American Electric Power Company, Inc.
Q4 2012 Earnings Call Transcript

Published: 15 Feb 2013

[Nicholas K. Akins:]

While everyone's getting a seat, good morning, and welcome to AEP's Analyst and Investor Meeting today, and thank you for your interest in AEP as well. So I guess, legally, please refer to the Safe Harbor Statement in the package that was given to you, so -- and we'll continue with the presentation. We have an excellent lineup of speakers today, and it's great to be back after 1 year, back in the saddle again with providing guidance, but also really providing a growth story for AEP. We're in a distinct position now, where we've cleared the decks, where now, we can really start thinking about how we reposition the company. And I think you're going to hear a pretty compelling story about why you should be investing in AEP. So we have an excellent lineup of speakers. Brian Tierney, CFO, will be up here a little bit later with the financial update. But we also have Lisa Barton, who heads up our transmission effort. I know there's a lot of questions about transmission. It's a major growth area for us, and we're very focused on that type of business. She's going to talk about some of the issues that I'm sure you have questions about relative to ROEs and things like that associated with transmission. And then Chuck Zebula, who you all know has taken over the competitive part of our business. So as we move toward that competitive environment in Ohio, he's very focused on dealing with the -- what will be unregulated generation, along with our retail play and the wholesale trading operation that goes along with that. So with those speakers, we should be in a position to answer many of your questions on the front end, so -- but if you have questions after that, certainly, we'll be happy to take them. We also have some of our senior leaders here in the audience as well. I wanted to at least point them out, so if you have questions, you can catch them as well later. Bob Powers, who's our Chief Operating Officer. If you could just raise your hand, Bob? Rich Munczinski, who heads our regulatory efforts, so all of the regulatory questions, you can go to him. And then Mark McCullough, who heads up our Generation area, heavily involved with the environmental effort and other activities associated with moving to the unregulated generation. And then, Lonni Dieck and Julie Sloat are here as well. Julie, I think you know from the past as well. So we have a very, very strong team here and people here who can answer the questions that you might have. So let's talk about what you're going to hear today. There's a positive story about our accomplishments in 2012, and I think you're going to see, we did a lot to clear the decks and eliminate risk for this company, but even more so, we're in the position now where we can talk about the strategic repositioning of our corporation. So as you see from the slide here, we delivered 2012 GAAP and operating earnings of $2.60 and $3.09, respectively. I think we beat consensus on 2012. And then now, we're providing guidance again, for 2013 and 2014. 2013 guidance is in the range of $3.05 to $3.25 per share, and then operating earnings range for 2014 is $3.15 to $3.45, with midpoints at $3.15 and $3.30, respectively. Earnings growth we'll reaffirm at 4% to 6%. We think that's supported by our regulated companies. And we're also, with board approval, increasing our dividend payout ratio, supported by the earnings of the regulated operations. Previously, we had 50% to 60%. We're raising that to 60% to 70%. You're also going to see that a lot of work's been done to make sure we have a strong foundation for growth, but also a strong foundation financially. Brian will be talking about the things that they have done relative to the financial effort, and it ensures that we're well into BBB credit rating and certainly well positioned to be able to move through the process of unregulated generation and so forth related to Ohio. And then the transmission growth. I hope -- you've probably had a chance to read the book at this point and know all the answers, but you look at the transmission growth, it's phenomenal. We continue to focus on that piece of the business. I think when you look at this business for the future, when you're retiring generation, when you're thinking about new sources of renewable energy and so forth, transmission will be key to that, robust transmission, and it certainly is a compelling growth engine for this company. The generation profile is changing, obviously. Chuck will be talking about that in detail, but generation is one of those areas where we'll still have a huge amount of regulated generation, but as a result of the corporate separation in Ohio, we'll be moving some of that generation out to an unregulated effort, and we'll work to hedge that. The Ohio situation is clarified. We were in the situation last year where there were orders going back and forth and a lot of changes were occurring during the year, and it was very difficult for us to provide guidance. But now, we have a clear path toward an unregulated environment and a competitive environment in Ohio, and we're well positioned to take advantage of that as well. But I do want to reaffirm to you that we are a regulated utility. We're 86% regulated; 14% unregulated; 4%, we already had with river operations; the other 10%, we'll pick up after the corporate separation. But we still are a regulated utility, and that is our focus. And in the future, you'll see that we'll continue to focus on regulated operations as well. So let's move on to some of the detail. For 2012, there were a lot of operational accomplishments, but things that you'll see that really presents a foundation for us so we can start really thinking about the growth and repositioning of the company. So 2012 was all about clearing the decks, all about reducing risk and repositioning the company for quality customer service and growth. So I always maintain, the first part of the slide is around safety. We had 0 fatalities during 2012, and we had one of the best safety records from an occurrence standpoint and a severity standpoint that we've had ever at AEP, and that's the first early indicator you'll see of operational excellence in any company. We maintain that. We focus on it. And it's shown during the work that we've done during the year. So the things we did from a construction standpoint

[Brian X. Tierney:]

Thank you, Nick, and good morning, everyone. We have a lot to cover today, so I'll jump right into it. And I'll give a comparison of GAAP and operating earnings for the fourth quarter of 2000 -- for the fourth quarter in the year of 2012 versus '11. GAAP earnings in the fourth quarter of 2012 were $0.05 per share compared to $0.64 per share in the fourth quarter of 2011. Operating earnings, however, were $0.50 per share compared to $0.40 per share in the fourth quarter of 2011. Reconciliations between operating earnings and GAAP earnings for the fourth quarter include the Ohio plant impairments, the costs associated with the restructuring program, as well as a reserve associated with the U.K. windfall profits taxes issues from when we owned plants over in the U.K. On the right-hand side of the chart. For the full year of 2012, GAAP earnings were $2.60 per share compared to $4.02 per share. And remember that in 2011, GAAP earnings included the $1.16 per share associated with issues related to the Texas capacity auction order. Operating earnings in 2012 were $3.09 per share compared to $3.12 per share in 2011. In addition to the items that explain the quarterly differences between operating earnings and GAAP earnings, similarly to the annual component, there were an additional $0.02 per share associated with costs associated with the restructuring program, and there were also $0.02 per share associated with the Turk plant impairments that was due to the Texas regulatory cap on the cost recovery for the Turk power plant. Let's turn to reconciliations between the fourth quarter of 2012 and full year operating earnings for 2012 as well. Many of the drivers that are the -- are the same for the annual as for the quarterly, so I'll focus my results -- or my discussion on the annual component. And we'll talk on the right-hand side of the page where the annual reconciliations are focusing mostly on the larger items. If you have any questions on some of the smaller items that I don't cover or on some of the quarterly reconciliations, we can either handle those in Q&A or with the IR team. In 2012, like we said, we earned operating earnings of $3.09 per share for the year compared with $3.12 per share for 2011. The net effect of Ohio customer switching and capacity deferrals was negative $0.23 per share, and that included the loss of generation-related margins that were partially offset by capacity deferrals of the ESP. As of the end of 2012, 51% of load in Ohio had switched and an additional 3% was in a queue waiting to switch. Higher depreciation and amortization accounted for negative $0.20 per share relative to 2011 and reflected plant additions, as well as increased depreciation rates at APCo and I&M. Nonutility operations and parent were negative $0.17 per share from 2011, and reflected primarily 3 items

[Lisa M. Barton:]

Can you guys hear me okay? All right. There are 3 items in particular that I'd like to cover with you today. First and foremost is to summarize our 2012 performance and talk about how that performance will really position us for the future. Secondly, I'm going to highlight the breadth of our transmission investments, basically give you a breakdown of the projects that make up our long-range plan, and these are the projects that are really going to propel our growth in the future. And finally, I'm going to address the subject of FERC ROEs and incentives and review where our performance has been in that space. So 2012 was an extremely positive year for AEP Transmission. Our earnings were 50% higher than they were in 2011. We secured approval of our West Virginia Transco. And why that is so crucially important is because that serves as the foundation for our Transco growth. As you may recall, AEP Transmission Holding Company is the parent of our state-based Transcos, ETT, ETA, our project-based joint ventures, as well as our new competitive affiliates with Great Plains Energy, Transource. Our Transcos ended the year with $373 million of plant in service with a net PP&E of $744 million. In 2013, we're projecting to have $770 million in plant in service with a net income of $47 million. ETT reached $880 million in 2012 and is on target to be self-funded in 2013, with a projected income of $25 million. And that represents AEP Transmission's Holdco share in that investment. Some of the things that we're particularly proud of in 2012 is the fact that we were able to be ahead of target in terms of our in-service assets, and this was during a time where we had both our own crews as well as the contract labor crews that we rely so heavily on to get our assets in service, deployed to the restoration efforts in the East in support of the damage caused by Sandy. One of the things just to note in the transmission businesses is that our outage windows to really get these assets in service are often in the spring and more often in the fall. So fall is a crucial time for us in terms of deploying capital. In 2012, we also secured $1.7 billion worth of new investment opportunities through the 3 RTOs that we are currently operating in, $1.25 billion of which is in PJM alone. And as Nick mentioned earlier, the transmission system is very much the backbone of the grid. This allocation of the $1.25 billion is very much tied to the region-wide retirements in PJM, which would be about 14 gigawatts between now and 2015. In 2012, we also deployed new technology and improved our standardization, basically with the intent to improve our ability to move capital more efficiently, deploy it more efficiently to meet in-service dates. And the in-service dates, we really needed to speed up to address the growing shale gas loads that we're having in our territory. It's no longer a situation where you can say to the customer that will be -- it'll take us 2 years to get you interconnected. We really have to do that in a very short period of time. So we used a number of technologies to make that happen. We also use it to manage our RTO outage windows, as I mentioned earlier; those are critical to our success. And finally, to reduce costs to our customers. Aggregating our growth under the AEP Transmission Holdco is providing greater visibility and transparency for these investments. On Slide 31, I'm going to talk a little bit about what our outlook is with respect to transmission. Certainly, diversification was key to our success in 2012. We're managing a large number of projects in a number of states. And what this slide attempts to do is to really break down that growth for you. So in our long-range plan for our transmission investments that we have across our system, and so this includes everything that we're doing in ETT, the Transcos, as well as the operating companies, we have nearly 500 new or enhanced stations, just under 22,000 MVA of new transformation capacity, nearly 2,000 miles of new transmission lines and just under 4,000 miles of rebuilt transmission lines. This really makes us unique. I'd really like to pause here for a second because we are -- we do not have a portfolio that is reliant on a small handful of projects. We have a portfolio that is spread really across the 11 states that we serve, as well as Missouri and Kansas where we have our Prairie Wind project as well as our Transource development efforts. So we're not as susceptible to that individual project risk that you might see if somebody has issues with getting siting approval and things like that. As Brian mentioned earlier, these are 2 approved projects, they're projects that are completely under our control, meaning that execution is also within our control. This, coupled with the diversity of the portfolio, puts us in a very strong position for executing well in 2013 and beyond. From a local reliability standpoint, we're replacing a lot of our obsolete voltage classes, the 46 kV system, the 88 kV system. And as you probably have heard, not a lot of people are talking about those voltage classes anymore. These rebuilt lines really serve as the ability to better serve our shale gas loads that we're seeing all across our territory, as well as improved local reliability to our operating company customers. We have the largest transmission system in the country. Again, as Nick mentioned earlier, this is the backbone of our system. It's going to fuel our investment opportunities and provide benefits to our customers as well as earnings growth for our investors. On Slide 31, I really wanted to pause for a moment and talk about FERC returns and incentives. Certainly, it's been depressed for quite a bit over the past month or so. And as you can see, our transmission company ROEs, these are for our Transcos, are pretty much in the middle of both the PJM and SPP ROEs. One thing to note about our ROEs is that they were either approved or settled within the past 5 years. So they're fairly recent ROEs. They were all calculated under the current median methodology that's applied by FERC to single-entity developers. One thing to keep in mind is that there are 2 types of filings. There are utility-triggered filings, which are 205 filings, and that's where the utility basically seeks to set or modify an established rate. In those cases, the burden of proof is on the utility to set the rate. The second type is, of course, the 206 complaint, where a third party basically needs to establish that the rates are unjust and unreasonable. And so the one distinction that I think is important in this space for folks to keep in mind is that this process can, in essence, result in different outcomes based on who has the burden of proof in those cases. But I think one of the things that's most important to remember when we think about FERC is that FERC is open to utilities modifying their rates. You can go in at any time after you have an established rate and modify that rate. This, coupled with FERC's track record of supporting transmission, makes us comfortable with investing in this space over the long term. I'd like to talk a little bit about incentives and where we are positioned in that space. So FERC provided greater clarity with respect to their position on incentives with their recently issued policy statement. And in that policy statement, they said a couple of things. They basically said that they expected utilities to pursue non-ROE incentives first, things like abandonment, things like return of construction work in progress, hypothetical capital structures. And then they said you really need to tie the incentive to the individual project risk, not the company's risk, the individual project risk. And they also indicated that they would view favorably incentives that were tied to developers who sought to contain project costs. And what was interesting is in that policy statement, they actually referenced the AEP Exelon project, RITELine, where we basically tied incentives to the forecasted cost of the project at the time of RTO approval. So what does this mean for us? It basically means that we have a proven track record with respect to incentives. We view credibility as the key to that success, not only for the investment community, but for our dealings with our regulators, including FERC. Without credibility, you really don't have anything. So FERC wants to differentiate between projects. In terms of our track record, we ask for incentives only when the project risks warrant it. If you think back to the slide before, we are rebuilding a tremendous amount of projects. We are investing in thousands of miles of new projects, but there's only really a handful of projects that we've actually thought to get incentives on. And because of that, when we ask for it, we have a proven track record of getting those. Our Transource order is probably a good one to note where what we asked for, we received, and it was basically issued just before FERC's issuance of the new incentive policy. So lastly, what I'd like to cover is the fact that we are delivering on our commitments, and delivering on them in 2012 and in 2011 was key to our success over the past 2 years. We're growing a new business, but this is by far not a start-up. AEP has over 100 years experience in building transmission. We operate ourselves as a separate business unit with nearly 2,000 employees that are dedicated to providing service to not only our operating companies, but our Transcos and our joint ventures with which we serve. So we're taking this experience and deploying it in support of transmission growth. By the end of 2013, we'll be doubling our net PP&E to the tune of $1.4 billion. We're deploying significant capital in support of transmission, which provides benefits to our customers and earnings growth to investors. By 2015, AEP Transmission Holdco expects to contribute $0.36 towards AEP's earnings, making it a significant increase from what we've contributed in the past. Our long-range plan is comprised of known and well-defined projects. I really can't emphasize this key enough. These are all projects that are included in our capital plans. They're all projects that we have underway. Because we have them underway, we're very well positioned to execute them; because we have these projects over the breadth of our territory and the diversity in the number, it really gives us a platform for future growth that is, again, unique to AEP. Also, as Nick mentioned and Brian mentioned as well, these are projects that make up our forecasted earnings per share contribution. There are additional transmission opportunities on top of it. What I've highlighted is just the stuff that we've got in the pipeline right now. So additional uplift potential includes the opportunities provided by the various joint ventures that we continue to pursue, such as RITELine, Pioneer and of course, our competitive affiliate with Great Plains Energy, Transource. In closing, we see ourselves as stewards of the largest transmission system in the country. In turn, this is fueling our need to invest in transmission and fueling what will be what we deliver to the investment community. Transmission is the resource that fuels our economy, energy markets and furthers regional and local reliability, and that's going to be the foundation for our growth over the next several years. With that, I will turn over the microphone to Chuck Zebula.

[Charles E. Zebula:]

Thank you, Lisa, and good morning to everyone. Let's start with a discussion of the principles that Nick has laid out for the unregulated businesses at AEP. The first thing that Nick has talked about is to mitigate risk, and that's going to be done through our participation in the capacity markets, the retail energy markets and the wholesale energy markets, as well as how we operate, invest and finance this company going forward. The second principle is don't get ahead of the cash flows in this business. We intend to run this business with a CapEx funded by internally generated cash flow. Thirdly, conservative capitalization, maintain an investment grade look in this business. It's important in terms of how you do business with counterparties, and that must be maintained. And lastly, to make this business look as regulated as possible. So where are we in the process? In terms of the regulatory process, Nick had mentioned that the corporate separation order is in rehearing at the PUCO. We have applications for corporate separation in before the FERC, with an effective date of 1/1/14 that we've asked for. Secondly is in terms of integration. We have generation that has operated in a 4- or 5-company pool for decades and decades. We need to extract that generation, make it competitive, combine it with a retail business that is relatively young, but also complement it with a wholesale marketing and trading business that is mature, competent and experienced. On Page 35, you'll find a lot of information, and I'll start with the bar graph up in the upper left corner. So you'll notice 3 colors to the bar in 2013

[Nicholas K. Akins:]

Thank you, Chuck. Thanks, Lisa, Brian. Now I hope that you've heard the story today about the things we're trying to achieve from a growth perspective. But I also trust that you sense the depth of our management team. These people who are working on these major initiatives for our corporation are stellar people that can really get the job done, and they will. So to wrap up the activity this morning, certainly, we're a clear regulated business model. I think that's happening over time. We're going through the corporate separation piece now, but we've done a lot to reinforce the foundation of this company in terms of a strong balance sheet. We have a competitive path that's cleared out for us in Ohio, and we don't anticipate any equity needs associated with the capital reallocation that's occurred over time. And we also, with a 4% to 6% earnings growth, primarily driven by transmission but our regulated business as well, is clearly a positive for AEP as we go forward. This management team has been proven as battle-tested over the last year. We've been through a lot of issues, and I'm sure when we review the 2012 list of things that we've clarified, it has been a process where this management team has grown closer and are really focused on making sure that now we can reinvigorate our sales to focus on growth. And it's actually a good position for the AEP management team to be in and a good position for the AEP shareholder to be in. So again, thank you very much for your time, and we'll entertain questions at this point. Brian, if you'd like to come up, and then obviously, we have the others here to answer any questions if they become too specific.

[Nicholas K. Akins:]

Okay, any questions?

[Unknown Analyst:]

Just on sort of on the post -- after this year, 2014 and beyond, when we're looking at the regulated strategy -- I'm looking at Page 48 and Slide 23. And when you look at sort of where your earned ROE is and your authorized ROE is, how should we think about how you're going to be growing that business? I mean, it seems like it's a regulated growth strategy. I'm just trying to get a sense, will you guys be going in for rate cases? Will this -- will you be filling it in through O&M or something? How should we think about the 4% to 6% growth in light of sort of the ROE environment? And if you could just elaborate a little bit on that. I just wasn't completely clear. Excluding transmission, which I think you guys explained very well.

[Nicholas K. Akins:]

Yes, so obviously, we target ROEs continuing to be north of 10%. And as well, the invested capital that we have through this -- the PP&E graph that we showed, those are legitimate investments that Brian went through that, really, in my opinion, is block-and-tackle spending with good opportunities for regulatory recovery. And historically, we've recovered those very well. The thing we have to work on, obviously, is being closer from a coincident standpoint of recovery. And that, of course, we're working on in those various jurisdictions. We have a multitude of trackers of deferred type of expenses that we can recover in the future. And the regulatory situation in each of the states is such that we're going through a repositioning exercise that keeps our O&M flat, and that's more of an opportunity to continue with capital investment, and the rate impacts are mitigated as a result. Brian, I don't know if you have anything to add to that.

[Unknown Analyst:]

So just to sort of understand this, I mean, in other words, you guys are in a regulatory environment where we're not probably going to be, at least for some of these situations where you seem to be earning above the authorized, where those are going to be reset. Or I mean, is that how we should think about it? Without going obviously into -- you guys have so many jurisdictions, it would take all day, but just sort of -- is that sort of how we should think about it in terms of...

[Nicholas K. Akins:]

Well, that's the strength of the diversity of the system. You see the Western properties as you see a higher return on equity in those areas, but it's because of the timing of rate cases and the investment of capital. So we'll continue to invest in those jurisdictions. You'll probably see those come down a little bit. You'll see O&M and others come up as a result, and the overall return across the corporation will still be north of that 10%.

[Unknown Analyst:]

Okay. Then just in terms of the transfer, the Genco transfer into regulated, what's the sensitivity can you give us if, in fact, worst-case scenario, that just doesn't happen? Let's say, for whatever reason, they don't want them. How should we think about the sensitivity towards the ongoing earnings growth if, for some reason, that pending regulatory situation doesn't go out as planned and it isn't transferred into a regulated asset?

[Nicholas K. Akins:]

Well, keep in mind that these companies are already paying for that capacity. They already have a call on that generation. So a distinction, I think, for AEP is, for APCO in Kentucky, since they are paying for that capacity, it's merely a transfer at net book. And we can demonstrate and have demonstrated in the cases that those transfers are positive for customers in the long term. So I don't sense a big issue when those particular jurisdictions -- the plant is located in West Virginia. And certainly, from a Kentucky perspective, they need the capacity, and they're very interested in coal. The coal comes from Kentucky and APCO-related mines. So there's more to the equation than just thinking about are we trying to transfer a plant from out of state into those various jurisdictions. So I don't even get to that second point of the premise of your question. But if that were to happen, certainly, we'd have to deal with it on the unregulated side, just be more that we have to hedge, but they're going to need capacity. So unless they want to leave themselves open to the market, which typically, those jurisdictions have not done because we're clearly still FRR in those jurisdictions, then we'd have more opportunities to sell that capacity, and it could be a PPA. But I don't see it going in that direction. Brian?

[Unknown Analyst:]

Okay. So in other words, you see it so unlikely that you don't want to give us any sense? I mean, really, this is so unusual, it's such an outlier situation that we shouldn't have to worry about it, I guess. So I'm just wondering, is there any sensitivity we should get to? I'm just wondering, you're sort of applying for this. Just wondering what the range of outcome could be. I'm not suggesting that's likely. I'm just wondering...

[Nicholas K. Akins:]

Yes, we don't see that happening. Obviously, a part of the discussion will be what the transfer price would be for the assets and those types of things. But even the net book that we show for the transfer of those assets is a positive benefit for customers. And clearly, I mean, look at Big Sandy, for example. If we put the scrubber on Big Sandy, it'd increase rates in Kentucky Power by 30%. But by not doing that and this capacity being transferred over, it's an 8% increase. So it's those kinds of things, I think, that you're measuring against. So I'm feeling -- I continue to be confident that we'll be able to transfer those assets.

[Unknown Analyst:]

Two questions not really related to each other. First, on the earnings bridge slide, the $0.45 of rate relief, if I gross that up for taxes and then kind of just multiply it by your share count, it's about $300 million, $325 million or so on a pretax basis. Can you just walk us through what the biggest components of that $300-plus million of rate relief is? You said most of it's already been granted. I'm just looking for the big move-the-needle items.

[Brian X. Tierney:]

Certainly getting Turk into rate base are large components of that. What we talked about in terms of I&M and the recently completed rate case there is a large component of that. In Ohio, the rate stability rider is a significant component of that. And like I said, a lot of it's associated with Turk coming into play. So it's a formula base rate extension in Louisiana. Those are primarily it. It's Louisiana, Texas, I&M and Ohio and all those components you're familiar with, Michael.

[Unknown Analyst:]

Okay. And I'll follow up off-line. The second question and this may be a Lisa one. We're seeing in other jurisdictions, like New England, like in Colorado, a regulated jurisdiction. We're seeing 206 complaints at the FERC regarding base ROEs. Just curious, haven't seen that yet in the SPP, haven't seen it yet in PJM. It's coming, right? I mean, the intervener groups all talk to each other, so it's just kind of a matter of time. Just curious for your high-level viewpoint of how that plays out over time.

[Brian X. Tierney:]

Yes, and certainly, there's a difference in the burden of proof, a 205 versus a 206. And Lisa, you may want to comment on this question, please.

[Lisa M. Barton:]

Sure. A lot of what you're seeing also is the fact that some utilities have entered into agreements with their states to go in annually. And I think PG&E fell into this category, so they have to go in for a 205 filing every year, which gives the commission staff an opportunity to launch a 206 to kind of get that debate going a little bit more lively. I think one of the things to just keep in mind is the fact that, anytime you hear stuff like what we heard in New England about what FERC's staff was saying, they are very much like an attorney general intervener. And so they are kind of anarchists in the midst there. And it is the commission who would ultimately decide on what is that range of reasonable. So that range of reasonable is still very broad, and you saw that in the New England proceeding. So it's really going to be up to either what the utilities decide to settle on, or it will be based on what the commission determines. But again, I think the good things are that FERC is very open to a reopener. Or alternatively, if you're hit with a 206 complaint, you can also sit there and agree not to go back and therefore, maybe settle a higher ROE. Ultimately, it's going to depend on where do long-term interest rates go because the longer that they stay at a lower level, the potential for more pressure on that. But it is very time-sensitive. If we were to go in with -- we have one that's currently before FERC right now with Transource. If we went in 6 months from now, that number would be very different. We really only have 2 interveners, for example, in that case, and that is an SPP case.

[Nicholas K. Akins:]

I think the key for us is the focus on no-regrets transmission projects. And then secondly, if FERC continues, which they have espoused to, they want to continue with transmission investment, then regardless of what happens, they will still trade at a premium associated with the retail regulated space. So that's why we continue to be bullish on transmission.

[Unknown Analyst:]

Brian, just a couple questions on the slides to review on Page 21. Nonutility parent, the $0.24 incremental positive, can you just review again what the biggest key drivers are of that? And then I have 1 or 2 other questions.

[Brian X. Tierney:]

Yes. it's the fact that we won't have the early redemption of the parent debt expense as we did in 2012. It's River Ops coming back to a more normal rate of earnings in 2013, and it's the Generation and Marketing increases associated with competitive retail.

[Unknown Analyst:]

Okay. My second question was on the sources and uses of cash slide on Page 26. Your target growth rate -- you haven't given an earnings guidance range for '15, but you've given a growth rate expectation. I'm just wondering how you could see earnings growth in that magnitude with CFO being relatively flat. Is there some sort of extension of depreciation rates or something else that's going on?

[Brian X. Tierney:]

It's the fact that in 2013 and '14, we've broken out bonus depreciation. We anticipate being a taxpayer again in 2015, and that's reflected in cash flow from operations and not broken out.

[Unknown Analyst:]

But it doesn't imply a deceleration in earnings?

[Brian X. Tierney:]

That's correct.

[Unknown Analyst:]

Okay. And then finally, you talked about -- I think you talked about in your comments on the slide on sales growth a significant difference in expected earnings growth from industrial in West versus East. And I see that you've got a massive amount of demand for new power gen for transmission, in particular.

[Brian X. Tierney:]

Yes.

[Unknown Analyst:]

Can you talk a little bit more about that? We see industry trends -- this is one of Paul's questions he usually asks. Sales has been -- the outlook is pretty bleak. My sense is that over time, that that's going to be very -- the regional winners and losers are going to be pretty differentiated. And with the Utica, we hope you're a winner. So can you talk about how you see sort of short, medium and long-term sales growth trends?

[Brian X. Tierney:]

Yes, I can talk about some of that, and Nick, I'll let you fill in the blanks. So we are seeing it very much on a regional basis. As we laid out in the industrial-specific side, we are seeing a real increase in industrial load associated, in particular, with the shale gas plays, Wheeling, West Virginia, for us and in Eastern Ohio. So we are seeing expansions associated with gas compression processing in those areas. It's significant and real. We are also seeing some pretty significant increases in load in Oklahoma and Texas, also associated with gas and oil production and shale gas developments down there. A lot of that's associated with -- a lot of what that means to us is increased transmission and increased distribution spend to get new customers either expanded or hooked up as well. So those particular areas, we're seeing real spots of growth. In other components of our Eastern system, we're seeing load growth largely flat or moderately down. Indiana, the western and central parts of Ohio are somewhat challenged, as are other parts of Kentucky. So for us, this is a particular area where the diversity of our footprint really helps us diversify away from some of the decreases that we have and being able to take advantage of some of the real load increases that we're seeing associated with the shale gas developments.

[Nicholas K. Akins:]

So Greg, my take on it is if there's an energy renaissance that includes shale gas activity, AEP's service territory sits extremely well from a fundamental perspective. I mean, as you said, you bring up the Utica Shale, you bring up the Eagle Ford Shale, we're having a substantial growth in that portion of the territory. Now you have the Cline Shale in Texas as well, in our North Texas area. And then we already have the Haynesville, Bossier, the Fayetteville, the Bakken. That's in our territories. So if there's oil and gas activity going on -- which has been our saving grace, actually, from an industrial standpoint, at this point and from a load perspective. If you continue to see that improve with an economy that's coming back, then you'll see not only those kinds of facilities pick up, piping manufacturers and so forth, but also petrochemicals along the river. Those are the kinds of things that we're looking forward to. And you're seeing some early indications of industrial output improving. But certainly, it has a ways to go, and certainly, it needs a -- I mean, it needs a federal focus that provides for the economy to fully recover. When that happens, we're going to take off.

[Unknown Analyst:]

Just a point of clarification on the environmental CapEx. You had mentioned there's about $4 billion to $5 billion to be spent between now and 2020. And in the back, in the appendix, there are some potential environmental investments to be made, about 11,000 megawatts. I'm wondering what's the timing of that -- of those 11,000 megawatts. Is it incorporated in that CapEx forecast? And also, I'd like to get your thoughts on greenhouse gases with regards to existing sources.

[Nicholas K. Akins:]

Yes, so I'll give my thoughts on greenhouse gases, and then I'll ask Mark McCullough to pick it up, so you can hear from him a little bit on the other part of your question. I think that certainly, the greenhouse gas issue has picked up, as everyone knows. The president, in his State of the Union address, there were 3 things that we were actually looking for

[Mark C. McCullough:]

Sure. I think it's best to refer you to Slide 22, and where Brian pointed out the environmental spend is moving up to over $500 million this year. We spent a little over $200 million last year. Most of those projects you see in the slide, in the appendix, engineering -- certainly, the pre-FEED studies are complete and much of the engineering and pre-site work is completed. We're poised to move forward as regulatory processes approve moving forward in a particular direction. So much of that $530 million you see for 2013 will be commitments to equipment. We'll begin to order that equipment and prepare the sites for the arrival of that equipment.

[Unknown Analyst:]

Mark, is there anything -- Brian up here, Mark. Is there anything you can say or you'd like to focus us on, on Page 50, in the appendix there, on the left-hand side, the 11,000 megawatts of potential investments?

[Mark C. McCullough:]

Yes, look, those are the numbers. We do have a lot in play with respect to evaluation of these technologies. As Brian mentioned earlier, we're looking for the most efficient, economically-driven technology, and we are prepared to move forward with this plan, as it shows here in the slide. DSI is a prominent player in this strategy. We've learned a lot more about that over the past several months and see it being deployed to comply in a large percentage of our fleet. Andy?

[Unknown Analyst:]

Can we just talk about the dividend policy? Obviously, you've articulated pretty well, but we didn't get a dividend increase last year as we waited for Ohio. How quickly can we kind of see the ramp-up to -- this is called midpoint of 65%. And do we get a little bit of a catch-up in 2013 and then kind of grow from there?

[Nicholas K. Akins:]

I certainly think initially, you're going to be at the lower range of that, given -- going through corporate separation, those types of activities, and then you would see it trend up toward the midpoint. Brian?

[Brian X. Tierney:]

And we can't speak for what the board will or won't do, but they were very mindful in terms of raising that targeted dividend payout ratio, reflecting where we were at the time. So I think the board knew what they were doing by raising it. And if they decide to make any changes, I'd expect that you'd see some of that this year.

[Unknown Analyst:]

Chuck did a great job in his presentation, but kind of the reality, competitive generation is a tough business and you look at the NRG Genon deal and a lot of that was a decision based on getting synergies out of an organization. Given the size of your Ohio fleet, how do you guys think about the long-term importance of that business to AEP? And is this something you scale up, or is it something you exit over time?

[Charles E. Zebula:]

At least our initial thoughts about that business, we're going to build that business as if we're keeping it. Now the focus of it is not to grow it to become a larger, unregulated business. Our focus is to hedge that generation. That is our focus. And if we can make it look regulated, where it's a hedging profile and a portfolio of hedges that support that generation, that is something that's acceptable from a volatility with our shareholders, we'll look at it. But we are a regulated utility, and anything that we can do to fortify that position, we will do.

[Unknown Analyst:]

And I guess we're going to talk corporate strategy, we heard conversations, everything turning into an MLP at this point in time. The transmission business does seem to have some viability as a REIT, according to the IRS. How do you guys think about the transco fitting in the corporate structure, and is that something you guys look to explore to maybe optimize incremental value out of that opportunity?

[Nicholas K. Akins:]

Yes. At this point, it's really focused on development of the transcos, development of the critical mass to get the transmission company moving. And then, of course, in the future, we can evaluate what it holds for transmission. My focus, though, is to make sure that we move more toward a regulated infrastructure-related business. And transmission is a big part of that. And then ultimately, we'll decide how do we continue to reinforce that for AEP shareholders, and we'll do that.

[Unknown Analyst:]

What are the steps to the corporate separation by January 1, 2014? Sort of what are the signposts for us watch along the way? And then secondly, the impairment that you took in the fourth quarter on Ohio generation, what was that?

[Brian X. Tierney:]

It was associated with assets that are going to be part of the competitive business that we were depreciating on a retirement date to mid-2015. And we used to evaluate those assets as part of the pool. When we got the Ohio corporate separation order, it made sense for us to start evaluating them not as part of the pool, because we don't anticipate them being part of the pool through the end of -- beyond, I guess, 2014. So we started looking at those plants individually. They include Muskingum River 1 to 4, Kanawha [ph] 1 to 3, Picway 5, Beckjord, Sporn 2 and 4.

[Unknown Analyst:]

So those are all plants you're closing?

[Brian X. Tierney:]

Plants that had been anticipated to retire by the end of -- by mid-2015. And when we started looking at them on an individualized basis, we realized we had to take an impairment on them.

[Nicholas K. Akins:]

That was only impairment because of Ohio.

[Brian X. Tierney:]

Yes.

[Unknown Analyst:]

I wondered if you could also discuss your outlook for retail margin.

[Brian X. Tierney:]

Yes, I made the mistake of doing that on an earnings call, and now they tell me that I shouldn't do that anymore.

[Nicholas K. Akins:]

We can say this, though. Our focus is on margins and customers, customer mixes that provide for higher margins. We are not out there trying to get all the megawatt hours we can get. We're not out there most certainly selling below market. And our focus continues to be those higher margins.

[Unknown Analyst:]

Rich, could you give us some of those signposts that Leslie was asking?

[Richard E. Munczinski:]

Sure. So let's take it by federal government, first. The FERC, we have filed our cases at the FERC late last year, and we would expect that we will get approval of the 6 filings at the FERC sometime midyear. I'm hoping a little bit earlier than midyear. FERC, hopefully, will not wait for the states. And then as concerned to the states, what we've done is we have filed for the transfer of those units and for the merger of Wheeling into APCo. We filed cases in West Virginia, in Virginia and in Kentucky. Each of the states have now provided us with a procedural schedule. And so there'll be procedures ongoing from now through the summertime. Each of the states and the FERC, we've asked for approval of all this effective January 1, 2014, which is also the same date the pool, the East pool that we continually talk about, will be terminated.

[Unknown Analyst:]

What do you see is the biggest issues that have been raised? I know the asset transfer and, perhaps, the price at which the assets are transferred in. But other than that, does there seem to be material pushback from interveners?

[Richard E. Munczinski:]

There's about 25 interveners at the FERC. I'll put them in 3 buckets. One is there's a few of the parties that are trying to retry the Ohio cases, which FERC shouldn't pay much attention to. Secondly, there's a lot of questions about the language in the agreement. I know we have made this as simple as possible by eliminating the pool, the pooling agreement, and basically having each of the companies stand alone. So there's some language issues that we'll clean up and, hopefully, settle with the parties. And then the transfers themselves, really, will be up to the states. And so each of the states have a case in front of them for the transfers. And then once the transfers are approved, we'll then go in individually to the states and collect the funds for those transfers if they're not offset by the pool dollars already. Does that help?

[Unknown Analyst:]

Brian, I think this one may be for you. On your waterfall chart for '13 guidance, you have the $0.24 of nonutility and parent. If I look back to EEI and sum the kind of 3 buckets that you listed earlier of interest costs, River Operations and then to the retail within Generation and Marketing, it seems that, that has kind of increased by maybe by a $0.10 or so since EEI. Which of the buckets is driving it? Or can you give us any insight into how the $0.24 breaks down?

[Brian X. Tierney:]

Yes. The early redemption of debt was probably about $0.12. The River Ops increase was about, I'd say, $0.09 or $0.10, and the balance is the Generation and Marketing.

[Unknown Analyst:]

Great. And Chuck gave us this disclosure on how much of the potential margin is determined in the competitive business and that you have this number of 60% for 2015. Is that a sort of -- is that the annual number adjusting for some of the midyear shift in the buckets? And is there any chance of a number on 2016?

[Charles E. Zebula:]

Yes and no.

[Nicholas K. Akins:]

Go ahead, Chuck.

[Charles E. Zebula:]

The answer is yes and no. So the first question is yes. Second question, no.

[Nicholas K. Akins:]

Any other questions? Okay, well, thank you very much, and thanks for your time.