GAAP earnings for fourth-quarter 2008 were $152 million, or $0.38 per share. Ongoing earnings for fourth-quarter 2008 were $237 million, or $0.59 per share.
GAAP earnings for fourth-quarter 2008 were $85 million lower than ongoing earnings primarily as a result of an order issued in November 2008 by the Federal Energy Regulatory Commission (FERC) regarding the affiliate allocation of off-system sales margins under the System Integration Agreement and the AEP West Operating Agreement. The FERC ordered AEP to reallocate off-system sales margins for the period June 2000 to March 2006 and to issue appropriate refunds, with interest, to the AEP West Companies. AEP has filed a request for rehearing with FERC. Pending rehearing, AEP has reallocated off-system sales margins for this time period. The AEP West Companies were required to share a portion of such margins with their customers during this period, and the unfavorable effect on AEP net income due to the AEP West Companies’ provisions for refunds of these margins was $97 million. The remaining difference between GAAP and ongoing earnings of $12 million is due to favorable adjustments to dispositions of discontinued operations.
For the year, GAAP earnings were $79 million higher than ongoing earnings primarily due to a favorable settlement reached with Tractebel Energy Marketing Inc. in January 2008 for $164 million, resolving all litigation regarding a power purchase and sale agreement, partially offset by the FERC order.
Earnings Guidance
AEP reaffirmed its ongoing guidance range for 2009 of between $3.00 and $3.40 per share. In providing ongoing earnings guidance, there could be differences between ongoing earnings and GAAP earnings for matters such as, but not limited to, divestitures or changes in accounting principles. AEP management is not able to estimate the impact, if any, on GAAP earnings of these items. Therefore, AEP is not able to provide a corresponding GAAP equivalent for earnings guidance.
“Our solid earnings performance for 2008 reflects the significant success we’ve had in working with regulators to put in place new, balanced rate structures that reflect the increased costs of providing service to customers and the investments that we’ve made in our system. We benefited from new rates in five jurisdictions in 2008 and received another balanced rate order from Oklahoma regulators in early 2009. New contracts with municipal and rural electric cooperatives and the full-year benefits of serving a large aluminum producer in Ohio also boosted retail margins for the year,” said Michael G. Morris, AEP chairman, president and chief executive officer.
“We enter 2009 facing significantly more challenging economic conditions than in recent years, but we are confident about our ability to achieve our 2009 earnings target. We are starting to see the impacts of the weakening economy through declining industrial sales and softening residential and commercial demand growth, and we expect that trend to continue as the impact of the economic downturn spreads more widely. We also saw a decline in power prices in the fourth quarter, due to lower natural gas prices and the weakening economy. We have prepared for these ongoing challenges by monitoring cash flow, holding operations and maintenance expenses relatively flat and reducing our 2009 planned capital investments by $750 million. Our ability to adjust our plan, either up or down, is a key strength as economic conditions continue to evolve. After the decision on our filing in Ohio, we’ll evaluate our capital investment and financing plans for the year and provide more focused earnings guidance within our current range,” Morris said.
Ongoing earnings from Utility Operations increased by $30 million during fourth-quarter 2008 compared with fourth-quarter 2007. Higher margins from retail sales, including favorable rate changes and lower operating and maintenance expenses, were mostly offset by lower margins on off-system sales.
For the 12-month period, ongoing earnings from Utility Operations increased by $126 million from the same period in 2007 because of higher retail sales reflecting favorable retail rate changes, increases in transmission and other margins, lower amortization expense and increased carrying-cost income. These improvements were partially offset by lower off-system sales; lower margins in Ohio due to higher fuel costs; and higher expenses, including increased operation and maintenance expenses and higher interest expense, primarily due to an increase in long-term debt.
AEP’s River Operations results were higher during the fourth quarter of 2008 than the same period in the prior year due to stronger freight rates. Increased demand driven by seasonal shipments of grain, road salt and fertilizer put pressure on barge supply and drove freight rates higher. Freight rates on contract business also increased in the fourth quarter due to significantly higher third-quarter fuel prices. These favorable items were partially offset by increases in higher operating expenses, including port costs and wage increases. Results for the full year 2008 were lower than those in 2007 due to poor operating conditions caused by flooding on various inland waterways throughout 2008 and rising diesel fuel prices, primarily during the first three quarters of 2008, when fuel prices increased faster than could be recovered by fuel escalation clauses or spot market rates. A major river closure as the result of an oil spill in New Orleans limited ship arrivals and departures in late July and August, and the impact of Hurricanes Gustav and Ike further disrupted operations in the Gulf and caused severe flooding on the Mississippi and Illinois rivers.
Generation and Marketing, which includes AEP’s non-regulated generating, marketing and risk management activities, primarily in the Electric Reliability Council of Texas (ERCOT), increased to $22 million in fourth-quarter 2008 from $20 million during the same period in 2007, and for the year, results increased to $65 million in 2008 from $37 million in 2007 primarily due to higher gross margins from marketing activities and increased gross margins due to improved price realizations, plant performance and hedging activities from its share of the Oklaunion Power Station.
All Other, which includes the Parent Company and other investments, was lower in the fourth quarter of 2008 compared with the fourth quarter of 2007 primarily due to favorable tax adjustments booked in 2007. For the year 2008 compared with 2007, results were lower primarily due to higher interest expense at the Parent and the favorable tax adjustments booked during the fourth quarter of the prior year.
Retail Sales – Results for fourth-quarter 2008 were higher than those in the same period in 2007 primarily due to rate increases and lower sharing of off-system sales margins with customers, partially offset by lower margins in Ohio, due to higher fuel costs. Fourth-quarter heating degree days were 11 percent higher than normal and 22 percent higher than in the same period last year in AEP’s Eastern service territory and 5 percent higher than normal and 10 percent higher than in last year’s fourth quarter in AEP’s Western service territory.
For 2008 compared with 2007, retail margins were higher due to rate increases in the Ohio Companies and in AEP’s utilities in Virginia, Indiana, Oklahoma and Texas. Sales to municipal and cooperative customers also added to the positive results, as did the full-year effect of the addition of a large industrial customer in Ohio. Lower margins in Ohio due to higher fuel costs and the impact of unfavorable weather somewhat offset the favorable year-over-year increase.
