Earnings Guidance
AEP reaffirmed its recently revised ongoing earnings guidance range for 2009 of between $2.75 and $3.05 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.
“But for the negative impact of the economic downturn, our performance in the beginning of 2009 would reflect very positively on our earnings,” said Michael G. Morris, AEP chairman, president and chief executive officer. “Residential sales remain reasonably strong, and we will continue to benefit from positive rate decisions at several of our operating companies, including $679 million in rate decisions already this year. Our operations and maintenance expenses are a little higher yearover- year because of storm expenses, but we are on track to keep them flat with 2008 levels.
“However, these positives are not enough to offset the significant negative impacts from declining industrial load and off-system sales margins and volumes. Declining demand across the country combined with the lowest natural gas prices in years is significantly impacting the volume and price we can realize for the excess generation we sell into the marketplace. Additionally, we are seeing declines in industrial usage averaging 15 percent throughout our service area.
“We are taking proactive steps to manage these negative impacts. We are maintaining our planned $2.6 billion capital spend in 2009 but have significantly cut our 2010 capital budget to $1.8 billion from a planned $3.4 billion. With depreciation of approximately $1.2 billion per year, our planned capital spend of $6.2 billion through 2011 still will provide earnings growth of 2 to 4 percent over the next few years. More important, our extraordinarily successful equity offering in early April, netting proceeds of around $1.64 billion, will allow us to pay down debt and strengthen our balance sheet so that we are well-positioned to adjust our plan and accelerate capital investment and earnings growth as the economy rebounds,” Morris said.
Ongoing earnings from Utility Operations decreased by $67 million during the first quarter of 2009 compared with the same period in 2008 as the result of lower sales to industrial customers, lower off-system sales and higher operating expenses. These unfavorable items were somewhat offset by increased rates, primarily in AEP’s utilities in Virginia, Indiana and Oklahoma, the activation of a fuel clause in Ohio, and by insurance payments related to the September 2008 fire and resulting outage at Cook Nuclear Plant in Michigan.
Results for AEP’s River Operations were higher in first-quarter 2009 compared with the same period in 2008 primarily because of lower fuel costs and gains on the sale of two older towboats, somewhat offset by lower revenues resulting from reduced import volumes and lower freight rates.
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 $23 million in the first quarter of 2009 compared with the same period in 2008 as the result of higher gross margins from marketing activities.
Retail Sales–The improvement in retail gross margins in the first quarter of 2009 reflects the favorable impact of higher rates in several jurisdictions and the impacts of the Ohio Companies’ Electric Security Plan, including activation of a fuel clause with associated deferrals, which was approved by the Public Utilities Commission of Ohio March 18. When compared with first-quarter 2008, these margin increases were partially offset by lower industrial usage and the favorable 2008 impact of a coal contract amendment that lowered fuel expenses at Ohio Power. The impact of weather was essentially flat.
Off-System Sales–Gross margins from Off-System Sales decreased $136 million for the first quarter of 2009 primarily because of lower volumes and prices that reflect weak market demand and a significant drop in natural gas prices.
Transmission Revenues–Transmission revenues were higher in first-quarter 2009 primarily due to increased Southwest Power Pool revenues.
Other Operating Revenue–The increase in Other Operating Revenue during first-quarter 2009 compared with first-quarter 2008 is primarily because of the accidental outage insurance payments related to the fire at the Cook Nuclear Plant. A portion of these insurance proceeds are offsetting higher fuel costs.
Operations & Maintenance Expense–Operations and Maintenance expenses in first quarter 2009 were $56 million higher than in first-quarter 2008 primarily because of storm expenses in 2009 and the establishment of a regulatory asset in 2008 to recover storm expenses incurred by Public Service Company of Oklahoma. These unfavorable variances were somewhat offset by lower production costs and administrative and general expenses in the current period.
Depreciation & Amortization–The increase in Depreciation and Amortization in the first quarter of 2009, when compared with the prior period, is primarily attributed to an increase in plant balances and higher depreciation rates at Ohio Power.
Interest Expense & Preferred Dividends–The increase in Interest Expense during first quarter 2009 compared with the same period in 2008 is primarily the result of increased long-term debt and higher interest rates.
Other Income & Deductions–The decrease in Income and Deductions in first-quarter 2009 over first-quarter 2008 is primarily because of lower carrying-cost income and accrued interest income related to a 2008 federal tax refund claim.
