Before the markets opened, American Electric Power Company (AEP) reported first quarter 2011 adjusted EPS of 82 cents, which surpassed the first quarter 2010 EPS of 76 cents and the Zacks Consensus Estimate of 79 cents.
Despite less favorable winter temperatures for the quarter in most of the regions, the year-over-year improvement resulted mainly from the company’s cost-reduction initiatives and its success in recovering operating costs in rate proceedings in a number of jurisdictions.
On a GAAP basis the company reached EPS of 73 cents, versus 72 cents in the year-ago period. The 9-cent variance between reported and adjusted EPS came from a restructuring gain of 2 cents, which was more than offset by a 6 cent charge from the Mountaineer Plant carbon capture and storage project and a 5 cent charge from settlement of litigation related to the Enron bankruptcy.
Operational Performance
Quarterly revenue at American Electric rose marginally to $3.7 billion from $3.6 billion in the year-ago period. However, revenues came in a tad below the Zacks Consensus Estimate of $3.8 billion for the quarter.
The company sees signs of economic improvement in its service areas, particularly in Arkansas, Oklahoma, Louisiana and Texas with a slower recovery in the eastern states. In the current quarter, Industrial usage grew 7% year over year and Commercial usage showed modest growth of 1.5% year over year.
Ongoing earnings were $392 million in the reported quarter, higher than $365 million in the prior-year quarter. The company reported net earnings of $353 million, up from the prior-year figure of $344 million.
For the quarter, GAAP earnings were $39 million, lower than ongoing earnings due to several one-time items. These include the settlement of litigation with Bank of America (BAC) and Enron related to the Enron bankruptcy that resulted in a net-of-tax loss of $22 million, and a net-of-tax charge of $26 million pertaining to a partial disallowance by the Public Service Commission of West Virginia of the Mountaineer Plant carbon capture and storage project. These were, however, partially offset by a $9.0 million net-of-tax recovery in rates related to severance costs associated with the 2010 cost-reduction program.
Segment Performance
Ongoing earnings from Utility Operations increased $31 million to $393 million in the reported quarter, driven by successful rate proceedings, higher margins for off-system sales, and operation and maintenance savings. However, this was partially offset by milder weather in comparison to 2010 and lower retail margins because of lower residential usage.
Ongoing earnings from the company’s River Operations improved $3 million to $7 million from the prior-year period due to increased volumes, partially tempered by higher operating costs.
Ongoing earnings from Generation and Marketing, which includes the company’s non-regulated generating, marketing and risk management activities primarily in the Electric Reliability Council of Texas (ERCOT) area, was down a massive $9.0 million year over year to $1 million in the current quarter.
The Other category, which includes the Parent Company and other investments, reported a loss of $9 million versus loss of $11 million in the first quarter of 2010.
Guidance
The company reaffirmed its EPS guidance in the range of $3.00–$3.20 for 2011 and $3.25 for 2012.
Outlook
American Electric Power is one of the largest electric utilities in the United States, delivering electricity to more than 5 million customers in 11 states. The company also owns the nation’s largest electricity transmission system, a nearly 39,000-mile network that includes more 765-kilovolt extra-high voltage transmission lines in comparison to all other U.S. transmission systems combined.Going forward, the company offers stable earnings through consistent performance in core regulated operations and growth through transmission network expansion.
However, we believe that tepid economies in a number of its service states restrict opportunities for growth, while uncertainty surrounding pending regulatory cases, predominantly fossil-fuel based generation assets and lower wholesale sales, continue to weigh on the valuation of the stock.
Accordingly, shares of American Electric presently retain a short-term Zacks #3 Rank ('Hold') that corresponds with our long-term Neutral recommendation on the stock. It mainly competes with Duke Energy Corporation (DUK) and Entergy Corporation (ETR).
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