American Electric Power Company, Inc. (AEP) Q4 2007 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the American Electric Power's Fourth Quarter 2007 Earnings Conference Call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session. [Operator Instructions]. At this time I'd like to turn the conference over to Julie Sloat. Please go ahead.

Thanks Ken. Good morning and thank you for joining us today to discuss AEP's 2007 fourth quarter and full year earnings. If you've not seen the press release issued earlier today, it's available on our web page at aep.com. And a podcast will be available on our web page at the conclusion of this call. In addition to the financial schedules included in the press release package, the webcast of this call will include visuals of charts and graphics referred to by AEP management during the call. An investor information packet 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 in marketing, and parents and all other. The earnings release and other matters that may be discussed on the call today contains forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings including the most recent annual reports on Form 10-K and quarterly reports on Form 10-Q, for a discussion of the factors that may cause results to differ from management's projections, forecasts, estimates, and expectations. Also on the call, we will discuss the measures about company performance that is ongoing earnings versus reported earnings that differ from those recognized by Generally Accepted Accounting Principles or GAAP. You can find a reconciliation of these non-GAAP measures on our Investor Relations website at aep.com. I will now turn the proceedings over to Mike Morris, Chairman, President and CEO of the company to lead an opening presentation and then there will be time for your questions. Mike.

Thanks a lot Julie, I'm glad you gave that introduction out, so well done. Welcome everybody to the wrap up of '07 and a bit of a peek at how we feel about 2008. I hope that you had an opportunity to digest our incredibly detailed almost incomprehensible press release on earnings as we typically do we try to be as transparent as we can. The fact of the matter is when we look at '07, AEP clicked on every cylinder that it possibly could. We had an outstanding year with an 8.3% growth in year-over-year ongoing earnings when compared to 06, a 4.9% increase in our shareholder dividend with our dividend now at a full $1.64 a year on an annual basis. We increased our guidance over the three year cycle to the 5% to 9% range with the meeting with many of you on October received $352 million, an incremental rate relief and favorable rate adjustments in 5 of our 11 jurisdictions, in fact in every of those jurisdictions where we made a rate filing. We were quite pleased to receive from the Arkansas Commission, the authority to move forward with our ultra-supercritical coal plant. We think it's essential for this country to continue to move forward, demonstrating the viability of coal both now and in the future. We brought SCRs and FGDs online which makes each of our historic plans or existing plans much more energy efficient as well as in the long run environmentally better, that we think will add to the portfolio of opportunities in our PJM footprint as those plans continue to perform excellently and with lower cost profiles than they had in the pre-environmental head days. I think we did an excellent job of managing our fuel supply as well as the fuel supply cost during very, very high fuel price time in 2007 and of course substantially increase the portion of fuel supply cost that are recovered in the more traditional regulatory proceedings. All of those points we think speak volumes about how successful we have been inside of the regulatory envelope where American Electric Power does most of its business. We received what we thought were very fair, orders from the public utility commission of Texas not only for our wires operating companies in Texas but equally important if not more so for our partnership with MidAmerican which allowed us to go forward and create the electric transmission company of Texas. In fact we began drilling our customers in the last quarter of '07 and are encouraged by the opportunities that that transmission play gives for us as we go. In the PJM marketplace, we had a gas capacity at what we thought were extremely favorable prices and feel very comfortable about what we were able to accomplish there. In the SPP footprint, we were able to not only add gas capacity but its gas capacity that we build and will ultimately role into the rate base of the operating companies inside the SPP footprint. We think we received tremendous political, public, customer, and regulatory support for outstanding performance by the men and women of Public Service Company of Oklahoma who were visited in January by the Iceman and then the then Iceman come up again in December. That recovery was nothing short of phenomenal and the credit goes to Stuart Solomon and the folks of PSO and many, many other utilities, who can't do the aid of PSO but help us get our customers on in record time. Substantial cost impacts from that storm will be recovered in upcoming rate activities as we go forward. The wholesale off-system activity housing our commercial operations is also nothing short of phenomenal in 2007. Not only were they extremely successful in the PJM market but equally so in the SPP market with off-systems sales and importantly the creation of our retail and wholesale energy marketing group inside of that had a very productive year as well. I know that Holly will detail some of those data for you as we go forward but I feel very satisfied with the way that commercial operations continues to perform year-over-year. We received an excellent rating from Institute of Nuclear Power Operators for the overall performance of our DC Cook nuclear power facility. Something that has never been received before in the timeline that this was by our team in that particular area we feel very, very good about that. We issued our first sustainability report which talk great deal about who we are at American Electric Power, what we believe in, and what we strive to become. We're different from many other people, reached out to a large group of constituents in the preparation of that report. In fact some of you on the phone helped us in that regard and we thank you for that. We signed contracts for additional wind power facilities throughout our eastern footprint and continue to pursue that both east and west. I know that people look at American Electric Power and say you are awfully heavy in the coal world, but we do continue to add green power to our portfolio wherever we are encouraged to do so by the state regulator. We received only two notices of violation of the myriad of environmental rules and regulations that are implemented at the state level in our 11 state footprint area. For a company the size of American Electric Power that kind of performance is nothing short of phenomenal and something that we're very, very proud of. We rolled out in October what we think is probably the breakthrough technological opportunity on the intelligence upgrade of the entire grid from the power plant inside our customers businesses and homes. We think grid smart will position American Electric Power at the head of that class, as we go into the 2009, 2010 and beyond timeline and actually implement that technology in the field with full support from our 11 instate regulators and our customers as well. Most importantly, and not that important maybe to all of you but surely to the men and women in the families of the employees of American Electric Power. In 2007, for the first time in a number of year's and only the second time in 20 year's we do not loose the life of the single member of our team, that to me is something that's outstanding and something that we hope to be able to sustain through 2008. And lastly at the very end of 2007, we announced a series of additional management reassignments all intended to continue to broaden our horizons and the scope and the knowledge base of this incredibly talented team and the deep bench that we have blessed with at American Electric Power. It's my hope and surely the Boards hope that a few year's down the line someone sitting with us and who has met you and dealt with you that will become my successor in 2011. So we feel very good about 2007 in almost anyway that we can look at it, almost anyway that we think about it from financial performance to regulatory performance, to political support, environmental performance, internal human performance, team work, a very outstanding year. So, as I do with my team, I am sure you do with me, what about 2008. Well for 2008 as you saw this morning we have already up the guidance range from $3.15 to $3.25 to I guess 05 $3.25 to $3.10, $3.30. You know how we always head for the middle of that range so that says our target would be $3.20 for 2008. We feel very comfortable having done that because we already are well along our way in rate settlements and rate recoveries and rate understandings that we think will support that. We have our intent to spend $3.7 billion to enhance the earnings strength and opportunity of American Electric Power in the year's 2009 and beyond. We continue to work diligently with a number of players trying to bring forward a reason to entering Ohio and feel much more comfortable about that and I am sure we will get into that in much more detail as we go forward. We today announced a settlement with the folks at SUEZ Energy Marketing and Tractebel to bring to a close the Dow Pluckemin story which ended in '06 for us by the sale of that plant to Dow and now ends in early '08 with a settlement of an outstanding disagreement over the contract obligations of the Tractebel Electric Marketing Company in America. We feel very comfortable about that, it will add to the cash flow, it will help our capital structure, and of course will be part of our reported earnings as well look at 2008. We continue to move forward on our transmission plant with the assignment of Susan Tomasky as the President of the Transmission Organization, a seasoned executive that many of you are familiar with. We see the transmission play becoming very political and very regulatory involved as we go forward. Our partnerships with Allegheny, our expanded partnership with MidAmerica, and our partnership with ITC and others yet to be announced, continue to encourage us that the Federal Energy Regulatory Commission will in fact occupy this space on the transmission front and we will be prepared to do that. So with that uncharacteristically long bragging about '07 and framing of '08, I will turn for the details to my abled CFO, Holly Koeppel. Holly.

Thanks, Mike and it was a very successful year as you recapped. Once again we were well above the mid point of our guidance range due to the many factors that you have listed. If we turn to page six, our fourth quarter performance drivers, we were blessed with near normal weather which was positive when compared with the fourth quarter of last year. We've also had tremendous success in the regulatory arena and rate release has contributed substantially to the quarter-on-quarter results. We covered off system sales, higher volumes and prices have contributed to a substantial quarter-on-quarter uplift in our system sales. And I am pleased to report that the challenge we were facing with regards to PJM's marginal losses has been substantially addressed through rate release that we have secured or is currently pending. We are now recovering or deferring in both Virginia and West Virginia. We will be filing in Kentucky for recovery of marginal losses through our fuel cost and we in fact have a settlement pending before the Ohio Commission this week that would provide for recovery of marginal losses in Ohio. That leaves only INM where in Michigan we currently recover and in Indiana it will be included in the filing we will be making again this week. So that's a huge positive that should change what we are seeing in terms of net transmission revenue and we will be reflecting marginal losses as part of the retail growth margins on a going forward basis. O&M ARE very positive right on track, say for the storm damage that we incurred in December as you outlined earlier. Other income and deductions, we did see a change because as you will recall we returned two regulations under FAS 41 earlier this year. And finally, income tax is a bit of an anomaly there on a year-on-year comparison and that we resolved a number of prior audits in 2006. We are now current with the service through 2003 and it's a quite a few reserves in '06. In '07 we then followed up with a fairly aggressive series of amended state income tax returns that resulted in a lower effective tax rate than would normally be the case in 2007. For the full year much the same story, weather was essentially normal, definitely a positive when compared to 2006, retail sales the story there is both load growth and rate relief. The load growth in major part in the Ohio companies was due to the addition of that major customer Ormet, which we have discussed with you in the past. Off-system sales is a tremendous success, again due to favorable pricing conditions as well as a nimble of transactional activity by our trading group. O&M on track, depreciation and amortization much inline with what we predicted, the increased amortization that you will note here relates primarily to our Texas securitization that went into effect in late '06. The higher interest expense on a year-on-year basis is due to again the Texas securitization, we are now at a fully annualized and normal level and we will see a continuation in '08, not a step up. And finally, the other income and deductions I spike out, the discontinuance or the reduction in Centrica sharing year-on-year and of the Centrica sharing which will occur in '08. As you will recall we received $70 million in '06, $20 million in '07 and that will drop to zero in '08. So that pretty well summarizes the quarter and year-on-year comparisons and the differences between the two. Turning to cash flows, again right in line with what we would expect. The schedule is fairly self explanatory. Changes in working capital were largely driven by the tax discussion that we just had, as well as our shift in receivables and payables. Our cash outlays did have a very successful year of CapEx right on track with our budget of $3.6 billion. We also sold a few assets, the Centrica sharing which I just mentioned, the Oakley Union sale was finally completed for $46 million, ETT formation resulted in a $70 million transaction, and we finally sold our last IPP the Sweeney plant for $82 million. Finally, we did have a successful addition of a number of gas fired generating plants that you mentioned earlier Mike, 3 plants in particular in '07, the Darby plant $100 million, Lawrenceberg $3.25 million, and Dresden for $85 million and that plant will be completed by the end of this decade. Our investing activities as noted here, we did issue through the drip common shares of 143 million, options exercised at $86 million and the dividend reinvestment plan 67. Summary is that the change in cash and cash equivalent balances year-on-year we moved from just over $300 million to $178 million. And finally, ending the year we had an adjusted debt-to-cap ratio of 58.5% right in line with our target of 60% or better in terms of outstanding debt. As you can see from the schedule on page 9, the adjustments that we make are to add back the off balance sheet lease of our Rockport unit 2 of $1.183 billion and to eliminate or deduct the Texas securitization bond outstanding of $2.2 billion. With that it's no surprises once again, pretty much a recap of the year and we can turn to questions.

Thanks Holly.

Kent we are ready for questions. Question And Answer

Great. Thank you very much. [Operator Instructions]. And our first question then this morning comes from the line of John Kiani with Deutsche Bank. Please go ahead.

Good morning, Mike, Holly, Julie.

Good morning, John.

How should we think, Mike, about the potential for maybe a reg asset and some type of securitization as part of post '08 rate structure in Ohio?

Well that's an intriguing way that one might find an answer to the discussions that are ongoing in Ohio. We would love to have that as a process whereby one could forecast to market price, create that particular reg asset, a new securitization as it means to smooth that out as we recover it. It would be wrong for me to tell you that I feel very strongly about that, that might well happen, but it is a viable tool that has been used in many, many jurisdictions in more creative ways than even that, but we will see how that unfolds. I think the most important piece in Ohio right now John is the very strong statement and commitment on behalf of the speaker of the house to the point that Ohio... the political part of Ohio needs to define what the energy policy of the state is, so that the implementation by the administrative part of Ohio being the PUCO isn't left to fill that void with however they create their determination of market and market liability. That is an essential part of the ongoing discussions and the ongoing development here at Ohio we believe a very important part to establish for all four of the operating utilities as well as the Ohio economy the road forward.

Thanks Mike, that's helpful. And then from a transmission perspective, you have made a few comments in your opening remarks about the potential for other joint ventures or other partnerships, certainly that's a growing focus and part of the company. Can you talk a little bit more about what we might see and what you might be able to do above and beyond the current partnerships out there.

Yeah, we have tried do be very, very straight forward since coming to AEP in 2004. We began to withdraw from the international marketplace where we along with others were being severely challenged and said that we would focus in on what is a very, very intriguing footprint 11 states covering luckily three RTO's; the ERCOT as well as SPP and the PJM which of course is most of the North Eastern quadrant of the United States save New York and New England. However, we have always said that the transmission play and surely the partnership called Electric Transmission America with MidAmerican is intended to allow for us to pursue transmission projects in a much wider footprint and we continue to discuss the potential of joining others in endeavors in a footprint much wider than the three power poles that we currently serve in. I think it would be pretty mature John to give you much more data than that. But as an old friend of mine used to tell me in the marketing game watch the space because we really do have what we think are some very real potentials.

Okay, great. Thanks.

Thank you and we have question now from the line of Dan Eggers with Credit Suisse. Please go ahead.

Good morning.

Good morning Dan.

Mike I was just wondering if you could just give some thoughts... there has been a lot of setbacks in the IGCC development business mostly by other folks at the market, can you give me your thoughts on what is the evolution of that asset type and kind of where you guys really think we'll see one in the ground?

I can tell you more about the formula than I can on the latter Dan but let me do that. There is no question. We have never tried to run from the reality that integrated gas combined cycle technology is in fact more expensive than pulverized coal or ultra-supercritical coal. At the end date, however, we believe that, that technology with environmental processes fully implemented will be cost competitive if not cost advantageous to others going forward. We are very comfortable as is General Electric with the gas fire technology, as Bob Powers use to say back when he used to run the power plants not near as well as Nick but back when he did that the integration is really the issue, and our engineers feel very, very comfortable about that. We have more chemical engineers working at American Electric Power today than we've ever had, and it really is in fact and it becomes a chemical plant with a power plant on the back, which is very unique understanding and undertaking for anyone who's going to be in that space. If you look at some of those who have walked away, I am not sure that they were as prepared to take on those challenges as we have been. So we feel very comfortable of this technology, we will continue to push the envelope. In that regard we think the prices we have put in front of the commissions in West Virginia and Virginia are very real, very honest, they are high. It's on the order of $3500 a kilowatt, but we think that that's a good honest portrayal of the costs that are associated with these activities. As to the win, we really believe that we'll get authority in West Virginia this year to be begin going forward in a much more aggressive fashion as you know Appalachian Power is regulated by both jurisdictions. The staff in Virginia is not as comfortable, they are worried about the unknown of tomorrow's carbon requirements and the unknown of tomorrow's environmental legislation whatever it might be. But its going to take bold commissions to make bold decisions not unlike the commissions in Indiana did for Duke, Indiana. I am not here to sell Jimmy's stock but the fact of the matter is commissions that are willing to make difficult decisions like Arkansas are the kinds of commissions that we are encouraged by because this country needs base slow generation and I don't want to wear my bush at too many more days, its getting pretty worn out but the President made that statement crystal clear last night and I was amazed that not only the duty for Republicans were clapping but I saw some Democrats clapping as well when he made those statements about clean coal and clean coal technology. So those who have stepped away have various reasons, those like us who continue to push forward believe very strongly that this is essential not only for our customers and our state, but this country as well.

Thanks. And I guess finishing the coal conversation there has also been a lot of market focus on rising coal prices and availability supply, can you just give us a feel of where you guys are from a supply perspective over the next couple of years and anything you are seeing we should be aware of by way of kind of coal pricing trends and what you're contracting for?

Well there is no question that, the coal prices are escalating. When we came into the '07 timeline we spoke in terms of 7% to 9% increases. We ended up with a 4% increase on average. And again that speaks volumes about the skill sets of Chuck Zebula and the fuel supply team that we have here at American Electric Power. When we look at 2008, we are looking at escalations in the double-digit range for coal. Fortunately as I also said at the offset of my remarks we have taken most of our fuel expenses and put them back under the more normal fuel recovery clause mechanism in the 11 jurisdictions where we do business. The only place where we don't have that address and surely we might do that as we go forward is in Ohio. But coal prices are tough. Coal supply were very good shape, we're fully... we're in the high 80's on coal supply for 2008, obviously a little less than that in 2009-2010. We continue do blend and extends. We continue to see a lot of pressure on the price of coal. We have the opportunity to do a lot more PBR and we're beginning to do that, blending that in as eastern coals... one other thing that you are seeing worldwide to your question is that steam coal in the eyes of a coal miner can look like met coal, when met coal prices get real high as they are today with the Australia event. You are beginning to see coal exporter from the eastern line out of Norfolk and other ports Baltimore I guess going to the world market place, and hardly enough some of our suppliers tell us they are having force majeure issues I call them price majeure issues, but we'll get them back in line and no shortages will all ultimately be delivered and that will help us put downward pressure on the price of coal as we go. And also remember that with scrubbers and things now being added to the plant we do have a better portfolio of coals that we can burn and that gives us some additional credits that we can monetize and when we look at the overall costs of coal we try to take all of that in to conclusion. So lots of words to two issues' costs going up, most of it recovered regulatory, volumes very comfortable.

Thanks Mike.

You bet, thanks Dan.

Thank you and we have question in from the line of David Frank with Catapult Capital. Please go ahead.

Yeah hi Mike, it's actually Steve Fleishman.

Hey Steve, how are you?

Good, how are you

You are playing David today

I'm playing David, yeah. Thanks, two questions, one I was... just wanted to check in from an Ohio standpoint from relative to the 2009 outlook that you gave last fall, how do you feel about the progress today relative to achieving that or potentially you have been doing better than that?

Well I feel that we can surely get within the range that we spoke to you all about in October in earnings sense by the way that Ohio will unfold. Do I think that we'll be at the high end of that range, I'm not comfortable with that yet Steve. I will tell you this that coming out of the senate I was very sick to my tummy, watching the House and the Governor, the interplay I feel much more comfortable. As you know Craig Baker, Bob Powers, Kevin Walker, and now Joe Hamrock have done an excellent job working on that issue and surely I've been involved with it as much as is appropriate. I think Ohio is going to come out fine. One thing that Ohioans have come to realize through a lot of work that we did and our commercial ops did, there is a viable market. They came over to the trading floor to a person in the press, they elected officials, the leadership in the House. There is no question that that is a viable market. Equally important, I think Ohio is beginning to realize that there are some very strong legal arguments surrounding the law of 1999. I appreciate the arguments that Tony has and I have already moved my assets and I will see you all tomorrow, but there are constitutional arguments about the viability of contracts and contract commitments for the other three utilities as well. I think all of that tell me that Ohio might come out alright Steve.

Okay, one other quick question. Just I know you have initially opted out of RPM and PJM, I am wondering if you could just remind us when does that opt out expire, and how would you think about... what you might do after that exploration?

Well a lot of that has to do with where the Ohio generation fleet will be when that day comes. There is a three year window and there is a rolling window after that, that you can opt out for any period where the capacity bids are not yet concluded. So, we think we've got a number of different times to pull that trigger and that will have a lot to do as I said where the Ohio fleet is. And you can see two things important to American Electric Power and I hope you all understand how our strategic plan hangs together in that regards. So, the resolution of the generation fleet in Ohio and its freedom to do what might make sense, but equally important is the ability of removing the transmission bottlenecks that don't allow us to get into the extremely tight capacity areas on the very far east side of the PJM. So when you look at the transmission projects I-765, Path, Trail and others, you can imagine that those who really don't want to see those things go are those who have those beautiful little power plants in a landlocked area but we're going to help them out. We're going to open up the highway and let the freedom of competition sweep over that area as well.

Great, thank you.

You bet.

Thanks and we have a question then from the line of Greg Gordon with Citigroup, please go ahead.

Good morning.

Good morning Greg.

So a follow on to the coal question, as I looked through your presentation and I look at the 2008 sort of midpoint pro forma on page 12, that's not page 12 it's a couple of pages later. Its page 15, I apologize.

Alright.

You have on the off-systems sales line you got a meaningful increase in volumes but a meaningful contraction in the suite gross margins achieved. I might have presumed that that's mainly the impact of higher coal prices or it was actually been ... you will see lower out coming?

Well I think clearly there is some impact on coal prices. They are actually the margin period realized but I think its also just our way of trying to make certain and that we do what we've done for '04, '05, '06, and '07 and that is not promise of sky and delivered the sea but try to give you a good look at a middle ground that we think is not only achievable but is build on some conservative data as we look at it.

Great, second question, the rate believe target is up from $360 million to $518 million and I know that you've also showed us that a big chunk of that is already in hand, $235 million of it. What on the margin are the new revenues that create that delta, and then second, that's a $0.23 increase in earnings if you just take that gross margin after tax, so what are the offsetting things that cause a $0.05 increase in the guidance range?

Let me try the first part of that. The bulk of that really has to do with the marginal loss activities and our ability to recover them and that was not in the earlier numbers that we showed you for rate activities back in October. Those are federally mandated costs that come down to the state level and under all jurisdictions those kinds of costs are recoverable, it is just matter of the timing of that and as Holly said in her comments much of that is already digested, much of it is already part of settlements that have been agreed to that are being filed or have been filed. The second part of your question is a difficult part. Yeah, that says there is lot of rate recovery going on. We feel very good about that, but its way too early in 2008 to get overly bullish on successes that might or might not come our way and we have no idea what impact the economy might have. Although much of our service territory in a manufacturing industrial sense is export oriented. And if you look at '07 sales, industrial sales were strong, it tailed off just a bit at the end of 2007. So it's just too early to get bullish on where '08 might go, but we felt strong enough or comfortable enough I should say to move that up by $0.05.

So to try and round that out a bit, to give you a sense of the increase in the numbers over a $100 million of it is the marginal losses in Ohio and that's a dollar for dollar offset Greg. So what we were really looking at in terms of incremental is to do two things, the Oklahoma ice storm that Mike mentioned earlier that we will be requesting recovery for obviously hadn't happened in October, so it wasn't in our announcement then. As we've announced that total costs is in the range of $70 million and we would expect substantial recovery of that. We'll also have updated the timing of our expectations for a Virginia regulatory proceeding both to recover marginal losses and as well as contemplating possibly a base rate proceeding. So those are the big moving pieces on the jurisdictions in which we expect to see incremental revenues relative to what we had out there in October.

Great, so a big chunk of it is a revenue increase offsetting an incremental cost and then Oklahoma recoveries and then maybe a Virginia marginal loss case, thank you.

Thank you.

Thanks, and we have a question then from the line of Ashar Khan with SAC Capital. Please go ahead.

Good morning, congrats.

Thanks.

Holly I think I missed it when Mike was mentioning it. I think so one of the major differences between the forecast, the '08 one is the higher wholesale sales, off-system sales sorry and I guess it's like 35 versus 30 and I am trying to understand why we are forecasting higher versus three months ago?

Just to give you a feel for why its stepped up both when compared to '07 actual and October we did have change in the AMUS tie in out of schedule. And as you know this year was a huge year for major plants being offline to tie in the environmental retrofit. So we've refined the estimates since October, we always expected '08 to have more gigawatt hours available for sale into the wholesale market.

So is that a good number for going forward '09 onwards?

Those kinds of numbers more than likely in that particular range, although we will be doing some AMUS tie in's in '09, and a little bit beyond that as well.

The other point that I got little coaching from my colleagues here, we did not in October factor in the additional gigawatt hours we are now reflecting as sales associated with marginal losses. As you know when we moved to the marginal loss payments, we now have additional 3% of availability to sell into the market that added into total gigawatts available.

Okay. And then I guess is it just conservativeness that we achieved a margin of 30.4 in '07 and we are forecasting 22.5 for '08?

Well I think part of it is the answer to Greg's question that as coal prices go up margins get impacted by you pass along some of that and not all of that. And then I think there is some comfort in knowing that we think we can hit those kinds with numbers.

Okay, and if can end up Holly on October for '07, you were expecting a loss for parent and ongoing for I think so around 40 million or so and we ended up the year with the positive 15 and I was trying to understand what was the reason between the delta? This is for '07?

I tried to touch on that a little earlier. We had some resolution of tax issues.

Okay.

That we took reserves for in '06. We actually got the IRS decisions last in the fourth quarter last year and that did shift around a bit relative to what we were forecasting. So predominately taxes.

So that's independent than the other line item? Thank you very, very much I appreciate it.

Thanks Ashar.

Thanks and we have a question then from the line of Elizabeth Parrella with Merrill Lynch. Please go ahead.

Yes. A couple of questions. One is following up on Ashar's question on the parent and what drives the big increase in the parent drag in '08. You have about... I think you have about $75 million negative swing, which would be even higher then, what you were looking at for '07 initially. What are the drivers there?

Well in addition to taxes having been a positive this past year it's compounded by the fact that we do plan to issue hybrids as the parent this year and so we have an increase in expense that will show up this year and we have no anticipated positives like this interest reversal that we saw last year.

Okay, and then just going back to some of the new generation projects that you have been working through the regulatory process on, for I believe its Turk, I think the Texas sales as opposing that you got permission in Arkansas, I think you are still waiting in Louisiana, can you maybe just give us an update on how that plays out and then just the whole process on Mountaineer, where you are really Virginia staff you made some comments but if you can just bring us up to date just on the whole Virginia and West Virginia situation for Mountaineer?

I had answered the first question Elizabeth, the Turk situation, obviously because its going to be in the Arkansas and the way that SWEPCO does their rate allocations that was the most important commission decision. We await the air permit in Arkansas which we hope will be coming sometime in the first quarter of '08. The ALJ's decision in Texas was couched in the same things that you frequently see and that is, why build a plant when you could buy in the market. Well we believe that in the long term that plant is going to add value to the customer base. If you look at SWEPCO's rates in Texas you'd surely say, oh there are some pretty bright people compared to the market price being paid by other customers throughout Texas. So, we will see how the commission sees that same issue, they may see it differently. And we expect that Louisiana will be in support of it. As we go forward we haven't seen any signs that are different from that. Should Texas say no then we'll take that part of the plant to the market gladly. But we will go forward and build the Turk plant and use it to satisfy the already agreed to need in Arkansas and in Louisiana as we go. On the West Virginia side, I really couldn't feel more comfortable about the way that West Virginia sees the project. I know you've all heard on some of our tours at Mountaineer when Governor Manson [ph] dropped by how bullish he is on the issue, but we think we'll get ultimate authority in West Virginia in '08. We think that one of the great things about the Virginia Commission over the years has been that they implement the laws that the Commonwealth put in place when the delegates speak, the commission reacts to that. You know, just look back at some E&R cases, where wild positions were taken by many, many people but the commission followed the law of the Commonwealth of Virginia. Virginia says we need new power plants, so there is no question about need, no one challenged a need not even the commission, they just commission staff, I mean they just went on, and on and on about the unknowns as well. Half of the unknowns are going to be unknown, that's why they call them that and then they are going to continue to be unknown, but sitting back and not building something that's needed, because we don't know what tomorrow is going to look like would tell us all the way for tomorrow to come and as you know that's definitionally impossible. So we are going to keep pushing forward. We expect we'll get the authorities in Virginia, West Virginia to build that station and I can tell you this that Bechtel, and GE, and American Electric Power are very eager to get that go ahead.

Thanks.

Yeah, thank you.

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

What was the total PJM margin losses you experienced in '07 and how much has been addressed to great activity behind you?

140 odd million and about a 110 odd millions have already been addressed.

The 140 was the absolute or incremental over '06.

So, remember there was no '06. Because this was a work order coming out in '07 on how to go about doing marginal losses on the system. Obviously they got it goofed up but because it's a federal order its recoverable at the state level.

Paul what you have to take into account also is the fact that we do have that additional 3% to sell into the market and so the 144 is the bill we paid but we also had higher revenues because we had more megawatt hours to sell. So that 144 is the gross number, I would say net is in the range of $30 million to $40 million.

et is 30 to 40.

Yes.

Thank you.

And that's sounds like 140 less 110 doesn't it.?

Thanks and we have a question then from the line of Leslie Rich with Columbia Management, please go ahead.

Hi Mike. Good morning. I wondered if you could update me on the ETT joint venture in Texas with MidAmerican, I guess I'm not clear, I thought that the Texas PUC had proposed below 10% ROE and that you and MidAmerican were sort of mulling your options. It sounded in your prepared remarks like you had actually incurred expenses moving forward. So I am not just clear I understand sort of where you are in that process?

We mull and then capitulate it and when went forward and created the partnership. We are, in fact, moving electrons on the ETT assets, and what I said was that we not only incurred expenses but we build those who were hauling energy for and low and behold they have paid us. So ETT is up and running and doing well. It is a 996 return on equity, that's a little off the mark but in today's marketplace, would you like to have something paying you 996.

So then going forward you've proposed some new transmission lines. Are those now awaiting approval by Ercott or the PUC?

As you know we have in fact proposed substantial additional transmission opportunity and investment in Texas. They are going through the PUCTs credit evaluation for how they will designate the areas and which projects will be build. We feel very comfortable about our position. We clearly are well suited to go forward and help build out the infrastructure in Texas. The partnership brings the incredible capital opportunity not only from us but more importantly from MidAmerican and it brings the incredible transmission experience paralleled by no one in this country to build transmission in Texas. So we feel comfortable about where we are Leslie.

So what kind of timing could we expect? And sort of what's allocations of capital?

Well the plan is something north of a billion dollars at the end of the day, in fact it's a couple of billion dollars. But the timeline which is much more important is the PUCT will make some decisions on that. Yet this year, they will select some projects and because of the way things happen in Texas you could be building later this year, early 2009 if given the go ahead.

Okay. Great, thanks you.

Thanks and we have a question then from the line of Paul Patterson with Glenrock, please go ahead.

Good morning, can you hear me?

I can Paul, go right ahead please.

I just wanted to follow up on off-system sales thing here. You appear to assume prices and what would that do to the actual margin, trying to get a sense as to what the cold impact I guess on off-system sales for 2008 versus you guys being kind of conservative?

Its gone be very hard to be fair Paul. Its the three moving pieces and you don't... you have too many variables not enough equations here. The fact that we had a terrific year in trading and the volumes that we show for off systems sales are physical volumes whereas the revenue number or the gross margin numbers are aggregate growth margin including both physical sales as well as financial transactions and I'd obviously excuse the math in terms of the calculated realization per megawatt hour. But the bottom line is we will have -- as you know our most expensive units are on the margin that which shows up in off-system sales. Fuel prices increases will serve to disproportionately eat into those margins and we are not forecasting another gang buster year end trading so I think its fair to say that we have a reasonable degree of conservatism factored in to our off-system sales line.

Okay, great. Then the other question I have for you is on the fundamental down freight [ph] situation, it seems like you guys are basically banking on a flat year. What caused the North bound freight to sort of fall off and just what in general are you guys looking in terms of economic condition in terms of MEMCO and sort of larger economic conditions in the economy and how they might or may not effect the income.

Part of... obviously we see a slow down in the importation of metals and cement that was part of the north bound freight that we experienced handsomely so in '06 but didn't see us strong in '07. We're forecasting that to be a bit slow in '08. We see some pretty good drain hauling. Obviously there are activity on the barge side for the coal deliveries will be very, very strong. So we see a pretty flat year down just a little bit for MEMCO '08 compared to '07 but the value that the entire barge fleet business brings to us, we think is well worth our continued investment and our continued position in that space, Paul.

Okay, great. Then, finally I guess back to Ohio, you said that you are looking for sort of political consensus with respect to where the market... where Electric Power should go and which makes lot of sense, but I'm wondering where do you think that consensus actually is. I mean it's seems that you do hear sort of comments about how people serve pro-market but it seems that sort of with the caveat that they think the market will provide a lower price if you follow. You know I am saying so I mean if you could just give us a little bit of a flavor to where you think consensus is actually heading and when we actually might see something come out of the, I guess the public utility committee and whether that would be sort of the final thing or just sort of where sort of the pathway that you actually, you think its most likely to the happen?

Well, I don't think there is any question that Ohio... once elected official in Ohio believed like almost Americans that the marketplace is the best place for anyone to find a competitive advantage. I agree with you 100% that my industrial customers would like to have the definition of market being lowest cost supply. They do that in the supply side of their chain, they don't do that in the sale side of their chain however, and we try to remind them of that frequently but without great success. The definition of the market... remember how it came out of the Senate, that the definition of the market is up to the nuances of the public utility commission of Ohio. Politically, that's untenable, that's like saying we're going to have healthcare and we'll leave it up to the docs to figure out what the healthcare plan is. Public policy is to be written by elected officials and implemented by administrative agency not to be written by administrative agency. And that... I mean the argument of all four of the Ohio utilities. The House has seen that and has taken that on as a very serious political assignment. So I expect that they'll help define what a market looks like and that will make it much easier for any utility to move to market when in fact that of those definitional points are kept. So it is in the matter of market $0.03, markets $0.08, markets $0.10 it's the matter of a market is there when there are willing suppliers to come in and bid in the marketplace which of course there is and there will be and there here has been. But it's that definition that will allow companies like American Electric Power to go forward and do what we have spoken to from the very, very beginning which is we appreciate and I know our customers appreciate, we are the lowest cost supplier in the City of Ohio and have been for a long, long time. For us to flash the market in a signal year would put a substantial strain on all of our customers residential, commercial as well as industrial. We would stare step to that market over time. Those who are within mills of market might move there in a season or two and almost no impact on their customers because already they are paying very, very high prices. So I think that's how Ohio will unfold and it will allow us, back to Steve's question to be well within the range that we spoke to you earlier on and really to go back to the very first question that John asked, the ability to charge a market price to the utility but not pass that price along to the customer, create a regulatory asset and securitization recovered that overtime would be a ten strike for us but again that would be speaking beyond what I think is achievable.

Okay, and when do you think we might see some final resolution to that?

I think the time is getting near. There was a very meaningful meeting in front of the house committee last week. There was a great deal of discussion by customers and others as to the certainty that Ohio really would like to see. There is and will yet be a discussion on the constitutionality of what they are trying to do, and I expect that will be an ultimate day, but no that will be the most important meeting as we go forward and it will lead us to the potential conclusions of this market definitions, so we can bring resolution at timeline probably before March. Sometime March they go on recess probably for Easter. They might get something done before that.

Okay, great. Thanks.

Yeah, thanks for the question.

Thank you very much. And speakers we are nearly at the top of the hour. Would you like to go ahead with the closing.

Yeah, we're fine. Go ahead Julie.

Thanks for joining us this morning. The IR staff is available for any follow-up questions. So please do reach out to us. And I know the operator is going to come back to you with replay numbers for anyone who's interested. Thanks.

Thank you. And ladies and gentlemen, this call will be available for replay starting today Tuesday, January 29th at 11:00 AM Eastern Time and it will be available through Tuesday, February 1st at midnight Eastern Time. And you may access the AT&T executive playback service by dialing 1-800-475-6701 from within the United States or Canada or from outside the United States or Canada please dial 320-365-3844 and then enter the access code of 904897. Those numbers once again are 1-800-475-6701 from within the U.S. or Canada or 320-365-3844 from outside the U.S. or Canada and again enter the access code of 904897. And that does conclude your conference for today. Thank you for your participation and for using AT&T's executive teleconference.