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American Electric Power Co., Inc. (NYSE:AEP)

Q1 FY08 Earnings Call

April 24, 2008, 9:00 AM ET

Executives

Julie Sherwood - Director, IR

Michael G. Morris - Chairman, President, and CEO

Holly Koeppel - EVP and CFO

Analysts

Ashar Khan - SAC Capital

Paul Patterson - Glenrock Associates

John Kiani - Deutsche Bank

Anthony Crowdell - Jefferies & Co

Michael Lapides - Goldman Sachs

Shalini Mahajan - UBS

Paul Ridzon - KeyBanc

Elizabeth Parrella - Merrill Lynch & Co.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power First Quarter 2008 Earnings Conference. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. [Operator Instructions].

I'll now turn the conference over to Julie Sherwood, Director of Investor Relations. Please go ahead.

Julie Sherwood - Director, Investor Relations

Thanks, Kathy. Good morning and thank you for joining us today to discuss AEP's 2008 first quarter earnings. If you've not seen the press release issued earlier today, it's available on our web page at aep.com. In addition to the financial schedules included in the press release, the webcast 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, MEMCO operations, generation and marketing and parent and all other.

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 quarterly reports on Form 10-Q for discussion of the 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 the reconciliation of these non-GAAP measures on our Investor Relations website 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 we will have time for your questions.

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

Thanks a lot Julie. Unfortunately, Julie Sloat isn't here with us today. I am sure she is on the phone with us; she is home with a high fever and wishes that she could be here. I know that you have seen the press release and the data, its easy for us to say that we have had an excellent first quarter 2008, we feel like we are off to a very, very solid start and that makes us feel very comfortable about reaffirming our guidance for 2008 of between $2.10 to $3.30 a share.

We have had as many of you know from meetings we've held all along a very productive regulatory first quarter receiving $481 million of the $518 million worth of rate adjustments that we had forecasted for the year. Ohio, Texas, Virginia, West Virginia Oklahoma are all reflective of new rates put in effect as of the first quarter 2008, that leaves Kentucky and Indiana, which are both pending. So, we feel very comfortable about where we stand in the rate arena. As I will skip the Ohio developments because, I want to spend more time talking that at the end of the slide that they've provided me to talk from.

The fact of the matter is and the new generation world [ph], the Turk Plant continues to move forward, we have had a series of discussions in the open forum with the Texas Public Utility Commission, we filed additional papers with them and they will have some additional hearings on the Turk Plant and we would expect an order some time in the month of May from the commission itself.

Again we feel relatively comfortable about where we stand there. Obviously the air permit in Arkansas is of great issue and importance to us and we expect to receive a favorable air permit authority some time yet in 2008 and to move forward with ultra super critical coal plant which will satisfy SWEPCO's energy needs.

As you know in the first quarter on the integrated gas combined cycle we have been on the roller coaster with a very, very favorable West Virginia order to go forward with the plant that's intended to be added to the footprint at Mountaineer and then somewhat of a disappointing order out of the Virginia Corporation Commission, where they were not comfortable with the technology, the cost of the technology or the assuredness of the price of that technology going forward.

It's our intention to petition for rehearing in Virginia to try to lay out a clear path for them in the state of Virginia and see if we can't receive a more favorable ruling from them, yet this year to go forward with integrated gas plant there. I think all of you know from conversations we have had that the Ohio existing integrated gas combined cycle application is back in front of the commission on remand from the Ohio Supreme Court.

Transmission activities continue to encourage the 14.3 return on equity granted to our partnership with Alageini [ph] and the project that we now call CAF [ph] is very supportive of the plans that we have in place. We are working on alignments and filings that would be required at the state level to receive siding authority and continue to move forward on that project as well. Other partnerships in Michigan and SBP and other areas continue to be developed, and we will talk about those as they get a more concrete in the very near term.

Let me move to Ohio and try to give you our view of what the legislature has placed in front of Governor Strickland, I can appreciate that when we get to the Q's and As there will be probably, considerably more interest in this.

I think you have all had an opportunity to read it and be involved in much of the give and take of the process. We are encouraged by the concept that there are 2 options, the market rate option, which is the blend of some percent of your current fleet going to market and the remainder of your fleet being blended in at then RSP rate adjusted for fuel and other issues that one might file in an R and MRO filing. The ESP approach would start out with the RSP rate that we know, I add adjustments for prudently incurred fuel cost and another factor that you would file to cover any other cost that you see going forward.

Clearly as we look at the two paths, we find positive in each of them, and it well might be because we are duty bound to file an ESP and that we may in fact file both of those approaches as we go, which is to say, the option, that says you can not only have an ESP, but you can top it off with a market rate option filing as well.

When we look at the pluses over the minuses of the overall legislation it's clear that under the MRO you can move to market over that 5 year period, you can also of course on the ESP path, that allows for significant flexibility, reduce regulatory lag, on many capital investments that need to be made in generation, transmission and distribution and of course an automatic tracker of your fuel cost as you go forward.

There is a price cap mechanism on what is now in Ohio called the Advanced Energy Requirement which is very different from renewable portfolio standards that you are seeing in other jurisdictions, and should you find an impact from adding those activities to your overall cost that bump up against cap you are relieved from going forward and doing those kinds of issues.

We are very encouraged by the inclusion of rate deferrals and securitization. Should you get to a point where the regulator believes that you have bumped up against what are reasonable increases in the cost of energy for your customers here in Ohio, as you know that is something that American Electric Power has been very much in favor of all along has we go. We are also encouraged by the fact that the law moves forward trying to encourage utilities to make additional capital investments in Ohio, we think that's healthy.

On the negative side there is no question that PUCO has been given wide ranging authority to make adjustments as you implement in the second and third and fourth years of your plan, that is a bit disquieting but some thing that we feel comfortable we could work around, as we make the filings in the first instance and then of course there is an excess earnings test.

The excess earnings test which was developed with a lot of thought and a pretty wide ranging test, is there and it is of concern and should be of concern. However, we think that it's tempered a great deal by the comparables. Make no mistake, that some people are misreading the excess earnings test to simply say that it is similarly situated utilities, when in fact the languages is quite clear that it is publicly traded companies parent including utilities close parent. We think that that cadre of comparables with risk profile and capital adjustments would make comfortable room for an equity earnings comparator in the high teens without much difficulty.

So the bottom line of how we see the legislation in Ohio, which we understand the governor's office is prepared to sign in the not too distant future is that it gives us some comfort to continue to stay with our guidance that we gave to you last October for calendar year '08, 09, and 2010. However, we won't really know much about the latter of those years including 2011 until we see how the filing that we make in the near term so that we fall inside of the timeline for the commission to deal with our applications in calendar year '08 for implementation on 01-01-09, we wont be able to give you much more clarity about that.

As you know should we pass the calendar year and there is no implementation, you can simply move forward and implement another cycle on your current rate stabilization plan, so we don't fall into never-never land if we don't finish our materials by 12-31-09.

So with that I will turn it over for a little more granularity on the first quarter to Holly and then we are surely going to be prepared to address the issues that are of concern to you. Thanks. Holly.

Holly Koeppel - Executive Vice President and Chief Financial Officer

And in the interest of getting quickly to the Q&A, I will cover at a high level the quarterly financial performance at page 4. We did have yet another terrific quarter. As Mike covered, we've had rate increases that have contributed a total of $0.12 year-on-year at nearly every jurisdiction, load growth has been up in every jurisdiction save for Texas, where we are a wires only business. Generation performance year-on-year is terrific, an additional 4300 gigawatt-hours were dispatch form the fleet of which 2500 went into the wholesale market where we saw higher prices in both the peak and off peak in the range of $10 to $15 higher across the period, so better volumes, better prices, better revenue.

As you will see, our operation and maintenance expense appears to be down considerably. We are continuing with disciplined cost control, but I should point out that last year we had a number of tie in outages, which contributed to out lower generation and higher O&M and we also had first of our two PSO ice storms. This year the O&M expense is lower by the amount of the benefit the rate relief that Mike covered in the first quarter approximately $80 million, so year-over-year on a normal basis we are up about 3%.

Depreciation and amortization despite the additions to plant is down because of amortization that's slightly lower in the of regulatory assets in Ohio as planed, as well as depreciation reductions associated with rate cases that were pushed through last year.

Finally, taxes are flat year-on-year, MEMCO is struggling against tough river conditions which we are seeing turn around and we expect a very solid second half of the year and the bottom line is it was a terrific first quarter.

Turning to cash flow; again right in line with expectations, strong net income. I would point out for you that we did see some pretty big swings that tended offset one another between our changes in components of working capital and other assets and liabilities. On the working capital side we do have lower payables this year, associated in major part to those construction programs and the ice storm that occurred in the first quarter last year.

For the other assets and liabilities, that's the line where we reflect all of our regulatory deferrals as well as differed fuel. As you know we have active fuel clauses in all of our jurisdictions with the exception of Ohio and we will have a fuel clause in Ohio under the new law, beginning in January next year. So we should see a pretty solid balance on this line in an era of rising prices.

Under investing activities, proceeds on sale of assets are slightly lower due to last year the sale of Oklaunion, the Texas Central interest in Oklaunion as well as Centrica. This year we sold a few moth ball gas plants in Texas.

And finally other investing net is up considerably due to the procurement of nuclear fuel at our Cook plant. The bottom line is our cash balance for the quarter this year ended at $155 million in line with expectations.

And finally on capitalization, our adjusted debt to cap is 57.7% at the end of the quarter, once again in line with our target of remaining below 60%.

Mike we can turn it back to you for questions.

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

Thanks a lot. Kathy, I guess we are ready to go to the Q&A phase.

Question And Answer

Operator

[Operator Instructions]. And our first question is from the line of Ashar Khan with SAC Capital. Please go ahead.

Ashar Khan - SAC Capital

Hi, good morning and congrats on a great quarter.

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

Thanks Ashar.

Ashar Khan - SAC Capital

Mike, I just wanted to kind of agree with you on the that you might be allowed a high teen number. My only concern was coming is if I read Columbus Southern's financials, they're earnings a pretty healthy ROE and how do we go about providing space towards that subsidiary in terms of growth going forward?

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

Well, its clear that among the AEP Ohio family of companies there difference between the earnings at Ohio and Columbus Southern and that's something that we will take a long hard look at as we go forward and make our filing. It makes more sense in the long term to combine those two companies as we go and we are not exactly sure how we will go about attacking that issue, Ashar. But the real benefit from Columbus Southern of course is the revenues that it receives from the pool being a net seller in a long position and the impact of that is that Ohio Power being a net buyer of the short position, if you balance those two out, you'd find a lot of room inside of AEP Ohio to be treated under the ESP and that may well be one of the things that we make in our filing.

Ashar Khan - SAC Capital

Okay. Thank you very, very much.

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

You are welcome. Kathy?

Operator

Yes, we will go next Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Good morning guys.

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

Good morning Paul.

Paul Patterson - Glenrock Associates

Just wanted to first of all, when you talk about the high teens, you are talking about an ROE. Is that pretty much via the return on equity that you --?

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

Yes.

Paul Patterson - Glenrock Associates

Okay. And then secondly, I guess the excessive earnings test would apply to either the MRO or the ESP, is that correct?

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

Yeah, there is an excessive earnings clause in all three of the sections whether you do an ESP that's 3 year or less or whether you do an ESP that's 3 years or more and there is also language in the MRO.

Paul Patterson - Glenrock Associates

So, even if you go to market or get to market, there is still I guess some restriction in terms of being able to make considerably more then let's say in the high teens.

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

I think that that's at least to accurate, but we just wont know until we go ahead and see how the filings are put together, as you know if you are going to do a 3 year or longer horizon you are going to forecast in that period what the earnings will be and the commission will determine, we think upfront, as to whether or not that is or isn't excessive and then they will review it after each year to see if in fact that had happened.

As you know prices can move around, the earnings that you thought you are going to make maybe more constructive or they maybe less than you had thought that they were going to be. It is in an intriguing issue, but it has been written and there was much give and take, conversations with the speaker, conversations with the President of the senate, conversations with the governor and his staff on these issues and I think that everybody tried to find a balance that would allow for a fair and balanced review both before and after the fact.

But remember what again the comparables are Corporate America including utilities. So that's why we think that the comparators are really going to put you in a pretty comfortable range.

Paul Patterson - Glenrock Associates

Right, with significant risk profiles I guess. And then just in general it sounds like you guys what would be the benefit of going to an MRO versus an ESP, it sounds like from a financial perspective you would be indifferent.

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

Well and that's part of what we are looking it right now. The MRO at the end of the day we leave you after that 10 years cycle if your stations at market rates, ESP might well leave you at the end of a three year or four year filed period with yet another filing to be named to be made, and other process to go through. The law allows their flexibility in the MRO for adjusting the amount of your fleet that actually is at market or your low that is at market your low that is at market. However, it does not call for them to truncate and at the end of that 10 year cycle you clearly will have your generation fleet in that standing. So again, as I said at the outset as we evaluate these, it's highly likely that you'll see us file them both, your duty bound to file an ESP that we may also join them with an MRO.

Paul Patterson - Glenrock Associates

But financially, it may not make that big a difference either way.

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

That's true. That's very true.

Paul Patterson - Glenrock Associates

Thank you very much.

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

You bet.

Operator

Our next question is from John Kiani with Deutsche Bank. Go ahead please.

John Kiani - Deutsche Bank

Good morning Mike.

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

Good morning John.

John Kiani - Deutsche Bank

In your response to one of the earlier questions, you talked about the potential for eventually collapsing or combining Columbus Southern and Ohio Power, and obviously one is net long, and one is slightly short, from an off-system sales perspective. Regardless of if those two are combined or not, do you believe that off-system sales will be included in any type of earning's test?

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

There is a potential for that, there is a part of the law that speaks in terms of evaluating other benefits, and it doesn't describe what those are. It says that you should take a look at credits that may have been monetized, you should take a look at tax changes that may be realized and other benefits, and it doesn't really say if that's on the adjustment side.

However, one of the things that all of us may be losing side of and that's my fault for having not mentioned it, if there is some fear that your going to find the excess earnings really has a lot to do with the rate spikes in the marketplace itself, and if you combine that with a regulatory deferral which the law calls for and offer a securitization for that, you might find a way to tamper some of the impact that that would have.

So again, I think there are enough levers inside the legislation for all of us to find a balance between not only seeing to it that our shareholders are respected but that are customers in the market place in Ohio receives fair and balanced rates going forward, and as you know, that has always been one of the goals of American Electric Power,

John Kiani - Deutsche Bank

That's helpful Mike. And then, as far as maybe this question is better for Holly, as for as off-system sales are concerned Holly, back when you all originally gave your new 2009 and also 2010 earnings guidance, can you talk about what level of power prices or perhaps what gas prices your were assuming in the off-systems sales portion, obviously gas prices are substantially higher in the out years relative to when you originally gave that guidance, heat rates have collapsed to some extent but it looks like power prices are net and net, still meaningfully higher than when you originally gave that guidance. Can you talk little bit about what was embedded in your original guidance and what you see in that outlook today?

Holly Koeppel - Executive Vice President and Chief Financial Officer

Certainly for the balance of year I think we are right on track. The point you made, which is heat rates have come in, mitigates the fact that gas has gone through the roof and coal prices are higher. So our realizations, our margins, that we were seeing are inline with what we were forecasting and I think we are on the track for the balance of the year.

John Kiani - Deutsche Bank

Okay, that's helpful. Then what about in 09 and 10, relative to what you originally views from a forecasting perspective, would you say that's directionally better, worse or the same?

Holly Koeppel - Executive Vice President and Chief Financial Officer

Neutral to possibly slightly better, if you think, that these this pricing environment can persist, but I think we are seeing some pretty lofty prices and that would be a bit hasty to adjust anything at this time.

John Kiani - Deutsche Bank

Okay, thanks Holly.

Holly Koeppel - Executive Vice President and Chief Financial Officer

Okay.

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

Thanks John.

Julie Sherwood - Director, Investor Relations

Kathy, are there any more questions?

Operator

Yes, we have Anthony Crowdell with Jefferies. Please go ahead.

Anthony Crowdell - Jefferies & Co

Hi Mike, I am wondering if you have been seeing off peak, maybe I guess higher coal prices being passed through in the off peak pricing in Ohio. We keep hearing of the higher commodity cost, does that hit the off peak pricing in the state of Ohio?

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

It surely has, we are seeing a pretty respectful clearing of fuel prices, both on and off peak.

Anthony Crowdell - Jefferies & Co

Thank you.

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

Thanks Anthony.

Operator

Thank you. And next we will go to Michael Lapides with Goldman Sachs. Go ahead please.

Michael Lapides - Goldman Sachs

Congrats on a great quarter and a good start for the year.

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

Thanks a lot, Michael.

Michael Lapides - Goldman Sachs

I have a couple of questions. First, on the excessive earnings test. Can you talk a little bit about how that process would work, from just kind of regulatory proceeding, meaning it does it look like a rate case, or does it look like something entirely different, that's first question. And second question, totally unrelated to Ohio. On Turk, where do you stand with the Louisiana PSC in terms of getting Turk approval, what's left in Louisiana for that, and what's the what's kind of the remaining hearing or proceedings related to Arkansas air permit?

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

Let me try to take those away, I don't think that the excess earnings test will look anything like a rate case. It will be specifically to the issue of their of the comparators that you use going in to where you are today. The burden of proof, of course in every utility proceeding as you know is on the utility. And it is the motion of the commission. So it isn't as though, anybody can file a paper and say we think there have been excess earnings here. The commission would have to make that conclusion themselves and begin the proceeding that you go under. So procedurally, they will have to write the rules on how they go about doing that, which of course will take some time and we'll all have an opportunity to, at least, weigh in as best we can as well others. But I don't think it will look like a classic rate case, it will have a very unique evaluation and the argument will be, did use reasonable comparators, are interstate natural gas pipeline companies master limited partnership companies who have risk profiles not unlike ours, did they include are they included in that. Do independent transmission companies regulated by the FERC, are they reasonable comparator? Is General Electric with a capital adjustment or the insurance industry with a capital adjustment, are those fair comparators. We feel very accomplished... if you just look at S&P, the overall rate return on equity is 20 plus percent. So that's why you are hearing and say things about high teens, so we just feel comfortable that the cadre that the law allows you to be compared to. So I don't think it will look a lot like a rate case in that sense, but burden of proof is on us and that's to be expected.

After the Truck Plant, we are approved in Louisiana by the full commission. We are approved in Arkansas, as you know. We are in Texas with the staff recommendation in the negative, simply because the staff did not want to include the long term wholesale contracts that's SWEPCO Texas has been serving for decades. Which we think is somewhat short sighted, and the commission has asked for some additional information which has now been submitted to them. And we will have couple of hearings, one late April, one early May and the commission itself will opine of that.

As to the air permit, from the Arkansas DEQ, we have complied 100% with the legal requirements of the DEQ's authority and responsibilities. They are going through some additional review of data that comes out of some of the Clean Air Act requirements, and some of the associated impact on near by wildlife areas and national forests and those kind of things, but we feel very comfortable that we are in very reasonable shape, there is just going through a standard paper trail hearing process now, and as I said, we expect because we are well within the confines and in full compliance with the law, we expect to receive that premium a little later in the year.

Michael Lapides - Goldman Sachs

Great. Thank you. One last item, at what point you would you likely be in a position to incorporate any Ohio related rate increases related to this legislation into your long term guidance?

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

Well unfortunately Michael, because we I don't expect that we'll get much clarity on what we're going to file until very late in the year. And as soon as the order were to come forward and we can see the affect that that will have on Ohio going forward, then will be come out with our three year forecast of the way we see that unfolding.

So it's going to be a little different for us because we feel very comfortable, and I know how much you all appreciate the notion of us stepping out with 3 year forecast in October. That is probably not going to happen this particular cycle because we won't, I don't think have clarity by October of the way the commission will handle our report, our filings, as you know, there is a 150 day window for them to look at the ESP piece. There is a 90 day window for them to determine that your MRO approach, at least is an expectable approach.

So even if you would jointly review those and they will, you are still going to bump into a calendar problem. But as soon as we have some clarity on what Ohio looks like, because if we do, the ESP route to Paul's question earlier, it clearly will be 3 years as minimum. The MRO will have that same factor in it, actually with the longer time line on it. So the minute we get clarity on that we will give you the forecast of the '09, 2010, 2011.

Michael Lapides - Goldman Sachs

Right, thank you and congrats.

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

Thanks a lot Michael.

Operator

We now have a question from Shalini Mahajan with UBS. Go ahead please.

Shalini Mahajan - UBS

Thank you. Mike, carbon remains a bit unknown, and hopefully we should get some quantity by 09 or 10. As you look at the ESP or the MRO option in Ohio, how do you handicap that? And to clarify, if you do choose a 3 year ESP option to begin with, do you still have the option to pursue an MRO at the end of 3 years?

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

Well, you are raising a really intriguing question, and as part of the process that I said that we are looking at both of these options and trying to understand them. On the ESP side of things, carbon would become a regulated capital investment on the existing fleet, as you know there are provisions in the law for new plants to be held in a different category which would really look a lot like a traditional regulatory compact power plant. So that's something that we will look at and that would be part of the determinant as to which of the two approaches we took.

You are always free at the end of your ESP period to shift to an MRO if that is your intent. However, once you select an MRO approach, you are no longer allowed to come back to an ESP undertaking. And understand that that's under the current law. And I say that, only to say that S.B. 3 was the law and now we have Substitute Bill 221 and if the state of Ohio finds itself at the end of a 3 or 4 years cycles in a very, very short power position, it surely isn't beyond the realm of what's logical that somebody might pass yet another piece of legislation to rectify that situation and you are seeing that, as you know in jurisdictions all around the country and lets face it, Virginia is a very different regulatory model than it was just two years ago. California is a distant regulatory model from what it was about a decade ago, when they started down the path logically changing the rules out there.

So I am not trying to create uncertainty, I am only simply saying if we find ourselves in a very awkward position in Ohio, you can rest assure that somebody will want to take a revisit of Substitute Bill 221.

Shalini Mahajan - UBS

That's pretty helpful Mike. And Holly, I think you probably address that in one of the Q&A's but I am still not very clear why the realization of on off-system sales is down year-over-year, given that your are seeing such a strong commodity environment this year.

Holly Koeppel - Executive Vice President and Chief Financial Officer

Well, as we've talked in the past, that realization includes not only prices we are seeing in the market but also the net trading profits that are flowing through earnings in the current quarter. And so the revenue number reflects the total book of business, the volume number reflects the output from the plant and it's simply an exercise in division for us. And it isn't really indicative of market prices per say its really net income divided by output.

Shalini Mahajan - UBS

Okay. Okay, great. That's very helpful, thanks Holly.

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

You welcome.

Shalini Mahajan - UBS

Thank you.

Operator

Our next question is from Paul Ridzon with KeyBanc. Go ahead please.

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

Good morning, Paul.

Paul Ridzon - KeyBanc

Good morning, how are you?

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

I am fine, thanks

Paul Ridzon - KeyBanc

In a very high price commodity environment, if a few years down the road, things got through draconian, what optionality do you have with regards to the ability to a corporate separation of your generation? Is that door closed or how could that work?

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

No, the Ohio law provides for a separation of the generation fleet, if that's the approach you would like to take, you need to get the state of Ohio approval to do that. And that has been the history in Ohio forever, but for the period that Senate Bill 3 were in fact enforced.

Paul Ridzon - KeyBanc

But it's an option but it would be tough to do because you'd need proof of approval?

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

I don't think it will be tough to do. Obviously, you created this scenario of a draconian environment of one store to another, so it will it would well be a hearing in front of the commission like any other hearing in front of the commission. And if you had every legal right to do it and they in some unjust, unreasonable way withheld the authority to do that, as you know in Ohio you would appeal that to the supreme court and if they were beyond their authority or what they had done was not supported by fact, then you'd have a victory anyway, so I don't think its any more... its no different than it has been historically as I said, but for the period that S.B. 3 were in effect.

Paul Ridzon - KeyBanc

And just as a follow up to the last question. Holly, is there some way we can look at gross margin ex-trading impact year-over-year?

Holly Koeppel - Executive Vice President and Chief Financial Officer

The information that would allow you to back into a proxy for that is in the 10-Q. But its not really disclosed in any detail, you know another point to make on that is, this year in the high priced environment, particularly high off peak prices, some of our units that are on the margin, as you know the most expensive units are what shows up in off-system sales, the least expensive gets dedicated or is delivered to our regulated operating companies, those swing units, lot of the sub-critical units ran quite a bit harder and that's what contributed to the additional 2500 gigawatt hours of energy put into the market. So our lower margin units running high are also contributed to the lower realizations.

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

And that's why as Holly said to the answer of the question as Shalini had asked, it isn't just a calculation of cash, we're seeing PGM prices of $100, a megawatt hour and your producing it at 40 devices [ph] since you dealt [ph] 60, it is the calculation of all of those activities as Holly just pointed out.

Paul Ridzon - KeyBanc

Thank you.

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

You bet.

Operator

Thank you. Our next question is from Elizabeth Parrella with Merrill Lynch. Go ahead, please.

Elizabeth Parrella - Merrill Lynch & Co.

Thank you. Mike, following up on part of your answer to another question. Can you just elaborate a little on how the law treats new generation? Is there a requirement that there be some type of competitive bid situation or the utilities can propose it as long as it is approved by the commission, and how then it's treated going forward in terms of recovering that investment, and does mentioned that one last question on this topic, does any of affect how you think the commission considers to remount from the supreme court on IGCC?

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

Well Elizabeth, as you frequently do, that's a loaded question. So let me try to address it. The law provides for an application for capital investment in new facilities either retrofit environmental facilities or new generating stations. It allows for construction work in progress, it allows for an ultimate non bypassable recovery of the capital for the life of the station. Once it's approved by the commission, they need to determine the need. Once they get to that point you are allowed to go forward and build the station and again the cost recovery is as I suggested non by passable, however they also as they do that, we will have a classic hearing on it as well. So we think that it covers those issues comfortably. It needs to be it doesn't need to be competitively bid, so it's our choice to file what it is that we would like to build, but you have to have competitively bid the construction of the facility which of course we would do, and at the end of the day, it then goes as I suggested and I guess in all that answer I've already lost the second train of thought you were after.

Elizabeth Parrella - Merrill Lynch & Co.

Oh, the IGCC remand?

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

Yeah, I am sorry. I must be getting too old, the IGCC remand intriguingly it might well be affected by this but that is up to the commission. What the Ohio Supreme Court said, and a lot of people missed this, is that we are not sure that Polar [ph] authority wouldn't accommodate this. We're just not comfortable that you gave us enough of the logic that you put behind this.

So, the question for the PUCO is to evaluate the new law and may be touch on some of those stones as they send this back to us by way of order which somebody clearly would probably contest, and then we'd go in front of the supreme court again. As we have said all along, the integrated gas combined cycle technology is essential for this country, quite honestly for the world and we think we are best suited to move on of these projects forward and very much would like do that. The timelines are just horrendous when you think about how long it is from start to finish on any of these breakthrough technology that you didn't ask but when you read the Virginia Corporation Commission order it's clear that they were quite complimentary at the end of our effort, but we're fearful of no one having built an integrated station at 630 megawatts and again the same question back on the un-know ability today of what the carbon regime will be let alone the cost of the carbon regime.

Elizabeth Parrella - Merrill Lynch & Co.

Okay, thank you.

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

Yeah you bet. Thanks.

Operator

Thank you, our next question is from John Ollie [ph], with the VLP [ph], please go ahead.

Unidentified Analyst

Good morning.

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

Good morning John [ph].

Unidentified Analyst

Great quarter guys.

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

Thanks.

Unidentified Analyst

Quick question, I guess a lot of this is yet to be determined and it will be up for debate I am sure. But the ROE that the EPUC will test is definitely a GAAP ROE? It's not a regulated ROE, correct?

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

I to tell you the truth, I am not really certain how they'll go about doing that.

Unidentified Analyst

Okay, and then, I know this isn't your utilities problem, but if the utility was say north of 20, would the commission have to basically force them to spend to kind of bring that down or how do you think that would get dealt up with, or are you talking about kind of a mid to high teens being fine?

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

Yeah, sure, if you over the years, as I know most of you on the phone know of boringly. So, I have been at this game a long while, you can control your returns on equity by additional capital spends, to the extend that you were fearful, there are two or three ways you can handle that as I have mentioned before, you could defer, you could securitize, you can control the amounts you spend, you can control the thickness of your equity, there is a number of different levers that one would look at as you go forward and forecast what you think the returns would be. So, it is an essential part of the law that was sought by the executive office of the state, it has been written in a broad term, so that all of us who might be affected by it sells it so it had balance to it and it gave everybody a reasonable chance of being successful in a review of the commission believing that you had excess returns on equity capital.

Unidentified Analyst

Right, and just the other question, is kind of the same bent. If you don't ask for an increase or another utility didn't for an increase, they just wanted to continue their RSP, will they still be subject to the same rules and tests?

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

Of course you would.

Unidentified Analyst

Okay, I was just a little vague on how that was --.

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

Because, remember, even if your plan is just to continue your RSP, you at least have to file that as your electric security plan and that then gets you into the tests.

Unidentified Analyst

That's when the capital --.

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

And you might I think, not that I need to do anyone's bidding for them, but I think Daten because their current RSP runs through 2010, so long as they don't make any adjustments to it they are not subject to that review for calendar year 09, calendar year 2010. Should they add a filing to additionally extend their current plan then it would fall under the ESP, as I read the law.

Unidentified Analyst

Okay, great. Thank you guys.

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

You bet.

Operator

Thank you. [Operator Instructions]. And we do have a follow-up from the line of Michael Lapides. Please go ahead.

Michael Lapides - Goldman Sachs

Hi, one question, related to fuel cost, can you kind of frame for us how big of an impact the fuel clause component of the legislation in Ohio would have, I mean, which year do we use as kind of the starting base year for fuel cost that will be kind of tested upon.

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

Well Michael that's again a very open question. The last time that we had a viable fuel clause in operation and approval by the commission was 2002.

One could argue that would make a reasonable point of beginning I guess may be even then that, as early as the year 2000. But we will try to find an appropriate period of time to begin a fuel clause and make the adjustments going forward. Again using whatever tools are in the law to soften the blow of that, if that need be. So I think that's pretty much an open field to bring in to either an MRO blended filing because of the 90% that will be under the blended definition of an MRO or of course the ESP where you would file the fuel as well. So I think that's a relatively wide open area, there will be discussions and there will be debate about what's the appropriate place. But at least if you just take base of the last time you had a commission approved rate you would begin in that 2000, 2002 range.

Michael Lapides - Goldman Sachs

Okay, thank you.

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

You bet, thanks Michael.

Operator

Thank you. And speakers we have no further questions. Please go ahead with any closing remark.

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

Thanks Kathy, and thanks for all of you being with us this morning I know that the law is fresh and you are all reading it. A lot of the materials that have been put out by the various organizations are very accurate, all well worth reading. I think the legislature has given all of us an opportunity to find a place that satisfies our shareholders' need as well as well our customers' desires. Thanks for being with us and we look forward to seeing you all on the highway.

Operator

Thank you, and ladies and gentlemen, this conference will be available for replay after 11 am today through midnight, Thursday, May 1st. You may access the AT&T executive playback service at any time by dialing 1800-475-6701 and entering the access code 916-636. International caller dial 320-365-3844 using the same excess code, 916-636. And 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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Source: American Electric Power Co., Inc. Q1 2008 Earnings Call Transcript
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