A Mixed Bag for FirstEnergy

Diversified energy company, FirstEnergy Corp. ( FE - Analyst Report ) reported adjusted earnings of 77 cents in the fourth quarter of 2011, in line with the Zacks Consensus Estimate and year-ago earnings.

Including income tax charges of Retiree Drug Subsidy of 6 cents, merger transaction/integration costs of 1 cent, non-core asset sales/impairment of 81 cents, pension/OPEB actuarial assumptions of 74 cents, other adjustment of 3 cents, merger accounting – commodity contracts of 8 cents and generating plant charges of 49 cents, FirstEnergy reported earnings of 23 cents in the fourth quarter of 2011, compared with 27 cents earned in the year-ago quarter.

Full-year adjusted earnings came in at $3.64 per share, 3 cents above the Zacks Consensus Estimate but down from $3.90 earned in 2010.

Net earnings reported were $2.22 per share, lower than $2.44 earned in 2010.

The benefits from accretion form the Allegheny merger were offset by lower sales margin attributable to low power prices. The company also had to incur higher financing costs due to higher depreciation expense and lower interest costs capitalized from the $1.8 billion environmental project pressed into service in 2011.

Total Revenue

FirstEnergy generated total revenue of $3.9 billion in the fourth quarter versus $3.2 billion in the year-ago quarter, reflecting a growth of 23%. The year-over-year spurt in revenue came on the back of higher Electricity Sales, which clocked a growth of 23.5% from the year-ago quarter.

Revenues generated by the company, however, fell short of the Zacks Consensus Estimate of $4.5 billion.

Full-year revenue increased 21.9% year over year to gross $16.3 billion. Revenue, however, lagged the Zacks Consensus Estimate of $17.1 billion.

Quarterly Highlights

FirstEnergy's nuclear capacity factor of 77% in the fourth quarter of 2011 was lower than 91% in the year-ago quarter.

Total expense during the quarter under review was $4.13 billion, up 43% from the year-ago quarter of $2.89 billion. The rise in expenses was primarily due to an increase in fuel expense and purchased power expenses.

However, the magnitude of total revenue growth was more than offset by growth in total expenses, resulting in an unfavorable margin in the reported quarter. Accordingly, the company incurred an operating loss of $230 million compared with operating profit of $287 million in the fourth quarter of 2010.

Interest expenses, in the fourth quarter 2011, increased 13% to $245 million from $217 million in the prior-year period.

Financial Update

Cash and cash equivalents as of December 31, 2011 were $0.2 billion versus $1.01 billion as of December 31, 2010.

Long-term debt and other long-term obligations as of December 31, 2011, were $15.7 billion versus $12.6 billion as of December 31, 2010. During the year, the company issued new long-term debts of $604 million and redeemed $1.9 billion.

Cash flows provided by operating activities during 2011 were $3.06 billion versus $3.08 billion in 2010.

Capital expenditure in 2011 totaled $2.48 billion.

Peer Comparison

Dominion Resources Inc. ( D - Snapshot Report ) , which competes with FirstEnergy, reported fourth quarter 2011 operating earnings of 58 cents per share, 5 cents less than the Zacks Consensus Estimate.

Results also dropped 7.9% from the year-ago earnings of 63 cents per share.

The year-over-year decline was largely due to lower weather-related sales in the regulated electric service territory and lower merchant generation margins. However, higher rate adjustment clause earnings and lower operation and maintenance expenses were partial offsets.

Full-year 2011 operating earnings came in at $3.05 per share, 6 cents lower than the Zacks Consensus Estimate. Results were also 8.7% below the year-ago earnings of $3.34 per share.

Looking Forward

FirstEnergy expects to deliver earnings in a band of $3.30-$3.60 per share in 2012. Including non recurring items, earnings is expected to be within $2.87-$3.17 per share.

For 2013, the company expects earnings in the range of $3.10-$3.40 per share. Including non recurring items, earnings are expected to be within $2.92-$3.22 per share.

Zacks Rank

We retain our Neutral recommendation on FirstEnergy. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

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.