UPDATE: American Electric Earnings Down Amid Falling Demand
April 24 2009 - 1:29PM
Dow Jones News
American Electric Power Co. (AEP) reported a 37% drop in
first-quarter net profit as an insurance settlement and higher
rates couldn't offset declines in electricity demand.
American Electric, one of the nation's biggest electricity
generators and providers with more than 5 million customers in 11
states, has the largest U.S. transmission network. That makes the
company, centered in the Midwest, a front-line victim of falling
electricity use that began late last year as the country's economic
woes deepened.
The company sees industrial demand falling 15% as paper
manufacturers, metal producers and other large customers slow and
shut operations. Overall, utility earnings in the first quarter
fell 16% on lower sales and higher costs. American Electric also
faces an ongoing drop in the sale of power to other utility
systems, with profits from excess electricity sales slumping
62%.
The company did benefit from higher rates in several
jurisdictions and insurance payments related to a fire at its Cook
Nuclear Plant.
American Electric reported net income on Friday of $360 million,
or 89 cents a share, compared with $573 million, or $1.43 a share,
a year earlier as the company benefited from a prior-year legal
gain of 41 cents.
Revenue was flat at $3.5 billion as domestic retail electricity
demand fell 6.5%. Wholesale sales tumbled 42%.
The mean estimates of analysts surveyed by Thomson Reuters was
for earnings of 81 cents and revenue of $3.77 billion.
The Columbus, Ohio, company reaffirmed its guidance for the year
of between $2.75 and $3.05 a share. Last month, American Electric
had cut guidance, while recently raising some $1.5 billion through
a stock sale that boosted shares outstanding nearly 15%.
"We continue to believe that AEP's relative discount to the
group is unwarranted and remain buyers of the shares," wrote
JPMorgan utilities analyst Andrew Smith in a note to clients
Friday.
Shares of American Electric recently traded up 0.5% at
$26.28.
Looking Ahead: Economic Rebound, Transmission Growth
American Electric executives told analysts during a meeting in
New York City Friday that earnings growth will accelerate with a
rebound in the U.S. economy in the near term and as much as $15
billion in possible transmission-line projects further out. The two
factors could fuel earnings growth of 4% to 8% instead of the
current projection of 2% to 4%, said Mike Morris, chairman and
chief executive of American Electric.
During an interview after the meeting, Morris said the struggle
in off-system sales is driven by demand declines, and the low price
of natural gas is not cutting into sales from American Electric's
coal plants. But the company - which shares a portion of the
revenue from sales with customers, unlike deregulated power
producers - is seeing power-sales margins shrink amid slumping
electricity prices and higher coal costs.
At the same time, Morris said American Electric will look to
develop additional renewable energy generation, but only if
regulators push for it. He continues to see the possibility of
national reliability problems if more fossil fuel generation isn't
built.
Federal policy will be crucial for the transmission projects,
with Morris seeing growing support for the federal government - not
state commissions - to site projects and set their returns. If
these rules change, Morris said there is plenty of capital ready to
invest in projects.
As for a federal cap on greenhouse gas emissions, Morris said he
doesn't expect Congress will pass a cap-and-trade system until next
year. He said Democrats in Congress still need to build support
among their own members, let alone Republicans.
Democratic leaders "are going to have to solve some of these
equations," Morris said.
Rep. Henry Waxman, D-Calif., chairman of the Energy and Commerce
Committee, is holding hearings this week on a wide-ranging climate
change and energy bill that will likely become the blueprint for
congressional and administration policy efforts.
-By Mark Peters, Dow Jones Newswires; 201-938-4604;
mark.peters@dowjones.com
(Kevin Kingsbury contributed to this report.)