COLUMBUS, Ohio, July 25, 2002 – American Electric Power (AEP) reported 2002 second-quarter ongoing earnings of $181.6 million, or $0.56 per share, in a quarter made difficult largely by declining system sales.
A loss from generation in the United Kingdom – particularly in the latter period of the quarter – and a spillover of natural gas trading losses from the first quarter also contributed to lower-than-forecasted results.
AEP revised its 2002 ongoing earnings guidance to a range of $3.20 to $3.35 per share, in line with the company’s announcement last week that it expected to reduce its previous 2002 ongoing guidance of $3.60 to $3.75 per share in the range of 10 percent. The revision was primarily the result of a major shift in the forward price curve for power and the potential impact on system sales – the sale of wholesale power from AEP plants.
Previously announced charges associated with the divestiture of two foreign retail electricity and gas supply and electricity distribution companies – SEEBOARD in the UK and CitiPower in Australia – account for the difference between ongoing and as-reported earnings in the second quarter and year-to-date results.
“We are disappointed in the results from the second quarter,” said E. Linn Draper Jr., AEP’s chairman, president and chief executive officer. “We’ve been consistent with our comments that we didn’t expect to replicate second-quarter results from last year, when operating conditions were much more favorable to our wholesale group. But the results were well below expectations.
“The wholesale energy sector is under pressure right now, pressure that extends beyond commodity prices to the economy and Wall Street,” Draper said. “But we remain committed to our strategy that focuses on our balanced portfolio, including our wholesale energy businesses and assets – both in the United States and select international markets – and our strong utility business in the U.S. With our significant power generation asset base, with many plants in competitive markets, it’s important that we have the commercial capabilities provided by our strong wholesale marketing and trading organization.”
Even with the losses in natural gas trading, the overall performance of the energy trading business was positive. “We had a solid showing in wholesale power markets, despite current market conditions, and we expect the energy trading business to be a significant contributor for the year,” Draper said.
“The nation’s need for power and gas – on both a wholesale and retail basis – isn’t going away,” Draper said. “In the long term, wholesale markets will recover and will be served by fewer – but stronger – companies. We will be one of those companies.”
AEP cited the following factors as contributing to the lower-than-expected second-quarter results:
* Reduced earnings from wholesale sales from AEP’s power plants, which contributed gross margin of $0.28 cents per share in the quarter, down $0.07 from second-quarter 2001 primarily because of lower wholesale energy prices that squeezed profit margins.
* Poor performances in the latter part of the quarter by UK power plants Fiddler’s Ferry and Ferrybridge, the primary contributor to a $16.1 million, or $0.04 per share, loss from wholesale investments – a $0.06 per share decline from second-quarter 2001. Results for the UK generation were attributed to a weaker balancing market and lower generation output than forecast. The generation output can be made up later in the year.
* A $20 million, or $0.04 a share, loss from gas trading and marketing, down $0.21 per share from second-quarter 2001. The losses occurred in April while the company continued unwinding positions that led to a first-quarter gas trading loss. Gas trading was profitable in May and June.
“While these factors were negatives in the second quarter, we expect the second-half performance to be significantly better,” Draper said. “Our gas trading was profitable in May and June after we successfully unwound positions that contributed to the first-quarter loss and the spillover into April.
“Assets that make up our wholesale investments are positioned to be important contributors in the second half because of seasonal strengths or contractual commitments,” Draper said. “We forecast that the UK generation will be stronger late in the year, since the UK is a winter-peaking market for power. Houston Pipe Line, a significant acquisition last year, will meet or exceed our targets. Our MEMCO barge line benefits from the shipping of grain, which begins in the summer months. And AEP Coal has reduced headcount and consolidated operations, which will improve performance.”
AEP’s wholesale business, which primarily consists of wholesale sales in the United States, the generation component of domestic retail sales and worldwide trading, contributed $0.39 per share in the quarter, down from $0.82 per share in second-quarter 2001. While AEP had forecast a year-to-year decline, results were lower than anticipated because of reduced earnings from wholesale energy sales and mixed results from wholesale investments.
Domestic wholesale electric trading volume for the quarter was 171 million megawatt hours, a 41 percent increase from second-quarter 2001.
Domestic wholesale natural gas volume for the second quarter was 1,397 billion cubic feet, an 81 percent increase from the same period last year.
AEP’s energy delivery business, which consists of domestic electric transmission and distribution, exceeded expectations and improved performance from last year. Energy delivery contributed $0.58 per share in the quarter, compared with $0.53 per share in second-quarter 2001.
Energy services benefited from effective cost management initiatives begun in 2001 and stable regulatory environments in most states.
American Electric Power is a multinational energy company with a balanced portfolio of energy assets. AEP, the United States’ largest electricity generator, owns and operates more than 42,000 megawatts of generating capacity in the U.S. and select international markets.
AEP is a wholesale energy marketer, ranking among North America’s top providers of wholesale power and natural gas with a growing wholesale presence in European markets.
In addition to electricity generation, AEP owns and operates natural gas pipeline systems, natural gas storage, coal mines, and the fourth-largest inland barge company in the U.S. AEP is also one of the largest electric utilities in the United States, with almost 5 million customers linked to AEP’s wires. The company is based in Columbus, Ohio.