Even though its second quarter income fell more than 90% from the same period a year ago — mostly because of natural gas trading losses — the CEO and chairman of American Electric Power (AEP) held fast to the company’s commitment to marketing and trading, and said that going forward, AEP expects the trading business to be a “significant contributor” for 2002. The company lost $20 million, or 4 cents a share, on gas trading in the quarter — mainly in April — but expects to make up the losses because of rising returns in May and June.

“The wholesale energy sector is under pressure right now, pressure that extends beyond commodity prices to the economy and Wall Street,” said CEO E. Linn Draper Jr. “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, he called the overall performance of the energy trading business 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. 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 called the second quarter “difficult,” with generation losses in the United Kingdom as well as a “spillover of natural gas trading losses from the first quarter.” AEP on Thursday reported a 90% tumble in net income compared to a year ago for the second quarter. Net income was $21.9 million, or 7 cents a share, down from $231.8 million, or 72 cents, for the second quarter of 2001. The Columbus, OH-based company also cut its ongoing earnings guidance for 2002 by 10%, expecting now to hit between $3.20-$3.35 a share; previously, it expected $3.60-to-$3.75 in earnings for the year.

The earnings revision, said AEP, is “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.” Earnings for the second quarter were $181.6 million, compared with $287.5 million for the same period of 2001. For the first six months, AEP reported a loss in net income of $147 million, compared to earnings of $497.9 million for the first six months of 2001. Previously announced charges associated with the divestiture of two foreign retail electricity and gas supply and electricity distribution companies, UK-based SEEBOARD and CitiPower in Australia, accounted 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 Draper. “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.

AEP cited the following factors as contributing to the lower-than-expected second-quarter results:

“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 head count and consolidated operations, which will improve performance.”

AEP’s wholesale business, which primarily consists of sales in the United States, the generation component of domestic retail sales and worldwide trading, contributed 39 cents a share in the quarter, down from 82 cents a year earlier. 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 MWh, a 41% increase from a year earlier. Domestic wholesale natural gas volume for the second quarter was 1,397 Bcf, an 81% increase from the second quarter of 2001.

In its energy delivery business, which consists of domestic electric transmission and distribution, AEP exceeded expectations and improved performance from last year. Energy delivery contributed 58 cents per share in the quarter, compared with 53 cents for the same period a year ago. Energy services benefited from effective cost management initiatives begun in 2001 and stable regulatory environments in most states, said AEP.

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