We reiterate our Neutral recommendation on Ohio-based
). Although the company posted lackluster financial results in the
second quarter 2012, we believe increased investments in its
transmission business will significantly drive top-line results in
the near term. Its several transmission projects in Ohio,
Pennsylvania, West Virginia, New Jersey and Maryland are also
expected to come online in the coming years.
However, the implementation of the recent Mercury and Air Toxics
standards (MATS) law, effective 2015, has forced the company
to trim its capital investment outlook to $975 million from
the earlier forecast range of $1.3-$1.7 billion. Moreover, with
regulatory pressures, the company closed its operations at the
coal-fired plants of Eastlake 4 and 5, Bayshore 2, 3 and 4, the
Armstrong, Albright, Willow Island and Rivesville, which will
adversely affect its financials.
First Energy's recent approval of the electric security plan for
long-term supply of power is expected to boost its customer base,
especially in the Ohio region. In addition, we believe the
company's market based capacity pricing will aid in increasing
revenue in the near term. Going forward, the FirstEnergy-Allegheny
merger is expected to spur margins.
Nonetheless, FirstEnergy's operation and financials are often
exposed to risks resulting from interest rate instability and
commodity price fluctuations which impact the company's earnings
and balance sheet positions. With the ongoing storm season in the
US, which will continue over the third quarter, we believe
FirstEnergy's operation will face severe difficulties with
unplanned outages and interruption of services. This could hamper
productivity and margins.
On a positive note, we expect successful execution of
FirstEnergy's retail strategy through hedging or selling forward to
its retail customers and the shifting of sales volume within and
among the sales channels will further benefit the company. The
company's retail volume witnessed a 16% increase in the second
quarter of 2012.
FirstEnergy reaffirmed its operating earnings expectation in a
band of $3.30−$3.60 per share for 2012. GAAP earnings for 2012 are
expected in the range of $2.80−$3.10 per share.
The Zacks Consensus Estimate for third quarter and full year
2012 are currently pegged at $1.14 per share and $3.37 per share,
respectively. The company's closest peer is Indiana-based
FirstEnergy currently has a short-term Zacks #3 Rank (Hold
rating). FirstEnergy is a diversified energy company. Through its
subsidiaries and affiliates, the company engages in the generation,
transmission and distribution of electricity as well as energy
management and other energy-related services. With market
capitalization of $18.29 billion, the company has a total of 17,257
FIRSTENERGY CP (FE): Free Stock Analysis Report
NISOURCE INC (NI): Free Stock Analysis Report
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