Diversified energy company FirstEnergy Corp. (FE) announced its first-quarter 2011 operating earnings of 69 cents per share, falling short of the Zacks Consensus Estimate of 74 cents per share and year-ago earnings of 81 cents per share.
The 12 cent year-over-year decline in earnings mainly issued from headwinds like the shares issued for its merger with Allegheny, higher operation and maintenance expenses, reduced capitalized interest, increased general taxes, and lower commodity margin from FirstEnergy Solutions. The negatives were marginally countered by a month’s earnings from the Allegheny Energy companies and higher distribution delivery revenues.
GAAP earnings during the quarter were 15 cents per share versus 51 cents per share reported in the first quarter of 2010. The difference between basic GAAP and operating earnings was due to the impact of certain one-time items like 1 cent for trust securities impairment, 37 cents from merger costs, 4 cents for regulatory charges, 6 cents related to non-core assets sales, 2 cents for mark – to-market adjustments and 4 cents for merger accounting.
Total Revenue
FirstEnergy generated total revenue of $3,576 million in the first quarter versus $3,299 million in the year-ago quarter, reflecting a growth of 8.4%. The year-over-year growth in revenue came on the back of higher Electricity Sales which clocked a growth of 8.8% from the year-ago quarter.
Revenues generated by the company exceeded the Zacks Consensus Estimate of $3,425 million.
Quarterly Highlights
FirstEnergy achieved a nuclear capacity factor of nearly 91.0% in the first quarter of 2011 versus 92.0% in the year-ago quarter.
Total expense during the quarter under review was $3.26 billion, up 13.1% from the year-ago quarter of $2.89 billion. The rise in expenses was attributable to increase in fuel expenses and higher operating & maintenance expenses, marginally offset by lower purchased power during the reported quarter.
As a consequence, the operating income of the company decreased by 24.3% year over year to $315 million from $416 million in the first quarter 2010.
Interest expenses, at the end of the first quarter 2011, shot up 8.5% to $231 million from $213 million at the end of the prior-year period.
Financial Update
The company continues to have a strong cash balance. Cash and cash equivalents as of March 31, 2011 were $1.1 billion versus $1.01 billion as of December 31, 2010.
Cash flows provided by operating activities during the first quarter 2011 was $491 million versus $506 million in the first quarter of 2010.
Long-term debt and other long-term obligations as of March 31, 2011, were $17.5 billion versus $12.6 billion as of December 31,2010. During the reported quarter the company issued new long-term debts worth $217 million.
Dividend
Since the merger with Allegheny Energy Inc. has closed within the scheduled timeframe, the dividend synchronization plan announced by First Energy in December 2010 is effective.
As a consequence, shareholders of FirstEnergy, on record as of February 7, 2011, received a pro rata dividend of 52.55 cents per share, which was paid on March 1, 2011.
Shareholders of FirstEnergy, on record as of February 25, 2011, received a pro rata dividend of 2.45 cents per share, as paid on March 7, 2011. Allegheny Energy shareholders, on record as of February 24, 2011 received a pro rated final dividend of 12.045 cents per share that was paid on March 11, 2011.
On February 15, 2011, the board of directors of FirstEnergy announced an unchanged dividend of 55 cents per share. The dividend is payable on June 1, 2011 to shareholders of record as of May 6, 2011.
Peer Comparison
Dominion Resources Inc.(D), which competes with FirstEnergy, announced its operating earnings for the first quarter 2011 of 93 cents per share, below the year-ago figure of 96 cents. However, its earnings surpassed the Zacks Consensus Estimate by 2 cents.
Dominion reported revenues of $4.1 billion in the quarter under review, down 2.7% year over year. Revenue also fell behind the Zacks Consensus Estimate of $4.3 billion.
Guidance
FirstEnergy provided its operating earnings per share expectation for 2011 through 2013 in an annual range of $3.20 to $3.50. The earnings expectation takes into account the benefits from merger, successful execution of the retail strategy and improvement in distribution deliveries.
The GAAP earnings per share guidance for the 2011 -2013 period is $2.88 to $3.18, $3.03 to $3.33 and $3.07 to $3.37, respectively.
Our View
The company completed its merger with Allegheny Energy during the quarter and in a month of combined operations Allegheny contributed 13 cents to earnings of FirstEnergy. We believe this contribution is only a glimpse of the benefits, which FirstEnergy is expected to accrue from the merger.
FirstEnergy currently retains a Zacks #3 Rank (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.
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