FirstEnergy Falls Short of Ests - Analyst Blog

Diversified energy company FirstEnergy Corp. (FE) announced its fourth-quarter 2010 operating earnings of 70 cents per share, falling short of the Zacks Consensus Estimate of 78 cents per share. The results were also lower by 7 cents over the year-ago earnings of 77 cents per share.

The GAAP earnings of the company during the quarter were 61 cents per share versus 78 cents per share reported in the fourth quarter of 2009. The difference between the basic GAAP and operating earnings was due to the impact of certain one-time items like 2 cent trust securities impairment, 7 cents impact from merger costs, 16 cents gain related to non-core assets sales and 17 cents for generating plant charges.

FirstEnergy's 2010 operating earnings were $3.61 per share compared with $3.75 per share reported in 2009. The results of the company failed to meet the Zacks Consensus Estimate of $3.65 per share as provided by 14 covering analysts. 

The GAAP earnings of the company during 2010 were $2.57 per share versus $3.28 per share reported in 2009.

The difference between the basic GAAP and operating earnings during the year was due to the impact of a few one-time items such as 11 cents for regulatory charges, 7 cents for trust securities impairment, 4 cents for legislative charges, 15 cents impact from merger costs, 77 cents for generating plant charges, 6 cents for mark-to-market adjustments, 15 cents gain related to non-core assets sales and 1 cents relating to litigation settlement.

Total Revenue

FirstEnergy generated total revenue of $3,217 million in the fourth quarter versus $2,960 million in the year-ago quarter. The year-over-year growth in revenue was driven by solid performance from Unregulated Business, which clocked a growth of 47.7% from the year-ago quarter.

The results of the company were lower than the Zacks Consensus Estimate of $3,964 million.

FirstEnergy generated total revenue of $13,339 million in 2010 versus $12,973 million in 2010. The full year also stood to gain from the profitable Unregulated Business that saw annualized sales spurring 23.1%.  

Total 2010 revenue once again lagged the Zacks Consensus Estimate of $13,920 million.

Quarterly Highlights

Total expense of the company during the quarter under review was $2.76 billion, up 1.9% from the year-ago quarter of $2.71 billion. The rise in expenses was mainly due to increased coal consumption along with higher coal transportation costs and fuel surcharges. A 24.2% year-over-year increase in other operating expenses also fueled escalating costs.

Higher expenses incurred during the quarter however did not impact the operating income of the company, as the revenue growth trajectory was strong enough to mitigate the impact of increased costs. Operating income came in at $448 million versus $243 million in the year-ago quarter, reflecting a substantial growth of 84.3%.

Net interest expenses, at $217 million, improved 2.7% from $223 million in the prior-year period.

Annual Highlights

Total expense of the company in 2010 was $11.5 billion, up 2.7% from $11.2 billion reported in 2009. The growth in costs in 2010 was mainly due to higher fuel cost and operating expenses.

The higher cost in fiscal year 2010 offset the year-over-year rise in revenues leading to below par operating income, dipping 3.9% from the prior year to net $74 million.

Total electric distribution deliveries in 2010 increased 5.6% from 2009 levels, driven by an 8.4% growth in the industrial segment followed by a 5.8% growth in the use of electricity in the residential sector.

Financial Update

The company ended the year with a strong cash balance. Cash on hand as of December 31, 2010, was $1.1 billion versus $0.9 billion as of December 31, 2009.

Cash from operating activities for 2010 was $3.07 billion versus $2.46 billion in 2009.

Long-term debt and other long-term obligations as of December 31, 2010, were $12.6 billion versus $12.0 billion as of December 31, 2009.

FirstEnergy issued new debts worth $848 million and $1.09 billion in the fourth quarter and fiscal year, respectively. During the final quarter the company redeemed debt worth $593 million and for the year it redeemed notes worth $1.01 billion.

Dividend

On February 15, 2011, the board of directors of FirstEnergy announced an unchanged dividend of 55 cents per share.

The company is presently trying to complete its merger with Allegheny Energy Inc. (AYE) and if the merger is completed before the payment date of June 1, 2011, the full 55 cent-per-share second quarter dividend would be payable on the said date to shareholders of record at the close of business on May 6, 2011.  

If the merger is completed before June 1, 2011, FirstEnergy will pay two separate dividends that will total 55 cents per share.

Peer Comparison  

Dominion Resources Inc. (D), which competes with FirstEnergy, announced its operating earnings for the fourth quarter 2010 of 63 cents per share, at par with the  year-ago figure. However, the earnings lagged the Zacks Consensus estimate by 3 cents.

The 2010 operating earnings of Dominion were $3.34 per share compared with $3.27 per share reported in 2009. The results of the company, akin to FirstEnergy, missed the Zacks Consensus Estimate by 2 cents.

Our View

We believe the merger of FirstEnergy and Allegheny Energy, expected to close by the first half of 2011, will turn the former into a leading regional energy provider, with ten regulated electric utilities serving 6 million customers in 7 states.

FirstEnergy currently retains a Zacks #2 Rank (short-term Buy rating).

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