3rd quarter financial results october 28, 2005. 2 forward-looking statements in addition to...
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3rd Quarter Financial Results
October 28, 2005
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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; execution of restructuring activity and liquidity enhancement plans; results of litigation; financing requirements and plans to meet those requirements; demand for energy and the cost and availability of inputs; demand for products and services; capacity purchase commitments; results of operations; capital expenditures; regulatory matters; internal controls and procedures and outstanding financial reporting obligations; and stockholder rights plans. 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. Factors that could cause actual results to differ materially include, among others, the following: execution of restructuring activity and liquidity enhancement plans; complications or other factors that render it difficult or impossible to obtain necessary lender consents or regulatory authorizations on a timely basis; general economic and business conditions; changes in access to capital markets; the continuing effects of global instability, terrorism, and war; changes in industry capacity, development, and other activities by Allegheny's competitors; changes in the weather and other natural phenomena; changes in technology; changes in the price of power and fuel for electric generation; the results of regulatory proceedings, including those related to rates; changes in the underlying inputs, including market conditions, and assumptions used to estimate the fair values of commodity contracts; changes in laws and regulations applicable to Allegheny, its markets, or its activities; environmental regulations; the loss of any significant customers and suppliers; the effect of accounting policies issued periodically by accounting standard-setting bodies; additional collateral calls; and changes in business strategy, operations, or development plans. 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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Earnings per Share
2005 2004
As reported $0.21 ($2.40)
As adjusted 0.45 0.37
Third Quarter Results:Strong Performance
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Third Quarter Highlights
Higher operating revenues
Increased generation output
Higher PJM market prices
Market-based C&I rates in Maryland
Lower interest expense
Debt reduction
Refinancings
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Earnings per Share
2005 2004
As reported $0.38 ($2.97)
As adjusted 0.90 0.17
Year-to-Date Results
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Reducing Debt
Goal: $1.5 billion (Dec. 1, 2003 – Dec. 31, 2005)
Achieved: $1.9 billion* (thru Oct. 15, 2005)
Refinanced: $1.3 billion (since July 1)
* Includes tender offer for convertible trust preferred securities.
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Asset Sales
Completed sale of Mountaineer Gas and Wheatland generating facility
Awaiting regulatory approvals for sale of Ohio service territory
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Improving Environmental Performance
Using low-sulfur PRB coal at Ft. Martin and Willow Island; scheduled for January at Hatfield
Obtained FERC approval for Fort Martin scrubbers; seeking state regulatory approvals
Evaluating options for Hatfield scrubbers
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83%
78%
82%
76%
79%
91%
83%
2002 2003 2004
Plant Availability
2007Year-End
Goal
Proforma*
Actual
* Adjusted for extended outages at Hatfield, Pleasants
Improvement of ~$100 million if year-end 2007 goal achieved
(supercritical units)
2005Est.
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Transition toMarket-Based Rates
Already underway in Maryland
Strong demand for power, high gas prices in third quarter
Average PJM market price was $71/mwh (APS Zone)
Benefits Allegheny through excess generation sales
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Litigation Update
Settled class action shareholder lawsuits
Cost to be paid by insurance
Requires court approval
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Turnaround Growth
Entering Growth Phase
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Jeffrey Serkes
Senior Vice President and Chief Financial Officer
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Financial Results3 Months Ended September 30
($ millions except EPS)
2005 2004
Net income (loss) $35.7 ($376.8)
Diluted income (loss) per share 0.21 (2.40)
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Financial Results3 Months Ended September 30
2005 2004
Net income (loss) $35.7 ($376.8)
Diluted income (loss) per share 0.21 (2.40)
Loss, discontinued operations (7.8) (427.5)
Continuing operations: Income Diluted income per share
43.50.26
50.60.37
($ millions except EPS)
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Adjustments3 Months Ended September 30
($ millions)
2005 2004
Debt redemption costs $32.6 ---
Ohio sale 30.5 ---
Insurance proceeds received (11.0) ---
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Adjusted Income FromContinuing Operations
3 Months Ended September 30
$ millions Diluted EPS
$50.6
$74.8
2004 2005
$0.37
$0.45
2004 2005
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EBITDA FromContinuing Operations
3 Months Ended September 30
($ millions)
$255$243
2004 2005
$243
$274
2004 2005
As reported Adjusted
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($ millions)
Better 2005 2004 (Worse)
Total operating revenues $845.1 $723.3 $121.8
Financial Results3 Months Ended September 30
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Key Drivers of Revenue Increase 3 Months Ended September 30
($ millions)
Better(Worse)
Increased plant output and higher prices $42
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10.2
12.5
11.2
12.3
11.1
13.2
12.2
Q1 Q2 Q3 Q4 Q1 Q2 Q3
MWH Generated Up 5.7%from 3rd Quarter 2004
(MWH millions)
20052004
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12.4
11.3
11.711.9
12.5
11.4
12.2
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Utility MWH Sales Up 4.8%from 3rd Quarter 2004
(MWH millions)
20052004
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Key Drivers of Revenue Increase 3 Months Ended September 30
($ millions)
Better(Worse)
Increased plant output and higher prices $42
Maryland: market-based rates 37
Ohio: Supply contract expiration 21
Customer growth 9
All other 13
TOTAL INCREASE IN REVENUES $122
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($ millions)
Better 2005 2004 (Worse)
Total operating revenues $845.1 $723.3 $121.8
Operating expenses 674.0 564.2 (109.8)
Operating income $171.1 $159.1 $12.0
Key factors - operating expenses: Ohio sale ($31) Insurance proceeds 11 Fuel, purchased power, deferred energy (84)
Financial Results3 Months Ended September 30
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($ millions)
Better 2005 2004 (Worse)
Fuel and deferred energy $207.3 $161.4 ($45.9)
Purchased power 124.1 85.9 (38.2)
TOTAL $331.4 $247.3 ($84.1)
Key factors: Fuel: More output, coal costs
($48) Purchased power: Maryland, Ohio (42) Purchased power: other contracts 4
Operating Expense3 Months Ended September 30
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Operating Expense3 Months Ended September 30
($ millions)
Better 2005 2004 (Worse)
Fuel, purchased power, deferred energy $331.4 $247.3 ($84.1)
Operations and maintenance 182.1 190.2 8.1
Key factors: O&M Insurance proceeds $11 Litigation reserves (net) (9) Other 6
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$24.1
$52.7
$19.0
$29.6
$9.8
$38.9
$16.2
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Special Maintenance atPower Plants
($ millions)
20052004
30
Year-to-Year Better/(Worse)
$ millions
$11.0Insurance proceeds
(9.2)Litigation reserves (net)
2.8Reduced special maintenance
3.5All other
$8.1TOTAL DECREASE IN O&M EXPENSE
Lower O&M Expense3rd Quarter 2005
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Operating Expense3 Months Ended September 30
($ millions)
Better 2005 2004 (Worse)
Fuel, purchased power, deferred energy $331.4 $247.3 ($84.1)
Operations and maintenance 182.1 190.2 8.1
Depreciation and amortization 76.7 75.1 (1.6)
Taxes other than income taxes 53.3 51.6 (1.7)
Ohio sale 30.5 -- (30.5)
TOTAL OPERATING EXPENSE $674.0 $564.2 ($109.8)
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($ millions)
Better 2005 2004 (Worse)
Operating income $171.1 $159.1 $12.0Interest expense:
As reported 113.1 91.4
Debt redemption costs (32.6) ---
As adjusted $ 80.5 $91.4 $10.9
Reduced Interest Expense
3 Months Ended September 30
Key factors – interest expense:
Lower debt balance Refinancings
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Strengthening the Balance Sheet
Debt Outstanding($ billions)
Sept.2003
Equity Ratio
Sept.2004
Sept.2005
Sept.2003
Sept.2004
Sept.2005
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Income, Continuing Operations 3 Months Ended September 30
Better 2005 2004 (Worse)
As reported: $ millions $43.5 $50.6 ($7.1)
As reported: per share 0.26 0.37 (0.11)
As adjusted: per share 0.45 0.37 0.08
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Strategic Initiative:Information Technology
Selected EDS for ongoing IT tasks, ERP system installation, supply chain review
Start-up costs: ~$6 million in 2006 ~$20 million (capital) in 2006 for ERP system
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Strategic Initiative:Information Technology
Selected EDS for ongoing IT tasks, ERP system installation, supply chain review
Start-up costs: ~$6 million in 2006 ~$20 million (capital) in 2006 for ERP system
Outsourcing expected to reduce O&M ~$5 million in 2007 ~$11 million annually in 2008-2012
Operational and purchasing cost savings
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Cash FlowPeriods ending September 30, 2005
($ millions)
3 Months 9 Months
Net cash from operations:
As reported $140.6 $326.3As adjusted* 170.1 403.0
Capital expenditures (77.7) (204.4)
FREE CASH FLOW $92.4 $198.6
* Excludes costs for St. Joe’s senior notes redemption and convertible trust preferred securities tender offer.
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Outlook:Fourth Quarter 2005
Strong market prices
Planned outages at two supercritical units
Special maintenance O&M up $20 million
Lower interest expense
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2006 Earnings Growth:Key Drivers
CONTRIBUTION TO PRE-TAX INCOME ($ millions; estimates*)
Pennsylvania rates ~$55
Maryland transition to market ~ 55
Ohio territory sale ~ 35
Market prices positive/negative
Plant availability no impact
Higher coal costs ~(80)
SO2 allowance costs ~(25)
Lower O&M expense ~20
Lower interest expense ~65
Other factors positive/negative
* 2006 vs. 2005 as adjusted