AEP’s Utility Operations includes the generation, transmission and distribution of electricity for retail and wholesale customers and represented nearly 99 percent of the company’s ongoing earnings for 2011. AEP earned an overall 10.6 percent return on equity (ROE) in 2011 on a pro-forma basis. The performance of our operating companies is reflected in Utility Operations.

Ongoing earnings from Utility Operations increased $56 million, from $1.43 billion in 2010 to $1.49 billion in 2011, largely due to favorable rate changes, especially in our eastern footprint. However, regulatory disallowances, customer switching, and other factors in 2011 materially mitigated the increase.

GAAP net income was $1.91 billion in 2011, up from $1.19 billion in 2010. GAAP earnings were $459 million higher than ongoing earnings for 2011 mainly because of a Texas Supreme Court ruling that resulted in a $558 million favorable adjustment, net of tax, relating to recovery of stranded costs in Texas.

Weather can help or hurt our results, and in 2011, it had a favorable impact versus normal weather of $113 million. Although the weather impacts to our performance lessened from 2010 to 2011, the hot summer in our western service territory worked to our advantage. In fact, 2011 ranked third out of the last 30 years in terms of total degree days for all of AEP.

Economic recovery continued in our service territory in 2011 but at a slower pace than we had hoped. Retail electricity sales volume was up 2 percent compared with 2010 on a weather-normalized basis. Industrial sales climbed 4.1 percent, led by a 14.1 percent increase in the primary metals sector, while sales to residential and commercial customers were essentially flat compared with 2010.

The economy in our western region continued to outperform the eastern portion of our service territory in 2011, with higher growth in gross domestic product and lower unemployment rates than both the eastern service territory and the national average. The eastern part of our service territory experienced stronger growth in gross domestic output than the United States as a whole but also had a slightly higher unemployment rate than the national average.

In Ohio, however, a growing number of retail customers have switched to alternative generation providers and additional customers have given notice of their intent to switch. Customer switching accounted for the loss of approximately 10 percent of our Ohio electricity load in 2011. This trend is increasing, but we have a strategy to address it. See Energy Reliability, Security & Growth for more information. 

Utility Operations O&M spending increased $118 million, to $3.55 billion, in 2011 as a result of Ohio regulatory orders and expenses related to dollar-for-dollar rate recovery.

Off-system sales, or sales to non-AEP entities, were up $44 million, to $343 million, in 2011, reflecting greater plant utilization and higher power prices in AEP’s eastern region during the first half of 2011.