American Electric Power Posts Flat First-Quarter Earnings

American Electric Power AEP reported $0.80 ongoing EPS for the first quarter of 2013, flat from the year-ago quarter. Management reaffirmed ongoing 2013 EPS guidance of $3.05 to $3.25. The company recently announced a $0.49 quarterly dividend, a 4.3% increase and in line with the previously announced increased targeted dividend payout ratio of 60% to 70%. We are reaffirming our 2013 EPS forecast, our $48 per share fair value estimate, narrow moat, and stable moat trend.

For the quarter, continued customer switching, lower allowance for funds used during construction, and lower capacity payments negatively affected earnings, offset by increased rates and colder weather. Higher residential and commercial sales were offset by weak industrial demand, particularly in the primary metals sector. At the company’s Indiana and Michigan subsidiary, legislation passed by the Indiana House and Senate would shorten regulatory lag and incorporate a forward-looking test year, moves that could improve the unit’s low 7% return on equity. The governor is expected to sign the legislation in early May.

Across AEP’s fleet, last year’s coal-to-gas switching showed significant signs of reversal. Overall generation from the company’s natural gas fleet fell 34% from the year-agoquarter, while coal generation notched a 9% gain. Management indicates the company’s coal fleet becomes competitive with natural gas generation in the $3.25 to $3.50 mmBTu range, aided by lower coal delivery costs and a competitive generation fleet.

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