FirstEnergy Looks Energetic

Electric utilities company FirstEnergy (NYS: FE) failed to convert a 29% jump in its second-quarter revenue to higher income, as higher plant costs ate into top-line growth.

Investors seemed mostly unconcerned, as shares slipped around 1.6%, probably because management raised the lower end of its full-year earnings guidance. Should investors care more about the lower earnings or the higher guidance? Let's try to figure out.

The numbers
Higher contract generation sales and capacity revenue primarily drove the growing top line. Total distribution deliveries declined around 1% from the year-ago period, with all residential, commercial, and industrial segments falling.

Significantly higher costs offset the company's sales growth. Total operating expenses surged by nearly 37% from the year-ago quarter, to $3.57 billion. Higher fuel costs and plant operating and maintenance expenses pertaining to unplanned outages at fossil units, along with refueling maintenance expenses at nuclear plants, led the rise in costs.

FirstEnergy, however, is not the only company facing higher costs. Higher expenses such as outages and interest expenses were some factors behind peer Dominion Resources' (NYS: D) lower second quarter earnings. Operating and maintenance, as well as fuel expenses also rose for PPL (NYS: PPL) in its second quarter.

With expenses rising faster than revenue, FirstEnergy's bottom line slumped from $256 million to $171 million year-on-year. Apart from operating expenses, higher financing costs also lowered earnings per share by $0.04.

Restructuring and financials
The integration of Allegheny, completed early this year, seems to be coming around well for FirstEnergy. The Allegheny companies added $0.2 per share to FirstEnergy's earnings in the quarter.

FirstEnergy also recently sold off a plant for over $500 million to use the proceeds for more productive purposes.

FirstEnergy's total debt-to-capitalization ratio stands at 51%. High levels of debt are not uncommon to this industry. While it's not unusual for the industry, interest payments eat up half of operating earnings.

The switching game
The biggest possible threat for the electricity utilities industry seems to be switching. Here, interestingly, FirstEnergy could gain far more than it stands to lose.

According to energy services provider Brakey Energy's report, FirstEnergy's rates are much lower than American Electric Power's (NYS: AEP) in the Ohio region, prompting active shopping. Recently, one of the cities with nearly 7,000 customers switched from AEP to FirstEnergy for electricity.

In April, FirstEnergy extended its discount offer to citizens of Cincinnati, giving them an option to save almost 30% over the prevalent rate charged by Duke Energy (NYS: DUK) . Now, the City of Fulton, Illinois has opted to make FirstEnergy its electricity provider through July 2014, in a bid to reduce the price consumers are currently paying for Exelon's (NYS: EXC) services. All these developmens look positive for FirstEnergy.

The Foolish bottom line
The numbers might have disappointed, but overall, I don't think it's reason enough to sign off the stock yet.

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At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Dominion Resources and Exelon. Motley Fool newsletter services have recommended creating a covered strangle position in Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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