Operator: Ladies and gentlemen, thank you for standing by, and welcome to the AEP Second Quarter 2011 Earnings Conference Call. For today’s conference, all the participant are in a listen-only mode. There will be an opportunity for your questions; instructions will be given at that time. And As a reminder, today's conference call is being recorded.
Now that being said I'll turn the conference over to Mr. Chuck Zebula, please go ahead, Sir.
Charles E. Zebula - SVP and Treasurer: Thank you, John. Good morning, and welcome to the second quarter 2011 earnings webcast of American Electric Power. Our earnings release, presentation slides and related financial information are available on our website, aep.com.
Today, we will be making forward-looking statements during the call. There are many factors that 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 are Mike Morris, our Chairman 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 Mike.
Michael G. Morris - Chairman and CEO: Thanks, Chuck and good morning everyone, thanks for being here with us for the second quarter activities at American Electric Power Company.
I move you to Page 3, the second quarter 2011 highlights and try to give some granularity about the small statements. First, we’re really quite satisfied with where we are through the second quarter of 2011. We’ve really got off to a bit of a slow start in kilowatt hour usage as you may remember early in the year, but things have improved in our entire footprint since then, clearly stronger than in the West than in the East but acceptable in both of those of areas.
Commercial sales in the East still are lagging from what were forecasted they might be, but we are really seeing very strong industrial sales throughout our Eastern footprint. In fact, if you remove the impact of Century Aluminum still being offline, we’re at about 95% plus of the overall industrial send outs that we saw in the precession time and that really stays in line with the things that we talked to you about during 2008 and 2009.
Clearly different from the recessions that we saw in our Eastern footprint back in the 80s and 90s where plants actually were shut and shut forever. What we suggested in the 2008-2009 timeline was that people were laying their plants up for the intent to come back and clearly that has come to be the case.
We are seeing additional shopping in Ohio beyond what we had forecast for our retailer customers, but as you might imagine, American Electric Power Retail operations have been successful not in AEP Ohio’s footprint, but in the other opportunities that present themselves here in Ohio and of course any gigawatt-hour sale that doesn’t go to the retail market does go to the off-system market and I think you know from our press release that off-systems sales results have been quite solid.
So when we look at the net-net of the effect of switching in Ohio, we have always been an advocate for that. We didn’t think that would affect us quite as deeply as it has, but we are reacting to it in a very constructive way, and net-net the impact is acceptable and we are satisfied with where we are with AEP Retail and some of the things that we see. So based on all that we look at throughout these first two quarters, we feel very comfortable with our $3 to $3.20 range and reaffirm our earnings strength forecast for calendar year 2011.
We have a couple of interesting litigation developments to talk about. We couldn’t be happier with the way that the Texas Supreme Court ruling came out just a couple of weeks ago. I know that many who have had a chance to digest that, and of course many of you have seen the impact that it had on CenterPoint and continues to have for them as they go through the remand cycle of what the Texas Supreme Court has decided.
For us as you know, it justifies the way that we went about auctioning off our assets, the way that we characterized stranded cost going forward, and it has great potential upside for us not only in a one-time event, which we’ll talk about or Brian will talk about a little bit more here in 2011, but on an ongoing basis as well.
And one of the things that you may not have appreciated and we surely do about the Texas Supreme Court decision is that it also removed potential downsides that were argued by other petitioners in the case and made it quite clear that the approach is that AEP Texas took that endeavor were exactly in compliance with the law and we’re very satisfied with that as you might imagine.
We’re also over the top satisfied with the ability to remove a number of the litigants in the overall activities in Arkansas as they pertain to the John W. Turk plant. We are grateful that our team at SWEPCO was able to bring to resolution with the hunting club folks as well as many of the other interveners in that case. And I can assure you that the political folks in Arkansas as well as many of the judges that we reported the settlement to were quite pleased with what they had come to learn about those activities.
As you know, there are two NGOs who did not participate in the overall dialogue, although invited, and that is interesting, and we'll continue to carry on our dialogues with them to see if we can find some resolution, but more importantly, the underlying environmental issues that those parties have raised were addressed in the overall settlement with the other parties. So, we think that we have the potential to bear fruit in those discussions with the two NGOs and we'll continue to do that.
When we look at our regulatory plan, as you know, we've already had some success in calendar year 2011, $220 million of our overall rate stack already accomplished. There are a few cats and dogs out there that may help us get there, but we're in pretty solid shape the way that we see it.
The open proceedings in Ohio, Virginia, and Michigan are there, some may be resolved yet this year and they'll have a constructive effect, we would hope, in that sense. So let's spend a few minutes talking about Ohio because surely as you know, we have a number of open cases in front of this jurisdiction, all of which are important to us, all of which are important to our customers, and clearly, all of which are very important to the economy here in Ohio.
We continue to have what we believe to be constructive dialogue with the many parties of the cases, including the Commission staff. We will continue to work toward that end on all of these outstanding matters. As you know, the merger case has been approved by the FERC. We would hope that that will come through here in Ohio in the not too distant future.
A couple of important filings to be made in the not too distant future. Obviously today, we expect that the staff will file their testimony in the overall ESP case. Like all staff, the testimony filed by any party will have some parts that we agree with. There will be some other parts that I’m sure we don’t agree with. That net testimony is never the end result of where case may end up, but nonetheless we like you look forward to reading that. And hopefully, we will find a few things and that would be encouraging for us, but are well aware that we may read things in there that we don’t necessarily agree with this well.
At the end of the day, we feel very comfortable about our position in Ohio. We feel comfortable as I mentioned about the dialogue that we’ve had with the parties to the cases. This is a new and different Commission surely up to the task of resolving these many cases and we would hope that that happens. We also will be filing our view of the 2010 review of the seed activity pursuant to Senate Bill 221. As before, we think Ohio Power is in the safe harbor zone. And based on the way that the staff dealt with the activities at Columbus and Southern in the 2009 review seed activities, we feel comfortable that we will not be impacted at all by the seed activities and the review that will go on.
Like all my other colleagues, let me move into the environmental update. I should say all my other colleagues who are coal centric producers, I know that you had a pretty good walk through the way that we all see the impact of the things, the Environmental Protection Agency continues to do. CSAPR came out. The industry spoken a solid voice of we understand the in game here. We think that we can get there efficiently financial and electrically if the dates would be expanded from 2014 to 2016. Much to our dismay and others, they moved those dates from 2014 to 2012 and of course, as you’ve surely read frequently the State of Texas was included for the very first time in the final rule that came out, now called CSAPR.
Notwithstanding that, we feel pretty comfortable at American Electric Power, with our overall view of what we think the EPAs rulings not only that which are issued, but those which will be issued or have on our overall system.
We stay committed to the notion that we will be shuttering 6,000 megawatts prematurely. I know there has always been some confusion whether they were part of an overall settlement on New Source Review and New Source Performance review some years back. About 700 of those megawatts were included in those timelines. However, the rest of them have all been moved forward because of the current activities going on at the EPA.
Closing some of those facilities over time will of course have an effect on our ability to have gigawatt-hours available for us in the off-system sales market. But throughout the footprints where we are very active with off-system sales, we expect other facilities will be shut as well and that clearly will have not only a constructive impact on the capacity fees that we receive going forward, but we will also increase the amount of money recognized on the gigawatt hours of energy put into the marketplace.
And it doesn’t take much of an uptick in those two numbers to compensate for the megawatts that were becoming offline because as you well can imagine, those were higher price plans at the top of the stack, which didn’t dispatch as earlier as those on the lower cost portion. So we feel as though they will be some impact, it surely won’t be a devastating impact. Nonetheless, we will continue to do what we can politically as well as in general dialogue with the EPA to try to put greater rationality in what it is that they are trying to accomplish.
I know that some of the more principled NGOs are concerned about the approaches that we have taken to this particularly in a legislative arena, but our position we think is reasonable. It gets us to the same environmental footprint by 2020, instead of 2016 or 2017, and it’s done in a much more financially and electrically rational and beneficial way. So we will continue to put as much pressure on the EPA as we can.
I am happy to see that today they decided to put another cap on oil and gas drilling that will bring some additional folks in the fray of trying to discuss about the incredible aggressiveness that the EPA is taking, all in keeping with what they think is their challenge, but nonetheless in our view, unnecessarily over the top and a bit aggressive. I don’t think there’s a corporation in America that doesn’t want to get to the right place. It’s just a matter of trying to get there in a cost effective and energy effective way.
Lastly, let me talk a minute about some disappointment for us anyways from the carbon capture and storage project layup at our Mountaineer station in New Haven, West Virginia. I know that many of you had the opportunity to be there. You know how amazingly impressive it was that we were able to capture and store the only integrated project anywhere in the world with a coal-fired power plant. But going forward without a carbon legislation or without an appropriate approach to carbon and its impact, it was simply not able for us to go forward and continue that project. It has been completed or will be completed through the base engineering drawings and activities and laid up for another day.
We’re encouraged by what we saw. We’re clearly impressed with what we learned and we feel that we have demonstrated to a certainty that carbon capture and storage is in fact a viable technology for the United States and quite honestly for the rest of the world going forward.
So with that, let me simply close by saying, we, as I mentioned at the outset, reaffirm our view of our earnings strength in 2011, and of course, stand by our 3.25 forecast for 2012.
With that, now I'll turn the microphone over to Brian.
Brian X. Tierney - EVP and CFO: Thank you, Mike. This morning, I'll review quarterly and year-to-date reconciliations through the second quarter, discuss load trends, review customer switching data, and provide an update on the Company's capitalization and liquidity. Then, we will get to your questions as quickly as possible.
On Slide 4, you will see that second quarter earnings for this year were $352 million or $0.73 per share, which was $3 million less than last year's second quarter results of $355 million or $0.74 per share. Here are some of the highlights for the quarter-on-quarter comparison.
Operations and maintenance expense, net of offsets, was unfavorable by $56 million or $0.08 per share. This number is largely explained by an increase in storms expense of $52 million. Much of this variance is attributable to Appalachian Power where in the second quarter of 2010, they were able to defer $25 million related to a 2009 storm. This year, Appalachian Power had storm costs totaling $17 million for the quarter.
Other costs net accounted for negative $0.04 per share or $34 million and primarily consisted of a decrease of $10 million net of tax from the sale of shares of the IntercontinentalExchange in 2010 and year-on-year increases in other taxes.
Customer switching accounted for an unfavorable quarterly comparison of $24 million or $0.04 per share. We will discuss this in more detail on Slide 7. Rate changes accounted for positive $66 million or $0.09 per share and came from multiple jurisdictions.
Off-system sales, net of sharing, were positive $37 million or $0.05 per share. This result was driven by significant increase in physical volumes and a widening of spark and dark spreads.
Physical volumes were up 81% due to an 11% reduction in planned and unplanned outages and the fact more of our units were in the money since around the clock prices were up 14% while natural gas prices were only up 1% and delivered prices for coal were only up 3%. Weather accounted for a positive $0.01 per share or $5 million improvement over the last year and was favorable $47 million versus normal weather. Driving this result for the quarter was the fact that our western service territories experienced the hottest June in the last 30 years.
Turning to Slide 5, you will see that for year-to-date 2011, AEP earned $744 million or about $1.55 per share which is $24 million more than last year’s $720 million or a $1.50 per share. Highlights include operations and maintenance expense net of offsets which compared negatively to last year by $30 million or $0.04 per share similar to the quarterly comparison, this difference was largely driven by an increase in storm costs of $36 million.
Other cost net decreased $0.05 per share or $35 million, and similar to the quarterly comparison was primarily driven by the absence of the $10 million net of tax gain on ICE shares and from higher other taxes. Customers switching was a difference of $43 million or negative $0.06 per share and again we’ll discuss this is more detail later. On a positive side, rate changes were responsible for year-to-date gain of $110 million or $0.15 per share versus 2010. Again, these rate increases were for multiple jurisdictions.
Off-system sales net of sharing accounted for the positive comparison to last year of $49 million or $0.07 per share year-to-date. The story here is similar to the quarterly explanation, though it’s not as dramatic. Physical volumes were up 45% and spark and darks spread widened with around the clock prices for electricity increasing 5% while natural prices were actually down 10% and delivered prices for coal increased 1.4%.
Finally, in contrast to the quarterly comparison, weather was a negative variance to last year for the year-to-date period. Although, unfavorable by $0.2 per share or $15 million to last year, this year it’s actually favorable $67million when compared to normal weather.
Turning to Slide 6, we will take a look at the normalized load trends as promised. It’s important to remember that this data has been adjusted to exclude the effect of weather and represents our total connected load.
In the bottom right hand side of the slide, you will see the total normalized retail sales were up 1.9% for the quarter and were running at a positive 2.2% for the year-to-date. This improvement is primarily in the residential and industrial classes. Although the residential class is up 4.4% for the quarter, it is up 0.9% of a percent year-to-date which we believe is more indicative of growth in the class.
Economic recovery for our commercial class of customer remained slow. The improvement in the industrial class has been aided by the return to full production of one of our large aluminum customers. Mike mentioned that with the exception of another aluminum customer who remains closed, our industrial sales volumes now stand at 95% of their prerecession levels.
Slight 19 in the appendix provides more detail on our top five industrial sectors. Finally, all customer classes have benefited by the Valley Electric Membership Corporation acquisition in our SWEPCO operating unit.
As a reminder, as part of our guidance for 2011, we were expecting sales volumes to exceed the prior year by 1.7%. Although the mix of customer sales continued to shift somewhat between the classes, we remain confident that our original guidance remains sound.
On Slide 7, we can examine AEP Ohio customer switching, but clearly let me describe the graph. The bar shows us the 2011 cumulative percentage of load lost as compared to AEP Ohio’s total load. The line shows us how much generation margin was lost associated with the customer switching, $46 million in total. At the bottom of the page, you can see how this activity is split between our two Ohio operating units for the quarter-to-date and year-to-date periods. As we’ve previously discussed, the more significant activity is occurring in Columbus in Southern Power. In aggregate, about 7% of 2011 total AEP Ohio load had switched through the end of June. The level of switching to-date is running ahead of the pace assumed in our guidance and we expect that to continue for the remainder of 2011. It is important to note that we are experiencing positive offsetting margins associated with the freed up energy and capacity through off system sales and capacity sales to competitive retail suppliers. Given the net effects of increased switching and positive margin offsets, we remain confident with the 2011 earnings guidance.
Finally, on Slide 8, I would like to update you on our balance sheet and renewal of our recent credit facilities. You’ll see that AEP’s debt to total capitalization stands at 56.6%. This is the lowest level for this ratio in the last five years, and reflects a commitment by the Company to maintain a strong balance sheet and solidly BBB credit ratings. Our cost reduction initiatives from last year and our capital expenditure discipline reflect that commitment and are direct reasons for the strength of our balance sheet.
Also on Wednesday, we issued an 8-K which contained important announcements about our two core credit facilities. On July 26th, we renewed and upsized the $1.45 billion facility that was due to expire in April of 2012 with a $1.75 billion facility that will expire in five years. In addition, we were able to extend the $1.5 billion facility that was due to expire at the end of June of '13 by two years, now with an expiration in June of '15. We were also able to re-price that facility to reflect current more favorable pricing. These assumptions improved the capacity of our credit facilities by nearly $300 million to $3.25 billion, and extend the tenure of these facilities considerably.
Also, as Mike mentioned earlier, we are pleased of the decision of the Texas Supreme Court to reverse the PUCT's decision to deny recovery related to the capacity auctions and to remand the issue back to the PUCT. As a result, TCC will be entitled to recover $420 million plus carrying costs dating back to 2002. We expect the total to be about $900 million. This capital infusion will further strengthen the balance sheet of the Company.
In summary, the Company is in a strong credit and liquidity position as we enter the next several years, where the Company will see increased demands for capital investment for environmental, maintenance, and reliability needs. As Mike mentioned, we are reaffirming our guidance for 2011 and 2012.
As you know, our point estimate guidance for 2012 is $3.25 per share. This guidance assumes a reasonable outcome in Ohio, manageable impact to off-system sales from the (indiscernible), and continued growth in our transmission business. In the coming months, as the Ohio and EPA pictures become clearer, we will be able to provide more specific guidance than the point estimate we affirmed today.
We appreciate your time today and I'll turn the call now over to the operator for your questions.
Operator: Greg Gordon, ISI Group.
Greg Gordon - ISI Group: So when we look at, we’re looking at the numbers clearly as you explicitly stated the switching numbers are tracking ahead of what you had, you told us your budget was for this year, but you had also 70% of the targeted gross margin for the year in your off-system sales business and we’re not even in the third quarter yet. So, is there some way maybe in the future you could give us what the net impacts to margins is by sort of carving out the benefits that are accruing to the OS off-systems sales margins as you – as energy and capacity move from the retail bucket to the wholesale bucket?
Michael G. Morris - Chairman and CEO: We’ll surely try to craft something like that, Greg, to give you guys at least some directional view. The offsetting positive effects as you already mentioned showing where we are with off-system sales, we’re just two quarters moving in to what as you know is usually the most productive quarter. We feel very, very comfortable about where we are and as you know inside of the ESP, there are some great design issues as they pertain to the commercial rate class which is the high impact class at Columbus Southern. We expect will get resolve and so going forward some of the off-system benefits will continue to be there and some on the on-system switching might slow down a bit, but we’ll try to give you a better picture of that, so that you can get a feel for it. But rest assured, we feel extremely comfortable with where we are, we are capturing about 25% of our own market share, in that sense through AEP Retail having success in the other areas both FE – all three really, FE, Dayton, and Cincinnati. So switching in Ohio was interesting. I think we have reacted to it in a constructive way and the impact on it, although more than we had expected, has been very tolerable.
Greg Gordon - ISI Group: And the CSAPR rule, some of the other companies reported yesterday indicated they thought there was a chance that the implementation could be delayed by the courts. Are you presuming that happens or you presuming that doesn’t happen? And when you look at amount of credits you’ve been allocated, are they sufficient to mitigate the potential increase in customer bills, or do you have enough credits to mitigate having the increase what you charge in the fiscal agreements? So when you look at the balance of – so your long-short position, how does that play out in terms of where those credits get allocated and is that going to be a ‘12 impact or do you think perhaps it will be delayed?
Michael G. Morris - Chairman and CEO: Well, I like everybody else will continue to push for delay, because there’s just no way in the world you can make a rule final in November of 2011 and expect people to comply with it on January 2012, which is as close to lunacy as you can get, but having said that, we will continue to plan to address those issues. We continue to look at the options that are available to us. Your question on the credits is interesting. We are long in some jurisdiction and short in another jurisdiction. Some of the controlled trading will allows us to address much of it, but maybe not all of it and we are going about the process of trying to satisfy that shortage as we go. But as you know in a regulated world, those kinds of activities are recoverable from our customers and it’s going to have some unfortunate dislocation. And when you think about CSAPR and the timelines, we will all be able to manage our way through it. If we end up spending a certain amount of money in the regulated footprint as you know that will turn into earnings as we go. The really devastating effect though will be in those communities where plans are prematurely closed, jobs are lost. Property tax bases are affected. And in many of those regions, Greg, as you know, we are the only game in town. So when the power plants go, so go the communities and that is truly the unfortunate impact and no one on the coast cares about, and I understand that whether East or West Coast. But we care a great deal about that in our footprint we sure do.
Greg Gordon - ISI Group: The final question on the $900 million in pre-tax cash, you’ll hopefully be getting some time next year, is there – do you know what the usage of that cash are going to look like at this point?
Michael G. Morris - Chairman and CEO: Yeah, we do. Greg, we’re going to obviously take some of that, and re-securitize (TCC) by retiring some debts and there are going to be some requirements that we’re going to have in Texas to retire debt and refinance that company. But there will be a component of that will – should be a significant dividend up to the parent. And of course, we’ll use that for the other capital needs that we have when we sort of laid some of those out for you, the environmental needs that we have building the transmission business and others.
Operator: (Paul Patterson, Glenrock Associates).
Paul Patterson - Glenrock Associates: First on the tax rate for the quarter, I’m sorry if I missed this, but it did seem a little bit lower than I think normal. Could you tell us what happened there and if there is any change or opportunity for growing your tax rate on a going forward basis?
Michael G. Morris - Chairman and CEO: I’m trying and I’m looking like Jeff Immelt, but I’ll let Brian answer that question.
Brian X. Tierney - EVP and CFO: Tax rate for the ongoing, the AEP Utility segment was about 33.27% compared to the prior year, and about 35.55% and it was lower as a result of lower pre-tax book income and larger favorable flow-through and permanent book to tax differences. We’re always looking for opportunities to try and get that down as low as we possibly can, and we’re engaged in a number of tax planning activities to try and get that as low as possible. We’re pleased that it’s below what we had in guidance of 35% range for the quarter and the year, but we're always planning and trying to find ways to reduce that tax burden as much as we possibly can.
Paul Patterson - Glenrock Associates: You're not going to change the – we shouldn't change our outlook on the tax situation going forward, right?
Brian X. Tierney - EVP and CFO: I think it's always wise for you to assume a 35% rate, and if we come in lower than that, that's a benefit of our shareholders.
Paul Patterson - Glenrock Associates: With respect to customer switching, I guess, Greg asked this question. You guys are not providing any – I mean, that's the gross margin that you always had on that slide as opposed to the net margin. Could you just give us a little bit of a flavor as to what you think the net margin would be, roughly speaking?
Brian X. Tierney - EVP and CFO: I'd rather give you some accurate data as best we can down the road. Paul, again, I will tell you that it's conservatively smaller than the gross margin impact.
Paul Patterson - Glenrock Associates: The Ohio situation, we've seen the interveners file their testimony, and it was all over the map, I guess, different industrials at different positions and what have you, and OCC and what have you. Is there any possibility that we're going to be getting a settlement? I know that others have suggested that, like Duke, and I'm just wondering whether or not – I mean, this is going to be a fully litigated case and that's just what we should expect?
Brian X. Tierney - EVP and CFO: I would hope not. As I mentioned in my opening comments, we continue to have what we think to be constructive dialogues. As you know, and I mentioned this as well, people file testimony to lay out what they think is their most preferred position, frequently knowing that they'll never get there, but nonetheless, they do, and each and every time people do that, it does have an effect on settlement discussion. But I have every reason to believe, based on what we're hearing and the give and take discussions with folks that these cases lend themselves to settlement, and we’ll continue to work diligently toward that end.
Paul Patterson - Glenrock Associates: Then just finally on the staff, you mentioned that it was coming out today, and with the old ESP it came out and it didn't really say much, it sounds like you guys are expecting them to give a more defined position as to where they are actually – what the sort of for ESP format should sort of be like, is that what you guys are sort of sensing?
Michael G. Morris - Chairman and CEO: Not necessarily, what I tried to say in my comments was just, if you see something there that looks draconian, you can react to it as you'd like but again that won't be the end game, and the dialog with the parties, the staff included have been constructive. I think, we are better than congress at debt ceilings and cost reductions, but some of the conversations get a little worrisome. So we’ll see what we will see, I don’t think it will be a crystal clear path of here's what we think the commission ought to do. It will lay out some of their positions on various issues, some that may be more aggressive than we would like, and others that may be supportive than others would have thought the staff would have been. So, it's really hard to forecast, I assure you, they are not sharing with us any drafts of what it is they intend to file, we'll get it the same time you get it.
Paul Patterson - Glenrock Associates: I’m glad to hear you guys are at a better position than Congress, that's heartwarming.
Michael G. Morris - Chairman and CEO: That doesn't take much long.
Operator: Dan Eggers, Credit Suisse.
Dan Eggers - Credit Suisse: Mike, I was wondering if you could just share your thoughts kind of on the – you had a big plan for the capital spending for environmental and kind of the plans for retirement versus keeping, could you share a little color on what was the regulatory response, and the stakeholder response to investment and closure decisions by states, and whether you are going to see any changes or inducements maybe to change that plan?
Michael G. Morris - Chairman and CEO: That’s an interesting question, Dan, because the granularity that we’ve provided have allowed us to be on the point, and to catch any one of the number of arrows coming our way. I will tell you this, we have not had a meeting with anyone in any of the states and/or in Washington, including the EPA, where there wasn’t serious – thanks for telling us exactly what your picture looks like. You can rest assured at the state level, the governors and the house and senate members, as well as the local community folks are eager to see us change the plans. I had an opportunity to speak to about 500 people at the Kentucky Chamber, where the speaker of the house of the state, the (indiscernible) of Kentucky, who serve us our Big Sandy area stood up, and said whatever you do don’t shut Big Sandy down. Go about whatever it is you need to do, whether you're going to retrofit it, which would be their preference and/or convert it to gas, and they will be with us as we go to the PSC in Kentucky to adjust the rates accordingly. I think what we were seeing in our Eastern footprint for the most part are state leaders, who are suggesting that they do not want to be at the whim of the market. Nor do they want to be a net energy importer, because each of those seven governors have already staked out their jobs and economic development are the plans for their success. So, we see a great deal of encouragement. I must tell you at meeting with the FERC, with the Departments of Energies Electricity Group, with the EPA, with the various NERC players and the RTOs, the (indiscernible) folks, everyone is saying thanks for the granularity and the honesty of your data. We can see what you mean by, there may be pockets of reliability impacts, and someone really needs to aggregate all that data, so that you can see that going forward. As you know, the Energy Commerce Committee and the House of Representatives have suggested in the train act that that’s exactly what the government does. So this is far from over with, it really is and again we are not in any way, shape or form, although I know many NGOs don’t agree with us in this regard. When I’m trying to change the environment nor affect the environment in a negative way, we’re trying to balance the environmental benefit that will come from retrofitting and changing the generation fleet here in the United States, with the economy of the United States which we think is every bit as important.
Dan Eggers - Credit Suisse: I guess just another question. If you look at the usage patterns in the quarter, we’ll take residential, kind of had a pretty nice pop relative to a trend had been coming out of the recession. Was there something unique to the quarter, was there some weather adjustment data that makes the world (swirly) or are you actually seeing a real change in usage out of that customer class?
Michael G. Morris - Chairman and CEO: You heard us say this in the first quarter was, one of the few things that is in the constructive sense, they’re heating bills went down a lot because natural gas prices continue to dampen compared to what they saw a year ago. And the cost of transportation went down some, so I think that they probably were turning on some of the lights that they had turned off in the first quarter.
Operator: Paul Ridzon, KeyBank.
Paul Ridzon - KeyBank: How should we think about the tax rate on the securitization proceeds?
Brian X. Tierney - EVP and CFO: We are going to be setting up a tax deferral associated with that. So we’re going to take at the time that we recognize a transaction, we’re going to take the $420 million plus the applicable interest and the debt only portion and we'll record that as a regulatory asset with the related deferred tax expense of about 35%. Then of course, as the reg assets amortized, the deferred taxes will be amortized to match the current income tax expense and the equity portion that we'll be realizing will be recognized as the amortization happens as well. We anticipate over the 14-year securitization period, the equity carrying cost of between $20 million and $185 million to be recognized in current period earnings.
Michael G. Morris - Chairman and CEO: Paul, I can't tell you how happy Brian as you asked that question.
Paul Ridzon - KeyBank: On the $0.04 to customer shopping in the quarter, is that net of what you might have picked up or where do you hear retail margin as you go and competitively shop your power, where does the margin on that show up?
Michael G. Morris - Chairman and CEO: Well, that is not a net number. That's the actual impact of those who have chosen other suppliers. As you might imagine, the retail margin on sales from the retailer are less than the margin you would see had those customers stayed on the system. Brian, where exactly…
Brian X. Tierney - EVP and CFO: In terms of the EEI line on pages 11 and 13, it's line 18, Generation & Marketing.
Operator: (Anthony Crudel, Jefferies & Co.)
Anthony Crudel - Jefferies & Co.: Sure some more question on customer switching. What customer class, I guess, had the most switching, and my assumption is commercial I guess, where would the loss of gross margin go if you saw all your Columbus Southern commercial customers switch?
Brian X. Tierney - EVP and CFO: That is right. It is the commercial class of customers and primarily at Columbus and Southern Power Company and the place where you would see that margin occurring is in the Ohio companies, line two on pages 11 and 13.
Michael G. Morris - Chairman and CEO: I think it’s almost inconceivable to imagine that the entirety of the commercial load at Columbus Southern would move away from us. And as a I mentioned before as you know inside of the ESP, a lot of their activity has to do with the arcane concept know as rate skewing. Our commercial customers typically pay more than the cost to serve them and in the filings that we made inside the ESP, one of the things that actually is getting some pretty solid support is adjusting that rate skewing to better balance customer bills to customer cost. So there are some self-correcting activities that will go forward in that sense.
Anthony Crudel - Jefferies & Co.: What percentage of commercial customers have switched already?
Brian X. Tierney - EVP and CFO: I don’t have the percent of total commercial customers that have switched, we can get that for you.
Operator: Michael Lapides, Goldman Sachs.
Michael Lapides - Goldman Sachs: Few question, first of all off-system sales. Second quarter the levels, the new normals when we start thinking about the same quarter for next year or is it something slightly different?
Michael G. Morris - Chairman and CEO: It’s hard to say at this point Michael because of the impact of what CSAPR might have on that. I would obviously expect that people might have less volume to go in the shorter periods and we’ll be trying to optimize what they have available to go in the winter and summer months as load and pricing is higher. So it’s really hard for us to tell what the new norm is going to be when we have the situation changing as much it is going to under the CSAPR regime.
Michael Lapides - Goldman Sachs: Second O&M, I know up to the quarter, given the storm cost, what are you assuming in the ‘11 guidance and in ’12 guidance, meaning back at second half of ’11 and 325 for ‘12 in terms of O&M growth?
Brian X. Tierney - EVP and CFO: Second half of ’11, we anticipate being very similar to the first half being darn close to flat consistent with what our guidance is and I’d anticipate that although we haven’t come out with ‘12, we are going to be very conservative on O&M growth there as well. Really, the bulk of what we are trying to show in any growth at all in O&M is trying to have as much of that as possible picked up in trackers and as little of that as possible flowing through as a net against revenue hitting the bottom line.
Michael G. Morris - Chairman and CEO: Yeah, I think that’s an important point Michael that Brian makes. I think it doesn’t – it surely isn’t missed by you or your colleagues. The fact of the matter is some of the increase in O&M has to do with the magnitude of storms that we’ve experienced so far this year. They don’t hit that threshold that you go in for recovery in the normal course of business in the various jurisdictions. And the other part of it is simply O&M authorities that have been granted to us by various commissions where you’re recovering dollar for dollar for the increase in O&M. As you know, we’ve been very aggressive to try to build more trackers and riders in our cases. So, we take Indiana as a perfect example, or I guess PSO maybe a better example. They gave us a certain amount of money to underground activities, so that the Tulsa region didn’t see the same amount of interruptions on the system and every single dollar that they authorized to be spent was spent for that goal as you would expect us to do. So, net-net, the O&M discipline at American Electric Power continues to be strong. The headcount numbers continue to be right where we thought that there would be. So we keep a very, very close eye on that as we go forward. So, when you see those increases, I want to make sure, and your question has given us the opportunity to put some granularity to what’s driving them.
Michael Lapides - Goldman Sachs: Last question, just in terms of rate filings, rate cases underway, I mean, I think, we’re up-to-date on the ones that are underway now, but in terms of what you expect to file in the back end of 2011 for future rate increases either in 2012 or beyond?
Michael G. Morris - Chairman and CEO: So, when we look at – there probably aren’t any or that we would file yet this year in an impact of this year. But there will be a few, and we’ll give you some granularity on that. There will be some active cases as you might imagine. As you know, the Virginia case will mature in ’12, the Michigan case will mature in ’12 although it has a potential to settle in ’11. So, we’ll see how it goes, we’ve got cases probably in Indiana as well, and other jurisdictions. But net-net, we’ll let you know what else we’re looking at in the back of the year.
Operator: Jonathan Arnold, Deutsche Bank.
Jonathan Arnold - Deutsche Bank: Quick question, as we look at your rebates line historical emissions of the fleet in, let’s say, 2010; is that a reasonable proxy for where you are or – were you operating your existing control as much as you could, could we get somewhere else on fuel switching, just something – should we think about it as a static starting point or not?
Michael G. Morris - Chairman and CEO: That would probably be inappropriate. We will begin to operate the fleet a bit differently. We’re looking at some fuel selection differences as you know we’re although not by a tremendous amount, because we’re getting more gassy, but at American Electric Power because of the size of our coal fleet adding the gas facilities that we have, we'll have some impact. We have moved Dresden up in a much more aggressive construction cycle that will come to play in 2012. So, it's probably inappropriate to use it as your base, because the mix will change, the fuels will change, and the footprint will go down some. Having said that, and I know, there's been some concern about how scrubbers are operating across the U.S. fleet, we're really operating at peak performance, 98%, 99% capture. So, we're quite satisfied. We're looking at remedial action and changes to some of those scrubbers as we go and that's all working out quite well as well.
Jonathan Arnold - Deutsche Bank: In terms of how the scrubbers are performing 2010, you consider to be a good base?
Michael G. Morris - Chairman and CEO: We do, indeed.
Jonathan Arnold - Deutsche Bank: I know you've said you're studying the CSAPR rule and the impacts. Is there any expectation that you'll update your compliance plan sometime later this year as you work more on studying or are we – well, sort of, tell us (indiscernible) think about a change?
Michael G. Morris - Chairman and CEO: No. I think, what we did earlier on is pretty accurate. The only difference that we may see is that we are taking a real hard look at the dry sorbent approach to it rather than the major capital investments that we thought we might have to put on. I think that as you know, what we get on HAPs MAC is going to have probably a much larger effect. So, we don't want to get too granular about what we're going to do yet, knowing that that's coming out in November.
Operator: Ali Agha, SunTrust.
Ali Agha - SunTrust: Mike, as you mentioned, there's a lot of activity going on in Ohio. Could you also give us a quick update and remind us, where you stand on the remand proceedings that are going on there and also the distribution rate case?
Michael G. Morris - Chairman and CEO: They are moving along at pace. The discussions that we are having on the ESP of course include the magnitude of all of the filings, so the merger docket, remand case as well as the overall distribution rate case. So they are all there, they all have schedules established for the most part and the commission staff and the commission as well as the parties are working through all of them as quickly as we can. I don’t know, I don’t want to leave you with the impression that there are some overall global settlement concept that may wrap them all up. If that were doable, we would be happy to do it, but there are uniqueness’s to each of the cases and some of the interveners would rather see some of them process to their conclusion while others of them may yield better opportunities to settle.
Ali Agha - SunTrust: But on the remand as far as I recall Mike, they were hearing held and then was there a date set for a decision or was that still an open item?
Michael G. Morris - Chairman and CEO: Still an open item.
Ali Agha - SunTrust: And separate question, as I recall when you had laid out your plan, your big environmental plan, have you assumed that there could be some delays in these proposals coming down the pike from EPA or was that based on what the existing proposals were laying out, can you just remind us that?
Michael G. Morris - Chairman and CEO: That was based exactly as the proposals were and to the only update again as I mentioned, we are looking at different technologies in response to the opportunity to address CSAPR. So I would not build any delay and that what we try to do, we’ll show a straight forward verifiable view of the effect of the draft rules as they stood at the time and the rules that we think will come out over time and the effect that they would have on our fleet.
Ali Agha - SunTrust: And last question, Mike, in the past you folks have – in the recent past, I should say there have been rumbling, musings from AEP, you’re looking at your entire portfolio. There may be opportunities to monetize some of the assets if it makes more sense. Could you just give us an update on your current thinking there and could we expect something before the year is up?
Michael G. Morris - Chairman and CEO: No, I would think that – as we always do, we look at the assets and the opportunities that are in front of us. A couple of the jurisdictions continue to lag from what we would like to see them do, but they are catching up in a hurry and we are encouraged by that. We are equally encouraged by the activities that we see from the FERC on their Transmission Final Rule 1000. I don’t want to take too much time on this call, but I must say that Susan Tomasky, who has had headed that Transmission Group for us for the last handful of years was instrumental in pulling together the comments that American Electric Power made to the FERC, and a number of those comments were very much evident in the final rule as it was brought forth. So, we are encouraged by what we see in transmission the opportunity to do that. Lisa Barton, who has managed many of our negotiations with our joint venture partners in transmission, will take Susan’s role. We will miss Susan a great deal, but the whole notion of having here responsible for transmission during that period of time worked out exactly as we had hoped that it would. So, we see a lot of investment opportunities with the assets that we have, but we will always look at monetizing anything if it seems better in the hands of another player.
Operator: Steve Fleishman, Bank of America Merrill Lynch.
Steve Fleishman - Bank of America Merrill Lynch: A couple questions. First, I believe most of your states have fuel clauses that recover emission allowances of CSAPR bring these back, are you able to cast through emission allowances in your fuel causes?
Michael G. Morris - Chairman and CEO: Every one of the states, yes. That’s correct.
Steve Fleishman - Bank of America Merrill Lynch: And then secondly, in Ohio, I guess one potential outcome given that it’s kind of – it seems like it’s almost happened with Duke is that they just don’t get a plan done by the end of this year. What happens then and if you just kind of kept your comp plan and had your fuel clause and et cetera is that really – how big a problem is that or not?
Michael G. Morris - Chairman and CEO: I don’t think that would be big issue at all, if that’s the way it ends up. I appreciate the points you make about Duke because they’ve kind of gone from one footprint – one approach to another and then kind of morphed in with a hybrid of the two and that may be a bit troubling. But we have every reason to believe that we’ll come to some resolution before the end of the year. I think you know, if – I think everyone knows that the executive administration in the state of Ohio is in different hands, very aggressive hands, Governor Kasich is a let’s get it done kind of person. I expect we’ll see an order before the end of the year in one way shape or form. If that doesn’t happen, we’ll just continue on with what's – where we are and that’s not a bad news story for us at all.
Operator: Justin McCann, Standard & Poor's.
Justin McCann - Standard & Poor's: If after the 2012 election, the political scenario plays out in which the climate bill was passed in say 2013 or ’14, and you were able to get regulatory approval for CCS cost recovery. How long would it take to pick up from where you left off and complete the remaining three phases needed to realize commercial operation.
Michael G. Morris - Chairman and CEO: Quite honestly not that long of a period of time, because again as I mentioned we are taking it to the original engineering design. Now that would have to be brought up to-date, and around the world there are still a couple of projects going forward. As you know Southern Company is working on some of the (indiscernible) technology down in Mississippi I believe. So we all continue to look at that as a constructive undertaking. But you have asked a very important question. Having spent a great deal of time and the international dialog on these issues to a number of facilities that American Electric Power is involved with. It would appear to me that a carbon intensity plan is about as far as you are going to China or India go. So if we had legislation that really was driven toward carbon intensity and the United States going forward that may cause some of the carbon capture and storage projects to go forward. We always thought we could get the final design in about a year or less, bid and construct in a year or more. So it would stay on those kinds of timelines. What we thought originally was a 2014, ’15 date if you had a piece of legislation by 2013 you may be looking more at a 2017 or ’18 timeline.
Operator: Ashar Khan, Visium Asset Management.
Ashar Khan - Visium Asset Management: I just wanted to get a – I guess you mentioned what would be the user proceeds. You said it would be all for debt reduction. Is that what I heard?
Brian X. Tierney - EVP and CFO: There will some debt reduction at TCC and perhaps some rebalancing of the capital structure of that company, but there will be a considerable dividend up to the parent.
Ashar Khan - Visium Asset Management: So what will the parent do with the dividend then?
Brian X. Tierney - EVP and CFO: We have some significant capital needs that we’re going to be embarking on. As we’ve talked about our capital plan, and what we need to do in terms of the environmental retrofits and the like, and we have some pretty significant needs for that capital in our transmission business as well, in addition to our underlying utility businesses. So, we have plenty of uses to put that capital to work and have it earning for the shareholders of the Company.
Michael G. Morris - Chairman and CEO: I think, if there's anyone who had concern over one-time equity issuances at the parent, I think that these kinds of activity surely lay those over.
Ashar Khan - Visium Asset Management: I understand, but you had not baked that into your point estimate, am I correct. It’s – I guess, the benefit of lower interest expense, that’s the way I look at it. That’s not really baked in into the 3.25. Is that a fair conclusion or no?
Brian X. Tierney - EVP and CFO: Yeah, this was not incorporated in our point estimate when we came out with it. We’ve since incorporated that in there and there have been a number of ins and outs, and so I wouldn’t just assume that there is some significant upside associated with the capital infusion.
Ashar Khan - Visium Asset Management: So, you’re saying there is some – the positive has been – from this has been, there have been some negative, so it’s like matched even and the 3.25 does incorporate this outlook now?
Brian X. Tierney - EVP and CFO: It does.
Operator: Paul Ridzon, KeyBank.
Paul Ridzon - KeyBank: You mentioned DSI, Southern Company, obviously another big coal burner, has their doubts about whether DSI has really kind of the silver bullet that a lot of people claim it is. What are your concerns around DSI?
Michael G. Morris - Chairman and CEO: Well, I don’t want to misrepresent because the EPA laid that out as the ultimate silver bullet that would make life go on without anyone ever having to pass away. It isn’t quite that good. What we’re saying is that, when we look at particularly some of our western plants, we may be able to use that technology there with a combination of some fuel blending in our western stations, and that will have an effect of one, maybe being able to do it more rapidly than we thought because they aren’t as massive a construction project. And two, not as expensive because they aren’t as massive a construction project. But we like Southern Company, actually see these things very much the same. We lay on top of each other with understanding the impact, and we don’t think that it’s a silver bullet, but we do think it’s a technology that may lend itself to use there. And our engineers are pretty far along the line with those conclusions, and in fairness, as you might expect, we and Southern Company do dialog on these issues frequently. So we will share with them what we think we see, but of course as you know, they don’t have the same lignite based fleet there, we do out west.
Paul Ridzon - KeyBank: We tend to trust your and Southern combustion engineers more than EPA, but…
Michael G. Morris - Chairman and CEO: As would I. They probably pay more than we do, Paul.
Paul Ridzon - KeyBank: Going back to Ali Agha’s question about M&A, could we expect to see you get smaller before you got bigger?
Michael G. Morris - Chairman and CEO: No, I don’t think so. We’d like to thank everyone for their time and for joining us on today’s call. As always, our IR team will be available to answer any additional questions you may have. John, can you please give the replay information.
Operator: Ladies and gentlemen, this replay starts today at 12 pm Eastern Time, and it will last until August 5th at midnight. You may access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code is 209105. Those numbers again 800-475-6701 or 320-365-3844, and the access code 209105. That does conclude your conference for today. Thank you for your participation. You may now disconnect.