4 th quarter financial results february 10, 2006
TRANSCRIPT
![Page 1: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/1.jpg)
4th Quarter Financial Results
February 10, 2006
![Page 2: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/2.jpg)
2
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.
![Page 3: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/3.jpg)
3
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.
![Page 4: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/4.jpg)
4
Paul Evanson
Chairman, President and Chief Executive Officer
![Page 5: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/5.jpg)
5
Earnings per Share
2005 2004
As reported $0.02 $0.48
As adjusted 0.02 0.22
Fourth Quarter Results
![Page 6: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/6.jpg)
6
Events in Early December
Four large units off line
Heavy POLR demand
Very high PJM prices
Adverse impact: $0.10 per share
![Page 7: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/7.jpg)
7
76%
82%
78%
83%83%
91%
79%
2002 2003 2004
Availability Improvement Program On Track
2008Goal
Proforma*
Actual
* Excludes extended unplanned outages at Hatfield, Pleasants
(supercritical units)
2005
![Page 8: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/8.jpg)
8
Power Plant Investment
$100 $105
$192
$165
2002 2003 2004 2005
Maintenance Spending($ millions)
![Page 9: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/9.jpg)
9
Availability Improvement Program On Track
Over 30 improvement project teams
New vice president-operations, regional plant director
Expect lower unplanned outage rate in 2006
![Page 10: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/10.jpg)
10
Achieving 91% Availability by 2008
2002 2003 2004 2005 2006 2007 2008
Outage Rate(supercritical units)
22%
24%
17% 17%
15%
9%
Reduce planned outages
Reduce unplanned outages
18%
![Page 11: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/11.jpg)
11
Earnings per Share
2005 2004
As reported $0.40 ($1.83)
As adjusted 0.94 0.47
2005 Accomplishments:Earnings Growth
![Page 12: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/12.jpg)
12
2005 Accomplishments: Completed Asset Sales
West Virginia gas assets
Wheatland generating facility
Ohio service territory
![Page 13: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/13.jpg)
13
2005 Accomplishments:Reduced Debt
$1.9 billion since Dec. 1, 2003
$919 million in 2005
Refinanced nearly $2 billion
Improved credit ratings; one step below investment grade
![Page 14: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/14.jpg)
14
2005 Accomplishments:Controlled Costs
Reduced O&M by nearly $40 million
Outsourced information technology functions
On track to achieve O&M target of $700-750 million
![Page 15: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/15.jpg)
15
301 291 281
217
2002 2003 2004 2005
2005 Accomplishments:Improved Service Reliability
Service Unavailability(average minutes without power)
![Page 16: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/16.jpg)
16
2005 Accomplishments:Managed Transition to Market
Pennsylvania rate cap extensions/increases approved
Won supply contracts in Pennsylvania, Maryland
Contracted 95% of 2006 generation
![Page 17: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/17.jpg)
17
2005 Accomplishments:Contracted Coal Supplies
Contracted POLR requirements through 2008
Announced development of coal reserves
![Page 18: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/18.jpg)
18
2005 Accomplishments:Environmental Stewardship
West Virginia securitization legislation approved
Expect PSC decision by early April
![Page 19: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/19.jpg)
19
2006 Priorities Strong earnings growth
Environmental stewardship
![Page 20: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/20.jpg)
20
2006 Priorities Strong earnings growth
Environmental stewardship
Transmission investments
Strengthen financial condition; investment grade by year-end 2007
![Page 21: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/21.jpg)
21
Jeffrey Serkes
Senior Vice President and Chief Financial Officer
![Page 22: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/22.jpg)
22
Financial Results3 Months Ended December 31
2005 2004
Net income $3 $72
Diluted income per share 0.02 0.48
($ millions except EPS)
![Page 23: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/23.jpg)
23
Financial Results3 Months Ended December 31
2005 2004
Net income $3 $72
Diluted income per share 0.02 0.48
Accounting change (6) ---
Discontinued operations 6 (9)
Continuing operations: Income Diluted income per share
30.02
810.53
($ millions except EPS)
![Page 24: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/24.jpg)
24
Adjustments3 Months Ended December 31
($ millions, pre-tax)
2005 2004
OVEC gain --- ($95)
Financing costs --- 9
Severance --- 4
![Page 25: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/25.jpg)
25
Adjusted Income FromContinuing Operations
3 Months Ended December 31
$ millions Diluted EPS
$30
$3
2004 2005
$0.22
$0.02
2004 2005
![Page 26: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/26.jpg)
26
EBITDA FromContinuing Operations
3 Months Ended December 31
($ millions)
$162
$313
2004 2005
$222
$162
2004 2005
As reported As adjusted
![Page 27: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/27.jpg)
27
EBITDA FromContinuing Operations
Year Ended December 31
($ millions)
$889$914
2004 2005
$763
$890
2004 2005
As reported As adjusted
![Page 28: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/28.jpg)
28
Plant Outage DaysDecember 1-16
4
8
13
16Hatfield #1
Pleasants #2
Pleasants #1
Hatfield #3
Unplanned Planned
![Page 29: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/29.jpg)
29
$0
$40
$80
$120
$160
1/1
1/1
6
1/3
1
2/1
5
3/2
3/1
7
4/1
4/1
6
5/1
5/1
6
5/3
1
6/1
5
6/3
0
7/1
5
7/3
0
8/1
4
8/2
9
9/1
3
9/2
8
10/1
3
10/2
8
11/1
2
11/2
7
12/1
2
12/2
7
PJM Prices in 2005
$ per MWH*
Outages at 4 units
* Daily average, round-the-clock, APS zone
![Page 30: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/30.jpg)
30
(40,000)
(30,000)
(20,000)
(10,000)
0
10,000
20,000
30,000
40,000
Dai
ly G
ener
atio
n
Sh
ort
fall
(m
wh
)
$40
$60
$80
$100
$120
$140
$160
PJM
Pri
ces
($/m
wh
)
Daily Shortfall PJM Price
Generation Shortfall and PJM PricesDecember 1-16, 2005
PJM Price: Day-ahead APS Zone
POLR Demand Exceeded Plant Output
![Page 31: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/31.jpg)
31
($ millions)
Better 2005 2004 (Worse)
Total operating revenues $724 $688 $36
Financial Results3 Months Ended December 31
![Page 32: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/32.jpg)
32
Key Drivers of Revenue Increase 3 Months Ended December 31
($ millions)
Better(Worse)
Maryland: market-based rates $39
Ohio: Supply contract expiration 22
Increased plant output 18
![Page 33: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/33.jpg)
33
10.2
12.5
11.2
12.3
11.1
13.2
11.512.2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Plant Output Up 2.6%Despite Outages
(MWH millions)
20052004
![Page 34: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/34.jpg)
34
12.4
11.3
11.711.9
12.5
11.4
12.2 12.2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Utility MWH Sales Up 2.6%from 4th Quarter 2004
(MWH millions)
20052004
![Page 35: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/35.jpg)
35
Key Drivers of Revenue Increase 3 Months Ended December 31
($ millions)
Better(Worse)
Maryland: market-based rates $39
Ohio: Supply contract expiration 22
Increased plant output 18
Customer growth 9
PJM purchases, higher market prices (50)
All other (2)
TOTAL INCREASE IN REVENUES $36
![Page 36: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/36.jpg)
36
($ millions)
Better 2005 2004 (Worse)
Total operating revenues $724 $688 $36
Operating expenses 650 457 (193)
Operating income $ 74 $231 ($157)
Key factors - operating expenses: OVEC gain ($95) Fuel, purchased power, deferred energy (80) O&M (17)
Financial Results3 Months Ended December 31
![Page 37: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/37.jpg)
37
($ millions)
Better 2005 2004 (Worse)
Fuel and deferred energy $188 $147 ($41)
Key factors: Higher coal costs
($29) Higher gas costs
(6)
Operating Expense3 Months Ended December 31
![Page 38: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/38.jpg)
38
Increased Coal Costs
Coal cost increased ~$5/ton
Burned ~300,000 more tons
Coal plant output increased 437,000 MWH
Increased output from lower-margin subcritical units
![Page 39: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/39.jpg)
39
9.2 9.0
1.0 1.6
2004 2005
Supercritical Subcritical
Coal Plant Output3 Months ended December 31
(MWH millions)
![Page 40: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/40.jpg)
40
($ millions)
Better 2005 2004 (Worse)
Fuel and deferred energy $188 $147 ($41)
Purchased power 121 82 (39)
TOTAL $309 $229 ($80)
Key factors: Higher coal costs ($29) Higher gas costs (6) Purchased power, MD and OH (35)
Operating Expense3 Months Ended December 31
![Page 41: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/41.jpg)
41
Year-to-Year Better/(Worse)
$ millions
($19)Increased special maintenance
(9)Snowstorm
6Lower outside services
4Severance costs in 2004
1All other
($17)TOTAL INCREASE IN O&M EXPENSE
O&M Expense4th Quarter 2005
![Page 42: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/42.jpg)
42
Operating Expense3 Months Ended December 31
($ millions)
Better 2005 2004 (Worse)
Fuel, purchased power, deferred energy $309 $229 ($80)
Operations and maintenance 212 195 (17)
Depreciation and amortization 78 77 (1)
Taxes other than income taxes 52 51 (1)
Ohio/OVEC sales (1) (95) (94)
TOTAL OPERATING EXPENSE $650 $457 ($193)
![Page 43: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/43.jpg)
43
($ millions)
Better 2005 2004 (Worse)
Operating income $74$231 ($157)Interest expense:
As reported 71100
Financing costs ---(9)
As adjusted $71$91$20
Reduced Interest Expense
3 Months Ended December 31
Key factors – interest expense:
Lower debt balance Lower rates
![Page 44: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/44.jpg)
44
Strengthening the Balance Sheet
Debt Outstanding($ billions; year end)
Equity Ratio(year end)
![Page 45: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/45.jpg)
45
9.0
6.5
4.6
<3.5
Dec.2003
Dec.2004
Dec.2005
Target
Improving Credit Statistics
Debt/EBITDA*
1.5
2.0
2.8
>4.0
Dec.2003
Dec.2004
Dec.2005
Target
EBITDA/Interest*
* Based on adjusted EBITDA and adjusted interest for 12-month periods. Excluding securitized debt and interest: Debt/EBITDA = 4.3, EBITDA/Interest = 3.0 at December 2005.
![Page 46: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/46.jpg)
46
Income Taxes, Q4 2005
Effective tax rate = 77%
Includes $7 million charge
Charge reduced EPS by $0.04
![Page 47: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/47.jpg)
47
Income, Continuing Operations 3 Months Ended December 31
Better 2005 2004 (Worse)
As reported:
- $ millions $3 $81 ($78)
- Per share 0.02 0.53 (0.51)
As adjusted: per share 0.02 0.22 (0.20)
![Page 48: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/48.jpg)
48
Cash FlowPeriods ending December 31, 2005
($ millions)
3 Months 12 Months
Net cash from operations:
As reported $153 $486As adjusted* --- 563
Capital expenditures (102) (306)
FREE CASH FLOW $51 $257
* Excludes costs for St. Joe’s senior notes redemption and convertible trust preferred securities tender offer.
![Page 49: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/49.jpg)
49
$81
$257>$300
2004 2005 2006
Increasing Free Cash Flow ($ millions)
Adjusted Cash from Operationsnet of Capital Expenditures
![Page 50: 4 th Quarter Financial Results February 10, 2006](https://reader036.vdocuments.us/reader036/viewer/2022070414/5697c00a1a28abf838cc781f/html5/thumbnails/50.jpg)
50
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
December 2005 adjustment 27
Plant availability no impact
Higher coal costs (80)
SO2 allowance costs (10)
Lower O&M expense >20
Lower depreciation, capitalize O&M >50
Lower interest expense 65
Other factors positive/negative
* 2006 vs. 2005 as adjusted