Stan Geiger

PSO: Let's Put Some Light on that Cockroach

I did a little more financial research into AEP---PSO's parent company. I found a release from PR Newswire, dated April 24, 2008, detailing AEP's first quarter earnings information. Given PSO's recent announcement about seeking an enormous rate increase due to increased fuel costs, I expected to see some mention of such in the release. But, I saw nary a word about higher fuel costs.

I did, however, find some very interesting stuff about AEP's financial position and outlook.

American Electric Power (NYSE: AEP) today reported 2008 first-quarter earnings, prepared in accordance with Generally Accepted Accounting Principles (GAAP), of $573 million, or $1.43 per share, compared with $271 million, or $0.68 per share, for first-quarter 2007. Ongoing earnings (earnings excluding special items) for first-quarter 2008 were $410 million, or $1.02 per share, compared with $271 million, or $0.68 per share, for first-quarter 2007.

KOTV ran a story the other night that showed AEP's Q1 earnings doubling since Q1 of 2004. Obviously, AEP's earnings don't look too awfully bad in a year-over-year comparison.

"We had a very strong first quarter, which demonstrates the strength of our operations as well as our ongoing successes in regulatory proceedings," said Michael G. Morris, AEP's chairman, president and chief executive officer. "We received approval to recover costs associated with severe ice storms that hit our customers in Oklahoma in January and December 2007, and we're seeing the benefit of rate increases approved for our Ohio Companies and for our utilities in Virginia, West Virginia, Oklahoma and Texas."

AEP's CEO seems very excited about the alleged regulators and their collective willingness to comply with the wishes of his company.

AEP reaffirmed its previous ongoing earnings guidance range for 2008 of between $3.10 and $3.30 per share. In providing ongoing earnings guidance, there could be differences between ongoing earnings and GAAP earnings for matters such as, but not limited to, divestitures or changes in accounting principles. AEP management is not able to estimate the impact, if any, on GAAP earnings of these items. Therefore, AEP is not able to provide a corresponding GAAP equivalent for earnings guidance.

AEP is clearly expecting strong earnings for the year, and is more than willing to alert stock analysts of that fact. But notice, in the qualifier, there is no direct mention of possible earnings variances due to higher fuel costs. No worries about such things, I reckon. That's the ratepayers' problem.

Retail Sales - The improvement in retail gross margins reflects load growth, and increased rates in the Ohio Companies and in AEP's utilities in Virginia, West Virginia, Oklahoma and Texas.

AEP is clearly showing revenue growth. The reasons for that being increased demand for its product and rate hikes in a number of states---including Oklahoma.

Operations & Maintenance Expense - The $81 million decrease in O&M expenses in first-quarter 2008, when compared to the prior period, is primarily attributed to the recovery of ice storm restoration expenses by AEP's PSO utility subsidiary related to storms experienced in January and December 2007.

A major drop in AEP's booked expenses is directly attributable, according to management, to Oklahoma ratepayers eating the cost of ice storms. Lower expenses equals a stronger bottom line. And a stronger bottom line equals a stronger stock price.

AEP's website lays claim to over 5 million customers in 11 states. PSO's website lays claim to 514,000 customers in Oklahoma. So PSO comprises no more than 10 percent of AEP's customer base.

PSO is seeking, according to reports, a rate increase of $18 per month per average customer. Times 514,000, that comes to an annual revenue increase of $111 million for PSO. Times 10, that means AEP is laying claim to its fuel costs increasing by over $1.1 billion in a single year. I find that bill of goods hard to buy.

Judging from the information in this piece, I'd say AEP is simply going from one state to the next seeking rate hikes, using any excuse it can find as justification. All the while, the profits of the conglomerate parent company grow, and grow, and grow.

AEP is showing bottom line profits of $1.4 billion for the trailing 12 months. That's the number after payroll costs, repair and maintenance costs, fuel costs and phantom write-offs have been booked. It is obvious citizens are paying more for electricity than they should be paying.

We supposedly have government regulators guarding the interests of ratepayers---in exchange for the government-granted local monopolies given to power companies. That system doesn't seem to be working very well. Maybe it's time we thought about changing it.

---