Diversified energy company, FirstEnergy Corporation ( FE - Analyst Report ) posted third quarter operating earnings of $1.11 per share, surpassing the Zacks Consensus Estimate of $1.06 per share. However, it was way below the year-ago earnings of $1.39 per share.

Diminished sales margins from competitive operations, lower distribution deliveries and increased income tax outweighed the positive impact of decline in operating costs, lower gross receipts taxes and reduction in interest and depreciation expense, resulting in lackluster bottom-line performance.

The reported quarter includes certain one-time items -- regulatory charges of 3 cent, tax charge -- Retiree Drug Change of 2 cents, plant closing costs of 4 cents, merger accounting commodity contracts of 3 cents. The quarterly results also included a gain of 3 cents from mark-to market adjustments.

Including the impact of these above one-time items, GAAP earnings of the company in third quarter were $1.02 per share versus $1.27 per share reported in the same period previous year.

Total Revenue

FirstEnergy posted revenue of $4,311.0 million in the quarter under review versus $4,719.0 million in the year-ago quarter, reflecting a decline of 8.6%. Lower contribution from the company’s regulated distribution and competitive energy businesses led to the year over year shortfall in total revenue.

Quarterly revenues missed the Zacks Consensus Estimate of $4,743.0 million.

Quarterly Highlights

Total electric distribution deliveries declined 4% year over year. Industrial and commercial deliveries decreased 5% and 3%, respectively. Residential deliveries also declined by 4% from the third quarter 2011 due to soft weather conditions.

Total expense in the reported quarter was $3,404 million, down 7.0% from the year-ago quarter figure of $3,662 million. Cost plummeted primarily on account of a 13.8% and a 2.7% decrease in other operating expenses and purchased power expenses, respectively.

Operating income fell 14.2% to $907 million compared with $1,057 million in the year ago quarter.

Interest expenses decreased 13.9% to $230 million in the quarter under review.

Financial Update

Cash and cash equivalents as of September 30, 2012 were $150 million versus $202 million as of December 31, 2011. Long-term debt and other long-term obligations were $15.6 billion versus $15.7 billion at the end of December 31, 2011.

Cash flows from operating activities during the quarter were $1.21 billion versus $1.19 billion in the third quarter of 2011.

Guidance

FirstEnergy trimmed its pro forma earnings expectation in a band of $3.30 to $3.40 per share for 2012 from its prior expectation of $3.30-$3.60 per share. Operatings earnings for 2013 are expected in the range of $2.85 to $3.15 per share.

Peer Comparison

One of the company’s peers, American Electric Power Co. Inc. ( AEP - Analyst Report ) reported third quarter 2012 adjusted earnings per share of $1.02 per share, in-line with the Zacks Consensus Estimate. The company’s results were below the year-ago quarterly earnings of $1.17 per share.

Revenue of $4,156 million was lower than the Zacks Consensus Estimate by $461 million and also the year-ago top-line figure of 4,333 million.

Our View

The weak U.S. macroeconomic environment will continue to weigh on the FirstEnergy’s profitability. The recent Hurricane Sandy has adversely affected the company’s core service territories of West Virginia, Pennsylvania, New York, New Jersey and Maryland. However, the company has nearly completed restoring power in majority of the areas with a negligible portion still remaining.

However, FirstEnergy’s retail business will continue to perform favorably in the upcoming quarters.

The company presently has a short term Zacks #3 Rank (Hold rating). FirstEnergy through its subsidiaries engages in the generation, transmission, and distribution of electricity.