FirstEnergy Corp. (FE) posted first-quarter 2010 adjusted earnings of 81 cents per share, topping the Zacks Consensus Estimate of 73 cents. The better-than-expected results were driven by improving demand for electricity from industrial customers that offset weaker sales to commercial and residential customers.
However, earnings in the quarter were below $1.01 reported in the year-ago quarter, primarily due to lower commodity margin, reduced transition cost recovery by Cleveland Electric Illuminating Co., and higher depreciation expenses and financing costs.
FirstEnergy reported a positive earnings surprise of nearly 9.88% in the quarter, in line with its history of outperforming estimates. Historically, the company has delivered a 4.05% positive surprise in the December quarter and an 8.82% positive surprise in the September quarter. The four-quarter average surprise through 2009 was a positive 8.13%.
Operational Update
Net revenue in the quarter decreased 1% year-over-year to $3.3 billion, hurt by slightly lower revenues from the electric utilities.
In the quarter, total electric generation sales decreased 8%, with retail generation sales down 1% and wholesale sales down 37%, compared with the same period last year.
Total electric distribution deliveries increased slightly compared with the first quarter of 2009 due to higher demand in the industrial sector. Higher use of electricity by steel and automotive customers drove a 7% increase in industrial distribution sales. On the residential and commercial side deliveries decreased by 3% and 1%, respectively, due to mild temperatures.
During the quarter, the company benefited from the cost-control initiatives implemented last year including lower labor and employee benefits expenses, the net impact of Ohio rate changes, and lower taxes. The company has achieved operation and maintenance savings of more than $370 million since the beginning of last year.
Financials
In February, FirstEnergy announced that it plans to buy rival Allegheny Energy (AYE) in a $4.7 billion stock deal that would create one of the biggest power companies in the U.S. with 6.1 million customers from Ohio to New Jersey. The company is progressing smoothly on the merger and targets to complete it during the first half of 2011.
As of Mar 31, 2010, the company had cash and cash equivalents of $310 million and long-term debt of $11.8 billion. Cash flow from operating activities in the quarter totaled $506 million compared with $462 million in the comparable quarter last year.
Guidance
The company reaffirmed its 2010 earnings guidance of $3.50 to $3.70 per share. Currently, the Zacks Consensus Estimate for 2010 is $3.58, which is within the company’s guidance range.
However, the company provided a conservative sales outlook for the remainder of 2010. FirstEnergy revised its distribution sales forecast downward to 106 million megawatt hours (from 110 million megawatt hours previously) and its generation output forecast to 77.1 million megawatt hours (from 80.9 million megawatt hours previously).
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