American Electric Power Company Inc (AEP) — Q2 2016 Transcript

Thank you, Sean. Good morning everyone and welcome to the second quarter 2016 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.

Okay, thanks, Bette Jo. Good morning everyone. Thank you once again for joining AEP’s second quarter 2016 earnings call. AEP had a strong second quarter with GAAP and operating earnings coming in at $1.02 per share and $0.95 per share respectively, bringing the year-to-date earnings to $2.04 per share on a GAAP basis and $1.97 per share on an operating basis. This compares favorably to the second quarter 2015 GAAP and operating earnings of $0.88 per share. The 2016 year-to-date earnings compare unfavorably to 2015, primarily driven by the significant weather and energy market differences experienced in the first quarter of 2015 versus first quarter 2016, as we reported last quarter. These results clearly keep us on pace to meet our operating earnings guidance range of $3.60 to $3.80 per share, which we are reaffirming. We’re also reaffirming our 4% to 6% growth rate, so overall steady as she goes quarter with a discipline and consistency that our investors have come to expect from AEP. Our focus on the utility operations, transmission growth, expansion of our customer sales channels, process optimization and the disciplined deployment of capital and O&M expense continues to drive positive results for our shareholders and customers. While externally it may appear to be a relatively calm quarter, there has been substantial activity internally that further highlights the direction of AEP and its strategy to be the next premium regulated utility. We recently established a Chief Customer Officer role assumed by Bruce Evans, our former AEP Texas President, that provides a focus on improving our customer's experience. This organizational redesign will focus on addressing the evolving nexus that exists between the regulatory framework, emerging technologies that enhance the customer experience, and deploying the analytics and technologies of the future to address resource needs and to optimize smart grid applications. As we progress with the substantial build out of transmission and distribution to accommodate large scale optimization and renewal of the grid along with the development of additional sales channels that provide growth, we are emerging as an energy company that provides solutions for our customers through both the classic regulated envelope that provides universal access and tailored solutions for customers. AEP's culture is one of openness, collaboration, and innovation, and I have no doubt that AEP, when focused on the investments in the largest transmission system in the U.S. and the energy grid tomorrow, will continue to evolve to be the next premium regulated energy company. Also during the second quarter, we continued our strategic review of our generation assets, keeping in mind that we now have two tranches of generation. The first of which we’ve called the non-PPA assets for lack of a better term, which essentially are the natural gas units and the Gavin coal station. The process for this tranche is going according to plan and continues beyond initial bids that were received in the second quarter, with final bids due in August. I can say that the response has been robust, and we are confident that the process will move toward the conclusion of the strategic review in the coming months. We have also begun planning for the disposition of any cash proceeds to ensure an earnings trajectory that replaces lost earnings as quickly as possible. This could include some ramp-up capital spending in transmission and other actions that we’ve done previously, and that cause immediate recognition of PTC benefits. One business we are currently ramping up is our investment in long-term solar arrangements as well. The second tranche, previously referred to PPA assets, is in the initial phase of preparing assets for processing, much like the non-PPA assets. This process will occur in parallel with our focused efforts toward restructuring in Ohio. We will be discussing these issues and implications in more detail during the coming months, leading up to the November EEI. To follow up on the Ohio restructuring discussion, for those of you who don’t know, several of our company's sites have shown up in the latest craze of Pokemon Go. One of those sites was our turbine sitting in front of our 1 Riverside Plaza corporate headquarters. The virtual reality of a Pokemon next to our generator turbine in Ohio made me think that it may be good for a game, but if the generator was virtual, we might have a real problem on our hands, and that is where Ohio is heading if it depends too much on federal markets that do not value the long-term base load generation. I want you to look at the PJM website, pjm.com, to review the generation mix during the peak information we have been experiencing lately. The vast majority of capacity at the time of the peak is delivered by coal and nuclear resources that are not valued properly in the market construct. Moreover, these markets do not take into account the other issues that are of state concern such as placing the generation balance portfolios, jobs, taxes, and other state-related issues. These markets, including PJM, need to be improved to adjust to these realities. With FERC’s order essentially taking the Ohio PPA proposal approved by the Ohio Commission off the table, which I discussed last quarter, AEP is addressing the situation by pursuing restructuring in Ohio. Note this is restructuring, not re-regulation. Our proposal for legislation is now being discussed with various stakeholders and involves the ability to transfer existing generation and invest in new generation such as natural gas and renewables by AEP Ohio. The proposed legislation strikes a balance between our ability to invest and maintain generation in the state and the customers’ ability to choose generation suppliers. This overall process would allow AEP Ohio to move forward with the transition of generation resources in a responsible way that would benefit the State of Ohio, AEP, and its customers. The legislation would address any potential FERC jurisdictional matters while allowing the state to take control of its own resources as well as any transition envisioned under initiatives such as the clean power plant. In the absence of restructuring legislation, AEP will continue with its strategic process with the second tranche of generation. We continue to analyze the load situation; our service territory shale gas load just tailed off in recent months along with mining, while industrial load has dropped, and commercial and residential load increased. So from quarter-to-quarter the last several years has overall been a mixed bag and hard to read, much like the economy in general. Brian will address the load-related issues in more detail in a few minutes. Moving to the equalizer chart on page four that shows our various operating areas, our overall ROE continues to improve, as we mentioned last quarter, it's now at 9.8% versus 9.4% that we reported last quarter. We still expect it to move toward our forecasted 10.1% overall ROE for 2016. So, all is moving according to plan. So here is the story for each of the regulated business units. For Ohio Power, the ROE for AEP Ohio at the end of the second quarter was 13.3%. We expect it to be more favorable than the forecasted 11.9% at the end of the year. The improved ROE forecast is primarily due to AEP Ohio receiving a regulatory order related to the PIR, the phase in recovery rider that allows us to recover accumulated deferred fuel costs with carrying charges as approved by the commission in the ESP 1 case and also a $21 million increase in retail margins due to our regulatory reversal and a provision that occurred, and then a favorable annual PJM transmission formally rated through us. So AEP Co Ohio Power is doing very well at this point, and we continue to expect that boost. AEP Co, the increased ROE is primarily due to a one-time recognition of deferred billing in West Virginia, as approved by the Public Service Commission of West Virginia in June of 2016. The 2015 West Virginia base rate case included delayed billing of $25 million of the annual base rate increase for residential customers until July 2016. As these revenues phase in, the company’s ROE is expected to trend near the 2016 forecasted ROE. AEP Co does continue to monitor reductions in industrial and residential load, particularly in the cold depressed areas of the state; we’re watching that very closely. Kentucky Power we’re seeing the expected continual improvement at quarter end. The commission authorized a $45 million rate increase effective July 2015, and this rate case will continue to improve the ROE in 2016. And also, they are continuing to watch their economy as well. I&M achieved an ROE of 10.1%. I&M continues to benefit from reasonable regulatory frameworks in place for those major capital investment programs that we have in the state, such as Rockport, the solar projects, nuclear with loss cycle management, and transmission projects as well. So I&M is well-positioned for another positive year in 2016. PSO's ROE is generally aligned with expectations; Oklahoma’s economy continues to experience a slowdown due in large part to low oil prices and reduced oil and gas activity in the state. In December 2015, the Oklahoma Corporation Commission heard the rate case, and PSO implemented an interim base rate increase of $75 million subject to refund in January of 2016. So, final commission order is expected on that in the fourth quarter. SWEPCO 2016 revenues were challenged by the weakness in oil and natural gas prices; wholesale revenue is rolling off; also, wholesale customers exercised options for sell generation or market participation, but we filed an application in Arkansas that went into effect March 24 to recover our retrofit investments at Welsh and Flint Creek. Then in Texas, we filed Transmission & Distribution riders there as well in that state. So we continue to make various filings in those states to improve the ROE. In AEP Texas, the ongoing distribution capital investment, AEP Texas to serve higher levels of electric load and maintain the reliability of the grid had gradually lowered the regulated ROE over time. The ROE should continue to improve, however, due to the recently approved $56 million DCRF settlement that will go into effect September 1, 2016. And that’s a Distribution Cost Recovery Factor, for those of you who don’t know what DCRF is. AEP Transmission Hold Co's return of 11.7% is outperforming the 2016 forecast of 10.2% The increase in ROE is really focused on a true-up, an annual true-up that occurs in the transmission formula. So we expect that ROE to come down during the year, but still expect it to be around 10.7% by year-end. So that’s a known and measurable process that we’re going through there. Overall, 9.8% continues to track upward and we are pleased with the progress that the operating companies have made. So overall, another great quarter for AEP; this quarter has been a continued approach by AEP to ensure consistency, discipline, and execution to provide quality shareholder value. It's hard for anyone from outside of AEP to see the company I see from inside with the dedication and innovation of our approximately 18,000 employees. So I’ll just put it this way, I happen to play drums in a band at an event in Cleveland last week where we backed up the Marshall Tucker Band. We played some Bruce Springsteen, and it's still on my mind, so I’ll just end by saying, Baby, we were born to run. Brian?

Thank you, Boss, and good morning everyone. I’ll take you through the second quarter and year-to-date financial results, provide our latest insight on load and the economy, and finish with a review of our balance sheet strength and liquidity position. Turning to Slide 5, operating earnings for the second quarter were $0.95 per share or $466 million, compared to $0.88 per share or $429 million in 2015. Overall, the increase in earnings was driven by rate changes including the reversal of our regulatory provision and lower O&M in our regulated utilities, and higher earnings in our AEP Transmission Hold Co segment. Both of which were partially offset by the expected decline in the generation and marketing segment. Earnings for the Vertically Integrated Utilities segment were $0.42 per share in the second quarter for both 2016 and 2015. Lower O&M due to decreased planned outage expenses and recovery of incremental investment to save our customers were offset by lower margins on retail sales and decreased off-system sales margins due to lower energy prices. The transmission and distribution utility segment earned $0.25 per share for the quarter, up $0.09 from last year. This segment’s major variances included the reversal of the previous regulatory provision in Ohio adding $0.03 per share, and higher margins on retail sales which added $0.02 per share. Other favorable drivers include higher ERCOT transmission revenue and lower O&M expense. Our AEP Transmission Hold Co segment continues to grow, contributing $0.19 per share for the quarter, an improvement of $0.06. The growth in earnings reflects our return on incremental investment and includes the impact of the annual true-up for the formula rate mechanism. Net plant investment less deferred taxes grew by approximately $840 million, an increase of 32% since last June. The generation and marketing segment produced earnings of $0.09 per share, down $0.07 from last year. Capacity revenues were lower by $0.07 due to plant retirements and the transition of Ohio to full market pricing. Energy margins were lower by $0.03 per share due to power prices liquidating 18% lower than last year. On the positive side, the commercial organization in our competitive business performed well and wholesale trading and marketing was favorable by a penny this quarter. Corporate and other was down a penny from last year due to higher O&M expense. Let’s turn to Slide 6, and I will briefly highlight our year-to-date results. Operating earnings through June were $1.97 per share or $967 million compared to $2.15 per share or $1.1 billion in 2015. The details are on the slides for those of you who’d like it, but overall the decrease in earnings was driven by the expected decline in earnings in the generation and marketing segment, less favorable weather conditions in the first quarter, depressed power prices, and the disposition of our river business last year. These unfavorable drivers were partially offset by rate changes, a change in the effective tax rate, growth in normalized margin, and increased earnings in our transmission businesses. Now let’s take a look at Slide 7 to review normalized load performance. For both the quarterly and year-to-date comparisons the message is the same. Our normalized retail sales were down compared to last year because the increase in residential and commercial sales was more than offset by the drop in industrial load. Our normalized retail sales were down 0.4% for the quarter and 0.3% year-to-date. For both periods, the strong sales performance in our Texas territory is being offset by weakness in the Appalachian and Kentucky regions. This illustrates the benefit of geographic diversity. Normalized residential sales rebounded in the second quarter and are now essentially flat compared to last year. Through the first half of 2016 our residential sales, customer accounts, and normalized usage were all essentially flat. In the upper right, commercial sales grew by 1% for the quarter and are up 0.8% year-to-date. This growth was spread across several of our operating companies, although the strongest growth occurred with the T&B utility segment. This is consistent with some of the economic data I will share with you on the next slide. Finally, industrial sales dropped by 4% this quarter and are down 1.6% through June. The sustained drop in energy prices, weak global demand, and the strong dollar have combined to form a challenging environment for manufacturers. For the quarter, industrial sales declined in seven of our top 10 industrial sectors. The two sectors that grew in the second quarter were pipeline transportation and transportation equipment manufacturing. The petroleum and coal product sector was flat for the quarter. I’ll provide additional context on our industrial sales later. Now let’s turn to Slide 8 to look at the most recent economic data for AEP service territory. Starting at the top with GDP, the estimated 1.3% growth for AEP is only 0.3% behind the U.S. The upper right chart shows that our Eastern territory is not only growing faster than our Western territory but is now exceeding the U.S. This is not the case for our Western territory where there is greater exposure to lower oil and gas prices. Depressed energy prices have created a noticeable slowing in our western footprint. While the nation benefited from lower fuel prices, AEP's regional economies supporting these shale plays are experiencing the impact of lost jobs. The charts at the bottom show that employment growth for AEP is holding steady at 1.1%, but still lags behind the U.S. by 0.6%. It is not surprising that job growth in AEP's eastern territory exceeds the west given what we just discussed. Earlier in the presentation, I mentioned that our commercial sales were the strongest in our utility segment, which aligns with the employment data for our service territory as well. Over two-thirds of all jobs added in 2016 have been in Ohio and Texas. The sectors showing the strongest job growth for the quarter include construction, leisure and hospitality, and education and health services. These gains were somewhat offset by the decline in natural resources and mining jobs. Today, there are 22,000 fewer employees in that sector than last year, and approximately 15,000 of those jobs were located in our western footprint. Now let's turn to Slide 9 to review our industrial sales trends by region. Over the last several years, our industrial sales growth has largely been tied to oil and gas activity around the major shale plays. Up until this quarter, sales to the oil and gas sectors have been fairly resilient despite low energy prices. The chart in the upper left shows that the tide has started to turn. AEP's industrial sales in shale counties this quarter have declined by 0.3%. Specifically, this decline is largely coming from our upstream oil and gas extraction sector, which experienced a 6% decline for the quarter. The map on the right identifies our coal counties shown in blue. I want to highlight these counties since we continue to see significant erosion in our industrial sales as well as customer accounts in this area. In the upper left chart, our industrial sales in the coal counties were down 14% for this quarter, while sales to the mining sector alone were down nearly 18%. Low natural gas prices, environmental regulations, decreased demand from the utility sector, and reduced demand globally from metallurgical coal have created a challenging situation for Appalachian coal producers. Outside of our shale and coal counties, the rest of AEP's industrial sales were down 3.3% for the quarter. Now let's turn to Slide 10 to review the company's capitalization and liquidity. Our total debt to capital ratio crept up by 0.3% during the quarter and remains healthy at 54%. Our credit metrics, FFO interest coverage and FFO-to-debt, are solidly in the BBB and BAA1 range at 5.6 times and 20.2% respectively. Our qualified pension funding remained unchanged for the quarter at 97%, although plant assets increased during the quarter, so did plant liabilities due to the discount rate coming in lower than assumed. During the month of June, we funded about $86 million to plant assets, an amount equal to the estimate of service cost for the year. Our OPEB funding now stands at 101%. Plant assets increased by 0.2% but plant liabilities increased by 3.1% due to a drop in the discount rate. The overall impact dropped our OPEB funding ratio by 2.9%. The estimated after-tax O&M expense for both plans this year is expected to be about $13 million. Finally, our net liquidity stands at about $2.3 billion and is supported by our two revolving credit facilities. During the second quarter, our treasury team worked with our banking partners to amend and extend our key credit facilities. We now have a $3 million facility that extends into June of 2021 and the second $500 million facility that expires in June of 2018. This tiered structure allows for maximum flexibility as we continue our strategic review of our competitive generation assets. Altogether, AEP’s balance sheet, liquidity, and credit metrics are strong and will allow us to fund our utility operations, growth, and dividends under all reasonably foreseeable conditions.

We are pleased with our earnings results for the second quarter of this year. Gains in our wires businesses more than offset expected decreases in our competitive businesses due to lower energy prices and deregulation in Ohio. As we look towards the second half of 2016, we believe that our regulated businesses will more than offset any challenges presented by our generation and marketing segment, giving us the confidence to reaffirm our operating earnings guidance range of $3.60 to $3.80 per share. Finally, as I mentioned earlier, the strategic review of our competitive generation remains on track and we hope to have news for you in that regard either later this quarter or early next quarter.

Looking at the numbers, the quarter was obviously great, but the sales trends in industrial are a bit concerning especially if you just extrapolate them out on a compounding basis. I’ve heard some concern from investors just around the ability to meet the 4% to 6% earnings growth aspiration if in fact the sales growth targets that you laid out when you laid that target out a year or so ago failed to materialize. Sort of, you aspired to be a premium utility; the premium utilities don’t blame changes in the outlook for not meeting their growth rates. So, how do you aspire to a nice plan to time if industrial sales continue to be a drag on the plant?

I think the last four years have shown a couple of things: one is the inconsistency of load from quarter to quarter, and obviously we’ve had to work through that. I think the other thing in the last four years has shown us that we have to adjust to it. And when you think about the levers that we have around O&M, but also have emerging revenue sides as well. I mean, transmission continues to pick up, there is no question. We’ll have to continue to invest in the grid, in particular transmission as well. And then we also have other investments like solar and those kinds of relationships with customers that are improving earnings as well. So I think when you look at the 4% to 6%, we’re still confident in the 4% to 6%. And as we go through the year, we’ll certainly be able to fine-tune that in more detail, but I guess the overall message is we feel like we have the ability, as we’ve done in the last four years, to be able to compensate for any of these issues that occur. And there is no question, I mean, any business has to adjust based upon what the sales forecast looks like, but also they got to look at the revenue side as well and ensure that we’re doing everything we can do there to make it work as well. So, Greg I know there is a lot of concern out there about load forecast going forward if we trend it out. And of course, what we do to irregular generation, but at the end of the day we are going to adjust to it. And I think we take very seriously the consistency that we’ve built and maintained over the last four years, and we don’t intend on giving that up.

All right, that’s great. Also, when I look at the balance sheet, you guys have sort of ascended to a position of having one of the strongest parent balance sheets amongst what I consider your utility holding company peers. If you look at the FFO-to-debt metrics, the debt EBITDA, and that. You’ve got a lot of balance sheet capacity. How do you think about that store value and how you might use it going forward?

We look at stored value; it gives us a lot of opportunity, but we have the ability to invest indigenously within our own footprint, and we also, from a transmission standpoint and other revenue producers that we’re working on, to really define that, whether it's an energy company of the future or whatever you want to call it. But there is no doubt that we have built up a strong balance sheet with great credit metrics. And obviously we intend on maintaining that, but at the same time, there is the ability for us to look at various options for the use of that debt, and it's actually a good place to be in. But also in this day and age and how the economy is doing, it’s a good place to be.

Greg, you know this management and you know how we use that balance sheet capacity in the past. It's been on prudent regulatory-type utility investments, and I think you’d expect us to spend any of our balance sheet capacity in a similar way going forward.

Great, thanks guys.

Just two questions: first question I guess on Ohio. You’ve had another utility in your state apply for a regulated plan. Looks like it’s going to be a wires charge to grow got to make a more robust grade. Does AEP make a similar filing, given that staff has recommended that?

Yes, ultimately we can also do that, I think that’s an option for us to do. But AEP is sort of in a different place. We have some outstanding issues, that we’re working through with the commission, the perk that we just got was one of those. But we also have the Supreme Court cases on capacity; they will come back, and on the RSR. So we are working through other outstanding issues and each one of those is generally positive for AEP. We want to work through those and get them resolved, and I think it's a great opportunity for us to do that. And at the end of the day, if that other companies are successful then obviously we will take a hard look at that. But we want to make sure that we are investing in this state and in those areas that make sense, and we are doing it well from a transmission and distribution perspective. We’ve got to get this generation things settled once and for all.

And then, following up on Gregg's question, you mentioned you guys have a strong balance sheet, highlighted all of that capacity; you’re going through the changes of the generation and marketing segment right now. Southern’s call yesterday highlighted the success at Southern Power, refining all these renewable projects. Do we see the generation marketing business for AEP in the year or two looking more like a Southern Power with a lot more renewables? Is that going to be the focus as we go forward? Or is it just really managing the fleet or just winding it down and adjusting the wires company or regulated company?

No, I think clearly, and we’re probably a little more quiet about it because the major part of our business is around infrastructure, infrastructure development on the transmission side. We have a huge transmission system, so we have a lot of ability to invest. But we’re always looking for sources of new revenue, and we see it as another tool in the toolbox to be able to focus on enhancements of earnings because obviously there are near-term benefits of the protection tax credits, and we’re after doing that. We just did a universal scale, or utility scale project in Utah that hasn’t been announced yet. We can’t say who, but it's a 20-megawatt project. And then we also have several other small projects with municipalities and so forth in New York and other locations around the country. And we’ve been doing that and we know how to do that. What we really are focused on though is ensuring that we do have a place to deploy our capital in the wisest fashion, and that can certainly augment our business, but our main focus is on the infrastructure and what it means. It goes beyond solar. It goes to relationships with customers, and I sort of alluded to that in my opening discussion. We have a much broader relationship with some of these customers that goes beyond solar; it extends to renewables with storage. We’re very focused on the storage aspect. Our investor in Greensmith, for example, is looking at integration of solar and wind, but also in energy storage. And you see those applications coming together from a distribution standpoint, and that’s going to be a huge benefit to us. So, obviously we want to be in the solar business, but we’re also going to be in the wind power business; it's really addressing tailored needs of customers focused around that customer experience. And so in an ancillary fashion, it's coming to pass, but we’ll probably be getting larger at it, but we’re good at it and we’ll be focused on ultimately those customer experience side of things.

My last thing is, just to make sure I understand this correctly. It looks like you’ll look at multiple opportunities, maybe to bridge the gap on GenCore marketing, and one of those may be a solar ITC bridge there. Is that correct, or that’s not what you said?

Yes, that's essentially correct. However, we aim for the earnings generated by the utility business to provide that consistency. If we can enhance this with long-term purchasing agreements, whether related to solar or other resources, it allows for a quasi-regulated environment in which we can demonstrate consistency, which is our primary focus. We are selective about the solar projects and partners we engage with; we’re not pursuing solar simply for the sake of it or with uncertain counterparties. Chuck Zebula, who manages this aspect of our business, is very methodical in his approach, similar to how he handled unregulated generation. We have performed exceptionally well in that area, regardless of the discussions about our involvement. When we engage in such projects, we do so with discipline, structure, and targeted objectives. Regarding the use of proceeds, if cash comes in from a transaction, we talked earlier about stock repurchase. However, investing in a long-term solar project and taking the production tax credits upfront can also be a strong investment option compared to buying back stock. We have various strategies on the table as we consider how to manage cash disposition. To be the energy company of the future, we need to engage with all aspects of the business while maintaining a disciplined approach. We don't have differing views on balancing these resources; we are aligned on that front. Our primary focus is on the infrastructure and how it connects with our customers. In the future, we will be involved in many distributed solutions driven by customer interactions at the distribution level.

Great, thanks for taking my questions.

So quick follow up if you will on the process here. When you think about the legislative effort, whether restructuring or what have you, when do you make a final call here? You kind of talked about it in this quarter, early next kind of making a vision on the sale. Is there potential for you to stretch it next year to try to get it done given kind of the limited window on legislation this year?

Yes, let me give you an idea of my perception of the timing. We have the framework of legislation that we’re addressing with stakeholders now. Whether it's legislature or other important discussions with various market participants, we are going to focus on that between now and November. In November, the Ohio legislature comes back into place. Keep in mind, I am talking about the first tranche of assets; this is really regarding the second tranche, which was formally the PPA assets. The first tranche, that’s moving along; the train’s left the station, and it’s moving forward. As for the second tranche, from a restructuring standpoint, we’re going to go through and have the legislature and have discussions with stakeholders to get that process in place in November when Ohio, the legislature comes back into session. It will be a lame-duck session, so we will have to make sure that we’re focused on those legislators who will still be around and the future leaders of that organization. That way, we can hit the ground running with the legislature that’s already been by and large embedded and discussed in the first quarter. So in the first quarter, you’re starting with the new legislature, I think we are going to know pretty quickly whether people are open to the possibility of this kind of thing happening or not. And at that point in time, we have already started our secondary process regarding the PPA assets, getting the data room ready, all that kind of stuff. We’ll make a determination of where we think Ohio is going to go. Many people didn’t think the PPA would happen in Ohio, and it did happen. I still think there is going to be some form of restructuring in Ohio because there has to be. But the question becomes; number one, are people receptive to it? Number two, is the timeframe appropriate for what we’re trying to achieve? The driver here will be that secondary process, and we’ll have to get some determination as to whether the openness and collaboration in the State of Ohio would work to get something done during the pendency of all that. That’s where we’re at. So when we think about that, you’re probably taking the decisional process in the first quarter of next year that we’ll know whether Ohio, there is a chance of moving forward with that thing or not. And that will tell us what we need to know.

And then just to keep going with that, you kind of alluded to new investment as well. I am just curious, even if you pursue the sales, do you pursue legislation next year to open that door as well? And to that end, what kind of generation and how do you envision that today?

I’ve made it very clear in the state that we’re not going to invest in generation in this state, period. Until something is resolved from a restructuring standpoint that enables us to invest and do it wisely. The legislation includes the ability for AEP Ohio to not only transfer those assets that were under the PPA to AEP Ohio, but also to have a mechanism for investment in future generation. Obviously, the State of Ohio is very interested in getting natural gas going. There are a lot of discussions about three or four natural gas units getting built, but that’s locally inadequate for what the Ohio load actually is. There is a capacity deficiency in Ohio, and if Ohio wants to take advantage of additional natural gas build-out, additional structural additions such as pipeline infrastructure and electric transmission infrastructure, the economic development follow-on to all of that, there is no reason for Ohio to give that up, and so there has to be a mechanism to do that, and that’s what we’re after.

And just to clarify, is renewables as well in the legislation? I know it’s a hot issue this year?

Yes, renewables as well, and we’ve had discussions. There are different opinions on when, and there are different opinions on solar. Most are for solar, some are against wind. But I think there are dialogues to where we can probably reach some happy medium.

Just a follow-up to Julien’s question. You had mentioned that this is not re-regulation, restructuring, and I am just curious about why the de-emphasis on re-regulation and what pushback do you see if that term was used or proposed?

I think re-regulation has the kind of connotation that everything is going to be slammed back into the wires company, and there won’t be any ability to shop, and other participants can’t participate in a market. So we are focused on reaching that balance of the ability for the utility to invest, but also others to invest as well, and customers to be able to. So that’s really the distinction. Re-regulation just has a larger connotation to it, and it actually is a much heavier lift to put the entire genie back in the bottle.

Right, so I guess it's a spectrum of possible options; one where you can have everything put in, one where you have only certain assets like the PPA assets, and then perhaps maybe on the other hand of the spectrum might be only to allow the utilities only to invest in new assets. I know that’s something that might happen?

Well, that’s not our preference obviously. That’s going to be determined on the second tranche of generation for sure. Our intention is to make sure that we can transfer these assets back into the larger company and enable the ability for us to continue to invest in new generation in a creatable fashion. It will take a legislative mechanism to do that, and we also want to make sure that we accommodate other participants in the market in some fashion, and that’s part of the dialogue. But those two things are what we’re after.

Okay, as a reinvestment possibility of the solar investments that you were talking about, how big do you see that getting in terms of contributing to the 4% to 6% growth rate versus, let's say, the transmission Hold Co growth that you are forecasting for that segment?

Yes, so we plan on updating that at EEI in November, particularly as it relates to ’17 and beyond. We know where it is for this year, and it's been pretty good. It's a $15 million to $20 million addition for this year. So, those projects have a huge pipeline of projects, and I think you’ve probably heard others talk about, there are a lot of solar projects out there, but we are going to pick and choose the ones that match up to what our degree of risk is, and we want to make sure that that business continues to grow, but we are going to be very disciplined in our approach. So we will have more on that at EEI in November. It's about what we’re doing with wind power and energy storage too. We could establish even more defined energy service relationships.

Just in terms of tax audit, could you elaborate a little more on what happened there, and if it's going to maybe impact tax rate going forward?

Yes, so it should not impact tax rates going forward at all. It was a favorable federal tax adjustment related to a settlement of a federal tax audit issue, where we had a tax valuation allowance recorded in 2011. Talk about how is legacy an issue; this was related to litigation that stemmed out of the Enron bankruptcy. So we are going back pretty far in history, these things take a long time to work their way through the IRS and ultimately a congressional committee, and that’s what happened with this settlement. It's great to get that resolved and behind us, but don’t expect anything like that to be a recurring item.

Regarding the re-regulation or restructuring, I want to clarify whether you anticipate any developments during the lame-duck session in November, or if you're looking at the first quarter of 2017 for more clarity on this matter.

I believe we are currently in a period of observation. In November, we plan to engage with other stakeholders and present a balanced proposal to the legislature that others in the market can support. We are reaching out to legislators we expect to remain in their positions and future leaders of the organization. If we are unable to achieve our goals in November, we will gain early insights into the direction things are heading. However, I do not anticipate any significant developments until the new legislature convenes at the beginning of the year. We will know who is coming into office, allowing us to use the time from November to December to prepare and then actively pursue the legislation. Although this may seem ambitious, we are seeking feedback on both the feasibility and timing, which will be crucial for our planning. I do not expect any legislation to be finalized until the first or second quarter of next year. However, having clarity on the upcoming changes will enable us to make appropriate plans.

And then, when you mentioned stakeholders, are we talking about other merchant generators? The reason for the question is that, as you know, it seems that unless their generation is included or what have you, that there is this sort of - we emit sort of take no prisoners on anything like restructuring or what have you because of the fear that they might not be as competitive if you follow me? Is your participation something critical here, or how should we think about the stakeholder dynamic you mentioned?

I certainly think that they are part of the equation, and certainly we want to be able to accommodate as much as we can, the investments that have been made in the state by some of these independent power producers. And keep in mind, I mean they can still have PPAs because they’re not affiliated, so there are opportunities for them to confirm earnings during a period where obviously being an independent power producer is not a good time to be in that business right now. So, I am not going to go into who we’ve been having discussions with or anything like that, but I would have to say that they are an important part of the puzzle here.

Can you just once again review the priorities for the proceeds from the non-PPA assets?

The proceeds from the non-PPA assets will be used to advance the process, with a focus on increasing transmission investment and other types of investments to ensure earnings are generated as quickly as possible. Solar may also play a role in this. We are exploring additional strategies to invest more rapidly in order to improve cash flow. More details will be provided in November.

Paul, we would like to be able to come out and have an Analyst Day when we do have something to announce on that strategic review that’s underway, and we would have a discussion of that at that time.

Thank you, and you mentioned that the process is going well. Can we consider using the Dukes Ohio assets on a dollar-per-kilowatt basis as a reasonable proxy?

Yes.

Thank you very much.

Just clarity on timing of the non-PPA outcome?

From a non-PPA perspective, as we receive final bids in August, it may take until the third quarter or early fourth quarter to finalize a deal that we will announce at that time. The process related to closing might extend into 2017, but the deal will be completed, and we will reach closing. Once the deal is finalized, it could take approximately six to nine months to actually close.

Okay. And then also, just you mentioned kind of some weaknesses in your coal country subsidiary facilities, are you planning to re-release in those areas, or given that they’re depressed, is there other ways that you might be able to find a solution there? It doesn’t seem like the politicians want to find a way to invest in new things in these areas, so I am just curious how you’re thinking about that.

There are a couple of things happening in Kentucky, and I apologize for the situation there. We recently received some rate relief, and we are considering the right timing for our next steps. The governor’s office is exploring ways to attract new businesses and support those impacted by the challenges in the coal sector. We are collaborating with the governor and state legislators to determine how we can contribute positively to this effort. And Steve, keep in mind too, we’ve converted some of the coal to natural gas as well. So the Big Sandy side is converted to natural gas; Clint Rivers is converted to natural gas. Those are operational now, and you’ll probably see more natural gas build-out, but also on the renewable side you will continue to see an expansion from that perspective. As Brian mentioned, we’re actually working, our economic development people have been working with the states to present these sites as brownfield sites for manufacturing and industrial. We’re working to try to reinforce those service territories as much as we can. There has certainly been significant damage to coal country, and it's crucial that whoever is elected focuses on revitalizing this struggling area. Each candidate has their own approach; Hillary Clinton proposes investing several billion dollars to address job rehabilitation, which seems like a long-term solution. On the other hand, Donald Trump claims he will help get miners back to work, though the specifics of that are unclear. Regardless, both candidates should prioritize rejuvenating this part of the country, which has been heavily impacted by recent events.

Operator, we have time for one more call. One more question.

Just to bring closure to the overall merger portfolio the exit here. So if I am hearing you right, the non-PPA assets announced in late Q3, early Q4 take six to nine months to close from there. The PPA assets, will you have something to announce in Q1 or are you going to follow the legislative process and maybe that spins over into Q2? I am not wide clear on when the final closure happens on that portfolio.

I believe you understood correctly. We will need to assess the receptiveness from the legislature at that time, and we will have a substantial amount of groundwork completed. Thus, we should have a clear idea about the first quarter and its direction. Additionally, the second tranche is progressing simultaneously, so we are not pausing on that. What I am saying is we will evaluate the first quarter, and if we don't feel that things are heading in a positive direction in Ohio, we will inform you about the progress of the second tranche and provide an update. If we believe that the legislation can be accomplished, we will aim to complete it as quickly as possible, but we will remain in the tranches until we are certain that the legislation will proceed. You can expect to hear something from us in the first quarter, possibly early in the second quarter. However, I believe you will receive significant policy updates from us in the first quarter.

Okay. And then second, given the load trends have played out through the first half, are you still sticking to the plus 0.9% target for the year, or should we be adjusting that?

As we do an update, being half through the year and looking at where we have been year-to-date, we anticipate being closer to flat by year-end versus 2015.

Okay. And last question, when we look at the transmission growth profile you have led for us, the Trans Co business for 2019, that’s going well above 4% to 6%, it's becoming a bigger piece of your overall earnings as well. So when you look at this company beyond the mergers, just on a regulated basis, if your PNB etc. grows pretty much in line with everybody and the transmission grows the way it is, might we be looking at an overall portfolio that has a growth rate north of 4% to 6% just looking at those numbers?

So we are going to provide a more fulsome update on the longer-term growth rate when we get together after the announcement of the conclusion of the strategic review of the assets. We would like to have an Analyst Day when we go into all that, sort of reset growth rate if it's time for that and take a look at the use of proceeds if that’s what we’re facing at that time and give you a more fulsome view hopefully later this in the autumn this year. So without answering, which we’ll answer, obviously later in the year as Brian said, we’ve really brought up the kind of company this is going to be in the future, and that will be one driven by transmission, distribution, focus on wires, and the convolution of resources and energy services associated with that. So it's going to be a very, very good company going forward from a consistency basis, but also from an investment standpoint and what we’re investing in. I think it will position us very well for the next 100 years.

Right. The regulated business should pretty much be growing with your rate base investment, is that fair?

That’s fair.

Okay, thank you.

And thank you everyone for joining us on today's call. As always, the IR team will be available to answer any additional questions you may have. Sean, would you please give the replay information?