3rd Quarter Financial Results
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Transcript of 3rd Quarter Financial Results
3rd Quarter Financial Results
October 27, 2006
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Forward-Looking StatementsIn addition to historical information, this presentation contains a number of "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Words such as anticipate, expect, project, intend, plan, believe and words and terms of similar substance used in connection with any discussion of future plans, actions or events identify forward-looking statements. These include statements with respect to: regulation and the status of retail generation service supply competition in states served by Allegheny Energy's delivery business, Allegheny Power; the closing of various agreements; financing plans; demand for energy and the cost and availability of raw materials, including coal; provider-of-last resort (“PLR”) and power supply contracts; results of litigation; results of operations; internal controls and procedures; capital expenditures; status and condition of plants and equipment; capacity purchase commitments; regulatory matters; and accounting issues. Forward-looking statements involve estimates, expectations, and projections and, as a result, are subject to risks and uncertainties. There can be no assurance that actual results will not materially differ from expectations. Actual results have varied materially and unpredictably from past expectations. Factors that could cause actual results to differ materially include, among others, the following: plant performance and unplanned outages; changes in the price of power and fuel for electric generation; general economic and business conditions; changes in access to capital; complications or other factors that render it difficult or impossible to obtain necessary lender consents or regulatory authorizations on a timely basis; environmental regulations; the results of regulatory proceedings, including proceedings related to rates; changes in industry capacity, development, and other activities by Allegheny's competitors; changes in the weather and other natural phenomena; changes in the underlying inputs and assumptions, including market conditions used to estimate the fair values of commodity contracts; changes in customer switching behavior and their resulting effects on existing and future PLR load requirements; changes in laws and regulations applicable to Allegheny, its markets or its activities; the loss of any significant customers and suppliers; dependence on other electric transmission and gas transportation systems and their constraints on availability; changes in PJM, including changes to participants rules and tariffs; the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; and the continuing effects of global instability, terrorism and war. Additional risks and uncertainties are identified and discussed in Allegheny Energy's reports and registration statements filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this document. Allegheny Energy undertakes no obligation to update its forward-looking statements to reflect events or circumstances after the date of this document.
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Non-GAAP Financial Measures
This presentation includes non-GAAP financial measures as defined in the Securities and Exchange Commission’s Regulation G. Where noted, the presentation shows certain financial information on an “as adjusted” basis, to exclude the effect of certain items as described herein. By presenting “as adjusted” results, management intends to provide investors with a better understanding of the core results and underlying trends from which to consider past performance and prospects for the future.
Users of this financial information should consider the types of events and transactions for which adjustments have been made. “As adjusted” information should not be considered in isolation or viewed as a substitute for, or superior to, net income or other data prepared in accordance with GAAP as measures of our operating performance or liquidity. In addition, the “as adjusted” information is not necessarily comparable to similarly titled measures provided by other companies.
Pursuant to the requirements of Regulation G, we provide a table that reconciles the non-GAAP financial measures in this presentation to the most directly comparable GAAP measures. The table is also available at www.alleghenyenergy.com.
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Paul Evanson
Chairman, Presidentand CEO
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Earnings per Share
2006 2005
As reported $0.65 $0.21
As adjusted 0.56 0.45
Third Quarter Results
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Third Quarter Results:Key Drivers
Higher generation rates in Pennsylvania
Expiration of below-market power contract
Lower costs
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Earnings per Share
Nine Months Ended September 30
2006 2005
As reported $1.51 $0.38
As adjusted 1.46 0.90
Year-To-Date Results
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Power Plant PerformanceIn Line with Last Year
Supercritical Units; Third Quarter
89.4% 89.6%
2005 2006
Unplanned OutageFactor
7.8% 8.1%
2005 2006
Availability
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Unplanned Outage Factor Units Which Completed Extended Outages
Planned Outages:Results
5%4%
2%
6%*
13%
9%
14%
11%
Harrison #1 Ft. Martin #2 Hatfield #1 Harrison #3
5%*
12%
Average, 4 Units
Pre-outage Post-outage
* Including transformer failure: Harrison 1 = 10%, average = 6%. Post-outage average is time weighted.
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Priority: Improve Environmental Performance
Fort Martin scrubbers: requested approval to securitize additional costs
Hatfield scrubbers: on track for 2009 completion
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Priority: Expand Transmission Facilities
500 kv line:
State regulatory filings: mid-2007
FERC rate filing: Q1 2007
Most capital expenditures will occur in 2009-2011
Additional $70 million investment in 2007
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Other Matters
West Virginia rate case: hearings set for February 2007
Solid customer growth
Set new peak demand in August 2006
Ranked No. 1 in customer satisfaction in Northeast region
New General Counsel
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Phil Goulding
Senior Vice President and Chief Financial Officer
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Financial Results3 Months Ended September 30
2006 2005
Net income:
$ millions $ 110 $36
Per share (diluted) 0.65 0.21
Income, continuing operations:
$ millions 111 43
Per share (diluted) 0.65 0.26
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Adjustments3 Months Ended September 30
($ millions)
2006 2005
Pennsylvania tax law change ($17)*
Debt redemption costs $33
Ohio sale impairment charge 31
Insurance proceeds received (11)
* After-tax
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Adjusted Income FromContinuing Operations
3 Months Ended September 30
$ millions EPS
$75
$94
2005 2006
$0.45
$0.56
2005 2006
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ADJUSTED EPS: Q3 2005 $ 0.45BETTER/(WORSE):
Maryland contract expiration 0.09 Pennsylvania generation rates 0.07 Ohio territory sale 0.07 Market prices (0.16) Harrison transformer fire (0.04) T&D revenues (0.04) Coal prices (0.08) O&M expense 0.14 Interest 0.05 All other 0.01
ADJUSTED EPS: Q3 2006 $ 0.56
Adjusted EPS: Key Drivers 3 Months Ended September 30
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($ millions)
GAAP ADJUSTED Better/ Better/(Worse) (Worse)
Revenues $ (28) $ (28)
Purchased power 22 22
Fuel (12) (12)
Impairment charge - Ohio 31 -0-
O&M 24 35
Depreciation 8 8
Interest 47 14
All other (5) (4)
PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35
Financial Results: Key Drivers3 Months Ended September 30
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Key Drivers of Change in Revenues 3 Months Ended September 30
($ millions) Better/(Worse)
Maryland contract expiration $ 24
Pennsylvania rates 18
Ohio sale 11
Market prices (41)
OVEC contract expiration (23)
Construction contract completion (10)
Transmission contract expiration (8)
All other 1
TOTAL DECREASE IN REVENUES $ (28)
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($ millions) GAAP ADJUSTED Better/ Better/(Worse) (Worse)
Revenues $ (28) $ (28)
Purchased power 22 22
Fuel (12) (12)
Impairment charge - Ohio 31 -0-
O&M 24 35
Depreciation 8 8
Interest 47 14
All other (5) (4)
PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35
Financial Results: Key Drivers3 Months Ended September 30
Key factors: OVEC contract expiration $10 Maryland 7 Other 5
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($ millions) GAAP ADJUSTED Better/ Better/(Worse) (Worse)
Revenues $ (28) $ (28)
Purchased power 22 22
Fuel (12) (12)
Impairment charge - Ohio 31 -0-
O&M 24 35
Depreciation 8 8
Interest 47 14
All other (5) (4)
PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35
Financial Results: Key Drivers3 Months Ended September 30
Key factors: Higher coal price ($20) Lower gas expense 8
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($ millions) GAAP ADJUSTED Better/ Better/(Worse) (Worse)
Revenues $ (28) $ (28)
Purchased power 22 22
Fuel (12) (12)
Impairment charge - Ohio 31 -0-
O&M 24 35
Depreciation 8 8
Interest 47 14
All other (5) (4)
PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35
Financial Results: Key Drivers3 Months Ended September 30
Adjustment: Insurance proceeds (O&M offset in 2005)
($11)
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Year-to-Year Better/(Worse)
$ millions
Reduced litigation settlement costs (net) $9
Completed construction services contract 10
Eliminated site remediation reserve 8
Uncollectibles, legal fees, ITservices, other 8
TOTAL DECREASE $35
Adjusted O&M Expense3rd Quarter 2006
24
($ millions) GAAP ADJUSTED Better/ Better/(Worse) (Worse)
Revenues $ (28) $ (28)
Purchased power 22 22
Fuel (12) (12)
Impairment charge - Ohio 31 -0-
O&M 24 35
Depreciation 8 8
Interest 47 14
All other (5) (4)
PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35
Financial Results: Key Drivers3 Months Ended September 30
Key factors: Extended plant lives
$9
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($ millions) GAAP ADJUSTED Better/ Better/(Worse) (Worse)
Revenues $ (28) $ (28)
Purchased power 22 22
Fuel (12) (12)
Impairment charge - Ohio 31 -0-
O&M 24 35
Depreciation 8 8
Interest 47 14
All other (5) (4)
PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35
Financial Results: Key Drivers3 Months Ended September 30
Adjustment: Debt redemption costs (2005)
$33
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($ millions) GAAP ADJUSTED Better/ Better/(Worse) (Worse)
Revenues $ (28) $ (28)
Purchased power 22 22
Fuel (12) (12)
Impairment charge - Ohio 31 -0-
O&M 24 35
Depreciation 8 8
Interest 47 14
All other (5) (4)
PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35
Financial Results: Key Drivers3 Months Ended September 30
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Cash FlowThird Quarter 2006
($ millions)
From operations $ 297
Capital expenditures (114)
FREE CASH FLOW $ 183
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Improving Credit Statistics
8.5
6.1
<3.54.3
3.8
Dec-03 Dec-04 Dec-05 Sep-06 Target
Debt/EBITDA* EBITDA/Interest*
* Based on adjusted EBITDA and adjusted interest for 12-month periods. Excludes securitized debt and interest.
1.6
2.2
>4.0
3.0
3.7
Dec-03 Dec-04 Dec-05 Sep-06 Target
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Coal Supply Under Contract
99%90%
85%
65%
45%
2006 2007 2008 2009 2010
% of Total Requirements
100% 100% 100% 100%
80%
2006 2007 2008 2009 2010
% of Fixed-Price Commitments*
* Excludes West Virginia
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Coal:Average Delivered Cost/Ton
Existing Contracts Only
$35$38 $39
$41 $42 $43
2005 2006 2007 2008 2009 2010
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Fourth Quarter 2006
Consistent with 2006 growth drivers
On track to deliver earnings growth
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2007 Earnings Growth:Key Drivers
CONTRIBUTION TO PRE-TAX INCOME*($ millions; estimates)
Pennsylvania generation rates $50
West Virginia rate case 60
Virginia rates 20
Maryland customer credit 10
Market prices positive/negative
Plant availability 10
O&M expense --
Higher coal prices (45)
Higher SO2 allowance costs (30)
Interest expense 10
Other factors positive/negative
* 2007 vs. 2006 as adjusted