FirstEnergy Sales Falter, EPS Beats

Diversified energy company, FirstEnergy Corp. (FE - Analyst Report) announced third-quarter 2011 operating earnings of $1.34 per share, surpassing the Zacks Consensus Estimate of $1.23 per share and year-ago earnings of $1.28 per share.

The year-over-year growth in earnings was due to higher sales margins and the net accretion from the Allegheny merger, including the impact of shares issued in the merger. The positives were marginally offset by higher operating costs, higher financing costs and depreciation expense.

GAAP earnings during the quarter were $1.22 per share versus 59 cents per share reported in the third quarter of 2010.

The difference of 12 cents between basic GAAP and operating earnings in the reported quarter was due to the impact of the following one-time items - 1 cent for trust securities impairment, 1 cent from merger costs, 2 cents related to non-core assets sales, 1 cent for mark-to-market adjustments, 6 cents for merger accounting and 1 cent for litigation costs.

Total Revenue

FirstEnergy generated total revenue of $4,719 million in the third quarter versus $3,728 million in the year-ago quarter, reflecting a growth of 26.6%. The year-over-year spurt in revenue came on the back of higher Electricity Sales which clocked a growth of 24.5% from the year-ago quarter.

Revenues generated by the company however fell short of the Zacks Consensus Estimate of $5,342 million.

Quarterly Highlights

FirstEnergy's nuclear capacity factor of 98.0% in the third quarter of 2011 was in line with the year-ago quarter.

Total expense during the quarter under review was $2.36 billion, up 46.3% from the year-ago quarter of $1.61 billion. The rise in expenses was primarily attributable to an increase in purchased power expenses, while fuel expenses and operating & maintenance expenses declined year over year.

However, the magnitude of total revenue growth was higher than the increase in total expenses resulting in a favorable margin in the reported period. Accordingly, operating income increased 38.01% year over year to $570 million from $413 million in the third quarter 2010.

Interest expenses, at the end of the third quarter 2011, shot up 79.3% to $147 million from $82 million at the end of the prior-year period.

Financial Update

Cash and cash equivalents as of September 30, 2011 were $0.3 billion versus $1.01 billion as of December 31, 2010.

Cash flows provided by operating activities during the third quarter 2011 were $1.19 billion versus $1.21 billion in the third quarter of 2010.

Long-term debt and other long-term obligations as of September 30, 2011, were $15.8 billion versus $12.6 billion as of December 31, 2010. During the reported quarter the company issued new long-term debts of $100 million and redeemed $579 million.

Peer Comparison

Dominion Resources Inc. (D - Snapshot Report), which competes with FirstEnergy, announced operating earnings for the third quarter 2011 of 95 cents per share, a penny more than the Zacks Consensus Estimate. Results, however, dipped 7.8% from the year-ago earnings of $1.03 per share.

Dominion's operating revenue of $3.775 billion in the quarter declined 4.4% from the year-ago quarter. Revenue also marginally lagged the Zacks Consensus Estimate of $3.824 billion.

Guidance

FirstEnergy maintained its operating earnings expectation for 2011 in a band of $3.30 to $3.50 per share and 2012 and 2013 non-GAAP guidance in a range of $3.20 to $3.50 per share.

GAAP earnings guidance for 2011, 2012 and 2013 are expected in the respective range of $3.38 to $3.58, $3.03 to 3.33 and $3.07 to $3.37.

Our View

In October 2011, joint venture partners, FirstEnergy Corp and privately held Boich Companies, included a third partner – Gunvor Group – for ownership of the Signal Peak coal mine in Montana. The companies sold a one-third interest in the mine for $400 million.

We believe this decision was an appropriate one for FirstEnergy as it not only received $260 million as its share of proceeds but also lowered its debt by nearly $360 million. The deconsolidation also gave the company an estimated $390 million as its share of the asset was revalued higher.

The company is also working continuously to realize the targeted synergy from the merger with Allegheny Energy. By the end of the third quarter the company was able to realize 79%, or $165 million, of its 2011 savings goal.

FirstEnergy currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Based in Akron, Ohio, FirstEnergy involves in the generation, transmission, and distribution of electricity, and is also engaged in energy management and other energy-related services.

Read the full analyst report on FE

Read the full analyst report on D