Allegheny Energy Inc. (AYE) shares closed down more than 10% Wednesday, after the power company lowered some expectations for the year ahead, while reporting a drop in net income in the fourth quarter.

The Greensburg, Pa. utility and power generator said net income dropped 85% amid a $116.3 million hedging loss and lower demand as high coal prices offset gains from increased plant output and reduced operating expenses.

At the same time, Allegheny, whichdoesn't provide earnings-per-share guidance, adjusted some key earnings drivers for 2009 downward. It now expects a $50 million reduction in pre-tax income from additional emissions costs this year, for example.

Shares fell as much as 15% Wednesday before settling down 10.1% at $29.50 apiece.

The market wasn't merely reacting to major changes in the 2009 outlook, but the uncertainty they add to the outlook for the years ahead, said Christopher Ellinghaus, an analyst at Shields & Co.

Electricity providers have been challenged by changes in demand, as they set their rates expecting sales to rise. When demand shrinks, utilities are squeezed between maintaining affordable rates for customers while covering their own infrastructure expenses amid higher material costs.

Allegheny, which operates in Pennsylvania, West Virginia, Maryland and Virginia, reported net income of $16.2 million, or 10 cents a share, down from $110.4 million, or 65 cents a share, a year earlier. Excluding $116.3 million in hedging losses and profits from a settlement with Merrill Lynch & Co., earnings grew to 51 cents from 46 cents.

Revenue slumped 10% to $707.8 million amid sliding demand.

Analysts were looking for earnings of 52 cents a share on revenue of $1.01 billion.

Operating margin decreased to 10.9% from 21.2%.

Profits in the company's delivery and services segment dropped 67% as retail electric sales tumbled and higher tax rates offset revenue from transmission expansion, customer growth and favorable weather.

Allegheny joined a roster of utilities cutting 2009 capital spending. Faced with slumping demand and tight credit markets, the company in November forecast capital expenditures of $1 billion instead of $1.18 billion after electric grid operator PJM Interconnection postponed the Potomac-Appalachian Transmission Highline project, a joint venture with American Electric Power Co. Inc. (AEP) that would run between West Virginia and Maryland.

Transmission projects are often attractive for utilities, providing a way to boost earnings by improving reliability and reducing bottlenecks in the electricity grid.

Reflecting the industry's troubles, Allegheny Energy two months ago received approval from the Public Service Commission of West Virginia to raise rates in the state by an annualized $142.5 million, beginning Jan. 1, as coal prices have risen.

-By Katherine E. Wegert, Dow Jones Newswires; 201-938-5400; katherine.wegert@dowjones.com

-By Mark Peters, Dow Jones Newswires; 201-938-4604; mark.peters@dowjones.com