Naureen S. Malik

American Electric Power Co.'s (AEP) fourth-quarter profit dropped 26% amid higher taxes and a required refund to customers, but revenue rose on a continued rebound in demand from industrial customers.

The Columbus, Ohio-based utility is one of the largest in the U.S., serving 5.2 million customers across 11 states stretching from Texas to Ohio.

The power generator's core results improved in recent quarters amid higher demand, driven by increased manufacturing, mining and other industrial activity in parts of the Midwest and South Central regions. Favorable weather conditions also bolstered demand for power during the quarter and throughout 2010. But the company continues to face significant hurdles in Ohio where its regulated power rates are higher than the going market rate in this partly deregulated market, resulting in persistent customer switching.

American Electric responded to recession-related struggles by cutting costs and will create sustainable savings, company executives said. "We clearly have demonstrated and will continue to demonstrate our ability not only to manage [operating and maintenance expenses], but also to manage the capital spending on our system," Chairman and Chief Executive Michael Morris said during a conference call Friday morning.

The company achieved "tremendous rate success" last year and set the stage for favorable rate activities in 2011 and beyond, he said. The Ohio rate case "will take center stage" as the year unfolds, he added.

In the most recent quarter, though, benefits from weather and cost-cutting initiatives were largely offset by a refund to Ohio utility customers required by regulators and higher health-care costs.

The company posted earnings of $176 million, or 37 cents a share, down from $238 million, or 50 cents, a year earlier. Restructuring charges cut the latest result by a penny. Revenue increased 3% to $3.4 billion.

Analysts polled by Thomson Reuters most recently forecast earnings of 40 cents on $3.56 billion in revenue.

The utility operations' income tax expenses soared to $111 million from $29 million and an order from the Public Utility Commission of Ohio to return $43 million to customers also reduced results by 6 cents a share. Virginia regulators also declined the company's request to recover $54 million in costs for a carbon capture.

AEP executives expect industrial sales to continue to improve in 2011. Last year's results also benefited from higher rates approved by regulators. Across AEP, the average return on equity "was extremely strong" at 10.75%, CEO Morris said.

Retail deliveries to industrial customers jumped 7%, while output to residential and commercial users was up 1.4% and 0.7%, respectively. Wholesale deliveries dropped 9.5%. On a weather-adjusted basis, total power demand across AEP's system rose 1.1% in 2010 and is expected to grow 1.7% this year.

The company also announced plans to repurchase $400 million to $700 million in shares this year, funded by tax savings.

Shares of AEP, which affirmed its forecast for the year, fell 1.4% to $36.16. The stock is up 3.1% over the past 12 months.

--Matt Jarzemsky contributed to this article.

Copyright © 2011 Dow Jones Newswires