American Electric Power Company Inc (AEP) — Q3 2015 Transcript

Thank you, Cynthia. Good morning, everyone and welcome to the third quarter 2015 earnings call for American Electric Power. We are glad that you are able to join us today. Our earnings release, presentation slides and related financial information are available on our website at aep.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning for opening remarks are Nick Akins, our Chairman, President and Chief Executive Officer and Brian Tierney, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Nick.

Thanks, Bette Jo. Good morning, everyone and thank you for joining the AEP third quarter 2015 earnings call. Once again, AEP is reporting a strong quarter performance driven by the strength of our regulated utilities in our transmission business. As a result, we are also increasing our 2015 guidance. For the third quarter 2015, AEP is reporting GAAP and operating earnings of $1.06 per share compared with $1.01 per share for the third quarter 2014. This brings 2015 year-to-date GAAP and operating earnings to $3.22 per share and $3.21 per share respectively compared with 2014 year-to-date GAAP and operating earnings of $2.95 per share. With the positive quarterly and year-to-date results in hand, AEP is increasing our 2015 guidance range from $3.50 to $3.65 per share to $3.67 to $3.77 per share and reaffirming our 4% to 6% growth rate. While load was also up in all three sectors, residential, commercial, and industrial during the third quarter year-on-year, we continue to analyze the makeup of load and margins of each sector as Brian will discuss in more detail later. Our employees focused on continuous improvement and cultural initiatives have been instrumental in not only achieving our earnings objectives but redesigning our lines of businesses for future success. The activities continue to progress across the enterprise. This has been a three-year effort of what is now over 65 initial 3 to 4 months deployment efforts generating over 20,000 ideas from employees to improve efficiency and deliver better outcomes. We are in the process of finishing up the few remaining deployments, and we will begin the process of ensuring the sustainability of the cultural and process-related changes that enable continuous improvement. This is primarily due to these efforts along with investment growth in the regulated companies and transmission as well as the outcomes from the PJM supplemental auctions that have improved our confidence regarding 2016, more to come on that in November, during the EEI Financial Conference. We announced the sale of AEP River Operations to American Commercial lines for approximately $550 million plus the assumption of capital lease obligations of approximately $235 million. We are very pleased with the outcome from the process we began back in March to sell River Ops at a fair price to a company we truly believe understands what it takes to be successful on the River. AEP will receive about $400 million in net cash proceeds to invest in our regulated businesses. We have followed through with the federal Hart-Scott-Rodino clearance and don’t expect any delays. So, we should close in November. I want to take this opportunity to recognize and thank the entire River Operations management and operations team for their continued emphasis on providing value to AEP and its customers over the years. This sale represents a step towards the desired direction of delivering customer and shareholder value as a regulated utility company. The PPA story in Ohio continues to develop with ongoing hearings occurring and should conclude very quickly. We don’t know the outcome yet, but AEP is actively pursuing discussions with various parties to ultimately drive to a solution that makes sense for AEP, its customers, and other stakeholders. We believe the PUCO should be able to render a decision sometime before the end of the year. This timeframe will have a direct bearing on AEP’s ultimate decision regarding long-term PPA coverage generation assets within our strategic evaluation process regarding the unregulated generation in Ohio. The PPA arrangements are important for the security of supply and pricing for Ohio customers and will provide an important segment regarding future investments in Ohio. We will complete our review with the Board as expeditiously as possible and expect not only the PPA decision but the broader strategic decisions to be answered in early 2016. AEP continues to work with each of our states regarding the clean power plant. We believe our state should follow initial plans with the EPA by September of next year to ensure the state maintains ownership and ensures the development of resource plants that makes sense for their particular jurisdictions. AEP in the industry needs clarity regarding investment decisions in new resources and will continue to work with the states to develop integrated resource plans that comport with the requirements of these ultimate state plans. During the last quarter, you may have seen AEP’s investment in Greensmith, an energy storage integration platform company, and our continued development of utility-scale solar in Indiana and Michigan, as well as our relationships with universities to define energy solutions such as rooftop and utility-scale solar along with battery technologies. These investments in combination with our bold technology in transmission and other distributor-related investments will move us toward a cleaner, more balanced energy portfolio that is focused on the quality of service to our customers. You will hear more about this during the EEI in November as well. Moving to what I usually call the equalizer chart of ROEs by operating unit, note that the overall ROE has improved to 9.4% from 9.1% from last quarter. As I go through the states, I will mention what’s going on in each so you can have a trim line on what to see in the future. For Ohio Power, the ROE for AEP Ohio is in line with expectations, and we expect to finish the year in line with the 12% ROE forecasted. For APCO, Virginia earnings are expected to remain steady during the period because of previous legislation and rate freezes in effect. For West Virginia, we had a recent rate case order that should address the weak returns there, where the order authorized a rate increase of $99 million with an authorized ROE of 9.75%. Rates were implemented in June of 2015, so we expect to see higher ROEs for APCO for the balance of the year. Kentucky, I know that looks a little strange to you. We did not know what to do when the return for the quarter was negative 0.1%. It almost looks like last year we probably should have just put the Kentucky investment into amateurs, but understand that we did recently get through a rate case there and we expect to continue to improve. That was part of the strategic decisions we made previously about what gets included in rate cases and the timing associated with them. We expect Kentucky to move up to 4% by the end of the year, and by mid-year ‘16, it will be back in the 8% to 9% range. While we have this short-term probation of lower ROEs, we expect that to improve. For I&M, I&M continues to be on track to grow earnings and achieve its authorized ROE range, which is around 10.2%. I&M had a good third quarter as it continues to execute major capital investment programs in generation Rockport SCR, solar, and the nuclear lifecycle management along with PJM transmission-related projects. PSO has an ROE about the same as last quarter, and we continue to progress through the rate case process. A base rate case was filed in July ‘15 to recover generation, environmental control investments, and cost increases since the last base rate case. We expect new rates to be put in place by the first quarter of 2016. SWEPCO transmission costs recovery in Texas in the form of the rate true-up in Louisiana as well as a true-up and increase in wholesale customer rates were the primary drivers for SWEPCO ROE improvement. Although, we continue to see it under pressure due to the Arkansas portion, what we believe is the Arkansas portion of Turk that we ultimately will be looking for in terms of a retail solution, but the timing has yet to be determined. For AEP Texas, we expect the ROE in AEP Texas to continue to decline through 2015 as the distribution CapEx increases are put in place. We are currently looking at alternatives for addressing the ROEs coming down in that jurisdiction either through distribution costs recovery, DCRF or rate case, but we are still looking at those options. AEP Transmission Holdco, its Holdco return of 11.3% is in line with the authorized return. So that keeps plugging along and we keep investing more and more in transmission. With all that said, as we look at the accomplishments of the third quarter and year-to-date, it should be instructive as to what the future holds for AEP. I am reminded that yesterday, October 21, 2015, was Back to the Future Day, the day that Marty McFly and Dr. Emmett Brown time traveled into the future from the 1989 sequel to Back to the Future. When we look back at 1989 and where we are today, during that time AEP has reduced SO2 emissions by over 80%, NOx emissions by over 80%, mercury emissions by over 54%, and CO2 emissions since 2005 levels by 15%. More recently, we have deployed battery storage technologies, the bold transmission line, utility and rooftop solar, and now embark on the infrastructure of the future to define a better customer experience. These are all examples of Back to the Future’s version of hoverboards and self-tying sneakers, but all of this is to say that we believe AEP is uniquely positioned both financially and culturally to be successful during this huge transition that is occurring within our industry. We will continue to focus on infrastructure development, technology, and resources of the future and a renewed focus on the customer experience. Our investors expect consistency in quality of earnings and dividend growth, so any decision we make should be viewed through the lens of being the next premium regulated utility. Now I will turn it over to Brian.

Thank you, Nick and good morning everyone. Let’s begin on Slide 5 with a review of the major drivers affecting the earnings comparison for the quarter. This year’s third quarter operating earnings were $1.06 per share or $521 million compared to $1.01 per share or $493 million last year. This solid performance was driven by our regulated businesses, which were all at or above last year’s prior results. Let’s review the major earnings drivers by segment. Earnings per share for the Vertically Integrated Utilities segment were $0.56, up $0.11 from last year. Key drivers in the quarterly comparison included rate changes, which added $0.09 per share and are related to the recovery of incremental investment to serve our customers. Warmer temperatures in 2015 also contributed significantly to the earnings, adding $0.07 per share. Cooling degree days were 25% higher in the east and 18% higher in our western service areas. Margins from normalized load were off $0.03 per share for the quarter due to lower residential sales and a slight decline in the average realization. Off-system sales were down $0.03 per share primarily due to much lower power prices this year. O&M expense was higher than the prior period adversely affecting the quarter by $0.03 per share, mostly due to the higher employee-related costs. This segment did benefit from higher AFUDC as a result of our capital spending program, adding $0.01 per share, and lower state and federal income taxes contributed $0.03. The Transmission and Distribution Utilities segment earned $0.23 per share for the quarter, up $0.04 from last year. The primary driver was an unfavorable regulatory provision recorded last year that was not repeated in 2015, contributing $0.04 per share for the quarter. The remaining variances were small, including rate changes in Ohio and weather in Texas each adding $0.01 versus last year, offset by lower off-system sales and higher O&M. The Transmission Holdco segment contributed $0.09 per share for the quarter, up $3 million over last year. We remain on track to meet our guidance level for this segment for the year. Year-over-year, the Transco’s net plant grew by approximately $1.2 billion, an increase of 51%. The generation and marketing segment produced earnings of $0.19 per share, down $0.05 from the third quarter of last year. We see the adverse effect of lower Ohio capacity revenue and earnings partially offset by lower O&M. AEP River Operations declined $0.01 per share and corporate and other lost $0.02 per share, down $0.04 from last year, primarily due to higher O&M and franchise taxes. On Slide 6, we have a view of year-to-date operating earnings compared to last year. Operating earnings for the year-to-date periods stand at $3.21 per share or $1.6 billion compared to last year’s $2.95 per share or $1.4 billion. Similar to the quarterly comparison, growth from our regulated businesses is driving the improved results with the competitive businesses performing at or below last year. Consistent with our original guidance for 2015, our Vertically Integrated and Transmission Holdco segments are realizing strong growth driven by our continued capital investment in rate base and execution of our regulatory plans. Favorable weather also contributed to year-over-year earnings growth. As expected, we are seeing a decline in year-to-year earnings in our competitive generation business, reflecting the loss of capacity revenue, which was tempered by lower O&M and the performance of our commercial and retail teams taking advantage of market opportunities. The combination of all our businesses allowed us to exceed last year’s results by $0.26 per share. These strong results and our confidence in our plan for the remainder of the year allow us to raise and narrow the operating earnings guidance range to $3.67 per share to $3.77 per share. Now, let’s take a look at Slide 7 to review the normalized load performance for the quarter. Starting in the lower right corner, our load increased by 0.09% for the quarter with growth spread across all major retail classes. This brings our year-to-date normalized load in line with last year. Our residential sales grew by 0.08% compared to last year. The growth in residential sales is driven by a mix of customer and usage growth, especially in our Western territory, where residential counts are up 1.2% versus last year. The growth in residential usage is strongest in Ohio, where we saw the strongest growth in employment for the quarter. Year-to-date, residential sales are down 1.1% versus last year, but this is mostly caused by the weak normalized growth reported in the first quarter impacted by last year’s Polar Vortex. Commercial sales were up 1.3% for the quarter, with the strongest growth happening in Ohio, consistent with the economic indicators we will discuss in more detail later. Finally, industrial sales grew by 0.07% compared to last year. We continue to see robust industrial sales growth from customers in oil and gas-related sectors despite the decline in oil prices. Most of our load growth for the quarter and year-to-date period is coming from our T&D utilities segment where we recovered only the wires portion in our rates. Unfortunately, normalized sales are down 0.08% in our Vertically Integrated Utilities where we recovered the full bundled rate. This means even though our normalized load is similar to last year, we lost approximately $0.08 for the year due to the mix of our sales by segment and class. With that, let’s review the most recent economic data for AEP service territory on Slide 8. The estimated 1.6% growth for the AEP service area is about 0.5% less than the estimated growth for the U.S. This is not surprising considering the impact of falling oil prices, especially in our Western footprint. While the nation benefits from lower fuel prices, the regional economies supporting the shale plays are experiencing the direct impact of lost jobs. Interestingly, job growth within AEP’s Eastern territory exceeded the Western service area for the first time since 2011. The sectors showing the strongest job growth include construction, leisure and hospitality, and education and health services, while the natural resources and mining sector saw the biggest employment decline this quarter. Now let’s turn to Slide 9 to update you on the domestic shale gas activity happening in AEP’s footprint. Given the impact lower energy prices are having on a regional economy, one might expect our electricity sales to oil and gas-related sectors to be down. However, we continue to see significant load increases in our service area near major shale formations. We are still seeing nearly 10% growth in our sales to oil and gas sectors this quarter, despite oil prices being down 50% from last year, rig counts being down nearly 60%, and the decline in oil and gas workers. If we dissect oil and gas growth into its components, we continue to see the strongest growth from the midstream pipeline transportation sector, which grew by over 33% compared to last year. We still have a large number of new oil and gas-related expansions expected to come online over the next 18 months that will drive our industrial sales growth through 2016. In contrast, sales to the remaining industrial sectors are not growing, down 3.1% in the third quarter. The mining sector is affected by low energy prices with sales down 9% for the quarter and 8% for the year. Let’s turn to Slide 10 and review the company’s capitalization and liquidity. Our debt to total capital improved by nearly 1% this quarter, now at a healthy 53.4%. Our credit metrics, FFO interest coverage and FFO to debt, are solidly in the BBB and BAA1 range at 5.7 times and 21.6%, respectively. Our qualified pension funding declined a bit this quarter, dropping from fully funded last quarter to 97% this quarter due to declining equity values and a slight decrease in interest rates. Our pension assets are weighted 60% in duration matching fixed-income securities, with the balance in global equity and alternative investments. Our OPEB obligations remain fully funded at 112%. Finally, our net liquidity stands at $3.6 billion and is supported by our two revolving credit facilities that extend into the summers of 2017 and 2018. Before we turn the call over to your questions, let me review some of the information we will provide at the upcoming EEI Financial Conference. We will confirm our previously stated 4% to 6% growth rate, which assumes the sale of River Operations and the retention of the other businesses in AEP’s portfolio. We will provide an updated operating earnings guidance range for 2016 with detail by segment. In addition, we will provide a capital expenditure plan for the next three years, details on transmission and utility investment opportunities, and a three-year financing plan for executing our strategy. Finally, we will also be discussing developments in both the Ohio PPAs and the strategic review of our competitive generation business. Let me now turn it over to the operator for your questions.

Hey, good morning guys.

Good morning, Dan.

You guys made great progress on the equalizer chart as far as improving the overall earned ROEs. How much more room do you think you have for ‘16 given the rate cases you see coming? Where do you see the ‘16 ROE headed and how much more improvement do you need in ROE to be able to hit the 4% to 6% growth rate?

Yes. I think it’s going to continue to improve, Dan. We are probably on the order of 9.6% to 10% in that range for 2016. So, it will continue to improve overall. And then with Kentucky coming up, that’s helpful, although Kentucky is pretty small in the overall comparison, but the others are doing quite well.

Okay. And I guess preemptively on the Ohio generation side, but given the weakness of the power stocks in the IPP sector, is there a market of buyers still sitting out there who will be willing to transact on your assets right now or are market conditions potentially going to slow down maybe the year since you are making a decision on those assets?

Yes, I think there is still a set of buyers out there. It just becomes more difficult, because you have the paper involved with those companies, but for sale, there are still parties out there and some of the recent transactions have shown that.

And I guess just one last question, when you guys look at the load trends going on right now, how is the residential versus commercial trends looking and what do you guys expect to see for load growth next year?

Yes. So, commercial continues to improve and that’s probably the bright spot of the portfolio. You have these cycles that change as we go along in the residential. That’s going up and down the last few quarters and it really does drive this view that we need the economy to pick up, particularly from the energy policy perspective. If we start exporting or continue a build-out of the economy focused on energy, then our economy will pick up as well. So, we are getting some benefits from auto manufacturing and similar areas. But primary metals on the world market and mining are certainly having an impact. We have been in a strange period for several quarters and years now, and we obviously need to get the economy moving again from an energy perspective.

Okay, got it. Thank you, guys.

Hi, Greg.

Thanks. Good morning.

Good morning.

A couple of questions, first the 4% to 6% earnings growth aspiration, is that still off the midpoint of the original 2014 guidance of $3.20 to $3.40 a share?

Yes, it is.

Okay, great figures. You earned $3.43 in ‘14 and this year you are at the new midpoint you are going to earn $3.73 even if that weather normalizes, that’s $3.65. So notwithstanding the deceleration in load growth trends that you are experiencing, one would presume you are doing very well relative to that aspiration. Do you think that aspiration builds in the expectation that there will be some dilution from the sale of generation assets, which gets offset over time as you redeploy that capital into transmission?

Greg, that assumes the business as usual case that we continue to own the properties that we do today with the exception of river operations. We will lay that out for you at EEI like we do the normal waterfall stair step between 2015 and what we anticipate 2016 to be. So, you can pretty easily do a stair step that takes off that $3.72 about $0.24 for things that we don’t anticipate to be recurring parts of our business.

Okay, that was addressing my question. I appreciate that.

Yes. Greg, I think you have to look at like in the previous quarters. We have been talking about working to drive to try to get to a solution for 2016. And now we move to confident about 2016.

Certainly, you have been taking into account the things you just articulated looking back at your aspiration at the beginning of ‘14, you are doing very well.

Yes.

The second question is with regard to the timeline for getting an answer from Ohio on whether or not you will be able to contact a portion of that fleet and whether that is the gating factor for concluding an asset sale or whether there is a deadline at which you would move on to the asset sale and not wait around for an open-ended process?

Yes. It won’t negate the discussion. I think really what matters here is as we get through the process with Ohio by the end of the year, we have a result that says these particular units are going to be covered by a long-term PPA. Then that says that we are sort of ambivalent about those units, assuming that the PPA addresses our concerns as certainly being long-term. We have lots of plans out there and some of the other provisions to ensure that we are able to make it quasi-regulated, and then we are somewhat ambivalent as to whether we hold those units or not. I think that bodes well for our ability to hold onto those units and still be a regulated utility for the remaining assets that aren’t covered by the PPA. There is still a process ongoing, and so we will go through this. My Board has been for the last two years, as you know, going through this issue with the PPA. No one knew because we didn’t have a schedule. We are concerned about this; we weren’t going to wait for it. Now there is a schedule. There are hearings that have occurred, and we will conclude pretty soon. We will have a result pretty soon. The PPA is very important to our standing in Ohio overall regarding whether we keep that portion of the generation or not. But it doesn’t change the objectivity and the measure of approach we are using to go through this process to ensure that we are making the right decisions for our shareholders. Because we get a PPA, it doesn’t mean the process is off for any of the remaining generation that’s not covered by such a PPA. So, we are looking at this very straightforwardly and have been very consistent in our discussions. I noted earlier this quarter we were saying that we were after the capacity options, and we would know and understand a lot more. We assumed it was never-ending in obtaining a PPA, and it appears the Ohio Commission has taken this on seriously and is moving forward in determining where their solution would be. So we are going to go through that process and fully understand it. By the first quarter next year, our Board will certainly know all the ins and outs of the issues that we are dealing with, and then we will move forward.

Great. Is there with the potential there has been chatter about the potential for substantive settlement talks on the PPA discussions? Is that going on or not?

Well, certainly, there has been a lot of chatter and a lot of discussion with multiple parties in this case. It’s a complex issue and certainly we continue to have conversations, and certainly FE can speak for themselves, but we both have the firm belief that there needs to be some kind of support for this generation in Ohio, and it’s really a discussion around what those mechanisms would look like. We will continue discussions with the parties. I will stop there.

Okay, thank you guys. Take care.

Yes.

Hey, good morning. I didn’t know you guys were such Back to the Future fans, but…

Yes, we all remember that. Some of us do anyway. I am probably talking to some people that don’t even remember it.

If we wanted to incorporate that at EEI, Nick, I’d be okay with it, but…

Well, you don’t want to think about that when I was talking about the bold line, boldly going where no man has gone before.

Just great answer to my question, but just quickly, when do you think on the PPA process if we don’t reach a settlement or whatever, if we end up going on a fully litigated track, when do you guys expect that to be finished?

Well, if it’s fully litigated, we still expect to get an order by the end of the year. Fully litigated just means there will still be, I am sure, there will be appeals and other extensions, but we are actually focusing on the commission order itself, because that really dictates the policymaking decision in the state. We believe that will occur before the end of the year.

Do you think such a big issue like this for Ohio, giving a PPA or entering into PPA, do you think the appeals process would be lessened if you get a fully litigated order, meaning the parties that are also getting a litigated order, do you think the appeals would be shorter compared to a settlement?

Yes, certainly; I think it depends on what the order looks like. The commission has a deliberative approach to this. We have certainly done a lot of analysis along with others who participate in hearings addressing PPA use. We feel really good about where we stand from a legal perspective going forward. I think the real issue is the commission needs to come out with an order that aligns with the discussions that occurred relative to the PPA. If there is deviation from that in some fashion, you could open yourself up to more substantial appeals. But we have given the rationale, the recipe is there. The commission can certainly put that kind of thing in place that holds up.

Great. Thanks for taking my question.

Yes.

Hi, thanks so much for taking my call.

Thanks.

My key question was on the generation business. As we look at it from an EBITDA perspective year-to-date for the generation business, you have already achieved about $725 million of EBITDA, relative to guidance midpoint of about $5.90 for 2015. I wanted to understand more long-term; is this due to specific factors that have occurred in 2015 that are driving 2015 EBITDA to be higher, but your longer-term guidance stays consistent?

Praful, a couple of things going on. One is for the first half of the year, we still had considerable capacity revenues coming from Ohio that dropped off in May, and we will be experiencing that negative impact through the balance of the year. That’s something that needs to be factored out of the business going forward. We also had two other pieces contributing to the generation marketing results this year that we believe are not going to be ongoing items. One is we have had inception gains of about $0.06 per share. The other is we have had reductions in liabilities that flow through O&M associated with the sales of two plants. The combination of these two items is another $0.06. You need to factor those out if you want to annualize that business on a forward-looking basis.

Got it, that’s very helpful. And just a key question on Ohio: I heard your points around the ESP and the PPA. I guess I'm trying to understand from a long-term perspective. I get the message that if it’s long-term, it’s a different answer or you are at least in a different position in terms of selling or keeping it. What defines long-term—is it 7 years? Is long-term enough? If we don’t get the full ‘15, at what point do you say, I actually do have a difference between keeping the business versus selling?

Certainly, I don’t want to get into that too much, because long-term, to us, I mean we have followed the life of the plant. The term has to be substantial because we have to have a feeling that we can invest. With the large capital investments we make in generation, we need to know that we can do that and be secure from a future perspective. When I look at even for our FERC wholesale contracts, we have had contracts that are 10 years, 15 years, and have had same customers for 75 years. So, when we talk about long-term, it has to be substantial enough for us to make that kind of investment. I am not going to assign an actual number; we have a lot of plants sitting out there. That’s what we believe it takes.

Got it. Thank you so much.

Yes.

Hi, how are you doing?

Fine.

I just want to follow up I guess on that question about the generation business and the asset retirement obligation. I saw that there was a $62 million benefit, and just to make sure that I understood that, a lot of that has to do with the asset retirement obligation going away through it, because of some plant sales. For the most part, you don’t see that recurring—is that correct?

Yes. We had reserved asset retirement obligations that were higher than what we could realize by selling the plant to a third-party. We were able to get the third-party to take those obligations for less than what we recorded on the books and that allowed us to flow the difference that we recorded through O&M.

Okay. And then just with respect to the AEP Dayton ATC liquidations, which seemed to be leveling off, how should we think about how they impacted year-to-date earnings in generation and marketing and how do you see the outlook for those in 2016?

We think those prices are going to continue to be under pressure, but I will say, Paul, we do have, as we go into a year, a significant component of that generation hedged. So, for the third quarter, we are at about 60% of the margins in megawatt hours, we have hedged going into that period. We will have amounts hedged going forward in 2016, which means we can take advantage of prices if they recover.

Okay, great. And then back to Ohio in the PPA situation, I mean, take this with a grain of salt, but what would you say the odds are that it would be settled as opposed to fully litigated?

I wish I could answer that at this point. There is much context within discussions; there are multiple aspects. It’s not just the units for generation that’s within a PPA but really what’s the total answer for Ohio. Moreover, the state of Ohio needs a framework for transitioning with base load generation that allows it to make long-term plans associated with retirements of generation and replacements with new resources.

Okay. And I gathered from your previous comments that you feel pretty confident that we will get a decision one way or the other by the end of the year? I just want to make sure that you feel that this is very likely to be settled by year-end?

I think we will. It should be settled by the end of the year. And if it goes the settlement route, then you have to think about how to argue about the settlement. If you litigate it, the commission needs to make a decision. I am really focused on making sure we drive to a solution as quickly as possible. This has been a long process. The first case was filed by AEP followed by FirstEnergy. I believe both were serious, but I think it should be clear to all involved that we need to get on with investments and decisions relative to these assets. Our commission recognizes that a decision needs to be made.

Okay, great. Thanks so much.

Good morning.

Good morning, Julien.

So perhaps just to follow up a little bit on the last question, and again I hate if you might go too much. Is there a minimum tenure that defines a long-term solution for a PPA? I know it’s a transient question, but how do you think about that?

Minimum tenure would be a long time. I want to make sure that everyone understands that regardless of the solution, if there is a PPA, there are two parts to this. One is the commission needs to approve it. The second is what does the PPA look like? AEP has been very upfront about our expectations. We want a PPA that goes beyond the three-year ESP cycle, one with adjustment mechanisms. We need a substantial long-term PPA that allows us to make the investments we need to make.

Got it. Very clear now. Secondly, when you think about CPP, the finalization recently, how do you think about coordination between the various states with T&D utilities fully integrated? When do you anticipate clarity on what needs to happen in each state through the filing process? Do you believe you need legislative approval in any state to kick off the CPP compliance?

No, we want to ensure the commissions are involved. The states will take their own approach. They may litigate; some states will litigate. That can be done in parallel. Our message is that regardless of what you decide, you need to develop a state implementation plan, because that approaches your plan.

Great. Thank you.

Good morning, Stephen.

Good morning, Stephen.

I wanted to discuss transmission, a good area of growth for you. I wondered if you could just comment on how bullish you are in terms of finding additional opportunities and the types of transmission opportunities you see out there?

Yes. We continue to have well over 2,000 projects that we are working on today. We constantly review the capital situation. If we wind up with bonus depreciation or other opportunities to advance capital. In anticipation of the sale of River operations, we started the transmission spend last quarter when we raised transmission to ensure no delay in earnings power associated with that. We are constantly analyzing those projects and will speak more at the EEI about that.

Understood. And then just thinking about utility-scale solar investments, when you look across your territories and consider investing capital versus entering PPAs, could you provide insight into the regulatory landscape for these decisions?

We historically have been an off-taker of renewables. We have over 2,000 megawatts of wind power. While others take credit for wind power, it wouldn’t exist without the PPAs we provide. We believe for utility-scale solar we should invest in that, as it is a resource for the future. We maintain operational, maintenance, and project management expertise that enhances efficiency. We will file our resource plans with some portion of natural gas, utility-scale solar, and emerging grid technologies. Transmission and distribution are great opportunities for us as well, particularly utility-scale generation. We aim to advance the business forward.

Okay, that’s great color. Thank you very much.

The other thing to add is our focus on PPA arrangements directly with customers, examples being Ohio State University and Denison University. As long as we secure a long-term PPA, we can confidently invest in energy storage, utility-scale solar, and rooftop solar. AEP is uniquely positioned financially and culturally to navigate this transition.

Good morning.

Good morning, Hugh.

I had a question about the AEP Transmission Holdco. You have had very good results year-to-date, but the third quarter had a flat earnings year-over-year. Can you explain what happened and if there are implications for the future?

We had a one-time issue related to O&M for ETP. We had to spend dollars to address a physical issue from some of the build-out. That should not be a recurring item, and we will be back on track towards the end of the year.

If I could follow-up on the prior question, is there a form of regulation or a structure of regulation that you are trying to push your states to consider, or are you willing to work with states on their individual objectives even if those are materially different?

Yes. We are willing to work with states on their individual unique circumstances. We would rather see a mass-based approach because that promotes trading within states. However, we will work on developing plans consistent with what the states want, enough to comply with the expectations.

Great, I appreciate that insight. Thank you.

Thanks. Most of my questions have been answered, but can you remind us what your indicative guidance for ‘16 was?

It was $3.45 to $3.85.

Any time on how you feel about where in that range things are looking?

We will be updating that at EEI in a couple of weeks.

Given that the decision regarding the Ohio generation is going to be a big driver for ‘16, how will you handle that in guidance?

The forecast for 2016 and guidance we will give in November will still include those generation resources. It’s not an assumption that we are going to continue to own. What it does mean is that’s what we know today, and so we will plan for 2016 with that assumption. If something does happen first quarter or whenever the transaction is completed, then we will have to re-benchmark and adjust.

And you indicated you expect oil and gas to expand through ‘16, are there any particular regions driving that expansion?

Yes, it’s all shale-related, Paul. It’s Texas, in particular, and then West Virginia and Ohio.

Keep in mind that while the rig count is not going up, the electric load is, primarily due to a lot of consolidation and efficiencies around compressor load. So, just de-link what rig counts doing versus what the electric load is doing.

Basically, we are behind the curve on the development of the infrastructure to move the gas out. Is that going to continue through ‘16?

That’s right.

Okay, thank you very much.

Good morning.

Good morning.

So, under a scenario where you retain the approximate 3 gigawatts under a PPA and sell the remaining 5 gigawatts, does that scenario necessarily lead to dilution or do you have enough levers to pull, such as the 2000-plus power transmission projects or even buybacks to mitigate any dilution opportunity?

Yes, I think you are sort of answering the question. We have to understand what the proceeds would be. If there is dilution, then there are all kinds of transactions that could be done to mitigate that. But also from a share buyback perspective, there could be adjustments there as well. It’s too difficult to answer at this point; there are many moving parts in that analysis.

Got it. Just one last question; obviously, we have staff throughout on the PPAs, and when you look at what the recommendations are, what’s the most contentious item? Is it the tenure of the PPA? Everything is up for negotiation?

Yes. Probably the most contentious issue is the PPA itself. The staff said they object to a PPA, but it can work under certain provisions, so if you get to the second door, then it’s probably tenure and those types of negotiations that will occur.

Terrific. Thanks so much.

Yes.

Hi, good morning. Can you hear me?

Yes, I can hear you.

Great. Just on the PPAs, could you categorize the settlement talks that are going on?

Well, I have said that discussions are ongoing. We are obviously going through that process and talking about various issues. I can’t say much more at this time, but we are discussing with several parties.

Great, thank you. And then on the potential asset sales generation, I guess, there are two buckets you are considering. Is it possible that the bucket not involved in the PPA gets moved before the PPA gets resolved?

I would say that’s not likely, because we are looking for an overall answer to this. If the PPA is not in place, then we have a larger amount of generation to process through this. Their resolution will probably happen simultaneously.

And if you were to get a PPA on the first bucket, would it be possible that you would pursue a PPA for the second bucket?

We would not assume that the units not included in the PPA would be brought back in at some later time, as we really don’t have the time for that.

And just regulatory-wise, the only potential for PPA at this stage is with what’s been filed for, correct? You wouldn't be able to add megawatts or assets to that within the settlement process?

Unless there is a settlement.

So through a settlement, it’s possible to add megawatts to the process?

Yes, but that winds up opening a lot of discovery and other issues. I just want to say it could be done, but that might create other complications.

Got it. Okay. Thank you. See you soon.

Operator, we have time for one more question.

Thank you.

Good morning, Ali.

Good morning. I know that, Brian, you mentioned that on ‘16 guidance you have assumed the sale of the River Operation, but you have kept the generation as is. Should we assume that sale at least from a timing perspective is dilutive in ‘16? Is that a fair assumption?

No. So, Ali, let’s just look at recent earnings history from that business. Last year, we earned $0.10. This year, we forecast to earn $0.08 for the year. In ‘12 and ‘13, we earned $0.02 per share from that business. So, I would not think of that as being dilutive for 2016.

Okay. And then also, Brian, as you mentioned earlier, your current 4% to 6% growth is based off the midpoint of the original ‘14 guidance. So, as we look forward, is that sort of the way to be thinking about it? Should we use your original midpoint of your ‘15 guidance as you move things forward, or conceptually, how should we think about what base to use for that 4% to 6% going forward?

We will lay out a framework for that at EEI. I need to stop talking about 2014 original guidance because that’s getting pretty far back in the rearview mirror now, but we will show that framework at EEI. Long-term anticipated growth is 4% to 6%. We can normalize everything and take you through that discussion in detail.

Understood. And last question, Nick, as you looked at the timeline on strategic issues regarding Ohio PPA. Things have moved as other events have gotten delayed. Are you now at a point where you say, we think this will happen by year-end and so we will make a decision by early next year? If regulatory processes continue to shift further, are you not going to wait for that to continue beyond early next year?

This has been ongoing for too long. We need to get on with making a decision. My Board has been dealing with this for 1.5, 2 years now. It’s important we get the answers that we need to understand Ohio’s policy in the future. I believe that by the first quarter this coming year, we should be in a position to move on.

Understood. Thank you.

Thank you for joining us on today’s call. As always, the IR team will be available to answer any additional questions.