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FirstEnergy Misses, Affirms Outlook

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Diversified energy company, FirstEnergy Corporation’s (FE - Analyst Report) second quarter operating earnings came in at 59 cents per share, missing the Zacks Consensus Estimate by 5 cents. However, it was far below the year-ago earnings of 70 cents per share.

Lower sales margins from operations, lower investment income and higher depreciation expense more than offset the positive impact of lower operating costs, lower gross receipts taxes and reduced interest expense, leading the company to deliver weak numbers.

The reported quarter includes certain one time items - regulatory charges of 1 cent, trust securities impairment of 1 cent, income tax charge–Retiree Drug Change of 2 cents, favorable impact of non-core asset sales/impairments of 1 cent, mark-to-market adjustments of 2 cent, plant closing costs of 7 cents, merger accounting commodity contracts of 3 cents. Including the impact of these one time items, FirstEnergy reported earnings of 45 cents per share versus 48 cents per share reported in the second quarter of 2011.

Total Revenue

FirstEnergy generated total revenue of $3.87 billion in the quarter under review versus $4.06 billion in the year-ago quarter, reflecting a decline of 4.7%. Lower revenues from regulated distribution largely attributed to the decline.

Revenues substantially missed the Zacks Consensus Estimate of $4.03 billion.

Quarterly Highlights

FirstEnergy's nuclear capacity factor was 78% in the second quarter of 2012 versus 75% in the second quarter of 2011.

Total electric distribution deliveries increased 0.9% year over year. Industrial deliveries increased 3% and commercial deliveries increased 1%. However, Residential deliveries declined 1% attributable to declining average customer consumption and a meager reduction in the number of residential accounts.

Total expense in the reported quarter was $3.3 billion, down 6.4% from the year-ago quarter of $3.5 billion. The decline in expenses was primarily due to lower purchased power expenses and operating expenses.

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 improved 6.9% year over year to $557 million.

Interest expenses increased 13.1% to $242 million in the quarter under review.

Financial Update

Cash and cash equivalents as of June 30, 2012 were $0.094 billion versus $0.202 billion as of December 31, 2011. Long-term debt and other long-term obligations were $15.2 billion versus $15.7 billion at the end of December 31, 2011.

Cash flows from operating activities during the quarter were $0.475 billion versus $0.540 billion in the second quarter of 2011.

Guidance

FirstEnergy reiterated its operating earnings expectation in a band of $3.30 to $3.60 per share for 2012. GAAP earnings for 2012 are expected in the range of $2.80 to $3.10.

Peer Comparison

One of the company’s peers, American Electric Power Co. Inc. (AEP - Analyst Report) reported second quarter 2012 adjusted earnings per share of 77 cents, beating the Zacks Consensus Estimate of 72 cents. The company’s results also surpassed the year-ago quarterly earnings of 73 cents per share.

Earnings in the reported quarter were higher by 4 cents than the year-ago period due to higher demand driven by warmer than normal weather, focus on cost control, and improving economies in service territories.

Revenue of $3.6 billion was flat with both the Zacks Consensus Estimate and the year-ago period.

Our View

The FirstEnergy-Allegheny merger is expected to provide significant stimulus to its top line going forward. The company’s continual investment activities and successful execution of its retail strategy through hedging or selling forward are expected to provide a stable earnings stream. FirstEnergy also remains focused to capitalize when economic recovery gains traction.

However, these positives are dampened by regulatory risks, commodity price fluctuations, and weather irregularities in its service territories which impacts power demand.

The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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