FirstEnergy (FE) Beats On Q2 Earnings, Revenues Down Y/Y

Diversified energy company FirstEnergy Corporation (NYSE:FE) FE announced second-quarter 2016 operating earnings of 56 cents per share, higher than both the Zacks Consensus Estimate and the prior-year figure of 53 cents by 5.7%.

On a GAAP basis, however, FirstEnergy reported a loss of $2.56 per share, compared to prior-year earnings of 44 cents.

The variance between GAAP and operating earnings figure was due to regulatory charges of a penny, asset impairment charges of $2.99,merger accounting related costs of a penny and mark-to-market adjustments of 11 cents.

Total Revenue

FirstEnergy generated total revenue of $3,401 million, slightly higher than the Zacks Consensus Estimate of than $3,384 million. However, revenues fell 1.9% from $3,465 million reported a year ago.

Revenues declined on account of lower electric distribution deliveries, a decline in transmission revenues and decreased revenues from Competitive energy services.

Highlights of the Release

Total electric sales decreased by 587 thousand megawatt-hours (MWh), or 1.7% year over year. Residential sales declined by 183 thousand MWh (1.5%), while commercial sales were down by 62 thousand MWh (0.6%). The decline was attributable to the use of more energy-efficient products. Impact of weather was mostly flat year over year. Industrial sales fell by 342 thousand MWh (2.7%) as lower usage for steel and coal mining activity more than offset growth in the shale gas space.

For the second quarter, FirstEnergy incurred operating expenses of $2,783 million, down 3% from $2,867 million a year ago.

Financial Update

FirstEnergy's cash on hand as of Jun 30, 2016 was $199 million, up from $131 million as of Dec 31, 2015.

Cash from operating activities in the second quarter was $822 million, compared with $797 million a year ago.

Long-term debt and other long-term obligations as of Jun 30, 2016 were $18,348 million, compared with $19,099 million as of Dec 31, 2015.

Guidance

FirstEnergy has provided its operating earnings guidance for the third-quarter 2016 and full year in the range of 65–75 cents and $2.40–$2.60, respectively.

The utility has projected 2016 capital expenditure of $2,950 million and free cash outflow of $665–$765 million.

Upcoming Peer Releases

NiSource Inc. NI is slated to report second-quarter 2016 earnings on Aug 2. The Zacks Consensus Estimate stands at 6 cents.

NRG Energy, Inc. NRG is slated to report second-quarter 2016 earnings on Aug 9. The Zacks Consensus Estimate is breakeven results.

Atlantic Power Corporation AT is expected to report second-quarter 2016 earnings on Aug 8. The Zacks Consensus Estimate stands at a loss of 16 cents.

Zacks Rank

FirstEnergy currently carries a Zacks Rank #3 (Hold).

Our View

Amid the ongoing low interest rate environment, cost of capital for capital-intensive companies like FirstEnergy has been falling, which is leading to improved credit ratings.

The regulated nature of the utility industry gives these companies’ revenues a high level of certainty, while their domestic orientation shields them from unfavorable foreign currency movements. Keeping with this, FirstEnergy has been making consistent efforts to expand its regulated generation mix. The company has 62 million Mwh committed for 2016 and about 42 million Mwh for 2017 thereby ensuring bottom-line stability.