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Executives

Brian Tierney - Chief Financial Officer, American Electric Power

Art Beattie - Chief Financial Officer, The Southern Company

Ben Fowke - Chairman and CEO

Analysts

Steve Fleishman - Bank of America Merrill Lynch

Shelby Tucker - RBC

Unidentified Analyst

Xcel Energy Inc. (XEL) Bank of America Merrill Lynch 2012 Power and Gas Leaders Conference Transcript September 20, 2012 3:00 PM ET

Steve Fleishman - Bank of America Merrill Lynch

The last panel we titled all the above. It’s become a very politically popular world in the energy space I guess. Although, I don’t know -- I think I heard first at Southern at some point long time ago but very happy to have three of the larger utility companies in our sector speak with us here.

So first we’re going to have American Electric Power, Brian Tierney, who is the Chief Financial Officer. Then we will have The Southern Company speak with, Art Beattie, who is the Chief Financial Officer. And then last but not least with us, starting with an X but beginning as name Xcel is Ben Fowke, who is the Chairman and CEO. So let me turn over to Brian to kick it off. Thank you.

Brian Tierney

Thank you, Steve. And once again, thank you for putting on such a strong conference so well attended and great topics that you have selected for the discussion, really appreciate it.

For those of you listening on webcast, I’m going to be taking us through a presentation that at beginning of course has the Safe Harbor warnings, that’s obviously applicable as we work through that.

So American Electric Power is now in a timeframe where we are very acutely focused on execution. We’ve been through a period of some transition where the only questions that we got in investor conferences likes this and individual one-on-one meetings what’s going on in Ohio. We’re starting to have some resolution to be Ohio situation and that we’re going to be focused on the future and what the future holds from American Electric Power.

That’s going to be comprised of a number of -- that’s going to be a comprised of a number of initiatives that we’re going to be focused on. The first is maximizing the operating company ROEs. We’ll have a slide on that later and we’ll look at what performance has been this year-to-date, what it was a year ago year-to-date and at significantly greater than 10%. I think you’ll see this investing in our operating companies has been some thing that’s worked for us both last year and this year. And it’s some thing that we anticipate being a significant component of our growth going forward.

We’re also going to be focused on positioning our generation portfolio for the future. So as we look at the environmental challenges that we’re facing and what they mean to us, we’ll be retiring units, retrofitting units and trying to do that and as cost effective matter as possible in both our de-regulated, our competitive and our regulated fleets.

And of course, then there is the transmission business, a significant component of our growth strategies investing in transmission to improve the liability and service to our customers and customers throughout the Midwest. And we'll talk about that in some detail.

Lastly, we are going to be focused on forming a robust competitive business and as our Ohio generation becomes de-regulated at the end of ‘15 after retirements, we’re going to have about 9000 megawatts of capacity that we will be hedging in both the retail environments through direct retail that our competitive retail supplier will be getting for us.

We’ll be working as well through retail auctions and then trying to enter into both long -- a mix of long and short-term wholesale transactions out of that business to hedge as much of that business as possible.

One of the things that we talked about recently is February 10 and since that it does not changed during the period of uncertainty related to Ohio. It has been the mix of our assets regulated versus competitive.

On the left hand part of the slide, you’ll see that 86% of our asset base and a similar percentage of our earnings come from our regulated properties. Those regulated properties are in the form of vertically integrated companies, regulated generation company AEP Gen Co., wires companies that we have both in Ohio Power and Texas and in the Transcos that we've set up -- that allow us to put capital to work providing transmission in our existing service territories at FERC regulated rates and at formula base rates so we can update our asset base on an annual basis.

A considerably smaller portion of our business in terms of assets and earnings will be competitive and that will comprise both AEP Generation Resources, which will help those 9000 megawatts of Ohio generation, AEP Energy which will be the competitive retail arm as well as our River Operations which includes the bulk commodity transport.

People frequently look at us and talk about us as if we’re hybrid. We look at ourselves as a large, very much mostly regulated assets and earnings play with a small but effective competitive component that has some significant upside opportunity associated with it.

Let’s talk about those regulated operations. We’re very much focused on execution there. Several years ago we rolled out what we talked about at the operating company focus. We've put operating company presidents in charge of those operations and are holding them accountable and giving them the responsibility for the returns on equity in those operating company.

We’ve given them control not only of the distribution spend, which is what they used to have but also of the spend associated with transmission and generation in their operating companies. We believe that those operating company presidents have a better line of sight and relationship with the regulators, legislators and customers in their operations. And as we'll see in a few slides that focus has been very effective for us as those operating company presidents have taken out of those rules and are very focused on success of those companies.

We have been looking for approval in our -- for our state Transcos. We have approvals currently in Ohio, Michigan, and Oklahoma. And we are working approvals right now in Kentucky, Arkansas and Louisiana. Recently, we've got a number of questions on what happened in Arkansas and the commission there asked us to come back and demonstrate how approval the Transco in that state is in the customer’s best interest and we intend to do that later this year.

We’re acutely focused on prudency, reliability, and financial discipline as well as capital efficiency and what does that mean. Capital efficiency is the efficiency with which we spend the dollars in providing that service to our customers and then get it either recovered in the terms of cost or we earn our return on it in terms of a return on equity.

We will focus on doing that in a number of ways through both trackers. We’re focused as well. It will attract us and ride us. We’re looking at forward looking test years and we’re looking at legislative changes where those things aren’t possible at the commission level in those jurisdiction.

We’re also very focused on O&M rationalization. So we're looking -- in 2010, we had a significant cost reduction effort. We’ve had a significant effort this year to keep our costs down and we believe some of that isn’t sustainable as we’re just to do it right now. Some of that includes moving outages from one year to another and you just can’t do that forever.

So we’ve partnered in this repositioning study with McKinsey & Company to help us take a look at our cost structure and see how we can position the company for a competitive environment that we face going forward in one on which the industry changed natural gas power prices what they used to be, load growth this challenge in some institutes and we just need to be very, very prudent with our cost there.

By focusing on this operating company model, we’ve given those operating company presidents, the responsibility, the authority but also the accountability for getting the job done and they proved up to that challenge at every step of the way. Again this regulated business is 86% of our asset based and a similar percentage of our earnings.

So let’s look at how the operating companies have done -- operating company presidents have done with this new model over time. This year-to-date with a 10.3% ROE that’s through the end of June 2012 or as last year we were at 10.6% ROE. You can seem some of the places where we’ve moved the needle and some of the places where we’ve had some challenges this year. Not surprising, Ohio, we are down from 12.8% ROE last year to 11% this year. APCo has increased nearly 200 basis points from 7.5% to nearly 9.5%.

Kentucky Power has had about a 100 basis point increase. I&M is somewhat challenged versus where they were last year, that’s the company that’s putting a significant amount of capital to work to provide Electric service to our customers there and they are in for rate case right now. We anticipate the answer to that coming later this year.

The West part of our system has done particularly well under the operating company model. PSO, SWEPCO and AEP Texas are well into the double digits and those APCo presidents and their teams down there have responded incredibly well to this new operating company model.

Our portfolio diversity helps us maintain an ROE that’s at these levels. People ask us all the time, if we think it’s a good thing to be in this major jurisdiction, in these many states. We said that we keep doing the same simple, fundamental things over and over again in multiple jurisdictions and that’s recouped. We’ve been able to do over time.

Let’s look at some of the areas of our rate base growth focus. On the top part of the page, you will see that we’ve been putting significant incremental dollars to work at our Transcos and JVs, from a $106 million in 2010 to an estimated $486 million this year on our way up to almost two-thirds, to approximately two thirds of $1 billion estimated next year. These figures obviously aren't cumulative, its year-on-year growth. And then on the top right-hand side of the page, you will see that we are coincidentally trying to grow the earnings from this transmission business in a similar manner, up to estimated $0.31 per share by 2015.

We’ve moved the focus of our transmission business from large intra-RTO project like path because there can be a number of interveners, states can get involved in this, make things more difficult, multiple RTOs tend not to work very well together to mostly intra state single jurisdiction opportunities and jurisdiction I should say. And that’s worked very well for us.

It allows to put the dollars to work quicker, allows it to convert them in earnings quicker and allows us to avail ourselves of the FERC cost raised ROE, weaken our PJM Transcos, our authorized ROE is 11.49% and SCP authorized Transcos or authorized ROE is 11.2%.

We are also going to be putting significant dollars to work. On the bottom part of the page, you will see environmental CapEx and our regulated business estimated to be between $5 billion and $6 billion between now and 2020. Most of that's going to be in compliance with the Air Rules and about a quarter of that going to be in compliance with the Water and CCR rules.

The recent CSAPR decision from the court has fairly minimal impact on AEP. Really the economy, power prices, the natural gas prices mean that the CSAPR rules weren't necessarily going to be constraining to us to begin with, and the more impactful rules are the maps, water and CCR rules where we do have opportunities to meaningfully put capital to work in our existing regulated fleet.

Let’s talk about corporate separation and the competitive operations a little bit. We do get a lot of questions on the Ohio regulatory setup. There are four major orders that we either were getting or are currently pending in Ohio. In early July, we got a capacity order. In early August, we got a fuel order and an ESP order and we are still awaiting a corporate separation order. Clearly, we've not got - we’ve gotten far from everything we asked for in these orders and have been disappointed in many cases and the outcomes.

We’re trying to find as positive of a way to get these orders implemented, to be able to provide reliable service and reasonably priced electricity service to our customers. And at the same time find a way to transition the company in a way that doesn’t financially harm us to a competitive model in Ohio.

The rehearing process on those four orders will likely play out through the balance of the year, in the early next year and we are working to try and see that we can have a transition to market, that allows us to recover our costs and allows us not to be harmed during the period. So despite being disappointed in a number of things in these orders, we are trying to view them as constructively as possible and try and find a way to work within the confines of those disorders, including the rehearing process that we are currently working through.

AEP Generation Resources on the competitive side - in 2012, we’ll have about 12,932 megawatts of capacity following retirements and transfers. We anticipate the generation resource will have about 9000 megawatts of capacity. Most of that as you can see, 61% will be coal controlled, 21% will be coal uncontrolled and the remainder will be natural gas and renewables.

We are going to be hedging this business in a number of ways, as I mentioned through retail auctions, direct retail, long-term formula base rates and market-based rates. We will be participating in wholesale auctions for retail load as well, and we believe we have a number of reasonable channels with which to hedge to that generated capability.

We did buy BlueStar Energy early this year and through the diligence of that, everything we were hoping to get in that business is what we've gotten. We've got a strong management team that knows the retail business, and also we’ve got significant mid and back-office customer care system that are doing everything we hope they would do.

We’ve now transferred most of our 100,000 customers over to, greater than 100,000 customers over to the systems of the BlueStar people and their transition is working as we hope it would. In that business, we are pursuing margin not customer headcount. So we are not as interested in pursuing customers for customer sake, but we are interested in pursuing customer for margin sake. And if we can’t find in the retail component of the business, we anticipate finding it in the wholesale portion of the business whether that’s through, like I said formula based rate type contracts or market-based contracts.

Capital plan and summary real quickly, nothings changed here. We’ve talked about ‘13 and ‘14 capital - CapEx plans being between $3.5 billion and $3.75 billion. Our growth rate of 46% is predicated on spending capital predominantly in our regulated businesses, getting those capital spends reflected in rates and earning on that. Between ’11 and ’14, we anticipate spending over $6.5 billion in regulated - in increasing regulated PP&E with a 6.4% CAGR in regulated PP&E in net CAGR PP&E during that time period.

We are anticipating regulated ROEs in the 9.96% to 11.49% range from Texas to SPP Transco, to PJM Transcos where those are. And a significantly smaller portion of CapEx going to work in our competitive retail business is where much of the environmental controls have already been added to that business.

In summary, really quickly, we do have a regulated opportunity for growth. It’s predicated on that regulated CapEx and regulatory recovery that we’re anticipating the 4% -- 4% to 6% growth in earnings going forward. And it's coincidental with the 4% to 6% growth in that PP&E in those regulated businesses.

The Ohio transition is moving forward far from forgetting everything we wanted. We’re trying to find a way to do these orders constructively and make them work so that we can transition between now and the competitive environment. Again looking for the re-hearing process to be done sometime later this year and hope to have considerably more clarity on the way the higher transition will work early next year and hope to share that with you in more detail sometime between now and early next year.

Competitive operations are up and running the way they should be in the Ohio retail play. And as we’re working towards the 9000 megawatts of ultimately de-regulated generation that we’ll have in AEP Generation Resources. Ultimately, a combination of our businesses both regulated and competitive represent a total return opportunity of 8% to 10% over time, 4% to 6% regulated earnings growth and a 4 plus percent dividend yield.

We believe as a competitive return opportunity and thank you for your interest in American Electric Power.

Art Beattie

Thank you, Brian. My name is Art Beattie. I’m the CFO with The Southern Company. I’m pleased to be here this afternoon to provide you an update on The Southern Company. Most of my remarks will hit on the highlights of things going on at Southern but bulk of my remarks will be updates on our new nuclear plants, Vogtle three and four in Georgia and on our new coal gasification plant in Mississippi, Plant Ratcliffe.

We’ll hit a few other topics during my remarks and so I’ll be pleased to answer any questions you have in regard to those as well. As we move forward, I'm sure this is not the first time you’re seeing this forward-looking statement. As you know, we’re making some forward-looking statements and undue reliance is not suggested.

Since the topic of the segment was all the above strategy. I felt it was important that I addressed Southern’s perspective on this. Of course, we have a different term for it. We call it all the arrows in the quiver but the meaning is generally the same.

We’re the only electric utility in industry that’s spending upwards of $20 billion on new 21st Energy Generation and other energy sources, including new natural gas in Georgia, obviously the new nuclear plant in Georgia, the coal gasification plant in Mississippi, the new biomass plant in Southern Power subsidiary in Texas, which began operation in June of this year, solar plants in Southern Power as well in the west and then the energy efficiency programs throughout our regulated jurisdictions.

As we look at our capacity mix, the hot chart on the left reflects total capacity owned by Southern, including The Southern Power resources of 46,000 megawatt. You can see the split of capacity about 48% of it is coal, about 36% gas, 9% nuclear and the rest are hydro and renewables.

But as you look at what we’re constructing on the ride, what will be added in 2012, we talked about new gas that’s another 1800 megawatts of new gas in Georgia, Cleveland County units. These are Southern Power units that are being built in North Carolina. Nacogdoches Generating Facility that is our biomass plant in Texas, the largest biomass plant in the country, began operations this summer.

The Apex Solar facility is a new solar facility that The Southern Power acquired in June of this year. Plant Ratcliffe at Kemper County is the coal gasification facility that we’ll talk about in a moment and of course, the Vogtle three and four units, which are scheduled for completion in 2016 and 2017. So that’s from our capacity perspective.

But if you look at where we are from an energy mix of how we actually generate power, the center column there is what we project for energy in 2012, fully 47% of our energy this year will come from natural gas resources, again that’s because we are dispatching all of our plans from variable cost but low-cost natural gas that’s what the result will be.

About 35% coal and about the remainder with nuclear and hydro and other resources but if you compare that to the ‘07, ‘08 level, it’s quite a dramatic shift of natural gas being fully 16% to 47% and coal being near 70% to now 35%. Again, it’s a great reflection of the value that we think a diverse portfolio bring to your customers.

If you look at the right part of that chart there the potential 2020 rank, we've outlined where that energy mix might move to in the future. This is consistent with the new natural gas we’re adding this year and with potential coal retirements brought about by the MATS rules as we move towards 2020 but you can see with a low natural gas twice as much as 57% of our energy may be produced by gas by 2020 and only 22% by coal. So it's -- again the diversity of the mix helps bring value to your customers, stable prices over time and that is our motivation as we move forward.

I said the bulk of my remarks would be about Vogtle three and four and Plant Kemper. So I’ll begin at this point, talk about Vogtle three and four. We’re making tremendous progress on the construction project there both on the site and off the site. On the site, it’s a little bit difficult to see but the unit three Nuclear Island which is at the bottom center portion of your screen. You can see rebar being built into that particular structure.

You see the turbine building just to its right that is coming out of the ground as if juxtaposed to the Turbine Island on unit four which is still basically a dirt field at this point. You can see the cooling towers to the left, the foundations are nearly complete on the cooling towers for unit three and they will be coming out of the ground as we move over the next 9 to 12 months.

The crane in the center is the heavy lift derrick, will operate on a tract and will actually life components that are being built outside of the plant inside to -- inside the reactor, Nuclear Island and inside the Turbine Building. So that is fully -- almost fully completed with testing. We’re ready to go in just a few weeks.

So, a lot of great progress on the site and I'll mention in a few moments I’ll show you some pictures of progress of the site that relates to other major components that are being built across the world in Japan and Korea and in Italy. We’re manufacturing major components that will be inserted into the plant as it’s ready for service.

As you know, the regulators in Georgia are intimately involved in our project. They’ve had an independent monitor. That independent monitor works with us through the entire project. He knows everything good, bad and ugly that's going on. He reports that to the commission on a six-month basis just as we report to the commission on a six-month basis.

Our last filing with the commission was made on August 31st of this year. It’s the seventh report that we filed since construction began, and in that report we highlight a lot of aspects of the project that safety and quality are the main priorities here. The last thing, we want to do is building new nuclear plant here in U.S., for the first time in 30 years is to avoid the quality and safety aspects of the plant.

Our project-to-date costs are $2.279 billion. We are asking for the commission to approve what was spent from January of this year through June of this year and we do this every six months, that’s another $263 million that we are asking for their approval on. We also, in each of our reports, filed what we call the projected in service costs of the plant. Our latest projection of that in service cost is $6.2 billion and it’s based on a November 16, November 17 in-service date for the units.

I will note that those dates are actually six months later than the initial in-service dates that we've outlined with the commission being April 16 and April 17. So we've seen a slight uptick in the costs about $100 million, most of that related to financing costs and oversight costs related to the project.

In light of ongoing discussions with our contractors, we do have some issues or claims that are still being debated. There’s $425 million of claims by Shaw, Westinghouse related primarily to schedule. Those are still being determined, still being negotiated. They are not included in the $6.2 billion estimate. We have not gone back to the regulator and asked for an increase in the certified amount, and will not go back to the regulator and ask for that until we settle this particular issue with our contractors.

One additional element of our filing this time was an element, we think is very important from a regulatory perspective and that is, what is the cost to the customer? Let’s not focused directly on what the cost of the plan is, but focus on what the life cycle cost to our customers will be. And life cycle costs per kilowatt hour are tracking well below the original projection and I'll talk more about that in just a moment.

This is a graph of each of the seven VCM filings that we have made with our commission. I mentioned that $6.2 billion is our latest filing, our latest projection. Our initial filing with the commission back in 2009 was a $6.4 billion project that is our 45.7% of the project.

You will notice the colors and the bar. The green color represents financing costs, the red bar represents our oversight costs and the blue bar represents the actual overnight EPC costs. The initial drop in the certified amounts from $6.4 billion down to $6.1 billion represents the benefit that customers get from the cash CWIP, the fact that they're not paying interest on interest as we construct the plant.

So that reduced the certified costs from $6.4 billion to about $6.1 billion. That amount hasn't changed, but you will notice our forecast amount has fluctuated slightly as we file reports through the seventh report.

The seventh report picked up a little bit, but again the primary reason for that, our financing costs are going up because you are adding an additional seven months of construction time to the project, and secondly you are adding oversight costs for those additional people allocated to the project to those seven months. We have not I will repeat, included any portion of the claims that are outstanding with our contractors in this estimate.

This is the life cycle cost graph that we've included in our filing with the commission. And again, it reflects additional values that we brought to the projects since original certification. The solid line represents what life cycle cost would be under the original certified proposal. The dotted line represents values that we brought to the project, mostly from the cash CWIP and changes to the contract that we made with our contractors.

These solid line underneath that represent the additional savings provided by financing costs being much lower than we originally thought, and production tax credits being available for the first seven years of operation on the plan. So what we would like from a regulatory perspective is focus on cost of the customers, what the elements of that will be as how we ought to finally measure our success on this particular project.

These are additional pictures of the turbine building from the outside. This particular photo on the left is inside the actual Nuclear Island of unit three and the rebar has a picture on that at the right of inside the turbine building and then the bottom right is unit four bottom head of the containment vessel.

These are the elements of outside progress that we’ve made especially on the left low-pressure turbine rotors are being built in Japan. And then the reactor vessel itself for unit three, it’s being build in Doosan, Korea and those are expected to be delivered to the site sometime late fall.

The photo on the right is really called cradle assembly, that will be lifted in place of steel cradle, lifted and placed in the Nuclear Island and will actually support the unit three bottom head as it's lowered into place inside the island. So a lot of the components of this plan are being built outside of the actual structure and lifted in by the crane.

As we look forward to the next few months, there's a lots of milestones out there. The Nuclear Island rebar, we expect to be completed sometime this fall. And once that is complete, we will be able to move ahead with nuclear concrete inside the Nuclear Island.

The island module assemblies are continuing their project, their construction on site and the assembly of the containment bottom head or the containment vessel bottom head of unit four is expected to be completed sometime in the spring of ’13. The reactor vessel as I mentioned, should be on site by late fall, and again there’s another major progression in the project itself.

Moving to Plant Ratcliffe, Plant Ratcliffe is our coal gasification plant in Mississippi. It was authorized by the Mississippi Public Service Commission in May of 2010. Construction is approximately 40% complete and we are less than two years to commercial operation date.

The estimated cost has been increased to $2.88 billion. The certified amount, again this was the top of the cap that they approved by the Mississippi Public Service Commission, and we have about $81 million of contingency around that amount. And in a very similar way to Vogtle, we have other items of value that we brought to the project. One being very similar to Vogtle, and that financing cost during construction has been much lower than what we originally certified to.

And the second fact around this plan, it relates to our sellable bio products. We’ve been able to arrange for sale of CO2 for sulfuric acid and for ammonia. And the prices we are seeing for those sales have been much more robust than our actual contracts than what we certified to, in our regional certification. So we’ve been able to bring value to mitigate the price increase around capital cost to again bring value to the bottom line with the Mississippi power customers.

These are some additional pictures of the Plant Ratcliffe site. The stacks of the heat recovery steam generators and then some other crystalizers and gasifier shots on the right. This is the main portion of the gasifier where the coal is actually gasified in this particular component. It will be constructed outside the particular steel structure you see there and then lift it inside that structure where the gasification process will take place.

A quick review of our CapEx. We revised our CapEx slightly in our last earnings call, went from an $18.2 billion three-year projection to a $16.3 billion amount. We reduced amounts related to our compliance with MATS by about $900 million because our expenditures for baghouses and other features of compliance weren’t as necessary as we originally thought they might be.

We have also pushed out some of our compliance related to water and our ash rules beyond the three-year timeframe. It doesn't mean we won't spend that money. It just means, it won't occur in the 2012 to 2014 timeframe.

If you look on the right side, you'll see that $14 billion is our base capital and those are dollars that have in most regards been played over by regulators. The MATS compliance dollars are $1.8 billion and then the ash and water compliance over the next three years is about a $0.5 billion and those are the components that drive the total capital cost of $16.3 billion over the next three years.

If we look at our history of dividend growth, obviously it is tied to our ability to invest CapEx and earn returns on those dollars in our regulated jurisdictions. If you look at our estimate of earnings growth that we've outlined in January of 2012, 47% over that three-year timeframe, obviously earnings and dividend growth are tied at the hip.

We have a strong history of dividend growth for our company. We understand the importance of dividends to our investors having fully provided 60% of the value accretion to our investors over the last 10 years. So it’s a major portion of the value equation for our investors.

In summary, we remain focused on our five priorities. I basically outlined only one of those priorities and that is completing Vogtle and Kemper with successful projects. The other four would relate to our business model. Our business model puts the customer at the center of everything we do.

We certainly have energy policy issues going on in Washington. We’re focused on those as well. We’re focused on our grid and the smart energy aspects of that and the other priority in our list basically focused on people and we continue to develop our people in a way that focuses on customers, the reliability of our assets and the leadership of our people.

We think that's what's necessary in order to drive success with the customer. Success with the customer relates directly to success with our investors and that's what that chart on the bottom right reflects for us over the last 30 years.

Thank you for your interest in The Southern Company and I’ll turn it over to Mr. Fowke.

Ben Fowke

Thanks, Art and Steve, thanks for having us here. So I’ll get started. It kind of reminds me of the old saying never stand in the way of the battering buffet. I think if I add plus to that then I’d capture this group here.

I will try to make my comments brief. Before I get started, let me remind you that some of the remarks I make are subject to safe harbor disclosures like you and my colleagues have talked about. Maybe one day we can do a best practices of safe harbor, talk about that too.

But until that great day comes, let’s get started with the presentation. I think many of you are familiar with Xcel Energy but just in case, you aren’t, we are a fully regulated gas and electric utility. We’re in eight states. Minnesota and Colorado are the predominant states. We serve 3.4 million electric customers, 1.9 million gas customers. And I think being in eight states and 21 different jurisdictions offers clearly regulatory diversity from any particular specific regulatory decision.

But in addition, those states have different economies and different weather patterns. So we get diversity there as well. Our mission is pretty straight forward and that is simply to provide our customers with clean, reliable, safe and competitively priced energy. We do that we think we are in a very good position to provide our shareholders with the competitive return.

We target 10% total return and all of these things are interlocked and there is really three keys to success, strong stakeholder alignment. We have to understand what you're doing and get behind it. You have to have an investment pipeline to invest in and then obviously you have to have constructive regulation, put all those together, I think you can achieve both the customer mission and the shareholder mission.

So, let start digging a little bit starting with stakeholder alignment. Environmental leadership has really been important to us. It’s something that our stakeholders have wanted. It’s something we’ve delivered. We have over 4000 megawatts of wind on online now that we either own or we integrate. That makes us the largest wind provider in the United States. It has been that way for number of years.

We’ve been able to do it very systematically and thoughtfully because our average portfolio of wind averages about $40 a megawatt hour. Clearly in today’s very depressed natural gas prices, that’s little bit out of the money but I think we can also see that it’s not a bad hedge against volatile gas prices.

If you look at where we've been and where we are and where were going, you can also see the impact of our strategy. Few years ago, we were running -- about 56% of our energy came from coal, today it’s closer to 50%. Few years, it will be 47%.

We see that slack being taken up by renewables as they grow into prominence reaching 17% of our energy mix in 2015. What you don't see and what I think it’s pretty interesting as you don't see gas increasing and again that’s the fuel diversity that I think wind particularly offer against our gas prices.

Well, the whole industry as we know is faced with environmental challenges as the whole host of EPA rules that are existing or coming at us. And I think the environmental leadership down in our strategy has gotten us ahead of that curve. You see the emission reductions there on your screen and it really put us in a position where -- while we have some things to do to meet these mandate.

We don't have as much spend as I think many of our peer companies because we already did it. We did it in Minnesota with the more projects. We’re doing in Colorado with Clean Air - Clean Jobs product -- project. So we're well on our way to meeting the environmental goal that exist today and that we anticipate tomorrow.

I mentioned to you that our mission was clean energy, talked about that. You have to have safe and reliable energy too and these are operational standards, SAIDI and its components, SAIFI and CAIDI and you can see that these are steady, they are consistent and they are good and I think that's really important.

I mean, customers expect reliable energy. In times, I think they become too used to reliable energy that we want to keep it that way. I am very proud and I think our customers are very pleased with our storm restoration efforts. We’ve had storms too and managed to recover from that pretty well. So all of that puts you in good standing with the customers. I also mentioned you got to competitively priced.

If you look at where our prices are, all of our jurisdictions are below the national average. And again, I think we’ve spent a lot and we have seen our rates go up a bit because of that, to come into environmental compliance, prepare for the future. But I think we are ahead of the game in that regard. So our rates should stay competitive.

Now, we are a regulated utility, so we don't give customers a choice of their energy providers, but we do give them choice on how they can manage their bills and what type of energy they want. I mean, starting with our award-winning demand side management programs, customers really like it. It saves them money. We save the need to build over the years about 3200 megawatts of generation and that’s pretty significant.

And I think we've done a good job of aligning ourselves with our regulators, so that we have financial incentives to do these programs. Last year, we made over $70 million to our DSM incentives. So it’s not insignificant for us. Additionally, while we offer a clean product, a green accretion and green product to our customers, if they want to do more we offer them the choice of that.

Our windsource programs, they are very popular as the voluntary program where you can basically have more of your energy delivered through wind. In addition, we have rebate program that supports solar rooftop installation although installation. Although, I would say that as those rebates are diminishing over time and as we don't see the need to do that based upon market condition.

Despite going through a series of rate increases, our satisfaction remains very high, that’s always the bellwether as how are you going to do, when it comes time to get paid for the good work you’ve done. So, I think we have stakeholder alignments.

The next thing we want to look at is our pipeline of investments. Through this year and 2016, we will spend about $13.4 billion and you can see the spread there, its generation. It’s primarily being driven by the Clean Air-Clean Jobs program in Colorado. There is distribution in natural gas, that’s the ageing infrastructure. Something that I think as an industry and is certainly as the company, we need to talk about doing more around, making sure that infrastructure stays solid and reliable.

We are going to spend a lot in transmission and that’s driven by our CapEx 2020 program in Minnesota and the surrounding regions. We have similar program in Colorado and Texas. It’s a wonderful area for us to invest.

The one thing I'll point out that there is the SPS CSAPR. Again that was $470 million I think you all know that was the court’s vacated, that ruling so that we don't have to spend that.

In third quarter of this year where we recast our capital managers, and obviously you'll see that go out. But expect that you will see us, anticipate that we will have to do some environmental retrofitting on our plants in Texas, but it will be towards the tail end of that timeframe, not look forward unlike we had now. In addition I think again, infrastructure is extremely important and we need to continue to put money into it.

This is a breakout not only of where we are spending it, but by year how we are spending it and again subject to change, we’ll update in the third quarter. But I think you can see that the next year ‘13 is the peak year then we start to level off. And keep that in mind as we talk about how we will reward shareholders in the years to come.

All right. So we have clearly enough to invest in. We’ve got stakeholder alignments versus the constructive regulatory compact where we think we have that. Through the years, we've done a very good job of think of moving first from historic year, test year to forward test year and developing the series of writers to cover things from transmission to environmental spend to lately in Colorado where we went through a multi-year plan. So we continue to evolve the regulatory compact.

We continue to work very hard to close the gap between our authorized ROEs and frankly, what we are at the operating company level, which is typically anywhere 75 basis even if we are 100 basis points less than what we authorized. And that’s a function, again of that pretty significant ramp-up we saw in our CapEx and somebody of the associated O&M that goes with that. So we have been filing rate cases in our jurisdictions fairly routinely. It’s hereby, our standards it’s been pretty live.

So let me give you the scorecard so far. We did get the three year settlement approved in Colorado. I think that’s a President that we really like there, and I think that’s going to pay dividends for us in the future. We had our settlement approved with the Minnesota Electric case. We had the North Dakota Electric case approved as well. The South Dakota Commission ruled on our electric case there. We weren’t pleased with the outcome. I will talk about then in a second.

And then we also were denied that the request we had to get an accounting deferral decision on significant increases in property taxes this year. We will pick that up as we follow -- we will pack up that difference in 2013 as we out file another electric case in Minnesota.

So what’s pending? Well, first, let me start with the right because it’s South Dakota. And that’s - we weren’t pleased with the equity award based on an historic test year that we received in South Dakota. So we immediately filed with our 2011 historic test year with known and measurables of the 24 months. We obviously need a better outcome in South Dakota and we got previously, and we are optimistic we will get that.

And Wisconsin is more business as usual, where we have filed an electric case of $39 million and a gas case of $5 million. We expect the decision there at the end of this year. Those are the pending cases. We also have a number of plan cases. 2013 should be a big top line year for us as far as regulatory outcomes.

We are going to file a Minnesota case in November of this year, should interim rates going to affect at the beginning of the year. We are going to file in Texas. We are going to file in New Mexico. By the way, Mexico is the only one that won’t have an impact in ’13, as we anticipate that decision will not take place till early ’14.

We’ll file in North Dakota and in Colorado; we anticipate filing the gas case, so a pretty busy regulatory calendar. It’s not unusual for us. Again, we are in 21 different jurisdictions. We are spending a lot of capital, making sure that we fulfill the missions that our customers want, and so we continue anticipate that the regulatory outcomes will be constructive and we will continue along our pathway.

When you have stakeholder alignment, when you have a good organic growth possibilities then you combine that constructive rate release, you are going to reward shareholders. And since, we came out in 2005 with our objectives to grow EPS at 5% to 7% and to grow the dividend at 2% to 4%. You can see on this slide that we have been on the upper end of the projections, sitting at compound annual growth rate and EPS of 6.6% and at the compound annual dividend growth rate of 3.3%.

Additionally, year in year out, we’ve delivered or exceeded on our guidance and financial expectation. So that’s something we are proud about and it’s something, by hopefully reward. I should mention 2012. We started out 2012 with historically mild winter and a couple of regulatory setbacks that I had mentioned, got things turnaround in some of those regulatory arenas and then we saw and historically hot summer.

I always like to say that I’m a lot smarter when the weather cooperates with me and it had this summer, and I have to say are operating. Personnel did a terrific job of keeping our lights on and keeping power to our customer. So we no longer have our guidance in the lower half of the range. It’s now just right in the original guidance range.

I think just an important slide, I alluded to before as we start to see CapEx levelize off and we grow into this capital number. I think it's possible than in 2014 and beyond. We’ll start to see the EPS growth rate of 5% to 7% taper off a little bit but at the same time, that gives us a lot more opportunity to reward our shareholders and achieve that 10% total return to the dividend.

And the good news for us is like our business, our dividend is very sustainable. We currently have a payout ratio of about 60% but we have room to grow. So I think we’re very well positioned to continue to reward our investors with a very good risk-adjusted return and again that targets total return of 10% and that concludes my presentation now. Thanks for your time.

Question-and-Answer Session

Steve Fleishman - Bank of America Merrill Lynch

Thanks Ben. Maybe just to kick us off before we go to the audience, all of your companies have pretty large capital than the investor needs over the period. Can you just -- I know in some ways you gave us some sense to this but just what do you see as likely customer impact, rate impact to incorporate all that, the question states give us sense can you do within like an inflationary level or how are you looking at the customer rate impact from that? Brian, Art or Ben, you want to start.

Ben Fowke

Yeah. Sure, I’ll start. It’s a great question because nobody likes to see rate increases. Keep in mind that one of the things we are going for is while sales have slowed down, fuel prices have come in. And so if you look at where we were few years ago and then compare it, we’re not actually looking at rate increases at all. Fuels, I don’t think it’s going to stay at this level, Steve.

So we anticipate rates are going to go up. That may be uptick above inflation but probably more than that 3% to 4% annual amount. So we think it’s manageable. We think the important thing is and while we’re really stressing average program is the alternative of not putting the money in is not a good outcome.

Art Beattie

Yeah. From a Southern Company perspective, we started with state of Georgia with the Vogtle plant coming online. We authorized to collect cash CWIP and as we put those rate increases in the place that we've already put about 3.5% employees cumulatively.

We will have an average of 1% through the construction period for total, cumulative total over the timeframe of about 9.5% rate increase but then when you consider the fuel benefits, when that plant becomes -- comes online, the net increase could run from 5% to 8%, depending on the benefit you get from the cheap indicative fuel.

So I would say that along with other increases would put us probably at or just below the level of inflation. If you go to Alabama, Alabama really doesn’t have a whole lot going other than environmental compliance requirements at this point. There is no new generation need there. So there, it would probably run at or below the level of inflation.

Gulf Power has other needs around environmental probably more so than some of our other jurisdictions. So this may run at inflation, maybe a bit above it, just depends on the timing of those increases. And then in Mississippi, with the coal gasification facility recently denied our request for cash CWIP. So it complicates that equation a little more rather than a ramp up of rate increase.

If we’re not able to get a positive appeal from Supreme Court in regards to cash CWIP, we would have more of its step function rate increase, which would be a little more dramatic than inflation. So that kind of out runs.

Brian Tierney

We’ve run in 11 different states, seven major operating companies. So it’s going to really be on a state-by-state, jurisdiction-by-jurisdiction basis for us. Overall, we’re seeing the same trends that Ben just mentioned. We’re having to increase base rates as we comply with environmental issues as we continue to invest in our transmission business but those increases are being somewhat offset by lower field costs.

So I’d say overall across our system, we will be increasing rates at a rate greater than inflation probably in the 2% to 4% range greater.

Steve Fleishman - Bank of America Merrill Lynch

I just got one more question before we go to Shelb, just on the dividend tax rate, I’m sure all of your companies have been involved with the EI discussing potential scenario there. So we’ll be curious what your thoughts on what is likely to happen and may be a little at the box but just if we were to go back to the pre-Bush tax dividend rates, would you think about changing your dividend policy at all?

Art Beattie

Who wants to go first?

Brian Tierney

I’ll go. We have been involved with EEI and some other groups. Spend a day on Capital Hill, while the group of CFO’s on -- within my dividend campaign and we talked to representative in house and senators as well and lot of diversity involved there.

On the democratic side, they are most interested in comprehensive texture for long, not so much just in the fiscal cliff issue. Although that’s what we’re there to try to convince some of the danger and we support as the Defend My Dividend campaign supports dividend tax rate and the capital appreciation tax rate that are linked and are as slow as possible.

And so you can have any diversity in that, what it means for us in terms of our dividend policy was as I mentioned in my remarks, dividends are in large portion of the return. We provide our investors. It’s hard for a company that grows 4% to 7% to call itself a growth company.

So it challenges us and we would have to be convinced that Congress was setting policy for the absolute long-term around that before we consider changing our policy.

Art Beattie

I guess that, I would just add that Tom Fanning, Southern and myself and others in the units, we have been -- I think successful in making the point that let’s keep the dividend tax as low as possible but if you’re going to raise it, keeping on parity with the capital gains rate. So that’s the second part of your question regarding, would you change your dividend policy. I think that’s going to be not an issue we have to cross and it’s my suspicion just listening to investors out there that you wouldn’t want us to change our dividend policy.

But we’re going to work real hard not to have that fiscal clip outcome. It’s not just the bad -- I’ll count for an industry that is trying to raise significant amounts of capital to keep the infrastructure reliable and to make a cleaner energy product. We have said take back all the other tax given issue we have but keep that dividend tax rate at a level that makes sense.

Steve Fleishman - Bank of America Merrill Lynch

Shelb.

Shelby Tucker - RBC

Wanted each one of yours’ assessment as to what are the chances you see, of course things change everyday of republic and senate and then secondly that happens that they come out and try to increase the time limits for compliance on naturals by a year or two years, your thoughts on each one?

Ben Fowke

Well. I mean, Shelb, I’m going to let the others answers that because I don’t think I have anymore insight on what’s going to happened with the elections, but I will tell you that MATS for us isn’t a big issue. So it’s not something, for the industry we’d like to -- we need time. The same thing we had with CSAPR.

I mean I can’t get it done in six months. It just doesn’t happen that way. So, I think the industry has historically met any challenge put to forth, but it’s got to be sensible and you got to give people time and it’s going to be balanced and we will do whatever we need to do.

Brian Tierney

I’d say the same thing. I’m not going to make any political predictions, but we do need more time to comply with MATS. It makes sense. It should happen. We’ve been very supportive of it. We worked with EEI and others at this table to try and make that happen.

We have Mark McCullough, our EVP of Generations, testifying before Congress today on those rules and it just needs to happen. We can't have timelines that can’t be complied with and expect that’s going to be public policy.

Shelby Tucker - RBC

On the topic of MATS, we brought it up. Since that rule came out, number of companies as they continue to try and find ways to reduce the compliance costs. Some of been able to do that. Do you see just new avenues or new technologies coming that can reduce the compliance cost to companies, or is it kind of fixed number at this point?

Art Beattie

I think Southern perspective, it’s getting more of a fixed number. But at least the rules are more clarified and I think that some of the aspects of the rules such as unit average inverses, plant life averaging have certainly given us a little more flexibility in how we can block.

We certainly, as I’ve said in my remarks, don’t have to build as many baghouses as we originally felt like we might. And that is reducing cost to our customers, which is a good thing. But MATS on its own is still a huge -- it’s a big deal for us and it’s a price increase for our customers.

That’s why we are using pushback so hard on the rules to begin with. It’s not the right time from an economic consequence to this economy to begin adding costs for these within that short timeframe of compliance.

Steve Fleishman - Bank of America Merrill Lynch

Do you have a question or any one at the back?

Unidentified Analyst

Yeah. Thank you. This is mostly for American Electric. With the coal plants that are not controlled you have set aside for retirement, have you prepared, how do you prepare the balance sheet because there will probably be some impairment on the gas side and on the lease side. This is I guess going to move forward to present value of any provisioning with the C&E tax, no benefits from those impairment or I just see it accelerated depreciation? How are you preparing for that?

Brian Tierney

So we have, we have two environments that we are operating in. One is the competitive in Ohio and we have accelerated depreciation rates in Ohio to be complied with the MATS rules. So of those plants that we anticipate retiring now by the early part of 2015, we’ve begun the depreciation to that date and anticipate hitting that, that’s reflected in our current period results.

In terms of our regulated operating companies, we obviously have the ability to recover the cost of those plants and regulated rates and we are either doing that on a current schedule depreciation that allows us to meet current retirement periods, or we are deferring the difference for future recoveries.

So we do anticipate that in the regulated component of our businesses, we will be able to recover those costs, either like I said, either on the current schedule or on the deferred base.

Steve Fleishman - Bank of America Merrill Lynch

[Carl].

Unidentified Analyst

Art, I don’t want to disappoint you because I have a question for you.

Art Beattie

Thank you, [Carl]. I would know to deal with that.

Unidentified Analyst

You had a slide on generation by fuel mix in which you refer to the 2020 range of percentage of generation from Gasco. And you did that based on low gas, high coal price or high gas, low coal price. What’s low, what’s higher with gas and coal?

Art Beattie

We took it out to ridiculous portion. Then it be, from a gas perspective it means seven, eight bucks or higher. From a coal perspective, it would certainly be much higher than where we are today. So that’s just like I said. If we just book ending the situation to give you an idea of what our mix would be given the change in the price structure.

Unidentified Analyst

Okay. Thank you. I had a question regarding demand growth. We got a lot of, I would say different views at the conference in terms of, is the weakness in demand growth in a lot of regions for the economy cyclical type thing or is it some kind of secular change in terms of efficiency or electric usage and I’d be curious each of your viewpoint on this. And is there a way that you guys can really determine the answer to that? Is it, they are assigned to this?

Brian Tierney

I think it’s all of the above. My jokes aren’t playing very well today. One, I think it's probably our own demand-side management efforts, and we think that probably cuts into about 70 basis points, seeing a little bit more of sales growth. Then, I think if you look at -- I think our class and I do think there is a difference of opinion in the industry. But I think if you look at the C&I class, I think that’s more of the economy. And of course we are seeing some, we don’t have a big industrial opening.

In industrial, what we do have is energy-related. So you can imagine that SPS in Texas, in the Mexico is the biggest growth area. But I do think, perhaps we are seeing something more fundamental on residential side and I think that has to do with the efficiency of appliances. You guys have seen the articles but PC uses about $45 of electricity a year and iPad uses a $1.50. That’s a pretty big difference.

Your flat screen TV, if you replace the one you bought eight years ago, your screen is going to use 60% less power when it’s on and 90% power when it’s off. If you are replacing your air conditioner unit, you can’t buy an air conditioner unit that is less sufficient even at the low end than the most efficient unit 15 years ago.

So technology is really getting better. And yeah, why I think we’ll have more gadgets. I think that’s the trend we are going to really have to watch. And again, I don’t know if everybody agrees with that but it is something we are certainly following pretty closely.

Ben Fowke

We are also following that very closely and are starting to believe that some of the impacts that we are seeing in our residential and commercial side are being driven by plant standards and building code standards changes.

On the industrial side, I think a lot of our energy intensive industrial customers have already made changes to try and reduce their demand consumption and be as energy-efficient as possible. But we are starting to see some of those trends work their way into the commercial side of the business and even in the people’s homes and it’s not just behavioral modification. We think there are some structural changes that reflect and we are closely watching what those trends are, modifying our plans accordingly.

Art Beattie

Steve, the only thing I want to add is it would be very difficult to handle forecast low growth because of all the things that my peers here have already mentioned but on the commercial side and the commercial is where we’ve seen, I guess, a bit of a struggling growth since the recession.

We begin to think about bigger issues like big box stores. They are beginning to move more through the internet. So it’s really a technology based equation now. What it really mean and how far would that translate, what if that had to do with tax policy related to internet purchase and will that make a difference. So there is all kinds of dynamics going on in each of the markets that we serve and it’s our challenge to try to deal with that and map that wholly.

Steve Fleishman - Bank of America Merrill Lynch

(Inaudible)

Unidentified Analyst

After his very similar questions that I had in mind but specifically for me, I wanted to know what the panel believes in terms of, if we have a sustained low gas price. How much difference will that make to the very growth of your specific area?

Brian Tierney

For us the production areas, Eagle Ford, Marcellus Shale could have some significant load growth opportunities for our processing and compression. And I drove last Friday night through a part of Ohio that begins in Steubenville and ends in Janesville, a traditionally depressed Eastern Ohio appellation components and the number of rigs pipeline construction that I saw, it was just unbelievable. It was like a boom town on a Friday night.

The number of trucks run around that. The number of scratches in the earth, the number of drills in rigs that I saw around, it was clearly a boom. They tell me it’s the same thing in the Eagle Ford shale in Texas and so to a large degree that’s a shinning part of our load story. It’s being able to get wire strong and get these customers hooked up as fast as we possibly can. So as much as low gas prices might crude us on off system sales basis. And that power prices are depressed and we can sell our access into the market as a significant improved margin.

In places, where we do have gas production and gas processing, it’s really a great spot in our load picture.

Art Beattie

Southern jurisdiction, we don’t have the opportunities a bit. Brian outlined that he is in Ohio in terms of shale gas. We’ve had a enormous of methane gas exploration but that’s not proved as fruitful as shale gays play in the other areas around the country. But from a customer benefit, we’re able because of their mix and our ability to pass on our diverse portfolio. We are able to pass on those lower debts and help people like slow, competitive help attract new industries of South East. And as our territory grows, so our benefit should grow as well.

Ben Fowke

I would just say that it’s a tremendous benefit for our customers and it’s helping mitigate the impact of the infrastructure build that we’re doing. I mentioned, Texas. We’ve seen a lot of growth there. I mean, even in Wisconsin, we are seeing growth not in shale gas but in sand mining because apparently we have some of the best sand for the fracing process.

So it’s really kind of interesting when you see that and I think the other thing we’re talking about is gas stays low and that probably means that we’re going to and you’re starting to see seeds of it that they are manufacturing, we’ll increase on America again.

And that might not be -- in my jurisdiction, maybe they will be somewhere else but I mean that’s good. So I think it generally is a wonderful thing we have.

Steve Fleishman - Bank of America Merrill Lynch

So I think you are letting us out early. We wanted schools happy. Gentlemen, thank you very much for the panel. And I want to thank everyone for the conference.

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