Continuing turmoil within the wholesale markets and an awful month of June for gas versus power prices have forced American Electric Power (AEP) to re-think its 2002 earnings forecast. On Thursday, the company predicted its earnings would be 10% lower than expected this year.

AEP won’t release its second-quarter earnings until July 25, but the Columbus, OH-based company offered investors its bad news preview, explaining it would earn only 20-25 cents instead of an earlier estimate of 77 cents in the quarter. June, it said, was “very disappointing.”

CEO E. Linn Draper Jr. noted that the company’s Texas business took a “surprising negative turnaround in June because of mild weather and lower utilization of our generation in the state. The lower utilization of our plants combined with high natural gas prices in June to squeeze margins.” Spokesman Pat Hemlepp called the month of June “horrid” because AEP’s Texas plants burn natural gas, and when gas prices rose and power demand fell, “that affected all of our operations in Texas.”

But there were other factors at play, said Draper, especially the continuing “turmoil in the wholesale market,” which he feels has “intensified in the past few weeks.” Even though AEP had remained “cautious all along, we had anticipated — until very recently — a return to more stability that would provide an opportunity for business recovery. That assumption is no longer sustainable in the short term.”

Other contributing factors cited in the lower earnings include the continued weakening of wholesale power prices in the United Kingdom, and the inability to realize significant benefits in the UK balancing market in the late second quarter. AEP expects continued weakness in UK wholesale power prices through the third quarter, with some recovery during the winter heating season.

“These factors cause us to reduce our ongoing earnings guidance for 2002 in the range of 10%,” Draper said. Previous ongoing earnings guidance for 2002 was $3.60 to $3.75 per share, and Wall Street analysts had estimated earnings in the area of $3.53.

However, despite the shortfall, Draper reaffirmed the company’s commitment to an investor dividend. “We recognize the importance of our dividend to investors. Management intends to continue to recommend to the board that we maintain the dividend at the current $0.60 per quarter.” The possibility of cutting the dividend has been on the minds of many investors; several energy merchants have slashed their dividends in the past two months. Dynegy Inc. and Aquila cut their dividends in June, and earlier this month, CMS Energy Corp. slashed its dividend 50%.

AEP’s ongoing earnings do not include the previously announced one-time loss related to the sale of AEP’s Seaboard retail electricity and gas supply and electricity distribution subsidiary in the UK, or any potential one-time losses associated with the planned sale of its CitiPower retail electricity and gas supply and electricity distribution subsidiary in Australia.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.