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AEP Beats EPS Est, Flat Rev

Zacks Equity Research

Before the bell, American Electric Power Company Inc. (AEP) reported stable second quarter 2012 results. In the reported quarter, the company clocked operating earnings of 77 cents per share, beating the Zacks Consensus Estimate of 72 cents.

The company’s results also came above the year-ago quarterly earnings of 73 cents per share. Earnings in the reported quarter were higher by 4 cents than the year-ago period due to higher demand driven by warmer than normal weather, focus on cost control, and improving economies in service territories.

On a reported basis, the company registered earnings of 75 cents per share in the reported quarter versus 73 cents per share in the year-ago period. The variance of 2 cents between the reported and operating numbers was due to the first phase of a cost restructuring program launched earlier in 2012.

Operational Performance

Quarterly revenue at American Electric Power was $3.6 billion flat with both the Zacks Consensus Estimate and the year-ago period. Operating earnings were $370 million in the reported quarter, higher than $352 million in the prior-year quarter. The company reported net earnings of $362 million, up from the prior year's earnings of $352 million.

Quarterly Segment Performance

Operating earnings from Utility Operations during second-quarter 2012 were $372 million, $23 million higher year over year. This reflects the positive impact of lower spending because of cost containment efforts, partially offset by customer switching in Ohio.

Operating earnings from the company’s River Operations rose $4 million to $3 million in the reported quarter from a loss of a million in the prior-year period.

Operating earnings from the company’s Transmission Operations rose $2 million to $8 million in the reported quarter from $6 million in the prior-year period.

Operating earnings from Generation and Marketing, which includes American Electric’s non-regulated generating, marketing and risk management activities primarily in the Electric Reliability Council of Texas (:ERCOT) area, decreased $16 million year over year to a loss of $5 million. The downcast in numbers is attributed to lower trading margins, lower power prices and the expiration of wind production tax credits in 2011.

All Other, which includes the Parent Company and other investments, improved $5 million to a loss of $8 million compared with a loss of $13 million last year.


American Electric Power’s earnings guidance remains suspended on account of the ongoing Ohio regulatory proceedings. Earlier in February 2012 the Public Utilities Commission of Ohio decided to terminate the previously approved stipulation agreement. As a result the company did not provide any earnings guidance when earlier it reported its first quarterly numbers in April 2012.

Subsequently, the company has received an order from the Public Utilities Commission of Ohio regarding capacity charges. However a decision on the Electric Security Plan, or ESP, is not expected until early August. As a result, until there is more clarity in Ohio, the company has decided to hold back its guidance.

Retail sales performance in the first half of 2012 for American Electric Power was below par as the company’s electricity sales suffered from the tepid demand in its service territories. The fall in demand in its service territories was due to switching of customers in Ohio to cheaper operators. Overall, retail volume sales fell 2.5% year over year, with the axe more pronounced in the residential segment, which decreased 8.2%.

American Electric Power, however, is experiencing growth in industrial volume. In the first half of 2012 the company saw a 2% jump in industrial volume owing to increased production. We view the growth in industrial demand as a significant indicator of a reviving economy, a fact that will surely benefit the company going forward.

We also appreciate the decision taken by the company to focus on shareholder value through payment of incremental dividends. The company currently dishes out an annualized dividend of $1.88 with a yield of 4.5%.

However, going forward, we expect third quarterly performance of the company to be affected by higher customer switching in Ohio and damages related to a late-June storm (super derecho). The storm on June 29 affected more than 1.4 million customers of the company spread over five states, an unprecedented outage number for the company.

American Electric Power presently retains a short-term Zacks #3 Rank, which translates into a short-term Hold rating. We have a long-term Neutral recommendation on the stock. Some of its main competitors are Duke Energy Corporation (DUK) and Entergy Corporation (ETR).

Columbus, Ohio-based American Electric Power is a public utility holding company which, through directly and indirectly owned subsidiaries, generates, transmits, and distributes electricity, natural gas, and other commodities. The company derives revenues mainly from power-generating activities.

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