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AEP’s Regulated Segment Boosted 4Q15 Earnings

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Operating segments

American Electric Power’s (AEP) vertically integrated utilities posted strong growth during the quarter. This segment witnessed a $0.12 per share rise in operating earnings, which primarily resulted from rate changes during the quarter.

AEP has three other reportable segments: Transmission and Distribution, Generation and Marketing, and AEP Transmission Holdco. Apart from the vertically integrated utilities, these segments reported neutral to negative performance during the quarter.

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Vertically integrated utilities

Compared to 4Q14, demand for electricity in AEP’s operational zones fell by 3.7% during the quarter. As a result, residential sales were down 4% in 4Q15 versus 4Q14. Commercial and industrial sales were down 3.9% and 3.3%, respectively, during the quarter. Weak global demand, the stronger dollar, and the oversupplied global metals market resulted in the industrial customer category’s poor performance.

Despite the epic fall in crude oil and natural gas prices, AEP’s electricity sales to the oil and gas sector hit an all-time high. During the quarter, AEP recorded a 10% rise in sales to oil and gas sectors compared to 4Q14.

Transmission and distribution

The transmission and distribution segment experienced a fall in quarterly earnings due to higher operating expenses. Operations and maintenance expenses were higher in 4Q15, which were partially offset by rate changes and regulatory provisions.

Generation and marketing

This segment took a beating during the quarter due to lower capacity revenues, which resulted in a $0.04 per share loss compared to 4Q14. Power generation decreased 32% in 4Q15 over 4Q14. However, the poor performance was partially offset by lower fuel costs and favorable hedging activities.

AEP’s Transmission Holdco segment did slightly better in 4Q15 compared to 4Q14. The better performance resulted due to increased revenues driven by continued capital investments.

AEP River Operations, which was sold in November 2015, contributed $0.06 per share to the year’s earnings. It contributed $0.1 per share in 2014.

American Electric Power (AEP) makes up 5.3% of the Utilities SPDR ETF (XLU). NextEra Energy (NEE), Duke Energy (DUK), and Southern Company (SO) are among XLU’s top holdings with weights of about 8.5% each.

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