American Electric Power Co., Inc., 2012 Guidance/Update Call, Feb 10, 2012

American Electric Power Company Inc (AEP)

February 10, 2012 8:00 am ET

Executives

Nicholas K. Akins - Chief Executive Officer, President and Director

Brian X. Tierney - Chief Financial Officer and Executive Vice President

Unknown Executive -

Lisa Barton - Executive Vice President of AEP Transmission

Robert P. Powers - Chief Operating Officer and Executive Vice President

Joseph Hamrock - President of Columbus Southern Power Company, President of Ohio Power Company, Chief Operating Officer of Columbus Southern Power Company and Chief Operating Officer of Ohio Power Company

Mark C. McCullough - Executive Vice President of Generation

Analysts

Unknown Analyst

Andrew Levi - Caris & Company, Inc., Research Division

Presentation

Nicholas K. Akins

Good morning, everyone. Thank you, all, for taking the time to visit with us today at AEP. We're very much focused on a few things, I think, you're going to find enlightening in the presentation today. Brian and I will certainly be talking about in detail the issues we see with the company, going forward. And certainly, we're working on several important aspects that you obviously need to be made aware of.

First of all, I want to talk about generally what you're going to hear today. We have significant commitment to growth. Execution is going to be something that you hear about, and as well, the transmission business is very much becoming a part of our portfolio mix for the future in terms of growth.

And I want to leave you with a notion: AEP is much more than coal and AEP is much more than Ohio. And I think we really have to consider some of the positives of the rest of our system as well when we go through this, so you're going to see a more balanced approach to that discussion. Since we've talked about the discount in our share price being focused on EPA and Ohio, it's very much the other way around, too. We need to think about that from an execution and clarity perspective.

So you're going to hear throughout this entire presentation what we are talking to our entire management team and all of our employees. The last year, I had discussions with many of you and heard resoundingly the issues that AEP needs to work on to enhance shareholder value. There are issues around clarity, execution, line of sight and discipline, you're going to hear that over and over in this presentation. And we're very much taking a fine-toothed comb in going over our entire business to focus on those particular areas. So let me see if this thing works here.

First of all, I'd like to say -- I think you can read that yourself, I'm not going to read it to you. But we're obviously going to observe the Safe Harbor provisions that we have there.

Okay, so here's what you're going to hear today. The earnings range that we're talking about for 2012 will be in the range of $3.05 to $3.25 per share, with a midpoint of $3.15. Earnings growth will be in the range of 4% to 6%, supported by the rate base growth of the regulated companies. We're going to show you that the regulated side of our business, even after corporate separation, is going to be pretty dramatically still regulated, and we want to have that discussion as well. The company's asset profile is going to continue, like I said, to be 86% regulated, which is very different from the 25% we heard before. We're just definitely going to be regulated as we go forward.

The dividend is supported by the regulated operations, you're going to see that clearly as well. What we've worked on for the past few years, what Brian and his team have definitely worked on, is making this company much stronger from a financial profile perspective. The credit metrics, the ongoing fundamentals of this business are getting better every day.

Corporate separation filings at FERC have been made today, about 6 different filings, which I'll go into a little bit detail later, but it all, it is all about that execution. And since we got corporate separation from Ohio approved, that was the precursor for us to make these additional filings. So they have been made today and the game is on.

The transition period, execution is key. You're going to see step-by-step processes that we have to go through over the next 2 years to have corporate separation completed by the first quarter of '13. We want to make sure that we're able to move forward in a very, very positive way not only with Ohio but with the other 3 members of the eastern pool, so you'll hear more about that as well.

The competitive generation profile, I really am excited by that business because we will be able to put together, I believe, a very good ongoing business operation not just about unregulated generation but about wholesale operations, retail operations, hedging activities associated with the available generation we're going to have available. It's really, I believe, it's going to be a positive thing.

So when we go through this, and I know we've typically talked about a combination of the metrics in terms of financials for the company, we're going to split it up in terms of the regulated piece of the business and the competitive piece of the business. I typically don't call it unregulated, it's more competitive because the hedging practices and so forth, I'm still making the argument that it is primarily FERC-based regulated and those types of things that remain regulated in some fashion. So we're going to go through that as well.

Just a little bit of history. AEP changed its path particularly when Mike Morris joined the company. We refocused on the regulated business. And in terms of that refocus, it's certainly has reached that point of discipline of the operating companies to focus on not only their return on equity but also making sure that we are able to do the things, make the investments that the commissions and customers and those various states would want us to make. And they've done an incredible job, as you're going to find out. But as you look at the years associated there, you will see that we've actually performed very well compared to the utility index and the S&P 500. When you look at that over the 1-year, 3-year, 6-year and 8-year period, AEP has been very credible in terms of providing consistent dividends, dividend growth and earnings growth during that period of time. We also have put in a strong balance sheet and put in that solid foundation by moving to the operating company model that provides the focus and execution for us to deliver in the future.

So the operating company model that I mentioned earlier, I think you're going to see further refinement in that model, going forward. Our operating companies have focused on certainly the distribution operations and also the capital allocation that's occurring in that area. They're going to really be focused on capital allocation at the operating company level because it's important to make sure that we are doing the right things by each of the jurisdictions that we serve, and many of them want different things. They may want a different resource portfolio; they may want different things in terms of investment between generation, distribution and transmission. So those modifications are going to be key. The pool operations that we're talking about, particularly in relation to the eastern pool, that is going be very positive for that line of sight with the regulators in the eastern footprint. They will be able to make their decisions about the resource portfolio of the future that makes sense for them. And I think that's something, a step we needed to make anyway so that we could adequately value each line of those businesses.

The financial controls in place to manage the balance have been put, manage the balance sheet and growth opportunities have been put in place. We have a strong financial platform and we're focused on capital discipline, as you'll see when we go through the capital plan a little bit later on.

So this is all about clarity and we have gone through the process of systematically addressing those issues that may have defined risk in our share value. As we've gone through the process, you know we've been upfront on the mercury MACT issue, on the environmental issues as well, to really get across the notion that we have to have some measure, some reasonable, rational measure to actually address the issues of system security, reliability, those types of things as we go forward in this transition. We embrace that transition. What we need to make sure of is there's a rational transition that makes sense.

So we have, we expect the MATS rule to be published in mid-February, probably effective in mid-April. And filings with the RTOs have been made. We have filed with PJM, we'll soon file with Southwest Power Pool. Those filings demonstrate the plans that the RTOs need to look at in terms of retirements of generation to ensure that we maintain system reliability and get our hall pass for that 1-year or 2-year extension. So those things are critical. We're probably one of the first out with our plans. Our plans have been consistent during this entire period and we have been very aggressive about ensuring that there is RTO review of these plans. And then, we'll take them to the EPA and have those discussions as well.

We also settled the Arkansas litigation associated with the Turk plant. That was an overhang for us in terms of our ability to move forward with that construction project. We're well over 80% complete now with the project. It's great that Venita McCellon-Allen, the President of SWEPCO, can actually focus on other things besides the legal ramifications of what she's doing with the Turk station, and that's important for us. We now can really focus on the construction, get it completed and get the cases done in the various jurisdictions of SWEPCO to ensure that we get recovery of that facility.

Securitization opportunities have occurred, as you well know, in Texas. We also are working on securitization in Ohio, particularly, of deferred fuel there. And there's a bill that's been filed in West Virginia associated with securitization of that fuel balance as well. So we're getting clarification around securitizing those deferred fuel balances to provide a further reinforcement of our balance sheet.

The PUC approval, I know you've heard a lot about Ohio and we'll get into that a little bit later on, but I think one of the critical things you have to look at is this: Getting the corporate separation filing was the most important step for us because you can argue about the economics of all the other things that we're dealing with around discounting capacity and all those types of things, but this was a critical step for us. To get the corporate separation approved via -- it's a net book value transfer that would occur, and it's important for us to do that because it's a precursor of every other step that we're taking. And as we put together the businesses associated with our competitive operations, it's important for us to have that done. Ohio is complete, we are filing with FERC and moving with that process and the negotiations and discussions with the various other jurisdictions involved.

Read the rest of this transcript for free on seekingalpha.com

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