Transcript Document
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st
Quarter Financial Results
April 28, 2006
Forward-Looking Statements In addition to historical information, this release 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: rate regulation and the status of retail generation service supply competition in states served by Allegheny Energy’s distribution business, Allegheny Power; financing plans; demand for energy and the cost and availability of raw materials, including coal; provider-of last-resort 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 markets; 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 Energy’s competitors; changes in the weather and other natural phenomena; changes in customer switching behavior and their resulting effects on existing and future load requirements; changes in the underlying inputs and assumptions, including market conditions used to estimate the fair values of commodity contracts; changes in laws and regulations applicable to Allegheny Energy, its markets or its activities; the loss of any significant customers or suppliers; dependence on other electric transmission and gas transportation systems and their constraints or availability; changes in PJM, including changes to participant rules and tariffs; the effect of accounting policies 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 filed with the Securities and Exchange Commission.
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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 have attached 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, President and Chief Executive Officer
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As reported As adjusted First Quarter Results Earnings per Share 2006 $0.67
0.68
2005 $0.29
0.39
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First Quarter Results: Key Contributors
Improved power plant performance
Higher generation prices
Lower interest expense
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Improved Power Plant Performance Supercritical Plant Availability 91% 87% Q1 2005 Q1 2006
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2006 Priorities: Grow Earnings Key drivers, Q1 2006:
Increased plant output
Higher Pennsylvania generation rates
Maryland customer contract expiration
Lower interest expense
Lower depreciation
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2006 Priorities: Strengthen Financial Condition
AE Supply refinancing near completion
Further refinancing, debt reduction planned
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2006 Priorities: Improve Environmental Performance
Received approval of Fort Martin scrubbers
Next steps:
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asset swap
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securitization
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construction contracts
Hatfield scrubbers
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2006 Priorities: Expand Transmission Facilities
Announced 330-mile transmission line project
$1.4 billion project
Expect PJM decision in June
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2006 Priorities: Manage Transition to Market
Monitoring regulatory situation in Maryland
Allegheny residential rate caps in Maryland expire in December 2008
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Progress on Legal Matters
SEC closed investigation
Reached proposed settlements in securities litigation
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Labor Agreement Signed
5-year agreement with largest union
Wage increases average 3% annually
Workforce stability
Greater operational efficiencies
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Jeffrey Serkes
Senior Vice President and Chief Financial Officer
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($ millions except EPS) Net income Diluted income per share Financial Results 3 Months Ended March 31 2006 $113 0.67
2005 $43 0.29
(1) 8 Discontinued operations Continuing operations: Income Diluted income per share 114 0.68
34 0.24
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($ millions, pre-tax) Merrill Lynch interest Adjustment 3 Months Ended March 31 2006 -- 2005 $39
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$59 $ millions $114 Adjusted Income From Continuing Operations 3 Months Ended March 31 Diluted EPS $0.68
$0.39
2005 2006 2005 2006
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($ millions) $261 EBITDA From Continuing Operations 3 Months Ended March 31 $322 2005 2006
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($ millions) Total operating revenues Financial Results 3 Months Ended March 31 2006 $846 2005 Better (Worse) $754 $92
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($ millions) Key Drivers of Revenue Increase 3 Months Ended March 31 Increased plant output Better (Worse) $37
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Increased Plant Output: 720,000 MWH
Sources Q1 2006; thousands 698 162 Supercritical Subcritical (140) All other
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($ millions) Key Drivers of Revenue Increase 3 Months Ended March 31 Increased plant output Pennsylvania rates Forward sales Maryland contract expiration Market prices Ohio sale Weather and other TOTAL INCREASE IN REVENUES Better (Worse) $37 19 15 10 5 4 2 $92
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Utility MWH Sales Down 10.6% (MWH millions) 12.5
11.4
12.2
12.2
11.2
Q1 Q2 2005 Q3 Q4 Q1 2006
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Financial Results 3 Months Ended March 31 ($ millions) Total operating revenues Operating expenses 2006 $846 598 Operating income Key factors - operating expenses:
Fuel, purchased power
All other $248 2005 Better (Worse) $754 574 $92 (24) $180 $68 (36) 12
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($ millions) Fuel Key factors:
Higher coal costs
Higher costs – all other fuels Operating Expense 3 Months Ended March 31 2006 $213 2005 $174 Better (Worse) ($39) ($37) (2)
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($ millions) Fuel Purchased power TOTAL Key factors:
Purchased power, Ohio
Purchased power, all other Operating Expense 3 Months Ended March 31 2006 $213 101 $314 2005 $174 104 $278 Better (Worse) ($39) 3 ($36) $12 (9)
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1 st O&M Expense Quarter 2006 Year-to-Year Better/(Worse) $ millions $ 6 3 (2) (2) (2) (2) $ 1 Hunlock guarantee Legal, auditing services Option expense Information technology initiatives Higher T&D maintenance All other TOTAL DECREASE IN O&M EXPENSE
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($ millions) Fuel, purchased power Operations and maintenance Depreciation and amortization All other TOTAL OPERATING EXPENSE Operating Expense 3 Months Ended March 31 2006 $314 162 68 54 $598 2005 $278 163 76 57 $574 Better (Worse) ($36) 1 8 3 ($24)
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Reduced Interest Expense 3 Months Ended March 31 ($ millions) Operating income Interest expense: As reported Merrill charge As adjusted Key factors – interest expense:
Lower debt balance Lower rates 2006 $248 68 -- $68 2005 $180 128 (39) $89 Better (Worse) $68 $21
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Strengthening the Balance Sheet Equity Ratio 35% 30% 25% 20% 15% 10% 5% 0% 21% Dec.
2003 21% Dec.
2004 29% Dec.
2005 31% Mar.
2006
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5.5
Debt/EBITDA* 4.3
<3.5
Improving Credit Statistics EBITDA/Interest* >4.0
3.2
2.4
March 2005 March 2006 Target March 2005 March 2006 Target * Based on adjusted EBITDA and adjusted interest for 12-month periods. Excluding securitized debt and interest: Debt/EBITDA = 3.9, EBITDA/Interest = 3.4 at March 2006.
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Income, Continuing Operations 3 Months Ended March 31 As reported: - $ millions - Per share As adjusted: per share 2006 $114 0.68
0.68
2005 Better (Worse) $34 0.24
0.39
$80 0.44
0.29
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($ millions) Net cash from operations Capital expenditures FREE CASH FLOW Cash Flow 3 Months Ended March 31 $110 (95) $15
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Free Cash Flow: 2006
About $200 million after capital expenditures for scrubbers
Projected capital expenditures for scrubbers: $90 100 million
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2006 Earnings Growth: Key Drivers CONTRIBUTION TO PRE-TAX INCOME* ($ millions; estimates) Pennsylvania rates Maryland transition to market Ohio territory sale Market prices December 2005 adjustment Plant availability Higher coal costs SO 2 allowance costs Lower O&M expense Lower depreciation Lower interest expense Other factors $55 55 35 positive/negative 27 no impact (80) (10) >40 30 65 positive/negative * 2006 vs. 2005 as adjusted
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(MWH millions) 12.3
11.1
13.2
11.5
Plant Output 13.0
Q1 Q2 2005 Q3 Q4 Q1 2006
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($ millions) $39 Special Maintenance Expenses $49 ~$45 $16 $10 Q1 Q2 2005 Q3 Q4 $9 Q1 2006 Q2
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