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What Drove American Electric Power’s 4Q16 Earnings?

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Part 2
What Drove American Electric Power’s 4Q16 Earnings? PART 2 OF 4

A Look at American Electric Power’s Q4 Earnings, Growth Drivers

AEP’s 4Q16 earnings

American Electric Power (AEP) reported earnings per share (or EPS) of $0.67 in 4Q16. In 4Q15, it reported EPS of $0.48. 

AEP’s 2016 operating earnings were $1.9 billion, or $3.94 per share, compared to its 2015 operating earnings of $1.8 billion, or $3.69 per share.

A Look at American Electric Power&#8217;s Q4 Earnings, Growth Drivers

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American Electric Power’s earnings are mostly driven by its regulated operations. During 3Q16, it agreed to sell its Merchant Generation segment, and it’s expected to complete this sale soon. Proceedings from the sale will be used for debt reduction and the expansion of the company’s regulated rate bases.

Earnings drivers

Falling contributions from competitive or wholesale operations are likely to positively impact AEP’s earnings in the long term, which may also improve its earnings stability and return on equity (or ROE). Its adjusted ROE in 4Q16 was near 10%, in line with the industry average.

On its 4Q16 earnings release, American Electric Power’s management reaffirmed the company’s 2017 operating earnings guidance range of $3.55–$3.75, reflecting its competitive generation asset sale.

American Electric Power’s rate base is expected to rise by more than 7% compounded annually through 2018. The rate base is the value of the property on which a utility is allowed to earn a specific rate of return, according to rules set by regulators.

A higher rate base tends to offer relatively stable earnings growth prospects for a utility. AEP’s planned capital investment in the transmission segment may also drive its earnings growth. A utility’s (XLU) transmission rate base is generally regulated by the Federal Energy Regulatory Commission and fetches a higher ROE.

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