American Electric Power Co. Inc. (AEP) reported second quarter 2011 adjusted EPS of 73 cents, down from the year-ago figure of 74 cents and the Zacks Consensus Estimate of 76 cents. GAAP and adjusted EPS was the same for the reported quarter compared with GAAP EPS of 28 cents in the year-ago period.
Operational Performance
Quarterly revenue at American Electric rose marginally to $3.6 billion from $3.4 billion in the year-ago period. However, revenues came in $37 million below the Zacks Consensus Estimate. In the current quarter, Industrial usage grew 3.3% year over year while Commercial usage showed a decline of 0.7% year over year.
American Electric generated operating income of $717 million in the quarter compared with $741 million the prior-year period. Total operating expenses rose by $128 million to $1.6 billion in the reported period.
Ongoing earnings were $352 million in the reported quarter, marginally lower than $355 million in the prior-year quarter.
Segment Performance
Ongoing earnings from Utility operations increased only $7 million to $355 million in the reported quarter. The results reflect the positive impact of rate changes, favorable weather in the company’s western service territory and higher margins from wholesale activity. These were, however, offset by higher storm expenses versus the prior year.
Heavy rain fall restricted operations on various river systems in 2011. The company’s River Operations incurred a loss of $1 million versus break-even results in the prior-year period.
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 up $4 million year over year to $11 million in the current quarter driven by favorable results from wind farm operations.
The Other category, which includes the parent company and other investments, reported a loss of $13 million versus break-even performance in the second quarter of 2010.
Financial Update
In the quarter under review, cash and cash equivalents were $417 million versus $234 million in fiscal 2010. Long-term debt was $15.6 billion versus $15.5 billion in fiscal 2010.
Guidance
The company reaffirmed its EPS guidance in the range of $3.00–$3.20 for 2011 and $3.25 for 2012.
Our Take
American Electric Power is one of the largest investor-owned utility holding companies in the country. Going forward, the company offers stable earnings through consistent performance in core regulated operations and growth through transmission network expansion.
However, tepid economies in a number of its service states restrict opportunities for growth. Also, uncertainty surrounding pending regulatory cases, its predominantly fossil-fuel based generation assets and lower wholesale sales continue to weigh on the valuation of the stock.
The company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.
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 revenue mainly from power-generating activities. Some of its main competitors are Duke Energy Corporation (DUK) and Entergy Corporation (ETR).
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