American Electric Power (NYSE:AEP) on Oct. 24 reported 3Q12 earnings of $487m or $1.00 per share, compared with $928m or $1.92 per share for 3Q11.
Operating earnings (excluding special items) for 3Q12 were $496m or $1.02 per share, $9m or $0.02 per share higher than GAAP earnings, because of a pretax $13m adjustment associated with the Southwestern Electric Power Co. Texas jurisdictional cost cap on the construction of the John W. Turk Jr. coal-fueled power plant in Arkansas. Year-to-date operating earnings for the nine months ending Sept. 30 were $1.3bn or $2.59 per share, $17m or $0.04 per share higher than GAAP earnings as a result of the Turk Plant cost-cap adjustment and an $8m or $0.02-per-share severance provision related to the first phase of AEP’s cost restructuring efforts. GAAP earnings in 3Q11 were substantially higher than operating earnings as a result of a favorable Texas Supreme Court decision on stranded costs.
A full reconciliation of 2012 and 2011 GAAP earnings with operating earnings for the quarter and year to date is included in tables at the end of this news release.
“Continued discipline around controlling costs and positive rate changes across multiple jurisdictions partially offset a number of negative impacts on our financial performance in the third quarter. Customer switching in Ohio and the restoration costs associated with the June 29 derecho, which left an unprecedented 1.4m of our customers in five states without power, hurt our performance. The drought and associated low-water conditions also hampered our river transportation business,” said Nicholas K. Akins, president and chief executive officer.
“We are meeting our investment commitments in the transmission segment of our business, primarily through Electric Transmission Texas and our state transmission companies, and we are beginning to see earnings improvement each quarter from transmission. Our transmission business remains a key component of our strategy for future earnings growth,” Akins said. “On the generation side of our business, our Turk Plant, the first ultra-supercritical coal plant in the nation, is nearly complete and we expect to start generating electricity from the plant before the end of the year. This facility demonstrates once again our ability to persevere and execute successfully on our plans, despite significant challenges. I commend our employees and the business and community partners who helped make Turk happen. I know that region will benefit from the jobs and economic support that this plant provides.”
“Our earnings guidance for 2012 remains suspended because of the ongoing Ohio regulatory proceedings. We have received orders from the Public Utilities Commission of Ohio regarding capacity charges, the Electric Security Plan and our corporate separation plan. These decisions have provided clarity for our transition to full competition in Ohio, but some of these orders still are subject to rehearing at the commission,” Akins said.
“Despite some bright spots in the economy, particularly related to shale gas development, the recovery is tenuous, and overall load growth in the regions where we operate is expected to remain essentially flat. Our employees have continued to demonstrate their ability to help us control costs and support our earnings performance,” Akins said. “We’ve been taking a hard look at all aspects of our company over the last few months to ensure that our cost profile is properly aligned to support our future plans. That study will continue into the fourth quarter, and we are confident that we will identify opportunities for sustainable cost-structure realignment and savings. We plan to discuss the results of this effort in more detail in early 2013.”
Summary of results by segment
Operating earnings from Utility Operations during 3Q12 were $63m lower than in 3Q11. This reflects lost earnings due to customer switching in Ohio, higher storm restoration costs and cooler temperatures in relation to last year, offset by the positive impact of successful rate proceedings and lower spending as a result of our cost-containment efforts. The difference between GAAP and operating earnings in 3Q12 relates to the Turk Plant cost-cap adjustment discussed above.
Operating earnings from AEP River Operations during 3Q12 were $18m lower than in 3Q11 primarily due to the 2012 drought, which significantly impacted river conditions.
Operating margin from utility operations
Margin represents total revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances and purchased power.
Retail Sales – Retail margins for the third quarter were $38m less than in the same period in 2011, primarily because of lost margins from customer switching in Ohio and cooler temperatures in relation to 2011, offset by the favorable impact of rate decisions. Retail Sales includes the East Regulated Integrated Utilities, Ohio Power Company, West Regulated Integrated Utilities and Texas Wires.
Off-System Sales – Margins from Off-System Sales were $20m lower for third- quarter 2012 compared with the same period in 2011 because of lower demand and lower power prices.
Transmission Revenue – 3rd Party – Transmission Revenue for 3Q12 was $20m higher than for the same period in 2011, primarily as a result of increased revenues in ERCOT and PJM, including revenues associated with customer switching.
Other Operating Revenue – Other Operating Revenue for 3Q12 was comparable with the same period last year.
Select other operating expenses – utility operations
The following Utility Operations expense categories had significant fluctuations in 2012 compared with 2011:
Operations and maintenance expense decreased $16m in 3Q12, when compared with the prior year, primarily as a result of controlled spending measures instituted in 2012, partially offset by higher storm restoration costs.
Depreciation and Amortization expense increased $23m in 3Q12, when compared with the prior year, because of higher depreciation related to shortened plant lives for certain generating plants and higher amortization expense associated with regulatory assets.
Other Income & Deductions were $65m lower in 3Q12, when compared with the prior year, due to carrying cost income associated with the Texas capacity auction true-up that was recognized in July 2011 when the Supreme Court of Texas overturned a 2006 Texas Commission order. The capacity auction true-up amount, including accrued interest, was securitized in first-quarter 2012.