American Electric Power (AEP) threw its two-week-old earnings guidance out the window Friday, after finding that higher regulated utility and wholesale power sales, combined with favorable weather, jumped quarterly earnings about 15 cents a share more than it had forecast earlier this month.

The integrated utility giant still reported heavy losses within its speculative energy trading business and its UK power generation units, however, and the continuing losses within the communications segment may lead to a sale — if AEP can find a buyer.

Ongoing quarterly earnings were $409 million, or $1.21 a share, down from $459 million, or $1.43 for the same period of 2001. On Oct. 10, management had announced earnings guidance for the quarter would be about $1.05 (see Daily GPI, Oct. 11). However, CEO E. Linn Draper said Friday that earnings were higher than “anticipated because of stronger wholesale and retail sales due to favorable weather, and improved margins due to lower-than-anticipated fuel costs.” He said AEP still expects annual earnings to fall between $2.85 and $3.15 per share.

Wholesale energy sales were $569.8 million for the quarter, compared with $728.6 million for the same period of 2001. The heaviest losses were in AEP’s natural gas trading and marketing, which lost $38.6 million, compared with a gain of $168 million a year earlier.

Adjustments for AEP’s sale of SEEBOARD and CitiPower, offset by costs for closing its mothballed West Texas Utilities plants, accounted for the difference between “ongoing” and “as-reported” earnings, and earnings per share (EPS) also were affected by the increase in shares outstanding. Net earnings within its utility and marketing operations were $432 million, or $1.28 for the quarter, compared with EPS of $426 million or $1.33 a year earlier, a loss of 5 cents. EPS was based on 339 million shares for 2002, compared with 332 million shares in 2001.

Draper, who presided over a short conference call Friday morning, noted that since the company announced it would drop out of speculative energy trading earlier this month, “we’ve seen a significant drop in volumes…We are flattening our positions in an orderly way and not liquidating positions just to get out. We have reduced our risk limits, reduced our value at risk by 50%, and expect a reduction in overheads as we transform the existing organization to manage risk around our assets in the regions we serve.”

Despite the losses within its merchant sales, Draper said the company’s diversified portfolio offered a “fairly predictable stream of earnings from traditional utility and marketing operations” in Ohio and Texas, as well as wholesale power sales from its own plants, transmission and its unbundled distribution system in unregulated states. “This fundamental strength of our company is often overlooked, but it provides liquidity and stability of earnings.”

Apparently, though, AES Communications is not part of the company’s strength. A money pit since it was formed, the telecommunications unit reported a loss of $6 million in the quarter, down from the doubled loss of $13 million for the third quarter of 2001.

“Our other investments continue to be a drag on earnings,” Draper said. “We’ve dramatically reduced operations of our communications business, but it continues to show losses. Even in today’s market environment, where communications assets have few buyers, we are evaluating options for exiting this business.”

Whether AEP can find a buyer, though, is questionable. Williams found no profit within telecom, spinning off Williams Communications shortly before it declared bankruptcy. And other energy companies also are finding the hoped-for revenues are not being found in their telecom units, which are relatively new. Most have been formed in the past two years.

Energy delivery also reported losses for the quarter, totaling $569.6 million, compared with $609.7 million a year ago. For the third quarter, AEP’s wholesale and energy delivery unit’s ongoing EPS were $2.37, compared with $3.01 EPS for the third quarter of 2001.

Meanwhile, domestic retail power sales also showed a 2.4% loss overall, mostly because of a 10.1% decline in industrial sales from a year earlier. Residential sales were up 3.8% from a year earlier, and commercial grew 0.4%. However, total wholesale domestic power sales were up 45.8%, while wholesale natural gas sales climbed almost 75%, to 4,599 Bcf, up from 2,631 Bcf for the same period a year earlier.

System sales totaled $139 million for the quarter, compared with $104 million a year ago. Transmission revenue also was higher, with $95 million in sales, compared with $86 million for the third quarter of 2001. However, merchant sales tumbled to $39 million, down from 2001’s third quarter, when sales were $96 million. AEP also reported losses within its operations and maintenance costs, losing $698 million for the quarter, compared with losses of $661 million a year earlier.

©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.