According to analyst estimates, American Electric Power (AEP) will report earnings of $0.54 per share. For the same quarter in 2015, it reported earnings of $0.50 per share.
American Electric Power’s earnings are majorly driven by its regulated operations. During 3Q16, it agreed to sell its merchant generation segment. In 2014, regulated operations contributed nearly 80% of its total earnings while in 2017, more than 95% of total earnings are expected to come from regulated operations.
The declining contribution from competitive or wholesale operations is likely to have a positive impact on AEP’s earnings in the longer term, which may improve earnings stability and return on equity as well. Its adjusted return on equity in 3Q16 was near 10%, which was in line with the industry average.
Additionally, its planned capital investments in the transmission segment may also drive its earnings growth. A utility’s transmission rate base is generally regulated by the FERC (Federal Energy Regulatory Commission) and fetches a higher return on equity.
American Electric Power’s rate base is expected to grow by more than 7% through 2018, compounded annually. The rate base is the value of the property on which the utility is allowed to earn a specific rate of return, according to rules set by regulators. A higher rate base generally tends to offer relatively stable earnings growth prospects for a utility (XLU) (IDU).