very quickly, we would hope that the PATH project, which PJM would like to have in place by 2012 can be done on that timeline.

But as you see everyday, when you look at the paper it's very difficult to build these facilities, we great Americans want to have all the energy in the world, we would like to have it as cheaply as we can, we just don't want to know where it came from or how it got to us. On the generation project updates, as you know we have filed in West Virginia and now Virginia the fact supporting the integrated gas combined cycle. It is as we have thought it would be 20% to 30% more costly than the advanced pulverized coal designs, but it is... we still believe the most appropriate way to handle an unknown carbon requirement as States look at a 30, 40 year physical life on a plant.

Red Rock out in Oklahoma, moving forward in hearings. The Turk Plant applications in front of all three SWEPCO jurisdictions, moving along nicely and we are happy to announce for our customers and SWEPCO that we actually brought in to operation the Madison Plant on July 12. All-in-all the plans that we have spoken to you about over the last two or three years are continuing to move forward in a very constructive way.

We are encouraged by the core utility concept investment strategy that we're employing. We are encouraged by the kind of rate treatment that we are seeing in most jurisdictions and will continue to work daily on building those relationships.

Now as to a great deal more granularity on the actual quarter and year-to-date performance, I'll turn the speakers over to Holly. Holly?

Holly Koeppel - Executive Vice President and Chief Financial Officer

Thanks Mike. Turning to the quarterly earnings, our GAAP earnings were $0.45 and ongoing earnings were $0.64 for the second quarter of '07. GAAP earnings were less than ongoing by $77 million, primarily due to reestablishing a cost of removal reserve when we return to regulation in Virginia. We did this in accordance with FAS 71. Our earnings from utility operations increased 50% quarter-over-quarter, $0.40 in ‘06, compared with $0.60 in the second quarter of this year, was driven the major part by favorable weather, increased usage, customer load growth and strong offsets in sales combined with well-controlled expenses.

Our non-utility operations showed a $6 million improvement year-on-year, comprised of a $7 million decrease in MEMCO's performance, which was more than offset by a $30 million increase in our generation and marketing segment. MEMCO's decrease is due primarily to return to more normal performance in barge operations. The second quarter '06 results as you may recall were remarkably strong as a result of pent-up demand in the marketplace coupled with the shortage of barges.

Our second quarter this year at MEMCO was more representative of normal operation. Additionally, in the first half of the year, we experienced a decrease in northbound backhaul of imported products, primarily steel and cement. We have also experienced anticipated increases in operating costs specifically fuel, labor and port cost. The increase in generation of marketing is primarily due to favorable marketing contracts executed with municipal and co-op customers in ERCOT.

Turning to our utility operation, on a cents per share basis, weather produced a $0.03 positive impact compared with normal weather and a $0.04 improvement year-on-year. This increase was primarily attributable to our Eastern and Ohio operating companies. The addition of a large industrial customer Ormet in January 2007, and new municipal customers at I&M and OPCo are of note. Additionally, our off system sales were $52 million higher this quarter, due to higher power prices and lower than anticipated fuel emission costs. O&M decreased $26 million, in major part due to an insurance surplus as well as lower storm cost year-on-year.

In summary, things are on track and proceeding as expected.

Turning to the year-on-year comparison, our GAAP earnings were $1.13, and ongoing earnings were $1.33. As you've already heard, the GAAP earnings are less due to the establishment of the reserve in Virginia. As you'll recall in the first quarter, our year-on-year earnings were $0.28 lower. We expected this decline and there were a couple of big items that drove the difference. By the end of the second quarter, our year-on-year gap has narrowed to only $0.07, and as Michael said, we are comfortably on track and remain within our guidance.

Turning to cash flow, our forecasted cash balance at the end of 2007 is expected to be $205 million. Year-to-date, our investing activities of $2.1 billion are attributed to $1.8 billion of plant CapEx, which is on track and on budget as well as the completion of purchases of two major gas fired plants in our Eastern foot print for a total of $427 million, totaling over 1500 megawatts.

Turning now to capitalization, we ended the quarter at 60.7% on a debt-to-cap basis on a GAAP basis. On a credit-adjusted basis, we were at 58.3%. As you know, our goal is to maintain our debt-to-cap ratio on a credit-adjusted basis at or below the 60% range. One other matter of note is we've met with the Commissions in Texas and Kentucky, and in discussions with them have concluded that it is in our ratepayer's best interest to mitigate the otherwise burdensome cost of Sarbanes-Oxley 404 compliance, by deregistering our two Texas companies TCC and TNC, as well as Kentucky Power. These smaller companies would have been unduly burdened by the cost of compliance.

So let me assure you as well as we've assured our Commissions that financial statements for these companies will continue to be available on our website in the same time period as the SEC filed financial statements. And with that, Mike, I could turn it over for question.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Thank you very much, Holly. Operator, we're ready to begin the Q&A session.

Question and Answer

Operator

Great, thank you. [Operator Instructions] And our first question this morning comes from the line of Dan Eggers with Credit Suisse. Please go ahead.

Daniel Eggers - Credit Suisse

Hi, good morning.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Good morning, Dan.

Daniel Eggers - Credit Suisse

First question on the I&M, it was nice to see that it get resolved. On our numbers, it is about $0.05 of EPS in the second half of this year and $0.10 on a full year basis. You guys didn't change your... the depreciation outlook or your guidance. Is that just the assumption that fits within the range or is that something we need to address at some point?

Holly Koeppel - Executive Vice President and Chief Financial Officer

You are spot on Dan, sitting well within the range.

Daniel Eggers - Credit Suisse

Okay. And then on the PJM capacity auction, can you just remind us about how much capacity you guys have available that you can get on a full capacity basis that isn't committed back to the customer base?

Michael G. Morris - Chairman, President, and Chief Executive Officer

Well, actually the way that the PGM work because we are self supplier, part of the settlement that Craig Baker and the team worked out was that we could put 1,300 megawatts into that marketplace minus the wholesale committed contracts that we had put on excess supply. We did that and did it successfully.

Daniel Eggers - Credit Suisse

And given the fact those results were also ahead of probably what everybody was expecting from an auction perspective. Is this going to a factor cause, a need to reconsider growth rate as we look out over the next couple of years?

Michael G. Morris - Chairman, President, and Chief Executive Officer

I think it would be premature, Dan to begin looking at growth rates. As we go forward we are surely constantly reviewing those things and we will share a lot of that with you come the October time frame.

Daniel Eggers - Credit Suisse

Okay. And I guess just one last question related to the Bingaman support and I think it feels very good, you guys are getting proactive on this front. How have you talked to them about the idea of going forward with the polarized plants in Arkansas and Oklahoma relative to a broader carbon plant and the exposure that would come with those new plants?

Michael G. Morris - Chairman, President, and Chief Executive Officer

We continue to, as you know, look at a post-combustion approach by 2011, we will have a real solid flavor for that after the test... validation test, I should say at our Northeastern Station. We will know a great deal about what to do with both Turk and Red Rock going forward as they come on line in the mid 20s…in the mid teens I should say and presuming that chilled ammonia is the best approach that will be incorporated ultimately in those processes as we go forward. So, we think that really is a very reasonable approach. As you know, we would love to go with an integrated gas design out west but with the lower ranked coals we haven't found a vendor yet who will stand behind the performance of the gas fire, which we think is essential for our customers, as well as our shareholders. So, we are very happy with the ultra-super critical and I must admit that the environmental community has been very understanding of that and I think that’s a real tribute to Dennis Welch and our environmental group for trying to build a bridge and an understanding of what we are trying to accomplish at American Electric Power. We are not in any way say perform running from the challenge. We embrace the challenge. We just want to make sure that the answers that come out politically or the requirements that come out politically have some realism-based element. That's one of the reasons we are so strongly supporting Senator Bingaman and his colleagues.

Daniel Eggers - Credit Suisse

Great. Thank you, guys.

Michael G. Morris - Chairman, President, and Chief Executive Officer

You bet, Dan. Thanks for the questions.

Operator

Thanks. We have a question now from the line of Elizabeth Parrella with Merrill Lynch. Please go ahead.

Elizabeth Parrella - Merrill Lynch

Thank you. A couple of questions. First on the fuel and [18.50] under recovery this quarter can you give us an idea on which jurisdictions are driving that and what your plans are in terms of addressing that from a regulatory standpoint including now and Indiana potentially?

Michael G. Morris - Chairman, President, and Chief Executive Officer

Holly?

Holly Koeppel - Executive Vice President and Chief Financial Officer

Elizabeth, I am not sure I understand your question in terms of…

Elizabeth Parrella - Merrill Lynch

Well, you had a $32 million drag in the second quarter of which... I think a lot more than in the first quarter and I don't know whether that's mostly Indiana now that the fuel cost is on frozen can you seek to recover that or are there some other jurisdictions where that's going to get resolved in the second half or is that something that's going to continue to be drag?

Holly Koeppel - Executive Vice President and Chief Financial Officer

I am with you now. Part of it is Indiana and you are right we have reopened the fuel costs there. We also received and have taken a reserve associated with the ruling from an ALJ in Texas around the claw back of proceeds from the sales of surplus emissions around [19.50]

Michael G. Morris - Chairman, President, and Chief Executive Officer

And that really is an event that stretched over a number of fuel recovery years. So, it would be wrong for you to build into your model that kind of a fuel drive going forward. We feel better about fuel than we have in long time Elizabeth.

Elizabeth Parrella - Merrill Lynch

Is it that the claw back you mentioned you took a reserve for, is that 25 million that's referred to in the press release?

Michael G. Morris - Chairman, President, and Chief Executive Officer

It is.

Elizabeth Parrella - Merrill Lynch

And that's been that fuel under recovery...?

Michael G. Morris - Chairman, President, and Chief Executive Officer

It is.

Elizabeth Parrella - Merrill Lynch

Okay. One other question for you. The Red Rock proceedings, I guess Chesapeake has been an intervener and I was wondering if you could give us a handle on, whether you think that become something in the process or not or, just how we should be thinking about that?

Michael G. Morris - Chairman, President, and Chief Executive Officer

Well, it's interesting if I am a large gas producer in Oklahoma, I'm going to intervene in any coal plant because that's going to put price pressure on my gas wellheads and so we understand why Chesapeake is in the proceeding. Whether or not that will have an impact really has so much to do with the way that the Commission sees the overall need for solid fuels in the Oklahoma generation mix going forward and again, if you're anywhere near where we see the gas model going forward over the next 20, 30 years, it would be in Oklahoma's best interest to have solid fuel plant. OMPA believes it, OG&E believes it, obviously, PSO believes it. The real issue, and the Commission come to that same conclusion. So Chesapeake was in there, padding their own bed, which I guess you would expect them to do, trying always to get the highest price for the gas they produce at the cost of the Oklahoma consumer. We just don't think that's right.

Elizabeth Parrella - Merrill Lynch

Okay. I think if I would ask may be one other question on the numbers. You mentioned in the first half results, which you think were also a factor in the second quarter, the lower FTR income of about $48 million in the first half. Is that something that we should expect to continue on a year-over... as a year-over-year factor in the second half?

Holly Koeppel - Executive Vice President and Chief Financial Officer

It's really too soon to say. It's certainly something we're analyzing those numbers are falling short of what we have anticipated not enough to have us change any guidance but it's something that I know will have a more refined view on given our relatively limited experience with just two years behind us by the October meeting.

Elizabeth Parrella - Merrill Lynch

Okay. Thank you.

Michael G. Morris - Chairman, President, and Chief Executive Officer

You bet Elizabeth, thanks for your question.

Operator

Thanks. And we have a question now from the line of John Kiani with Deutsche Bank. Please go ahead.

John Kiani - Deutsche Bank

Good morning, Mike, Holly.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Good morning John.

John Kiani - Deutsche Bank

Mike, can you just walk through some of the steps we can expect in the State of Ohio over the next year, year-and-a-half or so as you all work with other companies and with other individuals in the State to try to come up with a new wage structure?

Michael G. Morris - Chairman, President, and Chief Executive Officer

Sure. Let me start by saying I hope it doesn't take a year to year-and-a-half because we would have so deep into those, by then we will have to or made a decision and I know you're very familiar with that.

John Kiani - Deutsche Bank

Between now and end of '08.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Right. And where we find ourselves, John, is in very serious discussions with the executive officers here in the State with new Governor who... he and his team deserve a great deal of credit for quickly understanding the magnitude of this particular issue here in the state. Working in conjunction with the PUCO, I think that the executive officers as I say well up the learning curve. We continue to be in a dialogue with our fellow utilities where there has been a general meeting of the mines on approaches that would be acceptable. We continue to share those concepts and ideas with the leadership in both the House and the Senate. This is a bipartisan Ohio economic go-forward undertaking that I think everyone again is working as diligently as they can towards some conclusion. My hope would be

that we would see a proposal from the legislator and or the Governor's office sometime yet this summer. I would hope that we as a collective group of interested people meaning our residential represented customers, our industrial commercial customers, the utilities and the politicians could come to some recent conclusion, yet in 2007, so that, if in fact legislation would be crafted, it would be done toward the latter part of this year, early next year. As you know 2008 is a national political year, Ohio will be a pivotal state in those national debates and dialogue and it would be better for all of us to have this really put away come late '07 early '08. And I think they will be in the best interest not only of our customers, the Ohio economy but our investors as well. We still feel very comfortable about the notion that everyone understands the price of electricity, in Ohio was going go up to be more reflective of what's happening in the marketplace.

As you have heard us say many times before John, we are seeking for that place where we can take care of our investors by moving to market, and do that in a way that doesn't shock the Ohio economy and the many customers that we serve throughout the regions of the state that we provide electrical power. We think that's doable. What we would try to do is stair step-in rate increases something bigger than we did in the last RSP and whatever shortfall that yielded between market prices and those stair steps would be held as the regulatory asset. We think it's essential for investors and our customers that that regulatory asset be supported by a securitization or assurance of recovery method that's different from the classic regulatory asset and we'll continue to push for those things.

We find a balance in there, we think to be well struck making certain that those who have invested in American Electric Power get the realization of the benefit of the power plants that we so eagerly manage day-to-day, and while at the same time making certain of our customers have available of them all of the energy that they need. And the timeline as I said, I hope would be closed by '07 or very early in the '08 cycle.

John Kiani - Deutsche Bank

And then... that's helpful Mike and then your '09 guidance, if I remember correctly does not assume any meaningful change or upward shift to reflect the market reality for power and natural gas prices today and it just assumes another of the rate stabilization program, is that correct?

Holly Koeppel - Executive Vice President and Chief Financial Officer

The recovery is fuel.

John Kiani - Deutsche Bank

Right. And so is it safe to say that perhaps in the earlier '08 time frame, you might have better clarity on what the growth is going to look like and the earnings are going to look like in '09 apart from the just the assumption that there is an extension of the rate stabilization program?

Michael G. Morris - Chairman, President, and Chief Executive Officer

Our hope would be John that by the October EEI session, we can share with you a more solid view of what 2008, '09 and beyond might look like. We will by then I hope have enough understanding of where the dialogue in Ohio is that we would have made a filing to the PUCO, not dissimilar from what our colleagues have all done at Dayton, Cincinnati and Akron. So we will take that approach as we go.

John Kiani - Deutsche Bank

Great. We will look for that in that time. Thanks Mike.

Michael G. Morris - Chairman, President, and Chief Executive Officer

You bet John. Thank you.

Operator

Thanks and now we have a question now from the line of Paul Patterson with Glenrock Associates. Please go ahead.

Paul Patterson - Glenrock Associates

Good morning.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Good morning Paul. How have you been?

Paul Patterson - Glenrock Associates

All right.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Good.

Paul Patterson - Glenrock Associates

I want to touch basically on the O&M for the quarter. The insurance surplus and the storm cost restoration differences, what... how much was from the insurance?

Holly Koeppel - Executive Vice President and Chief Financial Officer

About $40 million Paul.

Paul Patterson - Glenrock Associates

Okay. And the favorable contracts on the merchant side...

Holly Koeppel - Executive Vice President and Chief Financial Officer

Yeah.

Paul Patterson - Glenrock Associates

That you guys signed, how are they accounted for? Is there a mark-to-market benefit from that or is that just... I mean how does that work, I guess?

Holly Koeppel - Executive Vice President and Chief Financial Officer

It’s… a sizeable benefit was from mark-to-market.

Paul Patterson - Glenrock Associates

Okay. Does it come back in the form of accruals, do we have an accrual offset over time or how does that work?

Holly Koeppel - Executive Vice President and Chief Financial Officer

No, typically...

Paul Patterson - Glenrock Associates

It is not hedged, it’s just…

Holly Koeppel - Executive Vice President and Chief Financial Officer

It is hedged. We will bring it in, hedge it off and realize the benefit.

Paul Patterson - Glenrock Associates

Okay. So, you are booking the benefit now and there really is no adjustments going further... going forward?

Holly Koeppel - Executive Vice President and Chief Financial Officer

And let me be clear, the book of business they started with... the vast majority of that is accounted for on an accrual basis. So, it is a blend of the ongoing earnings from that business or blend of mark-to-market from some new contracts executed as well as accrual earnings that are realized over time.

Paul Patterson - Glenrock Associates

Okay. But the number in this quarter was pretty much a mark-to-market; the increase quarter-over-quarter was pretty much near [ph] the mark-to-market?

Holly Koeppel - Executive Vice President and Chief Financial Officer

Yes. Quarter-over-quarter, yeah we did sign a size... the majority of that increase was due to signing up the large customer.

Paul Patterson - Glenrock Associates

Okay.

Michael G. Morris - Chairman, President, and Chief Executive Officer

But then I think Paul as Holly said we tried to hedge that also that we can remove the volatility of the contracts going forward. As you know, the whole accounting scenario around power contracts is confusing to say the least and you need to be... in the old days you needed to be a Philadelphia lawyer in the sense you probably need to be a Washington D.C. accountant to understand them.

Paul Patterson - Glenrock Associates

All right. I want to ask you about Ohio a little further and the OCC support of the FirstEnergy auction, it appears ...

Michael G. Morris - Chairman, President, and Chief Executive Officer

Yes sir?

Paul Patterson - Glenrock Associates

Does that mean... I mean I don't know how much you can tell me but does that mean... in terms of the residential class of customer that there will probably be less of an issue in terms of going to market from your perspective since you have a sort of interesting situation with the OCC to support the auction concept or whatever?

Michael G. Morris - Chairman, President, and Chief Executive Officer

Boy, that's a really interesting question Paul. I am not certain, the logic behind the OCC supporting the auction. I think if you look at most recent auctions were actual power prices as well as capacity in anyone of the number of jurisdictions that probably leads to some pretty substantial residential... potential residential increases, which I can't imagine politically why that doesn't raise a bit of a debate and concern and you'd only... you'd better ask the OCC how it is that they see this as being a rational approach. There has been a strong push by the OCC from the very beginning to go-to-market... on the whole belief that... and it's a belief that we all share, once you get there and people see the potential prices and projects get built and excess capacity comes to the market, you'll have a better supply demand equation than you have today. And if you get there, as you know prices might trend down. I expect that's the logic behind the OCC's view.

We have asked that question over before and it does seem to me that she isn't hampered by that process that might well be the ultimate outcome. But I wouldn't read too much into the notion that she supported the FE undertaking. At the end of the day if FE is successful in the approach that they have proposed it will be because the PUCO agrees with them and let's them go forward and we are all watching that with a great deal of interest.

Paul Patterson - Glenrock Associates

Okay. I appreciate it. Thank you very much.

Michael G. Morris - Chairman, President, and Chief Executive Officer

You'd bet Paul, thanks for your questions.

Operator

Thanks, and we have a question out from the line of Rudy Tolentino with Morgan Stanley. Please go ahead.

Rudy Tolentino - Morgan Stanley

Hi, still I was thinking on Paul's question about the merchant energy business. Can you just tell me what your plans for that is, if you intend to expand it or you guys sell it off?

Michael G. Morris - Chairman, President, and Chief Executive Officer

Well, we have no plans to bundle up any of our assets and put them in the marketplace. We like the merchant energy space. We play in it in a very unique way compared to most others. It's always the excess generation from the existing fleet. We play a little more directly in the merchant energy business down in the ERCOT, Texas market area with some budding success, but you won't see us move into a major merchant play role and you surely, I don't think, other than assets that are for sale in Texas from the mothballed gas plants, you all see us dug your fleet, you won't see us trying to monetize any of our asset base. We see no need for it and we see no logic in it.

Rudy Tolentino - Morgan Stanley

Okay. And just to remind me that in that line 17, the generation and marketing, from my recall that's your, DITC that you own, does that include the type of assets too, the old Texas north assets?

Holly Koeppel - Executive Vice President and Chief Financial Officer

Yes, it does. It's the share of the Oklaunion plant that was previously dedicated to Texas North.

Rudy Tolentino - Morgan Stanley

Okay. So that's the net generation and marketing line?

Holly Koeppel - Executive Vice President and Chief Financial Officer

Yes, it is.

Rudy Tolentino - Morgan Stanley

And then, and I take it there. Are you also going to expand your role at coal requirement offerings in ERCOT and trade around the asset, or are you just going to just sell [inaudible] out from the asset?

Holly Koeppel - Executive Vice President and Chief Financial Officer

In fact, what you described as trading around the asset is how we signed up some of those municipal customers that I mentioned earlier. So, yes, that is exactly the model we're following.

Michael G. Morris - Chairman, President, and Chief Executive Officer

No, I think it's safe to assume that whenever we signed a long-term contract, we bring the supply to match it. And then our commercial operations group constantly works the benefits of those contracts as we go forward. Adding value, taking value to the book is often as we can and making certain that we're fully covered so the risks and very low, but take advantage of any market movements that make those contracts more valuable for our investors.

Rudy Tolentino - Morgan Stanley

Okay. So, you'd also gone for the ERCOT market and buy supply contracts and then serve retail with full service load. Is that where… I think is that what you are doing.

Holly Koeppel - Executive Vice President and Chief Financial Officer

We are not really a retail provider. What we are doing is matching up our market opportunities with large wholesale loads. And then in trading around the assets as Mike has described, we'll enter into a commitment and hedge it off with market purchases or we may use our own generation and then when the price looks good, hedge it off later. So, but we are a wholesale market supplier to predominantly municipal call-offs on a full requirements basis.

Michael G. Morris - Chairman, President, and Chief Executive Officer

We find that to be a much more logical market space simply because the buyer is very familiar with the challenges and is more than willing to accept some of the cost increases that might come through the general play of a contract term rather than a retail contract where the retail consumer who would get very puzzled by the fact that SOx or NOx credits may cost more as time goes forward in those entire undertaking. So, again we're very comfortable in that space and to Holly's point that we expect commercial operations to constantly take whatever economic gain out of those contracts that they can.

Rudy Tolentino - Morgan Stanley

Okay. So, do you look to expand your wholesale presence in ERCOT?

Holly Koeppel - Executive Vice President and Chief Financial Officer

Yes. I think we will expand that presence. But, again just to put a fine point on it, I am very comfortable staying in the wholesale space because of the… our ability to administrate it, our ability to mitigate credit and other risk exposures, I don't see us moving into retail.

Rudy Tolentino - Morgan Stanley

Fair, understood. Thank you very much.

Michael G. Morris - Chairman, President, and Chief Executive Officer

You bet. Thank you.

Operator

Thanks, and we have a question out from the line of Danielle Seitz with Dahlman Rose. Please go ahead.

Danielle Seitz - Dahlman Rose & Company

Thank you. I was just wondering if you could compare the price of a new capacity in line with the new coal plants that you are planning on and compare them to the best estimates on the IGCC at this time.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Okay, Danielle, I think as we have said with the filing in West Virginia, you were looking at $2.2 billion, $2.3 billion, 629 megawatts, $3,500 a kilowatt. And that... what we try to do at American Electric Power is tell the whole of the story that of course includes the work that we would do on our side of the construction undertaking itself, meaning substations that need to build coal handling, so there’s a need to be build transmission facilities, that need to be build. And so we think that's a very conservative of all end cost, much of it will be tight and tied down as we go forward and those were the... those are the kinds of things that we'll share with the commissioners as we go through those hearings. We think that compares rate favorably to the concept that's available on a pulverized coal or supercritical ultra supercritical coal plays.

Quite honestly, we think that's a very comparable number to in a nuclear station, we've yet to see any one come forward with actual construction cost on new nuclear. We've heard a lot of vendors, vendors like to sell low and charge high. So we don't put much credit in vendor's numbers today. If a vendor is willing to sign, a guaranteed contracts of those kinds, in other words that would be very different. But from right here, from those in the nuclear space not much of that is happening. What we've said all along that we thought, integrated gas would be 20% to 30% more costly than the more traditional pulverized coal that really has proven to be the case. And again, the issue here is in an unknown global warming scenario, in a plant that's going to have a 40-plus year physical life, this probably is best approach, this is the most cost effective way to do SOx, NOx, and mercury.

We think it will automatically prove to be the most cost effective way to do carbon capture and storage as well. And we are in a very, very comfortable space with the Virginia, West Virginia commissions and we'll see what the ultimate determination is we stand ready to go forward and build those stations in fact quite encouraged by the announcement of southern company, just this week that they will begin breaking ground for their Orlando undertaking, what that tells us is that regulators in different jurisdictions see the benefit of that long-term thinking. As you know Danielle, you and I had this conversation many times; this is not a short-term business. When you put a couple of billion dollars to work it’s going to be there for long time providing environmentally responsible and we believe cost effective electricity to our customers.

Danielle Seitz - Dahlman Rose & Company

And the... the current… your plan for coal plants, the one that you're building in currently you're going to build, these... the 30% and to 40% below that number.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Well no, no. When we look at... if you're talking about the ultra supercritical plants out west, we are just… we are getting some final numbers out there.

Danielle Seitz - Dahlman Rose & Company

All right.

Michael G. Morris - Chairman, President, and Chief Executive Officer

They are… that cheaper than the integrated gas, again as you would expect them to be. But we haven't factored in the post combustion, carbon capture and storage here as well. We continue to look at the overall math of a global warming scenario with a Bingaman like bill and it tells us that integrated gas is cheaper than the ultra supercritical long term and very price competitive with the natural gas fired facility, which of course has carbon and will have the capture and storage as well.

Danielle Seitz - Dahlman Rose & Company

All right.

Michael G. Morris - Chairman, President, and Chief Executive Officer

It's an intriguing equation, but as you know, and you've heard us say many times before, all four of these plants, which we hope to build and I want to underline that hope to build, are subject to in-state regulatory approval, without which we will not build those four stations, which we think would be ill-advised and ultimately in the disinterest of our customers in Oklahoma, and the SWEPCO territory or in the Ohio power territory and/or Appalachian.

Danielle Seitz - Dahlman Rose & Company

Thank you.

Michael G. Morris - Chairman, President, and Chief Executive Officer

You bet, Danielle. Thank you.

Operator

Thanks, and we have a question then from the line of Paul Ridzon with KeyBanc. Please go ahead.

Paul Ridzon - KeyBanc

Holly, you indicated that your FTRs were below plan, kind of what other big deltas versus plan are you seeing? Can you just kind of give us a quick snapshot at that?

Holly Koeppel - Executive Vice President and Chief Financial Officer

I would say the one thing that may be spike out is fuel continues to be favorable year-on-year, probably the unanticipated positive offsetting the FTRs would be the fact that despite high oil prices, the synfuel plants continue to run, and on a year-on-year basis, that's keeping us at or even slightly below the low end of our forecasted coal price increase. Those two tend to offset each other, and as you know we have active field clauses everywhere, but Ohio. So, none of those factors would cause us to move away from our current guidance.

Paul Ridzon - KeyBanc

And what was the mark-to-market on the Ormet contract?

Holly Koeppel - Executive Vice President and Chief Financial Officer

We did not mark Ormet, it is a load served by Ohio Power, but what I can say is it is a very large load about 500 megawatts of capacity, and so on a year-on-year basis, what I would like to do is if you could give Julie a call afterwards, we can give you some color around the size of that Ormet contract for us.

Michael G. Morris - Chairman, President, and Chief Executive Officer

But I think it's safe to say that through negotiations with Ormet and the Public Utility Commission led by Craig Baker and the Ohio Power team, we're really pleased with the Ormet contract, very happy with the way that worked out.

Paul Ridzon - KeyBanc

But what was the mark-to-market we sell in the quarter, that's kind of my question?

Michael G. Morris - Chairman, President, and Chief Executive Officer

On that contract specifically?

Paul Ridzon - KeyBanc

On total.

Holly Koeppel - Executive Vice President and Chief Financial Officer

That contract is not marked, and I don't have the total mark-to-market earnings... but it will be in the Q.

Paul Ridzon - KeyBanc

Okay. Thank you.

Holly Koeppel - Executive Vice President and Chief Financial Officer

Okay.

Operator

[Operator Instructions]. And we're showing a question from the line Ashar Khan with SAC Capital. Please go ahead.

Ashar Khan – SAC Capital

Good morning.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Good morning, Ashar.

Ashar Khan – SAC Capital

How're you doing? Holly, a question for you, I don't know if you can answer it on the call. I was looking at the slide, which shows the incremental rate for each composition.

Holly Koeppel - Executive Vice President and Chief Financial Officer

Yeah.

Ashar Khan – SAC Capital

For the year 2007, last quarter, the secured number was $161 million and we are now at $294 million, and I was trying to see... do you know what's happened, what's gone into the secured column in the last three months. It's an increase of about $133 million. I was trying to see if you could quantify what the increase was in the secured, which happened in the last three months.

Holly Koeppel - Executive Vice President and Chief Financial Officer

Pretty sure, I can give you some of the big chunks. We had the Virginia rate case, which was $24 million, Virginia E&R was $60 million. Our Texas North rate case was $7 million, the Indiana depreciation as Dan mentioned earlier was $30 million, and so, what are we up to there?

Ashar Khan – SAC Capital

We are up to a $120 million or so.

Holly Koeppel - Executive Vice President and Chief Financial Officer

Or so.

Ashar Khan – SAC Capital

Okay.

Michael G. Morris - Chairman, President, and Chief Executive Officer

And I guess the other might well have been, the implementation of the 4% in Ohio.

Ashar Khan – SAC Capital

Okay. Okay.

Michael G. Morris - Chairman, President, and Chief Executive Officer

And we'll make sure that we follow up with you to give you actual data as best as we can, but I think Holly gave you a break down of the bigger numbers.

Ashar Khan – SAC Capital

That is very helpful. I really appreciate it.

Michael G. Morris - Chairman, President, and Chief Executive Officer

Okay. Thanks.

Operator

Thanks. [Operator Instructions]

Michael G. Morris - Chairman, President, and Chief Executive Officer

Well, if there are no more questions, let us close by simply saying, thank you very much for your attention, your questions, and we're pleased to report a very solid quarter and a very comfortable first half of the year and reaffirm our forecast of $2.85 to $3.05 calendar year '07. Thank you very much.

Operator

Great, and thank you. And ladies and gentlemen, this conference will be available for replay starting today Tuesday, July 31st at 12:30 PM Eastern Time and it will be available through next Tuesday, August 7th at midnight Eastern Time. And you may access the AT&T Executive Playback Service, by dialing 1-800-475-6701 from within the United States or Canada or from outside the United States or Canada, please dial 320-365-3844 and then enter the access code of 879864. Those numbers once again are 1-800-475-6701 from within the U.S. or Canada or 320-365-3844 from outside the U.S. or Canada and again enter the access code of 879864. And that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: American Electric Power Co., Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts