COLUMBUS, Ohio, April 29, 2003 — American Electric Power (AEP), boosted by a significant period-to-period gain in system sales, reported 2003 first-quarter ongoing earnings of $0.61 per share, a $0.02 per share improvement over the same period last year despite the dilutive effect of additional shares outstanding.
Revenue for the first quarter ended March 31, 2003 was $4.1 billion, compared with $3.2 billion for the same period in 2002. Ongoing earnings were $218.2 million, and increase from the 2002 $189.4 million. Ongoing earnings per share for the first quarter were $.61, compared with $.59 in 2002.
Ongoing and as-reported EPS for 2003 are based on an average of approximately 356 million shares outstanding, compared to an average of approximately 322 million shares outstanding in first quarter 2002. The dilution effect of the additional shares is approximately $0.06 on an ongoing basis.
AEP’s as-reported earnings are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and represent the company’s earnings as reported to the Securities and Exchange Commission.
While as-reported earnings were higher than ongoing earnings in the first quarter of 2003, AEP’s management believes that the company’s ongoing earnings data, or as-reported earnings adjusted for certain items as described in the news release and charts, provides a more meaningful representation of the company’s performance.
AEP uses ongoing earnings as the primary performance measurement when communicating with analysts and investors regarding its earnings outlook and results. The company also uses ongoing earnings data internally to measure performance against budget, to calculate employee compensation in performance-based plans, and to report to AEP’s board of directors.
Specific items excluded from 2003 ongoing earnings include the negative impact of the cessation of EITF 98-10 related to mark to market for non-derivative energy contracts and an adjustment related to the sale of a water heater rental program, and the positive impact of the implementation of SFAS 143 Asset Retirement Obligation which limits the establishment of retirement cost accruals to those which are legally required to be incurred, the sale of the back-office capabilities for AEP’s retail electricity business in Texas, and an adjustment to an impairment for South Coast generation.
A full reconciliation of items contributing to the difference between ongoing and as-reported earnings is included on the company’s web site.
“We had a very good first quarter, marked by both increased earnings and the completion of actions that improved our financial condition,” said E. Linn Draper Jr., AEP’s chairman, president and chief executive officer.
“Our utility businesses, the core of our company, benefited from favorable weather and higher natural gas prices,” Draper said, noting that net earnings from utility operations increased 36 percent and earnings per share from utility operations increased 21 percent. “We aggressively marketed excess power from our low-cost generation to neighboring utilities, taking advantage of improved market prices for power, weather-related demand increases and high availability from our plants at periods of peak demand. This brought dramatic increases in system sales volumes and profits in the quarter.
“On the financial side, we completed a successful equity offering and took steps that effectively eliminated our refinancing risk for this year,” Draper said. “We said we would take these actions in 2003, and we completed them in a 30-day period in February and March.”
The first-quarter results are in line with AEP’s 2003 ongoing earnings guidance of between $2.20 and $2.40 per share.
Improved earnings from system sales (the sale of wholesale power to third parties) were the primary contributor to increased earnings from utility operations. System sales volume increased 10 percent to 7,681 gigawatt hours, but system sales gross margin increased 420 percent to $130 million because of higher market prices for power and improved realization over AEP’s variable production costs in the first quarter when compared with the results during milder weather in the same period last year.
“System sales are an important part of our business,” Draper said. “We have highly efficient, low-cost generation throughout much of our system, with sufficient capacity to meet our utility customers’ needs and still sell into the market. We work hard to have the plants available at peak times to benefit from higher market prices. That strategy paid off for us in the first quarter.”
The improved market conditions also contributed to a 31 percent improvement in transmission revenue, since it increased the electricity flow on AEP’s transmission grid.
The integrated utilities performance was flat as load growth of 4 percent was offset by higher fuel prices not recovered under frozen rates, and higher capacity payments to Ohio Power. For the Ohio companies, the load growth was a bit less than 4 percent, but the fuel recovery was more favorable, and capacity payments from AEP’s integrated utilities in eastern states were higher.
The gain in earnings from Texas wires is attributed to $56 million in non-cash earnings associated with stranded cost recovery in Texas, which reflects the difference between the actual price received from the state-mandated auction of 15 percent of generation capacity and the earlier estimate of market prices derived from the Public Utility Commission of Texas (PUCT) model. It has been established as a regulatory asset that is recoverable through the 2004 true-up process established by deregulation laws in Texas.
The Texas supply business results reflected higher gross margins from generating units in the Electric Reliability Council of Texas (ERCOT), offset by a potential $40 million fuel disallowance.
The reduction in earnings from other wholesale transactions was expected, since AEP announced in October that it was exiting wholesale markets where it doesn’t own assets. The transition electric trading book associated with AEP’s exit from those markets is included in other wholesale transactions and is compared to gains in those markets in first-quarter 2002. Also included is the approximately $10 million loss from settlement of a power supply contract dispute with Public Utility District No. 1 of Snohomish County, Wash.
“As anticipated, our non-core investments continue to be a drain on earnings, but we have announced steps to address the situation,” Draper said. “We will continue to focus on our core utility businesses. Assets that we consider to be non-core or outside of the business of generating and transmitting electricity will be divested when market conditions are favorable.”
The primary negative factor is the performance of AEP’s generation assets in the United Kingdom.
“Power prices in the UK remain depressed, and we do not expect much improvement in the immediate future,” Draper said. “It’s obviously not a great market for selling power, but it’s also not a great market for selling the plants. For now we plan to continue running the plants as long as revenues exceed the variable costs of operating them. We will also continue our efforts to reduce the losses.”
The AEP Energy Services’ loss in the current period reflects the volatility in the gas market as a result of weather, operational constraints and historically high gas prices.
American Electric Power owns and operates more than 42,000 megawatts of generating capacity in the United States and select international markets and is the largest electricity generator 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 11-state electricity transmission and distribution grid. The company is based in Columbus, Ohio.