FirstEnergy Corp. (FE), the U.S.'s fifth largest public utility, reported Wednesday that fourth-quarter profit fell 24% as higher expenses and an accelerated work schedule cut into the utility's bottom line.

The operator of utilities serving 4.5 million customers in Ohio, Pennsylvania and New Jersey posted better-than-expected adjusted earnings in the third quarter on favorable weather, but fourth-quarter results came in short of Wall Street expectations despite a 23% increase in electric generation sales.

Though power demand has improved in some parts of the country, many producers have continued to struggle. FirstEnergy also operates merchant plants that sell their output at market prices rather than regulated rates.

FirstEnergy is trying to close its roughly $4.4 billion acquisition of Pennsylvania's Allegheny Energy Inc. (AYE) in the first half. The deal would create one of the largest U.S. electricity producers with 6.1 million customers. It was the first in a series of major buyout announcements in the utility sector last year, including Northeast Utilities (NU) and NSTAR's (NST) merger plans disclosed in October and gas utility AGL Resources Inc.'s (AGL) acquisition of Nicor Inc. (GAS), agreed to in December.

FirstEnergy posted a profit of $180 million, or 61 cents a share, down from $236 million, or 78 cents a share, a year earlier. Excluding merger costs, a large tax adjustment in the prior year and other items, per-share earnings were 70 cents, down from 77 cents, as revenue increased 8.8% to $3.22 billion.

Analysts polled by Thomson Reuters forecast earnings of 75 cents a share on $3.96 billion in revenue.

Utility distribution sales rose 2% on a colder winter than the mild one seen in 2009 and increased demand from industrial and commercial customers. This increased demand added about three cents to the quarterly profit, whereas the 23% spike in sales at its generation business boosted profits by 49 cents.

The Akron, Ohio company's generation business includes 17 power plants with the capacity to produce 14,000 megawatts of power.

It has been able to capture new retail customers in Ohio, a partly deregulated market, thanks to the drop in power prices, whereas regulated utilities such as American Electric Power Inc. (AEP) and Duke Energy Corp. (DUK) have lost customers because of rates set at relatively higher levels. Increased sales at this unit also raised the company's commodity margin by 24 cents a share.

These gains were by offset higher expenses from maintenance activity that was moved up as well as higher coal consumption and related transportation costs. Coal prices have risen dramatically in recent months on supply concerns because of flooded mines in Australia.

While the expense hit was larger than expected, the uplift in the commodity margin "was actually stronger than we expected," said FBR Capital Markets & Co. utilities analyst Marc de Croisset. However, looking at the company's earnings report, "conspicuously absent was any update in 2011 earnings drivers."

FirstEnergy executives will discuss results this afternoon.

Shares were down 1% at $38.80 in recent trading. The stock is up 5.9% this year.

-By Naureen S. Malik and Drew FitzGerald, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com
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