American Electric Power Earnings Call INSIGHTS: Customer Switching, O&M Success

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On Friday, American Electric Power Co Inc (NYSE:AEP) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Customer Switching

Anthony Crowdell – Jefferies and Company: I have a question on customer switching and I believe on the call you had said that about 34% of your Ohio customers have switched. I want to know how that compares to the expectation you guys filed in Ohio and I believe that was (Bill Owens) testimony, are you in line with that or they are switching ahead of what you guys refer (casting)?

Nick Akins – President and CEO: I think it is lower than expectation, however, after this last order we expect them switching to accelerate.

O&M Success

Dan Eggers – Credit Suisse: Question number one is, O&M has been one of these great success stories for 2012 so far, can you just maybe give a little more color on how much of the year-over-year savings is kind of durable and sustainable versus kind of timing related around maintenance schedules and that sort of thing with the fleet, and what kind of inflation we should be kind of modeling off from this level?

Nick Akins – President and CEO: We had some pretty good savings. Actually our employees have responded quite credibly to the reductions from the Ohio-related activities and we have adjusted. The majority have been sustainable type of reductions, although some of them are not such as deferral of outages and those types of things. But that’s the whole reason why we are having the repositioning study done, where we are going through and defining sustainable cost reduction opportunities either through process related activities or organizational activities and we recognize that cost cutting – we can’t continue a process of cost cutting. We have to have the view going forward of sustainable reductions that provide us a base where we can continue to progress as a company. So, that’s what we are really focused on. Brian, you may have some additional detail.

Brian X. Tierney – EVP and CFO: No, you hit the nail on the head, Nick. When we had talked about guidance that have since been suspended for 2012, we talked about O&M in that $3.4 billion range. I probably put it in the $3.3 billion to $3.4 billion range and that’s what we are doing with McKenzie. We anticipate it being in a similar range for next year.

Dan Eggers – Credit Suisse: Nick, I guess, with the gas plants running really well, gas prices low, coal prices kind of run into some cash pressures. Are you guys doing any work to reevaluate the environmental plan for EPA compliance of $6 billion, as far as maybe less plant investment and more new generation. How is that dialogue going internally?

Nick Akins – President and CEO: Yes, that continues to be a work in progress Dan, and you know it changes as we get new information and changes as a result of discussions we have with the states and with the EPA. Of course we continue to work as I said on the legislative side, because (indiscernible) has done an independent and also showing that it cost a third less if you wind up with a two-year extension. If you are able to optimize that, but I think it’s important for us to go through the process in concert with the state and it really focuses on that that operating company model, where we’re working with them to determine what the proper solution is. And you are right, we are – we continue to search, and as you see some of the changes have been made such as the Big Sandy scrubber proposal being called at this point. We are reevaluating that. We have some activity in Oklahoma around coal-fired generation as well that we have adjusted to. You’ll continue to see those kinds of adjustments, because what we are trying to get to is; number one, a portfolio that each of our operating jurisdictions support. Then secondly, a portfolio that provides some risk management around a balanced portfolio going forward. So for us it’s a relatively high hurdle for us to be putting scrubbers on our facilities. In many cases it’s already done, in some cases it continues to be an evaluation even for units such as the 1300-megawatt units at Rockport. Paul Chodak of I&M is working with the regulators to determine what the proper opportunities are for that. So that we can meet emission reduction guidelines and that’s being discussed in all of our jurisdictions, so you bring up a great point and something that we’re very focused on. Will continue to try to optimize, as a matter of fact, when we first started this process, we were looking at $8 billion and it’s come down to just over $6 billion and we expect it to continue to be refined as we go forward in concert with the states.

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